National Rural Utilities Cooperative Finance Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended May 31, 2015, with comparisons to fiscal 2014. The filing is an annual report, not a standalone “2014 Q4” report. Figures below are consolidated and generally in U.S. dollars.
Business context
CFC is a member-owned, tax-exempt cooperative lender serving rural electric utilities; consolidated results also include rural telecom lender RTFC, National Cooperative Services Corporation (NCSC), and entities holding foreclosed assets. CFC’s objective is to provide cost-based financing rather than maximize profit. It funds lending primarily through debt markets, member investments, bank credit facilities, Farmer Mac and USDA/RUS-supported programs. About 98% of outstanding loan exposure was to rural electric organizations.
Financial performance and position
| Metric | FY2015 / May 31, 2015 | Prior period |
|---|---|---|
| Interest income | $953.0 million | $957.5 million in FY2014 |
| Interest expense | $635.7 million | $654.7 million in FY2014 |
| Net interest income | $317.3 million; net interest yield 1.47% | $302.9 million; 1.42% in FY2014 |
| Net income (loss) | $(18.9) million | $192.9 million in FY2014 |
| Adjusted net income (non-GAAP) | $95.2 million; adjusted TIER 1.13 | $153.4 million; adjusted TIER 1.21 in FY2014 |
| Total assets | $22.89 billion | $22.23 billion |
| Loans outstanding | $21.46 billion, up 5% | $20.47 billion |
| Allowance for loan losses | $33.7 million, or 0.16% of loans | $56.4 million, or 0.28% |
| Total debt outstanding | $21.32 billion | $20.62 billion |
| Total equity | $911.8 million | $970.4 million |
| Cash and time deposits | $733.8 million | $888.7 million |
| Cash flow from operations | $219.0 million | $190.0 million in FY2014 |
| Cash flow from investing / financing | $(956.6) million / $647.8 million | FY2014: $(47.4) million / $19.1 million |
GAAP net interest margin improved as lower funding costs more than offset reduced loan yields. On the company’s adjusted basis, which includes derivative cash settlements, adjusted net interest income was $234.4 million and adjusted net interest yield was 1.08%, versus $228.9 million and 1.07% in FY2014. Cash and cash equivalents fell by $89.9 million during the year.
Reported debt-to-equity rose to 24.11:1 from 21.91:1; adjusted debt-to-equity increased to 6.26:1 from 5.90:1. Adjusted leverage was 6.58:1. These adjusted measures are non-GAAP and differ from reported ratios. CFC reported no nonperforming loans at year-end; restructured loans were $11.7 million, or 0.05% of loans.
Material changes and unusual items
- Reported results swung to a net loss, mainly reflecting derivative losses of $197.0 million and foreclosed-asset losses of $120.1 million. The latter included approximately $111 million of CAH impairment charges; the filing attributes the impairment to weaker-than-expected subscriber growth, slower customer migration and reduced forecasts, as well as estimated sale proceeds and costs.
- Derivative losses worsened from $34.4 million in FY2014. They included $82.9 million of cash settlement expense and $114.1 million of negative derivative forward-value changes, associated largely with yield-curve movements. Most swaps are not designated for hedge accounting, so fair-value changes flow through earnings.
- Core funding costs declined: average interest cost fell to 3.07% from 3.19%. Loan growth was primarily in CFC distribution and power-supply lending, including refinancing and capital investment advances.
- The allowance for loan losses declined by $22.7 million. Fourth-quarter revisions to recovery-rate assumptions and qualitative factors reduced the allowance by $18 million; management cautions that estimates depend on judgment.
- CAH’s carrying value fell to $116.5 million from $239.1 million. CFC and CAH signed a non-binding letter of intent in June 2015 to sell the telecom and cable operations; completion was expected in FY2016, subject to diligence, definitive documentation and approvals. DRP was dissolved after selling its remaining assets.
- Debt rose by $695.9 million. CFC issued $1.2 billion of collateral trust bonds and reduced dealer commercial paper by about $989 million, as part of a stated effort to limit short-term wholesale funding risk.
Liquidity, outlook and risks
Management expected new long-term advances to exceed scheduled loan repayments by $1.044 billion over the next 12 months, and forecast approximately $2.2 billion of long-term advances. It anticipated continued earnings growth from core lending, while noting that adjusted leverage would likely remain above its 6.00:1 goal in the near term.
At May 31, 2015, liquidity resources included $733.8 million of cash and time deposits, $3.419 billion available under bank revolvers, up to $750 million under FFB facilities, and up to $2.589 billion under the Farmer Mac agreement, subject to market conditions. Long-term debt maturities over the next 12 months were approximately $1.939 billion. Management believed available resources and market access would support obligations and operations for 12–18 months; this outlook depends on continued refinancing access and member investment rollovers.
- Funding and ratings: Access to capital markets, revolving facilities and member funding is critical. A ratings downgrade could raise costs, impair commercial-paper access, or trigger derivative termination payments; estimated net payments under specified rating triggers were approximately $220 million at year-end. S&P revised its outlook to negative in July 2015, after year-end.
- Leverage and covenants: CFC was in compliance with its stated covenants at year-end. Covenants include minimum adjusted TIER and maximum adjusted leverage; breaches may restrict borrowing, patronage retirements or access to new debt.
- Guarantees and commitments: Guarantees outstanding were $986.5 million, with $14.13 billion of unadvanced loan commitments. A significant portion of commitments is conditional, but $2.765 billion of line-of-credit commitments was not subject to a material-adverse-change clause at each advance.
- Concentration and industry: The portfolio is heavily concentrated in rural electric utilities. Regulatory, environmental, technology, economic and competitive changes could affect member finances and repayment capacity.
- Derivatives and operations: Counterparty performance, interest-rate movements, cyber incidents and operational failures are identified risks. CFC does not have external federal regulatory oversight of its lending activities.
- Legal/tax contingency: RTFC received a June 2015 Virgin Islands tax deficiency notice concerning tax years 1996–2005. RTFC disputed the allegations and planned to contest them. Management stated ordinary-course legal proceedings were not expected to materially harm results and had recorded no legal reserve.
- Tax status: CFC’s federal tax exemption depends on continued compliance with applicable requirements; loss of that status could increase tax expense.
Most important facts for investors to verify
- Track GAAP versus adjusted results, including how derivative fair-value volatility and cash settlements affect earnings, TIER and covenant calculations.
- Monitor the CAH sale process, final proceeds and any further impairment or operating costs; the announced agreement was non-binding.
- Assess liquidity and refinancing execution against the near-term debt maturity schedule, commercial-paper rollover assumptions, and availability of Farmer Mac and FFB funding.
- Review leverage, covenant headroom, credit-rating developments and potential derivative collateral or termination obligations.
- Evaluate the basis for the $18 million allowance reduction alongside portfolio risk ratings, loan growth and the absence of nonperforming loans.
- Follow the Virgin Islands tax dispute and any change in CFC’s tax-exempt status or related exposure.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.