National Rural Utilities Cooperative Finance Corporation (CFC) — Form 10-Q Summary
Reporting period: Fiscal first quarter ended August 31, 2020; income and cash-flow comparisons are for the three months ended August 31, 2019. Balance-sheet comparisons are with May 31, 2020. CFC is a member-owned cooperative lender primarily serving rural electric utilities.
Key financial metrics
| Metric | Quarter / period-end result | Comparable change |
|---|---|---|
| Total revenue | $103.1 million; adjusted revenue $76.2 million | GAAP revenue up 18% from $87.7 million; adjusted revenue down 1% from $76.6 million |
| Net interest income | $99.6 million; adjusted net interest income $72.6 million | Up 30% and 11%, respectively |
| Net income | $144.6 million | Versus a $324.1 million net loss |
| Adjusted net income | $57.3 million | Down from $60.6 million |
| Net interest yield | 1.42%; adjusted yield 1.04% | Up 28 basis points and 7 basis points, respectively |
| Cash flow | Operating +$104.0 million; investing −$442.1 million; financing +$15.2 million; cash and restricted cash decreased $322.8 million to $357.2 million | Operating cash flow was $99.8 million in the prior-year quarter |
| Loans and assets | Loans to members $26.93 billion; total assets $28.26 billion | Loans up $227 million and assets up $105 million from May 31 |
| Debt and equity | Total debt $26.02 billion; total equity $731.5 million | Debt broadly unchanged; equity up $82.7 million from May 31 |
| Liquidity | $6.96 billion of readily available liquidity | 2.1 times the $2.27 billion of long-term debt scheduled to mature over the next 12 months |
| Credit measures | Allowance $57.4 million; coverage ratio 0.21%; adjusted debt-to-equity 5.96x | Coverage was 0.20% and adjusted debt-to-equity 5.85x at May 31 |
CFC reported a GAAP TIER of 1.80 and adjusted TIER of 1.28, compared with adjusted TIER of 1.27 a year earlier. CFC’s stated goals are a minimum annual adjusted TIER of 1.10 and adjusted debt-to-equity of approximately 6.00x or below.
Material changes and drivers
- The swing from a prior-year net loss to current-quarter income mainly reflects derivative fair-value movements: a $60.3 million derivative gain this quarter versus a $395.7 million loss a year earlier. Management says these largely non-cash mark-to-market changes create GAAP earnings volatility and are not necessarily indicative of underlying operating performance.
- Net interest income rose as lower borrowing costs—especially on short-term borrowings—more than offset lower yields on loans and investments. Average borrowing cost declined to 2.75% from 3.36%; average interest-earning asset yield declined to 3.99% from 4.30%.
- Fee and other income fell to $3.5 million from $10.9 million, reflecting lower prepayment fees and the absence of an $8 million land-sale gain recorded in the prior-year quarter. Operating expenses were $22.7 million versus $25.3 million, while total non-interest expense was $23.0 million versus $18.2 million, in part because of that prior-year land-sale gain.
- Loans grew 1% from May 31, principally through long-term lending; long-term advances were $807 million, mostly for member capital expenditures. Long-term loans represented 95% of outstanding loans, and 94% of the portfolio was secured.
- Short-term borrowings rose $592 million to $4.55 billion; total debt increased only $20 million. Member investments were $5.62 billion, or 22% of debt outstanding. Dealer commercial paper was $300 million.
- Cash and cash equivalents declined to $347.8 million from $671.4 million, while the debt-securities portfolio increased to $527.5 million from $309.4 million, partly reflecting renewed purchases after market disruption earlier in 2020.
Outlook, 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 outlook excludes the effects of fiscal 2020’s $31 million software-project impairment, $34 million loan impairment, and unpredictable changes in derivative and investment-security fair values.
- Management reported no material COVID-19 impact on most borrowers to date, no delinquencies, and no requests for payment deferrals or covenant relief. It cautioned that the pandemic’s duration, severity and economic effects remain uncertain.
- One CFC power-supply borrower remains nonperforming and on nonaccrual despite being current on required payments. Its loan balance was $161 million, with a $33 million specific allowance at August 31. No other loans were nonperforming, and there were no delinquent loans or quarterly charge-offs.
- CFC adopted CECL on June 1, 2020. Adoption increased the loan allowance by $3.9 million and reduced retained earnings by the same amount; the quarter’s provision for credit losses was $0.3 million. Future changes in expected lifetime losses are recognized in earnings.
- Guarantees outstanding were $683 million, down from $821 million at May 31; the recorded guarantee liability was $10 million. Unadvanced loan commitments totaled $13.65 billion, including $3.07 billion of unconditional credit lines. Management notes historically low utilization of line-of-credit commitments.
- Interest-rate and refinancing risks remain important: swaps are generally not designated for hedge accounting, and most floating-rate swap payments reference LIBOR. CFC is preparing for the expected LIBOR transition. A downgrade could also trigger derivative termination payments; the filing estimates net payments of $692 million under specified rating-trigger scenarios.
- Credit is concentrated in the electric utility sector: it represented 99% of loans. The 20 largest borrowers represented 22% of loans, while the largest single borrower exposure was below 2%. Ratings were stable, and CFC reported compliance with debt covenants.
- The board authorized $60 million of patronage-capital retirement, paid to members in September 2020. CFC also received a September 16 commitment letter for a $375 million USDA-guaranteed facility. It redeemed $350 million of collateral trust bonds on October 1, after period-end.
- Management reported effective disclosure controls. It stated that no material changes to previously disclosed risk factors were known; ordinary-course legal proceedings were not expected to materially harm the company, and no legal reserve was recorded.
Important facts for investors to verify
- Track the nonperforming $161 million power-supply loan, borrower forecasts and the adequacy of its $33 million specific allowance.
- Assess credit quality and CECL allowance trends as COVID-19 effects evolve, especially given the portfolio’s electric-utility concentration and large unadvanced commitments.
- Separate recurring operating performance from derivative fair-value movements; review adjusted metrics alongside GAAP results and their reconciliations.
- Monitor liquidity sources, member investment rollover, short-term funding, upcoming maturities and the availability of committed facilities, including Farmer Mac funding subject to market conditions.
- Review interest-rate exposure, LIBOR transition progress, derivative counterparty concentration and potential rating-trigger payments.
- Confirm the effects of patronage-capital distributions and post-quarter debt redemptions and financing commitments on liquidity and capital measures.