NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/

This section provides a comparative discussion of our consolidated results of operations between FY2025 and FY2024. Following this section, we provide a discussion and analysis of material changes in amounts reported on our consolidated balance sheet as of May 31, 2025 and 2024. You should read these sections together with our “Executive Summary—Outlook” where we discuss trends and other factors that we expect will affect our future results of operations. See “Item 7. MD&A—Consolidated Results of Operations” in our 2024 Form 10-K for a comparative discussion of our consolidated results of operations between FY2024 and FY2023.

Net Interest Income

Net interest income, which is our largest source of revenue, represents the difference between the interest income earned on our interest-earning assets 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 5 presents average balances for FY2025, FY2024 and FY2023, 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 5 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 financial measures to the most comparable U.S. GAAP financial measures under “Non-GAAP Financial Measures and Reconciliations.”

Table 5: Average Balances, Interest Income/Interest Expense and Average Yield/Cost

(1)Interest income on long-term, fixed-rate loans includes loan conversion fees, which are generally deferred and recognized as interest income using the effective interest method.

(2)Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.

(3)The average balance represents average monthly balances, which is calculated based on the month-end balance as of the beginning of the reporting period and the balances as of the end of each month included in the specified reporting period.

(4)Short-term borrowings reported on our consolidated balance sheets consist of borrowings with an original contractual maturity of one year or less. However, short-term borrowings presented in Table 5 consist of commercial paper, select notes and daily liquidity fund notes. Short-term borrowings presented on our consolidated balance sheets related to medium-term notes, Farmer Mac notes payable and other notes payable are reported in the respective category for presentation purposes in Table 5. The period-end amounts reported as short-term borrowings on our consolidated balances sheets, which are excluded from the calculation of average short-term borrowings presented in Table 5, totaled $451 million, $1,021 million and $367 million as of May 31, 2025, 2024 and 2023, respectively.

(5)Collateral trust bonds represent secured obligations sold to investors in the capital markets including also those issued in a private placement transaction.

(6)Net interest spread represents the difference between the average yield on total average interest-earning assets and the average cost of total average interest-bearing liabilities. Adjusted net interest spread represents the difference between the average yield on total average interest-earning assets and the adjusted average cost of total average interest-bearing liabilities.

(7)Includes other liabilities and equity.

(8)Net interest yield is calculated based on net interest income for the period divided by total average interest-earning assets for the period.

(9)Represents the impact of net periodic contractual interest amounts on our interest rate swaps during the period. This amount is added to interest expense to derive non-GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on net periodic swap settlement interest amount during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of interest rate swaps was $7,274 million, $7,597 million and $7,668 million for FY2025, FY2024 and FY2023, respectively.

(10)Adjusted interest expense consists of interest expense plus net periodic derivative cash settlements interest income (expense) during the period. Net periodic derivative cash settlements interest income (expense) is reported in our consolidated statements of operations as a component of derivative gains (losses). Adjusted average cost is calculated based on the adjusted interest expense for the period divided by total average interest-bearing liabilities during the period.

(11)Adjusted net interest yield is calculated based on adjusted net interest income for the period divided by total average interest-earning assets for the period.

Table 6 displays the change in net interest income between periods and the extent to which the variance for each category of interest-earning assets and interest-bearing liabilities is attributable to (i) changes in volume, which represents the change in the average balances of our interest-earning assets and interest-bearing liabilities or volume, and (ii) changes in the rate, which represents the change in the average interest rates of these assets and liabilities. The table also presents the change in adjusted net interest income between periods.

Table 6: Rate/Volume Analysis of Changes in Interest Income/Interest Expense

(1)The changes for each category of interest income and interest expense represent changes in either average balances (volume) or average rates for both interest-earning assets and interest-bearing liabilities. We allocate the amount attributable to the combined impact of volume and rate to the rate variance.

(2)For the net periodic derivative cash settlements interest amount, the variance due to average volume represents the change in the net periodic derivative cash settlements interest amount resulting from the change in the average notional amount of derivative contracts outstanding. The variance due to average rate represents the change in the net periodic derivative cash settlements amount resulting from the net difference between the average rate paid and the average rate received for interest rate swaps during the period.

(3)See “Non-GAAP Financial Measures and Reconciliations” in this Report for additional information on our adjusted non-GAAP financial measures.

Reported Net Interest Income

Reported net interest income of $261 million for FY2025 increased by $7 million, or 3%, from FY2024, driven by an increase in average interest-earning assets of $1,772 million, or 5%, partially offset by a decrease in the net interest yield of 2 basis points, or 3%, to 0.72%.

•Average Interest-Earning Assets: The increase in average interest-earning assets of 5% during FY2025 was primarily attributable to growth in average total loans of $2,082 million, or 6%, partially offset by a decrease of $310 million in our average total investments, which include cash, time deposits and investment securities. The average loans increase was driven primarily by an increase in average long-term fixed-rate loans of $1,407 million and an increase in average line of credit loans of $624 million, as members continued to advance loans to fund capital expenditures and for working capital purposes. In addition, the increase in line of credit loans during FY2025 was also attributable to borrowings under emergency line of credit loans by our members primarily for Hurricane Helene recovery costs.

•Net Interest Yield: The decrease in the net interest yield of 2 basis points, or 3%, was primarily attributable to thecombined impact ofan increase in our average cost of borrowings of 11 basis points to 4.28%, which was partially offset by an increase in the average yield on interest-earning assets of 7 basis points to 4.71% and an increase in the benefit from non-interest-bearing funding of 2 basis point to 0.29%. The increase in average yields on long-term fixed-rate loans was the primary driver for the increase in the average yield on interest-earning assets, while the interest rates for variable-rate and line of credit loans decreased due to the federal funds rate cuts during FY2025. Meanwhile, our average cost of borrowings increased due to the long-term debt issued at higher interest rates after May 31, 2024.

Adjusted Net Interest Income

Adjusted net interest income of $360 million for FY2025 decreased by$21 million, or 6%, from FY2024, driven by a decrease in the adjusted net interest yield of 11 basis points, or 10%, to 1.00%, partially offset by an increase in average interest-earning assets of $1,772 million, or 5%.

•Average Interest-Earning Assets: The increase in average interest-earning assets was driven by the growth in average total loans, as discussed above.

•Adjusted Net Interest Yield: The decrease in the adjusted net interest yield of 11 basis points, or 10%, was attributable to an increase in our adjusted average cost of borrowings of 22 basis points to 3.99%, which was partially offset by the combined impact of an increase in the average yield on interest-earning assets of 7 basis points to 4.71% and an increase in the benefit from non-interest-bearing funding of 4 basis points to 0.28%. The increase in adjusted average cost of borrowings was attributable to the long-term debt issued at higher interest rates after May 31, 2024, and a lower average yield earned on our interest rate swaps as discussed below under the “Derivatives Cash Settlements” section. We discussed above the primary drivers for the increases in the average yield on interest-earning assets.

Derivative Cash Settlements

We include the net periodic derivative cash settlements interest income (expense) amounts on our interest rate swaps in the calculation of our adjusted average cost of borrowings, which, as a result, also impacts the calculation of adjusted net interest income and adjusted net interest yield. Because our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, the net periodic derivative cash settlements interest income (expense) amounts generally change based on changes in the floating interest amount received each period. When floating rates increase during the period, the floating interest amounts received on our pay-fixed swaps increase and, conversely, when floating rates decrease, the floating interest amounts received on our pay-fixed swaps decrease. We recorded net periodic derivative cash settlements interest income of $99 million, $127 million and $34 million for FY2025, FY2024 and FY2023, respectively.

The decrease inderivative cash settlements interest income between FY2025 and FY2024 was due to the lower net interest rates received on our pay-fixed swapsin FY2025, compared with FY2024, due to the federal funds rate cuts during FY2025 and an $8 million gain related to treasury locks recorded in FY2024. See “Note 10—Derivative Instruments and Hedging Activities” in this Report for additional information on our treasury locks activity.

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

Provision (Benefit) for Credit Losses

Our provision (benefit) for credit losses for each period is driven by changes in our measurement of lifetime expected credit losses for our loan portfolio recorded in the allowance for credit losses. Our allowance for credit losses and allowance coverage ratio was $41 million and 0.11%, respectively, as of May 31, 2025. In comparison, our allowance for credit losses and allowance coverage ratio was $49 million and 0.14%, respectively, as of May 31, 2024.

We recorded a benefit for credit lossesof$8 million for FY2025, resulting from a reduction in the asset-specific allowance for a nonperforming loan attributable to higher actual than expected payments received on this loan during FY2025. Our collective allowance decreased slightly during FY2025, primarily due to an improved recovery rate on our power supply loan portfolio, partially offset by an increase attributable to loan portfolio growth. In comparison, we recorded a benefit for credit losses of $5 million for FY2024, resulting from a decrease of $8 million in the asset-specific allowance for a nonperforming CFC power supply loan and a recovery of $1 million attributable to additional loan payments received on the previously charged-off loans, partially offset by an increase of $4 million in the collective allowance. The increase in the collective allowance for FY2024 was due to the growth in our loan portfolio, a slight decline in the overall credit quality of our loan portfolio and slightly higher expected default rates derived from third-party utility sector default data used in estimating the allowance for credit losses.

We discuss our methodology for estimating the allowance for credit losses in “Note 1—Summary of Significant Accounting Policies—Allowance for Credit Losses—Loan Portfolio.” We also provide additional information on our allowance for credit losses below under section “Credit Risk—Allowance for Credit Losses” and “Note 5—Allowance for Credit Losses” in this Report.

Non-Interest Income

Non-interest income consists of fee and other income, gains and losses on derivatives not accounted for in hedge accounting relationships, and gains and losses on equity and debt investment securities, which consist of both unrealized and realized gains and losses.

Table 7 presents the components of non-interest income recorded in our consolidated statements of operations.

Table 7: Non-Interest Income

The significant variance in non-interest income between fiscal years was primarily attributable to changes in the derivative gains (losses) recognized in our consolidated statements of operations. In addition, we experienced a decrease in gains recorded on our debt and equity investment securities of $5 million for FY2025 compared with FY2024. We expect period-to-period market fluctuations in the fair value of our equity and debt investment securities, which we report together with realized gains and losses from the sale of investment securities in our consolidated statements of operations.

Derivative Gains (Losses)

As of May 31, 2025 and 2024, our derivatives portfolio included interest rate swap agreements not designated for hedge accounting, composed of pay-fixed swaps and receive-fixed swaps, with a majority of the benchmark variable rate for the floating-rate payments based on daily compounded Secured Overnight Financing Rate (“SOFR”) as of May 31, 2025.

Additionally, treasury locks may be used to manage the interest rate risk associated with future debt issuance or repricing and are typically designated as cash flow hedges. We did not have any derivatives designated as accounting hedges as of May 31, 2025 and 2024. See “Note 10—Derivative Instruments and Hedging Activities” in this Report for detailed information on our cash flow hedge activities during FY2025, FY2024 and FY2023.

The total notional amount for our interest rate swaps was $7,252 million and $7,366 million as of May 31, 2025 and 2024, respectively. The portfolio was primarily composed of longer-dated pay-fixed swaps, which accounted for approximately 80% and 79% of the outstanding notional amount as of May 31, 2025 and 2024, respectively. Consequently, changes in medium- and longer-term swap rates generally have a more pronounced impact on the net fair value of our swap portfolio. As of May 31, 2025, the average remaining maturity of our pay-fixed and receive-fixed swaps was 16 years and two years, respectively, compared with 18 years and two years, respectively, as of May 31, 2024.

Table 8 presents the components of net derivative gains (losses) recorded in our consolidated statements of operations. Derivative cash settlements interest income (expense) represents the net periodic contractual interest amount for our interest rate swaps during the reporting period. Derivative forward value gains (losses) represent the change in fair value of our interest rate swaps during the applicable reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts.

Table 8: Derivative Gains (Losses)

We recorded derivative losses of $6 million for FY2025, attributable to decreases in interest rates across the swap curve, with the exception of the 30-year swap rate, which increased slightly during FY2025. In comparison, we recorded derivative gains of $392 million for FY2024, primarily attributable to increases in the medium- and longer-term swap interest rates during FY2024.

We present comparative swap curves, which depict the relationship between swap rates at varying maturities, for our reported periods in Table 9 below.

Comparative Swap Curves

Table 9 provides comparative swap curves as of May 31, 2025, 2024, 2023 and 2022.

Table 9: Comparative Swap Curves

Benchmark rates obtained from Bloomberg.

See “Note 1—Summary of Significant Accounting Policies—Derivative Instruments” and “Note 10—Derivative Instruments and Hedging Activities” in this Report for additional information on our derivative instruments. Also refer to “Note 14—Fair Value Measurement” for information on how we measure the fair value of our derivative instruments.

Non-Interest Expense

Non-interest expense consists of salaries and employee benefit expense, general and administrative expenses and other miscellaneous expenses.

Table 10 presents the components of non-interest expense recorded in our consolidated statements of operations.

Table 10: Non-Interest Expense

Non-interest expense of $152 million for FY2025, increased by $23 million, or 18%, from FY2024, primarily attributable to an increase in operating expenses, driven by higher expenses recorded for salaries and employee benefits, consulting, depreciation and amortization, member relations and board expenses. In addition, during FY2025, we recorded an $8 million non-interest expense from an impairment loss on our equity investment in Riesel HoldCo, LLC obtained in FY2023 as part of the Brazos Sandy Creek Electric Cooperative Inc. bankruptcy filing. See “Note 4—Loans” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023 for a detailed discussion of this equity investment.

Net Income (Loss) Attributable to Noncontrolling Interests

We recorded a net income attributable to noncontrolling interests of less than $1 million for FY2025, which represented 100% of the results of operations of NCSC, as the members of NCSC own or control 100% of the interest in its company during FY2025. In comparison, we recorded a net income attributable to noncontrolling interests of $1 million for FY2024 and less than $1 million for FY2023, which represented 100% of the results of operations of NCSC and RTFC, as the members of NCSC and RTFC own or control 100% of the interest in their respective companies during FY2024 and FY2023. On December 1, 2023, we completed the RTFC sale transaction and RTFC was subsequently dissolved. The fluctuations in net income (loss) attributable to noncontrolling interests are primarily due to changes in the fair value of NCSC’s derivative instruments recognized in NCSC’s earnings.