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 1: Net Income and TIER

Q3 FY2024 versus Q3 FY2023

The decrease in net income was primarily driven by:

•An unfavorable shift from gains to losses recorded in our derivative portfolio of $121 million, primarily attributable to decreases in interest rates across the entire swap curve during Q3 FY2024. In comparison, the interest rates across the swap curve increased during Q3 FY2023;

•A decrease in net interest income of $7 million, attributable to a decrease in the net interest yield of 14 basis points, or 16%, to 0.74%, partially offset by an increase in average interest-earning assets of $2,266 million, or 7%;

•A reduction in the benefit for credit losses of $5 million. We recorded a benefit for credit losses of $6 million for Q3 FY2024 compared to $11 million for Q3 FY2023, resulting primarily from decreases in the asset-specific allowance for both periods; and

•An increase in operating and other non-interest expenses of $5 million;

•A favorable shift from losses to gains recorded on our investment securities of $6 million, primarily due to period-to-period market fluctuations in fair value.

YTD FY2024 versus YTD FY2023

The decrease in net income was primarily driven by:

•A decrease in derivative gains of $64 million, primarily attributable to less pronounced increases in the medium- and longer-term swap interest rates during YTD FY2024 compared to YTD FY2023;

•A decrease in net interest income of $53 million, attributable to a decrease in the net interest yield of 28 basis points, or 27%, to 0.76%, partially offset by an increase in average interest-earning assets of $2,243 million, or 7%; and

•An increase in operating and other non-interest expenses of$16 million;

•A favorable shift from provision to benefit for credit losses of $9 million. We recorded a benefit for credit losses of $5 million for YTD FY2024, resulting primarily from a decrease in the asset-specific allowance, partially offset by an increase in the collective allowance due to loan portfolio growth. In comparison, we recorded a provision for credit losses of $4 million for YTD FY2023, driven primarily by increases in the collective allowance and in the asset-specific allowance;

•A favorable shift from losses to gains recorded on our investment securities of $14 million, primarily due to period-to-period market fluctuations in fair value; and an increase in fee and other income of $3 million.

The decreases in TIER for Q3 FY2024 and YTD FY2024, compared to Q3 FY2023 and YTD FY2023, were primarily driven by increased interest expense during Q3 FY2024 and YTD FY2024.

Debt-to-Equity Ratio

Our debt-to-equity ratio decreased to 11.52 as of February 29, 2024, from 12.14 as of May 31, 2023, primarily due to an increase in equity resulting from our reported net income of $408 million for YTD FY2024, which was partially offset by a decrease in equity of $10 million from CFC’s deconsolidation of RTFC and $113 million from CFC Board of Directors’ authorized patronage capital retirements, of which $72 million was paid to members in September 2023 and$41 million was paid from CFC to RTFC in December 2023 in connection with the RTFC sale transaction, which is discussed further under “Note 1—Summary of Significant Accounting Policies.”

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 2: Adjusted Net Income and Adjusted TIER

Q3 FY2024 versus Q3 FY2023

The increase in adjusted net income was primarily driven by:

•An increase in adjusted net interest income of $13 million, driven by the combined impact of an increase in average interest-earning assets of $2,266 million, or 7%, and an increase in the adjusted net interest yield of 7 basis points, or 6%, to 1.18%; and

•A favorable shift from losses to gains recorded on our investment securities of $6 million;

•A reduction in the benefit for credit losses of $5 million; and

•An increase in operating and other non-interest expenses of $5 million.

YTD FY2024 versus YTD FY2023

The increase in adjusted net income was primarily driven by:

•An increase in adjusted net interest income of $29 million, driven by the combined impact of an increase in average interest-earning assets of $2,243 million, or 7%, and an increase in the adjusted net interest yield of 4 basis points, or 4%, to 1.13%;

•A favorable shift from losses to gains recorded on our investment securities of $14 million;

•A favorable shift from provision to benefit for credit losses of $9 million; and an increase in fee and other income of $3 million;

•An increase in operating and other non-interest expenses of $16 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 6.29 as of February 29, 2024 from 6.04 as of May 31, 2023, due to an increase in adjusted liabilities resulting from additional borrowings to fund growth in our loan portfolio, partially offset by an increase in adjusted equity. The increase in adjusted equity was primarily due to our adjusted net income of $224 million for YTD FY2024, partially offset by a decrease in equity of$10 million from CFC’s deconsolidation of RTFC and$113 million from CFC Board of Directors’ authorized patronage capital retirements, as discussed above.

Lending and Credit Quality

We segregate our loan portfolio into segments based on the borrower member class, which consists of CFC distribution, CFC power supply, CFC statewide and associate, NCSC electric and NCSC telecommunications (“telecom”). Prior to the RTFC sale transaction on December 1, 2023, NCSC electric and NCSC telecom were referred to as NCSC and RTFC, respectively.

Loans to members totaled $34,412 million as of February 29, 2024, an increase of $1,880 million, or 6%, from May 31, 2023, reflecting net increases in long-term and line of credit loans of $1,473 million and $407 million, respectively. Our loan portfolio composition remained largely unchanged from May 31, 2023 with 78% of loans outstanding to CFC distribution borrowers, 16% to CFC power supply borrowers,3%to NCSC electric borrowers, 2% to NCSC telecom borrowers, and 1% to CFC statewide and associate borrowers as of February 29, 2024.

We believe the overall credit quality of our loan portfolio remained strong as of February 29, 2024. We had no loan charge-offs or recoveries during Q3 FY2024 and Q3 FY2023. We recorded $1 million in net loan recoveries to previously charged-off loan amounts during YTD FY2024. In comparison, we experienced net charge-offs totaling$15 million during YTD FY2023, which resulted in an annualized net charge-off rate of 0.06% for YTD FY2023.

We had one loan totaling $85 million classified as nonperforming as of February 29, 2024. 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 to pay off onenonperforming loan. In March 2024, we received a $36 million payment on the outstanding nonperforming loan, which reduced its balance to $49 million as of the date of this Report.

Our allowance for credit losses and allowance coverage ratio decreased to $49 million and 0.14%, respectively, as of February 29, 2024, from $53 million and 0.16%, respectively, as of May 31, 2023. The $4 million decrease in the allowance for credit losses reflected a reduction in the asset-specific allowance of $8 million, partially offset by an increase in the collective allowance of $4 million.

Financing and Liquidity

Total debt outstanding increased $1,542 million, or 5%, to $32,541 million as of February 29, 2024, primarily due to borrowings to fund the increase in loans to members. We issuedan aggregate principal amount of long-term dealer medium-term notes totaling $1,850 million during Q3 FY2024, of which $1,550 million was at an average fixed interest rate of 4.87% with an average term of five years and $300 million was at a floating interest rate with a term of three years. We also issued $100 million of 7.125% subordinated deferrable debt due in 2053 during Q3 FY2024. Outstanding dealer commercial paper was $899 million as of February 29, 2024.

During YTD FY2024, Fitch Ratings (“Fitch”), S&P Global Inc.(“S&P”) and Moody’s Investors Service (“Moody’s”) affirmed CFC’s credit ratings and stable outlook.

Our available liquidity consists of cash and cash equivalents, 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 February 29, 2024, our available liquidity totaled $6,595 million and was $358 million below our total scheduled debt obligations over the next 12 months of $6,953 million. In addition to our existing available liquidity, we expect to receive $1,535 million from scheduled long-term loan principal payments over the next 12 months.

We believe we can continue to roll over our member short-term investments of $3,206 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 $3,543 million over the last 12 fiscal quarter-end reporting periods. Our available liquidity as of February 29, 2024 was $2,848 million in excess of, or 1.8 times over, our total scheduled debt obligations, excluding member short-term investments, over the next 12 months of $3,747 million.

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 $1,847 million over the next 12 months. We also expect that ourvariable-rate line of credit loans outstanding will remainat approximately the current level over the same period.

In March 2024, the Federal Open Market Committee (“FOMC”) of the Federal Reserve signaled the expectation of no additional increases in the federal funds rate. The FOMC expects the U.S. economy to remain strong in 2024, with the median projected Gross Domestic Product (“GDP”) growth rate at 2.1% in 2024, up from 1.4% in its December 2023 projection. In addition, the Federal Reserve revised higher its inflation expectations and lowered its expected unemployment rate in 2024. Despite an improved economic outlook and inflation remaining above the 2% long-term target, the FOMC projects 75 basis points of 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 calendar year 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 slight increase in our reported net interest income. However, we expect a decrease in our reported net interest yield over the next 12 months compared to the 12-month period ended February 29, 2024. 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:

•Decreases in our adjusted net interest income and adjusted net interest yield over the next 12 months relative to the 12-month period ended February 29, 2024, primarily due to the current yield curve assumptions and our balance sheet position. See “Market Risk—Interest Rate Risk Assessment” for an additional discussion.

•Decreases 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.

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 15 years as of February 29, 2024, 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.