Business context and reporting period
National Rural Utilities Cooperative Finance Corporation (CFC) filed this Form 10-K for the fiscal year ended May 31, 2022, not a calendar-quarter period. CFC is a tax-exempt, member-owned cooperative lender serving rural electric systems; consolidated results include NCSC and RTFC. Its objective is member financing at cost-based rates, rather than profit maximization.
Key financial metrics
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $452.9 million | $433.5 million |
| Net interest income | $435.7 million | $414.5 million |
| Net income | $798.5 million | $814.0 million |
| Adjusted net income (non-GAAP) | $240.7 million | $192.0 million |
| Net interest yield / adjusted net interest yield | 1.46% / 1.12% | 1.47% / 1.06% |
| Loans to members at year-end | $30.1 billion | $28.4 billion |
| Total debt at year-end | $28.7 billion | $27.4 billion |
| Total assets / total equity | $31.3 billion / $2.1 billion | $29.6 billion / $1.4 billion |
GAAP net income was substantially affected by derivative fair-value gains. FY2022 derivative gains were $456.5 million, including $557.9 million of forward-value gains and $101.4 million of cash-settlement interest expense. CFC’s adjusted measures exclude unrealized derivative forward-value gains or losses and are non-GAAP.
Cash flows: operating activities provided $250.8 million; investing activities used $1.63 billion, mainly reflecting loan advances; financing activities provided $1.24 billion. Cash, cash equivalents and restricted cash declined $142.2 million to $161.1 million.
Liquidity available at year-end was $6.80 billion, versus $6.89 billion of debt scheduled to mature within 12 months (coverage of 0.99x). Excluding $3.96 billion of member short-term investments expected to roll over, coverage was 2.31x; management also expected $1.48 billion of scheduled loan principal repayments. Total debt was 5% higher year over year. Reported debt-to-equity was 13.59x; adjusted debt-to-equity was 6.24x, above CFC’s approximate 6.00x target. CFC reported compliance with debt covenants and ratings of A2/A-/A with stable outlooks from Moody’s/S&P/Fitch.
Material changes versus the prior year
- Total revenue increased 4% and net interest income increased 5%, supported by loan growth; adjusted net interest income rose 12% to $334.3 million.
- GAAP net income declined 2%, mainly because derivative gains were $49.8 million lower and investment securities shifted to a $30.2 million loss from a $1.5 million gain. These effects were partly offset by an $18.0 million benefit for credit losses versus a $28.5 million provision in FY2021.
- Adjusted net income increased 25%. The credit-loss swing chiefly reflected Rayburn’s improved credit profile and reduced exposure after its Texas securitization and payment of ERCOT obligations.
- Loans grew 6%. Long-term loan advances rose to $3.39 billion from $2.51 billion; approximately 80% funded capital expenditures. Broadband-related loans increased to an estimated $1.65 billion from $854 million.
- Nonperforming loans fell to $228 million (0.76% of loans) from $237 million (0.84%); there were no loan charge-offs in either year. The allowance for credit losses decreased to $67.6 million from $85.5 million.
Outlook, risks and unusual items
Management projected approximately $1.15 billion of net long-term loan growth over the following 12 months. Based on the interest-rate outlook available at the time of filing, it expected reported net interest income and both reported and adjusted net interest yields to decline, while adjusted net interest income could rise slightly as derivative cash-settlement expense decreased. Management anticipated slight declines in adjusted net income and adjusted TIER. These are forward-looking expectations, not guarantees; it did not provide a clear forward GAAP earnings forecast.
Credit remains concentrated: about 98% of loans were to electric utilities, Texas represented 17% of loans, and the 20 largest borrowers represented 21%. Brazos and its subsidiary Brazos Sandy Creek were in bankruptcy; combined loans were $114 million, including $65 million unsecured. Rayburn’s exposure improved, but the outcome and recovery on bankruptcy-related loans remain important uncertainties. Other risks include interest-rate and LIBOR-to-SOFR transition effects, funding-market access and refinancing, climate and severe-weather impacts on borrowers, inflation and supply-chain pressures, cybersecurity, competition, and employee turnover. Voluntary turnover was 19% in FY2022.
Derivative fair-value accounting drove unusually large GAAP earnings swings; CFC generally does not apply hedge accounting to its swaps. The allowance for credit losses is a critical accounting estimate and was identified as a critical audit matter. The auditor issued an unqualified opinion on the financial statements; its report did not attest to internal-control effectiveness. Management concluded disclosure controls and internal controls over financial reporting were effective.
Important facts for investors to verify
- Reconcile reported earnings to adjusted results and assess how unrealized derivative gains affect comparability and equity.
- Review recovery prospects, collateral and allowance coverage for Brazos/Brazos Sandy Creek and the remaining nonperforming borrowers.
- Assess near-term refinancing needs, member-investment rollover assumptions, committed facility availability and covenant headroom.
- Test the outlook against actual loan growth, interest rates, funding costs and derivative cash settlements; distinguish projections from reported results.
- Review the concentration of lending in electric utilities and Texas, and borrower exposure to extreme weather, power-price shocks and changing industry requirements.