National Rural Utilities Cooperative Finance Corporation

04/10/2026 | Press release | Distributed by Public on 04/10/2026 09:47

Quarterly Report for Quarter Ending February 28, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2026 ("this Report") contains certain statements that are considered "forward-looking statements" as defined in and within the meaning of the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not represent historical facts or statements of current conditions. Instead, forward-looking statements represent management's current beliefs and expectations, based on certain assumptions and estimates made by, and information available to, management at the time the statements are made, regarding our future plans, strategies, operations, financial results or other events and developments, many of which, by their nature, are inherently uncertain and outside our control. Forward-looking statements are generally identified by the use of words such as "intend," "plan," "may," "should," "will," "project," "estimate," "anticipate," "target," "believe," "expect," "forecast," "continue," "potential," "opportunity," "outlook" and similar expressions, whether in the negative or affirmative. All statements about future expectations or projections, including statements about loan volume, the adequacy of the allowance for credit losses, operating income and expenses, leverage and debt-to-equity ratios, borrower financial performance, impaired loans, and sources and uses of liquidity, are forward-looking statements. Although we believe the expectations reflected in our forward-looking statements are based on reasonable assumptions, actual results and performance may differ materially from our forward-looking statements. Therefore, you should not place undue reliance on any forward-looking statement and should consider the risks and uncertainties that could cause our current expectations to vary from our forward-looking statements, including, but not limited to, legislative changes that could affect our tax status and other matters, demand for our loan products, lending competition, changes in the quality or composition of our loan portfolio, changes in our ability to access external financing, fluctuations in interest rates and market volatility, changes in the credit ratings on our debt, valuation of collateral supporting impaired loans, charges associated with our operation or disposition of foreclosed assets, nonperformance of counterparties to our derivative agreements, economic conditions and regulatory or technological changes within the rural electric industry, the costs and impact of legal or governmental proceedings involving us or our members, general economic conditions, governmental monetary and fiscal policies, the occurrence and effect of natural disasters, including severe weather events or public health emergencies, and the factors listed and described under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended May 31, 2025 ("2025 Form 10-K"), as well as any risk factors identified under "Part II-Item 1A. Risk Factors" in this Report. Forward-looking statements speak only as of the date they are made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect the impact of events, circumstances or changes in expectations that arise after the date any forward-looking statement is made.
INTRODUCTION
Our financial statements include the consolidated accounts of National Rural Utilities Cooperative Finance Corporation ("CFC") and National Cooperative Services Corporation ("NCSC"). Our principal operations are currently organized for management reporting purposes into two business segments, which are based on the accounts of each of the legal entities included in our consolidated financial statements: CFC and NCSC, which are discussed below.
CFC is a member-owned, nonprofit finance cooperative association with a principal purpose of providing financing to its members to supplement the loan programs of the Rural Utilities Service ("RUS") of the United States Department of Agriculture ("USDA"). CFC extends loans to its rural electric members for construction, acquisitions, system and facility repairs and maintenance, enhancements and ongoing operations to support the goal of electric distribution and generation and transmission ("power supply") systems of providing reliable, affordable power to the customers they serve. CFC also provides its members and associates with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a Section 501(c)(4) tax-exempt, member-owned cooperative, CFC's objective is not to maximize profit, but rather to offer members cost-based financial products and services. The interest rates on lending products offered to our member borrowers reflect our funding costs plus a spread to cover operating expenses and estimated credit losses, while also generating sufficient earnings to cover interest owed on our debt obligations and achieve certain financial target goals.
CFC's primary funding sources consist of a combination of public and private issuances of debt securities, member investments and retained equity. As a tax-exempt cooperative, CFC cannot issue equity securities as a source of funding.
NCSC is a member-owned taxable cooperative that is permitted to provide financing to two types of members: NCSC electric and NCSC telecommunication. NCSC electric members and associates consist of members of CFC, entities eligible to be members of CFC, government or quasi-government entities that own electric utility systems that meet the Rural Electrification Act definition of "rural," and for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. NCSC telecommunication ("telecom") members and associates consist of rural telecommunications members and their affiliates.
Cooperative Securities LLC ("Cooperative Securities") is a limited liability company and a wholly owned subsidiary of NCSC. Cooperative Securities is a broker-dealer registered with the U.S. Securities and Exchange Commission ("SEC"), and is a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. Cooperative Securities provides institutional debt placement services, which may include advising, arranging and structuring private debt financing transactions, for NCSC's members, and for-profit and not-for-profit entities that are owned, operated or controlled by, or provide a significant benefit to certain rural utility providers.
See "Item 1. Business" in our 2025Form 10-K for additional information on the business structure, mission, principal purpose, members and core business activities of each of these entities. Unless stated otherwise, references to "we," "our" or "us" relate to CFC and its consolidated entities. All references to members within this document include members, associates and affiliates of CFC and its consolidated entities, except where indicated otherwise.
The following MD&A is intended to enhance the understanding of our consolidated financial statements by providing information that we believe is relevant in evaluating our results of operations, financial condition and liquidity and the potential impact of material known events or uncertainties that, based on management's assessment, are reasonably likely to cause the financial information included in this Report not to be necessarily indicative of our future financial performance. Management monitors a variety of key indicators and metrics to evaluate our business performance. We discuss these key measures and factors influencing changes from period to period. Our MD&A is provided as a supplement to, and should be read in conjunction with, the unaudited consolidated financial statements included in this Report, our audited consolidated financial statements and related notes for the fiscal year ended May 31, 2025 ("fiscal year 2025") included in our 2025 Form 10-K and additional information, including the risk factors discussed under "Item 1A. Risk Factors," contained in our 2025 Form 10-K, as well as additional information contained elsewhere in this Report.
Our fiscal year begins on June 1 and ends on May 31. References to "Q3 FY2026" and "YTD FY2026" refer to three and nine months ended February 28, 2026, respectively. References to "Q3 FY2025" and "YTD FY2025" refer to three and nine months ended February 28, 2025, respectively.
NON-GAAP FINANCIAL MEASURES
Our reported financial results are determined in conformity with generally accepted accounting principles in the United States ("U.S. GAAP") and are subject to period-to-period volatility due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under U.S. GAAP. Our financial assets and liabilities expose us to interest-rate risk, therefore we use derivatives, primarily interest rate swaps, to economically hedge and manage the interest-rate sensitivity mismatch between our financial assets and liabilities. We are required under U.S. GAAP to carry derivatives at fair value on our consolidated balance sheets; however, the financial assets and liabilities for which we use derivatives to economically hedge are carried at amortized cost. Changes in interest rates and the shape of the swap curve result in periodic fluctuations in the fair value of our derivatives, which may cause volatility in our earnings because we do not apply hedge accounting for our interest rate swaps. As a result, the mark-to-market changes in our interest rate swaps are recorded in earnings. The majority of our derivative portfolio consists of pay-fixed swaps with longer maturities, leading to derivative losses when interest rates decline and derivative gains when interest rates rise. This earnings volatility generally is not indicative of the underlying economics of our business, as the derivative forward fair value gains or losses recorded each period may or may not be realized over time, depending on the terms of our derivative instruments and future changes in market conditions that impact the periodic cash settlement amounts of our interest rate swaps.
Therefore, management uses non-GAAP financial measures, which we refer to as "adjusted" measures, to evaluate financial performance. Our key non-GAAP financial measures are adjusted net income, adjusted net interest income, adjusted interest expense, adjusted net interest yield, adjusted times interest earned ratio ("TIER"), adjusted debt-to-equity ratio and members' equity. The most comparable U.S. GAAP financial measures are net income, net interest income, interest expense, net interest yield, TIER, debt-to-equity ratio and CFC equity, respectively. The primary adjustments we make to calculate these non-GAAP financial measures consist of (i) adjusting interest expense and net interest income to include the impact of net periodic derivative cash settlements income (expense) amounts; (ii) adjusting net income and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting total debt outstanding to exclude members' subordinated certificates and 50% of the subordinated deferrable debt; (iv) adjusting total equity to include members' subordinated certificates and 50% of the subordinated deferrable debt, and exclude cumulative derivative forward value gains (losses) and the amounts of accumulated other comprehensive income (loss) ("AOCI"); and (v) adjusting CFC equity to exclude derivative forward value gains (losses) and AOCI.
We believe our non-GAAP financial measures, which should not be considered in isolation or as a substitute for measures determined in conformity with U.S. GAAP, provide meaningful information and are useful to investors because management evaluates performance based on these metrics for purposes of (i) establishing short- and long-term performance goals; (ii) budgeting and forecasting; (iii) comparing period-to-period operating results, analyzing changes in results and identifying potential trends; and (iv) making compensation decisions. In addition, certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on non-GAAP financial measures, as the forward fair value gains and losses related to our interest rate swaps that are excluded from our non-GAAP financial measures do not affect our cash flows, liquidity or ability to service our debt. Our non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies due to differences in the way these measures are calculated. We provide a reconciliation of our non-GAAP adjusted measures to the most directly comparable U.S. GAAP measures in the section "Non-GAAP Financial Measures and Reconciliations."
EXECUTIVE SUMMARY
Reported Results
Net Income and TIER
Table 1 below shows our net income 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 and TIER
(Dollars in thousands) Q3 FY2026 Q3 FY2025
Variance
YTD FY2026 YTD FY2025
Variance
Net income $ 22,737 $ 86,136 $ (63,399) $ 46,977 $ 66,613 $ (19,636)
TIER(1)
1.06 1.24 (0.18) 1.04 1.06 (0.02)
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(1)Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period.
Table 2 below presents a reconciliation of net income between Q3 FY2026 and Q3 FY2025.
Table 2: Reconciliation of Net Income-Quarter
Q3 FY2026versus Q3 FY2025-Key Highlights
•We experienced a shift from gains to losses on our derivatives portfolio of$73 million. We recorded derivative losses of $32 million for Q3 FY2026, driven by declines in interest rates across the entire swap curve during Q3 FY2026. In comparison, we recorded derivative gains of $40 million for Q3 FY2025, attributable to increases in the longer-term swap interest rates during Q3 FY2025.
•Net interest income increased $13 million from Q3 FY2025, driven by an increase in the net interest yield of 10 basis points, or 14%, to 0.84% and an increase in average interest-earning assets of $1,831 million, or 5%.
•Operating and other expenses increased by $5 million from Q3 FY2025, driven by higher expenses for salaries and employee benefits and higher other non-interest expenses mainly from losses on extinguishment of debt.
•We recorded a benefit for credit losses of $7 million and $6 million for Q3 FY2026 and Q3 FY2025, respectively, primarily driven by decreases in the asset-specific allowance for a nonperforming and nonaccrual CFC power supply loan due to higher actual and expected payments on this loan during both periods.
•We recorded a shift from gains to losses on our investment securities totaling $1 million,primarily driven by period-to-period market fluctuations in fair value, including both realized and unrealized gains (loss), and lower debt security balance due to maturities.
•The decrease in TIER for Q3 FY2026 compared with Q3 FY2025 was driven by the lower net income and higher interest expense. The decline in net income was primarilyattributable to our derivative portfolio forward value change as discussed above.
Table 3 below presents a reconciliation of net income between YTD FY2026 and YTD FY2025.
Table 3: Reconciliation of Net Income-YTD
YTD FY2026 versus YTD FY2025-Key Highlights
•Losses on our derivatives portfolio increased $34 million compared to YTD FY2025. We recorded derivative losses of $83 million for YTD FY2026, driven by declines in interest rates across the entire swap curve. In comparison, we recorded derivative losses of $49 million for YTD FY2025, driven by declines in interest rates across the swap curve, with the exception of the 30-year swap rate, which increased slightly during YTD FY2025.
•Net interest income increased $29 million from YTD FY2025,driven by an increase in the net interest yield of 6 basis points, or 8%, to 0.78% and an increase in average interest-earning assets of $2,055 million, or 6%.
•Operating and other expenses increased by $11 million from YTD FY2025, driven by higher operating expense for salaries and employee benefits and other general and administrative, as well as higher other non-interest expenses, primarily due to losses on extinguishment of debt.
•Gains on our investment securities decreased $7 million from YTD FY2025, primarily driven by period-to-period market fluctuations in fair value, including both realized and unrealized gains (loss), and lower debt security balance due to maturities.
•We recorded a benefit for credit losses of $5 million and $4 million for YTD FY2026 and YTD FY2025, respectively, primarily driven by decreases in the asset-specific allowance for a nonperforming and nonaccrual CFC power supply loan, partially offset by increases in the collective allowance due to growth in our loan portfolio in both periods.
•The decrease in TIER for YTD FY2026 compared with YTD FY2025 was driven by the lower net income, primarily attributable to our derivative portfolio forward value change as discussed above, and the increase in interest expense during YTD FY2026.
Debt-to-Equity Ratio
The debt-to-equity ratio was 11.74 and 11.20 as of February 28, 2026 and May 31, 2025, respectively. The increase in the debt-to-equity ratio during YTD FY2026 was due to the combined impact of an increase in debt to fund loan growth and a decrease in total equity. The decrease in total equity was primarily driven by the CFC Board of Directors' authorized patronage capital retirement of $53 million in July 2025, partially offset by our reported net income of $47 million for YTD FY2026.
Non-GAAP Adjusted Results
Adjusted Net Income and Adjusted TIER
Table 4 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 4: Adjusted Net Income and Adjusted TIER
(Dollars in thousands) Q3 FY2026 Q3 FY2025
Variance
YTD FY2026 YTD FY2025
Variance
Adjusted net income
$ 67,699 $ 66,303 $ 1,396 $ 180,636 $ 194,534 $ (13,898)
Adjusted TIER
1.19 1.19 - 1.17 1.20 (0.03)
Table 5 below presents a reconciliation of adjusted net income between Q3 FY2026 and Q3 FY2025.
Table 5: Reconciliation of Adjusted Net Income-Quarter
Q3 FY2026versus Q3 FY2025-Key Highlights
•Adjusted net interest income increased by $5 millionfrom Q3 FY2025, driven primarily by an increase in average interest-earning assets of $1,831 million, or 5%.
•We discuss the variances in the other components above under the section "Reported Results-Net Income and TIER- Q3 FY2026 versus Q3 FY2025-Key Highlights."
•Adjusted TIER for Q3 FY2026 was unchanged from Q3 FY2025, as the increase in adjusted net income was offset by the increase in adjusted interest expense.
Table 6 below presents a reconciliation of adjusted net income between YTD FY2026 and YTD FY2025.
Table 6: Reconciliation of Adjusted Net Income-YTD
YTD FY2026versus YTD FY2025-Key Highlights
•Adjusted net interest income increased slightly from YTD FY2025,driven by an increase in average interest-earning assets of $2,055 million, or 6%, largely offset by a decrease in the adjusted net interest yield of 6 basis points, or 6%, to 0.96%,
•We discuss the variances in the other components above under the section "Reported Results-Net Income and TIER- YTD FY2026 versus YTD FY2025-Key Highlights."
•The decrease in adjusted TIER for YTD FY2026 compared with YTD FY2025 was driven by an increase in adjusted interest expense and a decrease in adjusted net income during YTD FY2026.
Adjusted Debt-to-Equity Ratio
Our financial goals focus on maintaining an adjusted debt-to-equity ratio at approximately 8.5-to-1 or below. The adjusted debt-to-equity ratio was 7.76 and 7.39 as of February 28, 2026 and May 31, 2025, respectively. The increase in the adjusted debt-to-equity ratio during YTD FY2026was primarily driven by an increase in adjusted total debt outstanding, resulting from additional borrowings to fund growth in our loan portfolio, partially offset by a slight increase in adjusted total equity. The increase in adjusted total equity was primarily attributable to adjusted net income of $181 million for YTD FY2026, partially offset by the net decrease in subordinated debtandthe CFC Board of Directors' authorized patronage capital retirement of $53 million in July 2025.
We provide a more detailed discussion of the 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 $38,750 million as of February 28, 2026, an increase of $1,670 million, or 5%, from May 31, 2025, reflecting net increases in long-term and line of credit loans of $1,076 million and $594 million, respectively. Our loan portfolio composition remained largely unchanged from May 31, 2025 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 February 28, 2026.
The overall credit quality of our loan portfolio remained strong as of February 28, 2026. We recorded a charge-off of $0.3 million related to a CFC electric power supply loan during Q3 FY2026 and YTD FY2026. We had no charge-offs during YTD FY2025. We had one loan totaling $13 million and $26 millionclassified as nonperforming and nonaccrual as of February 28, 2026 and May 31, 2025, respectively. The decrease in this outstanding loan balance reflected $13 million payments received during YTD FY2026 and an immaterial charge-off during Q3 FY2026, as discussed above. Subsequent to the quarter ended February 28, 2026, we received $5 million payments on this loan which reduced its outstanding balance to $8 million.
Our allowance for credit losses and allowance coverage ratio were $36 million and 0.09%, respectively, as of February 28, 2026, compared with $41 million and 0.11%, respectively, as of May 31, 2025. The $5 million decrease in the allowance for credit losses reflected a $9 million reduction in the asset-specific allowance attributable to higher-than-expected payments received on a nonperforming and nonaccrual CFC power supply loan, partially offset by a $4 million increase in the collective allowance,primarilydue to growth in our loan portfolio.
Financing and Liquidity
Total debt outstanding increased $1,578 million, or 5%, to $36,347 million as of February 28, 2026, compared with May 31, 2025, primarily due to borrowings to fund the increase in loans to our members. During YTD FY2026, we issued:
•Unsecured long-term dealer medium-term notes to institutional investors totaling $3,975 million, of which $2,350 million was at a weighted average fixed interest rate of 4.09% and an average term of three years and $1,625 million was at floating interest rates with an average term of 16 months;
•Unsecured subordinated notes of $150 million at a fixed interest rate of 5.75%, due 2056 and noncallable for five years, representing the first tranche of a $600 million private placement of subordinated notes priced in November 2025; the remaining $450 million is scheduled to fund in April 2026; and
•Secured long-term notes under the Farmer Mac revolving note purchase agreement of $250 million.
During YTD FY2026, we redeemed all $300 million in principal amount of our subordinated deferrable debt due 2043 (the "2043 Notes") at par plus accrued interest and recognized $2 million and $3 million of losses on early extinguishment of debt related to unamortized debt issuance costs in our consolidated statements of operations for Q3 FY2026 and YTD FY2026, respectively. On March 20, 2026, notice was provided to investors that we will redeem all $350 million in principal amount of our 5.25% fixed-to-floating rate subordinated deferrable debt due 2046 (the "2046 Notes") on April 20, 2026. The 2046 Notes will be redeemed at par plus accrued interest. As a result, we expect to recognize an immaterial amount of losses on early extinguishment of debt related to unamortized debt issuance costs of the 2046 Notes in our consolidated statements of operations.
Subsequent to the quarter ended February 28, 2026, we redeemed all $600 million of our 4.45%fixed-rate dealer medium-term notes due March 2026 at par plus accrued interest.
In November 2025, we amended our three-year and four-year committed bank revolving line of credit agreements to extend the maturity date of each facility by one year and to increase the total commitments by $200 million, resulting in a total commitment amount under the two facilities of $3,500 million.
In January 2026, we closed on a $450 million Series W committed loan facility with the U.S.Treasury Department's Federal Financing Bank ("FFB") under the USDA Guaranteed Underwriter Program ("Guaranteed Underwriter Program"). As a result of this transaction, total borrowing capacity available to us under the Guaranteed Underwriter Program increased to $1,800 million.
During YTD FY2026,Fitch Ratings ("Fitch"), S&P Global Inc. ("S&P") and Moody's Investors Service ("Moody's") affirmed CFC's credit ratings and stable outlook, and at our request, S&P withdrew its "A-2" short-term issuer rating on CFC in June 2025.
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 Guaranteed Underwriter Program, and a revolving note purchase agreement with Farmer Mac. As of February 28, 2026, our available liquidity totaled $8,148 million
and was $2,022 million less than our total scheduled debt obligations over the next 12 months of $10,170 million, of which $2,908 million, or 29%, represented member short-term investments. In addition to our existing available liquidity, we expect to receive $2,060 million from long-term loan principal payments over the next 12 months.
We believe we can continue to roll over our member short-term investments 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 $3,227 million over the last 12 fiscal quarter-end reporting periods. Our available liquidity as of February 28, 2026 was $886 million in excess of, or 1.1 times over, our total $7,262 million scheduled debt obligations over the next 12 months, excluding member short-term investments.
Outlook
Macroeconomic Outlook
Geopolitical tensions, including the ongoing conflict involving Iran, have contributed to uncertainty in the broader macroeconomic environment, including volatility in energy markets and continued concerns regarding inflation and interest rates. Although CFC has not identified a material direct impact of these developments on its financial condition, results of operations or liquidity as of the date of this report, a prolonged period of geopolitical instability could contribute to higher borrowing costs, increased operating and capital costs for CFC's members, and broader market volatility. CFC continues to monitor these developments and the potential effects on the interest rate environment, capital markets and member operating conditions.
Following its meeting held in March 2026, the Federal Open Market Committee ("FOMC") of the Federal Reserve announced that it would hold the federal funds rate in the range of 3.50%-3.75%. The FOMC noted that uncertainty about the economic outlook remains elevated, while reaffirming its commitment to achieving inflation at 2 percent over the longer run. The Committee stated that it continues to monitor developments and is prepared to adjust monetary policy as new risks emerge. The Committee's future assessments will take into account labor market conditions, inflation pressures, and financial and international developments.
The Federal Reserve's March 2026 median projection for the annual growth rate of real gross domestic product ("GDP") in 2026 is 2.4%, up from 2.3% in its December 2025 projection. The median projection for Personal Consumption Expenditures ("PCE") inflation in 2026 increased to 2.7% from 2.4% previously. The U.S. unemployment rate in 2026 is projected to average 4.4%, unchanged from its December 2025 projection.
Federal funds futures markets anticipate no further rate cuts in calendar year 2026 and one rate cut of 25 basis points in calendar year 2027. If this rate cut occurs, the federal funds target rate would decline to a range of 3.25%-3.50% by the end of 2027. Overall the market expects the yield curve to steepen, as short-term interest rates are forecasted to decline, while longer-term rates are expected to remain near current levels.
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 February 28, 2026. See "Market Risk-Interest Rate Risk Assessment" in this Report for additional information.
Projected Non-GAAP Adjusted Results
Based on our current forecast assumptions, including the yield curve forecast noted above, we project:
•Increases in our adjusted net interest income and adjusted net interest yield over the next 12 months relative to the 12-month period ended February 28, 2026, primarily driven by an increase in interest-earning assets due to projected loan growth and by projected lower adjusted average cost of funding. The projected decline in adjusted average cost of funding reflects changes in funding mix and lower variable rate debt cost, partially offset by lower expected interest rate swaps derivative cash settlements andthe refinancing of maturing lower-cost long-term debt at forecasted higher interest rates. See "Market Risk-Interest Rate Risk Assessment" in this Report for additional information.
•A slight increase in our adjusted net income over the next 12 months, primarily driven by higher adjusted net interest income, partially offset by higher projected operating expenses.
•A slight decrease in adjusted TIER over the next 12 months, primarily attributable to increases in projected non-interest expenses, mainly operating expenses.
•A decrease in our adjusted debt-to-equity ratio, primarily due to a projected increase in total adjusted equity driven by an anticipated private placement subordinated debt issuance in April 2026, which outweighs the increase in debt outstanding to fund anticipated growth in our loan portfolio.
As stated above, we exclude the impact of unrealized derivative forward fair value gains (losses) from our non-GAAP financial measures. As the majority of our swaps are long-term with an average remaining life of approximately 15 years as of February 28, 2026, the unrealized periodic derivative forward value gains (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
Based on our current forecast assumptions, we anticipate net loan growth of $1,632 million over the next 12 months. Historically, line of credit loans activity has been fairly unpredictable due to the short-term and dynamic usage patterns of these facilities. Our baseline forecast scenario takes into account known likely near-term activity as well as historical analysis.
CONSOLIDATED RESULTS OF OPERATIONS
This section provides a comparative discussion of our consolidated results of operations between Q3 FY2026 and Q3 FY2025, and between YTD FY2026and YTD FY2025. Following this section, we provide a discussion and analysis of material changes between amounts reported on our consolidated balance sheets as of February 28, 2026 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 7 presents average balances for Q3 FY2026, Q3 FY2025, YTD FY2026and YTD 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 7 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 7: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
Q3 FY2026 Q3 FY2025
(Dollars in thousands) Average Balance Interest Income/Expense Average Yield/Cost Average Balance Interest Income/Expense Average Yield/Cost
Assets:
Long-term fixed-rate loans(1)
$ 31,958,745 $ 365,720 4.64 % $ 30,953,865 $ 347,021 4.55 %
Long-term variable-rate loans 1,374,199 18,202 5.37 889,537 13,699 6.25
Line of credit loans 4,878,978 64,911 5.40 4,404,359 65,998 6.08
Other, net(2)
- (597) - - (502) -
Total loans 38,211,922 448,236 4.76 36,247,761 426,216 4.77
Cash, time deposits and investment securities
246,798 1,334 2.19 380,206 2,644 2.82
Total interest-earning assets $ 38,458,720 $ 449,570 4.74 % $ 36,627,967 $ 428,860 4.75 %
Other assets, less allowance for credit losses(3)
1,260,478 1,237,658
Total assets(3)
$ 39,719,198 $ 37,865,625
Liabilities:
Commercial paper $ 3,288,937 $ 31,262 3.85 % $ 2,752,959 $ 32,073 4.72 %
Other short-term borrowings 1,690,822 14,926 3.58 1,583,025 16,923 4.34
Short-term borrowings(4)
4,979,759 46,188 3.76 4,335,984 48,996 4.58
Medium-term notes 12,117,876 139,541 4.67 10,416,775 122,412 4.77
Collateral trust bonds(5)
6,496,519 66,847 4.17 7,029,299 70,000 4.04
Guaranteed Underwriter Program notes payable
6,020,647 49,692 3.35 6,267,281 50,503 3.27
Farmer Mac notes payable 3,930,427 38,069 3.93 3,578,692 35,373 4.01
Other(6)
7,070 91 5.22 5,579 71 5.16
Subordinated deferrable debt 1,090,163 16,875 6.28 1,314,467 21,449 6.62
Subordinated certificates 1,130,529 12,707 4.56 1,188,408 13,114 4.48
Total interest-bearing liabilities $ 35,772,990 $ 370,010 4.19 % $ 34,136,485 $ 361,918 4.30 %
Other liabilities(3)
844,267 733,390
Total liabilities(3)
36,617,257 34,869,875
Total equity(3)
3,101,941 2,995,750
Total liabilities and equity(3)
$ 39,719,198 $ 37,865,625
Net interest spread(7)
0.55 % 0.45 %
Impact of non-interest bearing funding(8)
0.29 0.29
Net interest income/net interest yield(9)
$ 79,560 0.84 % $ 66,942 0.74 %
Adjusted net interest income/adjusted net interest yield:
Interest income $ 449,570 4.74 % $ 428,860 4.75 %
Interest expense 370,010 4.19 361,918 4.30
Add: Net periodic derivative cash settlements interest income(10)
(12,592) (0.79) (20,309) (1.15)
Adjusted interest expense/adjusted average cost(11)
$ 357,418 4.05 % $ 341,609 4.06 %
Adjusted net interest spread(7)
0.69 0.69
Impact of non-interest bearing funding(8)
0.28 0.28
Adjusted net interest income/adjusted net interest yield(12)
$ 92,152 0.97 % $ 87,251 0.97 %
YTD FY2026 YTD FY2025
(Dollars in thousands) Average Balance Interest Income/Expense Average Yield/Cost Average Balance Interest Income/Expense Average Yield/Cost
Assets:
Long-term fixed-rate loans(1)
$ 31,664,815 $ 1,083,938 4.58 % $ 30,722,695 $ 1,026,224 4.47 %
Long-term variable-rate loans 1,284,224 54,577 5.68 884,165 44,432 6.72
Line of credit loans 4,722,143 201,243 5.70 3,825,158 187,744 6.56
Other, net(2)
- (1,706) - - (1,460) -
Total loans 37,671,182 1,338,052 4.75 35,432,018 1,256,940 4.74
Cash and investment securities
243,270 4,638 2.55 426,954 9,916 3.11
Total interest-earning assets $ 37,914,452 $ 1,342,690 4.73 % $ 35,858,972 $ 1,266,856 4.72 %
Other assets, less allowance for credit losses(3)
1,180,574 1,173,247
Total assets(3)
$ 39,095,026 $ 37,032,219
Liabilities:
Commercial paper $ 2,940,411 $ 91,916 4.18 % $ 2,171,440 $ 81,785 5.04 %
Other short-term borrowings 1,748,691 50,574 3.87 1,659,387 59,441 4.79
Short-term borrowings(4)
4,689,102 142,490 4.06 3,830,827 $ 141,226 4.93
Medium-term notes 11,385,526 403,343 4.74 10,201,547 356,500 4.67
Collateral trust bonds(5)
6,723,459 206,070 4.10 6,968,539 205,542 3.94
Guaranteed Underwriter Program notes payable 6,267,315 156,337 3.34 6,318,852 153,376 3.25
Farmer Mac notes payable 3,808,413 112,757 3.96 3,612,338 111,576 4.13
Other(6)
7,168 275 5.13 4,194 173 5.52
Subordinated deferrable debt
1,249,355 59,923 6.41 1,295,988 64,705 6.68
Subordinated certificates 1,155,293 38,950 4.51 1,193,867 39,723 4.45
Total interest-bearing liabilities $ 35,285,631 $ 1,120,145 4.24 % $ 33,426,152 $ 1,072,821 4.29 %
Other liabilities(3)
718,721 667,980
Total liabilities(3)
36,004,352 34,094,132
Total equity(3)
3,090,674 2,938,087
Total liabilities and equity(3)
$ 39,095,026 $ 37,032,219
Net interest spread(7)
0.49 % 0.43 %
Impact of non-interest bearing funding(8)
0.29 0.29
Net interest income/net interest yield(9)
$ 222,545 0.78 % $ 194,035 0.72 %
Adjusted net interest income/adjusted net interest yield:
Interest income $ 1,342,690 4.73 % $ 1,266,856 4.72 %
Interest expense 1,120,145 4.24 1,072,821 4.29
Add: Net periodic derivative cash settlements interest income(10)
(50,444) (0.97) (78,776) (1.45)
Adjusted interest expense/adjusted average cost(11)
$ 1,069,701 4.05 % $ 994,045 3.98 %
Adjusted net interest spread(7)
0.68 0.74
Impact of non-interest bearing funding(8)
0.28 0.28
Adjusted net interest income/adjusted net interest yield(12)
$ 272,989 0.96 % $ 272,811 1.02 %
___________________________
(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 7 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 7. 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 7, totaled $367 million and $449 million as of February 28, 2026 and February 28, 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 financeleases.
(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 duringthe period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of interest rate swaps was $6,469 millionand $7,141 millionfor Q3 FY2026and Q3 FY2025, respectively. The average outstanding notional amount of interest rate swaps was $6,927 millionand $7,269 million for YTD FY2026 and YTD 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 8 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 8: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
Q3 FY2026
versus
Q3 FY2025 YTD FY2026
versus
YTD FY2025
Total
Variance Due To:(1)
Total
Variance Due To:(1)
(Dollars in thousands) Variance Volume Rate Variance Volume Rate
Interest income:
Long-term fixed-rate loans $ 18,699 $ 11,266 $ 7,433 $ 57,714 $ 31,469 $ 26,245
Long-term variable-rate loans 4,503 7,464 (2,961) 10,145 20,104 (9,959)
Line of credit loans (1,087) 7,112 (8,199) 13,499 44,025 (30,526)
Other, net (95) - (95) (246) - (246)
Total loans 22,020 25,842 (3,822) 81,112 95,598 (14,486)
Cash and investment securities
(1,310) (928) (382) (5,278) (4,266) (1,012)
Total interest income 20,710 24,914 (4,204) 75,834 91,332 (15,498)
Interest expense:
Commercial paper (811) 6,244 (7,055) 10,131 28,962 (18,831)
Other short-term borrowings (1,997) 1,152 (3,149) (8,867) 3,199 (12,066)
Short-term borrowings (2,808) 7,396 (10,204) 1,264 32,161 (30,897)
Medium-term notes 17,129 19,990 (2,861) 46,843 41,375 5,468
Collateral trust bonds (3,153) (5,306) 2,153 528 (7,229) 7,757
Guaranteed Underwriter Program notes payable (811) (1,987) 1,176 2,961 (1,251) 4,212
Farmer Mac notes payable 2,696 3,477 (781) 1,181 6,056 (4,875)
Other
20 19 1 102 123 (21)
Subordinated deferrable debt (4,574) (3,660) (914) (4,782) (2,328) (2,454)
Subordinated certificates (407) (639) 232 (773) (1,283) 510
Total interest expense 8,092 19,290 (11,198) 47,324 67,624 (20,300)
Net interest income
$ 12,618 $ 5,624 $ 6,994 $ 28,510 $ 23,708 $ 4,802
Adjusted net interest income:
Interest income $ 20,710 $ 24,914 $ (4,204) $ 75,834 $ 91,332 $ (15,498)
Interest expense 8,092 19,290 (11,198) 47,324 67,624 (20,300)
Net periodic derivative cash settlements interest income(2)
7,717 1,912 5,805 28,332 3,703 24,629
Adjusted interest expense(3)
15,809 21,202 (5,393) 75,656 71,327 4,329
Adjusted net interest income(3)
$ 4,901 $ 3,712 $ 1,189 $ 178 $ 20,005 $ (19,827)
____________________________
(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 $80 million for Q3 FY2026 increased $13 million from Q3 FY2025, driven by the combined impact of an increase in the net interest yield of 10 basis points, or 14%, to 0.84%, and an increase in average interest-earning assets of $1,831 million, or 5%.
•Average Interest-Earning Assets: The increase in average interest-earning assets of $1,831 million, or 5%, was attributable to a growth in average total loans of $1,964 million, or 5%, partially offset by a decrease of $133 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 $1,005 million, average long-term variable-rate loans of $485 million and average line of credit loans of $474 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 Q3 FY2026 and Q3 FY2025 was also attributable to borrowings under emergency line of credit loans by our members, primarily for recovery costs related to the Michigan ice storm in March 2025.
•Net Interest Yield: The increase in the net interest yield of 10basis points, or 14%, was primarily attributable to a decrease in our average cost of borrowings of 11basis points to 4.19%, partially offset by adecrease in the average yield on interest-earning assets of 1basis point to 4.74%. The benefit from non-interest bearing funding remained unchanged at 0.29%.The decrease in our average cost of borrowings was driven by lower average cost of short-term borrowings and variable-rate long-term debt due to the federal funds rate cuts since February 28, 2025, as well as fixed-rate long-term debt issued at lower interest rates since February 28, 2025. The decrease in average yields on interest-earning asset was primarily driven by the lower interest rates for variable-rate and line of credit loans due to the federal funds rate cuts since February 28, 2025.
Reported net interest income of $223 million for YTD FY2026 increased $29 million from YTD FY2025, driven by the combined impact of an increase in the net interest yield of 6 basis points, or 8%, to 0.78%, and an increase in average interest-earning assets of $2,055 million, or 6%.
•Average Interest-Earning Assets: The increase in average interest-earning assets of $2,055 million, or 6%, was attributable to a growth in average total loans of $2,239 million, or 6%, partially offset by a decrease of $184 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 $942 million, average line of credit loans of $897 million and average long-term variable-rate loans of $400 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 YTD FY2026 and YTD FY2025 was also attributable to borrowings under emergency line of credit loans by our members, primarily for recovery costs related to the Michigan ice storm in March 2025.
•Net Interest Yield: The increase in the net interest yield of 6 basis points, or 8%, was primarily attributable to a decrease in our average cost of borrowings of 5 basis points to 4.24% and an increase in the average yield on interest-earning assets of 1 basis point to 4.73%. The benefit from non-interest bearing funding remained unchanged at 0.29%. 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 due to the federal funds rate cuts since February 28, 2025. 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 February 28, 2025.
Adjusted Net Interest Income
Adjusted net interest income of $92 millionfor Q3 FY2026 increased $5 million from Q3 FY2025, driven primarily by an increase in average interest-earning assets of $1,831 million, or 5%.
•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 adjusted net interest yield was 0.97% for Q3 FY2026, unchanged from Q3 FY2025, as the decrease in the average yield on interest-earning assets of 1 basis point to 4.74% was offset by a decrease in our adjusted average cost of borrowings of 1 basis point to 4.05%. The benefit from non-interest bearing funding remained unchanged at 0.28%. We discussed above the primary drivers for the increase in the average yield on interest-earning assets. The 1 basis point decrease in the adjusted average cost of borrowings was driven by lower average cost of short-term borrowings and variable-rate long-term debt resulting from the federal funds rate cuts since February 28, 2025, as well as fixed-rate long-term debt issued at lower rates since February 28, 2025. These decreases were largely offset by
lower average yield earned on our interest rate swaps derivative cash settlements in Q3 FY2026 compared with Q3 FY2025, as discussed below.
Adjusted net interest income was$273 million for YTD FY2026, a slight increase from YTD FY2025, as the increase in average interest-earning assets of $2,055 million, or 6%, was largely offset by a decrease in the adjusted net interest yield of 6 basis points, or 6%, to 0.96%.
•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 6 basis points, or 6%, was attributable to an increase in our adjusted average cost of borrowings of 7 basis points to 4.05%, partially offset by an increase in the average yield on interest-earning assets of 1 basis point to 4.73%. The benefit from non-interest bearing funding remained unchanged at 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 YTD FY2026 compared with YTD FY2025 was the lower average yield earned on our interest rate swaps derivative cash settlements in YTD 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 rates, as the benchmark variable rate for the floating rate payments is based on 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 $13 million for Q3 FY2026 compared with $20 million for Q3 FY2025, and net periodic derivative cash settlements interest income of $50 million for YTD FY2026 compared with $79 million for YTD FY2025. The decreases for both the quarterly and year-to-date periods primarily reflected lower net interest rates received on our pay-fixed swaps during the current periods compared to the prior-year periods, due to the federal funds rate cuts since February 28, 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 decreased to $36 million and 0.09%, respectively, as of February 28, 2026, compared with $41 million and 0.11%, respectively, as of May 31, 2025.
We recorded a benefit for credit losses of $7 million and $6 million for Q3 FY2026 and Q3 FY2025, respectively, primarily driven by decreases in the asset-specific allowance for a nonperforming and nonaccrual CFC power supply loan due to higher actual and expected payments on this loan during both periods.
We recorded a benefit for credit losses of $5 million and $4 million for YTD FY2026 and YTD FY2025, respectively. The $5 million benefit for credit losses for YTD FY2026 was primarily driven by a $9 milliondecrease in the asset-specific allowance resulting from higher-than-expected payments received on a nonperforming and nonaccrual CFC power supply loan, partially offset by a $4 million increase in the collective allowance attributable to growth in our loan portfolio.The $4 million benefit for credit losses for YTD FY2025 was primarily from a decrease of $7 million in the asset specific allowance for a nonperforming and nonaccrual CFC power supply loan attributable to an increase in the expected payments on the loan, partially offset by a $3 million increase in the collective allowance due to loan portfolio growth.
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 9 presents the components of non-interest income (loss) recorded in our consolidated statements of operations.
Table 9: Non-Interest Income (Loss)
(Dollars in thousands) Q3 FY2026 Q3 FY2025 YTD FY2026 YTD FY2025
Non-interest income (loss) components:
Fee and other income $ 6,796 $ 5,982 $ 20,558 $ 17,074
Derivative gains (losses)
(32,370) 40,142 (83,215) (49,145)
Investment securities gains (losses)
(142) 663 276 6,891
Total non-interest income (loss)
$ (25,716) $ 46,787 $ (62,381) $ (25,180)
The variances in non-interest income (loss) were primarily attributable to changes in the derivative gains (losses) recognized in our consolidated statements of operations. In addition, we experienced a shift from gains to losses recorded on our debt and equity investment securities of $1 million for Q3 FY2026, compared with Q3 FY2025, and a decrease in gains on these investment securities of $7 millionfor YTD FY2026, compared with YTD FY2025. The variances for the quarterly and year-to-date periods weredriven by period-to-period market fluctuations in fair value, including both realized and unrealized gains (loss), and lower debt security balance due to maturities.
Derivative Gains (Losses)
As of February 28, 2026 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 SOFR. 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 February 28, 2026 and May 31, 2025.
The total notional amount for our interest rate swaps was $6,257 million and $7,252 million as of February 28, 2026 and May 31, 2025, respectively. The portfolio was primarily composed of longer-dated pay-fixed swaps, which accounted for approximately 86% and 80% of the outstanding notional amount as of February 28, 2026 and May 31, 2025, 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 February 28, 2026, the average remaining maturity of our pay-fixed and receive-fixed swaps was 17 years and one year, respectively, compared with 16 years and two years, respectively, as of May 31, 2025.
Table 10 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 10: Derivative Gains (Losses)
(Dollars in thousands) Q3 FY2026 Q3 FY2025 YTD FY2026 YTD FY2025
Derivative gains (losses) attributable to:
Derivative cash settlements interest income(1)
$ 12,592 $ 20,309 $ 50,444 $ 78,776
Derivative forward value gain (losses)
(44,962) 19,833 (133,659) (127,921)
Derivative gains (losses)
$ (32,370) $ 40,142 $ (83,215) $ (49,145)
___________________________
(1)During YTD FY2026, in connection with the redemption of the 2043 Notes, we terminated $300 million in notional amount of our pay-fixed interest rate swaps hedging the 2043 Notes. The termination resulted in an immaterial amount of settlement gains recorded in derivative gains (losses) in our consolidated statements of operations. See "Note 8-Subordinated Deferrable Debt" for details on the redemption of the 2043 Notes.
We recorded derivative losses of $32 million for Q3 FY2026, driven by declines in interest rates across the entire swap curveduring Q3 FY2026. In comparison, we recorded derivative gains of $40 millionfor Q3 FY2025, primarily attributable to increases in the longer-term swap interest rates during Q3 FY2025.
We recorded derivative losses of $83 million for YTD FY2026, driven by declines in interest rates across the entire swap curve. In comparison, we recorded derivative losses of $49 million for YTD FY2025, driven by declines in interest rates across the swap curve, with the exception of the 30-year swap rate, which increased slightly during YTD FY2025.
We present comparative swap curves, which depict the relationship between swap rates at varying maturities, for our reported periods in Table 11 below.
Comparative Swap Curves
Table 11 provides comparative swap curves as of February 28, 2026, November 30, 2025, May 31, 2025, February 28, 2025, November 30, 2024 and May 31, 2024.
Table 11: 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 12 presents the components of non-interest expense recorded in our consolidated statements of operations.
Table 12: Non-Interest Expense
(Dollars in thousands) Q3 FY2026 Q3 FY2025 YTD FY2026 YTD FY2025
Non-interest expense components:
Salaries and employee benefits $ (20,036) $ (18,123) $ (59,274) $ (52,750)
Other general and administrative expenses (15,936) (15,167) (54,950) (52,759)
Operating expenses (35,972) (33,290) (114,224) (105,509)
Other non-interest expense (2,378) (330) (3,412) (895)
Total non-interest expense $ (38,350) $ (33,620) $ (117,636) $ (106,404)
Non-interest expense increased $5 million for Q3 FY2026, or 14%, from Q3 FY2025, primarily attributable to an increase in operating expenses, driven by higher salaries and employee benefits, and an increase in other non-interest expense, attributable to losses on early extinguishment of our subordinated deferrable debt in Q3 FY2026. See "Note 8-Subordinated Deferrable Debt" in this Report for more information.
Non-interest expense increased $11 million for YTD FY2026, or 11%, from YTD FY2025, reflecting increasesin operating expenses and other non-interest expense. The increase in operating expenses was primarily driven by higher expenses for salaries and employee benefits, member relations, information technology, and depreciation and amortization, partially offset by lower consulting expense. The increase in other non-interest expense was attributable to losses on early extinguishment of our subordinated deferrable debt, as discussed above.
Net Income (Loss) Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was less than $1 million for each of Q3 FY2026, Q3 FY2025, YTD FY2026, and YTD FY2025. The net income attributable to noncontrolling interests 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.
CONSOLIDATED BALANCE SHEET ANALYSIS
Total assets increased $1,568 million, or 4%, to $39,893 million as of February 28, 2026 compared with May 31, 2025, primarily due to growth in our loan portfolio. We experienced an increase in total liabilities of $1,575 million, or 4%, to $36,796 million as of February 28, 2026 compared with May 31, 2025, largely due to the issuances of debt to fund the growth in our loan portfolio. Total equity decreased $7 million to $3,097 million as of February 28, 2026, primarily attributable to the CFC Board of Directors' authorized patronage capital retirement of $53 millionin YTD FY2026, partially offset by our reported net income of $47 millionfor the period.
Below is a discussion of changes in the major components of our assets and liabilities during YTD FY2026. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to manage our liquidity requirements and market risk exposure in accordance with our risk appetite framework.
Loan Portfolio
We segregate our loan portfolio into segments, by legal entity, based on the borrower member class, which consists of CFC distribution, CFC power supply, CFC statewide and associate, NCSC electric and NCSC telecom. We offer both long-term and line of credit loans to our borrowers. Under our long-term loan facilities, a borrower may select a fixed interest rate or a variable interest rate at the time of each loan advance. Line of credit loans are revolving loan facilities and generally have a variable interest rate. We describe and provide additional information on our member classes under "Item 1. Business-Members" and information about our loan programs and loan product types under "Item 1. Business-Loan and Guarantee Programs" in our 2025 Form 10-K.
Loans Outstanding
Loans to members totaled $38,750 million and $37,080 million as of February 28, 2026 and May 31, 2025, respectively. Loans to CFC distribution and power supply borrowers accounted for 94% and 95% of total loans to members as of February 28, 2026 and May 31, 2025, respectively. The increase in loans to members of $1,670 million, or 5%, from May 31, 2025, was primarily attributable to net increases in long-term and line of credit loans of $1,076 million and $594 million, respectively. We experienced increases in CFC distribution loans, CFC power supply loans, CFC statewide and associate loans, NCSC electric and NCSC telecom loans of $1,125 million, $393 million, $22 million, $84 million and $44 million, respectively during YTD FY2026.
Long-term loan advances totaled $2,404 million during YTD FY2026, of which approximately 97% was provided to members for capital expenditures, 1% was provided for bridge financing, 1% was provided for the refinancing of loans made by other lenders, and 1% was provided for other purposes. In comparison, long-term loan advances totaled $2,083 million during YTD FY2025, of which approximately 97% was provided to members for capital expenditures, 2% was provided for the refinancing of loans made by other lenders and 1% was provided for other purposes. Of the $2,404 million total long-term loans advanced during YTD FY2026, $2,014 million were fixed-rate loan advances with a
weighted average fixed-rate term of seven years. In comparison, of the $2,083 million total long-term loans advanced during YTD FY2025, $1,911 million were fixed-rate loan advances with a weighted average fixed-rate term of eight years.
Our aggregate loans outstanding to CFC electric distribution cooperative members relating to broadband projects, which we started tracking in October 2017, increased to an estimated $3,483 million as of February 28, 2026, from approximately $3,441 million as of May 31, 2025. Although we expect our member electric cooperatives to continue in their efforts to expand broadband access to unserved and underserved communities, their investment in broadband projects has slowed down in recent years and is expected to increase at a slower rate. As a result, we expect broadband related loan advances to moderate.
We provide information on the credit performance and risk profile of our loan portfolio below under the section "Credit Risk-Loan Portfolio Credit Risk" in this Report. Also refer to "Note 4-Loans" in this Report for addition information on our loans to members.
Debt
We utilize both secured and unsecured short-term borrowings and long-term debt as part of our funding strategy and asset/liability interest rate risk management. We seek to maintain diversified funding sources, including our members, affiliates, the capital markets and other private funding sources. Our funding strategy consists of various products and programs across markets to manage funding concentrations and reduce our liquidity or debt rollover risk.
Debt Outstanding
Table 13 displays the composition, by product type, of our outstanding debt as of February 28, 2026 and May 31, 2025. Table 13 also displays the composition of our debt based on several additional selected attributes.
Table 13: Debt-Total Debt Outstanding
(Dollars in thousands) February 28, 2026 May 31, 2025 Change
Debt product type:
Commercial paper:
Members, at par
$ 945,435 $ 785,608 $ 159,827
Dealer, net of discounts
2,192,686 2,206,451 (13,765)
Total commercial paper 3,138,121 2,992,059 146,062
Select notes to members
1,301,078 1,304,240 (3,162)
Daily liquidity fund notes to members
294,776 343,916 (49,140)
Medium-term notes:
Members, at par 732,680 870,849 (138,169)
Dealer(1)(2)
12,372,710 9,611,038 2,761,672
Total medium-term notes 13,105,390 10,481,887 2,623,503
Collateral trust bonds(1)(3)
6,497,499 6,895,702 (398,203)
Guaranteed Underwriter Program notes payable
5,743,393 6,456,852 (713,459)
Farmer Mac notes payable 3,929,086 3,780,461 148,625
Subordinated deferrable debt(1)(4)
1,209,713 1,329,485 (119,772)
Members' subordinated certificates:
Membership subordinated certificates 627,266 628,637 (1,371)
Loan and guarantee subordinated certificates 253,843 309,914 (56,071)
Member capital securities 246,797 246,163 634
Total members' subordinated certificates 1,127,906 1,184,714 (56,808)
Total debt outstanding $ 36,346,962 $ 34,769,316 $ 1,577,646
Security type:
Secured debt 44 % 49 %
Unsecured debt 56 51
Total 100 % 100 %
Funding source:
Members 12 % 13 %
Other non-capital markets:
Guaranteed Underwriter Program notes payable 16 18
Farmer Mac notes payable 11 11
Total other non-capital markets
27 29
Capital markets 61 58
Total 100 % 100 %
Interest rate type:
Fixed-rate debt 79 % 81 %
Variable-rate debt 21 19
Total 100 % 100 %
Interest rate type including swaps impact:
Fixed-rate debt(5)
91 % 94 %
Variable-rate debt(6)
9 6
Total 100 % 100 %
Maturity classification:(7)
Short-term borrowings 14 % 15 %
Long-term and subordinated debt(8)
86 85
Total 100 % 100 %
____________________________
(1)Amount is presented net of unamortized discounts, premium and issuance costs as applicable.
(2)Amount includes medium-term notes issued to both institutional and retail investors in the capital markets.
(3)Amount includes collateral trust bonds issued to investors through both public offerings and private placement transactions.
(4)Amount includes subordinated deferrable debt issued to institutional and retail investors through public offerings transactions. Amount as of February 28, 2026 also includes subordinated deferrable debt issued to investors through private placement transactions. See "Note 8-Subordinated Deferrable Debt" for details on the private placement of subordinated deferrable debt.
(5)Includes variable-rate debt that has been swapped to a fixed rate, net of any fixed-rate debt that has been swapped to a variable rate.
(6)Includes fixed-rate debt that has been swapped to a variable rate, net of any variable-rate debt that has been swapped to a fixed rate. Also includes commercial paper notes, which generally have maturities of less than 90 days. The interest rate on commercial paper notes does not change once the note has been issued; however, the interest rate for new commercial paper issuances changes daily.
(7)Borrowings with an original contractual maturity of one year or less are classified as short-term borrowings. Borrowings with an original contractual maturity of greater than one year are classified as long-term debt.
(8)Consists of long-term debt, subordinated deferrable debt and total members' subordinated certificates reported on our consolidated balance sheets. Maturity classification is based on the original contractual maturity as of the date of issuance of the debt.
We issue debt primarily to fund growth in our loan portfolio. As such, our debt outstanding generally increases and decreases in response to member loan demand. Total debt outstanding increased $1,578 million, or 5%, to $36,347 million as of February 28, 2026 compared with May 31, 2025, due to borrowings to fund the increase in loans to members. We provide additional information on our financing activities during YTD FY2026 in the below section "Liquidity Risk" of this Report.
Member Investments
Debt securities issued to our members represent an important, stable source of funding. Table 14 displays member debt outstanding, by product type, as of February 28, 2026 and May 31, 2025.
Table 14: Debt-Member Investments
February 28, 2026 May 31, 2025 Change
(Dollars in thousands) Amount
% of Total(1)
Amount
% of Total(1)
Member investment product type:
Commercial paper $ 945,435 30 % $ 785,608 26 % $ 159,827
Select notes 1,301,078 100 1,304,240 100 (3,162)
Daily liquidity fund notes 294,776 100 343,916 100 (49,140)
Medium-term notes 732,680 6 870,849 8 (138,169)
Members' subordinated certificates 1,127,906 100 1,184,714 100 (56,808)
Total member investments $ 4,401,875 $ 4,489,327 $ (87,452)
Percentage of total debt outstanding 12 % 13 %
____________________________
(1)Represents outstanding debt attributable to members for each debt product type as a percentage of the total outstanding debt for each debt product type.
Member investments accounted for 12% and 13% of total debt outstanding as of February 28, 2026 and May 31, 2025, respectively. Over the last twelve fiscal quarters, our member investments, including both short-term and long-term investments, have averaged $4,786 million, calculated based on outstanding member investments as of the end of each fiscal quarter.
Short-Term Borrowings
Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Short-term borrowings increased $9 million to $5,101 million as of February 28, 2026, compared with May 31, 2025, primarily driven by an increase in short-term member investments of $23 million, partially offset by a decrease in dealer commercial paper of$14 million during YTD FY2026. Short-term borrowings accounted for 14% and 15% of total debt outstanding as of February 28, 2026 and May 31, 2025, respectively.
See "Liquidity Risk" below and "Note 6-Short-Term Borrowings" for information on the composition of our short-term borrowings.
Long-Term and Subordinated Debt
Long-term debt, defined as debt with an original contractual maturity term of greater than one year, primarily consists of medium-term notes, collateral trust bonds, notes payable under the Guaranteed Underwriter Program and notes payable under the Farmer Mac revolving note purchase agreement. Subordinated debt consists of subordinated deferrable debt and members' subordinated certificates. Our subordinated deferrable debt and members' subordinated certificates have original contractual maturity terms of greater than one year.
Long-term and subordinated debt was $31,246 million as of February 28, 2026, compared with $29,678 million as of May 31, 2025. The increase of $1,568 million reflects net issuances of $2,763 million and $149 million in dealer medium-term notes and long-term notes payable under the Farmer Mac revolving note purchase agreement, respectively. These were partially offset by net repayments of $713 million, $413 million, $121 million, $57 million, and $54 million in notes payable under the Guaranteed Underwriter Program, collateral trust bonds, subordinated deferrable debt, members' subordinated certificates, and member medium-term notes, respectively. Long-term and subordinated debt accounted for 86% and 85% of total debt outstanding as of February 28, 2026 and May 31, 2025, respectively.
We provide additional information on our long-term debt below under the section "Liquidity Risk" and "Note 7-Long-Term Debt" and "Note 8-Subordinated Deferrable Debt" in this Report.
Equity
Table 15 presents the components of total CFC equity and total equity as of February 28, 2026 and May 31, 2025.
Table 15: Equity
(Dollars in thousands) February 28, 2026 May 31, 2025
Equity components:
Membership fees and educational fund:
Membership fees $ 967 $ 966
Educational fund 1,917 2,658
Total membership fees and educational fund 2,884 3,624
Patronage capital allocated 894,736 948,526
Members' capital reserve 1,632,421 1,631,609
Total allocated equity 2,530,041 2,583,759
Unallocated net income (loss):
Prior fiscal year-end cumulative derivative forward value gains(1)
501,663 606,215
Year-to-date derivative forward value losses(1)
(133,532) (104,552)
Period-end cumulative derivative forward value gains(1)
368,131 501,663
Other unallocated net income (loss) 179,574 (709)
Unallocated net income 547,705 500,954
CFC retained equity 3,077,746 3,084,713
Accumulated other comprehensive loss
(2,231) (2,236)
Total CFC equity 3,075,515 3,082,477
Noncontrolling interests 21,214 20,989
Total equity $ 3,096,729 $ 3,103,466
____________________________
(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities, which we are required to consolidate. We present the consolidated total derivative forward value gains (losses) in Table 32 in the "Non-GAAP Financial Measures and Reconciliations" section below. Also, see "Note 14-Business Segments" in this Report for the statements of operations for CFC.
Total equity decreased $7 million to $3,097 million as of February 28, 2026, compared with May 31, 2025, attributable primarily to the CFC Board of Directors' authorized patronage capital retirement of $53 million in YTD FY2026, partially offset byour reported net income of $47 million for the period.
Allocation and Retirement of Patronage Capital
We are subject to District of Columbia law governing cooperatives, under which CFC is required to make annual allocations of net earnings, if any, in accordance with the provisions of the District of Columbia statutes. We describe the allocation requirements under "Item 7. MD&A-Consolidated Balance Sheet Analysis-Equity-Allocation and Retirement of Patronage Capital" in our 2025 Form 10-K. The amount of patronage capital allocated each year by CFC's Board of Directors is based on non-GAAP adjusted net income, which excludes the impact of derivative forward value gains (losses). We provide a reconciliation of our adjusted net income to our reported net income and an explanation of the adjustments below in "Non-GAAP Financial Measures and Reconciliations."
In May 2025, the CFC Board of Directors authorized the allocation of $1 million of net earnings for fiscal year 2025 to the cooperative educational fund. In July 2025, the CFC Board of Directors authorized the allocation of fiscal year 2025 adjusted net income as follows: $67 million to members in the form of patronage capital and $176 million to the members' capital reserve.
In July 2025, the CFC Board of Directors also authorized the retirement of patronage capital totaling $53 million, of which $34 million represented 50% of the patronage capital allocation for fiscal year 2025, and $19 million represented the portion of the allocation from fiscal year 2000net earnings that has been held for 25 years pursuant to the CFC Board of Directors' policy. This amount was returned to members in cash in September 2025. The remaining portion of the patronage capital allocation for fiscal year 2025 will be retained by CFC for 25 years pursuant to the guidelines adopted by the CFC Board of Directors in June 2009.
ENTERPRISE RISK MANAGEMENT
Overview
CFC has an Enterprise Risk Management ("ERM") framework that is designed to identify, assess, monitor and manage the risks we assume in conducting our activities to serve the financial needs of our members. We face a variety of potential internal and external risks that can significantly affect our financial condition, liquidity position, reputation and ability to meet the expectations of our members, investors and other stakeholders. As a financial services company, the major categories of risk exposures inherent in our business activities include credit risk, liquidity risk, market risk and operational risk. These risk categories are summarized below.
•Credit riskis the risk that a borrower or other counterparty will be unable to meet its obligations in accordance with agreed-upon terms.
•Liquidity riskis the risk that we will be unable to fund our operations and meet our contractual financial obligations or that we will be unable to fund new loans to borrowers at a reasonable cost and tenor in a timely manner.
•Market riskis the risk that changes in market variables, such as movements in interest rates, may adversely affect the match between the timing of the contractual maturities, repricing and prepayments of our financial assets and the related financial liabilities funding those assets.
•Operational riskis the risk of loss resulting from inadequate or failed internal controls, processes, systems, human error or external events, including natural disasters or public health emergencies. Operational risk also includes cybersecurity risk, compliance risk, fiduciary risk, reputational risk and litigation risk.
Effective risk management is critical to our overall operations and to achieving our primary objective of providing cost-based financial products to our rural electric members while maintaining the sound financial results required to retain our investment-grade credit ratings on our rated debt instruments. In line with this, we have established a risk-management
framework designed to oversee the key risks encountered in our operations and the maximum level of risk we are prepared to undertake, known as risk tolerance. This also includes risk limits and guidelines that are in alignment with CFC's mission and strategic objectives. We provide a discussion of our risk management framework in our 2025 Form 10-K under "Item 7. MD&A-Enterprise Risk Management" and describe how we manage these risks under each respective MD&A section in our 2025 Form 10-K.
CREDIT RISK
Our loan portfolio, which represents the largest component of assets on our balance sheet, accounts for the substantial majority of our credit risk exposure. We also engage in certain non-lending activities that may give rise to counterparty credit risk, such as entering into derivative transactions to manage interest rate risk and investment in debt and equity securities. We provide additional information on our credit risk-management framework under "Item 7. MD&A-Credit Risk-Credit Risk Management" in our 2025 Form 10-K.
Loan Portfolio Credit Risk
Our primary credit exposure is loans to rural electric cooperatives, which provide essential electric services to end-users, the majority of which are residential customers. We also have a limited portfolio of loans to not-for-profit and for-profit telecommunication companies. The substantial majority of loans to our borrowers are long-term fixed-rate loans with terms of up to 35 years. Long-term fixed-rate loans accounted for 83% and 85% of total loans outstanding as of February 28, 2026 and May 31, 2025, respectively.
Because we lend primarily to our rural electric utility cooperative members, we have had a loan portfolio inherently subject to single-industry and single-obligor credit concentration risk since our inception in 1969. We historically, however, have experienced limited defaults and losses in our electric utility loan portfolio due to several factors. First, the majority of our electric cooperative borrowers operate in states where electric cooperatives are not subject to rate regulation. Thus, they are able to make rate adjustments to pass along increased costs to the end customer without first obtaining state regulatory approval, allowing them to cover operating costs and generate sufficient earnings and cash flows to service their debt obligations. Second, electric cooperatives face limited competition, as they tend to operate in exclusive territories not serviced by public investor-owned utilities. Third, electric cooperatives typically are consumer-owned, not-for-profit entities that provide an essential service to end-users, the majority of which are residential customers. As not-for-profit entities, rural electric cooperatives, unlike investor-owned utilities, generally are eligible to apply for assistance from federal and/or state agencies to help recover from major disasters or emergencies. Fourth, electric cooperatives tend to adhere to a conservative core business strategy model that has historically resulted in a relatively stable, resilient operating environment and overall strong financial performance and credit strength for the electric cooperative network. Finally, we generally lend to our members on a senior secured basis, which reduces the risk of loss in the event of a borrower default.
Below we provide information on the credit risk profile of our loan portfolio, including security provisions, credit concentration, credit quality indicators and our allowance for credit losses.
Security Provisions
Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Table 16 presents, by legal entity and member class and by loan type, secured and unsecured loans in our loan portfolio as of February 28, 2026 and May 31, 2025. Of our total loans outstanding, 88% and 89% were secured as of February 28, 2026 and May 31, 2025, respectively.
Table 16: Loans-Loan Portfolio Security Profile
February 28, 2026
(Dollars in thousands) Secured % of Total Unsecured % of Total Total
Member class:
CFC:
Distribution $ 27,220,589 90 % $ 3,166,697 10 % $ 30,387,286
Power supply 4,910,422 78 1,378,415 22 6,288,837
Statewide and associate 241,563 88 31,614 12 273,177
Total CFC 32,372,574 88 4,576,726 12 36,949,300
NCSC:
Electric
1,159,144 100 4,247 - 1,163,391
Telecom
584,393 94 34,595 6 618,988
Total NCSC
1,743,537 98 38,842 2 1,782,379
Total loans outstanding(1)
$ 34,116,111 88 $ 4,615,568 12 $ 38,731,679
Loan type:
Long-term loans:
Fixed rate $ 31,957,015 99 % $ 188,461 1 % $ 32,145,476
Variable rate 1,073,432 75 365,497 25 1,438,929
Total long-term loans 33,030,447 98 553,958 2 33,584,405
Line of credit loans 1,085,664 21 4,061,610 79 5,147,274
Total loans outstanding(1)
$ 34,116,111 88 $ 4,615,568 12 $ 38,731,679
May 31, 2025
(Dollars in thousands) Secured % of Total Unsecured % of Total Total
Member class:
CFC:
Distribution $ 26,376,425 90 % $ 2,886,070 10 % $ 29,262,495
Power supply 4,771,255 81 1,124,245 19 5,895,500
Statewide and associate 238,596 95 12,729 5 251,325
Total CFC 31,386,276 89 4,023,044 11 35,409,320
NCSC:
Electric
1,064,125 99 14,638 1 1,078,763
Telecom
561,132 98 14,333 2 575,465
Total NCSC
1,625,257 98 28,971 2 1,654,228
Total loans outstanding(1)
$ 33,011,533 89 $ 4,052,015 11 $ 37,063,548
Loan type:
Long-term loans:
Fixed rate $ 31,269,102 100 % $ 119,211 - % $ 31,388,313
Variable rate 911,573 81 210,677 19 1,122,250
Total long-term loans 32,180,675 99 329,888 1 32,510,563
Line of credit loans 830,858 18 3,722,127 82 4,552,985
Total loans outstanding(1)
$ 33,011,533 89 $ 4,052,015 11 $ 37,063,548
____________________________
(1)Represents the unpaid principal balance, net of discounts, charge-offs and recoveries, of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $18 million and $16 million as of February 28, 2026 and May 31, 2025, respectively.
Credit Concentration
Concentrations of credit may exist when a lender has large credit exposures to single borrowers, large credit exposures to borrowers in the same industry sector or engaged in similar activities or large credit exposures to borrowers in a geographic region that would cause the borrowers to be similarly impacted by economic or other conditions in the region.As discussed above under "Credit Risk-Loan Portfolio Credit Risk," because we lend primarily to our rural electric utility cooperative members, our loan portfolio is inherently subject to single-industry and single-obligor credit concentration risk. Loans outstanding to electric utility organizations totaled $38,113 million and$36,488 million as of February 28, 2026 and May 31, 2025, respectively, and represented 98% of our total loans outstanding as of each respective date. Our credit exposure is partially mitigated by long-term loans guaranteed by RUS, which totaled $97 million and $105 million as of February 28, 2026 and May 31, 2025, respectively.
Single-Obligor Concentration
Table 17 displays the outstanding loan exposure for our 20largest borrowers, by legal entity and member class, as of February 28, 2026 and May 31, 2025.Our 20 largest borrowers consisted of 13 distribution systems and seven powersupply systems as of February 28, 2026 and 14distribution systems and six power supply systems as of May 31, 2025. The largest total exposure to a single borrower or controlled group represented approximately 1% of total loans outstanding as of both February 28, 2026 and May 31, 2025.
Table 17: Loans-Loan Exposure to 20 Largest Borrowers
February 28, 2026 May 31, 2025
(Dollars in thousands) Amount % of Total Amount % of Total
Member class:
CFC:
Distribution $ 4,834,697 12 % $ 5,054,345 14 %
Power supply 2,238,117 6 1,926,448 5
Total CFC 7,072,814 18 6,980,793 19
NCSC Electric
174,842 1 168,063 -
Total loan exposure to 20 largest borrowers 7,247,656 19 7,148,856 19
Less: Loans covered under Farmer Mac standby purchase commitment(1)
(205,209) (1) (155,078) -
Net loan exposure to 20 largest borrowers $ 7,042,447 18 % $ 6,993,778 19 %
____________________________
(1)We entered into a long-term standby purchase commitment agreement with Farmer Mac during fiscal year 2016. Under this agreement, we may designate certain long-term loans to be covered under the commitment, subject to approval by Farmer Mac, and in the event any such loan later goes into payment default for at least 90 days, upon request by us, Farmer Mac must purchase such loan at par value. See "Note 4-Loans" in this Report for additional information on this agreement with Farmer Mac.
Geographic Concentration
Although our organizational structure and mission result in single-industry concentration, we serve a geographically diverse group of electric and telecommunications borrowers throughout the U.S.The consolidated number of borrowers with loans outstanding totaled 908, located in 49states as of February 28, 2026, compared with 899 borrowers located in 49 states as of May 31, 2025, of which49 and50 were electric power supply borrowers as of each respective date. Electric power supply borrowers generally require significantly more capital than electric distribution and telecommunications borrowers.
Texas had the largest number of borrowers with loans outstanding in any one state as of each respective date, as well as the largest concentration of loan exposure in anyone state with loans totaling $6,147 million and $5,987 million, net of the loans covered by the Farmer Mac standby repurchase agreement, as ofFebruary 28, 2026 and May 31, 2025, respectively, which represented approximately 16%of total loans outstanding as of each period. See "Note 4-Loans" in this Report for additional information on the Texas-based number of borrowers and loans outstanding.
Credit Quality Indicators
Assessing the overall credit quality of our loan portfolio and measuring our credit risk is an ongoing process that involves tracking payment status, modifications to borrowers experiencing financial difficulty, nonperforming loans, charge-offs, the internal risk ratings of our borrowers and other indicators of credit risk. We monitor and subject each borrower and loan facility in our loan portfolio to an individual risk assessment based on quantitative and qualitative factors. Payment status trends and internal risk ratings are indicators, among others, of the probability of borrower default and overall credit quality of our loan portfolio. We believe the overall credit quality of our loan portfolio remained strong as of February 28, 2026.
Loan Modifications to Borrowers Experiencing Financial Difficulty
We had no loan modifications to borrowers experiencing financial difficulty entered during YTD FY2026 and YTD FY2025.
Nonperforming Loans
We classify loans as nonperforming at the earlier of the date when we determine: (i) interest or principal payments on the loan are past due 90 days or more; (ii) as a result of court proceedings, the collection of interest or principal payments based on the original contractual terms is not expected; or (iii) the full and timely collection of interest or principal is otherwise uncertain. Once a loan is classified as nonperforming, we generally place the loan on nonaccrual status. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against earnings.
We had a loan to one CFC electric power supply borrower of $13 million and $26 million classified as nonperforming and nonaccrual, which represented 0.03% and 0.07% of total loans outstanding as of February 28, 2026 and May 31, 2025, respectively. The decrease in this outstanding loan balance reflected $13 million payments received during YTD FY2026 and an immaterial charge-off during Q3 FY2026, as discussed below. Subsequent to the quarter ended February 28, 2026, we received $5 million payments on this loan which reduced its outstanding balance to $8 million.
Net Charge-Offs
We recorded a charge-off of $0.3 million related to a CFC electric power supply loan during Q3 FY2026 and YTD FY2026. We had no charge-offs during YTD FY2025. Prior tothis charge-off and two CFC electric power supply loan defaults in fiscal years 2021 and 2022, we had not experienced any defaults or charge-offs in our electric utility loan portfolios since fiscal year 2013, or in our telecommunications loan portfolios since fiscal year 2017.
Borrower Risk Ratings
As part of our management of credit risk, we maintain a credit risk rating framework under which we employ a consistent process for assessing the credit quality of our loan portfolio. We evaluate each borrower and loan facility in our loan portfolio and assign internal borrower and loan facility risk ratings based on consideration of a number of quantitative and qualitative factors. We categorize loans in our portfolio based on our internally assigned borrower risk ratings, which are intended to assess the general creditworthiness of the borrower and probability of default. Our borrower risk ratings align with the U.S. federal banking regulatory agencies' credit risk definitions of pass and criticized categories, with the criticized category further segmented among special mention, substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Our internally assigned borrower risk ratings serve as the primary credit quality indicator for our loan portfolio. Because our internal borrower risk ratings provide important information on the probability of default, they are a key input in determining our allowance for credit losses.
Criticized loans totaled $224 million and $219 million as of February 28, 2026 and May 31, 2025, respectively, and represented approximately 1%of total loans outstanding as of each respective date. The increase of $5 million in criticized loans was primarily driven by a net increase of $18 million in loans outstanding in the special mention category, partially offset by $13 million payments received from a CFC electric power supply borrower in the doubtful category during YTD FY2026. Each of the borrowers with loans outstanding in the criticized category was current with regard to all principal and interest amounts due to us as of February 28, 2026 and May 31, 2025.
We provide additional information on our borrower risk rating framework in our 2025 Form 10-K under "Item 7. MD&A Credit Risk-Loan Portfolio Credit Risk-Credit Quality Indicators." See "Note 4-Loans" of this Report for detail, by member class, on loans outstanding in each borrower risk rating category.
Allowance for Credit Losses
We are required to maintain an allowance based on a current estimate of credit losses that are expected to occur over the remaining contractual term of the loans in our portfolio. Our allowance for credit losses consists of a collective allowance and an asset-specific allowance. The collective allowance is established for loans in our portfolio that share similar risk characteristics and are therefore evaluated on a collective, or pool, basis in measuring expected credit losses. The asset-specific allowance is established for loans in our portfolio that do not share similar risk characteristics with other loans in our portfolio and are therefore evaluated on an individual basis in measuring expected credit losses.
Table 18 presents, by legal entity and member class, loans outstanding and the related allowance for credit losses and allowance coverage ratio as of February 28, 2026 and May 31, 2025 and the allowance components as of each date.
Table 18: Allowance for Credit Losses by Borrower Member Class and Evaluation Methodology
February 28, 2026 May 31, 2025
(Dollars in thousands)
Loans Outstanding(1)
Allowance for Credit Losses
Allowance Coverage Ratio(2)
Loans Outstanding(1)
Allowance for Credit Losses
Allowance Coverage Ratio(2)
Member class:
CFC:
Distribution $ 30,387,286 $ 20,376 0.07 % $ 29,262,495 $ 18,473 0.06 %
Power supply 6,288,837 7,015 0.11 5,895,500 15,456 0.26
Statewide and associate 273,177 1,069 0.39 251,325 1,100 0.44
Total CFC 36,949,300 28,460 0.08 35,409,320 35,029 0.10
NCSC:
Electric
1,163,391 5,202 0.45 1,078,763 3,818 0.35
Telecom
618,988 2,050 0.33 575,465 1,768 0.31
Total NCSC
1,782,379 7,252 0.41 1,654,228 5,586 0.34
Total $ 38,731,679 $ 35,712 0.09 $ 37,063,548 $ 40,615 0.11
Allowance components:
Collective allowance $ 38,715,421 $ 35,515 0.09 % $ 37,031,238 $ 31,313 0.08 %
Asset-specific allowance 16,258 197 1.21 32,310 9,302 28.79
Total
$ 38,731,679 $ 35,712 0.09 $ 37,063,548 $ 40,615 0.11
Allowance coverage ratios:
Nonaccrual loans(3)
$ 12,887 277.12 % $ 26,099 155.62 %
___________________________
(1)Represents the unpaid principal balance, net of discounts, charge-offs and recoveries, of loans as of each period end. Excludes unamortized deferred loan origination costs of $18 million and $16 million as of February 28, 2026 and May 31, 2025, respectively.
(2)Calculated based on the allowance for credit losses attributable to each member class and allowance components at period end divided by the related loans outstanding at period end.
(3)Calculated based on the total allowance for credit losses at period end divided by loans outstanding on nonaccrual status at period end. Nonaccrual loans represented 0.03% and 0.07% of total loans outstanding as of February 28, 2026 and May 31, 2025, respectively. We provide additional information on our nonaccrual loans in "Note 4-Loans" in this Report.
Our allowance for credit losses and allowance coverage ratio were $36 million and 0.09%, respectively, as of February 28, 2026, compared with $41 million and 0.11%, respectively, as of May 31, 2025. The $5 million decrease in the allowance for credit losses was attributableto a $9 million decrease in the asset-specific allowance, partially offset by a $4 million increasein the collective allowance. The decrease in the asset-specific allowance was primarily due to higher-than-expected
payments received on a nonperforming and nonaccrual CFC power supply loan during YTD FY2026. The increase in the collective allowance was primarily due to growth of our loan portfolio.
We discuss our methodology for estimating the allowance for credit losses under the current expected credit loss ("CECL") model in "Note 1-Summary of Significant Accounting Policies-Allowance for Credit Losses-Loan Portfolio" and provide information on management's judgment and the uncertainties involved in our determination of the allowance for credit losses in "MD&A-Critical Accounting Estimates" in our 2025 Form 10-K. We provide additional information on our loans and allowance for credit losses under "Note 4-Loans" and "Note 5-Allowance for Credit Losses" of this Report.
Counterparty Credit Risk
In addition to credit exposure from our borrowers, we enter into other types of financial transactions in the ordinary course of business that expose us to counterparty credit risk, primarily related to transactions involving our cash and cash equivalents, securities held in our investment securities portfolio and derivatives. We mitigate our risk by only entering into these transactions with counterparties with investment-grade ratings, establishing operational guidelines and counterparty exposure limits and monitoring our counterparty credit risk position. We evaluate our counterparties based on certain quantitative and qualitative factors and periodically assign internal risk rating grades to our counterparties.
Cash and Investments Securities Counterparty Credit Exposure
Our cash and cash equivalents and investment securities totaled $241 million and $53 million, respectively, as of February 28, 2026. The primary credit exposure associated with investments held in our investment portfolio is that issuers will not repay principal and interest in accordance with the contractual terms. Our cash and cash equivalents with financial institutions generally have an original maturity of less than one year and pursuant to our investment policy guidelines, all fixed-income debt securities, at the time of purchase, must be rated at least investment grade based on external credit ratings from at least two of the leading global credit rating agencies, when available, or the corresponding equivalent, when not available. We therefore believe that the risk of default by these counterparties is low. As of February 28, 2026, our overall counterparty credit risk was deemed to be satisfactory and not materially changed compared with May 31, 2025.
We provide additional information on the holdings in our investment securities portfolio below under "Liquidity Risk-Investment Securities Portfolio" and in "Note 3-Investment Securities."
Derivative Counterparty Credit Exposure
Our derivative counterparty credit exposure relates principally to interest rate swap contracts. We generally engage in over-the-counter ("OTC") derivative transactions, which expose us to individual counterparty credit risk because these transactions are executed and settled directly between us and each counterparty. We are exposed to the risk that an individual derivative counterparty defaults on payments due to us, which we may not be able to collect or which may require us to seek a replacement derivative from a different counterparty. This replacement may be at a higher cost, or we may be unable to find a suitable replacement.
We manage our derivative counterparty credit exposure through diversification of our derivative positions among various counterparties and by executing derivative transactions with financial institutions that have investment-grade credit ratings and maintaining enforceable master netting arrangements with these counterparties, which allow us to net derivative assets and liabilities with the same counterparty. We also manage the credit risk associated with our derivative counterparties by using internal credit risk analysis, limits and a monitoring process. We had 12 active derivative counterparties with credit ratings ranging from Aa1 to Baa1 by Moody's as of both February 28, 2026 and May 31, 2025, and from AA- to BBB+ by S&P as of both February 28, 2026 and May 31, 2025. The total outstanding notional amount of derivatives with these counterparties was $6,257 million and $7,252 million as of February 28, 2026 and May 31, 2025, respectively. The highest single derivative counterparty concentration, by outstanding notional amount, accounted for approximately 27% and 25% of the total outstanding notional amount of our derivatives as of February 28, 2026 and May 31, 2025, respectively.
While our derivative agreements include netting provisions that allow for offsetting of all contracts with a given counterparty in the event of default by one of the two parties, we report the fair value of our derivatives on a gross basis by
individual contract as either a derivative asset or derivative liability on our consolidated balance sheets.The fair value of our derivatives includes credit valuation adjustments reflecting counterparty credit risk. We estimate our exposure to credit loss on our derivatives by calculating the replacement cost to settle at current market prices, as defined in our derivative agreements, of all outstanding derivatives in a net gain position at the counterparty level where a right of legal offset exists. We provide information on the impact of netting provisions under our master swap agreements and collateral pledged, if any, in "Note 9-Derivative Instruments and Hedging Activities-Impact of Derivatives on Consolidated Balance Sheets." We believe our exposure to derivative counterparty risk, at any point in time, is equal to the amount of our outstanding derivatives in a net gain position, at the individual counterparty level, which totaled $372 million and $506 million as of February 28, 2026 and May 31, 2025, respectively.
We provide additional detail on our derivative agreements, including a discussion of derivative contracts with credit rating triggers and settlement amounts that would be required in the event of a ratings trigger, in "Note 9-Derivative Instruments and Hedging Activities" in this Report.
See "Item 1A. Risk Factors" in our 2025 Form 10-K and "Item 1A. Risk Factors" of this Report for additional information about credit risks related to our business.
LIQUIDITY RISK
We define liquidity as the ability to convert assets into cash quickly and efficiently, maintain access to available funding and roll-over or issue new debt under normal operating conditions and periods of CFC-specific and/or market stress, to ensure that we can meet borrower loan requests, pay current and future obligations and fund our operations in a cost-effective manner. We provide additional information on our liquidity risk-management framework under "Item 7. MD&A-Liquidity Risk-Liquidity Risk Management" in our 2025 Form 10-K.
In addition to cash on hand and investment securities, our primary sources of funds include member loan principal and interest payments, committed bank revolving lines of credit, committed loan facilities under the Guaranteed Underwriter Program, a revolving note purchase agreement with Farmer Mac and proceeds from debt issuances to members and in the public capital markets. Our primary uses of funds include loan advances to members, principal and interest payments on borrowings, periodic interest settlement payments related to our derivative contracts and operating expenses.
Available Liquidity
As part of our strategy in managing liquidity risk and meeting our liquidity objectives, we seek to maintain various committed sources of funding that are available to meet our near-term liquidity needs. Table 19 presents a comparison between our available liquidity, which consists of cash and cash equivalents, our debt securities investment portfolio and amounts under committed credit facilities, as of February 28, 2026 and May 31, 2025.
Table 19: Available Liquidity
February 28, 2026 May 31, 2025
(Dollars in millions) Total Accessed Available Total Accessed Available
Liquidity sources:
Cash and investment debt securities:
Cash and cash equivalents $ 241 $ - $ 241 $ 135 $ - $ 135
Debt securities investment portfolio(1)
43 - 43 114 - 114
Total cash and investment debt securities
284 - 284 249 - 249
Committed credit facilities:
Committed bank revolving line of credit agreements-unsecured(2)
3,500 7 3,493 3,300 7 3,293
Guaranteed Underwriter Program committed facilities-secured(3)
10,823 9,023 1,800 10,373 9,023 1,350
Farmer Mac revolving note purchase agreement-secured(4)
6,500 3,929 2,571 6,500 3,780 2,720
Total committed credit facilities 20,823 12,959 7,864 20,173 12,810 7,363
Total available liquidity $ 21,107 $ 12,959 $ 8,148 $ 20,422 $ 12,810 $ 7,612
____________________________
(1)Represents the aggregate fair value of our portfolio of debt securities as of period end. Our portfolio of equity securities consists of Farmer Mac Class A common stock, which we exclude from our available liquidity.
(2)The committed bank revolving line of credit agreements consist of a three-year and a four-year revolving line of credit agreement. The accessed amount of $7 million as of both February 28, 2026 and May 31, 2025 relates to letters of credit issued pursuant to the four-year revolving line of credit agreement.
(3)The committed facilities under the Guaranteed Underwriter Program are not revolving.
(4)Availability subject to market conditions.
Although as a nonbank financial institution we are not subject to regulatory liquidity requirements, our liquidity management framework includes monitoring our liquidity and funding positions on an ongoing basis and assessing our ability to meet our scheduled debt obligations and other cash flow requirements based on point-in-time metrics as well as forward-looking projections. Our liquidity and funding assessment takes into consideration amounts available under existing liquidity sources, the expected rollover of member short-term investments and scheduled loan principal payment amounts, as well as our continued ability to access the capital markets and other non-capital market related funding sources.
Liquidity Risk Assessment
We utilize several measures to assess our liquidity risk and ensure we have adequate coverage to meet our liquidity needs. Our primary liquidity measures indicate the extent to which we have sufficient liquidity to cover the payment of scheduled debt obligations over the next 12 months. We calculate our liquidity coverage ratios under several scenarios that take into consideration various assumptions about our near-term sources and uses of liquidity, including the assumption that maturities of member short-term investments will not have a significant impact on our anticipated cash outflows. Our members have historically maintained a relatively stable level of short-term investments in CFC in the form of daily liquidity fund notes, commercial paper, select notes and medium-term notes. As such, we expect that our members will continue to reinvest their excess cash in short-term investment products offered by CFC.
Table 20 presents our primary liquidity coverage ratios as of February 28, 2026 and May 31, 2025 and displays the calculation of each ratio as of these respective dates based on the assumptions discussed above.
Table 20: Liquidity Coverage Ratios
(Dollars in millions) February 28, 2026 May 31, 2025
Liquidity coverage ratio:(1)
Total available liquidity(2)
$ 8,148 $ 7,612
Debt scheduled to mature over next 12 months:
Short-term borrowings(3)
5,101 5,091
Long-term and subordinated debt scheduled to mature over next 12 months(4)
5,069 3,679
Total debt scheduled to mature over next 12 months 10,170 8,770
Deficit in available liquidity over debt scheduled to mature over next 12 months
$ (2,022) $ (1,158)
Liquidity coverage ratio 0.80 0.87
Liquidity coverage ratio, excluding expected maturities of member short-term investments(5)
Total available liquidity(2)
$ 8,148 $ 7,612
Total debt scheduled to mature over next 12 months 10,170 8,770
Exclude: Member short-term investments(6)
(2,908) (2,885)
Total debt, excluding member short-term investments, scheduled to mature over next 12 months 7,262 5,885
Excess in available liquidity over total debt, excluding member short-term investments, scheduled to mature over next 12 months $ 886 $ 1,727
Liquidity coverage ratio, excluding expected maturities of member short-term investments 1.12 1.29
___________________________
(1)Calculated based on available liquidity at period end divided by total debt scheduled to mature over the next 12 months at period end.
(2)Total available liquidity is presented above in Table 19.
(3)The short-term borrowings scheduled maturity amount consists of member investments of $2,908 million and dealer commercial paper of $2,193 million as of February 28, 2026, and member investments of $2,885 million and dealer commercial paper of $2,206 million as of May 31, 2025, respectively.
(4)The long-term and subordinated scheduled debt obligations over the next 12 months consist of debt maturities and scheduled debt payment amounts, of which, $107 million and $206 million was from member investments as of February 28, 2026 and May 31, 2025, respectively.
(5)Calculated based on available liquidity at period end divided by debt, excluding member short-term investments, scheduled to mature over the next 12 months.
(6)Member short-term investments include commercial paper sold directly to members, select notes, daily liquidity fund notes and short-term medium-term notes sold to members. See Table 22: Short-Term Borrowings-Funding Sources below for additional information.
As presented in Tables 19and 20 above, as of February 28, 2026, our available liquidity increased by $536 million, or 7%, compared with May 31, 2025. The increase was driven by a $450 million increase in Guaranteed Underwriter Program committed facilities, a $200 million increase resulting from amendments to our committed bank revolving line of credit agreements,a $35 million net increase in cash and investment debt securities balances, partially offset by a $149 million decrease in available amount under the Farmer Mac revolving note purchase agreement. However, the increase in available liquidity was outweighed by a larger increase in debt scheduled to mature within the next 12 months, resulting in a decline in our liquidity coverage ratio from 0.87 as of May 31, 2025 to 0.80 as of February 28, 2026.
We believe we can continue to roll over our member short-term investments of $2,908 million as of February 28, 2026, based on our expectation that our members will continue to reinvest their excess cash in short-term investment products offered by CFC. As mentioned above, our members historically have maintained a relatively stable level of short-term investments in CFC. Member short-term investments in CFC have averaged $3,227 million over the last 12 fiscal quarter-end reporting periods. Our available liquidity as of February 28, 2026 was $886 million in excess of, or 1.12 times over, our total $7,262 million scheduled debt obligations over the next 12 months, excluding member short-term investments. In addition, we expect to receive $2,060 million from long-term loan principal payments over the next 12 months.
We expect to continue accessing the dealer commercial paper market as a cost-effective means of satisfying our incremental short-term liquidity needs. To mitigate commercial paper rollover risk, we expect to continue to maintain our committed
bank revolving line of credit agreements and be in compliance with the covenants of these agreements so we can draw on these facilities, if necessary, to repay commercial paper that cannot be refinanced with similar debt.
The issuance of long-term debt, which represents the most significant component of our funding, allows us to reduce our reliance on short-term borrowings, as well as effectively manage our refinancing and interest rate risk. We expect to continue to issue long-term debt in the public capital markets and under our other non-capital market debt arrangements to meet our funding needs and believe that we have sufficient sources of liquidity to meet our debt obligations and support our operations over the next 12 months.
Investment Securities Portfolio
We have an investment portfolio of debt securities classified as trading and equity securities, both of which are reported on our consolidated balance sheets at fair value. This portfolio was initially intended to provide an additional source of liquidity. Our debt securities investment portfolio totaled $43 million and $114 million as of February 28, 2026 and May 31, 2025, respectively, reflecting the continued wind-down of this portfolio as we reduce our holdings over time. Our investment portfolio also included equity securities with a fair value of $10 million and $11 millionas of February 28, 2026 and May 31, 2025, respectively, consisting of Farmer Mac Class A common stock, which we exclude from our available liquidity.
We provide additional information on our investment securities portfolio in "Note 3-Investment Securities" of this Report.
Borrowing Capacity Under Various Credit Facilities
The aggregate borrowing capacity under our committed bank revolving line of credit agreements, committed loan facilities under the Guaranteed Underwriter Program and revolving note purchase agreement with Farmer Mac totaled $20,823 million and $20,173 million as of February 28, 2026 and May 31, 2025, respectively, and the aggregate amount available for access totaled $7,864 million and $7,363 million as of each respective date. The following is a discussion of our borrowing capacity and key terms and conditions under each of these credit facilities.
Committed Bank Revolving Line of Credit Agreements-Unsecured
Our committed bank revolving lines of credit may be used for general corporate purposes; however, we generally rely on them as a backup source of liquidity for our commercial paper.
On November 12, 2025, we amended our three-year and four-year committed bank revolving line of credit agreements to (i) extend the maturity dates to November 28, 2028 and November 28, 2029, respectively, (ii) remove the credit spread adjustment in Term SOFR tenors as described in each agreement and (iii) increase commitments by $150 million under the three-year revolving credit agreement and $50 million under the four-year revolving credit agreement. Under the three-year revolving credit agreement, commitments of $50 million will continue to expire at the prior maturity date of November 28, 2027.
As of February 28, 2026, the total commitment amount under the three-year facility and the four-year facility was $1,745 million and $1,755 million, respectively, resulting in a combined total commitment amount under the two facilities of $3,500 million. Under our current committed bank revolving line of credit agreements, we have the ability to request up to $300 million of letters of credit, which, if requested, would result in a reduction in the remaining available amount under the facilities.
Table 21 presents the total commitment amount under our committed bank revolving line of credit agreements, outstanding letters of credit and the amount available for access as of February 28, 2026.
Table 21: Committed Bank Revolving Line of Credit Agreements
February 28, 2026
(Dollars in millions) Total Commitment Letters of Credit Outstanding Amount Available for Access Maturity
Annual
Facility Fee (1)
Bank revolving agreements:
3-year agreement $ 50 $ - $ 50 November 28, 2027
7.5 bps
3-year agreement 1,695 - 1,695 November 28, 2028
7.5 bps
Total 3-year agreement
1,745 - 1,745
4-year agreement 1,755 7 1,748 November 28, 2029 10.0 bps
Total $ 3,500 $ 7 $ 3,493
____________________________
(1)Facility fee based on CFC's senior unsecured credit ratings in accordance with the established pricing schedules at the inception of the related agreement.
We did not have any outstanding borrowings under our committed bank revolving line of credit agreements as of February 28, 2026; however, we had letters of credit outstanding of $7 million under the four-year committed bank revolving agreement as of this date.
Although our committed bank revolving line of credit agreements do not contain a material adverse change clause or rating triggers that would limit the banks' obligations to provide funding under the terms of the agreements, we must be in compliance with the covenants to draw on the facilities. We have been and expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements. As such, we could draw on these facilities to repay commercial paper that cannot be rolled over.
Guaranteed Underwriter Program Committed Facilities-Secured
Under the Guaranteed Underwriter Program, we can borrow from the FFB and use the proceeds to extend new loans to our members and refinance existing member debt. As part of the program, we pay fees, based on our outstanding borrowings, that are intended to help fund the USDA Rural Economic Development Loan and Grant program and thereby support additional investment in rural economic development projects. The borrowings under this program are guaranteed by RUS. Each advance is subject to quarterly amortization and a final maturity not longer than 30 years from the date of the advance.
On January 29, 2026, we closed on a $450 million Series W committed loan facility with the FFB under the Guaranteed Underwriter Program. Pursuant to this facility, we may borrow any time before July 15, 2030. Each advance is subject to
quarterly amortization and a final maturity not longer than 30 years from the date of the advance.
As displayed in Table 19, we had accessed $9,023 million under the Guaranteed Underwriter Program and up to $1,800 million was available for borrowing as of February 28, 2026. Of the $1,800 million available borrowing amount, $450 million is available for advance through July 15, 2027, $450 million is available for advance through July 15, 2028, $450 million is available for advance through July 15, 2029, and $450 million is available for advance through July 15, 2030. We are required to pledge eligible distribution system loans or power supply system loans as collateral in an amount at least equal to our total outstanding borrowings under the Guaranteed Underwriter Program committed loan facilities, which totaled $5,743 million as of February 28, 2026.
Farmer Mac Revolving Note Purchase Agreement-Secured
We have a revolving note purchase agreement with Farmer Mac under which we can borrow up to $6,500 million from Farmer Mac at any time, subject to market conditions, through January 14, 2030, after which the agreement allows successive one-year renewals of the draw period upon sixty days' notice by CFC, subject to approval by Farmer Mac and Farmer Mac Mortgage Securities Corporation. Pursuant to this revolving note purchase agreement, we can borrow, repay and re-borrow funds at any time through maturity, as market conditions permit, provided the outstanding principal does not exceed the total available under the agreement. Under this agreement, we had outstanding secured notes payable totaling
$3,929 million and $3,780 million as of February 28, 2026 and May 31, 2025, respectively.As displayed in Table 19, the amount available for borrowing under this agreement was $2,571 million as of February 28, 2026.
We are required to pledge eligible electric distribution system or electric power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding under this agreement.
We provide additional information on pledged collateral below under "Pledged Collateral" in this section and in "Note 3-Investment Securities" and "Note 4-Loans."
Short-Term Borrowings
Our short-term borrowings, which we rely on to meet our daily, near-term funding needs, consist of commercial paper, which we offer to members and dealers, select notes and daily liquidity fund notes offered to members, and medium-term notes offered to members and dealers.
Short-term borrowings increased to $5,101 million as of February 28, 2026, from $5,091 million as of May 31, 2025, and accounted for 14% and 15% of total debt outstanding as of each respective period. Table 22 displays the composition, by funding source, of our short-term borrowings as of February 28, 2026 and May 31, 2025. As indicated in Table 22, members' investments represented 57% of our outstanding short-term borrowings as of both February 28, 2026 and May 31, 2025. See "Note 6-Short-Term Borrowings" in this Report for additional information on our short-term borrowings.
Table 22: Short-Term Borrowings-Funding Sources
February 28, 2026 May 31, 2025
(Dollars in thousands) Amount
Outstanding 		% of Total Short-Term Borrowings Amount
Outstanding 		% of Total Short-Term Borrowings
Funding source:
Members
$ 2,908,142 57 % $ 2,884,965 57 %
Capital markets 2,192,686 43 2,206,451 43
Total
$ 5,100,828 100 % $ 5,091,416 100 %
Long-Term and Subordinated Debt
Long-term and subordinated debt, which represents the most significant source of our funding, totaled $31,246 million and $29,678 million as of February 28, 2026 and May 31, 2025, respectively, and accounted for 86% and 85% of total debt outstanding as of each respective date. See Table 23 below for a summary of our long-term and subordinated debt issuances and repayments during YTD FY2026.
In October 2025, we redeemed $50 million in principal amount of our $300 million 2043 Notes, at par plus accrued interest. In December 2025, we redeemed the remaining $250 million of the 2043 Notes at par plus accrued interest.As a result, we recognized $2 million and $3 million of losses on early extinguishment of debt related to unamortized debt issuance costs in our consolidated statements of operations for Q3 FY2026 and YTD FY2026, respectively.
In November 2025, we priced a $600 million private placement of fixed-to-fixed reset rate subordinated notes due 2056, consisting of two tranches: $150 million notes that are noncallable for five years and $450 million notes that are noncallable for 10 years. We funded $150 million at a fixed rate of 5.75% in February 2026 and intend to fund the remaining $450 million in April 2026.
On March 20, 2026, notice was provided to investors that we will redeem all $350 million in principal amount of our 5.25% 2046 Notes on April 20, 2026, at par plus accrued interest. As a result, we expect to recognize an immaterial amount of losses on early extinguishment of debt related to unamortized debt issuance costs of the 2046 Notes in our consolidated statements of operations.
Subsequent to the quarter ended February 28, 2026, we redeemed all $600 million of our 4.45% fixed-rate dealer medium-term notes due March 2026 at par plus accrued interest and recognized an immaterial amount of losses on early extinguishment of debt related to unamortized debt issuance costs and discount in our consolidated statements of operations.
The issuance of long-term debt allows us to reduce our reliance on short-term borrowings and effectively manage our refinancing and interest rate risk, due in part to the multi-year contractual maturity structure of long-term debt. Pursuant to Rule 405 of the Securities Act, we are classified as a "well-known seasoned issuer." Under our effective shelf registration statements filed with the SEC, we may offer and issue the following debt securities:
•an unlimited amount of collateral trust bonds and senior and subordinated debt securities, including medium-term notes, member capital securities and subordinated deferrable debt, until October 2026; and
•daily liquidity fund notes up to $20,000 million in the aggregate-with a $3,000 million limit on the aggregate principal amount outstanding at any time-until March 2028.
Although we register member capital securities and the daily liquidity fund notes with the SEC, these securities are not available for sale to the general public. Medium-term notes are available for sale to both the general public and members. Notwithstanding the foregoing, we have contractual limitations with respect to the amount of senior indebtedness we may incur.
In addition to issuances of unlimited debt in the public capital markets under our shelf registrations discussed above, we also have access to private debt facilities in private placement transactions through unregistered debt offerings. We had an outstanding balance of $291 million and $298 million of collateral trust bonds issued in a private placement transaction as of February 28, 2026 and May 31, 2025, respectively. We also had an outstanding balance of $150 million of subordinated notes issued in a private placement transaction as of February 28, 2026, as discussed above.
Long-Term Debt and Subordinated Debt-Issuances and Repayments
Table 23 summarizes long-term and subordinated debt issuances and repayments during YTD FY2026.
Table 23: Long-Term and Subordinated Debt-Issuances and Repayments
YTD FY2026
(Dollars in thousands) Issuances
Repayments(1)
Debt product type:
Collateral trust bonds(2)
$ - $ 412,520
Guaranteed Underwriter Program notes payable - 713,459
Farmer Mac notes payable 250,000 101,375
Medium-term notes sold to members 59,052 112,873
Medium-term notes sold to dealers(3)
3,991,036 1,228,027
Subordinated deferrable debt(4)
179,381 300,150
Members' subordinated certificates 640 57,448
Total $ 4,480,109 $ 2,925,852
____________________________
(1)Repayments include principal maturities, scheduled amortization payments, repurchases and redemptions.
(2)Amount includes the collateral trust bonds issued to investors through both public offerings and private placement transactions.
(3)Amount includes medium-term notes issued to both institutional and retail investors in the capital markets.
(4)Amount includes the subordinated deferrable debt issued to investors through both public offerings and private placement transactions.
Long-Term and Subordinated Debt-Principal Maturity and Amortization
Table 24 summarizes scheduled principal maturity and amortization of our long-term debt, subordinated deferrable debt and members' subordinated certificates outstanding as of February 28, 2026, in each fiscal year during the five-year period ending May 31, 2030, and thereafter.
Table 24: Long-Term and Subordinated Debt-Scheduled Principal Maturities and Amortization(1)
(Dollars in thousands)
Scheduled Amortization(2)
% of Total
Fiscal year ending May 31:
2026
$ 1,062,943 3 %
2027
4,596,293 15
2028
5,006,944 16
2029
4,152,002 13
2030
2,618,089 8
Thereafter 14,023,747 45
Total $ 31,460,018 100 %
____________________________
(1)Amounts presented are based on the face amount of debt outstanding as of February 28, 2026, and therefore does not include related debt issuance costs and premiums (discounts).
(2)In addition, member loan subordinated certificates totaling $114 million amortize annually based on the unpaid principal balance of the related loan.
We provide additional information on our financing activities under the above section "Consolidated Balance Sheet Analysis-Debt" and in "Note 7-Long-Term Debt" and "Note 8-Subordinated Deferrable Debt" of this Report.
Pledged Collateral
Under our secured borrowing agreements, we are required to pledge loans, investment debt securities or other collateral and maintain certain pledged collateral ratios. Of our total debt outstanding of $36,347 million as of February 28, 2026, $16,170 million, or 44%, was secured by pledged loans totaling $20,104 million. In comparison, of our total debt outstanding of $34,769 million as of May 31, 2025, $17,133 million, or 49%, was secured by pledged loans totaling $20,516 million. The following provides additional information on the collateral pledging requirements for our secured borrowing agreements.
Secured Borrowing Agreements-Pledged Loan Requirements
We are required to pledge loans or other collateral in transactions under our collateral trust bond indentures, bond agreements under the Guaranteed Underwriter Program and note purchase agreement with Farmer Mac. Our collateral pledging requirements are based on the face amount of secured outstanding debt, which excludes net unamortized discounts and issuance costs. As discussed below, we typically maintain pledged collateral in excess of the required percentage. Under the provisions of our committed bank revolving line of credit agreements, the excess collateral that we are allowed to pledge cannot exceed 150% of the outstanding borrowings under our collateral trust bond 2007 indenture, the Guaranteed Underwriter Program or the Farmer Mac note purchase agreements as of February 28, 2026.
Table 25 displays the collateral coverage ratios pursuant to these secured borrowing agreements as of February 28, 2026 and May 31, 2025.
Table 25: Collateral Pledged
Requirement Coverage Ratios
Maximum Committed Bank Revolving Line of Credit Agreements
Actual Coverage Ratios(1)
Minimum Debt Indentures February 28, 2026 May 31, 2025
Secured borrowing agreement type:
Collateral trust bonds 1994 indenture
100 % N/A 258 % 146 %
Collateral trust bonds 2007 indenture 100 150 117 116
Guaranteed Underwriter Program notes payable 100 150 129 118
Farmer Mac notes payable 100 150 125 123
___________________________
(1)Calculated based on the amount of collateral pledged divided by the face amount of outstanding secured debt.
Table 26 displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and unencumbered loans as of February 28, 2026 and May 31, 2025.
Table 26: Loans-Unencumbered Loans
(Dollars in thousands) February 28, 2026 May 31, 2025
Total loans outstanding(1)
$ 38,731,679 $ 37,063,548
Less: Loans required to be pledged under secured debt agreements(2)
(16,342,670) (17,320,024)
Loans pledged in excess of required amount(2)(3)
(3,761,724) (3,195,994)
Total pledged loans
(20,104,394) (20,516,018)
Unencumbered loans $ 18,627,285 $ 16,547,530
Unencumbered loans as a percentage of total loans outstanding 48 % 45 %
____________________________
(1)Represents the unpaid principal balance of loans as of the end of each period. Excludes unamortized deferred loan origination costs of $18 million and $16 million as of February 28, 2026 and May 31, 2025, respectively.
(2)Reflects unpaid principal balance of pledged loans.
(3)If there is an event of default under most of our indentures, we can only withdraw the excess collateral if we substitute cash or permitted investments of equal value.
As displayed above in Table 26, we had excess loans pledged as collateral totaling $3,762 million and $3,196 million as of February 28, 2026 and May 31, 2025, respectively. To ensure that we do not fall below the minimum collateral coverage ratio requirement, we typically pledge loans in excess of the required amount for the following reasons: (i) our distribution and power supply loans are typically amortizing loans that require scheduled principal payments over the life of the loan, whereas the debt securities issued under secured indentures and agreements typically have bullet maturities; (ii) distribution and power supply borrowers have the option to prepay their loans; and (iii) individual loans may become ineligible for various reasons, some of which may be temporary.
We provide additional information on our borrowings, including the maturity profile, below in "Liquidity Risk" and additional information on pledged loans in "Note 4-Loans" in this Report. For additional detail on each of our debt product types, refer to "Note 6-Short-Term Borrowings," "Note 7-Long-Term Debt," "Note 8-Subordinated Deferrable Debt" and "Note 9-Members' Subordinated Certificates" in our 2025 Form 10-K.
Off-Balance Sheet Arrangements
In the ordinary course of business, we engage in financial transactions that are not presented on our consolidated balance sheets or may be recorded on our consolidated balance sheets in amounts that are different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements consist primarily of unadvanced loan commitments intended to meet the financial needs of our members and guarantees of member obligations, which may affect our liquidity and funding requirements based on the likelihood that borrowers will advance funds under the loan commitments or we will be
required to perform under the guarantee obligations. We provide information on our unadvanced loan commitments in "Note 4-Loans" and information on our guarantee obligations in "Note 11-Guarantees."
Projected Near-Term Sources and Uses of Funds
Table 27 below displays a projection of our primary long-term sources and uses of funds, by quarter, over each of the next six fiscal quarters. Our projection is based on the following, which includes several assumptions: (i) the estimated issuance of long-term debt, including capital market and other non-capital market term debt, is based on our market-risk management goal of minimizing the mismatch between the cash flows from our financial assets and our financial liabilities; (ii) long-term loan scheduled amortization repayment amounts represent scheduled loan principal payments for long-term loans outstanding as of February 28, 2026 and estimated loan principal payments for long-term loan advances, plus estimated prepayment amounts on long-term loans; (iii) long-term and subordinated debt maturities consist of both scheduled principal maturity and amortization amounts and projected principal maturity and amortization amounts on term debt outstanding in each period presented; and (iv) long-term loan advances are based on our current projection of member demand for loans. In addition, amounts available under our committed bank revolving lines of credit, net increases in dealer commercial paper and short-term member investments are intended to serve as a backup source of liquidity.
Table 27: Projected Long-Term Sources and Uses of Funds(1)
Projected Long-Term Sources of Funds Projected Long-Term Uses of Funds
(Dollars in millions) Long-Term Debt Issuance
Anticipated Long-Term
Loan Repayments(2)
Total Projected Long-Term
Sources of
Funds
Long-Term and Subordinated Debt Maturities(3)
Long-Term
Loan Advances 		Total Projected
Long-Term Uses of
Funds
​
Q4 FY2026 $ 1,250 $ 501 $ 1,751 $ 1,381 $ 885 $ 2,266
Q1 FY2027 650 438 1,088 725 697 1,422
Q2 FY2027 1,506 561 2,067 1,630 636 2,266
Q3 FY2027 2,044 560 2,604 1,244 941 2,185
Q4 FY2027 1,086 433 1,519 1,011 709 1,720
Q1 FY2028 1,388 459 1,847 1,219 810 2,029
Total $ 7,924 $ 2,952 $ 10,876 $ 7,210 $ 4,678 $ 11,888
____________________________
(1)The dates presented represent the end of each quarterly period through the quarter ended August 31, 2027.
(2)Anticipated long-term loan repayments include scheduled long-term loan amortizations and anticipated cash repayments at repricing date.
(3)Long-term debt maturities also include expected early redemptions of debt and exclude long-term member medium-term notes maturing over the next 12 months totaling $103 million, as we expect we can continue to roll over our member medium-term notes investments based on our expectation that our members will continue to reinvest their excess cash with us.
As displayed in Table 27, we currently project long-term advances of $3,159 million over the next 12 months, which we project will exceed anticipated long-term loan repayments over the same period of $2,060 million, resulting in net long-term loan growth of approximately $1,099 million over the next 12 months.
The estimates presented above are developed at a particular point in time based on our expected future business growth and funding. Our actual results and future estimates may vary, perhaps significantly, from the current projections, as a result of changes in market conditions, management actions or other factors. In addition to the long-term sources of funds, we have access to short-term funding sources such as member and dealer commercial paper, select notes and daily liquidity fund notes offered to members, and medium-term notes offered to members and dealers, as discussed above.
Credit Ratings
Our funding and liquidity, borrowing capacity, ability to access capital markets and other sources of funds and the cost of these funds are partially dependent on our credit ratings.
On June 2, 2025, at our request, S&P withdrew its "A-2" short-term issuer rating on CFC. During YTD FY2026, Fitch, S&P and Moody's affirmed CFC's credit ratings and stable outlook. Table 28 displays our credit ratings as of February 28, 2026, which remain unchanged as of the date of this Report.
Table 28: Credit Ratings
February 28, 2026
Moody's S&P Fitch
CFC credit ratings and outlook:
Long-term issuer credit rating(1)
A2 A- A
Senior secured debt(2)
A1 A-
A+
Senior unsecured debt(3)
A2 A- A
Subordinated debt A3 BBB BBB+
Short-term issuer credit rating
P-1
N/A
F1
Outlook Stable Stable Stable
Rating agency credit opinion/report date
February 24, 2026
November 24, 2025
September 23, 2025
___________________________
(1)Based on our senior unsecured debt rating.
(2)Applies to our collateral trust bonds.
(3)Applies to our medium-term notes.
See "Credit Risk-Counterparty Credit Risk-Derivative Counterparty Credit Exposure" above for information on credit rating provisions related to our derivative contracts.
Financial Ratios
Our debt-to-equity ratio was 11.74 and 11.20 as of February 28, 2026 and May 31, 2025, respectively. The increase in the debt-to-equity ratio during YTD FY2026 was due to the combined impact of an increase in debt to fund loan growth and a decrease in total equity. The decrease in total equity was primarily drivenby the CFC Board of Directors' authorized patronage capital retirement of $53 million in July 2025, partially offset by our reported net income of $47 million for YTD FY2026.
Our adjusted debt-to-equity ratio was 7.76 and 7.39 as of February 28, 2026 and May 31, 2025, respectively. The increase in the adjusted debt-to-equity ratio during YTD FY2026was primarily driven by an increase in adjusted total debt outstanding, resulting from additional borrowings to fund growth in our loan portfolio, partially offset by a slight increase in adjusted total equity. The increase in adjusted total equity was primarily attributable to adjusted net income of $181 million for YTD FY2026, partially offset by the net decrease in subordinated debtandthe CFC Board of Directors' authorized patronage capital retirement of $53 million in July 2025.
We provide a more detailed discussion of the debt-to-equity ratio and adjusted debt-to-equity ratio under the section "Non-GAAP Financial Measures and Reconciliations" in this Report.
Debt Covenants
As part of our short-term and long-term borrowing arrangements, we are subject to various financial and operational covenants. If we fail to maintain specified financial ratios, such failure could constitute a default by CFC of certain covenants under our committed bank revolving line of credit agreements and senior debt indentures. We were in compliance with all covenants and conditions under our committed bank revolving line of credit agreements and senior debt indentures as of February 28, 2026.
As discussed above in "Non-GAAP Financial Measures," the financial covenants set forth in our committed bank revolving line of credit agreements and senior debt indentures are based on adjusted financial measures, including adjusted TIER. We provide a reconciliation of adjusted TIER and other non-GAAP financial measures disclosed in this Report to the most comparable U.S. GAAP financial measures below in "Non-GAAP Financial Measures and Reconciliations." See "Item 7.
MD&A-Non-GAAP Financial Measures and Reconciliations" in our 2025 Form 10-K for a discussion of each of our non-GAAP measures and an explanation of the adjustments to derive these measures.
MARKET RISK
Interest rate risk represents our primary source of market risk, as interest rate-volatility or changes in interest rates can have a significant impact on our earnings and overall financial condition as a financial institution. We are exposed to interest rate risk primarily from the differences in the timing between the maturity or repricing of our loans and the liabilities funding our loans. We seek to generate stable adjusted net interest yield on a sustained and long-term basis by minimizing the mismatch between the cash flows from our interest rate-sensitive financial assets and our financial liabilities. We use derivatives as a tool in matching the duration and repricing characteristics of our interest rate-sensitive assets and liabilities. We provide additional information on our management of interest rate risk in our 2025 Form 10-K under "Item 7. MD&A-Market Risk-Interest Rate Risk Management." Below we discuss how we manage and measure interest rate risk.
Interest Rate Risk Assessment
Our Asset Liability Management ("ALM") framework includes the use of analytic tools and capabilities, enabling CFC to generate a comprehensive profile of our interest rate risk exposure. We routinely measure and assess our interest rate risk exposure using various methodologies through the use of ALM models that enable us to accurately measure and monitor our interest rate risk exposure under multiple interest rate scenarios using several different techniques. Below we present two measures used to assess our interest rate risk exposure: (i) the interest rate sensitivity of projected net interest income and adjusted net interest income; and (ii) duration gap.
Interest Rate Sensitivity Analysis
We regularly evaluate the sensitivity of our interest-earning assets and the interest-bearing liabilities funding those assets and our net interest income and adjusted net interest income projections under multiple interest rate scenarios. Each month we update our ALM models to reflect our existing balance sheet position and incorporate different assumptions about forecasted changes in our balance sheet position over the next 12 months. Based on the forecasted balance sheet changes, we generate various projections of net interest income and adjusted net interest income over the next 12 months. Management reviews and assesses these projections and underlying assumptions to identify a baseline scenario of projected net interest income and adjusted net interest income over the next 12 months, which reflects what management considers, at the time, as the most likely scenario. As discussed under "Non-GAAP Financial Measures," we derive adjusted net interest income by adjusting our reported interest expense and net interest income to include the impact of net derivative cash settlement amounts.
Our interest rate sensitivity analyses take into consideration existing interest rate-sensitive assets and liabilities as of the reported balance sheet date and forecasted changes to the balance sheet over the next 12 months under management's baseline projection. As discussed in the "Executive Summary-Outlook" section, we currently anticipate net loan growth of $1,632 million over the next 12 months and overall, the market expects the yield curve to steepen as short-term interest rates are forecasted to decline and longer-term rates are expected to remain near current levels.
Based on our current baseline forecast assumptions, which include a total of 25 basis points of federal funds rate cuts from March 2026 through February 2027, 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 February 28, 2026. We also project increases in our adjusted net interest income and adjusted net interest yield over the next 12 months relative to the 12-month period ended February 28, 2026, primarily driven by projected loan growth and projected lower adjusted average cost of funding. The projected decline in adjusted average cost of funding reflects changes in funding mix and lower variable rate debt cost, partially offset by lower expected interest rate swaps derivative cash settlements andthe refinancing of maturing lower-cost long-term debt at forecasted higher interest rates.
Table 29 presents the estimated percentage impact that a hypothetical instantaneous parallel shift of additional plus or minus 100 basis points in the interest rate yield curve, relative to our base case forecast yield curve that includes 25 basis points of federal funds rate cuts, would have on our projected baseline 12-month net interest income and adjusted net interest income
as of February 28, 2026 and May 31, 2025. We also present the estimated percentage impact on our projected baseline 12-month net interest income and adjusted net interest income assuming a hypothetical inverted yield curve under which shorter-term interest rates increase by an instantaneous 75 basis points and longer-term interest rates decrease by an instantaneous 75 basis points.
Table 29: Interest Rate Sensitivity Analysis
February 28, 2026 May 31, 2025
Estimated Impact(1)
+ 100 Basis Points - 100 Basis Points
Inverted
+ 100 Basis Points - 100 Basis Points
Inverted
Net interest income
(3.04) % 3.12 % (4.60) % (1.68) % 1.79 % (5.07) %
Derivative cash settlements 12.24 % (12.22) % 9.40 % 11.33 % (11.32) % 9.12 %
Adjusted net interest income(2)
9.20 % (9.10) % 4.80 % 9.65 % (9.54) % 4.04 %
____________________________
(1)The actual impact on our reported and adjusted net interest income may differ significantly from the sensitivity analysis presented.
(2)We include net periodic derivative cash settlement interest amounts as a component of interest expense in deriving adjusted net interest income. See the section "Non-GAAP Financial Measures and Reconciliations" for a reconciliation of the non-GAAP financial measures presented in this Report to the most comparable U.S. GAAP financial measures.
The changes in the sensitivity measures between February 28, 2026 and May 31, 2025 are primarily attributable to changes in the size and composition of our forecasted balance sheet, as well as changes in current interest rates and forecasted interest rates. As the interest rate sensitivity simulations displayed in Table 29 indicate, we would expect an unfavorable impact on our projected net interest income over a 12-month horizon as of February 28, 2026, under the hypothetical scenario of an instantaneous parallel shift of plus 100 basis points in the interest rate yield curve and an inverted yield curve. We would expect an unfavorable impact on our adjusted net interest income over a 12-month horizon as of February 28, 2026, under the hypothetical scenario of an instantaneous parallel shift of minus 100 basis points in the interest rate yield curve.
Duration Gap
The duration gap, which represents the difference between the estimated duration of our interest-earning assets and the estimated duration of our interest-bearing liabilities, summarizes the extent to which the cash flows for assets and liabilities are matched over time. We use derivatives in managing the differences in timing between the maturities or repricing of our interest earning assets and the debt funding those assets. A positive duration gap indicates that the duration of our interest-earning assets is greater than the duration of our debt and derivatives, and therefore denotes an increased exposure to rising interest rates over the long term. Conversely, a negative duration gap indicates that the duration of our interest-earning assets is less than the duration of our debt and derivatives, and therefore denotes an increased exposure to declining interest rates over the long term. While the duration gap provides a relatively concise and simple measure of the interest rate risk inherent on our consolidated balance sheet as of the reported date, it does not incorporate projected changes on our consolidated balance sheets.
The duration gap widened to positive 2.16 months as of February 28, 2026, from positive 0.27 months as of May 31, 2025 and was within the risk limits and guidelines established by CFC's Asset Liability Committee as of each respective date. The widening of the positive duration gap is primarily due to shorter duration liabilities funding interest-earning assets.
Limitations of Interest Rate Risk Measures
While we believe that the interest income sensitivities and duration gap measures provided are useful tools in assessing our interest rate risk exposure, there are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. These measures should be understood as estimates rather than as precise measurements. The interest rate sensitivity analyses only contemplate certain hypothetical movements in interest rates and are performed at a particular point in time based on the existing balance sheet and, in some cases, expected future business growth and funding mix assumptions. The strategic actions that management may take to manage our balance sheet may differ significantly from our projections, which could cause our actual interest income to differ substantially from the above sensitivity analysis.
Moreover, as discussed above, we use various other methodologies to measure and monitor our interest rate risk under multiple interest rate scenarios, which, together, provide a comprehensive profile of our interest rate risk.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our consolidated financial statements. Understanding our accounting policies and the extent to which we use management's judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a discussion of our significant accounting policies in "Note 1-Summary of Significant Accounting Policies" in our 2025 Form 10-K.
Certain accounting estimates are considered critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. The determination of the allowance for expected credit losses over the remaining expected life of the loans in our loan portfolio involves a significant degree of management judgment and level of estimation uncertainty. As such, we have identified our accounting policy governing the estimation of the allowance for credit losses as a critical accounting estimate. We describe our allowance methodology and process for estimating the allowance for credit losses under "Note 1-Summary of Significant Accounting Policies-Allowance for Credit Losses-Loan Portfolio" in our 2025 Form 10-K.
We identify the key inputs used in determining the allowance for credit losses, discuss the assumptions that require the most significant management judgment and contribute to the estimation uncertainty and disclose the sensitivity of our allowance to hypothetical changes in the assumptions underlying the calculation of our reported allowance for credit losses under "Item 7. MD&A-Critical Accounting Estimates" in our 2025 Form 10-K. Management established policies and control procedures intended to ensure that the methodology used for determining our allowance for credit losses, including any judgments and assumptions made as part of such method, are well-controlled and applied consistently from period to period. We regularly evaluate the key inputs and assumptions used in determining the allowance for credit losses and update them, as necessary, to better reflect present conditions, including current trends in credit performance and borrower risk profile, portfolio concentration risk, changes in risk-management practices, changes in the regulatory environment and other factors relevant to our loan portfolio segments. We did not change our allowance methodology or the nature of the underlying key inputs and assumptions used in measuring our allowance for credit losses during the current quarter.
We discuss the risks and uncertainties related to management's judgments and estimates in applying accounting policies that have been identified as critical accounting estimates under "Item 1A. Risk Factors-Regulatory and Compliance Risks" in our 2025 Form 10-K. We provide additional information on the allowance for credit losses under the sections "Credit Risk-Allowance for Credit Losses" and "Note 5-Allowance for Credit Losses" in this Report.
RECENT ACCOUNTING CHANGES AND OTHER DEVELOPMENTS
Recent Accounting Changes
We provide information on recently adopted accounting standards and the adoption impact on CFC's consolidated financial statements and recently issued accounting standards not yet required to be adopted and the expected adoption impact in "Note 1-Summary of Significant Accounting Policies." To the extent we believe the adoption of new accounting standards has had or will have a material impact on our consolidated results of operations, financial condition or liquidity, we discuss the impact in the applicable section(s) of this MD&A.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
As discussed above in the section "Non-GAAP Financial Measures," in addition to financial measures determined in accordance with U.S. GAAP, management evaluates performance based on certain non-GAAP financial measures, which we refer to as "adjusted" financial measures. Below we provide a reconciliation of our adjusted financial measures presented in this Report to the most comparable U.S. GAAP financial measures.See "Item 7. MD&A-Non-GAAP Financial Measures and Reconciliations" in our 2025 Form 10-K for a discussion of each of these non-GAAP financial measures and an explanation of the adjustments to derive these measures.
Net Income and Adjusted Net Income
Table 30 provides a reconciliation of adjusted interest expense, adjusted net interest income, and adjusted net income to the comparable U.S. GAAP financial measures. These adjusted financial measures are used in the calculation of our adjusted net interest yield and adjusted TIER.
Table 30: Adjusted Net Income
(Dollars in thousands) Q3 FY2026 Q3 FY2025
YTD FY2026
YTD FY2025
Adjusted net interest income:
Interest income $ 449,570 $ 428,860 $ 1,342,690 $ 1,266,856
Interest expense (370,010) (361,918) (1,120,145) (1,072,821)
Include: Derivative cash settlements interest income(1)
12,592 20,309 50,444 78,776
Adjusted interest expense (357,418) (341,609) (1,069,701) (994,045)
Adjusted net interest income $ 92,152 $ 87,251 $ 272,989 $ 272,811
Adjusted net income:
Net income $ 22,737 $ 86,136 $ 46,977 $ 66,613
Exclude: Derivative forward value gains (losses)(2)
(44,962) 19,833 (133,659) (127,921)
Adjusted net income $ 67,699 $ 66,303 $ 180,636 $ 194,534
____________________________
(1)Represents primarily the net periodic contractual interest income amount on our interest rate swaps during the reporting period.
(2)Represents the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts.
We primarily fund our loan portfolio through the issuance of debt. However, we use derivatives as economic hedges as part of our strategy to manage the interest rate risk associated with funding our loan portfolio. We therefore consider the interest income and expense incurred on our derivatives to be part of our funding cost in addition to the interest expense on our debt. As such, we add net periodic derivative cash settlements interest income and expense amounts to our reported interest expense to derive our adjusted interest expense and adjusted net interest income. We exclude unrealized derivative forward value gains (losses) from our adjusted net income.
TIER and Adjusted TIER
Table 31 displays the calculation of our TIER and adjusted TIER.
Table 31: TIER and Adjusted TIER
Q3 FY2026 Q3 FY2025
YTD FY2026
YTD FY2025
TIER(1)
1.06 1.24 1.04 1.06
Adjusted TIER(2)
1.19 1.19 1.17 1.20
____________________________
(1)TIER is calculated based on our net income (loss) plus interest expense for the period divided by interest expense for the period.
(2)Adjusted TIER is calculated based on adjusted net income (loss) plus adjusted interest expense for the period divided by adjusted interest expense for the period.
Debt Outstanding and Equity and Adjusted Debt Outstanding and Equity
Table 32 provides a reconciliation between our total debt outstanding and equity and the adjusted amounts used in the calculation of our adjusted debt-to-equity ratio as of February 28, 2026 and May 31, 2025.
Table 32: Adjusted Total Debt Outstanding and Equity
(Dollars in thousands) February 28, 2026 May 31, 2025
Adjusted total debt outstanding:
Total debt outstanding(1)
$ 36,346,962 $ 34,769,316
Exclude:
50% of Subordinated deferrable debt
604,857 664,743
Members' subordinated certificates
1,127,906 1,184,714
Adjusted total debt outstanding
$ 34,614,199 $ 32,919,859
Adjusted total equity:
Total equity $ 3,096,729 $ 3,103,466
Exclude:
Prior fiscal year-end cumulative derivative forward value gains(2)
502,899 607,969
Year-to-date derivative forward value losses(2)
(133,659) (105,070)
Period-end cumulative derivative forward value gains(2)
369,240 502,899
Accumulated other comprehensive loss
(2,231) (2,236)
Subtotal 367,009 500,663
Include:
50% of Subordinated deferrable debt
604,857 664,743
Members' subordinated certificates
1,127,906 1,184,714
Subtotal 1,732,763 1,849,457
Adjusted total equity $ 4,462,483 $ 4,452,260
____________________________
(1)Total debt outstanding includes our interest-bearing debt and excludes non-interest bearing liabilities, such as derivative liabilities.
(2)Represents consolidated total derivative forward value gains (losses).
Debt-to-Equity and Adjusted Debt-to-Equity Ratios
Table 33 displays the calculations of our debt-to-equity and adjusted debt-to-equity ratios as of February 28, 2026 and May 31, 2025.
Table 33: Debt-to-Equity Ratio and Adjusted Debt-to-Equity Ratio
(Dollars in thousands) February 28, 2026 May 31, 2025
Debt-to equity ratio:
Total debt outstanding
$ 36,346,962 $ 34,769,316
Total equity 3,096,729 3,103,466
Debt-to-equity ratio(1)
11.74 11.20
Adjusted debt-to-equity ratio:
Adjusted total debt outstanding(2)
$ 34,614,199 $ 32,919,859
Adjusted total equity(2)
4,462,483 4,452,260
Adjusted debt-to-equity ratio(3)
7.76 7.39
____________________________
(1)Calculated based on total debt outstanding at period end divided by total equity at period end.
(2)See Table 32 above for details on the calculation of these non-GAAP financial measures and the reconciliation to the most comparable U.S. GAAP financial measures.
(3)Calculated based on adjusted total debt outstanding at period end divided by adjusted total equity at period end.
Total CFC Equity and Members' Equity
Members' equity excludes the noncash impact of derivative forward value gains (losses) and foreign currency adjustments recorded in net income and amounts recorded in AOCI. Because these amounts generally have not been realized, they are not available to members and are excluded by the CFC Board of Directors in determining the annual allocation of adjusted net income to patronage capital, to the members' capital reserve and to other member funds. Table 34 provides a reconciliation of members' equity to total CFC equity as of February 28, 2026 and May 31, 2025. We present the components of AOCI in "Note 10-Equity."
Table 34: Members' Equity
(Dollars in thousands) February 28, 2026 May 31, 2025
Members' equity:
Total CFC equity $ 3,075,515 $ 3,082,477
Exclude:
Accumulated other comprehensive loss
(2,231) (2,236)
Period-end cumulative derivative forward value gains attributable to CFC(1)
368,131 501,663
Subtotal 365,900 499,427
Members' equity $ 2,709,615 $ 2,583,050
____________________________
(1)Represents period-end cumulative derivative forward value gains for CFC only, as total CFC equity does not include the noncontrolling interest of the variable interest entity, which we are required to consolidate. We report the separate results of operations for CFC in "Note 14-Business Segments." The period-end cumulative derivative forward value total gain amounts as of February 28, 2026 and May 31, 2025 are presented above in Table 32.
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