may3109_10ka.htm

10-K/A 1 may3109_10ka.htm MAY 31, 2009 FORM 10-K/A - AMENDMENT #1 may3109_10ka.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

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

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2009

¨ 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)

2201 COOPERATIVE WAY, HERNDON, VA 20171

(Address of principal executive offices)

(Registrant's telephone number, including area code, is 703-709-6700)

Securities registered pursuant to Section 12(b) of the Act:


	Name of each		Name of each
	exchange on		exchange on
Title of each class	which registered	Title of each class	which registered
5.70% Collateral Trust Bonds, due 2010	NYSE	6.75% Subordinated Notes, due 2043	NYSE
7.20% Collateral Trust Bonds, due 2015	NYSE	6.10% Subordinated Notes, due 2044	NYSE
6.55% Collateral Trust Bonds, due 2018	NYSE	5.95% Subordinated Notes, due 2045	NYSE
7.35% Collateral Trust Bonds, due 2026	NYSE

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

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 ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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. (Check one):

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 Act). Yes ¨ No x

The Registrant is a tax-exempt cooperative and consequently is unable to issue any equity capital stock.

Explanatory Note

This Amendment No. 1 on Form 10-K/A (the “Amendment”) amends National Rural Utilities Cooperative Finance Corporation’s (the “Company”) Annual Report on Form 10-K for the fiscal year ended May 31, 2009 (the “Form 10-K”), as filed with the Securities and Exchange Commission on August 17, 2009, and is being filed solely to amend Item 7 of the Form 10-K to correct a typographical error in the date of the table on page 36 summarizing the Company’s secured debt or debt requiring collateral on deposit, the excess collateral pledged and unencumbered loans. Specifically, the headings of the columns on such table should be 2009 and 2008 rather than 2008 and 2007, respectively.

As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, we have (i) repeated the entire text of Item 7 of the Form 10-K in this Amendment and (ii) included new certifications of our principal executive officer and principal financial officer as exhibits to this Amendment.

Except as described above, no other changes have been made to the Form 10-K. This Amendment speaks as of the original filing date of the Form 10-K, does not reflect events that may have occurred subsequent to the original filing date and does not modify or update in any way disclosures made in the Form 10-K.

For convenience, the pages of Item 7 of this amended Form 10-K have been numbered to coincide with the Item 7 of the Form 10-K filed on August 17, 2009.

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Unless stated otherwise, references to “we,” “our,” or “us” relate to the consolidation of National Rural Utilities Cooperative Finance Corporation ("National Rural"), Rural Telephone Finance Cooperative ("RTFC"), National Cooperative Services Corporation ("NCSC") and certain entities created and controlled by National Rural to hold foreclosed assets and accommodate loan securitization transactions. 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. We refer to our financial measures that are not in accordance with generally accepted accounting principles ("GAAP") as "adjusted" throughout this document. See Non-GAAP Financial Measures for further explanation of why the non-GAAP measures are useful and for a reconciliation to GAAP amounts.

Business Overview

National Rural was formed in 1969 by rural electric cooperatives to provide a source of financing to supplement the loan programs of the Rural Utilities Service ("RUS"). National Rural is organized as a cooperative and is a tax-exempt entity under Section 501(c)(4) of the Internal Revenue Code.

RTFC is a private cooperative association created to provide and/or arrange financing for its rural telecommunications members and their affiliates. RTFC is a taxable cooperative that pays income tax based on its net income, excluding net income allocated to its members, as allowed by law under Subchapter T of the Internal Revenue Code. NCSC also is a private cooperative association. The principal purpose of NCSC is to provide financing to the for-profit or non-profit entities that are owned, operated or controlled by or provide substantial benefit to, members of National Rural. NCSC is a taxable corporation.

Our primary objective as a cooperative is to provide financial products to our rural electric and telecommunications members at a low cost while maintaining sound financial results required for investment grade credit ratings on our debt instruments. Our goal is not to maximize profit on loans to members, but to balance charging our members low rates on loans and maintaining the financial performance required to access the capital markets on behalf of our members. Therefore, the rates we charge our borrowers reflect our funding costs plus a spread to cover our operating expenses and a provision for loan losses and to provide earnings sufficient to preserve interest coverage to meet our financial objectives.

We obtain funding from the capital markets, private placements of debt and our members. We enter the capital markets, based on the combined strength of our members, to borrow the funds to fulfill our members’ financing requirements. We regularly obtain funding in the capital markets by issuing:

·	fixed-rate or variable-rate secured collateral trust bonds;

·	fixed-rate or variable-rate unsecured medium-term notes including retail notes;

·	commercial paper;

·	bank bid note agreements; and

·	fixed-rate subordinated deferrable debt.

We issue fixed-rate and variable-rate debt to private funding sources. We also obtain debt financing from our members and other qualified investors through the direct sale of our commercial paper, daily liquidity fund and unsecured medium-term notes.

As a condition of membership, rural electric cooperatives were generally required to purchase membership subordinated certificates from us. Members may be required to make an additional investment in us by purchasing loan or guarantee subordinated certificates as a condition for obtaining long-term loans or guarantees. The membership subordinated certificates and the loan and guarantee subordinated certificates are unsecured and subordinate to our senior debt.

National Rural is required by District of Columbia cooperative law to have a mechanism to allocate our net income to our members. We allocate our net income, excluding the non-cash effects of the accounting for derivative financial instruments and foreign currency translation, annually to a cooperative educational fund, a members' capital reserve and to members based on each member's patronage of our loan programs during the year. RTFC annually allocates its net income to a cooperative educational fund and to its members based on each member's patronage of its loan programs during the year. NCSC does not allocate its net income to its members, but does allocate a portion of its margins to a cooperative educational fund.

Our performance is closely tied to the performance of our member rural electric and telecommunications systems due to the near 100 percent concentration of our loan and guarantee portfolio in those industries.

Financial Overview

In this section, we analyze our results of operations, financial condition, liquidity and market risk. We also analyze trends and significant transactions completed in the years covered by this Form 10-K.

Results of Operations

We use a times interest earned ratio (“TIER”) instead of the dollar amount of net interest income or net income as our primary performance indicator, since net income can fluctuate as total loans outstanding and/or interest rates change. TIER is a measure of our ability to cover the interest expense on our debt obligations. TIER is calculated by dividing the sum of interest expense and the net income prior to the cumulative effect of change in accounting principle by the interest expense. Adjusted net income is calculated by excluding the effect of derivatives and including minority interest. Adjusted TIER is calculated by using adjusted net income and including all derivative cash settlements in the interest expense. See Non-GAAP Financial Measures for more information on the adjustments we make to our financial results for our own analysis and covenant compliance.

For the year ended May 31, 2009, we reported a net loss of $70 million, which resulted in a TIER calculation below 1.00 compared to a net income of $46 million and TIER of 1.05 for the prior year. For the year ended May 31, 2009, we reported an adjusted net income of $86 million with an adjusted TIER of 1.10, compared with an adjusted net income of $138 million and adjusted TIER of 1.15 for the prior-year period. The $116 million decrease in net income for the year ended May 31, 2009 compared with the prior-year period was primarily due to the $144 million increase in the provision for loan losses and the $61 million increase in the derivative forward value expense partially offset by the $86 million increase in derivative cash settlements.

Interest income of $1,071 million for the year ended May 31, 2009 increased two percent compared with the prior-year period. During the year ended May 31, 2009, there was an increase of $1.3 billion or seven percent to the average balance of loans outstanding which was largely offset by a 25 basis point decline in the weighted-average yield earned on the loan portfolio as compared with the prior-year period. The decline in the yield earned on the loan portfolio was the result of the lower interest rates earned on variable-rate loans.

Our interest expense was relatively unchanged for the year ended May 31, 2009 as compared with the prior-year period despite lower short-term interest rates. The small increase in interest expense was the result of the following factors:

·	The $2,707 million increase in average debt outstanding at May 31, 2009 compared with May 31, 2008.

Higher interest rates on our collateral trust bonds. In October 2008, we issued $1 billion of collateral trust bonds at a rate of 10.375 percent which was significantly higher than the $900 million five-year collateral trust bonds issued at a rate of 5.50 percent in June 2008 due to the severe credit environment in the fall of calendar year 2008.

·	For a short period of time during the latter part of calendar year 2008, the cost of issuing commercial paper increased because of disruptions in the financial markets.

These factors were mostly offset by the following:

·	The lower interest rate environment: Lower interest rates on our variable-rate debt and commercial paper funding particularly in the latter half of the fiscal year.

Lower cost funding from Federal Agricultural Mortgage Corporation (“Farmer Mac”): Notes issued under note purchase agreements with Farmer Mac totaling $700 million at a blended spread over three-month LIBOR of 119 basis points and $500 million at a blended fixed rate of 3.871 percent between December 2008 and May 2009.

·	Lower cost funding from the Rural Economic Development Loan and Grant (“REDLG”) program: In September 2008, $500 million was advanced to us under the REDLG program at an interest rate of 57.5 basis points above the comparable U.S. Treasury rate.

·	Lower cost retail notes: Retail notes increased $783 million from May 31, 2008 to May 31, 2009. We issued retail notes at spread levels well below the indicative collateral trust bond funding levels with a weighted-average interest rate of 4.50 percent.

Our adjusted interest expense decreased by $82 million for the year ended May 31, 2009. In addition to the factors above, the decrease in the adjusted interest expense was largely due to the $97 million payment to us, recorded as derivative cash settlements, for the termination of certain receive fixed, pay variable interest rate swaps during fiscal year 2009.

During fiscal year 2009, there was an increase of $144 million to the loan loss provision as compared with the prior-year period. The increase to the loan loss provision during the year ended May 31, 2009 was due to the deterioration in the market value of collateral supporting impaired loans. The fair value of the collateral was negatively affected by the limited access to

and high cost of capital to support acquisitions of assets similar to the collateral supporting these impaired loans, which resulted in a compression of the earning multiple that potential buyers were willing to pay for such assets. In addition, the current economic conditions caused consumers and businesses to reduce spending, which resulted in, at least for the short-term, reductions in the estimated earnings for companies whose stock is held as collateral for impaired loans. This increase was partially offset by payments received on impaired loans, changes in estimates of future expected cash flows and the net decrease in our variable interest rates from May 31, 2008 to May 31, 2009 as described below.

The loan loss provision is affected by changes in the calculated impairment on our impaired loans due to changes in interest rates. The impairment amount for certain loans is calculated by discounting future expected cash flows using the original contract interest rate on the loan, a portion of which is based on our variable interest rate. Changes to our variable interest rates are based on the underlying cost of funding, competition and other factors. Based on the current balance of impaired loans at May 31, 2009, an increase or decrease of 25 basis points to our short-term and long-term variable interest rates results in an increase or decrease of approximately $9 million, respectively, to the calculated impairment on loans irrespective of a change in the credit fundamentals of the impaired borrower. As of August 1, 2009, we had decreased our long-term variable interest rates by 45 basis points, resulting in a decrease to the calculated impairment on loans of $6 million.

Financial Condition

At May 31, 2009, total loans outstanding increased by $1,161 million or six percent as compared with May 31, 2008 due to a $929 million increase in power supply loans and a $292 million increase in distribution loans. See further discussion of our loan portfolio in Financial Condition, Loan and Guarantee Portfolio Assessment. We expect loan growth to remain relatively stable during fiscal year 2010.

Our loan growth has not been significantly affected by the slowdown in the economy since most of our members serve residential customers as opposed to industrial customers. The current economic conditions reduced the competition for power supply loans from investment and commercial banks. In addition, there is currently a need for utilities to improve their infrastructure, including base load generation, transmission and distribution plants, a significant portion of which is typically financed with borrowed capital.

The current difficult economic conditions have not resulted in a significant rise in delinquencies or defaults in our members’ receivables. Calendar year 2008 data from member systems shows no significant increase in late payments or write-offs for the year ended December 31, 2008 compared to the prior calendar year. The majority of the cooperatives' customers are residential, and electricity is considered an essential service, so we believe the impact of the recession on collections will likely be moderate.

Our total long-term and short-term debt outstanding increased by $1,087 million at May 31, 2009 as compared with the prior-year end. During the year ended May 31, 2009, there was a need to issue debt required to fund new loan advances, as well as to refinance maturing debt. During that period, we issued $5.8 billion of new term debt (collateral trust bonds, medium-term notes and private placement notes) to replace the $3.6 billion of debt that matured (mostly extendible collateral trust bonds). Some of the debt issued during fiscal year 2009 was to prefund debt maturing in the first quarter of fiscal year 2010. As part of our ongoing efforts to manage the liquidity risks associated with maturing debt, we regularly pre-fund large expected debt obligations prior to the maturity to ensure the availability of funds.

Total equity decreased $157 million from May 31, 2008 to May 31, 2009 primarily due to the board authorized patronage capital retirement totaling $85 million and the net loss of $70 million for the year ended May 31, 2009. Total equity fluctuates based on the changes in earnings which are significantly affected by changes in the fair value of our derivative instruments. The fair values of these derivative instruments are sensitive to changes in interest rates. As a result, it is difficult to predict the future changes in equity due to the uncertainty of the movement in future interest rates. In our internal analysis and for covenant compliance under our credit agreements, we adjust equity to exclude the non-cash effects of the accounting for derivative financial instruments and foreign currency translation. In July 2009, National Rural’s board of directors authorized the retirement of allocated net earnings totaling $41 million, representing 50 percent of the fiscal year 2009 allocation. This amount will be returned to members in cash at the end of September 2009.

Liquidity

After Lehman Brothers Holdings Inc. (“LBHI”) filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code in September 2008 and through the latter part of November 2008, there were significant disruptions in the capital markets that resulted in limited investor demand for corporate debt and a significant decrease in the investor demand for commercial paper investments with maturities of more than two weeks. The majority of the investor demand for commercial paper during that time was for maturities of one week or less and the rates required to replace such funding were at significantly higher than historical spreads over the federal funds rate. As a result, we had large volumes of commercial paper to roll over that were, on certain days during that period, at rates that were higher than normal. During that time, we met our

funding needs by issuing member and dealer commercial paper, collateral trust bonds, and through private placements of debt. Those disruptions in the capital markets, while continuing, eased during the third and fourth quarters of fiscal year 2009.

We evaluate and make decisions about our daily cash needs early in the day to be certain we can meet our funding requirements. On October 7, 2008, we were uncertain of our ability to issue the required amount of commercial paper for that day and drew down $418.5 million on our bank lines. We repaid the $418.5 million borrowed under our revolving lines of credit on November 13, 2008.

As part of the effort to support the capital markets, on October 7, 2008, the Federal Reserve Board announced the creation of the Commercial Paper Funding Facility (“CPFF”), to provide a source of liquidity to highly-rated U.S. issuers of commercial paper through a special purpose vehicle that purchased three-month unsecured and asset-backed commercial paper directly from eligible issuers. During the last half of November 2008, investors began to accept longer maturities in limited amounts, which allowed us to issue larger volumes of commercial paper on a daily basis. On days during the second quarter of fiscal year 2009 when investor demand was concentrated at shorter-term maturities, and we preferred to issue longer-term commercial paper to maintain a certain percentage of the portfolio with longer maturities, we were able to issue commercial paper with 90-day maturities through the CPFF. We did not issue any commercial paper through the CPFF during the third and fourth quarter of fiscal year 2009. The $1 billion of commercial paper we issued through the CPFF in the second quarter of fiscal year 2009 matured in March 2009. We have not issued additional commercial paper through the CPFF due to our ability to roll over maturing commercial paper with our existing investor base and finance our balance sheet growth with lower cost alternative sources of funding. We are still qualified to use the CPFF as the expiration date of the program was extended to February 1, 2010. However, there is no intention at this time to use the more expensive funding through the CPFF since there is sufficient demand in the commercial paper market.

As with other companies, we were negatively affected by the severe credit crisis in the fall of 2008 as the demand in the capital markets for corporate debt was reduced and corporate debt that was issued was at historically high spreads over comparable U.S. Treasury rates.

After the LBHI bankruptcy, there was limited demand in the capital markets for corporate debt. As a result, companies experienced difficulty issuing long-term debt, and for the companies that were able to issue long-term debt, the interest rate on the debt issued was at historically high spreads over comparable U.S. Treasury rates. In October 2008, we issued $1 billion of ten-year collateral trust bonds to refinance maturing long-term debt and meet member loan growth demand. This debt was issued with a coupon interest rate of 10.375 percent. This interest rate represented a significant increase in the credit spread over Treasury rates compared with the $900 million 5.50 percent, five-year collateral trust bonds issued in June 2008. We used other lower-cost funding sources during fiscal year 2009, as described in the Results of Operations section of this Financial Overview.

On March 13, 2009, we replaced our $1,500 million 364-day revolving credit agreement with a new $1,000 million 364-day revolving credit agreement. Since the revolving credit lines are required to maintain backup liquidity on our commercial paper, we cannot issue as much commercial paper in the future because of the $500 million reduction in the facility. We will issue long-term debt and swap the debt to a variable rate to make up for the reduction to commercial paper. This is a more expensive form of funding.

As a result of the bankruptcy filing of LBHI, we terminated interest rate swaps with Lehman Brothers Special Financing (“LBSF”) as counterparty (with an LBHI guarantee) on September 26, 2008. The payment due to us from LBSF of $26 million was recorded in derivative cash settlements representing the termination net settlement amount on that day, based on the terms of the contract. On October 3, 2008, LBSF filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. We have a claim of $26 million on the assets of both LBHI and LBSF. We used market data that indicated values for LBHI bonds of 10 cents and 15 cents on the dollar as a proxy for the potential recovery from both LBHI and LBSF. As a result, the receivable has been reduced to $7 million. The amount recorded as a receivable does not reduce or limit our claim of $26 million against LBHI and LBSF. The ultimate recovery will depend on the ability of LBHI and LBSF to maximize the value of assets through sale or assignment or the price that we can obtain through the sale of our claim. As of July 24, 2009, market sales for similar claims against LBHI and LBSF were between 37 cents and 41 cents on the dollar.

At May 31, 2009, we had $2,288 million of commercial paper, daily liquidity fund, term loans, and bank bid notes and $2,580 million of medium-term notes, collateral trust bonds and long-term notes payable scheduled to mature during the next 12 months. Members held commercial paper (including the daily liquidity fund) totaling $1,226 million or approximately 67 percent of the total commercial paper and daily liquidity fund outstanding at May 31, 2009. Commercial paper issued through dealers and bank bid notes totaled $850 million and represented four percent of total debt outstanding at May 31, 2009. 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 2010. During the next 12 months, we plan to replace the maturing $2,580 million of medium-term notes, collateral trust bonds and long-term notes payable and fund new loan growth by issuing a combination of commercial paper, medium-term notes, collateral trust bonds and other debt. At May 31, 2009, we had $1.2 billion available under note purchase agreements with Farmer Mac, $625 million of which was advanced through August 2009.

We began offering member capital securities, unsecured and subordinate voluntary debt investments, to members in December 2008. As of May 31, 2009, a total of $278 million of member capital securities had been sold. Subsequent to our fiscal year-end, we met our target of issuing at least $300 million of member capital securities. After the end of the fiscal year through August 7, 2009, an additional $53 million of member capital securities were sold bringing the total to $331 million.

At May 31, 2009 and 2008, we were the guarantor and liquidity provider for $643 million and $330 million, respectively of tax-exempt bonds issued for our member cooperatives. During the year ended May 31, 2009, we were required to purchase $72 million of tax-exempt bonds pursuant to our obligation as liquidity provider. As a result, we were required to hold the bonds until the remarketing agent was able to place them with third-party investors. At May 31, 2009, all tax-exempt bonds we held during fiscal year 2009 had been redeemed or repurchased by third-party investors with no gain or loss on the transactions.

Critical Accounting Estimates

Our significant accounting principles, as described in Note 1, General Information and Accounting Polices, to the consolidated financial statements are essential in understanding the Management’s Discussion and Analysis of Financial Condition and Results of Operations. Many of our significant accounting principles require complex judgments to estimate values of assets and liabilities. We have procedures and processes to facilitate making these judgments.

We have identified the allowance for loan losses and the determination of fair value of certain items on our balance sheet as critical accounting policies because they require significant estimations and judgments by management. The more judgmental estimates are summarized below. We have identified and described the development of the variables most important in the estimation process. In many cases, there are numerous alternative judgments that could be used in the process of determining the inputs to the model. Where alternatives exist, we have used the factors that we believe represent the most reasonable value in developing the inputs. Actual performance that differs from our estimates of the key variables could affect net income. Separate from the possible future effect to net income from our model inputs, market sensitive assets and liabilities may change subsequent to the balance sheet date, often significantly, due to the nature and magnitude of future credit and market conditions. Such credit and market conditions may change quickly and in unforeseen ways and the resulting volatility could have a significant, negative effect on future operating results.

Below is a description of the process used in determining the adequacy of the allowance for loan losses and the determination of fair value for certain items on our balance sheet.

Allowance for Loan Losses

At May 31, 2009 and 2008, our loan loss allowance totaled $623 million and $515 million, representing 3.09 percent and 2.71 percent of total loans outstanding, respectively. GAAP requires loans receivable to be reported on the consolidated balance sheets at net realizable value. The net realizable value is the total principal amount of loans outstanding less an estimate of the probable losses inherent in the portfolio. We calculate the loss allowance on a quarterly basis. The loan loss allowance is calculated by segmenting the portfolio into three categories of loans: impaired, high risk and general portfolio. There are significant subjective assumptions and estimates used in calculating the amount of the loss allowance required by each of the three categories. Different assumptions and estimates could also be reasonable. Changes in these assumptions and estimates could have a material impact on our financial statements.

Impaired Loans

We calculate the impairment on loans based on GAAP. A loan is impaired when a creditor does not expect to collect all principal and interest due under the original terms of the loan, other than an insignificant delay or an insignificant shortfall in amount. We review our portfolio to identify impairments at least quarterly. Factors considered in determining an impairment include, but are not limited to:

·	the review of the borrower's audited financial statements and interim financial statements if available,

·	the borrower's payment history,

·	communication with the borrower,

·	economic conditions in the borrower's service territory,

·	pending legal action involving the borrower,

·	restructure agreements between us and the borrower, and

·	estimates of the value of the borrower's assets that have been pledged as collateral to secure our loans.

We calculate the impairment by comparing the future expected cash flow discounted at the interest rate on the loans at the time the loans became impaired, against our current investment in the receivable. If the current investment in the receivable is greater than the net present value of the future payments discounted at the original contractual interest rate, the impairment is equal to that difference. If it is not possible to estimate the future cash flow associated with a loan, then the impairment calculation is based on the value of the collateral pledged as security for the loan.

At May 31, 2009 and 2008, we reserved a total of $414 million and $331 million specifically against impaired loans totaling $1,056 million and $1,078 million, respectively, representing 39 percent and 31 percent, respectively, of total impaired loans. The $414 million and $331 million specific reserves represented 66 percent and 64 percent of the total loan loss allowance at May 31, 2009 and 2008, respectively. The original contract interest rate on a portion of the impaired loans at May 31, 2009 will vary with the changes in our variable interest rates. Based on the current balance of impaired loans at May 31, 2009, a 25 basis point increase or decrease to our variable interest rates would result in an increase or decrease, respectively, of approximately $9 million to the calculated impairment irrespective of a change in the credit fundamentals of the impaired borrower.

In calculating the impairment on a loan, the estimates of the expected future cash flow or collateral value are the key estimates made by management. Changes in the estimated future cash flow or collateral value would impact the amount of the calculated impairment. The change in cash flow required to make the change in the calculated impairment material will be different for each borrower and depend on the period covered, the original contract interest rate and the amount of the loan outstanding. Estimates are not used to determine our investment in the receivables or the discount rate since, in all cases, the investment is equal to the loan balance outstanding at the reporting date and the discount rate is equal to the interest rate on the loans at the time the loans became impaired.

High Risk Loans

We define a loan exposure as high risk when:

·	the borrower has a history of late payments;

·	the borrower's financial results do not satisfy loan financial covenants;

·	the borrower contacts us to discuss pending financial difficulties; or

·	for some other reason, we believe the borrower's financial results could deteriorate resulting in an elevated potential for loss.

Our corporate credit committee determines which loans to classify as high risk. The committee meets at least quarterly to review all loan facilities with an internal risk rating above a certain level.

The corporate credit committee sets the required reserve for each borrower based on their facts and circumstances, such as:

·	the borrower's financial condition;

·	the borrower’s payment history;

·	our estimate of the collateral value;

·	pending litigation, if any; and

·	other factors.

This is an objective and subjective exercise where the committee uses the available information to make its best estimate of the reserve. At any reporting date, the reserve required could vary significantly depending on the facts and circumstances, which could include, but are not limited to:

·	changes in collateral value;

·	deterioration in financial condition;

·	bankruptcy of the borrower;

·	payment default on our loans; and

·	other factors.

The borrowers in the high risk category will generally either move to the impaired category or back to the general portfolio within 12 to 24 months. At May 31, 2009 and 2008, we reserved $11 million and $3 million against the $30 million and $8 million of exposure classified as high risk, representing coverage of 37 percent and 38 percent, respectively. The $11 million and $3 million reserved for loans in the high risk category represented 2 percent and less than 1 percent of the total loan loss allowance at May 31, 2009 and 2008, respectively.

General Portfolio

We determine the required loan loss allowance for the general portfolio by using our internal risk rating system, Standard & Poor’s historical default data on corporate bonds and our specific loss recovery data. We use the following factors to determine the loan loss allowance for the general portfolio category:

·	Internal risk ratings - We maintain risk ratings for each credit facility outstanding to our borrowers. The ratings are updated at least annually and are based on the following:

-	general financial condition of the borrower;

-	our estimated value of the collateral securing our loans;

-	our judgment of the borrower's management;

-	our judgment of the borrower's competitive position within its service territory and industry;

-	our estimate of potential impact of proposed regulation and litigation; and

-	other factors specific to individual borrowers or classes of borrowers.

Standard corporate bond default table - The table provides expected default rates based on rating level and the remaining maturity of the bond. We use the standard default table for all corporate bonds published by Standard and Poor's Corporation to assist in estimating our reserve levels because we have limited history from which to develop loss expectations and because we have been unable to identify utility specific default rates.

·	Recovery rates - Estimated recovery rates based on historical experience of loan balance at the time of default compared with the total loss on the loan to date.

We aggregate the loans in the general portfolio by borrower type (distribution, power supply, telecommunications, associate and other member) and by internal risk rating within borrower type. We correlate our internal risk ratings to the ratings used in the standard default table for borrowers with ratings from Standard and Poor’s Corporation and based on a standard matching used by banks.

At May 31, 2009 and 2008, we had a total of $18,858 million and $17,690 million of loans, respectively, in the general portfolio. This total excludes $244 million and $250 million of loans at May 31, 2009 and 2008, respectively, that have a U.S. Government guarantee of all principal and interest payments. We do not maintain a loan loss allowance on loans that are guaranteed by the U.S. Government. At May 31, 2009 and 2008, we reserved a total of $162 million and $155 million, respectively, for loans in the general portfolio representing coverage of approximately one percent of the total loans for the general portfolio at both dates.

In addition to the general portfolio reserve requirement as calculated above, we maintain an unallocated reserve to cover the additional risk associated with large loan exposures and to cover economic and environmental factors that may be currently affecting the financial results of borrowers, but have not shown up in the borrower’s annual audited financial statements.

The first component of the unallocated reserve is a single obligor reserve to cover the additional risk related to large loan exposures. We set the exposure threshold at one percent of total loans and guarantees outstanding and provide coverage equal to one percent times the internal risk rating associated with the loan exposure. We believe this reflects our assessment of the additional risk related to large loan exposures. At May 31, 2009 and 2008, our single obligor reserve was $30 million and $23 million, respectively.

The second component of the unallocated reserve is an economic and environmental reserve to cover factors that we believe are currently affecting the financial results of borrowers, but are not reflected in our internal risk rating process and therefore present an increased risk of losses incurred as of the balance sheet date. We use annual audited financial statements from our borrowers as part of our internal risk rating process. There could be a lag between the time that various environmental and economic factors occur and the time when these factors are reflected in the annual audited financial statements of the borrower and therefore the internal risk rating we determine for the borrower. This reserve component may be set at up to five percent of the amount of the calculated general reserve for each type of loan exposure. Our corporate credit committee will make a quarterly determination of the percentage of general reserve to be held and the portions of the loan portfolio that the additional reserve percentage shall be applied. At May 31, 2009, the corporate credit committee set the economic and environmental component of the unallocated reserve to be $6 million or four percent of the total general reserve, representing 3.5 percent of electric loans and five percent of telecommunications loans. This amount took into consideration the effect on electric and telecommunications borrowers from (1) the current economic downturn, (2) the increase in the unemployment rate, (3) the decline in the housing market that has led to a significant increase in foreclosures and (4) specifically for telecommunications borrowers, reduced discretionary spending for telecommunications services, increased competition from wireless providers and continued loss of access lines among rural local exchange carriers. At May 31, 2008, the economic and environmental component of the unallocated reserve was $3 million or two percent of the total general reserve.

Senior management reviews the estimates and assumptions used in the calculations of the loan loss allowance for impaired loans, high risk loans, the general portfolio and the unallocated reserve on a quarterly basis. Senior management discusses estimates with the board of directors and audit committee and reviews all loan loss-related disclosures included in our Form 10-Qs and Form 10-Ks filed with the SEC.

Management makes recommendations regarding loans to be written off to the National Rural board of directors. In making its recommendation to write off all or a portion of a loan balance, management considers various factors including cash flow analysis and collateral securing the borrower's loans.

Fair Value

We have determined the accounting for certain items on our balance sheet at fair value to be a critical accounting policy because of the subjective nature and the requirement for management to make significant estimations in determining the amounts to be recorded. Different assumptions and estimates could also be reasonable and changes in the assumptions used and estimates made could have a material effect on our financial statements.

The primary instruments recorded on our balance sheet at fair value are derivative financial instruments. Because we generally do not apply hedge accounting to these instruments, the accounting guidance requires us to record all derivative instruments at fair value on the balance sheet with changes in fair value reported in earnings. We record the change in the fair value of our derivatives for each reporting period in the derivative forward value line on the consolidated statements of operations.

Because there is not an active secondary market for the types of derivative instruments we use, we obtain market quotes from our dealer counterparties. The market quotes are based on the expected future cash flow and estimated yield curves. We perform our own analysis to confirm the values obtained from the counterparties. The counterparties are estimating future interest rates as part of the quotes they provide to us. We adjust all derivatives to fair value on a quarterly basis. The fair value we record will change as estimates of future interest rates change. To estimate the impact of changes to interest rates on the forward value of derivatives, we would need to estimate all changes to interest rates through the maturity of our outstanding derivatives. We have derivatives in the current portfolio that do not mature until 2045. Because many of the derivative instruments we use for risk management have such long-dated maturities, the valuation of these derivatives may require extrapolation of market data that is subject to significant judgment. Accounting guidance on fair value requires that credit risk be considered in determining the market value of any asset or liability carried at fair value. We adjust the market values of our derivatives received from the counterparties based on our counterparties’ and our credit spreads observed in the credit default swap market. The credit default swap levels represent the credit risk premium required by a market participant based on the available information related to the creditor.

In addition to the valuation associated with derivative financial instruments, we also periodically are required to record foreclosed assets at the lower of cost or fair value. In many instances the valuation of these assets are judgmental and dependent upon comparisons to similar assets or estimations of future cash flows that are expected to be generated by the underlying foreclosed properties. In both of these instances, management uses its best estimates, based upon available market data and/or projections of future cash flows. However, because of the subjective nature of these estimates, other estimates could be reasonable and changes in the assumptions used and our estimates could have a material effect on our financial statements.

New Accounting Pronouncements

In May 2009, the FASB issued SFAS 165, Subsequent Events (“SFAS 165”) to establish a general standard of accounting for the disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. SFAS 165 does not change the kinds of events that an entity must recognize or disclose in its financial statements. It does, however, require the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. This statement is effective on a prospective basis for interim or annual periods ending after June 15, 2009. Our adoption of SFAS 165 in the first quarter of fiscal year 2010 is not expected to have a material impact on our financial position or results of operations.

In April 2009, FASB issued FSP SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments which amends the recognition guidance for other-than-temporary impairments (“OTTI”) of debt securities and expands the financial statement disclosures for OTTI on debt and equity securities. Under this FSP, the difference between the amortized cost basis and fair value on debt securities that an entity intends to sell or would more-likely-than-not be required to sell before the expected recovery of the amortized cost basis is recorded in earnings. For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it is more-likely-than-not will not be required to be sold prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the

rest of the fair value loss is recognized in accumulated other comprehensive income. This FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Our adoption of this FSP in the first quarter of fiscal year 2010 is not expected to have a material impact on our financial position or results of operations.

In April 2009, FASB issued FSP SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. The FSP reaffirms that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The FSP also reaffirms the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. Our adoption of this FSP in the first quarter of fiscal year 2010 is not expected to have a material impact on our financial position or results of operations.

In April 2009, FASB issued FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. The FSP requires disclosing qualitative and quantitative information about the fair value of all financial instruments on a quarterly basis, including methods and significant assumptions used to estimate fair value during the period. These disclosures were previously only done annually. The disclosures required by the FSP are effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Our adoption of this FSP in the first quarter of fiscal year 2010 is not expected to have a material impact on our financial position or results of operations.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51 (“SFAS 160”), to establish accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain consolidation procedures for consistency with the requirements of guidance covering business combinations. Noncontrolling interests shall be reclassified to equity, consolidated net income shall be adjusted to include net income attributable to noncontrolling interests and consolidated comprehensive income shall be adjusted to include comprehensive income attributable to the noncontrolling interests. This statement is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 shall be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented.

The principal effect of recasting the consolidated balance sheets upon the adoption of the new standard on June 1, 2009 is to move the noncontrolling interests from long-term liabilities to equity attributable to noncontrolling interests, thus increasing the total of consolidated equity by that amount. The following table shows the expected effect of adopting SFAS 160 on the periods presented on the consolidated balance sheets as of May 31:

(dollar amounts in thousands)		2009		2008
Balance Sheet:
Total equity, as previously reported	$	508,938	$	665,965
Increase for SFAS 160 reclassification
of noncontrolling interests		10,162		14,247
Total equity, as adjusted	$	519,100	$	680,212

Additionally, the adoption of SFAS 160 requires that net income, as previously reported prior to the adoption of SFAS 160, be adjusted to include the net income attributable to the noncontrolling interests in the consolidated statement of earnings. Thus, after the adoption of SFAS 160, consolidated net loss increases by $4 million for the year ended May 31, 2009 and net income decreases by $6 million for the year ended May 31, 2008.

Our adoption of SFAS 160 in the first quarter of fiscal year 2010 is not expected to have a material impact on our financial position or results of operations.

Results of Operations

Reclassifications of prior period amounts for fiscal years 2008 and 2007 have been made to conform to the current reporting format for the following two items. Fees and other income totaling $18 million and $15 million for the years ended May 31, 2008 and 2007 have been reclassified from interest income to the fee and other income line of non-interest income on the consolidated statements of operations to conform with the May 31, 2009 presentation. The loss on early extinguishment of debt and other expense totaling $6 million and $5 million for the years ended May 31, 2008 and 2007 have been reclassified from interest expense to those line items in non-interest expense on the consolidated statements of operations to conform with the May 31, 2009 presentation.

Fiscal Year 2009 versus 2008 Results

The following table presents the results of operations for the years ended May 31, 2009 and 2008.

		For the year ended May 31,						Increase/
(dollar amounts in thousands)		2009			2008			(Decrease)
Interest income	$	1,070,764		$	1,051,393		$	19,371
Interest expense		(935,021	)		(931,268	)		(3,753	)
Net interest income		135,743			120,125			15,618
(Provision for) recovery of loan losses		(113,699	)		30,262			(143,961	)
Net interest income after (provision for) recovery of loan losses		22,044			150,387			(128,343	)

Non-interest income:
Fee and other income		13,163			19,608			(6,445	)
Derivative cash settlements		112,989			27,033			85,956
Results of operations of foreclosed assets		3,774			7,528			(3,754	)
Total non-interest income		129,926			54,169			75,757

Non-interest (expense) income:
Salaries and employee benefits		(36,865	)		(36,428	)		(437	)
Other general and administrative expenses		(23,977	)		(24,041	)		64
(Provision for) recovery of guarantee liability		(1,615	)		3,104			(4,719	)
Market adjustment on foreclosed assets		(8,014	)		(5,840	)		(2,174	)
Derivative forward value		(160,017	)		(98,743	)		(61,274	)
Loss on sale of loans		-			(676	)		676
Loss on early extinguishment of debt		-			(5,509	)		5,509
Other		(353	)		(112	)		(241	)
Total non-interest expense		(230,841	)		(168,245	)		(62,596	)

(Loss) income prior to income taxes and minority interest		(78,871	)		36,311			(115,182	)

Income tax benefit		5,101			3,335			1,766
Minority interest, net of income taxes		3,900			6,099			(2,199	)
Net (loss) income	$	(69,870	)	$	45,745		$	(115,615	)

TIER (1)		-			1.05
Adjusted TIER (2)		1.10			1.15

(1) For the year ended May 31, 2009, earnings were insufficient to cover the fixed charges by $70 million.

(2) Adjusted to exclude the effect of the derivative forward value from net income, to include minority interest in net income and to include all derivative cash settlements in the interest expense. See Non-GAAP Financial Measures for further explanation and a reconciliation of these adjustments.

The following tables provide a breakout of the average yield on loans, the average rate on debt and the change to interest income, interest expense and net interest income due to changes in average loan and debt volume versus changes to interest rates summarized by loan and debt type. The following tables also include a breakout of 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. Management calculates an 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 our interest expense.

Average balances and interest rates – Assets

		Average volume						Interest income					Average yield
(dollar amounts in thousands)		2009		2008		2007		2009		2008		2007	2009		2008		2007

Long-term fixed-rate loans (1)	$	15,052,425	$	14,782,141	$	14,542,951	$	890,367	$	872,488	$	833,247	5.92	%	5.90	%	5.73	%
Long-term variable-rate loans (1)		2,255,538		1,803,553		2,086,792		92,975		86,787		114,786	4.12		4.81		5.50
Short-term loans (1)		1,895,563		1,310,313		1,028,585		75,604		77,145		72,632	3.99		5.89		7.06
Non-performing loans		495,014		504,310		534,701		-		-		-	-		-		-
Total		19,698,540		18,400,317		18,193,029		1,058,946		1,036,420		1,020,665	5.38		5.63		5.61
Investments (2)		489,228		234,831		215,409		5,683		7,394		9,662	1.16		3.15		4.49
Fee income		-		-		-		6,135		7,579		9,323	-		-		-
Total	$	20,187,768	$	18,635,148	$	18,408,438	$	1,070,764	$	1,051,393	$	1,039,650	5.30	%	5.64	%	5.65	%

(1) Interest income on loans to members.

(2) Interest income on the investment of excess cash, preferred stock and trading securities.

Average balances and interest rates – Liabilities

		Average volume						Interest expense					Average cost
(dollar amounts in thousands)		2009		2008		2007		2009		2008		2007	2009		2008		2007
Commercial paper and bank bid
notes (1)	$	3,188,189	$	2,719,598	$	3,170,196	$	58,688	$	122,786	$	178,687	1.84	%	4.51	%	5.64	%
Medium-term notes (1)		5,278,445		4,101,955		5,336,846		326,313		330,193		363,760	6.18		8.05		6.82
Collateral trust bonds (1)		5,232,731		4,880,885		4,226,306		290,152		243,579		218,523	5.54		4.99		5.17
Subordinated deferrable debt (1)		294,592		301,771		476,764		19,663		19,663		33,089	6.67		6.52		6.94
Subordinated certificates (1)		1,428,083		1,326,216		1,317,373		55,330		48,717		47,852	3.87		3.67		3.63
Long-term private debt (1)		3,595,048		2,980,097		2,499,501		164,306		151,694		130,568	4.57		5.09		5.22
Total		19,017,088		16,310,522		17,026,986		914,452		916,632		972,479	4.81		5.62		5.71
Debt issuance costs (2)		-		-		-		10,158		9,605		12,328	-		-		-
Fee expense (3)		-		-		-		10,411		5,031		6,947	-		-		-
Total	$	19,017,088	$	16,310,522	$	17,026,986	$	935,021	$	931,268	$	991,754	4.92	%	5.71	%	5.82	%

Derivative cash settlements (4)	$	12,764,394	$	13,055,651	$	12,631,758	$	112,989	$	27,033	$	86,442	0.89	%	0.21	%	0.68	%
Adjusted interest expense (5)		19,017,088		16,310,522		17,026,986		822,032		904,235		905,312	4.32		5.54		5.32

Net interest income/Net yield							$	135,743	$	120,125	$	47,896	0.38	%	(0.07	)%	(0.17	)%
Adjusted net interest
income/Adjusted net yield (5)								248,732		147,158		134,338	0.98		0.10		0.33

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

(2) 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.

(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.

(4) 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.

(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.

		Analysis of changes in net interest income
		2009 vs. 2008									2008 vs. 2007
		Increase (decrease) due to change in:									Increase (decrease) due to change in:
(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	$	15,952		$	1,927		$	17,879		$	13,705		$	25,536		$	39,241
Long-term variable-rate loans		21,750			(15,562	)		6,188			(15,580	)		(12,419	)		(27,999	)
Short-term loans		34,457			(35,998	)		(1,541	)		19,894			(15,381	)		4,513
Total interest income on loans		72,159			(49,633	)		22,526			18,019			(2,264	)		15,755
Investments		8,010			(9,721	)		(1,711	)		871			(3,139	)		(2,268	)
Fee income		-			(1,444	)		(1,444	)		-			(1,744	)		(1,744	)
Total interest income	$	80,169		$	(60,798	)	$	19,371		$	18,890		$	(7,147	)	$	11,743

Increase (decrease) in interest expense:
Commercial paper and bank bid notes	$	21,156		$	(85,254	)	$	(64,098	)	$	(25,398	)	$	(30,503	)	$	(55,901	)
Medium-term notes		94,703			(98,583	)		(3,880	)		(84,170	)		50,603			(33,567	)
Collateral trust bonds		17,559			29,014			46,573			33,845			(8,789	)		25,056
Subordinated deferrable debt		(468	)		468			-			(12,145	)		(1,281	)		(13,426	)
Subordinated certificates		3,742			2,871			6,613			321			544			865
Long-term private debt		31,303			(18,691	)		12,612			25,105			(3,979	)		21,126
Total interest expense on debt		167,995			(170,175	)		(2,180	)		(62,442	)		6,595			(55,847	)
Debt issuance costs		-			553			553			-			(2,723	)		(2,723	)
Fee expense		-			5,380			5,380			-			(1,916	)		(1,916	)
Total interest expense		167,995			(164,242	)		3,753			(62,442	)		1,956			(60,486	)
Net interest income	$	(87,826	)	$	103,444		$	15,618		$	81,332		$	(9,103	)	$	72,229

Derivative cash settlements (3)	$	(603	)	$	86,559		$	85,956		$	2,901		$	(62,310	)	$	(59,409	)
Adjusted interest expense (4)		150,049			(232,252	)		(82,203	)		(38,094	)		37,017			(1,077	)

(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) For derivative cash settlements, variance due to average volume represents the change in derivative cash settlements from the change in average notional amount of derivative contracts outstanding. Variance due to average rate represents the change in derivative cash settlements from a change in rates. The change in rate represents the net difference between the average rate paid and the average rate received for cash settlements during the period.

(4) 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.

Interest Income

The $19 million or two percent increase in interest income for the year ended May 31, 2009, as compared with the prior-year period was due to a $1.3 billion or seven percent increase in average loan volume largely offset by a 25 basis point decline in the average yield earned on the portfolio due to lower variable interest rates.

For the year ended May 31, 2009, we had a reduction to interest income of $56 million due to non-accrual loans compared with a reduction of $67 million for the prior-year period. The effect on electric interest income of non-accrual loans was a reduction of $26 million for the year ended May 31, 2009, as compared with $34 million for the prior-year period. The telecommunications interest income was reduced by $30 million for the year ended May 31, 2009 as compared with $33 million for the prior-year period as a result of non-accrual loans. The effect of non-accrual loans on interest income is included in the rate variance in the table above.

Interest Expense

The $4 million or less than one percent increase in total interest expense for the year ended May 31, 2009 compared with the prior-year period was due to the higher level of debt outstanding to fund loan growth partially offset by the 79 basis point decline in the overall cost of our debt. The decline in debt costs was primarily attributable to a decline in the cost of our short-term and variable-rate debt as a result of a lower interest rate environment compared with the prior-year period. The growth in debt outstanding was primarily attributed to amounts borrowed under the REDLG program, notes payable issued to Farmer Mac and new issuances of collateral trust bonds since May 31, 2008.

The adjusted interest expense, which includes all derivative cash settlements, was $822 million for the year ended May 31, 2009 compared with $904 million for the prior-year period based on changes to interest expense noted above and derivative cash settlements described below. 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 $16 million increase in net interest income for the year ended May 31, 2009 compared with the prior-year period was due to the increase in average loan volume and the 79 basis point decline in the overall cost of debt partially offset by additional debt required to fund the increase in loans and the 25 basis point decline in the yield of our loan portfolio. The adjusted net interest income, which includes all derivative cash settlements, for the year ended May 31, 2009 was $249 million, an increase of $102 million from the prior-year period. 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.

Provision for Loan Loss

We recorded a loan loss provision of $114 million for the year ended May 31, 2009, compared with a $30 million recovery for the prior-year period. The loan loss provision for the year ended May 31, 2009, was primarily due to a reduction in the fair value of the collateral supporting our exposure to Innovative Communication Corporation (“ICC”). See Non-performing Loans in the Financial Condition section for additional discussion regarding this and other non-performing loans. The fair value of the collateral was negatively affected by the limited access to and the high cost of capital to support acquisitions of assets similar to the collateral supporting our impaired loans, which resulted in a compression of the earning multiple that potential buyers are willing to pay for such assets. In addition, the current economic conditions have caused consumers and businesses to reduce spending, which resulted in, at least for the short-term, reductions in the estimated earnings for companies. The combination of these two factors, which began to affect market values after the LBHI bankruptcy, resulted in a decrease to the market value of companies similar to the collateral supporting our impaired loans and an increase in the required reserve for impaired loans. The resulting increase in the loan loss provision was partly offset by payments received and changes in estimates of future expected cash flows for certain other impaired loans. See further discussion in Allowance for Loan Losses in the Financial Condition section.

Non-interest Income

Non-interest income increased by $76 million for the year ended May 31, 2009, compared with the prior-year period primarily due to the increase in cash settlements on derivative financial instruments. During the year ended May 31, 2009, we terminated certain receive fixed, pay variable interest rate swaps with notional amounts totaling $583 million that resulted in payments to us of $97 million which was recorded in the statement of operations as derivative cash settlements. Of the $583 million notional amount of derivative contracts terminated, we initiated the termination on $495 million, while the counterparty initiated the request to terminate $88 million (these swaps were terminated at par resulting in no cash payments or receipts). As a result of these terminations, we recorded a charge to the derivative forward value line for the year ended May 31, 2009, to reduce the derivative asset by $97 million. The income recorded in cash settlements for the payments received and the charge to derivative forward value are offsetting, and therefore there is no effect on reported net income as a result of these transactions. While there was no effect on reported net income, adjusted net income and the related adjusted

equity increased by $97 million due to these transactions. See Non-GAAP Financial Measures for further explanation of the adjustments we make in our financial analysis to net income and equity.

We terminated these derivative instruments primarily to increase our adjusted equity base for the fiscal year to partially offset losses from the quarter ended November 30, 2008 primarily due to the increase in the loan loss provision noted above. Terminating these swaps also had the benefit of reducing our counterparty risk exposure on two out of the three counterparties to these instruments. The economic effect of terminating these transactions was to accelerate into the current period the benefit we would have realized in future periods in the form of lower debt costs based upon expected future interest rates.

Cash settlements also include income of $7 million representing the estimated recovery for the $26 million due to us as a result of terminating interest rate swaps with LBSF. The amount recorded as a receivable does not reduce or limit our claim of $26 million against LBHI and LBSF. The ultimate recovery will depend on the ability of LBHI and LBSF to maximize the value of assets through sale or assignment or the price that we can obtain through the sale of our claim. The cash settlements income described above was partially offset by the decrease in cash settlements as a result of lower short-term interest rates during the year ended May 31, 2009 compared with the year ended May 31, 2008 as we received a variable rate on the majority of our derivative contracts during both periods. Additionally, the weighted-average rate received on pay fixed, receive variable interest rate swaps decreased from 2.64 percent for fiscal year 2008 to 0.62 percent for fiscal year 2009.

Non-interest Expense

Non-interest expense increased by $63 million for the year ended May 31, 2009 compared with the prior-year period primarily due to the $61 million increase in the derivative forward value expense explained below. Additionally, we recorded a $2 million provision for guarantee liability for the year ended May 31, 2009 compared with a $3 million recovery of guarantee liability for the year ended May 31, 2008. The increase to the provision for guarantee liability during the year ended May 31, 2009 was primarily due to the $238 million increase in guarantees outstanding. The $61 million increase in the derivative forward value expense during the year ended May 31, 2009 compared with the prior-year period is due to the reversal of the $97 million derivative asset related to terminated interest rate exchange agreements and changes in the estimate of future interest rates over the remaining life of the derivative contracts.

We recorded a decrease to the fair value of foreclosed assets of $8 million and $6 million for the years ended May 31, 2009 and 2008, respectively, based on decreasing collateral values. The balance of foreclosed assets includes land development loans and limited partnership interests in certain real estate developments. The reduction to the fair value of the collateral supporting these land development loans during the years ended May 31, 2009 and 2008 was primarily due to residential home market weakness which has caused lot sales to slow down. Additionally, lower gas prices resulted in a decrease in the fair value of the underlying collateral in fiscal year 2009.

Minority Interest

During the year ended May 31, 2009, NCSC’s net loss exceeded its equity balance by $6 million primarily due to NCSC’s $12 million in derivative forward value losses during the period. In accordance with consolidation accounting rules, National Rural is required to absorb the $6 million excess NCSC loss. Minority interest for the year ended May 31, 2009, represents RTFC’s net loss of $1 million and $3 million of NCSC’s net loss of $9 million. Minority interest for the year ended May 31, 2008 represents the total RTFC and NCSC net loss since NCSC losses did not exceed its equity during that period.

Net (Loss) Income

The change in the items described above resulted in a net loss of $70 million for the year ended May 31, 2009, compared to net income of $46 million for the prior-year period. The adjusted net income, which excludes the effect of the derivative forward value and adds back minority interest, was $86 million, compared to $138 million for the prior-year period. See Non-GAAP Financial Measures for further explanation of the adjustments we make in our financial analysis to net income.

Fiscal Year 2008 versus 2007 Results

The following table presents the results of operations for the year ended May 31, 2008 versus May 31, 2007.



		For the year ended May 31,						Increase/
(dollar amounts in thousands)		2008			2007			(Decrease)
Interest income	$	1,051,393		$	1,039,650		$	11,743
Interest expense		(931,268	)		(991,754	)		60,486
Net interest income		120,125			47,896			72,229
Recovery of loan losses		30,262			6,922			23,340
Net interest income after recovery of loan losses		150,387			54,818			95,569

Non-interest income:
Fee and other income		19,608			16,106			3,502
Derivative cash settlements		27,033			86,442			(59,409	)
Results of operations of foreclosed assets		7,528			9,758			(2,230	)
Total non-interest income		54,169			112,306			(58,137	)

Non-interest (expense) income:
Salaries and employee benefits		(36,428	)		(33,817	)		(2,611	)
Other general and administrative expenses		(24,041	)		(18,072	)		(5,969	)
Recovery of guarantee liability		3,104			1,700			1,404
Market adjustment on foreclosed assets		(5,840	)		-			(5,840	)
Derivative forward value		(98,743	)		(79,281	)		(19,462	)
Foreign currency adjustments		-			(14,554	)		14,554
Loss on sale of loans		(676	)		(1,584	)		908
Loss on early extinguishment of debt		(5,509	)		(4,806	)		(703	)
Other		(112	)		(169	)		(57	)
Total non-interest expense		(168,245	)		(150,583	)		(17,662	)

Income prior to income taxes and minority interest		36,311			16,541			19,770

Income tax benefit (expense)		3,335			(2,396	)		5,731
Minority interest, net of income taxes		6,099			(2,444	)		8,543
Net income	$	45,745		$	11,701		$	34,044

TIER		1.05			1.01
Adjusted TIER (1)		1.15			1.12

5(1) Adjusted to exclude the effect of the derivative forward value from net income, to include minority interest in net income and to include all derivative cash settlements in interest expense. See Non-GAAP Financial Measures for further explanation and a reconciliation of these adjustments.

Interest Income

The $12 million or 1 percent increase in interest income for the year ended May 31, 2008 as compared with the prior-year period was due to the increase in National Rural and NCSC loan volume and long-term fixed-rate loans that repriced at higher interest rates partly offset by the decrease in RTFC loan volume and lower variable interest rates. Interest rates for approximately $703 million of National Rural long-term fixed-rate loans were repriced in January 2008 with 85 percent selecting a new fixed rate. The weighted-average interest rate of long-term loans subject to repricing in January 2008 was approximately 5.37 percent, which is lower than the National Rural fixed interest rates available to members at that time of between 5.65 percent and 7.25 percent (depending on the term selected). The increase in interest income was offset by the impact of our decreasing variable interest rates by approximately 215 to 250 basis points, depending on the loan program, since May 31, 2007.

For the year ended May 31, 2008, we had a reduction to interest income of $67 million due to non-accrual loans compared with a reduction of $81 million for the prior year period. The effect on electric interest income of non-accrual loans was a reduction of $34 million for the year ended May 31, 2008 as compared with $39 million for the prior year period. The impact on RTFC interest income of non-accrual loans was a reduction of $33 million for the year ended May 31, 2008 as compared with $42 million for the prior year period. The impact of non-accrual loans on interest income is included in the rate variance in the table on page 28.

Interest Expense

The $60 million or 6 percent decrease in total interest expense for the year ended May 31, 2008 as compared with the prior year period was due to lower interest expense on commercial paper and variable-rate long-term debt as a result of a 325 basis point decrease in the federal funds rate from the rate in effect at May 31, 2007. The $500 million borrowed under the

REDLG program in August 2007 represents a lower cost compared with our other forms of long-term debt as a result of the guarantee of repayment by the RUS. In addition, the $175 million of 7.40 percent subordinated deferrable debt redeemed in June 2007 resulted in a 39 basis point decrease in the weighted-average cost of subordinated deferrable debt.

The adjusted interest expense, which includes all derivative cash settlements, was consistent for the year ended May 31, 2008 with the prior-year period based on changes to interest expense noted above and derivative cash settlements described below. See Non-GAAP Financial Measures for further explanation of the adjustment we make in our financial analysis to include all derivative cash settlements in our interest expense.

Net Interest Income

The change in the line items described above resulted in an increase in net interest income of $72 million for the year ended May 31, 2008 compared with the prior-year period. The adjusted net interest income, which includes all derivative cash settlements, for the year ended May 31, 2008 was $147 million, an increase of $13 million from the prior year period. See Non-GAAP Financial Measures for further explanation of the adjustment we make in our financial analysis to include all derivative cash settlements in our interest expense, and therefore net interest income.

Recovery of Loan Losses

The $30 million recovery of loan losses for the year ended May 31, 2008 resulted from the decrease in calculated impairments due to lower variable rates and payments received on impaired loans.

Non-interest Income

Non-interest income decreased by $58 million for the year ended May 31, 2008 compared with the prior year primarily due to decreases in cash settlements and income from the operations of foreclosed assets. The $59 million decrease in cash settlements for the year ended May 31, 2008 from the prior year period is primarily due to a $31 million payment received during the prior year for the termination of two exchange agreements compared with $8 million paid during the year ended May 31, 2008 for the termination of three exchange agreements. Additionally, cash settlements decreased for the year ended May 31, 2008 due to the 325 basis point decrease in the federal funds rate from May 31, 2007 to May 31, 2008 as we received a variable rate on 59 percent of our interest rate exchange agreements during fiscal year 2008 compared with 41 percent of our interest rate exchange agreements for which we pay a variable rate. Income from the operation of foreclosed assets decreased by $2 million for the year ended May 31, 2008 compared with the prior year due to a lower outstanding balance in foreclosed assets. At May 31, 2008, the foreclosed assets are comprised of real estate developer notes receivable and limited partnership interests in certain real estate developments.

Non-interest Expense

Non-interest expense increased by $18 million for the year ended May 31, 2008 compared with the prior year.

Salaries and employee benefits increased by $3 million for the year ended May 31, 2008 as compared with the prior year period primarily due to additional headcount and higher medical insurance rates. We had 13 additional employee positions filled at May 31, 2008 as compared with the prior-year period end.

General and administrative expenses increased by $6 million for the year ended May 31, 2008 compared with the prior-year period because of increased expenditures for the acceleration of information systems projects and the write-off of site work expenses on property we had under contract, but the seller was unable to meet the conditions to close the sale. Increased membership meeting expenses, marketing and audit fees also contributed to higher general and administrative expenses for the year ended May 31, 2008.

For the year ended May 31, 2008, we determined that there was a reduction of $6 million to the market value of the real estate developer notes receivable held as foreclosed assets. The reduction to the market value was primarily as a result of the slowdown in lot sales due to residential home market weakness.

The $19 million decrease in the derivative forward value during the year ended May 31, 2008 compared with the prior year period was due to changes in the estimate of future interest rates over the remaining life of the derivative contracts.

There was no foreign denominated debt outstanding during the year ended May 31, 2008, therefore there was no foreign currency adjustments compared with $15 million in the prior year period. When we issue debt in foreign currencies, we must adjust the value of the debt reported on the consolidated balance sheets for changes in foreign currency exchange rates since the date of

issuance. To the extent that the current exchange rate is different than the exchange rate at the time of issuance, there will be a change in the value of the foreign denominated debt. The adjustment to the value of the debt is reported on the consolidated statements of operations as foreign currency adjustments. At the time of issuance of all foreign denominated debt, we typically enter into a cross currency or cross currency interest rate exchange agreement to fix the exchange rate on all principal and interest payments through maturity.

In June 2007, we redeemed the $175 million of 7.40 percent subordinated deferrable debt at par and recorded a charge of $6 million as loss on the early extinguishment of debt for the unamortized issuance costs in the first quarter of fiscal year 2008. There was a $5 million loss on the extinguishment of debt for the year ended May 31, 2007 due to the write-off of unamortized debt issuance costs associated with the early redemption of subordinated deferrable debt.

Minority Interest

Minority interest represents $0.3 million and $5.8 million of net loss for RTFC and NCSC, respectively, for the year ended May 31, 2008 compared with $0.1 million and $2.3 million of net income for RTFC and NCSC, respectively, for the prior year period. The decrease in NCSC net income is primarily due to fluctuations in the fair value of its derivative instruments.

Net Income

The change in the line items described above resulted in an increase in net income of $34 million for the year ended May 31, 2008 from the prior year period. The adjusted net income, which excludes the impact of the derivative forward value and foreign currency adjustments and adds back minority interest, was $138 million, compared with $108 million for the prior year period. See Non-GAAP Financial Measures for further explanation of the adjustments we make in our financial analysis to net income.

Ratio of Earnings to Fixed Charges

The following table provides the calculation of the ratio of earnings to fixed charges. For fiscal years prior to May 31, 2009, the ratio of earnings to fixed charges is the same calculation as TIER. For the year ended May 31, 2009, the fixed charge coverage ratio includes capitalized interest in total fixed charges which is not included in our TIER calculation. See Results of Operations for a discussion of TIER and adjustments that we make to the TIER calculation.

		For the year ended May 31,
(dollar amounts in thousands)		2009			2008		2007
(Loss) income prior to cumulative effect of
change in accounting principle	$	(69,870	)	$	45,745	$	11,701
Add: fixed charges		935,194			931,268		991,754
Less: interest capitalized		(173	)		-		-
Earnings available for fixed charges	$	865,151		$	977,013	$	1,003,455

Total fixed charges:
Interest on all debt (including amortization of
discount and issuance costs)	$	935,021		$	931,268	$	991,754
Interest capitalized		173			-		-
Total fixed charges	$	935,194		$	931,268	$	991,754
Ratio of earnings to fixed charges (1)		-			1.05		1.01

(1) For the year ended May 31, 2009, earnings were insufficient to cover the fixed charges by $70 million.

Financial Condition

Loan and Guarantee Portfolio Assessment

Loan Programs

Loans to members bear interest at rates we determine from time to time after considering our interest expense, operating expenses, provision for loan losses and the maintenance of reasonable earnings levels. In keeping with the cooperative charter, our policy is to set interest rates at the lowest levels we consider to be consistent with sound financial management.

The following table summarizes loans outstanding by type and by segment at May 31:

(dollar amounts in millions)		2009				2008				2007				2006				2005
Loans by type:		Amount	%			Amount	%			Amount	%			Amount	%			Amount	%
Long-term loans (1):
Long-term fixed-rate loans	$	14,813	74	%	$	15,419	81	%	$	14,881	82	%	$	14,763	80	%	$	12,936	68	%
Long-term variable-rate loans		3,277	16			1,918	10			2,032	11			2,570	14			5,009	27
Total long-term loans		18,090	90			17,337	91			16,913	93			17,333	94			17,945	95
Short-term loans (2)		2,098	10			1,690	9			1,215	7			1,028	6			1,027	5
Total loans	$	20,188	100	%	$	19,027	100	%	$	18,128	100	%	$	18,361	100	%	$	18,972	100	%

Loans by segment:
National Rural:
Distribution	$	13,730	68	%	$	13,438	71	%	$	12,828	71	%	$	12,859	70	%	$	12,729	67	%
Power supply		4,268	21			3,339	17			2,858	16			2,811	15			2,641	14
Statewide and associate		93	1			109	1			119	1			125	1			135	1
National Rural total		18,091	90			16,886	89			15,805	88			15,795	86			15,505	82
RTFC		1,680	8			1,727	9			1,860	10			2,162	12			2,992	16
NCSC		417	2			414	2			463	2			404	2			475	2
Total	$	20,188	100	%	$	19,027	100	%	$	18,128	100	%	$	18,361	100	%	$	18,972	100	%

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

(2) Consists of secured and unsecured short-term loans, where the interest rate could be adjusted monthly or semi-monthly.

Loans outstanding increased by six percent for the year ended May 31, 2009. The primary reasons for the loan growth at National Rural were an increase in RUS note buyouts, funding of capital expenditures, bridge financing to fund projects before receipt of RUS funding and funding for renewable energy projects.

Loans that converted from a fixed rate to a variable rate totaled $856 million, which was partially offset by $205 million of loans converting from a variable rate to a fixed rate for the year ended May 31, 2009. The significant shift in fixed-rate loans converting to variable rates was the result of extremely low variable rates because the Federal Reserve lowered the federal funds rate to historically low levels in the latter half of calendar year 2008. For the year ended May 31, 2008, loans converting from a variable rate to fixed rate totaled $711 million, which was offset by $274 million of loans that converted from a fixed rate to a variable rate.

The following table summarizes loans and guarantees outstanding by segment at May 31:

										Increase/
(dollar amounts in thousands)		2009				2008				Increase/
National Rural:		Amount	% of Total			Amount	% of Total			(Decrease)
Distribution	$	13,994,595	65	%	$	13,622,829	68	%	$	371,766
Power supply		5,213,868	24			4,125,567	20			1,088,301
Statewide and associate		116,203	1			131,710	1			(15,507	)
National Rural total		19,324,666	90			17,880,106	89			1,444,560
RTFC		1,680,654	8			1,726,774	9			(46,120	)
NCSC		458,342	2			457,255	2			1,087
Total	$	21,463,662	100	%	$	20,064,135	100	%	$	1,399,527

The following table summarizes the loans and guarantees outstanding at RTFC as of May 31:

										Increase/
		2009				2008				Increase/
(dollar amounts in thousands)		Amount	% of Total			Amount	% of Total			(Decrease)
Rural local exchange carriers	$	1,476,402	88	%	$	1,518,197	88	%	$	(41,795	)
Cable television providers		152,326	9			153,539	9			(1,213	)
Fiber optic network providers		8,126	1			16,884	1			(8,758	)
Competitive local exchange carriers		37,294	2			29,871	2			7,423
Wireless providers		3,924	-			4,579	-			(655	)
Other		2,582	-			3,704	-			(1,122	)
Total	$	1,680,654	100	%	$	1,726,774	100	%	$	(46,120	)

Our members are widely dispersed throughout the United States and its territories, including 49 states, the District of Columbia and two U.S. territories. At May 31, 2009, 2008 and 2007, loans and guarantees outstanding to members in any one state or territory did not exceed 17 percent, 17 percent and 15 percent, respectively, of total loans and guarantees outstanding.

Credit Concentration

National Rural, RTFC and NCSC each have policies that limit the amount of credit that can be extended to individual borrowers or a controlled group of borrowers. The credit limitation policies set the limit on the total exposure and unsecured exposure to the borrower based on an assessment of the borrower's risk profile and our internal risk rating system. As a member-owned cooperative, we balance the needs of our member/owners and the risk associated with concentrations of credit exposure. The respective boards of directors must approve new credit requests from borrowers with total exposure or unsecured exposure in excess of the limits in the policies. Management may use syndicated credit arrangements to minimize credit concentrations.

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

·	loans outstanding, excluding loans guaranteed by RUS;

·	our guarantees of the borrower's obligations;

·	unadvanced loan commitments;

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

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

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

At May 31, 2009 and 2008, the total exposure outstanding to any one borrower or controlled group did not exceed 2.4 percent and 2.7 percent, respectively, of total loans and guarantees outstanding. At May 31, 2009, the ten largest borrowers included three distribution systems, six power supply systems and one telecommunications system. At May 31, 2008, the ten largest borrowers included five distribution systems, four power supply systems and one telecommunications system. Over the past five years, our single obligor concentrations in the telecommunications portfolio have decreased resulting in outstanding loans at May 31, 2009 averaging $10 million per active, performing telecommunications borrower. The following table shows the exposure to the ten largest borrowers as a percentage of total exposure by type and by segment at May 31:

		2009					2008					Increase/
(dollar amounts in thousands)		Amount	% of Total				Amount	% of Total				(Decrease)
Total by type:
Loans	$	3,686,956		17	%	$	3,395,865		17	%	$	291,091
Guarantees		363,883		2			164,740		1			199,143
Total credit exposure to ten largest borrowers	$	4,050,839		19	%	$	3,560,605		18	%	$	490,234

Total by segment:
National Rural	$	3,497,331		16	%	$	3,043,905		15	%	$	453,426
RTFC		523,758		3			491,700		3			32,058
NCSC		29,750		-			25,000		-			4,750
Total credit exposure to ten largest borrowers	$	4,050,839		19	%	$	3,560,605		18	%	$	490,234

Security Provisions

Except when providing short-term loans, we typically lend to our members on a senior secured basis. Long-term loans are typically secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenues of the borrower with exceptions typical in utility mortgages. Short-term loans are generally unsecured lines of credit. Guarantee reimbursement obligations are typically secured on parity with other secured creditors by all assets and revenues of the borrower or by the underlying financed asset. In addition to the collateral received, borrowers are also required to set rates charged to customers to achieve certain financial ratios.

The following table summarizes our unsecured credit exposure as a percentage of total exposure by type and by segment at May 31:

		2009					2008					Increase/
(dollar amounts in thousands)		Amount	% of Total				Amount	% of Total				(Decrease)
Total by type:
Loans	$	2,831,111		13	%	$	2,150,739		10	%	$	680,372
Guarantees		347,325		2			235,816		1			111,500
Total unsecured credit exposure	$	3,178,436		15	%	$	2,386,555		11	%	$	791,881

Total by segment:
National Rural	$	2,875,396		14	%	$	2,100,676		10	%	$	774,720
RTFC		237,259		1			229,287		1			7,972
NCSC		65,781		-			56,592		-			9,189
Total unsecured credit exposure	$	3,178,436		15	%	$	2,386,555		11	%	$	791,881

Pledging of Loans

We are required to pledge collateral equal to at least 100 percent of the outstanding balance of debt issued under the collateral trust bond indentures and the revolving debt issuance agreements with Farmer Mac. We pledge distribution mortgage loans and permitted investments under our collateral trust bond indentures. We pledge distribution and power supply mortgage loans under the debt issuance agreements with Farmer Mac, which permit up to 20 percent of loans pledged to be from power supply systems. In addition, we are required to maintain collateral on deposit equal to at least 100 percent of the outstanding balance of debt under the REDLG program. Distribution and power supply loans may be deposited for the REDLG program.

Although not required, we typically maintain pledged collateral and collateral on deposit in excess of the required 100 percent of the outstanding balance of debt issued. However, our revolving credit agreements limit pledged collateral to 150 percent of the outstanding balance of debt issued. The excess collateral ensures that required collateral levels are maintained and, when an opportunity exists, facilitates timely execution of debt issuances by limiting or eliminating the lead time required to gather collateral. Collateral levels fluctuate because:

·	distribution and power supply loans typically amortize, while the debt issued under the collateral trust bond indenture, the Farmer Mac debt issuance agreements and the REDLG program have bullet maturities;

·	individual loans may become ineligible for various reasons, some of which may be temporary; and

·	distribution and power supply borrowers have the ability to prepay their loans.

We may request the return of collateral pledged or held on deposit in excess of the 100 percent of the principal balance requirement or may move the collateral from one program to another to facilitate a new debt issuance, provided that all conditions of eligibility under the different programs are satisfied.

The following table summarizes our secured debt or debt requiring collateral on deposit, the excess collateral pledged and our unencumbered loans at May 31:

(dollar amounts in thousands)		2009			2008
Total loans to members	$	20,188,207		$	19,026,995
Less: Total secured debt or debt requiring
collateral on deposit		(9,390,000	)		(8,115,000	)
Less: Excess collateral pledged or on deposit		(2,566,723	)		(1,241,554	)
Unencumbered loans	$	8,231,484		$	9,670,441

Unencumbered loans as a percentage of total loans		41	%		51	%

Non-performing Loans

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. In certain circumstances, a performing restructured loan can also remain on non-accrual status (see Restructured Loans). We generally apply all cash received during the non-accrual period to the reduction of principal, thereby foregoing interest income recognition. At May 31, 2009, we had one non-performing loan outstanding in the amount of $524 million. At May 31, 2008, we had non-performing loans of $507 million outstanding. All loans classified as non-performing were on non-accrual status.

We monitor our borrowers’ performance and contact borrowers frequently when payments are delinquent. The table below shows our delinquency rates for the past six years. This table breaks out the delinquency rates including and excluding our loan to ICC. The one loan to ICC drives the vast majority of our delinquent loans and we are in the process of foreclosing upon the collateral of this borrower.

(dollar amounts in thousands)		2004			2005			2006			2007			2008			2009

Total loans outstanding	$	20,488,523		$	18,972,068		$	18,360,905		$	18,128,207		$	19,026,995		$	20,188,207
Unpaid principal balance:
Loans >60 and < 90
days past due		-			-			-			-			-			-

Loans > 90 days past due		-			480,963			488,392			492,795			499,234			523,758


ICC		-			479,196			488,392			492,795			491,706			523,758

Delinquency rates:
Loans >60 and < 90 days
past due		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Loans > 90 days past due		0.00			2.54			2.66			2.72			2.62			2.59

Delinquency rates less ICC:
Loans >60 and < 90 days
past due		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Loans > 90 days past due		0.00			0.01			0.00			0.00			0.04			0.00

Delinquency information:
Loans >30	$	-		$	480,963		$	488,392		$	492,795		$	499,234		$	523,758
Delinquency rate >30		0.00	%		2.54	%		2.66	%		2.72	%		2.62	%		2.59	%

Delinquency info less ICC:
Loans >30	$	-		$	1,767		$	-		$	-		$	7,528		$	-
Delinquency rate >30		0.00	%		0.01	%		0.00	%		0.00	%		0.04	%		0.00	%

At May 31, 2009 and 2008, non-performing loans include $524 million and $492 million, respectively, to ICC. All loans to ICC have been on non-accrual status since February 1, 2005. ICC has not made debt service payments to us since June 2005. RTFC is the primary secured lender to ICC.

In February 2006, involuntary bankruptcy petitions were filed against ICC's indirect majority shareholder and former chairman, Jeffrey Prosser ("Prosser"), ICC's immediate parent, Emerging Communication, Inc. ("Emcom") and Emcom's parent, Innovative Communication Company LLC ("ICC-LLC"); and in April 2006, RTFC reached a settlement with ICC, Virgin Islands Telephone Corporation d/b/a Innovative Telephone ("Vitelco"), ICC-LLC, Emcom, their directors and Prosser, individually. Under the settlement, RTFC obtained entry of judgments in the District Court of the Virgin Islands against ICC for approximately $525 million and Prosser for approximately $100 million. RTFC also obtained dismissals with prejudice and releases of all counterclaims, affirmative defenses and other lawsuits alleging wrongful acts by RTFC, certain of its officers, and National Rural thereby resolving all the loan-related litigation in RTFC’s favor. Regardless, Prosser and related parties continue to assert claims against National Rural and certain of its officers and directors and other parties in various proceedings and forums. National Rural therefore anticipates that it will continue to be engaged in defense of those assertions on many fronts, as well as pursuing claims of its own.

ICC-LLC, Emcom and Prosser each have bankruptcy proceedings pending in the United States District Court for the Virgin Islands, Bankruptcy Division (the “Bankruptcy Court”). A Chapter 11 trustee has been appointed for the ICC-LLC and Emcom estates; and a Chapter 7 trustee was appointed in Prosser’s individual case. Prosser’s Chapter 7 trustee is in the process of marshaling Prosser’s non-exempt assets for disposition and eventual payment in respect of creditor claims.

On September 21, 2007, the Bankruptcy Court entered an order placing ICC in its own bankruptcy proceeding, and on October 3, 2007 appointed a trustee. The Chapter 11 trustee of ICC has assumed ownership and control of ICC, including its subsidiaries, and has begun to marshal RTFC collateral and other assets for disposition, including property in Prosser’s possession or control, and eventual payment in respect of RTFC’s claims and the claims of other parties-in-interest. Certain assets have been sold, including certain foreign companies, aircraft, and real estate.

On February 1, 2008, the Court approved a motion of the Chapter 11 trustee of ICC to sell substantially all of ICC’s assets, divided into three groups: Group 1 consisting of ICC assets and stock in ICC subsidiaries operating in the U.S. Virgin Islands, the British Virgin Islands and St. Martin (the “Group 1 Assets”); Group 2 consisting of ICC assets and stock in ICC

subsidiaries operating in France and certain of its Caribbean territories and the Netherland Antilles (the “Group 2 Assets”); and Group 3 consisting of the newspaper and media operations of ICC (the “Group 3 Assets”). The Group 2 Assets and Group 3 Assets were sold in December 2008 and May 2008, respectively, and in each case, the distribution of proceeds was approved by the Court and resulted in a net recovery to us.

On March 13, 2009, RTFC and the Trustee entered into a Purchase Agreement as part of a $250 million credit bid for the ICC Group 1 Assets. The Purchase Agreement is conditional upon the approval of the bankruptcy court and applicable regulators. On April 6, 2009, the Bankruptcy Judge approved, on an interim basis, the sale of the ICC Group 1 Assets to RTFC. RTFC has begun the process of obtaining the applicable regulatory approvals.

In April 2009, RTFC acquired $85 million of Vitelco preferred stock and $12.5 million of accrued and unpaid dividends relating to such shares for a total purchase price of $30 million. We believe that the acquisition of the preferred shareholders interests at a discount has improved our estimated recovery from the collateral.

For a more detailed description of the contingencies related to the non-performing loans outstanding to ICC, see Note 16 Restructured /Non-performing Loans and Contingencies, to the consolidated financial statements. Based on its analysis, we believe that we have adequately reserved for our exposure to ICC at May 31, 2009.

Restructured Loans

When agreements are executed to change the original terms of a loan, generally a change to the originally scheduled cash flows, we classify the loan as restructured unless the new terms are deemed to be market terms. We make a determination about the accrual of interest income for these loans on a loan-by-loan basis. The initial decision is based on the terms of the restructure agreement and the anticipated performance of the borrower over the term of the agreement. We will periodically review the decision whether or not to accrue interest income on restructured loans based on the borrower's past performance and current financial condition.

At May 31, 2009 and 2008, restructured loans totaled $538 million and $577 million, respectively. A total of $491 million and $519 million of restructured loans were on non-accrual status at May 31, 2009 and 2008, respectively.

At May 31, 2009 and 2008, restructured loans outstanding to Denton County Electric Cooperative, d/b/a CoServ Electric ("CoServ") were $491 million and $519 million, respectively. All restructured CoServ loans have been on non-accrual status since January 1, 2001. In addition, $20 million was outstanding under the capital expenditure loan facility classified as a performing loan at both May 31, 2009 and 2008. Total loans to CoServ at May 31, 2009 and 2008 represented 2.4 percent and 2.7 percent of our total loans and guarantees outstanding, respectively.

Under the terms of a bankruptcy settlement from 2002, National Rural restructured the loans to CoServ. CoServ is scheduled to make quarterly payments to National Rural through December 2037. As part of the restructuring, National Rural may be obligated to provide up to $204 million of senior secured capital expenditure loans to CoServ for electric distribution infrastructure through December 2012. Under the facility, advances are limited to $46 million per year. As of the date of this filing, there is $184 million available under this loan facility. When CoServ requests capital expenditure loans from National Rural, these loans are made at the standard terms offered to all borrowers and require debt service payments in addition to the quarterly payments that CoServ is required to make to National Rural. To date, CoServ has made all payments required under the restructure agreement and capital expenditure loan facility. Under the terms of the restructure agreement, CoServ has the option to prepay the loan for the lesser of their outstanding balance or $405 million plus an interest payment true up on or after December 13, 2008. To date, National Rural has not received notice from CoServ that it intends to prepay the loan. CoServ and National Rural have no claims related to any of the legal actions asserted before or during the bankruptcy proceedings. National Rural's legal claim against CoServ is limited to CoServ's performance under the terms of the bankruptcy settlement.

Based on our analysis, we believe that we have adequately reserved for our exposure to CoServ at May 31, 2009.

At May 31, 2009 and 2008, we had a total of $42 million and $52 million, respectively, in restructured loans outstanding to Pioneer Electric Cooperative, Inc. ("Pioneer"). Pioneer is current with respect to all debt service payments at May 31, 2009 and all loans to Pioneer remain on accrual status. National Rural is the principal creditor to Pioneer.

Based on our analysis, we believe that we have adequately reserved for our exposure to Pioneer at May 31, 2009.

Loan Impairment

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 at the time of the review, to determine if the loans to the borrower are impaired and/or to update the impairment calculation. We calculate a borrower’s impairment based on the expected future cash flow or the fair value of any collateral securing our loans to the borrower. In some cases, to estimate future cash flow, certain assumptions are required regarding, but not limited to, the following:

·	interest rates,

·	court rulings,

·	changes in collateral values,

·	changes in economic conditions in the area in which the cooperative operates,

·	changes to the industry in which the cooperative operates, and

·	likelihood of repayment amount and timing.

As events related to the borrower take place and economic conditions and our assumptions change, the impairment calculations will change. The loan loss allowance specifically reserved to cover the calculated impairments is adjusted on a quarterly basis based on the most current information available. At May 31, 2009 and 2008, impaired loans totaled $1,056 million and $1,078 million, respectively. At May 31, 2009 and 2008, we specifically reserved a total of $414 million and $331 million, respectively, to cover impaired 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 at May 31:

(dollar amounts in thousands)		2009			2008			2007			2006			2005
Non-performing loans (1)	$	523,758		$	506,864		$	501,864		$	577,869		$	616,626
Percent of loans outstanding		2.59	%		2.67	%		2.77	%		3.15	%		3.25	%
Percent of loans and guarantees outstanding		2.44			2.52			2.61			2.97			3.06

Restructured loans	$	537,587		$	577,111		$	603,305		$	630,354		$	600,926
Percent of loans outstanding		2.66	%		3.03	%		3.33	%		3.43	%		3.17	%
Percent of loans and guarantees outstanding		2.50			2.88			3.14			3.24			2.99

Total non-performing and restructured loans	$	1,061,345		$	1,083,975		$	1,105,169		$	1,208,223		$	1,217,552
Percent of loans outstanding		5.25	%		5.70	%		6.10	%		6.58	%		6.42	%
Percent of loans and guarantees outstanding		4.94			5.40			5.75			6.21			6.05

Total non-accrual loans	$	1,014,585		$	1,026,121		$	1,046,561		$	1,147,009		$	1,210,210
Percent of loans outstanding		5.03	%		5.39	%		5.77	%		6.25	%		6.38	%
Percent of loans and guarantees outstanding		4.73			5.11			5.45			5.90			6.01

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

Allowance for Loan Losses

We maintain an allowance for loan losses at a level estimated by management to provide adequately for probable losses inherent in the loan portfolio. The allowance for loan losses is determined based upon evaluation of the loan portfolio, past loss experience, specific problem loans, economic conditions and other pertinent factors which, in management's judgment, could affect the risk of loss in its loan portfolio. We review and adjust the allowance quarterly to cover estimated probable losses in the portfolio.

Management makes recommendations to our board of directors regarding charge-offs of loan balances. In making its recommendation to charge-off all or a portion of a loan balance, management considers various factors including cash flows and the collateral securing the borrower's loans. Since inception in 1969, charge-offs totaled $217 million and recoveries totaled $34 million for a net loan loss of $183 million. Management believes that the allowance for loan losses is adequate to cover estimated probable portfolio losses.

Activity in the allowance for loan losses is summarized below:

		For the year ended May 31,
(dollar amounts in thousands)		2009			2008			2007			2006			2005
Beginning balance	$	514,906		$	561,663		$	611,443		$	589,749		$	573,939
Provision for (recovery of) loan losses		113,699			(30,262	)		(6,922	)		23,240			16,402
Net charge-offs		(5,645	)		(16,495	)		(42,858	)		(1,546	)		(592	)
Ending balance	$	622,960		$	514,906		$	561,663		$	611,443		$	589,749
`
Loan loss allowance by segment:
National Rural	$	622,851		$	514,626		$	561,113		$	610,617		$	588,365
NCSC		109			280			550			826			1,384
Total	$	622,960		$	514,906		$	561,663		$	611,443		$	589,749

As a percentage of total loans outstanding		3.09	%		2.71	%		3.10	%		3.33	%		3.11	%
As a percentage of total non-performing loans outstanding		118.94			101.59			111.95			105.71			95.62
As a percentage of total restructured loans outstanding		115.88			89.22			93.20			96.98			98.17
As a percentage of total loans on non-accrual		61.40			50.18			53.67			53.31			48.73

Our loan loss allowance increased $108 million from May 31, 2008 to May 31, 2009. Within our loan loss allowance at May 31, 2009 as compared to the prior year end, there was an increase in the calculated impairments of $130 million due to the deterioration in the market value of collateral supporting impaired loans offset by $28 million of payments received on impaired loans and a $13 million decrease due to changes in estimates of future expected cash flows of certain impaired loans. The remaining increase in the loan loss provision for the year ended May 31, 2009 was primarily due to the $1,161 million increase in loans.

In late November 2008, we engaged an outside consultant to renew the valuation of ICC that had been performed during the summer of 2008. The update of the appraisal of ICC assets was triggered by the changing economic conditions that occurred during our second quarter of fiscal year 2009, especially the tightening of the credit markets, coupled with indicators we were receiving from potential third party investors responding to the upcoming auction of the ICC assets. As a result of this new information, we recorded an addition to the provision for loan losses of $114 million during the quarter ended November 30, 2008. We believe that, as a result of this additional provision for losses and an additional $13 million provision in the third and fourth quarter, we have adequately reserved against losses associated with ICC at May 31, 2009.

At May 31, 2008, we estimated the collection of cash flows according to the contractual payments due, and reduced those amounts based on the risk rating assigned by the corporate credit committee to each loan using detailed knowledge of the financial condition of our members with impaired loans. We improved the process for estimating the future expected cash flows on impaired loans at May 31, 2009. We modeled expected cash flows based upon various probabilities of collection. We believe the new process is a better measure of impairment for these loans. The effect of the change in the estimation process reduced the impairment amount for impaired loans by approximately $13 million.

We have agreed to indemnify RTFC and NCSC for loan losses, with the exception of the NCSC consumer loans that are covered by the NCSC loan loss allowance. Therefore, there is no loan loss allowance required at RTFC and $0.1 million loan loss allowance required at NCSC to cover the exposure for consumer loans of $0.7 million.

Liabilities, Minority Interest and Equity

Outstanding Debt

The following table provides a breakout of debt outstanding at May 31:

(dollar amounts in thousands)		2009			2008			Increase/ (Decrease)
Short-term debt:
Commercial paper (1)	$	1,833,273		$	3,050,264		$	(1,216,991	)
Bank bid notes		255,000			100,000			155,000
Term loan		200,000			-			200,000
Long-term debt with remaining maturities less than one year		2,579,591			3,177,189			(597,598	)
Total short-term debt		4,867,864			6,327,453			(1,459,589	)
Long-term debt:
Collateral trust bonds		4,968,771			2,886,580			2,082,191
Notes payable		4,064,211			2,956,403			1,107,808
Medium-term notes		3,687,073			4,330,604			(643,531	)
Total long-term debt		12,720,055			10,173,587			2,546,468
Subordinated deferrable debt		311,440			311,440			-
Members' subordinated certificates:
Membership certificates		642,960			649,465			(6,505	)
Loan certificates		692,806			654,047			38,759
Guarantee certificates		126,193			103,267			22,926
Member capital securities		278,095			-			278,095
Total members' subordinated certificates		1,740,054			1,406,779			333,276
Total debt outstanding	$	19,639,413		$	18,219,259		$	1,420,155

Percentage of fixed-rate debt (2)		87	%		82	%
Percentage of variable-rate debt (3)		13			18
Percentage of long-term debt		75			65
Percentage of short-term debt		25			35

(1) Includes $291 million and $251 million related to the daily liquidity fund at May 31, 2009 and 2008, respectively.

(2) Includes variable-rate debt that has been swapped to a fixed rate less any fixed-rate debt that has been swapped to a variable rate.

(3) 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 less any variable-rate debt that has been swapped to a fixed rate.

The following table provides additional information on the debt instruments we offer and related credit ratings at

May 31, 2009. Subsequent to that date, Fitch Ratings announced downgrades, with a stable outlook, on all of our secured and unsecured debt (for further information, including the new ratings, see Credit Ratings on page 47).

Debt Instrument	Maturity Range	Rate Options	Market	Security	Credit Rating (1)
Daily liquidity fund	Demand note	Rate may change daily	Members	Unsecured	NA
Bank bid notes	Up to 3 months	Fixed rate	Bank institutions	Unsecured	NA
Commercial paper	1 to 270 days	Fixed rate	Public capital markets and members	Unsecured	P-1, A-1, F-1
Collateral trust bonds	Range from 2 years to 30 years	Fixed or Variable rate	Public capital markets	Secured (2)	A1, A+, A+
Medium-term notes	Range from 9 months to 30 years	Fixed or Variable rate	Public capital markets and members	Unsecured	A2, A, A
Notes payable	Range from 1 year to 30 years	Fixed or Variable rate	Private placement	Varies (3)	Varies (3)
Subordinated deferrable debt (4)	Up to 39 yrs	Fixed or Variable rate	Public capital markets	Unsecured (5)	A3, BBB, A-
Subordinated certificates	Up to 100 years (6)	Varies	Members	Unsecured (7)	NA

(1) Based on ratings defined by Moody’s Investors Service, Standard & Poor’s Corporation and Fitch Ratings, respectively.

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

(3) At May 31, 2009, notes payable primarily represent unsecured notes payable issued under the REDLG program and secured notes payable to Farmer Mac. We must obtain credit ratings on certain senior secured debt from two rating agencies on an annual basis. The most recent credit ratings obtained on Farmer Mac notes were A+ by Standard & Poor’s Corporation and A by Fitch Ratings. Unsecured notes payable issued under the REDLG program do not have a credit rating. However, we must obtain one credit rating on an annual basis for REDLG notes payable without regard to the bond guarantee agreement with RUS. The most recent credit rating obtained on REDLG notes payable without regard to the bond guarantee agreement with RUS was A by Standard and Poor’s Corporation. See further discussion of our private debt issuances under Sources of Liquidity.

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

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

(6) Membership subordinated certificates generally mature 100 years from issuance. Loan and guarantee subordinated certificates have the same maturity as the related long-term loan. Some certificates may also amortize annually based on the outstanding loan balance. Member capital securities mature 35 years from issuance.

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

The following is a summary of short-term debt outstanding and the effective interest rates thereon at May 31:

		2009				2008				2007
(dollar amounts in thousands)		Debt Outstanding	Effective Interest Rate			Debt Outstanding	Effective Interest Rate			Debt Outstanding	Effective Interest Rate
Short-term debt:
Commercial paper sold through dealers, net of discounts	$	594,533	0.33	%	$	1,511,953	2.33	%	$	1,017,879	5.36	%
Commercial paper sold directly to members, at par		934,897	0.35			1,275,809	2.31			1,383,090	5.29
Commercial paper sold directly to non-members, at par		12,502	1.58			11,752	4.26			133,087	5.31
Total commercial paper		1,541,932	0.35			2,799,514	2.33			2,534,056	5.32
Daily liquidity fund sold directly to members		291,341	0.22			250,750	2.05			250,563	5.23
Term loan		200,000	3.31			-	-			-	-
Bank bid notes		255,000	1.49			100,000	2.80			100,000	5.43
Subtotal short-term debt		2,288,273	0.72			3,150,264	2.32			2,884,619	5.32

Long-term debt maturing within one year:
Medium-term notes sold through dealers		1,674,760	4.88			558,776	4.40			133,801	4.47
Medium-term notes sold to members		502,396	4.65			288,634	4.77			231,158	5.37
Secured collateral trust bonds		209,985	5.71			1,824,995	3.27			999,560	4.65
Secured notes payable		187,800	1.20			500,000	4.66			-	-
Subordinated deferrable debt (1)		-	-			-	-			175,000	7.65
Unsecured notes payable		4,650	5.22			4,784	5.50			2,985	8.52
Total long-term debt maturing within one year		2,579,591	4.64			3,177,189	3.83			1,542,504	5.09
Total short-term debt	$	4,867,864	2.79		$	6,327,453	3.08		$	4,427,123	5.24

(1) Redeemed in June 2007

Other information about short-term debt at May 31 is as follows:

(dollar amounts in thousands)		2009		2008		2007
Weighted-average maturity outstanding at year-end:
Short-term debt (1)		41 days		26 days		25 days
Long-term debt maturing within one year		131 days		116 days		192 days
Total		89 days		71 days		83 days
Average amount outstanding during the year:
Short-term debt (1)	$	3,280,895	$	2,892,202	$	3,372,639
Long-term debt maturing within one year		2,688,165		2,961,714		1,692,083
Total	$	5,969,060	$	5,853,916	$	5,064,722
Maximum amount outstanding at any month-end during the year:
Short-term debt (1)	$	4,183,905	$	3,259,556	$	3,847,814
Long-term debt maturing within one year		4,224,816		3,981,567		2,549,356

(1) Includes the daily liquidity fund and bank bid notes and excludes long-term debt due in less than one year.

Total debt outstanding at May 31, 2009 increased compared with May 31, 2008 to fund the $1,161 million increase in loans outstanding. Approximately $3,606 million of collateral trust bonds, medium-term notes, and secured notes payable matured during the year ended May 31, 2009. The maturing debt was replaced with $5,765 million of new term debt issued during the period. We issued the following debt through the capital markets or in private placements during the year ended May 31, 2009:

·	$900 million of collateral trust bonds issued in June 2008 and due 2013;

·	$400 million of floating-rate collateral trust bonds issued in June 2008 and due 2010;

·	$1,000 million of collateral trust bonds issued in October 2008 and due 2018;

·	$200 million term loan issued in January 2009 and paid off early in June 2009;

·	$500 million in fixed-rate notes to Farmer Mac with maturities through 2014;

·	$300 million in variable-rate notes to Farmer Mac with maturities through 2014;

·	$500 million from the FFB under a loan facility with a guarantee of repayment by the RUS as part of the REDLG program issued in September 2008 and due 2028;

·	$400 million refinance of notes sold to Farmer Mac in March 2008 with maturities through 2014; and

·	$1,565 million of various member and dealer MTNs including retail notes.

At May 31, 2009 and 2008, we had no foreign denominated debt outstanding.

During fiscal year 2009, we replaced some of our commercial paper with term debt. The amount of commercial paper outstanding decreased $1,217 million compared with the balance at May 31, 2008 because of new debt issuances of $800 million to Farmer Mac, the net increase of $734 million in retail notes, and the $278 million issuance of member capital securities.

The increase to members' subordinated certificates for the year ended May 31, 2009 was due to our issuance of $278 million in member capital securities during the year ended May 31, 2009 and a net increase of $62 million to loan and guarantee certificates. A total of $113 million of loan and guarantee certificates were issued in relation to new loans and guarantees outstanding and were partially offset by $50 million of subordinated certificates maturing due to loan prepayments, maturities and normal amortization. We began issuing member capital securities during the quarter ended February 28, 2009. Member capital securities are unsecured obligations that are subordinate to our existing and future senior indebtedness and our existing and future subordinated indebtedness that may be held by or transferred to our non-members, but rank on parity with our member subordinated certificates. After the end of the fiscal year through August 7, 2009, an additional $53 million of member capital securities were sold bringing the total to $331 million.

Minority Interest

At May 31, 2009 and 2008, we reported minority interests of $10 million and $14 million, respectively, on the consolidated balance sheets. Minority interest represents 100 percent of RTFC and NCSC equity as the members of RTFC and NCSC own or control 100 percent of the interest in their respective companies.

During the year ended May 31, 2009, NCSC’s net loss of $9 million exceeded its equity balance by $6 million, which eliminated the NCSC equity presented in minority interest. Based on the accounting guidance governing consolidations, National Rural is required to absorb the $6 million NCSC excess loss. NCSC’s losses during the year ended May 31, 2009 were primarily due to its $12 million derivative forward value losses.

NCSC’s equity balance included in minority interest on the consolidated balance sheets was $2.9 million at May 31, 2008.

Equity

The following table provides a breakout of the equity balances at May 31:

(dollar amounts in thousands)		2009			2008			Increase/ (Decrease)
Membership fees	$	990		$	993		$	(3	)
Education fund		1,592			1,484			108
Members' capital reserve		187,098			187,409			(311	)
Allocated net income		420,834			423,249			(2,415	)
Unallocated net loss (1)		(6,198	)		(53	)		(6,145	)
Total members' equity		604,316			613,082			(8,766	)
Prior years cumulative derivative forward
value and foreign currency adjustments		44,056			131,551			(87,495	)
Year-to-date derivative forward value loss (2)		(147,549	)		(87,495	)		(60,054	)
Total retained equity		500,823			657,138			(156,315	)
Accumulated other comprehensive income		8,115			8,827			(712	)
Total equity	$	508,938		$	665,965		$	(157,027	)

(1) Excludes derivative forward value. Unallocated net loss at May 31, 2009 includes National Rural’s obligation to absorb NCSC losses in excess of their equity balance totaling $6 million.

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

To become a member, applicants may be required to pay a one-time fee which we treat as an equity investment. The fee varies from two hundred dollars to one thousand dollars depending on the membership class. National Rural is required by the District of Columbia cooperative law to have a methodology to allocate its net earnings to its members. National Rural maintains the current year net earnings as unallocated through the end of its fiscal year. National Rural calculates net earnings by adjusting net income to exclude certain non-cash adjustments. After the end of the fiscal year, National Rural's board of directors allocates its net earnings to its members in the form of patronage capital and to board approved reserves.

Currently, National Rural has two such board approved reserves, the cooperative educational fund and the members' capital reserve. National Rural adjusts the net earnings it allocates to its members and board approved reserves to exclude the non-cash effects of the accounting for derivative financial instruments and foreign currency translation. National Rural allocates a small portion, less than one percent, of net earnings annually to the cooperative educational fund. The allocation to the

cooperative educational fund must be at least 0.25 percent of net earnings as required by National Rural’s bylaws. Funds from the cooperative educational fund are disbursed annually to statewide cooperative organizations to fund the teaching of cooperative principles and for other cooperative education programs. The board of directors determines the amount of net earnings that is allocated to the members' capital reserve, if any. The members' capital reserve represents net earnings that are held by National Rural to increase equity retention. The net earnings held in the members' capital reserve have not been specifically allocated to members, but may be allocated to individual members in the future as patronage capital if authorized by National Rural's board of directors. All remaining net earnings are allocated to National Rural's members in the form of patronage capital. National Rural bases the amount of net earnings allocated to each member on the members' patronage of the National Rural lending programs during the year. There is no effect on National Rural's total equity as a result of allocating net earnings to members in the form of patronage capital or to board approved reserves. National Rural’s board of directors has annually voted to retire a portion of the patronage capital allocated to members in prior years. National Rural's total equity is reduced by the amount of patronage capital retired to its members and by amounts disbursed from board approved reserves.

At May 31, 2009, total equity decreased by $157 million from May 31, 2008 due to the board authorized patronage capital retirement and the net loss of $70 million. In July 2008, National Rural's board of directors authorized the retirement of allocated net earnings totaling $85 million, representing 70 percent of the fiscal year 2008 allocation and one-ninth of the fiscal years 1991, 1992 and 1993 allocated net earnings. This amount was paid to members in October 2008. The remaining 30 percent of the fiscal year 2008 allocated net earnings will be retained by National Rural and used to fund operations for 25 years and then may be retired under the new policy described below. The retirement of allocated net earnings for fiscal years 1991, 1992 and 1993 was done as part of the transition to the retirement cycle adopted in 1994 and in effect through fiscal year 2009.

In June 2009, we revised our guidelines related to the timing and amount of patronage capital to be distributed. The purpose of the revision, which was approved by National Rural’s board of directors, is to continue strengthening National Rural’s equity position. Under the new guidelines, National Rural will retire 50 percent of prior year’s margins and hold the remaining 50 percent for 25 years. The retirement amount and timing remains subject to annual approval by National Rural’s board of directors.

In July 2009, National Rural’s board of directors authorized the allocation of the fiscal year 2009 net earnings as follows: $1 million to the cooperative educational fund and $83 million to members in the form of patronage capital. In July 2009, National Rural’s board of directors authorized the retirement of allocated net earnings totaling $41 million, representing 50 percent of the fiscal year 2009 allocation. This amount will be returned to members in cash at the end of September 2009. Future allocations and retirements of net earnings will be made annually as determined by National Rural’s board of directors with due regard for National Rural’s financial condition. The board of directors for National Rural 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 May 31, 2009 and the scheduled reductions by fiscal year.

											More than 5
(dollar amounts in millions)	2010		2011		2012		2013		2014		Years		Total
Long-term debt due in less than one year	$	2,580	$	-	$	-	$	-	$	-	$	-	$	2,580
Long-term debt		-		1,831		1,948		123		2,181		6,637		12,720
Subordinated deferrable debt		-		-		-		-		-		311		311
Members' subordinated certificates (1)		17		15		55		23		15		1,374		1,499
Operating leases (2)		4		4		1		-		-		-		9
Contractual interest on long-term debt (3)		851		772		708		613		547		7,437		10,928
Total contractual obligations	$	3,452	$	2,622	$	2,712	$	759	$	2,743	$	15,759	$	28,047

(1) Excludes loan subordinated certificates totaling $241 million that amortize annually based on the outstanding balance of the related loan. 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 $28 million. In fiscal year 2009, amortization represented 8 percent of amortizing loan subordinated certificates outstanding.

(2) Primarily represents the payment obligation related to our lease of office space for our headquarters facility through the term of the lease ending on October 17, 2011. Assuming we exercise the option to extend the lease for an additional one-year period in fiscal year 2012, the future minimum lease payments for fiscal years 2012 and 2013 would increase to $4 million and $1 million, respectively. Assuming we exercise the option to extend the lease for an additional one-year period in fiscal year 2013, the future minimum lease payments for fiscal years 2012, 2013 and 2014 would increase to $4 million, $4 million and $1 million, respectively.

(3) Represents the interest obligation on our debt based on terms and conditions at May 31, 2009.

Off-Balance Sheet Obligations

Guarantees

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

(dollar amounts in thousands)		2009		2008		Increase/ (Decrease)
Total by type:
Long-term tax-exempt bonds	$	644,540	$	498,495	$	146,045
Indemnifications of tax benefit transfers		81,574		94,821		(13,247	)
Letters of credit		450,659		343,424		107,235
Other guarantees		98,682		100,400		(1,718	)
Total	$	1,275,455	$	1,037,140	$	238,315
Total by segment:
National Rural	$	1,233,333	$	993,699	$	239,634
RTFC		500		260		240
NCSC		41,622		43,181		(1,559	)
Total	$	1,275,455	$	1,037,140	$	238,315

We guarantee certain contractual obligations of our members so that they may obtain various forms of financing. With the exception of letters of credit, the underlying obligations may not be accelerated due to a payment default by the member so long as we perform under our guarantee. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. At May 31, 2009 and 2008, 73 percent and 77 percent of total guarantees, respectively, were secured by a mortgage lien on substantially all of the system's assets and future revenues. Members' interest expense for the years ended May 31, 2009 and 2008 on debt obligations that we guaranteed was approximately $21 million representing the amount of interest that we would have to pay in a year if our members were to default.

The increase in total guarantees during the year ended May 31, 2009 is primarily due to the increase in guarantees for long-term tax-exempt bonds and letters of credit. We entered into new agreements as the guarantor and liquidity provider for $176 million of tax-exempt bonds offset by $30 million of redemptions and normal amortization.

At May 31, 2009 and 2008, we had recorded a guarantee liability totaling $30 million and $15 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 May 31, 2009 and the related notional principal amortization and maturities by fiscal year.

				Principal Amortization and Maturities
		Outstanding																	Remaining
(dollar amounts in thousands)		Balance		2010			2011			2012			2013			2014			Years
	Guarantees (1)	$	1,275,455		$	326,570		$	214,291		$	81,035		$	120,596		$	51,089		$	481,874

(1) On a total of $643 million of tax-exempt bonds, we have unconditionally agreed to purchase bonds tendered or called for redemption at any time if the remarketing agents have not sold such bonds to other purchasers.

Contingent Off-Balance Sheet Obligations

Unadvanced Loan Commitments

At May 31, 2009, our unadvanced loan commitments totaled $13,551 million, a decrease of $23 million over the $13,574 million outstanding at May 31, 2008. These are unadvanced commitments because we approved and executed loan contracts, but the funds have not been advanced. For most long-term advances of unadvanced commitments, we confirm there have been no material adverse changes in the borrower’s financial statement condition based on our credit underwriting policy since we approved the loan.

It would be unlikely for members to draw all of their unadvanced commitments in the near term because of the following reasons:

·	electric cooperatives typically execute loan contracts, but do not advance the funds at the inception of the loan, to cover multi-year work plans;

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

·	unadvanced commitments generally expire within five years of the first advance on a loan.

Approximately $4 billion of long-term commitments are scheduled to expire if not advanced over the next three years.

Our line of credit loans generally contain material adverse change conditions. The majority of the short-term unadvanced commitments provide backup liquidity to our borrowers; therefore, we do not anticipate funding most of these commitments. Approximately 59 percent and 56 percent of the outstanding commitments at May 31, 2009 and 2008, respectively, were for short-term and line of credit loans.

Unadvanced commitments are classified as contingent liabilities. Based on the conditions to advance funds described above, unadvanced loan commitments do not represent off-balance sheet liabilities and have not been included in the table summarizing off-balance sheet obligations above.

Ratio Analysis

Leverage Ratio

The leverage ratio is calculated by dividing the sum of total liabilities and guarantees outstanding by total equity. Based on this formula, the leverage ratio at May 31, 2009 was 42.71, an increase from 29.64 at May 31, 2008. The increase in the leverage ratio is due to an increase of $1,764 million in total liabilities, a decrease of $157 million in total equity and an increase of $238 million in guarantees as discussed under the Liabilities, Minority Interest and Equity section and the Off-Balance Sheet Obligations section of Financial Condition. The primary reason for the increase in total liabilities during the year ended May 31, 2009 was to fund the $1,161 million increase to loans outstanding during the period and to increase the amount of cash on hand in anticipation of debt maturing shortly after year-end.

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 RUS guaranteed loans, subordinated deferrable debt and subordinated certificates from liabilities, uses members' equity rather than total equity and adds subordinated deferrable debt, subordinated certificates and minority interest to calculate adjusted equity. At May 31, 2009 and 2008, the adjusted leverage ratio was 7.11 and 7.50, respectively. See Non-GAAP Financial Measures for further explanation and a reconciliation of the adjustments we make in our leverage ratio calculation.

The decrease in the adjusted leverage ratio is due to an increase of $320 million in adjusted equity offset by an increase in adjusted liabilities of $1,116 million and an increase of $238 million to guarantees as discussed under the Liabilities, Minority Interest and Equity section and the Off-Balance Sheet Obligations section of Financial Condition. In addition to the adjustments made to the leverage ratio in the Non-GAAP Financial Measures section, guarantees to member systems that have certain investment grade ratings from Moody's Investors Service and Standard & Poor's Corporation are excluded from the calculation of the leverage ratio under the terms of the revolving credit agreements.

Debt to Equity Ratio

The debt to equity ratio is calculated by dividing the sum of total liabilities outstanding by total equity. The debt to equity ratio, based on this formula at May 31, 2009 was 40.21, an increase from 28.08 at May 31, 2008. The increase in the debt to equity ratio is due to the decrease of $157 million in total equity and an increase of $1,764 million in total liabilities as discussed under the Liabilities, Minority Interest 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 RUS guaranteed loans, subordinated deferrable debt and subordinated certificates from liabilities, uses members' equity rather than total equity and adds subordinated deferrable debt, subordinated certificates and minority interest to determine adjusted equity. At May 31, 2009 and 2008, the adjusted debt to equity ratio was 6.63 and 7.06, respectively. See Non-GAAP Financial Measures for further explanation and a reconciliation of the adjustments made to the debt to equity ratio calculation. The decrease in the adjusted debt to equity ratio is due to the increase of $320 million in adjusted equity offset by an increase of $1,116 million in adjusted liabilities.

Credit Ratings

Our long- and short-term debt and guarantees are rated by three of the major credit rating agencies registered with the SEC, Moody's Investors Service, Standard & Poor's Corporation and Fitch Ratings. The following table presents our credit ratings at May 31, 2009.

Moody's Investors

Standard & Poor's

Service

Corporation

Fitch Ratings

Direct:

Senior secured debt

A+

Senior unsecured debt

Subordinated deferrable debt (1)

BBB

A-

Commercial paper

P-1

A-1

F-1

Guarantees:

Pooled bonds

Other bonds

Short-term

P-1

A-1

F-1

(1) On February 24, 2009, Standard & Poor’s Corporation lowered the debt ratings on subordinated deferrable debt issued by 47 issuers, and our rating was lowered from BBB+ to BBB.

The ratings listed above are defined by each of the respective rating agencies, are not recommendations to buy, sell or hold securities and can be revised or withdrawn at any time by the rating organizations.

At May 31, 2009 and through the date of this filing, Moody's Investors Service and Standard & Poor’s Corporation had our ratings on stable outlook. On July 24, 2009, Fitch Ratings announced downgrades, with a stable outlook, on all of our secured and unsecured debt resulting in the following new ratings:

	Fitch Ratings
Senior secured debt		A
Senior unsecured debt		A-
Subordinated deferrable debt		BBB
Commercial paper		F-2

Liquidity and Capital Resources

The following section discusses our sources and uses of liquidity. Our primary sources of liquidity include capital market debt issuances, private debt issuances, member loan principal repayments, member loan interest payments, revolving bank line facilities and member investments. Our primary uses of liquidity include loan advances, interest payments on debt, principal repayments on debt and patronage capital retirements. We believe that our sources of liquidity are adequate to cover the uses of liquidity.

After the bankruptcy of LBHI and its subsidiaries in September and through the latter part of November 2008, we experienced periods in which access to both long-term funding and short-term funding was limited and the cost of such funding was at credit spreads higher than in prior periods. Investors were unwilling to take the risk of investing in corporate long-term debt without a significant premium and were unwilling to invest in commercial paper of even the highest rated companies with maturities longer than a week to ten days. Those disruptions in the capital markets, while continuing, eased during the third and fourth quarters of fiscal year 2009. Refer to Liquidity under the Business Overview for additional details about the funding issues we experienced during the year ended May 31, 2009.

Sources of Liquidity

Capital Market Debt Issuance

We qualify as a well-known seasoned issuer under SEC rules and we filed an automatic shelf registration statement for collateral trust bonds in October 2007. This automatic shelf registration statement is effective for three years for an unlimited amount of collateral trust bonds. We filed an automatic shelf registration statement for an unlimited amount of medium-term notes, member capital securities, and subordinated deferrable debt in November 2008. Member capital securities are unsecured obligations that are subordinate to our existing and future senior indebtedness and our existing and future subordinated indebtedness that may be held by or transferred to our non-members, but will rank on parity with our member subordinated certificates. As of May 31, 2009, National Rural had issued $278 million of member capital securities. The amount of member capital securities issued by National Rural increased to a total of $331 million as of August 7, 2009.

We have Board authorization to issue up to $1 billion of commercial paper and $4 billion of medium-term notes in the European market. We also have Board authorization to issue $2 billion of medium-term notes in the Australian market. At May 31, 2009, there was no debt outstanding under our European or Australian programs. In addition, we have a commercial

paper program to sell commercial paper to investors in the capital markets. We limit the amount of commercial paper that can be sold to the amount of backup liquidity available under our revolving credit agreements. We also obtain short-term funding from the sale of floating-rate demand notes to members under our daily liquidity fund program. The automatic shelf registration statement for the daily liquidity fund program is effective for a three-year period ending April 2010 for a total of $20 billion with a $3 billion limitation on the aggregate principal amount outstanding at any time.

Private Debt Issuance

We have access to liquidity from private debt issuances through the Farmer Mac and REDLG programs. Under the note purchase agreements with Farmer Mac, we have the option to draw or advance multiple issuances not to exceed the total amount of the note purchase agreements with Farmer Mac. When Farmer Mac communicates favorable pricing indications and investor interest to us, we may elect to advance under note purchase agreements. We are required to purchase Farmer Mac Series C cumulative, redeemable, non-voting preferred stock in an amount sufficient to maintain a balance at all times that is at least equal to 4 percent of the principal amount of the notes outstanding under the agreements with Farmer Mac.

During the year ended May 31, 2009, we issued new debt totaling $800 million to Farmer Mac. Fixed-rate notes totaling $500 million were issued under a December 2008 note purchase agreement. Variable-rate notes totaling $300 million were issued under a February 2009 note purchase agreement. Additionally, under a March 2009 note purchase agreement, we refinanced a $400 million five-year, variable-rate note sold to Farmer Mac in 2008 with notes totaling $400 million and maturities through 2014. In May 2009, we entered into a $1,000 million seven-year revolving note purchase agreement with Farmer Mac. We may select a fixed rate or variable rate at the time of each advance with maturities no later than December 31, 2016. This $1,000 million commitment remained unadvanced at May 31, 2009. In June 2009, the remaining $200 million available under the February 2009 note purchase agreement was advanced in the form of variable-rate five-year notes. In July 2009, we amended the two Farmer Mac note purchase agreements entered into in December 2008 and February 2009 to make them revolving credit facilities that allow us to borrow, repay and re-borrow funds at any time or from time to time as market conditions permit; provided that the principal amount at any time outstanding under each of the note purchase agreements is not more than $500 million.

Notes payable issued to Farmer Mac are secured by the pledge of mortgage notes in an amount at least equal to the principal balance of the notes outstanding. Those mortgage notes must meet certain ratio and concentration requirements to be eligible to pledge under our agreements with Farmer Mac.

At May 31, 2009, we had $3.0 billion of notes payable outstanding under FFB loan facilities with bond guarantee agreements with RUS as part of the funding mechanism for the REDLG program, including $500 million in additional funding received from the FFB in September 2008 and due in 2028. As part of the REDLG program, we pay RUS a fee of 30 basis points per year on the total amount borrowed. At May 31, 2009, the $3.0 billion of unsecured notes payable issued as part of the REDLG program require us to place mortgage notes on deposit in an amount at least equal to the principal balance of the notes outstanding. These mortgage notes become pledged as collateral based on certain triggering events.

Member Loan Repayments

Scheduled repayments on long-term loans are expected to average $1,028 million a year for fiscal years 2010 to 2014. Scheduled repayments include loan amortization and anticipated resolutions of impaired loans based on current expectations.

(dollar amounts in thousands)		Amortization (1)
2010 (2)	$	1,106,754
2011		860,033
2012		1,451,411
2013		863,403
2014		858,133
Thereafter		12,483,880
Total	$	17,623,614

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

(2) Excludes the anticipated settlement of long-term loans to ICC totaling $466 million.

Member Loan Interest Payments

During the year ended May 31, 2009, interest income on the loan portfolio was $1,059 million, representing an average yield of 5.38 percent as compared with 5.63 percent and 5.61 percent for the years ended May 31, 2008 and 2007, respectively. For the past three fiscal years, interest income on the loan portfolio has averaged $1,039 million. At May 31, 2009, 73 percent of the total loans outstanding had a fixed rate of interest and 27 percent of loans outstanding had a variable rate of interest. At May 31, 2009, a total of 5 percent of loans outstanding were on non-accrual status.

Bank Revolving Credit Facility

The following is a summary of our revolving credit agreements:

(dollar amounts in thousands)		2009		2008	Termination Date	Facility fee per year (1)
Five-year agreement (2)	$	1,125,000	$	1,125,000	March 16, 2012	6 basis points
Five-year agreement (2)		1,025,000		1,025,000	March 22, 2011	6 basis points
364-day agreement		1,000,000		-	March 12, 2010	12.5 basis points
364-day agreement		-		1,500,000	March 13, 2009	5 basis points
Total	$	3,150,000	$	3,650,000

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

(2) Amounts include Lehman Brother’s Bank, FSB’s (“LBB”) portion of the credit facility totaling $134 million allocated as follows: $76 million under the five-year facility maturing 2012, and $58 million under the five-year facility maturing in 2011. We do not expect LBB to fund our portion of the credit facility according to the agreements. See further discussion below.

We have the right under the 364-day revolving credit agreement, subject to certain terms and conditions, to increase the aggregate amount of the commitments by up to $250 million either by increasing the commitment of one or more existing lenders or by adding one or more new lenders, provided that no existing lender’s commitment may be increased without the consent of the lender and administrative agent.

Both five-year agreements contain a provision under which if borrowings exceed 50 percent of total commitments, a utilization fee of five basis points must be paid on the outstanding balance.

At May 31, 2009 and 2008, we were in compliance with all covenants and conditions under our revolving credit agreements and there were no borrowings outstanding under these agreements.

LBB, a subsidiary of LBHI, was a participant for up to $239 million of our revolving credit facilities at the time LBB filed a petition under Chapter 11 of the United States Bankruptcy Code in September 2008. No amount had been advanced. On October 7, 2008, we drew down $418.5 million from the $1.5 billion 364-day agreement. As the amount borrowed did not exceed 50 percent of total commitments, there was no utilization fee on the outstanding balance. LBB did not fund its portion of the draw. As a result, we do not believe that LBB’s $134 million current portion of the credit facilities will be available in the future. We believe that if accessing the credit markets continues to be difficult, the remaining amounts in the credit facilities will be adequate to fund our operations in the near term. We repaid the $418.5 million borrowed under our revolving credit facility on November 13, 2008. See the Financial Overview section for additional information.

To calculate the required financial covenants in our revolving credit agreements, we adjust net income, senior debt and total equity to exclude the non-cash adjustments related to the accounting for derivative financial instruments and foreign currency translation. The adjusted TIER, as defined by the agreements, represents the interest expense adjusted to include the derivative cash settlements, plus minority interest net income, plus net income prior to the cumulative effect of change in accounting principle and dividing that total by the interest expense adjusted to include the derivative cash settlements. In addition to the non-cash adjustments related to the accounting for derivative financial instruments and foreign currency translation, senior debt also excludes RUS guaranteed loans, subordinated deferrable debt, members' subordinated certificates and minority interest. Total equity is adjusted to include subordinated deferrable debt, members' subordinated certificates and minority interest. Senior debt includes guarantees; however, it excludes:

·	guarantees for members where the long-term unsecured debt of the member is rated at least BBB+ by Standard & Poor's Corporation or Baa1 by Moody's Investors Service; and

·	the payment of principal and interest by the member on the guaranteed indebtedness if covered by insurance or reinsurance provided by an insurer having an insurance financial strength rating of AAA by Standard & Poor's Corporation or a financial strength rating of Aaa by Moody's Investors Service.

The following represents our required and actual financial ratios under the revolving credit agreements at or for the year ended May 31:

		Actual
	Requirement	2009	2008

Minimum average adjusted TIER over the six most recent fiscal quarters	1.025	1.18	1.16

Minimum adjusted TIER at fiscal year end (1)	1.05	1.10	1.15

Maximum ratio of senior debt to total equity	10.00	6.90	7.33

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

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, including financial ratios, to draw down on the facilities.

Member Investments

At May 31, 2009 and 2008, members funded 20.5 percent and 20.3 percent, respectively, of total assets. Below is a table showing the components of our member investments:

		2009					2008					Increase/
(dollar amounts in thousands)		Amount		% of Total (1)			Amount		% of Total (1)			(Decrease)
Commercial paper (2)	$	1,226,238		67	%	$	1,526,559		50	%	$	(300,321	)
Medium-term notes		723,009		12			392,739		8			330,270
Members' subordinated certificates		1,740,054		100			1,406,779		100			333,275
Members' equity (3)		604,316		100			613,082		100			(8,766	)
Total	$	4,293,617				$	3,939,159				$	354,458
Percentage of total assets		20.5	%				20.3	%
Percentage of total assets less derivative assets (3)		20.8					20.6

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

(2) Includes $291 million and $251 million related to the daily liquidity fund at May 31, 2009 and 2008, respectively.

(3) See Non-GAAP Financial Measures for further explanation and a reconciliation of the adjustments made to total capitalization and a breakout of members' equity.

We view member commercial paper investments as a more stable source of funding than investor-purchased commercial paper. Member commercial paper investments have averaged $1,240 million outstanding since January 1, 2007.

Uses of Liquidity

Loan Advances

Loan advances are either from new loans approved to members or from the unadvanced portion of loans that were previously approved. At May 31, 2009, we had unadvanced loan commitments totaling $13,551 million. We do not expect to advance the full amount of the unadvanced commitments. Unadvanced commitments generally expire within five years of the first advance on a loan and the majority of short-term unadvanced commitments are used as backup liquidity for member operations. Approximately $4 billion of long-term commitments are scheduled to expire if not advanced over the next three years. Approximately 59 percent of the outstanding commitments at May 31, 2009 were for short-term or line of credit loans. We expect to fund loan advances, either from new loans approved to members or from unadvanced commitments, totaling $1.3 billion during fiscal year 2010.

Interest Expense on Debt

For the year ended May 31, 2009, interest expense on debt was $914 million, representing 4.81 percent of the average debt volume. The interest expense on debt represented 5.62 percent and 5.71 percent of the average debt volume for the years ended May 31, 2008 and 2007, respectively. For the past three fiscal years, interest expense on debt has averaged $935 million. At May 31, 2009, a total of 87 percent of outstanding debt had a fixed interest rate and 13 percent of outstanding debt had a variable interest rate.

Principal Repayments on Long-term Debt

The principal amount and weighted-average interest rates of medium-term notes, collateral trust bonds, long-term notes payable, subordinated deferrable debt and membership subordinated certificates maturing in each of the five fiscal years following May 31, 2009 and thereafter is as follows:

		Amount	Weighted-Average
(dollar amounts in thousands)		Maturing (1)	Interest Rate
2010	$	2,596,768	4.48	%
2011		1,845,606	3.86
2012		2,003,512	6.28
2013		145,877	3.82
2014		2,195,993	4.81
Thereafter		8,322,455	6.10
Total	$	17,110,211	5.45	%

Patronage Capital Retirements

We have made annual retirements of our allocated patronage capital in 29 of the last 30 years. In July 2009, the National Rural board of directors approved the allocation of a total of $83 million from fiscal year 2009 net earnings to the National Rural members. National Rural is scheduled to make a cash payment of $41 million to its members in September 2009 as retirement of 50 percent of allocated net earnings from the prior year as approved by the board of directors. The remaining portion of allocated net earnings will be retained by National Rural for 25 years under new guidelines starting in June 2009.

Market Risk

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

Interest Rate Risk

The interest rate risk exposure is related to the funding of the fixed-rate loan portfolio. We do not match fund the majority of our fixed-rate loans with a specific debt issuance at the time the loans are advanced. We aggregate fixed-rate loans until the volume reaches a level that will allow an economically efficient issuance of debt to fund fixed-rate loans. We allow borrowers flexibility when choosing the period a fixed interest rate will be in effect. 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, that rate is at our then-current market for that type of loan.

Matched Funding Policy

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). The interest rate risk is deemed minimal on variable-rate loans, since the loans may be repriced either monthly or semi-monthly to reflect the cost of the debt used to fund the loans. At May 31, 2009 and 2008, 27 percent and 19 percent, respectively, of loans carried variable interest rates.

Our funding objective is to manage the matched funding of asset and liability repricing terms within a range of three percent of total assets excluding derivative assets. However, at May 31, 2009, our matched funding was outside of this range. At May 31, 2009, we had $14,810 million of fixed-rate assets amortizing or repricing, funded by $14,571 million of fixed-rate liabilities maturing during the next 30 years and $1,805 million of members' equity and members' subordinated certificates, a portion of which does not have a scheduled maturity. The difference of $1,566 million, or 7.46 percent of total assets and 7.60 percent of total assets excluding derivative assets, represents the fixed-rate debt and equity maturing during the next 30 years in excess of the fixed-rate assets. At May 31, 2008, the fixed rate assets maturing during the next 30 years exceeded fixed rate debt and equity by $308 million, or less than 2% of each of total assets and total assets excluding derivative assets.

Fixed-rate loans are funded with fixed-rate collateral trust bonds, medium-term notes, long-term notes payable, subordinated deferrable debt, members' subordinated certificates and members' equity. 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 also use commercial paper supported by derivative instruments to fund our portfolio of fixed-rate loans. Variable-rate assets which reprice monthly or semi-monthly are funded with short-term liabilities, primarily commercial paper, collateral trust bonds, long-term notes payable and medium-term notes issued with a fixed rate and swapped to a variable rate, medium-term notes issued at a variable rate, subordinated certificates, members’ equity and bank bid notes. The schedule 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 issuance of the debt. See Non-GAAP Financial Measures for further explanation and a reconciliation of the adjustments to TIER.

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 prepay the loan. As a result, there is a possibility of significant changes in the composition of the loan portfolio and the management of the interest rate gap is very fluid. Items contributing to the prefunded position at May 31, 2009 include the following:

To pay down commercial paper and refinance maturing extendible collateral trust bonds, we issued $1 billion in collateral trust bonds in October 2008. These bonds were not swapped to a variable rate due to the high floating-rate credit spreads to swap fixed-rate debt to a variable rate. The floating-rate note market was not accessible due to the disruption in the credit markets at the time when we issued the collateral trust bonds.

·	The termination of certain receive fixed, pay variable interest rate swaps with notional amounts totaling $583 million created a larger prefund position than was originally anticipated.

·	The success of our retail notes program and member capital securities, which are both fixed-rate debt instruments. During the fiscal year ended May 31, 2009, we sold $278 million in member capital securities and retail notes increased by $734 million.

The decrease in commercial paper of $1.3 billion compared to the prior year as a result of prefunding floating-rate debt maturing in the first quarter of fiscal year 2010 with long-term fixed-rate funding. As part of our ongoing efforts to manage the liquidity risks associated with maturing debt, we regularly pre-fund large expected debt obligations prior to the maturity to ensure the availability of funds.

Certain of our collateral trust bonds, subordinated deferrable debt and medium-term notes were issued with early redemption provisions. To the extent borrowers are allowed to convert their fixed-rate loans to a variable interest rate and to the extent it is beneficial, we take advantage of these early redemption provisions. However, because conversions and prepayments can take place at different intervals from early redemptions, we charge conversion fees designed to compensate for the additional interest rate risk we assume.

The following table shows the scheduled amortization and repricing of fixed-rate assets and liabilities outstanding at May 31, 2009.

Interest Rate Gap Analysis

(Fixed-rate Assets/Liabilities)

As of May 31, 2009

	May 31,				June 1,				June 1,				June 1,				June 1,
	2010				2010 to				2012 to				2014 to				2019 to				Beyond
	or				May 31,				May 31,				May 31,				May 31,				June 1,
(dollar amounts in millions)	prior				2012				2014				2019				2029				2029				Total

Assets amortization and repricing		$	1,937			$	3,860			$	2,341			$	3,257			$	2,400			$	1,015			$	14,810

Liabilities and members' equity:
Long-term debt		$	1,655			$	4,705			$	2,245			$	4,391			$	662			$	913			$	14,571
Subordinated certificates			17				58				27				48				1,013				289				1,452
Members' equity (1)			-				-				-				15				206				132				353
Total liabilities and members' equity		$	1,672			$	4,763			$	2,272			$	4,454			$	1,881			$	1,334			$	16,376

Gap (2)		$	265			$	(903	)		$	69			$	(1,197	)		$	519			$	(319	)		$	(1,566	)
Cumulative gap			265				(638	)			(569	)			(1,766	)			(1,247	)			(1,566	)
Cumulative gap as a % of total assets			1.26	%			(3.04	)%			(2.71	)%			(8.42	)%			(5.94	)%			(7.46	)%
Cumulative gap as a % of adjusted total assets (3)			1.29				(3.10	)			(2.76	)			(8.57	)			(6.05	)			(7.60	)

(1) Includes the portion of the loan loss allowance and subordinated deferrable debt allocated to fund fixed-rate assets. See Non-GAAP Financial Measures for further explanation of why we use members' equity in our analysis of the funding of our loan portfolio.

(2) Assets less liabilities and members' equity.

(3) Adjusted total assets represents total assets in the consolidated balance sheet less derivative assets.

Subsequent to May 31, 2009, the gap between fixed-rate debt and equity in excess of fixed-rate assets was reduced to within our funding objective of 3 percent primarily as a result of the following that occurred subsequent to fiscal year 2009: (1) the maturity of pay fixed, receive variable interest rates swaps, (2) the execution of four pay variable, receive fixed interest rate swaps due to tighter floating-rate credit spreads to swap fixed-rate debt to a variable rate and (3) the conversion of variable-rate loans to fixed-rate loans by members that initially selected a variable rate during fiscal year 2009 on their respective repricing dates.

Derivative Financial Instruments

We account for derivatives based on the guidance for derivative financial instruments which require that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the consolidated balance sheets as either an asset or liability measured at fair value. Changes in the derivative instrument's fair value are required to be recognized currently in earnings unless specific hedge accounting criteria are met. We are neither a dealer or trader in derivative financial instruments. We use interest rate, cross currency and cross currency interest rate exchange agreements to manage our interest rate and foreign currency risk.

Generally, our derivatives do not qualify for hedge accounting. To qualify for hedge accounting, there must be a high correlation between the pay leg of the interest rate exchange agreement and the asset being hedged or between the receive leg of the interest rate exchange agreement and the liability being hedged. A large portion of our interest rate exchange agreements use a 30-day composite commercial paper index as the receive leg, which would have to be highly correlated to our own commercial paper rates to qualify for hedge accounting. We sell commercial paper to our members as well as to investors in the capital markets. We set our commercial paper rates daily based on our cash requirements. The correlation between our commercial paper rates and the 30-day composite commercial paper index has not been consistently high enough to qualify for hedge accounting. At May 31, 2009 and 2008, we did not have any interest rate exchange agreements that were accounted for using hedge accounting.

We do not plan to adjust our practice of using the 30-day composite commercial paper or a LIBOR index as the receive portion of our interest rate exchange agreements. We set the variable interest rates on our loans based on the cost of our short-term debt, which is comprised of long-term debt due within one year and commercial paper. We believe that we are economically hedging our net interest income on loans by using the 30-day composite commercial paper or LIBOR index, which are the rates that are most closely related to the rates we pay on our own commercial paper. During certain periods, the correlation between the LIBOR rates or the 30-day composite commercial paper rate and our 90-day and 30-day commercial paper rate has been higher than the required 90 percent to qualify for hedge accounting. However, the correlation is not consistently above the 90 percent threshold, and therefore the interest rate exchange agreements that use the LIBOR rates or the 30-day composite commercial paper rates do not qualify for hedge accounting. For the purposes of our own analysis, however, we believe that the correlation is sufficiently high to consider these agreements effective economic hedges.

Cash settlements that we pay and receive for derivative instruments that do not qualify for hedge accounting are recorded in the cash settlements line in the consolidated statements of operations. Each 25 basis point increase or decrease to the 30-day composite commercial paper index and the three-month LIBOR rate would result in a $3 million increase or decrease, respectively, in our net cash settlements due to the composition of the portfolio at May 31, 2009.

We currently use two types of interest rate exchange agreements: (1) we pay a fixed rate and receive a variable rate and (2) we pay a variable rate and receive a fixed rate. The following chart provides a breakout of the interest rate exchange agreements at May 31, 2009 by type of agreement.

		2009						2008
(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	$	6,506,603	4.67	%	0.62	%	$	7,659,973	4.59	%	2.64	%
Pay variable, receive fixed		5,323,239	1.39		5.82			5,256,440	3.50		6.15
Total	$	11,829,842	3.20		2.96		$	12,916,413	4.15		4.07

We use these derivative instruments as part of our overall interest rate matching strategy. These interest rate swaps are used when they provide a lower cost of funding or minimize interest rate risk. We enter into interest rate swaps only with counterparties that participate in our revolving credit agreements. We have not entered into derivative financial instruments for trading purposes in the past and do not anticipate doing so in the future.

At May 31, 2009 and 2008, there were no foreign currency exchange agreements outstanding.

Counterparty Risk

We are exposed to counterparty risk related to the performance of the parties with which we have entered into derivative instruments. To mitigate this risk, we only enter into these agreements with financial institutions with investment grade ratings. At May 31, 2009 and 2008, we were a party to derivative instruments with notional amounts totaling $11,830 million and $12,916 million, respectively. At the time counterparties are selected to participate in our exchange agreements, the counterparty must be a participant in one of our revolving credit agreements. At the date of this filing, our derivative instrument counterparties had credit ratings ranging from AAA to BBB+ as assigned by Standard & Poor's Corporation.

As a result of the bankruptcy filing of LBHI, we terminated seven interest rate swaps with LBSF on September 26, 2008. The payment due to us from LBSF totaling $26 million was recorded in derivative cash settlements representing the termination net settlement amount on that day, in accordance with the terms of the contract. On October 3, 2008, LBSF filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. We have a claim of $26 million against LBHI and LBSF. We used market data that indicated values for LBHI bonds of 10 cents and 15 cents on the dollar as a proxy for the potential recovery from both LBHI and LBSF. As a result, the receivable has been reduced to $7 million. The amount recorded as a receivable does not reduce or limit our claim of $26 million against LBHI and LBSF. The ultimate recovery will depend on the ability of LBHI and LBSF to maximize the value of assets through sale or assignment or the price that we can obtain through the sale of our claim.

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 May 31, 2009, the following 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 agreement and 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. See table on page 47 for National Rural's senior unsecured credit ratings as of May 31, 2009.

(dollar amounts in thousands)		Notional		Required Company			Amount Company		Net
Rating Level:		Amount		Payment			Would Collect		Total
Mutual rating trigger if ratings fall to Baa1/BBB+
and below (1)	$	6,917,396	$	(141,453	)	$	21,194	$	(120,259	)
Counterparty may terminate if ratings fall below
Baa1/BBB+ (2)		938,064		(5,503	)		-		(5,503	)
Total	$	7,855,460	$	(146,956	)	$	21,194	$	(125,762	)

(1) Stated 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.

(2) Stated ratings are for Moody's Investors Service and Standard & Poor’s Corporation, respectively. The rating trigger provisions on the interest rate swaps with one counterparty allow the counterparty to terminate the agreements based on our credit rating, but we do not have the right to terminate based on the counterparty’s credit rating.

In addition to the rating triggers listed above, at May 31, 2009, we had a total notional amount of $815 million of derivative instruments with one counterparty that would require the pledging of collateral totaling $23 million representing the net cash settlement amount of the derivative instruments if our senior unsecured ratings from Moody's Investors Service were to fall below Baa2 or if the rating 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 May 31, 2009 was $163 million.

Liquidity Risk

We face liquidity risk in funding our loan portfolio and refinancing our maturing obligations. We offer long-term loans with maturities of up to 35 years and line of credit loans that are generally required to be paid down annually. On long-term loans, we offer a variety of interest rate options including the ability to fix the interest rate for terms of one year through maturity. We fund the loan portfolio with a variety of debt instruments and our members' equity. We typically do not match fund each of our loans with a debt instrument of similar final maturity. Debt instruments such as membership subordinated certificates and loan and guarantee subordinated certificates have maturities that vary from the term of the associated loan or guarantee to 100 years, member capital securities have maturities of 35 years and subordinated deferrable debt has been issued with maturities of up to 49 years. We may issue collateral trust bonds and medium-term notes for periods of up to 30 years, but typically issue such debt instruments with maturities of 2, 3, 5, 7 and 10 years.

At May 31, 2009, we had a total of $2,580 million of long-term debt maturing during the next 12 months with $245 million maturing in July 2009 (that debt was prefunded as of May 31, 2009) and $1,250 million maturing in August 2009. As part of our ongoing efforts to manage the liquidity risks associated with maturing debt, we regularly pre-fund large expected debt obligations prior to the maturity to ensure the availability of funds. On August 10, 2009, we had $1,704 million of cash on hand that will be used to satisfy the $1,250 million debt obligation maturing on August 28, 2009. Debt instruments such as commercial paper and bank bid notes typically have maturities of 90 days or less. Therefore, we are at risk if we are unable to issue new debt instruments to replace debt that matures before the maturity of the loans for which they are used as funding. Factors that mitigate liquidity risk include our maintenance of back-up liquidity through revolving credit agreements with domestic and foreign banks and a large volume of scheduled principal repayments received on an annual basis. At May 31, 2009, we had $3 billion in lines of credit with financial institutions, with approximately $1.1 billion available for funding as a portion of these bank lines are required for liquidity purposes on our commercial paper and guarantees under which we are the liquidity provider. This amount is adjusted to exclude LBB’s $134 million portion of the credit facility as we do not believe that these funds will be available in the future. The capital constraints of banks could affect future commitment levels under our revolving credit agreements. Our $1.0 billion 364-day revolving credit agreement matures in March 2010. Liquidity risk is also mitigated by our access to the CPFF through February 2010 where we have the capacity to issue a maximum of $3.1 billion of commercial paper. At this time, there is no intention to make use of the more expensive funding through the CPFF since there is sufficient demand in the commercial paper market. In addition, we limit the amount of dealer commercial paper and bank bid notes used in the funding of loans. Our objective is to maintain the amount of dealer commercial paper and bank bid notes used to 15 percent or less of total debt outstanding. At May 31, 2009 and 2008, there was a total of $850 million and $1,612 million, respectively, of dealer commercial paper and bank bid notes outstanding, representing 4 percent and 9 percent, respectively, of our total debt outstanding.

We continue to see significant investment support from our members with $3.7 billion of commercial paper, daily liquidity fund, medium-term notes and subordinated certificate investments outstanding at May 31, 2009. The member debt

investments represented 19 percent of the total debt outstanding at May 31, 2009. In addition, we had a total of $4.3 billion of privately placed debt outstanding at May 31, 2009, $3 billion of which was guaranteed by the U.S. Government under the REDLG program. The private placements of debt represented 22 percent of total debt outstanding at May 31, 2009. In addition to the $4.3 billion of privately placed debt outstanding at May 31, 2009, the remaining $200 million available under the February 2009 note purchase agreement with Farmer Mac was advanced in June 2009 and $425 million of the $1,000 million May 2009 note purchase agreement with Farmer Mac was advanced in August 2009. Access to the remaining $575 million from Farmer Mac under the May 2009 note purchase agreement is subject to market conditions. From December 2008 to the date of this filing, Farmer Mac placed with investors $1,825 million of notes issued under our note purchase agreements with Farmer Mac.

At May 31, 2009, we were the guarantor and liquidity provider for $643 million of tax-exempt bonds issued for our member cooperatives. A total of $197 million of such tax-exempt bonds were in flexible and weekly mode, which reprice every seven to thirty-five days. A total of $446 million of such tax-exempt bonds reprice semi-annually. During the year ended May 31, 2009, the $155 million of auction rate bonds we guaranteed were converted to semi-annual mode. We became the liquidity provider for those bonds. We entered into new agreements as the guarantor and liquidity provider for $176 million of tax-exempt bonds that reprice semi-annually. During the year ended May 31, 2009, we were required to purchase a total of $72 million of tax-exempt bonds pursuant to our obligation as liquidity provider. Once acquired, we were required to hold the bonds until the remarketing agent was able to place them with third-party investors. During this period, we were entitled to receive a rate of interest on many of the bonds that is equal to or higher than the rate investors typically receive on similar bonds in the tax-exempt market. While we held the bonds, they were recorded at fair value and classified as investments in trading securities on the consolidated balance sheet. Changes in fair value were recorded as fair value adjustment on investments in trading securities on the consolidated statement of operations. At May 31, 2009, all tax-exempt bonds we held had been redeemed or repurchased at par by third-party investors.

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

Financial Instruments and Derivatives

The tables below provide information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. All of our financial instruments at May 31, 2009 were entered into or contracted for purposes other than trading except for the investments in preferred stock. For debt obligations, the table presents principal cash flows and related average interest rates by expected maturity dates at May 31, 2009.

							Principal Amortization and Maturities
(dollar amounts in millions)		Outstanding																					Remaining
	Instrument	Balance			Fair Value		2010			2011			2012			2013			2014				Years
Assets:
Investments in preferred stock		$	47		$	47	$	-		$	-		$	-		$	-		$	-		$	47
Long-term fixed-rate loans (1)			14,757			14,107		698			719			1,160			721			713			10,746
Average rate			6.21	%				5.98	%		6.00	%		5.80	%		6.07	%		6.11	%		6.30	%
Long-term variable-rate loans (2)		$	2,297		$	2,297	$	395		$	126		$	276		$	127		$	129		$	1,244
Average rate (3)			5.42	%				-			-			-			-			-			-
Short-term loans (4)		$	2,041		$	2,041	$	2,041		$	-		$	-		$	-		$	-		$	-
Average rate (3)			3.51	%				3.51	%		-			-			-			-			-
RUS Guaranteed FFB Refinance		$	33		$	33	$	2		$	3		$	3		$	3		$	4		$	18
Average rate (3)			0.57	%				-			-			-			-			-			-
Non-performing loans (5)		$	524		$	174	$	524		$	-		$	-		$	-		$	-		$	-
Average rate (5)			-	%				-			-			-			-			-			-
Restructured loans (5)		$	538		$	324	$	11		$	12		$	12		$	12		$	13		$	478
Average rate (5)			0.54	%				-			-			-			-			-			-
Liabilities and equity:
Short-term debt (6)		$	4,868		$	4,886	$	4,868		$	-		$	-		$	-		$	-		$	-
Average rate			2.71	%				2.71	%		-			-			-			-			-
Medium-term notes		$	3,687		$	3,743	$	-		$	846		$	1,695		$	39		$	60		$	1,047
Average rate			6.61	%				-			4.54	%		6.92	%		4.73	%		5.54	%		7.91	%
Collateral trust bonds		$	4,969		$	5,134	$	-		$	906		$	5		$	5		$	1,504		$	2,549
Average rate			6.08	%				-			3.34	%		7.35	%		7.35	%		5.21	%		7.53	%
Long-term notes payable		$	4,064		$	4,284	$	-		$	79		$	248		$	79		$	617		$	3,041
Average rate			4.35	%				-			2.44	%		2.29	%		3.14	%		3.77	%		4.72	%
Subordinated deferrable debt		$	311		$	275	$	-		$	-		$	-		$	-		$	-		$	311
Average rate			6.31	%				-			-			-			-			-			6.31	%
Membership sub certificates (7)		$	1,499		$	1,499	$	17		$	15		$	55		$	23		$	15		$	1,374
Average rate			4.99	%				3.25	%		4.17	%		4.35	%		3.84	%		4.43	%		5.07	%

(1) The principal amount of fixed-rate loans is the total of scheduled principal amortizations without consideration for loans that reprice. Includes $210 million of loans guaranteed by RUS.

(2) Long-term variable-rate loans include $1 million of loans guaranteed by RUS.

(3) Variable rates are set the first day of each month.

(4) The principal amount of line of credit loans are generally required to be paid down for a period of five consecutive days each year. These loans do not have a principal amortization schedule.

(5) Amortization based on expected repayment schedule. Average rate represents current accrual rate. Interest accrual rate cannot be estimated for future periods.

(6) Short-term debt includes commercial paper, bank bid notes and long-term debt due in less than one year.

(7) Fair value is estimated at par as there is no ready market to obtain fair value quotes and it is impracticable to estimate fair value (see Note 15 to the consolidated financial statements). Excludes loan subordinated certificates totaling $241 million that amortize annually based on the outstanding balance of the related loan, therefore there is no scheduled amortization. Over the past three years, annual amortization on these certificates has averaged $28 million. In fiscal year 2009, amortization represented 8 percent of amortizing loan subordinated certificates outstanding.

The following table provides the notional amount, average rate paid, average rate received and maturity dates for the interest rate exchange agreements to which we were a party at May 31, 2009.

(dollar amounts in millions)		Notional						Notional Amortization and Maturities
		Principal																Remaining
	Instruments	Amount			Fair Value			2010		2011		2012		2013		2014		Years
Interest rate exchange agreements		$	11,830		$	(112	)	$	2,360	$	454	$	2,962	$	888	$	1,312	$	3,854
Average rate paid			3.20	%
Average rate received			2.96

There were no cross currency or cross currency interest rate exchange agreements to which we were a party at May 31, 2009 and 2008.

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: (1) adjustments related to the calculation of the TIER ratio, and (2) adjustments related to the calculation of 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, and 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 the TIER Ratio

Our primary performance measure is TIER. TIER is calculated by adding the interest expense to net income prior to the cumulative effect of change in accounting principle and dividing that total by the interest expense. The TIER is a measure of our ability to cover interest expense requirements on our debt. We adjust the TIER calculation to add the derivative cash settlements to the interest expense, to add minority interest net income back to total net income and to remove the derivative forward value and foreign currency adjustments from total net income. Adding the cash settlements back to the interest expense also has a corresponding effect on our adjusted net interest income and adjusted income prior to income taxes and minority interest. We make these adjustments to our TIER calculation for covenant compliance on our revolving credit agreements. The revolving credit agreements require us to achieve an average adjusted TIER ratio over the six most recent fiscal quarters of at least 1.025 and prohibit the retirement of patronage capital unless we have achieved an adjusted TIER ratio of at least 1.05 for the preceding fiscal year.

We use derivatives to manage interest rate and foreign currency exchange risk on our funding of the loan portfolio. The derivative cash settlements represent the amount that we receive from or pay to our counterparties based on the interest rate indexes in our derivatives that do not qualify for hedge accounting. We adjust the reported cost of funding to include the derivative cash settlements. We use the adjusted cost of funding to set interest rates on loans to our members and believe that the interest expense adjusted to include derivative cash settlements represents our total cost of funding for the period. For computing compliance with our revolving credit agreement covenants, we are required to adjust our interest expense to include the derivative cash settlements. TIER is calculated by adding the derivative cash settlements to the interest expense and reflects management's perspective on our operations and therefore, we believe that it represents a useful financial measure for investors.

The derivative forward value and foreign currency adjustments do not represent cash inflows or outflows to us during the current period. The derivative forward value represents a present value estimate of the future cash inflows or outflows that will be recognized as net cash settlements for all periods through the maturity of our derivatives that do not qualify for hedge accounting. Foreign currency adjustments represent the change in value of foreign denominated debt resulting from the change in foreign currency exchange rates during the current period. The derivative forward value and foreign currency

adjustments do not represent cash inflows or outflows that affect our current ability to cover our debt service obligations. The forward value calculation is based on future interest rate expectations that may change daily creating volatility in the estimated forward value. The change in foreign currency exchange rates adjusts the debt balance to the amount that would be due at the reporting date. At the issuance date, we enter into a foreign currency exchange agreement for all foreign denominated debt that effectively fixes the exchange rate for all interest and principal payments. For making operating decisions, we subtract the derivative forward value and foreign currency adjustments from our net income when calculating TIER and for other net income presentation purposes. The covenants in our revolving credit agreements also exclude the effects of derivative forward value and foreign currency adjustments. In addition, since the derivative forward value and foreign currency adjustments do not represent current period cash flows, we do not allocate such funds to our members and therefore exclude the derivative forward value and foreign currency adjustments from net income when making certain presentations to our members and in calculating the amount of net income to be allocated to our members. TIER calculated by excluding the derivative forward value and foreign currency adjustments from net income reflects management's perspective on our operations and therefore, we believe that it represents a useful financial measure for investors.

The accounting for derivative financial instruments and foreign currency adjustments have also affected our total equity. The derivative forward value and foreign currency adjustments flow through the consolidated statements of operations as income or expense, increasing or decreasing the total net income for the period. The total net income or net loss for the period represents an increase or decrease, respectively, to total equity. As a result of implementing the accounting for derivative financial instruments, our total equity includes other comprehensive income, which represents unrecognized gains and losses on derivatives. The other comprehensive income component of equity related to derivatives that qualify for hedge accounting does not flow through the consolidated statements of operations. As stated above, the derivative forward value and foreign currency adjustments do not represent current cash inflow or outflow. The other comprehensive income is also an estimate of future gains and losses and as such does not represent earnings that we can use to fund our loan portfolio. Financial measures calculated with members' equity, which is total equity excluding the accounting for derivative financial instruments and foreign currency adjustments, reflect management's perspective on our operations and therefore, we believe that we represent a useful measure of our financial condition.

The following table provides a reconciliation between interest expense, net interest income, income prior to income taxes and minority interest and net income and these financial measures adjusted to exclude the impact of derivatives and foreign currency adjustments and to include minority interest in net income for the years ended May 31, 2009, 2008, 2007, 2005 and 2004.

		For the year ended May 31,
		2009			2008			2007			2006			2005
(dollar amounts in thousands)
Interest expense	$	(935,021	)	$	(931,268	)	$	(991,754	)	$	(977,200	)	$	(941,398	)
Derivative cash settlements		112,989			27,033			86,442			80,883			78,287
Adjusted interest expense	$	(822,032	)	$	(904,235	)	$	(905,312	)	$	(896,317	)	$	(863,111	)


Net interest income	$	135,743		$	120,125		$	47,896		$	18,682		$	46,776
Derivative cash settlements		112,989			27,033			86,442			80,883			78,287
Adjusted net interest income	$	248,732		$	147,158		$	134,338		$	99,565		$	125,063


(Loss) income prior to income taxes and minority interest	$	(78,871	)	$	36,311		$	16,541		$	105,762		$	126,561
Derivative forward value		160,017			98,743			79,281			(28,805	)		(25,849	)
Foreign currency adjustments		-			-			14,554			22,594			22,893
Adjusted income prior to income taxes and
minority interest	$	81,146		$	135,054		$	110,376		$	99,551		$	123,605


Net (loss) income prior to cumulative effect of change in accounting principle	$	(69,870	)	$	45,745		$	11,701		$	95,497		$	122,503
Minority interest net (loss) income		(3,900	)		(6,099	)		2,444			7,089			2,540
Derivative forward value		160,017			98,743			79,281			(28,805	)		(25,849	)
Foreign currency adjustments		-			-			14,554			22,594			22,893
Adjusted net income	$	86,247		$	138,389		$	107,980		$	96,375		$	122,087

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 provides the TIER and adjusted TIER for the years ended May 31, 2009, 2008, 2007, 2006 and 2005.

	For the year ended May 31,
	2009		2008		2007		2006		2005
TIER (1)		-		1.05		1.01		1.10		1.13
Adjusted TIER		1.10		1.15		1.12		1.11		1.14

(1) For the year ended May 31, 2009, we reported a net loss prior to the cumulative effect of change in accounting principle of $70 million, thus the TIER calculation results in a value below 1.00.

Adjustments to the Calculation of Leverage and Debt to Equity

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

Our adjusted leverage and debt to equity ratios include adjustments to:

·	subtract debt used to fund loans that are guaranteed by RUS from total liabilities;

·	subtract from total liabilities, and add to total equity, debt with equity characteristics issued to our members and in the capital markets;

·	include minority interest as equity; and

·	exclude the non-cash impact of derivative financial instruments and foreign currency adjustments from total liabilities and total equity.

For computing compliance with our revolving credit agreement covenants, we are required to make these adjustments to our leverage ratio calculation. The revolving credit agreements prohibit us from incurring senior debt in an amount in excess of ten times the sum of equity, members' subordinated certificates, minority interest and subordinated deferrable debt, as defined by the agreements. In addition to the adjustments we make to calculate the adjusted leverage ratio, guarantees to our member systems that have an investment grade rating from Moody's Investors Service and Standard & Poor's Corporation are excluded from the calculation of the leverage ratio under the terms of the revolving credit agreements.

We are an eligible lender under the RUS loan guarantee program. Loans issued under this program carry the U.S. Government's guarantee of all interest and principal payments. Therefore, we have little or no risk associated with the collection of principal and interest payments on these loans. Therefore, we believe that there is little or no risk related to the repayment of the liabilities used to fund RUS guaranteed loans and subtracts such liabilities from total liabilities to calculate our leverage and debt to equity ratios. For computing compliance with our revolving credit agreement covenants, we are required to adjust our leverage ratio by subtracting liabilities used to fund RUS guaranteed loans from total liabilities. The leverage and debt to equity ratios adjusted to subtract debt used to fund RUS guaranteed loans from total liabilities reflect management's perspective on our operations and therefore, we believe that these are useful financial measures for investors.

Members have been required to purchase subordinated certificates as a condition of membership and as a condition to obtaining a loan or guarantee. The subordinated certificates are accounted for as debt under GAAP. The subordinated certificates have long-dated maturities and pay no interest or pay interest that is below market and under certain conditions we are prohibited from making interest payments to members on the subordinated certificates. For computing compliance with our revolving credit agreement covenants, we are required to adjust our leverage ratio by subtracting members' subordinated certificates from total liabilities and adding members' subordinated certificates to total equity. The leverage and debt to equity ratios adjusted to treat members' subordinated certificates as equity rather than debt reflect management's perspective on our operations and therefore, we believe that these are useful financial measures for investors.

We also sell subordinated deferrable debt in the capital markets with maturities of up to 39 years and the option to defer interest payments. The characteristics of subordination, deferrable interest and long-dated maturity are all equity characteristics. For computing compliance with our revolving credit agreement covenants, we are required to adjust our leverage ratio by subtracting subordinated deferrable debt from total liabilities and adding it to total equity. The leverage and debt to equity ratios adjusted to treat subordinated deferrable debt as equity rather than debt reflect management's perspective on our operations and therefore, we believe that these are useful financial measures for investors.

We record derivative instruments at fair value on our consolidated balance sheets. The fair values are estimates of the future gains and losses we may incur related to derivatives. The amounts do not represent current cash flows and are not available to fund current operations. For computing compliance with our revolving credit agreement covenants, we are required to adjust our leverage ratio by excluding the non-cash impact of our derivative accounting from liabilities and equity. The leverage and debt to equity ratios adjusted to exclude the impact of our derivative accounting from liabilities and equity reflect management's perspective on our operations and therefore, we believe that these are useful financial measures for investors.

As a result of issuing foreign denominated debt and the accounting guidance for derivative financial instruments which discontinued the practice of recording the foreign denominated debt and the related currency exchange agreement as one transaction, we must adjust the value of such debt reported on the consolidated balance sheets for changes in foreign currency exchange rates since the date of issuance based on the accounting for foreign currency translation. At the time of issuance of all foreign denominated debt, we enter into a foreign currency exchange agreement to fix the exchange rate on all principal and interest payments through maturity. The adjustments to the value of the debt on the consolidated balance sheets are reported on the consolidated statements of operations as foreign currency adjustments. The adjusted debt value at the reporting date does not represent the amount that we will ultimately pay to retire the debt unless the current exchange rate is equal to the exchange rate in the related foreign currency exchange agreement or the counterparty fails to honor its obligations under the agreement. For computing compliance with our revolving credit agreement covenants, we are required to adjust our leverage ratio by excluding the impact of foreign currency valuation adjustments from liabilities and equity. The leverage and debt to equity ratios adjusted to exclude the effect of foreign currency translation reflect management's perspective on our operations and therefore, we believe that these are useful financial measures for investors.

The accounting guidance governing variable interest entities requires that National Rural consolidate the results of operations and financial condition of RTFC and NCSC even though we have no financial interest or voting control over either company. In consolidation, the amount of the subsidiary equity that is owned or due to investors other than the parent company is shown as minority interest. Before accounting guidance required that we consolidate RTFC, the RTFC members' equity was combined with our equity and therefore included in total equity. For computing compliance with our revolving credit agreement covenants, we are required to adjust total equity to include minority interest. The leverage and debt to equity ratio adjusted to treat minority interest as equity reflect management's perspective on our operations and therefore, we believe that these are useful financial measures for investors.

The following table reconciles the liabilities and equity on the consolidated balance sheets to the amounts used to calculate the adjusted leverage and debt to equity ratios as of the five years ended May 31, 2009.

	May 31,
(dollar amounts in thousands)	2009			2008			2007			2006			2005
Liabilities	$	20,463,605		$	18,699,169		$	17,843,151		$	18,373,319		$	19,276,728
Less:
Derivative liabilities		(493,002	)		(171,390	)		(71,934	)		(85,198	)		(78,471	)
Foreign currency valuation account		-			-			-			(244,955	)		(260,978	)
Debt used to fund loans guaranteed by RUS		(243,997	)		(250,169	)		(255,903	)		(261,330	)		(258,493	)
Subordinated deferrable debt (2)		(311,440	)		(311,440	)		(486,440	)		(636,440	)		(685,000	)
Subordinated certificates		(1,740,054	)		(1,406,779	)		(1,381,447	)		(1,427,960	)		(1,490,750	)
Adjusted liabilities	$	17,675,112		$	16,559,391		$	15,647,427		$	15,717,436		$	16,503,036
Total equity	$	508,938		$	665,965		$	710,041		$	784,408		$	764,934
Less:
Prior year cumulative derivative forward
value and foreign currency adjustments		(44,056	)		(131,551	)		(225,849	)		(225,730	)		(221,868	)
Year-to-date derivative forward value (income)
loss (1)		147,549			87,495			79,744			(22,713	)		(26,755	)
Current period foreign currency adjustments		-			-			14,554			22,594			22,893
Accumulated other comprehensive loss		(8,115	)		(8,827	)		(12,204	)		(13,208	)		(15,621	)
Subtotal members' equity		604,316			613,082			566,286			545,351			523,583
Plus:
Subordinated certificates		1,740,054			1,406,779			1,381,447			1,427,960			1,490,750
Subordinated deferrable debt (2)		311,440			311,440			486,440			636,440			685,000
Minority interest		10,162			14,247			21,989			21,894			18,652
Adjusted equity	$	2,665,972		$	2,345,548		$	2,456,162		$	2,631,645		$	2,717,985

Guarantees	$	1,275,455		$	1,037,140		$	1,074,374		$	1,078,980		$	1,157,752

(1) Represents the derivative forward value loss (gain) recorded by National Rural for the period.

(2) At May 31, 2007 and 2006, includes $175 million and $150 million, respectively, of subordinated deferrable debt classified in short-term debt.

The following table provides the calculated ratio for leverage and debt to equity, as well as the adjusted ratio calculations, as of the five years ended May 31, 2009. The adjusted leverage ratio and the adjusted debt to equity ratio are the same calculation except for the addition of guarantees to adjusted liabilities in the adjusted leverage ratio.

	May 31,
	2009	2008	2007	2006	2005
Leverage ratio	42.71	29.64	26.64	24.80	26.71
Adjusted leverage ratio	7.11	7.50	6.81	6.38	6.50

Debt to equity ratio	40.21	28.08	25.13	23.42	25.20
Adjusted debt to equity ratio	6.63	7.06	6.37	5.97	6.07

PART IV

Item 15.

Exhibits, Financial Statement Schedules.

Exhibits

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.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of Fairfax, Commonwealth of Virginia, on the 24th day of August 2009.

NATIONAL RURAL UTILITIES COOPERATIVE

FINANCE CORPORATION

By: /s/ STEVEN L. LILLY

Steven L. Lilly

Chief Financial Officer