National Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution systems, generation and transmission (“power supply”) systems and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. As a member-owned cooperative, CFC’s objective is not to maximize profit, but rather to offer members cost-based financial products and services. CFC funds its activities primarily through a combination of public and private issuances of debt securities, member investments and retained equity. As a Section 501(c)(4) tax-exempt, member-owned cooperative, we cannot issue equity securities.

Our financial statements include the consolidated accounts of CFC, National Cooperative Services Corporation (“NCSC”), Rural Telephone Finance Cooperative (“RTFC”) and subsidiaries created and controlled by CFC to hold foreclosed assets resulting from defaulted loans or bankruptcy. NCSC is a taxable member-owned cooperative that may provide financing to

Electrification Act definition of “rural,” and for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. RTFC is a taxable Subchapter T cooperative association that provides financing for its rural telecommunications members and their affiliates. CFC and its consolidated entities have not held any foreclosed assets since the fiscal year 2017.ended May 31, 2017 (“fiscal year 2017”). See “Item 1. Business—Overview” in our 2020 Form 10-K for additional information on the business activities of each of these entities. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities. All references to members within this document include members, associates and affiliates of CFC and its consolidated entities, except where indicated otherwise.

We conduct our operations through three business segments, which are based on each of the legal entities included in our consolidated financial statements: CFC, NCSC and RTFC. CFC’s business operations account for the substantial majority of our loans and revenue. Loans to members totaled $26,929$27,063 million as of August 31,November 30, 2020, of which 96% was attributable to CFC. We generated total revenue, which consists of net interest income and fee and other income, of $103$212 million for the threesix months ended August 31,November 30, 2020, (“current quarter”), compared with $88$171 million for the threesix months ended August 31,November 30, 2019 (“same prior-year quarter”prior year-to-date period”). Our adjusted total revenue was $76$155 million for the current quarter,six months ended November 30, 2020, compared with $77$146 million for the same prior-year quarter.prior year-to-date period. We provide information on the financial performance of our business segments in “Note 14—Business Segments.”

Management monitors a variety of key indicators to evaluate our business performance. In addition to financial measures determined in accordance with generally accepted accounting principles in the United States (“GAAP”), management also evaluates performance based on certain non-GAAP measures and metrics, which we refer to as “adjusted” measures. The following MD&A is intended to provide the reader with an understanding of our consolidated results of operations, financial condition and liquidity by discussing the factors influencing changes from period to period and key measures used by management to evaluate performance, including, among others, net interest income, net interest yield, debt-to-equity ratio and the related non-GAAP adjusted measures, loan activity and credit quality metrics. Our MD&A is provided as a supplement to, and should be read in conjunction with the unaudited consolidated financial statements and related notes in this Report, our audited consolidated financial statements and related notes in our 2020 Form 10-K and additional information contained in our 2020 Form 10-K, including the risk factors identified under “Part I—Item 1A. Risk Factors,” as well as additional information contained elsewhere in this Report.

Our primary objective as a member-owned cooperative lender is to provide cost-based financial products to our rural electric members while maintaining a sound financial position required for investment-grade credit ratings on our debt instruments. Our objective is not to maximize profit; therefore, the rates we charge our member-borrowers reflect our funding costs plus a spread to cover our operating expenses, a provision for credit losses and earnings sufficient to achieve interest coverage to meet our financial objectives. Our goal is to earn an annual minimum adjusted TIER of 1.10 and to maintain an adjusted debt-to-equity ratio at approximately 6.00-to-1 or below.

We are subject to period-to-period volatility in our reported GAAP results due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under GAAP. Our financial assets and liabilities expose us to interest-rate risk. We use derivatives, primarily interest rate swaps, as part of our strategy in managing this risk. Our derivatives are intended to economically hedge and manage the interest-rate sensitivity mismatch between our financial assets and liabilities. We are required under GAAP to carry derivatives at fair value on our consolidated balance sheets; however, the financial assets and liabilities for which we use derivatives to economically hedge are carried at amortized cost. Changes in interest rates and the shape of the swap curve result in periodic fluctuations in the fair value of our derivatives, which may cause volatility in our earnings because we do not apply hedge accounting for our interest rate swaps. As a result, the mark-to-market changes in our interest rate swaps are recorded in earnings. Because our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, we generally record derivative losses when interest rates decline and derivative gains when interest rates rise. This earnings volatility generally is not indicative of the underlying economics of our business, as the derivative forward fair value gains or losses recorded each period may or may not be realized over time, depending on the terms of our derivative instruments and future changes in market conditions that impact the periodic cash settlement amounts of our interest rate swaps. As such, management uses our non-GAAP adjusted results to evaluate our operating performance. Our adjusted results include realized net periodic interest rate swap settlement amounts but exclude the impact of unrealized forward fair value gains and losses. Certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are also based on our non-GAAP adjusted results, as the forward fair value gains and losses related to our interest rate swaps do not affect our cash flows, liquidity or ability to service our debt.

We reported net income of $145$161 million and a TIER of 1.801.92 for the three months ended November 30, 2020 (“current quarter.quarter”). In comparison, we reported net income of $242 million and a TIER of 2.16 for the three months ended November 30, 2019 (“same prior-year quarter”). We reported net income of $305 million and a TIER of 1.86 for the six months ended November 30, 2020, compared with a net loss of $324$82 million and a TIER of 0.80 for the same prior-year quarter, which resulted in no TIER coverage.prior year-to-date period. The significant variance between our reported results for the current quartercurrent-year periods and the same prior-year quarterperiods was attributable to mark-to-market changes in the fair value of our derivative instruments. Our debt-to-equity ratio decreased to 37.6430.60 as of August 31,November 30, 2020, from 42.40 as of May 31, 2020, primarily due to an increase in equity from our reported net income of $145$305 million, which was partially offset by a decrease in equity as a resultfrom the retirement of the CFC Board of Directors’ authorization in the current quarter to retire patronage capital of $60 million which we returnedauthorized by the CFC Board of Directors in July 2020 and paid to members in September 2020.

A decrease in the average cost of our short-term borrowings of 213183 basis points to 0.45%0.33% for the current quarter.

Adjusted net income totaled $57$49 million and adjusted TIER was 1.281.24 for the current quarter, compared with adjusted net income of $61$44 million and adjusted TIER of 1.271.20 for the same prior-year quarter. Adjusted net income totaled $107 million and adjusted TIER was 1.26 for the six months ended November 30, 2020, compared with adjusted net income of $105 million and adjusted TIER of 1.23 for the same prior year-to-date period. Our adjusted debt-to-equity ratio increased to 5.965.90 as of August 31,November 30, 2020, from 5.85 as of May 31, 2020, primarily attributable to a reduction in adjusted equity due to the maturity and redemption of subordinated certificates and the authorized patronage capital retirement amount, partially offset by adjusted net income for the current quarter. Our adjusted debt-to-equity ratio of 5.965.90 as of August 31,November 30, 2020, remained below our targeted threshold of 6.00-to-1.

See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of these measures to the most comparable GAAP measures.

Loans to members totaled $26,929$27,063 million as of August 31,November 30, 2020, an increase of $227$361 million, or 1%, from May 31, 2020. The increase was driven primarily by an increase in long-term loans of $385$492 million, partially offset by a decrease in line of credit loans of $159$132 million. We experienced increases in CFC distribution loans, NCSC loans and RTFC loans increased by $242of $453 million, $7 million and $46 million, respectively, and decreases in CFC power supply loans and CFC statewide and associate loans of $135 million and $11 million, respectively. NCSCSubsequent to the quarter end, during the month of December 31, 2020, our outstanding loans CFC statewideto members increased by an additional $476 million, driven by increases in long-term and associateline of credit loans and CFC power supply loans decreased by $17 million, $8of $274 million and $2$202 million, respectively.

Long-term loan advances totaled $807$1,271 million during the current quarter,six months ended November 30, 2020, of which approximately 93%85% was provided to members for capital expenditures and approximately 4%5% was provided for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled $888$1,387 million during the same prior-year quarter,prior year-to-date period, of which approximately 73%69% was provided to members for capital expenditures and approximately 19%25% was provided for the refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling $79$204 million that were scheduled to reprice during the current quarter.six months ended November 30, 2020. Of this total, $78$198 million repriced to a new long-term fixed rate, and the remainder either$5 million repriced to a long-term variable rate or wereand $1 million was repaid in full. In comparison, CFC had long-term fixed-rate loans totaling $110$234 million that were scheduled to reprice during the same prior-year quarter,prior year-to-date period, of which $109$224 million repriced to a new long-term fixed rate, and $1$7 million repriced to a long-term variable rate $3 million was repaid in full.

Loans outstanding to electric utility organizations represented approximately 98% and 99% of total loans outstanding as of both August 31,November 30, 2020 and May 31, 2020.2020, respectively. We historically have had limited defaults and losses on loans in our electric utility loan portfolio largely because of the essential nature of the service provided by electric utility cooperatives as well as other factors, such as limited rate regulation and competition, which we discuss further in the section “Credit Risk—Loan Portfolio Credit Risk.” We generally lend to members on a senior secured basis, which reduces the risk of loss in the event of a borrower default. Of our total loans outstanding, 94% were secured as of August 31,both November 30, 2020 and May 31, 2020.

The allowance for credit losses for our loan portfolio increased to $57 million as of August 31, 2020, from $53 million as of May 31, 2020, and the allowance coverage ratio increased to 0.21% from 0.20%, primarily due to the increase in the allowance of $4 million recorded at adoption of CECL on June 1, 2020. We discuss our methodology for estimating the allowance for credit losses under the CECL model in “Note 1—Summary of Significant Accounting Policies” of this Report. We also provide information on the allowance for credit losses below in the section “Credit Risk—Allowance for Credit Losses” and in “Note 5—Allowance for Credit Losses.”

We issue debt primarily to fund growth in our loan portfolio. As such, our outstanding debt volume generally increases and decreases in response to member loan demand. Total debt outstanding was $26,020$26,017 million as of August 31,November 30, 2020, an increase of $20$17 million from May 31, 2020. In the fourth quarter of fiscal year 2020 we increased our cash position to $671 million, as a precaution in case there were disruptions in the capital markets due to Covid-19 that would impact our ability to fund operations in fiscal year 2021. During the first six months of fiscal year 2021 there have not been disruptions in our ability to access the capital markets or in our issuance of debt to our members. As a result we have been able to use the $671 million of cash that was on hand as of May 31, 2020 to fund the majority of our operations through November 30, 2020, at which date our cash balance had been reduced to $167 million. Debt activity during the current quarterthis period consisted of net increases in outstanding dealer commercial paper of $715 million and member commercial paper, select notes and daily liquidity fund notes of $297 million and dealer commercial paper of $300$104 million, which together totaled $597$819 million. This increase was partially offset by net decreases in collateral trust bonds of $396$351 million, Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payable of $161 million, medium-term notes of $86$151 million, borrowings under the United States Department of Agriculture (“USDA”) Guaranteed Underwriter Program (“Guaranteed Underwriter Program”) of $35$71 million and Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payablemembers’ subordinated certificates of $18$68 million, which together totaled $535$802 million. Outstanding dealer commercial paper, which totaled $300$715 million as of August 31,November 30, 2020, was below our targeted maximum threshold of $1,250 million.

As of August 31,November 30, 2020, our sources of liquidity readily available for access totaled $6,956$7,317 million, consisting of (i) $348$167 million in cash and cash equivalents; (ii) $528 millioninvestments in debt investment securities;securities with a fair value of $552 million, subject to changes in market value; (iii) up to $2,722 million available for access under committed bank revolving line of credit agreements; (iv) up to $900$1,275 million available under committed loan facilities under the Guaranteed Underwriter Program; and (v) up to $2,458$2,601 million available under a revolving note purchase agreement with Farmer Mac, subject to market conditions.

Our members historically have maintained a relatively stable level of short-term investments in CFC in the form of commercial paper, select notes, daily liquidity fund notes and medium-term notes. We believe we can continue to roll over outstanding member short-term debt, of $4,003which totaled $3,848 million as of August 31,November 30, 2020, based on our expectation that our members will continue to reinvest their excess cash in our commercial paper, daily liquidity fund notes, select notes and medium-term notes. We expect to continue accessing the dealer commercial paper market as a cost-effective means of satisfying our short-term liquidity needs. Although the intra-period amount of outstanding dealer commercial paper may fluctuate based on our liquidity requirements, we intend to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper at an amount near or below $1,250 million for the foreseeable future. We expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements, which will allow us to mitigate roll-over risk, as we can draw on these facilities to repay dealer or member commercial paper that cannot be refinanced with similar debt.

We provide additional information on our primary sources and uses of liquidity and our liquidity profile below in the section “Liquidity Risk.”

We continueThe COVID-19 pandemic continues to adhere tohave an ongoing disruptive impact on the COVID-19United States (“U.S.”). The continuing duration and severity of the pandemic and its long-term economic impact remain uncertain. CFC is headquartered in the Commonwealth of Virginia and is following workplace guidelines established by the CentersCommonwealth and the U.S. Center for Disease Control and PreventionPrevention. We are currently staffing our office at no more than 25% occupancy, with other personnel working remotely, and the World Health Organizationwe have limited travel and orders issued by state and local governments where we operate. In mid-June 2020, following the announcement by the governor of phased reopening dates and guidelines for Virginia, we implemented a return-to-work policy that included, as part of our physical distancing measures, assigning employees to physically separate teams and a staggered weekly in-office rotation schedule for each team to limit the number of employees present at any given time, face mask covering requirements and an enhanced cleaning program to maintain the well-being of our employees as well as comply with Virginia’s reopening guidelines. Our current expectation is that we will maintain the return-to-work policy

We believe that the pandemic has not had any significant negative effect on our liquidity, and that our portfolio credit quality remains strong. In the first six months of fiscal year 2021, we have remained able to access the capital markets, private funding programs and our members for the capital required to repay maturing debt, and we have made long-term loan advances of $1.3 billion to our members to fund their operations. In comparison, we made $1.4 billion of long-term loan advances in first six months of the prior year, prior to the impacts of COVID-19. We believe that we currently have sufficient liquidity to meet member loan demand and repay maturing debt over the next 12 months.

Our electric utility cooperative borrowers operate in a sector identified by the U.S. government as one of the 16 critical infrastructure sectors because the services provided to residential customers and commercial customers in other industry sectors are considered essential and vital in supporting and maintaining the overall functioning of the U.S. economy. Historically, the utility sector in which our electric utility borrowers operate has been workingresilient to economic downturns. While our electric cooperative members continue to be subject to certain state-mandated suspensions on utility shut-offs due to nonpayment, we have not experienced any delinquencies in scheduled loan payments or received requests for payment deferrals or covenant relief from our borrowers due to the pandemic. We are in contact with our membersmember borrowers on a continuous basis and, to date, we believe that the pandemic has not only ashad a lender, but also by offering a full range of products, services, tools and training designed to help cooperatives continue to deliver uninterrupted, essential utility services tosignificant negative impact on their customers and successfully manage the ongoing challenges of the COVID-19 pandemic.overall financial performance.

We believe we have been able to navigate the challenges of the COVID-19 pandemic reasonably well to date. As noted above, we currently believe that we have sufficient cash flow and liquidity to cover our existing debt obligations as well asand meet the borrowing needs of our members. While there continues to be uncertainty about the duration and severity of the COVID-19 pandemic and the extent of its future economic impact, our borrowers operate in an industry sector that historically has been resilient to economic downturns. Our electric utility cooperative members, which have a strong track record in preparing for and responding to emergencies, thus far, have been able to manage the challenges and pressures presented by the COVID-19 pandemic. To date, the COVID-19 pandemic has not had a material adverse impact on the operations and financial performance of the substantial majority of our borrowers. Thus far,Although we have not experienced any delinquencies in scheduled loan payments from our borrowers or received requests for payment deferrals or covenant relief.

See “Item 1A. Risk Factors” in our 2020 Form 10-K for a discussion of the potential adverse impact of COVID-19 on our business, results of operations, financial condition and liquidity.

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our consolidated financial statements. Understanding our accounting policies and the extent to which we use management’s judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a discussion of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 2020 Form 10-K. Pursuant to our June 1, 2020 adoption of the CECL accounting standard, we have provided updates to certain of our significant accounting policies, including the allowance for credit losses, in “Note 1—Summary of Significant Accounting Policies” of this Report.

We have identified certain accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. Our most critical accounting policies and estimates involve the determination of the allowance for credit losses and fair value. Below we have updated our critical accounting policy for the allowance for credit losses under the CECL model, which involves additional areas involving significant management judgment.

Prior to the adoption of CECL on June 1, 2020, we maintained an allowance based on an estimate of probable incurred losses inherent in our loan portfolio as of each balance sheet date. Under CECL, we are required to maintain an allowance based on a current estimate of credit losses that are expected to occur over the remaining contractual life of the loans in our

We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussed significant judgments and assumptions in applying our critical accounting policies with the Audit Committee of the CFC Board of Directors. We provide information on the significant judgments and assumptions in measuring fair value under “MD&A—Critical Accounting Policies and Estimates” in our 2020 Form 10-K. See “Item 1A. Risk Factors” in our 2020 Form 10-K for a discussion of the risks associated with management’s judgments and estimates in applying our accounting policies and methods.

See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted during the current fiscal year, as well as recently issued accounting standards not yet required to be adopted and the expected impact of the adoption of these accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our consolidated results of operations, financial condition or liquidity, we also discuss the impact in the applicable section(s) of this MD&A.

The section below provides a comparative discussion of our consolidated results of operations between the three months ended August 31,November 30, 2020 and 2019 and between the six months ended November 30, 2020 and 2019. Following this section, we provide a comparative analysis of our consolidated balance sheets as of August 31,November 30, 2020 and May 31, 2020. You should read these sections together with our “Executive Summary—Outlook for the Next 12 Months” where we discuss trends and other factors that we expect will affect our future results of operations.

Net interest income represents the difference between the interest income earned on our interest-earning assets, which includes loans and investment securities, and the interest expense on our interest-bearing liabilities. Our net interest yield represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities plus the impact fromof non-interest bearing funding. We expect net interest income and our net interest yield to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities. We do not fund each individual loan with specific debt. Rather, we attempt to minimize costs and maximize efficiency by proportionately funding large aggregated amounts of loans.

Table 2 presents average balances for the three and six months ended August 31,November 30, 2020 and 2019, and for each major category of our interest-earning assets and interest-bearing liabilities, the interest income earned or interest expense incurred, and the average yield or cost. Table 2 also presents non-GAAP adjusted interest expense, adjusted net interest income and adjusted net interest yield, which reflect the inclusion of net accrued periodic derivative cash settlements expense in interest expense. We provide reconciliations of our non-GAAP adjusted measures to the most comparable GAAP measures under “Non-GAAP Financial Measures.”