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.

Q2 FY2025 versus Q2 FY2024

The decrease in net income was primarily driven by:

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

•A decrease in fee and other income of$1 million;

•An increase in gains recorded on our derivatives portfolio of $2 million, primarily attributable to more pronounced increases in the medium- and longer-term swap interest rates during Q2 FY2025 compared to increases in thelonger-term swap interest rates during Q2 FY2024.

We recorded a provision for credit losses of $1 million for both Q2 FY2025 and Q2 FY2024, primarily attributable to an increase in the collective allowancedue to loan portfolio growth for both periods.

The decrease in TIER for Q2 FY2025, compared with Q2 FY2024, was primarily driven by increased interest expense during Q2 FY2025.

YTD FY2025 versus YTD FY2024

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

•A shift to losses from gains recorded on our derivatives portfolio of $386 million, primarily attributable to decreases in interest rates across the entire swap curve during YTD FY2025. In comparison, the medium- and longer-term swap interest rates increased during YTD FY2024;

•An increase in operating and other expenses of $8 million; and

•A decrease in net interest income of $3 million, attributable to a decrease in the net interest yield of 6 basis points, or 8%, to 0.71%, partially offset by an increase in average interest-earning assets of $1,777 million, or 5%;

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

We recorded a provision for credit losses of $2 million for YTD FY2025 primarily attributable to an increase in the collective allowancedue to loan portfolio growth. We recorded a provision for credit losses of $1 million for YTD FY2024 primarily attributable to an increase in the collective allowancedue to loan portfolio growth and a slight decline in the overall credit quality and risk profile of our loan portfolio.

The decrease in TIER for YTD FY2025, compared with YTD FY2024, was driven by the combined impact of the net loss primarily attributable to our derivative portfolio forward value change and the increased interest expense during YTD FY2025.

Debt-to-Equity Ratio

Beginning in Q2 FY2025, we have refined our methodology for calculating the debt-to-equity ratio to revise from total liabilities divided by total equity to total debt outstanding divided by total equity. This change was driven by a change in our methodology for calculating the adjusted debt-to-equity ratio which is discussed in more detail under the section “Non-GAAP Financial Measures and Reconciliations” in this Report. The debt-to-equity ratio under the revised methodology was 11.44 and 10.86 as of November 30, 2024 and May 31, 2024, respectively. The increase in the debt-to-equity ratio during YTD FY2025 was due to the combined impact of an increase in debt to fund loan growth and a decrease in total equity resulting from our reported net loss of $20 million for YTD 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

Q2 FY2025 versus Q2 FY2024

The decrease in adjusted net income was primarily driven by:

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

•A decrease in adjusted net interest income of $2 million, driven by a decrease in the adjusted net interest yield of 9 basis points, or 8%, to 1.03%, partially offset by an increase in average interest-earning assets of $1,737 million, or 5%; and

•A decrease in fee and other income of$1 million.

YTD FY2025 versus YTD FY2024

The decrease in adjusted net income was primarily driven by:

•An increase in operating and other expenses of $8 million; and

•A decrease in adjusted net interest income of approximately $1 million, driven by a decrease in the adjusted net interest yield of 7 basis points, or 6%, to 1.04%, partially offset by an increase in average interest-earning assets of $1,777 million, or 5%;

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

The decrease in adjusted TIER for Q2 FY2025 and YTD FY2025, compared with Q2 FY2024 and YTD FY2024, was primarily driven by increased adjusted interest expense during Q2 FY2025 and YTD FY2025.

Adjusted Debt-to-Equity Ratio

Beginning in Q2 FY2025, we have refined our methodology for calculating the adjusted debt-to-equity ratioin response to the continued growth in our loan portfolio. Consequently, we have revised our internally established adjusted debt-to-equity threshold from 6-to-1 to 8.5-to-1. The adjusted debt-to-equity ratio under the revised methodology was 7.37 and 7.27 as of November 30, 2024 and May 31, 2024, respectively. The increase in the adjusted debt-to-equity ratio during YTD FY2025 was due to an increase in adjusted total debt outstanding resulting from additional borrowings to fund growth in our loan portfolio, partially offset by an increase in adjusted total equity. The increase in adjusted total equity was primarily due to our adjusted net income of $128 million for YTD 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 more detailed discussion of the revised methodology for calculating the adjusted debt-to-equity ratio and 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 $35,614 million as of November 30, 2024, an increase of $1,072 million, or 3%, from May 31, 2024, reflecting net increases in long-term and line of credit loans of $559 million and $513 million, respectively. Of the increase in line of credit loans, 43% was attributable to borrowings under emergency line of credit loans by our members primarily for Hurricane Helene recovery costs and the remaining 57% was primarily attributable to funding provided for higher member working capital and capital expenditures requirements. Subsequent to November 30, 2024, our line of credit loans increased by an additional $776 million in December 2024, of which 30% was attributable to emergency lines of credit loans. Our loan portfolio composition remained largely unchanged from May 31, 2024 with 79% of loans outstanding to CFC distribution borrowers, 16% to CFC power supply borrowers,3%to NCSC electric borrowers, 2% to NCSC telecom borrowers as of November 30, 2024.

The overall credit quality of our loan portfolio remained strong as of November 30, 2024. We had no loan charge-offs during YTD FY2025 and YTD FY2024. We recorded $1 million in net loan recoveries to previously charged-off loan amounts during YTD FY2024, which resulted in an annualized net recovery rate of 0.01% for YTD FY2024.

We had one loan totaling $49 million classified as nonperforming as of both November 30, 2024 and May 31, 2024. In December 2024, we received a $6 million payment on this nonperforming loan which reduced its outstanding balance to $43 million.

Our allowance for credit losses and allowance coverage ratio was $51 million and 0.14%, respectively, as of November 30, 2024, compared with $49 million and 0.14%, respectively, as of May 31, 2024. The $2 million increase in the allowance for credit losses reflected an increase in the collective allowance of $3 million, partially offset by a reduction in the asset-specific allowance of $1 million during YTD FY2025.

Financing and Liquidity

Total debt outstanding increased $976 million, or 3%, to $33,694 million as of November 30, 2024, primarily due to borrowings to fund the increase in loans to members. During YTD FY2025, we issued long-term debt consisting primarily ofdealer medium-term notes, collateral trust bonds and notes payable to Farmer Mac totaling $1,850 million, of which $1,250 million was at an average fixed interest rate of 4.64% with an average term of eight years and $600 million was at floating interest rates with an average term of two years. Outstanding dealer commercial paper of $1,308 million as of November 30, 2024 was within our quarter-end target range of $1,000 million to $1,500 million.

In October 2024, we priced $300 million collateral trust bonds at a fixed rate of 5.23% with weighted average term of 13.3 years in a private placement transaction which will settle on January 23, 2025.

On November 1, 2024, we filed a prospectus supplement for a new CFC subordinated deferrable interest notes (“subordinated notes”) program with the SEC, that would allow us to issue subordinated notes under our existing shelf registration. Subsequent to Q2 FY2025, we issued a total of $34 million of 30-year subordinated notes under this new program as of the date of this Report.

During YTD FY2025, Fitch Ratings (“Fitch”) and S&P Global Inc.(“S&P”) affirmed CFC’s credit ratings and stable outlook.

Our available liquidity consists of cash and cash equivalents, investments in debt securities, 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, 2024, our available liquidity totaled $7,006 million and was $787 million below our total scheduled debt obligations over the next 12 months of $7,793 million. In addition to our existing available liquidity, we expect to receive $1,627 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 $3,184 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 $3,481 million over the last 12 fiscal quarter-end reporting periods. Our available liquidity as of November 30, 2024 was $2,397 million in excess of, or 1.5 times over, our total $4,609 million scheduled debt obligations over the next 12 months, excluding member short-term investments.

On December 5, 2024, we amended our three-year and four-year committed bank revolving line of credit agreements to extend the maturity dates of each facility by one year and increase the total commitments by $500 million resulting in a total commitment amount under the two facilities of $3,300 million, of which $3,298 million was available as of the date of this Report. On December 18, 2024, we closed on a $450 million Series V committed loan facility from the U.S. Treasury Department’s Federal Financing Bank (“FFB”) under the Guaranteed Underwriter Program, resulting in an increase of the total availability under the Guaranteed Underwriter Program from $1,200 million as of November 30, 2024 to$1,650 million as of the date of this Report. As a result, subsequent to Q2 FY2025, ouravailable liquidity increased by $950 million to $7,956 million as of the date of this Report.

Outlook

Macroeconomic Outlook

In December 2024, the Federal Open Market Committee (“FOMC”) of the Federal Reserve lowered the target range for federal funds rate by 25 basis points to 4.25% - 4.50%. The FOMC stated that (i) the U.S. economy has continued to expand at a solid pace, (ii) the unemployment, though having increased, remains low, and (iii) inflation, while elevated, has made progress toward the FOMC’s 2% objective. The median projected gross domestic product (“GDP”) annual growth rate for 2025 is 2.1%, a slight increase from its September 2024 projection of 2.0%. In addition, the Federal Reserve revised its inflation expectations, with the median expected Personal Consumption Expenditures (“PCE”) inflation for 2025 now at 2.5% (up from 2.1% in September 2024). The median FOMC projection for U.S. unemployment for 2025 dropped to 4.3% (from 4.4% in September 2024). Though warning that it will be cautious about further cuts, the FOMC remains strongly committed to supporting maximum employment and returning inflation to its 2% objective. The Federal Reserve anticipates inflation being stickier than previously expected, and mostly indicated two rate cuts in 2025, down from four at their September 2024 meeting. FOMC projections show 50 basis points of additional federal funds rate cuts in 2025, bringing the target rate range to 3.75% - 4.00% by December 31, 2025. Consensus market outlook for interest rates indicates declining interest rates across the yield curve in 2025, with shorter-term rates expected to decline faster than longer-term rates. The U.S Treasury curve un-inverted following the September 2024 FOMC meeting, and is expected to further steepen throughout 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 November 30, 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 November 30, 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 7.37 as of November 30, 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 November 30, 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 $1,680 million over the next 12 months. We also expect that our variable-rate line of credit loans outstanding will increase over the same period.