NRUC

Business Context and Reporting Period

Company: National Rural Utilities Cooperative Finance Corporation (CFC) and National Cooperative Services Corporation (NCSC).

Reporting Period: Quarterly period ended February 28, 2026 (Q3 FY2026) and Year-to-Date (YTD) FY2026.

Business Overview: CFC is a tax-exempt, member-owned cooperative providing financing to rural electric utility members. NCSC is a taxable cooperative serving electric and telecommunications members. The company funds loans primarily through debt issuances and member investments, utilizing derivatives to manage interest rate risk.

Key Financial Metrics

Material Changes vs. Prior Period

• Derivative Volatility: GAAP Net Income decreased significantly ($63.4 million Q3 decline) primarily due to a shift from $40.1 million in derivative gains in Q3 FY2025 to $32.4 million in derivative losses in Q3 FY2026. This was driven by declines in interest rates across the swap curve.
• Net Interest Income Growth: Net interest income increased $12.6 million in Q3 and $28.5 million YTD, driven by a 5% increase in average interest-earning assets and improved net interest yields.
• Loan Portfolio Expansion: Total loans increased by $1.67 billion (5%) year-over-year, with growth in long-term fixed-rate and line of credit loans.
• Debt Issuances: YTD FY2026 saw $3.98 billion in unsecured medium-term notes issued and $150 million in subordinated notes. The company also redeemed $300 million of subordinated deferrable debt (2043 Notes).
• Equity Reduction: Total equity decreased slightly due to a $53 million patronage capital retirement authorized in July 2025, partially offset by net income.

Guidance, Outlook, and Risks

• Outlook: Management projects increases in reported and adjusted net interest income and yield over the next 12 months, driven by loan growth and lower adjusted funding costs. Adjusted TIER is expected to decrease slightly due to higher operating expenses.
• Loan Growth: Anticipated net loan growth of $1.63 billion over the next 12 months.
• Interest Rate Environment: The Federal Reserve is projected to hold rates steady in 2026 with a potential 25 basis point cut in 2027. The yield curve is expected to steepen.
• Risks:
  • Interest Rate Risk: A positive duration gap of 2.16 months indicates exposure to rising rates, though derivatives are used to manage this.
  • Liquidity: While available liquidity covers non-member debt obligations 1.12 times, total liquidity is 0.80 times total scheduled debt maturities over the next 12 months, relying on the rollover of member short-term investments.
  • Geopolitical: Ongoing tensions (e.g., Iran conflict) could impact energy markets and inflation, potentially increasing borrowing costs for members.
• Unusual Items: Losses on early extinguishment of debt were recognized for the redemption of the 2043 Notes. A $0.3 million charge-off was recorded for a nonperforming power supply loan.

Investor Verification Checklist

• Derivative Accounting Impact: Verify the reconciliation between GAAP Net Income and Adjusted Net Income to understand the magnitude of unrealized derivative fair value changes.
• Liquidity Coverage: Confirm the company's ability to roll over $2.9 billion in member short-term investments maturing within 12 months, as this is critical to meeting the liquidity coverage ratio.
• Nonperforming Loan Status: Monitor the $13 million nonperforming/nonaccrual CFC power supply loan (reduced to $8 million post-quarter) and the associated allowance for credit losses.
• Debt Maturities: Review the schedule of $10.2 billion in debt maturing over the next 12 months and the company's refinancing strategy.
• Adjusted TIER Covenant: Ensure the Adjusted TIER remains above the 1.10 minimum target required by financial covenants.