NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP DC

Reported Results

Net Income and TIER

The table below shows our net income and TIER for the periods presented and the variance between these periods. We provide a more detailed discussion of our reported results under the section “Consolidated Results of Operations.”

Table 2: Net Income and TIER

Q2 FY2024 versus Q2 FY2023

The decrease in net income was primarily driven by:

•A decrease in derivative gains of $40 million, attributable to less pronounced increases in interest rates across the swap curve during Q2 FY2024 compared to Q2 FY2023;

•A decrease in net interest income of $14 million, attributable to a decrease in the net interest yield of 22 basis points, or 22%, to 0.77%, partially offset by an increase in average interest-earning assets of $2,105 million, or 7%; and

•Anincrease in operating and other non-interest expenses of $4 million;

•A reduction in the provision for credit losses of $11 million. We recorded a provision for credit losses of $1 million for Q2 FY2024, resulted primarily from an increase inthe collective allowance due to loan portfolio growth. In comparison, we recorded a provision for credit losses of $12 million for Q2 FY2023, primarily driven byan increase in the asset-specific allowance for a nonperforming CFC power supply loan;

•A favorable shift from losses to gains recorded on our investment securities of $2 million, primarily due to period-to-period market fluctuations in fair value; and an increase in fee and other income of $3 million.

YTD FY2024 versus YTD FY2023

The increase in net income was primarily driven by:

•An increase in derivative gains of $56 million, primarily from an increase in the net interest rate received on our pay-fixed swaps, which drove the higher derivative cash settlements income for YTD FY2024;

•A reduction in the provision for credit losses of $14 million. We recorded a provision for credit losses of $1 million for YTD FY2024, resulted primarily from an increase in the collective allowance due to loan portfolio growth and a slight decline in the overall credit quality and risk profile of our loan portfolio. In comparison, we recorded a provision for credit losses of $15 million for YTD FY2023, driven primarily by an increase in the asset-specific allowance for a nonperforming CFC power supply loan as discussed above;

•A favorable shift from losses to gains recorded on our investment securities of $9 million, primarily due to period-to-period market fluctuations in fair value; and an increase in fee and other income of $3 million;

•A decrease in net interest income of $46 million, attributable to a decrease in the net interest yield of 35 basis points, or 31%, to 0.77%, partially offset by an increase in average interest-earning assets of $2,226 million, or 7%; and

•An increase in operating and other non-interest expenses of$11 million.

The decrease in TIER for Q2 FY2024 and YTD FY2024, compared to Q2 FY2023 and YTD FY2023, was primarily driven by increased interest expense during Q2 FY2024 and YTD FY2024.

Debt-to-Equity Ratio

Our debt-to-equity ratio decreased to 11.26 as of November 30, 2023, from 12.14 as of May 31, 2023, primarily due to an increase in equity resulting from our reported net income of $376 million for YTD FY2024, which was partially offset by a decrease in equity attributable to the CFC Board of Directors’ authorized patronage capital retirement in July 2023 of $72 million.

Non-GAAP Adjusted Results

Adjusted Net Income and Adjusted TIER

The table below shows our adjusted net income and adjusted TIER for the periods presented and the variance between these periods. Our financial goals focus on earning an annual minimum adjusted TIER of 1.10. We provide a more detailed discussion of our non-GAAP adjusted results under the section “Consolidated Results of Operations.”

Table 3: Adjusted Net Income and Adjusted TIER

Q2 FY2024 versus Q2 FY2023

The increase in adjusted net income was primarily driven by:

•An increase in adjusted net interest income of $10 million, driven by the combined impact of an increase in average interest-earning assets of $2,105 million, or 7%, and an increase in the adjusted net interest yield of 7 basis points, or 7%, to 1.12%;

•A reduction in the provision for credit losses of $11 million;

•A favorable shift from losses to gains recorded on our investment securities of $2 million; and an increase in fee and other income of $3 million;

•An increase in operating and other non-interest expenses of $4 million.

YTD FY2024 versus YTD FY2023

The increase in adjusted net income was primarily driven by:

•An increase in adjusted net interest income of $16 million, driven by the combined impact of an increase in average interest-earning assets of $2,226 million, or 7%, and an increase in the adjusted net interest yield of 3 basis points, or 3%, to 1.11%;

•A reduction in the provision for credit losses of $14 million;

•A favorable shift from losses to gains recorded on our investment securities of $9 million; and an increase in fee and other income of $3 million;

•An increase in operating and other non-interest expenses of $11 million.

Adjusted Debt-to-Equity Ratio

Our financial goals focus on maintaining an adjusted debt-to-equity ratio at approximately 6-to-1 or below. The adjusted debt-to-equity ratio increased to 6.38 as of November 30, 2023 from 6.04 as of May 31, 2023, due to the combined impact of an increase in adjusted liabilities resulting from additional borrowings to fund growth in our loan portfolio and a decrease in adjusted equity. The decrease in adjusted equity was primarily due to the early redemption during YTD FY2024 of $100 million of our $400 million subordinated deferrable debt due 2043 and the CFC Board of Directors’ authorized patronage capital retirement in July 2023, partially offset by our adjusted net income for YTD FY2024.

Lending and Credit Quality

Loans to members totaled $33,554 million as of November 30, 2023, an increase of $1,022 million, or 3%, from May 31, 2023, reflecting net increases in long-term and line of credit loans of $853 million and $169 million, respectively. Our loan portfolio composition remained largely unchanged from May 31, 2023 with 77% of loans outstanding to CFC distribution borrowers, 17% to CFC power supply borrowers, and 2% to RTFC borrowers as of November 30, 2023.

We believe the overall credit quality of our loan portfolio remained strong as of November 30, 2023. We had no loan charge-offs during Q2 FY2024 and YTD FY2024. We recorded a $1 million loan recovery to previously charged-off loan amounts during the three months ended August 31, 2023 (“Q1 FY2024”), which resulted in an annualized net recovery rate of 0.01% for YTD FY2024. In comparison, we experienced charge-offs totaling $15 million during Q2 FY2023 and YTD FY2023, which resulted in an annualized net charge-off rate of 0.19% and 0.10% for Q2 FY2023 and YTD FY2023, respectively.

We had one loan totaling $85 million classified as nonperforming as of November 30, 2023. In comparison, we had two loans totaling $89 million classified as nonperforming as of May 31, 2023. The reduction was due to the receipt of $4 million in payments for anonperforming loan.

Our allowance for credit losses and allowance coverage ratio increased to $56 million and 0.17%, respectively, as of November 30, 2023, from $53 million and 0.16%, respectively, as of May 31, 2023. The $3 million increase in the allowance for credit losses reflected an increase in the collective allowance of $4 million, partially offset by a reduction in the asset-specific allowance of$1 million.

Financing and Liquidity

Total debt outstanding increased $1,195 million, or 4%, to $32,195 million as of November 30, 2023, primarily due to borrowings to fund the increase in loans to members. Outstanding dealer commercial paper of $1,039 million as of November 30, 2023 was within our quarter-end target range of $1,000 million to $1,500 million.

In September 2023 and December 2023, Fitch Ratings (“Fitch”) and S&P Global Inc.(“S&P”), respectively, affirmed CFC’s credit ratings and stable outlook.

Our available liquidity consists of cash and cash equivalents, time deposits, investments in debt securities and availability under committed bank revolving line of credit agreements, committed loan facilities under the USDA Guaranteed Underwriter Program (“Guaranteed Underwriter Program”), and a revolving note purchase agreement with the Federal Agricultural Mortgage Corporation (“Farmer Mac”). As of November 30, 2023, our available liquidity totaled $6,556 million and was $824 million below our total scheduled debt obligations over the next 12 months of $7,380 million. In addition to our existing available liquidity, we expect to receive$1,516 million from scheduled long-term loan principal payments over the next 12 months. Subsequent to November 30, 2023, we closed on a $450 million Series U committed loan facility from the U.S. Treasury Department’s Federal Financing Bank under the Guaranteed Underwriter Program, resulting in an increase of the total availability under the Guaranteed Underwriter Program from $750 million as of November 30, 2023 to $1,200 million as of the date of this Report.

We believe we can continue to roll over our member short-term investments of $3,623 million based on our expectation that our members will continue to reinvest their excess cash primarily in short-term investment products offered by CFC. Our members historically have maintained a relatively stable level of short-term investments in CFC. Member short-term investments in CFC have averaged $3,589 million over the last 12 fiscal quarter-end reporting periods. Our available liquidity as of November 30, 2023 was $2,799 million in excess of, or 1.7 times over, our total scheduled debt obligations, excluding member short-term investments, over the next 12 months of $3,757 million.

RTFC and NCSC Consolidation

In April 2023 and June 2023, RTFC’s and NCSC’s members, respectively, approved the sale of RTFC’s business to NCSC. In October 2023, as part of the consolidation process between RTFC and NCSC, the Board of Directors approved the early retirement of allocated but unretired patronage capital at a discounted amount of $51 million, which was returned in cash to RTFC’s members in January 2024. In addition, on October 26, 2023, we early redeemed at par $12 million of members’ subordinated certificates, as approved by CFC’s and RTFC’s Board of Directors. The consolidation of RTFC and NCSC was finalized on December 1, 2023. We accounted for the transaction pursuant to ASC 805-50 “Transactions between Entities under Common Control.”

Outlook

As further described below in the “Liquidity Risk—Projected Near-Term Sources and Uses of Funds” section, we currently anticipate net long-term loan growth of $1,763 million over the next 12 months. We also expect that ourvariable-rate line of credit loans outstanding will remain at an elevated level over the same period.

In December 2023, the Federal Open Market Committee (“FOMC”) of the Federal Reserve signaled the expectation of no additional increases in the federal funds rate and pointed to a target rate of 5.4% by December 31, 2023. The FOMC expects a slowdown in the U.S. economy in 2024, with the median projected Gross Domestic Product (“GDP”) growth rate at 1.4% in 2024. In addition, the Federal Reserve expects that inflation will continue to remain above the 2% long-term target in 2024. As such, the FOMC projects federal funds rate cuts in 2024, bringing the target rate to 4.6% by December 31, 2024. Consensus market outlook for interest rates indicates declining interest rates across the yield curve in 2024. Although the yield curve is expected to remain inverted throughout 2024, given the expected drop in short-term interest rates, the yield curve inversion is expected to narrow in 2024.

Projected Reported Results

Based on our current forecast assumptions, including the yield curve forecast noted above, we project:

•A decrease in our reported net interest income and reported net interest yield over the next 12 months compared to the 12-month period ended November 30, 2023. See “Market Risk—Interest Rate Risk Assessment” for an additional discussion.

Projected Non-GAAP Adjusted Results

Based on our current forecast assumptions, including the yield curve forecast noted above, we project:

•A decrease in our adjusted net interest income and adjusted net interest yield over the next 12 months relative to the 12-month period ended November 30, 2023, primarily due to the current yield curve assumptions and our balance sheet position. See “Market Risk—Interest Rate Risk Assessment” for an additional discussion.

•A decrease in our adjusted net income and adjusted TIER over the next 12 months, primarily attributable to increased operating expenses and a projected decrease in adjusted net interest income.

•Our adjusted debt-to-equity ratio will remain above our target of 6-to-1, primarily due to the projected increase in total debt outstanding to fund anticipated growth in our loan portfolio and the early retirement of patronage capital as discussed above.

As stated above, we exclude the impact of unrealized derivative forward fair value gains and losses from our non-GAAP financial measures. As the majority of our swaps are long-term with an average remaining life of approximately 14 years as of November 30, 2023, the unrealized periodic derivative forward value gains and losses are largely based on future expected changes in longer-term interest rates, which we are unable to accurately predict for each reporting period over the next 12 months. Due to the difficulty in predicting these unrealized amounts, we are unable to provide without unreasonable effort a reconciliation of our forward-looking adjusted financial measures to the most directly comparable GAAP financial measures.