Business Context and Reporting Period
Company: National Rural Utilities Cooperative Finance Corporation (CFC), a private, not-for-profit cooperative providing financing to rural electric and telecommunications cooperatives.
Reporting Period: Quarterly period ended February 29, 2000 (Nine months ended February 29, 2000).
Scope: Financials include CFC and its controlled affiliates, Rural Telephone Finance Cooperative (RTFC) and Guaranty Funding Cooperative (GFC).
Key Financial Metrics
| Metric (in thousands) | Feb 29, 2000 | May 31, 1999 |
|---|---|---|
| Total Assets | $16,068,620 | $13,925,252 |
| Loans to Members, Net | $15,582,238 | $13,491,199 |
| Total Liabilities & Equity | $16,068,620 | $13,925,252 |
| Notes Payable (Short-term) | $6,601,707 | $4,976,706 |
| Long-Term Debt | $7,312,453 | $6,891,122 |
| Members' Equity | $310,128 | $294,953 |
| Cash & Equivalents | $104,956 | $74,403 |
Performance (Nine Months Ended)
| Metric (in thousands) | Feb 29, 2000 | Feb 28, 1999 |
|---|---|---|
| Interest Income | $734,837 | $572,479 |
| Cost of Funds | $620,146 | $483,200 |
| Gross Operating Margin | $114,691 | $89,279 |
| Net Margins | $81,207 | $56,714 |
| Provision for Loan Losses | $17,355 | $15,780 |
| Net Cash from Operating Activities | $99,840 | $98,291 |
Material Changes
- Asset Growth: Total assets increased by $2.14 billion (15.4%) driven primarily by a $2.09 billion increase in net loans to members.
- Profitability: Net margins increased by $24.5 million (43%) to $81.2 million, attributed to a 26% increase in average loan volume.
- Debt Structure: Short-term notes payable increased by $1.63 billion to fund loan growth. Long-term debt increased by $421 million.
- Loan Portfolio: Non-performing loans increased to $29.6 million from $1.6 million, largely due to the Deseret Generation & Transmission Co-operative restructuring. However, $28.0 million of these were brought current subsequent to the quarter end.
- Allowance for Loan Losses: Increased to $229.6 million (1.45% of total loans) from $212.2 million.
Outlook, Risks, and Contingencies
- Deseret Contingency: CFC holds significant exposure ($665.4 million) to Deseret Generation & Transmission Co-operative under a restructuring agreement (ORA) extending to 2025. CFC believes reserves are adequate, and Deseret has made all required payments to date.
- Non-Performing Loans: CFC plans to write off the remaining $1.6 million of non-performing loans in April 2000.
- Interest Rate Risk: CFC utilizes interest rate exchange agreements (notional amount $4.38 billion) to manage risk. Fixed rate loans funded by variable rate debt represent only 0.3% of total assets.
- Liquidity: CFC maintains $5.49 billion in revolving credit agreements to support commercial paper rollovers and loan requests.
- Guidance: Management expects the leverage ratio to increase modestly to accommodate loan growth. The Times Interest Earned Ratio (TIER) was 1.13 for the nine months ended Feb 29, 2000, exceeding the 1.10 minimum objective.
Investor Verification Checklist
- Deseret Exposure: Verify the status of Deseret's cash flow payments and the adequacy of the $91 million allowance allocated to impaired loans.
- Loan Loss Provision: Confirm the sustainability of the $17.4 million provision given the increase in non-performing assets.
- Debt Maturity: Review the schedule of commercial paper maturities and the availability of the $5.49 billion credit facility for rollover.
- Derivative Compliance: Note the upcoming implementation of SFAS No. 133 (effective June 1, 2001) and its potential impact on balance sheet valuation of derivatives.
- Capital Retention: Monitor the retirement of patronage capital ($66.2 million retired in FY1999) and its impact on members' equity.