Business context and reporting period
National Rural Utilities Cooperative Finance Corporation (CFC) is a member-owned, tax-exempt lender serving rural electric cooperatives; it also consolidates NCSC and RTFC. Although the request metadata says “2020 Q3,” this 10-Q reports the quarter ended February 28, 2021—the third quarter of fiscal 2021—and the nine months then ended. Comparisons are with the quarter and nine months ended February 29, 2020.
Financial performance and condition
| Metric | Three months ended February 28, 2021 | Nine months ended February 28, 2021 |
|---|---|---|
| Net interest income | $105 million, up 25% | $307 million, up 28% |
| Net income (loss) | $379 million; prior-year loss $277 million | $684 million; prior-year loss $359 million |
| Adjusted net income (non-GAAP) | $19 million; prior-year $47 million | $126 million; prior-year $151 million |
| Net interest yield / adjusted net interest yield | 1.51% / 1.08% | 1.47% / 1.05% |
| Adjusted TIER | 1.09; prior-year 1.21 | 1.20; prior-year 1.23 |
GAAP earnings swung sharply mainly because of derivative fair-value movements: gains were $330 million for the quarter and $472 million year to date, versus losses of $338 million and $550 million in the comparable prior-year periods. These marks are volatile and generally do not reflect current-period cash flows; adjusted measures include cash settlements but exclude derivative forward-value changes.
For the nine months, operating cash flow was $221 million, investing cash outflow was $1.867 billion and financing cash inflow was $1.143 billion. Cash, cash equivalents and restricted cash declined $503 million to $177 million. Loans to members were $28.327 billion, up 6% from May 31, 2020; total assets were $29.415 billion. Total debt was $27.207 billion, up $1.207 billion, and total equity was $1.269 billion, up $620 million.
At February 28, 2021, short-term borrowings were $4.408 billion and long-term debt was $20.556 billion. GAAP debt-to-equity was 22.19, down from 42.40, largely reflecting derivative-related reported earnings and higher equity; adjusted debt-to-equity was 6.21, up from 5.85 and above management’s approximate 6.00 target. Available liquidity was $7.566 billion, compared with $7.082 billion of debt scheduled to mature over the next 12 months. The allowance for credit losses was $92 million, or 0.32% of loans, versus $53 million and 0.20% at May 31, 2020. CFC had no loan charge-offs in the nine-month period.
Material changes, outlook and risks
- Texas winter storm and borrower credit: The February 2021 polar vortex drove extreme wholesale power prices. Brazos Electric Power Cooperative filed for Chapter 11 on March 1, 2021. CFC reported $85 million of exposure after $3 million in letters of credit were drawn; its $82 million loan balance at quarter-end was classified nonperforming and placed on nonaccrual. CFC estimated a pro rata set-off right of about $20 million against Brazos funds held by participating lenders, subject to potential challenge. A second Texas power-supply borrower, with $383 million in loans, was downgraded to special mention. The two borrowers together had $465 million of loans outstanding at quarter-end.
- Nonperforming loans rose to $240 million, or 0.85% of loans, from $168 million, or 0.63%. Criticized loans increased to $1.016 billion, about 4% of the portfolio. Management said broader portfolio credit quality remained strong, but the ultimate resolution and loss estimate for the Texas exposures were uncertain; the allowance estimate may change as information develops.
- Guidance: CFC expects loan growth and a potentially steeper yield curve to support higher net interest income and yield over the next 12 months. It expects adjusted debt-to-equity to remain above 6.00. Because of uncertainty surrounding the two Texas borrowers, it could not provide a reliable 12-month forecast for adjusted net income or adjusted TIER. Its annual adjusted TIER goal is at least 1.10.
- Funding and ratings: S&P downgraded CFC on March 5, 2021, citing Texas concentration and potential credit stress; senior ratings fell to A- and commercial paper to A-2, with a negative outlook. Moody’s and Fitch ratings were unchanged. CFC reported covenant compliance and said the split ratings had not materially impaired market access, while noting a slight increase in commercial-paper costs and possible higher long-term funding costs.
- Other exposures and developments: Guarantees totaled $676 million; unadvanced loan commitments totaled $13.925 billion, including $3.047 billion of unconditional commitments. CFC cited COVID-19, natural disasters, interest-rate and LIBOR-transition risks. It planned to move staff toward normal office operations beginning May 2021 and expected a CEO transition on May 3, 2021. Management reported effective disclosure controls; it said ordinary-course legal proceedings were not expected to materially harm the company and recorded no related reserve.
Important facts for investors to verify
- Developments in Brazos’s bankruptcy, recoveries and the enforceability or value of CFC’s approximately $20 million set-off right.
- Updated credit ratings, Texas borrower risk classifications, and any resulting changes to CFC’s expected-credit-loss allowance.
- Whether adjusted TIER and adjusted debt-to-equity remain near management’s targets, recognizing these are non-GAAP measures.
- Liquidity availability and refinancing needs, including the $7.082 billion of debt scheduled to mature within 12 months and the market-dependent Farmer Mac capacity.
- The filing’s actual reporting period: quarter ended February 28, 2021, not 2020 Q3 as stated in the request metadata.