National Rural Utilities Cooperative Finance Corporation — Form 10-Q
Reporting period: Fiscal quarter and six months ended November 30, 2017. CFC is a member-owned cooperative lender, principally financing rural electric utilities; consolidated results include NCSC and RTFC. Amounts below are in U.S. dollars, rounded to millions unless stated otherwise.
Financial results and position
| Metric | Three months | Six months |
|---|---|---|
| Interest income | $265.8 million | $531.7 million |
| Interest expense | $195.2 million | $387.9 million |
| Net interest income | $70.7 million | $143.8 million |
| Total net revenue | $76.2 million | $153.3 million |
| Net income, consolidated | $178.7 million | $187.7 million |
| Adjusted net income (non-GAAP) | $33.5 million | $68.5 million |
| Net interest yield | 1.12% | 1.14% |
| Adjusted net interest yield (non-GAAP) | 0.81% | 0.83% |
| TIER / adjusted TIER | 1.92 / 1.16 | 1.48 / 1.16 |
Quarterly net income attributable to CFC was $177.6 million. GAAP income included derivative gains of $125.6 million for the quarter and $79.4 million for six months, primarily unrealized fair-value gains; management’s adjusted measures exclude derivative forward-value gains and include periodic cash settlements.
At November 30, total assets were $25.88 billion, loans to members were $24.82 billion, and total debt was $24.09 billion. Total equity was $1.24 billion. Cash and cash equivalents were $280 million; investment securities were $340 million. The allowance for loan losses was $36.8 million, or 0.15% of loans.
For the six months, operating cash flow was $71 million, investing cash outflow was $526 million, and financing cash inflow was $569 million. Cash increased by $114 million to $280 million.
Changes versus comparable periods
- Compared with the prior-year quarter, net income fell 55% and six-month net income fell 29%, mainly because derivative gains were lower. Adjusted net income was broadly stable: up 1% for the quarter and 4% for six months.
- Net interest income declined 4% in both comparisons; net interest yield fell 9 basis points, reflecting higher funding costs. Average interest-earning assets grew about 4%.
- Loans increased $458 million, or 2%, from May 31, 2017. Total debt rose $626 million, or 3%, largely to finance lending growth.
- GAAP debt-to-equity improved to 19.87x from 21.94x, while adjusted debt-to-equity increased to 6.12x from 5.95x and exceeded management’s approximate 6.00x target.
Outlook, risks and unusual items
- Management expects long-term loan advances to exceed repayments over the next 12 months and projects $1.651 billion of long-term advances versus $1.223 billion of anticipated repayments. It expects lower-cost replacement funding for $1.875 billion of maturing collateral trust bonds (weighted-average coupon 8.18%) to reduce funding costs and support higher net interest income and yield.
- Long-term debt maturities over the next 12 months totaled $2.88 billion. CFC expected to redeem $325 million of debt early in fiscal Q3 2018. Management said liquidity should be sufficient, citing a $7.05 billion liquidity reserve; part of Farmer Mac availability is subject to market conditions.
- Committed bank revolving facilities totaled $3.085 billion, with $3.083 billion available. CFC also closed a new $750 million Federal Financing Bank facility, increasing available Guaranteed Underwriter Program capacity to $1.375 billion. Management intends to keep dealer commercial paper below $1.25 billion and expects adjusted leverage to remain above 6.00x over the next 12 months.
- Credit quality remained strong: no past-due or nonperforming loans and no charge-offs in the current six-month period; 0.5% of loans were criticized. However, approximately 99% of loans were to electric utilities, and the 20 largest borrowers represented 23% of total loans and guarantees.
- Guarantees outstanding were $662 million, down from $890 million; recorded guarantee liability was $8 million. CFC also provided liquidity support for $251 million of variable-rate tax-exempt bonds. Unadvanced loan commitments totaled $12.53 billion, although management noted historically low line-of-credit utilization; $2.78 billion was unconditional.
- Derivatives expose reported earnings to interest-rate-driven fair-value swings; CFC does not apply hedge accounting. A downgrade could trigger derivative settlements; the filing estimates a net payable of $164 million under specified rating-trigger scenarios. Senior unsecured ratings were A2/A with stable outlooks from Moody’s/S&P.
- The filing discusses the Tax Cuts and Jobs Act, enacted December 22, 2017, after the reporting date; management did not expect a material consolidated impact. A $16 million escrow related to the prior sale of foreclosed assets produced a $13 million release to CFC, with $3 million remaining for claims under review.
Important facts for investors to verify
- Reconcile GAAP income with adjusted income and assess how much reported earnings depend on noncash derivative fair-value gains.
- Track funding costs, net interest yield, loan growth, and whether forecast refinancing lowers the cost of debt as expected.
- Monitor adjusted debt-to-equity against the 6.00x target, planned debt maturities and redemptions, and actual access to contingent liquidity sources.
- Review borrower concentration, guarantee and unconditional commitment exposures, collateral availability, and any changes in loan performance or the allowance.
- Confirm subsequent developments affecting the remaining escrow claim, tax-law assessment, ratings, and derivative termination exposure.