Business context and reporting period
National Rural Utilities Cooperative Finance Corporation (CFC) filed this unaudited Form 10-Q for the three months ended August 31, 2022, its fiscal first quarter of 2023. CFC is a member-owned cooperative lender primarily financing rural electric utilities; consolidated results include NCSC and RTFC. CFC is tax-exempt and does not issue capital stock.
Financial performance and position
| Metric | Quarter ended August 31, 2022 | Prior-year quarter / comparison |
|---|---|---|
| Total revenue | $101.6 million | $112.4 million; down 10% |
| Net interest income | $97.5 million | $108.5 million; down 10% |
| Net interest yield | 1.24% | 1.47%; down 23 basis points |
| Net income (loss) | $161.9 million | $(90.3) million |
| Adjusted net income (non-GAAP) | $57.5 million | $54.3 million |
| Adjusted net interest income (non-GAAP) | $86.7 million | $80.9 million |
| Adjusted TIER (non-GAAP) | 1.26 | 1.27; above 1.10 target |
The reported earnings swing mainly reflects derivative fair-value movements, not underlying operating performance: a $104.4 million derivative forward-value gain in the current quarter versus a $144.6 million loss a year earlier. Management excludes these unrealized changes from adjusted earnings. Interest expense rose 20% to $209.5 million, while interest income increased 8% to $307.0 million. Operating expenses were $25.5 million, up 5%. The provision for credit losses was $3.5 million.
Operating cash flow was $145.5 million, compared with $122.3 million a year earlier. Investing activities used $674.1 million, principally for loan advances; financing activities provided $608.0 million. Cash, cash equivalents and restricted cash ended at $240.6 million.
Balance sheet, lending, debt and liquidity
- Total assets were $32.1 billion, up 3% from May 31, 2022. Member loans were $30.7 billion, up $624 million, or 2%; 96% were attributable to CFC. Long-term loan advances were $815 million, with approximately 95% funding capital expenditures.
- Total debt outstanding was $29.4 billion, up $614 million, or 2%. Short-term borrowings were $5.3 billion; long-term debt was $21.9 billion; subordinated debt and member certificates totaled about $2.2 billion.
- Total equity was $2.25 billion. The quarter’s $161.9 million reported income was partly offset by a $58.9 million patronage capital retirement authorized in July and paid in September.
- Reported debt-to-equity was 13.28; adjusted debt-to-equity was 6.40 versus management’s approximate 6.00 target. Adjusted liabilities increased to fund loan growth.
- Available liquidity was $7.35 billion against $7.28 billion of debt scheduled to mature in the next 12 months, a 1.01 coverage ratio and $63 million excess. Excluding member short-term investments due for renewal, coverage was 2.23. Management expects member investments to roll over and anticipates $1.50 billion in scheduled loan principal receipts.
- Credit quality indicators included a $71.1 million allowance (0.23% of loans), no loan charge-offs, and nonperforming loans of $217.8 million (0.71% of loans), down from $227.8 million at May 31.
Changes, outlook and key risks
Management projects net long-term loan growth of approximately $1.26 billion over the next 12 months. Based on its September 2022 interest-rate outlook, it expects reported net interest income and yield to decline versus the prior 12 months, with a modest decline in adjusted net interest income and yield. Adjusted net income and adjusted TIER are expected to decrease slightly; adjusted leverage is expected to remain above the approximate 6.00 target. The filing provides no precise earnings forecast and says GAAP forward guidance cannot be reconciled without unreasonable effort because derivative fair-value changes are difficult to predict.
Key risks include exposure to higher interest rates and yield-curve movements, substantial reliance on wholesale and member funding, and concentrated lending to electric utilities: approximately 98% of loans were to electric utility organizations. Texas represented about 17% of total loans. Brazos and Brazos Sandy Creek remained in bankruptcy and accounted for $114 million of nonperforming loans; recovery depends in part on bankruptcy proceedings and a proposed Texas securitization. A separate special-mention borrower affected by hurricane restoration costs was expected to receive government grants, which are not assured. CFC also reported $14.2 billion of unadvanced loan commitments and $770.6 million of guarantees. LIBOR-indexed instruments and commitments remain subject to transition risk, although CFC says it has taken steps toward SOFR and ceased originating new LIBOR-based loans in December 2021.
Management cited inflation, supply-chain disruption, system resilience, broadband investment and clean-energy opportunities under the Inflation Reduction Act as industry developments. Fitch affirmed CFC’s ratings with a stable outlook on September 7, 2022; Moody’s and S&P ratings were also stable. CFC reported compliance with debt covenants and effective disclosure controls. It stated that no material risk-factor changes from its latest Form 10-K were identified and that ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Separate recurring cooperative earnings from the substantial, noncash derivative fair-value gain; review adjusted measures alongside GAAP results.
- Monitor net interest yield, borrowing costs and management’s outlook as interest rates and the yield curve change.
- Assess liquidity beyond the 1.01 reported coverage ratio, including assumptions about member-investment rollover and continued capital-market access.
- Track Brazos and Brazos Sandy Creek bankruptcy outcomes, collateral and allowance adequacy, as well as the special-mention borrower’s expected grant recovery.
- Review leverage against management’s target, loan growth and the scale of unadvanced commitments and guarantees.