Washington, D.C. 20549

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For the quarterly period ended August 31, 2016

OR

For the transition period from to

Commission File Number: 1-7102

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(Exact name of registrant as specified in its charter)

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Registrant's telephone number, including area code: (703) 467-1800

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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 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.

(Do not check if a smaller reporting company)

TABLE OF CONTENTS

INDEX OF MD&A TABLES

PART I-FINANCIAL INFORMATION

This Quarterly Report on Form 10-Q contains certain statements that are considered "forward-looking statements" within the Securities Act of 1933, as amended, and the Exchange Act of 1934, as amended. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identified by our use of words such as "intend," "plan," "may," "should," "will," "project," "estimate," "anticipate," "believe," "expect," "continue," "potential," "opportunity" and similar expressions, whether in the negative or affirmative. All statements about future expectations or projections, including statements about loan volume, the appropriateness of the allowance for loan losses, operating income and expenses, leverage and debt-to-equity ratios, borrower financial performance, impaired loans, and sources and uses of liquidity, are forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, actual results and performance may differ materially from our forward-looking statements due to several factors. Factors that could cause future results to vary from our forward-looking statements include, but are not limited to, general economic conditions, legislative changes including those that could affect our tax status, governmental monetary and fiscal policies, demand for our loan products, lending competition, changes in the quality or composition of our loan portfolio, changes in our ability to access external financing, changes in the credit ratings on our debt, valuation of collateral supporting impaired loans, charges associated with our operation or disposition of foreclosed assets, regulatory and economic conditions in the rural electric industry, nonperformance of counterparties to our derivative agreements, the costs and effects of legal or governmental proceedings involving us or our members and the factors listed and described under "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended May 31, 2016 (" 2016 Form 10-K"). Except as required by law, we undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date on which the statement is made.

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, generation, transmission 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. As a member-owned cooperative, CFC's objective is not to maximize profit, but rather to offer its members cost-based financial products and services consistent with sound financial management. CFC funds its activities primarily through a combination of public and private issuances of debt securities, member investments and retained equity. As a tax-exempt, member-owned cooperative, we cannot issue equity securities.

Our financial statements include the consolidated accounts of CFC, Rural Telephone Finance Cooperative ("RTFC"), National Cooperative Services Corporation ("NCSC") and subsidiaries created and controlled by CFC to hold foreclosed assets resulting from borrower defaults on loans or bankruptcy proceedings. RTFC is a taxable Subchapter T cooperative association that was established to provide private financing for the rural telecommunications industry. NCSC is a taxable cooperative that may provide financing to members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural Electrification Act definition of "rural", and the for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. See "Item 1. Business-Overview" of our 2016 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.

Management monitors a variety of key indicators to evaluate our business performance. The following MD&A is intended to provide the reader with an understanding of our results of operations, financial condition and liquidity by discussing the drivers of changes from period to period and the key measures used by management to evaluate performance, such as leverage ratios, growth and credit quality metrics. MD&A is provided as a supplement to, and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes in this Report, our audited consolidated financial statements and related notes in our 2016 Form 10-K and additional information contained in our 2016 Form 10-K, including the risk factors discussed under "Part I-Item 1A. Risk Factors," as well as any risk factors identified under "Part II-Item 1A. Risk Factors" in this Report.

Table 1 provides a summary of selected financial data for the three months ended August 31, 2016 and 2015 , and as of August 31, 2016 and May 31, 2016 . In addition to financial measures determined in accordance with GAAP, management also evaluates performance based on certain non-GAAP measures, which we refer to as "adjusted" measures. Our primary non-GAAP metrics include adjusted net income, adjusted net interest income and net interest yield, adjusted times interest earned ratio ("adjusted TIER"), adjusted debt-to-equity ratio and adjusted leverage ratio. The most comparable GAAP measures are net income, net interest income, TIER, debt-to-equity ratio and leverage ratio, respectively. The primary adjustments we make to calculate these non-GAAP measures consist of (i) adjusting interest expense and net interest income to include the impact of net periodic derivative cash settlements; (ii) adjusting net income, senior debt and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting senior debt to exclude the amount that funds CFC member loans guaranteed by RUS, subordinated deferrable debt and members' subordinated certificates; and (iv) adjusting total equity to include subordinated deferrable debt and members' subordinated certificates. We believe our non-GAAP adjusted metrics, which are not a substitute for GAAP and may not be consistent with similarly titled non-GAAP measures used by other companies, provide meaningful information and are useful to investors because management evaluates performance based on these metrics, and the financial covenants in our revolving credit agreements and debt indentures are based on adjusted TIER and the adjusted debt-to-equity ratio. See "Non-GAAP Financial Measures" for a detailed reconciliation of these adjusted measures to the most comparable GAAP measures.

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- Change is less than one percent or not meaningful.

(1) Consists of derivative cash settlements and derivative forward value amounts. Derivative cash settlement amounts represent net periodic contractual interest accruals related to derivatives not designated for hedge accounting. Derivative forward value amounts represent changes in fair value during the

period, excluding net periodic contractual accruals, related to derivatives not designated for hedge accounting and expense amounts reclassified into income related to the cumulative transition loss recorded in accumulated other comprehensive income as of June 1, 2001, as a result of the adoption of the derivative accounting guidance that required derivatives to be reported at fair value on the balance sheet.

(2) Consists of the salaries and employee benefits and the other general and administrative expenses components of non-interest expense, each of which are presented separately on our consolidated statements of operations.

(3) See "Non-GAAP Financial Measures" for details on the calculation of these non-GAAP adjusted measures and the reconciliation to the most comparable GAAP measures.

(4) Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period. The fixed-charge coverage ratios and TIER were the same during each period presented because we did not have any capitalized interest during these periods.

(5) Loans to members consists of the outstanding principal balance of member loans plus unamortized deferred loan origination costs, which totaled $ 10 million as of both August 31, 2016 and May 31, 2016 .

(6) Reflects the total amount of member obligations for which CFC has guaranteed payment to a third party as of the end of each period. This amount represents our maximum exposure to loss, which significantly exceeds the guarantee liability recorded on our consolidated balance sheets as the guarantee liability is determined based on anticipated losses. See "Note 11-Guarantees" for additional information.

(7) Calculated based on total liabilities and guarantees at period end divided by total equity at period end.

(8) Calculated based on total liabilities at period end divided by total equity at period end.

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 net income; therefore, the rates we charge our member-borrowers reflect our adjusted interest expense plus a spread to cover our operating expenses, a provision for loan losses and earnings sufficient to achieve interest coverage to meet our financial objectives. Our goal is to earn an annual minimum adjusted TIER of 1.10 and to maintain an adjusted debt-to-equity ratio below 6.00-to-1.

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 sheet; however, our other financial assets and liabilities are carried at amortized cost. Changes in interest rates and spreads 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. As a result, the mark-to-market changes in our derivatives are recorded in earnings. Based on the composition of our derivatives, we generally record derivative losses in earnings 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 future changes in market conditions and the terms of our derivative instruments. As such, management uses our adjusted non-GAAP results, which include realized net periodic derivative settlements but exclude the impact of unrealized derivative forward fair value gains and losses, to evaluate our operating performance. Because derivative forward fair value gains and losses do not impact our cash flows, liquidity or ability to service our debt costs, our financial debt covenants are also based on our non-GAAP adjusted results.

Financial Performance

Reported Results

We reported a net loss of $132 million and a TIER of 0.27 for the quarter ended August 31, 2016 ("current quarter"), compared with net income of $43 million and a TIER of 1.26 for the same prior-year quarter. The variance in our reported results for the current quarter versus the same prior year quarter was primarily attributable to an increase in derivative losses of $176 million due to a decline in longer-term interest rates during the period. We also experienced a decrease in net interest income of $5 million , which was partially offset by a $3 million decrease in the provision for loan losses to $2 million . Our debt-to-equity ratio increased to 36.80 -to-1 as of August 31, 2016 , from 28.69 -to-1 as of May 31, 2016 , largely attributable to a reduction in equity as a result of the current quarter reported net loss of $132 million .

Adjusted Non-GAAP Results

Our adjusted net income totaled $33 million and our adjusted TIER was 1.16 for the current quarter, compared with adjusted net income of $35 million and adjusted TIER of 1.19 for the same prior-year quarter. Our adjusted net income for the current quarter reflected the impact of a decline in adjusted net interest income of $8 million , which was partially offset by the decrease in the provision for loan losses of $3 million and the decrease in operating expenses of $2 million . Our adjusted debt-to-equity ratio increased to 5.94 -to-1 as of August 31, 2016 , from 5.82 -to-1 as of May 31, 2016 .

Lending Activity

Total loans outstanding, which consists of the unpaid principal balance and excludes deferred loan origination costs, was $23,556 million as of August 31, 2016 , an increase of $403 million , or 2% , from May 31, 2016 . The increase was primarily due to increases in CFC distribution and power supply loans of $310 million and $36 million , respectively, which were largely attributable to members refinancing with us loans made by other lenders and member advances for capital investments.

CFC had long-term fixed-rate loans totaling $172 million that repriced during the three months ended August 31, 2016 . Of this total, $142 million repriced to a new long-term fixed rate and $30 million repriced to a long-term variable rate.

Financing Activity

Our outstanding debt volume generally increases and decreases in response to member loan demand. As outstanding loan balances increased during the three months ended August 31, 2016 , our debt volume also increased. Total debt outstanding was $22,905 million as of August 31, 2016 , an increase of $307 million , or 1% , from May 31, 2016 . The increase was primarily attributable to an increase in commercial paper outstanding of $174 million and an advance on August 30, 2016 of $100 million under committed loan facilities from the Federal Financing Bank under the Guaranteed Underwriter Program of the USDA.

Sale of CAH

On July 1, 2016, the sale of Caribbean Asset Holdings, LLC ("CAH") to ATN VI Holdings, LLC ("Buyer") was completed. As a result, we did not carry any foreclosed assets on our consolidated balance sheet as of August 31, 2016. Our net proceeds at closing totaled $109 million, which represents the purchase price of $144 million less agreed-upon purchase price adjustments as of the closing date. Upon closing, $16 million of the sale proceeds was deposited into escrow to fund potential indemnification claims for a period of 15 months following the closing. In connection with the sale, RTFC provided a loan in the amount of $60 million to Buyer to finance a portion of the transaction. ATN International, Inc., the parent corporation of Buyer, has provided a guarantee on an unsecured basis of Buyer's obligations to RTFC pursuant to the financing.

The net proceeds at closing were subject to post-closing adjustments, which were due from Buyer within 60 days of the closing for review by us. The Buyer provided and we agreed upon a net amount due to us of approximately $1 million for post-closing adjustments. See "Consolidated Results of Operations-Non-Interest Income-Results of Operations of Foreclosed Assets" below in this Report and "Note 5-Foreclosed Assets" in our 2016 Form 10-K for additional information on the sale of CAH.

Outlook for the Next 12 Months

We currently expect the amount of new long-term loan advances to exceed scheduled loan repayments over the next 12 months. Although we expect an increase in loans outstanding, we anticipate lower net interest income and adjusted net interest income over the next 12 months, primarily due to a continued decline in the average yield on our loan portfolio, coupled with an expected increase in interest expense.

Long-term debt scheduled to mature over the next 12 months totaled $2,460 million as of August 31, 2016 . We believe we have sufficient liquidity from the combination of existing cash and time deposits, member loan repayments, committed loan facilities and our ability to issue debt in the capital markets, to our members and in private placements to meet the demand

for member loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months. We also may consider the early redemption of certain maturing debt to reduce large debt maturity amounts when it is economically feasible. As of August 31, 2016 , we had access to liquidity reserves totaling $6,946 million , which consisted of $631 million in cash and cash equivalents and time deposits, up to $500 million available under committed loan facilities from the Federal Financing Bank under the Guaranteed Underwriter Program, $3,309 million available under committed bank revolving lines of credit, up to $300 million available under a note purchase agreement with Farmer Mac executed during fiscal year 2016 and, subject to market conditions, up to $2,206 million available under the previously existing revolving note purchase agreement with Farmer Mac.

On September 28, 2016, we received a commitment from RUS to guarantee a loan of $375 million from the Federal Financing Bank under the Guaranteed Underwriter Program of the USDA. The draw period for advances under this loan facility is three years, followed by a 20-year repayment period. Upon closing of the loan, we will have up to $875 million of committed loan facilities available for access under the Guaranteed Underwriter Program.

We believe we can continue to roll over the member outstanding short-term debt of $2,442 million as of August 31, 2016 , based on our expectation that our members will continue to reinvest their excess cash in our commercial paper, daily liquidity fund, select notes and medium-term notes. We expect to continue to roll over our outstanding dealer commercial paper of $710 million as of August 31, 2016 . We intend to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper at an amount below $1,250 million for the foreseeable future. We expect to continue to be in compliance with the covenants under our revolving credit agreements, which will allow us to mitigate our roll-over risk as we can draw on these facilities to repay dealer or member commercial paper that cannot be rolled over.

Our goal is to maintain the adjusted debt-to-equity ratio at or below 6.00-to-1. Our adjusted debt-to-equity ratio was 5.94 as of August 31, 2016 . We expect to maintain our adjusted debt-to-equity ratio at a level of 6.00 or below over the next 12 months.

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the amount of assets, liabilities, income and expenses in the 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 2016 Form 10-K.

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 loan losses and fair value. 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. There were no material changes in the assumptions used in our critical accounting policies and estimates during the current quarter. Management has discussed significant judgments and assumptions in applying our critical accounting policies with the Audit Committee of our board of directors. We provide information on the methodologies and key assumptions used in our critical accounting policies and estimates under "MD&A-Critical Accounting Policies and Estimates" in our 2016 Form 10-K. See "Item 1A. Risk Factors" in our 2016 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 three months ended August 31, 2016 , as well as recently issued accounting standards not yet required to be adopted and the expected impact of these accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our results of operations, financial condition or liquidity, we discuss the impact in the applicable section(s) of MD&A.

The section below provides a comparative discussion of our condensed consolidated results of operations between the three months ended August 31, 2016 and the three months ended August 31, 2015 . Following this section, we provide a comparative analysis of our condensed consolidated balance sheets as of August 31, 2016 and May 31, 2016 . 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

Net interest income represents the difference between the interest income and applicable fees earned on our interest-earning assets, which include loans and investment securities, and the interest expense on our interest-bearing liabilities. Our net interest yield represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities plus the impact from 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 funding large aggregated amounts of loans.

Table 2 presents our average balance sheets for the three months ended August 31, 2016 and 2015 , 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 in interest expense. We provide reconciliations of our non-GAAP adjusted measures to the most comparable GAAP measures under "Non-GAAP Financial Measures."

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(1) Interest income includes loan conversion fees, which are generally deferred and recognized in interest income using the effective interest method.

(2) Amounts primarily include the amortization of deferred loan origination costs and late payment fees. Up-front loan arranger fees, which are not based on interest rates, are included in fee and other income.

(3) Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing funding. Adjusted net interest spread represents the difference between the average yield on interest-earning assets and the adjusted average cost of interest-bearing funding.

(4) Includes other liabilities and equity.

(5) Net interest yield is calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

(6) Represents the impact of net accrued periodic derivative cash settlements during the period, which is added to interest expense to derive non-GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on the annualized net accrued periodic derivative cash settlements during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of derivatives was $ 10,338 million and $ 9,788 million for the three months ended August 31, 2016 and 2015 , respectively.

(7) Adjusted interest expense represents interest expense plus net accrued derivative cash settlements during the period. Net accrued derivative cash settlements are reported on our consolidated statements of operations as a component of derivative gains (losses). Adjusted average cost is calculated based on annualized adjusted interest expense for the period divided by average interest-bearing funding during the period.

(8) Adjusted net interest yield is calculated based on annualized adjusted net interest income for the period divided by average interest-earning assets for the period.

Table 3 displays the change in our net interest income between periods and the extent to which the variance is attributable to: (i) changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates of these assets and liabilities. The table also presents the change in adjusted net interest income between periods.

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(1) The changes for each category of interest income and interest expense are divided between the portion of change attributable to the variance in volume and the portion of change attributable to the variance in rate for that category. The amount attributable to the combined impact of volume and rate has been allocated to each category based on the proportionate absolute dollar amount of change for that category.

(2) For net accrued periodic derivative cash settlements, the variance due to average volume represents the change in derivative cash settlements resulting from the change in the average notional amount of derivative contracts outstanding. The variance due to average rate represents the change in derivative cash settlements resulting from the net difference between the average rate paid and the average rate received for interest rate swaps during the period.

(3) See "Non-GAAP Financial Measures" for additional information on our adjusted non-GAAP measures.

Net interest income of $76 million for the current quarter decreased by $5 million , or 6% , from the same prior-year quarter, driven by a decrease in net interest yield of 13% ( 18 basis points) to 1.26% , which was partially offset by an increase in average interest-earning assets of 7% .

Adjusted net interest income of $52 million for the current quarter decreased by $8 million , or 13% , from the same prior-year quarter, driven by a decrease in the adjusted net interest yield of 20% ( 21 basis points) to 0.86% , which was partially offset by an increase in average interest-earning assets of 7% . The decrease in the adjusted net interest yield reflected the combined impact of an increase in our average cost of funds, coupled with the decline in the average yield on interest-earning assets.

Our adjusted net interest income and adjusted net interest yield include the impact of net accrued periodic derivative cash settlements during the period. We recorded net periodic derivative cash settlement expense of $23 million and $20 million for the three months ended August 31, 2016 and 2015 , respectively. See "Non-GAAP Financial Measures" for additional information on our adjusted measures.

Provision for Loan Losses

Our provision for loan losses in each period is primarily driven by the level of allowance that we determine is necessary for probable incurred loan losses inherent in our loan portfolio as of each balance sheet date.

We recorded a provision for loan losses of $2 million and $5 million for the three months ended August 31, 2016 and 2015 , respectively. The decrease in the allowance was attributable to an overall reduction in the credit risk exposure of our loan portfolio, due in part to the Farmer Mac long-term standby purchase commitment agreement we entered into during fiscal year 2016 as well as an improvement in the historical default rates used in calculating the allowance. The outstanding principal balance of loans covered under the Farmer Mac long-term standby purchase agreement totaled $887 million as of August 31, 2016 , compared with $926 million as of May 31, 2016 and $520 million as of August 31, 2015. No loans had been put to Farmer Mac for purchase, pursuant to this agreement, as of August 31, 2016 .

We provide additional information on our allowance for loan losses under "Credit Risk-Allowance for Loan Losses" and "Note 4-Loans and Commitments" of this Report. For information on our allowance methodology, see "MD&A-Critical Accounting Policies and Estimates" and "Note 1-Summary of Significant Accounting Policies" in our 2016 Form 10-K.

Non-Interest Income

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

We recorded non-interest income losses of $185 million and $9 million for the three months ended August 31, 2016 and 2015 , respectively. The variance in non-interest income between periods was primarily attributable to a significant increase in derivative losses for the quarter ended August 31, 2016 .

Derivative Gains (Losses)

Our derivative instruments are an integral part of our interest rate risk management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments we use primarily include interest rate swaps, which we typically hold to maturity. The primary factors affecting the fair value of our derivatives and derivative gains (losses) recorded in our results of operations include changes in interest rates, the shape of the yield curve and the composition of our derivative portfolio. We generally do not designate interest rate swaps, which presently account for all of our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our consolidated statements of operations under derivative gains (losses). We did not have any derivatives designated as accounting hedges as of August 31, 2016 or May 31, 2016 .

We currently use two types of interest rate swap agreements: (i) we pay a fixed rate and receive a variable rate ("pay-fixed swaps") and (ii) we pay a variable rate and receive a fixed rate ("receive-fixed swaps"). The benchmark rate for the substantial majority of the floating rate payments under our swap agreements is the London Interbank Offered Rate ("LIBOR"). Table 4 displays the average notional amount outstanding, by swap agreement type, and the weighted-average interest rate paid and received for derivative cash settlements during the three months ended August 31, 2016 and 2015 . As indicated in Table 4 , our derivative portfolio currently consists of a higher proportion of pay-fixed swaps than receive-fixed swaps. The profile of our derivative portfolio may change as a result of changes in market conditions and actions taken to manage our interest rate risk.

The average remaining maturity of our pay-fixed and receive-fixed swaps was 18 years and three years, respectively, as of August 31, 2016 . In comparison, the average remaining maturity of our pay-fixed and receive-fixed swaps was 17 years and three years, respectively, as of August 31, 2015 .

Pay-fixed swaps generally decrease in value as interest rates decline and increase in value as interest rates rise. In contrast, receive-fixed swaps generally increase in value as interest rates decline and decrease in value as interest rates rise. Because our pay-fixed and receive-fixed swaps are referenced to different maturity terms along the swap yield curve, different changes in the swap yield curve- parallel, flattening or steepening-will result in differences in the fair value of our derivatives. The chart below provides comparative yield curves as of the end of each reporting period in the current year and as of the end of the same prior-year reporting periods.

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Benchmark rates obtained from Bloomberg.

We recorded derivative losses of $188 million and $12 million for the three months ended August 31, 2016 and 2015 , respectively. Table 5 presents the components of net derivative gains (losses) recorded in our condensed consolidated results of operations for the three months ended August 31, 2016 and 2015 . Derivative cash settlements represent the net interest amount accrued during a period for interest-rate swap payments. The derivative forward value represents the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts.

Table 5 : Derivative Gains (Losses)

The derivative losses of $188 million recorded for the three months ended August 31, 2016 were primarily attributable to a decline in longer-term interest rates and a flattening of the yield curve during the current quarter.

The derivative losses of $12 million recorded for the three months ended August 31, 2015 reflected the combined impact of net periodic derivative cash settlements, which were partially offset by derivative forward value gains of $8 million . The derivative forward value gains were primarily attributable to an increase in the fair value of our pay-fixed swaps during the period due to a slight steepening of the swap yield curve resulting from a gradual increase in interest rates across the curve.

See "Note 9-Derivative Instruments and Hedging Activities" for additional information on our derivative instruments.

Results of Operations of Foreclosed Assets

Results of operations of foreclosed assets consist of the operating results of entities controlled by CFC that hold foreclosed assets, impairment charges related to those entities and gains or losses related to the disposition of the entities.

As discussed above in "Executive Summary," on July 1, 2016, the sale of CAH was completed. As a result, we did not carry any foreclosed assets on our consolidated balance sheet as of August 31, 2016. Our net proceeds at closing totaled $109 million, which represents the purchase price of $144 million less agreed-upon purchase price adjustments as of the closing date.

The net proceeds at closing were subject to post-closing adjustments, which were due from Buyer within 60 days of the closing for review by us. The Buyer provided and we agreed upon a net amount due to us of approximately $1 million for post-closing adjustments. CFC remains subject to potential indemnification claims, as specified in the Purchase Agreement. We recorded a loss of $1 million in the current quarter, which reflects the combined impact of the July 1, 2016 sale closing and post-closing purchase price adjustments. Upon closing of the sale of CAH, we derecognized the loss of $10 million recorded in accumulated other comprehensive income attributable to actuarial-related changes in CAH's pension and other postretirement benefit obligations as an offset against the sale proceeds. This derecognition had no effect on our consolidated statement of operations in the current quarter, as the amount was taken into consideration in the measurement of the CAH impairment loss recorded in fiscal year 2016. See "Note 5-Foreclosed Assets" in our 2016 Form 10-K for additional information on the sale of CAH.

We recorded a loss related to CAH of $2 million in the same prior-year quarter. This loss was attributable to valuation adjustments.

Non-Interest Expense

Non-interest expense consists of salaries and employee benefit expense, general and administrative expenses, losses on early extinguishment of debt and other miscellaneous expenses.

We recorded non-interest expense of $21 million and $23 million for the three months ended August 31, 2016 and 2015 , respectively. The decrease in non-interest expense of $2 million was primarily attributable to a reduction in other general and administrative expenses during the current quarter.

Net Income (Loss) Attributable to Noncontrolling Interests

Net income (loss) attributable to noncontrolling interests represents 100% of the results of operations of RTFC and NCSC, as the members of RTFC and NCSC own or control 100% of the interest in their respective companies. The fluctuations in net income (loss) attributable to noncontrolling interests are primarily due to fluctuations in the fair value of NCSC's derivative instruments.

We recorded a net loss attributable to noncontrolling interests of less than $1 million for the three months ended August 31, 2016 and 2015 .

Total assets of $24,678 million as of August 31, 2016 increased by $407 million , or 2% , from May 31, 2016 , primarily due to growth in our loan portfolio. Total liabilities of $24,025 million as of August 31, 2016 increased by $572 million , or 2% , from May 31, 2016 , primarily due to debt issuances to fund our loan portfolio growth. Total equity decreased by $165 million to $653 million as of August 31, 2016 . The decrease in total equity for the three months ended August 31, 2016 was primarily attributable to the net loss of $132 million and to the patronage capital retirement of $42 million .

Following is a discussion of changes in the major components of our assets and liabilities during the three months ended August 31, 2016 . Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to manage liquidity requirements for the company and our customers and our market risk exposure in accordance with our risk appetite.

Loan Portfolio

We offer long-term fixed- and variable-rate loans and line of credit variable-rate loans. Borrowers may choose a fixed or variable interest rate for periods of one to 35 years. When a selected fixed-rate term expires, the borrower may select either another fixed-rate term or a variable rate or elect to repay the loan in full. We also offer a conversion option to members with long-term loan agreements, which allows borrowers to change the rate and term prior to the repricing date. Borrowers are generally charged a conversion fee when converting from a fixed to a variable rate, or a fixed rate to another fixed rate.

Loans Outstanding

Loans outstanding consist of advances from either new approved loans or from the unadvanced portion of loans previously approved. Table 6 summarizes total loans outstanding, by type and by member class, as of August 31, 2016 and May 31, 2016 .

Table 6 : Loans Outstanding by Type and Member Class

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(1) Includes nonperforming and restructured loans.

(2) Includes long-term loans guaranteed by RUS totaling $172 million and $174 million as of August 31, 2016 and May 31, 2016 , respectively, and long-term loans covered under the Farmer Mac standby purchase commitment agreement totaling $887 million and $926 million of as of August 31, 2016 and May 31, 2016 , respectively.

(3) Total loans outstanding represents the outstanding unpaid principal balance of loans. Unamortized deferred loan origination costs, which totaled $10 million as of August 31, 2016 and May 31, 2016 , are excluded from total loans outstanding. These costs, however, are included in loans to members reported on the condensed consolidated balance sheets.

Total loans outstanding of $23,556 million as of August 31, 2016 increased by $403 million , or 2% , from May 31, 2016 . The increase was primarily due to increases in CFC distribution and power supply loans of $310 million and $36 million , respectively, which were largely attributable to members refinancing with us loans made by other lenders and member advances for capital investments.

We provide ad ditional information on our loan product types in "Item 1. Business-Loan Programs " and "Note 4-Loans and Commitments" in our 2016 Form 10-K. See "Debt-Secured Borrowings" below for information on encumbered and unencumbered loans and "Credit Risk Management" for information on the credit risk profile of our loan portfolio.

Loan Retention Rate

Table 7 compares the historical retention rate of long-term fixed-rate loans that repriced during the three months ended August 31, 2016 and the year ended May 31, 2016, and provides information on the percentage of borrowers that selected either another fixed-rate term or a variable rate. The retention rate is calculated based on the election made by the borrower at the repricing date. As indicated in Table 7 , the average retention rate of repriced loans has been 99% over the presented periods.

Debt

We utilize both short-term and long-term borrowings as part of our funding strategy and asset/liability management. We seek to maintain diversified funding sources across products, programs and markets to manage funding concentrations and reduce our liquidity or debt roll-over risk. Our funding sources include a variety of secured and unsecured debt securities in a wide range of maturities to our members and affiliates and in the capital markets.

Debt Outstanding

Table 8 displays the composition, by product type, of our outstanding debt as of August 31, 2016 and May 31, 2016 . Table 8 also displays the composition of our debt based on several additional selected attributes.

Table 8 : Total Debt Outstanding

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(1) Includes variable-rate debt that has been swapped to a fixed rate net of any fixed-rate debt that has been swapped to a variable rate.

(2) Includes fixed-rate debt that has been swapped to a variable rate net of any variable-rate debt that has been swapped to a fixed rate. Also includes commercial paper notes, which generally have maturities of less than 90 days. The interest rate on commercial paper notes does not change once the note has been issued; however, the rates on new commercial paper notes change daily.

(3) Consists of long-term debt, subordinated deferrable debt and total members' subordinated debt reported on the condensed consolidated balance sheets.

Total debt outstanding of $22,905 million as of August 31, 2016 increased by $307 million , or 1% , from May 31, 2016 , primarily due to debt issuances to fund our loan portfolio growth. The increase was attributable primarily to an increase of $174 million in our commercial paper outstanding and an advance on August 30, 2016 of $100 million under committed loan facilities from the Federal Financing Bank under the Guaranteed Underwriter Program of the USDA.

Member Investments

Debt securities issued to our members represent an important, stable source of funding. Table 9 displays outstanding member debt, by debt product type, as of August 31, 2016 and May 31, 2016 .

Table 9 : Member Investments