Washington, D.C. 20549

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For the quarterly period ended August 31, 2017

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 ☒  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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer  ☐     Accelerated filer  ☐ Non-accelerated filer ☒ Smaller reporting company ☐ Emerging growth company ☐

(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ☐

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

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, 2017 (" 2017 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 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 its 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 members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural 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 did not have any entities that held foreclosed assets as of August 31, 2017 or May 31, 2017 . See "Item 1. Business-Overview" of our 2017 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 net interest income, net interest yield, loan growth, debt-to-equity ratio, 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 2017 Form 10-K and additional information contained in our 2017 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 consolidated selected financial data for the three months ended August 31, 2017 and 2016 , and as of August 31, 2017 and May 31, 2017 . 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. Certain financial covenant provisions in our credit agreements are also based on non-GAAP financial measures. Our key non-GAAP financial measures include adjusted net income, adjusted net interest income, adjusted interest expense, adjusted net interest yield, adjusted times interest earned ratio ("adjusted TIER"), adjusted debt-to-equity ratio and adjusted leverage ratio. The adjusted leverage ratio is a non-GAAP measure included as a covenant in our committed bank revolving line of credit agreements. The most comparable GAAP measures are net income, net interest income, interest expense, net interest yield, 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 and exclude cumulative derivative forward value gains and losses and accumulated other comprehensive income. We believe our non-GAAP adjusted measures, 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 committed bank revolving line of credit agreements and debt indentures are based on adjusted TIER and adjusted leverage ratios. See "Non-GAAP Financial Measures" for a detailed reconciliation of these adjusted measures to the most comparable GAAP measures.

Table 1 : Summary of Selected Financial Data

** Change is not meaningful.

(1) Consists of derivative cash settlements and derivative forward value gains (losses). Derivative cash settlement amounts represent net periodic contractual interest accruals related to derivatives not designated for hedge accounting. Derivative forward value gains (losses) represent changes in fair value during the period, excluding net periodic contractual interest 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 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) Selected metrics and ratios represent percentage amounts.

(5) 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.

(6) Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

(7) Calculated based on annualized adjusted net interest income for the period divided by average interest-earning assets for the period.

(8) Calculated based on annualized net charge-offs (recoveries) for the period divided by average total outstanding loans for the period.

(9) Consists of the outstanding principal balance of member loans plus unamortized deferred loan origination costs, which totaled $11 million as of both August 31, 2017 and May 31, 2017 .

(10) 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. See "Note 10-Guarantees" for additional information.

(11) Calculated based on the allowance for loan losses at period end divided by total outstanding loans at period end.

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

(13) Calculated based on total liabilities and guarantees 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 at approximately or 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, the financial assets and liabilities for which we use derivatives to economically hedge 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 the terms of our derivative instruments and future changes in market conditions that impact actual derivative cash settlement amounts. 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 net income of $9 million and a TIER of 1.05 for the quarter ended August 31, 2017 ("current quarter"), compared with a net loss of $132 million and a TIER of 0.27 for the same prior-year quarter. Our debt-to-equity ratio increased to 23.00 -to-1 as of August 31, 2017 , from 21.94 -to-1 as of May 31, 2017 , primarily due to an increase in debt outstanding to fund loan growth and a decrease in equity resulting from the CFC Board of Directors authorization in the current quarter to retire patronage capital of $45 million .

The variance of $141 million between our reported net income of $9 million for the current quarter and our net loss of $132 million for the same prior-year quarter was driven primarily by mark-to-market changes in the fair value of our derivatives. We recognized derivative losses of $46 million in the current quarter, which were largely due to a modest flattening of the yield curve as interest rates on the shorter end of the curve rose while medium and longer-term interest rates declined slightly. In comparison we recognized derivative losses of $188 million in the same prior-year quarter, attributable to more pronounced flattening of the yield curve during the period. In addition, we experienced a decrease in net interest income of $3 million and an increase in operating expenses of $1 million , which were largely offset by a favorable shift in the provision for loan losses of $2 million and a decrease in charges related to foreclosed assets of $1 million .

Adjusted Non-GAAP Results

Adjusted net income totaled $35 million and adjusted TIER was 1.16 for the current quarter, compared with adjusted net income of $33 million and adjusted TIER of 1.16 for the same prior-year quarter. Our adjusted debt-to-equity ratio increased to 6.05 -to-1 as of August 31, 2017 , from 5.95 -to-1 as of May 31, 2017 , due to the combined impact of the increase in debt outstanding to fund loan growth and the decrease in equity resulting from the CFC Board of Directors authorization in the current quarter to retire patronage capital.

The increase of $2 million in adjusted net income in the current quarter from the same prior-year quarter was primarily driven by the favorable shift in the provision for loan losses of $2 million and decrease in charges related to foreclosed assets of $1 million , which were partially offset by the increase in operating expenses of $1 million .

Lending Activity

Loans to members totaled $24,642 million as of August 31, 2017 , an increase of $275 million , or 1% , from May 31, 2017 . The increase was primarily due an increase in CFC distribution loans of $244 million and an increase in NCSC loans of $45 million , which were partially offset by a decrease in CFC power supply loans of $14 million . The net increase in loans outstanding was largely attributable to member advances for capital investments and members refinancing with us loans made by other lenders.

CFC had long-term fixed-rate loans totaling $150 million that were scheduled to reprice during the current quarter. Of this total, $128 million repriced to a new long-term fixed rate, $21 million repriced to a long-term variable rate and $1 million were repaid in full.

Financing Activity

Our outstanding debt volume generally increases and decreases in response to member loan demand. As total outstanding loans increased during the current quarter, our debt volume also increased. Total debt outstanding was $23,664 million as of August 31, 2017 , an increase of $204 million , or 1% , from May 31, 2017 . The increase was primarily attributable to a net increase in dealer medium-term notes of $396 million , a net increase in our member investments of $217 million and a net increase in notes payable to the Federal Financing Bank under the Guaranteed Underwriter Program of the USDA ("Guaranteed Underwriter Program") of $88 million . These increases were partially offset by a net decrease in dealer commercial paper outstanding of $490 million .

We issued $350 million principal amount of dealer medium-term notes and received advances of $100 million under the Guaranteed Underwriter Program during the three months ended August 31, 2017 .

We provide additional information on our financing activities below under "Consolidated Balance Sheet Analysis-Debt" and "Liquidity Risk."

Outlook for the Next 12 Months

We currently expect the amount of long-term loan advances to exceed anticipated loan repayments over the next 12 months. We expect net interest income and adjusted net interest income to be relatively flat over the next 12 months, reflecting a projected slight increase in average total loans and a relatively stable net interest yield and adjusted net interest yield.

Long-term debt scheduled to mature over the next 12 months totaled $1,453 million as of August 31, 2017 . We believe we have sufficient liquidity from the combination of existing cash and time deposits, member loan repayments, committed bank revolving lines of credit 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. As of August 31, 2017 , we had access to liquidity reserves totaling $6,483 million , which consisted of (i) $396 million in cash and cash equivalents and time deposits, (ii) up to $625 million available under committed loan facilities under the Guaranteed Underwriter Program, (iii) up to $3,164 million available under committed bank revolving line of credit agreements, (iv) up to $300 million available under a committed revolving note purchase agreement with Farmer Mac, and (v) up to $1,998 million available under a revolving note purchase agreement with Farmer Mac, subject to market

conditions. On August 14, 2017, we received a commitment from RUS for the guarantee of a $750 million loan facility from the Federal Financing Bank under the Guaranteed Underwriter Program. The amount available for access under the Guaranteed Underwriter Program, based on amounts advanced to us as of August 31, 2017 , will increase to $1,375 million upon closing of the facility.

We believe we can continue to roll over outstanding member short-term debt of $2,565 million as of August 31, 2017 , 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. Although we expect to continue accessing the dealer commercial paper market to help meet our liquidity needs, 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 committed bank revolving line of 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.

While we are not subject to bank regulatory capital rules, we generally aim to maintain an adjusted debt-to-equity ratio at approximately or below 6.00-to-1. Our adjusted debt-to-equity ratio was 6.05 as of August 31, 2017 , slightly above our targeted threshold due to the combined impact of the increase in debt outstanding to fund loan growth and the decrease in adjusted equity resulting from the CFC Board of Directors authorization in the current quarter to retire patronage capital of $45 million . We expect to maintain our adjusted debt-to-equity ratio at approximately 6.00-to-1 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 2017 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 2017 Form 10-K. See "Item 1A. Risk Factors" in our 2017 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 quarter, 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 this MD&A.

The section below provides a comparative discussion of our condensed consolidated results of operations between the three months ended August 31, 2017 and August 31, 2016. Following this section, we provide a comparative analysis of our condensed consolidated balance sheets as of August 31, 2017 and May 31, 2017 . 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 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, 2017 and 2016 , 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."

Table 2 : Average Balances, Interest Income/Interest Expense and Average Yield/Cost

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(1) Interest income on long-term, fixed-rate loans includes loan conversion fees, which are generally deferred and recognized as interest income using the effective interest method.

(2) Troubled debt restructuring ("TDR") loans.

(3) Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.

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

(5) Includes other liabilities and equity.

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

(7) 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 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 $ 10,682 million and $ 10,338 million for the three months ended August 31, 2017 and 2016 , respectively.

(8) Adjusted interest expense represents interest expense plus net accrued periodic derivative cash settlements during the period. Net accrued periodic 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 total average interest-bearing liabilities during the period.

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

Table 3 displays the change in 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 $73 million for the current quarter decreased by $3 million , or 3% , from the same prior-year quarter, driven by a decrease in net interest yield of 8% ( 10 basis points) to 1.16% , which was partially offset by an increase in average interest-earning assets of 4% .

Adjusted net interest income of $53 million for the current quarter increased by $1 million , or 1% , from the same prior-year quarter, driven by an increase in average interest-earning assets of 4% , which was partially offset by a decrease in the adjusted net interest yield of 2% ( 2 basis points) to 0.84% . The decrease in the adjusted net interest yield was primarily attributable to a modest increase in our adjusted average cost of funds.

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 $20 million and $23 million for the three months ended August 31, 2017 and 2016 , 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 benefit for loan losses of less than $1 million for the current quarter, compared with a provision for loan losses of $2 million for the same prior-year quarter. The credit quality and performance statistics of our loan portfolio continued to remain strong. We experienced no charge-offs during the current quarter, and we had no loans classified as nonperforming as of the end of the quarter. In comparison, we recorded a net charge-off of $2 million in the same prior year quarter.

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 2017 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 $42 million and $185 million for the three months ended August 31, 2017 and 2016 , respectively. The variance between periods was primarily attributable to changes in the net derivative losses recognized in our condensed consolidated statements of operations.

Table 4 presents the components of non-interest income recorded in our condensed consolidated results of operations for the three months ended August 31, 2017 and 2016 .

Table 4 : Non-Interest Income

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 our interest rate swaps, which currently 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 during the current quarter nor during the same prior-year quarter.

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 LIBOR. Table 5 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, 2017 and 2016 . As indicated in Table 5 , our derivative portfolio currently consists of a higher proportion of pay-fixed swaps than receive-fixed swaps. The profile of our derivative portfolio, however, 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 19 years and four years, respectively, as of August 31, 2017 , unchanged from fiscal year end May 31, 2017 . In comparison, the average remaining maturity of our pay-fixed and receive-fixed swaps was 18 years and three years, respectively, as of August 31, 2016 .

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 swap yield curves as of the end of May 31, 2016, August 31, 2016, May 31, 2017 and August 31, 2017.

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Benchmark rates obtained from Bloomberg.

Table 6 presents the components of net derivative gains (losses) recorded in our condensed consolidated results of operations. Derivative cash settlements represent the net periodic contractual interest amount for our interest-rate swaps for the reporting period. Derivative forward value gains (losses) represent 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 6 : Derivative Gains (Losses)

The net derivative losses of $46 million in the current quarter were due to a net decrease in the fair value of our interest rate swaps resulting from a modest flattening of the yield curve, as interest rates on the shorter end of the curve rose while medium and longer-term interest rates declined slightly.

The net derivative losses of $188 million in the same prior-year quarter were due to a more significant net decrease in the

fair value of our interest rate swaps, largely attributable to a more pronounced flattening of the yield curve during the period.

See "Note 8-Derivative Instruments and Hedging Activities" for additional information on our derivative instruments.

Results of Operations of Foreclosed Assets

Results of operations of foreclosed assets consists of the operating results of entities controlled by CFC that hold foreclosed assets, impairment charges related to those entities, gains or losses related to the disposition of the entities and potential subsequent charges related to those assets. On July 1, 2016, we completed the sale of Caribbean Asset Holdings, LLC ("CAH"). As a result, we did not carry any foreclosed assets on our consolidated balance sheet as of August 31, 2017 or May 31, 2017 .

We recorded charges related to CAH of $24 thousand and $1 million for the three months ended August 31, 2017 and 2016, respectively. The charges during the current quarter were attributable to legal fees. The same prior-year quarter charges were attributable to the combined impact of adjustments recorded at the closing date of the sale of CAH, post-closing purchase price adjustments and certain legal costs incurred pertaining to CAH.

In connection with the sale of CAH, $16 million of the sale proceeds was deposited into escrow to fund potential indemnification claims for a period of 15 months following the closing. On September 27, 2017, we received a claim notice from the purchaser of CAH asserting potential indemnification claims and seeking funding from the escrow. We are evaluating whether the claims are subject to indemnification and what amounts, if any, would be owing to the purchaser under the purchase agreement.

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.

Table 7 presents the components of non-interest expense recorded in our condensed consolidated results of operations for the three months ended August 31, 2017 and 2016 .

Table 7 : Non-Interest Expense

Non-interest expense of $22 million for the current quarter increased by $1 million , or 4%, from the same prior-year period primarily due to increases in salaries and employee benefits and other operating expenses.

Net Income (Loss) Attributable to Noncontrolling Interests

Net income (loss) attributable to noncontrolling interests represents 100% of the results of operations of NCSC and RTFC, as the members of NCSC and RTFC 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 changes in the fair value of NCSC's derivative instruments recognized in NCSC's earnings.

We recorded net losses attributable to noncontrolling interests of less than $1 million for the three months ended August 31, 2017 and 2016 .

Total assets of $25,481 million as of August 31, 2017 increased by $275 million , or 1% , from May 31, 2017 , primarily due to growth in our loan portfolio. Total liabilities of $24,419 million as of August 31, 2017 increased by $312 million , or 1% , from May 31, 2017 , primarily due to debt issuances to fund our loan portfolio growth. Total equity decreased by $37 million to $1,062 million as of August 31, 2017 . The decrease in total equity was primarily attributable to the CFC Board of Directors authorization in the current quarter to retire patronage capital of $45 million , which was partially offset by our reported net income of $9 million for the current quarter.

Following is a discussion of changes in the major components of our assets and liabilities during the three months ended August 31, 2017 . 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. Under our long-term facilities, borrowers have the option of choosing a fixed or variable interest rate for periods of one to 35 years.

Loans Outstanding

Table 8 summarizes loans to members, by loan type and by member class, as of August 31, 2017 and May 31, 2017 . As indicated in Table 8 , long-term fixed-rate loans accounted for 91% of loans to members as of both August 31, 2017 and May 31, 2017 .

Table 8 : Loans Outstanding by Type and Member Class

Loans to members totaled $24,642 million as of August 31, 2017 , an increase of $275 million , or 1% , from May 31, 2017 . The increase was primarily due an increase in CFC distribution loans of $244 million and an increase in NCSC loans of $45 million , which was partially offset by a decrease in CFC power supply loans of $14 million . The net increase in loans to members was largely attributable to member advances for capital investments and members refinancing with us loans made by other lenders.

We provide ad ditional information on our loan product types in "Item 1. Business-Loan Programs " and "Note 4-Loans and Commitments" in our 2017 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 9 presents a comparison between the historical retention rate of CFC's long-term fixed-rate loans that repriced during the three months ended August 31, 2017 and loans that repriced during fiscal year 2017, 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. The average annual retention rate of CFC's repriced loans has been 97% over the last three fiscal years.

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(1) Does not include NCSC and RTFC loans.

Debt

We utilize both short-term and long-term borrowings as part of our funding strategy and asset/liability interest rate risk 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 10 displays the composition, by product type, of our outstanding debt as of August 31, 2017 and May 31, 2017 . Table 10 also displays the composition of our debt based on several additional selected attributes.