National Rural Utilities Cooperative Finance Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended November 30, 2011. Unaudited consolidated results include CFC, RTFC, NCSC, and certain controlled entities. CFC is a tax-exempt cooperative and cannot issue equity capital stock. Amounts below are in U.S. dollars; financial figures are generally shown in millions.
Financial performance and position
| Metric | Quarter ended Nov. 30, 2011 | Six months ended Nov. 30, 2011 | Prior-year comparison |
|---|---|---|---|
| Interest income | $237.8 | $485.0 | $250.5 and $501.6 |
| Interest expense | $194.7 | $396.7 | $212.4 and $431.9 |
| Net interest income | $43.1 | $88.3 | $38.1 and $69.7 |
| Net income (loss) | $(27.3) | $(113.9) | $90.7 and $48.3 |
| Net income (loss) attributable to CFC | $(26.8) | $(110.8) | $87.4 and $50.3 |
| Adjusted net income (non-GAAP) | $19.5 | $44.6 | $43.0 and $74.4 |
| Adjusted TIER (non-GAAP) | 1.10 | 1.11 | 1.20 and 1.17 |
Quarterly and six-month comparisons in the table are against the corresponding 2010 periods. GAAP TIER was below 1.00 in both 2011 periods because of the reported losses. Adjusted measures exclude derivative fair-value changes and make other specified adjustments; they are not GAAP measures.
- Margins and funding costs: Six-month net interest income rose 27% to $88.3 million as lower interest expense more than offset lower interest income. Adjusted interest expense was $397.5 million, down from $436.7 million. Average loan yield was 5.11%, versus 5.15%; average debt cost was 4.19%, versus 4.56%.
- Balance sheet at Nov. 30: Total assets were $19.79 billion, including net loans of $18.17 billion and cash and cash equivalents of $559.6 million. Short-term debt was $5.59 billion and long-term debt $10.86 billion. Total equity was $526.2 million, down from $687.3 million at May 31, 2011.
- Debt and leverage: Total debt outstanding, including members’ subordinated certificates and subordinated deferrable debt, was $18.39 billion, down $730 million from May 31. GAAP debt-to-equity was 36.61-to-1; management’s adjusted debt-to-equity measure was 5.93-to-1, down from 6.09-to-1.
- Cash flow: Six-month operating cash flow was $56.3 million, investing cash flow was positive $986.0 million, and financing cash flow was negative $776.3 million. Cash increased $266.0 million to $559.6 million. Investing cash flow included substantial net loan collections.
- Loan quality: Gross member loans were $18.31 billion, down $1.01 billion since May 31. The allowance for loan losses was $149.2 million, or 0.81% of loans. Non-performing loans were $43.8 million (0.24% of loans), up from $31.3 million; restructured loans were $460.0 million, and all were on accrual status at quarter-end.
Material changes and notable items
- Net losses replaced prior-year profits, chiefly reflecting $159.3 million of six-month derivative losses, including a $158.5 million non-cash derivative forward-value loss. The comparable 2010 six-month derivative loss was $30.9 million. Derivatives are not accounted for as hedges, so fair-value movements flow through earnings.
- Interest income fell 3% for the six-month period, primarily because of lower average loan rates and lower balances in variable-rate and line-of-credit loans. Interest expense declined 8%, supported by lower-cost funding, debt refinancing, and a smaller average debt balance.
- Loan balances fell mainly because power-supply borrowers repaid bridge loans with Rural Utilities Service funding; an RTFC borrower also repaid a $200 million loan during the quarter. Debt declined less than loans, partly because cash balances increased.
- CFC redeemed $500 million of 7.25% medium-term notes due March 2012 ahead of maturity, recording a $16 million six-month extinguishment loss. Management expects future interest savings to offset that charge.
- In October, CFC replaced two revolving facilities with new facilities expiring in 2015 and 2016. Total revolving commitments declined by approximately $714 million; the company cited lower fees and longer maturities. At Nov. 30, $2.84 billion was available and there were no borrowings under the facilities.
- A $420 million restructured electric-cooperative loan moved to accrual status on October 1 after its balance fell below the contractual prepayment-option threshold. A separate $31 million geothermal-project borrower remained in bankruptcy and on non-accrual; the filing describes pending court proceedings on lien priorities.
Outlook, liquidity, and risks
- Management expected fiscal 2012 adjusted net income to be below fiscal 2011, citing lower average loan balances, lower offered loan rates, a smaller loan-loss recovery, and a slower decline in adjusted interest expense. It expected loan balances to be broadly stable over the following six to twelve months, while interest income would continue to decline.
- Management expected adjusted debt-to-equity to remain below its 6.00-to-1 target over the next 12 months, assuming current loan balances and equity-retention policy. Its stated annual minimum adjusted TIER goal is 1.10.
- Management believed liquidity was sufficient for the next 12–18 months. Long-term debt maturing within one year totaled $2.45 billion; cash was $560 million, available revolving credit was about $2.84 billion, and additional funding sources included member and capital-market debt, a Federal Agricultural Mortgage Corporation facility, and Federal Financing Bank commitments. A new $499 million Federal Financing Bank facility closed in December 2011.
- Total guarantees were $1.07 billion, with a recorded guarantee liability of $24.1 million. Additional master letter-of-credit capacity of up to $562 million could be issued, subject to conditions. Unadvanced loan commitments totaled $14.14 billion, but management said most were subject to material-adverse-change clauses or historically were not fully drawn.
- Derivative rating triggers could result in a net payment of approximately $169 million if specified rating thresholds were reached and agreements terminated. A separate $688 million notional position could require $20 million of collateral following further specified downgrades. CFC reported A2 and A senior unsecured ratings, both with stable outlook, at Nov. 30.
- The filing identifies risks including access to external financing, credit quality and collateral values, interest-rate and derivative-counterparty exposure, rural utility industry conditions, and legal or governmental proceedings. Management reported no material changes to the risk factors in its May 31, 2011 Form 10-K and stated that it was in compliance with debt covenants.
Important facts for investors to verify
- How much of the reported loss reflects non-cash derivative valuation changes, and how sensitive are adjusted earnings and covenant measures to the company’s adjustments?
- Whether the decline in loans and interest income, and management’s expectation of lower fiscal 2012 adjusted earnings, develop as forecast.
- Progress on refinancing the $2.45 billion of debt due within one year and continued access to commercial-paper and other funding markets.
- Credit developments in the $31 million bankruptcy exposure, the newly non-performing borrower loans, and the sizable restructured-loan portfolio.
- Potential liquidity or collateral demands from guarantees, unadvanced commitments, and derivative rating triggers; confirm covenant compliance and ratings remain intact.