10-K: CFC Reports FY25 Net Income Drop Amid Rate Shifts

National Rural Utilities Cooperative Finance Corporation (CFC) reported a significant decrease in net income for fiscal year 2025, primarily due to derivative losses from declining interest rates, despite strong loan portfolio growth.

Summary

• Net income decreased by $414.3 million to $140.014 million in fiscal year 2025 (FY2025) from $554.316 million in FY2024.
• Times Interest Earned Ratio (TIER) decreased to 1.10 in FY2025 from 1.41 in FY2024.
• Adjusted net income decreased by $44.361 million to $245.084 million in FY2025 from $289.445 million in FY2024.
• Adjusted TIER decreased to 1.18 in FY2025 from 1.24 in FY2024.
• Total loans to members increased by $2.538 billion (7%) to $37.080 billion as of May 31, 2025.
• Loan growth was driven by net increases in long-term loans of $1.405 billion and line of credit loans of $1.130 billion, with 78% of the line of credit increase attributable to Hurricane Helene recovery costs.
• Total debt outstanding increased by $2.051 billion (6%) to $34.769 billion as of May 31, 2025, primarily to fund loan growth.
• The allowance for credit losses decreased by $8.111 million to $40.615 million (0.11% coverage) as of May 31, 2025, primarily due to higher-than-expected payments received on a nonperforming loan.
• No loan charge-offs were recorded during FY2025 and FY2024.
• One loan totaling $26.099 million was classified as nonperforming as of May 31, 2025, a reduction from $48.669 million in FY2024.
• Available liquidity totaled $7.612 billion as of May 31, 2025, which was $1.158 billion less than total scheduled debt obligations over the next 12 months ($8.770 billion).
• Excluding member short-term investments, available liquidity was $1.727 billion in excess of scheduled debt obligations over the next 12 months ($5.885 billion).
• The methodology for calculating the debt-to-equity ratio and adjusted debt-to-equity ratio was refined, revising the internal adjusted debt-to-equity threshold from 6-to-1 to 8.5-to-1.
• The debt-to-equity ratio increased to 11.20 as of May 31, 2025, from 10.86 as of May 31, 2024.
• The adjusted debt-to-equity ratio increased to 7.39 as of May 31, 2025, from 7.27 as of May 31, 2024.
• Issued $44 million of 30-year subordinated deferrable interest notes under a new program launched in November 2024.
• Loans outstanding for renewable energy projects increased to $450 million as of May 31, 2025, from $299 million in FY2024.
• Aggregate loans outstanding for broadband projects increased to $3.441 billion as of May 31, 2025, from $3.103 billion in FY2024.
• The employee turnover rate for FY2025 was 9.5%, with 317 staff members employed as of May 31, 2025.

Sentiment

Score: 4

Explanation: While CFC demonstrated strong loan growth and maintained excellent credit quality with no charge-offs, the significant drop in reported net income due to derivative losses from interest rate fluctuations is a notable negative. The increase in debt-to-equity ratios and the short-term liquidity deficit (before considering rollovers) indicate increased leverage and near-term funding needs. The underlying business model remains robust, but financial results were impacted by market conditions.

Positives

• Achieved strong loan portfolio growth, increasing by $2.538 billion (7%) to $37.080 billion as of May 31, 2025.
• Maintained strong overall credit quality of the loan portfolio, with no loan charge-offs recorded in FY2025 or FY2024.
• The allowance for credit losses decreased due to higher actual than expected payments received on a nonperforming loan.
• Demonstrated historically low default and loss rates in the electric utility loan portfolio, with only 18 defaults in 56 years, 9 of which resulted in no loss.
• Maintained high recovery rates for the electric loan portfolio, attributed to the unique cooperative structure, senior security position, member investment, and collaborative approach.
• Credit ratings and stable outlook were affirmed by Moody's, S&P, and Fitch during FY2025.
• Successfully issued $2.4 billion in unsecured long-term dealer medium-term notes and $1.45 billion in secured long-term debt in FY2025.
• Increased lending to support key strategic initiatives, with loans for renewable energy projects growing to $450 million and broadband projects to $3.441 billion.
• Maintained a relatively stable employee pool with an average tenure of eight years, indicating strong employee retention.
• Demonstrated high employee engagement with 83% participation in the employee engagement survey and continued investment in talent development programs.

Negatives

• Net income decreased significantly by $414.302 million in FY2025, primarily due to a shift from derivative gains to losses ($398 million impact) caused by decreases in interest rates across the swap curve.
• TIER decreased to 1.10 and Adjusted TIER decreased to 1.18 in FY2025, indicating a reduction in interest coverage.
• Operating and other expenses increased by $21 million in FY2025, driven by higher salaries, employee benefits, general and administrative costs, and an $8 million impairment loss on an equity investment.
• Available liquidity of $7.612 billion was $1.158 billion less than total scheduled debt obligations over the next 12 months, primarily due to increased dealer commercial paper issuances and higher upcoming long-term debt maturities.
• The debt-to-equity ratio increased to 11.20 and the adjusted debt-to-equity ratio increased to 7.39, indicating higher leverage.
• Member commercial paper investments decreased by $372.412 million as members utilized funds for capital expenditure programs and operating needs.

Risks

• Credit risk exists as borrowers may be unable to meet contractual obligations, potentially leading to increased allowance for credit losses, nonperforming loans, and net charge-offs.
• The loan portfolio has single-industry (rural electric utility systems, ~98%) and single-obligor concentration risks, making it vulnerable to adverse developments in this sector or with large borrowers.
• Adverse changes in the rural electric utility industry, such as distributed energy resources, grid reliability, cyber-related attacks, regulatory/compliance factors related to greenhouse gas emissions, and extreme weather, could negatively impact members' operations and repayment ability.
• Threat of weather-related events or climate change shifts (e.g., increased storm intensity, temperature extremes) could raise power supply and operating costs for members, affecting their financial performance and ability to make payments.
• Changes in Federal Emergency Management Agency (FEMA) programs or delays in disaster cost reimbursements could adversely impact the quality of the loan portfolio and financial condition of members.
• Advances in technology (e.g., alternative electricity generation, 5G satellite internet) could reduce demand for members' services or render their assets obsolete, negatively impacting loan quality.
• Obtaining entities or assets through foreclosure subjects CFC to the performance and financial risks of operating those businesses or assets, potentially leading to impairment losses.
• Nonperformance of derivative counterparties could impair financial results, as CFC uses interest rate swaps to manage interest rate risk.
• A decline in CFC's credit rating could trigger payments under derivative agreements, potentially having a material adverse impact on financial results.
• Inability to access capital markets or other external funding sources could negatively affect liquidity, increase borrowing costs, or limit funding for new loan advances.
• A reduction in credit ratings for CFC's debt could adversely affect liquidity, increase borrowing costs, or limit access to capital markets.
• Failure to maintain compliance with covenants related to revolving credit agreements, collateral trust bond, and medium-term note indentures could affect patronage capital retirement, accelerate debt repayment, or hinder financing.
• Changes in the level and direction of interest rates or inability to successfully manage interest rate risk could adversely affect financial results and condition.
• Damage to CFC's reputation from fraud, misconduct, unethical behavior, human error, system failures, or negative publicity could harm business and ability to attract skilled employees.
• Cybersecurity incidents affecting IT systems (internal or third-party) pose risks to data security, service provision, and could lead to reputational, financial, legal, or operational consequences.
• Potential conflicts of interest may arise due to CFC's elected directors also serving as officers or directors of certain member cooperatives.
• Natural or man-made disasters, including widespread health emergencies, acts of terrorism or war, or supply chain complications, could disrupt business and adversely affect results of operations and financial condition.
• Competition from other lenders (e.g., CoBank, ACB, banks) could limit CFC's ability to raise rates to adequately cover increased costs.
• Failure to attract, retain, or motivate highly skilled and qualified employees could impair strategic plan execution and adversely affect business.
• Loss of CFC's tax-exempt status could adversely affect earnings by requiring payment of federal income taxes.
• As a tax-exempt, nonbank financial institution, CFC's lending activities are not subject to the regulations and oversight of U.S. financial regulators, potentially exposing it to greater credit, market, and liquidity risk.
• Changes in accounting standards or assumptions in applying accounting policies could materially impact financial statements, potentially requiring restatements.
• The determination of the allowance for expected credit losses involves significant management judgment and estimation uncertainty, with potential for material impact if estimates are inaccurate.

Future Outlook

CFC projects increases in reported net interest income and net interest yield over the next 12 months, primarily driven by anticipated loan growth. However, a slight decrease in adjusted net interest yield is expected due to the current shape of the yield curve, the baseline interest rate forecast, and faster repricing of interest-earning assets compared to liabilities, along with the need to refinance lower-cost debt at forecasted higher interest rates. A decrease in adjusted net income and adjusted TIER is projected due to an increase in projected operating expenses. The adjusted debt-to-equity ratio is expected to increase due to anticipated growth in the loan portfolio requiring additional funding.

Management Comments

• Our financial goals focus on earning an annual minimum adjusted TIER of 1.10.
• We believe we can continue to roll over our member short-term investments of $2,885 million based on our expectation that our members will continue to reinvest their excess cash primarily in short-term investment products offered by CFC.
• We believe that the capital expenditures for the completion of the broadband projects that we have financed or are financing will total approximately $5,537 million.
• 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 the recent year and is expected to increase at a slower rate.
• We believe the above trends and current investment priorities of our electric cooperative members will require funding and may result in an increased demand for capital from CFC.
• We expect to continue accessing the dealer commercial paper market as a cost-effective means of satisfying our incremental short-term liquidity needs.
• 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.
• Management presently believes that the ultimate outcome of legal proceedings, individually and in the aggregate, will not materially harm our financial position, liquidity or results of operations.
• We have not experienced any material cybersecurity incidents that have impacted our business, results of operations or financial condition to date.

Industry Context

The rural electric cooperative sector is navigating a dynamic environment characterized by evolving federal government programs and policies, including reduced federal incentives for renewable energy development (due to the One Big Beautiful Bill Act), ongoing permitting reform efforts to streamline grid infrastructure improvements, and EPA revisions to greenhouse gas emission requirements. Electricity demand is forecasted to grow substantially through 2040, driven by new data centers, manufacturing facilities, electric vehicle adoption, and beneficial electrification trends. This increased demand necessitates significant investments in power supply, transmission, and related infrastructure. Grid reliability remains a key concern due to baseload power plant retirements, the intermittent nature of renewable energy sources, extreme weather events, and increasing cybersecurity threats. Electric cooperatives are proactively investing in system strengthening and operational resilience. Many cooperatives are also expanding investments in fiber optic lines to support electric grid reliability and offer broadband services to rural communities, often with federal and state grant support, though the pace of broadband investment has slowed recently. CFC plays a crucial role in financing these industry trends and meeting the capital needs of its members.

Comparison to Industry Standards

• CFC's internal borrower risk rating system aligns with U.S. federal banking regulatory agencies' credit risk definitions of pass and criticized categories.
• Due to a limited default history, CFC utilizes third-party default data tables for the utility sector as a proxy to estimate default rates for its loan pools, mapping its internal borrower risk ratings to equivalent external credit ratings.
• CFC's refined methodology for calculating the adjusted debt-to-equity ratio aims to align more closely with rating agency methodologies.
• In assessing CEO compensation, CFC's Compensation Committee engaged Mercer (US) Inc. to conduct a survey using a peer group of 17 organizations, including financial institutions (private market, commercial, mission-driven lenders) and Farm Credit System members, with assets ranging from approximately 50% to 200% of CFC's total assets.

Management Changes

Corporate Governance

Legal Proceedings

• CFC is subject to certain legal proceedings and claims in the ordinary course of business, including litigation with borrowers related to enforcement or collection actions.
• Management believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm CFC's financial position, liquidity, or results of operations.
• No reserve has been recorded with respect to any legal proceedings at this time.

Related Party Transactions

• CFC's business model inherently involves related-party transactions as it lends exclusively to its members and associates, and its directors are drawn from its membership.
• Loans and guarantees to member systems where CFC directors are officers, directors, or employees are made in the ordinary course of business on the same terms (including interest rates and collateral) as comparable transactions with other members, and do not involve more than normal risk of uncollectibility or other unfavorable features.
• Substantially all extensions of credit to such related entities are approved only by disinterested directors.
• The CEO has the authority to approve emergency lines of credit and certain other loans and lines of credit to members with affiliated directors, provided all such credits are underwritten in accordance with prevailing standards and terms.
• No personal loans are extended to any related person.
• Total compensation for other executive officers who meet the definition of a related person for FY2025: Gholam M. Saleh ($798,463), Nathan Howard ($682,443), Jill Maison ($950,020), and Amy Luongo ($811,410).

Stakeholder Impact

• **Shareholders (Members)**: Experienced a decrease in reported net income, but adjusted net income, which is used for patronage capital allocations, also declined. Patronage capital retirement of $47 million was returned in FY2025 (for FY2024 allocation), and $53 million was authorized for return in FY2026 (for FY2025 allocation). Increased leverage ratios could impact future financial flexibility and capital returns.
• **Employees**: The company maintains a competitive Total Rewards package, including base pay, annual incentives, and comprehensive benefits, aimed at attracting, developing, rewarding, and retaining high-level talent. The employee turnover rate was 9.5% in FY2025, and average employee tenure was eight years, indicating stable employment.
• **Customers (Members/Borrowers)**: Continued to receive financing for essential services, infrastructure development, and strategic initiatives like broadband expansion and renewable energy projects. Emergency line of credit loans were provided for disaster recovery, such as Hurricane Helene.
• **Creditors**: Credit ratings were affirmed as stable by Moody's, S&P, and Fitch, indicating continued confidence in CFC's creditworthiness. The company remained in compliance with all debt covenants. However, increased debt-to-equity ratios suggest higher leverage, which creditors will continue to monitor.
• **Regulatory Authorities**: CFC is subject to ongoing regulatory changes, particularly concerning environmental standards (EPA rules) and FEMA reimbursement policies, which could indirectly impact its members and, consequently, CFC's loan portfolio quality. The company also adopted a clawback policy to align with SEC requirements.

Next Steps

• Expect to return $53 million in authorized patronage capital retirement to members in cash in the second quarter of fiscal year 2026.
• Two new at-large directors will be elected by the membership at the 2027 annual meeting to replace the two directors designated by NRECA, whose terms expire in June 2027.
• Expect to adopt ASU 2024-03, 'Income Statement Expense Disaggregation Disclosures,' in the annual report for the fiscal year ended May 31, 2028, and the interim disclosure requirements in the quarterly report for the quarter ended August 31, 2028.
• Will continue to assess the appropriateness of non-GAAP financial measures, which could be subject to change.
• Expect to continue accessing the dealer commercial paper market as a cost-effective means of satisfying incremental short-term liquidity needs.
• Expect to continue to issue long-term debt in the public capital markets and under other non-capital market debt arrangements to meet funding needs.
• Will continue to enhance the crisis management framework and implement management action plans to respond to identified crises, including natural disasters, pandemics, technology disruption, and workforce issues.
• Expect to amortize less than $1 million of unrecognized pension costs as a component of net periodic pension benefit expense in the fiscal year ended May 31, 2026.

Key Dates

Recommendation

While CFC exhibits strong underlying business fundamentals, including robust loan growth, excellent credit quality, and a stable cooperative model, the significant decline in reported net income due to derivative losses and increased leverage warrant a cautious stance. The company's ability to manage interest rate risk and maintain sufficient liquidity in a dynamic market will be key. The stable credit ratings and consistent member support are positives, but the financial metrics show some deterioration. A 'Hold' recommendation reflects the balance between the company's inherent strengths and the recent financial headwinds, suggesting investors monitor future performance and market conditions closely.

Keywords

Rural electric cooperatives, Financial services, Lending, Credit, Debt, SEC filing, 10-K, Cooperative finance, Utility industry, Broadband, Renewable energy, Risk management, Corporate governance, Financial performance, Liquidity, Interest rates, Credit ratings, Patronage capital