National Rural Utilities Cooperative Finance Corporation — Form 10-Q
Reporting period: Quarter and six months ended November 30, 2021 (fiscal second quarter). Unaudited consolidated results include CFC, NCSC and RTFC. CFC is a member-owned, tax-exempt finance cooperative serving primarily rural electric utilities; its objective is member financing, not profit maximization. Filed January 14, 2022.
Financial performance and position
| Metric | Three months ended Nov. 30, 2021 | Six months ended Nov. 30, 2021 | Comparable 2020 period |
|---|---|---|---|
| Net interest income | $109.6 million | $218.0 million | $102.1 million / $201.7 million |
| Total revenue | $114.4 million | $226.8 million | $108.4 million / $211.5 million |
| GAAP net income | $135.7 million | $45.4 million | $160.5 million / $305.1 million |
| Adjusted net income (non-GAAP) | $63.7 million | $118.0 million | $49.4 million / $106.8 million |
| Net interest yield | 1.49% | 1.48% | 1.48% / 1.45% |
| Adjusted net interest yield (non-GAAP) | 1.13% | 1.11% | 1.05% / 1.04% |
| TIER / adjusted TIER | 1.78 / 1.32 | 1.13 / 1.29 | 1.92 / 1.24; 1.86 / 1.26 |
GAAP income is materially affected by interest-rate-swap fair-value changes. For the six months, derivative losses were $126.1 million, including $72.6 million of forward-value losses, versus $141.6 million in derivative gains, including $198.3 million of forward-value gains, in 2020. Adjusted measures include cash settlements but exclude unrealized forward-value changes; they are non-GAAP and should be read alongside GAAP results.
- Cash flow, six months: Operating cash flow was $139.1 million; investing cash outflow was $549.8 million, largely reflecting net loan advances; financing cash inflow was $291.1 million. Cash, cash equivalents and restricted cash declined $119.6 million to $183.8 million.
- Balance sheet at November 30: Total assets were $30.02 billion; member loans were $28.95 billion, up $520 million (2%) from May 31. Total debt was $27.79 billion, up $364 million; total equity was $1.39 billion, down $9 million.
- Leverage and liquidity: GAAP debt-to-equity was 20.58x, versus 20.17x at May 31; adjusted debt-to-equity was 6.15x, above management’s approximate 6.00x target. Available liquidity was $7.06 billion against $7.21 billion of debt maturities over the next 12 months (coverage ratio 0.98). Management expects member short-term investments to roll over; excluding those investments, available liquidity was 1.9x near-term debt obligations. Scheduled loan principal receipts of $1.46 billion are also expected over 12 months.
- Credit allowance: $86.1 million, or 0.30% of loans, essentially unchanged from May 31. No loan charge-offs occurred in the six-month period.
Material changes versus comparable periods
- Six-month GAAP net income fell $259.7 million, primarily because derivative fair-value results shifted substantially from gains to losses. Adjusted net income increased $11.2 million, supported mainly by 14% growth in adjusted net interest income.
- Quarterly GAAP net income declined $24.8 million as derivative gains fell, partly offset by higher net interest income and a favorable credit-loss allowance change.
- Net interest income rose 8% year to date as average interest-earning assets grew 6%, primarily from loan growth, and net interest yield increased 3 basis points. Lower funding costs were partly offset by lower yields on earning assets.
- Equity declined mainly because CFC returned $58 million of patronage capital to members in September, partly offset by year-to-date net income.
Outlook, commentary and key risks
- Management projected approximately $879 million of net long-term loan growth over the next 12 months and expected reported and adjusted net interest income to increase. It expected reported net interest yield to remain flat and adjusted yield to rise, assuming short-term rates increase and reduce derivative cash-settlement expense. Adjusted leverage was expected to remain above the 6.00x target in the near term.
- Reported earnings remain exposed to potentially significant, noncash volatility from swaps, which generally are not designated for hedge accounting. Management did not provide directional GAAP guidance because future derivative fair-value movements cannot be predicted reliably.
- Texas power-cost exposure: Loans to Brazos Electric and Rayburn totaled $457 million, including $277 million unsecured. Brazos, with $86 million outstanding, was in bankruptcy and had not paid since March 2021. Rayburn had $371 million outstanding, was current on obligations to CFC, and was pursuing Texas securitization financing; its completion and effect on loan collectibility were uncertain.
- Nonperforming loans were $219 million (0.76% of loans), down from $237 million (0.84%) at May 31. The balance included Brazos and a separate CFC power-supply borrower with $134 million outstanding. Criticized loans totaled $890 million (about 3.08% of loans); the portfolio is highly concentrated in electric utilities, which represented approximately 99% of loans. Texas borrowers represented about 17% of loans.
- Liquidity depends in part on continued capital-market access and rollover of member funding. Short-term borrowings were $4.75 billion, including $3.46 billion of member investments; management targeted dealer commercial paper at or below $1.25 billion. Ratings from Moody’s, S&P and Fitch were stable as of the filing.
- Management said COVID-19 had not materially affected borrower credit quality or loan-payment performance to date, but uncertainty remained around the pandemic and new variants. Other key exposures include interest-rate and LIBOR-transition risk, borrower and industry concentration, funding access, and natural disasters. The filing reported no material change to the risk factors in the 2021 Form 10-K.
- The allowance for credit losses depends on management estimates and assumptions. The company reported compliance with debt covenants, effective disclosure controls, and no legal-proceedings reserve or legal matter management believed would materially harm its financial condition.
Important facts for investors to verify
- Whether reported and adjusted net interest income grow as projected, and how higher rates affect yields, funding costs and swap settlements.
- Developments in Brazos bankruptcy proceedings and Rayburn’s securitization, including recoveries on the $457 million combined exposure and the unsecured portion.
- Liquidity and refinancing assumptions, especially renewal of $3.46 billion in member short-term investments, capital-market access and scheduled debt maturities.
- Changes in criticized/nonperforming loans, allowance estimates and the concentrated Texas and electric-utility exposures.
- Implementation of the LIBOR transition: the filing identified $7.34 billion of swap notional and $2.63 billion of unadvanced commitments with maturities beyond June 2023, as well as LIBOR-indexed loans, securities and debt.