Business Context and Reporting Period
National Rural Utilities Cooperative Finance Corporation (CFC) filed this unaudited Form 10-Q for the fiscal quarter ended November 30, 2022, covering the three- and six-month periods then ended. CFC is a member-owned finance cooperative serving mainly rural electric utilities; consolidated results include NCSC and RTFC. CFC’s objective is member financing, not profit maximization.
Financial Results and Position
| Metric | Three months ended Nov. 30, 2022 | Six months ended Nov. 30, 2022 |
|---|---|---|
| Total revenue | $82.9 million, down 28% | $184.5 million, down 19% |
| Net interest income | $78.8 million, down 28% | $176.3 million, down 19% |
| Net income | $189.8 million, up 40% | $351.6 million, versus $45.4 million |
| Adjusted net income (non-GAAP) | $47.8 million, down 25% | $105.3 million, down 11% |
| Net interest yield / adjusted net interest yield | 0.99% / 1.05% | 1.12% / 1.08% |
| Adjusted TIER | 1.20 | 1.23 |
GAAP net income was substantially affected by unrealized derivative fair-value gains: $142.0 million for the quarter and $246.4 million year to date. CFC excludes these noncash changes from adjusted net income; adjusted measures are non-GAAP and may not be comparable across companies. Rising borrowing costs outpaced increases in asset yields, compressing net interest yield.
For the six months, operating cash flow was $176.4 million (prior year: $118.1 million); investing cash outflow was $1.595 billion, primarily reflecting loan advances, and financing cash inflow was $1.539 billion. Cash, cash equivalents and restricted cash ended at $281.6 million.
At November 30, 2022, total assets were $33.19 billion, loans to members were $31.58 billion, and total equity was $2.43 billion. Total debt outstanding was $30.36 billion, up 6% from May 31, including $5.59 billion of short-term borrowings and $22.54 billion of long-term debt. The reported debt-to-equity ratio was 12.64; the adjusted ratio was 6.54, above CFC’s approximate 6.00 target. The allowance for credit losses was $67.6 million, or 0.21% of loans.
Material Changes and Credit Developments
- Loans grew $1.51 billion, or 5%, from fiscal year-end, including growth in long-term loans and lines of credit. Broadband-related loans to electric distribution members were estimated at $2.0 billion.
- Interest expense rose 41% for the quarter and 31% year to date, as rates increased; average borrowing costs reached 3.31% for the quarter and 3.08% year to date.
- CFC recorded $15 million of charge-offs tied to bankrupt borrowers Brazos Electric Power Cooperative and Brazos Sandy Creek. Nonperforming loans were $202.7 million, or 0.64% of loans, at quarter-end.
- After quarter-end, CFC received $56 million from Brazos in December, reducing its remaining exposure to $22 million, unsecured, at December 31. Brazos Sandy Creek’s plant interest was sold in December for a $105 million credit bid; CFC received an $8 million ownership interest in the acquiring entity.
- Total equity rose $292 million year to date, mainly from reported earnings, partly offset by a $59 million patronage capital retirement paid to members.
Liquidity, Outlook and Risks
Available liquidity was $7.16 billion, compared with $7.54 billion of debt scheduled to mature within 12 months, a coverage ratio of 0.95. CFC expects member short-term investments to roll over; excluding those maturities, liquidity coverage was 1.94. Available liquidity includes bank revolvers, USDA Guaranteed Underwriter Program facilities, and Farmer Mac capacity, the latter subject to market conditions. Management said it expects to meet obligations and support operations over the next 12 months.
Management projected approximately $1.25 billion of net long-term loan growth over the next 12 months. It expected reported net interest income and yield to decline, adjusted net interest income and yield to decrease modestly, adjusted net income to remain flat, and adjusted TIER to decline slightly. The adjusted debt-to-equity ratio was expected to remain above target. CFC did not provide forward reconciliation to GAAP measures because future derivative fair-value changes are difficult to predict.
Key risks include rising and changing interest rates, funding and refinancing access, member investment rollover, concentrated lending to the electric utility sector, borrower credit deterioration, and derivative counterparty exposure. CFC’s long-dated swaps create significant GAAP earnings volatility because hedge accounting is generally not applied. The filing also identifies inflation and supply-chain disruption, severe weather and other emergencies, and the transition away from LIBOR as relevant uncertainties. Fitch and S&P affirmed ratings with stable outlooks; CFC reported compliance with debt covenants.
Important Facts for Investors to Verify
- Whether the reported earnings increase is being interpreted alongside adjusted earnings and the large, unrealized derivative gains.
- Progress in collecting remaining Brazos and Brazos Sandy Creek exposures, including recoveries and the value and disposition of CFC’s HoldCo interest.
- Liquidity assumptions, particularly member short-term investment rollover, access to committed facilities, and capital-market access.
- Whether loan growth, credit quality, and the allowance remain consistent with management’s expectations as rates and borrower costs change.
- Actual net interest performance and leverage versus management’s outlook and stated adjusted TIER and debt-to-equity goals.