UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

debt securities, member investments and retained equity. NCSC is a member-owned taxable member-owned cooperative that mayis permitted to provide financing to members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural

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 $27,063$28,883 million as of November 30, 2020,August 31, 2021, of which 96% was attributable to CFC. We generated total revenue, which consists of net interest income and fee and other income, of $212$112 million for the sixthree months ended November 30, 2020,August 31, 2021 (“current quarter”), compared with $171$103 million for the sixthree months ended November 30, 2019August 31, 2020 (“same prior year-to-date period”prior-year quarter”). Our adjusted total revenue was $155$85 million for the six months ended November 30, 2020,current quarter, compared with $146$76 million for the same prior year-to-date period.prior-year quarter. We provide information on the financial performance of our business segments in “Note 14—Business Segments.”

The following MD&A is intended to enhance the understanding of our consolidated financial statements by providing material information that we believe is relevant in evaluating our results of operations, financial condition and liquidity and the potential impact of material known events or uncertainties that, based on management’s assessment, are reasonably likely to cause the financial information included in this Report not to be necessarily indicative of our future financial performance. Management monitors a variety of key indicators and metrics to evaluate our business performance. In addition to financialWe discuss these key 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.period. Our MD&A is provided as a supplement to, and should be read in conjunction with, the unaudited consolidated financial statements and related notesincluded in this Report, our audited consolidated financial statements and related notes for the fiscal year ended May 31, 2021 (“fiscal year 2021”) included in our 20202021 Form 10-K and additional information, contained in our 2020 Form 10-K, including the risk factors identifieddiscussed under “Part I—Item“Item 1A. Risk Factors,” contained in our 2021 Form 10-K, as well as additional information contained elsewhere in this Report.

a reconciliation of our non-GAAP adjusted measures to the most comparable U.S. GAAP measures in the section “Non-GAAP Financial Measures.”

**Calculation of percentage change is not meaningful.

OurAs a member-owned, nonprofit finance cooperative, our primary objective as a member-owned cooperative lender is to provide cost-based financial products to our rural electric utility members with access to affordable, flexible financing products while also maintaining a sound, stable financial position required forand adequate liquidity to meet our financial obligations and maintain ongoing investment-grade credit ratings on our debt instruments. Our objectiveratings. Because maximizing profit is not our primary objective, the interest rates on lending products offered to maximize profit; therefore, the rates we charge our member-borrowersmember borrowers reflect our funding costs plus a spread to cover our operating expenses a provision forand estimated credit losses and generate sufficient earnings sufficient to cover interest owed on our debt obligations and achieve interest coverage to meet ourcertain financial objectives.target goals. Our goal is to earnfinancial goals focus on earning an annual minimum adjusted TIER of 1.10 and to maintainmaintaining 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 U.S. GAAP results due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under U.S. 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 U.S. 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, the majority of which are longer dated, than receive-fixed swaps, the majority of which are shorter dated, 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,Therefore, as discussed above under “Summary of Selected Financial Data,” management uses our non-GAAP adjusted resultsmeasures to evaluate our operatingfinancial performance. Our adjusted financial results include the realized net periodic contractual interest expense amounts on our interest rate swap settlement amountsswaps 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 $161 million and a TIER of 1.92 for the three months ended November 30, 2020 (“current 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 $82$90 million and a TIER of 0.800.48 for the current quarter, compared with net income of $145 million and TIER of 1.80 for the same prior year-to-date period.prior-year quarter. The significant variance between our reported results for the current-year periodscurrent quarter and the same prior-year periodsquarter was attributable to mark-to-market changes in the fair value of our derivative instruments. Our debt-to-equity ratio decreasedincreased to 30.6022.99 as of November 30, 2020,August 31, 2021, from 42.4020.17 as of May 31, 2020,2021, primarily due to an increase in equity from our reported net income of $305 million, which was partially offset by a decrease in equity from the combined impact of our reported net loss of $90 million and the authorized patronage capital retirement of patronage capital of $60$58 million authorized by the CFC Board of Directors in July 2020 and paid to members in September 2020.2021.

rates derived from third-party utility sector default data, which we use to inform the default rates used in measuring our collective allowance for credit losses, and in-person meetingan increase in the asset-specific allowance for loans outstanding to Brazos Electric Power Cooperative, Inc. (“Brazos”). Brazos is a Texas-based CFC power supply borrower that filed for bankruptcy in March 2021 due to its exposure to elevated wholesale electric power costs andduring the cancellationmid-February 2021 polar vortex (the “February 2021 polar vortex”). In comparison, we recorded a provision for credit losses of certain events because ofless than $1 million for the COVID-19 pandemic.same prior-year quarter, primarily attributable to an increase in the allowance resulting from growth in loans outstanding during the period.

Adjusted net income totaled $49$54 million and adjusted TIER was 1.241.27 for the current quarter, compared with adjusted net income of $44$57 million and adjusted TIER of 1.201.28 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. OurWhile our goal is to maintain an adjusted debt-to-equity ratio increased to 5.90of approximately 6.00-to-1, the adjusted debt-to-equity ratios of 6.27 as of November 30, 2020, from 5.85August 31, 2021 and 6.15 as of May 31, 2020, primarily attributable2021 were above our targeted goal, largely due to a reductionan increase in adjusted equity dueliabilities resulting from additional borrowings to the maturity and redemption of subordinated certificatesfund growth in our loan portfolio and the authorized patronage capital retirement amount,of $58 million by the CFC Board of Directors in July 2021, partially offset by our current-quarter adjusted net income for the current quarter. Our adjusted debt-to-equity ratio of 5.90 as of November 30, 2020, remained below our targeted threshold of 6.00-to-1.income.

We experienced an increase in adjusted net income of $5 million in the current quarter from the same prior-year quarter, largely attributable to an increase in adjustedAdjusted net interest income of $7increased $8 million, or 11%, to $72$81 million for the current quarter. Thequarter, driven by the combined impact of an increase in adjusted net interest income was driven byaverage interest-earning assets of $1,559 million, or 6%, and an increase in the adjusted net interest yield of 95 basis points, or 9%5%, to 1.05% and an increase in average interest-earning assets of $575 million, or 2%1.09%. The increase in our adjusted net interest yield reflected the favorable impact of a reduction in our adjusted average cost of borrowings of 3424 basis points to 3.16%2.92%, which was partially offset by a decrease in the average yield on interest-earning assets of 2516 basis points to 4.01%. As noted above, the lower interest rate environment had a favorable impact on our adjusted average cost of borrowings and contributed to the decrease in the average yield on interest-earnings assets.

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

Loans to members totaled $27,063$28,883 million as of November 30, 2020,August 31, 2021, an increase of $361$456 million, or 1%2%, from May 31, 2020. The increase was driven primarily by an increase in long-term loans of $492 million, partially offset by a decrease in line of credit loans of $132 million. We experienced increases in CFC distribution loans, NCSC loans and RTFC loans of $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. Subsequent to the quarter end, during the month of December 31, 2020, our outstanding loans to members increased by an additional $476 million, driven by2021, reflecting net increases in long-term and line of credit loans of $274$358 million and $202$98 million, respectively. We experienced increases in CFC distribution loans, CFC power supply loans and RTFC loans of $384 million, $67 million and $11 million, respectively, and decreases in CFC statewide and associate loans and NCSC loans of $5 million and $1 million, respectively.

Long-term loan advances totaled $1,271$727 million during the six months ended November 30, 2020,current quarter, of which approximately 85%62% was provided to members for capital expenditures and 5%approximately 35% was provided to members for operating expenses, primarily for the refinancingpayment of loans made by other lenders.elevated wholesale electric power costs incurred during the February 2021 polar vortex. In comparison, long-term loan advances totaled $1,387$807 million during the same prior year-to-date period,prior-year quarter, of which approximately 69%93% was provided to members for capital expenditures and 25%4% was provided for the refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling $204$109 million that were scheduled to reprice during the six months ended November 30, 2020.current quarter. Of this total, $198$105 million repriced to a new long-term fixed rate $5 million repriced to a long-term variable rate and $1$4 million was repaid in full. In comparison, CFC had long-term fixed-rate loans totaling $234$79 million that were scheduled to reprice during the same prior year-to-date period,prior-year quarter, of which $224$78 million repriced to a new long-term fixed rate $7 millionand the remainder either repriced to a long-term variable rate $3 million wasor were repaid in full.

We believe the overall credit quality of our loan portfolio remained highstrong as of November 30, 2020, as evidenced by our continued strong credit performance metrics. We had no delinquent loans as of either November 30, 2020 or MayAugust 31, 2020, and2021. Historically, we have not experienced any loan defaults or charge-offs since fiscal year 2017. During the fourth quarter of the fiscal year ended May 31, 2020 (“fiscal year 2020”), we classified one loan to a CFC power supply borrower, with an outstanding balance of $168 million as of May 31, 2020, as nonperforming, placed the loan on nonaccrual status and established an asset-specific allowance for credit losses of $34 million as of May 31, 2020. Payments received from the borrower on this loan resulted in a reduction in the outstanding balance to $153 million as of November 30, 2020. The asset-specific allowance for credit losses for this nonperforming loan, which remains on nonaccrual status, was $32 million as of November 30, 2020. We had no other loans classified as nonperforming or on nonaccrual status as of November 30, 2020 or May 31, 2020.

discuss further in the section “Credit Risk—Loan Portfolio Credit Risk.” WeIn addition, we generally lend to members on a senior secured basis, which reduces the risk of loss in the event of a borrower default. Loans outstanding to electric utility organizations of $28,439 million and $27,995 million as of August 31, 2021 and May 31, 2021, respectively, represented approximately 99% of total loans outstanding as of each date. Of our total loans outstanding, 94%93% were secured as of both November 30, 2020August 31, 2021 and May 31, 2020.2021.

The allowance for credit losses for our loan portfolio increasedWe had loans to $59four borrowers, including Brazos, totaling $232 million as of November 30, 2020, from $53August 31, 2021 and $237 million as of May 31, 2020,2021, classified as nonperforming as of each respective date. These nonperforming loans represented 0.80% and 0.84% of total loans outstanding as of August 31, 2021 and May 31, 2021, respectively. Each of the borrowers with loans outstanding classified as nonperforming, except Brazos, has continued to make scheduled loan payments. Brazos is not permitted to make scheduled loan payments without approval of the bankruptcy court. As a result, we have not received payments from Brazos, and its loans outstanding of $86 million and $85 million as of August 31, 2021 and May 31, 2021, respectively, were delinquent as of each respective date. Prior to Brazos’ bankruptcy filing in March 2021, we had not experienced any defaults or charge-offs in our electric utility and telecommunications loan portfolios since fiscal years 2013 and 2017, respectively.

Our allowance for credit losses and allowance coverage ratio increased to 0.22%$90 million and 0.31%, respectively, as of August 31, 2021, from 0.20%. The$86 million and 0.30%, respectively as of May 31, 2021, resulting from a current-quarter addition to the allowance of $4 million, predominantly attributable to an increase in the collective allowance for credit losses was primarily attributabledue to the impact of our June 1, 2020 adoption of the currenthigher expected credit loss (“CECL”) accounting standard, which replaces the incurred loss methodology for estimating credit losses with an expected loss methodology. The incurred loss model delayed the recognition of credit losses until it was probable that a loss had occurred, while the CECL model requires the immediate recognition of expected credit losses over the contractual term for financial instruments that fall within the scope of CECL at the date of origination or purchase of the financial instrument. The CECL model, which is applicable to the measurement of credit lossesdefault rates based on financial assets measured at amortized costthird-party proxy default data and certain off-balance sheet credit exposures, affects our estimates of the allowance for credit losses for our loan portfolio and the reserve for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees. The adoption of CECL resulted in an increase in ourthe asset-specific allowance for credit losses for our loan portfolio of $4 million and a corresponding decreaseloans outstanding to retained earnings of $4 million, recorded through a cumulative-effect adjustment. The impact on the reserve for credit losses for our off-balance sheet credit exposures related to unadvanced loan commitments and financial guarantees was not material. While CECL had no impact on our earnings at adoption on June 1, 2020, subsequent estimates of lifetime expected credit losses for newly recognized loans, unadvanced loan commitments and financial guarantees, as well as changes during the period in our estimate of lifetime expected credit losses for existing financial instruments subject to CECL, are now recognized in earnings.Brazos.

We discussprovide additional information on the credit quality of 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 onloan portfolio and the allowance for credit losses below in the section “Credit Risk—Allowance for Credit Losses” and in “Note 4—Loans” and “Note 5—Allowance for Credit Losses.”Losses” in this Report.

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 $26,017increased $352 million, or 1% to $27,778 million as of November 30, 2020, an increase of $17 million from MayAugust 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 markets2021, 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, 2020borrowings to fund the majority of our operations through November 30, 2020, at which date our cash balance had been reducedincrease in loans to $167 million. Debt activity during this period consisted of net increases in outstandingmembers. Outstanding dealer commercial paper of $715 million and member commercial paper, select notes and daily liquidity fund notes of $104 million, which together totaled $819 million. This increase was partially offset by net decreases in collateral trust bonds of $351 million, Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payable of $161 million, medium-term notes of $151 million, borrowings under the United States Department of Agriculture (“USDA”) Guaranteed Underwriter Program (“Guaranteed Underwriter Program”) of $71 million and members’ subordinated certificates of $68 million, which together totaled $802 million. Outstanding dealer commercial paper, which totaled $715$1,010 million as of November 30, 2020,August 31, 2021 was below our targeted maximum threshold of $1,250 million.

On October 8, 2020, we issued $400 million aggregate principal amountAugust 6, 2021, S&P Global Inc. (“S&P”) revised its outlook on CFC to stable from negative, stating that the outlook revision mainly reflected its view that the risk of 1.35% sustainability collateral trust bonds due March 15, 2031. On November 19, 2020, we closed on a $375 million committed loan facility (“Series R”)CFC experiencing substantial further losses stemming from the Federal Financing Bank under the Guaranteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2025. Each advance is subject to quarterly amortizationFebruary 2021 polar vortex had diminished. S&P also affirmed CFC’s issuer ratings. On September 13, 2021, Fitch Ratings (“Fitch”) affirmed CFC’s issuer ratings and a final maturity not longer than 30 yearsstable outlook. Our credit ratings by S&P, Moody’s Investors Service (“Moody’s”) and Fitch remain unchanged from August 31, 2021 through the date of this Report.

We provide additional information on our financing activities during the advance.current quarter, as well as information on the amendment to and extension of our three-year and five-year committed bank revolving line of credit agreements under “Consolidated Balance Sheet Analysis—Debt” and “Liquidity Risk.”

As of November 30, 2020,August 31, 2021, our sources ofavailable liquidity readily available for access totaled $7,317$6,585 million, consisting ofof: (i) $167 million in cash and cash equivalents;equivalents of $303 million; (ii) investments in debt securities with aan aggregate fair value of $552$570 million, which is subject to change based on changes in market value;values; (iii) up to $2,722$2,597 million available for access under committed bank revolving line of credit agreements; (iv) up to $1,275$975 million available under committed loan facilities under the Guaranteed Underwriter Program; and (v) up to $2,601$2,140 million available under a Farmer Mac revolving note purchase agreement, with Farmer Mac, subject to market conditions. In addition to our existing available liquidity of $6,585 million as of August 31, 2021, we expect to receive $1,653 million from scheduled repayments on long-term loans over the next 12 months.

Although our available liquidity along withof $6,585 million as of August 31, 2021, was $1,308 million below our abilitytotal debt obligations over the next 12 months of $7,892 million, we believe we can continue to access the capital marketsroll over member short-term investments, which totaled $3,643 million as a well-known seasoned issuer of debt and to issue debt toAugust 31, 2021, based on our expectation that our members andwill continue to reinvest their excess cash in private placements will be more than sufficient to meet the borrowing needs of our members and to cover the payment of long-term debt maturing over the 12 months subsequent to November 30, 2020.

We expect to continue accessing the dealer commercial paper market as a cost-effective means of satisfying our incremental short-term liquidity needs. Although the intra-period amount of outstanding dealer commercial paper outstanding may fluctuate based on our liquidity requirements, we intendour intent is to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper outstanding at an amount near or below $1,250 million for the foreseeable future. We expect to continue to be in compliance with the covenants underMaintaining our committed bank revolving line of credit agreements which will allow usand continuing to be in compliance with the covenants of these agreements serve to mitigate roll-overour rollover risk, as we can draw on these facilities, if necessary, to repay dealer or member commercial paper that cannot be refinanced with similar debt. In addition, under master repurchase agreements we have with two banks, we can obtain short-term funding in secured borrowing transactions by selling investment-grade corporate debt securities from our investment securities portfolio subject to an obligation to repurchase the same or similar securities at an agreed-upon price and date.

We provide additional information on our liquidity profile and our primary sources and uses of liquidity and our liquidity profile belowfunds, including projected amounts, by quarter, over each of the next six fiscal quarters through the quarter ending February 28, 2023, in the “Liquidity Risk” section “Liquidity Risk.”of this Report.

We believe that the COVID-19 pandemic has not had any significant negative effect onadversely affected our liquidity, and that our portfolio credit quality remains strong. In the first six monthsprimary objective of fiscal year 2021, we have remained able to access the capital markets, private funding programs andproviding our members forwith the capital required to repay maturing debt, and we have made long-term loan advances of $1.3 billion to our memberscredit products they need to fund their operations. In comparison,operations and that we made $1.4 billion of long-term loan advances in first six monthshave been able to successfully navigate the challenges of the prior year, priorCOVID-19 pandemic to the impacts of COVID-19.date. We also believe that we currently have sufficient liquidity to meet memberthe overall credit quality of our loan demand and repay maturing debt over the next 12 months.portfolio has not been adversely

affected by market, economic and other disruptions caused by the pandemic. Our electric utility cooperative borrowers operate in a sector identified by the United States (“U.S.”) government as one of the 16 critical infrastructure sectors because the nature of the services provided to residential customers and commercial customers in other industrythese 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 resilient to economic downturns. While our electric cooperative members continue to be subject to certain state-mandated suspensions on utility shut-offs due to nonpayment, weWe 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 member borrowers on a continuous basis and, to date, we believe that the pandemic has not had a significant negative impact on their overall financial performance.

We believe weAlthough most of the initial restrictions imposed at the onset of the pandemic in the U.S. have been able to navigate the challengesrelaxed or lifted as a result of the distribution of vaccines, the recent surge in COVID-19 pandemiccases could cause federal, state and local governments to date. As noted above, we currently believe that we have sufficient cash flowreimpose certain measures and liquidityrestrictions to cover our existing debt obligationscontain the spread of COVID-19 and meetmitigate public health risks in jurisdictions where significant outbreaks are detected. Such actions could possibly disrupt the borrowing needsbusiness, activities and operations of CFC, as well as the business and operations of our members. Although we believemembers, the overall credit qualityextent to which are highly uncertain and depend on future developments, which include, among others, the severity and duration of the recent COVID-19 resurgence, vaccination rates, the longer-term efficacy of vaccinations and the potential emergence of new, more transmissible severe variants.

As part of our loan portfolio remains high,credit risk management process, we continue to activelymaintain ongoing communications with our members, closely monitor conditionsdevelopments and developments, includingreview key credit metrics of our borrowers, to facilitate the timely identification and active management of loans to borrowers with potential credit weaknesses and assess any notable shifts in the credit quality of our loan portfolio as well as anydue to the pandemic or to other factors. To date, we believe that the pandemic has not had a significant negative impact on the overall financial performance of our financial position. Assuming no material adverse changesmembers.

As indicated in the credit quality“Liquidity Risk—Projected Near-Term Sources and Uses of Funds” section, we currently anticipate net long-term loan growth over the next 12 months of $696 million. We believe that our borrowers,current projected loan growth, coupled with our current estimated cost of funding this loan growth, will result in a slight increase in our net interest income and adjusted net interest income over this period. However, we expect a slight decrease in our net interest yield and adjusted net interest yield over the next 12 months, as we anticipate an increase in the cost of borrowings needed to fund our projected loan growth over the next 12 months. We expect that our financial performance for the fiscal year ended May 31, 2021 (“fiscal year 2021”) will be comparable to or slightly better than our financial performance for fiscal year 2020, absentadjusted debt-to-equity ratio, which excludes the impact of (i) the non-cash impairment chargederivative forward fair value gains and losses, will remain elevated above our target threshold of $31 million recorded6.00-to-1 in the fourth quarter of fiscal year 2020 resulting from the abandonment of an internal-use software project; (ii) the loan impairment charge of $34 million recorded in the fourth quarter of fiscal year 2020near term due to a projected increase in total debt outstanding to fund the establishmentanticipated growth in our loan portfolio. Our reported income and equity include the impact of an asset-specific allowance for the outstanding loan to the CFC power supply borrower noted above; and (iii) changesperiodic unrealized fluctuations in the fair value of our derivatives and investment securities thatinterest rate swaps. These periodic fluctuations are primarily driven by changes in marketexpected interest rates over the life of the swaps, which we are unable to predict because the majority of our swaps are long-term, with an average remaining life of approximately 15 years as of August 31, 2021. We therefore exclude the potential impact of derivative forward value gains and prices,losses from our forecasted adjusted net income-related measures.

August 31, 2021, of which $184 million was secured and $277 million was unsecured. In June 2021, Texas enacted securitization legislation that offers financing programs for qualifying electric cooperatives exposed to elevated power costs during the February 2021 polar vortex. We believe Brazos and Rayburn qualify for the financing programs, but we are currently uncertain whether Brazos will utilize the provisions available under this legislation. In filings made with the Public Utility Commission of Texas, Rayburn has stated that it intends to utilize the securitization legislation to finance its elevated power costs and has taken steps to begin the process to do so. However, there are many factors that may impact the outcome of a securitization transaction and the ultimate collectibility of Rayburn’s loans outstanding, which we are unable to predict.

See “Item 1A. Risk Factors” in our 20202021 Form 10-K for a discussion of the potential adverse impact of natural disasters, including weather-related events such as the February 2021 polar vortex, and widespread health emergencies, such as COVID-19, on our business, results of operations, financial condition and liquidity.

The preparation of financial statements in accordance with U.S. 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 underin “Note 1—Summary of Significant Accounting Policies” in our 20202021 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 certainCertain accounting policies asare considered 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 criticalThe determination of the allowance for expected credit losses over the remaining expected life of the loans in our loan portfolio involves a significant degree of management judgment and level of estimation uncertainty. As such, we have identified our accounting policies and estimates involvepolicy governing the determinationestimation of the allowance for credit losses and fair value. Below we have updated ouras a critical accounting policypolicy.We describe our allowance methodology and process for estimating the allowance for credit losses under the CECL model, which involves additional areas involving significant management judgment.“Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses–Loan Portfolio—Current Methodology” in our 2021 Form 10-K.

PriorWe identify the key inputs used in determining the allowance for loan losses, discuss the assumptions that require the most significant management judgment and provide and disclose the sensitivity of our allowance to hypothetical changes in the adoptionassumptions underlying the calculation of CECL on June 1, 2020, we maintained anour reported allowance based on an estimatefor credit losses of probable incurred losses inherent$86 million as of May 31, 2021 under “Item 7. MD&A—Critical Accounting Policies and Estimates” 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 over2021 Form 10-K. We regularly evaluate the remaining contractual life of the loanskey inputs and assumptions used in our portfolio. The methods utilized to estimatedetermining the allowance for credit losses key assumptions and quantitative and qualitative information considered by management in determining the appropriate allowance for credit losses is discussed in “Note 1—Summary of Significant Accounting Policies” of this Report. The determination of allowance for credit losses entails significant judgment on various risk factors, including our historical loss data, third-party default data and the assessment of a borrower’s capacity to meet its financial obligations. While our estimate of lifetime credit losses is sensitive to each of these inputs, the most notable input that affects the sensitivity of the allowance is the internal risk ratings assigned to each borrower.

Management has discussed the significant judgments, key inputs and assumptions in applying our critical accounting policiespolicy governing the measurement of the allowance for credit losses 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 ofdiscuss the risks associated withand uncertainties related to management’s judgments and estimates in applying our accounting policies that have been identified as a critical accounting policy under “Item 1A. Risk Factors—Regulatory and methods.Compliance Risks” in our 2021 Form 10-K. We provide additional information on the allowance for credit losses under “Credit Risk—Allowance for Credit Losses” section and in “Note 5—Allowance for Credit Losses” in this Report.

See “Note 1—Summary of Significant Accounting Policies” forWe provide information on recently adopted accounting standards adopted duringand the current fiscal year, as well asadoption impact on CFC’s consolidated financial statements and recently issued accounting standards not yet required to be adopted and the expected adoption impact in “Note 1—Summary of the adoption of these accounting standards.Significant Accounting Policies.” 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.

TheThis section below provides a comparative discussion of our consolidated results of operations between the three months ended November 30, 2020August 31, 2021 and 2019 and between the six months ended November 30, 2020 and 2019.2020. Following this section, we provide a comparativediscussion and analysis of material changes between amounts reported on our consolidated balance sheetssheet as of November 30, 2020August 31, 2021 and amounts reported as of May 31, 2020.2021. You should read these sections together with our “Executive Summary—Outlook for the Next 12 Months”Outlook” where we discuss trends and other factors that we expect will affect our future results of operations.

Net interest income, which is our largest source of revenue, 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 of 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 November 30,August 31, 2021 and 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 U.S. GAAP measures under “Non-GAAP Financial Measures.”