National Rural Utilities Cooperative Finance Corporation — Form 10-Q
Reporting period: Three months ended August 31, 2015, the first quarter of fiscal 2016. CFC is a member-owned, tax-exempt cooperative lender serving rural electric and related members; the consolidated results include RTFC and NCSC.
Financial results and position
| Metric | Quarter ended Aug. 31, 2015 | Prior-year quarter or comparison |
|---|---|---|
| Interest income | $246.1 million | $237.3 million |
| Interest expense | $165.7 million | $156.6 million |
| Net interest income | $80.4 million | $80.7 million |
| Provision for loan losses | $4.6 million expense | $6.8 million benefit |
| Derivative losses | $12.0 million | $49.9 million |
| Net income | $43.1 million | $20.6 million |
| Adjusted net income (non-GAAP) | $35.0 million | $50.4 million |
| TIER / adjusted TIER | 1.26 / 1.19 | 1.13 / 1.29 |
| Operating cash flow | $110.7 million | $124.1 million |
Net interest yield was 1.44%, down 7 basis points year over year; adjusted net interest yield was 1.07%, down 6 basis points. The adjusted measures include derivative cash settlements and exclude derivative fair-value movements where applicable; they are non-GAAP measures.
At August 31, 2015, total assets were $23.46 billion, including net member loans of $22.06 billion. Loans outstanding rose $625 million, or 3%, from May 31, primarily from CFC distribution and power-supply lending. Total debt was $21.80 billion, up $527 million, or 2%; total equity was $915 million. GAAP debt-to-equity was 24.63-to-1 and adjusted debt-to-equity was 6.52-to-1, compared with 24.06-to-1 and 6.26-to-1 at May 31.
Cash and time deposits totaled $751 million; cash and cash equivalents were $266 million. Available liquidity reserve access was reported at $7.39 billion, including cash and time deposits, committed bank lines, Federal Financing Bank facilities and Farmer Mac arrangements. Long-term debt maturities over the next 12 months were $1.93 billion. CFC reported compliance with its revolving-credit and senior-debt covenants.
Changes and material developments
- Reported net income more than doubled, mainly because derivative losses were $38 million lower than in the prior-year quarter. The improvement was partly offset by a $12 million year-over-year swing in loan-loss provision.
- Adjusted net income fell 31% and adjusted TIER declined from 1.29 to 1.19, reflecting slightly lower adjusted net interest income and the provision swing.
- The allowance for loan losses increased to $38.3 million from $33.7 million at May 31. Management cited portfolio growth and slight credit deterioration, including negative risk-rating migration. Criticized loans remained below 1% of the portfolio; nonperforming TDR loans were $4.2 million.
- Operating expenses rose 25% to approximately $23 million, primarily due to system infrastructure work and legal fees.
- CFC early-adopted debt-issuance-cost presentation guidance, retrospectively reclassifying $47 million from assets as a deduction from debt. The filing says this presentation change did not otherwise affect the financial statements.
- The board authorized a $39 million patronage capital retirement, paid to members in September 2015; the payment was reflected as payable at quarter-end.
Outlook, risks and contingencies
- Management expects new long-term loan advances to exceed scheduled repayments over the next 12 months and anticipates higher earnings from core lending as loans grow. It expects adjusted debt-to-equity to remain above its 6.00-to-1 goal in the near term as borrowing supports growth.
- Management believes liquidity will be sufficient to fund member lending and meet obligations, and expects continued rollover of member and dealer commercial paper. These expectations depend on member investment behavior, market access, credit ratings and covenant compliance.
- Unadvanced loan commitments were $14.30 billion, including $2.69 billion of line commitments not subject to material-adverse-change clauses. Most other commitments are conditional; CFC says historical utilization has been low and commitments do not necessarily equal expected funding needs.
- Guarantees outstanding were $972 million, in addition to a $493 million liquidity-provider exposure for variable-rate tax-exempt bonds. A further $84 million of letters of credit could be issued under existing master facilities.
- Interest-rate swaps are marked to market through earnings, creating volatility. A rating-trigger termination scenario showed a net potential payment of $212 million; no counterparties had breached trigger levels at quarter-end. CFC’s S&P outlook was negative, while Moody’s outlook was stable.
- On September 30, 2015, CFC agreed to sell Caribbean Asset Holdings (CAH) to Atlantic for $145 million, subject to adjustments and closing conditions. Completion was expected in the second half of calendar 2016 and required regulatory approvals and other conditions. The quarter-end carrying value was $114 million, reflecting expected net proceeds.
- RTFC is contesting a Virgin Islands tax deficiency notice covering specified tax years from 1996–2005. RTFC says the allegations are without merit; CFC recorded no legal reserve. Management said other ordinary-course legal matters were not expected to materially harm the company.
Investor facts to verify
- Track adjusted TIER and adjusted debt-to-equity against CFC’s stated goals and covenant thresholds, and review the filing’s non-GAAP reconciliations.
- Monitor credit-rating outlooks, commercial-paper rollover, committed liquidity availability and the $1.93 billion of near-term long-term debt maturities.
- Assess loan-quality migration, allowance adequacy, TDR/nonperforming loan trends and the standby Farmer Mac commitment covering an initial $520 million loan tranche.
- Confirm CAH sale approvals, final proceeds and timing, and follow the RTFC tax dispute and other legal developments.
- Consider the scale and potential funding demands of guarantees and unadvanced commitments, including the conditional nature of most commitments.