National Rural Utilities Cooperative Finance Corporation — Form 10-Q Summary
Period: Fiscal third quarter ended February 28, 2019, with year-to-date results for the nine months ended that date. The filing’s reporting period is 2019 Q3, notwithstanding the request metadata’s “2018 Q3.” CFC is a member-owned, tax-exempt cooperative lender primarily serving rural electric utilities; the consolidated results include NCSC and RTFC.
Financial performance and position
- Quarter: Total revenue was $81.9 million, up 6% year over year. Net interest income increased 7% to $78.2 million, while GAAP net loss was $71.5 million versus net income of $221.0 million a year earlier. Adjusted net income, a non-GAAP measure, was $50.9 million versus $34.1 million.
- Nine months: Total revenue was $234.8 million, up 2%; net interest income was $223.6 million, up 3%. GAAP net income was $96.2 million, down 76% from $408.8 million. Adjusted net income increased 20% to $123.4 million.
- Margins and coverage: GAAP net interest yield was 1.19% for the quarter and 1.14% year to date, compared with 1.16% and 1.15%, respectively. Adjusted net interest yield was 1.04% and 0.96%, versus 0.86% and 0.84%. GAAP TIER was 0.66 for the quarter and 1.15 year to date; adjusted TIER was 1.23 and 1.19.
- Cash flow: Nine-month operating cash flow was $173.7 million; investing cash use was $790.0 million and financing cash provided was $608.1 million. Cash, cash equivalents and restricted cash ended at $230.6 million, down $8.2 million from May 31, 2018.
- Balance sheet and debt: Total assets were $27.41 billion; loans to members were $26.02 billion, up 3% from May 31, 2018. Total debt rose 3% to $25.32 billion, while equity increased 3% to $1.55 billion. The GAAP debt-to-equity ratio was 16.65; adjusted debt-to-equity was 6.29, above management’s approximate 6.00 target.
- Liquidity: Readily accessible liquidity totaled $6.87 billion, including $223 million of cash, $2.97 billion under bank revolvers, $1.35 billion under USDA Guaranteed Underwriter Program facilities, and Farmer Mac capacity. Long-term debt maturities over the next 12 months were $2.22 billion.
Changes versus comparable periods
- Reported earnings swung sharply because derivative forward-value marks shifted from gains of $168.0 million in the prior-year quarter to losses of $122.4 million in the current quarter; for the nine-month periods, the comparable marks were gains of $306.2 million and losses of $27.2 million. Total derivative results, including cash settlements, were losses of $132.2 million for the quarter and $61.6 million year to date.
- Management says these noncash fair-value movements create GAAP earnings volatility and are not necessarily indicative of underlying operations. Adjusted measures include derivative cash settlements but exclude unrealized forward-value changes.
- Loan balances grew by $839 million, but nine-month long-term advances declined to $1.44 billion from $1.86 billion, reflecting fewer borrower refinancings. Total debt increased to fund loan growth.
- The $1 billion of 10.375% collateral trust bonds was redeemed in part and repaid at maturity, with replacement funding at lower cost. The early redemption resulted in a $7.1 million debt-extinguishment loss in the nine-month period.
Outlook, risks and other items
- Management expects net interest income, adjusted net interest income, TIER and net interest yields to increase over the next 12 months, largely due to savings from replacing the high-coupon bonds with lower-cost funding.
- CFC expects adjusted debt-to-equity to move closer to or below its 6.00 target, based on forecast loan advances and equity. These are expectations, not guarantees.
- Credit quality was reported as strong: no delinquent or nonperforming loans, defaults or charge-offs during the periods cited. Criticized loans were $185 million, or 0.71% of loans; $178 million was substandard. The portfolio is concentrated in electric utilities (99% of loans), creating industry and single-obligor exposure despite geographic diversification.
- Off-balance-sheet exposures included $786 million of guarantees and $12.91 billion of unadvanced loan commitments. Most commitments were subject to material-adverse-change clauses; $2.91 billion of lines of credit were unconditional. CFC also provided liquidity support for $248 million of member tax-exempt bonds.
- Interest-rate risk and derivative valuation are key sensitivities. A downgrade could trigger derivative termination payments; the filing estimates a net payment of $51.7 million under specified rating-trigger scenarios. Funding access, credit ratings, borrower demand, interest rates and counterparty performance are additional risks.
- The filing reported compliance with debt covenants and stable investment-grade credit ratings. Management reported effective disclosure controls and no material change in internal control over financial reporting. It did not identify material changes to the prior annual report’s risk factors; ordinary-course legal proceedings were not expected to materially harm results, and no legal reserve was recorded.
- A 28-acre Virginia property remained held for sale; the closing date was extended to no later than July 25, 2019, and CFC expected a gain on sale. Adoption of new equity-security accounting moved unrealized gains and losses into earnings; adoption of the expected-credit-loss standard was still under evaluation.
Important facts for investors to verify
- Reconcile GAAP net loss and income changes to derivative fair-value movements, and assess adjusted results alongside their non-GAAP definitions.
- Review liquidity availability and refinancing plans against $2.22 billion of near-term long-term debt maturities and dependence on capital markets, member funding and committed facilities.
- Monitor adjusted debt-to-equity against management’s 6.00 target and the impact of continued loan growth and patronage capital distributions.
- Assess the substandard borrower, industry concentration, guarantee exposure and utilization of unconditional loan commitments.
- Confirm the timing and proceeds of the Virginia land sale and monitor implementation of the expected-credit-loss accounting standard.