Business context and reporting period
National Rural Utilities Cooperative Finance Corporation (CFC) filed this Form 10-Q for the quarter ended February 29, 2020, covering the three and nine months then ended. CFC is a member-owned cooperative lender serving rural electric utilities, primarily funding loans through debt, member investments and retained equity. The filing’s results consolidate CFC, NCSC and RTFC.
Financial performance and position
| Metric | Three months ended Feb. 29, 2020 | Nine months ended Feb. 29, 2020 |
|---|---|---|
| Total revenue | $87.8 million | $258.5 million |
| Net interest income | $84.2 million | $240.1 million |
| GAAP net income (loss) | ($277.0 million) | ($359.4 million) |
| Adjusted net income (non-GAAP) | $46.6 million | $151.2 million |
| Adjusted TIER (non-GAAP) | 1.21 | 1.23 |
- Revenue for the nine-month period increased 10% year over year; net interest income rose 7%. Nine-month GAAP results included $550.2 million in derivative losses, of which $510.7 million was derivative forward-value losses.
- Nine-month net interest yield was 1.18%, up 4 basis points year over year; adjusted net interest yield was 0.99%, up 3 basis points. Nine-month operating cash flow was $200.0 million; investing cash outflow was $873.9 million and financing cash inflow was $551.2 million. Cash, cash equivalents and restricted cash fell $122.8 million to $63.4 million.
- At February 29, loans to members were $26.82 billion, up 3% from May 31, 2019. Total assets were $27.95 billion; total debt was $25.79 billion, up 3%; and total equity was $880.7 million, down $423.1 million.
- GAAP debt-to-equity increased to 30.73 from 19.80, reflecting derivative liabilities and reduced equity. Adjusted debt-to-equity was 5.80 versus 5.73. The allowance for loan losses was $18.9 million, or 0.07% of loans.
- As of February 29, short-term borrowings were $4.28 billion and long-term debt was $19.19 billion. The company reported $6.98 billion of available committed liquidity at that date. Separately, after March actions, available liquidity was reported at $8.76 billion as of March 31.
Material changes versus comparable periods
- Quarterly GAAP loss widened from $71.5 million to $277.0 million; the nine-month result shifted from $96.2 million net income to a $359.4 million loss. Management attributed the change primarily to substantially larger fair-value losses on interest-rate swaps as rates declined.
- Adjusted nine-month net income increased from $123.4 million to $151.2 million, supported by higher adjusted net interest income, increased prepayment fees, an $8 million land-sale gain and the absence of the prior-year $7.1 million early debt-redemption loss. Quarterly adjusted net income declined from $50.9 million to $46.6 million.
- Loan growth was funded with higher borrowings. Loans increased $905.6 million from May 31; debt increased $630.9 million. Long-term loan advances were $1.95 billion, compared with $1.44 billion in the prior-year period.
- Credit indicators remained strong: no delinquent or nonperforming loans and no loan defaults or charge-offs were reported for the period. Criticized loans totaled $206 million, or 0.77% of loans. Around 99% of loans were to electric utility organizations, and the largest single borrower exposure was approximately 2% of loans.
Outlook, risks and unusual items
- Management’s objectives are a minimum annual adjusted TIER of 1.10 and adjusted debt-to-equity of approximately 6.00 or below. Nine-month adjusted TIER was 1.23 and adjusted debt-to-equity was 5.80. These are non-GAAP measures; the filing does not provide formal earnings guidance.
- COVID-19 created substantial uncertainty around member finances, loan quality and access to capital markets. In March 2020, CFC drew additional facilities, raising cash to $857 million by March 31; it reported $8.76 billion of available liquidity and stated this exceeded expected next-12-month debt maturities. Availability under the Farmer Mac agreement is subject to market conditions.
- In April 2020, CFC abandoned a loan-origination and servicing platform project and recognized a $31 million non-cash impairment charge in fiscal Q4. In March, it transferred held-to-maturity debt securities to trading and recognized a $2 million unrealized gain; it later suspended planned securities liquidations.
- Other key risks include interest-rate and derivative valuation volatility, funding and refinancing access, concentrated exposure to the rural electric sector, LIBOR transition, and potential deterioration in member credit quality. CFC reported compliance with debt covenants at February 29 and stable investment-grade ratings. It identified no material legal proceedings or recorded legal reserves.
Important facts for investors to verify
- Review the composition and sensitivity of the $510.7 million nine-month derivative forward-value loss, and distinguish it from cash settlements and adjusted results.
- Assess how COVID-19 affected member collections, credit ratings, commercial-paper funding and liquidity after March 31; the filing says the ultimate impact could not yet be estimated.
- Track the $31 million platform impairment, replacement-system costs and implementation risks.
- Monitor loan concentration, criticized exposures, the allowance and the transition to CECL effective June 1, 2020; management could not estimate the CECL adoption impact.
- Confirm refinancing capacity and debt maturity management, particularly given short-term funding, market-dependent Farmer Mac availability and derivative downgrade-trigger exposures.