Business context and reporting period
National Rural Utilities Cooperative Finance Corporation (CFC) filed this Form 10-K for the fiscal year ended May 31, 2023; the filing is not a calendar-year 2022 fourth-quarter report. Consolidated results include CFC, National Cooperative Services Corporation (NCSC) and Rural Telephone Finance Cooperative (RTFC). CFC is a member-owned, tax-exempt cooperative that primarily finances rural electric utilities.
Key financial results
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net income | $502 million | $799 million |
| Net interest income | $315 million | $436 million |
| Adjusted net interest income (non-GAAP) | $349 million | $334 million |
| Adjusted net income (non-GAAP) | $249 million | $241 million |
| Net interest yield | 0.98% | 1.46% |
| Adjusted net interest yield (non-GAAP) | 1.08% | 1.12% |
| Total assets at year-end | $34.0 billion | $31.3 billion |
| Loans to members at year-end | $32.5 billion | $30.1 billion |
| Total debt at year-end | $31.0 billion | $28.7 billion |
Interest income was $1.35 billion and interest expense was $1.04 billion. Fee and other income was $18 million. Reported derivative gains were $286 million, including $252 million of forward-value gains; these mark-to-market gains are a significant source of earnings volatility and are excluded from adjusted net income. Operating expenses rose 15% to $110 million, primarily on salary, IT, travel and in-person meeting costs.
Cash flow and liquidity
Operating cash flow was $338 million, investing cash flow was negative $2.46 billion and financing cash flow was positive $2.17 billion. Cash, cash equivalents and restricted cash increased $46 million to $207 million. Net lending advances for loans held for investment were a major investing cash use.
Available liquidity was $7.15 billion, against $6.93 billion of debt scheduled to mature in the next 12 months, a coverage ratio of 1.03. Excluding $3.25 billion of short-term member investments assumed to be reinvested, coverage was 1.94. Total equity was $2.59 billion. The reported debt-to-equity ratio was 12.14; management’s adjusted ratio was 6.04, near its approximately 6.00 target. CFC reported compliance with debt covenants.
Material changes versus the prior year
- Net income fell $297 million, or 37%, primarily because derivative gains declined $171 million and net interest income fell $120 million. Higher borrowing costs outpaced the improvement in loan yields as interest rates rose.
- Adjusted net income increased $9 million to $249 million, as adjusted net interest income and lower investment-security losses more than offset higher expenses and the less favorable credit-loss provision.
- Loans grew 8% to $32.5 billion. Line-of-credit balances rose $845 million, partly reflecting member operating costs, delayed RUS financing and broadband bridge loans.
- Debt rose 8% to $31.0 billion to fund loan growth. Its weighted-average interest rate increased to 3.83% from 2.54%; short-term borrowing costs also rose sharply.
- Credit metrics improved: nonperforming loans declined to $89 million (0.27% of loans) from $228 million (0.76%), and criticized loans fell to $323 million from $494 million. The allowance for credit losses decreased to $53 million from $68 million.
Outlook, risks and unusual items
Management projects approximately $1.63 billion of net long-term loan growth over the next 12 months. It expects reported net interest income and yield to decline, but adjusted net interest income and adjusted net income to increase; adjusted net interest yield is expected to decrease slightly and adjusted TIER to decline slightly. Management cautions that it cannot provide comparable GAAP forward guidance because unrealized derivative values are difficult to forecast.
Major risks include the concentration of approximately 99% of loans in electric utilities, interest-rate and funding-market exposure, borrower and geographic concentration, severe weather and climate-related impacts, environmental requirements, cyber and operational risks, and competition. Texas represented 17% of loans; the 20 largest borrowers represented 20%. CFC is not subject to direct federal financial-regulator supervision and depends on continued market and other funding access.
CFC recorded $15 million of charge-offs related to Brazos Electric Power Cooperative and Brazos Sandy Creek, both of which had entered bankruptcy. It subsequently received repayment in full of their remaining balances in June and July 2023, respectively. CFC retained an $8 million investment in an entity formed in connection with the sale of Brazos Sandy Creek’s plant interest; the entity had no stated disposition timeline. Members approved the planned sale of RTFC’s business to NCSC, with consolidation targeted over the following 12 months subject to closing conditions. CFC also expected discounted patronage-capital retirements connected to the consolidation.
The filing says substantially all LIBOR-linked contracts and instruments transitioned to SOFR after year-end, completing the transition. KPMG issued an unmodified opinion on the financial statements and identified the collective allowance for credit losses as a critical audit matter. The auditor did not attest to internal control over financial reporting; management concluded its controls were effective.
Important facts for investors to verify
- Whether projected loan growth, funding access and short-term member-investment rollover assumptions are realized, and whether liquidity remains adequate against maturities.
- How much of reported earnings reflects noncash derivative fair-value movements versus recurring adjusted results, and how rising or changing rates affect funding costs and margins.
- Whether credit quality and the $53 million allowance remain appropriate given the concentrated utility portfolio, criticized borrowers and the allowance’s sensitivity to borrower risk ratings.
- Completion terms and financial effects of the RTFC-NCSC consolidation, including the expected discounted patronage-capital retirements.
- Progress and potential borrower impacts from environmental regulation, severe-weather exposure, broadband projects and cybersecurity risks.