Business context and reporting period
National Rural Utilities Cooperative Finance Corporation (CFC) is a tax-exempt, member-owned cooperative lender primarily serving rural electric utilities. This Form 10-Q covers the quarter and six months ended November 30, 2020 (CFC fiscal Q2 and first half of fiscal 2021), with comparisons to the same periods in 2019. CFC accounted for 96% of the $27.1 billion loan portfolio.
Key financial metrics
| Metric | Three months ended Nov. 30, 2020 | Six months ended Nov. 30, 2020 |
|---|---|---|
| Total revenue | $108.4 million, up 31% | $211.5 million, up 24% |
| Net interest income | $102.1 million, up 29% | $201.7 million, up 29% |
| Net income (loss) | $160.5 million, down 34% | $305.1 million, versus a loss of $82.5 million |
| Adjusted net income (non-GAAP) | $49.4 million, up 12% | $106.8 million, up 2% |
| Net interest yield / adjusted net interest yield | 1.48% / 1.05% | 1.45% / 1.04% |
| TIER / adjusted TIER | 1.92 / 1.24 | 1.86 / 1.26 |
Six-month operating cash flow was $109.8 million; investing cash outflow was $573.6 million and financing cash outflow was $39.0 million. Cash, cash equivalents and restricted cash fell $502.8 million to $177.2 million.
At November 30, total assets were $28.2 billion, loans to members were $27.1 billion, total debt was $26.0 billion and total equity was $891.7 million. Short-term borrowings were $4.7 billion and long-term debt was $19.1 billion. Available liquidity was $7.3 billion, including $2.7 billion of undrawn bank revolvers, $1.3 billion of available USDA Guaranteed Underwriter Program facilities and $2.6 billion available through Farmer Mac, subject to market conditions. Long-term debt due in the next 12 months was $1.7 billion.
Material changes versus comparable periods
- Reported earnings were strongly affected by non-cash derivative fair-value movements. Six-month derivative gains were $141.6 million, versus losses of $212.3 million a year earlier; excluding derivative forward-value gains and losses, adjusted net income was $106.8 million versus $104.6 million.
- Lower borrowing costs lifted net interest income: six-month average borrowing cost fell to 2.72% from 3.32%, while average asset yield declined to 4.00% from 4.28%. Lower short-term rates, including a 168-basis-point year-over-year decline in 3-month LIBOR, also increased derivative cash-settlement expense.
- Loans grew $361 million, or 1%, from May 31, 2020. Long-term loans increased $492 million, partly offset by a $132 million decline in lines of credit. Long-term advances were $1.27 billion for the half, down from $1.39 billion.
- Debt outstanding was nearly unchanged from May 31, while cash declined from $680.0 million to $177.2 million. Total equity rose $242.9 million, principally reflecting earnings, partly offset by $59.9 million of patronage capital retired and a $3.9 million CECL adoption adjustment.
- The allowance for credit losses rose to $59.0 million from $53.1 million; coverage increased to 0.22% from 0.20%. Adoption of CECL on June 1 increased the allowance by $3.9 million and reduced retained earnings by the same amount.
Outlook, commentary, risks and unusual items
Management expects fiscal 2021 financial performance to be comparable to or slightly better than fiscal 2020, assuming no material deterioration in borrower credit quality. This expectation excludes the prior-year $31 million software-project impairment, the $34 million loan impairment charge, and unpredictable changes in derivative and investment-security fair values. CFC’s stated goals are annual adjusted TIER of at least 1.10 and adjusted debt-to-equity of approximately 6.00-to-1 or lower; current adjusted measures were 1.26 for the six-month period and 5.90 at period-end.
Management said COVID-19 had not materially impaired liquidity or portfolio credit quality to date; CFC reported no pandemic-related payment deferrals, covenant-relief requests or delinquencies. It nevertheless highlighted uncertainty about the pandemic’s duration and economic effects. Principal risks include the concentration in the electric-utility sector, interest-rate and derivative valuation volatility, access to funding and refinancing, counterparty performance, and the LIBOR transition. CFC had one nonperforming, nonaccrual power-supply loan of $153 million, with a $32 million specific allowance; the borrower was current on required payments. No other loans were nonperforming, and there had been no delinquencies or loan charge-offs in the period.
Other notable items: CFC issued $400 million of 1.35% sustainability collateral trust bonds due 2031 and closed a new $375 million USDA Guaranteed Underwriter Program facility. Guarantees totaled $676.9 million, down from $820.8 million; unadvanced loan commitments were $14.0 billion, although management cautioned that historical line-of-credit utilization is low and commitments do not necessarily represent future funding needs. Ratings were affirmed with stable outlooks, and CFC reported compliance with debt covenants. No material legal proceedings reserve was recorded; management reported effective disclosure controls.
Most important facts for investors to verify
- Review the $153 million nonperforming loan, its borrower outlook, collateral and adequacy of the $32 million specific allowance.
- Assess the sensitivity of reported earnings, equity and liquidity to interest-rate changes, derivative fair values and cash settlements; distinguish GAAP results from non-GAAP adjusted measures.
- Verify the availability and conditions of the $7.3 billion liquidity sources, particularly Farmer Mac market-dependent capacity, and the refinancing plan for $1.7 billion of debt due within 12 months.
- Monitor CECL allowance assumptions, criticized-loan balances and the concentrated exposure to electric utilities and Texas borrowers.
- Track the LIBOR fallback transition, derivative rating-trigger exposures and the potential drawdown of unconditional loan commitments and guarantees.