Business Context and Reporting Period
National Rural Utilities Cooperative Finance Corporation (CFC) is a member-owned finance cooperative that primarily lends to rural electric utilities. Its consolidated statements include NCSC and RTFC. This unaudited Form 10-Q covers the three and six months ended November 30, 2023 (Q2 and YTD FY2024); comparatives are the periods ended November 30, 2022. RTFC’s business consolidation into NCSC was finalized December 1, 2023, after quarter-end.
Key Financial Metrics
| Metric | Q2 FY2024 | Q2 FY2023 | YTD FY2024 | YTD FY2023 |
|---|---|---|---|---|
| Net interest income | $65.1 million | $78.8 million | $129.8 million | $176.3 million |
| Total revenue | $71.8 million | $82.9 million | $141.0 million | $184.5 million |
| Net income | $148.0 million | $189.8 million | $376.3 million | $351.6 million |
| Adjusted net income (non-GAAP) | $69.9 million | $47.8 million | $136.1 million | $105.3 million |
| Net interest yield / adjusted net interest yield | 0.77% / 1.12% | 0.99% / 1.05% | 0.77% / 1.11% | 1.12% / 1.08% |
| TIER / adjusted TIER | 1.46 / 1.24 | 1.77 / 1.20 | 1.59 / 1.23 | 1.77 / 1.23 |
At November 30, 2023, total assets were $35.5 billion, loans to members were $33.6 billion, total debt outstanding was $32.2 billion and total equity was $2.9 billion. Debt-to-equity was 11.26, versus 12.14 at May 31, 2023; adjusted debt-to-equity was 6.38, up from 6.04 and above CFC’s approximate 6-to-1 goal.
YTD operating cash flow was $146 million, investing cash outflow was $1.324 billion and financing cash inflow was $1.111 billion. Cash, cash equivalents and restricted cash ended at $140 million, down from $207 million at May 31, 2023. The filing reports a 0.17% allowance coverage ratio and a 0.25% nonperforming-loan ratio at quarter-end.
Material Changes Versus Comparable Periods
- Q2 GAAP net income declined 22%; YTD net income increased 7%. Q2 and YTD net interest income declined 17% and 26%, respectively, as borrowing costs rose faster than asset yields.
- Q2 adjusted net income increased 46% and YTD adjusted net income increased 29%. Adjusted net interest income rose 12% for Q2 and 10% YTD, reflecting loan growth and modestly higher adjusted yields.
- Derivative gains were $107 million in Q2, down from $147 million, but $297 million YTD, up from $240 million. These gains include noncash fair-value changes and can materially move reported earnings; management’s adjusted measures exclude derivative forward-value gains and losses.
- Member loans increased $1.022 billion, or 3%, from May 31, 2023. Total debt increased $1.195 billion, or 4%, primarily to fund loan growth. Allowance for credit losses increased $3 million to $56 million.
- Non-interest expense rose 15% in Q2 and 21% YTD, mainly on higher salaries, IT and depreciation and amortization costs.
Liquidity, Outlook, Risks and Unusual Items
- Available liquidity was $6.556 billion against $7.380 billion of debt scheduled to mature over the next 12 months, a $824 million shortfall and a 0.89 liquidity coverage ratio. Excluding $3.623 billion of member short-term investments expected to roll over, liquidity exceeded scheduled debt by $2.799 billion, or 1.75 times. Management also expects $1.516 billion of long-term loan principal payments.
- After quarter-end, CFC closed a $450 million Federal Financing Bank facility under the USDA Guaranteed Underwriter Program, increasing program availability from $750 million to $1.2 billion. Bank revolving credit commitments totaled $2.8 billion, with $2.798 billion available at quarter-end; Farmer Mac availability was $2.098 billion, subject to market conditions.
- Management projects net long-term loan growth of $1.763 billion over the next 12 months and expects reported and adjusted net interest income and yields to decline. It also expects adjusted net income and adjusted TIER to decrease, and adjusted leverage to remain above target, based partly on forecast interest rates, balance-sheet mix, expenses and loan growth.
- Credit exposure is concentrated in rural electric utilities: 98% of loans were to electric utility organizations. One $85 million CFC power-supply loan was nonperforming; criticized loans totaled $300 million. A separate $199 million distribution borrower was in special mention, with hurricane restoration costs and expected FEMA and state reimbursements cited. Management described overall portfolio credit quality as strong.
- Unadvanced loan commitments totaled $15.765 billion, including $3.269 billion of unconditional committed lines. Management says historical utilization of line-of-credit facilities has been low; actual advances could nevertheless affect funding needs. Guarantees outstanding were $898 million, including $637 million of letters of credit; $657 million of guarantees lacked secured recovery rights.
- Interest-rate risk and derivative fair-value volatility are significant. The swap portfolio was $7.621 billion notional, predominantly pay-fixed swaps; falling rates can reduce their fair value and reported earnings. CFC reported a negative 1.48-month duration gap. Fitch and S&P affirmed ratings with stable outlooks; the filing says covenants were met and no material risk-factor changes were identified.
- Other notable items: CFC redeemed $100 million of subordinated debt early and recorded a $1 million extinguishment loss; it paid $72 million in patronage capital retirements. Management reported no current legal-proceeding reserve and no material effect from adopting ASU 2022-02.
Important Facts for Investors to Verify
- Whether member short-term investments continue to roll over and CFC can refinance debt and access committed funding on acceptable terms.
- Actual loan growth, advances under the $15.765 billion commitment pool, and whether the forecast decline in net interest income and adjusted earnings occurs.
- Developments in the $85 million nonperforming loan and the special-mention borrower’s recovery of hurricane costs.
- The distinction between GAAP results and adjusted non-GAAP results, particularly the impact of noncash derivative fair-value changes on reported income.
- Progress toward the adjusted debt-to-equity target and the financial and operational effects of the RTFC-NCSC consolidation and patronage-capital actions.