Business context and reporting period
National Rural Utilities Cooperative Finance Corporation (CFC) filed this Form 10-K for the fiscal year ended May 31, 2021, with consolidated results including NCSC and RTFC. The filing is an annual report, notwithstanding the request metadata’s “2020 Q4” label. CFC is a member-owned, tax-exempt cooperative that finances rural utilities; it does not issue capital stock and is not a federal agency or government-sponsored enterprise. Electric utility organizations represented about 99% of loans outstanding.
Key financial metrics
Amounts below are in U.S. dollars; “adjusted” figures are company-defined non-GAAP measures and are not substitutes for GAAP results.
| Metric | FY2021 / May 31, 2021 | Comparable period |
|---|---|---|
| Total revenue (net interest income plus fee and other income) | $433 million | $353 million in FY2020 |
| Net interest income / net interest yield | $415 million / 1.47% | $330 million / 1.21% |
| Adjusted net interest income / adjusted net interest yield | $299 million / 1.06% | $274 million / 1.00% |
| Net income (loss) | $814 million | $(589) million in FY2020 |
| Adjusted net income | $192 million | $145 million in FY2020 |
| Provision for credit losses | $29 million | $36 million in FY2020 |
| Total assets / total equity | $29.64 billion / $1.40 billion | $28.16 billion / $649 million |
| Loans to members | $28.43 billion | $26.70 billion |
| Total debt outstanding | $27.43 billion | $26.00 billion |
| Cash, cash equivalents and restricted cash | $303 million | $680 million |
| Operating cash flow | $240 million | $219 million in FY2020 |
GAAP net income and equity were materially affected by derivative fair-value movements. FY2021 included $622 million of derivative forward-value gains, contributing to total derivative gains of $506 million; FY2020 had $734 million of forward-value losses and total derivative losses of $790 million. Adjusted net income excludes forward-value gains and losses, but includes periodic derivative cash settlements.
The GAAP debt-to-equity ratio was 20.17, down from 42.40; the adjusted debt-to-equity ratio was 6.15, up from 5.85 and above management’s approximate 6.00 target. The allowance for credit losses was $86 million, or 0.30% of loans, versus $53 million, or 0.20%, a year earlier. Nonperforming loans were $237 million, or 0.84% of loans, versus $168 million, or 0.63%.
Cash flow from investing activities was $(1.97) billion and financing activities provided $1.36 billion; cash and restricted cash declined by $377 million during the year. These movements primarily reflect loan advances and funding activity.
Material changes versus FY2020
- Revenue increased 23% and adjusted net income rose by $47 million. Net interest income increased $84 million, reflecting a higher reported net interest yield and growth in average interest-earning assets; lower short-term borrowing costs were partly offset by lower yields on loans and investments.
- The swing from a GAAP loss to substantial GAAP income was chiefly the change in derivative fair values, not a comparable change in core operating earnings.
- Loans grew 6% to $28.43 billion, including a $679 million increase in lines of credit, partly related to weather emergencies. Total debt rose 5% to $27.43 billion to fund lending growth.
- The allowance increased $32 million, primarily following credit downgrades of Texas power-supply borrowers Brazos and Rayburn. CFC adopted the CECL expected-credit-loss standard on June 1, 2020, recording a $4 million opening retained-earnings reduction.
- Non-interest expense fell 23%, mainly because FY2020 included a $31 million noncash impairment of an abandoned loan-platform software project.
Outlook, risks and unusual items
- Outlook: Management anticipated loan growth over the following 12 months and expected growth, if the yield curve remained steep, to support higher net interest income and adjusted net interest income. It projected approximately $2.23 billion of long-term advances versus $1.43 billion of long-term repayments over the next 12 months. Management expected the adjusted debt-to-equity ratio to remain above its 6.00 target in the near term. No specific earnings guidance was provided.
- Texas power-market event: The February 2021 polar vortex drove ERCOT wholesale prices as high as $9,000 per MWh. Brazos filed for Chapter 11; CFC had $85 million of Brazos loans outstanding, including $64 million unsecured. Rayburn had $379 million outstanding, including $212 million unsecured. Their combined exposure was $464 million. Texas enacted a securitization financing law after year-end, but CFC said it was uncertain whether either borrower would use it.
- Credit concentration: Texas borrowers represented 17% of loans, and the 20 largest borrowers represented 22%. Criticized loans increased to $886 million from $371 million. CFC reported no loan charge-offs in FY2021, FY2020 or FY2019, but Brazos’s bankruptcy and the stressed borrowers increased credit uncertainty.
- Liquidity and funding: Available liquidity was $7.09 billion, compared with $7.18 billion of debt scheduled to mature in the next 12 months. Availability included bank revolvers, government-guaranteed facilities and Farmer Mac capacity, some subject to collateral, market conditions or program terms. CFC reported compliance with its covenants. After year-end, bank revolver commitments were extended to 2024 and 2025, with combined commitments reduced to $2.60 billion.
- Ratings and derivatives: S&P downgraded CFC in March 2021 and assigned a negative outlook, citing Texas concentration and polar-vortex credit stress; Moody’s and Fitch ratings were unchanged. CFC reported potential derivative termination payments of up to $328 million at specified rating-trigger thresholds, plus up to $22 million at a lower threshold. These are contingent exposures, not payments reported as made.
- Other risks: Key risks include dependence on capital markets and member funding, interest-rate and LIBOR-transition exposure, concentrated utility lending, severe weather, COVID-19, cybersecurity and preserving CFC’s tax-exempt status. Management said COVID-19 had not significantly harmed liquidity or borrower performance to date and reported no pandemic-related payment deferrals.
- Governance and audit: The CEO changed on May 3, 2021, with J. Andrew Don succeeding Sheldon Petersen; management anticipated no fundamental change in strategy. KPMG issued an unqualified opinion on the financial statements. The auditor identified the collective allowance for credit losses as a critical audit matter. The auditor did not attest to internal control over financial reporting.
Important facts for investors to verify
- Track Brazos’s Chapter 11 recovery, the treatment of CFC’s $85 million exposure and set-off rights, and Rayburn’s repayment prospects and any use of Texas securitization legislation.
- Review subsequent allowance changes, risk-rating migrations and nonperforming or delinquent loan balances, particularly given CECL’s judgment-sensitive estimates.
- Confirm liquidity sources remain available and collateral requirements and debt maturities are manageable; note that reported liquidity was slightly below next-12-month debt maturities.
- Monitor S&P’s negative outlook, borrowing costs and any derivative rating-trigger exposure or counterparty developments.
- Assess the durability of adjusted earnings and net interest margins separately from volatile GAAP derivative fair-value gains and losses; review the company’s non-GAAP reconciliations.
- Check subsequent loan growth, adjusted leverage against the 6.00 target, patronage allocations and cash retirements, and progress on LIBOR contract fallbacks.