10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2012

OR

o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From          To

Commission File Number 1-7102

NATIONAL RURAL UTILITIES COOPERATIVE

FINANCE CORPORATION

(Exact name of registrant as specified in its charter)

DISTRICT OF COLUMBIA

(State or other jurisdiction of incorporation or organization)

52-0891669

(I.R.S. Employer Identification Number)

20701 COOPERATIVE WAY, DULLES, VA 20166

(Address of principal executive offices)

(Registrant’s telephone number, including area code, is 703-467-1800)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨                  Accelerated filer ¨                   Non-accelerated filer x                 Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x

The Registrant does not issue capital stock because it is a tax-exempt cooperative.

1

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements.

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 (UNAUDITED)

(in thousands)

  A S S E T S

		November 30, 2012		May 31, 2012
Cash and cash equivalents	$	439,183	$	191,167
Restricted cash		8,649		7,694
Investments		309,932		59,045
Loans to members		19,105,207		18,919,612
Less: Allowance for loan losses		(148,737)		(143,326	)
Loans to members, net		18,956,470		18,776,286
Accrued interest and other receivables		171,964		185,827
Fixed assets, net		103,106		102,770
Debt service reserve funds		39,803		39,803
Debt issuance costs, net		40,572		43,515
Foreclosed assets, net		245,803		223,476
Derivative assets		273,480		296,036
Other assets		21,432		25,716
	$	20,610,394	$	19,951,335
See accompanying notes.

2

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)

L I A B I L I T I E S   A N D   E Q U I T Y

		November 30, 2012		May 31, 2012
Short-term debt	$	6,050,861	$	4,493,434
Accrued interest payable		155,488		161,817
Long-term debt		11,201,472		12,151,967
Deferred income		23,202		26,131
Other liabilities		61,649		63,922
Derivative liabilities		630,919		654,125
Subordinated deferrable debt		186,440		186,440
Members’ subordinated certificates:
Membership subordinated certificates		646,388		646,279
Loan and guarantee subordinated certificates		727,169		678,115
Member capital securities		398,650		398,350
Total members’ subordinated certificates		1,772,207		1,722,744
Commitments and contingencies
CFC equity:
Retained equity		510,281		473,964
Accumulated other comprehensive income		9,592		9,199
Total CFC equity		519,873		483,163
Noncontrolling interest		8,283		7,592
Total equity		528,156		490,755
	$	20,610,394	$	19,951,335
See accompanying notes.

3

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands)

		For the three months ended November 30,					For the six months ended November 30,
		2012		2011			2012		2011
Interest income	$	241,630	$	237,755		$	481,715	$	485,005
Interest expense		(174,301)		(194,680	)		(350,897)		(396,724	)
Net interest income		67,329		43,075			130,818		88,281
Recovery of (provision for) loan losses		3,817		2,995			(5,305)		12,125
Net interest income after recovery of (provision for) loan losses		71,146		46,070			125,513		100,406
Non-interest income:
Fee and other income		17,807		3,986			22,765		8,709
Derivative losses		(3,766)		(47,753	)		(28,358)		(159,324	)
Results of operations of foreclosed assets		(909)		(6,648	)		(5,674)		(16,466	)
Total non-interest income		13,132		(50,415	)		(11,267)		(167,081	)
Non-interest expense:
Salaries and employee benefits		(10,148)		(9,833	)		(20,553)		(20,232	)
Other general and administrative expenses		(9,303)		(6,859	)		(16,068)		(12,849	)
Recovery of guarantee liability		92		12			101		72
Loss on early extinguishment of debt		-		(6,258	)		-		(15,525	)
Other		(4,384)		(418	)		(4,547)		(815	)
Total non-interest expense		(23,743)		(23,356	)		(41,067)		(49,349	)
Income (loss) prior to income taxes		60,535		(27,701	)		73,179		(116,024	)
Income tax (expense) benefit		(454)		407			(452)		2,108
Net income (loss)		60,081		(27,294	)		72,727		(113,916	)
Less: Net (income) loss attributable to the noncontrolling interest		(699)		533			(704)		3,123
Net income (loss) attributable to CFC	$	59,382	$	(26,761	)	$	72,023	$	(110,793	)

See accompanying notes.

4

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)

		For the three months ended November 30,				For the six months ended November 30,
		2012		2011		2012		2011
Net income (loss)	$	60,081	$	(27,294)	$	72,727	$	(113,916)
Other comprehensive income (loss):
Add: Unrealized gains (losses) on securities		893		(160)		887		(99)
Less: Realized gains on derivatives		(253)		(259)		(505)		(518)
Other comprehensive income (loss)		640		(419)		382		(617)
Total comprehensive income (loss)		60,721		(27,713)		73,109		(114,533)
Less: Total comprehensive (income) loss attributable to
noncontrolling interest		(694)		539		(693)		3,136
Total comprehensive income (loss) attributable to CFC	$	60,027	$	(27,174)	$	72,416	$	(111,397)

See accompanying notes.

5

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

(in thousands)

For the six months ended November 30, 2012 and 2011

						Accumulated							Membership
					Total	other		CFC	Unallocated	Members’		Patronage	fees and
			Noncontrolling		CFC	comprehensive		retained	net income	capital		capital	education
		Total	interest		equity	income		equity	(loss)	reserve		allocated	fund
Balance as of May 31, 2012	$	490,755	$   7,592	$	483,163	$    9,199	$	473,964	$   (346,941)	$    272,126	$	546,366	$    2,413
Patronage capital retirement		(35,341)	-		(35,341)	-		(35,341)	-	-		(35,341)	-
Net income		72,727	704		72,023	-		72,023	72,023	-		-	-
Other comprehensive income (loss)		382	(11)		393	393		-	-	-		-	-
Other		(367)	(2)		(365)	-		(365)	-	-		-	(365)
Balance as of November 30, 2012	$	528,156	$    8,283	$	519,873	$    9,592	$	510,281	$   (274,918)	$    272,126	$	511,025	$    2,048
Balance as of May 31, 2011	$	687,309	$  11,786	$	675,523	$   9,758	$	665,765	$   (130,689)	$   272,126	$	521,897	$   2,431
Patronage capital retirement		(46,086)	-		(46,086)	-		(46,086)	-	-		(46,086)	-
Net loss		(113,916)	(3,123)		(110,793)	-		(110,793)	(110,793)	-		-	-
Other comprehensive loss		(617)	(13)		(604)	(604)		-	-	-		-	-
Other		(446)	(4)		(442)	-		(442)	-	-		-	(442)
Balance as of November 30, 2011	$	526,244	$   8,646	$	517,598	$   9,154	$	508,444	$   (241,482)	$   272,126	$	475,811	$   1,989

See accompanying notes.

6

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

		For the six months ended November 30,
		2012		2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	72,727	$	(113,916	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Amortization of deferred income		(4,710)		(5,617	)
Amortization of debt issuance costs and deferred charges		3,842		6,038
Depreciation		2,625		1,719
Provision for (recovery of) loan losses		5,305		(12,125	)
Recovery of guarantee liability		(101)		(72	)
Results of operations of foreclosed assets		5,674		16,466
Derivative forward value		(961)		158,510
Changes in operating assets and liabilities:
Accrued interest and other receivables		13,386		7,238
Accrued interest payable		(6,329)		(12,236	)
Other		4,921		10,300
Net cash provided by operating activities		96,379		56,305
CASH FLOWS FROM INVESTING ACTIVITIES
Advances made on loans		(2,584,296)		(3,260,727	)
Principal collected on loans		2,300,104		4,187,593
Net investment in fixed assets		(2,961)		(11,432	)
Proceeds from foreclosed assets		29,110		18,849
Investments in foreclosed assets		(57,111)		(29,179	)
Net proceeds from sale of loans		98,147		81,897
Investments		(250,000)		-
Change in restricted cash		(955)		(955	)
Net cash (used in) provided by investing activities		(467,962)		986,046
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) issuances of short-term debt, net		215,087		(181,095	)
Issuance costs for revolving bank lines of credit		(1,447)		(3,626	)
Proceeds from issuance of long-term debt		1,254,167		299,132
Payments for retirement of long-term debt		(730,293)		(810,286	)
Proceeds from issuance of members’ subordinated certificates		55,548		18,145
Payments for retirement of members’ subordinated certificates		(6,066)		(54,892	)
Payments for retirement of patronage capital		(33,991)		(43,697	)
Cash paid portion of debt exchange premium		(133,406)		-
Net cash provided by (used in) financing activities		619,599		(776,319	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		248,016		266,032
BEGINNING CASH AND CASH EQUIVALENTS		191,167		293,615
ENDING CASH AND CASH EQUIVALENTS	$	439,183	$	559,647

See accompanying notes.

7

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

		For the six months ended November 30,
		2012		2011
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	353,383	$	402,922
Cash paid for income taxes		89		210
Non-cash financing and investing activities:
Net decrease in debt service reserve funds/debt service reserve certificates	$	-	$	(5,859	)
Collateral trust bonds issued as debt exchange premium		39,647		-

See accompanying notes.

8

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1)        General Information and Accounting Policies

(a)       Basis of Presentation

The accompanying financial statements include the consolidated accounts 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 accommodate loan securitization transactions, after elimination of intercompany accounts and transactions.

Unless stated otherwise, references to “we,” “our” or “us” represent the consolidation of CFC, RTFC, NCSC and certain entities created and controlled by CFC to hold foreclosed assets and accommodate loan securitization transactions. Foreclosed assets are held by two groups of subsidiaries wholly-owned by CFC. Our Denton Realty Partners entities (“DRP”) hold assets, including a land development loan, limited partnership interests in certain real estate developments and developed lots and land and raw land in Texas. Caribbean Asset Holdings LLC (“CAH”) holds our investment in cable and telecommunications operating entities in the United States Virgin Islands (“USVI”), British Virgin Islands and St. Maarten.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the assets, liabilities, revenue and expenses reported in the financial statements, as well as amounts included in the notes thereto, including discussion and disclosure of contingent liabilities. The accounting estimates that require our most significant and subjective judgments include the allowance for loan losses and the determination of the fair value of our derivatives and certain aspects of our foreclosed assets. While we use our best estimates and judgments based on the known facts at the date of the financial statements, actual results could differ from these estimates as future events occur.

These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2012.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (which consist only of normal recurring accruals) necessary for a fair presentation of our results of operations and financial position for the interim periods presented.

(b) Variable Interest Entities

We are required to consolidate the financial results of RTFC and NCSC because CFC is the primary beneficiary of variable interests in RTFC and NCSC due to its exposure to absorbing the majority of their expected losses and because CFC manages the business activities of RTFC and NCSC. Under separate guarantee agreements, RTFC and NCSC pay CFC a fee to indemnify against loan losses. CFC manages the business activities of RTFC and NCSC through separate management agreements. Additionally, CFC is the sole lender to RTFC and the primary source of funding to NCSC. NCSC funds its lending programs through loans from CFC and debt guaranteed by CFC.

RTFC and NCSC creditors have no recourse against CFC in the event of a default by RTFC and NCSC, unless there is a guarantee agreement under which CFC has guaranteed NCSC or RTFC debt obligations to a third party. At November 30, 2012, CFC had guaranteed $79 million of NCSC debt, derivative instruments and guarantees with third parties, and CFC’s maximum potential exposure for these instruments totaled $88 million. The maturities for NCSC obligations guaranteed by CFC run through 2031. Guarantees of NCSC debt and derivative instruments are not included in Note 10, Guarantees, as the debt and derivatives are reported on the consolidated balance sheet. At November 30, 2012, CFC guaranteed $5 million of RTFC guarantees with third parties. The maturities for RTFC obligations guaranteed by CFC run through 2013. All CFC loans to RTFC and NCSC are secured by all assets and revenue of RTFC and NCSC. At November 30, 2012, RTFC had total assets of $662 million and NCSC had total assets of $722 million. At November 30, 2012, CFC had committed to lend RTFC up to $4,000 million, of which $523 million was outstanding. At November 30, 2012, CFC had committed to provide up to $2,000 million of credit to NCSC, of which $754 million was outstanding, representing $675 million of outstanding loans and $79 million of credit enhancements. In December 2012, CFC increased its commitment to provide up to $3,000 million of credit to NCSC.

9

(c) Loan Sales

We account for the sale of loans resulting from direct loan sales to third parties and securitization transactions by removing the financial assets from our consolidated balance sheets when control has been surrendered. We recognize related servicing fees on an accrual basis over the period for which servicing activity is provided. Deferred transaction costs and unamortized deferred loan origination costs related to the loans sold are included in the calculation of the gain or loss on the sale. We do not hold any continuing interest in the loans sold to date other than servicing performance obligations. We have no obligation to repurchase loans from the purchaser, except in the case of breaches of representations and warranties. We retain the servicing performance obligations on these loans. We have not recorded a servicing asset or liability.

During the six months ended November 30, 2012 and 2011, we sold CFC loans with outstanding balances totaling $98 million and $82 million, respectively, at par for cash. We recorded a loss on sale of loans, representing the unamortized deferred loan origination costs and transaction costs for the loans sold, which was immaterial during the six months ended November 30, 2012 and 2011.

(d)          Interest Income

Interest income on loans is recognized using the effective interest method. The following table presents the components of interest income:

		For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)		2012		2011		2012		2011
Interest on long-term fixed-rate loans	$	218,247	$	219,841	$	436,187	$	445,187
Interest on long-term variable-rate loans		4,893		4,655		10,918		12,907
Interest on line of credit loans		7,413		6,738		15,105		16,364
Interest on restructured loans		7,625		4,084		13,087		4,776
Interest on investments		1,576		853		2,514		1,781
Fee income (1)		1,876		1,584		3,904		3,990
Total interest income	$	241,630	$	237,755	$	481,715	$	485,005

(1) 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.

Deferred income on the consolidated balance sheets primarily includes deferred conversion fees totaling $18 million and $20 million at November 30, 2012 and May 31, 2012, respectively.

(e)          Interest Expense

The following table presents the components of interest expense:

		For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)		2012		2011		2012		2011
Interest expense on debt (1):
Commercial paper and bank bid notes	$	1,697	$	1,391	$	3,316	$	3,160
Medium-term notes		24,833		47,733		52,716		101,574
Collateral trust bonds		82,271		77,346		163,710		154,618
Subordinated deferrable debt		2,807		2,807		5,613		5,613
Subordinated certificates		20,528		20,075		40,882		38,376
Long-term notes payable		37,915		39,071		76,311		78,898
Debt issuance costs (2)		1,905		2,380		3,842		7,505
Fee expense (3)		2,345		3,877		4,507		6,980
Total interest expense	$	174,301	$	194,680	$	350,897	$	396,724

(1) Represents interest expense and the amortization of discounts on debt.

(2) Includes amortization of all deferred charges related to the issuance of debt, principally underwriters’ fees, legal fees, printing costs and comfort letter fees. Amortization is calculated using the effective interest method or a method approximating the effective interest method. Also includes issuance costs related to dealer commercial paper, which are recognized as incurred.

(3) 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.

We exclude indirect costs, if any, related to funding activities from interest expense.

10

(f)         Derivative Financial Instruments

We are an end user of financial derivative instruments. We use derivatives such as interest rate swaps and treasury rate locks to mitigate interest rate risk. Consistent with the accounting standards for derivative financial instruments, we record derivative instruments on the consolidated balance sheets as either an asset or liability measured at fair value. In recording the fair value of derivative assets and liabilities, we do not net our positions under contracts with individual counterparties. Changes in the fair value of derivative instruments along with realized gains and losses from cash settlements are recognized in the derivative gains (losses) line item of the consolidated statement of operations unless specific hedge accounting criteria are met.

We formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. If applicable hedge accounting criteria are satisfied, the change in fair value of derivative instruments is recorded to other comprehensive income, and net cash settlements are recorded in interest expense. The gain or loss on derivatives used as a cash flow hedge of a forecasted debt transaction is recorded as a component of other comprehensive income (loss) and amortized through interest expense using the effective interest method over the term of the hedged debt. Any ineffectiveness in the hedging relationship is recognized in the derivative gains (losses) line of the statement of operations.

A transition adjustment was recorded as an other comprehensive loss on June 1, 2001, the date we implemented the accounting standards for derivative financial instruments. This amount will be amortized into earnings through April 2029 in the derivative gains (losses) line of the statement of operations.

Cash activity associated with interest rate swaps is classified as an operating activity in the consolidated statements of cash flows.

(g)         Early Extinguishment of Debt

We redeem outstanding debt early from time to time to manage liquidity and interest rate risk. When we redeem outstanding debt early, we recognize a gain or loss related to the difference between the amount paid to redeem the debt and the net book value of the extinguished debt as a component of non-interest expense in the gain (loss) on early extinguishment of debt line item.

In August 2011 and October 2011, we redeemed a total of $500 million of our $1,500 million, 7.25 percent Series C medium-term notes with an original maturity of March 1, 2012 at a premium. Both the premium and unamortized issuance costs totaling $16 million were recorded as a loss on extinguishment of debt during the six months ended November 30, 2011.

(h)         Reclassifications

Reclassifications of prior period amounts have been made to conform to the current reporting format and the presentation in our Form 10-Q for the three and six months ended November 30, 2012. Specifically, the fair value adjustments on DRP foreclosed assets have been reclassified into results of operations of foreclosed assets in the condensed consolidated statement of operations for the three and six months ended November 30, 2011. The corresponding non-cash adjustments were reclassified to the results of operations of foreclosed assets on the condensed consolidated statement of cash flows for the six months ended November 30, 2011.

(2)         Investments

Our investments at November 30, 2012 and May 31, 2012 include Farmer Mac Series C preferred stock totaling $58 million and Farmer Mac Series A common stock totaling $2 million and $1 million, respectively. The Series C preferred stock is valued at cost, while the Series A common stock is accounted for as available-for-sale and recorded at fair value. Our investments also include a $250 million deposit that we made with a financial institution in an interest bearing account with a maturity of less than one year at the reporting date.

11

(3)         Loans and Commitments

Loans outstanding to members and unadvanced commitments by loan type and by member class are summarized as follows:

		November 30, 2012				May 31, 2012
(dollar amounts in thousands)		Loans outstanding		Unadvanced commitments (1)		Loans outstanding			Unadvanced commitments (1)
Total by loan type (2):
Long-term fixed-rate loans	$	16,982,140	$	-	$	16,742,914		$	-
Long-term variable-rate loans		607,312		5,754,729		764,815			5,437,881
Loans guaranteed by RUS (3)		213,275		-		219,084			-
Line of credit loans		1,294,447		9,160,920		1,184,929			8,691,543
Total loans outstanding		19,097,174		14,915,649		18,911,742			14,129,424
Deferred origination costs		8,033		-		7,870			-
Less: Allowance for loan losses		(148,737)		-		(143,326	)		-
Net loans outstanding	$	18,956,470	$	14,915,649	$	18,776,286		$	14,129,424
Total by member class (2):
CFC:
Distribution	$	13,883,982	$	9,344,109	$	14,075,471		$	9,191,227
Power supply		3,909,155		3,962,776		3,596,820			3,714,241
Statewide and associate		73,566		119,891		73,606			123,189
CFC total		17,866,703		13,426,776		17,745,897			13,028,657
RTFC		536,759		318,664		571,566			341,792
NCSC		693,712		1,170,209		594,279			758,975
Total loans outstanding	$	19,097,174	$	14,915,649	$	18,911,742		$	14,129,424

(1) The interest rate on unadvanced commitments is not set until drawn, therefore, the long-term unadvanced loan commitments have been classified in this table as variable-rate unadvanced commitments. However, at the time of the advance, the borrower may select a fixed or a variable rate on the new loan.

(2) Includes non-performing and restructured loans.

(3) “RUS” is the Rural Utilities Service.

Non-performing and restructured loans outstanding and unadvanced commitments to members included in the table above are summarized as follows by loan type and by company:

		November 30, 2012				May 31, 2012
		Loans		Unadvanced		Loans		Unadvanced
(dollar amounts in thousands)		outstanding		commitments (1)		outstanding		commitments (1)
Non-performing and restructured loans:
Non-performing loans: CFC:
Long-term variable-rate loans	$	8,194	$	-	$	8,194	$	-
Line of credit loans (2)		27,955		1,828		26,049		-
RTFC:
Long-term fixed-rate loans		6,577		-		6,970		-
Total non-performing loans	$	42,726	$	1,828	$	41,213	$	-
Restructured loans:
CFC:
Long-term fixed-rate loans	$	39,717	$	-	$	455,689	$	-
Long-term variable-rate loans (3)		-		-		-		45,918
Line of credit loans (3)		-		5,000		-		5,000
Total restructured loans	$	39,717	$	5,000	$	455,689	$	50,918

(1) The interest rate on unadvanced commitments is not set until drawn, therefore, the long-term unadvanced loan commitments have been classified in this table as variable-rate unadvanced commitments. However, at the time of the advance, the borrower may select a fixed or a variable rate on the new loan.

(2) The unadvanced commitment is available under a debtor-in-possession facility for which the principal and interest has priority over all other claims.

(3) The unadvanced commitment is part of the terms outlined in the related restructure agreement. Loans advanced under these commitments would be classified as performing. Principal and interest due under these performing loans would be in addition to scheduled payments due under the restructured loan agreement.

Unadvanced Loan Commitments

A total of $1,444 million and $1,303 million of unadvanced commitments at November 30, 2012 and May 31, 2012, respectively, represented unadvanced commitments related to committed lines of credit loans that are not subject to a material adverse change clause at the time of each loan advance. As such, we will 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.

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The following table summarizes the available balance under committed lines of credit at November 30, 2012, and the related maturities by fiscal year and thereafter as follows:

	Available	Notional maturities of committed lines of credit
(dollar amounts in thousands)	balance	2013	2014	2015	2016	2017	Thereafter
Committed lines of  credit	$1,444,133	$        9,333	$    281,733	$   116,754	$   223,492	$  559,562	$   253,259

The remaining unadvanced commitments totaling $13,472 million and $12,826 million at November 30, 2012 and May 31, 2012, respectively, were generally subject to material adverse change clauses. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. 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.

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

The above items all contribute to our expectation that the majority of the unadvanced commitments will expire without being fully drawn upon and that the total unadvanced amount does not necessarily represent future cash funding requirements.

Payment Status of Loans

The tables below show an analysis of the age of the recorded investment in loans outstanding by member class:

		November 30, 2012
(dollar amounts in thousands)		30-89 days past due		90 days or more past due (1)		Total past due		Current		Total financing receivables		Non-accrual loans
CFC:
Distribution	$	1,530	$	29,619	$	31,149	$	13,852,833	$	13,883,982	$	31,149
Power supply		-		5,000		5,000		3,904,155		3,909,155		5,000
Statewide and associate		-		-		-		73,566		73,566		-
CFC total		1,530		34,619		36,149		17,830,554		17,866,703		36,149
RTFC		-		4,156		4,156		532,603		536,759		6,577
NCSC		-		-		-		693,712		693,712		-
Total loans outstanding	$	1,530	$	38,775	$	40,305	$	19,056,869	$	19,097,174	$	42,726
As a % of total loans		0.01%		0.20%		0.21%		99.79%		100.00%		0.22%

(1) All loans 90 days or more past due are on non-accrual status.

		May 31, 2012
(dollar amounts in thousands)		30-89 days past due		90 days or more past due (1)		Total past due		Current		Total financing receivables		Non-accrual loans
CFC:
Distribution	$	-	$	29,243	$	29,243	$	14,046,228	$	14,075,471	$	29,243
Power supply		-		5,000		5,000		3,591,820		3,596,820		5,000
Statewide and associate		-		-		-		73,606		73,606		-
CFC total		-		34,243		34,243		17,711,654		17,745,897		34,243
RTFC		-		4,306		4,306		567,260		571,566		6,970
NCSC		-		-		-		594,279		594,279		-
Total loans outstanding	$	-	$	38,549	$	38,549	$	18,873,193	$	18,911,742	$	41,213
As a % of total loans		-	%	0.20%		0.20%		99.80%		100.00%		0.22%

(1) All loans 90 days or more past due are on non-accrual status.

Credit Quality

We monitor the credit quality and performance statistics of our financing receivables in an ongoing manner to provide a balance between the credit needs of our members and the requirements for sound credit quality of the loan portfolio. We

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evaluate the credit quality of our loans using an internal risk rating system that employs similar criteria for all member classes.

Our internal risk rating system is based on a determination of a borrower’s risk of default utilizing both quantitative and qualitative measurements.

We have grouped our risk ratings into the categories of pass and criticized based on the criteria below.

(i)  Pass:  Borrowers that are not experiencing difficulty and/or not showing a potential or well-defined credit weakness.

(ii) Criticized:  Includes borrowers categorized as special mention, substandard and doubtful as described below:

·   Special mention:  Borrowers that may be characterized by a potential credit weakness or deteriorating financial condition that is not sufficiently serious to warrant a classification of substandard or doubtful.

·   Substandard:  Borrowers that display a well-defined credit weakness that may jeopardize the full collection of principal and interest.

·   Doubtful:  Borrowers that have a well-defined weakness and the full collection of principal and interest is questionable or improbable.

Each risk rating is reassessed annually based on the receipt of the borrower’s audited financial statements; however, interim downgrades and upgrades may take place at any time as significant events or trends occur.

The following table presents our loan portfolio by risk rating category and member class based on available data as of:

		November 30, 2012						May 31, 2012
(dollar amounts in thousands)		Pass		Criticized		Total		Pass		Criticized		Total
CFC:
Distribution	$	13,851,402	$	32,580	$	13,883,982	$	14,046,228	$	29,243	$	14,075,471
Power supply		3,904,155		5,000		3,909,155		3,591,820		5,000		3,596,820
Statewide and associate		73,566		-		73,566		73,606		-		73,606
CFC total		17,829,123		37,580		17,866,703		17,711,654		34,243		17,745,897
RTFC		529,642		7,117		536,759		564,596		6,970		571,566
NCSC		693,712		-		693,712		594,279		-		594,279
Total loans outstanding	$	19,052,477	$	44,697	$	19,097,174	$	18,870,529	$	41,213	$	18,911,742

Loan Security

Except when providing line of credit loans, we typically lend to our members on a senior secured basis. Long-term loans are typically secured on a parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. In addition to the lien and security interest we receive under the mortgage, our member borrowers are also required to achieve certain financial ratios as required by loan covenants.

The following table summarizes our secured and unsecured loans outstanding by loan type and by company:

(dollar amounts in thousands)			November 30, 2012								May 31, 2012
Total by loan type:			Secured	%			Unsecured	%			Secured	%			Unsecured	%
	Long-term fixed-rate loans	$	16,361,860	96	%	$	620,280	4	%	$	16,168,857	97	%	$	574,057	3	%
	Long-term variable-rate loans		508,490	84			98,822	16			661,115	86			103,700	14
	Loans guaranteed by RUS		213,275	100			-	-			219,084	100			-	-
	Line of credit loans		245,427	19			1,049,020	81			205,143	17			979,786	83
	Total loans outstanding	$	17,329,052	91		$	1,768,122	9		$	17,254,199	91		$	1,657,543	9
Total by company:
	CFC	$	16,369,535	92	%	$	1,497,168	8	%	$	16,317,195	92	%	$	1,428,702	8	%
	RTFC		514,384	96			22,375	4			549,085	96			22,481	4
	NCSC		445,133	64			248,579	36			387,919	65			206,360	35
	Total loans outstanding	$	17,329,052	91		$	1,768,122	9		$	17,254,199	91		$	1,657,543	9

Loan Loss Allowance

We maintain an allowance for loan losses at a level estimated by management to provide for probable losses inherent in the loan portfolio. Under a guarantee agreement, CFC reimburses RTFC and NCSC for loan losses, therefore, RTFC and NCSC do not maintain separate loan loss allowances.

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The activity in the loan loss allowance summarized in the tables below reflects a disaggregation by company of the allowance for loan losses held at CFC based on borrower type:

		As of and for the three months ended November 30, 2012
(dollar amounts in thousands)		CFC		RTFC		NCSC			Total
Balance as of August 31, 2012	$	136,781	$	8,877	$	6,843		$	152,501
(Recovery of) provision for loan losses		(3,256)		(563)		2			(3,817)
Recoveries of loans previously charged-off		53		-		-			53
Balance as of November 30, 2012	$	133,578	$	8,314	$	6,845		$	148,737
		As of and for the three months ended November 30, 2011
(dollar amounts in thousands)		CFC		RTFC		NCSC			Total
Balance as of August 31, 2011	$	134,457	$	8,649	$	8,994	$		152,100
(Recovery of) provision for loan losses		(3,625)		824		(194	)		(2,995)
Recoveries of loans previously charged-off		53		-		-			53
Balance as of November 30, 2011	$	130,885	$	9,473	$	8,800	$		149,158

		As of and for the six months ended November 30, 2012
(dollar amounts in thousands)		CFC		RTFC		NCSC			Total
Balance as of May 31, 2012	$	126,941	$	8,562	$	7,823		$	143,326
Provision for (recovery of) loan losses		6,531		(248)		(978)			5,305
Recoveries of loans previously charged-off		106		-		-			106
Balance as of November 30, 2012	$	133,578	$	8,314	$	6,845		$	148,737
		As of and for the six months ended November 30, 2011
(dollar amounts in thousands)		CFC		RTFC		NCSC			Total
Balance as of May 31, 2011	$	143,706	$	8,389	$	9,082	$		161,177
(Recovery of) provision for loan losses		(12,927)		1,084		(282)			(12,125)
Recoveries of loans previously charged-off		106		-		-			106
Balance as of November 30, 2011	$	130,885	$	9,473	$	8,800	$		149,158

Our allowance for loan losses includes a specific valuation allowance related to individually-evaluated impaired loans, as well as a general reserve for other probable incurred losses for loans that are collectively evaluated. The tables below present the loan loss allowance and the recorded investment in outstanding loans by impairment methodology and by company:

		November 30, 2012
(dollar amounts in thousands)		CFC		RTFC		NCSC		Total
Ending balance of the allowance:
Collectively evaluated	$	113,627	$	6,695	$	6,845	$	127,167
Individually evaluated		19,951		1,619		-		21,570
Total ending balance of the allowance	$	133,578	$	8,314	$	6,845	$	148,737
Recorded investment in loans:
Collectively evaluated	$	17,790,837	$	530,182	$	693,712	$	19,014,731
Individually evaluated		75,866		6,577		-		82,443
Total recorded investment in loans	$	17,866,703	$	536,759	$	693,712	$	19,097,174
Loans to members, net (1)	$	17,733,125	$	528,445	$	686,867	$	18,948,437

		May 31, 2012
(dollar amounts in thousands)		CFC		RTFC		NCSC		Total
Ending balance of the allowance:
Collectively evaluated	$	103,681	$	6,561	$	7,823	$	118,065
Individually evaluated		23,260		2,001		-		25,261
Total ending balance of the allowance	$	126,941	$	8,562	$	7,823	$	143,326
Recorded investment in loans:
Collectively evaluated	$	17,255,965	$	564,596	$	594,279	$	18,414,840
Individually evaluated		489,932		6,970		-		496,902
Total recorded investment in loans	$	17,745,897	$	571,566	$	594,279	$	18,911,742
Loans to members, net (1)	$	17,618,956	$	563,004	$	586,456	$	18,768,416

(1) Excludes deferred origination costs of $8 million at November 30, 2012 and May 31, 2012.

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Impaired Loans

Our recorded investment in individually-impaired loans and the related specific valuation allowance is summarized below by member class:

		November 30, 2012				May 31, 2012
(dollar amounts in thousands)		Recorded investment		Related allowance		Recorded investment		Related allowance
With no specific allowance recorded:
CFC/Distribution	$	39,717	$	-	$	415,692	$	-
With a specific allowance recorded:
CFC/Distribution		31,149		19,709		69,240		23,009
CFC/Power Supply		5,000		242		5,000		251
RTFC		6,577		1,619		6,970		2,001
Total		42,726		21,570		81,210		25,261
Total impaired loans	$	82,443	$	21,570	$	496,902	$	25,261

The recorded investment for impaired loans was equal to the total unpaid principal balance for impaired loans as of November 30, 2012 and May 31, 2012. The table below represents the average recorded investment in impaired loans and the interest income recognized by member class:

		For the three months ended November 30,
		2012		2011		2012		2011
(dollar amounts in thousands)		Average recorded investment				Interest income recognized
CFC/Distribution	$	70,706	$	491,101	$	7,625	$	4,084
CFC/Power Supply		5,000		2,667		-		-
RTFC		6,618		7,962		-		-
Total impaired loans	$	82,324	$	501,730	$	7,625	$	4,084

		For the six months ended November 30,
		Average recorded investment				Interest income recognized
(dollar amounts in thousands)		2012		2011		2012		2011
CFC/Distribution	$	277,891	$	494,620	$	13,087	$	4,776
CFC/Power Supply		5,000		1,333		-		-
RTFC		6,754		5,322		-		-
Total impaired loans	$	289,645	$	501,275	$	13,087	$	4,776

Non-performing and Restructured Loans

Interest income was reduced as a result of holding loans on non-accrual status as follows:

		For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)		2012		2011		2012		2011
Non-performing loans	$	373	$	388	$	780	$	805
Restructured loans		-		1,384		-		6,714
Total	$	373	$	1,772	$	780	$	7,519

At November 30, 2012 and May 31, 2012, non-performing loans included $43 million, or 0.2 percent, of loans outstanding and $41 million or 0.2 percent, of loans outstanding, respectively. Two borrowers in this group are currently in bankruptcy. In one of the bankruptcy cases, the borrower filed a disclosure statement and draft plan of reorganization on November 27, 2012. The disclosure statement and draft plan are subject to certain changes and approval of the bankruptcy court, which is expected to occur in January 2013. In the other bankruptcy case, the borrower has until February 15, 2013 to file a disclosure statement and a Chapter 11 plan. There are two other borrowers that are currently seeking buyers for their systems, as it is not anticipated that they will have sufficient cash flow to repay their loans without the proceeds from the sale of the business. It is currently anticipated that even with the sale of the business, there will not be sufficient funds to repay the full amount owed. We have approval rights with respect to the sale of either or both of these companies.

At November 30, 2012 and May 31, 2012, we had restructured loans totaling $40 million, or 0.2 percent, of loans outstanding and $456 million, or 2.4 percent, of loans outstanding, respectively, all of which were performing according to their restructured terms. Approximately $8 million and $13 million of interest income was accrued on restructured loans during the three and six months ended November 30, 2012, respectively, compared with $4 million and $5 million of interest income in

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the prior-year periods, respectively. One of the restructured loans totaling $40 million at November 30, 2012 and May 31, 2012, has been on accrual status since the time of restructuring. The other restructured loan totaling $416 million at May 31, 2012, was on non-accrual status through September 30, 2011, with all amounts collected being applied against the principal balance. On October 1, 2011, the principal balance of the loan was reduced below the level of a buyout option and as such we placed the loan on accrual status at that time at a rate based on the effective rate returned by the future scheduled cash flows. This loan was paid off early by the borrower on September 13, 2012.

We believe our allowance for loan loss is adequate to cover the losses inherent in our loan portfolio at November 30, 2012.

Pledging of Loans and Loans on Deposit

We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt.

The following table summarizes our loans outstanding as collateral pledged to secure our collateral trust bonds, Clean Renewable Energy Bonds and notes payable to the Federal Agricultural Mortgage Corporation and the amount of the corresponding debt outstanding (see Note 5, Short-Term Debt and Credit Arrangements and Note 6, Long-Term Debt).

(dollar amounts in thousands)		November 30, 2012		May 31, 2012
Collateral trust bonds:
2007 indenture
Distribution system mortgage notes	$	5,839,885	$	5,833,475
RUS guaranteed loans qualifying as permitted investments		167,953		170,024
Total pledged collateral	$	6,007,838	$	6,003,499
Collateral trust bonds outstanding		4,979,372		4,850,000
1994 indenture
Distribution system mortgage notes	$	1,724,015	$	1,574,823
Collateral trust bonds outstanding		1,465,000		1,470,000
Federal Agricultural Mortgage Corporation:
Distribution and power supply system mortgage notes	$	1,579,274	$	1,379,989
Notes payable outstanding		1,298,506		1,165,100
Clean Renewable Energy Bonds Series 2009A:
Distribution and power supply system mortgage notes	$	24,605	$	25,640
Cash		7,218		7,669
Total pledged collateral	$	31,823	$	33,309
Notes payable outstanding		21,545		23,487

We are required to maintain collateral on deposit in an amount at least equal to the balance of debt outstanding to the Federal Financing Bank of the United States Treasury issued under the Guaranteed Underwriter program of the U.S. Department of Agriculture (see Note 6, Long-Term Debt).

The following table shows the collateral on deposit and the amount of the corresponding debt outstanding:

(dollar amounts in thousands)		November 30, 2012		May 31, 2012
Federal Financing Bank
Distribution and power supply system mortgage notes on deposit	$	4,053,511	$	3,814,311
Notes payable outstanding		3,674,000		3,419,000

(4)        Foreclosed Assets

Assets received in satisfaction of loan receivables are initially recorded at fair value when received and are subsequently evaluated periodically for impairment. These assets are classified on the consolidated balance sheets as foreclosed assets. At November 30, 2012 all foreclosed assets were held by DRP and CAH, which are wholly-owned subsidiaries of CFC.

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The activity for foreclosed assets is summarized below:

		As of and for the six months ended November 30, 2012
(dollar amounts in thousands)		CAH		DRP		Total
Balance as of May 31, 2012	$	201,558	$	21,918	$	223,476
Results of operations:
Operating loss		(5,327)		(171)		(5,498)
Impairment		-		(176)		(176)
Cash investments		28,001		-		28,001
Balance as of November 30, 2012	$	224,232	$	21,571	$	245,803

(5)         Short-Term Debt and Credit Arrangements

The following is a summary of short-term debt outstanding:

(dollar amounts in thousands)		November 30, 2012		May 31, 2012
Short-term debt:
Commercial paper sold through dealers, net of discounts (1)	$	1,009,898	$	1,404,901
Commercial paper sold directly to members, at par (1)		1,408,371		997,778
Commercial paper sold directly to non-members, at par (1)		39,828		70,479
Select notes		51,852		-
Daily liquidity fund notes sold directly to members		656,701		478,406
Bank bid notes		295,000		295,000
Subtotal short-term debt		3,461,650		3,246,564
Long-term debt maturing within one year:
Medium-term notes sold through dealers		630,262		232,830
Medium-term notes sold to members		396,806		409,961
Secured collateral trust bonds		1,204,783		254,962
Member subordinated certificates		15,080		16,710
Secured notes payable		336,872		327,006
Unsecured notes payable		5,408		5,401
Total long-term debt maturing within one year		2,589,211		1,246,870
Total short-term debt	$	6,050,861	$	4,493,434

(1) Backup liquidity provided by bank lines of credit.

Revolving Credit Agreements

At November 30, 2012 and May 31, 2012, we had $2,845 million of commitments under revolving credit agreements. We may request letters of credit for up to $100 million under each agreement in place at November 30, 2012, which then reduces the amount available under the facility. The following table presents the total available and the outstanding letters of credit under our revolving credit agreements:

		Total available				Letters of credit outstanding
(dollar amounts in thousands)		November 30, 2012		May 31, 2012		November 30, 2012		May 31, 2012	Original maturity	Facility fee per year (1)
Three-year agreement	$	1,125,000	$	1,125,000	$	-	$	-	March 21, 2014	15 basis points
Four-year agreement		883,875		883,875		1,000		1,000	October 21, 2015	10 basis points
Five-year agreement		831,387		834,875		3,488		-	October 21, 2016	10 basis points
Total	$	2,840,262	$	2,843,750	$	4,488	$	1,000

(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.

The following represents our required and actual financial ratios under the revolving credit agreements:

		Actual
	Requirement	November 30, 2012	May 31, 2012
Minimum average adjusted TIER over the six most recent fiscal quarters (1)	1.025	1.19	1.21
Minimum adjusted TIER for the most recent fiscal year (1) (2)	1.05	1.18	1.18
Maximum ratio of adjusted senior debt to total equity (1)	10.00	5.96	5.97

(1) In addition to the adjustments made to the leverage ratio set forth in the Non-GAAP Financial Measures section, 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 in the Non-GAAP Financial Measures section and exclude the results of operations for CAH.

(2) We must meet this requirement to retire patronage capital.

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At November 30, 2012 and May 31, 2012, we were in compliance with all covenants and conditions under our revolving credit agreements and there were no borrowings outstanding under these agreements.

(6)         Long-Term Debt

The following is a summary of long-term debt outstanding:

(dollar amounts in thousands)		November 30, 2012		May 31, 2012
Unsecured long-term debt:
Medium-term notes sold through dealers	$	1,295,252	$	1,692,605
Medium-term notes sold to members		156,403		89,261
Subtotal		1,451,655		1,781,866
Unamortized discount		(634)		(971	)
Total unsecured medium-term notes		1,451,021		1,780,895
Unsecured notes payable		3,712,982		3,457,982
Unamortized discount		(1,011)		(1,093	)
Total unsecured notes payable		3,711,971		3,456,889
Total unsecured long-term debt		5,162,992		5,237,784
Secured long-term debt:
Collateral trust bonds		5,239,372		6,065,000
Unamortized discount		(184,070)		(12,398	)
Total secured collateral trust bonds		5,055,302		6,052,602
Secured notes payable		983,178		861,581
Total secured long-term debt		6,038,480		6,914,183
Total long-term debt	$	11,201,472	$	12,151,967

At November 30, 2012 and May 31, 2012, we had unsecured notes payable totaling $3,674 million and $3,419 million, respectively, outstanding under a bond purchase agreement with the Federal Financing Bank and a bond guarantee agreement with RUS issued under the Guaranteed Underwriter program of the U.S. Department of Agriculture, which provides guarantees to the Federal Financing Bank. During the six months ended November 30, 2012, we borrowed $255 million under our committed loan facilities with the Federal Financing Bank. In the aggregate at November 30, 2012, we had up to $325 million available under committed loan facilities from the Federal Financing Bank as part of this program.

At November 30, 2012 and May 31, 2012, secured notes payable include $1,299 million and $1,165 million, respectively, in debt outstanding to the Federal Agricultural Mortgage Corporation under a note purchase agreement totaling $3,900 million. All note purchase agreements previously entered into with the Federal Agricultural Mortgage Corporation were consolidated into one agreement in March 2011. Under the terms of the 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 then-remaining term. The agreement with the Federal Agricultural Mortgage Corporation is a revolving credit facility that allows us to borrow, repay and re-borrow funds at any time through maturity or from time to time as market conditions permit, provided that the principal amount at any time outstanding under the note purchase agreement is not more than the total available under the agreement. In November 2012, we issued notes totaling $133 million under the agreement with the Federal Agricultural Mortgage Corporation.

In September 2012, CFC commenced an offer to exchange a portion of its outstanding 8 percent medium-term notes, Series C, due 2032 for consideration of collateral trust bonds due 2032 and cash. On October 10, 2012, following the expiration of the offering period, CFC announced that it had accepted $340 million aggregate principal amount of medium-term notes for exchange. At settlement, on October 16, 2012, holders whose medium-term notes were accepted for exchange received $379 million aggregate principal amount of 4.023 percent collateral trust bonds due 2032 and $134 million in cash.

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(7)         Subordinated Deferrable Debt

The following table is a summary of subordinated deferrable debt outstanding:

(dollar amounts in thousands)		November 30, 2012		May 31, 2012
NRC 6.10% due 2044	$	88,201	$	88,201
NRU 5.95% due 2045		98,239		98,239
Total	$	186,440	$	186,440

All subordinated deferrable debt currently outstanding is callable at par at any time.

(8)          Derivative Financial Instruments

We are an end-user of financial derivative instruments. We utilize derivatives such as interest rate swaps and treasury rate locks for forecasted transactions to mitigate interest rate risk. The following table shows the notional amounts outstanding and the weighted average interest rate paid and received for our interest rate swaps by type:

		November 30, 2012						May 31, 2012
(dollar amounts in thousands)		Notional amount	Weighted- average rate paid		Weighted- average rate received			Notional amount	Weighted- average rate paid		Weighted- average rate received
Pay fixed-receive variable	$	5,790,832	3.62	%	0.30	%	$	5,275,553	3.78	%	0.45	%
Pay variable-receive fixed		3,500,440	1.12		4.75			3,720,440	1.29		4.68
Total interest rate swaps	$	9,291,272	2.68		1.98		$	8,995,993	2.75		2.20

The derivative losses line item of the consolidated statement of operations includes cash settlements and derivative forward value for derivative instruments that do not meet hedge accounting criteria. Cash settlements includes periodic amounts paid and received related to our interest rate swaps, as well as amounts accrued from the prior settlement date. Derivative forward value includes changes in the fair value of derivative instruments unless specific hedge accounting criteria are met. If applicable hedge accounting criteria are satisfied, the change to the fair value is recorded to other comprehensive income (loss) and net cash settlements are recorded in interest expense. Gains and losses recorded on the consolidated statements of operations for our interest rate swaps are summarized below:

		For the three months ended November 30,					For the six months ended November 30,
(dollar amounts in thousands)		2012		2011			2012		2011
Derivative cash settlements	$	(15,456)	$	(982	)	$	(29,319)	$	(814	)
Derivative forward value		11,690		(46,771	)		961		(158,510	)
Derivative losses	$	(3,766)	$	(47,753	)	$	(28,358)	$	(159,324	)

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 are not required to be accounted for separately as derivatives. At November 30, 2012, 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 November 30, 2012, our senior unsecured credit ratings from Moody’s Investors Service and Standard & Poor’s Corporation were A2 and A, respectively. At November 30, 2012, both Moody’s Investors Service and Standard & Poor’s Corporation had our ratings on stable outlook.

(dollar amounts in thousands)		Notional amount		Our required payment		Amount we would collect		Net total
Mutual rating trigger if ratings:
fall to Baa1/BBB+ (1)	$	3,000	$	(157)	$	-	$	(157)
fall below Baa1/BBB+ (1)		6,890,779		(290,678)		38,257		(252,421)
Total	$	6,893,779	$	(290,835)	$	38,257	$	(252,578)

(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.

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In addition to the rating triggers listed above, at November 30, 2012 we had a total notional amount of $650 million of derivative instruments with one counterparty that would require the pledging of collateral totaling $16 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 the ratings from Standard & Poor’s Corporation were to fall below BBB. The aggregate fair value of all interest rate swaps with rating triggers that were in a net liability position at November 30, 2012 was $299 million.

(9)          Equity

In July 2012, the CFC Board of Directors authorized the allocation of the fiscal year 2012 net earnings as follows: $1 million to the cooperative educational fund and $71 million to members in the form of patronage. In July 2012, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $35 million, representing 50 percent of the fiscal year 2012 allocation. This amount was returned to members in cash in September 2012. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for its financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable laws and regulations.

(10)         Guarantees

The following table summarizes total guarantees by type of guarantee and member class:

(dollar amounts in thousands)		November 30, 2012		May 31, 2012
Total by type:
Long-term tax-exempt bonds	$	555,960	$	573,110
Indemnifications of tax benefit transfers		2,419		49,771
Letters of credit		452,373		504,920
Other guarantees		116,916		121,529
Total	$	1,127,668	$	1,249,330
Total by member class:
CFC:
Distribution	$	269,610	$	340,385
Power supply		816,296		854,444
Statewide and associate		6,514		7,202
CFC total		1,092,420		1,202,031
RTFC		4,738		1,026
NCSC		30,510		46,273
Total	$	1,127,668	$	1,249,330

The maturities for the long-term tax-exempt bonds and the related guarantees run through calendar year 2042. Amounts in the table represent the outstanding principal amount of the guaranteed bonds. At November 30, 2012, our maximum potential exposure for the $75 million of fixed-rate tax-exempt bonds is $125 million, representing principal and interest. Of the amounts shown in the table above for long-term tax-exempt bonds, $481 million and $498 million as of November 30, 2012 and May 31, 2012, respectively, are adjustable or floating-rate bonds that may be converted to a fixed rate as specified in the applicable indenture for each bond offering. We are unable to determine the maximum amount of interest that we could be required to pay related to the remaining adjustable and floating-rate bonds. Many of these bonds have a call provision that in the event of a default allow us to trigger the call provision. This would limit our exposure to future interest payments on these bonds. Our maximum potential exposure is secured by a mortgage lien on all of the system’s assets and future revenue. If the debt is accelerated because of a determination that the interest thereon is not tax-exempt, the system’s obligation to reimburse us for any guarantee payments will be treated as a long-term loan.

The maturities for the indemnifications of tax benefit transfers run through calendar year 2015. The amounts shown represent our maximum potential exposure for guaranteed indemnity payments. A member’s obligation to reimburse CFC for any guarantee payments would be treated as a long-term loan to the extent of any cash received by the member at the outset of the transaction. This amount is secured by a mortgage lien on substantially all of the system’s assets and future revenue. The remainder would be treated as a line of credit loan secured by a subordinated mortgage on substantially all of the member’s property. Due to changes in federal tax law, no further guarantees of this nature are anticipated.

The maturities for letters of credit run through calendar year 2024. The amounts shown in the table above represent our maximum potential exposure, of which $185 million is secured at November 30, 2012. At November 30, 2012, and May 31, 2012, the letters of credit include $125 million to provide the standby liquidity for adjustable and floating-rate tax-exempt

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bonds issued for the benefit of our members. Security provisions include a mortgage lien on substantially all of the system’s assets, future revenue and the system’s investment in our commercial paper.

In addition to the letters of credit listed in the table, under master letter of credit facilities in place at November 30, 2012, we may be required to issue up to an additional $837 million in letters of credit to third parties for the benefit of our members. Of this amount, $649 million represents commitments that may be used for the issuance of letters of credit or line of credit loan advances, at the option of the borrower, and are included in unadvanced loan commitments for line of credit loans reported in Note 3, Loans and Commitments. Master letter of credit facilities subject to material adverse change clauses at the time of issuance totaled $496 million at November 30, 2012. Prior to issuing a letter of credit, 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 master letter of credit facilities of $341 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.

The maturities for other guarantees run through calendar year 2025. The maximum potential exposure for these guarantees is $118 million, all of which is unsecured.

At November 30, 2012 and May 31, 2012, we had $384 million and $385 million of guarantees, representing 34 percent and 31 percent, respectively, of total guarantees, under which our right of recovery from our members was not secured.

In addition to the guarantees in the chart above, at November 30, 2012, we are the liquidity provider for a total of $606 million of variable-rate tax-exempt bonds issued for our member cooperatives. While the bonds are in variable-rate mode, we have, in return for a fee, unconditionally agreed to purchase bonds tendered or put for redemption if the remarketing agents are unable to sell such bonds to other investors. During the six months ended November 30, 2012, we were not required to perform as liquidity provider pursuant to these obligations.

Guarantee Liability

At November 30, 2012 and May 31, 2012, we recorded a guarantee liability of $27 million and $29 million, respectively, which represents the contingent and non-contingent exposures related to guarantees and liquidity obligations associated with our members’ debt. The contingent guarantee liability at November 30, 2012 and May 31, 2012 was $6 million for both periods, based on management’s estimate of exposure to losses within the guarantee portfolio. The remaining balance of the total guarantee liability of $21 million and $23 million at November 30, 2012 and May 31, 2012, respectively, relates to our non-contingent obligation to stand ready to perform over the term of our guarantees and liquidity obligations that we have entered into or modified since January 1, 2003.

Activity in the guarantee liability account is summarized below:

		As of and for the six months ended November 30,
(dollar amounts in thousands)		2012
Beginning balance as of May 31, 2012	$	28,663
Net change in non-contingent liability		(1,584)
Recovery of contingent guarantee liability		(101)
Ending balance as of November 30, 2012	$	26,978
Liability as a percentage of total guarantees		2.39	%

(11)         Fair Value Measurement

Assets and liabilities measured at fair value on either a recurring or non-recurring basis on the consolidated balance sheets at November 30, 2012 and May 31, 2012 consisted of investments in common stock, derivative instruments, and collateral-dependent non-performing loans.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

We account for derivative instruments (including certain derivative instruments embedded in other contracts) in the consolidated balance sheets as either an asset or liability measured at fair value. Since there is not an active secondary market for the types of interest rate swaps we use, we obtain market quotes from the interest rate swap counterparties to adjust all swaps to fair value on a quarterly basis. The market quotes are based on the expected future cash flow and the estimated yield curve.

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We perform analysis to validate the market quotes obtained from our swap counterparties. We adjust the market values received from the counterparties using credit default swap levels for us and the counterparties. The credit default swap levels represent the credit risk premium required by a market participant based on the available information related to us and the counterparty. We only enter into exchange agreements with counterparties that are participating in our revolving lines of credit at the time the exchange agreements are executed. All of our exchange agreements are subject to master netting agreements.

Our valuation techniques for interest rate swaps are based on observable inputs, which reflect market data. Fair values for our interest rate swaps are classified as a Level 2 valuation. We record the change in the fair value of our derivatives for each reporting period in the derivative gains (losses) line, included in non-interest income in the consolidated statements of operations, as currently none of our derivatives qualify for hedge accounting.

At November 30, 2012 and May 31, 2012, our investments in equity securities included investments in the Federal Agricultural Mortgage Corporation Series A common stock that is recorded in the consolidated balance sheets at fair value. We calculate fair value based on the quoted price on the stock exchange where the stock is traded. That stock exchange is an active market based on the volume of shares transacted. Fair values for these securities are classified as a Level 1 valuation.

The following table presents our assets and liabilities that are measured at fair value on a recurring basis:

		November 30, 2012				May 31, 2012
(dollar amounts in thousands)		Level 1		Level 2		Level 1		Level 2
Derivative assets	$	-	$	273,480	$	-	$	296,036
Derivative liabilities		-		630,919		-		654,125
Investments in common stock		2,354		-		1,467		-

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. Any adjustments to fair value usually result from application of lower-of-cost or fair value accounting or write-downs of individual assets. At November 30, 2012 and May 31, 2012, we measured certain collateral-dependent non-performing loans at fair value. In certain instances when a loan is non-performing, we utilize the collateral fair value underlying the loan in estimating the specific loan loss allowance. To estimate the fair value of the collateral, we may use third party valuation specialists, internal estimates or a combination of both. The approaches used by both our internal staff and third party specialists include the discounted cash flow, market multiple and replacement cost methods. The material inputs used in estimating the fair value of such collateral, by both internal staff and third party specialists, are Level 3 within the fair value hierarchy. In these instances, the valuation is considered to be a non-recurring item. The significant unobservable inputs for Level 3 assets that are valued using fair values obtained from third party specialists are reviewed by our Credit Risk Management group to assess the reasonableness of the assumptions used and the accuracy of the work performed. In cases where we rely on third party inputs, we use the final unadjusted third party valuation analysis as support for any financial statement adjustments and disclosures to the financial statements. The valuation techniques and significant unobservable inputs for assets classified as Level 3 in the fair value hierarchy, which are measured using an internal model, are independently reviewed by other internal staff.

For assets measured at fair value on a non-recurring basis at November 30, 2012 and May 31, 2012 that are classified as Level 3 within the fair value hierarchy, any increase or decrease to significant unobservable inputs used in the determination of fair value, will not have a material impact on the fair value measurement of those assets or to the results of operations of the Company.

Assets measured at fair value on a non-recurring basis at November 30, 2012 and May 31, 2012 were classified as Level 3 within the fair value hierarchy. The following table provides the carrying/fair value of the related individual assets at November 30, 2012 and May 31, 2012 and the total losses for the three and six months ended November 30, 2012 and 2011:

		Level 3 Fair Value				Total losses for the three months ended November 30,				Total losses for the six months ended November 30,
(dollar amounts in thousands)		November 30, 2012		May 31, 2012		2012		2011		2012		2011
Non-performing loans,
net of specific reserves	$	21,156	$	16,517	$	-	$	(167)	$	-	$	(2,220	)

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(12)         Fair Value of Financial Instruments

Carrying and fair values for our financial instruments are presented as follows:

		November 30, 2012				May 31, 2012
(dollar amounts in thousands)		Carrying value		Fair value		Carrying value		Fair value
Assets:
Cash and cash equivalents	$	439,183	$	439,183	$	191,167	$	191,167
Restricted cash		8,649		8,649		7,694		7,694
Investments		309,932		309,932		59,045		59,045
Loans to members, net		18,956,470		20,564,234		18,776,286		20,405,353
Debt service reserve funds		39,803		39,803		39,803		39,803
Derivative instruments		273,480		273,480		296,036		296,036
Liabilities:
Short-term debt		6,050,861		6,084,603		4,493,434		4,498,565
Long-term debt		11,201,472		13,011,698		12,151,967		13,936,540
Guarantee liability		26,978		29,818		28,663		31,518
Derivative instruments		630,919		630,919		654,125		654,125
Subordinated deferrable debt		186,440		188,227		186,440		187,335
Members’ subordinated certificates		1,772,207		1,928,999		1,722,744		1,880,558
Off-balance sheet instruments:
Commitments		-		-		-		-

See Note 11, Fair Value Measurement,for more details on assets and liabilities measured at fair value on a recurring or non-recurring basis on our consolidated balance sheets. We consider relevant and observable prices in the principal market in our valuations where possible. Fair value estimates were developed at the reporting date and may not necessarily be indicative of amounts that could ultimately be realized in a market transaction at a future date.

With the exception of redeeming debt under early redemption provisions, terminating derivative instruments under early termination provisions and allowing borrowers to prepay their loans, we held and intend to hold all financial instruments to maturity excluding common stock investments that have no stated maturity. Below is a summary of significant methodologies used in estimating fair value amounts at November 30, 2012 and May 31, 2012.

Cash and Cash Equivalents

Cash and cash equivalents includes cash and certificates of deposit with original maturities of less than 90 days. Cash and cash equivalents are valued at the carrying value, which approximates fair value. Cash and cash equivalents are classified within Level 1 of the fair value hierarchy.

Restricted Cash

Restricted cash consists of cash and cash equivalents for which use is contractually restricted. Restricted cash is valued at the carrying value, which approximates fair value. Restricted cash is classified within Level 1 of the fair value hierarchy.

Investments

Our investments include investments in the Federal Agricultural Mortgage Corporation Series A common stock. The Series A common stock is classified as available-for-sale securities and recorded in the consolidated balance sheets at fair value. We calculate fair value based on the quoted price on the stock exchange where the stock is traded. That stock exchange is an active market based on the volume of shares transacted. The common stock is classified within Level 1 of the fair value hierarchy.

Our investments also include investments in Federal Agricultural Mortgage Corporation Series C non-voting, cumulative preferred stock purchased based on a percentage of debt issued under note purchase agreements. The note purchase agreements have since been amended so that we may be required to purchase additional Series C preferred stock based on the terms and circumstances at the time of each advance. The fair value for the Series C preferred stock is estimated at cost, which approximates fair value as the preferred stock securities do not meet the definition of marketable securities and the stock is callable at par. These securities carry with it a netting provision against our debt held by Federal Agricultural Mortgage Corporation in case of non-payment, therefore transferability of these securities is unlikely. The preferred stock is classified within Level 3 of the fair value hierarchy.

Our investments also include a deposit that we made with a financial institution in an interest bearing account with a maturity of less than one year as of the reporting date. This deposit is valued at the carrying value, which approximates fair value. It is classified within Level 1 of the fair value hierarchy.

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Loans to Members, Net

As part of receiving a loan from us, our members have additional requirements and rights that are not typical of other financial institutions, such as the ability to receive a patronage capital allocation, the general requirement to purchase subordinated certificates or member capital securities to meet their capital contribution requirements as a condition of obtaining additional credit from us, the option to select fixed rates from one year to maturity with the fixed rate resetting or repricing at the end of each selected rate term, the ability to convert from a fixed rate to another fixed rate or the variable rate at any time, and certain interest rate discounts that are specific to the borrower’s activity with us. These features make it difficult to obtain market data for similar loans. Therefore, we must use other methods to estimate the fair value.

Fair values for fixed-rate loans are estimated by discounting the future cash flows using the current rates at which we would make similar loans to new borrowers for the same remaining maturities. The maturity date used in the fair value calculation of loans with a fixed rate for a selected rate term is the next repricing date since these borrowers must reprice their loans at various times throughout the life of the loan at the then-current market rate.

Loans with different risk characteristics, specifically non-performing and restructured loans, are valued by using collateral valuations or by adjusting cash flows for credit risk and discounting those cash flows using the current rates at which similar loans would be made by us to borrowers for the same remaining maturities. See Note 11, Fair Value Measurement, for more details about how we calculate the fair value of certain non-performing loans.

Variable-rate loans are valued at cost, which approximates fair value since we can reset rates every 15 days.

Credit risk for the loan portfolio is estimated based on the associated reserve in our allowance for loan losses.

Loans to members, net are classified within Level 3 of the fair value hierarchy.

Debt Service Reserve Funds

Debt service reserve funds represent cash and/or investments on deposit with the bond trustee for tax-exempt bonds that we guarantee. Carrying value is considered to be equal to fair value. Debt service reserve funds are classified within Level 1 of the fair value hierarchy.

Short-Term Debt

Short-term debt consists of commercial paper, bank bid notes and other debt due within one year. The fair value of short-term debt with maturities greater than 90 days is estimated based on quoted market rates for debt with similar maturities. The fair value of short-term debt with maturities less than or equal to 90 days is carrying value, which is a reasonable estimate of fair value. Short-term debt is classified within Level 2 and Level 3 of the fair value hierarchy.

Long-Term Debt

Long-term debt consists of collateral trust bonds, medium-term notes and long-term notes payable. We issue all collateral trust bonds and some medium-term notes in underwritten public transactions. There is not active secondary trading for all underwritten collateral trust bonds and medium-term notes; therefore, dealer quotes and recent market prices are both used in estimating fair value. There is essentially no secondary market for the medium-term notes issued to our members or in transactions that are not underwritten; therefore, fair value is estimated based on observable benchmark yields and spreads for similar instruments supplied by banks that underwrite our other debt transactions. Collateral trust bonds and medium-term notes are classified within Level 2 of the fair value hierarchy. The long-term notes payable are issued in private placement transactions and there is no secondary trading of such debt. Therefore, the fair value is estimated based on underwriter quotes for similar instruments, if available, or based on cash flows discounted at current rates for similar instruments supplied by underwriters or by the original issuer. Secondary trading quotes for our debt instruments used in the determination of fair value incorporate our credit risk. Long-term notes payable are classified within Level 3 of the fair value hierarchy.

Guarantees

The fair value of our guarantee liability is based on the fair value of our contingent and non-contingent exposure related to our guarantees. The fair value of our contingent exposure for guarantees is based on management’s estimate of our exposure to losses within the guarantee portfolio. The fair value of our non-contingent exposure for guarantees issued is estimated based on the total unamortized balance of guarantee fees paid and guarantee fees to be paid discounted at our current short-term funding rate, which represents management’s estimate of the fair value of our obligation to stand ready to perform. Guarantees are classified within Level 3 of the fair value hierarchy.

Subordinated Deferrable Debt

Our subordinated deferrable debt is traded on the New York Stock Exchange; therefore, daily market quotes are available. The fair value for subordinated deferrable debt is based on the closing market quotes from the last day of the reporting period. Subordinated deferrable debt is classified within Level 1 of the fair value hierarchy.

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Members’ Subordinated Certificates

Members’ subordinated certificates include (i) membership subordinated certificates issued to our members as a condition of membership, (ii) loan and guarantee subordinated certificates as a condition of obtaining loan funds or guarantees and (iii) member capital securities issued as voluntary investments by our members. All members’ subordinated certificates are non-transferable other than among members with CFC’s consent. As there is no ready market from which to obtain fair value quotes for membership, loan and guarantee subordinated certificates, it is impracticable to estimate fair value, and such certificates are, therefore, valued at par. There also is no ready market from which to obtain fair value quotes for member capital securities. Fair value for member capital securities is based on the discounted cash flows using the coupon interest rate on the last business day of the reporting period. Members’ subordinated certificates are classified within Level 3 of the fair value hierarchy.

Derivative Instruments

We record derivative instruments in the consolidated balance sheets as either an asset or liability measured at fair value. Because there is not an active secondary market for the types of interest rate swaps we use, we obtain market quotes from the interest rate swap counterparties to adjust all interest rate swaps to fair value on a quarterly basis. The market quotes are based on the expected future cash flow and estimated yield curves. We adjust the market values received from the counterparties using credit default swap levels for us and the counterparties. The credit default swap levels represent the credit risk premium required by a market participant based on the available information related to us and the counterparty. Derivative instruments are classified within Level 2 of the fair value hierarchy.

Commitments

The fair value of our commitments is estimated as the carrying value, or zero. Extensions of credit under these commitments, if exercised, would result in loans priced at market rates. Commitments are classified within Level 3 of the fair value hierarchy.

(13)         Segment Information

The following tables contain the segment presentation for the condensed consolidated statements of operations for the six months ended November 31, 2012 and 2011 and condensed consolidated balance sheets at November 30, 2012 and 2011.

		For the six months ended November 30, 2012
(dollar amounts in thousands)		CFC		Other		Elimination		Consolidated
Statement of operations:
Interest income	$	473,682	$	28,333	$	(20,300)	$	481,715
Interest expense		(350,034)		(21,163)		20,300		(350,897)
Net interest income		123,648		7,170		-		130,818
Provision for loan losses		(5,305)		-		-		(5,305)
Net interest income after provision for loan losses		118,343		7,170		-		125,513
Non-interest income:
Fee and other income		22,533		686		(454)		22,765
Derivative losses		(26,436)		(1,922)		-		(28,358)
Results of operations from foreclosed assets		(5,674)		-		-		(5,674)
Total non-interest income		(9,577)		(1,236)		(454)		(11,267)
Non-interest expense:
General and administrative expenses		(32,297)		(4,778)		454		(36,621)
Recovery of guarantee liability		101		-		-		101
Other		(4,547)		-		-		(4,547)
Total non-interest expense		(36,743)		(4,778)		454		(41,067)
Income prior to income taxes		72,023		1,156		-		73,179
Income tax expense		-		(452)		-		(452)
Net income	$	72,023	$	704	$	-	$	72,727
Assets:
Total loans outstanding	$	19,064,837	$	1,230,471	$	(1,198,134)	$	19,097,174
Deferred origination costs		8,033		-		-		8,033
Less: Allowance for loan losses		(148,737)		-		-		(148,737)
Loans to members, net		18,924,133		1,230,471		(1,198,134)		18,956,470
Other assets		1,623,931		153,837		(123,844)		1,653,924
Total assets	$	20,548,064	$	1,384,308	$	(1,321,978)	$	20,610,394

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		For the six months ended November 30, 2011
(dollar amounts in thousands)		CFC			Other			Elimination			Consolidated
Statement of operations:
Interest income	$	475,194		$	36,453		$	(26,642	)	$	485,005
Interest expense		(396,011	)		(27,359	)		26,646			(396,724	)
Net interest income		79,183			9,094			4			88,281
Recovery of loan losses		12,125			-			-			12,125
Net interest income after recovery of loan losses		91,308			9,094			4			100,406
Non-interest income:
Fee and other income		9,146			431			(868	)		8,709
Derivative losses		(149,471	)		(9,853	)		-			(159,324	)
Results of operations from foreclosed assets		(16,466	)		-			-			(16,466	)
Total non-interest income		(156,791	)		(9,422	)		(868	)		(167,081	)
Non-interest expense:
General and administrative expenses		(29,042	)		(4,419	)		380			(33,081	)
Recovery of guarantee liability		72			-			-			72
Loss on early extinguishment of debt		(15,525	)		-			-			(15,525	)
Other		(815	)		(484	)		484			(815	)
Total non-interest expense		(45,310	)		(4,903	)		864			(49,349	)
Loss prior to income taxes		(110,793	)		(5,231	)		-			(116,024	)
Income tax benefit		-			2,108			-			2,108
Net loss	$	(110,793	)	$	(3,123	)	$	-		$	(113,916	)
Assets:
Total loans outstanding	$	18,279,036		$	1,187,321		$	(1,151,764	)	$	18,314,593
Deferred origination costs		7,050			-			-			7,050
Less: Allowance for loan losses		(149,158	)		-			-			(149,158	)
Loans to members, net		18,136,928			1,187,321			(1,151,764	)		18,172,485
Other assets		1,590,928			180,532			(151,607	)		1,619,853
Total assets	$	19,727,856		$	1,367,853		$	(1,303,371	)	$	19,792,338

27

The following tables contain the segment presentation for the condensed consolidated statements of operations for the three months ended November 30, 2012 and 2011.

		For the three months ended November 30, 2012
(dollar amounts in thousands)		CFC		Other			Elimination			Consolidated
Statement of operations:
Interest income	$	237,711	$	13,946		$	(10,027	)	$	241,630
Interest expense		(173,870)		(10,458	)		10,027			(174,301)
Net interest income		63,841		3,488			-			67,329
Recovery of loan losses		3,817		-			-			3,817
Net interest income after recovery of loan losses		67,658		3,488			-			71,146
Non-interest income:
Fee and other income		17,741		292			(226	)		17,807
Derivative losses		(3,391)		(375	)		-			(3,766)
Results of operations from foreclosed assets		(909)		-			-			(909)
Total non-interest income		13,441		(83	)		(226	)		13,132
Non-interest expense:
General and administrative expenses		(17,425)		(2,252	)		226			(19,451)
Recovery of guarantee liability		92		-			-			92
Other		(4,384)		-			-			(4,384)
Total non-interest expense		(21,717)		(2,252	)		226			(23,743)
Income prior to income taxes		59,382		1,153			-			60,535
Income tax expense		-		(454	)		-			(454)
Net income	$	59,382	$	699		$	-		$	60,081

		For the three months ended November 30, 2011
(dollar amounts in thousands)		CFC			Other			Elimination			Consolidated
Statement of operations:
Interest income	$	234,001		$	17,106		$	(13,352	)	$	237,755
Interest expense		(194,418	)		(13,615	)		13,353			(194,680	)
Net interest income		39,583			3,491			1			43,075
Recovery of loan losses		2,995			-			-			2,995
Net interest income after recovery of loan losses		42,578			3,491			1			46,070
Non-interest income:
Fee and other income		3,964			213			(191	)		3,986
Derivative losses		(45,133	)		(2,620	)		-			(47,753	)
Results of operations from foreclosed assets		(6,648	)		-			-			(6,648	)
Total non-interest income		(47,817	)		(2,407	)		(191	)		(50,415	)
Non-interest expense:
General and administrative expenses		(14,858	)		(2,024	)		190			(16,692	)
Recovery of guarantee liability		12			-			-			12
Loss on early extinguishment of debt		(6,258	)		-			-			(6,258	)
Other		(418	)		-			-			(418	)
Total non-interest expense		(21,522	)		(2,024	)		190			(23,356	)
Loss prior to income taxes		(26,761	)		(940	)		-			(27,701	)
Income tax benefit		-			407			-			407
Net loss	$	(26,761	)	$	(533	)	$	-		$	(27,294	)

28

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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-Q, including Part I, Item 1A. Risk Factors in our Form 10-K for the year ended May 31, 2012.

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.

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

Executive Summary

Throughout this management discussion and analysis, we will refer to certain of our financial measures that are not in accordance with generally accepted accounting principles in the United States (“GAAP”) as “adjusted.” In our Executive Summary, our discussion focuses on the key metrics that we use to evaluate our business, which are 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. We do not measure our performance or evaluate our business based on the GAAP measures, and the financial covenants in our revolving credit agreements and debt indentures are based on our adjusted measures rather than the related GAAP measures. The main adjustments we make to calculate the non-GAAP measures compared with the related GAAP measures are to adjust interest expense to include derivative cash settlements; to adjust net income, senior debt and total equity to exclude the non-cash adjustments from the accounting for derivative financial instruments; to exclude from senior debt the amount that funds CFC member loans guaranteed by the Rural Utilities Service (“RUS”), subordinated deferrable debt and members’ subordinated certificates; and to adjust 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 related GAAP measures.

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 within a range of 6.00-to-1.

Lending Activity

Loans outstanding increased by $185 million or 1 percent during the six months ended November 30, 2012 primarily due an increase of $312 million in CFC power supply loans and an increase of $99 million in NCSC loans partly offset by a decrease of $191 million in CFC distribution loans during the first half of fiscal year 2013. The decrease in CFC distribution loans was driven by the pay-off of a $414 million restructured loan and the prepayment of a $19 million capital expenditures loan by a restructured borrower in September 2012.

29

During the six months ended November 30, 2012, $693 million of CFC long-term fixed-rate loans were scheduled to reprice. Of this total, $543 million selected a new long-term fixed rate; $104 million selected a long-term variable rate; $18 million selected a new rate offered as part of our loan sales program and were sold by CFC with CFC continuing to service the loans sold; and $28 million were repaid in full.

Funding Activity

During the six months ended November 30, 2012, total debt outstanding increased by $656 million primarily due to the $185 million increase in loans outstanding and $499 million increase in cash and investments. At November 30, 2012 and May 31, 2012, commercial paper, select notes, daily liquidity fund and bank bid notes outstanding represented 18 percent and 17 percent, respectively, of total debt outstanding. At November 30, 2012 and May 31, 2012, collateral trust bonds represented 33 percent and 34 percent, respectively, of total debt outstanding, while medium-term notes represented 13 percent of total debt outstanding for both periods. We were able to maintain the same utilization of short-term debt, while replacing higher cost maturing medium-term notes with new issuances of lower cost medium-term notes, collateral trust bonds and notes payable issued under our Guaranteed Underwriter program.

Financial Results

For the six months ended November 30, 2012 and 2011, we reported net income of $73 million and net loss of $114 million, respectively, and TIER of 1.21 and less than 1.00, respectively. As previously mentioned, we use adjusted non-GAAP measures in our analysis to evaluate our performance and for debt covenant compliance. For the six months ended November 30, 2012 and 2011, our adjusted net income was $72 million and $45 million, respectively, and adjusted TIER was 1.19 and 1.11, respectively.

The increase to our adjusted net income for the six months ended November 30, 2012 as compared with the prior-year period was driven by the increase of $14 million to adjusted net interest income, which is due to the reduction to adjusted interest expense, the increase of $14 million to fee and other income, which is primarily due to the $13 million prepayment fee received on a capital expenditures loan in September 2012, and a decrease of $16 million to the expense for early debt redemption, as we redeemed a total of $500 million of medium-term notes in August 2011 and October 2011, at a premium and had no such early redemption during the six months ended November 30, 2012. These factors are partially offset by the increase of $17 million to the loan loss provision, primarily as a result of an increase to loans outstanding during the period.

At November 30, 2012, our debt-to-equity ratio decreased to 38.02 to-1 compared with 39.65-to-1 at May 31, 2012. As mentioned previously, we use adjusted non-GAAP measures in our own analysis to evaluate our performance and for covenant compliance. Our adjusted debt-to-equity ratio increased to 6.04-to-1 at November 30, 2012 compared with 6.01-to-1 at May 31, 2012 primarily due to an increase in our adjusted liabilities that was greater than the increase in adjusted equity.

Outlook for the Next 12 Months

We expect the amount of long-term loan repayments to slightly exceed the amount of long-term loan advances over the next 12 months. We anticipate a slight increase to core earnings over the next 12 months due to savings associated with the debt exchange completed in October 2012 and the continued use of short-term funding options which are sufficient to offset the decrease to long-term variable and line-of-credit interest rates that we charge to our members. We expect to continue to make investments in liquid interest bearing accounts as an additional source of liquidity resulting in an increase to cash and investments.

We have $2,589 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 November 30, 2012, we had $439 million in cash and cash equivalents, up to $325 million available under committed loan facilities from the Federal Financing Bank, $2,840 million available under committed revolving lines of credit with a syndicate of banks and, subject to market conditions, up to $2,601 million available under a revolving note purchase agreement with the Federal Agriculture Mortgage Corporation. In September 2012, we received a commitment from RUS to guarantee a loan from the Federal Financing Bank for additional funding of $424 million as part of the Guaranteed Underwriter program. We closed the loan facility in December 2012. As a result, we will have an additional $424 million available under Federal Financing Bank loan facilities with a 20-year maturity repayment period during the three-year period following the date of closing. We also have the ability to issue collateral trust bonds and medium-term notes in the capital markets and medium-term notes to members. We believe we can continue to roll over the $3,462 million of commercial paper, select notes, daily liquidity fund and bank bid notes scheduled to mature through May 31, 2013, 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 within a range of 6.00-to-1 over the next 12 months.

30

Results of Operations

The following table presents the results of operations for the three and six months ended November 30, 2012 and 2011.

		For the three months ended November 30,							For the six months ended November 30,
(dollar amounts in thousands)		2012		2011			Change		2012		2011			Change
Interest income	$	241,630	$	237,755		$	3,875	$	481,715	$	485,005		$	(3,290)
Interest expense		(174,301)		(194,680	)		20,379		(350,897)		(396,724	)		45,827
Net interest income		67,329		43,075			24,254		130,818		88,281			42,537
Recovery of (provision for) loan losses		3,817		2,995			822		(5,305)		12,125			(17,430)
Net interest income after recovery of    (provision for) loan losses
		71,146		46,070			25,076		125,513		100,406			25,107
Non-interest income:
Fee and other income		17,807		3,986			13,821		22,765		8,709			14,056
Derivative losses		(3,766)		(47,753	)		43,987		(28,358)		(159,324	)		130,966
Results of operations from foreclosed assets		(909)		(6,648	)		5,739		(5,674)		(16,466	)		10,792
Total non-interest income		13,132		(50,415	)		63,547		(11,267)		(167,081	)		155,814
Non-interest expense:
Salaries and employee benefits		(10,148)		(9,833	)		(315)		(20,553)		(20,232	)		(321)
Other general and administrative expenses		(9,303)		(6,859	)		(2,444)		(16,068)		(12,849	)		(3,219)
Recovery of guarantee liability		92		12			80		101		72			29
Loss on early extinguishment of debt		-		(6,258	)		6,258		-		(15,525	)		15,525
Other		(4,384)		(418	)		(3,966)		(4,547)		(815	)		(3,732)
Total non-interest expense		(23,743)		(23,356	)		(387)		(41,067)		(49,349	)		8,282
Income (loss) prior to income taxes		60,535		(27,701	)		88,236		73,179		(116,024	)		189,203
Income tax (expense) benefit		(454)		407			(861)		(452)		2,108			(2,560)
Net income (loss)		60,081		(27,294	)		87,375		72,727		(113,916	)		186,643
Less:  Net (income) loss attributable to
noncontrolling interest		(699)		533			(1,232)		(704)		3,123			(3,827)
Net income (loss) attributable to CFC	$	59,382	$	(26,761	)	$	86,143	$	72,023	$	(110,793	)	$	182,816
Adjusted net income	$	48,391	$	19,477		$	28,914	$	71,766	$	44,594		$	27,172
Adjusted interest expense	$	(189,757)	$	(195,662	)	$	5,905	$	(380,216)	$	(397,538	)	$	17,322
TIER (1)		1.34		-					1.21		-
Adjusted TIER (2)		1.26		1.10					1.19		1.11

(1) For the three and six months ended November 30, 2011 we reported a net loss of $27 million and $114 million, respectively; 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 losses line item in the chart above. See Non-GAAP Financial Measures for further explanation and a reconciliation of these adjustments.

Interest Income

The following tables break out the average rate on loans and the change to interest income due to changes in average loan volume versus changes to interest rates summarized by loan type.

			Average balances and interest rates – Assets
			For the three months ended November 30,
			2012		2011		2012		2011	2012		2011
(dollar amounts in thousands)			Average volume				Interest income			Average yield
Long-term fixed-rate loans		$	17,138,897	$	16,372,866	$	218,247	$	219,841	5.11	%	5.39	%
Long-term variable-rate loans			642,677		572,130		4,893		4,655	3.05		3.26
Line of credit loans			1,163,508		1,009,431		7,413		6,738	2.56		2.68
Restructured loans (2)			92,944		462,246		7,625		4,084	32.91		3.54
Non-performing loans			47,747		41,853		-		-	-		-
Total			19,085,773		18,458,526		238,178		235,318	5.01		5.11
Investments			356,532		315,209		1,576		853	1.77		1.09
Fee income (1)			-		-		1,876		1,584	-		-
Total	$		19,442,305	$	18,773,735	$	241,630	$	237,755	4.98		5.08

31

			Average balances and interest rates – Assets
			For the six months ended November 30,
			2012		2011			2012		2011	2012		2011
(dollar amounts in thousands)			Average volume					Interest income			Average yield
Long-term fixed-rate loans		$	16,967,005	$		16,472,695	$	436,187	$	445,187	5.13	%	5.39	%
Long-term variable-rate loans			692,218			625,487		10,918		12,907	3.15		4.12
Line of credit loans			1,156,766			1,101,760		15,105		16,364	2.60		2.96
Restructured loans (2)			274,565			465,890		13,087		4,776	9.51		2.04
Non-performing loans			48,105			37,843		-		-	-		-
Total			19,138,659			18,703,675		475,297		479,234	4.95		5.11
Investments			391,837			397,024		2,514		1,781	1.28		0.89
Fee income (1)			-			-		3,904		3,990	-		-
Total	$		19,530,496	$		19,100,699	$	481,715	$	485,005	4.92		5.06

(1) 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.

(2) 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.

		Analysis of changes in interest income
		For the three months ended November 30, 2012 vs. 2011						For the six months ended November 30, 2012 vs. 2011
		Change due to (3)						Change due to (3)
(dollar amounts in thousands)		Average volume (1)		Average rate (2)		Net change		Average volume (1)		Average rate (2)		Net change
Increase (decrease) in interest income:
Long-term fixed-rate loans	$	10,286	$	(11,880)	$	(1,594)	$	13,359	$	(22,359)	$	(9,000)
Long-term variable-rate loans		574		(336)		238		1,377		(3,366)		(1,989)
Line of credit loans		1,028		(353)		675		817		(2,076)		(1,259)
Restructured loans		(3,263)		6,804		3,541		(1,961)		10,272		8,311
Non-performing loans		-		-		-		-		-		-
Total interest income on loans		8,625		(5,765)		2,860		13,592		(17,529)		(3,937)
Investments		112		611		723		(23)		756		733
Fee income		-		292		292		-		(86)		(86)
Total interest income	$	8,737	$	(4,862)	$	3,875	$	13,569	$	(16,859)	$	(3,290)

(1) Calculated using the following formula: (current period average balance – prior-year period average balance) x prior-year period average rate.

(2) Calculated using the following formula: (current period average rate – prior-year period average rate) x 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.

During the three months ended November 30, 2012, interest income increased by 2 percent compared with the prior-year period primarily due to the 3 percent increase in average loan balances partially offset by the 10 basis points decrease in the average rate on loans. During the six months ended November 30, 2012, interest income decreased by 1 percent primarily due to the 16 basis points decrease in the average rate on loans partially offset by a 2 percent increase in average loan balances.

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. During the three and six months ended November 30, 2012, there was a reduction in the rates we had to pay for funding in the capital markets as compared with the prior-year periods. As a result, the average long-term fixed interest rates we offered on electric loans for the three and six months ended November 30, 2012 decreased 42 basis points and 77 basis points, respectively, compared with the prior-year periods. During the six months ended November 30, 2012, $693 million of long-term fixed-rate loans were scheduled to reprice and the borrowers of $543 million of these loans selected a new long-term fixed rate, which was on average lower than the rate prior to the repricing. In addition, the loans advanced to repay obligations of other lenders were done so at rates lower than the average rate for long-term fixed-rate loans at the prior-year period-end. Thus, there was a reduction of 28 basis points and 26 basis points in the weighted-average rate received on our long-term fixed-rate loan portfolio during the three and six months ended November 30, 2012, respectively, compared with the prior-year periods. The decrease to the yields earned on long-term variable-rate loans and line of credit loans was due to a reduction to the standard rates we charged for such loans on October 1, 2012. The reduction to interest income due to rates was offset slightly by placing a $420 million restructured loan on accrual status on October 1, 2011, which was paid in full in September 2012. Placing this loan on accrual status resulted in an increase of $7 million and $12 million to interest income and, therefore, a higher average rate on restructured loans for the three and six months ended November 30, 2012, respectively, as compared with the prior-year periods.

32

The increase in average loan balances for the three and six months ended November 30, 2012 compared with the prior-year periods is driven primarily by increases in long-term fixed rate and long-term variable rate loan balances due to advances to CFC and NCSC borrowers to refinance debt from other lenders.

Our non-performing and restructured loans on non-accrual status affect interest income for both the current and prior-year period. The effect of non-accrual loans on interest income is included in the rate variance in the table above. Interest income was reduced as follows as a result of holding loans on non-accrual status:

		For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)		2012		2011		2012		2011
Electric	$	267	$	1,654	$	565	$	7,361
Telecommunications		106		118		215		158
Total	$	373	$	1,772	$	780	$	7,519

The decrease in interest foregone for electric loans was due to placing a $420 million restructured loan on accrual status on October 1, 2011, which was paid off in September 2012.

Interest Expense

The following tables break out the average cost of debt and the change to interest expense due to changes in average debt volume versus changes to interest rates summarized by debt type. We do not fund each individual loan with specific debt. Rather, we attempt to minimize costs and maximize efficiency by funding large aggregated amounts of loans. The following tables also break out 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. Additionally, the tables present adjusted interest expense, which includes all derivative cash settlements in interest 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 interest expense.

		Average balances and interest rates – Liabilities
		For the three months ended November 30,
		2012		2011		2012		2011		2012		2011
		Average volume				Interest expense				Average cost
(dollar amounts in thousands)
Short-term debt (1) (2)	$	3,394,771	$	2,876,946	$	(1,697)	$	(1,391	)	(0.20)	%	(0.19	)%
Medium-term notes (1)		2,623,679		3,277,260		(24,833)		(47,733	)	(3.80)		(5.84	)
Collateral trust bonds (1)		6,222,897		5,538,310		(82,271)		(77,346	)	(5.30)		(5.60	)
Subordinated deferrable debt (1)		181,058		180,955		(2,807)		(2,807	)	(6.22)		(6.22	)
Subordinated certificates (1)		1,728,603		1,713,121		(20,528)		(20,075	)	(4.76)		(4.70	)
Long-term notes payable (1)		4,881,191		4,395,487		(37,915)		(39,071	)	(3.12)		(3.57	)
Total		19,032,199		17,982,079		(170,051)		(188,423	)	(3.58)		(4.20	)
Debt issuance costs (3)		-		-		(1,905)		(2,380	)	-		-
Fee expense (4)		-		-		(2,345)		(3,877	)	-		-
Total	$	19,032,199	$	17,982,079	$	(174,301)	$	(194,680	)	(3.67)		(4.34	)
Derivative cash settlements (5)	$	9,252,825	$	10,532,463	$	(15,456)	$	(982	)	(0.67)	%	(0.04	)%
Adjusted interest expense (6)		19,032,199		17,982,079		(189,757)		(195,662	)	(4.00)		(4.36	)

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		Average balances and interest rates – Liabilities
		For the six months ended November 30,
		2012		2011		2012		2011		2012		2011
		Average volume				Interest expense				Average cost
(dollar amounts in thousands)
Short-term debt (1) (2)	$	3,357,570	$	2,804,435	$	(3,316)	$	(3,160	)	(0.20)	%	(0.22	)%
Medium-term notes (1)		2,573,378		3,441,788		(52,716)		(101,574	)	(4.09)		(5.89	)
Collateral trust bonds (1)		6,276,068		5,538,274		(163,710)		(154,618	)	(5.20)		(5.57	)
Subordinated deferrable debt (1)		181,001		180,949		(5,613)		(5,613	)	(6.19)		(6.19	)
Subordinated certificates (1)		1,714,449		1,746,512		(40,882)		(38,376	)	(4.76)		(4.38	)
Long-term notes payable (1)		4,780,003		4,478,344		(76,311)		(78,898	)	(3.18)		(3.51	)
Total		18,882,469		18,190,302		(342,548)		(382,239	)	(3.62)		(4.19	)
Debt issuance costs (3)		-		-		(3,842)		(7,505	)	-		-
Fee expense (4)		-		-		(4,507)		(6,980	)	-		-
Total	$	18,882,469	$	18,190,302	$	(350,897)	$	(396,724	)	(3.71)		(4.35	)
Derivative cash settlements (5)	$	9,306,967	$	10,757,943	$	(29,319)	$	(814	)	(0.63)	%	(0.02	)%
Adjusted interest expense (6)		18,882,469		18,190,302		(380,216)		(397,538	)	(4.02)		(4.36	)

(1) Interest expense includes the amortization of discounts on debt.

(2) Average volume includes commercial paper, daily liquidity fund, bank bid notes and select notes.

(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.

		Analysis of changes in interest expense
		For the three months ended November 30, 2012 vs. 2011						For the six months ended November 30, 2012 vs. 2011
		Change due to (3)						Change due to (3)
(dollar amounts in thousands)		Average volume (1)		Average rate (2)		Net change		Average volume (1)		Average rate (2)		Net change
(Increase) decrease in interest expense:
Short-term debt	$	(250)	$	(56)	$	(306)	$	(623)	$	467	$	(156)
Medium-term notes		9,519		13,381		22,900		25,629		23,229		48,858
Collateral trust bonds		(9,561)		4,636		(4,925)		(20,598)		11,506		(9,092)
Subordinated deferrable debt		(2)		2		-		(2)		2		-
Subordinated certificates		(181)		(272)		(453)		705		(3,211)		(2,506)
Long-term notes payable		(4,317)		5,473		1,156		(5,315)		7,902		2,587
Total interest expense on debt		(4,792)		23,164		18,372		(204)		39,895		39,691
Debt issuance costs		-		475		475		-		3,663		3,663
Fee expense		-		1,532		1,532		-		2,473		2,473
Total interest expense	$	(4,792)	$	25,171	$	20,379	$	(204)	$	46,031	$	45,827
Derivative cash settlements (4)	$	119	$	(14,593)	$	(14,474)	$	110	$	(28,615)	$	(28,505)
Adjusted interest expense (5)		(4,673)		10,578		5,905		(94)		17,416		17,322

(1) Calculated using the following formula: (current period average balance – prior-year period average balance) x prior-year period average rate.

(2) Calculated using the following formula: (current period average rate – prior-year period average rate) x 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.

During the three and six months ended November 30, 2012, interest expense decreased by 10 percent and 12 percent, respectively, compared with the prior-year periods primarily due to the 67 basis points and 64 basis points reduction in the total cost of debt. The lower average cost of debt was due to the lower cost of issuing new debt in the capital markets, commercial paper and daily liquidity fund, and the refinancing of $1,500 million of higher cost medium-term notes with a mix of commercial paper and lower cost collateral trust bonds during fiscal year 2012. This resulted in a higher utilization of commercial paper which decreased in cost by 2 basis points, or 9 percent, for the six months ended November 30, 2012, as

34

compared with the prior-year period. Commercial paper is our lowest cost debt instrument, with an average cost of 20 basis points during the six months ended November 30, 2012.

The items described above and the change in the funding mix of debt outstanding contributed to the decrease in our interest expense as of November 30, 2012 as compared with the prior-year. Our utilization of short-term debt increased from 16 percent and 15 percent of total debt during the three and six months ended November 30, 2011, respectively, to 18 percent of total debt during the three and six months ended November 30, 2012, respectively, while the weighted average rate paid for these instruments decreased slightly. Our utilization of collateral trust bond funding increased from 31 percent and 30 percent of total debt during the three and six months ended November 30, 2011, respectively, to 33 percent during the three and six months ended November 30, 2012, while the weighted average rate paid for our collateral trust bond funding decreased by 30 basis points and 37 basis points for the three and six month ended November 30, 2012, respectively, as compared to the prior-year periods. Our utilization of medium-term note funding decreased from 18 percent and 19 percent of total debt during the three and six months ended November 30, 2011, respectively, to 14 percent during the three and six month ended November 30, 2012, due to the maturity of $1,500 million of 7.25 percent medium-term notes. The weighted average rate paid on our medium-term note funding decreased by 204 basis points and 180 basis points for the three and six month ended November 30, 2012, respectively, compared to the prior-year periods.

The adjusted interest expense, which includes all derivative cash settlements, was $190 million and $380 million for the three and six months ended November 30, 2012, respectively, compared with $196 million and $398 million for the three and six months ended November 30, 2011. The decrease in adjusted interest expense during the three and six months ended November 30, 2012 was due to the lower interest expense noted above, partially offset by an increase in derivative cash settlements expense during the three and six months ended November 31, 2012. 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.

Net Interest Income

The following tables represent a summary of the effect on net interest income and adjusted net interest income from changes in the components of total interest income and total interest expense described above. The following tables also summarize the net yield and adjusted net yield and the changes to net interest income and adjusted net interest income due to changes in average balances versus changes to average rate/cost.

		Average interest rates – Assets and Liabilities
		For the three months ended November 30,
		2012		2011	2012		2011
(dollar amounts in thousands)
Total interest income	$	241,630	$	237,755	4.98	%	5.08	%
Total interest expense		(174,301)		(194,680	(3.67)		(4.34	)
Net interest income/Net yield	$	67,329	$	43,075	1.31	%	0.74	%
Derivative cash settlements		(15,456)		(982	(0.67)		(0.04	)
Adjusted net interest income/Adjusted net yield (1)	$	51,873	$	42,093

		Average interest rates – Assets and Liabilities
		For the six months ended November 30,
		2012		2011		2012		2011
(dollar amounts in thousands)		Interest income (expense)				Average yield (cost)
Total interest income	$	481,715	$	485,005		4.92	%	5.06	%
Total interest expense		(350,897)		(396,724	)	(3.71)		(4.35	)
Net interest income/Net yield	$	130,818	$	88,281		1.21	%	0.71	%
Derivative cash settlements		(29,319)		(814	)	(0.63)		(0.02	)
Adjusted net interest income/Adjusted net yield (1)	$	101,499	$	87,467		0.90		0.70

(1) 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 net interest income.

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		Analysis of changes in net interest income
		For the three months ended November 30, 2012 vs. 2011						For the six months ended November 30, 2012 vs. 2011
		Change due to (3)						Change due to (3)
(dollar amounts in thousands)		Average volume (1)		Average rate (2)		Net change		Average volume (1)		Average rate (2)		Net change
Increase in net interest income	$	3,945	$	20,309	$	24,254	$	13,365	$	29,172	$	42,537
Increase in adjusted net interest income		4,064		5,716		9,780		13,475		557		14,032

(1) Calculated using the following formula: (current period average balance – prior-year period average balance) x prior-year period average rate.

(2) Calculated using the following formula: (current period average rate – prior-year period average rate) x 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.

Net interest income for the three and six months ended November 30, 2012, increased 56 percent and 48 percent, respectively, compared with the prior-year periods, primarily due to the reduction to interest expense that exceeded the decrease in interest income. The primary factor driving the reduction to interest expense during the first half of fiscal year 2013 was our refinancing of maturing term debt with lower cost debt during fiscal years 2012 and 2013. We maintained a higher average balance of collateral trust bonds and commercial paper, which have a lower weighted-average cost, in our overall funding mix and decreased the utilization of medium-term notes during the three and six months ended November 30, 2012 compared with the prior-year periods.

Adjusted net interest income increased 23 percent and 16 percent, respectively, for the three and six months ended November 30, 2012 compared with the prior-year periods primarily due to the reduction to interest expense that exceeded the decrease in interest income, partially offset by higher derivative cash settlements expense compared with the prior-year periods. 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.

Recovery of (Provision for) Loan Losses

The loan loss recovery of $4 million during the three months ended November 30, 2012 was primarily due to the reduction of $3 million in the allowance held for impaired loans. The provision for loan losses during the six months ended November 30, 2012 of $5 million was due to the increase in the allowance held for the general loan portfolio of $4 million and an increase in the allowance held for large loan exposures of $5 million, partially offset by the reduction of $4 million to the allowance held for impaired loans. The increase in the loan loss allowance for the six months ended November 30, 2012 was driven primarily by the overall increase in the balance of loans outstanding and a slight deterioration in certain borrowers’ internal risk ratings.

Non-interest Income

Non-interest income increased by $64 million and $156 million, respectively, for the three and six months ended November 30, 2012 compared with the prior-year periods primarily due to the decrease in derivative losses of $44 million and $131 million, respectively, the decrease in losses from operations of foreclosed assets of $6 million and $11 million, respectively, and the increase in fee income of $14 million for both periods. The increase in fee income was due to a $13 million prepayment fee received on a capital expenditures loan in September 2012.

The derivative losses line item includes income and losses recorded for our interest rate swaps as summarized below:

		For the three months ended November 30,							For the six months ended November 30,
(dollar amounts in thousands)		2012		2011			Net Change		2012		2011		Net Change
Derivative cash settlements	$	(15,456)	$	(982	)	$	(14,474)	$	(29,319)	$	(814)	$	(28,505)
Derivative forward value		11,690		(46,771	)		58,461		961		(158,510)		159,471
Derivative losses	$	(3,766)	$	(47,753	)	$	43,987	$	(28,358)	$	(159,324)	$	130,966

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We currently use two types of interest rate exchange agreements:  (i) we pay a fixed rate and receive a variable rate and (ii) we pay a variable rate and receive a fixed rate. The following chart 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:

		For the three months ended November 30,
		2012						2011
(dollar amounts in thousands)		Average notional balance	Weighted- average rate paid		Weighted- average rate received			Average notional balance	Weighted- average rate paid		Weighted- average rate received
Pay fixed-receive variable	$	5,752,385	3.63	%	0.37	%	$	5,566,188	3.99	%	0.34	%
Pay variable-receive fixed		3,500,440	1.19		4.72			4,966,275	1.26		5.30
Total	$	9,252,825	2.69		2.03		$	10,532,463	2.69		2.70

		For the six months ended November 30,
		2012						2011
(dollar amounts in thousands)		Average notional balance	Weighted- average rate paid		Weighted- average rate received			Average notional balance	Weighted- average rate paid		Weighted- average rate received
Pay fixed-receive variable	$	5,651,883	3.66	%	0.41	%	$	5,597,760	4.02	%	0.30	%
Pay variable-receive fixed		3,655,084	1.23		4.67			5,160,183	1.21		5.26
Total	$	9,306,967	2.71		2.08		$	10,757,943	2.67		2.68

During the three and six months ended November 30, 2012, the weighted-average rate we paid on our interest rate swap agreements was 66 basis points and 63 basis points, respectively, higher than the weighted-average rate we received, whereas the weighted-average rate we paid on our interest rate swap agreements was 1 basis point lower that the weighted-average rate we received during the prior-year periods. 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 $1,800 million of pay variable-receive fixed interest rate swaps that matured since November 30, 2011.

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 three and six months ended November 30, 2012 increased by $58 million and $159 million, respectively, compared with the prior-year periods.

For the three months ended November 30, 2012, the derivative forward value gains of $12 million were the result of an increase in the steepness of the estimated yield curve for our swaps of 17 basis points based on market expectations of interest rates. For the six months ended November 30, 2012 the derivative value forward gain of $1 million was due to the increase in the steepness of the estimated yield curve for our swaps of 43 basis points based on market expectations of interest rates. During the six months ended November 30, 2012, 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 61 percent 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 six months ended November 30, 2012, the fair value of pay variable-receive fixed swaps declined as a result of swap maturities and remaining tenors within the pay variable-receive fixed swap portfolio.

Non-interest Expense

Non-interest expense remained fairly stable for the three months ended November 30, 2012 compared with the prior-year period. The $2 million increase in other general and administrative expenses and the $4 million increase in other expenses were offset by the reduction of $6 million to the loss on early extinguishment of debt recorded during the three months ended November 30, 2011 related to the redemption of $250 million of medium-term notes. Non-interest expense decreased by $8 million during the six months ended November 30, 2012 compared with prior-year period primarily due to the $3 million increase in other general and administrative expenses and the $4 million increase in other expenses offset by a reduction of $16 million to the loss on early extinguishment of debt recorded during the six months ended November 30, 2011 related to the early redemption of $500 million of medium-term. The increase in other general and administrative expenses during the three and six months ended November 30, 2012 is driven by $3 million in transaction costs incurred associated with the debt exchange that closed in October 2012. The increase in other expenses during the three and six months ended November 30, 2012 is due to a payment of $4 million related to the Innovative Communication Corporation bankruptcy. The Chapter 11 trustee for the Innovative Communication Corporation cases proposed a Chapter 11 Plan based upon a $4 million contribution by RTFC. The Plan was accepted by the voting creditors and other interested parties and confirmed by the Court in November 2012 resulting in broad releases of RTFC, CFC, and related parties and affiliates.

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Net Income (Loss)

The changes in the items described above resulted in net income of $60 million and $73 million for the three  and six months ended November 30, 2012, respectively, compared with net losses of $27 million and $114 million for the same prior-year periods, respectively. The adjusted net income, which excludes the effect of the derivative forward value, was $48 million and $72 million for the three and six months ended November 30, 2012, respectively, compared with the adjusted net income of $19 million and $45 million, respectively, for the same prior-year periods. Based on the adjusted net income, adjusted TIER was 1.26 and 1.19 for the three and six months ended November 30, 2012, respectively, compared with 1.10 and 1.11 for the same prior-year periods, respectively. See Non-GAAP Financial Measures for further explanation of the adjustments we make in our financial analysis to net income.

Net Income (Loss) Attributable to the Noncontrolling Interest

The net income or loss attributable to the noncontrolling interest represents 100 percent of the results of operations of RTFC and NCSC as the members of RTFC and NCSC own or control 100 percent of the interest in their respective companies. Noncontrolling interest for the three and six months ended November 30, 2012 represents $1 million of net income compared with net loss of $1 million and $3 million, respectively, for the prior-year periods. Fluctuations in net income and loss are primarily due to fluctuations in the fair value of NCSC’s derivative instruments.

Ratio of Earnings to Fixed Charges

The following table provides the calculation of the ratio of earnings to fixed charges. The fixed-charge coverage ratio includes capitalized interest in total fixed charges, which is not included in our TIER calculation. For the three and six months ended November 30, 2012, the fixed-charge coverage ratio was the same as our TIER ratio.

		For the three months ended November 30,					For the six months ended November 30,
(dollar amounts in thousands)		2012		2011			2012		2011
Net income (loss) prior to cumulative effect of
change in accounting principle	$	60,081	$	(27,294	)	$	72,727	$	(113,916)
Add: fixed charges		174,301		194,680			350,897		396,795
Less: interest capitalized		-		-			-		(71)
Earnings available for fixed charges	$	234,382	$	167,386		$	423,624	$	282,808
Total fixed charges:
Interest on all debt (including amortization of discount
and issuance costs)	$	174,301	$	194,680		$	350,897	$	396,724
Interest capitalized		-		-			-		71
Total fixed charges	$	174,301	$	194,680		$	350,897	$	396,795
Ratio of earnings to fixed charges (1)		1.34		-			1.21		-

(1) For the three and six months ended November 30, 2011 earnings were insufficient to cover fixed charges by $27 million and $114 million, respectively and therefore, the ratio for those periods results in a value below zero.

Financial Condition

Loan and Guarantee Portfolio Assessment

Loan Programs

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.

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The following table summarizes loans outstanding by type and by member class:

(dollar amounts in thousands)		November 30, 2012				May 31, 2012				Increase/
Loans by type (1):		Amount	%			Amount	%			(decrease)
Long-term loans:
Long-term fixed-rate loans	$	16,982,140	89	%	$	16,742,914	89	%	$	239,226
Long-term variable-rate loans		607,312	3			764,815	4			(157,503)
Loans guaranteed by RUS		213,275	1			219,084	1			(5,809)
Total long-term loans		17,802,727	93			17,726,813	94			75,914
Line of credit loans		1,294,447	7			1,184,929	6			109,518
Total loans	$	19,097,174	100	%	$	18,911,742	100	%	$	185,432
Loans by member class (1):
CFC:
Distribution	$	13,883,982	73	%	$	14,075,471	74	%	$	(191,489)
Power supply		3,909,155	20			3,596,820	19			312,335
Statewide and associate		73,566	-			73,606	1			(40)
CFC total		17,866,703	93			17,745,897	94			120,806
RTFC		536,759	3			571,566	3			(34,807)
NCSC		693,712	4			594,279	3			99,433
Total	$	19,097,174	100	%	$	18,911,742	100	%	$	185,432

(1) Includes loans classified as restructured and non-performing.

The balance of loans outstanding increased by $185 million during the six months ended November 30, 2012 primarily due to an increase of $312 million in CFC power supply loans and an increase of $99 million in NCSC loans, partly offset by a decrease of $191 million in CFC distribution loans during the period. The decrease in CFC distribution loans was driven by the pay-off of a $414 million restructured loan and the prepayment of a $19 million capital expenditures loan by a restructured borrower in September 2012.

During the six months ended November 30, 2012, $693 million of CFC long-term fixed-rate loans were scheduled to reprice. Of this total, $543 million selected a new long-term fixed rate; $104 million selected the long-term variable rate; $18 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 $28 million were prepaid in full.

The following table summarizes loans and guarantees outstanding by member class:

		November 30, 2012				May 31, 2012				Increase/
(dollar amounts in thousands)		Amount	% of Total			Amount	% of Total			(decrease)
CFC:
Distribution	$	14,153,592	70	%	$	14,415,856	72	%	$	(262,264)
Power supply		4,725,451	23			4,451,264	22			274,187
Statewide and associate		80,080	-			80,808	-			(728)
CFC total		18,959,123	93			18,947,928	94			11,195
RTFC		541,497	3			572,592	3			(31,095)
NCSC		724,222	4			640,552	3			83,670
Total loans and guarantees	$	20,224,842	100	%	$	20,161,072	100	%	$	63,770

Credit Concentration

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 and two U.S. territories. At November 30, 2012 and May 31, 2012, loans outstanding to members in any one state or territory did not exceed 15 percent and 17 percent, respectively, of total loans outstanding.

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At November 30, 2012 and May 31, 2012, the total exposure outstanding to any one borrower or controlled group did not exceed 2.4 percent of total loans and guarantees outstanding. At November 30, 2012, the 10 largest borrowers included four distribution systems and six power supply systems. At May 31, 2012, the 10 largest borrowers included five distribution systems and five power supply systems. The following table represents the exposure to the 10 largest borrowers as a percentage of total exposure presented by type of exposure and by company:

		November 30, 2012					May 31, 2012					Increase/
(dollar amounts in thousands)		Amount	% of Total				Amount	% of Total				(decrease)
Total by exposure type:
Loans	$	2,871,618		14	%	$	2,852,364		14	%	$	19,254
Guarantees		398,149		2			481,706		3			(83,557)
Total credit exposure to 10 largest borrowers	$	3,269,767		16	%	$	3,334,070		17	%	$	(64,303)
Total by company:
CFC	$	3,194,412		16	%	$	3,314,070		17	%	$	(119,658)
NCSC		75,355		-			20,000		-			55,355
Total credit exposure to 10 largest borrowers	$	3,269,767		16	%	$	3,334,070		17	%	$	(64,303)

Security Provisions

The following table summarizes our unsecured credit exposure as a percentage of total exposure presented by type of exposure and by company:

		November 30, 2012					May 31, 2012					Increase/
(dollar amounts in thousands)		Amount	% of Total				Amount	% of Total				(decrease)
Total by exposure type:
Loans	$	1,768,122		9	%	$	1,657,543		8	%	$	110,579
Guarantees		384,531		2			385,165		2			(634)
Total unsecured credit exposure	$	2,152,653		11	%	$	2,042,708		10	%	$	109,945
Total by company:
CFC	$	1,867,463		9	%	$	1,811,830		9	%	$	55,633
RTFC		27,113		-			23,507		-			3,606
NCSC		258,077		2			207,371		1			50,706
Total unsecured credit exposure	$	2,152,653		11	%	$	2,042,708		10	%	$	109,945

Pledged Loans and Loans on Deposit

The following table summarizes our secured debt or debt requiring collateral on deposit, the excess collateral pledged and our unencumbered loans:

(dollar amounts in thousands)		November 30, 2012		May 31, 2012
Total loans to members	$	19,097,174	$	18,911,742
Less: Total secured debt or debt requiring
collateral on deposit		(11,438,423)		(10,927,587	)
Excess collateral pledged or on deposit (1)		(1,950,820)		(1,870,675	)
Unencumbered loans	$	5,707,931	$	6,113,480
Unencumbered loans as a percentage of total loans		30	%	32	%

(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 percent 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.

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Non-performing and Restructured Loans

The following table presents a summary of non-performing and restructured loans as a percentage of total loans and total loans and guarantees outstanding:

(dollar amounts in thousands)		November 30, 2012			May 31, 2012
Non-performing loans (1)	$	42,726		$	41,213
Percent of loans outstanding		0.22	%		0.22	%
Percent of loans and guarantees outstanding		0.21			0.20
Restructured loans	$	39,717		$	455,689
Percent of loans outstanding		0.21	%		2.41	%
Percent of loans and guarantees outstanding		0.20			2.26
Total non-performing and restructured loans	$	82,443		$	496,902
Percent of loans outstanding		0.43	%		2.63	%
Percent of loans and guarantees outstanding		0.41			2.46
Total non-accrual loans	$	42,726		$	41,213
Percent of loans outstanding		0.22	%		0.22	%
Percent of loans and guarantees outstanding		0.21			0.20

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

A borrower is classified as non-performing 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 non-performing, we typically place the loan on non-accrual status and reverse all accrued and unpaid interest back to the date of the last payment.

At November 30, 2012 and May 31, 2012, non-performing loans included $43 million, or 0.2 percent, of loans outstanding and $41 million, or 0.2 percent, of loans outstanding, respectively. Two borrowers in this group are currently in bankruptcy. In one of the bankruptcy cases, the borrower filed a disclosure statement and draft plan of reorganization on November 27, 2012. The proposed disclosure statement and draft plan are subject to certain changes and ultimate approval of the bankruptcy court, which is expected to occur in January 2013. In the other bankruptcy case, the borrower has until February 15, 2013 to file a disclosure statement and a Chapter 11 plan. Two other borrowers in this group are currently seeking buyers for their systems, as it is not anticipated that they will have sufficient cash flow to repay their loans as scheduled through maturity. It is currently anticipated that even with the sales of the businesses, there will not be sufficient funds to repay the full respective amount owed. We have approval rights with respect to the sale of either or both of these companies.

At November 30, 2012 and May 31, 2012, we had restructured loans totaling $40 million, or 0.2 percent, of loans outstanding and $456 million, or 2.4 percent, of loans outstanding, respectively, all of which were performing according to their restructured terms. Approximately $8 million and $13 million of interest income was accrued on restructured loans during the three and six months ended November 30, 2012, respectively, compared with $4 million and $5 million of interest income in the prior-year periods, respectively. One of the restructured loans totaling $40 million at November 30, 2012 and May 31, 2012 has been on accrual status since the time of restructuring. The other restructured loan was paid off early by the borrower on September 13, 2012.

Based on our analysis, we believe we have an adequate loan loss allowance for our exposure related to non-performing and restructured loans at November 30, 2012.

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Allowance for Loan Losses

We maintain an allowance for loan losses at a level estimated by management to provide adequately for probable losses inherent in the loan portfolio. Activity in the allowance for loan losses is summarized below including a disaggregation by company of the allowance for loan losses held at CFC:

(dollar amounts in thousands)		As of and for the six months ended November 30, 2012
Balance as of May 31, 2012	$	143,326
Provision for loan losses		5,305
Recovery of loans previously charged-off		106
Balance as of November 30, 2012	$	148,737
`
Loan loss allowance by segment:
CFC (1)	$	133,578
RTFC (1)		8,314
NCSC (1)		6,845
Total	$	148,737
As a percentage of total loans outstanding		0.78	%
As a percentage of total non-performing loans outstanding		348.12
As a percentage of total restructured loans outstanding		374.49
As a percentage of total loans on non-accrual		348.12

(1) The allowance for loan losses recorded for RTFC and NCSC is held at CFC.

Our loan loss allowance increased by $5 million from May 31, 2012 to November 30, 2012 due to the increase in the allowance for loan losses held for the general portfolio of $4 million and the increase in the allowance for loan losses held for large loan exposures of $5 million, partially offset by the reduction of $4 million in the allowance held for impaired loans. See Recovery of (Provision for) Loan Losses in the Results of Operations section for further discussion. On a quarterly basis, we review all non-performing and restructured borrowers, as well as certain additional borrowers selected based on known facts and circumstances, to determine if the loans to the borrower 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 November 30, 2012, there was a total specific loan loss allowance balance of $22 million, related to impaired loans totaling $82 million.

Liabilities and Equity

Outstanding Debt

The following table breaks out our debt outstanding by type of debt:

(dollar amounts in thousands)		November 30, 2012			May 31, 2012			Increase/ (decrease)
Commercial paper
sold through dealers, net of discounts	$	1,009,898		$	1,404,901		$	(395,003)
Commercial paper
sold directly to members, at par		1,408,371			997,778			410,593
Commercial paper
sold directly to non-members, at par		39,828			70,479			(30,651)
Select notes		51,852			-			51,852
Daily liquidity fund		656,701			478,406			178,295
Bank bid notes		295,000			295,000			-
Collateral trust bonds		6,260,085			6,307,564			(47,479)
Notes payable		5,037,429			4,650,877			386,552
Medium-term notes		2,478,089			2,423,686			54,403
Subordinated deferrable debt		186,440			186,440			-
Membership certificates		646,388			646,279			109
Loan and guarantee certificates		742,249			694,825			47,424
Member capital securities		398,650			398,350			300
Total debt outstanding	$	19,210,980		$	18,554,585		$	656,395
Percentage of fixed-rate debt (1)		86	%		86	%
Percentage of variable-rate debt (2)		14			14
Percentage of long-term debt		82	%		83	%
Percentage of short-term debt		18			17

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(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 six months ended November 30, 2012, total debt outstanding increased $656 million. The increase was primarily due to the $185 million increase to the balance of loans outstanding and the $499 million increase in cash and investments. The increase in cash and investments at November 30, 2012 was due to two $250 million investments made during the six months ended November 30, 2012.

Total commercial paper, select notes, daily liquidity fund and bank bid notes outstanding represented 18 percent and 17 percent of total debt at November 30, 2012 and May 31, 2012, respectively. To take advantage of the current low interest rates on short-term debt, we intend to continue to maximize the use of commercial paper in our funding portfolio mix.

Equity

At November 30, 2012, total equity increased by $37 million from May 31, 2012 due to net income of $73 million for the six months ended November 30, 2012, partially offset by the board authorized patronage capital retirement of $35 million. In July 2012, the CFC Board of Directors authorized the allocation of the fiscal year 2012 net earnings as follows: $1 million to the cooperative educational fund and $71 million to members in the form of patronage capital. In July 2012, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $35 million, representing 50 percent of the fiscal year 2012 allocation. This amount was returned to members in cash in September 2012. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable cooperative law.

Contractual Obligations

The following table summarizes our long-term contractual obligations at November 30, 2012 and the scheduled reductions by fiscal year and thereafter:

(dollar amounts in millions)	2013		2014		2015		2016		2017		Thereafter		Total
Contractual Obligations (1)
Long-term debt due in less than one year	$	541	$	2,048	$	-	$	-	$	-	$	-	$	2,589
Long-term debt		-		1,331		919		993		595		7,364		11,202
Subordinated deferrable debt		-		-		-		-		-		186		186
Members’ subordinated certificates (2)		-		11		31		23		14		1,540		1,619
Contractual interest on long-term debt (3)		338		589		535		512		492		5,788		8,254
Total contractual obligations	$	879	$	3,979	$	1,485	$	1,528	$	1,101	$	14,878	$	23,850

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

(2) Excludes loan subordinated certificates totaling $150 million that amortize annually based on the outstanding balance of the related loan and $3 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 three years, annual amortization on these certificates has averaged $23 million. In fiscal year 2012, amortization represented 14 percent of amortizing loan subordinated certificates outstanding.

(3) Represents the interest obligation on our debt based on terms and conditions at November 30, 2012.

Off-Balance Sheet Obligations

Guarantees

The following table breaks out our guarantees outstanding by type of guarantee and by company:

(dollar amounts in thousands)		November 30, 2012		May 31, 2012		Increase/ (decrease)
Total by guarantee type:
Long-term tax-exempt bonds	$	555,960	$	573,110	$	(17,150)
Indemnifications of tax benefit transfers		2,419		49,771		(47,352)
Letters of credit		452,373		504,920		(52,547)
Other guarantees		116,916		121,529		(4,613)
Total	$	1,127,668	$	1,249,330	$	(121,662)
Total by company:
CFC	$	1,092,420	$	1,202,031	$	(109,611)
RTFC		4,738		1,026		3,712
NCSC		30,510		46,273		(15,763)
Total	$	1,127,668	$	1,249,330	$	(121,662)

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In addition to the letters of credit listed in the table, under master letter of credit facilities in place at November 30, 2012, we may be required to issue up to an additional $837 million in letters of credit to third parties for the benefit of our members. Of this amount, $649 million represents 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. Master letter of credit facilities subject to material adverse change clauses at the time of issuance totaled $496 million at November 30, 2012. Prior to issuing a letter of credit, 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 terms and conditions of the letter of credit facility. The remaining commitment under master letter of credit facilities of $341 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 November 30, 2012 and May 31, 2012, 66 percent and 69 percent 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 six months ended November 30, 2012 is primarily due to a net decrease to the total amount of indemnifications of tax benefit transfers and letters of credit outstanding. At November 30, 2012 and May 31, 2012, we recorded a guarantee liability totaling $27 million and $29 million, respectively, which represents the contingent and non-contingent exposure related to guarantees and liquidity obligations associated with members’ debt.

The following table summarizes the off-balance sheet obligations at November 30, 2012, and the related maturities by fiscal year and thereafter as follows:

		Maturities of guaranteed obligations
	Outstanding
(dollar amounts in thousands)	balance	2013	2014	2015	2016	2017	Thereafter
Guarantees (1)	$  1,127,668	$  90,941	$  168,947	$ 264,031	$  24,811	$  93,255	$  485,683

(1) At November 30, 2012, we are the guarantor and liquidity provider for $481 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.

Contingent Off-Balance Sheet Obligations

Unadvanced Loan Commitments

Unadvanced commitments represent approved and executed loan contracts for which the funds have not been advanced. At November 30, 2012 and May 31, 2012, we had the following amount of unadvanced commitments on loans to our borrowers.

(dollar amounts in thousands)		November 30, 2012	% of Total			May 31, 2012	% of Total
Long-term	$	5,754,729	39	%	$	5,437,881	38	%
Line of credit		9,160,920	61			8,691,543	62
Total	$	14,915,649	100	%	$	14,129,424	100	%

A total of $1,444 million and $1,303 million of unadvanced commitments at November 30, 2012 and May 31, 2012, 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 November 30, 2012 and May 31, 2012 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. 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.

Unadvanced commitments related to line of credit loans are typically 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.

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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 typically 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. The following table summarizes the available balance under committed lines of credit at November 30, 2012, and the related maturities by fiscal year and thereafter as follows:

	Available	Notional maturities of committed lines of credit
(dollar amounts in thousands)	balance	2013	2014	2015	2016	2017	Thereafter
Committed lines of  credit	$1,444,133	$        9,333	$    281,733	$   116,754	$   223,492	$  559,562	$    253,259

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 November 30, 2012 was 40.16-to-1, a decrease from 42.20-to-1 at May 31, 2012. The decrease in the leverage ratio is due to the increase of $37 million in total equity and the decrease of $122 million in total guarantees, partially offset by the increase of $622 million in total liabilities as discussed under the Liabilities and Equity section of Financial Condition and under Off-Balance Sheet Obligations.

For covenant compliance on our revolving credit agreements and for internal management purposes, 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 November 30, 2012 and May 31, 2012, the adjusted leverage ratio was 6.43to-1 and 6.46-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 slight decrease to the adjusted leverage ratio was due to the increase of $85 million in adjusted equity and the decrease of $122 million in total guarantees, partially offset by the increase of $603 million in adjusted liabilities as discussed under the Liabilities and Equity section of Financial Condition and under 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 November 30, 2012 was 38.02 -to-1, a decrease from 39.65-to-1 at May 31, 2012. The decrease in the debt-to-equity ratio is due to the increase of  $37 million in total equity, partially offset by the increase of $622 million in total liabilities as discussed under the Liabilities and Equity section of Financial Condition.

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 November 30, 2012 and May 31, 2012, the adjusted debt-to-equity ratio was 6.04-to-1 and 6.01-to-1, respectively. The increase in the adjusted debt-to-equity ratio is due to the increase of $603 million in adjusted liabilities, partially offset by the increase of $85 million in adjusted equity. See Non-GAAP Financial Measures for further explanation and a reconciliation of the adjustments made to the debt-to-equity ratio calculation.

Liquidity and Capital Resources

The following section discusses our expected sources and uses of liquidity. At November 30, 2012, 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.

The table below shows the projected sources and uses of cash by quarter through May 31, 2014. In analyzing our projected liquidity position, we track key items identified in the chart 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

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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 November 30, 2012, as well as our current estimate for the repayment of long-term loans. The estimate of the amount and timing of long-term loan repayments is subject to change. We assumed the issuance of commercial paper, medium-term notes and other long-term debt, including collateral trust bonds and private placement of term debt, to maintain matched funding within our loan portfolio and to allow our revolving lines of credit to provide backup liquidity for our outstanding commercial paper. Commercial paper repayments in the table below do not represent scheduled maturities but rather the assumed use of excess cash to pay down the commercial paper balance.

	Projected uses of liquidity				Projected sources of liquidity
						Debt Issuance
(dollar amounts in millions)	Long-term debt maturities	Debt  repayment- commercial  paper	Long-term  loan advances	Total uses of liquidity	Long-term loan amortization & repayment	Commercial paper	Other long-term debt	Medium term notes	Total sources of liquidity	Cumulative excess sources over uses of liquidity (1)
2Q13										$    689
3Q13	$       338	$              -	$      313	$       651	$           299	$            450	$            -	$     120	$          869	907
4Q13	203	-	664	867	373	300	100	120	893	933
1Q14	1,347	400	181	1,928	378	-	1,200	120	1,698	703
2Q14	701	300	188	1,189	304	-	500	120	924	438
3Q14	283	200	248	731	383	-	-	120	503	210
4Q14	1,055	-	252	1,307	321	250	650	120	1,341	244
Totals	$    3,927	$         900	$   1,846	$    6,673	$        2,058	$         1,000	$     2,450	$     720	$      6,228

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

The chart above represents our best estimate of the funding requirements and how we expect to manage such funding requirements through May 31, 2014. 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 for the issuance of debt:

·   unlimited amount of collateral trust bonds until September 2013;

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

·   daily liquidity fund for a total of $20,000 million with a $3,000 million limitation on the aggregate principal amount outstanding at any time until April 2013. CFC expects to file a new registration statement to replace the expiring registration statement in April 2013.

We issued $325 million of 12-month floating-rate medium-term notes in registered offerings during the first half of fiscal year 2013. We use our bank lines of credit as backup liquidity, primarily for dealer and member commercial paper. Commercial paper issued through dealers and bank bid notes totaled $1,305 million and represented 7 percent of total debt outstanding at November 30, 2012. We intend to maintain the balance of dealer commercial paper and bank bid notes at 15 percent or less of total debt outstanding during fiscal year 2013.

In September 2012, CFC commenced an offer to exchange a portion of its outstanding 8 percent medium-term notes, Series C, due 2032 for consideration of collateral trust bonds due 2032 and cash. On October 10, 2012, following the expiration of the offering period, CFC announced that it had accepted $340 million aggregate principal amount of medium-term notes for exchange. At settlement, on October 16, 2012, holders whose medium-term notes were accepted for exchange received $379 million aggregate principal amount of 4.023 percent collateral trust bonds due 2032 and $134 million in cash.

Private Debt Issuance

We have access to liquidity from private debt issuances through a note purchase agreement with the Federal Agricultural Mortgage Corporation. At November 30, 2012 and May 31, 2012, we had secured notes payable of $1,299 million and $1,165 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 then remaining term. The agreement with the Federal Agricultural Mortgage Corporation is a revolving credit facility that allows us to borrow, repay and re-borrow funds at any time through maturity or from time to time as market conditions permit, provided that the principal amount at any time outstanding under the note purchase agreement is not more than the total available under the agreement. 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

46

each such borrowing. We may select a fixed rate or variable rate at the time of each advance with a maturity as determined in the applicable pricing agreement. In November 2012, we issued notes totaling $133 million under the agreement with the Federal Agricultural Mortgage Corporation. At November 30, 2012, we had up to $2,601 million available under this agreement, subject to market conditions for debt issued by the Federal Agricultural Mortgage Corporation.

At November 30, 2012 and May 31, 2012, we had $3,674 million and $3,419 million, respectively, of unsecured notes payable outstanding under a bond purchase agreement with the Federal Financing Bank and a bond guarantee agreement with RUS issued under the Guaranteed Underwriter program of the U.S. Department of Agriculture, which supports the Rural Economic Development Loan and Grant program and provides guarantees to the Federal Financing Bank. During the six months ended November 30, 2012, we borrowed $255 million under our committed loan facilities from the Federal Financing Bank as part of this program at a weighted average interest rate of 2.30 percent with a repricing period ranging from 10 to 15 years and a final maturity of 20 years. At November 30, 2012, we had up to $325 million available under committed loan facilities from the Federal Financing Bank as part of this program. In September 2012, we received a commitment from RUS to guarantee a loan from the Federal Financing Bank for additional funding of $424 million as part of the Guaranteed Underwriter program. We closed the loan facility in December 2012. As a result, we will have an additional $424 million available under Federal Financing Bank loan facilities with a 20-year maturity repayment period during the three-year period following the date of closing.

Member Loan Repayments

We expect long-term loan repayments from scheduled loan amortization and prepayments to be $1,354 million over the next 12 months.

Member Loan Interest Payments

During the six months ended November 30, 2012, interest income on the loan portfolio was $475 million, representing an average rate of 4.95 percent compared with 5.11 percent for the six months ended November 30, 2011. For the past three fiscal years, interest income on the loan portfolio has averaged $993 million. At November 30, 2012, 90 percent of the total loans outstanding had a fixed rate of interest, and 10 percent of loans outstanding had a variable rate of interest.

Bank Revolving Credit Agreements

At November 30, 2012 and May 31, 2012, we had 2,845 million of commitments under revolving credit agreements. We may request letters of credit for up to $100 million under each agreement in place at November 30, 2012, which then reduces the amount available under the facility.

The following table presents the total available and the outstanding letters of credit under our revolving credit agreements:

		Total available				Letters of credit outstanding
(dollar amounts in thousands)		November 30, 2012		May 31, 2012		November 30, 2012		May 31, 2012	Original maturity	Facility fee per year (1)
Three-year agreement	$	1,125,000	$	1,125,000	$	-	$	-	March 21, 2014	15 basis points
Four-year agreement		883,875		883,875		1,000		1,000	October 21, 2015	10 basis points
Five-year agreement		831,387		834,875		3,488		-	October 21, 2016	10 basis points
Total	$	2,840,262	$	2,843,750	$	4,488	$	1,000

(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.

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

Member Investments

The table below shows the components of our member investments included in total debt outstanding:

		November 30, 2012					May 31, 2012					Increase/
(dollar amounts in thousands)		Amount		% of Total (1)			Amount		% of Total (1)			(decrease)
Commercial paper	$	1,408,371		57	%	$	997,778		40	%	$	410,593
Select notes		50,352		97			-		-			50,352
Daily liquidity fund		656,701		100			478,406		100			178,295
Medium-term notes		553,209		22			499,222		21			53,987
Members’ subordinated certificates		1,787,287		100			1,739,454		100			47,833
Total	$	4,455,920				$	3,714,860				$	741,060
Percentage of total debt outstanding		23	%				20	%

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

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Member investments averaged $3,889 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 quarter ended November 30, 2012, 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 and Investments

At November 30, 2012, cash and investments included two $250 million deposits that we made with two financial institutions in interest bearing accounts. The interest rate earned on these investments is sufficient to cover the cost of the underlying borrowed funds. Subsequent to November 30, 2012, we made an additional $200 million investment with a different financial institution in which the interest rate earned is sufficient to cover the cost of the underlying borrowed funds. The total investment of $700 million represents an additional source of liquidity that is available to support our operations.

Cash Flows from Operations

For the six months ended November 30, 2012, cash flows provided by operating activities were $96 million compared with cash flows provided by operating activities of $56 million for the prior-year period. 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 November 30, 2012, we were in compliance with all covenants and conditions under our revolving credit agreements and senior debt indentures.

The following represents our required and actual financial ratios under the revolving credit agreements:

		Actual
	Requirement	November 30, 2012	May 31, 2012
Minimum average adjusted TIER over the six most recent fiscal quarters (1)	1.025	1.19	1.21
Minimum adjusted TIER for the most recent fiscal year (1) (2)	1.05	1.18	1.18
Maximum ratio of adjusted senior debt to total equity (1)	10.00	5.96	5.97

(1) In addition to the adjustments made to the leverage ratio set forth in the Non-GAAP Financial Measures section, 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 in the Non-GAAP Financial Measures section and exclude the results of operations 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 up to $7,500 million on any other indebtedness of CFC. As of November 30, 2012, the amount of our secured borrowings as defined under all three revolving credit agreements was $4,994 million.

The revolving credit agreements limit new investments in foreclosed assets held by CAH to $275 million without consent by the required banks. These investments did not exceed this limit at November 30, 2012.

The following represents 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:

		Actual
	Requirement	November 30, 2012	May 31, 2012
Maximum ratio of adjusted senior debt to total equity (1)	20.00	7.60	7.68

(1) The ratio calculation includes the adjustments made to the leverage ratio in the Non-GAAP Financial Measures section, with the exception of the adjustments to exclude the non-cash impact of derivative financial instruments and adjustments from total liabilities and total equity.

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We are required to pledge collateral equal to at least 100 percent 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 percent of the outstanding balance of debt outstanding to the Federal Financing Bank under the Guaranteed Underwriter program of the U.S. Department of Agriculture, which supports the Rural Economic Development Loan and Grant program, for which distribution and power supply loans may be deposited. See Pledging of Loans and Loans on Deposit in Note 3, Loans and Commitments, for additional information related to collateral.

The following table summarizes the amount of collateral pledged or on deposit as a percentage of the related debt outstanding under the debt agreements noted above:

	Requirement				Actual
Debt agreement	Debt indenture minimum		Revolving credit agreements maximum		November 30, 2012		May 31, 2012
Collateral trust bonds 1994 indenture	100	%	150	%	118	%	107%
Collateral trust bonds 2007 indenture	100		150		121		124
Federal Agricultural Mortgage Corporation	100		150		122		118
Clean Renewable Energy Bonds Series 2009A	100		150		114		109
Federal Financing Bank Series A (1)	100		150		106		110
Federal Financing Bank Series B (1)	100		150		110		111
Federal Financing Bank Series C (1)	100		150		113		108
Federal Financing Bank Series D (1)	100		150		123		123
Federal Financing Bank Series E (1)	100		150		114		119

(1) Represents collateral on deposit as a percentage of the related debt outstanding.

Uses of Liquidity

Loan Advances

Loan advances are either from new loans approved to borrowers or from the unadvanced portion of loans previously approved. At November 30, 2012, unadvanced loan commitments totaled $14,916 million. Of that total, $1,444 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 45 percent of these committed facilities would be advanced at CFC’s standard rates 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 55 percent of committed facilities 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 market conditions at the time of syndication. The remaining $13,472 million of unadvanced loan commitments at November 30, 2012 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 borrowers’ 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 November 30, 2012.

We currently expect to make long-term loan advances totaling approximately $1,346 million to our members over the next 12 months.

Interest Expense on Debt

For the six months ended November 30, 2012, interest expense on debt was $343 million, representing an average cost of 3.62 percent compared with 4.19 percent for the six months ended November 30, 2011. For the past three fiscal years, interest expense on debt has averaged $817 million. At November 30, 2012, 86 percent of outstanding debt had a fixed interest rate and 14 percent had a variable interest rate.

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Principal Repayments on Long-Term Debt

The principal amount of medium-term notes, collateral trust bonds, long-term notes payable, subordinated deferrable debt and membership subordinated certificates maturing by fiscal year and thereafter is as follows:

		Amount
(dollar amounts in thousands)		Maturing (1)
May 31, 2013	$	540,615
May 31, 2014		3,390,354
May 31, 2015		949,418
May 31, 2016		1,016,371
May 31, 2017		609,025
Thereafter		9,090,264
Total	$	15,596,047

(1) Excludes loan subordinated certificates totaling $150 million that amortize annually based on the outstanding balance of the related loan and $3 million in payments not received on certificated 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 three years, annual amortization on these certificates has averaged $23 million. In fiscal year 2012, amortization represented 14 percent of amortizing loan subordinated certificates outstanding.

Patronage Capital Retirements

CFC has made annual retirements of allocated net earnings in 33 of the last 34 fiscal years. In July 2012, the CFC Board of Directors approved the allocation of $71 million from fiscal year 2012 net earnings to CFC’s members. CFC made a cash payment of $35 million to its members in September 2012 as retirement of 50 percent of allocated net earnings from the prior-year period 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.

Market Risk

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

Liquidity Risk

We face liquidity risk in funding our loan portfolio and refinancing our maturing obligations. Our Asset Liability Committee monitors liquidity risk by establishing and monitoring liquidity targets, as well as strategies and tactics to meet those targets, and ensuring that sufficient liquidity is available for unanticipated contingencies.

We face liquidity risk in the funding of our loan portfolio based on member demand for new loans, although as presented in our projected sources and uses of liquidity chart on page 46, we expect over the next six quarters that repayments on our long-term loans will exceed long-term loan advances by an estimated $212 million.

At November 30, 2012, we had $3,462 million of commercial paper, select notes, daily liquidity fund 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 at recent levels of approximately $2,115 million. Dealer commercial paper and bank bid notes decreased from $1,700 million at May 31, 2012 to $1,305 million at November 30, 2012. 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 percent or less of total debt outstanding. At November 30, 2012, 15 percent of total debt outstanding was $2,882 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 as backup liquidity, primarily for dealer and member commercial paper. At November 30, 2012, we had $2,840 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 November 30, 2012, we had long-term debt maturing in the next 12 months totaling $2,589 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 $630 million of medium-term notes sold through dealers and $397 million of medium-term notes sold to

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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 first half of fiscal year 2013 we issued $619 million of medium-term notes and during the prior fiscal year we issued $800 million of collateral trust bonds in registered offerings.

·   We can borrow up to $3,900 million under a note purchase agreement with the Federal Agriculture Mortgage Corporation at any time through January 11, 2016, subject to market conditions for debt issued by the Federal Agricultural Mortgage Corporation. In November 2012, we issued notes totaling $133 million under this agreement. We had up to $2,601 million available under this revolving note purchase agreement at November 30, 2012.

·   We had up to $325 million available under committed loan facilities from the Federal Financing Bank at November 30, 2012. In September 2012, we received a commitment from RUS to guarantee a loan from the Federal Financing Bank for additional funding of $424 million as part of the Guaranteed Underwriter program. This new commitment, which closed in December 2012, increases total funding available to us under committed loan facilities from the Federal Financing Bank to $749 million.

At November 30, 2012, we are the liquidity provider for $606 million of tax-exempt bonds issued for our member cooperatives. These tax-exempt bonds are adjustable or floating-rate bonds that may be converted to a fixed rate as specific in the applicable indenture for each bond offering. During the variable-rate period (including at the time of conversion to a fixed rate), we have, in return for a fee, unconditionally agreed to purchase bonds tendered or put for redemption if the remarketing agents have not previously sold such bonds to other investors. During the six months ended November 30, 2012, we were not required to perform as liquidity provider pursuant to these obligations.

At November 30, 2012, we had a total of $452 million of letters of credit outstanding for the benefit of our members. Included in that total is $125 million for the purpose of providing liquidity for pollution controls bonds and is included in the $606 million mentioned in the paragraph above. The remaining $327 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 amount we advance becomes an obligation of the member upon whose application we issued the letter of credit.

We expect that our current sources of liquidity, along with our $689 million of cash on hand and short-term investments at November 30, 2012, will allow us to meet our obligations and to fund our operations over the next 12 to 18 months.

Interest Rate Risk

Our interest rate risk exposure is related to the funding of the fixed-rate loan portfolio. 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- 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 typically have maturities of up to 35 years. Borrowers may select fixed interest rates for periods of one year through the life of the loan. Each time borrowers select a rate, it is at our current market rate for that type of 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 on page 52). 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

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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 may be repriced either monthly or semi-monthly, therefore minimizing the variance to the cost of variable-rate debt used to fund the loans. At November 30, 2012 and May 31, 2012, 10 percent 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.

The following table shows the scheduled amortization and repricing of fixed-rate assets and liabilities outstanding at November 30, 2012.

Interest Rate Gap Analysis

(Fixed-Rate Assets/Liabilities)

November 30, 2012

(dollar amounts in millions)		May 31, 2013 or prior			June 1, 2013 to May 31, 2015			June 1, 2015 to May 31, 2017			June 1, 2017 to May 31, 2022			June 1, 2022 to May 31, 2032			Beyond June 1, 2032			Total
Assets amortization and repricing	$	1,146		$	4,076		$	2,997		$	4,260		$	3,531		$	1,160		$	17,170
Liabilities and members’ equity:
Long-term debt	$	1,440		$	3,007		$	2,657		$	4,121		$	2,659		$	405		$	14,289
Subordinated certificates		15			49			36			83			1,247			260			1,690
Members’ equity (1)		-			-			-			57			248			496			801
Total liabilities and members’ equity	$	1,455		$	3,056		$	2,693		$	4,261		$	4,154		$	1,161		$	16,780
Gap (2)	$	(309)		$	1,020		$	304		$	(1	)	$	(623	)	$	(1	)	$	390
Cumulative gap		(309)			711			1,015			1,014			391			390
Cumulative gap as a % of total assets		(1.50)	%		3.45	%		4.92	%		4.92	%		1.90	%		1.89	%
Cumulative gap as a % of adjusted total assets (3)		(1.52)			3.50			4.99			4.99			1.92			1.92

(1) Includes the portion of the loan loss allowance 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 November 30, 2012, we had $17,170 million of fixed-rate assets amortizing or repricing, funded by $14,289 million of fixed-rate liabilities maturing during the next 30 years and $2,491 million of members’ equity and members’ subordinated certificates, a portion of which does not have a scheduled maturity. The difference of $390 million, or 1.89 percent of total assets and 1.92 percent 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 November 30, 2012 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 November 30, 2012 through committed revolving credit agreements totaling $2,840 million with domestic and foreign banks, $325 million under committed loan facilities from the Federal Financing Bank, and, subject to market conditions, up to $2,601 million under a revolving note purchase agreement with the Federal Agriculture Mortgage Corporation.

Derivative Financial Instruments

We are an end-user of financial derivative instruments. We use derivatives such as interest rate swaps, treasury locks for forecasted transactions, cross-currency swaps and cross-currency interest rate swaps to mitigate interest rate and foreign currency exchange 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. We have not entered into derivative financial instruments for trading purposes in the past and do not anticipate doing so in the future. At November 30, 2012 and May 31, 2012, there were no foreign currency derivative instruments outstanding.

Counterparty Risk

We are exposed to counterparty risk related to the performance of the parties with which we entered into derivative instruments. To mitigate this risk, we only enter into these agreements with financial institutions with investment-grade ratings. At November 30, 2012 and May 31, 2012, the highest percentage concentration of total notional exposure to any one counterparty was 18 percent of total derivative instruments. 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

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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 November 30, 2012, our derivative instrument counterparties had credit ratings ranging from BBB+ to AA- as assigned by Standard & Poor’s Corporation and Baa2 to Aa1 as assigned by Moody’s Investors Service. Based on the fair market value of our derivative instruments at November 30, 2012, there were three counterparties that would be required to make a payment to us totaling $39 million if all of our derivative instruments were terminated on that day. The largest amount owed to us by a single counterparty was $26 million, or 65 percent of the total exposure to us, at November 30, 2012.

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 are not required to be accounted for separately as derivatives.

At November 30, 2012, 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 November 30, 2012, our senior unsecured credit rating from Moody’s Investors Service and Standard & Poor’s Corporation was A2 and A, respectively. At November 30, 2012, both Moody’s Investors Service and Standard & Poor’s Corporation had our ratings on stable outlook.

		Notional		Our required		Amount we		Net
(dollar amounts in thousands)		amount		payment		would collect		total
Mutual rating trigger if ratings:
fall to Baa1/BBB+ (1)	$	3,000	$	(157)	$	-	$	(157)
fall below Baa1/BBB+ (1)		6,890,779		(290,678)		38,257		(252,421)
Total	$	6,893,779	$	(290,835)	$	38,257	$	(252,578)

(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 November 30, 2012, we had a total notional amount of $650 million of derivative instruments with one counterparty that would require the pledging of collateral totaling $16 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 of all interest rate swaps with rating triggers that were in a net liability position at November 30, 2012 was $299 million.

During the six months ended November 30, 2012, the Moody’s Investors Service credit rating for one counterparty was downgraded to a level below the rating trigger level in the interest rate swap contracts with this counterparty. As a result, we have the option to terminate all interest rate swaps with this counterparty. At November 30, 2012, the interest rate swap contracts with this counterparty have a total notional amount of $715 million. If we were to decide to terminate the interest rate swaps with this counterparty, the contracts would be settled based on the fair value at the date of termination. At November 30, 2012, we would have to make a payment of $23 million to settle the interest rate swaps with this counterparty. We use our interest rate swaps as part of our matched funding strategy and do not generally terminate such agreements early. At this time, we have not provided notice to the counterparty that we intend to terminate the interest rate swaps. We will continue to evaluate the overall credit worthiness of this counterparty and to monitor our overall matched funding position.

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

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 the 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.

Adjustments to Net Income and the Calculation of TIER

The following table provides a reconciliation between interest expense and net interest income, and these financial measures adjusted to include the impact of derivatives. Refer to Non-GAAP Financial Measures in Item 7. Management’s Discussion

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and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the year ended May 31, 2012 for an explanation of why these adjustments to net income and the calculation of the TIER ratio reflect management’s perspective on our operations and why we believe these are useful financial measures for investors.

		For the three months ended November 30,					For the six months ended November 30,
(dollar amounts in thousands)		2012		2011			2012		2011
Interest expense	$	(174,301)	$	(194,680	)	$	(350,897)	$	(396,724	)
Derivative cash settlements		(15,456)		(982	)		(29,319)		(814	)
Adjusted interest expense	$	(189,757)	$	(195,662	)	$	(380,216)	$	(397,538	)
Net interest income	$	67,329	$	43,075		$	130,818	$	88,281
Derivative cash settlements		(15,456)		(982	)		(29,319)		(814	)
Adjusted net interest income	$	51,873	$	42,093		$	101,499	$	87,467
Net income (loss) prior to cumulative effect of change in accounting principle	$	60,081	$	(27,294	)	$	72,727	$	(113,916	)
Derivative forward value		(11,690)		46,771			(961)		158,510
Adjusted net income	$	48,391	$	19,477		$	71,766	$	44,594

TIER using GAAP financial measures is calculated as follows:

	Interest expense + net income prior to cumulative
TIER =	effect of change in accounting principle
	Interest expense

Our adjusted TIER is calculated as follows:

Adjusted TIER =	Adjusted interest expense + adjusted net income
	Adjusted interest expense

The following table presents our TIER and adjusted TIER.

	For the three months ended November 30,				For the six months ended November 30,
	2012		2011		2012		2011
TIER (1)		1.34		-		1.21		-
Adjusted TIER		1.26		1.10		1.19		1.11

(1) For the three and six months ended November 30, 2011 we reported a net loss of $27 million and $114 million, respectively; therefore, the TIER for these periods results in a value below 1.00.

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

The following table provides a reconciliation between the liabilities and equity used to calculate the leverage and debt-to-equity ratios and these financial measures adjusted to exclude the non-cash effects of derivatives and foreign currency adjustments, to subtract debt used to fund loans that are guaranteed by RUS from total liabilities, and to subtract from total liabilities, and add to total equity, debt with equity characteristics. Refer to Non-GAAP Financial Measures in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the year ended May 31, 2012 for an explanation of why these adjustments to the calculation of leverage and debt-to-equity ratios reflect management’s perspective on our operations and why we believe these are useful financial measures for investors.

(dollar amounts in thousands)		November 30, 2012		May 31, 2012
Liabilities	$	20,082,238	$	19,460,580
Less:
Derivative liabilities		(630,919)		(654,125	)
Debt used to fund loans guaranteed by RUS		(213,275)		(219,084	)
Subordinated deferrable debt		(186,440)		(186,440	)
Subordinated certificates (1)		(1,787,287)		(1,739,454	)
Adjusted liabilities	$	17,264,317	$	16,661,477
Total equity	$	528,156	$	490,755
Less:
Prior-year period cumulative derivative forward
value and foreign currency adjustments		366,026		142,252
Year-to-date derivative forward value (gain) loss		(961)		223,774
Accumulated other comprehensive income (2)		(7,776)		(8,270	)
Plus:
Subordinated certificates (1)		1,787,287		1,739,454
Subordinated deferrable debt		186,440		186,440
Adjusted equity	$	2,859,172	$	2,774,405
Guarantees	$	1,127,668	$	1,249,330

(1) Includes $15 million and $17 million of subordinated certificates classified in short-term debt at November 30, 2012 and May 31, 2012, respectively.

(2) Represents the accumulated other comprehensive income related to derivatives. Excludes $2 million and $1 million, respectively, of accumulated other comprehensive income related to the unrecognized gains on our investments at November 30, 2012 and May 31, 2012.

The leverage and debt-to-equity ratios using GAAP financial measures are calculated as follows:

Leverage ratio =	Liabilities + guarantees outstanding
	Total equity
Debt-to-equity ratio =	Liabilities
	Total equity

The adjusted leverage and debt-to-equity ratios are calculated as follows:

Adjusted leverage ratio =	Adjusted liabilities + guarantees outstanding
	Adjusted equity

Adjusted debt-to-equity ratio =	Adjusted liabilities
	Adjusted equity

The following table provides the calculated ratio for leverage and debt-to-equity, as well as the adjusted ratio calculations.

	November 30, 2012	May 31, 2012
Leverage ratio	40.16	42.20
Adjusted leverage ratio	6.43	6.46
Debt-to-equity ratio	38.02	39.65
Adjusted debt-to-equity ratio	6.04	6.01

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

See Market Risk discussion beginning on page 50.

55

Item 4. Controls and Procedures.

At the end of the period covered by this report, senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting that occurred during the three months ended November 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

56

PART II. OTHER INFORMATION

Item 1A. Risk Factors.

Item 5. Other Information.

Refer to Part I, Item 1A. Risk Factors in our Form 10-K for the year ended May 31, 2012 for information regarding factors that could affect our results of operations, financial condition and liquidity. There have been no material changes to our risk factors described in our Form 10-K for the year ended May 31, 2012.

Item 5. Other Information.

None.

Item 6. Exhibits.

10.1	–	Series F Bond Purchase Agreement between the Registrant, Federal Financing Bank and Rural Utilities Service dated as of December 13, 2012 for up to $424,286,000.
10.2	–	Amended, Restated and Consolidated Bond Guarantee Agreement between the Registrant and the Rural Utilities Service dated as of December 13, 2012 for up to $3,999,000,000.
10.3	–	Amended, Restated and Consolidated Pledge Agreement dated as of December 13, 2012, between the Registrant, the Rural Utilities Service and U.S. Bank National Association.
10.4	–	Series F Future Advance Bond from the Registrant to the Federal Financing Bank dated as of December 13, 2012 for up to $424,286,000 maturing on October 15, 2035.
31.1	–	Certification of the Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	–	Certification of the Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	–	Certification of the Chief Executive Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	–	Certification of the Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002.
101.01	–	Financial statements from the Quarterly Report on Form 10-Q of National Rural Utilities Cooperative Finance Corporation for the quarter ended November 30, 2012, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statement of Changes in Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.

57

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NATIONAL RURAL UTILITIES COOPERATIVE

     FINANCE CORPORATION

/s/ STEVEN L. LILLY

Steven L. Lilly

Chief Financial Officer

/s/ ROBERT E. GEIER

Robert E. Geier

Controller

(Principal Accounting Officer)

January 14, 2013

58

EX-10.1

    gupf_purchase.htm
    
    
    

EX-10.2

AMENDED, RESTATED, AND CONSOLIDATED BOND GUARANTEE

AGREEMENT

dated as of December 13, 2012

between

UNITED STATES OF AMERICA

acting through the

Rural Utilities Service

as Guarantor,

and

NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION,

as the Borrower.

TABLE OF CONTENTS
	Page
RECITALS		1
ARTICLE I
DEFINITIONS
Section 1.1.	Definitions	2
Section 1.2.	Principles of Construction	7
ARTICLE II
THE GUARANTEE
Section 2.1.	Guarantees of the Original Bond	7
Section 2.2.	Execution of the Series F Guarantee	7
Section 2.3.	Coverage of the Series F Guarantee	7
Section 2.4.	Payment on the Guarantees	7
Section 2.5.	Issuance of Additional Guarantees	8
ARTICLE III
CONDITIONS PRECEDENT
Section 3.1.	Conditions Precedent to Issuance of the Guarantee	8
Section 3.2.	Conditions Precedent to each Advance	9
ARTICLE IV
GUARANTEE FEE
Section 4.1.	Guarantee Fee	10
Section 4.2.	Amount of Guarantee Fee; Dates of Payment	10

i

ARTICLE V
SERVICING OF THE GUARANTEE BONDS
Section 5.1.	Servicing	10
ARTICLE VI
REPORTING REQUIREMENTS
Section 6.1.	Annual Reporting Requirements	11
Section 6.2.	Trigger Event Notices.	12
Section 6.3.	Default Notices	12
ARTICLE VII
LIMITATIONS ON AMENDMENTS TO THE GUARANTEED BONDS
Section 7.1.	Limitations on Amendments to the Guaranteed Bonds	12
ARTICLE VIII
REPRESENTATIONS OF THE PARTIES
Section 8.1.	Representations of RUS	12
Section 8.2.	Representations of the Borrower	12
ARTICLE IX
AGREEMENTS OF THE BORROWER
Section 9.1.	Patronage Refunds.	14
Section 9.2.	Security and Collateral	14
Section 9.3.	Subrogation	15
Section 9.4.	Use of Proceeds	15
Section 9.5.	Compliance with Covenants in Other Agreements	15

ii

Section 9.6.		Ratings	15
Section 9.7.		Acknowledge of Borrower	16
Section 9.8.		Financial Expert	16
ARTICLE X
EVENTS OF DEFAULT
Section 10.1.		Events of Default	16
Section 10.2.		Compulsory Redemption	17
Section 10.3.		Acceleration by RUS’s Purchase of the Bonds	17
Section 10.4.		Effect of Payments by RUS pursuant to the RUS Guarantees	17
Section 10.5.		Remedies Not Exclusive	17
ARTICLE XI
MISCELLANEOUS
Section 11.1.	GOVERNING LAW		17
Section 11.2.	WAIVER OF JURY TRIAL		17
Section 11.3.	Method of Payment		18
Section 11.4.	Notices		18
Section 11.5.	Benefit of Agreement		18
Section 11.6.	Entire Agreement		18
Section 11.7.	Amendments and Waivers		18
Section 11.8.	Counterparts		19
Section 11.9.	Termination of Agreement		19
Section 11.10.	Survival		19
Section 11.11.	Severability		19

iii

Schedule I – Addresses for Notices

Annex A – Form of Supplement to the Bond Guarantee Agreement

Annex B–  Form of Bond Purchase Agreement

Annex C – Pledge Agreement

Annex D – Form of Reimbursement Note

Annex E – Opinion of Counsel to the Borrower

Annex F – Officers’ Closing Certificate

Annex G – Officers’ Advance Certificate

Annex H – Auditors’ Letter

iv

AMENDED, RESTATED AND CONSOLIDATED BOND GUARANTEE AGREEMENT dated as of December 13, 2012 between the UNITED STATES OF AMERICA (the “Government”), acting through the Rural Utilities Service, a Rural Development agency of the United States Department of Agriculture, and its successors and assigns (“RUS”); and NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION, a cooperative association existing under the laws of the District of Columbia (the “Borrower”).

RECITALS

1.The Federal Financing Bank, a body corporate and instrumentality of the Government under the general supervision of the Secretary of the Treasury, and its permitted successors and assigns (“FFB”), has previously made loans to the Borrower in the aggregate principal amount of up to $3,999,000,000 upon the terms and subject to the conditions set forth in the following Bond Purchase Agreements by and among the Borrower, FFB and RUS, each as in effect as of the date hereof:  (a)  that certain Series A Bond Purchase Agreement dated as of June 14, 2005, (b) that certain Series B Bond Purchase Agreement dated as of April 28, 2006, (c) that certain Series C Bond Purchase Agreement dated as of September 19, 2008, (d) that certain Series D Bond Purchase Agreement dated as of  November 10, 2010, and (e) that certain Series E Bond Purchase Agreement dated as of December 1, 2011 (collectively, the “Original Bond Purchase Agreements”), and upon the terms and subject to the conditions set forth in the following Future Advance Bonds, each as in effect as of the date hereof: (a) that certain Series A Future Advance Bond dated as of June 14, 2005, (b) that certain Series B Future Advance Bond dated as of April 28, 2006, (c) that certain Series C Future Advance Bond dated as of September 19, 2008, (d) that certain Series D Future Advance Bond dated as of November 10, 2010, and (e) that certain Series E Future Advance Bond dated as of December 1, 2011 (collectively, the “Original Bonds”).

2.RUS previously determined that the Borrower was eligible to receive guarantees under Section 313A of the Rural Electrification Act of 1936, as amended (the “RE Act”) and the regulations promulgated thereunder (as set forth in Section 1720 of Part 7 of the Code of Federal Regulations (the “Regulations”)) and entered into the following Bond Guarantee Agreements with Borrower, each as in effect immediately prior to the date hereof: (a) that certain Series A Bond Guarantee Agreement dated as of June 14, 2005, as amended by that certain Amendment No. 1 dated as of April 28, 2006, (b) that certain Series B Bond Guarantee Agreement dated as of April 28, 2006, as amended by that certain Amendment No. 1 dated as of September 19, 2008, (c) that certain Series C Bond Guarantee Agreement dated as of September 19, 2008, (d) that certain Series D Bond Guarantee Agreement dated as of November 10, 2010, and (e) that certain Series E Bond Guarantee Agreement dated as of December 1, 2011 (collectively, the “Original Bond Guarantee Agreements”).

Amended, Restated and Consolidated Bond Guarantee Agreement

3.On December 9, 2011, the Borrower applied to RUS (the “Application”), in accordance with the RE Act and the Regulations, for RUS to guarantee a sixth loan from FFB to the Borrower, the proceeds of which would be used by the Borrower to fund new Eligible Loans (as defined herein) or to refinance existing debt instruments of the Borrower used to fund Eligible Loans.

4.RUS has determined that the Borrower is eligible for guarantees under Section 313A of the RE Act.

5.FFB is willing to make a loan to the Borrower in the aggregate principal amount of up to $424,286,000.00 upon the terms and subject to the conditions set forth in the Series F Bond Purchase Agreement among FFB, the Borrower and the Government dated as of the date hereof, as the same may be amended, supplemented, consolidated or restated from time to time in accordance with the terms thereof (the “Series F Bond Purchase Agreement”; together, with the Original Bond Purchase Agreements, the “Bond Purchase Agreements”), and upon the terms and subject to the conditions set forth in the Series F Future Advance Bond issued by the Borrower to FFB and dated as of the date hereof (the “Series F Bond”; together with the Original Bonds, the “Bonds”).

6.The Borrower and RUS have agreed to (i) amend, restate and consolidate the Original Bond Guarantee Agreements, (ii) set forth the terms by which RUS will issue its guarantee of the Series F Bond, and (iii) set forth the terms by which RUS will issue additional guarantees, as contemplated by Section 313A of the RE Act, upon the terms and subject to the conditions hereinafter provided.

NOW, THEREFORE, in consideration of the mutual agreements herein contained, RUS and the Borrower agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.1.Definitions.  As used in this Agreement, the following terms shall have the following meanings:

“91-day Treasury-Bill Rate” shall mean, for any date, the rate equal to the weighted average per annum discount rate (expressed as a bond equivalent yield and applied on a daily basis) for direct obligations of the United States with a maturity of thirteen weeks ("91-day Treasury-Bills") sold at the applicable 91-day Treasury-Bill auction on or most recently prior to such date, as published on the website http://www.treasurydirect.gov/RI/OFBills or otherwise as reported by the U.S. Department of the Treasury. In the event that the results of the auctions of 91-day Treasury Bills cease to be published or reported as provided above, or that no 91-day Treasury Bill auction is held in a particular week, then the 91-day Treasury-Bill Rate in effect as a result of the last such publication or report will remain in effect until such

2

Amended, Restated and Consolidated Bond Guarantee Agreement

 time, if any, as the results of auctions of 91-day Treasury-Bills will again be so published or reported or such auction is held, as the case may be.

“Administrator” shall mean the Administrator of RUS.

“Advance” shall have the meaning given to that term in the Bond.

“Agreement” shall mean this Amended, Restated and Consolidated Bond Guarantee Agreement, as the same may be amended, supplemented, consolidated or restated from time to time.

“Application” shall have the meaning given to that term in the recitals hereto.

“Bond” shall have the meaning given to that term in the recitals hereto.

“Bond Fee” shall mean the fee applicable to each Advance as calculated in accordance with paragraph 9(b) of the Bond.

“Bond Purchase Agreements” shall have the meaning given to that term in the recitals hereto.

“Bond Documents” shall mean the Bonds, the Bond Purchase Agreements, the Guarantees, this Agreement, the Pledge Agreement and the Reimbursement Notes.

“Borrower” shall have the meaning given to that term in the Preamble.

“Borrower Notice” shall have the meaning given to that term in the Pledge Agreement.

“Business Day” shall mean any day other than a Saturday, a Sunday, a legal public holiday under 5 U.S.C. §6103 for the purpose of statutes relating to pay and leave of employees or any other day declared to be a legal holiday for the purpose of statutes relating to pay and leave of employees by Federal statute or Federal Executive Order.

“Certificate of Available Securities” shall have the meaning given to that term in the Pledge Agreement.

“Certificate of Pledged Collateral” shall have the meaning given to that term in the Pledge Agreement.

“Closing Date” shall mean December 13, 2012.

“Consolidated Subsidiary” means at any date any Subsidiary and any other entity the accounts of which would be combined or consolidated with those of the Borrower in its combined or consolidated financial statements if such statements were prepared as of such date.

3

Amended, Restated and Consolidated Bond Guarantee Agreement

“Eligible Loan” shall mean all or part of any Loan that the Borrower has made for any electrification or telephone purpose eligible under the RE Act, to the extent the Loan is not used directly or indirectly to fund projects for the generation of electricity.

“Event of Default” shall have the meaning given to that term in Section 10.1.

“FFB” shall have the meaning given to that term in the recitals hereto.

A “Financial Expert Trigger Event” shall exist at any time when the Borrower has failed to comply with the covenant contained in Section 9.8 hereof.

“Financial Statements”, in respect of a Fiscal Year, shall mean the consolidated financial statements (including footnotes) of the Borrower for that Fiscal Year as audited by independent certified public accountants appointed by the Borrower.

“Fiscal Year” shall mean the fiscal year of the Borrower, as such may be changed from time to time, which at the date hereof commences on June 1 of each calendar year and ends on May 31 of the following calendar year.

“Government” shall have the meaning given to that term in the Preamble.

“Guarantee” shall mean a guarantee executed by the Secretary, in the form attached to a Bond.

“Guarantee Fee” shall have the meaning given to that term in Section 4.1.

“Guaranteed Bond” shall mean a Bond with the executed Guarantee attached thereto.

“Indebtedness” with respect to any Person shall mean without duplication:

(a)           all indebtedness which would appear as indebtedness on a balance sheet of such Person prepared in accordance with generally accepted accounting principles (i) for money borrowed, (ii) which is evidenced by securities sold for money or (iii) which constitutes purchase money indebtedness;

(b)           all indebtedness of others guaranteed by such Person (not including endorsements for collection or deposit in the ordinary course of business);

(c)           all indebtedness secured by any mortgage, lien, pledge, charge or encumbrance upon property owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness; and

(d)           all indebtedness of such Person created or arising under any conditional sale or other title retention agreement (including any lease in the nature of a title retention agreement) with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of

4

Amended, Restated and Consolidated Bond Guarantee Agreement

default are limited to repossession of such property), but only if such property is included as an asset on the balance sheet of such Person,

provided that, in computing the “Indebtedness” of such Person, there shall be excluded any particular indebtedness if, upon or prior to the maturity thereof, there shall have been deposited with the proper depositary in trust money (or evidences of such indebtedness) in the amount necessary to pay, redeem or satisfy such indebtedness; and provided further that no provision of this definition shall be construed to include as “Indebtedness” of the Borrower or its Consolidated Subsidiaries any indebtedness by virtue of any agreement by the Borrower or its Consolidated Subsidiaries to advance or supply funds to Members or Consolidated Subsidiary members.

“Investment Grade Rating” shall mean, in respect of any ratable instrument, a rating for that instrument in one of the four highest rating categories (within which there may be subcategories or gradations which are to be ignored for the purposes of this definition) of a Rating Agency.  At the date hereof, this would require the following:  (i) a BBB- rating or higher from Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.; (ii) a Baa3 rating or higher from Moody’s Investors Service, Inc.; or (iii) a BBB- rating or higher from Fitch, Inc.

“Loan” shall mean a loan that the Borrower has or will have outstanding to any of its Members or associates.

“Member” shall mean any Person who is member or patron of the Borrower, as the case may be.

“Original Bonds” shall have the meaning given to that term in the recitals hereto.

“Original Bond Guarantee Agreements” shall have the meaning given to that term in the recitals hereto.

“Original Bond Purchase Agreements” shall have the meaning given to that term in the recitals hereto.

“Person” means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

“Pledge Agreement” shall mean the Amended, Restated and Consolidated Pledge Agreement dated as of December 13, 2012 entered into by the Borrower, RUS and U.S. Bank National Association, an executed copy of which is attached as Annex C hereto, and an executed original of which has previously been delivered to each of the parties thereto, as the same may be amended, supplemented, or restated from time to time in accordance with the terms thereof and hereof.

“Program” shall mean the guarantee program for bonds and notes issued for electrification or telephone purposes authorized by Section 313A of the RE Act.

5

Amended, Restated and Consolidated Bond Guarantee Agreement

“Rating Agency” shall mean (i) Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., Moody’s Investors Service, Inc., or Fitch, Inc; and (ii) their respective successor rating agencies.

A “Rating Trigger Event” shall exist at any time when the Borrower has a Senior Secured Credit Rating (without regard to the Guarantee or any other third party credit support) that is not equal to at least two of the following ratings:  (i) A- or higher from Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.; (ii) A3 or higher from Moody’s Investors Service, Inc.; (iii) A- or higher from Fitch, Inc.; and (iv) an equivalent rating from a successor rating agency to any of those Rating Agencies.

“RE Act” shall have the meaning given to that term in the recitals hereto.

“Regulations” shall have the meaning given to that term in the recitals hereto.

“Reimbursement Note” shall mean a note issued by the Borrower to RUS, in the form of Annex D attached hereto, as the same may be amended, supplemented, or restated from time to time in accordance with the terms thereof and hereof.

“Requested Advance Date” shall have the meaning given to that term in the Bonds.

“RUS” shall have the meaning given to that term in the Preamble.

“Secretary” shall mean the Secretary of Agriculture acting through the Administrator.

“Senior Secured Credit Rating” means a credit rating of the Borrower by a Rating Agency in the category of “Senior Secured”, as set forth in an annual credit opinion or letter for the Borrower.

“Series F Bond” shall have the meaning given to that term in the recitals hereto.

“Series F Guarantee” shall mean the Guarantee executed by the Secretary and attached to the Series F Bond.

“Series F Bond Purchase Agreement” shall have the meaning given to that term in the recitals hereto.

“Subrogation Claim” shall have the meaning given to that term in Section 9.3(a).

“Subsidiary” of any Person means (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such

6

Amended, Restated and Consolidated Bond Guarantee Agreement

 Person directly or indirectly through its Subsidiaries; and (ii) any other Person in which such Person directly or indirectly through Subsidiaries has more than a 50% voting and equity interest; provided that no Person shall be deemed a Subsidiary whose only assets are (A) loans guaranteed, in whole or in part, as to principal and interest by the Government through RUS pursuant to a guarantee; and (B) investments incidental thereto.

“Termination Date” shall mean the date upon which this Agreement terminates in accordance with Section 11.9.

SECTION 1.2.Principles of Construction.  Unless the context shall otherwise indicate, the terms defined in Section 1.1 hereof include the plural as well as the singular and the singular as well as the plural.  The words “hereafter”, “herein”, “hereof”, “hereto” and “hereunder”, and words of similar import, refer to this Agreement as a whole.  The descriptive headings of the various articles and sections of this Agreement were formulated and inserted for convenience only and shall not be deemed to affect the meaning or construction of the provisions hereof.

ARTICLE II

THE GUARANTEES

SECTION 2.1.Guarantee of Original Bonds.  Prior to the execution of this Agreement, the Secretary executed Guarantees for each of the Original Bonds pursuant to Section 313A of the RE Act.  Such Guarantees are obligations supported by the full faith and credit of the Government and are incontestable except for fraud or misrepresentation of which FFB had actual knowledge at the time it extended the loan represented by the Guaranteed Bonds.  The Guarantees remain in full force and effect and are subject to the provisions set forth in this Agreement.

SECTION 2.2.Execution of Series F Guarantee.  Upon presentation to RUS of the Series F Bond, and upon satisfaction of the conditions set forth in Section 3.1 of this Agreement, and subject to Section 2.3, the Secretary shall execute, pursuant to the RE Act, the Series F Guarantee.

SECTION 2.3.Coverage of the Series F Guarantee.  The Series F Guarantee shall be an obligation supported by the full faith and credit of the Government and incontestable except for fraud or misrepresentation of which FFB had actual knowledge at the time it extended the loan represented by the Series F Guaranteed Bond.

SECTION 2.4.Payment on the Guarantees.  RUS guarantees the full repayment of the principal, interest, late payment charges, Bond Fees and discount or prepayment premiums, if any, when and as due on the Guaranteed Bonds in accordance with the terms of the Guarantees, provided, however, that any payment by RUS under each Guarantee does not relieve the Borrower of any of its obligations or liabilities under or in respect of this Agreement or any of the Bond Documents.

7

Amended, Restated and Consolidated Bond Guarantee Agreement

SECTION 2.5.Issuance of Additional Guarantees.   RUS may from time to time issue additional guarantees of loans of the Borrower pursuant to the RE Act.  Such guarantees shall become subject to this Agreement by the execution of a supplement by RUS and the Borrower substantially in the form attached hereto as Annex A.

ARTICLE III

CONDITIONS PRECEDENT

SECTION 3.1.Conditions Precedent to Issuance of a Guarantee.  RUS shall be under no obligation to execute and deliver a Guarantee unless and until the following conditions have been satisfied or waived in writing:

(a)Bond Documents.  RUS shall have received originals of: (i) the Bond to which the Guarantee relates (with an unexecuted Guarantee attached thereto) duly executed on behalf of the Borrower, identical in all respects to the form of Bond attached to the Bond Purchase Agreement except to the extent that RUS may have approved changes therein, (ii) a Bond Purchase Agreement duly executed on behalf of the Borrower and FFB, identical in all respects to the form of Bond Purchase Agreement in Annex B attached hereto except to the extent that RUS may have approved changes therein, and (iii) a Reimbursement Note duly executed on behalf of the Borrower, identical in all respects to the form of Reimbursement Note in Annex D attached hereto except to the extent that RUS may have approved changes therein.

(b)Amount of RE Act Loans. The Borrower shall have provided RUS a certification by its Governor and its Chief Financial Officer or Treasurer (or other senior management acceptable to the Secretary) certifying that as of the Closing Date the outstanding principal amount of Loans made for electrification and telephone purposes eligible under the RE Act is equal to or greater than the amount of the Borrower’s Guaranteed Bonds under the Program, including the Bond.

(c)Opinion of Counsel.  Counsel to the Borrower shall have furnished an opinion substantially as to each of the matters listed in Annex E attached hereto.

(d)No material adverse change.  The Borrower shall have certified to the Secretary (in the manner specified in paragraph (g) of this Section 3.1), and the Secretary shall be satisfied, that no material adverse change shall have occurred in the financial condition of the Borrower between the date of the Application and the date of execution of the Guarantee.

8

Amended, Restated and Consolidated Bond Guarantee Agreement

(e)Investment Grade Rating of Bond.  The Borrower shall have provided evidence of an Investment Grade Rating from a Rating Agency for the Bond, without regard to the Guarantee.

(f)Senior Secured Credit Rating.  The Borrower shall have provided evidence satisfactory to the Secretary of its Senior Secured Credit Rating.  

(g)Certification of Senior Management.  The Borrower shall have provided RUS a certification by its Governor and its Chief Financial Officer or Treasurer (or other senior management acceptable to the Secretary), substantially in the form attached of Annex F attached hereto, of the following: (i) that the Borrower is a lending institution organized as a private, not-for-profit, cooperative association with the appropriate expertise, experience and qualifications to make loans for electrification or telephone purposes; (ii) the matter to be certified under paragraph (d) of this Section 3.1; (iii) acknowledgment of the Borrower’s commitment to comply with the reporting requirements specified in Article VI; and (iv) to the effect that no Rating Trigger Event or Financial Expert Trigger Event exists.

(h)UCC Filing.  The Borrower shall have provided RUS with evidence that the Borrower has filed the financing statement required pursuant to Section 2.05(i) of the Pledge Agreement.

SECTION 3.2.Conditions Precedent to each Advance.  The following conditions shall be fulfilled to the satisfaction of RUS or waived in writing by RUS prior to the drawdown of each Advance under a Guaranteed Bond:

(a)Existing Loans.  The Borrower shall have certified to the Secretary (in the manner specified in paragraph (d) of this Section 3.2): (i) the total aggregate principal amount of outstanding Eligible Loans as of the Requested Advance Date; (ii) the total aggregate principal amount of outstanding Loans as at the Requested Advance Date; and (iii) the percentage the amount in subparagraph (i) comprises of the amount in subparagraph (ii).

(b)Use of Proceeds.  The Borrower shall have certified to the Secretary (in the manner specified in paragraph (d) of this Section 3.2) that the Advance will be applied: (i) to fund new Eligible Loans under the RE Act; and/or (ii) to refinance existing debt instruments of the Borrower, in the case of each such debt instrument up to the percentage certified by the Borrower in accordance with Section 3.2(a)(iii) hereof.

(c)No material adverse change.  The Borrower shall have certified to the Secretary (in the manner specified in paragraph (d) of this Section 3.2), and the Secretary shall be satisfied, that no material adverse change shall have occurred in the financial condition of the Borrower between the Closing Date and the applicable Requested Advance Date.

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Amended, Restated and Consolidated Bond Guarantee Agreement

(d)Certification of Senior Management.  The Borrower shall have provided RUS a certification by its Governor and its Chief Financial Officer or Treasurer (or other senior management acceptable to the Secretary), substantially in the form attached of Annex G attached hereto, of the matters to be certified under paragraphs (a), (b) and (c) of this Section 3.2.

(e)Certificate of Available Securities/Pledged Collateral.  The Borrower shall have provided RUS a copy of a Certificate of Available Securities or Certificate of Pledged Collateral, as applicable, in accordance with the terms of the Pledge Agreement.

ARTICLE IV

GUARANTEE FEE

SECTION 4.1.Guarantee Fee.  The Borrower shall pay a guarantee fee (the “Guarantee Fee”), to the RUS for deposit into the Rural Economic Development Subaccount maintained under Section 313(b)(2)(A) of the RE Act.

SECTION 4.2.Amount of Guarantee Fee; Dates of Payment.  (a)  The Guarantee Fee will be in the amount of 30 basis points (0.30 percent) of the unpaid principal amount of the Bonds, payable as provided in paragraph (b) of this Section 4.2.

(b)The Guarantee Fee will be payable, in advance, on each January 15 and July 15 in the amount of 15 basis points (0.15 percent) of the outstanding principal amount of the Bonds on that date.  In addition, on the date of each Advance under a Bond, the Borrower will pay to RUS the Guarantee Fee on the principal amount of such advance in the amount of (i) 30 basis points (0.30 percent) of the principal amount of such advance multiplied by (ii) the ratio of (x) the actual amount of days from the date of such advance until the next January 15 or July 15, whichever comes first, to (y) 365 (except in calendar years including February 29, when the number shall be 366).

(c)Payments of the Guarantee Fee are non-refundable as of the date and in the amount required to be paid hereunder, without regard to any reduction in the principal amount of the Bonds after that date.

ARTICLE V

SERVICING OF THE GUARANTEED BONDS

SECTION 5.1.Servicing.  The Secretary, or other agent of the Secretary on his or her behalf, shall have the right to service the Guaranteed Bonds, and periodically inspect the books and accounts of the Borrower to ascertain compliance with the provisions of the RE Act with respect to the guarantees under Section 313A thereof

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Amended, Restated and Consolidated Bond Guarantee Agreement

and the Bond Documents.  The Secretary, or agent thereof, shall endeavor to give the Borrower at least five Business Days’ notice of any intention to inspect the Borrower’s books and accounts.  Such inspection shall be made only during regular office hours of the Borrower or at any time the Borrower and Secretary, or agent thereof, find mutually convenient.

ARTICLE VI

REPORTING REQUIREMENTS

SECTION 6.1.Annual Reporting Requirements.  Until the Termination Date, the Borrower shall provide the Secretary with the following items within 90 days of the end of each Fiscal Year, in each case, in form and substance satisfactory to the Secretary:

(a)the Financial Statements for such Fiscal Year;

(b)a Certificate of Available Securities or Certificate of Pledged Collateral, as applicable, as of the end of such Fiscal Year;

(c)a letter substantially in the form of Annex H attached hereto, by Deloitte & Touche LLP or by such other reputable, independent certified public accountants proposed by the Borrower, who in the judgment of the Secretary have the requisite skills, knowledge, reputation and experience to provide such letter, such letter to be based upon Schedule A to the applicable certificate delivered under paragraph (b) of this Section 6.1;

(d)a receipt from the Collateral Agent (as defined in the Pledge Agreement), or such other evidence as is satisfactory to the Secretary, as to the Available Securities or Pledged Collateral, as applicable, held by the Collateral Agent at the end of such Fiscal Year, such Available Securities or Pledged Collateral, as applicable, to agree with Schedule A to the applicable certificate delivered under paragraph (b) of this Section 6.1;

(e)a projection of the Borrower’s balance sheet, income statement and statement of cash flows over the ensuing five years, pro forma assuming the full principal amount of the Bond is advanced;

(f)the most recent credit assessment of the Borrower issued by a Rating Agency;

(g)the most recent Senior Secured Credit Rating issued by a Rating Agency; and

(h)such other information as is reasonably requested by the Secretary.

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Amended, Restated and Consolidated Bond Guarantee Agreement

SECTION 6.2.Trigger Event Notices.  If the Borrower becomes aware that a Rating Trigger Event or a Financial Expert Trigger Event has occurred, the Borrower shall deliver a Borrower Notice of such event to RUS and to the Collateral Agent (as defined in the Pledge Agreement) before 4:00 p.m. District of Columbia time on the Business Day following the date the Borrower has become aware of such event, specifying the existence of such event.

SECTION 6.3.Default Notices.  If an action, occurrence or event shall happen that is, or with notice and the passage of time would become, an Event of Default, the Borrower shall deliver a Borrower Notice of such action, occurrence or event to RUS before 4:00 p.m. District of Columbia time on the Business Day following the date the Borrower becomes aware of such action, occurrence or event, and, if such Event of Default should occur, shall submit to RUS, as soon as possible thereafter, a report setting forth its views as to the reasons for the Event of Default, the anticipated duration of the Event of Default and what corrective actions the Borrower is taking to cure such Event of Default.

ARTICLE VII

LIMITATIONS ON AMENDMENTS TO THE GUARANTEED BONDS

SECTION 7.1.Limitations on Amendments to the Guaranteed Bonds.  No amendment or supplement to, and no modification or rescission of, the Guaranteed Bonds shall be effective unless approved in writing by RUS, nor shall any waiver of any rights of RUS under the Guaranteed Bonds be effective against RUS unless such waiver has been approved in writing by RUS.  No amendment or supplement to, and no modification of, any of the other Bond Documents, which materially adversely affects RUS, shall be effective unless approved in writing by RUS, nor shall any waiver of any rights of RUS under any of the Bond Documents be effective against RUS unless such waiver has been approved in writing by RUS.

ARTICLE VIII

REPRESENTATIONS OF THE PARTIES

SECTION 8.1.Representation of RUS.  RUS represents that the Guarantees endorsed on the original of the Guaranteed Bonds constitute legal, valid and binding obligations supported by the full faith and credit of the Government, incontestable except for fraud or misrepresentation of which FFB had actual knowledge at the time it extended the loan represented by the Guaranteed Bonds.

SECTION 8.2.Representations of the Borrower.  The Borrower hereby represents to RUS that on the date hereof, the Closing Date, and each Requested Advance Date:

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Amended, Restated and Consolidated Bond Guarantee Agreement

(a)the Borrower has been duly organized and is validly existing and in good standing as a cooperative association under the laws of the District of Columbia;

(b)the Borrower has the corporate power and authority to execute and deliver this Agreement and each of the other Bond Documents to which the Borrower is a party, to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder;

(c)the Borrower has taken all necessary corporate action to authorize the execution and delivery of this Agreement and each of the other Bond Documents to which the Borrower is a party, the consummation by the Borrower of the transactions contemplated hereby and thereby and the performance by the Borrower of its obligations hereunder and thereunder;

(d)this Agreement and each of the other Bond Documents to which the Borrower is a party have been duly authorized, executed and delivered by the Borrower and constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, subject to: (i) applicable bankruptcy, reorganization, insolvency, moratorium and other laws of general applicability relating to or affecting creditors’ rights generally; and (ii) the application of general principles of equity regardless of whether such enforceability is considered in a proceeding in equity or at law;

(e)no approval, consent, authorization, order, waiver, exemption, variance, registration, filing, notification, qualification, license, permit or other action is now, or under existing law in the future will be, required to be obtained, given, made or taken, as the case may be, with, from or by any regulatory body, administrative agency or governmental authority having jurisdiction over the Borrower to authorize the execution and delivery by the Borrower of this Agreement or any of the other Bond Documents to which the Borrower is a party, or the consummation by the Borrower of the transactions contemplated hereby or thereby or the performance by the Borrower of its obligations hereunder or thereunder;

(f)neither the execution or delivery by the Borrower of this Agreement or any of the other Bond Documents to which the Borrower is a party nor the consummation by the Borrower of any of the transactions contemplated hereby or thereby nor the performance by the Borrower of its obligations hereunder or thereunder, including, without limitation, the pledge of the Pledged Securities (as such term is defined in the Pledge Agreement) to RUS if required, conflicts with or will conflict with, violates or will violate, results in or will result in a breach of, constitutes or will constitute a default under, or results in or will result in the imposition of any lien or encumbrance pursuant to any term or provision of the articles of incorporation or the bylaws of the Borrower or any provision of any existing law or any rule or regulation currently applicable to the Borrower or any judgment, order or decree of any court or any regulatory body, administrative

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Amended, Restated and Consolidated Bond Guarantee Agreement

agency or governmental authority having jurisdiction over the Borrower or the terms of any mortgage, indenture, contract or other agreement to which the Borrower is a party or by which the Borrower or any of its properties is bound;

(g)there is no action, suit, proceeding or investigation before or by any court or any regulatory body, administrative agency or governmental authority presently pending or, to the knowledge of the Borrower, threatened with respect to the Borrower, this Agreement or any of the other Bond Documents to which the Borrower is a party challenging the validity or enforceability of this Agreement or any of the other Bond Documents to which the Borrower is a party or seeking to restrain, enjoin or otherwise prevent the consummation by the Borrower of the transactions contemplated by this Agreement or any of the other Bond Documents to which the Borrower is a party or which, if adversely determined, would have a material adverse effect on the Borrower’s financial condition or its ability to perform its obligations under this Agreement or any of the other Bond Documents to which the Borrower is a party;

(h)the Borrower is a lending institution organized as a member-owned, not-for-profit, cooperative association with the appropriate expertise, experience and qualifications to make loans for electrification or telephone purposes;

(i)the total principal amount of the Guaranteed Bonds under the Program does not exceed the total principal amount of outstanding Loans, made for electrification and telephone purposes eligible under the RE Act, as of the Closing Date; and

(j)no material adverse change has occurred in the financial condition of the Borrower between the date of the Application and the date this representation is given.

ARTICLE IX

AGREEMENTS OF THE BORROWER

SECTION 9.1.Patronage Refunds.  During any portion of a Fiscal Year when a Rating Trigger Event exists, the Borrower shall not make cash patronage refunds in excess of five percent of its total patronage capital, as disclosed in its most recent Financial Statements.  While the Borrower is subject to such restriction, equity securities issued as part of a patronage refund shall not be redeemed in cash, and, if the Borrower shall have outstanding any common stock or preferred stock, the Borrower shall not issue any dividends on any such stock.

SECTION 9.2.Security and Collateral.  (a)  If a Rating Trigger Event or Financial Expert Trigger Event exists, the Pledged Securities (as such term is defined in the Pledge Agreement) shall be pledged in accordance with the terms and conditions of

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Amended, Restated and Consolidated Bond Guarantee Agreement

 the Pledge Agreement to secure the payment obligations of the Borrower under this Agreement and under the Reimbursement Notes.

(b)Until the Termination Date, the Borrower shall cause the Available Securities or Pledged Collateral (as such terms are defined in the Pledge Agreement), as the case may be, to be at all times not less than 100% of the aggregate principal amount of the Guaranteed Bonds and any other guaranteed bonds issued by the Borrower under the Program and, except as provided for in paragraph (a) of this Section 9.2 or otherwise permitted by the Pledge Agreement, shall not create, or permit to exist, any pledge, lien, charge, mortgage, encumbrance, debenture, hypothecation or other similar security instrument that secures, or in any way attaches to, such Available Securities or Pledged Collateral, as the case may be, without the prior written consent of RUS.

SECTION 9.3.Subrogation.  (a)  The Borrower agrees that RUS shall be subrogated to the rights of FFB to the extent of any and all payments made by RUS under each Guarantee (herein called the “Subrogation Claim”).  The Borrower agrees to pay directly to RUS all amounts due on the Guaranteed Bonds as to which RUS is so subrogated, together with interest thereon (to the extent permitted by applicable law) at a rate determined by the following paragraph, and such payments shall satisfy the obligations of the Borrower hereunder with respect to such amounts paid by RUS.

(b)The Subrogation Claim of RUS shall bear interest from the date of payment by RUS under the Guarantees until the date such claim is satisfied.  Interest shall accrue at an annual rate of the greater of 1.5 times the 91-day Treasury-Bill Rate or 200 basis points (2.00%) above the interest rate on the Guaranteed Bonds.

SECTION 9.4.Use of Proceeds.  (a)  The Borrower shall only apply the proceeds of the Guaranteed Bonds to finance new Eligible Loans or, subject to paragraph (b), to refinance existing debt instruments of the Borrower.

(b)The Borrower may only apply the proceeds of each Advance to refinance any of the Borrower’s indebtedness up to the percentage certified by the Borrower under Section 3.2(a)(iii) hereof of the amount of such indebtedness being refinanced.

SECTION 9.5.Compliance with Covenants in Other Agreements.  The Borrower and each of its Subsidiaries will observe and perform within any applicable grace period all covenants and agreements (as the same may be from time to time amended or waived) contained in any agreement or instrument relating to any Indebtedness of the Borrower or any of its Subsidiaries, aggregating for the Borrower and its Subsidiaries in excess of $50,000,000, if the effect of the failure to observe or perform such covenant or agreement is to accelerate, or to permit the holder of such Indebtedness or any other Person to accelerate, the maturity of such Indebtedness.

SECTION 9.6.Ratings.  For the term of the Bonds, the Borrower shall request, and do all things reasonably within its power to obtain (including paying all fees

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Amended, Restated and Consolidated Bond Guarantee Agreement

 incidental thereto), Senior Secured Credit Ratings from at least two Rating Agencies on at least an annual basis.

SECTION 9.7.Acknowledgement of Borrower.  The Borrower acknowledges and agrees that failure by the Borrower to receive any repayment under a Loan, does not affect the Borrower’s obligations to make payments under this Agreement or any other Bond Document.

SECTION 9.8.Financial Expert.  The Borrower will cause a financial expert (within the meaning of Section 407 of the Sarbanes-Oxley Act of 2002) to serve on the audit committee of its board of directors until the Termination Date; and shall not allow the financial expert position on the audit committee to remain vacant for more than 90 consecutive days.

ARTICLE X

EVENTS OF DEFAULT

SECTION 10.1.Events of Default.  Each of the following actions, occurrences or events shall, but only (except in the case of subsections (a), (c) and (e) below) if the Borrower does not cure such action, occurrence or event within 30 days of notice from RUS requesting that it be cured, constitute an “Event of Default” under the terms of this Agreement:

(a)A failure by the Borrower to make a payment of principal, interest or a Bond Fee when due on a Guaranteed Bond;

(b)The issuance of a Guaranteed Bond in violation of the terms and conditions of this Agreement or any of the other Bond Documents;

(c)A failure by the Borrower to make payment of the Guarantee Fee required by Article IV when due;

(d)A misrepresentation by the Borrower to the Secretary in any material respect in connection with this Agreement, the Guaranteed Bonds or the information reported pursuant to Article VI;

(e)A failure by the Borrower to comply with the covenant contained in Section 9.5 hereof; or

(f)A failure by the Borrower to comply with any other material covenant or provision contained in this Agreement or any of the other Bond Documents, except that the failure of the Borrower to comply with Section 9.8 hereof shall not constitute such an Event of Default.

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Amended, Restated and Consolidated Bond Guarantee Agreement

SECTION 10.2.Compulsory Redemption.  If an Event of Default occurs, the Secretary may demand that the Borrower redeem the Guaranteed Bonds in accordance with its terms.

SECTION 10.3.Acceleration by RUS’s Purchase of the Bonds.  If an Event of Default occurs, and RUS purchases from FFB each Bond in its entirety in the manner provided in Section 13.5 of each Bond Purchase Agreement, then the entire purchase price shall be included in the Principal Amount of the Reimbursement Notes as defined therein and shall be immediately due and payable to RUS.  Payment to RUS of all amounts due under the Reimbursement Notes after such an acceleration shall satisfy in full all obligations of the Borrower under the Bonds and Reimbursement Notes and all corresponding obligations under the other Bond Documents, including any obligations to reimburse RUS for any payments thereafter made by RUS under the RUS Guarantees.

SECTION 10.4.Effect of Payments by RUS pursuant to the RUS Guarantees.  No payment by RUS pursuant to the RUS Guarantees shall (i) be considered a payment for purposes of determining the existence of a failure of the Borrower to perform its obligations to RUS under the Bond Documents, or (ii) relieve the Borrower of its obligations to reimburse RUS for payments made by RUS pursuant to the RUS Guarantees. Payment by the Borrower to RUS of amounts due under the Reimbursement Notes shall satisfy pro tonto the corresponding obligations of the Borrower under the Bonds.

SECTION 10.5.Remedies Not Exclusive.  Upon the occurrence of an Event of Default, the Secretary shall be entitled to take such other action as is provided for by law, in this Agreement, or in any of the other Bond Documents, including injunctive or other equitable relief.

ARTICLE XI

MISCELLANEOUS

SECTION 11.1.GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE UNITED STATES OF AMERICA, TO THE EXTENT APPLICABLE, AND OTHERWISE THE LAWS OF THE DISTRICT OF COLUMBIA.

SECTION 11.2.WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF

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Amended, Restated and Consolidated Bond Guarantee Agreement

 LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTY HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.2.

SECTION 11.3.Method of Payment.  All payments to be made by the Borrower to RUS hereunder, shall be made in the manner notified to the Borrower by RUS from time to time in accordance with Section 11.4.

SECTION 11.4.Notices.  All notices and other communications hereunder to be made to any party shall be in writing and shall be addressed as specified in Schedule I attached hereto as appropriate.  The address, telephone number, or facsimile number for any party may be changed at any time and from time to time upon written notice given by such changing party to the other parties hereto.  A properly addressed notice or other communication to the Borrower shall be deemed to have been delivered at the time it is sent by facsimile (fax) transmission.  A properly addressed notice or other communication to RUS shall be deemed to have been delivered at the time it is sent by facsimile (fax) transmission, provided that the original of such faxed notice or other communication shall have been received by RUS within five Business Days.

SECTION 11.5.Benefit of Agreement.  This Agreement shall become effective when it shall have been executed by RUS and the Borrower, and thereafter shall be binding upon and inure to the respective benefit of the parties and their permitted successors and assigns.

SECTION 11.6.Entire Agreement.  This Agreement, including Schedule I hereto and Annexes A to H hereto, and the other Bond Documents, constitutes the entire agreement between the parties hereto concerning the matters contained herein and supersedes all prior oral and written agreements and understandings between the parties.

SECTION 11.7.Amendments and Waivers.  (a)  No failure or delay of RUS or the Borrower in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power.  No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be authorized as provided in paragraph (b) of this Section 11.7, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given.  No notice or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances.

(b)  No provision of this Agreement may be amended or modified except pursuant to an agreement in writing entered into by RUS and the Borrower.  No provision of this Agreement may be waived except in writing by the party or parties receiving the benefit of and under such provision.

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Amended, Restated and Consolidated Bond Guarantee Agreement

SECTION 11.8.Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument.

SECTION 11.9.Termination of Agreement.  This Agreement shall terminate upon the indefeasible payment in full of all amounts payable hereunder, under the Reimbursement Notes and under the Guaranteed Bonds.

SECTION 11.10.Survival.  The representations and warranties of each of the parties hereto contained in this Agreement and contained in each of the other Bond Documents to which such party hereto is a party thereto, and the parties’ obligations under any and all thereof, shall survive and shall continue in effect following the execution and delivery of this Agreement, any disposition of the Guaranteed Bonds and the expiration or other termination of any of the other Bond Documents, but, in the case of each Bond Document, shall not survive the expiration or the earlier termination of such Bond Document, except to the extent expressly set forth in such Bond Document.

SECTION 11.11.Severability.  If any term or provision of this Agreement or any Bond Document or the application thereof to any circumstance shall, in any jurisdiction and to any extent, be invalid or unenforceable, such term or such provision shall be ineffective as to such jurisdiction to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable any remaining terms or provisions of such Bond Document or the application of such term or provision to circumstances other than those as to which it is held invalid or unenforceable.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

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IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed by an authorized officer as of the day and year first above written.

UNITED STATES OF AMERICA, acting through the Administrator of the Rural Utilities Service,
By:	/s/ JOHN C. PADALINO
Name:  John C. Padalino
Title:   Acting Administrator of the Rural Utilities Service

NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE

CORPORATION, as the Borrower

By:

Name:  Sheldon C. Petersen

Title:    Chief Executive Officer

IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed by an authorized officer as of the day and year first above written.

UNITED STATES OF AMERICA, acting

through the Administrator of the Rural

Utilities Service,

By:

Name: John C. Padalino

Title:   Acting Administrator of the Rural

Utilities Service

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION, as the Borrower
By:	/s/ SHELDON C. PETERSEN
Name: Sheldon C. Petersen
Title:   Chief Executive Officer

SCHEDULE I

TO

AMENDED, RESTATED AND CONSOLIDATED BOND GUARANTEE

AGREEMENT

Addresses for Notices

1.   The addresses referred to in Section 11.4 hereof, for purposes of delivering communications and notices, are as follows:

If to RUS:

Rural Utilities Service

United States Department of Agriculture

1400 Independence Avenue, SW

Washington, DC 20250

Fax:  202-720-1725

Attention of: The Administrator

Subject: Guaranteed Underwriter Program

If to the Borrower:

National Rural Utilities Cooperative Finance Corporation

20701 Cooperative Way

Dulles, VA 20166

Telephone:  703-467-7402

Fax:  703-467-5178

Attention of: J. Andrew Don, Treasurer

With a copy to:

National Rural Utilities Cooperative Finance Corporation

20701 Cooperative Way

Dulles, VA 20166

Telephone:  703-467-7404

Fax:  703-467-5651

Attention of: John J. List, Esq., General Counsel

ANNEX A

Form of Supplement to Amended, Restated and Consolidated Bond Guarantee Agreement

SUPPLEMENT TO AMENDED, RESTATED AND CONSOLIDATED BOND GUARANTEE AGREEMENT dated as of [_____________]  (the “Supplement”) by and between the UNITED STATES OF AMERICA (the “Government”), acting through the Rural Utilities Service, a Rural Development agency of the United States Department of Agriculture, and its successors and assigns (“RUS”); and NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION, a cooperative association existing under the laws of the District of Columbia (the “Borrower”).

RECITALS

1,  The Borrower and RUS are parties to that certain Amended, Restated and Consolidated Bond Guarantee Agreement, dated as of December 13, 2012, pursuant to which RUS has agreed to issue guarantees of certain Bonds, as contemplated by Section 313A of the RE Act, upon the terms and subject to the conditions provided therein (the “Original Agreement”).  Capitalized terms that are not defined herein shall have the meanings assigned to them in the Original Agreement.

2. On [date of Application], the Borrower applied to RUS, in accordance with Section 313A of the Act and the Regulations, for RUS to guarantee a [Application number] loan from FFB to the Borrower, the proceeds of which would be used by the Borrower to fund new Eligible Loans or to refinance existing debt instruments of the Borrower used to fund Eligible Loans.

3, FFB is willing to make a loan to the Borrower in the aggregate principal amount of up to $[___________] upon the terms and subject to the conditions set forth in that certain Series [__] Bond Purchase Agreement, dated as of [__________], by and among FFB, the Borrower and RUS, as the same may be amended, supplemented, consolidated or restated from time to time in accordance with the terms thereof (the “Series [__] Bond Purchase Agreement”), and upon the terms and subject to the conditions set forth in the Series [__] Future Advance Bond issued by the Borrower to FFB and dated as of the date hereof (the “Series [__] Bond”).

4.  RUS has determined that the Borrower is eligible for guarantees under Section 313A of the RE Act and is willing to issue its guarantee of the Series [__] Bond (the “Section [__] Guarantee”) upon the terms and subject to the conditions set forth in the Original Agreement.

NOW, THEREORE, in consideration of the mutual agreements herein contained, RUS and the Borrower agree as follows:

SECTION 1.  Recitals.  The foregoing recitals are incorporated into the Original Agreement by reference.

SECTION 2.  Definitions.

A.    The following definitions will be added to Section 1.1 of the Original Agreement:

“Series [_] Bond” shall have the meaning given to that term in the recitals hereto.

2

“Series [_] Bond Purchase Agreement” shall have the meaning given to that term in the recitals hereto.

“Series [__] Guarantee” shall have the meaning given to that term in the recitals hereto.

B.    The following definitions shall be amended as indicated below:

“Bonds” shall mean the Original Bonds, the Series F Bond and the Series [__] Bond dated as of [__________].

“Bond Purchase Agreement” shall mean the Original Bond Purchase Agreements, the Series F Bond Purchase Agreement, and the Series [__] Bond Purchase Agreement dated as of [___________].

SECTION 3.  Conditions Precedent to the Issuance of the Series [__] Guarantee.  The obligation of RUS to enter into this Supplement and to issue the guarantee of the Series [__] Bond pursuant to the terms hereof is subject to the satisfaction of the conditions precedent listed in Section 3.1 of the Original Agreement unless and until such conditions have been satisfied or waived in writing.

SECTION 4.  Prior Representation of RUS.  The representation made by RUS in Section 8.1 of the Original Agreement is true and correct as of the date hereof.

SECTION 5.  Prior Representations of the Borrower.  All representations made by the Borrower in Section 8.2 of the Original Agreement are true and correct as of the date hereof.

SECTION 6.  Incorporation; Inconsistency with Original Agreement.  Except as otherwise amended or modified herein, the terms, conditions and provisions of the Original Agreement are incorporated herein by reference as if set forth in full herein and remain in full force and effect.  In the event of any conflict or inconsistency between the terms of this Supplement and the Original Agreement, the terms of this Supplement shall control.  Nothing in this Supplement shall, however, eliminate or modify any special condition, special affirmative covenant or special negative covenant, if any, specified in the Original Agreement.

SECTION 7.  GOVERNING LAW.  THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE UNITED STATES OF AMERICA, TO THE EXTENT APPLICABLE, AND OTHERWISE THE LAWS OF THE DISTRICT OF COLUMBIA.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

3

IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed by an authorized officer as of the day and year first above written.

UNITED STATES OF AMERICA, acting through the Administrator of the Rural Utilities Service
By:
Title:	Administrator of the Rural Utilities Service

NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE

CORPORATION, as the Borrower

By:

Title:

4

ANNEX B

Form of Bond Purchase Agreement

ANNEX C

Pledge Agreement

Dated as of December 13, 2012

2

ANNEX D

Form of Reimbursement Note

ANNEX E

Opinion of Counsel to the Borrower

 (1)           The Borrower has been duly incorporated and is validly existing as a not-for-profit cooperative association in good standing under the laws of the District of Columbia with corporate power and authority to execute and perform its obligations under the Bond Documents.

(2)           The Bond Documents have been duly authorized, executed and delivered by the Borrower, and such documents constitute the legal, valid and binding agreements of the Borrower, enforceable against the Borrower in accordance with their respective terms subject to (a) applicable bankruptcy, reorganization, insolvency, moratorium and other laws of general applicability relating to or affecting creditors’ rights generally, and (b) the application of general principles of equity regardless of whether such enforceability is considered in a proceeding in equity or at law.

(3)           Neither the execution nor the delivery by the Borrower of any of the Bond Documents nor the consummation by the Borrower of any of the transactions contemplated therein, including, without limitation, the pledge of the Pledged Securities (as such term is defined in the Pledge Agreement) to RUS if required, nor the fulfillment by the Borrower of the terms of any of the Bond Documents will conflict with or violate, result in a breach of or constitute a default under any term or provision of the Articles of Incorporation or By-laws of the Borrower or any law or any regulation or any order known to Counsel currently applicable to the Borrower of any court, regulatory body, administrative agency or governmental body having jurisdiction over the Borrower or the terms of any indenture, deed of trust, note, note agreement or instrument to which the Borrower is a party or by which the Borrower or any of its properties is bound.

(4)           No approval, authorization, consent, order, registration, filing, qualification, license or permit of or with any state or Federal court or governmental agency or body including, without limitation, RUS, having jurisdiction over the Borrower is required for any consummation by the Borrower of the transactions contemplated by the Bond Documents except such as have been obtained from RUS; provided, however, no opinion is expressed as to the applicability of any Federal or state securities law to any sale, transfer or other disposition of the Guaranteed Bond after the date hereof.

(5)           There is no pending or, to the best of Counsel’s knowledge, threatened action, suit or proceeding before any court or governmental agency, authority or body or any arbitrator with respect to the Borrower, or any of the Bond Documents, or which, if adversely determined, would have a material adverse effect on the Borrower’s financial condition or its ability to perform its obligations under any of the Bond Documents, except as previously disclosed.

ANNEX F

Officers’ Closing Certificate

TO:                      The United States of America acting through the Rural Utilities Service.

We, [                           ], Governor, and [                           ], Senior Vice President and Treasurer, of National Rural Utilities Cooperative Finance Corporation (the “Borrower”), pursuant to the Amended, Restated and Consolidated Bond Guarantee Agreement dated as of December 13, 2012, between the Borrower and the United States of America acting through the Rural Utilities Service (the “Bond Guarantee Agreement”), hereby certify on behalf of the Borrower that as at the date hereof:

(1)           the Borrower is a lending institution organized as a member-owned, not-for-profit, cooperative association with the appropriate expertise, experience and qualifications to make loans for electrification or telephone purposes;

(2)           no material adverse change has occurred in the financial condition of the Borrower between the date of the Application and the date hereof;

(3)           we acknowledge the commitment of the Borrower to submit to the Secretary the documents required under Article VI of the Bond Guarantee Agreement in accordance with the terms thereof;

(4)           all of the representations contained in Section 8.2 of the Bond Guarantee Agreement remain true and correct in all respects; and

(5)           no Rating Trigger Event or Financial Expert Trigger Event exists.

Capitalized terms used in this certificate shall have the meanings given to those terms in the Bond Guarantee Agreement.

DATED as of this ___ day of December, 2012.

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

______________________________

Governor

______________________________

                                                                            Senior Vice President and Treasurer

ANNEX G

Officers’ Advance Certificate

TO:                      The United States of America acting through the Rural Utilities Service.

We, [                           ], Governor, and [                           ], of National Rural Utilities Cooperative Finance Corporation (the “Borrower”), pursuant to the Amended, Restated and Consolidated Bond Guarantee Agreement dated as of December 13, 2012, between the Borrower and the United States of America acting through Rural Utilities Service (the “Bond Guarantee Agreement”), hereby certify on behalf of the Borrower that:

(1)           (i) as at the last day of the most recent month ended more than 10 business days before the date hereof, the total aggregate principal amount of outstanding Eligible Loans is:  $                        ;

           (ii) as at the last day of the most recent month ended more than 10 business days before the date hereof, the total aggregate principal amount of outstanding Loans is: $                        ;

           (iii) the percentage the amount under (i) comprises of the amount under (ii) is:               %;

(2)           the Advance will be applied to: (i) fund new Eligible Loans under the RE Act; or (ii) to refinance existing debt instruments of the Borrower, in the case of each such debt instrument up to the percentage set forth in clause (1)(iii) above;

(3)           as at the date hereof, no material adverse change has occurred in the financial condition of the Borrower between the Closing Date and the applicable Requested Advance Date; and

(4)           as at the date hereof, all of the representations contained in Section 8.2 of the Bond Guarantee Agreement remain true and correct in all respects.

Capitalized terms used in this certificate shall have the meanings given to those terms in the Bond Guarantee Agreement.

DATED as of this         day of                      , 20     .

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

______________________________

Governor

______________________________

ANNEX H

Auditors’ Letter

To the Board of Directors of

National Rural Utilities Cooperative Finance Corporation

Herndon, Virginia

We have performed the procedures enumerated below, which were agreed to by National Rural Utilities Cooperative Finance Corporation (the “Company”) and the Rural Utilities Service (the “RUS”), solely to assist in evaluating the Company’s compliance with Section 6.1(b) of the Amended, Restated and Consolidated Bond Guarantee Agreement between the Company and the United States of America, acting through the RUS, dated December 13, 2012 (the “Bond Guarantee Agreement”), as of [last day of preceding fiscal year].  The Company’s management is responsible for the Company’s compliance with those requirements.  This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants.  The sufficiency of these procedures is solely the responsibility of those parties specified in this report.  Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose.

The procedures that we performed and our findings are as follows:

1.   We obtained the attached schedule of the total aggregate unpaid principal amount of the securities identified by the Company as comprising [the Available Securities][the Pledged Securities], as defined in the Bond Guarantee Agreement, as of [last day of preceding fiscal year] from Company management and compared the total aggregate unpaid principal amount shown on such schedule ($ ____) to the Company's underlying accounting records as of the same date and found them to be in agreement.

2.   We obtained the attached schedule of the total aggregate amount of all amounts outstanding under the Guaranteed Bonds, as defined in the Bond Guarantee Agreement, as of [last day of preceding fiscal year] from Company management and compared the amount shown on such schedule ($_____) to the Company's underlying accounting records as of the same date and found them to be in agreement.

We were not engaged to, and did not, conduct an examination, the objective of which would be the expression of an opinion on compliance.  Accordingly, we do not express such an opinion.  Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.

This report is intended solely for the information and use of the Company and the RUS and is not intended to be and should not be used by anyone other than these specified parties.

July    , 20

Yours truly,

_____________________________

DELOITTE & TOUCHE LLP

EX-10.3

THE UNITED STATES OF AMERICA

acting through the Rural Utilities Service

NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION

U.S. BANK NATIONAL ASSOCIATION

____________________________

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AGREEMENT

____________________________

Dated as of

December 13, 2012

TABLE OF CONTENTS
			Page
ARTICLE I
Definitions and Other Provisions of General Application
Section 1.01.	Definitions	3
ARTICLE II
Application of this Pledge Agreement
Section 2.01.	Application of the Lien of this Pledge Agreement			7
Section 2.02.	Delivery of Certificates of Available Securities			7
Section 2.03.	Maintenance of Available Securities			7
Section 2.04.	Existence of Trigger Event			8
Section 2.05.	UCC Filings			8
Section 2.06.	APPLICATION OF ARTICLES III, IV AND V OF THIS
	PLEDGE AGREEMENT			8
ARTICLE III
Provisions as to Pledged Collateral
Section 3.01.	Pledged Securities			8
Section 3.02.	Holding of Pledged Securities			9
Section 3.03.	Withdrawal and Substitution of Pledged Collateral			9
Section 3.04.	Reassignment of Pledged Securities upon Payment			10
Section 3.05.	Addition of Pledged Collateral			10
Section 3.06.	Accompanying Documentation			10
Section 3.07.	Renewal; Extension; Substitution			10
Section 3.08.	Voting Rights; Interest and Principal			11
Section 3.09.	Protection of Title; Payment of Taxes; Liens, etc			12
Section 3.10.	Maintenance of Pledged Collateral			13
Section 3.11.	Representations, Warranties and Covenants			13
Section 3.12.	Further Assurances			14
ARTICLE IV
Application of Moneys Included in Pledged Collateral

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Section 4.01.	Investment of Moneys by Collateral Agent	14
Section 4.02.	Collateral Agent To Retain Moneys during Event of Default	15
ARTICLE V
Remedies
Section 5.01.	Events of Default	15
Section 5.02.	Remedies Upon Default	15
Section 5.03.	Application of Proceeds	17
Section 5.04.	Securities Act	18
ARTICLE VI
The Collateral Agent
Section 6.01.	Certain Duties and Responsibilities	18
Section 6.02.	Certain Rights of Collateral Agent	19
Section 6.03.	Money Held by Collateral Agent	21
Section 6.04.	Compensation and Reimbursement	21
Section 6.05.	Corporate Collateral Agent Required; Eligibility	21
Section 6.06.	Resignation and Removal; Appointment of Successor	22
Section 6.07.	Acceptance of Appointment by Successor	22
Section 6.08.	Merger, Conversion, Consolidation or Succession to	23
	Business
ARTICLE VII
Miscellaneous
Section 7.01.	Notices	23
Section 7.02.	Waivers; Amendment	23
Section 7.03.	Successors and Assigns	24
Section 7.04.	Counterparts; Effectiveness	24
Section 7.05.	Severability	24
Section 7.06.	GOVERNING LAW	24
Section 7.07.	WAIVER OF JURY TRIAL	24
Section 7.08.	Headings	25
Section 7.09	Security Interest Absolute	25
Section 7.10	Termination or Release	25
Section 7.11	Collateral Agent Appointed Attorney-in-Fact	25

iii

Schedule I – Form of Certificate of Available Securities

Schedule II – Form of Certificate of Pledged Collateral

Schedule III – Addresses for Notices

iv

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AGREEMENT, dated as of December 13, 2012, among NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION, a District of Columbia cooperative association and its successors and assigns (hereinafter called the “Borrower”), having its principal executive office and mailing address at 20701 Cooperative Way, Dulles, VA 20166, the UNITED STATES OF AMERICA, acting through the Rural Utilities Service, a Rural Development agency of the United States Department of Agriculture and its successors and assigns (“RUS”), and U.S. BANK NATIONAL ASSOCIATION, a national association and its successors and assigns (hereinafter called the “Collateral Agent”), having its corporate office at 100 Wall Street, Suite 1600, New York, NY 10005-3701.

RECITALS OF THE BORROWER

WHEREAS, the Borrower has previously issued the following bonds to the Federal Financing Bank (“FFB”) to evidence loans therefrom in the aggregate principal amount of up to $3,999,000,000.00:  (a) that certain Series A Future Advance Bond dated as of June 14, 2005, (b) that certain Series B Future Advance Bond dated as of April 28, 2006, (c) that certain Series C Future Advance Bond dated as of September 19, 2008, (d) that certain Series D Future Advance Bond dated as of November 10, 2010, and (e) that certain Series E Future Advance Bond dated as of December 1, 2011  (collectively, the “Original Bonds”);

WHEREAS, concurrently with the execution of this Pledge Agreement, the Borrower has issued a bond to FFB to evidence a loan therefrom in the aggregate principal amount of up to $424,286,000.00 (hereinafter called the “Series F Bond”) and may from time to time issue additional bonds to FFB (the “New Bonds”); (the Original Bonds, the Series F Bond and the New Bonds are collectively referred to as the “Bonds”);

WHEREAS the Original Bonds have been guaranteed by RUS pursuant to the following bond guarantee agreements by and between the Borrower and RUS, each as in effect immediately prior to the date hereof:  (a) that certain Series A Bond Guarantee Agreement dated as of June 14, 2005, as amended by that certain Amendment No. 1 to Series A Bond Guarantee Agreement dated as of April 28, 2006, (b) that certain Series B Bond Guarantee Agreement dated as of April 28, 2006, (c) that certain Series C Bond Guarantee Agreement dated as of September 19, 2008, (d) that certain Series D Bond Guarantee Agreement dated as of November 10, 2010, and (e) that certain Series E Bond Guarantee Agreement dated as of December 1, 2011 (collectively, the “Original Bond Guarantee Agreements”);

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WHEREAS, the Borrower and FFB have entered into that certain Amended, Restated and Consolidated Bond Guarantee Agreement dated as of December 13, 2012, by and between Borrower and RUS (the “Consolidated Bond Guarantee Agreement”), which amended, restated and consolidated the Original Bond Guarantee Agreements and provides for the guarantee of the Original Bonds, the Series F Bond and any New Bonds;

WHEREAS, the Original Bonds were secured by the following separate pledge agreements by and among the Borrower, RUS and the Collateral Agent, each as in effect immediately prior to the date hereof:  (a) that certain Pledge Agreement dated as of June 14, 2005, as amended by that certain Amendment No. 1 to Pledge Agreement dated as of April 28, 2006, (b) that certain Pledge Agreement dated as of April 28, 2006, as amended by that certain Amendment No. 1 to Pledge Agreement dated as of September 19, 2008, (c) that certain Pledge Agreement dated as of September 19, 2008, (d) that certain Pledge Agreement dated as of November 10, 2010, and (e) that certain Pledge Agreement dated as of December 1, 2011 (collectively, the “Original Pledge Agreements”);

                     WHEREAS, the Borrower is required pursuant to the terms of Consolidated Bond Guarantee Agreement to pledge certain property to the Collateral Agent for the benefit of RUS if a Rating Trigger Event or a Financial Expert Trigger Event exists, in each case to ratably secure the Borrower’s obligations under the bonds from time to time issued to FFB if a Rating Trigger Event or Financial Expert Trigger Event exists; and

WHEREAS, in furtherance of the foregoing, the Borrower, RUS and the Collateral Agent have agreed to amend, restate and consolidate the Original Pledge Agreements, continue the liens created by the Original Pledge Agreements, and set forth the terms by which the Borrower will agree to pledge to the Collateral Agent for the benefit of RUS if a Rating Trigger Event or a Financial Expert Trigger Event exists pursuant to the Consolidated Bond Guarantee Agreement, as such agreement may be amended, restated, or supplemented from time to time;

NOW, THEREFORE, THIS PLEDGE AGREEMENT WITNESSETH that, to secure the performance of the certain Obligations contained in the Consolidated Bond Guarantee Agreement, the Original Pledge Agreements, the Reimbursement Notes and herein, for the duration of any Trigger Event, the Borrower assigns and pledges to the Collateral Agent, its successors and assigns, for the benefit of RUS, and grants to the Collateral Agent, its successors and assigns, for the benefit of RUS, a security interest in the following (collectively referred to as the “Pledged Collateral”) in each case with effect from and after the occurrence of a Trigger Event and as otherwise provided in Article II: (a)(i) the Pledged Securities and the certificates representing the Pledged Securities; (ii) subject to Section 3.08, all payments of principal or interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of, in exchange for, and all other Proceeds received in respect of, the Pledged Securities pledged hereunder; (iii) subject to Section 3.08, all rights and privileges of the Borrower with respect to the Pledged Securities pledged hereunder; (iv) all Proceeds of any of

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the foregoing above; and (b) any property, including cash and Permitted Investments, that may, on the date hereof or from time to time hereafter, be subject to the Lien hereof by the Borrower by delivery, assignment or pledge thereof to the Collateral Agent hereunder and the Collateral Agent is authorized to receive the same as additional security hereunder (subject to any reservations, limitations or conditions agreed to in writing by the Borrower and RUS respecting the scope or priority of such security or the use and disposition of such property or the Proceeds thereof).

TO HAVE AND TO HOLD the Pledged Collateral, together with all right, title, interest, powers, privileges and preferences pertaining or incidental thereto, unto the Collateral Agent, its successors and assigns, for the benefit of RUS, forever; subject, however, to the terms, covenants and conditions hereinafter set forth.

ARTICLE I  

Definitions and Other Provisions of General Application

SECTION 1.01.Definitions.  For all purposes of this Pledge Agreement, except as otherwise expressly provided or unless the context otherwise requires:

(i)           the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular;

(ii)           all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles;

(iii)           all reference in this instrument to designated “Articles”, “Sections” and other subdivisions are to the designated Articles, Sections and other subdivisions of this instrument; and

(iv)           the words “herein”, “hereof’ and “hereunder” and other words of similar import refer to this Pledge Agreement as a whole and not to any particular Article, Section or other subdivision.

“Allowable Amount” on any date, means:

(a)with respect to cash, 100% thereof;

(b)with respect to Eligible Securities, the aggregate principal amount of such Eligible Securities theretofore advanced thereon which remains unpaid on such date; and

(c)with respect to Permitted Investments, the cost to the Borrower thereof (exclusive of accrued interest or brokerage commissions) except that with respect to any Permitted Investments which are traded on any national securities exchange or over-the-counter market, Allowable Amount on any date shall mean the fair market value thereof (as determined by the Borrower).

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“Available Securities” means the Eligible Securities specified in Schedule A of the Certificate of Available Securities most recently delivered to the Collateral Agent and RUS.

“Bonds” has the meaning set forth in the recitals hereto.

“Borrower” means the Person named as the “Borrower” in the first paragraph of this instrument.

“Borrower Notice” and “Borrower Order” mean, respectively, a written notice or order signed in the name of the Borrower by either its Governor, its Chief Financial Officer or its Treasurer, and by any Vice President of the Borrower, and delivered to the Collateral Agent and RUS.

“Certificate of Available Securities” means (i) each Certificate of Available Securities (as defined in the Original Pledge Agreements) previously delivered to the Collateral Agent and RUS pursuant to the Original Pledge Agreements), and (ii) a certificate delivered from and after the date hereof to the Collateral Agent and RUS substantially in the form of Schedule I attached hereto.

“Certificate of Pledged Collateral” means (i) each Certificate of Pledged Collateral (as defined in the Original Pledge Agreements) previously delivered to the Collateral Agent and RUS pursuant to the Original Pledge Agreements, and (ii) a certificate delivered from and after the date hereof to the Collateral Agent and RUS substantially in the form of Schedule II attached hereto.

 “Class B Member” means any Class B Member of the Borrower as described in the Borrower’s Bylaws as of the date hereof.

“Collateral Agent” means the Person named as the “Collateral Agent” in the first paragraph of this instrument.

“Consolidated Bond Guarantee Agreement” has the meaning set forth in the recitals hereto.

“Eligible Member” means a member or associate of the Borrower, the Rural Telephone Finance Cooperative or the National Cooperative Services Corporation, as defined in the bylaws of each entity.

“Eligible Security” means a note or bond of any Person payable or registered to, or to the order of, the Borrower, the Rural Telephone Finance Cooperative or the National Cooperative Services Corporation, and in respect of which (i) no default has occurred in the payment of principal or interest in accordance with the terms of such note or bond that is continuing beyond the contractual grace period (if any) provided in such note or bond for such payment; (ii) no “event of default” as defined in such note or bond (or in any instrument creating

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 a security interest in favor of the Borrower, the Rural Telephone Finance Cooperative or the National Cooperative Services Corporation in respect of such note or bond), shall exist that has resulted in the exercise of any right or remedy described in such note or bond (or in any such instrument); (iii) such note or bond is not classified by the Borrower as a non-performing loan under generally accepted accounting principles in the United States; (iv) such note or bond is free and clear of all liens other than the Lien created by this Pledge Agreement; and (iv) the Total Exposure Amount does not exceed the Maximum Debtor Principal Amount; provided, however, if the Total Exposure Amount does exceed the Maximum Debtor Principal Amount, such note or bond may be pledged hereunder but only to the extent it does not exceed the Maximum Debtor Principal Amount and the Allowable Amount of such Eligible Security shall only include the principal amount which does not exceed the Maximum Debtor Principal Amount.

“Event of Default” has the meaning set forth in Section 5.01.

“Financial Expert Trigger Event” has the meaning given to that term in the Consolidated Bond Guarantee Agreement.

“Lien” means any lien, pledge, charge, mortgage, encumbrance, debenture, hypothecation or other similar security interest attaching to any part of the Pledged Collateral.

“Lien of this Pledge Agreement” or “Lien hereof” means the Lien created by these presents.

“Maximum Debtor Principal Amount” means 5% of the total aggregate amount of Available Securities held by the Collateral Agent, or such higher amount permitted by RUS and communicated to Borrower in writing.

“New Bonds” has the meaning set forth in the recitals hereto.

“Obligations” means the due and punctual performance of the obligations of the Borrower to make payment under Sections 4.1, 9.4 and 10.3 of the Consolidated Bond Guarantee Agreement and, without duplication, under the Reimbursement Note.

“Original Bonds” has the meaning set forth in the recitals hereto.

“Original Pledge Agreements” has the meaning set forth in the recitals hereto.

Officers’ Certificate” means a certificate signed by either the Governor, the Chief Financial Officer or the Treasurer of the Borrower, and by any Vice President of the Borrower, and delivered to RUS and/or the Collateral Agent, as applicable.

“Permitted Investment” has the meaning given to that term in Section 4.01.

5

“Person” means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Pledge Agreement” means this Pledge Agreement, as originally executed and as it may from time to time be supplemented, restated or amended entered into pursuant to the applicable provisions hereof.

“Pledged Collateral” has the meaning set forth in the Granting Clause. “Pledged Securities” means has the meaning set forth in Section 3.01.

“Proceeds” has the meaning specified in Section 9-102 of the Uniform Commercial Code.

“Rating Trigger Event” has the meaning given to that term in the Consolidated Bond Guarantee Agreement.

“Reimbursement Notes” has the meaning given to that term in the Consolidated Bond Guarantee Agreement.

“RUS” means the Person named as “RUS” in the first paragraph of this instrument.

“RUS Notice” and “RUS Order” mean, respectively, a written notice or order signed by the Secretary and delivered to the Collateral Agent and the Borrower.

“RUS Notice of Default” has the meaning given to that term in Section 5.02.

“Secretary” shall mean the Secretary of Agriculture acting through the Administrator of RUS.

 “Total Exposure Amount” on any date, means with respect to Eligible Securities, the aggregate principal amount of all notes or bonds of an Eligible Member pledged hereunder.

“Trigger Event” means a Rating Trigger Event or a Financial Expert Trigger Event.

“Uniform Commercial Code” means the Uniform Commercial Code as from time to time in effect in the District of Columbia.

“United States” means the United States of America, its territories, possessions and other areas subject to its jurisdiction.

“Vice President” means any vice president of the Borrower, whether or not designated by a number or a word or words added before or after the title “vice president”.

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ARTICLE II

Application of this Pledge Agreement

SECTION 2.01.Application of the Lien of this Pledge Agreement.  Notwithstanding any other provision of this Pledge Agreement, and in accordance with the Granting Clause hereof:

(a)no Lien shall attach to the Available Securities in favor of the Collateral Agent, for the benefit of RUS, prior to the occurrence of a Trigger Event;

(b)the Lien hereof shall automatically, and without further act, attach and apply to the Available Securities upon the occurrence of a Trigger Event subject to the terms, covenants and conditions set forth in this Pledge Agreement; and

(c)upon cessation of all the Trigger Events, the Lien hereof shall be automatically released and the Collateral Agent shall execute and deliver to the Borrower, at the Borrower’s expense, all documents that the Borrower shall reasonably request to evidence such release.  Any execution and delivery of documents pursuant to this paragraph (c) shall be without recourse to or warranty by the Collateral Agent.

SECTION 2.02.Delivery of Certificates of Available Securities.  Each time money is advanced under a Bond prior to the existence of a Trigger Event, the Borrower shall deliver, and from time to time prior to the existence of a Trigger Event the Borrower may deliver, a Certificate of Available Securities to the Collateral Agent and RUS, showing that the aggregate principal amount of Eligible Securities specified in Schedule A thereto that have been delivered to the Collateral Agent as of the last day of the most recent month ended more than 10 business days before the date thereof shall at least equal the aggregate principal amount of the Bonds outstanding, or to be outstanding after any such advance, at the date thereof.  At the time of delivery of a Certificate of Available Securities, the Borrower shall deliver to the Collateral Agent all Available Securities specified in such certificate that are not already deposited with the Collateral Agent accompanied by the appropriate instruments of transfer executed in blank and in a form satisfactory to the Collateral Agent and by such other instruments and documents as the Collateral Agent may reasonably request.  All Eligible Securities deposited with the Collateral Agent that were previously Available Securities, but are no longer specified in the Certificate of Available Securities most recently delivered, shall, at the Borrower’s expense and pursuant to a Borrower Order, be returned by the Collateral Agent to the Borrower.

SECTION 2.03.Maintenance of Available Securities.  Prior to the occurrence of a Trigger Event:

(a)the Collateral Agent shall hold and segregate the Available Securities in a separate account;

(b)the Borrower shall cause the aggregate principal amount of Available Securities at all times to be not less than 100% of the aggregate principal amount of the Bonds outstanding;

7

(c)the Borrower shall cause the aggregate principal amount of Available Securities of Class B Members at all times to be not more than 30% of the total aggregate principal amount of the Available Securities; provided, however, that the Available Securities of Class B Members placed on deposit in excess of 30% prior to the date hereof may remain on deposit and shall be deemed acceptable by RUS.  RUS shall deem acceptable all Available Securities of Class B Members in excess of 30% of the total aggregate principal amount of the Available Securities and placed on deposit prior to the date hereof so long as the Bonds are outstanding and until such time as such Class B Member Available Securities are withdrawn at the sole discretion of the Borrower, provided, however, that Borrower shall not place any additional Class B Member securities on deposit with the Collateral Agent until the total aggregate principal amount of Available Securities of Class B Members falls below 30%; and

(d)the Borrower shall not create, or permit to exist, any Lien that is secured by, or in any way attaches to, the Available Securities, without the prior written consent of RUS.

SECTION 2.04.Existence of Trigger Event.  For the purposes of this Pledge Agreement (but without affecting whether or not the Lien hereof applies):

(a)the Collateral Agent shall not be required to recognize that a Trigger Event exists before such time as the Collateral Agent receives an RUS Notice or Borrower Notice stipulating the existence of such event; and

(b)the Collateral Agent shall not be required to recognize that a Trigger Event has ceased to exist until (i) such time as the Collateral Agent receives an RUS Notice stipulating that such event has ceased to exist; or (ii) 30 days after receipt by the Collateral Agent of a Borrower Notice stipulating that such event has ceased, provided that the Collateral Agent does not receive an RUS Notice within such timeframe disputing the cessation of such Trigger Event. Upon receipt of any such Borrower Notice under subparagraph (ii) of this Subsection, the Collateral Agent shall provide a copy of such Borrower Notice to RUS.

SECTION 2.05.UCC Filings.  The Borrower shall prepare and file in the proper Uniform Commercial Code filing office in the District of Columbia (i) on or prior to the Closing Date, a financing statement recording the Collateral Agent’s interest in the Pledged Collateral; and (ii) from time to time thereafter, continuation statements or such other filings as are necessary to maintain the perfection of the Lien hereof on the Pledged Collateral.

SECTION 2.06.APPLICATION OF ARTICLES III, IV AND V OF  THIS PLEDGE AGREEMENT.  THE PARTIES SHALL HAVE NO RIGHTS OR OBLIGATIONS UNDER ARTICLES III, IV OR V HEREOF, AND THE PROVISIONS OF SUCH ARTICLES SHALL NOT APPLY, EXCEPT DURING THE CONTINUANCE OF A TRIGGER EVENT.

ARTICLE III

Provisions as to Pledged Collateral

SECTION 3.01.Pledged Securities.  The “Pledged Securities” shall mean:

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(a)upon and from the occurrence of a Trigger Event until such time as the first Certificate of Pledged Collateral is delivered hereunder, the Available Securities as specified in the most recent Certificate of Available Securities delivered prior to the occurrence of such Trigger Event; and

(b)upon and from delivery of the first Certificate of Pledged Collateral until the cessation of all Trigger Events, the Eligible Securities listed on Schedule A and Schedule B of the Certificate of Pledged Collateral most recently delivered.

SECTION 3.02.Holding of Pledged Securities.  After the occurrence of a Trigger Event and unless and until an Event of Default shall occur, the Collateral Agent, on behalf of RUS, shall hold the Pledged Securities in the name of the Borrower (or its nominee), endorsed or assigned in blank or in favor of the Collateral Agent.  Upon occurrence of an Event of Default, the Collateral Agent, on behalf of RUS, shall have the right (in its sole and absolute discretion), to the extent a register is maintained therefor, to register the Pledged Securities in the Collateral Agent’s own name as pledgee, or in the name of the Collateral Agent’s nominee (as pledgee or as sub-agent) or to continue to hold the Pledged Securities in the name of the Borrower, endorsed or assigned in blank or in favor of the Collateral Agent. Upon cessation of such Event of Default, the Collateral Agent shall take such action as is necessary to again cause the Pledged Securities to be registered in the name of the Borrower (or its nominee).

SECTION 3.03.Withdrawal and Substitution of Pledged Collateral.

(a)Any part of the Pledged Collateral may be withdrawn by the Borrower or substituted for cash or other Eligible Securities or Permitted Investments by the Borrower and shall be delivered to the Borrower by the Collateral Agent upon Borrower Order at any time and from time to time, together with any other documents or instruments of transfer or assignment necessary to reassign to the Borrower said Pledged Collateral and the interest of the Borrower, provided the aggregate Allowable Amount of Pledged Collateral remaining after such withdrawal or substitution shall at least equal the aggregate principal amount of the Bonds outstanding after such withdrawal or substitution, as shown by the Certificate of Pledged Collateral furnished to the Collateral Agent pursuant to Subsection (b)(i) of this Section.

(b)Prior to any such withdrawal or substitution, the Collateral Agent shall be furnished with the following instruments:

(i)a Certificate of Pledged Collateral, dated not more than 30 days prior to such withdrawal or substitution, showing that immediately after such withdrawal or substitution the requirements of Subsection (a) of this Section will be satisfied; and

(ii)an Officers’ Certificate certifying that no Event of Default has occurred which has not been remedied.

Upon any such withdrawal or substitution, the Borrower shall deliver any cash or Eligible Securities or Permitted Investments to be substituted and the Collateral Agent shall

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execute any instruments of transfer or assignment specified in a Borrower Order as necessary to vest in the Borrower any part of the Pledged Collateral withdrawn.

In case an Event of Default shall have occurred and be continuing, the Borrower shall not withdraw or substitute any part of the Pledged Collateral, provided that any Pledged Collateral may be withdrawn (a) as provided for in Section 3.04; or (b) upon the deposit with the Collateral Agent of an amount of cash at least equal to the Allowable Amount (at the time of such withdrawal) of the Pledged Securities so withdrawn and the delivery to the Collateral Agent of the instruments referred to in Subsection (b)(i) of this Section and a Borrower Order.

SECTION 3.04.Reassignment of Pledged Securities upon Payment.  Upon receipt of:

(i)an Officers’ Certificate stating that all payments of principal, premium (if any) and interest have been made upon any Pledged Securities held by the Collateral Agent other than payment of an amount (if any) specified in said certificate required fully to discharge all obligations on said Pledged Securities; and

(ii)cash in the amount (if any) so specified fully to discharge said Pledged Securities,

the Collateral Agent shall deliver to the Borrower upon Borrower Order said Pledged Securities, together with any other documents or instruments of transfer or assignment necessary to reassign to the Borrower said Pledged Securities and the interest of the Borrower specified in such Borrower Order.

SECTION 3.05.Addition of Pledged Collateral.  At any time, the Borrower may pledge additional Eligible Securities, cash or Permitted Investments under this Pledge Agreement by delivering such Pledged Collateral to the Collateral Agent, accompanied by a Certificate of Pledged Collateral specifying such additional collateral and dated not more than 30 days prior thereto, provided that, in the case of additional Permitted Investments, no such Permitted Investments shall be subject to any reservations, limitations or conditions referred to in the Granting Clause hereof.

SECTION 3.06.Accompanying Documentation.  Where Eligible Securities are delivered to the Collateral Agent under Section 3.03 or Section 3.05, such securities shall be accompanied by the appropriate instruments of transfer executed in blank and in a form satisfactory to the Collateral Agent and by such other instruments and documents as the Collateral Agent may reasonably request.  All other property delivered to the Collateral Agent under Section 3.03 or Section 3.05 and comprising part of the Pledged Collateral shall be accompanied by proper instruments of assignment duly executed by the Borrower and such other instruments or documents as the Collateral Agent may reasonably request.

SECTION 3.07.Renewal; Extension; Substitution.  Unless and until an Event of Default shall have occurred and be continuing, the Borrower may at any time renew or extend, subject to the Lien of this Pledge Agreement, any Pledged Security upon any terms or may accept in place of and in substitution for any such Pledged Security, another Eligible Security or

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Securities of the same issuer or of any successor thereto for at least the same unpaid principal amount, all as evidenced by a Borrower Order delivered to the Collateral Agent; provided, however, that in case of any substitution, Eligible Securities substituted as aforesaid shall be subject to the Lien of this Pledge Agreement as part of the Pledged Collateral and be held in the same manner as those for which they shall be substituted, and in the case of each substituted Eligible Security the Borrower shall provide an Officers’ Certificate certifying to the Collateral Agent that such substituted security satisfies the requirements of this Section.  So long as no Event of Default shall have occurred and be continuing, the Collateral Agent, upon Borrower Order stating that no Event of Default shall have occurred and be continuing, shall execute any consent to any such renewal, extension or substitution as shall be specified in such Borrower Order.

SECTION 3.08.Voting Rights; Interest and Principal

(a)Unless and until an Event of Default has occurred and is continuing, and RUS delivers to the Collateral Agent an RUS Notice of Default suspending the Borrower’s rights under this clause:

(i)The Borrower shall be entitled to exercise any and all voting and/or other consensual rights and powers inuring to an owner of Pledged Securities or any part thereof provided that such rights and powers shall not be exercised in any manner inconsistent with the terms of the Consolidated Bond Guarantee Agreement or this Pledge Agreement.

(ii)The Collateral Agent shall execute and deliver to the Borrower, or cause to be executed and delivered to the Borrower, all such proxies, powers of attorney and other instruments as the Borrower may reasonably request for the purpose of enabling the Borrower to exercise the voting and/or consensual rights and powers it is entitled to exercise pursuant to subparagraph (i) above.

(iii)The Borrower shall be entitled to receive and retain any and all interest, principal and other distributions paid on or distributed in respect of the Pledged Securities; provided that any non-cash interest, principal or other distributions that would constitute Pledged Securities if pledged hereunder, and received in exchange for Pledged Securities or any part thereof pledged hereunder, or in redemption thereof, or as a result of any merger, consolidation, acquisition or other exchange of assets to which such issuer of Pledged Securities may be a party or otherwise, shall be and become part of the Pledged Collateral, and, if received by the Borrower, shall not be commingled by the Borrower with any of its other funds or property but shall be held separate and apart therefrom, shall be held in trust for the benefit of the Collateral Agent and shall be forthwith delivered to the Collateral Agent in the same form as so received (with any necessary endorsement).

(b)If an Event of Default shall have occurred and be continuing, then, to the extent such rights are suspended by the applicable RUS Notice of Default, all rights of the Borrower to interest, principal or other distributions that the Borrower is authorized to receive pursuant to paragraph (a)(iii) of this Section 3.08 shall cease, and all such suspended rights

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 shall thereupon become vested in the Collateral Agent, which shall have the sole and exclusive right and authority to receive and retain such interest, principal or other distributions. All interest, principal or other distributions received by the Borrower contrary to the provisions of this Section 3.08 shall be held in trust for the benefit of the Collateral Agent, shall be segregated from other property or funds of the Borrower and shall be forthwith delivered to the Collateral Agent in the same form as so received (with any necessary endorsement). Any and all money and other property paid over to or received by the Collateral Agent pursuant to the provisions of this paragraph (b) shall be retained by the Collateral Agent in an account to be established by the Collateral Agent upon receipt of such money or other property and shall be applied in accordance with the provisions of Section 5.03. After all Events of Default have ceased, the Collateral Agent shall promptly repay to the Borrower (without interest) all interest, principal or other distributions that the Borrower would otherwise be permitted to retain pursuant to the terms of paragraph (a)(iii) of this Section 3.08 and that remain in such account.

(c)If an Event of Default shall have occurred and be continuing, then, to the extent such rights are suspended by the applicable RUS Notice of Default, all rights of the Borrower to exercise the voting and consensual rights and powers it is entitled to exercise pursuant to paragraph (a)(i) of this Section 3.08, and the obligations of the Collateral Agent under paragraph (a)(ii) of this Section 3.08, shall cease, and all such rights shall thereupon become vested in the Collateral Agent, which shall have the sole and exclusive right and authority to exercise such voting and consensual rights and powers; provided that the Collateral Agent shall have the right from time to time during the existence of such Event of Default to permit the Borrower to exercise such rights and powers.

SECTION 3.09.Protection of Title; Payment of Taxes; Liens, etc.

  The Borrower will:

(i)duly and promptly pay and discharge, or cause to be paid and discharged, before they become delinquent, all taxes, assessments, governmental and other charges lawfully levied, assessed or imposed upon or against any of the Pledged Collateral, including the income or profits therefrom and the interests of the Collateral Agent in such Pledged Collateral;

(ii)duly observe and conform to all valid requirements of any governmental authority imposed upon the Borrower relative to any of the Pledged Collateral, and all covenants, terms and conditions under or upon which any part thereof is held;

(iii)cause to be paid and discharged all lawful claims (including, without limitation, income taxes) which, if unpaid, might become a lien or charge upon Pledged Collateral; and

(iv)do all things and take all actions necessary to keep the Lien of this Pledge Agreement a first and prior lien upon the Pledged Collateral and protect its title to the Pledged Collateral against loss by reason of any foreclosure or other proceeding to enforce any lien prior to or pari passu with the Lien of this Pledge Agreement.

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Nothing contained in this Section shall require the payment of any such tax, assessment, claim, lien or charge or the compliance with any such requirement so long as the validity, application or amount thereof shall be contested in good faith; provided, however, that the Borrower shall have set aside on its books such reserves (segregated to the extent required by generally accepted accounting principles) as shall be deemed adequate with respect thereto as determined by the Board of Directors of the Borrower (or a committee thereof).

SECTION 3.10.Maintenance of Pledged Collateral.  The Borrower shall cause the aggregate principal amount of Pledged Collateral held by the Collateral Agent at all times to be not less than 100% of the aggregate principal amount of the Bonds outstanding.

SECTION 3.11.Representations, Warranties and Covenants.  The Borrower represents, warrants and covenants to the Collateral Agent, for the benefit of RUS, that from the time that they are pledged hereunder, and for so long as they are required to remain pledged:

(a)except for the Lien hereof and any Lien consented to in writing by RUS, the Borrower or the Rural Telephone Finance Cooperative or the National Cooperative Services Corporation (i) is and will continue to be the direct owner, beneficially and of record, of the Pledged Securities from time to time pledged hereunder, (ii) holds and will continue to hold the same free and clear of all Liens, other than Liens created by this Pledge Agreement, (iii) will make no assignment, pledge, hypothecation or transfer of, or create or permit to exist any security interest in or other Lien on, the Pledged Collateral, other than Liens created by this Pledge Agreement and (iv) will defend its title or interest thereto or therein against any and all Liens (other than the Lien created by this Pledge Agreement), however arising, of all Persons whomsoever;

(b)except for restrictions and limitations imposed by the Consolidated Bond Guarantee Agreement or securities laws generally, the Pledged Securities are and will continue to be freely transferable and assignable, and none of the Pledged Securities are or will be subject to any restriction of any nature that might prohibit, impair, delay or otherwise affect the pledge of such Pledged Securities hereunder, the sale or disposition thereof pursuant hereto or the exercise by the Collateral Agent of rights and remedies hereunder;

(c)the Borrower has the power and authority to pledge the Pledged Collateral pledged by it hereunder in the manner hereby done or contemplated;

(d)no consent or approval of any governmental authority, any securities exchange or any other Person (with the exception RUS) was or is necessary to the validity of the pledge effected hereby (other than such as have been obtained and are in full force and effect); and

(e)by virtue of the execution and delivery by the Borrower of this Pledge Agreement, when any Pledged Securities are delivered to the Collateral Agent in accordance with this Pledge Agreement, the Collateral Agent will obtain a legal and valid Lien upon and security interest in such Pledged Securities as security for the payment and performance of the Obligations.

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SECTION 3.12.Further Assurances.  The Borrower will execute and deliver, or cause to be executed and delivered, all such additional instruments and do, or cause to be done, all such additional acts as (a) may be necessary or proper, consistent with the Granting Clause hereof, to carry out the purposes of this Pledge Agreement and to make subject to the Lien hereof any property intended so to be subject or (b) may be necessary or proper to transfer to any successor the estate, powers, instruments and funds held hereunder and to confirm the Lien of this Pledge Agreement.  The Borrower will also cause to be filed, registered or recorded any instruments of conveyance, transfer, assignment or further assurance in all offices in which such filing, registering or recording is necessary to the validity thereof or to give notice thereof.

ARTICLE IV

Application of Moneys Included in Pledged Collateral

SECTION 4.01.Investment of Moneys by Collateral Agent.  Any moneys held by the Collateral Agent as part of the Pledged Collateral shall, upon Borrower Order and as stated therein, be invested or reinvested by the Collateral Agent until required to be paid out by the Collateral Agent as provided in this Pledge Agreement, in any one or more of the following (herein called “Permitted Investments”):

(i)obligations of or guaranteed by the United States of America or any agency thereof for which the full faith and credit of the United States of America or such agency shall be pledged;

(ii)obligations of any state or municipality, or subdivision or agency of either thereof, which are rated AA (or equivalent) or better by at least two nationally recognized statistical rating organizations or having a comparable rating in the event of any future change in the rating system of such agencies;

(iii)certificates of deposit issued by, or time deposits of, any bank or trust company (including the Collateral Agent) organized under the laws of the United States of America or any State thereof having capital and surplus of not less than $500,000,000 (determined from its most recent report of condition, if it publishes such reports at least annually pursuant to law or the requirements of Federal or State examining or supervisory authority); and

(iv)commercial paper of bank holding companies or of other issuers (excluding the Borrower) generally rated in the highest category by at least two nationally recognized statistical rating organizations and maturing not more than one year after the purchase thereof.

Unless and until an Event of Default shall have occurred and be continuing, any interest received by the Collateral Agent on any such investments which shall exceed the amount of accrued interest, if any, paid by the Collateral Agent on the purchase thereof, and any profit which may be realized from any sale, redemption or maturity of such investments, shall be paid to the Borrower.  Such investments shall be held by the Collateral Agent as a part of the Pledged Collateral, but upon Borrower Order the Collateral Agent shall sell all or any designated part of

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the same, and the proceeds of such sale shall be held by the Collateral Agent subject to the same provisions hereof as the cash used by it to purchase the investments so sold.  In case the net proceeds realized upon any sale, redemption or maturity shall amount to less than the purchase price paid by the Collateral Agent for the purchase of the investments so sold, the Collateral Agent shall notify the Borrower in writing thereof, and the Borrower shall pay to the Collateral Agent the amount of the difference between such purchase price and the amount so realized, and the amount so paid shall be held by the Collateral Agent in like manner and subject to the same conditions as the proceeds realized upon such sale.  The Borrower will reimburse the Collateral Agent for any brokerage commissions or other expenses incurred by the Collateral Agent in connection with the purchase or sale of such investments.  The Collateral Agent may aggregate such costs and expenses of and such receipts from such investments on a monthly basis (or such other periodic basis as the Borrower and the Collateral Agent may agree in writing from time to time) so as to net each against the other during such period and pay to the Borrower amounts due to it or notify the Borrower of amounts due from it on a net basis for such period.

SECTION 4.02.Collateral Agent To Retain Moneys during Event of Default.  If an Event of Default shall have occurred and be continuing, moneys held by the Collateral Agent as a part of the Pledged Collateral shall not be paid over to the Borrower upon Borrower Order except pursuant to Section 5.03.

ARTICLE V

Remedies

SECTION 5.01.Events of Default. “Event of Default”, wherever used herein, means any “Event of Default” as defined in Sections 10.1(a) and 10.1(c) of the  Consolidated Bond Guarantee Agreement, provided that, for the purposes of this Pledge Agreement:

(a)the Collateral Agent shall not be required to recognize that an Event of Default exists before such time as the Collateral Agent receives an RUS Notice or Borrower Notice stating that an Event of Default exists and specifying the particulars of such default in reasonable detail; and

(b)the Collateral Agent shall not be required to recognize that an Event of Default has ceased until (i) such time as the Collateral Agent receives an RUS Notice stipulating that such event has ceased to exist; or (ii) 30 days after receipt by the Collateral Agent of a Borrower Notice stipulating that such event has ceased to exist, provided that the Collateral Agent does not receive an RUS Notice within such timeframe disputing the cessation of such Event of Default, and further provided that no additional RUS Notice of Default shall have been received in respect of any other subsisting Event(s) of Default.  Upon receipt of any Borrower Notice under subparagraph (ii) of this Subsection, the Collateral Agent shall provide a copy of such Borrower Notice to RUS.

SECTION 5.02.Remedies Upon Default.  If an Event of Default shall have occurred and be continuing, RUS may issue a notice (an “RUS Notice of Default”), which may be combined with the notice provided under Section 5.01(b), suspending the rights of the Borrower

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under Section 3.08 in part without suspending all such rights (as specified by RUS in its sole and absolute discretion) without waiving or otherwise affecting RUS’ rights to give additional RUS Notices of Default from time to time suspending other rights under Section 3.08 so long as an Event of Default has occurred and is continuing.  Subject to paragraph (b) of this Section 5.02, upon cessation of an Event of Default, all rights of the Borrower suspended under the applicable RUS Notice of Default shall revest in the Borrower.

(a)Upon the occurrence of an Event of Default, the Collateral Agent shall, for the benefit and at the direction of RUS, have the right to exercise any and all rights afforded to a secured party under the Uniform Commercial Code or other applicable law.  Without limiting the generality of the foregoing, the Borrower agrees that the Collateral Agent shall have the right, but only if so instructed by an RUS Order and subject to the requirements of applicable law and the Collateral Agent’s right (in its sole and absolute discretion) to receive indemnification or other reasonable assurances that its costs and expenses in connection therewith will be paid, to sell or otherwise dispose of all or any part of the Pledged Collateral at a public or private sale or at any broker’s board or on any securities exchange, for cash, upon credit or for future delivery as the Collateral Agent shall deem appropriate.  The Collateral Agent shall be authorized at any such sale of securities (if it deems it advisable to do so) to restrict the prospective bidders or purchasers to Persons who will represent and agree that they are purchasing the Pledged Collateral for their own account for investment and not with a view to the distribution or sale thereof, and upon consummation of any such sale the Collateral Agent shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Pledged Collateral so sold.  Each such purchaser at any sale of Pledged Collateral shall hold the property sold absolutely, free from any claim or right on the part of the Borrower, and the Borrower hereby waives (to the extent permitted by law) all rights of redemption, stay and appraisal which the Borrower now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted.

(b)The Collateral Agent shall give the Borrower 10 days’ written notice (which the Borrower agrees is reasonable notice within the meaning of Section 9-611 of the Uniform Commercial Code or its equivalent in other jurisdictions) of the Collateral Agent’s intention to make any sale of Pledged Collateral.  Such notice, in the case of a public sale, shall state the time and place for such sale and, in the case of a sale at a broker’s board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or portion thereof, will first be offered for sale at such board or exchange.  Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Collateral Agent may fix and state in the notice (if any) of such sale.  At any such sale, the Pledged Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Collateral Agent may (in its sole and absolute discretion) determine.  The Collateral Agent shall not be obligated to make any sale of any Pledged Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Pledged Collateral shall have been given.  The Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned.  In case any sale of all or any part of the Pledged Collateral is made on credit or for future delivery, the Pledged Collateral so sold may be retained by the Collateral Agent

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 until the sale price is paid by the purchaser or purchasers thereof, but the Collateral Agent shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Pledged Collateral so sold and, in case of any such failure, such Pledged Collateral may be sold again upon like notice.  At any public (or, to the extent permitted by law, private) sale made pursuant to this Pledge Agreement, RUS may bid for or purchase, free (to the extent permitted by law) from any right of redemption, stay, valuation or appraisal on the part of the Borrower (all said rights being also hereby waived and released to the extent permitted by law), the Pledged Collateral or any part thereof offered for sale and may make payment on account thereof by using any claim then due and payable to RUS from the Borrower as a credit against the purchase price, and RUS may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to Pledged Collateral therefor.  For purposes hereof, a written agreement to purchase the Pledged Collateral or any portion thereof shall be treated as a sale thereof; the Collateral Agent shall be free to carry out such sale pursuant to such agreement and the Borrower shall not be entitled to the return of the Pledged Collateral or any portion thereof subject thereto, notwithstanding the fact that after the Collateral Agent shall have entered into such an agreement all Events of Default shall have been remedied and the Obligations paid in full.  As an alternative to exercising the power of sale herein conferred upon it, the Collateral Agent may proceed by a suit or suits at law or in equity to foreclose this Pledge Agreement and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed receiver.  Any sale pursuant to the provisions of this Section 5.02 shall be deemed to conform to the commercially reasonable standards as provided in Section 9-610(b) of the Uniform Commercial Code or its equivalent in other jurisdictions.

SECTION 5.03.Application of Proceeds.  The Collateral Agent shall apply the proceeds of any collection or sale of Pledged Collateral, including any Pledged Collateral consisting of cash, as follows:

FIRST, to the payment of all reasonable costs and expenses incurred by the Collateral Agent in connection with or reasonably related or reasonably incidental to such collection or sale or otherwise in connection with or related or incidental to this Pledge Agreement or any of the Obligations, including all court costs and the reasonable fees and expenses of its agents and legal counsel, the repayment of all advances made by the Collateral Agent (in its sole discretion) hereunder on behalf of the Borrower and any other reasonable costs or expenses incurred in connection with the exercise of any right or remedy hereunder;

SECOND, to the payment to RUS in full of the Obligations; such payment to be for an amount certified in a RUS Notice delivered to the Collateral Agent as being the amount due and owing to RUS under the Obligations; and

THIRD, to the Borrower, its successors or assigns, or as a court of competent jurisdiction may otherwise direct.

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Upon ally sale of the Pledged Collateral by the Collateral Agent (including pursuant to a power of sale granted by statute or under a judicial proceeding), the receipt of the Collateral Agent or of the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Pledged Collateral so sold and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Collateral Agent or such officer or be answerable in any way for the misapplication thereof.

SECTION 5.04.Securities Act.  In view of the position of the Borrower in relation to the Pledged Collateral, or because of other current or future circumstances, a question may arise under the Securities Act of 1933, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being called the “Federal Securities Laws”) with respect to any disposition of the Pledged Collateral permitted hereunder.  The Borrower understands that compliance with the Federal Securities Laws might very strictly limit the course of conduct of the Collateral Agent if the Collateral Agent were to attempt to dispose of all or any part of the Pledged Collateral, and might also limit the extent to which or the manner in which any subsequent transferee of any Pledged Collateral could dispose of the same.  Similarly, there may be other legal restrictions or limitations affecting the Collateral Agent in any attempt to dispose of all or part of the Pledged Collateral under applicable Blue Sky or other state securities laws or similar laws analogous in purpose or effect.  The Borrower recognizes that in light of such restrictions and limitations the Collateral Agent may, with respect to any sale of the Pledged Collateral, limit the purchasers to those who will agree, among other things, to acquire such Pledged Collateral for their own account, for investment, and not with a view to the distribution or resale thereof.  The Borrower acknowledges and agrees that in light of such restrictions and limitations, the Collateral Agent, in its sole and absolute discretion (a) may proceed to make such a sale whether or not a registration statement for the purpose of registering such Pledged Collateral or part thereof shall have been filed under the Federal Securities Laws and (b) may approach and negotiate with a single potential purchaser to effect such sale.  The Borrower acknowledges and agrees that any such sale might result in prices and other terms less favorable to the seller than if such sale were a public sale without such restrictions.  In the event of any such sale, the Collateral Agent shall incur no responsibility or liability for selling all or any part of the Pledged Collateral at a price that the Collateral Agent, in its sole and absolute discretion, may in good faith deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might have been realized if the sale were deferred until after registration as aforesaid or if more than a single purchaser were approached.  The provisions of this Section 5.04 will apply notwithstanding the existence of a public or private market upon which the quotations or sales prices may exceed substantially the price at which the Collateral Agent sells.

ARTICLE VI

The Collateral Agent

SECTION 6.01.Certain Duties and Responsibilities.

(a)At all times under this Pledge Agreement:

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(i)the Collateral Agent undertakes to perform such duties and only such duties as are specifically set forth in this Pledge Agreement, and no implied covenants or obligations shall be read into this Pledge Agreement against the Collateral Agent; and

(ii)in the absence of bad faith on its part, the Collateral Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Collateral Agent and substantially conforming to the requirements of this Pledge Agreement; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Collateral Agent the Collateral Agent shall be under a duty to examine the same to determine whether or not they substantially conform to the requirements of this Pledge Agreement.

(b)No provision of this Pledge Agreement shall be construed to relieve the Collateral Agent from liability for its own grossly negligent action, its own grossly negligent failure to act, or its own willful misconduct, except that:

(i)this Subsection shall not be construed to limit the effect of Subsection (a) of this Section;

(ii)the Collateral Agent shall not be liable for any error of judgment made in good faith, unless it shall be proved that the Collateral Agent was grossly negligent in ascertaining the pertinent facts; and

(iii)no provision of this Pledge Agreement shall require the Collateral Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.

(c)Whether or not therein expressly so provided, every provision of this Pledge Agreement relating to the conduct or affecting the liability of or affording protection to the Collateral Agent shall be subject to the provisions of this Section.

SECTION 6.02.Certain Rights of Collateral Agent.  Except as otherwise provided in Section 6.01:

(a)the Collateral Agent may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

(b)any request or direction of the Borrower mentioned herein shall be sufficiently evidenced by a Borrower Notice or Borrower Order;

(c)any request or direction of RUS mentioned herein shall be sufficiently evidenced by an RUS Notice or RUS Order;

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(d)whenever in the administration of this Pledge Agreement the Collateral Agent shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Collateral Agent (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers’ Certificate in the case of the Borrower, and a certificate signed by the Secretary in the case of RUS;

(e)the Collateral Agent may consult with counsel and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;

(f)the Collateral Agent shall be under no obligation to exercise any of the rights or powers vested in it by this Pledge Agreement at the request or direction of either the Borrower or RUS pursuant to this Pledge Agreement, unless such party shall have offered to the Collateral Agent reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;

(g)the Collateral Agent shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document, or to recompute, verify, reclassify or recalculate any information contained therein, but the Collateral Agent, in its sole and absolute discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Collateral Agent shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Borrower, personally or by agent or attorney;

(h)the Collateral Agent may execute any of the powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Collateral Agent shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder;

(i)unless explicitly stated herein to the contrary, the Collateral Agent shall have no duty to inquire as to the performance of any Borrower’s covenants herein.  In addition, the Collateral Agent shall not be deemed to have knowledge of any Trigger Event, or Event of Default, unless the Collateral Agent has received an RUS Notice in accordance with Section 2.04(a) or Section 5.01(a) (as applicable), and shall not be deemed to have knowledge of the cessation of the same until such time as it receives a Borrower Notice in accordance with Section 2.04(b) or Section 5.01(b) (as applicable); and

(j)unless explicitly stated herein to the contrary, the Collateral Agent shall have no obligation to take any action with respect to any Trigger Event or Event of Default until it has received the an RUS Notice applicable to such event in accordance with Section 2.04(a) or Section 5.01(a) (as applicable), and the Collateral Agent shall have no liability for any action or inaction taken, suffered or omitted in respect of any such event by it prior to such time as the applicable RUS Notice is delivered.  Similarly, the Collateral Agent shall have no obligation to take any action with respect to the cessation of a Trigger Event or Event of Default until it has received a Borrower Notice applicable to such event in accordance in

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accordance with Section 2.04(b) or Section 5.01(b) (as applicable), and the Collateral Agent shall have no liability for any action or inaction taken, suffered or omitted in respect of any such event by it prior to such time as the applicable Borrower Notice is delivered.

SECTION 6.03.Money Held by Collateral Agent.  Money held by the Collateral Agent hereunder need not be segregated from other funds except to the extent required by law.  The Collateral Agent shall have no liability to pay interest on or (except as expressly provided herein) invest any such moneys.

SECTION 6.04.Compensation and Reimbursement.

(a)The Borrower agrees:

(i)to pay to the Collateral Agent from time to time reasonable compensation for all services rendered by it hereunder;

(ii)except as otherwise expressly provided herein, to reimburse the Collateral Agent upon its request for all reasonable expenses, out-of-pocket costs, disbursements and advances incurred or made by the Collateral Agent in accordance with any provision of this Pledge Agreement (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except to the extent any such expense, disbursement or advance may be attributable to its gross negligence or bad faith; and

(iii)to indemnify the Collateral Agent for, and to defend and hold it harmless against, any loss, liability or expense incurred without gross negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Pledge Agreement or the performance of its duties hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent such loss, liability or expense may be attributable to its gross negligence or bad faith; provided, however, that the Borrower shall have no liability under this clause for any settlement of any litigation or other dispute effected without the prior written consent of the Borrower (such consent not to be unreasonably withheld).

(b)Any such amounts payable as provided hereunder shall be additional Obligations secured by the Lien hereof.  The provisions of this Section 6.04 shall remain operative and in full force and effect regardless of the termination of this Pledge Agreement or the Consolidated Bond Guarantee Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Obligations, the invalidity or unenforceability of any term or provision of this Pledge Agreement or the Consolidated Bond Guarantee Agreement, or any investigation made by or on behalf of the Collateral Agent or RUS.  All amounts due under this Section 6.04 shall be payable on written demand therefor.

SECTION 6.05.Corporate Collateral Agent Required; Eligibility.  There shall at all times be a Collateral Agent hereunder which shall be a corporation or association organized and doing business under the laws of the United States of America or of any State, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, subject to supervision or examination by Federal or State authority.  If such

21

corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published.  Neither the Borrower nor any Person directly or indirectly controlling, controlled by or under common control with the Borrower shall serve as Collateral Agent hereunder.  If at any time the Collateral Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.

SECTION 6.06.Resignation and Removal; Appointment of Successor.

(a)No resignation or removal of the Collateral Agent and no appointment of a successor Collateral Agent pursuant to this Article shall become effective until the acceptance of appointment by the successor Collateral Agent under Section 6.07.

(b)The Collateral Agent may resign at any time by giving written notice thereof to the Borrower.  If an instrument of acceptance by a successor Collateral Agent shall not have been delivered to the Collateral Agent within 30 days after the giving of such notice of resignation, the resigning Collateral Agent may petition any court of competent jurisdiction for the appointment of a successor Collateral Agent.

(c)If at any time:

(i)except if an Event of Default has occurred and is continuing, the Borrower, in its sole and absolute discretion, elects to remove the Collateral Agent; or

(ii)the Collateral Agent shall cease to be eligible under Section 6.05 or shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Collateral Agent or of its property shall be appointed or any public officer shall take charge or control of the Collateral Agent or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

then, in any such case, the Borrower may remove the Collateral Agent by delivery of a Borrower Order to that effect.

(d)If the Collateral Agent shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Collateral Agent for any cause, the Borrower shall promptly appoint a successor Collateral Agent by delivering a Borrower Notice to the retiring Collateral Agent, the successor Collateral Agent and RUS to such effect.

SECTION 6.07.Acceptance of Appointment by Successor.  Every successor Collateral Agent appointed hereunder shall execute, acknowledge and deliver to the Borrower, RUS and to the retiring Collateral Agent an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Collateral Agent shall become effective and such successor Collateral Agent, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Collateral Agent; but, on request of the Borrower, RUS or the successor Collateral Agent, such retiring Collateral Agent shall, upon payment of its

22

charges, execute and deliver an instrument transferring to such successor Collateral Agent all the rights, powers and trusts of the retiring Collateral Agent, and shall duly assign, transfer and deliver to such successor Collateral Agent all property and money held by such retiring Collateral Agent hereunder, subject nevertheless to its Lien, if any, provided for in Section 6.04.  Upon request of any such successor Collateral Agent, the Borrower shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Collateral Agent all such rights, powers and trusts.

No successor Collateral Agent shall accept its appointment unless at the time of such acceptance such successor Collateral Agent shall be eligible under Section 6.05 hereof.

SECTION 6.08.Merger, Conversion, Consolidation or Succession to Business.  Any corporation into which the Collateral Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Collateral Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Collateral Agent, shall be the successor of the Collateral Agent hereunder, provided such corporation shall be eligible under Section 6.05 hereof without the execution or filing of any paper or any further act on the part of any of the parties hereto.

ARTICLE VII

Miscellaneous

SECTION 7.01.Notices.  All notices and other communications hereunder to be made to any party shall be in writing and shall be addressed as specified in Schedule III attached hereto as appropriate.  The address, telephone number, or facsimile number for any party may be changed at any time and from time to time upon written notice given by such changing party to the other parties hereto.  A properly addressed notice or other communication to the Borrower shall be deemed to have been delivered at the time it is sent by facsimile (fax) transmission.  A properly addressed notice or other communication to the Collateral Agent shall be deemed to have been delivered at the time it is sent by facsimile (fax) transmission.  A properly addressed notice or other communication to RUS shall be deemed to have been delivered at the time it is sent by facsimile (fax) transmission, provided that the original of such faxed notice or other communication shall have been received by RUS within five Business Days.

(a)All Borrower Notices and Borrower Orders delivered to the Collateral Agent shall be contemporaneously copied to RUS by the Borrower, and all RUS Notices and .RUS Orders delivered to the Collateral Agent shall be contemporaneously copied by RUS to the Borrower, and all Collateral Agent notices delivered to either the Borrower or RUS shall be contemporaneously copied to the other such party by the Collateral Agent.

SECTION 7.02.Waivers; Amendment.

(a)No failure or delay by a party in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power.  The rights and

23

remedies of each party hereunder are cumulative and are not exclusive of any rights or remedies that such party would otherwise have.  No waiver of any provision of this Pledge Agreement or consent to any departure by any party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section 7.02, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given.  No notice or demand on any party in any case shall entitle any party to any other or further notice or demand in similar or other circumstances.

(b)Neither this Pledge Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower, the Collateral Agent and RUS.

SECTION 7.03.Successors and Assigns.  Whenever in this Pledge Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower, the Collateral Agent or RUS that are contained in this Pledge Agreement shall bind and inure to the benefit of their respective successors and assigns.

SECTION 7.04.Counterparts; Effectiveness.  This Pledge Agreement may be executed in counterparts, each of which shall constitute an original but all of which when taken together shall constitute a single contract.  Delivery of an executed signature page to this Pledge Agreement by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Pledge Agreement.

SECTION 7.05.Severability.  Any provision of this Pledge Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.  The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

SECTION 7.06.GOVERNING LAW.  THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE UNITED STATES OF AMERICA, TO THE EXTENT APPLICABLE, AND OTHERWISE THE LAWS OF THE STATE OF NEW YORK.

SECTION 7.07.WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS PLEDGE AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER

24

AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS PLEDGE AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 7.07.

SECTION 7.08.Headings.  Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Pledge Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Pledge Agreement.

SECTION 7.09.Security Interest Absolute.  All rights of the Collateral Agent and/or RUS hereunder, the grant of a security interest in the Pledged Collateral and all obligations of the Borrower hereunder shall be absolute and unconditional irrespective of (a) any lack of validity or enforceability of the Consolidated Bond Guarantee Agreement, any agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing, (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Consolidated Bond Guarantee Agreement or any other agreement or instrument, (c) any exchange, release or non-perfection of any Lien on other collateral, or any release or amendment or waiver of or consent under or departure from any guarantee, securing or guaranteeing all or any of the Obligations, or (d) any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower in respect of the Obligations or this Pledge Agreement.

SECTION 7.10.Termination or Release.

(a)This Pledge Agreement shall terminate on the date when the Collateral Agent receives an RUS Notice to the effect that all of the Obligations have been indefeasibly paid in full and the Federal Financing Bank has no further commitment to lend under the Bonds, and if applicable at such time the Lien hereof shall be released.

(b)Upon any withdrawal, substitution or other disposal by the Borrower of any Pledged Collateral that is permitted by the terms of this Pledge Agreement, or upon the effectiveness of any written consent to the release of the security interest granted hereby in any Pledged Collateral, the Lien hereof securing such Pledged Collateral shall be automatically released.

(c)In connection with any termination or release pursuant to paragraph (a) or (b) the Collateral Agent shall deliver to the Borrower the Pledged Collateral and shall execute and deliver to the Borrower, at the Borrower’s expense, all documents that the Borrower shall reasonably request to evidence such termination or release.  Any execution and delivery of documents pursuant to this Section 7.10 shall be without recourse to or warranty by the Collateral Agent.

SECTION 7.11.Collateral Agent Appointed Attorney-in-Fact.  The Borrower hereby appoints the Collateral Agent the attorney-in-fact of the Borrower for the purpose of, upon the occurrence and during the continuance of an Event of Default, carrying out the provisions of this Pledge Agreement with respect to the Pledged Collateral and taking any action and executing

25

any instrument that the Collateral Agent may deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest but is subject nevertheless to the terms and conditions of this Pledge Agreement.  Without limiting the generality of the foregoing, the Collateral Agent shall have the right, upon the occurrence and during the continuance of an Event of Default, with full power of substitution either in the Collateral Agent’s name or in the name of the Borrower (a) to receive, endorse, assign and/or deliver any and all notes, acceptances, checks, drafts, money orders or other evidences of payment relating to the Pledged Collateral or any part thereof; (b) to demand, collect, receive payment of, give receipt for and give discharges and releases of all or any of the Pledged Collateral; (c) to commence and prosecute any and all suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect or otherwise realize on all or any of the Pledged Collateral or to enforce any rights in respect of any Pledged Collateral; (d) to settle, compromise, compound, adjust or defend any actions, suits or proceedings relating to all or any of the Pledged Collateral; (e) to notify, or to require the Borrower to notify, obligors under Pledged Securities to make payment directly to the Collateral Agent; and (f) to use, sell, assign, transfer, pledge, make any agreement with respect to or otherwise deal with all or any of the Pledged Collateral, and to do all other acts and things necessary to carry out the purposes of this Pledge Agreement, as fully and completely as though the Collateral Agent were the absolute owner of the Pledged Collateral for all purposes; provided that nothing herein contained shall be construed as requiring or obligating the Collateral Agent to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Collateral Agent, or to present or file any claim or notice, or to take any action with respect to the Pledged Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby.  The Collateral Agent and RUS shall be accountable only for amounts actually received as a result of the exercise of the powers granted to them herein, and neither they nor their officers, directors, employees or agents shall be responsible to the Borrower for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.

26

Pledge Agreement

IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed, all as of the day and year first above written.

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION,
By:	/s/ SHELDON C. PETERSEN
Name:Sheldon C. Petersen
Title: Governor and Chief Executive Officer

UNITED STATES OF AMERICA, acting

through the Administrator of the Rural Utilities

Service,

By:

Name:John C. Padalino

Title: Acting Administrator of the Rural

Utilities Service

U.S. BANK NATIONAL ASSOCIATION

By:

Name:Beverly A. Freeney

Title: Vice President

IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed, all as of the day and year first above written.

NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION,

By:

Name:Sheldon C. Petersen

Title: Governor and

Chief Executive Officer

UNITED STATES OF AMERICA, acting through the Administrator of the Rural Utilities Service,
By:	/s/ JOHN C. PADALINO
Name:John C. Padalino
Title: Acting Administrator of the Rural Utilities Service

U.S. BANK NATIONAL ASSOCIATION

By:

Name:Beverly A. Freeney

Title: Vice President

IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed, all as of the day and year first above written.

NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION,

By:

Name: Sheldon C. Petersen

Title:   Governor and

Chief Executive Officer

UNITED STATES OF AMERICA, acting

through the Administrator of the Rural Utilities

Service,

By:

Name: John C. Padalino

Title:   Acting Administrator of the Rural

Utilities Service

U.S. BANK NATIONAL ASSOCIATION
By:	/s/ BEVERLY A. FREENEY
Name: Beverly A. Freeney
Title:   Vice President

SCHEDULE I

TO

AMENDED, RESTATED AND

CONSOLIDATED PLEDGE AGREEMENT

NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AGREEMENT DATED AS OF DECEMBER 13, 2012

CERTIFICATE OF AVAILABLE SECURITIES FILED WITH

U.S. BANK NATIONAL ASSOCIATION, Collateral Agent

 ________________________, Governor (or Chief Financial Officer or Treasurer) and _______________________, Vice-President, respectively, of National Rural Utilities Cooperative Finance Corporation, hereby certify to RUS and the Collateral Agent under the above-mentioned Amended, Restated and Consolidated Pledge Agreement as amended to the date hereof (herein called the “Pledge Agreement”) as follows:

1. The Allowable Amount of Available Securities certified hereby, all as shown on Schedule A hereto, is  $

2. The cumulative amount excluded from the Allowable Amount of Available Securities on Schedule A based on the Maximum Debtor Principal Amount is……………  $

3. The difference between the amounts in items 1 and 2 is…  $

4. The aggregate principal amount of the Bonds outstanding at the date hereof is  $

5. The aggregate amount, if any, of the Advance to be made on the basis of this Certificate is  $

6. The sum of the amounts in items 4 and 5 is  $

7. The aggregate amount by which the Allowable Amount of Available Securities exceeds the aggregate principal amount of the Bonds outstanding plus the amount of any Advance in item 5 (item 3 minus item 6) is  $

8. So far as is known to the undersigned no Trigger Event exists.

SCHEDULE I

TO

AMENDED, RESTATED AND

CONSOLIDATED PLEDGE AGREEMENT

All terms which are defined in the Pledge Agreement are used herein as so defined.

Dated:

OF NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION,

SCHEDULE I

TO

AMENDED, RESTATED AND

CONSOLIDATED PLEDGE AGREEMENT

AVAILABLE SECURITIES

SCHEDULE A TO OFFICERS’ CERTIFICATE

DATED

Eligible Securities Name of Issuer Current Allowable Amount (Item 3)

Available Securities

(Here List Securities)……………….

SCHEDULE II

TO

AMENDED, RESTATED AND

CONSOLIDATED PLEDGE AGREEMENT

NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION

AMENDED, RESTATED AND CONSOLIDATED PLEDGE AGREEMENT DATED AS OF DECEMBER 13, 2012

CERTIFICATE OF PLEDGED COLLATERAL FILED WITH

U.S. BANK NATIONAL ASSOCIATION, Collateral Agent

________________________, Governor (or Chief Financial Officer or Treasurer) and ________________________, Vice-President, respectively, of National Rural Utilities Cooperative Finance Corporation, hereby certify to RUS and the Collateral Agent under the above-mentioned Amended, Restated and Consolidated Pledge Agreement as amended to the date hereof (herein called the “Pledge Agreement”) as follows:

1. The Allowable Amount of Pledged Collateral shown in item 9 in the most recent Certificate of Pledged Collateral

dated __________  delivered to the Collateral Agent is ...$

2. The increase (or decrease) in the Allowable Amount of such Pledged Collateral and the Allowable Amount of any Eligible Securities substituted for other Pledged Securities pursuant to Section 3.07 of the Pledge Agreement, remaining on deposit with the Collateral Agent, as shown on Schedule A hereto, is...$

3. The cumulative amount excluded from the Allowable Amount of Pledged Collateral on Schedule A based on the Maximum Debtor Principal Amount is  $

4. The Allowable Amount, as at the date of such most recent Certificate of Pledged Collateral, of Pledged Collateral which has, since such date, been withdrawn or substituted for pursuant to Section 3.07 (including Pledged Securities fully paid) by the Borrower or ceased to be Pledged Collateral, as shown on Schedule A hereto) is...$

5. The present Allowable Amount of Pledged Collateral certified to the Collateral Agent in the most recent Certificate of Pledged Collateral (item 1 plus (or minus, if decrease) item 2, minus items 3 and 4) is  $

SCHEDULE I

TO

AMENDED, RESTATED AND

CONSOLIDATED PLEDGE AGREEMENT

6. The Allowable Amount of Pledged Collateral certified hereby, including the Pledged Collateral deposited herewith, which were not certified in the most recent Certificate of Pledged Collateral, all as shown on Schedule B hereto, is  $

7. The cumulative amount excluded from the Allowable Amount of Pledged Collateral on Schedule A based on the Maximum Debtor Principal Amount is  $

8. The Allowable Amount of Pledged Collateral held by the Collateral Agent on the date hereof and included in this Certificate before any withdrawals (item 5 plus (item 6-item 7)) is  $

9. The Allowable Amount of Pledged Collateral the

withdrawal of which is hereby requested, if any, as shown

on Schedule C hereto (the Pledged Collateral made the basis of such withdrawal being designated on Schedule A and/or Schedule B hereto) is $

10. The Allowable Amount of Pledged Collateral held by the Collateral Agent on the date hereof and included in this Certificate after any withdrawals (item 8 minus item 9) is  $

11. The aggregate principal amount of the Bonds outstanding at the date hereof is  $

12. The aggregate amount by which such Allowable Amount

of Pledged Securities exceeds the aggregate principal amount of the Bonds outstanding (item 10 minus item 11) is $

All terms which are defined in the Pledge Agreement are used herein as so defined.

Dated:

OF NATIONAL RURAL UTILITIES

COOPERATIVE FINANCE CORPORATION,

SCHEDULE II

TO

AMENDED, RESTATED AND

CONSOLIDATED PLEDGE AGREEMENT

PLEDGED COLLATERAL ON DEPOSIT

SCHEDULE A TO OFFICERS’ CERTIFICATE

DATED

Pledged Collateral Name of Issuer Allowable Amount included in Certificate last Previously filed (Item 1) Increase (Decrease) in such Allowable Amount (Items 2,3 and 4) Current Allowable Amount (Item 5)

Cash........                                    

Permitted Investments

   (Here List)........                                    

Pledged Securities

   (Here List Securities)..

SCHEDULE II

TO

AMENDED, RESTATED AND

CONSOLIDATED PLEDGE AGREEMENT

PLEDGED COLLATERAL BEING DEPOSITED

SCHEDULE B TO OFFICERS’ CERTIFICATE

DATED

Pledged Collateral Name of Issuer Allowable Amount (Item 6)

Cash........                                    

Permitted Investments

   (Here List)........                                    

Pledged Securities

   (Here List Securities)..

SCHEDULE II

TO

AMENDED, RESTATED AND

CONSOLIDATED PLEDGE AGREEMENT

PLEDGED COLLATERAL BEING DEPOSITED

SCHEDULE B TO OFFICERS’ CERTIFICATE

DATED

Pledged Collateral Name of Issuer Allowable Amount (Item 8)

Cash........                                    

Permitted Investments

   (Here List).........                                    

Pledged Securities

   (Here List Securities)..

SCHEDULE III

TO

AMENDED, RESTATED AND

CONSOLIDATED PLEDGE AGREEMENT

Addresses for Notices

1. The addresses referred to in Section 7.01 hereof, for purposes of delivering

communications and notices, are as follows:

If to RUS:

Rural Utilities Service

United States Department of Agriculture

1400 Independence Avenue, SW

Washington, DC 20250

Fax: 202-720-1725

Attention of: The Administrator

Subject: Guaranteed Underwriter Program

If to the Borrower:

National Rural Utilities Cooperative Finance Corporation

20701 Cooperative Way

Dulles, VA 20166

Telephone: 703-467-7402

Fax: 703-467-5178

Attention of: J. Andrew Don, Treasurer

With a copy to:

National Rural Utilities Cooperative Finance Corporation

20701 Cooperative Way

Dulles, VA 20166

Telephone: 703-467-7404

Fax: 703-467-5651

Attention of John J. List, Esq., General Counsel

If to the Collateral Agent:

U.S. Bank National Association

100 Wall Street

Suite 1600

New York, NY 10005-3701

Fax: 212-509-3384

Attention of: Beverly A. Freeney

EX-10.4

RUS

  FOR FFB USE ONLY:    Bond Identifier:    CFC  0006     Purchase Date:    12-13-2012      Bond Date December 13, 2012 Place of Issue Washington, DC Last Day for an Advance (¶3) October 15, 2015 Maximum Principal Amount (¶4) $424,286,000.00 Final Maturity Date (¶5) October 15, 2035

FUTURE ADVANCE BOND

SERIES F

1.           Promise to Pay.

FOR VALUE RECEIVED, NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION, a cooperative association existing under the laws of the District of Columbia (the "Borrower," which term includes any successors or assigns) promises to pay the FEDERAL FINANCING BANK ("FFB"), a body corporate and instrumentality of the United States of America (FFB, for so long as it shall be the holder of this Bond, and any successor or assignee of FFB, for so long as such successor or assignee shall be the holder of this Bond, being the "Holder"), at the times, in the manner, and with interest at the rates to be established as hereinafter provided, such amounts as may be advanced from time to time by FFB to the Borrower under this Bond (each such amount being an "Advance", and more than one such amount being "Advances").

2. Reference to Certain Agreements.

(a)  Bond Purchase Agreement.  This Bond is the "Bond" referred to in, and entitled to the benefits of, the Series F Bond Purchase Agreement dated as of even date herewith, made by and among FFB, the Borrower, and the Administrator of the Rural Utilities Service, a Rural Development agency of the United

Bond - page 1

RUS

States Department of Agriculture ("RUS") (such agreement, as it may be amended, supplemented, and restated from time to time in accordance with its terms, being the "Bond Purchase Agreement").

(b) Bond Guarantee Agreement.  This Bond is the "Bond" referred to in, and entitled to the benefits of, the Amended, Restated and Consolidated Bond Guarantee Agreement dated as of even date herewith, made between RUS and the Borrower (such agreement, as it may be amended, supplemented, and restated from time to time in accordance with its terms, being the "Bond Guarantee Agreement").

(c) Pledge Agreement.  This Bond is the "Bond" referred to in the Amended, Restated and Consolidated Pledge Agreement dated as of even date herewith, made among the Borrower, RUS, and U.S. Bank Trust National Association, a national association (such agreement, as it may be amended, supplemented, and restated from time to time in accordance with its terms, being the "Pledge Agreement").

3. Advances; Advance Requests; RUS Approval Requirement; Last Day for an Advance.

(a) Subject to the terms and conditions of the Bond Purchase Agreement, FFB shall make Advances to the Borrower from time to time under this Bond, in each case upon delivery to FFB of a written request by the Borrower for an Advance under this Bond, in the form of request attached to the Bond Purchase Agreement as Exhibit A thereto (each such request being an "Advance Request") and completed as prescribed in section 7.3.1 of the Bond Purchase Agreement.

(b) To be effective, an Advance Request must first be delivered to RUS for approval and be approved by RUS in writing, and such Advance Request, together with written notification of RUS's approval thereof (each such notification being an "Advance Request Approval Notice"), must be received by FFB consistent with the advance notice requirements prescribed in sections 7.3.1(c) and 7.3.2(b) of the Bond Purchase Agreement.

(c) FFB shall make each requested Advance on the particular calendar date that the Borrower requested in the respective Advance Request to be the date on which the respective Advance is to be made (such date being the "Requested Advance Date" for such Advance), subject to the provisions of the Bond Purchase Agreement describing certain circumstances under which a requested Advance shall be made on a later date; provided, however, that no Advance shall be made under this Bond after the particular date specified on page 1 of this Bond as being the "Last Day for an Advance."

Bond - page 2

RUS

4.           Principal Amount of Advances; Maximum Principal Amount.

The principal amount of each Advance shall be the particular dollar amount that the Borrower specified in the respective Advance Request as the "Requested Advance Amount" for the respective Advance; provided, however, that the aggregate principal amount of all Advances made under this Bond shall not exceed the particular amount specified on page 1 of this Bond as being the "Maximum Principal Amount."

5. Maturity Dates for Advances.

Subject to paragraph 15 of this Bond, each Advance shall mature on the particular calendar date that the Borrower selected in the respective Advance Request to be the date on which the respective Advance is to mature (such date being the "Maturity Date" for such Advance), provided that such Maturity Date meets all of the criteria for Maturity Dates prescribed in section 7.3.1(a)(5) of the Bond Purchase Agreement.

6.           Computation of Interest on Advances.

(a) Subject to paragraphs 11 and 16 of this Bond, interest on the outstanding principal of each Advance shall accrue from the date on which the respective Advance is made to the date on which such principal is due.

(b) Interest on each Advance shall be computed on the basis of (1) actual days elapsed from (but not including) the date on which the respective Advance is made (for the first payment of interest due under this Bond for such Advance) or the date on which the payment of interest was last due (for all other payments of interest due under this Bond for such Advance), to (and including) the date on which the payment of interest is next due; and (2) a year of 365 days (except in calendar years including February 29, when the basis shall be a 366-day year).

(c) The basic interest rate for each Advance shall be established by FFB, as of the date on which the respective Advance is made, on the basis of the determination made by the Secretary of the Treasury pursuant to section 6(b) of the Federal Financing Bank Act of 1973, as amended (codified at 12 U.S.C. § 2281 et seq.) (the "FFB Act"); provided, however, that the shortest maturity used as the basis for any rate determination shall be the remaining maturity of the most recently auctioned  United States Treasury bills having the shortest maturity of all United States Treasury bills then being regularly auctioned.

           (d) In the event that (1) the Borrower has selected for any Advance a Maturity Date that will occur on or after the fifth anniversary of the Requested Advance Date for such Advance, and (2) the Borrower has elected for such Advance a prepayment/ refinancing privilege described in section 11.3 of the Bond

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Purchase Agreement, then the interest rate for such Advance shall also include a price (expressed in terms of a basis point increment to the applicable basic interest rate) for the particular prepayment/refinancing privilege that the Borrower selected, which price shall be established by FFB on the basis of a determination made by FFB as to the difference between (A) the estimated market yield of a notional obligation if such obligation were to (i) be issued by the Secretary of the Treasury, (ii) have a maturity comparable to the maturity of such Advance, and (iii) include a prepayment and refinancing privilege identical to the particular prepayment/refinancing privilege that the Borrower elected for such Advance, and (B) the estimated market yield of a notional obligation if such obligation were to (i) be issued by the Secretary of the Treasury, (ii) have a maturity comparable to the maturity of such Advance, but (iii) not include such prepayment and refinancing privilege.

7.           Payment of Interest; Payment Dates.

Interest accrued on the outstanding principal amount of each Advance shall be due and payable quarterly on January 15, April 15, July 15, and October 15 of each year (each such day being a "Payment Date"), beginning on the first Payment Date to occur after the date on which the respective Advance is made, up through and including the Maturity Date of such Advance; provided, however, that with respect to each Advance that is made in the 30-day period immediately preceding any Payment Date, payments of accrued interest on the outstanding principal amount of the respective Advance shall be due beginning on the second Payment Date to occur after the date on which such Advance is made.

8.           Repayment of Principal; Principal Repayment Options.

(a) The principal amount of each Advance shall be payable in quarterly installments, which installments shall be due beginning on the first Payment Date to occur after the date on which the respective Advance is made, and shall be due on each Payment Date to occur thereafter until the principal amount of the respective Advance is repaid in full on or before the particular date specified on page 1 of this Bond as being the "Final Maturity Date" (such date being the "Final Maturity Date"); provided, however, that with respect to each Advance that is made in the 30-day period immediately preceding any Payment Date, principal installments shall be due beginning on the second Payment Date to occur after the date on which the respective Advance is made.

(b) In the respective Advance Request for each Advance, the Borrower must also select a method for the repayment of principal of such Advance from among the following options:

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(1) "equal principal installments" -- the amount of each quarterly principal installment shall be substantially equal to the amount of every other quarterly principal installment and shall be sufficient, when added to all other such quarterly installments of equal principal, to repay the principal amount of such  Advance in full on the Final Maturity Date (notwithstanding the fact that the Borrower may have selected a Maturity Date for such  Advance that will occur before the Final Maturity Date);

(2) "graduated principal installments" -- the amount of each of the first one-third (or nearest number of payments that rounds to one-third) of the total number of quarterly principal installments shall be substantially equal to one-half of the amount of each of the remaining quarterly principal installments, and shall be sufficient, when added to all other such quarterly installments of graduated principal, to repay the principal amount of such  Advance in full on the Final Maturity Date (notwithstanding the fact that the Borrower may have selected a Maturity Date for such  Advance that will occur before the Final Maturity Date); or

(3) "level debt service" -- the amount of each quarterly payment consisting of a principal installment and accrued interest shall be substantially equal to the amount of every other quarterly payment consisting of a principal installment and accrued interest, and shall be sufficient, when added to all other such level quarterly payments consisting of a principal installment and accrued interest, to repay the principal amount of such  Advance in full on the Final Maturity Date (notwithstanding the fact that the Borrower may have selected a Maturity Date for such  Advance that will occur before the Final Maturity Date).

(c) For each  Advance, the amount of principal that shall be due and payable on each of the dates specified in subparagraph (a) of this paragraph 8 shall be the amount of the principal installment due under a principal repayment schedule for the respective  Advance that is computed in accordance with the principles of the particular method for the repayment of principal that is selected by the Borrower for such  Advance from among the options described in subparagraph (b) of this paragraph 8.  Except at the times described in the immediately following sentence, the method for the repayment of principal that is selected by the Borrower for any  Advance, and the resulting principal repayment schedule that is so computed for such  Advance, may not be changed.  Notwithstanding the foregoing, with respect to each  Advance for which the Borrower has selected a Maturity Date that will occur before the Final Maturity Date, the Borrower may change the particular method for the repayment of principal that was selected by the Borrower for the respective  Advance from either the "equal principal installments" method or the "graduated principal installments"

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method to the "level debt service" method at the time (if ever) that the Borrower elects to extend the maturity of such  Advance (as provided in paragraph 15 of this Bond), effective as of the effective date of such maturity extension, or at the time (if ever) that the Borrower elects to refinance the outstanding principal amount of such  Advance (as provided in paragraph 18 of this Bond), effective as of the effective date of such refinancing, and the principal repayment schedule for such  Advance shall thereupon be newly computed in accordance with the "level debt service" method for the repayment of principal.  After the Borrower has selected the Final Maturity Date as the Maturity Date for any  Advance, the Borrower may so change the particular method for the repayment of principal of any  Advance, and the principal repayment schedule for such  Advance shall be so newly computed, only at the time (if ever) that the Borrower elects to refinance the outstanding principal amount of such  Advance (as provided in paragraph 18 of this Bond), effective as of the effective date of such refinancing.

(d) With respect to each Advance that has a Maturity Date that will occur before the Final Maturity Date, the entire unpaid principal amount of the respective Advance shall be payable on such Maturity Date, subject to extensions of the maturity of such Advance (as provided in paragraph 15 of this Bond).

(e) Notwithstanding which of the methods for the repayment of principal described in subparagraph (b) of this paragraph 8 is selected by the Borrower for any  Advance, the aggregate of all quarterly payments of principal and interest on such  Advance shall be such as will repay the entire principal amount of such  Advance, and pay all interest accrued thereon, on or before the Final Maturity Date.

9.           Fee.

(a)  A fee to cover expenses and contingencies, assessed by FFB pursuant to section 6(c) of the FFB Act, shall accrue on the outstanding principal amount of each Advance for the period from the date on which the respective Advance is made to the date on which the principal amount of such Advance is due, not taking into account any maturity extensions permitted by paragraph 15 of this Bond (such period being the "Advance Period").

(b) The fee on each Advance shall be:

(1) 22.5 basis points (0.225%)per annum of the unpaid principal balance of such Advance for an Advance Period of a year or less;

(2) 27.5 basis points (0.275%)per annum of the unpaid principal balance of such Advance for an Advance Period greater than a year but no more than 5 years; and

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(3) 35 basis points (0.35%)per annum of the unpaid principal balance of such Advance for an Advance Period greater than 5 years.

(c) The fee on each Advance shall be computed in the same manner as accrued interest is computed under paragraph 6(b) of this Bond, and shall be due and payable at the same times as accrued interest is due and payable under paragraph 7 of this Bond (adjusted as provided in paragraph 10 of this Bond if a Payment Date is not a Business Day).  The fee on each Advance shall be credited to RUS as required by section 505(c) of the Federal Credit Reform Act of 1990, as amended (codified at 2 U.S.C. § 661d(c)).

10.           Business Days.

(a) Whenever any Payment Date, the Maturity Date for any Advance, or the Final Maturity Date shall fall on a day on which either FFB or the Federal Reserve Bank of New York is not open for business, the payment that would otherwise be due on such Payment Date, Maturity Date, or Final Payment Date, as the case may be, shall be due on the first day thereafter on which FFB and the Federal Reserve Bank of New York are both open for business (any such day being a "Business Day").

(b) In the event that any Payment Date falls on a day other than a Business Day, then the extension of time for making the payment that would otherwise be due on such Payment Date shall be (1) taken into account in establishing the interest rate for the respective Advance, (2) included in computing interest due in connection with such payment, and (3) excluded in computing interest due in connection with the next payment.

(c) In the event that the Maturity Date for any Advance or the Final Maturity Date falls on a day other than a Business Day, then the extension of time for making the payment that would otherwise be due on such Maturity Date or the Final Maturity, as the case may be, shall be (1) taken into account in establishing the interest rate for such Advance, and (2) included in computing interest due in connection with such payment.

11.  Late Payments.

(a) In the event that any payment of any amount owing under this Bond is not made when and as due (any such amount being then an "Overdue Amount"), then the amount payable shall be such Overdue Amount plus interest thereon (such interest being the "Late Charge") computed in accordance with this subparagraph (a).

(1) The Late Charge shall accrue from the scheduled date of payment for the Overdue Amount (taking into account

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paragraph 10 of this Bond) to the date on which payment is made.

(2) The Late Charge shall be computed on the basis of (A) actual days elapsed from (but not including) the scheduled date of payment for such Overdue Amount (taking into account paragraph 10 of this Bond) to (and including) the date on which payment is made, and (B) a year of 365 days (except in calendar years including February 29, when the basis shall be a 366-day year).

(3) The Late Charge shall accrue at a rate (the "Late Charge Rate") equal to one and one-half times the rate to be determined by the Secretary of the Treasury taking into consideration the prevailing market yield on the remaining maturity of the most recent auctioned 13-week United States Treasury bills.

(4) The initial Late Charge Rate shall be in effect until the earlier to occur of either (A) the date on which payment of the Overdue Amount and the amount of accrued Late Charge is made, or (B) the first Payment Date to occur after the scheduled date of payment for such Overdue Amount.  In the event that the Overdue Amount and the amount of the accrued Late Charge are not paid on or before such Payment Date, then the amount payable shall be the sum of the Overdue Amount and the amount of the accrued Late Charge, plus a Late Charge on such sum accruing at a new Late Charge Rate to be then determined in accordance with the principles of clause (3) of this subparagraph (a).  For so long as any Overdue Amount remains unpaid, the Late Charge Rate shall be re-determined in accordance with the principles of clause (3) of this subparagraph (a) on each Payment Date to occur thereafter, and shall be applied to the Overdue Amount and all amounts of the accrued Late Charge to the date on which payment of the Overdue Amount and all amounts of the accrued Late Charge is made.

(b) Nothing in subparagraph (a) of this paragraph 11 shall be construed as permitting or implying that the Borrower may, without the written consent of FFB, modify, extend, alter or affect in any manner whatsoever (except as explicitly provided herein) the right of FFB to receive any and all payments on account of this Bond on the dates specified in this Bond.

12.           Final Due Date.

Notwithstanding anything in this Bond to the contrary, all amounts outstanding under this Bond remaining unpaid as of the Final Maturity Date shall be due and payable on the Final Maturity Date.

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13.           Manner of Making Payments.

(a) For so long as FFB is the Holder of this Bond and RUS is the bond servicing agent for FFB (as provided in the Bond Purchase Agreement), each payment under this Bond shall be paid in immediately available funds by electronic funds transfer to the account of the United States Treasury (for credit to the subaccount of RUS, as bond servicing agent for FFB) maintained at the Federal Reserve Bank of New York specified by RUS in a written notice to the Borrower, or to such other account as may be specified from time to time by RUS in a written notice to the Borrower.

(b) In the event that FFB is the Holder of this Bond and RUS is not the bond servicing agent for FFB, each payment under this Bond, with the exception of the fee described in paragraph 9 of this Bond, shall be paid in immediately available funds by electronic funds transfer to the account of the United States Treasury (for credit to the subaccount of FFB) maintained at the Federal Reserve Bank of New York specified by FFB in a written notice to the Borrower, or to such other account as may be specified from time to time by FFB in a written notice to the Borrower.  In the event that FFB is the Holder of this Bond and RUS is not the bond servicing agent for FFB, each payment of the fee described in paragraph 9 of this Bond shall be paid in immediately available funds by electronic funds transfer to the account of the United States Treasury (for credit to the subaccount of RUS) maintained at the Federal Reserve Bank of New York specified from time to time by RUS in a written notice delivered by RUS to the Borrower.

(c) In the event that FFB is not the Holder of this Bond, then each payment under this Bond, with the exception of the fee described in paragraph 9 of this Bond, shall be made in immediately available funds by electronic funds transfer to such account as shall be specified by the Holder in a written notice to the Borrower.  In the event that FFB is not the Holder of this Bond, each payment of the fee described in paragraph 9 of this Bond shall be made in the manner specified by FFB in the written notice delivered by FFB to the Borrower and RUS as provided in section 15.4.2 of the Bond Purchase Agreement.

14.           Application of Payments.

Each payment made on this Bond shall be applied, first, to the payment of Late Charges (if any) payable under paragraphs 11 and 18 of this Bond, then to the payment of premiums (if any) payable under paragraphs 16 and 17 of this Bond, then to the payment of unpaid accrued interest, then on account of outstanding principal, and then to the payment of the fee payable under paragraph 9 of this Bond.

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15.           Maturity Extensions.

(a) With respect to each Advance (1) for which the Borrower has selected a Maturity Date that will occur before the twentieth anniversary of the Requested Advance Date specified in the respective Advance Request, or (2) for which a Maturity Date that will occur before the twentieth anniversary of the Requested Advance Date specified in the respective Advance Request has been determined as provided in subparagraph (b) of this paragraph 15 (each such Maturity Date being an "Interim Maturity Date"), the Borrower may, effective as of such Interim Maturity Date, elect to extend the maturity of all or any portion of the outstanding principal amount of the respective Advance to a new Maturity Date to be selected by the Borrower in the manner and subject to the limitations specified in this subparagraph (a) (each such election being a "Maturity Extension Election"; each such elective extension of the maturity of any Advance that has an Interim Maturity Date being a "Maturity Extension"; and the Interim Maturity Date that is in effect for an Advance immediately before any such elective Maturity Extension being, from and after such Maturity Extension, the "Maturity Extension Effective Date").

(1) Except under the circumstances described in clause (3) of this subparagraph (a), the Borrower shall deliver to FFB (with a copy to RUS) written notification of each Maturity Extension Election, in the form of notification attached to this Bond as Annex 1-A (each such notification being a "Maturity Extension Election Notice"), making reference to the "Advance Identifier" (as that term is defined in the Bond Purchase Agreement) that FFB assigned to such Advance (as provided in the Bond Purchase Agreement) and specifying, among other things, the following:

(A) the amount of the outstanding principal of the such Advance with respect to which the Borrower elects to extend the maturity; and

(B) the new Maturity Date that the Borrower selects to be in effect for such principal amount after the respective Maturity Extension Effective Date, which date:

(i) may be either (I) a new Interim Maturity Date, or (II) the twentieth anniversary of the Requested Advance Date specified in the original Advance Request (if such twentieth anniversary date is a Payment Date) or the Payment Date immediately preceding such twentieth anniversary date (if such twentieth anniversary date is not a Payment Date); and

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(ii) in the event that the Borrower selects a new Interim Maturity Date as the new Maturity Date for any Advance, must meet the criteria for Maturity Dates prescribed in section 7.3.1(a)(5) of the Bond Purchase Agreement (provided, however, that, for purposes of selecting a new Maturity Date in connection with a Maturity Extension Election, each of the references to the "Requested Advance Date" for the respective Advance in section 7.3.1(a)(5)(D) of the Bond Purchase Agreement shall be deemed to be a reference to the "respective Maturity Extension Effective Date").

(2) To be effective, a Maturity Extension Election Notice must be received by FFB on or before the third Business Day before the Interim Maturity Date in effect for the respective Advance immediately before such Maturity Extension.

(3) In the event that either of the circumstances described in subclause (A) or (B) of the next sentence occurs, then a Maturity Extension Election Notice (in the form of notice attached to this Bond as Annex 1-B), to be effective, must first be delivered to RUS for approval and be approved by RUS in writing, and such Maturity Extension Election Notice, together with written notification of RUS's approval thereof, must be received by FFB on or before the third Business Day before the Interim Maturity Date in effect for the respective Advance immediately before such Maturity Extension.  RUS approval of a Maturity Extension Election Notice will be required under either of the following circumstances:

(A) (i) any payment of any amount owing under this Bond is not made by the Borrower when and as due; (ii) payment is made by RUS in accordance with the guarantee set forth at the end of this Bond; and (iii) RUS delivers notice to both the Borrower and FFB advising each of them that each Maturity Extension Election Notice delivered by the Borrower after the date of such notice shall require the approval of RUS; or

(B) FFB at any time delivers written notice to both the Borrower and RUS advising each of them that each Maturity Extension Election Notice delivered by the Borrower after the date of such notice shall require the approval of RUS.

(b) With respect to any Advance that has an Interim Maturity Date, in the event that FFB does not receive a Maturity Extension Election Notice (and, if required under subparagraph (a)(3) of this paragraph 15, written notification

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 of RUS's approval thereof) on or before the third Business Day before such Interim Maturity Date, then the maturity of such Advance shall be extended automatically in the manner and subject to the limitations specified in this subparagraph (b) (each such automatic extension of the maturity of any Advance that has an Interim Maturity Date also being a "Maturity Extension"; and the Interim Maturity Date that is in effect for an Advance immediately before any such automatic Maturity Extension also being, from and after such Maturity Extension, the "Maturity Extension Effective Date").  The new Maturity Date for such Advance shall be the immediately following Payment Date.  The amount of principal that will have its maturity extended automatically shall be the entire outstanding principal amount of such Advance on such Maturity Extension Effective Date, less the amount of any payment of principal made on such Maturity Extension Effective Date.

(c) In the event that the maturity of any Advance that has an Interim Maturity Date is extended under either subparagraph (a) or (b) of this paragraph 15, then the basic interest rate for such Advance, from and after the respective Maturity Extension Effective Date, shall be the particular rate that is established by FFB, as of such Maturity Extension Effective Date, in accordance with the principles of paragraph 6(c) of this Bond.

(d) In the event that the maturity of any Advance that has an Interim Maturity Date is extended under either subparagraph (a) or (b) of this paragraph 15, then the fee for such Advance, from and after the respective Maturity Extension Effective Date, shall be the particular fee that is assessed by FFB, as of such Maturity Extension Effective Date, with the new Advance Period being the period from the Maturity Extension Effective Date through the new Maturity Date, in accordance with the principles of paragraphs 9(b) and (c) of this Bond.

(e) In the event that (1) the maturity of any Advance that has an Interim Maturity Date is extended under either subparagraph (a) or (b) of this paragraph 15, and (2) the Maturity Date for such extended Advance is a date that will occur before the fifth anniversary of the respective Maturity Extension Effective Date, then the prepayment/refinancing privilege described in section 11.2 of the Bond Purchase Agreement shall apply automatically to such Advance.

(f) In the event that (1) the Borrower makes a Maturity Extension Election with respect to any Advance that has an Interim Maturity Date, and (2) the Borrower selects as the Maturity Date for such extended Advance a new Maturity Date that will occur on or after the fifth anniversary of the respective Maturity Extension Effective Date, then the Borrower must elect a prepayment/refinancing privilege for such extended Advance from between the options described in sections 11.2 and 11.3 of the Bond Purchase Agreement (provided, however, that each of the

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references to "the Requested Advance Date for such Advance" in  section 11.3 of the Bond Purchase Agreement shall be deemed to be a reference to "the respective Maturity Extension Effective Date").  The Maturity Extension Election Notice delivered by the Borrower in connection with each such Maturity Extension Election must also specify the particular prepayment/refinancing privilege that the Borrower elects for the respective extended Advance.  In the event that the Borrower elects for any such extended Advance a prepayment/refinancing privilege described in section 11.3 of the Bond Purchase Agreement, then the interest rate for such extended Advance, from and after the respective Maturity Extension Effective Date, shall include a price (expressed in terms of a basis point increment to the applicable basic interest rate) for the particular prepayment/refinancing privilege that the Borrower elects, which price shall be established by FFB, as of such Maturity Extension Effective Date, in accordance with the principles of paragraph 6(d) of this Bond.

(g) The maturity of each Advance may be extended more than once as provided in this paragraph 15, but upon the twentieth anniversary of the Requested Advance Date specified in the original Advance Request (if such twentieth anniversary date is a Payment Date) or upon the Payment Date immediately preceding such twentieth anniversary date (if such twentieth anniversary date is not a Payment Date), no further Maturity Extensions may occur.

16.  Prepayments.

(a) The Borrower may elect to prepay all or any portion of the outstanding principal amount of any Advance made under this Bond, or to prepay this Bond in its entirety, in the manner, at the price, and subject to the limitations specified in this paragraph 16 (each such election being a "Prepayment Election").

(b) For each Prepayment Election in which the Borrower elects to prepay a particular amount of the outstanding principal of an Advance, the Borrower shall deliver to RUS written notification of the respective Prepayment Election, in the form of notification attached to this Bond as Annex 2-A (each such notification being a "Prepayment Election Notice"), making reference to the Advance Identifier that FFB assigned to the respective Advance (as provided in the Bond Purchase Agreement) and specifying, among other things, the following:

(1) the particular date on which the Borrower intends to make the prepayment on such Advance (such date being the "Intended Prepayment Date" for such Advance), which date:

(A) must be a Business Day; and

(B) for any Advance for which the Borrower has selected a fixed premium prepayment/refinancing

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 privilege that includes a 5-year period during which such Advance shall not be eligible for any prepayment or refinancing (such time period being a "No-Call Period"), may not be a date that will occur before the applicable "First Call Date" determined as provided in section 11.3.2 of the Bond Purchase Agreement (such date being the "First Call Date"); and

(2) the amount of principal of the respective Advance that the Borrower intends to prepay, which amount may be either:

(A) the total outstanding principal amount of such Advance; or

(B) an amount less than the total outstanding principal amount of such Advance (subject to subparagraph (g) of this paragraph 16) (any such amount being a "Portion").

(c) For each Prepayment Election in which the Borrower elects to have a particular amount of funds applied by FFB toward the prepayment of the outstanding principal of an Advance, the Borrower shall deliver to RUS written notification of the respective Prepayment Election, in the form of notification attached to this Bond as Annex 2-B (each such notification also being a "Prepayment Election Notice"), making reference to the Advance Identifier that FFB assigned to the respective Advance (as provided in the Bond Purchase Agreement) and specifying, among other things, the following:

(1) the particular date on which the Borrower intends to make the prepayment on such Advance (such date being the "Intended Prepayment Date" for such Advance), which date:

(A) must be a Business Day; and

(B) for any Advance for which the Borrower has selected a fixed premium prepayment/refinancing privilege that includes a 5-year No-Call Period, may not be a date that will occur before the applicable First Call Date; and

(2) the particular amount of funds that the Borrower elects to be applied by FFB toward a prepayment of the outstanding principal amount of such Advance.

(d) To be effective, a Prepayment Election Notice must be approved by RUS in writing, and such Prepayment Election Notice, together with written notification of RUS's approval thereof, must be received by FFB on or before the fifth Business Day before the date specified therein as the Intended Prepayment Date for the respective Advance or Portion.

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(e) The Borrower shall pay to FFB a price for the prepayment of any Advance, any Portion of any Advance, or this Bond in its entirety (such price being the "Prepayment Price" for such Advance or Portion or this Bond, as the case may be) determined as follows:

(1) in the event that the Borrower elects to prepay the entire outstanding principal amount of any Advance, then the Borrower shall pay to FFB a Prepayment Price for such Advance equal to the sum of:

(A) the entire outstanding principal amount of such Advance on the Intended Prepayment Date;

(B) all unpaid interest (and Late Charges, if any) accrued on such Advance through the Intended Prepayment Date; and

(C) the amount of the premium or discount credit (if any) that is required under the particular prepayment/refinancing privilege that applies to such Advance as provided in article 11 of the Bond Purchase Agreement;

(2) in the event that the Borrower elects to prepay a Portion of any Advance, then the Borrower shall pay to FFB a Prepayment Price for such Portion that would equal such Portion's pro rata share of the Prepayment Price that would be required for a prepayment of the entire outstanding principal amount of such Advance (determined in accordance with the principles of clause (1) of this subparagraph (e)); and

(3) in the event that the Borrower elects to prepay this Bond in its entirety, then the Borrower shall pay to FFB an amount equal to the sum of the Prepayment Prices for all outstanding Advances (determined in accordance with the principles of clause (1) of this subparagraph (e)).

(f) Payment of the Prepayment Price for any Advance, any Portion of any Advance, or this Bond in its entirety shall be due to FFB before 3:00 p.m. (Washington, DC, time) on the Intended Prepayment Date for such Advance or Portion or this Bond, as the case may be.

(g) Each prepayment of a Portion shall, as to the principal amount of such Portion, be subject to a minimum amount equal to $100,000.00 of principal.

(h) The Borrower may make more than one Prepayment Election with respect to an Advance, each such Prepayment Election being made with respect to a different Portion of such Advance, until such time as the entire principal amount of such Advance is repaid in full.

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17.  Refinancings.

(a) The Borrower may elect to refinance the outstanding principal amount of any Advance (but not any Portion) in the manner, at the price, and subject to the limitations specified in this paragraph 17 (each such election being a "Refinancing Election").

(b) Except under the circumstances described in subparagraph (d) of this paragraph 17, the Borrower shall deliver to FFB (with a copy to RUS) written notification of each Refinancing Election, in the form of notification attached to this Bond as Annex 3-A (each such notification being a "Refinancing Election Notice"), making reference to the Advance Identifier that FFB assigned to the respective Advance (as provided in the Bond Purchase Agreement) and specifying, among other things, the following:

(1) the particular date on which the Borrower intends to refinance the respective Advance (such date being the "Intended Refinancing Date" for the respective Advance), which date:

(A) must be a Payment Date; and

(B) for any Advance for which the Borrower has selected a prepayment/refinancing privilege that includes a 5-year No-Call Period, may not be a date that will occur before the applicable First Call Date;

(2) the amount of the outstanding principal of the respective Advance that the Borrower elects to refinance (which may not be a Portion); and

(3) the Maturity Date that the Borrower selects to be in effect for such principal amount after such refinancing, which date may be:

(A) the Maturity Date that is in effect for such Advance immediately before such refinancing; or

(B) a new Maturity Date that the Borrower selects in connection with such Refinancing Election, provided that such new Maturity Date meets the criteria for Maturity Dates prescribed in section 7.3.1(a)(5) of the Bond Purchase Agreement (provided, however, that for purposes of selecting a new Maturity Date in connection with a Refinancing Election, each of the references to the "Requested Advance Date" for the respective Advance in section 7.3.1(a)(5)(D) of the Bond Purchase Agreement shall be deemed to be a reference to the "respective Refinancing Effective Date").

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(c) To be effective, a Refinancing Election Notice must be received by FFB on or before the fifth Business Day before the date specified therein as the Intended Refinancing Date.

(d) In the event that either of the circumstances described in clause (1) or (2) of the next sentence shall have occurred, then a Refinancing Election Notice (in the form of notice attached to this Bond as Annex 3-B), to be effective, must first be delivered to RUS for approval and be approved by RUS in writing, and such Refinancing Election Notice, together with written notification of RUS's approval thereof, must be received by FFB on or before the fifth Business Day before the date specified therein to be the Intended Refinancing Date.  RUS approval of a Refinancing Election Notice will be required under either of the following circumstances:

(1) (A) payment of any amount owing under this Bond is not made by the Borrower when and as due; (B) payment is made by RUS in accordance with the guarantee set forth at the end of this Bond; and (C) RUS delivers notice to both the Borrower and FFB advising each of them that each Refinancing Election Notice delivered by the Borrower after the date of such notice shall require the approval of RUS; or

(2) FFB at any time delivers written notice to both the Borrower and RUS advising each of them that each Refinancing Election Notice delivered by the Borrower after the date of such notice shall require the approval of RUS.

(e) The Borrower shall pay to FFB a price for the refinancing of any Advance (such price being the "Refinancing Price" for such Advance) equal to the sum of:

(1) all unpaid interest (and Late Charges, if any) accrued on such Advance through the Intended Refinancing Date; and

(2) the amount of the premium (if any) that is required under the particular prepayment/refinancing privilege that applies to such Advance as provided in article 11 of the Bond Purchase Agreement.

In the event that (A) the prepayment/refinancing privilege that applies to the particular Advance being refinanced is the privilege described in section 11.2 of the Bond Purchase Agreement, and (B) the Market Value Premium (or Discount) that is to be included in the Refinancing Price for such Advance is a discount on such Advance, then such discount shall be applied by FFB in the manner requested by the Borrower in a written notice delivered by the Borrower to FFB and approved by RUS in writing.

Bond - page 17

RUS

(f) Payment of the Refinancing Price for any Advance shall be due to FFB before 3:00 p.m. (Washington, DC, time) on the Intended Refinancing Date for such Advance.

(g) In the event that a Refinancing Election Notice (and, if required under subparagraph (d) of this paragraph 17, written notification of RUS's approval thereof) is received by FFB on or before the fifth Business Day before the Intended Refinancing Date specified therein, then the refinancing of the respective Advance shall become effective on such Intended Refinancing Date (in such event, the Intended Refinancing Date being the "Refinancing Effective Date").  In the event that a Refinancing Election Notice (and, if required under subparagraph (d) of this paragraph 17, written notification of RUS's approval thereof) is received by FFB after the fifth Business Day before the Intended Refinancing Date specified therein, then the refinancing of the respective Advance shall become effective on the fifth Business Day to occur after the day on which such Refinancing Election Notice (and, if required under subparagraph (d) of this paragraph 17, written notification of RUS's approval thereof) is received by FFB (in such event, the fifth Business Day to occur after the day on which such Refinancing Election Notice (and, if required under subparagraph (d) of this paragraph 17, written notification of RUS's approval thereof) is received by FFB being the "Refinancing Effective Date"), provided that the Borrower shall have paid to FFB, in addition to the Refinancing Price required under subparagraph (e) of this paragraph 17, the interest accrued from the Intended Refinancing Date through such Refinancing Effective Date.

(h) In the event that the Borrower makes a Refinancing Election with respect to any Advance, the basic interest rate for such Advance, from and after the respective Refinancing Effective Date, shall be the particular rate that is established by FFB, as of such Refinancing Effective Date, in accordance with the principles of paragraph 6(c) of this Bond.

(i) In the event that the Borrower makes a Refinancing Election with respect to any Advance, then the fee for such Advance, from and after the respective Refinancing Effective Date, shall be the particular fee that is assessed by FFB, as of such Refinancing Effective Date, with the new Advance Period being the period from the Refinancing Effective Date through the new Maturity Date, in accordance with the principles of paragraphs 9(b) and (c) of this Bond.

(j) In the event that (1) the Borrower makes a Refinancing Election with respect to any Advance, and (2) the Borrower selects as the Maturity Date for such refinanced Advance either (A) the Maturity Date that is in effect for such Advance immediately before such refinancing, and such Maturity Date will occur before the fifth anniversary of the respective Refinancing Effective Date, or (B) a new Maturity Date that will occur before the fifth anniversary of the respective Refinancing

Bond - page 18

RUS

Effective Date, then the prepayment/refinancing privilege described in section 11.2 of the Bond Purchase Agreement shall apply automatically to such Advance.

(k) In the event that (1) the Borrower makes a Refinancing Election with respect to any Advance, and (2) the Borrower selects as the Maturity Date for such refinanced Advance either (A) the Maturity Date that is in effect for such Advance immediately before such refinancing, and such Maturity Date will occur on or after the fifth anniversary of the respective Refinancing Effective Date, or (B) a new Maturity Date that will occur on or after the fifth anniversary of the respective Refinancing Effective Date, then the Borrower must elect a prepayment/refinancing privilege for such refinanced Advance from between the options described in sections 11.2 and 11.3 of the Bond Purchase Agreement (provided, however, that each of the references to the "Requested Advance Date for such Advance" in section 11.3 of the Bond Purchase Agreement shall be deemed to be a reference to the "respective Refinancing Effective Date").  The Refinancing Election Notice delivered by the Borrower in connection with each such Refinancing Election must also specify the particular prepayment/refinancing privilege that the Borrower elects for the respective refinanced Advance.  In the event that the Borrower elects for any such refinanced Advance a prepayment/refinancing privilege described in section 11.3 of the Bond Purchase Agreement, then the interest rate for such refinanced Advance, from and after the respective Refinancing Effective Date, shall include a price (expressed in terms of a basis point increment to the applicable basic interest rate) for the particular prepayment/refinancing privilege that the Borrower elects, which increment shall be established by FFB, as of such Refinancing Effective Date, in accordance with the principles of paragraph 6(d) of this Bond.

(l) In the event that the Borrower makes a Refinancing Election with respect to any Advance, then the outstanding principal amount of such Advance, after the respective Refinancing Effective Date, shall be due and payable in accordance with this subparagraph (l).

(1) With respect to each Advance to which either the "equal principal installments" method or the "graduated principal installments" method for the repayment of principal applies, the amount of the quarterly principal installments that will be due after the respective Refinancing Effective Date shall be equal to the amount of the quarterly installments of equal principal or graduated principal, as the case may be, that were due in accordance with the principal repayment schedule that applied to such  Advance immediately before the respective Refinancing Effective Date.

(2) With respect to each Advance to which the "level debt service" method for the repayment of principal

Bond - page 19

RUS

applies, the amount of the level quarterly payments consisting of a principal installment and accrued interest that will be due after the respective Refinancing Effective Date shall be newly computed so that the amount of each such quarterly payment consisting of a principal installment and accrued interest (taking into account the new interest rate that applies to such Advance from and after such Refinancing Effective Date) shall be substantially equal to the amount of every other quarterly payment consisting of a principal installment and accrued interest, and shall be sufficient, when added to all other such newly-computed level quarterly payments consisting of a principal installment and accrued interest, to repay the outstanding principal amount of such refinanced Advance in full on the Final Maturity Date (notwithstanding the fact that the Borrower may have selected a Maturity Date for such refinanced Advance that will occur before the Final Maturity Date).

(3) The quarterly installments of equal principal or graduated principal, or the newly-computed level quarterly payments consisting of a principal installment and accrued interest, as the case may be, shall be due beginning on the first Payment Date to occur after the respective Refinancing Effective Date, and shall be due on each Payment Date to occur thereafter up through and including the earlier to occur of (A) the new Maturity Date that the Borrower selected for such refinanced Advance, on which date the entire unpaid principal amount of such refinanced  Advance shall also be payable, subject to Maturity Extensions (as provided in paragraph 15 of this Note) if the new Maturity Date is an Interim Maturity Date, or (B) the date on which the entire principal amount of such refinanced Advance, and all unpaid interest (and Late Charges, if any) accrued thereon, are paid.

(m) The Borrower may make more than one Refinancing Election with respect to any Advance.

18. Rescission of Prepayment Elections and Refinancing Elections; Late Charges for Late Payments.

(a) The Borrower may rescind any Prepayment Election made in accordance with paragraph 16 of this Bond or any Refinancing Election made in accordance with paragraph 17 of this Bond, but only in accordance with this paragraph 18.

(b) The Borrower shall deliver to both FFB and RUS written notification of each rescission of a Prepayment Election or a Refinancing Election (each such notification being an "Election Rescission Notice") specifying the particular Advance for which the Borrower wishes to rescind such Prepayment Election or Refinancing Election, as the case may be, which specification must make reference to both:

Bond - page 20

RUS

(1) the particular Advance Identifier that FFB assigned to such Advance (as provided in the Bond Purchase Agreement); and

(2) the RUS account number for such Advance.

The Election Rescission Notice may be delivered by facsimile transmission to FFB at (202) 622-0707 and to RUS at (202) 720-1401, or at such other facsimile number or numbers as either FFB or RUS may from time to time communicate to the Borrower.

(c) To be effective, an Election Rescission Notice must be received by both FFB and RUS not later than 3:30 p.m. (Washington, DC, time) on the second Business Day before the Intended Prepayment Date or the Intended Refinancing Date, as the case may be.

(d) In the event that the Borrower (1) makes a Prepayment Election in accordance with paragraph 16 of this Bond or a Refinancing Election in accordance with paragraph 17 of this Bond; (2) does not rescind such Prepayment Election or Refinancing Election, as the case may be, in accordance with this paragraph 18; and (3) does not, before 3:00 p.m. (Washington, DC, time) on the Intended Prepayment Date or Intended Refinancing Date, as the case may be, pay to FFB the Prepayment Price described in paragraph 16(e) of this Bond or Refinancing Price described in paragraph 17(e) of this Bond, as the case may be, then a Late Charge shall accrue on any such unpaid amount from the Intended Prepayment Date or Intended Refinancing Date, as the case may be, to the date on which payment is made, computed in accordance with the principles of paragraph 11 of this Bond.

19.           Amendments to Bond.

To the extent not inconsistent with applicable law, this Bond, for so long as FFB or its agent is the holder thereof, shall be subject to modification by such amendments, extensions, and renewals as may be agreed upon from time to time by FFB and the Borrower, with the approval of RUS.

20.           Certain Waivers.

The Borrower hereby waives any requirement for presentment, protest, or other demand or notice with respect to this Bond.

21.           Bond Effective Until Paid.

This Bond shall continue in full force and effect until all principal outstanding hereunder, all interest accrued hereunder, all premiums (if any) payable under paragraphs 16 and 17 of this Bond, all Late Charges (if any) payable under paragraphs 11 and

Bond - page 21

RUS

 18 of this Bond, and all fees (if any) payable under paragraph 9 of this Bond have been paid in full.

22. RUS Guarantee of Bond.

Upon execution of the guarantee set forth at the end of this Bond (the "RUS Guarantee"), the payment by the Borrower of all amounts due and payable under this Bond, when and as due, shall be guaranteed by the United States of America, acting through RUS, pursuant to the Rural Electrification Act of 1936, as amended (codified at 7 U.S.C. § 901 et seq.).  In consideration of the RUS Guarantee, the Borrower promises to RUS to make all payments due under this Bond when and as due.

23. Pledge Agreement.

This Bond is one of several Bonds referred to in the Pledge Agreement, wherein the Borrower made provision for the pledge and grant of a security interest in, under certain circumstances described therein, certain property of the Borrower, described therein, to secure the payment of and performance of certain obligations owed to RUS, as set forth in the Pledge Agreement.

24.  Guarantee Payments; Reimbursement.

If RUS makes any payment, pursuant to the RUS Guarantee, of any amount due and payable under this Bond, when and as due, each and every such payment so made shall be deemed to be a payment hereunder; provided, however, that no payment by RUS pursuant to the RUS Guarantee shall be considered a payment for purposes of determining the existence of a failure by the Borrower to perform its obligation to RUS to make all payments under this Bond when and as due.  RUS shall have any rights by way of subrogation, agreement or otherwise which arise as a result of such payment pursuant to the RUS Guarantee.

25. Default and Enforcement.

In case of a default by the Borrower under this Bond or the occurrence of an event of default under the Bond Guarantee Agreement, then, in consideration of the obligation of RUS under the RUS Guarantee, in that event, to make payments to FFB as provided in this Bond, RUS, in its own name, shall have all rights, powers, privileges, and remedies of the holder of this Bond, in accordance with the terms of this Bond, the Bond Guarantee Agreement, and the Pledge Agreement, including, without limitation, the right to enforce or collect all or any part of the obligation of the Borrower under this Bond or arising as a result of the RUS Guarantee, to file proofs of claim or any other document in any bankruptcy, insolvency, or other judicial proceeding, and to vote such proofs of claim.

Bond - page 22

RUS

26.           Acceleration.

The entire unpaid principal amount of this Bond, and all interest thereon, may be declared, and upon such declaration shall become, due and payable to RUS, under the circumstances described, and in the manner and with the effect provided, in the Bond Guarantee Agreement.

IN WITNESS WHEREOF, the Borrower has caused this Bond to be signed in its corporate name and its corporate seal to be hereunder affixed and attested by its officers thereunto duly authorized, all as of the day and year first above written.

NATIONAL RURAL UTILITIES

 COOPERATIVE FINANCE CORPORATION

 (the "Borrower")

 BY:

Signature: /s/ SHELDON C. PETERSEN

Print Name: Sheldon C. Petersen

Title: Governor and

   Chief Executive Officer

ATTEST:

Signature: /s/JOHN J. LIST

(SEAL)

Print Name: John J. List

Title: Assistant Secretary-Treasurer

Bond - page 23

RUS

ANNEX 1-A

TO

FUTURE ADVANCE BOND

FORM

OF

MATURITY EXTENSION ELECTION NOTICE

RUS

MATURITY EXTENSION ELECTION NOTICE

****************************************************************

PART 1 OF THIS FORM HAS BEEN COMPLETED BY RUS.  THE BORROWER SHOULD COMPLETE PART 2 OF THIS FORM ONLY FOR THOSE PARTICULAR ADVANCES IDENTIFIED IN PART 1 OF THIS FORM WITH RESPECT TO WHICH THE BORROWER ELECTS TO HAVE THE MATURITY EXTENDED TO A NEW MATURITY DATE OTHER THAN THE IMMEDIATELY FOLLOWING QUARTERLY PAYMENT DATE.

DIRECT ALL QUESTIONS ON HOW TO COMPLETE THIS FORM TO THE ASSIGNED CONTACT OFFICE FOR THE BORROWER:

Chief

Policy Analysis and Loan Management Staff

Telephone:  (202) 720-0424

WHEN COMPLETED, DELIVER THIS ORIGINAL FORM TO FFB AT THE FOLLOWING ADDRESS:

Manager

Federal Financing Bank

Main Treasury Building

1500 Pennsylvania Avenue, NW

Washington, DC  20220

Telephone:  (202) 622-2470

Facsimile:   (202) 622-0707

 DELIVER A COPY OF THIS FORM TO RUS AT THE ADDRESS OF THE CONTACT OFFICE INDICATED BELOW:

Chief

Policy Analysis and Loan Management Staff

Rural Utilities Service

U.S. Department of Agriculture

Mail Stop 1560

1400 Independence Avenue, SW

Washington, DC  20250-1560

Reference:  Section 313A Loan Guarantee

Telephone:  (202) 720-0424

Facsimile:   (202) 690-0717

THE BORROWER SHOULD NOT COMPLETE THIS FORM OR DELIVER IT TO FFB  IF THE BORROWER DESIRES TO HAVE THE MATURITY OF ALL OF THE ADVANCES IDENTIFIED IN PART 1 OF THIS FORM EXTENDED AUTOMATICALLY TO THE IMMEDIATELY FOLLOWING QUARTERLY PAYMENT DATE.

IF THE BORROWER DOES NOT RETURN THIS FORM TO FFB, THE MATURITY OF ALL OF THE ADVANCES IDENTIFIED IN PART 1 OF THIS FORM WILL BE EXTENDED AUTOMATICALLY TO THE IMMEDIATELY FOLLOWING QUARTERLY PAYMENT DATE.

****************************************************************

MATURITY EXTENSION ELECTION NOTICE - page 1 

RUS

MATURITY EXTENSION ELECTION NOTICE

Manager

Federal Financing Bank

Reference is made to the following-described Future Advance Bond (the "Bond") payable to the Federal Financing Bank ("FFB"), which is guaranteed by the Rural Utilities Service ("RUS"):

Name of Borrower (the "Borrower"):

National Rural Utilities Cooperative Finance Corporation

FFB Bond Identifier: _____________________

RUS Bond Number: _____________________

Part 1 (To be completed by RUS):

Each of the advances of funds ("Advances") identified in this Part 1 will mature on _______________ (the "Maturity Date").

FFB ADVANCE IDENTIFIER	RUS ACCOUNT NUMBER	ORIGINAL ADVANCE DATE		ORIGINAL ADVANCE AMOUNT		OUTSTANDING PRINCIPAL AMOUNT
			$		$
			$		$
			$		$
			$		$

MATURITY EXTENSION ELECTION NOTICE - page 2

RUS

Part 2:

Notice is hereby given to FFB (and RUS) of the Borrower's election that the maturity of each of the Advances identified in this Part 2 be extended as follows:

FFB ADVANCE IDENTIFIER1		OPTIONAL PRINCIPAL PAYMENT2	AMOUNT OF PRINCIPAL TO BE EXTENDED3	NEW MATURITY DATE4	TYPE OF PREPAYMENT/ REFINANCING PRIVILEGE5	5-YEAR NO-CALL PERIOD6	PREMIUM OPTION7
	$
	$
	$
	$

1Complete 1 line in Part 2 for each Advance identified in Part 1 with respect to which the Borrower elects to have the maturity extended to a new Maturity Date other than the next Payment Date.  Insert the FFB Advance Identifier that FFB assigned to the respective Advance for each Advance identified in Part 1 with respect to which the Borrower elects to have the maturity so extended.

 

2The Borrower has the option of making a payment of principal on the Maturity Date without any premium being charged.  For each Advance, insert the amount of any such optional principal payment that will be paid on the Maturity Date.

 

3For each Advance, insert the amount of principal for which the maturity is to be extended.  That amount must equal the difference between the outstanding principal amount for the respective Advance, as specified in Part 1, and the optional principal payment (if any) for such Advance inserted by the Borrower in Part 2.

4For each Advance, insert the particular calendar date that the Borrower selects to be the new Maturity Date to be in effect for the respective Advance after the Maturity Extension, which new Maturity Date must meet all the criteria for Maturity Dates specified in section 7.3.1(a)(5) of the Bond Purchase Agreement referred to in the Bond.

5Elect 1 of the following 2 types of prepayment/refinancing privilege for an Advance only if the new Maturity Date selected for such Advance will occur on or after the fifth anniversary of the effective date of this Maturity Extension.  The 2 types of prepayment/refinancing privilege are: the market value premium (or discount) privilege ("M") and a fixed premium privilege ("F").  Insert in the box the letter-symbol for the particular type of prepayment/refinancing privilege elected.

 

6Elect 1 of the following 2 no-call period options for an Advance only if a fixed premium privilege is elected as the prepayment/refinancing privilege for such Advance.  The 2 no-call period options are: yes ("Y"), if the Borrower elects to have the fixed premium prepayment/refinancing privilege include a 5-year period during which the Advance will not be eligible for prepayment or refinancing, and no ("N"), if the Borrower elects to have the fixed premium prepayment/refinancing privilege not include any such a 5-year no-call period.  Insert in the box the letter-symbol for the particular no-call period option elected.

 

7Select 1 of the following 3 premium options for an Advance only if a fixed premium privilege is elected as the prepayment/refinancing privilege for such Advance.  The 3 premium options are: a 10% premium declining over 10 years ("X"), a 5% premium declining over 5 years ("V"), and par (no premium) ("P").  Insert in the box the letter-symbol for the particular premium option selected.

MATURITY EXTENSION ELECTION NOTICE - page 3

RUS

The undersigned hereby certifies that the authority of the undersigned to execute and deliver this Maturity Extension Election Notice on behalf of the Borrower is valid and in full force and effect on the date hereof.

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION

(the "Borrower")

By:     _______________________

Name:   _______________________

Title:  _______________________

Date:   _______________________

MATURITY EXTENSION ELECTION NOTICE - page 4 

RUS

ANNEX 1-B

TO

FUTURE ADVANCE BOND

FORM

OF

MATURITY EXTENSION ELECTION NOTICE

(RUS APPROVAL REQUIRED)

RUS

MATURITY EXTENSION ELECTION NOTICE

(RUS APPROVAL REQUIRED)

****************************************************************

PART 1 OF THIS FORM HAS BEEN COMPLETED BY RUS.  THE BORROWER SHOULD COMPLETE PART 2 OF THIS FORM ONLY FOR THOSE PARTICULAR ADVANCES IDENTIFIED IN PART 1 OF THIS FORM WITH RESPECT TO WHICH THE BORROWER ELECTS TO HAVE THE MATURITY EXTENDED TO A NEW MATURITY DATE OTHER THAN THE IMMEDIATELY FOLLOWING QUARTERLY PAYMENT DATE.

DIRECT ALL QUESTIONS ON HOW TO COMPLETE THIS FORM TO THE ASSIGNED CONTACT OFFICE FOR THE BORROWER:

Chief

Policy Analysis and Loan Management Staff

Telephone:  (202) 720-0424

WHEN COMPLETED, DELIVER THIS ORIGINAL FORM TO RUS AT THE ADDRESS OF THE CONTACT OFFICE INDICATED BELOW:

Chief

Policy Analysis and Loan Management Staff

Rural Utilities Service

U.S. Department of Agriculture

Mail Stop 1560

1400 Independence Avenue, SW

Washington, DC  20250-1560

Reference:  Section 313A Loan Guarantee

Telephone:  (202) 720-0424

Facsimile:   (202) 690-0717

THE BORROWER SHOULD NOT COMPLETE THIS FORM OR DELIVER IT TO RUS  IF THE BORROWER DESIRES TO HAVE THE MATURITY OF ALL OF THE ADVANCES IDENTIFIED IN PART 1 OF THIS FORM EXTENDED AUTOMATICALLY TO THE IMMEDIATELY FOLLOWING QUARTERLY PAYMENT DATE.

IF THE BORROWER DOES NOT RETURN THIS FORM TO RUS, THE MATURITY OF ALL OF THE ADVANCES IDENTIFIED IN PART 1 OF THIS FORM WILL BE EXTENDED AUTOMATICALLY TO THE IMMEDIATELY FOLLOWING QUARTERLY PAYMENT DATE.

****************************************************************

MATURITY EXTENSION ELECTION NOTICE (RUS APPROVAL REQ'D) - page 1

RUS

MATURITY EXTENSION ELECTION NOTICE

Manager

Federal Financing Bank

Reference is made to the following-described Future Advance Bond (the "Bond") payable to the Federal Financing Bank ("FFB"), which is guaranteed by the Rural Utilities Service ("RUS"):

Name of Borrower (the "Borrower"):

National Rural Utilities Cooperative Finance Corporation

FFB Bond Identifier: _____________________

RUS Bond Number: _____________________

Part 1 (To be completed by RUS):

Each of the advances of funds ("Advances") identified in this Part 1 will mature on _______________ (the "Maturity Date").

FFB ADVANCE IDENTIFIER	RUS ACCOUNT NUMBER	ORIGINAL ADVANCE DATE		ORIGINAL ADVANCE AMOUNT		OUTSTANDING PRINCIPAL AMOUNT
			$		$
			$		$
			$		$
			$		$

MATURITY EXTENSION ELECTION NOTICE (RUS APPROVAL REQ'D) - page 2

RUS

Part 2:

Notice is hereby given to FFB (and RUS) of the Borrower's election that the maturity of each of the Advances identified in this Part 2 be extended as follows:

FFB ADVANCE IDENTIFIER1		OPTIONAL PRINCIPAL PAYMENT2	AMOUNT OF PRINCIPAL TO BE EXTENDED3	NEW MATURITY DATE4	TYPE OF PREPAYMENT/ REFINANCING PRIVILEGE5	5-YEAR NO-CALL PERIOD6	PREMIUM OPTION7
	$
	$
	$
	$

 

1Complete 1 line in Part 2 for each Advance identified in Part 1 with respect to which the Borrower elects to have the maturity extended to a new Maturity Date other than the next Payment Date.  Insert the FFB Advance Identifier that FFB assigned to the respective Advance for each Advance identified in Part 1 with respect to which the Borrower elects to have the maturity so extended. 

2The Borrower has the option of making a payment of principal on the Maturity Date without any premium being charged.  For each Advance, insert the amount of any such optional principal payment that will be paid on the Maturity Date.

3For each Advance, insert the amount of principal for which the maturity is to be extended.  That amount must equal the difference between the outstanding principal amount for the respective Advance, as specified in Part 1, and the optional principal payment (if any) for such Advance inserted by the Borrower in Part 2.

4For each Advance, insert the particular calendar date that the Borrower selects to be the new Maturity Date" to be in effect for the respective Advance after the Maturity Extension, which new Maturity Date must meet all the criteria for Maturity Dates specified in section 7.3.1(a)(5) of the Bond Purchase Agreement referred to in the Bond.

5Elect 1 of the following 2 types of prepayment/refinancing privilege for an Advance only if the new Maturity Date selected for such Advance will occur on or after the fifth anniversary of the effective date of this Maturity Extension.  The 2 types of prepayment/refinancing privilege are: the market value premium (or discount) privilege ("M") and a fixed premium privilege ("F").  Insert in the box the letter-symbol for the particular type of prepayment/refinancing privilege elected.

6Elect 1 of the following 2 no-call period options for an Advance only if a fixed premium privilege is elected as the prepayment/refinancing privilege for such Advance.  The 2 no-call period options are: yes ("Y"), if the Borrower elects to have the fixed premium prepayment/refinancing privilege include a 5-year period during which the Advance will not be eligible for prepayment or refinancing, and no ("N"), if the Borrower elects to have the fixed premium prepayment/refinancing privilege not include any such a 5-year no-call period.  Insert in the box the letter-symbol for the particular no-call period option elected.

7Select 1 of the following 3 premium options for an Advance only if a fixed premium privilege is elected as the prepayment/refinancing privilege for such Advance.  The 3 premium options are: a 10% premium declining over 10 years ("X"), a 5% premium declining over 5 years ("V"), and par (no premium) ("P").  Insert in the box the letter-symbol for the particular premium option selected.

MATURITY EXTENSION ELECTION NOTICE (RUS APPROVAL REQ'D) - page 3

RUS

The undersigned hereby certifies that the authority of the undersigned to execute and deliver this Maturity Extension Election Notice on behalf of the Borrower is valid and in full force and effect on the date hereof.

NATIONAL RURAL UTILITIES COOPERATIVE

FINANCE CORPORATION

(the "Borrower")

By:

Name:

Title:

Date:

NOTICE OF RUS APPROVAL OF

MATURITY EXTENSION ELECTION NOTICE

Notice is hereby given to FFB that the preceding Maturity Extension Election Notice made by the Borrower identified therein has been approved by RUS for purposes of the Bond identified therein.

ADMINSTRATOR of the

RURAL UTILITIES SERVICE,

acting through his or her

duly assigned designee

By:

Name:

Title:

Date:

MATURITY EXTENSION ELECTION NOTICE (RUS APPROVAL REQ'D) - page 4

RUS

ANNEX 2-A

TO

FUTURE ADVANCE BOND

FORM

OF

PREPAYMENT ELECTION NOTICE

SPECIFIED PRINCIPAL AMOUNT(S)

(RUS APPROVAL REQUIRED)

RUS

PREPAYMENT ELECTION NOTICE

SPECIFIED PRINCIPAL AMOUNT(S)

(RUS APPROVAL REQUIRED)

****************************************************************

DIRECT ALL QUESTIONS ON HOW TO COMPLETE THIS FORM TO THE ASSIGNED CONTACT OFFICE FOR THE BORROWER:

Chief

Policy Analysis and Loan Management Staff

Telephone:  (202) 720-0424

WHEN COMPLETED, DELIVER THIS ORIGINAL FORM TO RUS AT THE ADDRESS OF THE CONTACT OFFICE INDICATED BELOW:

Chief

Policy Analysis and Loan Management Staff

Rural Utilities Service

U.S. Department of Agriculture

Mail Stop 1560

1400 Independence Avenue, SW

Washington, DC  20250-1560

Reference:  Section 313A Loan Guarantee

Telephone:  (202) 720-0424

Facsimile:   (202) 690-0717

****************************************************************

PREPAYMENT ELECTION NOTICE

SPECIFIED PRINCIPAL AMOUNT(S)

Manager

Federal Financing Bank

Reference is made to the following-described Future Advance Bond (the "Bond") payable to the Federal Financing Bank ("FFB"), which is guaranteed by the Rural Utilities Service ("RUS"):

Name of Borrower (the "Borrower"):

National Rural Utilities Cooperative Finance Corporation

FFB Bond Identifier: _____________________1

1Insert the FFB Bond Identifier that FFB assigned to the Bond (as provided in the Bond Purchase Agreement referred to in the Bond).

PREPAYMENT ELECTION NOTICE - SP PRN (RUS APPROVAL REQ'D) - page 1

RUS

Part 1:

Notice is hereby given to FFB (and RUS) of the Borrower's election to prepay all or a portion of the outstanding principal amount of the advances of funds ("Advances") identified in this Part 1:

FFB ADVANCE IDENTIFIER2	RUS ACCOUNT NUMBER3	ORIGINAL ADVANCE DATE4		ORIGINAL ADVANCE AMOUNT5		OUTSTANDING PRINCIPAL AMOUNT6
			$		$
			$		$
			$		$
			$		$

Part 2:

The Borrower intends to prepay all or a portion of the outstanding principal amount of each of the Advances identified in Part 1 on the following date (such date being the "Intended Prepayment Date"):

____________________________________7

 

2Complete 1 line in Part 1 for each Advance that the Borrower intends to prepay in whole or in part. For each Advance, insert the FFB Advance Identifier for the respective Advance as specified in the most recent billing notice delivered by RUS to the Borrower.

3For each Advance, insert the RUS Account Number for the respective Advance as specified in the most recent billing notice delivered by RUS to the Borrower.

4For each Advance, insert the date on which FFB made the respective Advance to the Borrower.

5For each Advance, insert the original principal amount of the respective Advance that FFB made to the Borrower.

6Insert the outstanding principal amount of each Advance specified in Part 1 as of the day before the date on which the Borrower intends to make a prepayment on the respective Advances.

7Insert the particular calendar date that the Borrower selects to be the date on which the Borrower intends to prepay the Advances specified in Part 1, which date must meet the criteria for Intended Prepayment Date prescribed in paragraph 16(b)(1) of the Bond.

PREPAYMENT ELECTION NOTICE - SP PRN (RUS APPROVAL REQ'D) - page 2

RUS

Part 3:

For each of the Advances identified in Part 1, the respective amount of principal that the Borrower intends to prepay on the Intended Prepayment Date is as follows:

FFB ADVANCE IDENTIFIER8		AMOUNT OF PRINCIPAL TO BE PREPAID9
	$
	$
	$
	$

The undersigned hereby certifies that the authority of the undersigned to execute and deliver this Prepayment Election Notice on behalf of the Borrower is valid and in full force and effect on the date hereof.

NATIONAL RURAL UTILITIES COOPERATIVE

FINANCE CORPORATION

(the "Borrower")

By:

Name:

Title:

Date:

8Complete 1 line in Part 3 for each Advance identified in Part 1.

9For each Advance, insert the amount of principal that will be prepaid on the Intended Prepayment Date.

PREPAYMENT ELECTION NOTICE - SP PRN (RUS APPROVAL REQ'D) - page 3

RUS

NOTICE OF RUS APPROVAL OF

PREPAYMENT ELECTION NOTICE

Notice is hereby given to FFB that the preceding Prepayment Election Notice made by the Borrower identified therein has been approved by RUS for purposes of the Bond identified therein.

ADMINSTRATOR of the

RURAL UTILITIES SERVICE,

acting through his or her

duly assigned designee

By:

Name:

Title:

Date:

PREPAYMENT ELECTION NOTICE - SP PRN (RUS APPROVAL REQ'D) - page 4

RUS

ANNEX 2-B

TO

FUTURE ADVANCE BOND

FORM

OF

PREPAYMENT ELECTION NOTICE

FIXED SUM TO BE APPLIED

(RUS APPROVAL REQUIRED)

RUS

PREPAYMENT ELECTION NOTICE

FIXED SUM TO BE APPLIED

(RUS APPROVAL REQUIRED)

****************************************************************

DIRECT ALL QUESTIONS ON HOW TO COMPLETE THIS FORM TO THE ASSIGNED CONTACT OFFICE FOR THE BORROWER:

Chief

Policy Analysis and Loan Management Staff

Telephone:  (202) 720-0424

WHEN COMPLETED, DELIVER THIS ORIGINAL FORM TO RUS AT THE ADDRESS OF THE CONTACT OFFICE INDICATED BELOW:

Chief

Policy Analysis and Loan Management Staff

Rural Utilities Service

U.S. Department of Agriculture

Mail Stop 1560

1400 Independence Avenue, SW

Washington, DC  20250-1560

Reference:  Section 313A Loan Guarantee

Telephone:  (202) 720-0424

Facsimile:   (202) 690-0717

****************************************************************

PREPAYMENT ELECTION NOTICE

FIXED SUM TO BE APPLIED

Manager

Federal Financing Bank

Reference is made to the following-described Future Advance Bond (the "Bond") payable to the Federal Financing Bank ("FFB"), which is guaranteed by the Rural Utilities Service ("RUS"):

Name of Borrower (the "Borrower"):

National Rural Utilities Cooperative Finance Corporation

FFB Bond Identifier: _____________________1

1Insert the FFB Bond Identifier that FFB assigned to the Bond (as provided in the Bond Purchase Agreement referred to in the Bond).

PREPAYMENT ELECTION NOTICE - FX SUM (RUS APPROVAL REQ'D) - page 1

RUS

Part 1:

Notice is hereby given to FFB (and RUS) of the Borrower's election to prepay all or a portion of the outstanding principal amount of the advances of funds ("Advances") identified in this Part 1:

FFB ADVANCE IDENTIFIER2	RUS ACCOUNT NUMBER3	ORIGINAL ADVANCE DATE4		ORIGINAL ADVANCE AMOUNT5		OUTSTANDING PRINCIPAL AMOUNT6
			$		$
			$		$
			$		$
			$		$

Part 2:

The Borrower intends to prepay all or a portion of the outstanding principal amount of the Advances identified in Part 1 on the following date (such date being the "Intended Prepayment Date"):

____________________________________7

2Complete 1 line in Part 1 for each Advance that the Borrower intends to prepay in whole or in part.  For each Advance, insert the FFB Advance Identifier for the respective Advance as specified in the most recent billing notice delivered by RUS to the Borrower.

3For each Advance, insert the RUS Account Number for the respective Advance as specified in the most recent billing notice delivered by RUS to the Borrower.

4For each Advance, insert the date on which FFB made the respective Advance to the Borrower.

5For each Advance, insert the original principal amount of the respective Advance that FFB made to the Borrower.

6Insert the outstanding principal amount of each Advance specified in Part 1 as of the day before the date on which the Borrower intends to make a prepayment on the respective Advances.

 

7Insert the particular calendar date that the Borrower selects to be the date on which the Borrower intends to prepay the Advances specified in Part 1, which date must meet the criteria for Intended Prepayment Date prescribed in paragraph 16(b)(1) of the Bond.

PREPAYMENT ELECTION NOTICE - FX SUM (RUS APPROVAL REQ'D) - page 2

RUS

Part 3:

The Borrower elects to have the following amount of funds applied by FFB toward a prepayment of the outstanding principal amount of the Advances identified in Part 1, in the order in which they appear in Part 1:

____________________________________8

The undersigned hereby certifies that the authority of the undersigned to execute and deliver this Prepayment Election Notice on behalf of the Borrower is valid and in full force and effect on the date hereof.

NATIONAL RURAL UTILITIES COOPERATIVE

FINANCE CORPORATION

(the "Borrower")

By:

Name:

Title:

Date:

8Insert the particular amount of funds that the Borrower elects to be applied by FFB toward a prepayment of the outstanding principal amount of the Advances identified in Part 1, in the order in which they appear in Part 1.

PREPAYMENT ELECTION NOTICE - FX SUM (RUS APPROVAL REQ'D) - page 3

RUS

NOTICE OF RUS APPROVAL OF

PREPAYMENT ELECTION NOTICE

Notice is hereby given to FFB that the preceding Prepayment Election Notice made by the Borrower identified therein has been approved by RUS for purposes of the Bond identified therein.

ADMINSTRATOR of the

RURAL UTILITIES SERVICE,

acting through his or her

duly assigned designee

By:

Name:

Title:

Date:

PREPAYMENT ELECTION NOTICE - FX SUM (RUS APPROVAL REQ'D) - page 4

RUS

ANNEX 3-A

TO

FUTURE ADVANCE BOND

FORM

OF

REFINANCING ELECTION NOTICE

RUS

REFINANCING ELECTION NOTICE

****************************************************************

DIRECT ALL QUESTIONS ON HOW TO COMPLETE THIS FORM TO THE ASSIGNED CONTACT OFFICE FOR THE BORROWER:

Chief

Policy Analysis and Loan Management Staff

Telephone:  (202) 720-0424

WHEN COMPLETED, DELIVER THIS ORIGINAL FORM TO FFB AT THE FOLLOWING ADDRESS:

Manager

Federal Financing Bank

Main Treasury Building

1500 Pennsylvania Avenue, NW

Washington, DC  20220

Telephone:  (202) 622-2470

Facsimile:   (202) 622-0707

 DELIVER A COPY OF THIS FORM TO RUS AT THE ADDRESS OF THE CONTACT OFFICE INDICATED BELOW:

Chief

Policy Analysis and Loan Management Staff

Rural Utilities Service

U.S. Department of Agriculture

Mail Stop 1560

1400 Independence Avenue, SW

Washington, DC  20250-1560

Reference:  Section 313A Loan Guarantee

Telephone:  (202) 720-0424

Facsimile:   (202) 690-0717

******************************************************************************

REFINANCING ELECTION NOTICE

Manager

Federal Financing Bank

Reference is made to the following-described Future Advance Bond (the "Bond") payable to the Federal Financing Bank ("FFB"), which is guaranteed by the Rural Utilities Service ("RUS"):

Name of Borrower (the "Borrower"):

National Rural Utilities Cooperative Corporation

REFINANCING ELECTION NOTICE - page 1

RUS

FFB Bond Identifier: ______________________1

Part 1:

Notice is hereby given to FFB (and RUS) of the Borrower's election to refinance the outstanding principal amount of each of the advances of funds ("Advances") identified in this Part 1:

FFB ADVANCE IDENTIFIER2	RUS ACCOUNT NUMBER3	ORIGINAL ADVANCE DATE4		ORIGINAL ADVANCE AMOUNT5		OUTSTANDING PRINCIPAL AMOUNT6
			$		$
			$		$
			$		$
			$		$

Part 2:

The Borrower intends to refinance the outstanding principal amount of each of the Advances identified in Part 1 on the following date (such date being the "Intended Refinancing Date"):

____________________________________7

1Insert the FFB Bond Identifier that FFB assigned to the Bond (as provided in the Bond Purchase Agreement referred to in the Bond).

2Complete 1 line in Part 1 for each Advance that the Borrower intends to refinance. For each Advance, insert the FFB Advance Identifier for the respective Advance as specified in the most recent billing notice delivered by RUS to the Borrower.

3For each Advance, insert the RUS Account Number for the respective Advance as specified in the most recent billing notice delivered by RUS to the Borrower.

4For each Advance, insert the date on which FFB made the respective Advance to the Borrower.

5For each Advance, insert the original principal amount of the respective Advance that FFB made to the Borrower.

6For each Advance, insert the outstanding principal amount of the respective Advance as of the day before the intended refinancing.

7Insert the particular calendar date that the Borrower selects to be the date on which the Borrower intends to refinance the Advances specified in Part 1, which date must meet the criteria for Intended Refinancing Date prescribed in paragraph 17(b)(1) of the Bond.

REFINANCING ELECTION NOTICE - page 2

RUS

Part 3:

Notice is hereby given to FFB (and RUS) of the Borrower's election that each of the Advances identified in Part 1 is to be refinanced as follows:

FFB ADVANCE IDENTIFIER8		AMOUNT OF PRINCIPAL TO BE REFINANCED9	NEW MATURITY DATE10	TYPE OF PREPAYMENT/ REFINANCING PRIVILEGE11	5-YEAR NO-CALL PERIOD12	PREMIUM OPTION13
	$
	$
	$
	$

8Complete 1 line in Part 3 for each Advance identified in Part 1 as being an Advance the Borrower elects to refinance.  Insert the FFB Advance Identifier that FFB assigned to the respective Advance.

9For each Advance, insert the amount of principal that is to be refinanced.  This will be the same amount as the outstanding principal amount of the respective Advance inserted in Part 1.

10For each Advance, insert the particular calendar date that the Borrower selects to be the new Maturity Date to be in effect for the respective Advance after the refinancing, which new Maturity Date must meet all the criteria for Maturity Dates specified in section 7.3.1(a)(5) of the Bond Purchase Agreement referred to in the Bond.

11Elect 1 of the following 2 types of prepayment/refinancing privilege for an Advance only if the new Maturity Date selected for such Advance will occur on or after the fifth anniversary of the effective date of this Maturity Extension.  The 2 types of prepayment/refinancing privilege are: the market value premium (or discount) privilege ("M") and a fixed premium privilege ("F").  Insert in the box the letter-symbol for the particular type of prepayment/refinancing privilege elected.

12Elect 1 of the following 2 no-call period options for an Advance only if a fixed premium privilege is elected as the prepayment/refinancing privilege for such Advance.  The 2 no-call period options are: yes ("Y"), if the Borrower elects to have the fixed premium prepayment/refinancing privilege include a 5-year period during which the Advance will not be eligible for prepayment or refinancing, and no ("N"), if the Borrower elects to have the fixed premium prepayment/refinancing privilege not include any such a 5-year no-call period.  Insert in the box the letter-symbol for the particular no-call period option elected.

13Select 1 of the following 3 premium options for an Advance only if a fixed premium privilege is elected as the prepayment/refinancing privilege for such Advance.  The 3 premium options are: a 10% premium declining over 10 years ("X"), a 5% premium declining over 5 years ("V"), and par (no premium) ("P").  Insert in the box the letter-symbol for the particular premium option selected.

REFINANCING ELECTION NOTICE - page 3

RUS

The undersigned hereby certifies that the authority of the undersigned to execute and deliver this Refinancing Election Notice on behalf of the Borrower is valid and in full force and effect on the date hereof.

NATIONAL RURAL UTILITIES COOPERATIVE

FINANCE CORPORATION

(the "Borrower")

By:

Name:

Title:

Date:

REFINANCING ELECTION NOTICE - page 4

RUS

ANNEX 3-B

TO

FUTURE ADVANCE BOND

FORM

OF

REFINANCING ELECTION NOTICE

(RUS APPROVAL REQUIRED)

RUS

REFINANCING ELECTION NOTICE

(RUS APPROVAL REQUIRED)

****************************************************************

DIRECT ALL QUESTIONS ON HOW TO COMPLETE THIS FORM TO THE ASSIGNED CONTACT OFFICE FOR THE BORROWER:

Chief

Policy Analysis and Loan Management Staff

Telephone:  (202) 720-0424

WHEN COMPLETED, DELIVER THIS ORIGINAL FORM TO RUS AT THE ADDRESS OF THE CONTACT OFFICE INDICATED BELOW:

Chief

Policy Analysis and Loan Management Staff

Rural Utilities Service

U.S. Department of Agriculture

Mail Stop 1560

1400 Independence Avenue, SW

Washington, DC  20250-1560

Reference:  Section 313A Loan Guarantee

Telephone:  (202) 720-0424

Facsimile:   (202) 690-0717

******************************************************************************

REFINANCING ELECTION NOTICE

Manager

Federal Financing Bank

Reference is made to the following-described Future Advance Bond (the "Bond") payable to the Federal Financing Bank ("FFB"), which is guaranteed by the Rural Utilities Service ("RUS"):

Name of Borrower (the "Borrower"):

National Rural Utilities Cooperative Corporation

FFB Bond Identifier: ______________________1

1Insert the FFB Bond Identifier that FFB assigned to the Bond (as provided in the Bond Purchase Agreement referred to in the Bond).

REFINANCING ELECTION NOTICE (RUS APPROVAL REQ'D) - page 1

RUS

Part 1:

Notice is hereby given to FFB (and RUS) of the Borrower's election to refinance the outstanding principal amount of each of the advances of funds ("Advances") identified in this Part 1:

FFB ADVANCE IDENTIFIER2	RUS ACCOUNT NUMBER3	ORIGINAL ADVANCE DATE4		ORIGINAL ADVANCE AMOUNT5		OUTSTANDING PRINCIPAL AMOUNT6
			$		$
			$		$
			$		$
			$		$

Part 2:

The Borrower intends to refinance the outstanding principal amount of each of the Advances identified in Part 1 on the following date (such date being the "Intended Refinancing Date"):

____________________________________7

2Complete 1 line in Part 1 for each Advance that the Borrower intends to refinance.  For each Advance, insert the FFB Advance Identifier for the respective Advance as specified in the most recent billing notice delivered by RUS to the Borrower.

3For each Advance, insert the RUS Account Number for the respective Advance as specified in the most recent billing notice delivered by RUS to the Borrower. 

4For each Advance, insert the date on which FFB made the respective Advance to the Borrower.

5For each Advance, insert the original principal amount of the respective Advance that FFB made to the Borrower.

6For each Advance, insert the outstanding principal amount of the respective Advance as of the day before the intended refinancing.

7Insert the particular calendar date that the Borrower selects to be the date on which the Borrower intends to refinance the Advances specified in Part 1, which date must meet the criteria for Intended Refinancing Date prescribed in paragraph 17(b)(1) of the Bond.

REFINANCING ELECTION NOTICE (RUS APPROVAL REQ'D) - page 2

RUS

Part 3:

Notice is hereby given to FFB (and RUS) of the Borrower's election that each of the Advances identified in Part 1 is to be refinanced as follows:

FFB ADVANCE IDENTIFIER8		AMOUNT OF PRINCIPAL TO BE REFINANCED9	NEW MATURITY DATE10	TYPE OF PREPAYMENT/ REFINANCING PRIVILEGE11	5-YEAR NO-CALL PERIOD12	PREMIUM OPTION13
	$
	$
	$
	$

8Complete 1 line in Part 3 for each Advance identified in Part 1 as being an Advance the Borrower elects to refinance.  Insert the FFB Advance Identifier that FFB assigned to the respective Advance.

9For each Advance, insert the amount of principal that is to be refinanced.  This will be the same amount as the outstanding principal amount of the respective Advance inserted in Part 1.

10For each Advance, insert the particular calendar date that the Borrower selects to be the new Maturity Date" to be in effect for the respective Advance after the refinancing, which new Maturity Date must meet all the criteria for Maturity Dates specified in section 7.3.1(a)(5) of the Bond Purchase Agreement referred to in the Bond.

11Elect 1 of the following 2 types of prepayment/refinancing privilege for an Advance only if the new Maturity Date selected for such Advance will occur on or after the fifth anniversary of the effective date of this Maturity Extension.  The 2 types of prepayment/refinancing privilege are: the market value premium (or discount) privilege ("M") and a fixed premium privilege ("F").  Insert in the box the letter-symbol for the particular type of prepayment/refinancing privilege elected.

12Elect 1 of the following 2 no-call period options for an Advance only if a fixed premium privilege is elected as the prepayment/refinancing privilege for such Advance.  The 2 no-call period options are: yes ("Y"), if the Borrower elects to have the fixed premium prepayment/refinancing privilege include a 5-year period during which the Advance will not be eligible for prepayment or refinancing, and no ("N"), if the Borrower elects to have the fixed premium prepayment/refinancing privilege not include any such a 5-year no-call period.  Insert in the box the letter-symbol for the particular no-call period option elected.

13Select 1 of the following 3 premium options for an Advance only if a fixed premium privilege is elected as the prepayment/refinancing privilege for such Advance.  The 3 premium options are: a 10% premium declining over 10 years ("X"), a 5% premium declining over 5 years ("V"), and par (no premium) ("P").  Insert in the box the letter-symbol for the particular premium option selected.

REFINANCING ELECTION NOTICE (RUS APPROVAL REQ'D) - page 3

RUS

The undersigned hereby certifies that the authority of the undersigned to execute and deliver this Refinancing Election Notice on behalf of the Borrower is valid and in full force and effect on the date hereof.

NATIONAL RURAL UTILITIES COOPERATIVE

FINANCE CORPORATION

(the "Borrower")

By:

Name:

Title:

Date:

NOTICE OF RUS APPROVAL OF

REFINANCING ELECTION NOTICE

Notice is hereby given to FFB that the preceding Refinancing Election Notice made by the Borrower identified therein has been approved by RUS for purposes of the Bond identified therein.

ADMINSTRATOR of the

RURAL UTILITIES SERVICE,

acting through his or her

duly assigned designee

By:

Name:

Title:

Date:

REFINANCING ELECTION NOTICE (RUS APPROVAL REQ'D) - page 4

EX-31.1

Exhibit 31.1

National Rural Utilities Cooperative Finance Corporation

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(18 U.S.C. Section 1350)

I, Sheldon C. Petersen, certify that:

1. I have reviewed this report on Form 10-Q of National Rural Utilities Cooperative Finance Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s board of directors:

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:                    January 14, 2013

/s/ SHELDON C. PETERSEN

Sheldon C. Petersen

Chief Executive Officer

A signed original of this written statement required by Section 302 has been provided to National Rural Utilities Cooperative Finance Corporation and will be retained by National Rural Utilities Cooperative Finance Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-31.2

Exhibit 31.2

National Rural Utilities Cooperative Finance Corporation

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(18 U.S.C. Section 1350)

I, Steven L. Lilly, certify that:

1. I have reviewed this report on Form 10-Qof National Rural Utilities Cooperative Finance Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s board of directors:

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:                   January 14, 2013

/s/ STEVEN L. LILLY

Steven L. Lilly

Chief Financial Officer

A signed original of this written statement required by Section 302 has been provided to National Rural Utilities Cooperative Finance Corporation and will be retained by National Rural Utilities Cooperative Finance Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.1

Exhibit 32.1

National Rural Utilities Cooperative Finance Corporation

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(18 U.S.C. Section 1350)

     Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sections 1350(a) and (b)), I, the Chief Executive Officer of National Rural Utilities Cooperative Finance Corporation (“CFC”), hereby certify to the best of my knowledge as follows:

1. CFC’s November 30, 2012  Form 10-Q filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CFC.

January 14, 2013

By:  /s/  SHELDON C. PETERSEN

Sheldon C. Petersen

Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to National Rural Utilities Cooperative Finance Corporation and will be retained by National Rural Utilities Cooperative Finance Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

National Rural Utilities Cooperative Finance Corporation

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(18 U.S.C. Section 1350)

     Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sections 1350(a) and (b)), I, the Chief Financial Officer of National Rural Utilities Cooperative Finance Corporation (“CFC”), hereby certify to the best of my knowledge as follows:

1. CFC’s November 30, 2012 Form 10-Q filed with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of CFC.

January 14, 2013

By:  /s/ STEVEN L. LILLY

Steven L. Lilly

Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to National Rural Utilities Cooperative Finance Corporation and will be retained by National Rural Utilities Cooperative Finance Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Loans and Commitments (Details 3) (USD $) In Thousands, unless otherwise specified	Nov. 30, 2012	May 31, 2012	Nov. 30, 2011
Payment Status of Loans
30-89 days past due	$ 1,530
90 days or more past due	38,775	38,549
Total past due	40,305	38,549
Current	19,056,869	18,873,193
Total recorded investment in loans	19,097,174	18,911,742	18,314,593
Non-accrual loans	42,726	41,213
As a % of total loans
30-89 days past due	0.01%
90 days or more past due	0.20%	0.20%
Total past due	0.21%	0.20%
Current	99.79%	99.80%
Total financing receivables	100.00%	100.00%
Non-accrual loans	0.22%	0.22%
CFC
Payment Status of Loans
30-89 days past due	1,530
90 days or more past due	34,619	34,243
Total past due	36,149	34,243
Current	17,830,554	17,711,654
Total recorded investment in loans	17,866,703	17,745,897
Non-accrual loans	36,149	34,243
CFC | Distribution
Payment Status of Loans
30-89 days past due	1,530
90 days or more past due	29,619	29,243
Total past due	31,149	29,243
Current	13,852,833	14,046,228
Total recorded investment in loans	13,883,982	14,075,471
Non-accrual loans	31,149	29,243
CFC | Power supply
Payment Status of Loans
90 days or more past due	5,000	5,000
Total past due	5,000	5,000
Current	3,904,155	3,591,820
Total recorded investment in loans	3,909,155	3,596,820
Non-accrual loans	5,000	5,000
CFC | Statewide and associate
Payment Status of Loans
Current	73,566	73,606
Total recorded investment in loans	73,566	73,606
RTFC
Payment Status of Loans
90 days or more past due	4,156	4,306
Total past due	4,156	4,306
Current	532,603	567,260
Total recorded investment in loans	536,759	571,566
Non-accrual loans	6,577	6,970
NCSC
Payment Status of Loans
Current	693,712	594,279
Total recorded investment in loans	$ 693,712	$ 594,279

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Fair Value Measurement (Details) (USD $) In Thousands, unless otherwise specified							3 Months Ended	6 Months Ended
	Nov. 30, 2012	May 31, 2012	Nov. 30, 2012 Recurring basis Level 1	May 31, 2012 Recurring basis Level 1	Nov. 30, 2012 Recurring basis Level 2	May 31, 2012 Recurring basis Level 2	Nov. 30, 2011 Non-recurring basis	Nov. 30, 2011 Non-recurring basis	Nov. 30, 2012 Non-recurring basis Level 3	May 31, 2012 Non-recurring basis Level 3
Fair value of assets and liabilities
Derivative assets	$ 273,480	$ 296,036			$ 273,480	$ 296,036
Derivative liabilities	630,919	654,125			630,919	654,125
Investments in common stock			2,354	1,467
Non-performing loans, net of specific reserves									21,156	16,517
Total losses							$ (167)	$ (2,220)

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Long-Term Debt (Details) (USD $)				6 Months Ended																	0 Months Ended								6 Months Ended
	Nov. 30, 2012	Oct. 16, 2012	May 31, 2012	Nov. 30, 2012 Federal Agricultural Mortgage Corporation	Nov. 30, 2012 Unsecured long-term debt	May 31, 2012 Unsecured long-term debt	Nov. 30, 2012 Unsecured medium-term notes	Oct. 16, 2012 Unsecured medium-term notes	Sep. 30, 2012 Unsecured medium-term notes	May 31, 2012 Unsecured medium-term notes	Nov. 30, 2012 Medium-term notes sold through dealers	May 31, 2012 Medium-term notes sold through dealers	Nov. 30, 2012 Medium-term notes sold to members	May 31, 2012 Medium-term notes sold to members	Nov. 30, 2012 Unsecured notes payable	May 31, 2012 Unsecured notes payable	Nov. 30, 2012 Unsecured notes payable Federal Financing Bank	May 31, 2012 Unsecured notes payable Federal Financing Bank	Nov. 30, 2012 Secured long-term debt	May 31, 2012 Secured long-term debt	Oct. 10, 2012 Collateral trust bonds	Nov. 30, 2012 Collateral trust bonds	Oct. 16, 2012 Collateral trust bonds	May 31, 2012 Collateral trust bonds	Nov. 30, 2012 Secured notes payable	May 31, 2012 Secured notes payable	Nov. 30, 2012 Secured notes payable Federal Agricultural Mortgage Corporation	May 31, 2012 Secured notes payable Federal Agricultural Mortgage Corporation	Nov. 30, 2012 Committed loan facilities Federal Financing Bank
Long-term debt
Long-term debt before unamortized discount							$ 1,451,655,000			$ 1,781,866,000	$ 1,295,252,000	$ 1,692,605,000	$ 156,403,000	$ 89,261,000	$ 3,712,982,000	$ 3,457,982,000	$ 3,674,000,000	$ 3,419,000,000				$ 5,239,372,000		$ 6,065,000,000			$ 1,299,000,000	$ 1,165,000,000
Unamortized discount							(634,000)			(971,000)					(1,011,000)	(1,093,000)						(184,070,000)		(12,398,000)
Total long-term debt	11,201,472,000		12,151,967,000		5,162,992,000	5,237,784,000	1,451,021,000			1,780,895,000					3,711,971,000	3,456,889,000			6,038,480,000	6,914,183,000		5,055,302,000		6,052,602,000	983,178,000	861,581,000
Amount borrowed				133,000,000																									255,000,000
Maximum borrowing capacity																											3,900,000,000		325,000,000
Stated interest rate (as a percent)									8.00%														4.023%
Aggregate principal amount of debt exchanged																					340,000,000
Aggregate principal amount of debt issued in exchange								379,000,000
Cash paid in exchange		$ 134,000,000

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Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended		6 Months Ended	0 Months Ended	6 Months Ended
	Nov. 30, 2012	May 31, 2012	Nov. 30, 2012 Minimum	Nov. 30, 2012 Maximum	Nov. 30, 2012 Maximum	Nov. 30, 2012 Carrying value	May 31, 2012 Carrying value	Nov. 30, 2012 Fair value	May 31, 2012 Fair value
Assets:
Cash and cash equivalents						$ 439,183	$ 191,167	$ 439,183	$ 191,167
Restricted cash	8,649	7,694				8,649	7,694	8,649	7,694
Investments						309,932	59,045	309,932	59,045
Loans to members, net						18,956,470	18,776,286	20,564,234	20,405,353
Debt service reserve funds	39,803	39,803				39,803	39,803	39,803	39,803
Derivative instruments	273,480	296,036				273,480	296,036	273,480	296,036
Liabilities:
Short-term debt	6,050,861	4,493,434				6,050,861	4,493,434	6,084,603	4,498,565
Long-term debt	11,201,472	12,151,967				11,201,472	12,151,967	13,011,698	13,936,540
Guarantee liability						26,978	28,663	29,818	31,518
Derivative instruments	630,919	654,125				630,919	654,125	630,919	654,125
Subordinated deferrable debt	186,440	186,440				186,440	186,440	188,227	187,335
Total members' subordinated certificates						$ 1,772,207	$ 1,722,744	$ 1,928,999	$ 1,880,558
Minimum period from which the option to select fixed rates can be exercised	1 year
Frequency of interest rates reset of variable-rate loans	15 days
Maturity period of short-term debt for which the fair value is estimated based on quoted market rates			90 days
Maturity period of short-term debt for which the carrying value is a reasonable estimate of fair value					90 days
Term of deposit assets				1 year

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Short-Term Debt and Credit Arrangements (Details) (USD $) In Thousands, unless otherwise specified	Nov. 30, 2012	May 31, 2012
Short-Term Debt
Short-term debt	$ 3,461,650	$ 3,246,564
Total long-term debt maturing within one year	2,589,211	1,246,870
Total short-term debt	6,050,861	4,493,434
Commercial paper sold through dealers, net of discounts
Short-Term Debt
Short-term debt	1,009,898	1,404,901
Commercial paper sold directly to members, at par
Short-Term Debt
Short-term debt	1,408,371	997,778
Commercial paper sold directly to non-members, at par
Short-Term Debt
Short-term debt	39,828	70,479
Select notes
Short-Term Debt
Short-term debt	51,852
Daily liquidity fund notes sold directly to members
Short-Term Debt
Short-term debt	656,701	478,406
Bank bid notes
Short-Term Debt
Short-term debt	295,000	295,000
Medium-term notes sold through dealers
Short-Term Debt
Total long-term debt maturing within one year	630,262	232,830
Medium-term notes sold to members
Short-Term Debt
Total long-term debt maturing within one year	396,806	409,961
Secured collateral trust bonds
Short-Term Debt
Total long-term debt maturing within one year	1,204,783	254,962
Member subordinated certificates
Short-Term Debt
Total long-term debt maturing within one year	15,080	16,710
Secured notes payable
Short-Term Debt
Total long-term debt maturing within one year	336,872	327,006
Unsecured notes payable
Short-Term Debt
Total long-term debt maturing within one year	$ 5,408	$ 5,401

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General Information and Accounting Policies (Details 2) (USD $)	3 Months Ended		6 Months Ended
	Nov. 30, 2012	Nov. 30, 2011	Nov. 30, 2012	Nov. 30, 2011	May 31, 2012
Loan Sales
Carrying amount of loans sold			$ 98,000,000	$ 82,000,000
Components of interest income
Interest on investments	1,576,000	853,000	2,514,000	1,781,000
Fee income	1,876,000	1,584,000	3,904,000	3,990,000
Total interest income	241,630,000	237,755,000	481,715,000	485,005,000
Deferred conversion fees	18,000,000		18,000,000		20,000,000
Long-term fixed-rate loans
Components of interest income
Total interest income	218,247,000	219,841,000	436,187,000	445,187,000
Long-term variable-rate loans
Components of interest income
Total interest income	4,893,000	4,655,000	10,918,000	12,907,000
Line of credit loans
Components of interest income
Total interest income	7,413,000	6,738,000	15,105,000	16,364,000
Restructured loans
Components of interest income
Total interest income	$ 7,625,000	$ 4,084,000	$ 13,087,000	$ 4,776,000

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Long-Term Debt (Tables)

6 Months Ended

Nov. 30, 2012

Long-Term Debt

Summary of long-term debt outstanding

(dollar amounts in thousands)	November 30, 2012			May 31, 2012
Unsecured long-term debt:
Medium-term notes sold through dealers	$	1,295,252		$	1,692,605
Medium-term notes sold to members	156,403			89,261
Subtotal	1,451,655			1,781,866
Unamortized discount	(634		)	(971		)
Total unsecured medium-term notes	1,451,021			1,780,895
Unsecured notes payable	3,712,982			3,457,982
Unamortized discount	(1,011		)	(1,093		)
Total unsecured notes payable	3,711,971			3,456,889
Total unsecured long-term debt	5,162,992			5,237,784
Secured long-term debt:
Collateral trust bonds	5,239,372			6,065,000
Unamortized discount	(184,070		)	(12,398		)
Total secured collateral trust bonds	5,055,302			6,052,602
Secured notes payable	983,178			861,581
Total secured long-term debt	6,038,480			6,914,183
Total long-term debt	$	11,201,472		$	12,151,967

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Derivative Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended		12 Months Ended
	Nov. 30, 2012	Nov. 30, 2011	Nov. 30, 2012	Nov. 30, 2011	May 31, 2012
Derivative Financial Instruments
Derivative forward value			$ 961	$ (158,510)
Derivative losses	(3,766)	(47,753)	(28,358)	(159,324)
Interest rate swaps
Derivative Financial Instruments
Notional amounts outstanding	9,291,272		9,291,272		8,995,993
Weighted-average rate paid (as a percent)			2.68%		2.75%
Weighted-average rate received (as a percent)			1.98%		2.20%
Derivative cash settlements	(15,456)	(982)	(29,319)	(814)
Derivative forward value	11,690	(46,771)	961	(158,510)
Aggregate fair value of interest rate swaps with rating triggers that were in net liability position	299,000		299,000
Interest rate swaps | Counterparty Group
Derivative Financial Instruments
Notional amounts outstanding	6,893,779		6,893,779
Entity's required payment	(290,835)		(290,835)
Additional collateral amount	38,257		38,257
Aggregate fair value of interest rate swaps with rating triggers that were in net liability position	(252,578)		(252,578)
Interest rate swaps | Counterparty Group | Mutual rating trigger falls to | Baa1
Derivative Financial Instruments
Notional amounts outstanding	3,000		3,000
Entity's required payment	(157)		(157)
Aggregate fair value of interest rate swaps with rating triggers that were in net liability position	(157)		(157)
Interest rate swaps | Counterparty Group | Mutual rating trigger falls below | Baa1
Derivative Financial Instruments
Notional amounts outstanding	6,890,779		6,890,779
Entity's required payment	(290,678)		(290,678)
Additional collateral amount	38,257		38,257
Aggregate fair value of interest rate swaps with rating triggers that were in net liability position	(252,421)		(252,421)
Interest rate swaps | Specific Counterparty
Derivative Financial Instruments
Notional amounts outstanding	650,000		650,000
Additional collateral amount	16,000		16,000
Number of counterparties			1
Pay fixed-receive variable
Derivative Financial Instruments
Notional amounts outstanding	5,790,832		5,790,832		5,275,553
Weighted-average rate paid (as a percent)			3.62%		3.78%
Weighted-average rate received (as a percent)			0.30%		0.45%
Pay variable-receive fixed
Derivative Financial Instruments
Notional amounts outstanding	$ 3,500,440		$ 3,500,440		$ 3,720,440
Weighted-average rate paid (as a percent)			1.12%		1.29%
Weighted-average rate received (as a percent)			4.75%		4.68%

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Loans and Commitments (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Nov. 30, 2012	Nov. 30, 2011	Nov. 30, 2012	Nov. 30, 2011	May 31, 2012
Activity in the loan loss allowance
Balance at the beginning of the period	$ 152,501	$ 152,100	$ 143,326	$ 161,177
(Recovery of) provision for loan losses	(3,817)	(2,995)	5,305	(12,125)
Recoveries of loans previously charged-off	53	53	106	106
Balance at the end of the period	148,737	149,158	148,737	149,158
Ending balance of the allowance:
Collectively evaluated	127,167		127,167		118,065
Individually evaluated	21,570		21,570		25,261
Total ending balance of the allowance	148,737	149,158	148,737	149,158
Recorded investment in loans:
Collectively evaluated	19,014,731		19,014,731		18,414,840
Individually evaluated	82,443		82,443		496,902
Total recorded investment in loans	19,097,174	18,314,593	19,097,174	18,314,593	18,911,742
Loans to members, net	18,948,437		18,948,437		18,768,416
Deferred origination costs	8,033	7,050	8,033	7,050	7,870
CFC
Activity in the loan loss allowance
Balance at the beginning of the period	136,781	134,457	126,941	143,706
(Recovery of) provision for loan losses	(3,256)	(3,625)	6,531	(12,927)
Recoveries of loans previously charged-off	53	53	106	106
Balance at the end of the period	133,578	130,885	133,578	130,885
Ending balance of the allowance:
Collectively evaluated	113,627		113,627		103,681
Individually evaluated	19,951		19,951		23,260
Total ending balance of the allowance	133,578	130,885	133,578	130,885
Recorded investment in loans:
Collectively evaluated	17,790,837		17,790,837		17,255,965
Individually evaluated	75,866		75,866		489,932
Total recorded investment in loans	17,866,703		17,866,703		17,745,897
Loans to members, net	17,733,125		17,733,125		17,618,956
RTFC
Activity in the loan loss allowance
Balance at the beginning of the period	8,877	8,649	8,562	8,389
(Recovery of) provision for loan losses	(563)	824	(248)	1,084
Balance at the end of the period	8,314	9,473	8,314	9,473
Ending balance of the allowance:
Collectively evaluated	6,695		6,695		6,561
Individually evaluated	1,619		1,619		2,001
Total ending balance of the allowance	8,314	9,473	8,314	9,473
Recorded investment in loans:
Collectively evaluated	530,182		530,182		564,596
Individually evaluated	6,577		6,577		6,970
Total recorded investment in loans	536,759		536,759		571,566
Loans to members, net	528,445		528,445		563,004
NCSC
Activity in the loan loss allowance
Balance at the beginning of the period	6,843	8,994	7,823	9,082
(Recovery of) provision for loan losses	2	(194)	(978)	(282)
Balance at the end of the period	6,845	8,800	6,845	8,800
Ending balance of the allowance:
Collectively evaluated	6,845		6,845		7,823
Total ending balance of the allowance	6,845	8,800	6,845	8,800
Recorded investment in loans:
Collectively evaluated	693,712		693,712		594,279
Total recorded investment in loans	693,712		693,712		594,279
Loans to members, net	$ 686,867		$ 686,867		$ 586,456

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Loans and Commitments (Details) (USD $) In Thousands, unless otherwise specified	Nov. 30, 2012	Aug. 31, 2012	May 31, 2012	Nov. 30, 2011	Aug. 31, 2011	May 31, 2011
Loans outstanding
Total recorded investment in loans	$ 19,097,174		$ 18,911,742	$ 18,314,593
Deferred origination costs	8,033		7,870	7,050
Less: Allowance for loan losses	(148,737)	(152,501)	(143,326)	(149,158)	(152,100)	(161,177)
Net loans outstanding	18,956,470		18,776,286	18,172,485
Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	14,915,649		14,129,424
Non-performing loans
Loans outstanding
Total recorded investment in loans	42,726		41,213
Non-performing loans | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	1,828
Restructured loans
Loans outstanding
Total recorded investment in loans	39,717		455,689
Restructured loans | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	5,000		50,918
CFC
Loans outstanding
Total recorded investment in loans	17,866,703		17,745,897
Less: Allowance for loan losses	(133,578)	(136,781)	(126,941)	(130,885)	(134,457)	(143,706)
CFC | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	13,426,776		13,028,657
CFC | Distribution
Loans outstanding
Total recorded investment in loans	13,883,982		14,075,471
CFC | Distribution | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	9,344,109		9,191,227
CFC | Power supply
Loans outstanding
Total recorded investment in loans	3,909,155		3,596,820
CFC | Power supply | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	3,962,776		3,714,241
CFC | Statewide and associate
Loans outstanding
Total recorded investment in loans	73,566		73,606
CFC | Statewide and associate | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	119,891		123,189
RTFC
Loans outstanding
Total recorded investment in loans	536,759		571,566
Less: Allowance for loan losses	(8,314)	(8,877)	(8,562)	(9,473)	(8,649)	(8,389)
RTFC | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	318,664		341,792
NCSC
Loans outstanding
Total recorded investment in loans	693,712		594,279
Less: Allowance for loan losses	(6,845)	(6,843)	(7,823)	(8,800)	(8,994)	(9,082)
NCSC | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	1,170,209		758,975
Long-term fixed-rate loans
Loans outstanding
Total recorded investment in loans	16,982,140		16,742,914
Long-term fixed-rate loans | CFC | Restructured loans
Loans outstanding
Total recorded investment in loans	39,717		455,689
Long-term fixed-rate loans | RTFC | Non-performing loans
Loans outstanding
Total recorded investment in loans	6,577		6,970
Long-term variable-rate loans
Loans outstanding
Total recorded investment in loans	607,312		764,815
Long-term variable-rate loans | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	5,754,729		5,437,881
Long-term variable-rate loans | CFC | Non-performing loans
Loans outstanding
Total recorded investment in loans	8,194		8,194
Long-term variable-rate loans | CFC | Restructured loans | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments			45,918
Loans guaranteed by RUS
Loans outstanding
Total recorded investment in loans	213,275		219,084
Line of credit loans
Loans outstanding
Total recorded investment in loans	1,294,447		1,184,929
Line of credit loans | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	9,160,920		8,691,543
Line of credit loans | CFC | Non-performing loans
Loans outstanding
Total recorded investment in loans	27,955		26,049
Line of credit loans | CFC | Non-performing loans | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	1,828
Line of credit loans | CFC | Restructured loans | Unadvanced commitments
Unadvanced commitments
Total Unadvanced commitments	$ 5,000		$ 5,000

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Guarantees (Details) (USD $)			6 Months Ended
	Nov. 30, 2012	May 31, 2012	Nov. 30, 2012 Long-term variable-rate loans	Nov. 30, 2012 CFC	May 31, 2012 CFC	Nov. 30, 2012 CFC Distribution	May 31, 2012 CFC Distribution	Nov. 30, 2012 CFC Power supply	May 31, 2012 CFC Power supply	Nov. 30, 2012 CFC Statewide and associate	May 31, 2012 CFC Statewide and associate	Nov. 30, 2012 RTFC	May 31, 2012 RTFC	Nov. 30, 2012 NCSC	May 31, 2012 NCSC	Nov. 30, 2012 Financial guarantees Long-term tax-exempt bonds	May 31, 2012 Financial guarantees Long-term tax-exempt bonds	Nov. 30, 2012 Financial guarantees Long-term fixed-rate loans	Nov. 30, 2012 Financial guarantees Long-term variable-rate loans	May 31, 2012 Financial guarantees Long-term variable-rate loans	Nov. 30, 2012 Indemnifications of tax benefit transfers	May 31, 2012 Indemnifications of tax benefit transfers	Nov. 30, 2012 Letters of credit	May 31, 2012 Letters of credit	Nov. 30, 2012 Letters of credit Letters of credit, secured	Nov. 30, 2012 Letters of credit Master letter of credit	Nov. 30, 2012 Letters of credit Master letter of credit subject to material adverse change clauses	Nov. 30, 2012 Letters of credit Adjustable and floating-rate tax-exempt bonds	May 31, 2012 Letters of credit Adjustable and floating-rate tax-exempt bonds	Nov. 30, 2012 Other guarantees	May 31, 2012 Other guarantees
Guarantees
Total	$ 1,127,668,000	$ 1,249,330,000		$ 1,092,420,000	$ 1,202,031,000	$ 269,610,000	$ 340,385,000	$ 816,296,000	$ 854,444,000	$ 6,514,000	$ 7,202,000	$ 4,738,000	$ 1,026,000	$ 30,510,000	$ 46,273,000	$ 555,960,000	$ 573,110,000	$ 125,000,000	$ 481,000,000	$ 498,000,000	$ 2,419,000	$ 49,771,000	$ 452,373,000	$ 504,920,000				$ 125,000,000	$ 125,000,000	$ 116,916,000	$ 121,529,000
Maximum potential exposure																		75,000,000												118,000,000
Amount of guarantee secured																									185,000,000
Maximum additional amount potentially required to be issued																										837,000,000
Commitments that may be used for the issuance of letters of credit or line of credit loan advances																										649,000,000	496,000,000
Commitment remaining under letter of credit facility																										341,000,000
Amount of unsecured guarantees	384,000,000	385,000,000
Unsecured guarantees as a percentage of total guarantees	34.00%	31.00%
Value of bonds issued under liquidity provider obligations			$ 606,000,000

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Short-Term Debt and Credit Arrangements (Details 2) (USD $)	6 Months Ended	12 Months Ended
	Nov. 30, 2012	May 31, 2012
Requirement
Minimum average adjusted TIER over the six most recent fiscal quarters	1.025
Minimum adjusted TIER for the most recent fiscal year	1.05
Maximum ratio of adjusted senior debt to total equity	10.00
Actual
Minimum average adjusted TIER over the six most recent fiscal quarters	1.19	1.21
Minimum adjusted TIER for the most recent fiscal year	1.18	1.18
Maximum ratio of adjusted senior debt to total equity	5.96	5.97
Revolving credit agreements
Revolving Credit Agreements
Maximum borrowing capacity	2,845,000,000	2,845,000,000
Maximum borrowing capacity	100,000,000
Total available	2,840,262,000	2,843,750,000
Outstanding letters of credit	4,488,000	1,000,000
Revolving credit agreements | Three-year agreement
Revolving Credit Agreements
Term of credit agreements	3 years
Total available	1,125,000,000	1,125,000,000
Facility fee per year	0.15%
Revolving credit agreements | Four-year agreement
Revolving Credit Agreements
Term of credit agreements	4 years
Total available	883,875,000	883,875,000
Outstanding letters of credit	1,000,000	1,000,000
Facility fee per year	0.10%
Revolving credit agreements | Five-year agreement
Revolving Credit Agreements
Term of credit agreements	5 years
Total available	831,387,000	834,875,000
Outstanding letters of credit	3,488,000
Facility fee per year	0.10%

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Loans and Commitments

6 Months Ended

Nov. 30, 2012

Loans and Commitments

Loans and Commitments

(3)           Loans and Commitments

Loans outstanding to members and unadvanced commitments by loan type and by member class are summarized as follows:

	November 30, 2012					May 31, 2012
(dollar amounts in thousands)	Loans outstanding			Unadvanced commitments (1)		Loans outstanding			Unadvanced commitments (1)
Total by loan type (2):
Long-term fixed-rate loans	$	16,982,140		$	—	$	16,742,914		$	—
Long-term variable-rate loans	607,312			5,754,729		764,815			5,437,881
Loans guaranteed by RUS (3)	213,275			—		219,084			—
Line of credit loans	1,294,447			9,160,920		1,184,929			8,691,543
Total loans outstanding	19,097,174			14,915,649		18,911,742			14,129,424
Deferred origination costs	8,033			—		7,870			—
Less: Allowance for loan losses	(148,737		)	—		(143,326		)	—
Net loans outstanding	$	18,956,470		$	14,915,649	$	18,776,286		$	14,129,424
Total by member class (2):
CFC:
Distribution	$	13,883,982		$	9,344,109	$	14,075,471		$	9,191,227
Power supply	3,909,155			3,962,776		3,596,820			3,714,241
Statewide and associate	73,566			119,891		73,606			123,189
CFC total	17,866,703			13,426,776		17,745,897			13,028,657
RTFC	536,759			318,664		571,566			341,792
NCSC	693,712			1,170,209		594,279			758,975
Total loans outstanding	$	19,097,174		$	14,915,649	$	18,911,742		$	14,129,424

(1) The interest rate on unadvanced commitments is not set until drawn, therefore, the long-term unadvanced loan commitments have been classified in this table as variable-rate unadvanced commitments. However, at the time of the advance, the borrower may select a fixed or a variable rate on the new loan.

(2) Includes non-performing and restructured loans.

(3) “RUS” is the Rural Utilities Service.

Non-performing and restructured loans outstanding and unadvanced commitments to members included in the table above are summarized as follows by loan type and by company:

	November 30, 2012				May 31, 2012
	Loans		Unadvanced		Loans		Unadvanced
(dollar amounts in thousands)	outstanding		commitments (1)		outstanding		commitments (1)
Non-performing and restructured loans:
Non-performing loans:
CFC:
Long-term variable-rate loans	$	8,194	$	—	$	8,194	$	—
Line of credit loans (2)	27,955		1,828		26,049		—
RTFC:
Long-term fixed-rate loans	6,577		—		6,970		—
Total non-performing loans	$	42,726	$	1,828	$	41,213	$	—
Restructured loans:
CFC:
Long-term fixed-rate loans	$	39,717	$	—	$	455,689	$	—
Long-term variable-rate loans (3)	—		—		—		45,918
Line of credit loans (3)	—		5,000		—		5,000
Total restructured loans	$	39,717	$	5,000	$	455,689	$	50,918

(1) The interest rate on unadvanced commitments is not set until drawn, therefore, the long-term unadvanced loan commitments have been classified in this table as variable-rate unadvanced commitments. However, at the time of the advance, the borrower may select a fixed or a variable rate on the new loan.

(2) The unadvanced commitment is available under a debtor-in-possession facility for which the principal and interest has priority over all other claims.

(3) The unadvanced commitment is part of the terms outlined in the related restructure agreement. Loans advanced under these commitments would be classified as performing. Principal and interest due under these performing loans would be in addition to scheduled payments due under the restructured loan agreement.

Unadvanced Loan Commitments

A total of $1,444 million and $1,303 million of unadvanced commitments at November 30, 2012 and May 31, 2012, respectively, represented unadvanced commitments related to committed lines of credit loans that are not subject to a material adverse change clause at the time of each loan advance. As such, we will 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 following table summarizes the available balance under committed lines of credit at November 30, 2012, and the related maturities by fiscal year and thereafter as follows:

	Available		Notional maturities of committed lines of credit
(dollar amounts in thousands)	balance		2013		2014		2015		2016		2017		Thereafter
Committed lines of credit	$	1,444,133	$	9,333	$	281,733	$	116,754	$	223,492	$	559,562	$	253,259

The remaining unadvanced commitments totaling $13,472 million and $12,826 million at November 30, 2012 and May 31, 2012, respectively, were generally subject to material adverse change clauses. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. 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.

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

The above items all contribute to our expectation that the majority of the unadvanced commitments will expire without being fully drawn upon and that the total unadvanced amount does not necessarily represent future cash funding requirements.

Payment Status of Loans

The tables below show an analysis of the age of the recorded investment in loans outstanding by member class:

	November 30, 2012
(dollar amounts in thousands)	30-89 days past due			90 days or more past due (1)			Total past due			Current			Total financing receivables			Non-accrual loans
CFC:
Distribution	$	1,530		$	29,619		$	31,149		$	13,852,833		$	13,883,982		$	31,149
Power supply	—			5,000			5,000			3,904,155			3,909,155			5,000
Statewide and associate	—			—			—			73,566			73,566			—
CFC total	1,530			34,619			36,149			17,830,554			17,866,703			36,149
RTFC	—			4,156			4,156			532,603			536,759			6,577
NCSC	—			—			—			693,712			693,712			—
Total loans outstanding	$	1,530		$	38,775		$	40,305		$	19,056,869		$	19,097,174		$	42,726
As a % of total loans	0.01		%	0.20		%	0.21		%	99.79		%	100.00		%	0.22		%

(1) All loans 90 days or more past due are on non-accrual status.

	May 31, 2012
(dollar amounts in thousands)	30-89 days past due			90 days or more past due (1)			Total past due			Current			Total financing receivables			Non-accrual loans
CFC:
Distribution	$	—		$	29,243		$	29,243		$	14,046,228		$	14,075,471		$	29,243
Power supply	—			5,000			5,000			3,591,820			3,596,820			5,000
Statewide and associate	—			—			—			73,606			73,606			—
CFC total	—			34,243			34,243			17,711,654			17,745,897			34,243
RTFC	—			4,306			4,306			567,260			571,566			6,970
NCSC	—			—			—			594,279			594,279			—
Total loans outstanding	$	—		$	38,549		$	38,549		$	18,873,193		$	18,911,742		$	41,213
As a % of total loans	—		%	0.20		%	0.20		%	99.80		%	100.00		%	0.22		%

(1) All loans 90 days or more past due are on non-accrual status.

Credit Quality

We monitor the credit quality and performance statistics of our financing receivables in an ongoing manner to provide a balance between the credit needs of our members and the requirements for sound credit quality of the loan portfolio. We evaluate the credit quality of our loans using an internal risk rating system that employs similar criteria for all member classes.

Our internal risk rating system is based on a determination of a borrower’s risk of default utilizing both quantitative and qualitative measurements.

We have grouped our risk ratings into the categories of pass and criticized based on the criteria below.

(i)  Pass:  Borrowers that are not experiencing difficulty and/or not showing a potential or well-defined credit weakness.

(ii) Criticized:  Includes borrowers categorized as special mention, substandard and doubtful as described below:

· Special mention:  Borrowers that may be characterized by a potential credit weakness or deteriorating financial condition that is not sufficiently serious to warrant a classification of substandard or doubtful.

· Substandard:  Borrowers that display a well-defined credit weakness that may jeopardize the full collection of principal and interest.

· Doubtful:  Borrowers that have a well-defined weakness and the full collection of principal and interest is questionable or improbable.

Each risk rating is reassessed annually based on the receipt of the borrower’s audited financial statements; however, interim downgrades and upgrades may take place at any time as significant events or trends occur.

The following table presents our loan portfolio by risk rating category and member class based on available data as of:

	November 30, 2012						May 31, 2012
(dollar amounts in thousands)	Pass		Criticized		Total		Pass		Criticized		Total
CFC:
Distribution	$	13,851,402	$	32,580	$	13,883,982	$	14,046,228	$	29,243	$	14,075,471
Power supply	3,904,155		5,000		3,909,155		3,591,820		5,000		3,596,820
Statewide and associate	73,566		—		73,566		73,606		—		73,606
CFC total	17,829,123		37,580		17,866,703		17,711,654		34,243		17,745,897
RTFC	529,642		7,117		536,759		564,596		6,970		571,566
NCSC	693,712		—		693,712		594,279		—		594,279
Total loans outstanding	$	19,052,477	$	44,697	$	19,097,174	$	18,870,529	$	41,213	$	18,911,742

Loan Security

Except when providing line of credit loans, we typically lend to our members on a senior secured basis. Long-term loans are typically secured on a parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. In addition to the lien and security interest we receive under the mortgage, our member borrowers are also required to achieve certain financial ratios as required by loan covenants.

The following table summarizes our secured and unsecured loans outstanding by loan type and by company:

	November 30, 2012								May 31, 2012
(dollar amounts in thousands)	Secured		%		Unsecured		%		Secured		%		Unsecured		%
Total by loan type:
Long-term fixed-rate loans	$	16,361,860	96	%	$	620,280	4	%	$	16,168,857	97	%	$	574,057	3	%
Long-term variable-rate loans	508,490		84		98,822		16		661,115		86		103,700		14
Loans guaranteed by RUS	213,275		100		—		—		219,084		100		—		—
Line of credit loans	245,427		19		1,049,020		81		205,143		17		979,786		83
Total loans outstanding	$	17,329,052	91		$	1,768,122	9		$	17,254,199	91		$	1,657,543	9
Total by company:
CFC	$	16,369,535	92	%	$	1,497,168	8	%	$	16,317,195	92	%	$	1,428,702	8	%
RTFC	514,384		96		22,375		4		549,085		96		22,481		4
NCSC	445,133		64		248,579		36		387,919		65		206,360		35
Total loans outstanding	$	17,329,052	91		$	1,768,122	9		$	17,254,199	91		$	1,657,543	9

Loan Loss Allowance

We maintain an allowance for loan losses at a level estimated by management to provide for probable losses inherent in the loan portfolio. Under a guarantee agreement, CFC reimburses RTFC and NCSC for loan losses, therefore, RTFC and NCSC do not maintain separate loan loss allowances.

The activity in the loan loss allowance summarized in the tables below reflects a disaggregation by company of the allowance for loan losses held at CFC based on borrower type:

	As of and for the three months ended November 30, 2012
(dollar amounts in thousands)	CFC			RTFC			NCSC		Total
Balance as of August 31, 2012	$	136,781		$	8,877		$	6,843	$	152,501
(Recovery of) provision for loan losses	(3,256		)	(563		)	2		(3,817		)
Recoveries of loans previously charged-off	53			—			—		53
Balance as of November 30, 2012	$	133,578		$	8,314		$	6,845	$	148,737

	As of and for the three months ended November 30, 2011
(dollar amounts in thousands)	CFC			RTFC		NCSC			Total
Balance as of August 31, 2011	$	134,457		$	8,649	$	8,994		$	152,100
(Recovery of) provision for loan losses	(3,625		)	824		(194		)	(2,995		)
Recoveries of loans previously charged-off	53			—		—			53
Balance as of November 30, 2011	$	130,885		$	9,473	$	8,800		$	149,158

	As of and for the six months ended November 30, 2012
(dollar amounts in thousands)	CFC		RTFC			NCSC			Total
Balance as of May 31, 2012	$	126,941	$	8,562		$	7,823		$	143,326
Provision for (recovery of) loan losses	6,531		(248		)	(978		)	5,305
Recoveries of loans previously charged-off	106		—			—			106
Balance as of November 30, 2012	$	133,578	$	8,314		$	6,845		$	148,737

	As of and for the six months ended November 30, 2011
(dollar amounts in thousands)	CFC			RTFC		NCSC			Total
Balance as of May 31, 2011	$	143,706		$	8,389	$	9,082		$	161,177
(Recovery of) provision for loan losses	(12,927		)	1,084		(282		)	(12,125		)
Recoveries of loans previously charged-off	106			—		—			106
Balance as of November 30, 2011	$	130,885		$	9,473	$	8,800		$	149,158

Our allowance for loan losses includes a specific valuation allowance related to individually-evaluated impaired loans, as well as a general reserve for other probable incurred losses for loans that are collectively evaluated. The tables below present the loan loss allowance and the recorded investment in outstanding loans by impairment methodology and by company:

	November 30, 2012
(dollar amounts in thousands)	CFC		RTFC		NCSC		Total
Ending balance of the allowance:
Collectively evaluated	$	113,627	$	6,695	$	6,845	$	127,167
Individually evaluated	19,951		1,619		—		21,570
Total ending balance of the allowance	$	133,578	$	8,314	$	6,845	$	148,737
Recorded investment in loans:
Collectively evaluated	$	17,790,837	$	530,182	$	693,712	$	19,014,731
Individually evaluated	75,866		6,577		—		82,443
Total recorded investment in loans	$	17,866,703	$	536,759	$	693,712	$	19,097,174
Loans to members, net (1)	$	17,733,125	$	528,445	$	686,867	$	18,948,437

	May 31, 2012
(dollar amounts in thousands)	CFC		RTFC		NCSC		Total
Ending balance of the allowance:
Collectively evaluated	$	103,681	$	6,561	$	7,823	$	118,065
Individually evaluated	23,260		2,001		—		25,261
Total ending balance of the allowance	$	126,941	$	8,562	$	7,823	$	143,326
Recorded investment in loans:
Collectively evaluated	$	17,255,965	$	564,596	$	594,279	$	18,414,840
Individually evaluated	489,932		6,970		—		496,902
Total recorded investment in loans	$	17,745,897	$	571,566	$	594,279	$	18,911,742
Loans to members, net (1)	$	17,618,956	$	563,004	$	586,456	$	18,768,416

(1) Excludes deferred origination costs of $8 million at November 30, 2012 and May 31, 2012.

Impaired Loans

Our recorded investment in individually-impaired loans and the related specific valuation allowance is summarized below by member class:

	November 30, 2012				May 31, 2012
(dollar amounts in thousands)	Recordedinvestment		Relatedallowance		Recordedinvestment		Relatedallowance
With no specific allowance recorded:
CFC/Distribution	$	39,717	$	—	$	415,692	$	—
With a specific allowance recorded:
CFC/Distribution	31,149		19,709		69,240		23,009
CFC/Power Supply	5,000		242		5,000		251
RTFC	6,577		1,619		6,970		2,001
Total	42,726		21,570		81,210		25,261
Total impaired loans	$	82,443	$	21,570	$	496,902	$	25,261

The recorded investment for impaired loans was equal to the total unpaid principal balance for impaired loans as of November 30, 2012 and May 31, 2012. The table below represents the average recorded investment in impaired loans and the interest income recognized by member class:

	For the three months ended November 30,
	2012		2011		2012		2011
(dollar amounts in thousands)	Average recorded investment				Interest income recognized
CFC/Distribution	$	70,706	$	491,101	$	7,625	$	4,084
CFC/Power Supply	5,000		2,667		—		—
RTFC	6,618		7,962		—		—
Total impaired loans	$	82,324	$	501,730	$	7,625	$	4,084

	For the six months ended November 30,
	Average recorded investment				Interest income recognized
(dollar amounts in thousands)	2012		2011		2012		2011
CFC/Distribution	$	277,891	$	494,620	$	13,087	$	4,776
CFC/Power Supply	5,000		1,333		—		—
RTFC	6,754		5,322		—		—
Total impaired loans	$	289,645	$	501,275	$	13,087	$	4,776

Non-performing and Restructured Loans

Interest income was reduced as a result of holding loans on non-accrual status as follows:

	For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)	2012		2011		2012		2011
Non-performing loans	$	373	$	388	$	780	$	805
Restructured loans	—		1,384		—		6,714
Total	$	373	$	1,772	$	780	$	7,519

At November 30, 2012 and May 31, 2012, non-performing loans included $43 million, or 0.2 percent, of loans outstanding and $41 million or 0.2 percent, of loans outstanding, respectively. Two borrowers in this group are currently in bankruptcy. In one of the bankruptcy cases, the borrower filed a disclosure statement and draft plan of reorganization on November 27, 2012. The disclosure statement and draft plan are subject to certain changes and approval of the bankruptcy court, which is expected to occur in January 2013. In the other bankruptcy case, the borrower has until February 15, 2013 to file a disclosure statement and a Chapter 11 plan. There are two other borrowers that are currently seeking buyers for their systems, as it is not anticipated that they will have sufficient cash flow to repay their loans without the proceeds from the sale of the business. It is currently anticipated that even with the sale of the business, there will not be sufficient funds to repay the full amount owed. We have approval rights with respect to the sale of either or both of these companies.

At November 30, 2012 and May 31, 2012, we had restructured loans totaling $40 million, or 0.2 percent, of loans outstanding and $456 million, or 2.4 percent, of loans outstanding, respectively, all of which were performing according to their restructured terms. Approximately $8 million and $13 million of interest income was accrued on restructured loans during the three and six months ended November 30, 2012, respectively, compared with $4 million and $5 million of interest income in the prior-year periods, respectively. One of the restructured loans totaling $40 million at November 30, 2012 and May 31, 2012, has been on accrual status since the time of restructuring. The other restructured loan totaling $416 million at May 31, 2012, was on non-accrual status through September 30, 2011, with all amounts collected being applied against the principal balance. On October 1, 2011, the principal balance of the loan was reduced below the level of a buyout option and as such we placed the loan on accrual status at that time at a rate based on the effective rate returned by the future scheduled cash flows. This loan was paid off early by the borrower on September 13, 2012.

We believe our allowance for loan loss is adequate to cover the losses inherent in our loan portfolio at November 30, 2012.

Pledging of Loans and Loans on Deposit

We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt.

The following table summarizes our loans outstanding as collateral pledged to secure our collateral trust bonds, Clean Renewable Energy Bonds and notes payable to the Federal Agricultural Mortgage Corporation and the amount of the corresponding debt outstanding (see Note 5, Short-Term Debt and Credit Arrangements and Note 6, Long-Term Debt).

(dollar amounts in thousands)	November 30, 2012		May 31, 2012
Collateral trust bonds:
2007 indenture
Distribution system mortgage notes	$	5,839,885	$	5,833,475
RUS guaranteed loans qualifying as permitted investments	167,953		170,024
Total pledged collateral	$	6,007,838	$	6,003,499
Collateral trust bonds outstanding	4,979,372		4,850,000
1994 indenture
Distribution system mortgage notes	$	1,724,015	$	1,574,823
Collateral trust bonds outstanding	1,465,000		1,470,000
Federal Agricultural Mortgage Corporation:
Distribution and power supply system mortgage notes	$	1,579,274	$	1,379,989
Notes payable outstanding	1,298,506		1,165,100
Clean Renewable Energy Bonds Series 2009A:
Distribution and power supply system mortgage notes	$	24,605	$	25,640
Cash	7,218		7,669
Total pledged collateral	$	31,823	$	33,309
Notes payable outstanding	21,545		23,487

We are required to maintain collateral on deposit in an amount at least equal to the balance of debt outstanding to the Federal Financing Bank of the United States Treasury issued under the Guaranteed Underwriter program of the U.S. Department of Agriculture (see Note 6, Long-Term Debt).

The following table shows the collateral on deposit and the amount of the corresponding debt outstanding:

(dollar amounts in thousands)	November 30, 2012		May 31, 2012
Federal Financing Bank
Distribution and power supply system mortgage notes on deposit	$	4,053,511	$	3,814,311
Notes payable outstanding	3,674,000		3,419,000

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Loans and Commitments (Details 7) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Nov. 30, 2012	Nov. 30, 2011	Nov. 30, 2012	Nov. 30, 2011	May 31, 2012
Recorded investment in individually-impaired loans and the related specific valuation allowance
With a specific allowance recorded	$ 42,726		$ 42,726		$ 81,210
Total impaired loans	82,443		82,443		496,902
Related allowance	21,570		21,570		25,261
Average recorded investment
Total impaired loans	82,324	501,730	289,645	501,275
Interest income recognized
Interest impaired loans	7,625	4,084	13,087	4,776
Interest income reduction as a result of holding loans on non-accrual status
Interest income reduced	373	1,772	780	7,519
Total loans outstanding	19,097,174	18,314,593	19,097,174	18,314,593	18,911,742
Loans receivable as a percentage of total loan	100.00%		100.00%		100.00%
Non-performing loans
Interest income reduction as a result of holding loans on non-accrual status
Interest income reduced	373	388	780	805
Total loans outstanding	42,726		42,726		41,213
Loans receivable as a percentage of total loan	0.20%		0.20%		0.20%
Number of borrowers currently in bankruptcy	2		2
Number of borrowers currently seeking buyers for their systems	2		2
Restructured loans
Interest income recognized
Interest impaired loans	8,000	4,000	13,000	5,000
Interest income reduction as a result of holding loans on non-accrual status
Interest income reduced		1,384		6,714
Total loans outstanding	39,717		39,717		455,689
Loans receivable as a percentage of total loan	0.20%		0.20%		2.40%
Restructured loans | Accrual
Interest income reduction as a result of holding loans on non-accrual status
Total loans outstanding	40,000		40,000		40,000
Number of impaired loans	1		1		1
Restructured loans | Nonaccrual
Interest income reduction as a result of holding loans on non-accrual status
Total loans outstanding					416,000
CFC
Interest income reduction as a result of holding loans on non-accrual status
Total loans outstanding	17,866,703		17,866,703		17,745,897
CFC | Distribution
Recorded investment in individually-impaired loans and the related specific valuation allowance
With no specific allowance recorded	39,717		39,717		415,692
With a specific allowance recorded	31,149		31,149		69,240
Related allowance	19,709		19,709		23,009
Average recorded investment
Total impaired loans	70,706	491,101	277,891	494,620
Interest income recognized
Interest impaired loans	7,625	4,084	13,087	4,776
Interest income reduction as a result of holding loans on non-accrual status
Total loans outstanding	13,883,982		13,883,982		14,075,471
CFC | Power supply
Recorded investment in individually-impaired loans and the related specific valuation allowance
With a specific allowance recorded	5,000		5,000		5,000
Related allowance	242		242		251
Average recorded investment
Total impaired loans	5,000	2,667	5,000	1,333
Interest income reduction as a result of holding loans on non-accrual status
Total loans outstanding	3,909,155		3,909,155		3,596,820
RTFC
Recorded investment in individually-impaired loans and the related specific valuation allowance
With a specific allowance recorded	6,577		6,577		6,970
Related allowance	1,619		1,619		2,001
Average recorded investment
Total impaired loans	6,618	7,962	6,754	5,322
Interest income reduction as a result of holding loans on non-accrual status
Total loans outstanding	$ 536,759		$ 536,759		$ 571,566

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Fair Value Measurement (Tables)

6 Months Ended

Nov. 30, 2012

Fair Value Measurement

Schedule of the entity's assets and liabilities that are measured at fair value on a recurring basis

	November 30, 2012				May 31, 2012
(dollar amounts in thousands)	Level 1		Level 2		Level 1		Level 2
Derivative assets	$	—	$	273,480	$	—	$	296,036
Derivative liabilities	—		630,919		—		654,125
Investments in common stock	2,354		—		1,467		—

Schedule of carrying/fair value of the related individual assets and the total losses

	Level 3 Fair Value				Total losses for the three months ended November 30,					Total losses for the six months ended November 30,
(dollar amounts in thousands)	November 30, 2012		May 31, 2012		2012		2011			2012		2011
Non-performing loans,
net of specific reserves	$	21,156	$	16,517	$	—	$	(167	)	$	—	$	(2,220	)

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Guarantees (Tables)

6 Months Ended

Nov. 30, 2012

Guarantees

Summary of total guarantees by type of guarantee and member class

(dollar amounts in thousands)	November 30, 2012		May 31, 2012
Total by type:
Long-term tax-exempt bonds	$	555,960	$	573,110
Indemnifications of tax benefit transfers	2,419		49,771
Letters of credit	452,373		504,920
Other guarantees	116,916		121,529
Total	$	1,127,668	$	1,249,330
Total by member class:
CFC:
Distribution	$	269,610	$	340,385
Power supply	816,296		854,444
Statewide and associate	6,514		7,202
CFC total	1,092,420		1,202,031
RTFC	4,738		1,026
NCSC	30,510		46,273
Total	$	1,127,668	$	1,249,330

Summary of activity in the guarantee liability account

	As of and for the six months ended November 30,
(dollar amounts in thousands)	2012
Beginning balance as of May 31, 2012	$	28,663
Net change in non-contingent liability	(1,584		)
Recovery of contingent guarantee liability	(101		)
Ending balance as of November 30, 2012	$	26,978
Liability as a percentage of total guarantees	2.39		%

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Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended		12 Months Ended
	Nov. 30, 2012	Nov. 30, 2011	Nov. 30, 2012	Nov. 30, 2011	May 31, 2012	Aug. 31, 2012	Aug. 31, 2011	May 31, 2011
Statement of operations:
Interest income	$ 241,630	$ 237,755	$ 481,715	$ 485,005
Interest expense	(174,301)	(194,680)	(350,897)	(396,724)
Net interest income	67,329	43,075	130,818	88,281
Recovery of (provision for) loan losses	3,817	2,995	(5,305)	12,125
Net interest income after recovery of (provision for) loan losses	71,146	46,070	125,513	100,406
Non-interest income:
Fee and other income	17,807	3,986	22,765	8,709
Derivative losses	(3,766)	(47,753)	(28,358)	(159,324)
Results of operations from foreclosed assets	(909)	(6,648)	(5,674)	(16,466)
Total non-interest income	13,132	(50,415)	(11,267)	(167,081)
Non-interest expense:
General and administrative expenses	(19,451)	(16,692)	(36,621)	(33,081)
Recovery of guarantee liability	92	12	101	72
Loss on early extinguishment of debt		(6,258)		(15,525)
Other	(4,384)	(418)	(4,547)	(815)
Total non-interest expense	(23,743)	(23,356)	(41,067)	(49,349)
Income prior to income taxes	60,535	(27,701)	73,179	(116,024)
Income tax (expense) benefit	(454)	407	(452)	2,108
Net income (loss)	60,081	(27,294)	72,727	(113,916)	(148,797)
Assets:
Total recorded investment in loans	19,097,174	18,314,593	19,097,174	18,314,593	18,911,742
Deferred origination costs	8,033	7,050	8,033	7,050	7,870
Less: Allowance for loan losses	(148,737)	(149,158)	(148,737)	(149,158)	(143,326)	(152,501)	(152,100)	(161,177)
Loans to members, net	18,956,470	18,172,485	18,956,470	18,172,485	18,776,286
Other assets	1,653,924	1,619,853	1,653,924	1,619,853
Total assets	20,610,394	19,792,338	20,610,394	19,792,338	19,951,335
CFC
Statement of operations:
Interest income	237,711	234,001	473,682	475,194
Interest expense	(173,870)	(194,418)	(350,034)	(396,011)
Net interest income	63,841	39,583	123,648	79,183
Recovery of (provision for) loan losses	3,817	2,995	(5,305)	12,125
Net interest income after recovery of (provision for) loan losses	67,658	42,578	118,343	91,308
Non-interest income:
Fee and other income	17,741	3,964	22,533	9,146
Derivative losses	(3,391)	(45,133)	(26,436)	(149,471)
Results of operations from foreclosed assets	(909)	(6,648)	(5,674)	(16,466)
Total non-interest income	13,441	(47,817)	(9,577)	(156,791)
Non-interest expense:
General and administrative expenses	(17,425)	(14,858)	(32,297)	(29,042)
Recovery of guarantee liability	92	12	101	72
Loss on early extinguishment of debt		(6,258)		(15,525)
Other	(4,384)	(418)	(4,547)	(815)
Total non-interest expense	(21,717)	(21,522)	(36,743)	(45,310)
Income prior to income taxes	59,382	(26,761)	72,023	(110,793)
Net income (loss)	59,382	(26,761)	72,023	(110,793)
Assets:
Total recorded investment in loans	19,064,837	18,279,036	19,064,837	18,279,036
Deferred origination costs	8,033	7,050	8,033	7,050
Less: Allowance for loan losses	(148,737)	(149,158)	(148,737)	(149,158)
Loans to members, net	18,924,133	18,136,928	18,924,133	18,136,928
Other assets	1,623,931	1,590,928	1,623,931	1,590,928
Total assets	20,548,064	19,727,856	20,548,064	19,727,856
Other
Statement of operations:
Interest income	13,946	17,106	28,333	36,453
Interest expense	(10,458)	(13,615)	(21,163)	(27,359)
Net interest income	3,488	3,491	7,170	9,094
Net interest income after recovery of (provision for) loan losses	3,488	3,491	7,170	9,094
Non-interest income:
Fee and other income	292	213	686	431
Derivative losses	(375)	(2,620)	(1,922)	(9,853)
Total non-interest income	(83)	(2,407)	(1,236)	(9,422)
Non-interest expense:
General and administrative expenses	(2,252)	(2,024)	(4,778)	(4,419)
Other				(484)
Total non-interest expense	(2,252)	(2,024)	(4,778)	(4,903)
Income prior to income taxes	1,153	(940)	1,156	(5,231)
Income tax (expense) benefit	(454)	407	(452)	2,108
Net income (loss)	699	(533)	704	(3,123)
Assets:
Total recorded investment in loans	1,230,471	1,187,321	1,230,471	1,187,321
Loans to members, net	1,230,471	1,187,321	1,230,471	1,187,321
Other assets	153,837	180,532	153,837	180,532
Total assets	1,384,308	1,367,853	1,384,308	1,367,853
Elimination
Statement of operations:
Interest income	(10,027)	(13,352)	(20,300)	(26,642)
Interest expense	10,027	13,353	20,300	26,646
Net interest income		1		4
Net interest income after recovery of (provision for) loan losses		1		4
Non-interest income:
Fee and other income	(226)	(191)	(454)	(868)
Total non-interest income	(226)	(191)	(454)	(868)
Non-interest expense:
General and administrative expenses	226	190	454	380
Other				484
Total non-interest expense	226	190	454	864
Assets:
Total recorded investment in loans	(1,198,134)	(1,151,764)	(1,198,134)	(1,151,764)
Loans to members, net	(1,198,134)	(1,151,764)	(1,198,134)	(1,151,764)
Other assets	(123,844)	(151,607)	(123,844)	(151,607)
Total assets	$ (1,321,978)	$ (1,303,371)	$ (1,321,978)	$ (1,303,371)

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Loans and Commitments (Details 8) (USD $) In Thousands, unless otherwise specified	Nov. 30, 2012	May 31, 2012
Pledging of Loans and Loans on Deposit
Cash	$ 8,649	$ 7,694
Collateral trust bonds 2007 indenture
Pledging of Loans and Loans on Deposit
Debt outstanding	4,979,372	4,850,000
Loans outstanding and pledged as collateral	6,007,838	6,003,499
Collateral trust bonds 1994 indenture
Pledging of Loans and Loans on Deposit
Debt outstanding	1,465,000	1,470,000
Notes payable | Federal Agricultural Mortgage Corporation
Pledging of Loans and Loans on Deposit
Debt outstanding	1,298,506	1,165,100
Notes payable | Federal Financing Bank
Pledging of Loans and Loans on Deposit
Debt outstanding	3,674,000	3,419,000
Clean Renewable Energy Bonds Series 2009A
Pledging of Loans and Loans on Deposit
Debt outstanding	21,545	23,487
Cash	7,218	7,669
Total pledged collateral	31,823	33,309
Mortgage notes | Distribution system mortgage notes | Collateral trust bonds 2007 indenture
Pledging of Loans and Loans on Deposit
Loans outstanding and pledged as collateral	5,839,885	5,833,475
Mortgage notes | Distribution system mortgage notes | Collateral trust bonds 1994 indenture
Pledging of Loans and Loans on Deposit
Loans outstanding and pledged as collateral	1,724,015	1,574,823
Mortgage notes | Distribution and power supply system mortgage notes | Federal Agricultural Mortgage Corporation
Pledging of Loans and Loans on Deposit
Loans outstanding and pledged as collateral	1,579,274	1,379,989
Mortgage notes | Distribution and power supply system mortgage notes | Clean Renewable Energy Bonds Series 2009A
Pledging of Loans and Loans on Deposit
Loans outstanding and pledged as collateral	24,605	25,640
RUS guaranteed loans qualifying as permitted investments | Collateral trust bonds 2007 indenture
Pledging of Loans and Loans on Deposit
Loans outstanding and pledged as collateral	167,953	170,024
Mortgage notes receivable on deposit | Distribution and power supply system mortgage notes | Federal Financing Bank
Pledging of Loans and Loans on Deposit
Loans outstanding and pledged as collateral	$ 4,053,511	$ 3,814,311

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Fair Value of Financial Instruments (Tables)

6 Months Ended

Nov. 30, 2012

Fair Value of Financial Instruments

Schedule of carrying and fair values for the entity's financial instruments

November 30, 2012				May 31, 2012
(dollar amounts in thousands)	Carrying value		Fair value		Carrying value		Fair value
Assets:
Cash and cash equivalents	$	439,183	$	439,183	$	191,167	$	191,167
Restricted cash	8,649		8,649		7,694		7,694
Investments	309,932		309,932		59,045		59,045
Loans to members, net	18,956,470		20,564,234		18,776,286		20,405,353
Debt service reserve funds	39,803		39,803		39,803		39,803
Derivative instruments	273,480		273,480		296,036		296,036
Liabilities:
Short-term debt	6,050,861		6,084,603		4,493,434		4,498,565
Long-term debt	11,201,472		13,011,698		12,151,967		13,936,540
Guarantee liability	26,978		29,818		28,663		31,518
Derivative instruments	630,919		630,919		654,125		654,125
Subordinated deferrable debt	186,440		188,227		186,440		187,335
Members’ subordinated certificates	1,772,207		1,928,999		1,722,744		1,880,558
Off-balance sheet instruments:
Commitments	—		—		—		—

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Segment Information (Tables)

6 Months Ended

Nov. 30, 2012

Segment Information

Schedule of segment presentation for the condensed consolidated statements of operations and condensed consolidated balance sheets

	For the six months ended November 30, 2012
(dollar amounts in thousands)	CFC			Other			Elimination			Consolidated
Statement of operations:
Interest income	$	473,682		$	28,333		$	(20,300	)	$	481,715
Interest expense	(350,034		)	(21,163		)	20,300			(350,897		)
Net interest income	123,648			7,170			—			130,818
Provision for loan losses	(5,305		)	—			—			(5,305		)
Net interest income after provision for loan losses	118,343			7,170			—			125,513
Non-interest income:
Fee and other income	22,533			686			(454		)	22,765
Derivative losses	(26,436		)	(1,922		)	—			(28,358		)
Results of operations from foreclosed assets	(5,674		)	—			—			(5,674		)
Total non-interest income	(9,577		)	(1,236		)	(454		)	(11,267		)
Non-interest expense:
General and administrative expenses	(32,297		)	(4,778		)	454			(36,621		)
Recovery of guarantee liability	101			—			—			101
Other	(4,547		)	—			—			(4,547		)
Total non-interest expense	(36,743		)	(4,778		)	454			(41,067		)
Income prior to income taxes	72,023			1,156			—			73,179
Income tax expense	—			(452		)	—			(452		)
Net income	$	72,023		$	704		$	—		$	72,727
Assets:
Total loans outstanding	$	19,064,837		$	1,230,471		$	(1,198,134	)	$	19,097,174
Deferred origination costs	8,033			—			—			8,033
Less: Allowance for loan losses	(148,737		)	—			—			(148,737		)
Loans to members, net	18,924,133			1,230,471			(1,198,134		)	18,956,470
Other assets	1,623,931			153,837			(123,844		)	1,653,924
Total assets	$	20,548,064		$	1,384,308		$	(1,321,978	)	$	20,610,394

	For the six months ended November 30, 2011
(dollar amounts in thousands)	CFC			Other			Elimination			Consolidated
Statement of operations:
Interest income	$	475,194		$	36,453		$	(26,642	)	$	485,005
Interest expense	(396,011		)	(27,359		)	26,646			(396,724		)
Net interest income	79,183			9,094			4			88,281
Recovery of loan losses	12,125			—			—			12,125
Net interest income after recovery of loan losses	91,308			9,094			4			100,406
Non-interest income:
Fee and other income	9,146			431			(868		)	8,709
Derivative losses	(149,471		)	(9,853		)	—			(159,324		)
Results of operations from foreclosed assets	(16,466		)	—			—			(16,466		)
Total non-interest income	(156,791		)	(9,422		)	(868		)	(167,081		)
Non-interest expense:
General and administrative expenses	(29,042		)	(4,419		)	380			(33,081		)
Recovery of guarantee liability	72			—			—			72
Loss on early extinguishment of debt	(15,525		)	—			—			(15,525		)
Other	(815		)	(484		)	484			(815		)
Total non-interest expense	(45,310		)	(4,903		)	864			(49,349		)
Loss prior to income taxes	(110,793		)	(5,231		)	—			(116,024		)
Income tax benefit	—			2,108			—			2,108
Net loss	$	(110,793	)	$	(3,123	)	$	—		$	(113,916	)
Assets:
Total loans outstanding	$	18,279,036		$	1,187,321		$	(1,151,764	)	$	18,314,593
Deferred origination costs	7,050			—			—			7,050
Less: Allowance for loan losses	(149,158		)	—			—			(149,158		)
Loans to members, net	18,136,928			1,187,321			(1,151,764		)	18,172,485
Other assets	1,590,928			180,532			(151,607		)	1,619,853
Total assets	$	19,727,856		$	1,367,853		$	(1,303,371	)	$	19,792,338

	For the three months ended November 30, 2012
(dollar amounts in thousands)	CFC			Other			Elimination			Consolidated
Statement of operations:
Interest income	$	237,711		$	13,946		$	(10,027	)	$	241,630
Interest expense	(173,870		)	(10,458		)	10,027			(174,301		)
Net interest income	63,841			3,488			—			67,329
Recovery of loan losses	3,817			—			—			3,817
Net interest income after recovery of loan losses	67,658			3,488			—			71,146
Non-interest income:
Fee and other income	17,741			292			(226		)	17,807
Derivative losses	(3,391		)	(375		)	—			(3,766		)
Results of operations from foreclosed assets	(909		)	—			—			(909		)
Total non-interest income	13,441			(83		)	(226		)	13,132
Non-interest expense:
General and administrative expenses	(17,425		)	(2,252		)	226			(19,451		)
Recovery of guarantee liability	92			—			—			92
Other	(4,384		)	—			—			(4,384		)
Total non-interest expense	(21,717		)	(2,252		)	226			(23,743		)
Income prior to income taxes	59,382			1,153			—			60,535
Income tax expense	—			(454		)	—			(454		)
Net income	$	59,382		$	699		$	—		$	60,081

	For the three months ended November 30, 2011
(dollar amounts in thousands)	CFC			Other			Elimination			Consolidated
Statement of operations:
Interest income	$	234,001		$	17,106		$	(13,352	)	$	237,755
Interest expense	(194,418		)	(13,615		)	13,353			(194,680		)
Net interest income	39,583			3,491			1			43,075
Recovery of loan losses	2,995			—			—			2,995
Net interest income after recovery of loan losses	42,578			3,491			1			46,070
Non-interest income:
Fee and other income	3,964			213			(191		)	3,986
Derivative losses	(45,133		)	(2,620		)	—			(47,753		)
Results of operations from foreclosed assets	(6,648		)	—			—			(6,648		)
Total non-interest income	(47,817		)	(2,407		)	(191		)	(50,415		)
Non-interest expense:
General and administrative expenses	(14,858		)	(2,024		)	190			(16,692		)
Recovery of guarantee liability	12			—			—			12
Loss on early extinguishment of debt	(6,258		)	—			—			(6,258		)
Other	(418		)	—			—			(418		)
Total non-interest expense	(21,522		)	(2,024		)	190			(23,356		)
Loss prior to income taxes	(26,761		)	(940		)	—			(27,701		)
Income tax benefit	—			407			—			407
Net loss	$	(26,761	)	$	(533	)	$	—		$	(27,294	)

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Investments

6 Months Ended

Nov. 30, 2012

Investments

Investments

(2)           Investments

Our investments at November 30, 2012 and May 31, 2012 include Farmer Mac Series C preferred stock totaling $58 million and Farmer Mac Series A common stock totaling $2 million and $1 million, respectively. The Series C preferred stock is valued at cost, while the Series A common stock is accounted for as available-for-sale and recorded at fair value. Our investments also include a $250 million deposit that we made with a financial institution in an interest bearing account with a maturity of less than one year at the reporting date.

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General Information and Accounting Policies (Details) (USD $)	6 Months Ended
	Nov. 30, 2012 item	May 31, 2012	Nov. 30, 2011	Nov. 30, 2012 Consolidated variable interest entities RTFC	Dec. 31, 2012 Consolidated variable interest entities NCSC	Nov. 30, 2012 Consolidated variable interest entities NCSC
General Information and Accounting Policies
Number of groups of subsidiaries wholly-owned by the entity, holding foreclosed assets	2
Variable interest entities
Guarantee amount				$ 5,000,000		$ 79,000,000
Maximum potential exposure						88,000,000
Total assets including loans outstanding to members				662,000,000		722,000,000
Loans outstanding to members	18,956,470,000	18,776,286,000	18,172,485,000	523,000,000		675,000,000
Maximum amount committed to extend loan				4,000,000,000	3,000,000,000	2,000,000,000
Commitment outstanding						754,000,000
Credit enhancement						$ 79,000,000

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Loans and Commitments (Details 4) (USD $) In Thousands, unless otherwise specified	Nov. 30, 2012	May 31, 2012	Nov. 30, 2011
Credit Quality
Total loans outstanding	$ 19,097,174	$ 18,911,742	$ 18,314,593
CFC
Credit Quality
Total loans outstanding	17,866,703	17,745,897
CFC | Distribution
Credit Quality
Total loans outstanding	13,883,982	14,075,471
CFC | Power supply
Credit Quality
Total loans outstanding	3,909,155	3,596,820
CFC | Statewide and associate
Credit Quality
Total loans outstanding	73,566	73,606
RTFC
Credit Quality
Total loans outstanding	536,759	571,566
NCSC
Credit Quality
Total loans outstanding	693,712	594,279
Pass
Credit Quality
Total loans outstanding	19,052,477	18,870,529
Pass | CFC
Credit Quality
Total loans outstanding	17,829,123	17,711,654
Pass | CFC | Distribution
Credit Quality
Total loans outstanding	13,851,402	14,046,228
Pass | CFC | Power supply
Credit Quality
Total loans outstanding	3,904,155	3,591,820
Pass | CFC | Statewide and associate
Credit Quality
Total loans outstanding	73,566	73,606
Pass | RTFC
Credit Quality
Total loans outstanding	529,642	564,596
Pass | NCSC
Credit Quality
Total loans outstanding	693,712	594,279
Criticized
Credit Quality
Total loans outstanding	44,697	41,213
Criticized | CFC
Credit Quality
Total loans outstanding	37,580	34,243
Criticized | CFC | Distribution
Credit Quality
Total loans outstanding	32,580	29,243
Criticized | CFC | Power supply
Credit Quality
Total loans outstanding	5,000	5,000
Criticized | RTFC
Credit Quality
Total loans outstanding	$ 7,117	$ 6,970

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Guarantees (Details 2) (USD $)	3 Months Ended		6 Months Ended
	Nov. 30, 2012	Nov. 30, 2011	Nov. 30, 2012	Nov. 30, 2011	May 31, 2012
Guarantee Liability
Contingent guarantee liability	$ 6,000,000		$ 6,000,000		$ 6,000,000
Non-contingent guarantee liability	21,000,000		21,000,000		23,000,000
Activity in the guarantee liability account
Beginning balance			28,663,000
Net change in non-contingent liability	(1,584,000)		(1,584,000)
Recovery of contingent guarantee liability	(92,000)	(12,000)	(101,000)	(72,000)
Ending balance	$ 26,978,000		$ 26,978,000
Liability as a percentage of total guarantees	2.39%		2.39%

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Nov. 30, 2012	May 31, 2012
ASSETS
Cash and cash equivalents	$ 439,183	$ 191,167
Restricted cash	8,649	7,694
Investments	309,932	59,045
Loans to members	19,105,207	18,919,612
Less: Allowance for loan losses	(148,737)	(143,326)
Loans to members, net	18,956,470	18,776,286
Accrued interest and other receivables	171,964	185,827
Fixed assets, net	103,106	102,770
Debt service reserve funds	39,803	39,803
Debt issuance costs, net	40,572	43,515
Foreclosed assets, net	245,803	223,476
Derivative assets	273,480	296,036
Other assets	21,432	25,716
Total assets	20,610,394	19,951,335
LIABILITIES AND EQUITY
Short-term debt	6,050,861	4,493,434
Accrued interest payable	155,488	161,817
Long-term debt	11,201,472	12,151,967
Deferred income	23,202	26,131
Other liabilities	61,649	63,922
Derivative liabilities	630,919	654,125
Commitments and contingencies
CFC equity:
Retained equity	510,281	473,964
Accumulated other comprehensive income	9,592	9,199
Total CFC equity	519,873	483,163
Noncontrolling interest	8,283	7,592
Total equity	528,156	490,755
Total liabilities and equity	20,610,394	19,951,335
Subordinated deferrable debt
LIABILITIES AND EQUITY
Subordinated deferrable debt	186,440	186,440
Membership subordinated certificates
LIABILITIES AND EQUITY
Subordinated deferrable debt	646,388	646,279
Loan and guarantee subordinated certificates
LIABILITIES AND EQUITY
Subordinated deferrable debt	727,169	678,115
Member capital securities
LIABILITIES AND EQUITY
Subordinated deferrable debt	398,650	398,350
Total members' subordinated certificates
LIABILITIES AND EQUITY
Subordinated deferrable debt	$ 1,772,207	$ 1,722,744

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Foreclosed Assets (Details) (USD $)			6 Months Ended
	Nov. 30, 2012	May 31, 2012	Nov. 30, 2012 Foreclosed Assets	Nov. 30, 2012 Foreclosed Assets CAH	Nov. 30, 2012 Foreclosed Assets DRP
Activity for foreclosed assets
Beginning balance	$ 245,803,000	$ 223,476,000	$ 223,476,000	$ 201,558,000	$ 21,918,000
Results of operations, Operating loss			(5,498,000)	(5,327,000)	(171,000)
Results of operations, Impairment			(176,000)		(176,000)
Cash investments			28,001,000	28,001,000
Ending balance	$ 245,803,000	$ 223,476,000	$ 245,803,000	$ 224,232,000	$ 21,571,000

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Nov. 30, 2012	Nov. 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$ 72,727	$ (113,916)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Amortization of deferred income	(4,710)	(5,617)
Amortization of debt issuance costs and deferred charges	3,842	6,038
Depreciation	2,625	1,719
Provision for (recovery of) loan losses	5,305	(12,125)
Recovery of guarantee liability	(101)	(72)
Results of operations of foreclosed assets	5,674	16,466
Derivative forward value	(961)	158,510
Changes in operating assets and liabilities:
Accrued interest and other receivables	13,386	7,238
Accrued interest payable	(6,329)	(12,236)
Other	4,921	10,300
Net cash provided by operating activities	96,379	56,305
CASH FLOWS FROM INVESTING ACTIVITIES
Advances made on loans	(2,584,296)	(3,260,727)
Principal collected on loans	2,300,104	4,187,593
Net investment in fixed assets	(2,961)	(11,432)
Proceeds from foreclosed assets	29,110	18,849
Investments in foreclosed assets	(57,111)	(29,179)
Net proceeds from sale of loans	98,147	81,897
Investments	(250,000)
Change in restricted cash	(955)	(955)
Net cash (used in) provided by investing activities	(467,962)	986,046
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) issuances of short-term debt, net	215,087	(181,095)
Issuance costs for revolving bank lines of credit	(1,447)	(3,626)
Proceeds from issuance of long-term debt	1,254,167	299,132
Payments for retirement of long-term debt	(730,293)	(810,286)
Proceeds from issuance of members' subordinated certificates	55,548	18,145
Payments for retirement of members' subordinated certificates	(6,066)	(54,892)
Payments for retirement of patronage capital	(33,991)	(43,697)
Cash paid portion of debt exchange premium	(133,406)
Net cash provided by (used in) financing activities	619,599	(776,319)
NET INCREASE IN CASH AND CASH EQUIVALENTS	248,016	266,032
BEGINNING CASH AND CASH EQUIVALENTS	191,167	293,615
ENDING CASH AND CASH EQUIVALENTS	439,183	559,647
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	353,383	402,922
Cash paid for income taxes	89	210
Non-cash financing and investing activities:
Net decrease in debt service reserve funds/debt service reserve certificates		(5,859)
Collateral trust bonds issued as debt exchange premium	$ 39,647

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General Information and Accounting Policies (Details 4) (USD $)	3 Months Ended	6 Months Ended
	Nov. 30, 2011	Nov. 30, 2011
Loss on early extinguishment of debt
Loss on early extinguishment of debt	$ 6,258,000	$ 15,525,000
7.25% Series C medium-term notes
Loss on early extinguishment of debt
Amount redeemed	500,000,000	500,000,000
Aggregate principal amount	1,500,000,000	1,500,000,000
Stated interest rate (as a percent)	7.25%	7.25%
Loss on early extinguishment of debt		$ 16,000,000

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Loans and Commitments (Tables)

6 Months Ended

Nov. 30, 2012

Loans and Commitments

Summary of loans outstanding to members and unadvanced commitments by loan type and by member class

	November 30, 2012					May 31, 2012
(dollar amounts in thousands)	Loans outstanding			Unadvanced commitments (1)		Loans outstanding			Unadvanced commitments (1)
Total by loan type (2):
Long-term fixed-rate loans	$	16,982,140		$	—	$	16,742,914		$	—
Long-term variable-rate loans	607,312			5,754,729		764,815			5,437,881
Loans guaranteed by RUS (3)	213,275			—		219,084			—
Line of credit loans	1,294,447			9,160,920		1,184,929			8,691,543
Total loans outstanding	19,097,174			14,915,649		18,911,742			14,129,424
Deferred origination costs	8,033			—		7,870			—
Less: Allowance for loan losses	(148,737		)	—		(143,326		)	—
Net loans outstanding	$	18,956,470		$	14,915,649	$	18,776,286		$	14,129,424
Total by member class (2):
CFC:
Distribution	$	13,883,982		$	9,344,109	$	14,075,471		$	9,191,227
Power supply	3,909,155			3,962,776		3,596,820			3,714,241
Statewide and associate	73,566			119,891		73,606			123,189
CFC total	17,866,703			13,426,776		17,745,897			13,028,657
RTFC	536,759			318,664		571,566			341,792
NCSC	693,712			1,170,209		594,279			758,975
Total loans outstanding	$	19,097,174		$	14,915,649	$	18,911,742		$	14,129,424

(1) The interest rate on unadvanced commitments is not set until drawn, therefore, the long-term unadvanced loan commitments have been classified in this table as variable-rate unadvanced commitments. However, at the time of the advance, the borrower may select a fixed or a variable rate on the new loan.

(2) Includes non-performing and restructured loans.

(3) “RUS” is the Rural Utilities Service.

Summary of non-performing and restructured loans outstanding and unadvanced commitments to members by loan type and by company

	November 30, 2012				May 31, 2012
	Loans		Unadvanced		Loans		Unadvanced
(dollar amounts in thousands)	outstanding		commitments (1)		outstanding		commitments (1)
Non-performing and restructured loans:
Non-performing loans:
CFC:
Long-term variable-rate loans	$	8,194	$	—	$	8,194	$	—
Line of credit loans (2)	27,955		1,828		26,049		—
RTFC:
Long-term fixed-rate loans	6,577		—		6,970		—
Total non-performing loans	$	42,726	$	1,828	$	41,213	$	—
Restructured loans:
CFC:
Long-term fixed-rate loans	$	39,717	$	—	$	455,689	$	—
Long-term variable-rate loans (3)	—		—		—		45,918
Line of credit loans (3)	—		5,000		—		5,000
Total restructured loans	$	39,717	$	5,000	$	455,689	$	50,918

(1) The interest rate on unadvanced commitments is not set until drawn, therefore, the long-term unadvanced loan commitments have been classified in this table as variable-rate unadvanced commitments. However, at the time of the advance, the borrower may select a fixed or a variable rate on the new loan.

(2) The unadvanced commitment is available under a debtor-in-possession facility for which the principal and interest has priority over all other claims.

(3) The unadvanced commitment is part of the terms outlined in the related restructure agreement. Loans advanced under these commitments would be classified as performing. Principal and interest due under these performing loans would be in addition to scheduled payments due under the restructured loan agreement.

Summary of available balance under committed lines of credit and the related maturities by fiscal year

The following table summarizes the available balance under committed lines of credit at November 30, 2012, and the related maturities by fiscal year and thereafter as follows:

	Available		Notional maturities of committed lines of credit
(dollar amounts in thousands)	balance		2013		2014		2015		2016		2017		Thereafter
Committed lines of credit	$	1,444,133	$	9,333	$	281,733	$	116,754	$	223,492	$	559,562	$	253,259

Schedule of analysis of the age of the recorded investment in loans outstanding by member class

	November 30, 2012
(dollar amounts in thousands)	30-89 days past due			90 days or more past due (1)			Total past due			Current			Total financing receivables			Non-accrual loans
CFC:
Distribution	$	1,530		$	29,619		$	31,149		$	13,852,833		$	13,883,982		$	31,149
Power supply	—			5,000			5,000			3,904,155			3,909,155			5,000
Statewide and associate	—			—			—			73,566			73,566			—
CFC total	1,530			34,619			36,149			17,830,554			17,866,703			36,149
RTFC	—			4,156			4,156			532,603			536,759			6,577
NCSC	—			—			—			693,712			693,712			—
Total loans outstanding	$	1,530		$	38,775		$	40,305		$	19,056,869		$	19,097,174		$	42,726
As a % of total loans	0.01		%	0.20		%	0.21		%	99.79		%	100.00		%	0.22		%

(1) All loans 90 days or more past due are on non-accrual status.

	May 31, 2012
(dollar amounts in thousands)	30-89 days past due			90 days or more past due (1)			Total past due			Current			Total financing receivables			Non-accrual loans
CFC:
Distribution	$	—		$	29,243		$	29,243		$	14,046,228		$	14,075,471		$	29,243
Power supply	—			5,000			5,000			3,591,820			3,596,820			5,000
Statewide and associate	—			—			—			73,606			73,606			—
CFC total	—			34,243			34,243			17,711,654			17,745,897			34,243
RTFC	—			4,306			4,306			567,260			571,566			6,970
NCSC	—			—			—			594,279			594,279			—
Total loans outstanding	$	—		$	38,549		$	38,549		$	18,873,193		$	18,911,742		$	41,213
As a % of total loans	—		%	0.20		%	0.20		%	99.80		%	100.00		%	0.22		%

(1) All loans 90 days or more past due are on non-accrual status.

Schedule of loan portfolio by risk rating category and member class based on available data

	November 30, 2012						May 31, 2012
(dollar amounts in thousands)	Pass		Criticized		Total		Pass		Criticized		Total
CFC:
Distribution	$	13,851,402	$	32,580	$	13,883,982	$	14,046,228	$	29,243	$	14,075,471
Power supply	3,904,155		5,000		3,909,155		3,591,820		5,000		3,596,820
Statewide and associate	73,566		—		73,566		73,606		—		73,606
CFC total	17,829,123		37,580		17,866,703		17,711,654		34,243		17,745,897
RTFC	529,642		7,117		536,759		564,596		6,970		571,566
NCSC	693,712		—		693,712		594,279		—		594,279
Total loans outstanding	$	19,052,477	$	44,697	$	19,097,174	$	18,870,529	$	41,213	$	18,911,742

Summary of secured and unsecured loans outstanding by loan type and by company

	November 30, 2012								May 31, 2012
(dollar amounts in thousands)	Secured		%		Unsecured		%		Secured		%		Unsecured		%
Total by loan type:
Long-term fixed-rate loans	$	16,361,860	96	%	$	620,280	4	%	$	16,168,857	97	%	$	574,057	3	%
Long-term variable-rate loans	508,490		84		98,822		16		661,115		86		103,700		14
Loans guaranteed by RUS	213,275		100		—		—		219,084		100		—		—
Line of credit loans	245,427		19		1,049,020		81		205,143		17		979,786		83
Total loans outstanding	$	17,329,052	91		$	1,768,122	9		$	17,254,199	91		$	1,657,543	9
Total by company:
CFC	$	16,369,535	92	%	$	1,497,168	8	%	$	16,317,195	92	%	$	1,428,702	8	%
RTFC	514,384		96		22,375		4		549,085		96		22,481		4
NCSC	445,133		64		248,579		36		387,919		65		206,360		35
Total loans outstanding	$	17,329,052	91		$	1,768,122	9		$	17,254,199	91		$	1,657,543	9

Summary of the activity in the loan loss allowance reflecting disaggregation by company of the allowance for loan losses held at CFC based on borrower type

	As of and for the three months ended November 30, 2012
(dollar amounts in thousands)	CFC			RTFC			NCSC		Total
Balance as of August 31, 2012	$	136,781		$	8,877		$	6,843	$	152,501
(Recovery of) provision for loan losses	(3,256		)	(563		)	2		(3,817		)
Recoveries of loans previously charged-off	53			—			—		53
Balance as of November 30, 2012	$	133,578		$	8,314		$	6,845	$	148,737

	As of and for the three months ended November 30, 2011
(dollar amounts in thousands)	CFC			RTFC		NCSC			Total
Balance as of August 31, 2011	$	134,457		$	8,649	$	8,994		$	152,100
(Recovery of) provision for loan losses	(3,625		)	824		(194		)	(2,995		)
Recoveries of loans previously charged-off	53			—		—			53
Balance as of November 30, 2011	$	130,885		$	9,473	$	8,800		$	149,158

	As of and for the six months ended November 30, 2012
(dollar amounts in thousands)	CFC		RTFC			NCSC			Total
Balance as of May 31, 2012	$	126,941	$	8,562		$	7,823		$	143,326
Provision for (recovery of) loan losses	6,531		(248		)	(978		)	5,305
Recoveries of loans previously charged-off	106		—			—			106
Balance as of November 30, 2012	$	133,578	$	8,314		$	6,845		$	148,737

	As of and for the six months ended November 30, 2011
(dollar amounts in thousands)	CFC			RTFC		NCSC			Total
Balance as of May 31, 2011	$	143,706		$	8,389	$	9,082		$	161,177
(Recovery of) provision for loan losses	(12,927		)	1,084		(282		)	(12,125		)
Recoveries of loans previously charged-off	106			—		—			106
Balance as of November 30, 2011	$	130,885		$	9,473	$	8,800		$	149,158

Schedule of loan loss allowance and the recorded investment in outstanding loans by impairment methodology and by company

	November 30, 2012
(dollar amounts in thousands)	CFC		RTFC		NCSC		Total
Ending balance of the allowance:
Collectively evaluated	$	113,627	$	6,695	$	6,845	$	127,167
Individually evaluated	19,951		1,619		—		21,570
Total ending balance of the allowance	$	133,578	$	8,314	$	6,845	$	148,737
Recorded investment in loans:
Collectively evaluated	$	17,790,837	$	530,182	$	693,712	$	19,014,731
Individually evaluated	75,866		6,577		—		82,443
Total recorded investment in loans	$	17,866,703	$	536,759	$	693,712	$	19,097,174
Loans to members, net (1)	$	17,733,125	$	528,445	$	686,867	$	18,948,437

	May 31, 2012
(dollar amounts in thousands)	CFC		RTFC		NCSC		Total
Ending balance of the allowance:
Collectively evaluated	$	103,681	$	6,561	$	7,823	$	118,065
Individually evaluated	23,260		2,001		—		25,261
Total ending balance of the allowance	$	126,941	$	8,562	$	7,823	$	143,326
Recorded investment in loans:
Collectively evaluated	$	17,255,965	$	564,596	$	594,279	$	18,414,840
Individually evaluated	489,932		6,970		—		496,902
Total recorded investment in loans	$	17,745,897	$	571,566	$	594,279	$	18,911,742
Loans to members, net (1)	$	17,618,956	$	563,004	$	586,456	$	18,768,416

(1) Excludes deferred origination costs of $8 million at November 30, 2012 and May 31, 2012

Summary of recorded investment in individually-impaired loans and the related specific valuation allowance by member class

November 30, 2012				May 31, 2012
(dollar amounts in thousands)	Recordedinvestment		Relatedallowance		Recordedinvestment		Relatedallowance
With no specific allowance recorded:
CFC/Distribution	$	39,717	$	—	$	415,692	$	—
With a specific allowance recorded:
CFC/Distribution	31,149		19,709		69,240		23,009
CFC/Power Supply	5,000		242		5,000		251
RTFC	6,577		1,619		6,970		2,001
Total	42,726		21,570		81,210		25,261
Total impaired loans	$	82,443	$	21,570	$	496,902	$	25,261

Schedule of average recorded investment in impaired loans and the interest income recognized by member class

	For the three months ended November 30,
	2012		2011		2012		2011
(dollar amounts in thousands)	Average recorded investment				Interest income recognized
CFC/Distribution	$	70,706	$	491,101	$	7,625	$	4,084
CFC/Power Supply	5,000		2,667		—		—
RTFC	6,618		7,962		—		—
Total impaired loans	$	82,324	$	501,730	$	7,625	$	4,084

	For the six months ended November 30,
	Average recorded investment				Interest income recognized
(dollar amounts in thousands)	2012		2011		2012		2011
CFC/Distribution	$	277,891	$	494,620	$	13,087	$	4,776
CFC/Power Supply	5,000		1,333		—		—
RTFC	6,754		5,322		—		—
Total impaired loans	$	289,645	$	501,275	$	13,087	$	4,776

Schedule of interest income reduced as a result of holding loans on non-accrual status

For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)	2012		2011		2012		2011
Non-performing loans	$	373	$	388	$	780	$	805
Restructured loans	—		1,384		—		6,714
Total	$	373	$	1,772	$	780	$	7,519

Summary of loans outstanding as collateral pledged to secure the entity's collateral trust bonds, Clean Renewable Energy Bonds and notes payable to the Federal Agricultural Mortgage Corporation and the amount of the corresponding debt outstanding

(dollar amounts in thousands)	November 30, 2012		May 31, 2012
Collateral trust bonds:
2007 indenture
Distribution system mortgage notes	$	5,839,885	$	5,833,475
RUS guaranteed loans qualifying as permitted investments	167,953		170,024
Total pledged collateral	$	6,007,838	$	6,003,499
Collateral trust bonds outstanding	4,979,372		4,850,000
1994 indenture
Distribution system mortgage notes	$	1,724,015	$	1,574,823
Collateral trust bonds outstanding	1,465,000		1,470,000
Federal Agricultural Mortgage Corporation:
Distribution and power supply system mortgage notes	$	1,579,274	$	1,379,989
Notes payable outstanding	1,298,506		1,165,100
Clean Renewable Energy Bonds Series 2009A:
Distribution and power supply system mortgage notes	$	24,605	$	25,640
Cash	7,218		7,669
Total pledged collateral	$	31,823	$	33,309
Notes payable outstanding	21,545		23,487

Schedule of collateral on deposit and the amount of the corresponding debt outstanding

(dollar amounts in thousands)	November 30, 2012		May 31, 2012
Federal Financing Bank
Distribution and power supply system mortgage notes on deposit	$	4,053,511	$	3,814,311
Notes payable outstanding	3,674,000		3,419,000

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Investments (Details) (USD $) In Millions, unless otherwise specified		0 Months Ended
	Nov. 30, 2012	Nov. 30, 2012 Maximum	Nov. 30, 2012 Farmer Mac Series C preferred stock	May 31, 2012 Farmer Mac Series C preferred stock	Nov. 30, 2012 Farmer Mac Series A common stock	May 31, 2012 Farmer Mac Series A common stock
Investments
Investment at cost			$ 58	$ 58
Investment at fair value					2	1
Deposit with a financial institution in an interest bearing account	$ 250
Term of deposit assets		1 year

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Short-Term Debt and Credit Arrangements (Tables)

6 Months Ended

Nov. 30, 2012

Short-Term Debt and Credit Arrangements

Summary of short-term debt outstanding

(dollar amounts in thousands)	November 30, 2012		May 31, 2012
Short-term debt:
Commercial paper sold through dealers, net of discounts (1)	$	1,009,898	$	1,404,901
Commercial paper sold directly to members, at par (1)	1,408,371		997,778
Commercial paper sold directly to non-members, at par (1)	39,828		70,479
Select notes	51,852		—
Daily liquidity fund notes sold directly to members	656,701		478,406
Bank bid notes	295,000		295,000
Subtotal short-term debt	3,461,650		3,246,564
Long-term debt maturing within one year:
Medium-term notes sold through dealers	630,262		232,830
Medium-term notes sold to members	396,806		409,961
Secured collateral trust bonds	1,204,783		254,962
Member subordinated certificates	15,080		16,710
Secured notes payable	336,872		327,006
Unsecured notes payable	5,408		5,401
Total long-term debt maturing within one year	2,589,211		1,246,870
Total short-term debt	$	6,050,861	$	4,493,434

(1) Backup liquidity provided by bank lines of credit.

Schedule of total available and outstanding letters of credit under the revolving credit agreements

	Total available				Letters of credit outstanding
(dollar amounts in thousands)	November 30, 2012		May 31, 2012		November 30, 2012		May 31, 2012		Original maturity	Facility fee per year (1)
Three-year agreement	$	1,125,000	$	1,125,000	$	—	$	—	March 21, 2014	15 basis points
Four-year agreement	883,875		883,875		1,000		1,000		October 21, 2015	10 basis points
Five-year agreement	831,387		834,875		3,488		—		October 21, 2016	10 basis points
Total	$	2,840,262	$	2,843,750	$	4,488	$	1,000

(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.

Schedule of required and actual financial ratios under the revolving credit agreements

		Actual
	Requirement	November 30, 2012	May 31, 2012
Minimum average adjusted TIER over the six most recent fiscal quarters (1)	1.025	1.19	1.21
Minimum adjusted TIER for the most recent fiscal year (1) (2)	1.05	1.18	1.18
Maximum ratio of adjusted senior debt to total equity (1)	10.00	5.96	5.97

(1) In addition to the adjustments made to the leverage ratio set forth in the Non-GAAP Financial Measures section, 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 in the Non-GAAP Financial Measures section and exclude the results of operations for CAH.

(2) We must meet this requirement to retire patronage capital.

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General Information and Accounting Policies

6 Months Ended

Nov. 30, 2012

General Information and Accounting Policies

General Information and Accounting Policies

(1)           General Information and Accounting Policies

(a)           Basis of Presentation

The accompanying financial statements include the consolidated accounts 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 accommodate loan securitization transactions, after elimination of intercompany accounts and transactions.

Unless stated otherwise, references to “we,” “our” or “us” represent the consolidation of CFC, RTFC, NCSC and certain entities created and controlled by CFC to hold foreclosed assets and accommodate loan securitization transactions. Foreclosed assets are held by two groups of subsidiaries wholly-owned by CFC. Our Denton Realty Partners entities (“DRP”) hold assets, including a land development loan, limited partnership interests in certain real estate developments and developed lots and land and raw land in Texas. Caribbean Asset Holdings LLC (“CAH”) holds our investment in cable and telecommunications operating entities in the United States Virgin Islands (“USVI”), British Virgin Islands and St. Maarten.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the assets, liabilities, revenue and expenses reported in the financial statements, as well as amounts included in the notes thereto, including discussion and disclosure of contingent liabilities. The accounting estimates that require our most significant and subjective judgments include the allowance for loan losses and the determination of the fair value of our derivatives and certain aspects of our foreclosed assets. While we use our best estimates and judgments based on the known facts at the date of the financial statements, actual results could differ from these estimates as future events occur.

These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2012.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (which consist only of normal recurring accruals) necessary for a fair presentation of our results of operations and financial position for the interim periods presented.

(b)           Variable Interest Entities

We are required to consolidate the financial results of RTFC and NCSC because CFC is the primary beneficiary of variable interests in RTFC and NCSC due to its exposure to absorbing the majority of their expected losses and because CFC manages the business activities of RTFC and NCSC. Under separate guarantee agreements, RTFC and NCSC pay CFC a fee to indemnify against loan losses. CFC manages the business activities of RTFC and NCSC through separate management agreements. Additionally, CFC is the sole lender to RTFC and the primary source of funding to NCSC. NCSC funds its lending programs through loans from CFC and debt guaranteed by CFC.

RTFC and NCSC creditors have no recourse against CFC in the event of a default by RTFC and NCSC, unless there is a guarantee agreement under which CFC has guaranteed NCSC or RTFC debt obligations to a third party. At November 30, 2012, CFC had guaranteed $79 million of NCSC debt, derivative instruments and guarantees with third parties, and CFC’s maximum potential exposure for these instruments totaled $88 million. The maturities for NCSC obligations guaranteed by CFC run through 2031. Guarantees of NCSC debt and derivative instruments are not included in Note 10, Guarantees, as the debt and derivatives are reported on the consolidated balance sheet. At November 30, 2012, CFC guaranteed $5 million of RTFC guarantees with third parties. The maturities for RTFC obligations guaranteed by CFC run through 2013. All CFC loans to RTFC and NCSC are secured by all assets and revenue of RTFC and NCSC. At November 30, 2012, RTFC had total assets of $662 million and NCSC had total assets of $722 million. At November 30, 2012, CFC had committed to lend RTFC up to $4,000 million, of which $523 million was outstanding. At November 30, 2012, CFC had committed to provide up to $2,000 million of credit to NCSC, of which $754 million was outstanding, representing $675 million of outstanding loans and $79 million of credit enhancements. In December 2012, CFC increased its commitment to provide up to $3,000 million of credit to NCSC.

(c)           Loan Sales

We account for the sale of loans resulting from direct loan sales to third parties and securitization transactions by removing the financial assets from our consolidated balance sheets when control has been surrendered. We recognize related servicing fees on an accrual basis over the period for which servicing activity is provided. Deferred transaction costs and unamortized deferred loan origination costs related to the loans sold are included in the calculation of the gain or loss on the sale. We do not hold any continuing interest in the loans sold to date other than servicing performance obligations. We have no obligation to repurchase loans from the purchaser, except in the case of breaches of representations and warranties. We retain the servicing performance obligations on these loans. We have not recorded a servicing asset or liability.

During the six months ended November 30, 2012 and 2011, we sold CFC loans with outstanding balances totaling $98 million and $82 million, respectively, at par for cash. We recorded a loss on sale of loans, representing the unamortized deferred loan origination costs and transaction costs for the loans sold, which was immaterial during the six months ended November 30, 2012 and 2011.

(d)           Interest Income

Interest income on loans is recognized using the effective interest method. The following table presents the components of interest income:

	For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)	2012		2011		2012		2011
Interest on long-term fixed-rate loans	$	218,247	$	219,841	$	436,187	$	445,187
Interest on long-term variable-rate loans	4,893		4,655		10,918		12,907
Interest on line of credit loans	7,413		6,738		15,105		16,364
Interest on restructured loans	7,625		4,084		13,087		4,776
Interest on investments	1,576		853		2,514		1,781
Fee income (1)	1,876		1,584		3,904		3,990
Total interest income	$	241,630	$	237,755	$	481,715	$	485,005

(1) 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.

Deferred income on the consolidated balance sheets primarily includes deferred conversion fees totaling $18 million and $20 million at November 30, 2012 and May 31, 2012, respectively.

(e)           Interest Expense

The following table presents the components of interest expense:

	For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)	2012		2011		2012		2011
Interest expense on debt (1):
Commercial paper and bank bid notes	$	1,697	$	1,391	$	3,316	$	3,160
Medium-term notes	24,833		47,733		52,716		101,574
Collateral trust bonds	82,271		77,346		163,710		154,618
Subordinated deferrable debt	2,807		2,807		5,613		5,613
Subordinated certificates	20,528		20,075		40,882		38,376
Long-term notes payable	37,915		39,071		76,311		78,898
Debt issuance costs (2)	1,905		2,380		3,842		7,505
Fee expense (3)	2,345		3,877		4,507		6,980
Total interest expense	$	174,301	$	194,680	$	350,897	$	396,724

(1) Represents interest expense and the amortization of discounts on debt.

(2) Includes amortization of all deferred charges related to the issuance of debt, principally underwriters’ fees, legal fees, printing costs and comfort letter fees. Amortization is calculated using the effective interest method or a method approximating the effective interest method. Also includes issuance costs related to dealer commercial paper, which are recognized as incurred.

(3) 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.

We exclude indirect costs, if any, related to funding activities from interest expense.

(f)            Derivative Financial Instruments

We are an end user of financial derivative instruments. We use derivatives such as interest rate swaps and treasury rate locks to mitigate interest rate risk. Consistent with the accounting standards for derivative financial instruments, we record derivative instruments on the consolidated balance sheets as either an asset or liability measured at fair value. In recording the fair value of derivative assets and liabilities, we do not net our positions under contracts with individual counterparties. Changes in the fair value of derivative instruments along with realized gains and losses from cash settlements are recognized in the derivative gains (losses) line item of the consolidated statement of operations unless specific hedge accounting criteria are met.

We formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. If applicable hedge accounting criteria are satisfied, the change in fair value of derivative instruments is recorded to other comprehensive income, and net cash settlements are recorded in interest expense. The gain or loss on derivatives used as a cash flow hedge of a forecasted debt transaction is recorded as a component of other comprehensive income (loss) and amortized through interest expense using the effective interest method over the term of the hedged debt. Any ineffectiveness in the hedging relationship is recognized in the derivative gains (losses) line of the statement of operations.

A transition adjustment was recorded as an other comprehensive loss on June 1, 2001, the date we implemented the accounting standards for derivative financial instruments. This amount will be amortized into earnings through April 2029 in the derivative gains (losses) line of the statement of operations.

Cash activity associated with interest rate swaps is classified as an operating activity in the consolidated statements of cash flows.

(g)           Early Extinguishment of Debt

We redeem outstanding debt early from time to time to manage liquidity and interest rate risk. When we redeem outstanding debt early, we recognize a gain or loss related to the difference between the amount paid to redeem the debt and the net book value of the extinguished debt as a component of non-interest expense in the gain (loss) on early extinguishment of debt line item.

In August 2011 and October 2011, we redeemed a total of $500 million of our $1,500 million, 7.25 percent Series C medium-term notes with an original maturity of March 1, 2012 at a premium. Both the premium and unamortized issuance costs totaling $16 million were recorded as a loss on extinguishment of debt during the six months ended November 30, 2011.

(h)           Reclassifications

Reclassifications of prior period amounts have been made to conform to the current reporting format and the presentation in our Form 10-Q for the three and six months ended November 30, 2012. Specifically, the fair value adjustments on DRP foreclosed assets have been reclassified into results of operations of foreclosed assets in the condensed consolidated statement of operations for the three and six months ended November 30, 2011. The corresponding non-cash adjustments were reclassified to the results of operations of foreclosed assets on the condensed consolidated statement of cash flows for the six months ended November 30, 2011.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Nov. 30, 2012	Nov. 30, 2011	Nov. 30, 2012	Nov. 30, 2011
Interest income	$ 241,630	$ 237,755	$ 481,715	$ 485,005
Interest expense	(174,301)	(194,680)	(350,897)	(396,724)
Net interest income	67,329	43,075	130,818	88,281
Recovery of (provision for) loan losses	3,817	2,995	(5,305)	12,125
Net interest income after recovery of (provision for) loan losses	71,146	46,070	125,513	100,406
Non-interest income:
Fee and other income	17,807	3,986	22,765	8,709
Derivative losses	(3,766)	(47,753)	(28,358)	(159,324)
Results of operations of foreclosed assets	(909)	(6,648)	(5,674)	(16,466)
Total non-interest income	13,132	(50,415)	(11,267)	(167,081)
Non-interest expense:
Salaries and employee benefits	(10,148)	(9,833)	(20,553)	(20,232)
Other general and administrative expenses	(9,303)	(6,859)	(16,068)	(12,849)
Recovery of guarantee liability	92	12	101	72
Loss on early extinguishment of debt		(6,258)		(15,525)
Other	(4,384)	(418)	(4,547)	(815)
Total non-interest expense	(23,743)	(23,356)	(41,067)	(49,349)
Income (loss) prior to income taxes	60,535	(27,701)	73,179	(116,024)
Income tax (expense) benefit	(454)	407	(452)	2,108
Net income (loss)	60,081	(27,294)	72,727	(113,916)
Less: Net (income) loss attributable to the noncontrolling interest	(699)	533	(704)	3,123
Net income (loss) attributable to CFC	$ 59,382	$ (26,761)	$ 72,023	$ (110,793)

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Fair Value Measurement

6 Months Ended

Nov. 30, 2012

Fair Value Measurement

Fair Value Measurement

(11)         Fair Value Measurement

Assets and liabilities measured at fair value on either a recurring or non-recurring basis on the consolidated balance sheets at November 30, 2012 and May 31, 2012 consisted of investments in common stock, derivative instruments, and collateral-dependent non-performing loans.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

We account for derivative instruments (including certain derivative instruments embedded in other contracts) in the consolidated balance sheets as either an asset or liability measured at fair value. Since there is not an active secondary market for the types of interest rate swaps we use, we obtain market quotes from the interest rate swap counterparties to adjust all swaps to fair value on a quarterly basis. The market quotes are based on the expected future cash flow and the estimated yield curve.

We perform analysis to validate the market quotes obtained from our swap counterparties. We adjust the market values received from the counterparties using credit default swap levels for us and the counterparties. The credit default swap levels represent the credit risk premium required by a market participant based on the available information related to us and the counterparty. We only enter into exchange agreements with counterparties that are participating in our revolving lines of credit at the time the exchange agreements are executed. All of our exchange agreements are subject to master netting agreements.

Our valuation techniques for interest rate swaps are based on observable inputs, which reflect market data. Fair values for our interest rate swaps are classified as a Level 2 valuation. We record the change in the fair value of our derivatives for each reporting period in the derivative gains (losses) line, included in non-interest income in the consolidated statements of operations, as currently none of our derivatives qualify for hedge accounting.

At November 30, 2012 and May 31, 2012, our investments in equity securities included investments in the Federal Agricultural Mortgage Corporation Series A common stock that is recorded in the consolidated balance sheets at fair value. We calculate fair value based on the quoted price on the stock exchange where the stock is traded. That stock exchange is an active market based on the volume of shares transacted. Fair values for these securities are classified as a Level 1 valuation.

The following table presents our assets and liabilities that are measured at fair value on a recurring basis:

	November 30, 2012				May 31, 2012
(dollar amounts in thousands)	Level 1		Level 2		Level 1		Level 2
Derivative assets	$	—	$	273,480	$	—	$	296,036
Derivative liabilities	—		630,919		—		654,125
Investments in common stock	2,354		—		1,467		—

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. Any adjustments to fair value usually result from application of lower-of-cost or fair value accounting or write-downs of individual assets. At November 30, 2012 and May 31, 2012, we measured certain collateral-dependent non-performing loans at fair value. In certain instances when a loan is non-performing, we utilize the collateral fair value underlying the loan in estimating the specific loan loss allowance. To estimate the fair value of the collateral, we may use third party valuation specialists, internal estimates or a combination of both. The approaches used by both our internal staff and third party specialists include the discounted cash flow, market multiple and replacement cost methods. The material inputs used in estimating the fair value of such collateral, by both internal staff and third party specialists, are Level 3 within the fair value hierarchy. In these instances, the valuation is considered to be a non-recurring item. The significant unobservable inputs for Level 3 assets that are valued using fair values obtained from third party specialists are reviewed by our Credit Risk Management group to assess the reasonableness of the assumptions used and the accuracy of the work performed. In cases where we rely on third party inputs, we use the final unadjusted third party valuation analysis as support for any financial statement adjustments and disclosures to the financial statements. The valuation techniques and significant unobservable inputs for assets classified as Level 3 in the fair value hierarchy, which are measured using an internal model, are independently reviewed by other internal staff.

For assets measured at fair value on a non-recurring basis at November 30, 2012 and May 31, 2012 that are classified as Level 3 within the fair value hierarchy, any increase or decrease to significant unobservable inputs used in the determination of fair value, will not have a material impact on the fair value measurement of those assets or to the results of operations of the Company.

Assets measured at fair value on a non-recurring basis at November 30, 2012 and May 31, 2012 were classified as Level 3 within the fair value hierarchy. The following table provides the carrying/fair value of the related individual assets at November 30, 2012 and May 31, 2012 and the total losses for the three and six months ended November 30, 2012 and 2011:

	Level 3 Fair Value				Total losses for the three months ended November 30,					Total losses for the six months ended November 30,
(dollar amounts in thousands)	November 30, 2012		May 31, 2012		2012		2011			2012		2011
Non-performing loans,
net of specific reserves	$	21,156	$	16,517	$	—	$	(167	)	$	—	$	(2,220	)

XML

Document and Entity Information	6 Months Ended
	Nov. 30, 2012
Document and Entity Information
Entity Registrant Name	NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/
Entity Central Index Key	0000070502
Document Type	10-Q
Document Period End Date	Nov. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--05-31
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding	0
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2

XML

Fair Value of Financial Instruments

6 Months Ended

Nov. 30, 2012

Fair Value of Financial Instruments

Fair Value of Financial Instruments

(12)         Fair Value of Financial Instruments

Carrying and fair values for our financial instruments are presented as follows:

	November 30, 2012				May 31, 2012
(dollar amounts in thousands)	Carrying value		Fair value		Carrying value		Fair value
Assets:
Cash and cash equivalents	$	439,183	$	439,183	$	191,167	$	191,167
Restricted cash	8,649		8,649		7,694		7,694
Investments	309,932		309,932		59,045		59,045
Loans to members, net	18,956,470		20,564,234		18,776,286		20,405,353
Debt service reserve funds	39,803		39,803		39,803		39,803
Derivative instruments	273,480		273,480		296,036		296,036
Liabilities:
Short-term debt	6,050,861		6,084,603		4,493,434		4,498,565
Long-term debt	11,201,472		13,011,698		12,151,967		13,936,540
Guarantee liability	26,978		29,818		28,663		31,518
Derivative instruments	630,919		630,919		654,125		654,125
Subordinated deferrable debt	186,440		188,227		186,440		187,335
Members’ subordinated certificates	1,772,207		1,928,999		1,722,744		1,880,558
Off-balance sheet instruments:
Commitments	—		—		—		—

See Note 11, Fair Value Measurement, for more details on assets and liabilities measured at fair value on a recurring or non-recurring basis on our consolidated balance sheets. We consider relevant and observable prices in the principal market in our valuations where possible. Fair value estimates were developed at the reporting date and may not necessarily be indicative of amounts that could ultimately be realized in a market transaction at a future date.

With the exception of redeeming debt under early redemption provisions, terminating derivative instruments under early termination provisions and allowing borrowers to prepay their loans, we held and intend to hold all financial instruments to maturity excluding common stock investments that have no stated maturity. Below is a summary of significant methodologies used in estimating fair value amounts at November 30, 2012 and May 31, 2012.

Cash and Cash Equivalents

Cash and cash equivalents includes cash and certificates of deposit with original maturities of less than 90 days. Cash and cash equivalents are valued at the carrying value, which approximates fair value. Cash and cash equivalents are classified within Level 1 of the fair value hierarchy.

Restricted Cash

Restricted cash consists of cash and cash equivalents for which use is contractually restricted. Restricted cash is valued at the carrying value, which approximates fair value. Restricted cash is classified within Level 1 of the fair value hierarchy.

Investments

Our investments include investments in the Federal Agricultural Mortgage Corporation Series A common stock. The Series A common stock is classified as available-for-sale securities and recorded in the consolidated balance sheets at fair value. We calculate fair value based on the quoted price on the stock exchange where the stock is traded. That stock exchange is an active market based on the volume of shares transacted. The common stock is classified within Level 1 of the fair value hierarchy.

Our investments also include investments in Federal Agricultural Mortgage Corporation Series C non-voting, cumulative preferred stock purchased based on a percentage of debt issued under note purchase agreements. The note purchase agreements have since been amended so that we may be required to purchase additional Series C preferred stock based on the terms and circumstances at the time of each advance. The fair value for the Series C preferred stock is estimated at cost, which approximates fair value as the preferred stock securities do not meet the definition of marketable securities and the stock is callable at par. These securities carry with it a netting provision against our debt held by Federal Agricultural Mortgage Corporation in case of non-payment, therefore transferability of these securities is unlikely. The preferred stock is classified within Level 3 of the fair value hierarchy.

Our investments also include a deposit that we made with a financial institution in an interest bearing account with a maturity of less than one year as of the reporting date. This deposit is valued at the carrying value, which approximates fair value. It is classified within Level 2 of the fair value hierarchy.

Loans to Members, Net

As part of receiving a loan from us, our members have additional requirements and rights that are not typical of other financial institutions, such as the ability to receive a patronage capital allocation, the general requirement to purchase subordinated certificates or member capital securities to meet their capital contribution requirements as a condition of obtaining additional credit from us, the option to select fixed rates from one year to maturity with the fixed rate resetting or repricing at the end of each selected rate term, the ability to convert from a fixed rate to another fixed rate or the variable rate at any time, and certain interest rate discounts that are specific to the borrower’s activity with us. These features make it difficult to obtain market data for similar loans. Therefore, we must use other methods to estimate the fair value.

Fair values for fixed-rate loans are estimated by discounting the future cash flows using the current rates at which we would make similar loans to new borrowers for the same remaining maturities. The maturity date used in the fair value calculation of loans with a fixed rate for a selected rate term is the next repricing date since these borrowers must reprice their loans at various times throughout the life of the loan at the then-current market rate.

Loans with different risk characteristics, specifically non-performing and restructured loans, are valued by using collateral valuations or by adjusting cash flows for credit risk and discounting those cash flows using the current rates at which similar loans would be made by us to borrowers for the same remaining maturities. See Note 11, Fair Value Measurement, for more details about how we calculate the fair value of certain non-performing loans.

Variable-rate loans are valued at cost, which approximates fair value since we can reset rates every 15 days.

Credit risk for the loan portfolio is estimated based on the associated reserve in our allowance for loan losses.

Loans to members, net are classified within Level 3 of the fair value hierarchy.

Debt Service Reserve Funds

Debt service reserve funds represent cash and/or investments on deposit with the bond trustee for tax-exempt bonds that we guarantee. Carrying value is considered to be equal to fair value. Debt service reserve funds are classified within Level 1 of the fair value hierarchy.

Short-Term Debt

Short-term debt consists of commercial paper, bank bid notes and other debt due within one year. The fair value of short-term debt with maturities greater than 90 days is estimated based on quoted market rates for debt with similar maturities. The fair value of short-term debt with maturities less than or equal to 90 days is carrying value, which is a reasonable estimate of fair value. Short-term debt is classified within Level 2 and Level 3 of the fair value hierarchy.

Long-Term Debt

Long-term debt consists of collateral trust bonds, medium-term notes and long-term notes payable. We issue all collateral trust bonds and some medium-term notes in underwritten public transactions. There is not active secondary trading for all underwritten collateral trust bonds and medium-term notes; therefore, dealer quotes and recent market prices are both used in estimating fair value. There is essentially no secondary market for the medium-term notes issued to our members or in transactions that are not underwritten; therefore, fair value is estimated based on observable benchmark yields and spreads for similar instruments supplied by banks that underwrite our other debt transactions. Collateral trust bonds and medium-term notes are classified within Level 2 of the fair value hierarchy. The long-term notes payable are issued in private placement transactions and there is no secondary trading of such debt. Therefore, the fair value is estimated based on underwriter quotes for similar instruments, if available, or based on cash flows discounted at current rates for similar instruments supplied by underwriters or by the original issuer. Secondary trading quotes for our debt instruments used in the determination of fair value incorporate our credit risk. Long-term notes payable are classified within Level 3 of the fair value hierarchy.

Guarantees

The fair value of our guarantee liability is based on the fair value of our contingent and non-contingent exposure related to our guarantees. The fair value of our contingent exposure for guarantees is based on management’s estimate of our exposure to losses within the guarantee portfolio. The fair value of our non-contingent exposure for guarantees issued is estimated based on the total unamortized balance of guarantee fees paid and guarantee fees to be paid discounted at our current short-term funding rate, which represents management’s estimate of the fair value of our obligation to stand ready to perform. Guarantees are classified within Level 3 of the fair value hierarchy.

Subordinated Deferrable Debt

Our subordinated deferrable debt is traded on the New York Stock Exchange; therefore, daily market quotes are available. The fair value for subordinated deferrable debt is based on the closing market quotes from the last day of the reporting period. Subordinated deferrable debt is classified within Level 1 of the fair value hierarchy.

Members’ Subordinated Certificates

Members’ subordinated certificates include (i) membership subordinated certificates issued to our members as a condition of membership, (ii) loan and guarantee subordinated certificates as a condition of obtaining loan funds or guarantees and (iii) member capital securities issued as voluntary investments by our members. All members’ subordinated certificates are non-transferable other than among members with CFC’s consent. As there is no ready market from which to obtain fair value quotes for membership, loan and guarantee subordinated certificates, it is impracticable to estimate fair value, and such certificates are, therefore, valued at par. There also is no ready market from which to obtain fair value quotes for member capital securities. Fair value for member capital securities is based on the discounted cash flows using the coupon interest rate on the last business day of the reporting period. Members’ subordinated certificates are classified within Level 3 of the fair value hierarchy.

Derivative Instruments

We record derivative instruments in the consolidated balance sheets as either an asset or liability measured at fair value. Because there is not an active secondary market for the types of interest rate swaps we use, we obtain market quotes from the interest rate swap counterparties to adjust all interest rate swaps to fair value on a quarterly basis. The market quotes are based on the expected future cash flow and estimated yield curves. We adjust the market values received from the counterparties using credit default swap levels for us and the counterparties. The credit default swap levels represent the credit risk premium required by a market participant based on the available information related to us and the counterparty. Derivative instruments are classified within Level 2 of the fair value hierarchy.

Commitments

The fair value of our commitments is estimated as the carrying value, or zero. Extensions of credit under these commitments, if exercised, would result in loans priced at market rates. Commitments are classified within Level 3 of the fair value hierarchy.

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Nov. 30, 2012	Nov. 30, 2011	Nov. 30, 2012	Nov. 30, 2011
Net income (loss)	$ 60,081	$ (27,294)	$ 72,727	$ (113,916)
Other comprehensive income (loss):
Add: Unrealized gains (losses) on securities	893	(160)	887	(99)
Less: Realized gains on derivatives	(253)	(259)	(505)	(518)
Other comprehensive income (loss)	640	(419)	382	(617)
Total comprehensive income (loss)	60,721	(27,713)	73,109	(114,533)
Less: Total comprehensive (income) loss attributable to noncontrolling interest	(694)	539	(693)	3,136
Total comprehensive income (loss) attributable to CFC	$ 60,027	$ (27,174)	$ 72,416	$ (111,397)

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Long-Term Debt

6 Months Ended

Nov. 30, 2012

Long-Term Debt

Long-Term Debt

(6)           Long-Term Debt

The following is a summary of long-term debt outstanding:

(dollar amounts in thousands)	November 30, 2012			May 31, 2012
Unsecured long-term debt:
Medium-term notes sold through dealers	$	1,295,252		$	1,692,605
Medium-term notes sold to members	156,403			89,261
Subtotal	1,451,655			1,781,866
Unamortized discount	(634		)	(971		)
Total unsecured medium-term notes	1,451,021			1,780,895
Unsecured notes payable	3,712,982			3,457,982
Unamortized discount	(1,011		)	(1,093		)
Total unsecured notes payable	3,711,971			3,456,889
Total unsecured long-term debt	5,162,992			5,237,784
Secured long-term debt:
Collateral trust bonds	5,239,372			6,065,000
Unamortized discount	(184,070		)	(12,398		)
Total secured collateral trust bonds	5,055,302			6,052,602
Secured notes payable	983,178			861,581
Total secured long-term debt	6,038,480			6,914,183
Total long-term debt	$	11,201,472		$	12,151,967

At November 30, 2012 and May 31, 2012, we had unsecured notes payable totaling $3,674 million and $3,419 million, respectively, outstanding under a bond purchase agreement with the Federal Financing Bank and a bond guarantee agreement with RUS issued under the Guaranteed Underwriter program of the U.S. Department of Agriculture, which provides guarantees to the Federal Financing Bank. During the six months ended November 30, 2012, we borrowed $255 million under our committed loan facilities with the Federal Financing Bank. In the aggregate at November 30, 2012, we had up to $325 million available under committed loan facilities from the Federal Financing Bank as part of this program.

At November 30, 2012 and May 31, 2012, secured notes payable include $1,299 million and $1,165 million, respectively, in debt outstanding to the Federal Agricultural Mortgage Corporation under a note purchase agreement totaling $3,900 million. All note purchase agreements previously entered into with the Federal Agricultural Mortgage Corporation were consolidated into one agreement in March 2011. Under the terms of the 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 then-remaining term. The agreement with the Federal Agricultural Mortgage Corporation is a revolving credit facility that allows us to borrow, repay and re-borrow funds at any time through maturity or from time to time as market conditions permit, provided that the principal amount at any time outstanding under the note purchase agreement is not more than the total available under the agreement. In November 2012, we issued notes totaling $133 million under the agreement with the Federal Agricultural Mortgage Corporation.

In September 2012, CFC commenced an offer to exchange a portion of its outstanding 8 percent medium-term notes, Series C, due 2032 for consideration of collateral trust bonds due 2032 and cash. On October 10, 2012, following the expiration of the offering period, CFC announced that it had accepted $340 million aggregate principal amount of medium-term notes for exchange. At settlement, on October 16, 2012, holders whose medium-term notes were accepted for exchange received $379 million aggregate principal amount of 4.023 percent collateral trust bonds due 2032 and $134 million in cash.

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Short-Term Debt and Credit Arrangements

6 Months Ended

Nov. 30, 2012

Short-Term Debt and Credit Arrangements

Short-Term Debt and Credit Arrangements

(5)           Short-Term Debt and Credit Arrangements

The following is a summary of short-term debt outstanding:

(dollar amounts in thousands)	November 30, 2012		May 31, 2012
Short-term debt:
Commercial paper sold through dealers, net of discounts (1)	$	1,009,898	$	1,404,901
Commercial paper sold directly to members, at par (1)	1,408,371		997,778
Commercial paper sold directly to non-members, at par (1)	39,828		70,479
Select notes	51,852		—
Daily liquidity fund notes sold directly to members	656,701		478,406
Bank bid notes	295,000		295,000
Subtotal short-term debt	3,461,650		3,246,564
Long-term debt maturing within one year:
Medium-term notes sold through dealers	630,262		232,830
Medium-term notes sold to members	396,806		409,961
Secured collateral trust bonds	1,204,783		254,962
Member subordinated certificates	15,080		16,710
Secured notes payable	336,872		327,006
Unsecured notes payable	5,408		5,401
Total long-term debt maturing within one year	2,589,211		1,246,870
Total short-term debt	$	6,050,861	$	4,493,434

(1) Backup liquidity provided by bank lines of credit.

Revolving Credit Agreements

At November 30, 2012 and May 31, 2012, we had $2,845 million of commitments under revolving credit agreements. We may request letters of credit for up to $100 million under each agreement in place at November 30, 2012, which then reduces the amount available under the facility. The following table presents the total available and the outstanding letters of credit under our revolving credit agreements:

	Total available				Letters of credit outstanding
(dollar amounts in thousands)	November 30, 2012		May 31, 2012		November 30, 2012		May 31, 2012		Original maturity	Facility fee per year (1)
Three-year agreement	$	1,125,000	$	1,125,000	$	—	$	—	March 21, 2014	15 basis points
Four-year agreement	883,875		883,875		1,000		1,000		October 21, 2015	10 basis points
Five-year agreement	831,387		834,875		3,488		—		October 21, 2016	10 basis points
Total	$	2,840,262	$	2,843,750	$	4,488	$	1,000

(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.

The following represents our required and actual financial ratios under the revolving credit agreements:

		Actual
	Requirement	November 30, 2012	May 31, 2012
Minimum average adjusted TIER over the six most recent fiscal quarters (1)	1.025	1.19	1.21
Minimum adjusted TIER for the most recent fiscal year (1) (2)	1.05	1.18	1.18
Maximum ratio of adjusted senior debt to total equity (1)	10.00	5.96	5.97

(1) In addition to the adjustments made to the leverage ratio set forth in the Non-GAAP Financial Measures section, 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 in the Non-GAAP Financial Measures section and exclude the results of operations for CAH.

(2) We must meet this requirement to retire patronage capital.

At November 30, 2012 and May 31, 2012, we were in compliance with all covenants and conditions under our revolving credit agreements and there were no borrowings outstanding under these agreements.

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Foreclosed Assets (Tables)

6 Months Ended

Nov. 30, 2012

Foreclosed Assets

Summary of activity for foreclosed assets

	As of and for the six months ended November 30, 2012
(dollar amounts in thousands)	CAH			DRP			Total
Balance as of May 31, 2012	$	201,558		$	21,918		$	223,476
Results of operations:
Operating loss	(5,327		)	(171		)	(5,498		)
Impairment	—			(176		)	(176		)
Cash investments	28,001			—			28,001
Balance as of November 30, 2012	$	224,232		$	21,571		$	245,803

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Segment Information

6 Months Ended

Nov. 30, 2012

Segment Information

Segment Information

(13)         Segment Information

The following tables contain the segment presentation for the condensed consolidated statements of operations for the six months ended November 31, 2012 and 2011 and condensed consolidated balance sheets at November 30, 2012 and 2011.

	For the six months ended November 30, 2012
(dollar amounts in thousands)	CFC			Other			Elimination			Consolidated
Statement of operations:
Interest income	$	473,682		$	28,333		$	(20,300	)	$	481,715
Interest expense	(350,034		)	(21,163		)	20,300			(350,897		)
Net interest income	123,648			7,170			—			130,818
Provision for loan losses	(5,305		)	—			—			(5,305		)
Net interest income after provision for loan losses	118,343			7,170			—			125,513
Non-interest income:
Fee and other income	22,533			686			(454		)	22,765
Derivative losses	(26,436		)	(1,922		)	—			(28,358		)
Results of operations from foreclosed assets	(5,674		)	—			—			(5,674		)
Total non-interest income	(9,577		)	(1,236		)	(454		)	(11,267		)
Non-interest expense:
General and administrative expenses	(32,297		)	(4,778		)	454			(36,621		)
Recovery of guarantee liability	101			—			—			101
Other	(4,547		)	—			—			(4,547		)
Total non-interest expense	(36,743		)	(4,778		)	454			(41,067		)
Income prior to income taxes	72,023			1,156			—			73,179
Income tax expense	—			(452		)	—			(452		)
Net income	$	72,023		$	704		$	—		$	72,727
Assets:
Total loans outstanding	$	19,064,837		$	1,230,471		$	(1,198,134	)	$	19,097,174
Deferred origination costs	8,033			—			—			8,033
Less: Allowance for loan losses	(148,737		)	—			—			(148,737		)
Loans to members, net	18,924,133			1,230,471			(1,198,134		)	18,956,470
Other assets	1,623,931			153,837			(123,844		)	1,653,924
Total assets	$	20,548,064		$	1,384,308		$	(1,321,978	)	$	20,610,394

	For the six months ended November 30, 2011
(dollar amounts in thousands)	CFC			Other			Elimination			Consolidated
Statement of operations:
Interest income	$	475,194		$	36,453		$	(26,642	)	$	485,005
Interest expense	(396,011		)	(27,359		)	26,646			(396,724		)
Net interest income	79,183			9,094			4			88,281
Recovery of loan losses	12,125			—			—			12,125
Net interest income after recovery of loan losses	91,308			9,094			4			100,406
Non-interest income:
Fee and other income	9,146			431			(868		)	8,709
Derivative losses	(149,471		)	(9,853		)	—			(159,324		)
Results of operations from foreclosed assets	(16,466		)	—			—			(16,466		)
Total non-interest income	(156,791		)	(9,422		)	(868		)	(167,081		)
Non-interest expense:
General and administrative expenses	(29,042		)	(4,419		)	380			(33,081		)
Recovery of guarantee liability	72			—			—			72
Loss on early extinguishment of debt	(15,525		)	—			—			(15,525		)
Other	(815		)	(484		)	484			(815		)
Total non-interest expense	(45,310		)	(4,903		)	864			(49,349		)
Loss prior to income taxes	(110,793		)	(5,231		)	—			(116,024		)
Income tax benefit	—			2,108			—			2,108
Net loss	$	(110,793	)	$	(3,123	)	$	—		$	(113,916	)
Assets:
Total loans outstanding	$	18,279,036		$	1,187,321		$	(1,151,764	)	$	18,314,593
Deferred origination costs	7,050			—			—			7,050
Less: Allowance for loan losses	(149,158		)	—			—			(149,158		)
Loans to members, net	18,136,928			1,187,321			(1,151,764		)	18,172,485
Other assets	1,590,928			180,532			(151,607		)	1,619,853
Total assets	$	19,727,856		$	1,367,853		$	(1,303,371	)	$	19,792,338

The following tables contain the segment presentation for the condensed consolidated statements of operations for the three months ended November 30, 2012 and 2011.

	For the three months ended November 30, 2012
(dollar amounts in thousands)	CFC			Other			Elimination			Consolidated
Statement of operations:
Interest income	$	237,711		$	13,946		$	(10,027	)	$	241,630
Interest expense	(173,870		)	(10,458		)	10,027			(174,301		)
Net interest income	63,841			3,488			—			67,329
Recovery of loan losses	3,817			—			—			3,817
Net interest income after recovery of loan losses	67,658			3,488			—			71,146
Non-interest income:
Fee and other income	17,741			292			(226		)	17,807
Derivative losses	(3,391		)	(375		)	—			(3,766		)
Results of operations from foreclosed assets	(909		)	—			—			(909		)
Total non-interest income	13,441			(83		)	(226		)	13,132
Non-interest expense:
General and administrative expenses	(17,425		)	(2,252		)	226			(19,451		)
Recovery of guarantee liability	92			—			—			92
Other	(4,384		)	—			—			(4,384		)
Total non-interest expense	(21,717		)	(2,252		)	226			(23,743		)
Income prior to income taxes	59,382			1,153			—			60,535
Income tax expense	—			(454		)	—			(454		)
Net income	$	59,382		$	699		$	—		$	60,081

	For the three months ended November 30, 2011
(dollar amounts in thousands)	CFC			Other			Elimination			Consolidated
Statement of operations:
Interest income	$	234,001		$	17,106		$	(13,352	)	$	237,755
Interest expense	(194,418		)	(13,615		)	13,353			(194,680		)
Net interest income	39,583			3,491			1			43,075
Recovery of loan losses	2,995			—			—			2,995
Net interest income after recovery of loan losses	42,578			3,491			1			46,070
Non-interest income:
Fee and other income	3,964			213			(191		)	3,986
Derivative losses	(45,133		)	(2,620		)	—			(47,753		)
Results of operations from foreclosed assets	(6,648		)	—			—			(6,648		)
Total non-interest income	(47,817		)	(2,407		)	(191		)	(50,415		)
Non-interest expense:
General and administrative expenses	(14,858		)	(2,024		)	190			(16,692		)
Recovery of guarantee liability	12			—			—			12
Loss on early extinguishment of debt	(6,258		)	—			—			(6,258		)
Other	(418		)	—			—			(418		)
Total non-interest expense	(21,522		)	(2,024		)	190			(23,356		)
Loss prior to income taxes	(26,761		)	(940		)	—			(27,701		)
Income tax benefit	—			407			—			407
Net loss	$	(26,761	)	$	(533	)	$	—		$	(27,294	)

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Equity

6 Months Ended

Nov. 30, 2012

Equity

Equity

(9)           Equity

In July 2012, the CFC Board of Directors authorized the allocation of the fiscal year 2012 net earnings as follows: $1 million to the cooperative educational fund and $71 million to members in the form of patronage. In July 2012, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $35 million, representing 50 percent of the fiscal year 2012 allocation. This amount was returned to members in cash in September 2012. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for its financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable laws and regulations.

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Subordinated Deferrable Debt

6 Months Ended

Nov. 30, 2012

Subordinated Deferrable Debt

Subordinated Deferrable Debt

(7)           Subordinated Deferrable Debt

The following table is a summary of subordinated deferrable debt outstanding:

(dollar amounts in thousands)	November 30, 2012		May 31, 2012
NRC 6.10% due 2044	$	88,201	$	88,201
NRU 5.95% due 2045	98,239		98,239
Total	$	186,440	$	186,440

All subordinated deferrable debt currently outstanding is callable at par at any time.

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Derivative Financial Instruments

6 Months Ended

Nov. 30, 2012

Derivative Financial Instruments

Derivative Financial Instruments

(8)           Derivative Financial Instruments

We are an end-user of financial derivative instruments. We utilize derivatives such as interest rate swaps and treasury rate locks for forecasted transactions to mitigate interest rate risk. The following table shows the notional amounts outstanding and the weighted average interest rate paid and received for our interest rate swaps by type:

	November 30, 2012						May 31, 2012
(dollar amounts in thousands)	Notional amount		Weighted- average rate paid		Weighted- average rate received		Notional amount		Weighted- average rate paid		Weighted- average rate received
Pay fixed-receive variable	$	5,790,832	3.62	%	0.30	%	$	5,275,553	3.78	%	0.45	%
Pay variable-receive fixed	3,500,440		1.12		4.75		3,720,440		1.29		4.68
Total interest rate swaps	$	9,291,272	2.68		1.98		$	8,995,993	2.75		2.20

The derivative losses line item of the consolidated statement of operations includes cash settlements and derivative forward value for derivative instruments that do not meet hedge accounting criteria. Cash settlements includes periodic amounts paid and received related to our interest rate swaps, as well as amounts accrued from the prior settlement date. Derivative forward value includes changes in the fair value of derivative instruments unless specific hedge accounting criteria are met. If applicable hedge accounting criteria are satisfied, the change to the fair value is recorded to other comprehensive income (loss) and net cash settlements are recorded in interest expense. Gains and losses recorded on the consolidated statements of operations for our interest rate swaps are summarized below:

	For the three months ended November 30,						For the six months ended November 30,
(dollar amounts in thousands)	2012			2011			2012			2011
Derivative cash settlements	$	(15,456	)	$	(982	)	$	(29,319	)	$	(814	)
Derivative forward value	11,690			(46,771		)	961			(158,510		)
Derivative losses	$	(3,766	)	$	(47,753	)	$	(28,358	)	$	(159,324	)

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 are not required to be accounted for separately as derivatives. At November 30, 2012, 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 November 30, 2012, our senior unsecured credit ratings from Moody’s Investors Service and Standard & Poor’s Corporation were A2 and A, respectively. At November 30, 2012, both Moody’s Investors Service and Standard & Poor’s Corporation had our ratings on stable outlook.

(dollar amounts in thousands)	Notional amount		Our required payment			Amount we would collect		Net total
Mutual rating trigger if ratings:
fall to Baa1/BBB+ (1)	$	3,000	$	(157	)	$	—	$	(157	)
fall below Baa1/BBB+ (1)	6,890,779		(290,678		)	38,257		(252,421		)
Total	$	6,893,779	$	(290,835	)	$	38,257	$	(252,578	)

(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 November 30, 2012 we had a total notional amount of $650 million of derivative instruments with one counterparty that would require the pledging of collateral totaling $16 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 the ratings from Standard & Poor’s Corporation were to fall below BBB. The aggregate fair value of all interest rate swaps with rating triggers that were in a net liability position at November 30, 2012 was $299 million.

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Guarantees

6 Months Ended

Nov. 30, 2012

Guarantees

Guarantees

(10)         Guarantees

The following table summarizes total guarantees by type of guarantee and member class:

(dollar amounts in thousands)	November 30, 2012		May 31, 2012
Total by type:
Long-term tax-exempt bonds	$	555,960	$	573,110
Indemnifications of tax benefit transfers	2,419		49,771
Letters of credit	452,373		504,920
Other guarantees	116,916		121,529
Total	$	1,127,668	$	1,249,330
Total by member class:
CFC:
Distribution	$	269,610	$	340,385
Power supply	816,296		854,444
Statewide and associate	6,514		7,202
CFC total	1,092,420		1,202,031
RTFC	4,738		1,026
NCSC	30,510		46,273
Total	$	1,127,668	$	1,249,330

The maturities for the long-term tax-exempt bonds and the related guarantees run through calendar year 2042. Amounts in the table represent the outstanding principal amount of the guaranteed bonds. At November 30, 2012, our maximum potential exposure for the $75 million of fixed-rate tax-exempt bonds is $125 million, representing principal and interest. Of the amounts shown in the table above for long-term tax-exempt bonds, $481 million and $498 million as of November 30, 2012 and May 31, 2012, respectively, are adjustable or floating-rate bonds that may be converted to a fixed rate as specified in the applicable indenture for each bond offering. We are unable to determine the maximum amount of interest that we could be required to pay related to the remaining adjustable and floating-rate bonds. Many of these bonds have a call provision that in the event of a default allow us to trigger the call provision. This would limit our exposure to future interest payments on these bonds. Our maximum potential exposure is secured by a mortgage lien on all of the system’s assets and future revenue. If the debt is accelerated because of a determination that the interest thereon is not tax-exempt, the system’s obligation to reimburse us for any guarantee payments will be treated as a long-term loan.

The maturities for the indemnifications of tax benefit transfers run through calendar year 2015. The amounts shown represent our maximum potential exposure for guaranteed indemnity payments. A member’s obligation to reimburse CFC for any guarantee payments would be treated as a long-term loan to the extent of any cash received by the member at the outset of the transaction. This amount is secured by a mortgage lien on substantially all of the system’s assets and future revenue. The remainder would be treated as a line of credit loan secured by a subordinated mortgage on substantially all of the member’s property. Due to changes in federal tax law, no further guarantees of this nature are anticipated.

The maturities for letters of credit run through calendar year 2024. The amounts shown in the table above represent our maximum potential exposure, of which $185 million is secured at November 30, 2012. At November 30, 2012, and May 31, 2012, the letters of credit include $125 million to provide the standby liquidity for adjustable and floating-rate tax-exempt bonds issued for the benefit of our members. Security provisions include a mortgage lien on substantially all of the system’s assets, future revenue and the system’s investment in our commercial paper.

In addition to the letters of credit listed in the table, under master letter of credit facilities in place at November 30, 2012, we may be required to issue up to an additional $837 million in letters of credit to third parties for the benefit of our members. Of this amount, $649 million represents commitments that may be used for the issuance of letters of credit or line of credit loan advances, at the option of the borrower, and are included in unadvanced loan commitments for line of credit loans reported in Note 3, Loans and Commitments. Master letter of credit facilities subject to material adverse change clauses at the time of issuance totaled $496 million at November 30, 2012. Prior to issuing a letter of credit, 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 master letter of credit facilities of $341 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.

The maturities for other guarantees run through calendar year 2025. The maximum potential exposure for these guarantees is $118 million, all of which is unsecured.

At November 30, 2012 and May 31, 2012, we had $384 million and $385 million of guarantees, representing 34 percent and 31 percent, respectively, of total guarantees, under which our right of recovery from our members was not secured.

In addition to the guarantees in the chart above, at November 30, 2012, we are the liquidity provider for a total of $606 million of variable-rate tax-exempt bonds issued for our member cooperatives. While the bonds are in variable-rate mode, we have, in return for a fee, unconditionally agreed to purchase bonds tendered or put for redemption if the remarketing agents are unable to sell such bonds to other investors. During the six months ended November 30, 2012, we were not required to perform as liquidity provider pursuant to these obligations.

Guarantee Liability

At November 30, 2012 and May 31, 2012, we recorded a guarantee liability of $27 million and $29 million, respectively, which represents the contingent and non-contingent exposures related to guarantees and liquidity obligations associated with our members’ debt. The contingent guarantee liability at November 30, 2012 and May 31, 2012 was $6 million for both periods, based on management’s estimate of exposure to losses within the guarantee portfolio. The remaining balance of the total guarantee liability of $21 million and $23 million at November 30, 2012 and May 31, 2012, respectively, relates to our non-contingent obligation to stand ready to perform over the term of our guarantees and liquidity obligations that we have entered into or modified since January 1, 2003.

Activity in the guarantee liability account is summarized below:

	As of and for the six months ended November 30,
(dollar amounts in thousands)	2012
Beginning balance as of May 31, 2012	$	28,663
Net change in non-contingent liability	(1,584		)
Recovery of contingent guarantee liability	(101		)
Ending balance as of November 30, 2012	$	26,978
Liability as a percentage of total guarantees	2.39		%

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General Information and Accounting Policies (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Nov. 30, 2012	Nov. 30, 2011	Nov. 30, 2012	Nov. 30, 2011
Interest expense on debt:
Debt issuance costs	$ 1,905	$ 2,380	$ 3,842	$ 7,505
Fee expense	2,345	3,877	4,507	6,980
Total interest expense	174,301	194,680	350,897	396,724
Commercial paper and bank bid notes
Interest expense on debt:
Interest expense on debt	1,697	1,391	3,316	3,160
Medium-term notes
Interest expense on debt:
Interest expense on debt	24,833	47,733	52,716	101,574
Collateral trust bonds
Interest expense on debt:
Interest expense on debt	82,271	77,346	163,710	154,618
Subordinated deferrable debt
Interest expense on debt:
Interest expense on debt	2,807	2,807	5,613	5,613
Subordinated certificates
Interest expense on debt:
Interest expense on debt	20,528	20,075	40,882	38,376
Long-term notes payable
Interest expense on debt:
Interest expense on debt	$ 37,915	$ 39,071	$ 76,311	$ 78,898

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Equity (Details) (USD $)	1 Months Ended	6 Months Ended
	Jul. 31, 2012	Nov. 30, 2012	Nov. 30, 2011
Equity disclosures
Retirement/allocation of net earnings authorized		$ (35,341,000)	$ (46,086,000)
Cooperative educational fund
Equity disclosures
Allocation of net earnings	1,000,000
Patronage capital allocated
Equity disclosures
Allocation of net earnings	71,000,000
Retirement/allocation of net earnings authorized	$ (35,000,000)	$ (35,341,000)	$ (46,086,000)
Retirement of allocated net earnings, authorized percentage	50.00%

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General Information and Accounting Policies (Tables)

6 Months Ended

Nov. 30, 2012

General Information and Accounting Policies

Schedule of components of interest income

	For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)	2012		2011		2012		2011
Interest on long-term fixed-rate loans	$	218,247	$	219,841	$	436,187	$	445,187
Interest on long-term variable-rate loans	4,893		4,655		10,918		12,907
Interest on line of credit loans	7,413		6,738		15,105		16,364
Interest on restructured loans	7,625		4,084		13,087		4,776
Interest on investments	1,576		853		2,514		1,781
Fee income (1)	1,876		1,584		3,904		3,990
Total interest income	$	241,630	$	237,755	$	481,715	$	485,005

(1) 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.

Schedule of components of interest expense

	For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)	2012		2011		2012		2011
Interest expense on debt (1):
Commercial paper and bank bid notes	$	1,697	$	1,391	$	3,316	$	3,160
Medium-term notes	24,833		47,733		52,716		101,574
Collateral trust bonds	82,271		77,346		163,710		154,618
Subordinated deferrable debt	2,807		2,807		5,613		5,613
Subordinated certificates	20,528		20,075		40,882		38,376
Long-term notes payable	37,915		39,071		76,311		78,898
Debt issuance costs (2)	1,905		2,380		3,842		7,505
Fee expense (3)	2,345		3,877		4,507		6,980
Total interest expense	$	174,301	$	194,680	$	350,897	$	396,724

(1) Represents interest expense and the amortization of discounts on debt.

(2) Includes amortization of all deferred charges related to the issuance of debt, principally underwriters’ fees, legal fees, printing costs and comfort letter fees. Amortization is calculated using the effective interest method or a method approximating the effective interest method. Also includes issuance costs related to dealer commercial paper, which are recognized as incurred.

(3) 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.

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Subordinated Deferrable Debt (Tables)

6 Months Ended

Nov. 30, 2012

Subordinated Deferrable Debt

Summary of subordinated deferrable debt outstanding

(dollar amounts in thousands)	November 30, 2012		May 31, 2012
NRC 6.10% due 2044	$	88,201	$	88,201
NRU 5.95% due 2045	98,239		98,239
Total	$	186,440	$	186,440

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Subordinated Deferrable Debt (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Nov. 30, 2012	May 31, 2012
Subordinated Deferrable Debt
Subordinated deferrable debt	$ 186,440	$ 186,440
NRC 6.10% due 2044
Subordinated Deferrable Debt
Subordinated deferrable debt	88,201	88,201
Interest rate (as a percent)	6.10%	6.10%
NRU 5.95% due 2045
Subordinated Deferrable Debt
Subordinated deferrable debt	$ 98,239	$ 98,239
Interest rate (as a percent)	5.95%	5.95%

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Loans and Commitments (Details 5) (USD $) In Thousands, unless otherwise specified	Nov. 30, 2012	May 31, 2012	Nov. 30, 2011
Loan Security
Total loans outstanding	$ 19,097,174	$ 18,911,742	$ 18,314,593
Loans receivable as a percentage of total loan	100.00%	100.00%
CFC
Loan Security
Total loans outstanding	17,866,703	17,745,897
RTFC
Loan Security
Total loans outstanding	536,759	571,566
NCSC
Loan Security
Total loans outstanding	693,712	594,279
Secured
Loan Security
Total loans outstanding	17,329,052	17,254,199
Loans receivable as a percentage of total loan	91.00%	91.00%
Secured | CFC
Loan Security
Total loans outstanding	16,369,535	16,317,195
Loans receivable as a percentage of total loan	92.00%	92.00%
Secured | RTFC
Loan Security
Total loans outstanding	514,384	549,085
Loans receivable as a percentage of total loan	96.00%	96.00%
Secured | NCSC
Loan Security
Total loans outstanding	445,133	387,919
Loans receivable as a percentage of total loan	64.00%	65.00%
Unsecured
Loan Security
Total loans outstanding	1,768,122	1,657,543
Loans receivable as a percentage of total loan	9.00%	9.00%
Unsecured | CFC
Loan Security
Total loans outstanding	1,497,168	1,428,702
Loans receivable as a percentage of total loan	8.00%	8.00%
Unsecured | RTFC
Loan Security
Total loans outstanding	22,375	22,481
Loans receivable as a percentage of total loan	4.00%	4.00%
Unsecured | NCSC
Loan Security
Total loans outstanding	248,579	206,360
Loans receivable as a percentage of total loan	36.00%	35.00%
Long-term fixed-rate loans
Loan Security
Total loans outstanding	16,982,140	16,742,914
Long-term fixed-rate loans | Secured
Loan Security
Total loans outstanding	16,361,860	16,168,857
Loans receivable as a percentage of total loan	96.00%	97.00%
Long-term fixed-rate loans | Unsecured
Loan Security
Total loans outstanding	620,280	574,057
Loans receivable as a percentage of total loan	4.00%	3.00%
Long-term variable-rate loans
Loan Security
Total loans outstanding	607,312	764,815
Long-term variable-rate loans | Secured
Loan Security
Total loans outstanding	508,490	661,115
Loans receivable as a percentage of total loan	84.00%	86.00%
Long-term variable-rate loans | Unsecured
Loan Security
Total loans outstanding	98,822	103,700
Loans receivable as a percentage of total loan	16.00%	14.00%
Loans guaranteed by RUS
Loan Security
Total loans outstanding	213,275	219,084
Loans guaranteed by RUS | Secured
Loan Security
Total loans outstanding	213,275	219,084
Loans receivable as a percentage of total loan	100.00%	100.00%
Line of credit loans
Loan Security
Total loans outstanding	1,294,447	1,184,929
Line of credit loans | Secured
Loan Security
Total loans outstanding	245,427	205,143
Loans receivable as a percentage of total loan	19.00%	17.00%
Line of credit loans | Unsecured
Loan Security
Total loans outstanding	$ 1,049,020	$ 979,786
Loans receivable as a percentage of total loan	81.00%	83.00%

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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (USD $) In Thousands, unless otherwise specified	Total	Noncontrolling interest	Total CFC equity	Accumulated other comprehensive income	CFC retained equity	Unallocated net income (loss)	Members' capital reserve	Patronage capital allocated	Membership fees and education fund
Balance at May. 31, 2011	$ 687,309	$ 11,786	$ 675,523	$ 9,758	$ 665,765	$ (130,689)	$ 272,126	$ 521,897	$ 2,431
Increase (Decrease) in Stockholders' Equity
Patronage capital retirement	(46,086)		(46,086)		(46,086)			(46,086)
Net income (loss)	(113,916)	(3,123)	(110,793)		(110,793)	(110,793)
Other comprehensive income (loss)	(617)	(13)	(604)	(604)
Other	(446)	(4)	(442)		(442)				(442)
Balance at Nov. 30, 2011	526,244	8,646	517,598	9,154	508,444	(241,482)	272,126	475,811	1,989
Balance at May. 31, 2012	490,755	7,592	483,163	9,199	473,964	(346,941)	272,126	546,366	2,413
Increase (Decrease) in Stockholders' Equity
Patronage capital retirement	(35,341)		(35,341)		(35,341)			(35,341)
Net income (loss)	72,727	704	72,023		72,023	72,023
Other comprehensive income (loss)	382	(11)	393	393
Other	(367)	(2)	(365)		(365)				(365)
Balance at Nov. 30, 2012	$ 528,156	$ 8,283	$ 519,873	$ 9,592	$ 510,281	$ (274,918)	$ 272,126	$ 511,025	$ 2,048

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Foreclosed Assets

6 Months Ended

Nov. 30, 2012

Foreclosed Assets

Foreclosed Assets

(4)           Foreclosed Assets

Assets received in satisfaction of loan receivables are initially recorded at fair value when received and are subsequently evaluated periodically for impairment. These assets are classified on the consolidated balance sheets as foreclosed assets. At November 30, 2012 all foreclosed assets were held by DRP and CAH, which are wholly-owned subsidiaries of CFC.

The activity for foreclosed assets is summarized below:

	As of and for the six months ended November 30, 2012
(dollar amounts in thousands)	CAH			DRP			Total
Balance as of May 31, 2012	$	201,558		$	21,918		$	223,476
Results of operations:
Operating loss	(5,327		)	(171		)	(5,498		)
Impairment	—			(176		)	(176		)
Cash investments	28,001			—			28,001
Balance as of November 30, 2012	$	224,232		$	21,571		$	245,803

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Derivative Financial Instruments (Tables)

6 Months Ended

Nov. 30, 2012

Derivative Financial Instruments

Schedule of notional amounts outstanding and the weighted average interest rate paid and received for the entity's interest rate swaps

November 30, 2012					May 31, 2012
(dollar amounts in thousands)	Notional amount		Weighted- average rate paid		Weighted- average rate received		Notional amount		Weighted- average rate paid		Weighted- average rate received
Pay fixed-receive variable	$	5,790,832	3.62	%	0.30	%	$	5,275,553	3.78	%	0.45	%
Pay variable-receive fixed	3,500,440		1.12		4.75		3,720,440		1.29		4.68
Total interest rate swaps	$	9,291,272	2.68		1.98		$	8,995,993	2.75		2.20

Summary of gains and losses recorded on the consolidated statements of operations for the entity's interest rate swaps

For the three months ended November 30,					For the six months ended November 30,
(dollar amounts in thousands)	2012			2011			2012			2011
Derivative cash settlements	$	(15,456	)	$	(982	)	$	(29,319	)	$	(814	)
Derivative forward value	11,690			(46,771		)	961			(158,510		)
Derivative losses	$	(3,766	)	$	(47,753	)	$	(28,358	)	$	(159,324	)

Schedule of notional amounts of derivative instruments having rating triggers

(dollar amounts in thousands)	Notional amount		Our required payment			Amount we would collect		Net total
Mutual rating trigger if ratings:
fall to Baa1/BBB+ (1)	$	3,000	$	(157	)	$	—	$	(157	)
fall below Baa1/BBB+ (1)	6,890,779		(290,678		)	38,257		(252,421		)
Total	$	6,893,779	$	(290,835	)	$	38,257	$	(252,578	)

(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.

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Loans and Commitments (Details 2) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Nov. 30, 2012	May 31, 2012
Unadvanced commitments
Notional maturities of committed lines of credit
Total unadvanced commitments	$ 14,915,649	$ 14,129,424
Maximum period of commitments to fully fund agreements which have not yet been advanced	5 years
Unadvanced commitments not subject to material adverse change clauses
Notional maturities of committed lines of credit
2013	9,333
2014	281,733
2015	116,754
2016	223,492
2017	559,562
Thereafter	253,259
Total unadvanced commitments	1,444,133	1,303,000
Maximum period of commitments to fully fund agreements which have not yet been advanced	5 years
Unadvanced commitments subject to material adverse change clauses
Notional maturities of committed lines of credit
Total unadvanced commitments	$ 13,472,000	$ 12,826,000

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General Information and Accounting Policies (Policies)

6 Months Ended

Nov. 30, 2012

General Information and Accounting Policies

Basis of Presentation

(a)           Basis of Presentation

The accompanying financial statements include the consolidated accounts 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 accommodate loan securitization transactions, after elimination of intercompany accounts and transactions.

Unless stated otherwise, references to “we,” “our” or “us” represent the consolidation of CFC, RTFC, NCSC and certain entities created and controlled by CFC to hold foreclosed assets and accommodate loan securitization transactions. Foreclosed assets are held by two groups of subsidiaries wholly-owned by CFC. Our Denton Realty Partners entities (“DRP”) hold assets, including a land development loan, limited partnership interests in certain real estate developments and developed lots and land and raw land in Texas. Caribbean Asset Holdings LLC (“CAH”) holds our investment in cable and telecommunications operating entities in the United States Virgin Islands (“USVI”), British Virgin Islands and St. Maarten.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the assets, liabilities, revenue and expenses reported in the financial statements, as well as amounts included in the notes thereto, including discussion and disclosure of contingent liabilities. The accounting estimates that require our most significant and subjective judgments include the allowance for loan losses and the determination of the fair value of our derivatives and certain aspects of our foreclosed assets. While we use our best estimates and judgments based on the known facts at the date of the financial statements, actual results could differ from these estimates as future events occur.

These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2012.

In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (which consist only of normal recurring accruals) necessary for a fair presentation of our results of operations and financial position for the interim periods presented.

Variable Interest Entities

(b)           Variable Interest Entities

We are required to consolidate the financial results of RTFC and NCSC because CFC is the primary beneficiary of variable interests in RTFC and NCSC due to its exposure to absorbing the majority of their expected losses and because CFC manages the business activities of RTFC and NCSC. Under separate guarantee agreements, RTFC and NCSC pay CFC a fee to indemnify against loan losses. CFC manages the business activities of RTFC and NCSC through separate management agreements. Additionally, CFC is the sole lender to RTFC and the primary source of funding to NCSC. NCSC funds its lending programs through loans from CFC and debt guaranteed by CFC.

RTFC and NCSC creditors have no recourse against CFC in the event of a default by RTFC and NCSC, unless there is a guarantee agreement under which CFC has guaranteed NCSC or RTFC debt obligations to a third party. At November 30, 2012, CFC had guaranteed $79 million of NCSC debt, derivative instruments and guarantees with third parties, and CFC’s maximum potential exposure for these instruments totaled $88 million. The maturities for NCSC obligations guaranteed by CFC run through 2031. Guarantees of NCSC debt and derivative instruments are not included in Note 10, Guarantees, as the debt and derivatives are reported on the consolidated balance sheet. At November 30, 2012, CFC guaranteed $5 million of RTFC guarantees with third parties. The maturities for RTFC obligations guaranteed by CFC run through 2013. All CFC loans to RTFC and NCSC are secured by all assets and revenue of RTFC and NCSC. At November 30, 2012, RTFC had total assets of $662 million and NCSC had total assets of $722 million. At November 30, 2012, CFC had committed to lend RTFC up to $4,000 million, of which $523 million was outstanding. At November 30, 2012, CFC had committed to provide up to $2,000 million of credit to NCSC, of which $754 million was outstanding, representing $675 million of outstanding loans and $79 million of credit enhancements. In December 2012, CFC increased its commitment to provide up to $3,000 million of credit to NCSC.

Loan Sales

(c)           Loan Sales

We account for the sale of loans resulting from direct loan sales to third parties and securitization transactions by removing the financial assets from our consolidated balance sheets when control has been surrendered. We recognize related servicing fees on an accrual basis over the period for which servicing activity is provided. Deferred transaction costs and unamortized deferred loan origination costs related to the loans sold are included in the calculation of the gain or loss on the sale. We do not hold any continuing interest in the loans sold to date other than servicing performance obligations. We have no obligation to repurchase loans from the purchaser, except in the case of breaches of representations and warranties. We retain the servicing performance obligations on these loans. We have not recorded a servicing asset or liability.

During the six months ended November 30, 2012 and 2011, we sold CFC loans with outstanding balances totaling $98 million and $82 million, respectively, at par for cash. We recorded a loss on sale of loans, representing the unamortized deferred loan origination costs and transaction costs for the loans sold, which was immaterial during the six months ended November 30, 2012 and 2011.

Interest Income

(d)           Interest Income

Interest income on loans is recognized using the effective interest method. The following table presents the components of interest income:

	For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)	2012		2011		2012		2011
Interest on long-term fixed-rate loans	$	218,247	$	219,841	$	436,187	$	445,187
Interest on long-term variable-rate loans	4,893		4,655		10,918		12,907
Interest on line of credit loans	7,413		6,738		15,105		16,364
Interest on restructured loans	7,625		4,084		13,087		4,776
Interest on investments	1,576		853		2,514		1,781
Fee income (1)	1,876		1,584		3,904		3,990
Total interest income	$	241,630	$	237,755	$	481,715	$	485,005

(1) 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.

Deferred income on the consolidated balance sheets primarily includes deferred conversion fees totaling $18 million and $20 million at November 30, 2012 and May 31, 2012, respectively.

Interest Expense

(e)           Interest Expense

The following table presents the components of interest expense:

	For the three months ended November 30,				For the six months ended November 30,
(dollar amounts in thousands)	2012		2011		2012		2011
Interest expense on debt (1):
Commercial paper and bank bid notes	$	1,697	$	1,391	$	3,316	$	3,160
Medium-term notes	24,833		47,733		52,716		101,574
Collateral trust bonds	82,271		77,346		163,710		154,618
Subordinated deferrable debt	2,807		2,807		5,613		5,613
Subordinated certificates	20,528		20,075		40,882		38,376
Long-term notes payable	37,915		39,071		76,311		78,898
Debt issuance costs (2)	1,905		2,380		3,842		7,505
Fee expense (3)	2,345		3,877		4,507		6,980
Total interest expense	$	174,301	$	194,680	$	350,897	$	396,724

(1) Represents interest expense and the amortization of discounts on debt.

(2) Includes amortization of all deferred charges related to the issuance of debt, principally underwriters’ fees, legal fees, printing costs and comfort letter fees. Amortization is calculated using the effective interest method or a method approximating the effective interest method. Also includes issuance costs related to dealer commercial paper, which are recognized as incurred.

(3) 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.

We exclude indirect costs, if any, related to funding activities from interest expense.

Derivative Financial Instruments

(f)            Derivative Financial Instruments

We are an end user of financial derivative instruments. We use derivatives such as interest rate swaps and treasury rate locks to mitigate interest rate risk. Consistent with the accounting standards for derivative financial instruments, we record derivative instruments on the consolidated balance sheets as either an asset or liability measured at fair value. In recording the fair value of derivative assets and liabilities, we do not net our positions under contracts with individual counterparties. Changes in the fair value of derivative instruments along with realized gains and losses from cash settlements are recognized in the derivative gains (losses) line item of the consolidated statement of operations unless specific hedge accounting criteria are met.

We formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. If applicable hedge accounting criteria are satisfied, the change in fair value of derivative instruments is recorded to other comprehensive income, and net cash settlements are recorded in interest expense. The gain or loss on derivatives used as a cash flow hedge of a forecasted debt transaction is recorded as a component of other comprehensive income (loss) and amortized through interest expense using the effective interest method over the term of the hedged debt. Any ineffectiveness in the hedging relationship is recognized in the derivative gains (losses) line of the statement of operations.

A transition adjustment was recorded as an other comprehensive loss on June 1, 2001, the date we implemented the accounting standards for derivative financial instruments. This amount will be amortized into earnings through April 2029 in the derivative gains (losses) line of the statement of operations.

Cash activity associated with interest rate swaps is classified as an operating activity in the consolidated statements of cash flows.

Early Extinguishment of Debt

(g)           Early Extinguishment of Debt

We redeem outstanding debt early from time to time to manage liquidity and interest rate risk. When we redeem outstanding debt early, we recognize a gain or loss related to the difference between the amount paid to redeem the debt and the net book value of the extinguished debt as a component of non-interest expense in the gain (loss) on early extinguishment of debt line item.

In August 2011 and October 2011, we redeemed a total of $500 million of our $1,500 million, 7.25 percent Series C medium-term notes with an original maturity of March 1, 2012 at a premium. Both the premium and unamortized issuance costs totaling $16 million were recorded as a loss on extinguishment of debt during the six months ended November 30, 2011.

Reclassifications

(h)           Reclassifications

Reclassifications of prior period amounts have been made to conform to the current reporting format and the presentation in our Form 10-Q for the three and six months ended November 30, 2012. Specifically, the fair value adjustments on DRP foreclosed assets have been reclassified into results of operations of foreclosed assets in the condensed consolidated statement of operations for the three and six months ended November 30, 2011. The corresponding non-cash adjustments were reclassified to the results of operations of foreclosed assets on the condensed consolidated statement of cash flows for the six months ended November 30, 2011.

Fair Value Measurement

Assets and Liabilities Measured at Fair Value on a Recurring Basis

We account for derivative instruments (including certain derivative instruments embedded in other contracts) in the consolidated balance sheets as either an asset or liability measured at fair value. Since there is not an active secondary market for the types of interest rate swaps we use, we obtain market quotes from the interest rate swap counterparties to adjust all swaps to fair value on a quarterly basis. The market quotes are based on the expected future cash flow and the estimated yield curve.

We perform analysis to validate the market quotes obtained from our swap counterparties. We adjust the market values received from the counterparties using credit default swap levels for us and the counterparties. The credit default swap levels represent the credit risk premium required by a market participant based on the available information related to us and the counterparty. We only enter into exchange agreements with counterparties that are participating in our revolving lines of credit at the time the exchange agreements are executed. All of our exchange agreements are subject to master netting agreements.

Our valuation techniques for interest rate swaps are based on observable inputs, which reflect market data. Fair values for our interest rate swaps are classified as a Level 2 valuation. We record the change in the fair value of our derivatives for each reporting period in the derivative gains (losses) line, included in non-interest income in the consolidated statements of operations, as currently none of our derivatives qualify for hedge accounting.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. Any adjustments to fair value usually result from application of lower-of-cost or fair value accounting or write-downs of individual assets. At November 30, 2012 and May 31, 2012, we measured certain collateral-dependent non-performing loans at fair value. In certain instances when a loan is non-performing, we utilize the collateral fair value underlying the loan in estimating the specific loan loss allowance. To estimate the fair value of the collateral, we may use third party valuation specialists, internal estimates or a combination of both. The approaches used by both our internal staff and third party specialists include the discounted cash flow, market multiple and replacement cost methods. The material inputs used in estimating the fair value of such collateral, by both internal staff and third party specialists, are Level 3 within the fair value hierarchy. In these instances, the valuation is considered to be a non-recurring item. The significant unobservable inputs for Level 3 assets that are valued using fair values obtained from third party specialists are reviewed by our Credit Risk Management group to assess the reasonableness of the assumptions used and the accuracy of the work performed. In cases where we rely on third party inputs, we use the final unadjusted third party valuation analysis as support for any financial statement adjustments and disclosures to the financial statements. The valuation techniques and significant unobservable inputs for assets classified as Level 3 in the fair value hierarchy, which are measured using an internal model, are independently reviewed by other internal staff.

For assets measured at fair value on a non-recurring basis at November 30, 2012 and May 31, 2012 that are classified as Level 3 within the fair value hierarchy, any increase or decrease to significant unobservable inputs used in the determination of fair value, will not have a material impact on the fair value measurement of those assets or to the results of operations of the Company.

Fair Value of Financial Instruments

See Note 11, Fair Value Measurement, for more details on assets and liabilities measured at fair value on a recurring or non-recurring basis on our consolidated balance sheets. We consider relevant and observable prices in the principal market in our valuations where possible. Fair value estimates were developed at the reporting date and may not necessarily be indicative of amounts that could ultimately be realized in a market transaction at a future date.

With the exception of redeeming debt under early redemption provisions, terminating derivative instruments under early termination provisions and allowing borrowers to prepay their loans, we held and intend to hold all financial instruments to maturity excluding common stock investments that have no stated maturity. Below is a summary of significant methodologies used in estimating fair value amounts at November 30, 2012 and May 31, 2012.

Cash and Cash Equivalents

Cash and cash equivalents includes cash and certificates of deposit with original maturities of less than 90 days. Cash and cash equivalents are valued at the carrying value, which approximates fair value. Cash and cash equivalents are classified within Level 1 of the fair value hierarchy.

Restricted Cash

Restricted cash consists of cash and cash equivalents for which use is contractually restricted. Restricted cash is valued at the carrying value, which approximates fair value. Restricted cash is classified within Level 1 of the fair value hierarchy.

Investments

Our investments include investments in the Federal Agricultural Mortgage Corporation Series A common stock. The Series A common stock is classified as available-for-sale securities and recorded in the consolidated balance sheets at fair value. We calculate fair value based on the quoted price on the stock exchange where the stock is traded. That stock exchange is an active market based on the volume of shares transacted. The common stock is classified within Level 1 of the fair value hierarchy.

Our investments also include investments in Federal Agricultural Mortgage Corporation Series C non-voting, cumulative preferred stock purchased based on a percentage of debt issued under note purchase agreements. The note purchase agreements have since been amended so that we may be required to purchase additional Series C preferred stock based on the terms and circumstances at the time of each advance. The fair value for the Series C preferred stock is estimated at cost, which approximates fair value as the preferred stock securities do not meet the definition of marketable securities and the stock is callable at par. These securities carry with it a netting provision against our debt held by Federal Agricultural Mortgage Corporation in case of non-payment, therefore transferability of these securities is unlikely. The preferred stock is classified within Level 3 of the fair value hierarchy.

Our investments also include a deposit that we made with a financial institution in an interest bearing account with a maturity of less than one year as of the reporting date. This deposit is valued at the carrying value, which approximates fair value. It is classified within Level 2 of the fair value hierarchy.

Loans to Members, Net

As part of receiving a loan from us, our members have additional requirements and rights that are not typical of other financial institutions, such as the ability to receive a patronage capital allocation, the general requirement to purchase subordinated certificates or member capital securities to meet their capital contribution requirements as a condition of obtaining additional credit from us, the option to select fixed rates from one year to maturity with the fixed rate resetting or repricing at the end of each selected rate term, the ability to convert from a fixed rate to another fixed rate or the variable rate at any time, and certain interest rate discounts that are specific to the borrower’s activity with us. These features make it difficult to obtain market data for similar loans. Therefore, we must use other methods to estimate the fair value.

Fair values for fixed-rate loans are estimated by discounting the future cash flows using the current rates at which we would make similar loans to new borrowers for the same remaining maturities. The maturity date used in the fair value calculation of loans with a fixed rate for a selected rate term is the next repricing date since these borrowers must reprice their loans at various times throughout the life of the loan at the then-current market rate.

Loans with different risk characteristics, specifically non-performing and restructured loans, are valued by using collateral valuations or by adjusting cash flows for credit risk and discounting those cash flows using the current rates at which similar loans would be made by us to borrowers for the same remaining maturities. See Note 11, Fair Value Measurement, for more details about how we calculate the fair value of certain non-performing loans.

Variable-rate loans are valued at cost, which approximates fair value since we can reset rates every 15 days.

Credit risk for the loan portfolio is estimated based on the associated reserve in our allowance for loan losses.

Loans to members, net are classified within Level 3 of the fair value hierarchy.

Debt Service Reserve Funds

Debt service reserve funds represent cash and/or investments on deposit with the bond trustee for tax-exempt bonds that we guarantee. Carrying value is considered to be equal to fair value. Debt service reserve funds are classified within Level 1 of the fair value hierarchy.

Short-Term Debt

Short-term debt consists of commercial paper, bank bid notes and other debt due within one year. The fair value of short-term debt with maturities greater than 90 days is estimated based on quoted market rates for debt with similar maturities. The fair value of short-term debt with maturities less than or equal to 90 days is carrying value, which is a reasonable estimate of fair value. Short-term debt is classified within Level 2 and Level 3 of the fair value hierarchy.

Long-Term Debt

Long-term debt consists of collateral trust bonds, medium-term notes and long-term notes payable. We issue all collateral trust bonds and some medium-term notes in underwritten public transactions. There is not active secondary trading for all underwritten collateral trust bonds and medium-term notes; therefore, dealer quotes and recent market prices are both used in estimating fair value. There is essentially no secondary market for the medium-term notes issued to our members or in transactions that are not underwritten; therefore, fair value is estimated based on observable benchmark yields and spreads for similar instruments supplied by banks that underwrite our other debt transactions. Collateral trust bonds and medium-term notes are classified within Level 2 of the fair value hierarchy. The long-term notes payable are issued in private placement transactions and there is no secondary trading of such debt. Therefore, the fair value is estimated based on underwriter quotes for similar instruments, if available, or based on cash flows discounted at current rates for similar instruments supplied by underwriters or by the original issuer. Secondary trading quotes for our debt instruments used in the determination of fair value incorporate our credit risk. Long-term notes payable are classified within Level 3 of the fair value hierarchy.

Guarantees

The fair value of our guarantee liability is based on the fair value of our contingent and non-contingent exposure related to our guarantees. The fair value of our contingent exposure for guarantees is based on management’s estimate of our exposure to losses within the guarantee portfolio. The fair value of our non-contingent exposure for guarantees issued is estimated based on the total unamortized balance of guarantee fees paid and guarantee fees to be paid discounted at our current short-term funding rate, which represents management’s estimate of the fair value of our obligation to stand ready to perform. Guarantees are classified within Level 3 of the fair value hierarchy.

Subordinated Deferrable Debt

Our subordinated deferrable debt is traded on the New York Stock Exchange; therefore, daily market quotes are available. The fair value for subordinated deferrable debt is based on the closing market quotes from the last day of the reporting period. Subordinated deferrable debt is classified within Level 1 of the fair value hierarchy.

Members’ Subordinated Certificates

Members’ subordinated certificates include (i) membership subordinated certificates issued to our members as a condition of membership, (ii) loan and guarantee subordinated certificates as a condition of obtaining loan funds or guarantees and (iii) member capital securities issued as voluntary investments by our members. All members’ subordinated certificates are non-transferable other than among members with CFC’s consent. As there is no ready market from which to obtain fair value quotes for membership, loan and guarantee subordinated certificates, it is impracticable to estimate fair value, and such certificates are, therefore, valued at par. There also is no ready market from which to obtain fair value quotes for member capital securities. Fair value for member capital securities is based on the discounted cash flows using the coupon interest rate on the last business day of the reporting period. Members’ subordinated certificates are classified within Level 3 of the fair value hierarchy.

Derivative Instruments

We record derivative instruments in the consolidated balance sheets as either an asset or liability measured at fair value. Because there is not an active secondary market for the types of interest rate swaps we use, we obtain market quotes from the interest rate swap counterparties to adjust all interest rate swaps to fair value on a quarterly basis. The market quotes are based on the expected future cash flow and estimated yield curves. We adjust the market values received from the counterparties using credit default swap levels for us and the counterparties. The credit default swap levels represent the credit risk premium required by a market participant based on the available information related to us and the counterparty. Derivative instruments are classified within Level 2 of the fair value hierarchy.

Commitments

The fair value of our commitments is estimated as the carrying value, or zero. Extensions of credit under these commitments, if exercised, would result in loans priced at market rates. Commitments are classified within Level 3 of the fair value hierarchy.