NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/

This section provides a comparative discussion of our consolidated results of operations between Q1 FY2027 and Q1 FY2026. Following this section, we provide a discussion and analysis of material changes between amounts reported on our consolidated balance sheets as of August 31, 2026 and May 31, 2026. 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 FY2027 and Q1 FY2026, 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 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 $294 million and $469 million as of August 31, 2026 and August 31, 2025, 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)Subordinated deferrable debt represents unsecured obligations issued to investors in the capital markets, including those issued through both public offerings and private placement transactions.

(8)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.

(9)Includes other liabilities and equity.

(10)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.

(11)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$6,580 million and$7,217 millionfor Q1 FY2027 and Q1 FY2026, respectively.

(12)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.

(13)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 $76 million for Q1 FY2027 increased $5 million from Q1 FY2026, driven by the combined impact of an increase in the net interest yield of 3 basis points, or 4%, to 0.78%, and an increase in average interest-earning assets of $1,011 million, or 3%.

•Average Interest-Earning Assets: The increase in average interest-earning assets of $1,011 million, or 3%, was attributable to a growth in average total loans of $1,058 million, or 3%, partially offset by a decrease of $47 million in our average total investments, which include cash and investment securities. The average loans increase was driven by increases in average long-term fixed-rate loans of $1,088 million and average long-term variable-rate loans of $222 million as members continued to advance loans to fund capital expenditures and for working capital purposes. These increases were partially offset by a decrease inaverage line of credit loans of $252 million, primarily attributable to repayments of emergency line of credit loans with FEMA reimbursements received by our members, as well as repayments of line of credit loans using proceeds from term-debt borrowings, including long-term loans from CFC.

•Net Interest Yield: The increase in the net interest yield of 3 basis points, or 4%, was primarily attributable to a decrease in our average cost of borrowings of 7 basis points to 4.20% and an increase in the benefit from non-interest bearing funding of 1 basis point to 0.31%, partially offset by a decrease in the average yield on interest-earning assets of 5 basis points to 4.67%. The decrease in our average cost of borrowings was driven by the lower average cost of short-term borrowings and variable-rate long-term debt, while the decrease in the average yield on interest-earning assets was primarily attributable to lower average yields on long-term variable-rate and line of credit loans, both reflecting the federal funds rate cuts since August 31, 2025.

Adjusted Net Interest Income

Adjusted net interest income was $90 million for Q1 FY2027, a decrease of$1 million, or 1%, from Q1 FY2026, driven by a decrease in the adjusted net interest yield of 3 basis points, or 3%, to 0.93%, partially offset by an increase in average interest-earning assets of $1,011 million, or 3%.

•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 3 basis points, or 3%, was attributable to a decrease in the average yield on interest-earning assets of 5 basis points to 4.67%, partially offset by an increase in the benefit from non-interest bearing funding of 2 basis pointsto 0.30%. Although the average yield on interest-earning assets and the average cost of borrowings both decreased, as discussed above, adjusted average cost of borrowings remained unchanged at 4.04% between Q1 FY2027 and Q1 FY2026, as the decrease in theaverage cost of borrowings was offset by a lower average yield earned on our interest rate swaps derivative cash settlements in Q1 FY2027, 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 rates, as the benchmark variable rate for the floating rate payments is based on the daily compounded Secured Overnight Financing Rate (“SOFR”). 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 $14 million for Q1 FY2027 compared with $20 million for Q1 FY2026. The decrease was primarily due to lower net interest rates received on our pay-fixed swaps in Q1 FY2027, compared with Q1 FY2026, due to the federal funds rate cuts since August 31, 2025.

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 and allowance coverage ratio increased to $34 million and 0.09%, respectively, as of August 31, 2026, compared with $30 million and 0.08%, respectively, as of May 31, 2026.

We recorded a provision for credit losses of $4 million and $2 million for Q1 FY2027 and Q1 FY2026, respectively, primarily driven by increases in the collective allowance for both periods. The increase in collective allowance for Q1 FY2027 was driven primarily by longer weighted-average remaining maturity of our loan portfolio and higher credit risk associated with certain borrowers, partially offset by an improvement in the overall credit quality and risk profile of the loan portfolio, while theincrease in collective allowance for Q1 FY2026 was 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 2026 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 variances in non-interest income (loss) were primarily attributable to changes in the derivative gains (losses) recognized in our consolidated statements of operations.

Derivative Gains (Losses)

As of August 31, 2026 and May 31, 2026, our derivatives portfolio included interest rate swap agreements not designated for hedge accounting, composed of pay-fixed swaps and receive-fixed swaps, with the benchmark variable rate for the floating-rate payments based on daily compounded 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, 2026 and May 31, 2026.

The total notional amount for our interest rate swaps was $6,603 million and $6,566 million as of August 31, 2026 and May 31, 2026, respectively. The portfolio was primarily composed of longer-dated pay-fixed swaps, which accounted for approximately 82% of the outstanding notional amount as of both August 31, 2026 and May 31, 2026. 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, 2026, the average remaining maturity of our pay-fixed and receive-fixed swaps was 17 years and three years, respectively, compared with 17 years and four years, respectively, as of May 31, 2026.

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 gains of $97 million for Q1 FY2027, driven by increases in interest rates across the entire swap curve. In comparison, we recorded derivative losses of $32 million for Q1 FY2026, driven by declines in interest rates across the swap curve, with the exception of the 30-year swap rate, which increased slightly during Q1 FY2026.

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, 2026, May 31, 2026, August 31, 2025 and May 31, 2025.

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 2026 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 for Q1 FY2027 increased $1 million, or 3%, from Q1 FY2026, reflecting an increase in operating expenses, primarily driven by higher expenses for salaries and employee benefits, information technology, and depreciation and amortization, partially offset by lower consulting expense.

Net Income (Loss) Attributable to Noncontrolling Interests

We recorded net income attributable to noncontrolling interests of $1 million for Q1 FY2027, compared with a net loss attributable to noncontrolling interests of less than $1 million for Q1 FY2026, 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.