NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/

This section provides a comparative discussion of our consolidated results of operations between Q1 FY2026 and Q1 FY2025. Following this section, we provide a discussion and analysis of material changes between amounts reported on our consolidated balance sheets as of August 31, 2025 and May 31, 2025. You should read these sections together with our “Executive Summary—Outlook” in this Report where we discuss trends and other factors that we expect will affect our future results of operations.

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, and term structures our members select on their loans. 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 Q1 FY2026 and Q1 FY2025, 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 income (expense) in interest expense. We provide reconciliations of our non-GAAP financial measures to the most comparable U.S. GAAP financial measures under the section “Non-GAAP Financial Measures and Reconciliations” in this Report.

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 balance sheets, which are excluded from the calculation of average short-term borrowings presented in Table 5, totaled $469 million and $519 million as of August 31, 2025 and August 31, 2024, respectively.

(5)Collateral trust bonds represent secured obligations sold to investors in the capital markets, including those issued through both public offerings and private placement transactions.

(6)Other represents the average balance of lease liabilities and the interest expense for our finance leases.

(7)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.

(8)Includes other liabilities and equity.

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

(10)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 the annualized 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$7,217 million and$7,393 million for Q1 FY2026 and Q1 FY2025, respectively.

(11)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 annualized adjusted interest expense for the period divided by total average interest-bearing liabilities during the period.

(12)Adjusted net interest yield is calculated based on the annualized 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 $71 million for Q1 FY2026 increased $9 million from Q1 FY2025, driven by the combined impact of an increase in the net interest yield of 6 basis points, or 9%, to 0.75%, and an increase in average interest-earning assets of $2,223 million, or 6%.

•Average Interest-Earning Assets: The increase in average interest-earning assets of 6% was attributable to a growth in average total loans of $2,402 million, or 7%, partially offset by a decrease of $179 million in our average total investments, which include cash and investment securities. The average loans increase was driven by increases in average line of credit loans of $1,219 million, average long-term fixed-rate loans of $856 million and average long-term variable-rate loans of $327 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 between Q1 FY2026 and Q1 FY2025 was also attributable to borrowings under emergency line of credit loans by our members, primarily for recovery costs for Hurricane Helene, which impacted the Southeastern United States in September 2024.

•Net Interest Yield: The increase in the net interest yield of 6 basis points, or 9%, was primarily attributable to an increase in the average yield on interest-earning assets of 3 basis points to 4.72%, an increase in the benefit from non-interest bearing funding of 1 basis point to 0.30%, and a decrease in our average cost of borrowings of 2 basis points to 4.27%. 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 since August 31, 2024. The decrease in our average cost of borrowings was driven by the lower average cost of our short-term borrowings and variable-rate long-term debt due to the federal funds rate cuts since August 31, 2024, partially offset by fixed-rate long-term debt issued at higher interest rates since August 31, 2024.

Adjusted Net Interest Income

Adjusted net interest incomeof $91 million for Q1 FY2026 decreased $2 million from Q1 FY2025, driven by a decrease in the adjusted net interest yield of 9 basis points, or 9%, to 0.96%, partially offset by an increase in average interest-earning assets of $2,223 million, or 6%.

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

•Adjusted Net Interest Yield: The decrease in the adjusted net interest yield of 9 basis points, or 9%, was attributable to an increase in our adjusted average cost of borrowings of 13 basis points to 4.04%, which was partially offset by the combined impact of an increase in the average yield on interest-earning assets of 3 basis points to 4.72% and an increase in the benefit from non-interest bearing funding of 1 basis point to 0.28%. We discussed above the primary drivers for the increase in the average yield on interest-earning assets and the decrease in the average cost of borrowings. However, the primary driver of the increase in adjusted average cost of borrowings in Q1 FY2026 compared with Q1 FY2025 wasthe lower average yield earned on our interest rate swaps derivative cash settlements in Q1 FY2026 as discussed below.

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 $20 million for Q1 FY2026 compared with $32 million for Q1 FY2025. The decrease was primarily due to the lower net interest rates received on our pay-fixed swaps in Q1 FY2026, compared with Q1 FY2025, due to the federal funds rate cuts since August 31, 2024.

See “Non-GAAP Financial Measures and Reconciliations” in this Report 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 increased to $42 million as of August 31, 2025, compared with $41 million as of May 31, 2025. Our allowance coverage ratio remained steady at 0.11% as of both August 31, 2025 and May 31, 2025.

We recorded a provision for credit losses of $2 million and $1 million for Q1 FY2026 and Q1 FY2025, respectively, primarily from an increase in the collective allowance due to the growth in our loan portfolio.

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” in our 2025 Form 10-K. 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 (Loss)

Non-interest income (loss) 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 (loss) recorded in our consolidated statements of operations.

Table 7: Non-Interest Income (Loss)

The significant decrease in non-interest loss from Q1 FY2025 was primarily attributable to a reduction in the derivative 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 approximately$3 million for Q1 FY2026, compared with Q1 FY2025, primarily driven by period-to-period market fluctuations in fair value and a reduction in our debt security balance due to maturities. 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 August 31, 2025 and May 31, 2025, our derivatives portfolio included interest rate swap agreements not designated for hedge accounting, composed of pay-fixed swaps and receive-fixed swaps, with benchmark variable rate for the floating rate payments based on daily compounded Secured Overnight Financing Rate (“SOFR”). Additionally, treasury locks may be used to manage the interest rate risk assoc iated 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 August 31, 2025 and May 31, 2025.

The total notional amount for our interest rate swaps was $7,169 million and $7,252 million as of August 31, 2025 and May 31, 2025, respectively. The portfolio was primarily composed of longer-dated pay-fixed swaps, which accounted for approximately 80% of the outstanding notional amount as of both August 31, 2025 and May 31, 2025. 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 August 31, 2025, the average remaining maturity of our pay-fixed and receive-fixed swaps was 16 years and one year, respectively, compared with 16 years and two years, respectively, as of May 31, 2025.

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$32 millionfor Q1 FY2026, attributable to declines in interest rates across the swap curve, with the exception of the 30-year swap rate which increased slightly during Q1 FY2026. In comparison, we recorded derivative losses of$198 million for Q1 FY2025, primarily attributable to more pronounced declines in interest rates across the entire swap curve during Q1 FY2025.

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 August 31, 2025, May 31, 2025, August 31, 2024 and May 31, 2024.

Table 9: Comparative Swap Curves

Benchmark rates obtained from Bloomberg.

See “Note 9—Derivative Instruments and Hedging Activities” in this Report for additional information on our derivative instruments. Also refer to “Note 14—Fair Value Measurement” to the Consolidated Financial Statements in our 2025 Form 10-K 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 increased $4 million, or 12%, from Q1 FY2025, primarily attributable to an increase in operating expenses, driven by higher expenses reco rded for salaries and employee benefits, member relations, information technology and depreciation and amortization, partially offset by lower consulting expense.

Net Income (Loss) Attributable to Noncontrolling Interests

We recorded a net loss attributable to noncontrolling interests of less than $1 million for both Q1 FY2026 and Q1 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. 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.