NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP DC

Reported Results

Net Income (Loss) and TIER

The table below shows our net income (loss) 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 (Loss) and TIER

(1)Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period.

Q1 FY2025 versus Q1 FY2024

The variance between the net loss in Q1 FY2025 and the net income in Q1 FY2024 was primarily driven by:

•A shift to losses from gains recorded on our derivatives portfolio of $388 million, primarily attributable to decreases in interest rates across the entire swap curve during Q1 FY2025. In comparison, the medium- and long-term swap interest rates increased during Q1 FY2024;

•A decrease in net interest income of $3 million, attributable to a decrease in the net interest yield of 8 basis points, or 10%, to 0.69%, partially offset by an increase in average interest-earning assets of $1,816 million, or 5%; and

•An increase in operating and other expenses of approximately $4 million;

Partially offset by:

•An increase in gains recorded on our investment securities of $1 million, primarily due to period-to-period market fluctuations in fair value; and

•An increase in fee and other income of$1 million.

We recorded a provision for credit losses of $1 million for both Q1 FY2025 and Q1 FY2024, primarily attributable to an increase in the collective allowancedue to loan portfolio growth, as discussed in greater detail underthe section “Consolidated Results of Operations.”

The decrease in TIER for Q1 FY2025, compared to Q1 FY2024, was primarily driven by a net loss attributable to our derivative portfolio forward value change for Q1 FY2025, compared with a net income for Q1 FY2024, as discussed above.

Debt-to-Equity Ratio

Our debt-to-equity ratio increased to 12.03 as of August 31, 2024, from 11.01 as of May 31, 2024, due to the combined impact of an increase in debt to fund loan growth and a decrease in equity resulting from our reported net loss of $164 million for Q1 FY2025 and the CFC Board of Directors’ authorized patronage capital retirement of $47 million in July 2024.

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

Q1 FY2025 versus Q1 FY2024

The slight decrease in adjusted net income was primarily driven by:

•An increase in operating and other expenses of approximately $4 million;

Partially offset by:

•An increase in adjusted net interest income of $1 million, driven by an increase in average interest-earning assets of $1,816 million, or 5%, partially offset by a decrease in the adjusted net interest yield of 5 basis points, or 5%, to 1.05%;

•An increase in gains recorded on our investment securities of $1 million; and

•An increase in fee and other income of $1 million.

As discussed above, we recorded a provision for credit losses of $1 million for both Q1 FY2025 and Q1 FY2024, primarily attributable to an increase in the collective allowancedue to loan portfolio growth.

Adjusted Debt-to-Equity Ratio

We are moving away from maintaining the internally established threshold of a 6-to-1 adjusted debt-to-equity ratio and are in the process of making changes to how we calculate and manage our adjusted debt-to-equity ratio that will allow us to continue to execute our business objectives and to sustain our current credit ratings. The adjusted debt-to-equity ratio increased to 6.32 as of August 31, 2024 from 6.24 as of May 31, 2024, 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 $66 million for Q1 FY2025, partially offset by a decrease in equity of $47 million attributable to the CFC Board of Directors’ authorized patronage capital retirement in July 2024, as discussed above.

We provide a reconciliation of our non-GAAP adjusted measures to the most directly comparable U.S. GAAP measures under the section “Non-GAAP Financial Measures and Reconciliations” in this Report.

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 telecom.

Loans to members totaled $35,111 million as of August 31, 2024, an increase of $569 million, or 2%, from May 31, 2024, reflecting net increases in long-term and line of credit loans of $386 million and $183 million, respectively. Our loan portfolio composition remained unchanged from May 31, 2024 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 August 31, 2024.

We believe the overall credit quality of our loan portfolio remained strong as of August 31, 2024. We had no loan charge-offs or recoveries during Q1 FY2025. We recorded $1 million in net loan recoveries to previously charged-off loan amounts during Q1 FY2024, which resulted in an annualized net recovery rate of 0.01% for Q1 FY2024.

We had one loan totaling $49 million classified as nonperforming as of both August 31, 2024 and May 31, 2024.

Our allowance for credit losses and allowance coverage ratio was $50 million and 0.14%, respectively, as of August 31, 2024, compared with $49 million and 0.14%, respectively, as of May 31, 2024. The $1 million increase in the allowance for credit losses reflected an increase in the collective allowance of $1 million during Q1 FY2025.

Financing and Liquidity

Total debt outstanding increased $448 million, or 1%, to $33,166 million as of August 31, 2024, primarily due to borrowings to fund the increase in loans to members. We issued long-term debt consisting of collateral trust bonds and notes payable to Farmer Mac, totaling $550 million at an average fixed interest rate of 5.03% with an average term of 14 years during Q1 FY2025. Outstanding dealer commercial paper of $1,089 million as of August 31, 2024 was within our quarter-end target range of $1,000 million to $1,500 million. In September 2024, we issued anaggregate principal amount of dealer medium-term notes totaling $1,000 million, of which $700 million was at an average fixed interest rate of 4.34% with an average term of three years, and $300 million was at a floating interest rate with a term of three years. Our outstanding dealer commercial paper decreased to $155 million as of September 30, 2024 as we used the proceeds from the September 2024 issuance of dealer medium-term notes to pay down outstanding dealer commercial paper.

During Q1 FY2025, Fitch Ratings (“Fitch”) 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 August 31, 2024, our available liquidity totaled $6,950 million and was $499 million below our total scheduled debt obligations over the next 12 months of $7,449 million. In addition to our existing available liquidity, we expect to receive $1,598 million from scheduled long-term loan principal payments over the next 12 months. Subsequent to August 31, 2024, we executed a commitment letter for the guarantee by RUS of a $450 million loan facility from the U.S. Treasury Department’s Federal Financing Bank (“FFB”) under the Guaranteed Underwriter Program.

We believe we can continue to roll over our member short-term investments of $3,328 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 $3,503 million over the last 12 fiscal quarter-end reporting periods. Our available liquidity as of August 31, 2024 was $2,829 million in excess of, or 1.7 times over, our total $4,121 million scheduled debt obligations over the next 12 months, excluding member short-term investments.

Outlook

Macroeconomic Outlook

In September 2024, the Federal Open Market Committee (“FOMC”) of the Federal Reserve lowered the federal funds target rate by 50 basis points to 4.75% - 5.00%. The FOMC expects the U.S. economy to remain strong for the remainder of 2024, with the median projected gross domestic product (“GDP”) annual growth rate at 2.0%, a slight reduction from its June 2024 projection of 2.1%. In addition, the Federal Reserve revised lower its inflation expectations, with the Personal Consumption Expenditures (“PCE”) inflation for December 2024 now expected at +2.3% year-over-year (down from +2.6% in June). The FOMC projection for U.S. unemployment for the remainder of 2024 increased to 4.4% (from 4.0% in June). Despite a fairly positive economic outlook and inflation continuing to trend towards the 2% long-term target, the FOMC is also strongly committed to supporting maximum employment as the unemployment rate, although still low, has moved up. Updated FOMC projections now show 50 basis points of additional federal funds rate cuts for the remainder of 2024, bringing the target rate to 4.25% - 4.50% by December 31, 2024. Further, the FOMC projects additional 100 basis points in federal funds rate cuts in 2025, bringing the target rate to 3.25% - 3.50% by December 2025. Consensus market outlook for interest rates indicates declining interest rates across the yield curve for the remainder of 2024 and in 2025, with shorter-term rates expected to decline faster than longer-term rates. The U.S Treasury curve un-inverted following the September FOMC meeting, and is expected to further steepen throughout the remainder of 2024 and in 2025.

Projected Reported Results

Based on our current forecast assumptions, including the yield curve forecast noted above, we project increases in our reported net interest income and net interest yield over the next 12 months compared with the 12-month period ended August 31, 2024. See “Market Risk—Interest Rate Risk Assessment” in this Report 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 August 31, 2024, primarily due to the current yield curve assumptions and our interest-earning assets repricing faster than our interest-bearing liabilities combined with the impact of lower cost debt maturing in the near term, which will need to be refinanced at a relatively higher interest rate. See “Market Risk—Interest Rate Risk Assessment” in this Report 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 is expected to stay slightly above our current level of 6.32 as of August 31, 2024, 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 14 years as of August 31, 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.

Projected Loan Portfolio

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 $1,542 million over the next 12 months. We also expect that our variable-rate line of credit loans outstanding will remain at approximately the current level over the same period.