Business context and reporting period
National Rural Utilities Cooperative Finance Corporation (CFC) is a tax-exempt cooperative lender serving rural electric and telecommunications members. The consolidated filing includes CFC, RTFC, NCSC and certain subsidiaries. This Form 10-Q covers the quarter and nine months ended February 29, 2012, comparing with February 28, 2011; it is fiscal 2012 Q3, notwithstanding the request metadata’s “2011 Q3” label. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 FY2012 | Nine months FY2012 | Prior comparable period |
|---|---|---|---|
| Interest income | $238.0 | $723.0 | $254.3; $755.9 |
| Interest expense | $190.3 | $587.0 | $206.3; $638.2 |
| Net interest income | $47.7 | $136.0 | $48.0; $117.6 |
| Net income (loss) | $(37.3) | $(151.2) | $83.7; $132.0 |
| Adjusted net income (non-GAAP) | $(11.2) | $33.4 | $29.5; $103.9 |
| Adjusted TIER (non-GAAP) | Below 1.00 | 1.06 | 1.14; 1.16 |
| Net yield | 0.87% | 0.77% | 0.69%; 0.52% |
Interest income fell 6% in Q3 and 4% year to date, reflecting lower average loan balances and rates. Nine-month net interest income rose 16% as lower funding costs more than offset reduced interest income. Adjusted measures incorporate derivative cash settlements and exclude derivative forward-value changes from adjusted net income; they are not GAAP results.
- Cash flow: Operating cash flow was $198.9 versus $184.8 in the prior-year nine months; investing used $384.0 and financing provided $272.9. Cash and cash equivalents increased $87.8 to $381.4. Restricted cash was $1,083.5, largely prefunding a $1,000 note maturity paid March 1, 2012.
- Balance sheet and debt: Total assets were $20.93 billion. Loans outstanding were $18.61 billion, down $713 million from May 31, 2011; the allowance was $149.5 million (0.80% of loans). Short- and long-term debt totaled $17.52 billion; total debt outstanding including subordinated debt and member certificates was approximately $19.45 billion. Total equity declined to $488.7 million from $687.3 million.
- Liquidity: At period-end, CFC reported $2.84 billion available under revolving credit lines, $849 million available from the Federal Financing Bank, and up to $2.49 billion under a Federal Agricultural Mortgage Corporation facility, subject to market conditions. It had $3.4 billion of short-term funding and $2.41 billion of long-term debt scheduled to mature within 12 months; the $1 billion March 1 maturity was subsequently repaid.
- Credit quality: Non-performing loans were $41.9 million (0.23% of loans), versus $31.3 million (0.16%) at May 31, 2011. Restructured loans were $457.8 million, all performing under revised terms and on accrual status at period-end.
Material changes versus prior period
- Year-to-date results shifted from $132.0 million net income to a $151.2 million net loss. Derivative losses were $184.9 million versus gains of $22.4 million; these largely reflect non-cash fair-value movements.
- Foreclosed-asset operations recorded a $59.3 million loss versus $6.3 million. CAH recorded $36 million of goodwill impairment and $9 million of other asset impairment in Q3, amid weaker regional economic conditions and operating performance.
- The loan loss recovery fell to $11.9 million from $42.9 million. The prior-year recovery was substantially associated with resolution of a telecommunications borrower matter.
- Debt outstanding rose $328 million from fiscal year-end, primarily reflecting prefunding of the March 2012 note maturity. CFC issued $800 million of collateral trust bonds in February and redeemed $500 million of 7.25% notes early, recording a $15.5 million extinguishment loss.
- Adjusted debt-to-equity increased to 6.42-to-1 from 6.09-to-1 at May 31, 2011; management reported 6.03-to-1 after excluding the $1 billion maturity paid March 1. GAAP debt-to-equity was 41.84-to-1, reflecting the cooperative’s small equity base and accounting treatment.
Outlook, commentary and risks
Management expects new long-term loan advances over the next 12 months to approximate scheduled repayments and expects interest income to remain broadly stable. It anticipates a modest further decline in adjusted interest expense, while noting that the March 1 maturity of $1 billion of swaps—on which CFC had received a favorable spread of about 530 basis points—will offset much of the refinancing benefit. Management expects to maintain adjusted debt-to-equity at or below its 6.00-to-1 target over the next 12 months and believes available funding sources can meet maturities and lending needs.
Key exposures include refinancing and commercial-paper rollover, access to capital markets, borrower credit quality and collateral values, derivative fair-value volatility and counterparty performance, and conditions affecting CAH’s Caribbean operations. Swap rating triggers could require termination payments: the filing estimates a net $181.7 million payment exposure under specified downgrade scenarios, plus potential collateral posting of $18 million on certain swaps. Total guarantees were $1.15 billion; additional master letter-of-credit commitments could reach $793 million. Unadvanced loan commitments totaled $14.14 billion, although management says most are conditional or historically not fully drawn. CFC reported compliance with debt covenants and effective disclosure controls; it reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Confirm the reporting period: the filing is for the quarter ended February 29, 2012 (FY2012 Q3), not 2011 Q3.
- Review the drivers and cash/non-cash composition of the $184.9 million derivative loss and the $45 million CAH impairment.
- Track adjusted TIER (1.06 year to date) and adjusted debt-to-equity (6.42-to-1 at period-end) against management’s targets and covenant requirements.
- Verify liquidity and refinancing capacity, including subsequent repayment of the $1 billion note and the maturity/renewal profile of short-term funding.
- Monitor CAH performance, non-performing loans and the bankruptcy/reorganization process for the geothermal-project borrower, as well as guarantee and swap-trigger exposures.