National Rural Utilities Cooperative Finance Corporation — Form 10-Q
Reporting period: Three months ended August 31, 2023 (first quarter of fiscal 2024); unaudited consolidated results include CFC, NCSC and RTFC. CFC is a member-owned nonprofit finance cooperative focused principally on lending to rural electric utilities.
Financial performance and position
- Net income: $228.3 million, up 41% from $161.9 million a year earlier. The increase was mainly due to derivative gains, not stronger reported net interest income.
- Net interest income: $64.7 million, down 34%; reported net interest yield fell to 0.77% from 1.24%. Interest income rose 24% to $381.0 million, while interest expense increased 51% to $316.3 million as borrowing costs rose.
- Adjusted results (non-GAAP): Adjusted net income was $66.3 million, up 15%; adjusted net interest income was $92.5 million, up 7%, and adjusted net interest yield held at 1.10%. Adjusted TIER was 1.23, above the 1.10 target, versus 1.26 a year earlier.
- Derivative and investment results: Derivative gains totaled $189.9 million, including $162.0 million of forward-value gains and $27.9 million of cash-settlement income. Investment securities recorded $2.9 million of gains versus $3.7 million of losses a year earlier. Derivative fair-value changes create significant volatility in GAAP earnings.
- Cash flow: Operating activities provided $116.2 million, investing activities used $513.0 million and financing activities provided $398.4 million. Cash, cash equivalents and restricted cash ended at $208.8 million.
- Balance sheet and debt: Total assets were $34.7 billion, including $33.1 billion of loans to members. Total debt was $31.4 billion; total equity was $2.75 billion. GAAP debt-to-equity was 11.63, while adjusted debt-to-equity was 6.31, above the approximately 6.0 target.
- Liquidity: Available liquidity was $6.62 billion against $7.01 billion of debt scheduled to mature within 12 months (0.94x coverage). Excluding expected maturities of $3.54 billion in member short-term investments, coverage was 1.91x. Management expects members to roll over these investments and says it expects adequate funding for the next 12 months.
- Credit quality: Nonperforming loans were $85 million (0.26% of loans), down from $89 million at May 31. Criticized loans were $288 million, down from $323 million. The allowance for credit losses was $54.9 million, or 0.17% of loans. There were no charge-offs; a $1 million recovery was recorded.
Changes and notable events
- Loans grew $565 million, or 2%, from May 31, primarily from long-term lending and higher line-of-credit use. Long-term advances were $711 million; 87% funded capital expenditures.
- Operating expenses rose 23% to $31.5 million, with increases in salaries, technology, depreciation and member relations. A $0.9 million loss was recorded on early debt extinguishment.
- CFC redeemed $100 million of subordinated debt due 2043. The July patronage capital retirement of $72 million reduced equity and was paid in cash in September.
- Members approved the planned transfer of RTFC’s business to NCSC; completion is intended in fiscal 2024 subject to closing conditions. In October 2023, the board approved a discounted $52 million early retirement of allocated patronage capital, subject to adjustment, and approved early redemption of $12 million of member subordinated certificates.
Outlook, risks and contingencies
- Management projects net long-term loan growth of approximately $1.96 billion over the next 12 months. It expects reported net interest income and yield to decline, but adjusted net interest income and yield and adjusted net income to rise, mainly because of anticipated derivative cash-settlement income and loan growth. Adjusted TIER is expected to decline slightly; adjusted leverage is expected to remain above target.
- Outlook depends on interest-rate and yield-curve assumptions; management cautions that unrecognized future derivative fair-value movements make GAAP earnings difficult to forecast. A hypothetical parallel 100-basis-point rate increase would reduce modeled 12-month net interest income by 5.29% and increase adjusted net interest income by 7.75%.
- Credit exposure is concentrated: approximately 98% of loans were to electric utilities; Texas represented 17% of loans. Management cites the essential nature of utility service and secured lending as mitigants, but industry and geographic concentration remain risks. Unadvanced loan commitments totaled $15.0 billion and guarantees $900 million.
- Other principal risks include access to capital markets and refinancing, member investment rollover, rising costs, borrower credit deterioration, interest-rate exposure, derivative counterparty risk, and natural disasters. Fitch affirmed ratings with a stable outlook in September 2023. The company reported covenant compliance, effective disclosure controls, no material risk-factor changes, and no legal-proceeding reserves.
Important facts for investors to verify
- How much of reported earnings reflects unrealized derivative gains, and how adjusted measures reconcile to GAAP results.
- Whether projected derivative cash-settlement benefits, loan growth and interest-rate assumptions materialize.
- Liquidity and refinancing capacity, particularly member investment rollover and access to committed facilities and capital markets.
- Whether the nonperforming power-supply loan, hurricane-affected borrower exposures and allowance remain manageable.
- Completion terms and financial effects of the RTFC–NCSC consolidation and related patronage-capital retirement.