National Rural Utilities Cooperative Finance Corporation — Form 10-Q Summary
Reporting period: Three months ended August 31, 2021 (the first quarter of fiscal 2022). CFC is a tax-exempt, member-owned finance cooperative serving rural electric utilities; consolidated results include NCSC and RTFC. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Quarter / period-end | Comparable / prior period |
|---|---|---|
| Total revenue | $112.4 million | $103.1 million; up 9% |
| Net interest income | $108.5 million | $99.6 million; up 9% |
| Net income (loss), GAAP | $(90.3) million | $144.6 million |
| Adjusted net income (non-GAAP) | $54.3 million | $57.3 million |
| Net interest yield | 1.47% | 1.42% |
| Adjusted net interest yield (non-GAAP) | 1.09% | 1.04% |
| Operating cash flow | $122.3 million provided | $104.0 million provided |
| Total assets | $30.09 billion | $29.64 billion at May 31, 2021 |
| Total loans to members | $28.88 billion | $28.43 billion at May 31, 2021 |
| Total debt outstanding | $27.78 billion | $27.43 billion at May 31, 2021 |
| Total equity | $1.25 billion | $1.40 billion at May 31, 2021 |
| Available liquidity | $6.59 billion | $7.09 billion at May 31, 2021 |
The reported net loss primarily reflects $144.6 million of unrealized derivative forward-value losses, compared with $87.2 million of derivative gains in the prior-year quarter. Management says these fair-value movements create GAAP earnings volatility and excludes them from adjusted results. Adjusted TIER was 1.27 versus 1.28; reported TIER was 0.48 versus 1.80. Net interest income improved as average interest-earning assets grew and borrowing costs fell, partly offset by lower asset yields. The provision for credit losses was $4.0 million, versus less than $1 million.
Loans grew $456 million during the quarter. Long-term loan advances were $727 million, with roughly 62% funding capital expenditures and 35% operating expenses, including costs related to the February 2021 Texas polar vortex. Total debt rose $351 million to fund lending growth. Short-term borrowings increased to $5.38 billion; 61% of total debt was secured. The reported debt-to-equity ratio rose to 22.99 from 20.17, while adjusted debt-to-equity increased to 6.27 from 6.15, above management’s approximately 6.00 target.
Material changes and credit quality
- Equity declined $146 million, principally due to the GAAP net loss and a $58 million patronage-capital retirement authorized in July and paid in September.
- The allowance for credit losses rose to $89.5 million from $85.5 million. Nonperforming loans were $231.6 million, or 0.80% of loans, down from $237.5 million, or 0.84%. There were no loan charge-offs during the quarter.
- Brazos Electric Power Cooperative, which filed for bankruptcy in March 2021, had $86 million of loans outstanding and was not making scheduled payments without bankruptcy-court approval. Rayburn Country Electric Cooperative had $375 million outstanding and was classified substandard. Together, Brazos and Rayburn exposure was $461 million, including $277 million unsecured.
- Approximately 99% of loans were to electric utility organizations and 93% of total loans were secured. Texas represented approximately 18% of loans. Management characterized portfolio credit quality as strong overall.
Liquidity, outlook, risks and other notable items
- Available liquidity of $6.59 billion was below $7.89 billion of debt scheduled to mature within 12 months. Management expects member short-term investments to roll over and anticipates $1.65 billion in long-term loan repayments. Excluding member short-term investments, liquidity was 1.5 times near-term debt obligations; including scheduled loan repayments, coverage was 1.9 times.
- Management projects approximately $696 million of net long-term loan growth over the next 12 months, with slight increases in net interest income and adjusted net interest income but slight decreases in their respective yields. Adjusted leverage is expected to remain above target in the near term.
- On June 7, 2021, CFC extended its $2.6 billion bank revolving facilities to November 2024 and November 2025. It had $2.60 billion of commitments, of which $2.60 billion was available less $3 million of letters of credit. CFC reported compliance with debt covenants.
- S&P changed its outlook to stable from negative in August and affirmed ratings; Fitch affirmed its rating and stable outlook in September. Moody’s, S&P and Fitch ratings were A2, A- and A, respectively, for senior unsecured debt.
- Texas enacted securitization legislation for qualifying utilities affected by the polar vortex. Rayburn stated it intends to pursue the program; whether Brazos will use it and the ultimate recovery on both exposures remain uncertain.
- Management reported no pandemic-related loan deferrals or delinquencies, but warned that renewed COVID-19 restrictions could affect CFC and members. LIBOR transition remains a material operational and market consideration: $7.41 billion of swap notional and other financial instruments extended beyond June 2023; CFC planned to stop originating new LIBOR-based loans before year-end 2021.
- Guarantees outstanding were $656.7 million. Derivative rating triggers could require net payments of approximately $426.7 million under specified downgrades. Management reported no material change to previously disclosed risk factors, no material legal reserve, and effective disclosure controls.
Key facts investors should verify
- How Brazos bankruptcy proceedings, Texas securitization, and Rayburn recovery prospects affect the allowance, collateral and eventual loan collections.
- Whether member short-term investments roll over and capital-market access remains sufficient to refinance the $7.89 billion of debt maturing within 12 months.
- Whether projected loan growth, funding costs and interest-rate movements deliver the stated income outlook while adjusted leverage remains above target.
- The distinction between GAAP results and management’s non-GAAP adjusted measures, particularly the treatment of derivative cash settlements and unrealized fair-value changes.
- Progress in transitioning LIBOR-linked loans, debt and swaps to replacement benchmarks, including contractual fallback provisions.