Filing summary
Period clarification: The filing is a Form 10-Q for the quarter ended February 28, 2022, covering the third quarter and first nine months of fiscal 2022. This differs from the request metadata label “2021 Q3.” Financial statements are unaudited.
Business context
National Rural Utilities Cooperative Finance Corporation (CFC) is a member-owned, tax-exempt finance cooperative serving primarily rural electric utilities. It also consolidates National Cooperative Services Corporation (NCSC) and Rural Telephone Finance Cooperative (RTFC). CFC’s objective is to provide cost-based financing, not maximize profit; it funds lending primarily through debt, member investments and retained equity.
Financial performance and position
| Metric | Three months ended Feb. 28, 2022 | Nine months ended Feb. 28, 2022 |
|---|---|---|
| Total revenue | $115.8 million, up 6% | $342.6 million, up 7% |
| Net interest income | $111.6 million, up 6% | $329.6 million, up 7% |
| Net income (GAAP) | $262.0 million, down 31% | $307.4 million, down 55% |
| Adjusted net income (non-GAAP) | $66.5 million, versus $19.0 million | $184.4 million, up 47% |
| Net interest yield / adjusted net interest yield | 1.50% / 1.15% | 1.48% / 1.13% |
| TIER / adjusted TIER | 2.51 / 1.33 | 1.59 / 1.31 |
GAAP earnings were materially affected by fair-value movements on interest-rate swaps, which CFC does not designate for hedge accounting. Derivative gains were $169.3 million for the quarter and $43.2 million year to date, versus $330.2 million and $471.8 million in the comparable 2021 periods. Adjusted measures include realized swap cash settlements but exclude unrealized forward-value changes; they are non-GAAP and not directly comparable across companies.
At February 28, 2022, loans to members were $29.52 billion, up 4% from May 31, 2021; total assets were $30.48 billion, up 3%. Total debt was $28.17 billion, up 3%, and total equity was $1.65 billion, up 18%. The GAAP debt-to-equity ratio was 17.45, down from 20.17; the adjusted ratio was 6.19, above CFC’s approximate 6.00 target. The allowance for credit losses was $73.4 million, or 0.25% of loans, versus $85.5 million, or 0.30%, at fiscal year-end.
Cash, cash equivalents and restricted cash fell to $110.8 million from $303.4 million. For the nine months, operating cash flow was $255.9 million, investing cash use was $1.11 billion, and financing cash flow was $664.8 million. Available liquidity was $6.82 billion against $6.78 billion of debt due within 12 months, a 1.01 coverage ratio; excluding member short-term investments due, coverage was 1.97. CFC reported compliance with debt covenants.
Changes and operating developments
- Adjusted net income and adjusted TIER improved year over year, primarily due to higher adjusted net interest income and a favorable change in credit-loss provisions. GAAP net income fell because derivative gains were substantially lower than in the prior-year periods.
- Average interest-earning assets increased with loan growth. Lower borrowing costs supported net interest income, while the low-rate environment also reduced yields on interest-earning assets.
- Rayburn completed a Texas securitization in February 2022, repaid its ERCOT obligations, moved from a criticized to a pass credit rating, and reduced its CFC loan balance to $207 million from $371 million at November 30, 2021.
- Long-term advances were $2.38 billion year to date; $2.03 billion were fixed-rate advances with a weighted-average fixed-rate term of 23 years. Broadband-related distribution-member loans were estimated at $1.24 billion, up from $854 million at May 31, 2021.
- CFC issued medium-term notes and $500 million of 2.75% collateral trust bonds, and redeemed $400 million of bonds early. It also extended committed bank-line maturities and added a $550 million Guaranteed Underwriter Program facility.
Outlook, risks and contingencies
- Management projected approximately $1.17 billion of net loan growth over the next 12 months. Based on its interest-rate outlook, it expected reported and adjusted net interest income and yields, adjusted net income, and adjusted TIER to decline versus the preceding 12-month period. It did not provide forward GAAP guidance or a reconciliation, citing the unpredictability of derivative fair-value changes.
- Management expected adjusted debt-to-equity to remain above its approximate 6.00 target in the near term as borrowing funds anticipated loan growth. Its stated financial goals include an annual minimum adjusted TIER of 1.10.
- Credit exposure remains concentrated: about 98% of loans were to electric utility organizations, and Texas represented about 17% of loans. Nonperforming loans were $207 million, or 0.70% of loans; the portfolio had no charge-offs in the nine-month period.
- Brazos, which filed for bankruptcy in March 2021, had $86 million of nonperforming loans outstanding and had made no payments since its filing. On March 18, 2022, after quarter-end, Brazos subsidiary Brazos Sandy Creek filed for bankruptcy; CFC had a secured $28 million loan to it at February 28 and classified it as nonperforming in fiscal Q4. CFC said its estimate of the event’s expected credit-loss impact was not finalized.
- Interest-rate and swap-valuation volatility, refinancing and liquidity access, credit concentration, borrower performance, severe weather and the uncertain effects of COVID-19 are key risks. The filing also identifies LIBOR transition exposure, including $7.26 billion of swaps and $2.75 billion of unadvanced commitments with maturities after June 30, 2023.
- Management said the pandemic had not materially impaired member credit quality to date, but its future effects remain uncertain. The filing reports no material change to the risk factors in the 2021 Form 10-K and no material legal-proceeding reserve.
Most important facts to verify
- Confirm the intended reporting period: the filing covers the quarter ended February 28, 2022, not 2021 Q3.
- Review how derivative fair-value gains and losses affect reported earnings and distinguish GAAP results from management’s adjusted measures.
- Assess developments in the Brazos bankruptcy and the unfinalized credit-loss estimate for Brazos Sandy Creek’s $28 million loan.
- Test the liquidity outlook against debt maturities, member-investment rollover assumptions, market access and projected loan growth.
- Track whether margins, adjusted TIER and adjusted leverage meet management’s targets as rates and the yield curve change.
- Review the full financial statements, credit-quality disclosures, debt covenants and contingent obligations, including guarantees and unadvanced loan commitments.