Business context and reporting period
National Rural Utilities Cooperative Finance Corporation (CFC) is a member-owned, tax-exempt cooperative lender serving rural electric utilities, with consolidated results including NCSC and RTFC. This Form 10-K covers the fiscal year ended May 31, 2020—not calendar 2019 Q4, as the request metadata indicates. Amounts below are in U.S. dollars; financial figures are generally rounded to millions.
Financial results and position
- Revenue and earnings: Total revenue was $353 million, up 12% from $315 million in fiscal 2019. Net interest income rose 10% to $330 million; fee and other income was $23 million. GAAP net loss was $589 million, compared with a $151 million loss a year earlier.
- Key earnings drivers: Derivative losses were $790 million, including $734 million of noncash forward-value losses, largely reflecting falling interest rates. Excluding derivative forward-value changes, adjusted net income was $145 million versus $169 million; adjusted TIER was 1.17 versus 1.19. These are non-GAAP measures and are not substitutes for GAAP results.
- Margins and funding cost: GAAP net interest yield increased to 1.21% from 1.14%; adjusted net interest yield rose to 1.00% from 0.97%. Average funding cost fell to 3.19%, while average yield on interest-earning assets declined to 4.20%.
- Credit and loan growth: Loans to members grew 3% to $26.7 billion. The allowance for loan losses rose to $53 million from $18 million, principally due to a $34 million specific provision against a $168 million power-supply borrower loan classified as nonperforming and placed on nonaccrual. No loans were delinquent, and there were no charge-offs during the year.
- Cash flow: Operating cash flow was $219 million; investing activities used $481 million; financing activities provided $756 million. Cash, cash equivalents and restricted cash increased by $494 million to $680 million.
- Debt and equity: Total debt outstanding was $26.0 billion, up 3%; total equity fell 50% to $649 million, primarily reflecting the GAAP loss and $63 million of patronage capital retirement. GAAP debt-to-equity rose to 42.40 from 19.80, while adjusted debt-to-equity was 5.85 versus 5.73.
- Liquidity: Available liquidity was reported at $7.0 billion, including $671 million cash, $2.7 billion of bank revolving capacity, $900 million under the Guaranteed Underwriter Program, $2.4 billion available under Farmer Mac subject to market conditions, and $309 million of investment securities. Long-term debt principal scheduled to mature within 12 months was $2.0 billion.
Material changes versus the prior year
- GAAP net loss increased by $438 million, principally because derivative losses more than doubled. Management attributes much of the GAAP volatility to fair-value accounting for swaps not designated for hedge accounting; adjusted results exclude unrealized forward-value changes.
- Adjusted net income decreased by $24 million, reflecting the higher loan-loss provision and a $31 million noncash impairment charge after CFC abandoned an internal-use loan-origination and servicing software project. Higher adjusted net interest income and fee income partly offset these costs.
- In response to market disruption early in the COVID-19 crisis, CFC raised cash through additional borrowing, transferred held-to-maturity debt securities to trading, and sold $239 million of securities. This increased reported cash and made the securities portfolio available as a liquidity source.
- Member loans increased $785 million, while total debt rose $838 million. Member investments increased to $5.4 billion and represented 21% of total debt, compared with 18% a year earlier; dealer commercial paper outstanding was zero at year-end.
Outlook, risks and unusual items
Management said it could not quantify the COVID-19 pandemic’s impact on fiscal 2021 because its duration, economic effects, and possible government restrictions or relief remained uncertain. CFC reported no borrower delinquencies or requests for payment deferrals or covenant relief as of the filing, and stated that it believed liquidity was sufficient to meet debt obligations and member borrowing needs. Its projected next-12-month loan advances exceeded anticipated repayments by approximately $663 million; these projections are subject to change.
- Management’s stated objectives are annual adjusted TIER of at least 1.10 and adjusted debt-to-equity of approximately 6.00-to-1 or below. Fiscal 2020 results met those objectives at 1.17 and 5.85, respectively.
- Material risks include concentrated exposure to rural electric utilities, borrower credit deterioration, access to capital markets and refinancing, interest-rate and derivative exposure, rating-triggered termination payments, and the uncertain transition from LIBOR after 2021.
- If specified credit-rating triggers were activated, disclosed potential derivative termination payments included up to $753 million under certain agreements, plus up to $62 million under a separate counterparty arrangement. These are contingent exposures, not amounts reported as currently payable.
- Guarantees totaled $821 million, including $414 million of letters of credit. CFC reported that it made no payments under its guarantee obligations during the year.
- One $168 million power-supply loan was current on required payments but classified as doubtful, impaired, nonperforming and on nonaccrual based on the borrower’s forecasts. The estimated specific allowance was approximately $34 million and could change with borrower performance and updated forecasts.
- CFC adopted CECL on June 1, 2020 and expected an immaterial reduction in retained earnings at adoption; the estimate was still subject to review in light of COVID-19 uncertainty.
KPMG issued an unqualified opinion on the consolidated financial statements. Management stated that disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to opine on internal control.
Important facts for investors to verify
- Review the $168 million impaired borrower exposure, collateral and repayment assumptions, and subsequent changes to its allowance or status.
- Assess the distinction between GAAP losses and adjusted earnings, including the nature and potential cash effects of derivative settlements and fair-value changes.
- Confirm available liquidity, market-dependent Farmer Mac capacity, debt maturities, covenant compliance and access to member and capital-market funding.
- Monitor COVID-19 effects on member utility revenues, customer collections, credit quality and future loan-loss estimates following CECL adoption.
- Track LIBOR-linked loans, debt and swaps, the transition plan and any effects on pricing, operations or risk management.