may310710k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended May 31, 2007
OR
¨
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period
from to
Commission
File Number 1-7102
NATIONAL
RURAL UTILITIES COOPERATIVE
FINANCE
CORPORATION
(Exact
name of registrant as specified in its charter)
DISTRICT
OF COLUMBIA
(State
or other jurisdiction of incorporation or organization)
52-0891669
(I.R.S.
Employer Identification Number)
2201
COOPERATIVE WAY, HERNDON, VA 20171
(Address
of principal executive offices)
(Registrant's
telecommunications number, including area code, is 703-709-6700)
Securities
registered pursuant to Section 12(b) of the Act:
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Name
of each
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Name
of each
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exchange
on
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exchange
on
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Title
of each class
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which
listed
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Title
of each class
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which
listed
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6.20%
Collateral Trust Bonds, due 2008
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NYSE
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7.35%
Collateral Trust Bonds, due 2026
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NYSE
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5.75%
Collateral Trust Bonds, due 2008
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NYSE
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6.75%
Subordinated Notes, due 2043
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NYSE
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5.70%
Collateral Trust Bonds, due 2010
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NYSE
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6.10%
Subordinated Notes, due 2044
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NYSE
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7.20%
Collateral Trust Bonds, due 2015
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NYSE
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5.95%
Subordinated Notes, due 2045
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NYSE
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6.55%
Collateral Trust Bonds, due 2018
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NYSE
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Indicated
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes x No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained to the best
of
the registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.[ x
]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer ¨ Accelerated
filer ¨
Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x.
The
Registrant is a cooperative and consequently, does not issue any equity capital
stock.
TABLE
OF CONTENTS
|
Part
No.
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Item
No.
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Page
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I.
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1.
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Business
|
1
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General
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1
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Members
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2
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Distribution
Systems
|
3
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Power
Supply Systems
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3
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Service
Organizations and Associate Systems
|
3
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Telecommunications
Systems
|
3
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Loan
Programs
|
4
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Interest
Rates on Loans
|
5
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CFC
Loan Programs
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5
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RTFC
Loan Programs
|
5
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NCSC
Loan Programs
|
6
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RUS
Guaranteed Loans for Rural Electric Systems
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6
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Conversion
of Loans
|
6
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Prepayment
of Loans
|
6
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Loan
Security
|
6
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Guarantee
Programs
|
7
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Guarantees
of Long-Term Tax-Exempt Bonds
|
7
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|
Guarantees
of Tax Benefit Transfers
|
8
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Letters
of Credit
|
8
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Other
Guarantees
|
8
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Disaster
Recovery
|
9
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Tax
Status
|
9
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Investment
Policy
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9
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Employees
|
9
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CFC
Lending Competition
|
9
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Member
Regulation and Competition
|
10
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The
RUS Program
|
12
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1A.
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Risk
Factors
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13
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1B.
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Unresolved
Staff Comments
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14
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2.
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Properties
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15
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3.
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Legal
Proceedings
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15
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4.
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Submission
of Matters to a Vote of Security Holders
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15
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II.
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5.
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Market
for the Registrant's Common Equity and Related Stockholder
Matters
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16
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6.
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Selected
Financial Data
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16
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7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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Restatement
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17
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Business
Overview
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17
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Critical
Accounting Estimates
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20
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New
Accounting Pronouncements
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23
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Results
of Operations
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24
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Ratio
of Earnings to Fixed Charges
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32
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Financial
Condition
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33
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Off-Balance
Sheet Obligations
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41
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Liquidity
and Capital Resources
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43
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Market
Risk
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46
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Non-GAAP
Financial Measures
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51
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7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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55
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8.
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Financial
Statements and Supplementary Data
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55
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9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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55
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9A.
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Controls
and Procedures
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55
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9B.
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Other
Information
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56
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III.
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10.
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Directors
and Executive Officers of the Registrant
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57
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11.
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Executive
Compensation
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63
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12.
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Security
Ownership of Certain Beneficial Owners and Management
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72
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13.
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Certain
Relationships and Related Transactions
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72
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14.
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Principal
Accountant Fees and Services
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73
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IV.
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15.
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Exhibits
and Financial Statement Schedules
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75
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Signatures
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77
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Form 10-K contains forward-looking statements within the meaning of the
Securities Act of 1933, as amended, and the Exchange Act of 1934, as
amended. Forward-looking statements, which are based on certain
assumptions and describe our future plans, strategies and expectations, are
generally identified by our use of words such as "intend," "plan," "may,"
"should," "will," "project," "estimate," "anticipate," "believe," "expect,"
"continue," "potential," "opportunity," and similar expressions, whether in
the
negative or affirmative. All statements that address expectations or projections
about the future, including statements about loan growth, the adequacy of the
loan loss allowance, net income growth, leverage and debt to equity ratios,
and
borrower financial performance are forward-looking
statements. Although we believe that the expectations reflected in
our forward-looking statements are based on reasonable assumptions, actual
results and performance could differ materially from those set forth in the
forward-looking statements. Factors that could cause future results
to vary from current expectations include, but are not limited to, general
economic conditions, legislative changes, governmental monetary and fiscal
policies, changes in tax policies, changes in interest rates, the interest
expense, demand for our loan products, changes in the quality or composition
of
our loan and investment portfolios, changes in accounting principles, policies
or guidelines, and other economic and governmental factors affecting our
operations. Some of these and other factors are discussed in our
annual and quarterly reports previously filed with the Securities and Exchange
Commission ("SEC"). Except as required by law, we undertake no
obligation to update or publicly release any revisions to forward-looking
statements to reflect events, circumstances or changes in expectations after
the
date on which the statement is made.
The
information contained in this section should be read in conjunction with our
consolidated financial statements and related notes and the information
contained elsewhere in this Form 10-K, including that set forth under
Item 1A, Risk Factors.
PART
I
Item
1. Business.
General
National
Rural Utilities Cooperative Finance Corporation ("CFC" or "the Company") is
a
private, not-for-profit cooperative association incorporated under the laws
of
the District of Columbia in April 1969. The principal purpose of CFC
is to provide its members with a source of financing to supplement the loan
programs of the Rural Utilities Service ("RUS") of the United States Department
of Agriculture. CFC makes loans to its rural utility system members
("utility members") to enable them to acquire, construct and operate electric
distribution, generation, transmission and related facilities. CFC
also provides its members with credit enhancements in the form of letters of
credit and guarantees of debt obligations. CFC is exempt from payment
of federal income taxes under the provisions of Section 501(c)(4) of the
Internal Revenue Code. CFC is a not-for-profit member-owned finance
cooperative, thus its objective is not to maximize its net income, but to offer
its members low cost financial products and services consistent with sound
financial management. CFC's internet address is
www.nrucfc.coop, where under "Investors," copies can be found of this
annual report on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K, and amendments thereto, all of which CFC makes available as soon
as
reasonably practicable after the report is filed with the
SEC. Information posted on CFC's website is not incorporated by
reference into this Form 10-K.
For
financial statement purposes, the results of operations and financial condition
of CFC are consolidated with and include Rural Telephone Finance Cooperative
("RTFC") and National Cooperative Services Corporation
("NCSC"). Unless stated otherwise, references to the Company relate
to the consolidation of CFC, RTFC, NCSC and certain entities controlled by
CFC
and created to hold foreclosed assets and effect loan securitization
transactions. CFC also reports the operations for each of CFC, RTFC
and NCSC as separate segments.
RTFC
is a private not-for-profit cooperative association incorporated under the
laws
of the District of Columbia. The principal purpose of RTFC is to
provide and arrange financing for its rural telecommunications members and
their
affiliates. CFC is the sole lender to and manages the lending and
financial affairs of RTFC through a long-term management
agreement. Under a guarantee agreement, RTFC pays CFC a fee in
exchange for which CFC reimburses RTFC for loan losses. RTFC is
headquartered with CFC in Herndon, Virginia. RTFC is a taxable
cooperative that pays income tax based on its net income, excluding net income
allocated to its members, as allowed by law under Subchapter T of the Internal
Revenue Code.
NCSC
was incorporated in 1981 in the District of Columbia as a private non-profit
cooperative association. The principal purpose of NCSC is to provide
financing to the for-profit and non-profit entities that are owned, operated
or
controlled by, or provide substantial benefit to, members of
CFC. NCSC also markets, through its cooperative members, a consumer
loan program for home improvements and an affinity credit card
program. NCSC's membership consists of CFC and distribution systems
that are members of CFC or are eligible for such membership. CFC is
the primary source of funding to and manages the lending and financial affairs
of NCSC through a management agreement which is automatically renewable on
an
annual basis unless terminated by either party. Under a guarantee
agreement, NCSC pays CFC a fee in exchange for which CFC reimburses NCSC for
loan losses, excluding losses in the consumer loan program. NCSC is
headquartered with CFC in Herndon, Virginia. NCSC is a taxable
corporation.
Members
The
Company's consolidated membership was 1,544 as of May 31, 2007 including 899
utility members, the majority of which are consumer-owned electric cooperatives,
513 telecommunications members, 66 service members and 66 associates in 49
states, the District of Columbia and two U.S. territories. The
utility members included 830 distribution systems and 69 generation and
transmission ("power supply") systems. Memberships between CFC, RTFC
and NCSC have been eliminated in consolidation.
CFC
currently has four classes of electric members:
·
|
Class
A - cooperative or not-for-profit distribution
systems;
|
·
|
Class
B - cooperative or not-for-profit power supply
systems;
|
·
|
Class
C - statewide and regional associations wholly-owned or controlled
by
Class A or Class B members; and
|
·
|
Class
D - national associations of
cooperatives.
|
The
associates are not-for-profit entities organized on a cooperative basis which
are owned, controlled or operated by Class A, B or C members and which provide
non-electric services primarily for the benefit of ultimate
consumers. Associates are not entitled to vote at any meeting of the
members and are not eligible to be represented on CFC's board of
directors. All references to members within this document include
members and associates.
Membership
in RTFC is limited to commercial (for-profit) or cooperative (not-for-profit)
telecommunications systems that receive or are eligible to receive loans or
other assistance from RUS, and that are engaged (or plan to be engaged) in
providing telecommunications services to ultimate users.
Membership
in NCSC is limited to CFC and organizations that are Class A members of CFC
or
are eligible to be Class A members of CFC.
In
many cases, the residential and commercial customers of CFC's electric members
are also the customers of RTFC's telecommunications members, as the service
territories of the electric and telecommunications members overlap in many
of
the rural areas of the United States.
Set
forth below is a table showing by state or U.S. territory the total number
of
CFC, RTFC and NCSC members, the percentage of total loans and the percentage
of
total loans and guarantees outstanding at May 31, 2007.
|
|
Number
|
|
|
|
Loan
and
|
|
|
|
|
Number
|
|
|
|
Loan
and
|
|
|
of
|
|
Loan
|
|
Guarantee
|
|
|
|
|
of
|
|
Loan
|
|
Guarantee
|
State/Territory
|
|
Members
|
|
%
|
|
%
|
|
|
State/Territory
|
|
Members
|
|
%
|
|
%
|
Alabama
|
|
|
30
|
|
|
|
1.92
|
%
|
|
|
2.19
|
%
|
|
|
Missouri
|
|
|
65
|
|
|
|
3.48
|
%
|
|
|
3.73
|
%
|
Alaska
|
|
|
30
|
|
|
|
1.85
|
%
|
|
|
1.76
|
%
|
|
|
Montana
|
|
|
40
|
|
|
|
0.73
|
%
|
|
|
0.74
|
%
|
American
Samoa
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Nebraska
|
|
|
40
|
|
|
|
0.09
|
%
|
|
|
0.09
|
%
|
Arizona
|
|
|
27
|
|
|
|
0.99
|
%
|
|
|
1.13
|
%
|
|
|
Nevada
|
|
|
7
|
|
|
|
0.81
|
%
|
|
|
0.80
|
%
|
Arkansas
|
|
|
30
|
|
|
|
2.86
|
%
|
|
|
2.76
|
%
|
|
|
New
Hampshire
|
|
|
4
|
|
|
|
0.83
|
%
|
|
|
0.96
|
%
|
California
|
|
|
11
|
|
|
|
0.15
|
%
|
|
|
0.15
|
%
|
|
|
New
Jersey
|
|
|
1
|
|
|
|
0.10
|
%
|
|
|
0.09
|
%
|
Colorado
|
|
|
40
|
|
|
|
5.09
|
%
|
|
|
5.09
|
%
|
|
|
New
Mexico
|
|
|
25
|
|
|
|
0.18
|
%
|
|
|
0.17
|
%
|
Connecticut
|
|
|
1
|
|
|
|
1.10
|
%
|
|
|
1.04
|
%
|
|
|
New
York
|
|
|
21
|
|
|
|
0.11
|
%
|
|
|
0.10
|
%
|
Delaware
|
|
|
1
|
|
|
|
0.22
|
%
|
|
|
0.21
|
%
|
|
|
North
Carolina
|
|
|
44
|
|
|
|
2.86
|
%
|
|
|
3.23
|
%
|
District
of Columbia
|
|
|
4
|
|
|
|
0.05
|
%
|
|
|
0.16
|
%
|
|
|
North
Dakota
|
|
|
34
|
|
|
|
0.43
|
%
|
|
|
0.44
|
%
|
Florida
|
|
|
19
|
|
|
|
3.40
|
%
|
|
|
3.24
|
%
|
|
|
Ohio
|
|
|
42
|
|
|
|
2.15
|
%
|
|
|
2.06
|
%
|
Georgia
|
|
|
68
|
|
|
|
8.64
|
%
|
|
|
8.29
|
%
|
|
|
Oklahoma
|
|
|
49
|
|
|
|
2.65
|
%
|
|
|
2.52
|
%
|
Guam
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Oregon
|
|
|
40
|
|
|
|
1.69
|
%
|
|
|
1.74
|
%
|
Hawaii
|
|
|
1
|
|
|
|
0.04
|
%
|
|
|
0.04
|
%
|
|
|
Pennsylvania
|
|
|
25
|
|
|
|
2.07
|
%
|
|
|
2.05
|
%
|
Idaho
|
|
|
17
|
|
|
|
0.93
|
%
|
|
|
0.89
|
%
|
|
|
South
Carolina
|
|
|
38
|
|
|
|
2.63
|
%
|
|
|
2.52
|
%
|
Illinois
|
|
|
52
|
|
|
|
3.00
|
%
|
|
|
2.83
|
%
|
|
|
South
Dakota
|
|
|
46
|
|
|
|
0.89
|
%
|
|
|
0.84
|
%
|
Indiana
|
|
|
53
|
|
|
|
2.65
|
%
|
|
|
2.51
|
%
|
|
|
Tennessee
|
|
|
29
|
|
|
|
0.53
|
%
|
|
|
0.50
|
%
|
Iowa
|
|
|
118
|
|
|
|
2.66
|
%
|
|
|
2.55
|
%
|
|
|
Texas
|
|
|
109
|
|
|
|
14.44
|
%
|
|
|
14.43
|
%
|
Kansas
|
|
|
49
|
|
|
|
4.69
|
%
|
|
|
4.71
|
%
|
|
|
Utah
|
|
|
11
|
|
|
|
3.12
|
%
|
|
|
3.04
|
%
|
Kentucky
|
|
|
33
|
|
|
|
1.96
|
%
|
|
|
2.50
|
%
|
|
|
Vermont
|
|
|
7
|
|
|
|
0.42
|
%
|
|
|
0.41
|
%
|
Louisiana
|
|
|
17
|
|
|
|
1.77
|
%
|
|
|
1.69
|
%
|
|
|
Virgin
Islands
|
|
|
0
|
|
|
|
2.72
|
%
|
|
|
2.57
|
%
|
Maine
|
|
|
6
|
|
|
|
0.05
|
%
|
|
|
0.05
|
%
|
|
|
Virginia
|
|
|
27
|
|
|
|
1.02
|
%
|
|
|
0.98
|
%
|
Maryland
|
|
|
2
|
|
|
|
1.14
|
%
|
|
|
1.21
|
%
|
|
|
Washington
|
|
|
19
|
|
|
|
0.61
|
%
|
|
|
0.70
|
%
|
Massachusetts
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
West
Virginia
|
|
|
4
|
|
|
|
0.03
|
%
|
|
|
0.03
|
%
|
Michigan
|
|
|
27
|
|
|
|
1.50
|
%
|
|
|
1.42
|
%
|
|
|
Wisconsin
|
|
|
62
|
|
|
|
2.04
|
%
|
|
|
1.92
|
%
|
Minnesota
|
|
|
75
|
|
|
|
4.04
|
%
|
|
|
3.87
|
%
|
|
|
Wyoming
|
|
|
15
|
|
|
|
0.65
|
%
|
|
|
0.68
|
%
|
Mississippi
|
|
|
26
|
|
|
|
2.02
|
%
|
|
|
2.37
|
%
|
|
|
Total
|
|
|
1,544
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Distribution
Systems
Distribution
systems are utilities engaged in retail sales of electricity to consumers in
their service areas. Most distribution systems have all-requirements
power purchase contracts with their power supply systems, which are owned and
controlled by the member distribution systems. Wholesale power for
resale also comes from other sources, including power supply system contracts
with government agencies, investor-owned utilities and other entities, and
in
rare cases, the distribution system's own generating facilities.
Wholesale
power supply contracts ordinarily guarantee neither an uninterrupted supply
nor
a constant cost of power. Contracts with RUS-financed power supply
systems (which generally require the distribution system to purchase all its
power requirements from the power supply system) provide for rate increases
to
pass along increases in sellers' costs. The wholesale power contracts
permit the power supply system, subject to approval by RUS and, in certain
circumstances, regulatory agencies, to establish rates to its members so as
to
produce revenues sufficient, with revenues from all other sources, to meet
the
costs of operation and maintenance (including replacements, insurance, taxes
and
administrative and general overhead expenses) of all generating, transmission
and related facilities, to pay the cost of any power and energy purchased for
resale, to pay the costs of generation and transmission, to make all payments
on
account of all indebtedness and lease obligations of the power supply system
and
to provide for the establishment and maintenance of reasonable
reserves. The board of directors of the power supply
system may review the rates under the wholesale power contracts at least
annually.
Power
contracts with investor-owned utilities and power supply systems which do not
borrow from RUS generally have rates subject to regulation by the Federal Energy
Regulatory Commission ("FERC"). Contracts with federal agencies
generally permit rate changes by the selling agency (subject, in some cases,
to
federal regulatory approval).
Power
Supply Systems
Power
supply systems are utilities that purchase or generate electric power and
provide it on a wholesale basis to distribution systems for delivery to the
ultimate retail consumer. Of the 61 operating power supply systems
financed in whole or in part by RUS or CFC at December 31, 2005 (the most recent
year for which data is available), 60 were cooperatives owned directly or
indirectly by groups of distribution systems and one was government
owned. Of this number, 34 had generating capacity of at least 100
megawatts, 12 had less than 100 megawatts of generating capacity and 14 had
no
generating capacity. The systems with no generating capacity
generally operated transmission lines to supply certain distribution
systems. Certain other power supply systems have been formed but do
not yet own generating or transmission facilities.
Service
Organizations and Associate Systems
Service
organizations include the National Rural Electric Cooperative Association
("NRECA"), statewide and regional cooperative associations. NRECA
represents cooperatives nationally.
Associates
include organizations that are owned, controlled or operated by Class A, B
or C
members and that provide non-electric services primarily for the benefit of
ultimate consumers.
Telecommunications
Systems
Telecommunications
systems include not-for-profit cooperative organizations and for-profit
commercial organizations that primarily provide local exchange and access
telecommunications services to rural areas.
Independent
rural telecommunications companies provide service throughout many of the rural
areas of the United States. These companies, which number
approximately 1,300, are called independent because they are not affiliated
with
Verizon, AT&T or Qwest. Included in the 1,300 total are
approximately 250 not-for-profit cooperative telecommunications
companies. The majority of these independent rural telecommunications
companies are family-owned or privately-held commercial
companies. Approximately 20 of these commercial companies are
publicly traded or issue bonds publicly.
Rural
telecommunications companies (including all local exchange carriers ("LECs")
other than Verizon, AT&T, Qwest, Cincinnati Bell and Embarq (formerly
Sprint's local exchange properties)) comprise a relatively small sector (less
than 15%) of a local exchange telecommunications industry that provides service
to over 172 million access lines. These rural companies range in size
from fewer than 100 customers to more than one million. Rural
telecommunications companies' annual operating revenues range from less than
$100,000 to over $2 billion. In addition to basic local exchange and
access telecommunications service, most independents offer other communications
services including wireless telephone, cable television and internet
access. Most rural telecommunications companies' networks incorporate
digital switching, fiber optics, internet protocol telephony and other advanced
technologies.
Loan
Programs
Set
forth below is a table showing the weighted average loans outstanding to
borrowers and the weighted average interest rates thereon by loan program and
by
segment during fiscal years ended May 31:
|
|
2007
|
|
2006
|
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
|
average
|
|
average
|
|
average
|
|
average
|
|
|
loans
outstanding
|
|
interest
rate
|
|
loans
outstanding
|
|
interest
rate
|
(Dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by loan type: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
|
$
|
14,323,272
|
|
|
5.87
|
%
|
|
$
|
13,672,251
|
|
|
5.64
|
%
|
Long-term
variable rate loans
|
|
|
1,433,484
|
|
|
7.58
|
%
|
|
|
2,351,131
|
|
|
6.43
|
%
|
Loans
guaranteed by RUS
|
|
|
258,407
|
|
|
5.59
|
%
|
|
|
262,852
|
|
|
5.34
|
%
|
Short-term
loans
|
|
|
1,028,585
|
|
|
7.06
|
%
|
|
|
948,774
|
|
|
6.07
|
%
|
Non-performing
loans
|
|
|
534,733
|
|
|
0.02
|
%
|
|
|
570,196
|
|
|
0.01
|
%
|
Restructured
loans
|
|
|
614,580
|
|
|
0.61
|
%
|
|
|
599,779
|
|
|
0.08
|
%
|
Total
loans
|
|
|
18,193,061
|
|
|
5.79
|
%
|
|
|
18,404,983
|
|
|
5.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
|
$
|
15,803,285
|
|
|
5.80
|
%
|
|
$
|
15,604,657
|
|
|
5.43
|
%
|
RTFC
|
|
|
1,993,672
|
|
|
5.30
|
%
|
|
|
2,356,449
|
|
|
5.50
|
%
|
NCSC
|
|
|
396,104
|
|
|
8.00
|
%
|
|
|
443,877
|
|
|
7.08
|
%
|
Total
|
|
|
18,193,061
|
|
|
5.79
|
%
|
|
|
18,404,983
|
|
|
5.48
|
%
|
|
|
|
|
|
|
|
|
|
(1)
Loans are classified as long-term or short-term based on their original
maturity.
|
|
|
|
|
|
|
|
Total
loans outstanding by state or U.S. territory based on the location of the
system's headquarters are summarized below at
May
31:
(in
thousands)
|
|
|
|
|
|
|
State/Territory
|
|
2007
|
|
2006
|
|
2005
|
|
State/Territory
|
|
2007
|
|
2006
|
|
2005
|
|
Alabama
|
$
|
347,723
|
|
|
$
|
355,420
|
|
|
$
|
362,305
|
|
|
|
Montana
|
$
|
132,603
|
|
|
$
|
147,731
|
|
|
$
|
164,715
|
|
|
Alaska
|
|
335,352
|
|
|
|
333,716
|
|
|
|
330,827
|
|
|
|
Nebraska
|
|
16,447
|
|
|
|
14,149
|
|
|
|
15,635
|
|
|
American
Samoa
|
|
769
|
|
|
|
1,604
|
|
|
|
2,765
|
|
|
|
Nevada
|
|
147,401
|
|
|
|
137,701
|
|
|
|
141,571
|
|
|
Arizona
|
|
178,659
|
|
|
|
169,754
|
|
|
|
165,664
|
|
|
|
New
Hampshire
|
|
149,496
|
|
|
|
164,651
|
|
|
|
178,740
|
|
|
Arkansas
|
|
518,273
|
|
|
|
549,552
|
|
|
|
555,055
|
|
|
|
New
Jersey
|
|
18,217
|
|
|
|
18,211
|
|
|
|
19,438
|
|
|
California
|
|
27,283
|
|
|
|
24,362
|
|
|
|
20,894
|
|
|
|
New
Mexico
|
|
32,344
|
|
|
|
36,528
|
|
|
|
34,223
|
|
|
Colorado
|
|
922,558
|
|
|
|
876,100
|
|
|
|
873,413
|
|
|
|
New
York
|
|
19,844
|
|
|
|
21,782
|
|
|
|
19,621
|
|
|
Connecticut
|
|
200,000
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
North
Carolina
|
|
519,214
|
|
|
|
522,194
|
|
|
|
1,024,134
|
|
|
Delaware
|
|
39,582
|
|
|
|
23,842
|
|
|
|
19,809
|
|
|
|
North
Dakota
|
|
77,072
|
|
|
|
77,002
|
|
|
|
81,977
|
|
|
District
of Columbia
|
|
9,717
|
|
|
|
9,908
|
|
|
|
25,526
|
|
|
|
Ohio
|
|
390,350
|
|
|
|
410,346
|
|
|
|
415,227
|
|
|
Florida
|
|
617,010
|
|
|
|
659,416
|
|
|
|
636,792
|
|
|
|
Oklahoma
|
|
480,536
|
|
|
|
490,351
|
|
|
|
492,462
|
|
|
Georgia
|
|
1,566,308
|
|
|
|
1,557,675
|
|
|
|
1,573,770
|
|
|
|
Oregon
|
|
305,506
|
|
|
|
305,961
|
|
|
|
314,137
|
|
|
Hawaii
|
|
7,157
|
|
|
|
7,500
|
|
|
|
7,834
|
|
|
|
Pennsylvania
|
|
376,193
|
|
|
|
438,914
|
|
|
|
265,930
|
|
|
Idaho
|
|
168,253
|
|
|
|
165,035
|
|
|
|
170,820
|
|
|
|
South
Carolina
|
|
476,139
|
|
|
|
501,990
|
|
|
|
525,285
|
|
|
Illinois
|
|
543,389
|
|
|
|
509,391
|
|
|
|
543,196
|
|
|
|
South
Dakota
|
|
161,247
|
|
|
|
169,335
|
|
|
|
173,074
|
|
|
Indiana
|
|
481,243
|
|
|
|
432,953
|
|
|
|
373,185
|
|
|
|
Tennessee
|
|
96,073
|
|
|
|
111,043
|
|
|
|
125,688
|
|
|
Iowa
|
|
482,513
|
|
|
|
468,236
|
|
|
|
492,095
|
|
|
|
Texas
|
|
2,618,010
|
|
|
|
2,877,586
|
|
|
|
2,904,185
|
|
|
Kansas
|
|
849,864
|
|
|
|
593,670
|
|
|
|
539,392
|
|
|
|
Utah
|
|
565,768
|
|
|
|
580,472
|
|
|
|
547,288
|
|
|
Kentucky
|
|
355,503
|
|
|
|
335,551
|
|
|
|
454,976
|
|
|
|
Vermont
|
|
75,905
|
|
|
|
81,761
|
|
|
|
87,595
|
|
|
Louisiana
|
|
320,765
|
|
|
|
382,505
|
|
|
|
337,741
|
|
|
|
Virgin
Islands
|
|
492,795
|
|
|
|
488,392
|
|
|
|
479,196
|
|
|
Maine
|
|
9,884
|
|
|
|
11,737
|
|
|
|
12,954
|
|
|
|
Virginia
|
|
184,986
|
|
|
|
209,153
|
|
|
|
218,801
|
|
|
Maryland
|
|
206,491
|
|
|
|
176,797
|
|
|
|
169,581
|
|
|
|
Washington
|
|
110,907
|
|
|
|
102,128
|
|
|
|
99,562
|
|
|
Michigan
|
|
271,541
|
|
|
|
294,162
|
|
|
|
301,822
|
|
|
|
West
Virginia
|
|
5,355
|
|
|
|
7,700
|
|
|
|
8,171
|
|
|
Minnesota
|
|
731,883
|
|
|
|
744,941
|
|
|
|
895,976
|
|
|
|
Wisconsin
|
|
369,427
|
|
|
|
348,351
|
|
|
|
339,207
|
|
|
Mississippi
|
|
366,989
|
|
|
|
426,634
|
|
|
|
426,895
|
|
|
|
Wyoming
|
|
117,374
|
|
|
|
117,098
|
|
|
|
139,618
|
|
|
Missouri
|
|
630,289
|
|
|
|
669,914
|
|
|
|
663,301
|
|
|
|
Total
|
$
|
18,128,207
|
|
|
$
|
18,360,905
|
|
|
$
|
18,972,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's loan portfolio is widely dispersed throughout the United States and
its territories, including 48 states, the District of Columbia, American Samoa
and the U.S. Virgin Islands. At May 31, 2007, 2006 and 2005, loans
outstanding to borrowers located in any one state or territory did not exceed
15%, 16% and 16%, respectively, of total loans outstanding.
Interest
Rates on Loans
CFC's
goal as a not-for-profit cooperatively-owned finance company is to set rates
at
levels that will provide its members with the lowest cost financing while
maintaining sound financial results as required to obtain high credit ratings
on
its debt instruments. CFC sets its interest rates primarily based on
its cost of funding, as well as general and administrative expenses, the loan
loss provision and a reasonable level of earnings. Various discounts,
which reduce the stated interest rates, are available to borrowers meeting
certain criteria related to business type, performance, volume and whether
CFC
is their sole mortgage holder.
CFC
Loan Programs
Long-Term
Loans
Long-term
loans are generally for terms of up to 35 years and can be either amortizing
or
bullet loans with serial payment structures. These loans finance
electric plant and equipment which typically have a useful life equal to or
in
excess of the loan maturity. A borrower can select a fixed interest
rate for periods of one to 35 years or a variable rate. Upon the
expiration of the selected fixed interest rate term, the borrower may select
another fixed rate term or the variable rate. CFC sets long-term
fixed rates daily and the long-term variable rate is set on the first business
day of each month. The fixed rate on a loan is determined on the day
the loan is advanced or repriced based on the rate term selected. A
borrower may divide its loan into various tranches. The borrower then
has the option of selecting a fixed or variable interest rate for each
tranche.
In
addition to CFC’s customary loan standards, to be eligible for long-term loan
advances, distribution systems generally must maintain an average modified
debt
service coverage ratio ("MDSC"), as defined in the loan agreement, of 1.35
or
greater. Similarly, power supply systems generally must maintain an
average times interest earned ratio ("TIER") and MDSC, as defined in the loan
agreement, of 1.0 or greater. These are general guidelines only and
CFC has in the past and may in the future make long-term loans to distribution
and power supply systems that do not meet these criteria.
Short-Term
Loans
CFC’s
short-term loans are line of credit loans and generally are advanced only at
a
variable interest rate. The line of credit variable interest rate is
set on the first business day of each month. The principal amount of
line of credit loans with maturities of greater than one year generally must
be
paid down to a zero outstanding principal balance for five consecutive days
during each 12-month period.
Interim
financing line of credit loans are also made available to CFC members that
have
a loan application pending with RUS and have received approval from RUS to
obtain interim financing. Advances under these interim facilities are
made with the agreement that they will be repaid with advances from RUS
long-term loans.
RTFC
Loan Programs
The
RTFC loan portfolio is concentrated in the core rural local exchange carrier
("RLEC") segment of the telecommunications market. RLECs are
characterized by the low population density of their service
territories. Services are generally delivered over networks that
include fiber optic cable and digital switching. There is generally a
significant barrier to competitive entry.
The
businesses to which the remaining RTFC loans have been made are generally
supporting the operations of the RLECs and are owned, operated or controlled
by
RLECs. Many such loans are supported by payment guarantees from the
sponsoring RLECs.
Long-Term
Loans
RTFC
makes long-term loans to rural telecommunications companies and their affiliates
for the acquisition, construction or upgrade of wireline telecommunications
systems, wireless telecommunications systems, fiber optic networks, cable
television systems and other corporate purposes. Long-term loans are
generally for periods of up to 15 years. Loans may be advanced at a
fixed or variable interest rate. Fixed rates are generally available
for periods from one year to 15 years. Upon the expiration of the
selected fixed interest rate term, the borrower may select another fixed rate
term or a variable rate. Long-term fixed rates for telecommunications
loans are set daily and the long-term variable rate is set on the first business
day of each month. The fixed rate on a loan is determined on the day
the loan is advanced or converted to a fixed rate based on the term
selected. A borrower may divide its loan into various
tranches. The borrower then has the option of selecting a fixed or
variable interest rate for each tranche.
To
borrow from RTFC, a wireline telecommunications system generally must be able
to
demonstrate the ability to achieve and maintain an annual debt service coverage
ratio ("DSC") and an annual TIER of 1.25 and 1.50, respectively. To
borrow from RTFC, a cable television system, fiber optic network or wireless
telecommunications system generally must be able to demonstrate the ability
to
achieve and maintain an annual DSC of 1.25. Loans made to start-up
ventures using emerging technologies are evaluated based on the quality of
the
business plan, experience of the management team and the level and quality
of
credit support from established companies. Based on the business
plan, specific covenants are developed for each transaction which require
performance at levels deemed sufficient to repay the RTFC obligations under
the
approved terms.
Short-Term
Loans
RTFC
provides line of credit loans to telecommunications systems for periods of
up to
five years. These line of credit loans are typically in the form of a
revolving line of credit, which generally requires the borrower to pay off
the
principal balance for five consecutive business days at least once during each
12-month period. These line of credit loans may be provided on a
secured or unsecured basis and are designed primarily to assist borrowers with
liquidity and cash management.
Interim
financing line of credit loans are also made available to RTFC members that
have
a loan application pending with RUS and have received approval from RUS to
obtain interim financing. These loans are for terms up to 24 months
and the borrower must repay the RTFC loan with advances from the RUS long-term
loans.
NCSC
Loan Programs
NCSC
makes long-term and short-term loans to rural utility members and organizations
affiliated with its members. Loans may be secured or
unsecured. The loans to the affiliated organizations may have a
guarantee of repayment to NCSC from the CFC member cooperative with which it
is
affiliated.
Lease
and General Loan Program
NCSC
provided financing for the purchase of utility plant and/or related equipment,
in some cases by a third party in a sale/leaseback
transaction. Collateral for these loans consists of a mortgage on the
leased asset, utility plant and/or related equipment. NCSC is not a
party to these lease agreements. NCSC no longer provides new
financing of this type.
Associate
Member Loan Program
NCSC
provides financing to for-profit or not-for-profit affiliated entities of member
cooperatives for economic and community development
purposes. Collateral for these loans generally consists of a first
mortgage lien on the assets of the associate member and/or project. These loans
are also generally guaranteed by the sponsoring cooperative.
RUS
Guaranteed Loans for Rural Electric Systems
CFC
may participate as an eligible lender in the RUS loan guarantee program under
the terms and conditions of a master loan guarantee and servicing agreement
between RUS and CFC. Under this agreement, CFC may make long-term
secured loans to eligible members for periods of up to 35 years, at fixed or
variable rates established by CFC. RUS guarantees the principal and
interest payments on the notes evidencing such loans. At May 31,
2007, CFC had $219 million of loans outstanding under this
program. In addition, at May 31, 2007, CFC was holding certificates
totaling $37 million representing interests in trusts holding RUS guaranteed
loans.
Conversion
of Loans
A
borrower may convert a long-term loan from a variable interest rate to a fixed
interest rate at any time without a fee. Such conversion will be
effective on the first day of the following month. Generally, a borrower may
convert from a fixed rate to another fixed rate or to a variable rate at any
time, subject to a fee in most instances. The fee on the conversion
of a fixed interest rate to a variable interest rate is 25 basis points plus
a
make-whole premium, if applicable, per current loan policies.
Prepayment
of Loans
Generally,
borrowers may prepay long-term loans at any time, subject to the payment of
a
prepayment fee of 33 to 50 basis points and a make-whole premium, if
applicable. Line of credit loans may be repaid at any time without a
premium.
Loan
Security
Except
when providing short-term loans, the Company typically lends to its members
on a
senior secured basis. Long-term loans are typically secured on a
parity with other secured lenders (primarily RUS), if any, by all assets and
revenues of the borrower with exceptions typical in utility
mortgages. Short-term loans are generally unsecured lines of
credit.
The
following tables summarize the Company's secured and unsecured loans
outstanding by loan program and by segment at May 31:
|
|
(Dollar
amounts in thousands)
|
|
2007
|
|
2006
|
Total
by loan program:
|
|
Secured
|
|
%
|
|
Unsecured
|
|
%
|
|
Secured
|
|
%
|
|
Unsecured
|
|
%
|
|
Long-term
fixed rate loans
|
$
|
14,180,956
|
|
97%
|
$
|
482,384
|
|
3%
|
$
|
13,984,404
|
|
96%
|
$
|
562,446
|
|
4%
|
|
Long-term
variable rate loans
|
|
1,865,821
|
|
94%
|
|
127,713
|
|
6%
|
|
2,414,737
|
|
96%
|
|
109,985
|
|
4%
|
|
Loans
guaranteed by RUS
|
|
255,903
|
|
100%
|
|
-
|
|
-
|
|
261,330
|
|
100%
|
|
-
|
|
-
|
|
Short-term
loans
|
|
191,231
|
|
16%
|
|
1,024,199
|
|
84%
|
|
146,835
|
|
14%
|
|
881,168
|
|
86%
|
|
Total
loans
|
$
|
16,493,911
|
|
91%
|
$
|
1,634,296
|
|
9%
|
$
|
16,807,306
|
|
92%
|
$
|
1,553,599
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
14,462,448
|
|
92%
|
$
|
1,342,842
|
|
8%
|
$
|
14,575,691
|
|
92%
|
$
|
1,218,681
|
|
8%
|
|
RTFC
|
|
1,630,079
|
|
88%
|
|
230,300
|
|
12%
|
|
1,921,635
|
|
89%
|
|
240,829
|
|
11%
|
|
NCSC
|
|
401,384
|
|
87%
|
|
61,154
|
|
13%
|
|
309,980
|
|
77%
|
|
94,089
|
|
23%
|
|
Total
loans
|
$
|
16,493,911
|
|
91%
|
$
|
1,634,296
|
|
9%
|
$
|
16,807,306
|
|
92%
|
$
|
1,553,599
|
|
8%
|
Guarantee
Programs
The
Company uses the same credit policies and monitoring procedures in providing
guarantees as it does for loans and commitments. The following chart
provides a breakout of guarantees outstanding by type at May 31:
(in
thousands)
|
2007
|
|
2006
|
|
|
Long-term
tax-exempt bonds
|
$
|
526,185
|
|
|
$
|
607,655
|
|
|
|
|
|
Indemnifications
of tax benefit transfers
|
|
107,741
|
|
|
|
123,544
|
|
|
|
|
|
Letters
of credit
|
|
365,766
|
|
|
|
272,450
|
|
|
|
|
|
Other
guarantees
|
|
74,682
|
|
|
|
75,331
|
|
|
|
|
|
Total
|
$
|
1,074,374
|
|
|
$
|
1,078,980
|
|
|
|
|
|
Members'
interest expense for the years ended May 31, 2007 and 2006 on debt obligations
guaranteed by the Company was approximately $20 million for each
year.
Guarantees
of Long-Term Tax-Exempt Bonds
The
Company has guaranteed debt issued in connection with the construction or
acquisition by its members of pollution control, solid waste disposal,
industrial development and electric distribution
facilities. Governmental authorities issue such debt and the interest
thereon is exempt from federal taxation. The proceeds of the offering
are made available to the member system, which in turn is obligated to pay
the
governmental authority amounts sufficient to service the debt. The
debt, which is guaranteed by the Company, may include short- and long-term
obligations.
In
the event of a default by a system for non-payment of debt service, the Company
is obligated to pay, after available debt service reserve funds have been
exhausted, scheduled debt service under its guarantee. The bond issue
may not be accelerated due to such non-payment by the system so long as the
Company performs under its guarantee. The system is required to
repay, on demand, any amount advanced by the Company pursuant to its
guarantee. This repayment obligation is secured on a pari passu basis
with other lenders (including, in most cases, RUS), by a lien on substantially
all of the system’s assets. If the security instrument is a common
mortgage with RUS, then in general, the Company may not exercise remedies
thereunder for up to two years following default. However, if the
debt is accelerated under the common mortgage because of a determination that
the interest thereon is not tax-exempt, the system's obligation to reimburse
the
Company for any guarantee payments will be treated as a long-term
loan. The system is required to pay to the Company initial and/or
on-going guarantee fees in connection with these transactions.
Certain
guaranteed long-term debt bears interest at variable rates which are adjusted
at
intervals of one to 270 days, weekly, each five weeks or semi-annually to a
level expected to permit their resale or auction at par. At the
option of the member on whose behalf it is issued, and provided funding sources
are available, rates on such debt may be fixed until
maturity. Holders have the right to tender the debt for purchase at
par at the time rates are reset when the debt bears interest at a variable
rate
and the Company has committed to purchase debt so tendered if it cannot
otherwise be remarketed. If the Company held the securities, the
cooperative would pay interest to the Company at its short-term
rate. Since the inception of the program in the mid-1980s, all bonds
have been successfully remarketed and thus, the Company has not been required
to
purchase any bonds.
Guarantees
of Tax Benefit Transfers
The
Company also has guaranteed members' obligations to indemnify against loss
of
tax benefits in certain tax benefit transfers that occurred in 1981 and
1982. A member's obligation to reimburse the Company for any
guarantee payments would be treated as a long-term loan, secured on a pari
passu
basis with RUS by a first lien on substantially all the member's property to
the
extent of any cash received by the member at the outset of the
transaction. The remainder would be treated as a short-term loan
secured by a subordinated mortgage on substantially all of the member's
property. Due to changes in federal tax law, no guarantees of this
nature have been put in place since 1982. The maturities for this
type of guarantee run through 2015.
Letters
of Credit
The
Company issues irrevocable letters of credit to support members' obligations
to
energy marketers, other third parties and to the Rural Business and Cooperative
Development Service. Letters of credit are generally issued on an
unsecured basis and with such issuance fees as may be determined from time
to
time. Each letter of credit issued by CFC is supported by a
reimbursement agreement with the member on whose behalf the letter of credit
was
issued. In the event a beneficiary draws on a letter of credit, the
agreement generally requires the member to reimburse the Company within one
year
from the date of the draw, with interest accruing from such date at the
Company's short-term variable rate of interest.
Other
Guarantees
The
Company may provide other guarantees as requested by its
members. Such guarantees may be made on a secured or unsecured basis
with guarantee fees set to cover the Company's general and administrative
expenses, a provision for losses and a reasonable margin.
The
following chart summarizes total guarantees by segment at May 31:
(Dollar
amounts in thousands)
|
|
CFC:
|
2007
|
|
2006
|
|
|
Distribution
|
$
|
211,320
|
|
|
|
20%
|
|
|
$
|
70,166
|
|
|
|
7%
|
|
|
|
|
|
|
|
|
|
Power
supply
|
|
797,009
|
|
|
|
74%
|
|
|
|
921,930
|
|
|
|
85%
|
|
|
|
|
|
|
|
|
|
Statewide
and associate
|
|
25,359
|
|
|
|
2%
|
|
|
|
32,873
|
|
|
|
3%
|
|
|
|
|
|
|
|
|
|
CFC
Total
|
|
1,033,688
|
|
|
|
96%
|
|
|
|
1,024,969
|
|
|
|
95%
|
|
|
|
|
|
|
|
|
|
NCSC
|
|
40,686
|
|
|
|
4%
|
|
|
|
54,011
|
|
|
|
5%
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,074,374
|
|
|
|
100%
|
|
|
$
|
1,078,980
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
Total
guarantees outstanding, by state and territory based on the location of the
system's headquarters, are summarized as follows at May 31:
(in
thousands) |
|
2007
|
|
2006
|
|
2005
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Alabama
|
|
$
|
72,348
|
|
|
$
|
22,250
|
|
|
$
|
22,450
|
|
|
|
Montana
|
|
$
|
9,029
|
|
|
$
|
145
|
|
$
|
-
|
|
|
Alaska
|
|
|
1,900
|
|
|
|
1,800
|
|
|
|
3,320
|
|
|
|
Nebraska
|
|
|
6
|
|
|
|
-
|
|
|
-
|
|
|
Arizona
|
|
|
38,301
|
|
|
|
43,699
|
|
|
|
45,869
|
|
|
|
Nevada
|
|
|
5,400
|
|
|
|
-
|
|
|
-
|
|
|
Arkansas
|
|
|
12,027
|
|
|
|
15,921
|
|
|
|
19,776
|
|
|
|
New
Hampshire
|
|
|
34,550
|
|
|
|
9,550
|
|
|
10,500
|
|
|
California
|
|
|
1,010
|
|
|
|
-
|
|
|
|
-
|
|
|
|
New
Mexico
|
|
|
1,020
|
|
|
|
1,016
|
|
|
1,000
|
|
|
Colorado
|
|
|
54,236
|
|
|
|
55,131
|
|
|
|
55,744
|
|
|
|
North
Carolina
|
|
|
100,630
|
|
|
|
107,817
|
|
|
100,854
|
|
|
District
of Columbia
|
|
|
20,998
|
|
|
|
21,428
|
|
|
|
30,248
|
|
|
|
North
Dakota
|
|
|
7,115
|
|
|
|
-
|
|
|
-
|
|
|
Florida
|
|
|
4,623
|
|
|
|
100,038
|
|
|
|
108,385
|
|
|
|
Ohio
|
|
|
5,500
|
|
|
|
2,000
|
|
|
1,000
|
|
|
Georgia
|
|
|
26,027
|
|
|
|
35,283
|
|
|
|
-
|
|
|
|
Oklahoma
|
|
|
3,056
|
|
|
|
4,358
|
|
|
4,930
|
|
|
Idaho
|
|
|
3,173
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Oregon
|
|
|
29,439
|
|
|
|
24,922
|
|
|
24,880
|
|
|
Illinois
|
|
|
219
|
|
|
|
225
|
|
|
|
633
|
|
|
|
Pennsylvania
|
|
|
17,519
|
|
|
|
18,307
|
|
|
21,021
|
|
|
Indiana
|
|
|
7
|
|
|
|
911
|
|
|
|
95,900
|
|
|
|
South
Carolina
|
|
|
7,819
|
|
|
|
50
|
|
|
-
|
|
|
Iowa
|
|
|
8,240
|
|
|
|
8,517
|
|
|
|
5,708
|
|
|
|
South
Dakota
|
|
|
6
|
|
|
|
-
|
|
|
-
|
|
|
Kansas
|
|
|
55,472
|
|
|
|
42,561
|
|
|
|
35,632
|
|
|
|
Tennessee
|
|
|
296
|
|
|
|
295
|
|
|
295
|
|
|
Kentucky
|
|
|
124,013
|
|
|
|
121,864
|
|
|
|
132,115
|
|
|
|
Texas
|
|
|
152,307
|
|
|
|
167,881
|
|
|
143,682
|
|
|
Louisiana
|
|
|
4,733
|
|
|
|
4,778
|
|
|
|
4,728
|
|
|
|
Utah
|
|
|
17,193
|
|
|
|
20,594
|
|
|
41,126
|
|
|
Maine
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Vermont
|
|
|
3,500
|
|
|
|
1,250
|
|
|
1,250
|
|
|
Maryland
|
|
|
25,266
|
|
|
|
24,800
|
|
|
|
-
|
|
|
|
Virginia
|
|
|
3,935
|
|
|
|
4,133
|
|
|
3,603
|
|
|
Michigan
|
|
|
2,123
|
|
|
|
1,163
|
|
|
|
1,207
|
|
|
|
Washington
|
|
|
23,171
|
|
|
|
250
|
|
|
-
|
|
|
Minnesota
|
|
|
10,585
|
|
|
|
76,010
|
|
|
|
86,372
|
|
|
|
Wisconsin
|
|
|
32
|
|
|
|
322
|
|
|
274
|
|
|
Mississippi
|
|
|
88,312
|
|
|
|
37,267
|
|
|
|
41,437
|
|
|
|
Wyoming
|
|
|
13,969
|
|
|
|
9,370
|
|
|
9,595
|
|
|
Missouri
|
|
|
85,268
|
|
|
|
93,074
|
|
|
|
104,218
|
|
|
|
Total
|
|
$
|
1,074,374
|
|
|
$
|
1,078,980
|
|
$
|
1,157,752
|
|
|
Disaster
Recovery
CFC
has had a comprehensive disaster recovery and business continuity plan in place
since May of 2001. The plan includes a duplication of CFC's
production information systems at an off-site facility coupled with an extensive
business recovery plan to utilize those remote systems. CFC's
production data is replicated in real time to the recovery site 24 hours a
day,
7 days a week. The plan also includes steps for each of CFC's
operating groups to conduct business with a view to minimizing disruption for
customers. CFC contracts with an external vendor for the facilities
to house the CFC owned backup systems as well as office space and related office
equipment.
Tax
Status
In
1969, CFC obtained a ruling from the Internal Revenue Service recognizing CFC's
exemption from the payment of federal income taxes under Section 501(c)(4)
of
the Internal Revenue Code. Such exempt status could be revoked as a
result of changes in legislation or in administrative policy or as a result
of
changes in CFC's business. CFC believes that its operations have not
changed materially from those described to the Internal Revenue Service in
its
exemption filing. RTFC is a taxable cooperative under Subchapter T of
the Internal Revenue Code. As long as RTFC continues to qualify under
Subchapter T of the Internal Revenue Code, it is allowed a deduction from
taxable income for the amount of net income allocated to its
members. RTFC pays income tax based on its net income, excluding net
income allocated to its members. NCSC is a taxable corporation. NCSC
pays income tax annually based on its net income for the period.
Investment
Policy
Surplus
funds are invested pursuant to policies adopted by CFC's board of
directors. Under present policy, surplus funds may be invested in
direct obligations of, or guaranteed by, the United States or agencies thereof
or other highly liquid investment grade paper. Current investments
may include highly-rated securities such as commercial paper, obligations of
foreign governments, Eurodollar deposits, bankers' acceptances, bank letters
of
credit, certificates of deposit or working capital acceptances. The
policy also permits investments in certain types of repurchase agreements with
highly rated financial institutions, whereby the assets consist of eligible
securities of a type listed above set aside in a segregated
account.
Employees
At
May 31, 2007, CFC had 218 employees, including financial and legal personnel,
management specialists, credit analysts, accountants and support
staff. CFC believes that its relations with its employees are
good.
CFC
Lending Competition
CFC
competes with other lenders on price, the variety of financing options offered
and additional services provided to its member/owners. CFC is
primarily in competition with other banks for the business of its
members. The primary bank competitor is CoBank, ACB ("CoBank"), a
government sponsored enterprise and member of the Farm Credit System whose
status as such gives it the ability to offer lower interest rates in select
situations. In addition, there are some members that are large enough
to obtain a credit rating and access the capital markets for
funding. In these cases, CFC is competing with the pricing and
funding options the member is able to obtain in the capital
markets. CFC attempts to minimize the impact of competition by
offering a variety of loan options and complimentary services and by leveraging
the working relationship that it has with the majority of the members for over
35 years.
RUS
is generally the members' first financing option as it is able to offer members
interest rates that are generally lower than the rates CFC and the other banks
are able to offer. However, CFC and other banks do compete for bridge
loans in anticipation of long-term funding from RUS, the portion of a loan
that
RUS is not able to provide, loans to members that cannot borrow from RUS and
loans to members that have elected not to borrow from RUS.
According
to December 31, 2005 financial data (the latest full calendar year for which
this data is available as of the date of filing this Form 10-K) provided to
CFC
by its 812 reporting electric cooperative distribution and 60 reporting power
supply systems, those entities had a total of $51 billion in long-term debt
outstanding at December 31, 2005. RUS is the dominant lender to the
electric cooperative industry with $29 billion or 57% of the total outstanding
debt for the 872 systems reporting 2005 results to CFC. At December
31, 2005, CFC had a total of $16 billion of long-term exposure to its
distribution and power supply member systems, including $15 billion of long-term
loans and $1 billion of guarantees. CFC's $16 billion long-term
exposure represented 31% of the total long-term debt to these electric
systems. The remaining $6 billion or 12% was borrowed from other
sources.
At
December 31, 2006, CFC had a total of $16 billion of long-term exposure to
its
distribution and power supply member systems, including $15 billion of long-term
loans and $1 billion of guarantees.
The
competitive market for providing credit to the rural telecommunications industry
is difficult to quantify, since many rural telecommunications companies are
not
RUS borrowers. At December 31, 2006, RUS had a total of approximately
$3.7 billion outstanding to telecommunications borrowers. The Rural
Telephone Bank ("RTB") is expected to be fully liquidated by November 2007
resulting in the transfer of the RTB loan portfolio to RUS. RTFC is
not in direct competition with RUS, but rather competes with other lenders
for
supplemental lending and for the full lending requirement of the rural
telecommunications companies that have decided not to borrow from RUS or for
projects not eligible for RUS financing. RTFC's competition includes
commercial banks, CoBank and insurance companies. At December 31,
2006, RTFC had a total of $1.9 billion in long-term loans outstanding to
telecommunications borrowers.
Member
Regulation and Competition
Electric
Systems
The
movement toward retail electric competition has faltered. The
electric utility industry has settled into a "hybrid" model in which there
are
significant differences in the regulatory approaches followed in different
states and regions. At October 31, 2005 (the latest comprehensive,
and we believe still accurate, information available), customer choice has
been
implemented in 17 states. Those states were Arizona, Connecticut,
Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, New Hampshire,
New
Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Texas and Virginia
(although Virginia passed legislation in 2007 to re-regulate the distribution
and sale of electricity). Of the remaining states, customer choice
was not under consideration in 26 states, delayed in four states (Montana,
Nevada, Oklahoma, and West Virginia), repealed in two states (Arkansas and
New
Mexico), and suspended in one state (California). However, several of
the states that had implemented customer choice are currently reconsidering
their move to customer choice.
In
the 17 states where customer choice has been implemented, the Company had a
total of 240 electric members (185 distribution, 22 power supply and 33
statewide and associates) and $5,082 million of loans to electric systems at
May
31, 2007. In New York, where the Company has five electric members
and $8 million of loans to electric systems, cooperatives are not required
to
file competition plans with the state utility commission. In
Michigan, where the Company has 13 electric members and $243 million in loans,
the starting date for customer choice has been delayed. The Company
continues to believe that the distribution systems, which comprise the majority
of its membership and loan exposure, will not be materially impacted by customer
choice. In general, even in those states where customers have a
choice of alternative energy suppliers, very few customers have switched from
the traditional supplier.
In
addition, in five of the 17 states where customer choice has been implemented,
cooperatives may decide whether to "opt in" to competition or retain a monopoly
position with respect to energy sales. Those states are Illinois, New
Jersey, Ohio, Oregon and Texas. As of May 31, 2007, CFC had loans
outstanding in the amount of $3,747 million in those states. Even if
customers choose to purchase energy from an alternative supplier, the
distribution systems own the lines to the customer and it would not be feasible
for a competitor to build a second line to serve the same customers in almost
all situations. Therefore, the distribution systems will still be
charging a fee or access tariff for the service of delivering power regardless
of who supplies the power. The impact of customer choice on power
supply systems cannot be determined until final rules have been approved in
each
state and on the federal level.
Even
in states where customer choice laws have been passed, there are many factors
that may delay or influence the choices that customers have available to them
and the timing of competition for cooperatives. One such factor will
be the level of fees that systems will be allowed to charge other utilities
for
use of their transmission and distribution system. Other issues that
may further delay competition include, but are not limited to, the
following:
·
|
Ability
of cooperatives to "opt out" of the provisions of the customer choice
laws
in some states;
|
·
|
Utilities
in many states may still be regulated regarding rates on non-competitive
services, such as distribution;
|
·
|
Many
states will still regulate the securities issued by utilities, including
cooperatives;
|
·
|
FERC
regulation of rates as well as terms and conditions of transmission
service;
|
·
|
Reconciling
the differences between state laws, such that out-of-state utilities
can
compete with in-state utilities;
and
|
·
|
The
fact that few competitors have much interest in serving residential
or
rural customers.
|
In
addition to customer choice laws, some state agencies regulate electric
cooperatives with regard to rates and borrowing. There are 16 states
that regulate the rates electric systems charge; of these states, two states
have partial oversight authority over the cooperatives' rates, but not the
specific authority to set rates. Nine states allow cooperatives the
right to opt in or out of state regulation. There are 20 states that
regulate electric systems regarding the issuance of long-term debt and one
of
these states regulates both the issuance of short-term and long-term
debt. FERC also has jurisdiction to regulate wholesale rates, terms
and conditions of service and the issuance of securities by public utilities
within its jurisdiction, which presently includes only a few
cooperatives.
With
the enactment of the Energy Policy Act of 2005 in August 2005, the definition
of
a public utility has been modified to exclude cooperatives currently financed
by
RUS and non-RUS financed cooperatives provided that the non-RUS financed
cooperatives have total annual sales less than four million Mwh. The
Energy Policy Act of 2005 effectively provides a statutory exemption from FERC
regulation as public utilities for essentially all distribution cooperatives,
although such cooperatives may be subject to other aspects of FERC regulation
in
certain circumstances.
Telecommunications
Systems
RTFC
member telecommunications systems generally are regulated at the state and
federal levels. Most state regulatory bodies regulate local service
rates, intrastate access rates and telecommunications company
borrowing. The Federal Communications Commission ("FCC") regulates
interstate access rates and the issuance of licenses required to operate certain
types of telecom operations. Some member telecommunications systems
have affiliated companies that are not regulated.
The
Telecommunications Act of 1996 (the "Telecom Act") created a framework for
competition and deregulation in the local telecommunications
market. The Telecom Act had four basic goals: competition, universal
service, deregulation and fostering advanced telecommunications and information
technologies. To achieve competition, the Act required all carriers
to interconnect with all others and LECs to provide competitors with access
to
elements of their networks. Congress included provisions in the
Telecom Act granting RLECs an exemption from the above requirement to provide
competitors with access to their networks, absent a determination that it would
be in the public interest.
Competition
continues to be a significant factor in the telecommunications
industry. A January 2007 FCC report on competition states that as of
June 2006, competitive local exchange carriers ("CLECs") provided service to
30
million access lines - 17.4 % of the nation's 172 million end-user switched
access lines. Wireless carriers are providing service to 217.4
million mobile telephone service subscriptions - more than incumbent LEC
("ILECs") and CLECs combined. Non facilities-based CLECs took
advantage of pro-competitive FCC rules that allowed CLECs to obtain all elements
of the ILECs' networks necessary to conduct business at favorable
rates. This is known as the unbundled network element platform
("UNE-P") and consisted of a combination of an unbundled loop, unbundled local
circuit switching and shared transport.
A
March 2004 court order forced the FCC to revisit its rules on
UNE-P. In a decision favorable to the regional Bell companies, in
December 2004, the FCC ruled that ILECs no longer had any obligation to provide
CLECs with mass market local circuit switching and gave CLECs 12 months to
transition existing customers off of unbundled local circuit
switching. This ruling caused the UNE-P CLEC business model to
collapse and created extreme hardship for many such CLECs. Over 50%
of total CLEC lines as of June 2004 were provided through
UNE-P. AT&T and MCI subsequently exited the residential CLEC
market. Combined with the failure of the stand-alone long distance
provider business model, AT&T and MCI sought merger
partners. AT&T was merged into SBC and is now known as
AT&T. MCI merged into Verizon.
RLECs
generally were not subject to UNE-P based competition, since RLECs enjoyed
an
exemption contained in the Telecom Act; however, rural telecommunications
companies are experiencing competition. For the most part, local
exchange competition has benefited RLECs by enabling them to enter nearby towns
and cities as competitive LECs, leveraging their existing infrastructure and
reputation for providing quality, modern telecommunications
service.
In
addition to competition, the Telecom Act also mandated a universal
telecommunications service support mechanism and required that it be: (1)
sufficient to ensure that rural customers receive reasonably comparable rates
and services when compared to urban customers; and (2) portable, that is
available to all eligible providers. Congress stated its intent that
implicit subsidies presently contained in the access charges local
telecommunications companies levy on long distance carriers be eliminated and
be
made explicit in the new universal service support mechanism. Rules adopted
by
the FCC in 2000 have provided adequate levels of universal service
support. This has been essential for RLECs, as other FCC rulings have
reduced access charges which are a key revenue source. Numerous
wireless carriers have entered rural markets as competitors to the
RLECs. By obtaining competitive eligible telecommunications carrier
status from state regulators (as provided for in the Telecom Act), these
wireless carriers are able to receive universal service funds ("USF") based
on
the incumbent LEC's costs. This has led to growth of the fund and
great concern for its sustainability. USF's current funding base of
interstate telecommunications revenues is shrinking as long distance
minutes-of-use go down due to wireless, email and voice over internet protocol
substitution. Uncontrolled demand for USF funding has resulted in the
rate assessed on all participants in the nationwide network becoming
unsustainably high. The second quarter 2007 assessment rate is
11.7%. All industry segments agree that changes need to be made
regarding eligibility and the funding mechanism for USF. However,
they are not all in agreement on what those changes should be. The
Federal-State Joint Board has recently recommended limiting payments to wireless
carriers at the 2006 levels on an interim basis to help stabilize the fund
until
Congress and the FCC can develop a long-term solution. Wireline
carriers support this approach. Wireless carriers are
opposed.
The
FCC also has a proceeding open on intercarrier compensation – the most important
components of which are access fees LECs charge to interexchange carriers that
originate or terminate long distance traffic on LEC networks. While
the large LECs (most of which now own long distance companies) would like to
see
these fees transition to zero, RLECs depend heavily on access charges and are
active participants in the FCC proceeding. RLECs have come together
with a unified proposal that would preserve some access fees and are promoting
it with the FCC.
While
uncertainty exists regarding USF and access, the Company does not anticipate
that any potential revenue losses resulting from these changes will result
in
material losses on loans outstanding to rural telecommunications
companies.
Most
RLECs are expanding their service offerings to customers. Without
cable as a competitor in most rural areas, RLECs are introducing digital video,
high-speed data, and local and long distance voice service. Where
they can leverage their infrastructure, they are competing with Verizon, Qwest,
AT&T, Embarq and cable companies in neighboring towns. RLECs have
generally been very successful competitors in these situations.
Deregulation
has not had much effect on LECs thus far. The FCC has promulgated a
series of rules to implement the Telecom Act, and eliminated very few existing
regulatory requirements. States continue to regulate RLECs
extensively. A revised or totally rewritten Telecom Act would start a
whole new round of regulatory proceedings.
Another
aspect of the Telecom Act dealt with advanced telecommunications and information
technologies. In the late 1990s there was the concern that there was
a growing "digital divide" between various groups and areas within the
country. Legislators sought to provide broadband connectivity to all
Americans through programs which provide funding to connect schools and
libraries to the internet. RUS has issued rules liberalizing its
lending criteria to facilitate provision of advanced telecommunications and
information services in rural areas. Congress also created an RUS
broadband loan program in 2002. To date, RUS has made 70 broadband loans
totaling $1.22 billion. Congress authorized $500 million in fiscal
year 2007 lending authority. For fiscal year 2008, the Administration
is proposing an additional $300 million.
Given
the increased availability of government financing for rural broadband, it
is
unlikely that the Company will be participating in this financing to any
significant degree outside of incremental lending to existing RLEC borrowers
to
provide broadband services to their customers.
The
RUS Program
Since
the enactment of the Rural Electrification Act in 1936 (the "RE Act"), RUS
has
financed the construction of electric generating plants, transmission facilities
and distribution systems in order to provide electricity to rural
areas. Principally through the organization of systems under the RUS
loan program in 47 states and one U.S. territory, the percentage of farms and
residences in rural areas of the United States receiving central station
electric service increased from 11% in 1934 to almost 100%
currently. Rural electric systems serve 12% of all consumers of
electricity in the United States and its territories and account for
approximately 10% of total sales of electricity and own about 5% of energy
generation and generating capacity.
In
1949, the RE Act was amended to allow RUS to lend for the purpose of furnishing
and improving rural telecommunications service. For fiscal year 2007,
RUS has $690 million in lending authority for rural telephone systems and an
additional $558 million for other telecommunications programs, including
distance learning and broadband.
The
RE Act provides for RUS to make insured loans and to provide other forms of
financial assistance to electric borrowers. RUS is authorized to make
direct loans, at below market rates, to systems that qualify for the hardship
program (5% interest rate) or the municipal rate program (based on a municipal
government obligation index). RUS is also authorized to guarantee
loans that are used mainly to provide financing for construction of power supply
projects. Guaranteed loans bear interest at a rate agreed upon by the
borrower and the lender (which generally has been the Federal Financing Bank
("FFB")). RUS also provides financing at the Treasury
rate. The RUS exercises financial and technical supervision over
borrowers' operations. Its loans and guarantees are generally secured
by a mortgage on substantially all of the system's property and
revenues.
For
the fiscal year ending September 30, 2008, the President’s budget requests $100
million for hardship loans and $4 billion for loan guarantees with no requested
budget for both municipal rate loans and treasury rate loans. Neither
the House of Representatives or the Senate have passed an Appropriations measure
settling the fiscal year 2008 RUS Electric loan program
levels. Electric funding levels for fiscal year 2007 were as
follows: municipal rate loans of $100 million, hardship loans of $99
million, treasury rate loans of $1 billion, and loan guarantees of $2.7
billion.
Item
1A. Risk
Factors.
The
Company's financial condition and results of operations are subject to various
risks inherent in its business. The material risks and uncertainties that
management believes affect CFC are described below. The risks and
uncertainties described below are not the only ones facing
CFC. Additional risks and uncertainties that management is not aware
of, or that it currently deems immaterial, may also impair business operations.
If any of the events or circumstances described in the following risks actually
occur, our business, financial condition or results of operations could
suffer. You should consider all of the following risks together with
all of the other information in this Annual Report on
Form 10-K.
The
Company's ability to maintain and grow our business depends on access to
external financing.
The
Company depends on access to the capital markets to refinance its long-term
and
short-term debt, fund new loan advances and if necessary, to fulfill its
obligations under its guarantee and repurchase agreements. At May 31,
2007, the Company had $2,884 million of commercial paper, daily liquidity fund
and bank bid notes and $1,543 million of medium-term notes, collateral trust
bonds, subordinated deferrable debt and long-term notes payable scheduled to
mature during the next twelve months. There can be no assurance that
the Company will be able to access the markets in the future at all or on terms
that are acceptable to the Company. Downgrades to the Company's
long-term debt ratings and/or commercial paper ratings or other events that
may
deny or limit the Company's access to the capital markets could negatively
impact its operations. The Company has no control over certain items
that are considered by the credit rating agencies as part of their analysis
for
the Company, such as the overall outlook for the electric and telecommunications
industries.
Fluctuating
interest rates could adversely affect our income, margin and cash
flow.
The
Company is exposed to interest rate risk in its core lending and borrowing
activities. If the Company does not set interest rates on its loans
at a level to cover its cost of funding, there would be an adverse affect on
net
interest income and net income.
The
Company provides its members with many options on its loans with regard to
interest rates, the term for which the selected interest rate is in effect
and
the ability to prepay the loan. As a result there is a possibility of
significant changes in the composition of the loan portfolio. If the
Company is not able to adjust its outstanding debt portfolio to match the
changes in the loan portfolio, there could be an adverse impact on net interest
income and net income.
In
addition, the Company's calculated impairment on non-performing and restructured
loans will increase as the Company's long-term variable and short-term interest
rates increase. Currently, an increase of 25 basis points to the
Company's variable interest rates would result in an increase of $7 million
to
the calculated impairment.
Competition
from other lenders could impair the Company's financial
results.
The
majority of the Company's members are eligible to borrow from
RUS. The rates offered by RUS are generally lower than the rates that
the Company and other lenders can offer. Thus the members' first
financing option generally is to borrow funds under the RUS
program. The RUS funding level is determined by the U.S. Congress
each year. Increases to the amount of RUS funding could limit the
amount of loan growth experienced by the Company.
The
Company competes with other lenders for the portion of the loan commitment
that
RUS will not lend, for the loans to members that cannot borrow from RUS or
for
loans to members that have elected not to borrow from RUS. If other
lenders are more successful than the Company in the competition for this loan
volume, it could have an adverse impact on the Company's financial
results.
We
may not recover the value of amounts that we lend.
CFC's
allowance for loan losses is established through a provision charged to expense
that represents management's best estimate of probable losses that have been
incurred within the existing portfolio for loans. The level of the
allowance reflects management's continuing evaluation of: industry
concentrations; specific credit risks; loan loss experience; current loan
portfolio quality; present economic, political and regulatory conditions and
unidentified losses and risks inherent in the current loan
portfolio. The determination of the appropriate level of the
allowance for loan losses involves a high degree of subjectivity and requires
CFC to make significant estimates of current credit risks and future trends,
all
of which may undergo material changes. Changes in economic conditions
affecting borrowers, new information regarding existing loans, identification
of
additional problem loans and other factors, both within and outside of CFC's
control, may require an increase in the allowance for loan losses. In
addition, if actual losses incurred exceed current estimates of probable losses
currently included in the allowance for loan losses, CFC will need additional
provisions to increase the allowance for loan losses. Any increases
in the allowance for loan losses will result in a decrease in net income, and
may have a material adverse effect on CFC's financial results and credit
ratings.
The
Company has been and may in the future be in litigation with borrowers related
to enforcement or collection actions pursuant to loan documents. In such cases,
the borrower or others may assert counterclaims against the Company or initiate
actions against the Company related to the loan
documents. Unfavorable rulings in these cases which result in loan
losses that exceed the related allowance could have a material adverse effect
on
our financial results and credit ratings.
Our
ability to access the capital markets depends on our ability to maintain
adjusted leverage and debt to equity ratios within a reasonable range of the
current levels.
Maintenance
of adjusted leverage and debt to equity ratios within a reasonable range of
the
current levels is important in relation to the Company's ability to access
the
capital markets. A significant increase in the adjusted leverage or
debt to equity ratios could impair the Company's ability to access the capital
markets, its ability to access the Company's revolving lines of credit and
its
ability to maintain preferred credit ratings. See "Non-GAAP Financial
Measures" for further explanation and a reconciliation of adjusted
ratios.
A
decline in our credit rating could trigger payments under our derivative
agreements.
If
the Company's credit rating falls to the level specified in certain of its
derivative agreements, the other counterparty may terminate the
agreement. If the counterparty terminates the agreement, a net
payment may be due from one counterparty to the other based on the fair value
of
the underlying derivative instrument. Based on the fair market value
of its interest rate exchange agreements subject to rating triggers at May
31,
2007, the Company may be required to make a payment of up to $5 million if
its
senior unsecured ratings declined to Baa1 or BBB+, and up to $47 million if
its
senior unsecured ratings declined below Baa1 or BBB+. In calculating
the required payments, the Company only considered agreements in which it would
have been required to make a payment upon termination. In the event
the Company is required to make a payment as a result of a rating trigger,
it
could have a material adverse impact on its financial results.
Our
ability to comply with covenants related to our revolving credit agreements
and
debt indentures may affect our ability to obtain financing and maintain
preferred rating levels on our debt.
The
Company must maintain compliance with all covenants related to its revolving
credit agreements, including the adjusted TIER, adjusted leverage and amount
of
loans pledged in order to have access to the funds available under the revolving
lines of credit. See "Non-GAAP Financial Measures" for further explanation
and a
reconciliation of adjusted ratios. A restriction on access to the
revolving lines of credit would impair the Company's ability to issue short-term
debt, as it is required to maintain backup-liquidity to maintain preferred
rating levels on its short-term debt.
If
the Company does not maintain compliance with covenants on its collateral trust
bond, medium-term note and subordinated deferrable debt indentures, the holders
of such debt could declare an event of default and accelerate the repayment
of
the full amount of the outstanding debt principal prior to the stated maturity
of such debt. Additionally, the Company could not issue new debt
under such indentures. Such an event would require the Company to
obtain new funding to repay the accelerated debt as a result of the covenant
default and could have a material adverse impact on its financial results and
credit ratings.
Our
concentration of loans to borrowers within rural electric and telephone
industries could impair our revenues if either or both of those industries
were
to experience economic difficulties.
Credit
concentration is one of the risk factors considered by the rating agencies
in
the evaluation of the Company's credit rating. Substantially all of
the Company's credit exposure is to the rural electric and telephone industries
and is subject to risks associated with those industries.
The
Company's credit concentration to its ten largest borrowers could increase
from
the current 18% of total loans and guarantees outstanding, if:
·
|
it
were to extend additional loans and/or guarantees to the current
ten
largest borrowers,
|
·
|
its
total loans and/or guarantees outstanding were to decrease, with
a
disproportionately large share of the decrease to borrowers not in
the
current ten largest, or
|
·
|
it
were to advance large new loans and/or guarantees to one of the borrowers
below the ten largest.
|
We
could jeopardize our federal tax exemption if we fail to conduct our business
in
accordance with our exemption from the Internal Revenue
Service.
Legislation
that removes or imposes new conditions on the federal tax exemption for
501(c)(4) social welfare organizations could have a negative impact on the
Company's net income. CFC's continued exemption depends on it
conducting its business in accordance with its 501(c)(4) status.
Item
1B. Unresolved
Staff Comments.
None.
Item
2. Properties.
CFC
leases office space that serves as its headquarters in Fairfax County,
Virginia. In October 2005, CFC entered into a three-year lease with
the building owner for approximately 107,228 square feet of the facility’s
office, meeting and storage space. CFC has the option to extend the
lease for two additional one-year periods with terms similar to the initial
three-year lease.
Item
3. Legal
Proceedings.
None.
Item
4. Submission
of Matters to a Vote of Security Holders.
None.
PART
II
Item
5. Market
for Registrant's Common Equity and Related Stockholder
Matters.
Item
6. Selected
Financial Data.
The
following is a summary of selected financial data for the years ended May
31:
(Dollar
amounts in thousands)
|
|
2007
|
|
2006
(As
restated) (11)
|
|
2005
(As
restated) (11)
|
|
2004
(As
restated) (11)
|
|
2003
(As
restated) (11)
|
|
For
the year ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
1,054,224
|
|
|
$
|
1,007,912
|
|
|
$
|
1,030,853
|
|
|
$
|
1,009,856
|
|
|
$
|
1,075,310
|
|
|
Net
interest income
|
|
|
57,494
|
|
|
|
31,976
|
|
|
|
88,820
|
|
|
|
68,365
|
|
|
|
123,682
|
|
|
Derivative
cash settlements (1)
|
|
|
86,442
|
|
|
|
80,883
|
|
|
|
78,287
|
|
|
|
123,363
|
|
|
|
130,686
|
|
|
Derivative
forward value (1)
|
|
|
(79,281
|
)
|
|
|
28,805
|
|
|
|
25,849
|
|
|
|
(228,840
|
)
|
|
|
754,727
|
|
|
Foreign
currency adjustments (2)
|
|
|
(14,554
|
)
|
|
|
(22,594
|
)
|
|
|
(22,893
|
)
|
|
|
(65,310
|
)
|
|
|
(243,220
|
)
|
|
Income
(loss) prior to income taxes, minority
interest
and cumulative effect of change in
accounting
principle (3)
|
|
|
16,541
|
|
|
|
105,762
|
|
|
|
126,561
|
|
|
|
(194,292
|
)
|
|
|
649,485
|
|
|
Cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle (4)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,369
|
|
|
|
-
|
|
|
Net
income (loss)
|
|
$
|
11,701
|
|
|
$
|
95,497
|
|
|
$ |
122,503
|
|
|
$ |
(177,729
|
)
|
|
$ |
649,485
|
|
|
Fixed
charge coverage ratio (TIER) (5)(6)
|
|
|
1.01
|
|
|
|
1.10
|
|
|
|
1.13
|
|
|
|
-
|
|
|
|
1.68
|
|
|
Adjusted
fixed charge coverage ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Adjusted
TIER)
(7)
|
|
|
1.12
|
|
|
|
1.11
|
|
|
|
1.14
|
|
|
|
1.12
|
|
|
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
|
$
|
18,128,207
|
|
|
$
|
18,360,905
|
|
|
$
|
18,972,068
|
|
|
$
|
20,488,523
|
|
|
$
|
19,484,341
|
|
|
Allowance
for loan losses
|
|
|
(561,663
|
)
|
|
|
(611,443
|
)
|
|
|
(589,749
|
)
|
|
|
(573,939
|
)
|
|
|
(511,463
|
)
|
|
Assets
|
|
|
18,575,181
|
|
|
|
19,179,621
|
|
|
|
20,060,314
|
|
|
|
21,455,443
|
|
|
|
21,139,282
|
|
|
Short-term
debt (8)
|
|
|
4,427,123
|
|
|
|
5,343,824
|
|
|
|
7,952,579
|
|
|
|
5,990,039
|
|
|
|
5,046,978
|
|
|
Long-term
debt (9)
|
|
|
11,295,219
|
|
|
|
10,642,028
|
|
|
|
8,701,955
|
|
|
|
12,009,182
|
|
|
|
12,050,119
|
|
|
Subordinated
deferrable debt (10)
|
|
|
311,440
|
|
|
|
486,440
|
|
|
|
685,000
|
|
|
|
550,000
|
|
|
|
650,000
|
|
|
Members'
subordinated certificates
|
|
|
1,381,447
|
|
|
|
1,427,960
|
|
|
|
1,490,750
|
|
|
|
1,665,158
|
|
|
|
1,708,297
|
|
|
Members'
equity (1)
|
|
|
566,286
|
|
|
|
545,351
|
|
|
|
523,583
|
|
|
|
483,126
|
|
|
|
454,376
|
|
|
Total
equity
|
|
|
710,041
|
|
|
|
784,408
|
|
|
|
764,934
|
|
|
|
692,453
|
|
|
|
927,453
|
|
|
Guarantees
|
|
$
|
1,074,374
|
|
|
$
|
1,078,980
|
|
|
$
|
1,157,752
|
|
|
$
|
1,331,299
|
|
|
$
|
1,903,556
|
|
|
Leverage
ratio (6)
|
|
|
26.64
|
|
|
|
24.80
|
|
|
|
26.71
|
|
|
|
31.88
|
|
|
|
23.85
|
|
|
Adjusted
leverage ratio (7)
|
|
|
6.81
|
|
|
|
6.38
|
|
|
|
6.50
|
|
|
|
7.07
|
|
|
|
6.69
|
|
|
Debt
to equity ratio (6)
|
|
|
25.13
|
|
|
|
23.42
|
|
|
|
25.20
|
|
|
|
29.95
|
|
|
|
21.79
|
|
|
Adjusted
debt to equity ratio (7)
|
|
|
6.37
|
|
|
|
5.97
|
|
|
|
6.07
|
|
|
|
6.58
|
|
|
|
6.01
|
|
|
|
|
(1)
|
Derivative
cash settlements represent the net settlements received/paid on interest
rate and cross currency exchange agreements that do not qualify for
hedge
accounting for the years ended May 31, 2007, 2006, 2005, 2004 and
2003. The derivative forward value represents the change in
fair value on exchange agreements that do not qualify for hedge
accounting, as well as amortization related to the long-term debt
valuation allowance and related to the transition adjustment recorded
as
an other comprehensive loss on June 1, 2001. Members' equity
represents total equity excluding foreign currency adjustments, derivative
forward value and accumulated other comprehensive income (see "Non-GAAP
Financial Measures" in Management's Discussion and Analysis for further
explanation of members' equity and a reconciliation to total
equity).
|
(2)
|
Foreign
currency adjustments represent the change on foreign denominated
debt that
is not related to a qualifying hedge under SFAS 133 during the
period. The foreign denominated debt is revalued at each
reporting date based on the current exchange rate. To the
extent that the current exchange rate is different than the exchange
rate
at the time of issuance, there will be a change in the value of the
foreign denominated debt. CFC enters into foreign currency
exchange agreements at the time of each foreign denominated debt
issuance
to lock in the exchange rate for all principal and interest payments
required through maturity.
|
(3)
|
Includes
$43 million gain on sale of building and land at May 31,
2006.
|
(4)
|
The
cumulative effect of change in accounting principle in 2004 represents
the
impact of implementing Financial Accounting Standards Board Interpretation
No. 46 (R), Consolidation of Variable Interest Entities, an interpretation
of Accounting Research Bulletin No. 51, effective June 1,
2003.
|
(5)
|
The
fixed charge coverage ratio is the same calculation as CFC's Times
Interest Earned Ratio ("TIER"). For the year ended May 31,
2004, CFC's earnings were insufficient to cover fixed charges by
$200
million.
|
(6)
|
See
"Non-GAAP Financial Measures" in Management's Discussion and Analysis
for
the GAAP calculations of these ratios.
|
(7)
|
Adjusted
ratios include non-GAAP adjustments that CFC makes to financial measures
in assessing its financial performance. See "Non-GAAP Financial
Measures" in Management's Discussion and Analysis for further explanation
of these calculations and a reconciliation of the
adjustments.
|
(8)
|
Includes
the foreign currency valuation account of $245 million, $40 million
and
$150 million at May 31, 2006, 2005 and 2003,
respectively.
|
(9)
|
Excludes
$1,368 million, $1,839 million, $3,591 million, $2,365 million, and
$
2,911 million in long-term debt that comes due, matures and/or will
be
redeemed during fiscal years 2008, 2007, 2006, 2005 and 2004, respectively
(see Note 5 to the consolidated financial statements). Includes
the long-term debt valuation allowance of $(1) million and $2 million
at
May 31, 2003 and 2002, respectively, and the foreign currency valuation
account of $221 million, $234 million and $176 million at May 31,
2005,
2004 and 2003, respectively.
|
(10)
|
Excludes
$175 million called in June 2007 and $150 million called in June
2006 at
May 31, 2007 and 2006, respectively, reported in short-term
debt.
|
(11)
|
See
Note 1 (w) to the consolidated financial statements for further
explanation of the restatement of the consolidated statement of operations
data for fiscal years 2006 and 2005 and the consolidated balance
sheet
data as of May 31, 2006. Prior year periods have been revised
to reflect the adjustments related to the restatement described in
Note
1(w).
|
Item
7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
Unless
stated otherwise, references to the Company relate to the consolidation of
National Rural Utilities Cooperative Finance Corporation ("CFC" or "the
Company"), Rural Telephone Finance Cooperative ("RTFC"), National Cooperative
Services Corporation ("NCSC") and certain entities controlled by CFC and created
to hold foreclosed assets and effect loan securitization
transactions. The following discussion and analysis is designed to
provide a better understanding of the Company's consolidated financial condition
and results of operations and as such should be read in conjunction with the
consolidated financial statements, including the notes thereto. CFC refers
to
its financial measures that are not in accordance with generally accepted
accounting principles ("GAAP") as "adjusted" throughout this
document. See "Non-GAAP Financial Measures" for further explanation
of why the Non-GAAP measures are useful and for a reconciliation to GAAP
amounts.
Restatement
Subsequent
to the issuance of the May 31, 2006 consolidated financial statements, the
Company’s management identified an error in the recording of interest expense on
foreign denominated debt and the cash settlement income from foreign currency
exchange agreements, as well as the related accrued interest payable and accrued
interest receivable. The Company was using the agreed upon foreign
exchange rate from the foreign currency exchange agreement rather than the
average spot foreign currency exchange rate during the income statement period
to convert the interest expense on the foreign denominated debt and foreign
exchange agreement income to U.S. dollars. The Company was also using
the agreed upon foreign exchange rate from the foreign currency exchange
agreement rather than the spot foreign currency exchange rate at the end of
the
balance sheet period to convert the accrued interest payable and accrued
interest receivable to U.S. dollars. The interest expense on the
foreign denominated debt and the cash settlement income from the foreign
currency exchange agreement are equal and offsetting amounts, as the Company
uses the amount received under the exchange agreement to pay the interest
expense on the foreign denominated debt. The amounts for the accrued
interest payable and accrued interest receivable are also
offsetting. As a result of this error, interest expense and cash
settlement income were understated by $13 million and $15 million for the years
ended May 31, 2006 and 2005, respectively. The Company subtracts the
net accrual from the last settlement date on its derivatives at each period
end
in the calculation of the related fair value, so the error in the calculation
of
the income receivable on the foreign exchange agreements also impacted the
fair
value of the derivatives recorded as a derivative asset. Thus this
correction also impacts the change in the fair value of the derivatives reported
in the derivative forward value line on the consolidated statement of
operations. The derivative forward value line and net income were
overstated by $0.2 million and $0.5 million for the years ended May 31, 2006
and
2005, respectively. There is no impact on cash flows from operating
activities or the total change in cash in the consolidated statements of cash
flows. There was no change to the reported times interest earned
(“TIER”) calculation for either year. The amounts reported on the
consolidated balance sheet for accrued interest payable and accrued interest
and
other receivables at May 31, 2006 were understated by $4 million and the amounts
reported for the derivative asset and retained equity at May 31, 2006 were
overstated by $4 million.
The
Company has revised the Management’s Discussion and Analysis for the effects of
this restatement.
Business
Overview
CFC
was formed in 1969 by rural electric cooperatives to provide a source of
financing to supplement the loan programs of the Rural Utilities Service
("RUS"). CFC is organized as a cooperative in which each member
(other than associates) is entitled to one vote. Under CFC's bylaws,
the board of directors is composed of 23 individuals, 20 of whom must be either
general managers or directors of member systems, two of whom are designated
by
the National Rural Electric Cooperative Association and one at-large position
who must satisfy the requirements of an audit committee financial expert as
defined by Section 407 of the Sarbanes-Oxley Act of 2002 and must be a trustee,
director, manager, Chief Executive Officer or Chief Financial Officer of a
member. In November 2006, the CFC Board elected an at-large director
that qualifies as a financial expert who will serve on the audit
committee. The director took his seat on the board following the CFC
annual meeting in March 2007. CFC is a tax-exempt entity under
Section 501(c)(4) of the Internal Revenue Code.
RTFC
is a not-for-profit private cooperative association created for the purpose
of
providing and/or arranging financing for its rural telecommunications members
and their affiliates. NCSC also is a private non-profit cooperative
association. The principal purpose of NCSC is to provide financing to
the for-profit or non-profit entities that are owned, operated or controlled
by
or provide substantial benefit to, members of CFC.
The
Company's primary objective as a cooperative is to provide its members with
low
loan and guarantee rates while maintaining sound financial results required
to
attain high credit ratings on its debt instruments. As a
not-for-profit, membership owned financial institution, the Company's goal
is
not to maximize its profit on loans to members, but rather to find a balance
between charging its members low rates on loans and maintaining the financial
performance required to access the capital markets on behalf of its
members. Thus, the Company marks up its funding costs only to the
extent necessary to cover its operating expenses, a provision for loan losses
and to provide earnings sufficient to preserve interest coverage in light of
the
Company's financing objectives.
At
May 31, 2007, the Company's consolidated membership was 1,544 including 899
utility members, the majority of which are consumer-owned electric cooperatives,
513 telecommunications members, 66 service members and 66 associates in 49
states, the District of Columbia and two U.S. territories. The
utility members included 830 distribution systems and 69 generation and
transmission ("power supply") systems.
CFC
obtains its funding from the capital markets, private placement of debt and
its
membership. CFC enters the capital markets, based on the combined
strength of its members, to borrow the funds required to fulfill the financing
requirements of its members. On a regular basis, CFC obtains debt
financing in the capital markets by issuing fixed rate or variable rate secured
collateral trust bonds, fixed rate subordinated deferrable debt, fixed rate
or
variable rate unsecured medium-term notes, commercial paper and enters into
bank
bid note agreements. In addition, CFC obtains debt financing from
private funding sources through the issuance of fixed rate notes. CFC
also obtains debt financing from its membership and other qualified investors
through the direct sale of its commercial paper, daily liquidity fund and
unsecured medium-term notes.
Rural
electric cooperatives that join CFC are generally required to purchase
membership subordinated certificates from CFC as a condition of
membership. In connection with any long-term loan or guarantee made
by CFC on behalf of one of its members, CFC may require that the member make
an
additional investment in CFC by purchasing loan or guarantee subordinated
certificates. The membership subordinated certificates and the loan
and guarantee subordinated certificates are unsecured and subordinate to other
senior debt of CFC.
CFC
is required by law to have a mechanism to allocate its net income to its
members. CFC allocates its net income excluding the non-cash effects
of Statement of Financial Accounting Standards ("SFAS") 133, Accounting for
Derivative Instruments and Hedging Activities, as amended and SFAS 52, Foreign
Currency Translation annually to an education fund, a members' capital reserve
and to members based on each member's patronage of the loan programs during
the
year. RTFC annually allocates its net income to its members based on
each member's patronage of the loan programs during the year. NCSC
does not allocate its net income to its members.
The
Company's performance is closely tied to the performance of its member rural
electric and telecommunications systems due to the near 100% concentration
of
its loan and guarantee portfolio in those industries.
Financial
Overview
Results
of Operations
The
Company uses TIER instead of the dollar amount of net interest income or net
income as its primary performance indicator, since its net income in dollar
terms is subject to fluctuation as interest rates change. TIER is a
measure of the Company's ability to cover the interest expense on its debt
obligations. TIER is calculated by dividing the sum of interest
expense and the net income prior to the cumulative effect of change in
accounting principle by the interest expense.
For
the year ended May 31, 2007, the Company reported net income of $12 million
and
TIER of 1.01, compared to a net income of $96 million and TIER of 1.10 for
the
prior year. For the year ended May 31, 2007, the Company reported an
adjusted net income of $108 million and adjusted TIER of 1.12, compared to
an
adjusted net income of $97 million and adjusted TIER of 1.11 for the prior
year. See "Non-GAAP Financial Measures" for more information on the
adjustments the Company makes to its financial results for the purposes of
its
own analysis and covenant compliance.
During
the year ended May 31, 2007, the Company's earnings were impacted by the level
of loans on non-accrual status. Holding loans on non-accrual status
resulted in a reduction of $81 million to reported interest income for the
year
ended May 31, 2007. During fiscal year 2008, the Company expects the
outstanding balance on the current loans on non-accrual status to decrease
due
to anticipated loan write-offs and principal repayments. The Company
anticipates writing off approximately $17 million related to VarTec Telecom,
Inc. (“VarTec”) during the first quarter of fiscal year 2008. This
write-off will reduce the exposure to the amount of the expected recovery on
the
debtor-in-possession loan. In addition, it is expected that Denton
County Electric Cooperative, Inc. d/b/a CoServ Electric (“CoServ”) will make
scheduled quarterly payments totaling $25 million, which will all be applied
as
a reduction to principal in fiscal year 2008.
The
reduction to the amount of loans on non-accrual status should result in an
increase to the adjusted net interest income yield during fiscal year
2008. Changes to the Company's variable interest rates should mirror
changes to the federal funds
rate. The
calculated impairment on the Company's loans increases or decreases with the
increases and decreases to the Company's variable interest
rates. Based on the current balance of impaired loans at May 31,
2007, an increase or decrease of 25 basis points to the Company's variable
interest rates results in an increase or decrease of approximately $7 million,
respectively, to the calculated impairment on loans irrespective of a change
in
the credit fundamentals of the impaired borrower.
Financial
Condition
During
the year ended May 31, 2007, the Company's total loans outstanding decreased
by
$233 million or 1% from May 31, 2006. At May 31, 2007, RTFC loans
outstanding decreased by $302 million, CFC loans outstanding increased by $10
million and NCSC loans outstanding increased by $59 million compared to May
31,
2006. CFC loan advances were offset by the sale of $366 million of
CFC distribution loans at par in a loan securitization transaction in February
2007. CFC expects to continue such loan sales. See further
discussion in “Results of Operations”.
The
Company expects that the balance of the loan portfolio will remain relatively
stable during fiscal year 2008. Loans from the Federal Financing Bank
("FFB"), a division of the U.S. Treasury Department, with an RUS guarantee,
represent a lower cost option for rural electric utilities compared to the
Company. The Company anticipates that the majority of its electric
loan growth will come from distribution system borrowers that have fully prepaid
their RUS loans and choose not to return to the government loan program, from
distribution system borrowers that do not want to wait the 12 to 24 months
it
may take RUS to process and fund the loan and from power supply
systems. The Company anticipates that the RTFC loan balance will
continue to decline due to long-term loan amortization and lower levels of
capital expenditure requirements and asset acquisitions in the rural
telecommunications marketplace.
During
the year ended May 31, 2007, short-term debt decreased by $917 million and
long-term debt increased by $653 million. Short-term debt
decreased due to the maturity of medium-term notes and because CFC further
reduced its reliance on the dealer commercial paper markets.
At
May 31, 2007, the Company reported total equity of $710 million, a decrease
of
$74 million from $784 million reported at May 31, 2006. Under GAAP,
the Company's reported equity balance fluctuates based on the impact of future
expected changes to interest rates on the fair value of its interest rate
exchange agreements. As a result, it is difficult to predict the
future changes in the Company's reported GAAP equity due to the uncertainty
of
the movement in future interest rates. In its internal analysis and
for purposes of covenant compliance under its credit agreements, the Company
adjusts equity to exclude the non-cash impacts of SFAS 133 and 52.
Liquidity
At
May 31, 2007, the Company had $2,884 million of commercial paper, daily
liquidity fund and bank bid notes and $1,543 million of medium-term notes,
collateral trust bonds, subordinated deferrable debt and long-term notes payable
scheduled to mature during the next twelve months. Members held
commercial paper (including the daily liquidity fund) totaling $1,634 million
or
approximately 59% of the total commercial paper outstanding at May 31,
2007. Commercial paper issued through dealers and bank bid notes
totaled $1,118 million and represented 6% of total debt outstanding at May
31,
2007. The Company intends to maintain the balance of dealer
commercial paper and bank bid notes at 15% or less of total debt outstanding
during fiscal year 2008. During the next twelve months, the Company
plans to refinance the $1,543 million of medium-term notes, collateral trust
bonds, subordinated deferrable debt and long-term notes payable and fund new
loan growth by issuing a combination of commercial paper, medium-term notes,
collateral trust bonds and other debt.
CFC
uses member loan repayments, capital market debt issuance, private debt
issuance, member investments, and net income to fund its
operations. In addition, the Company maintains both short-term and
long-term bank lines in the form of revolving credit agreements with its bank
group. Members pay a small membership fee and are typically required
to purchase subordinated certificates as a condition to receiving a long-term
loan advance and as a condition of membership. CFC has a need for
funding to make loan advances to its members, to make interest payments on
its
public and private debt and to make payments of principal on its maturing
debt. To facilitate open access to the capital markets, CFC is a
regular issuer of debt in the capital markets, maintains strong credit ratings
and has shelf registrations on file with the Securities and Exchange Commission
("SEC"). The Company plans to file a registration statement as a
well-known seasoned issuer that will authorize the Company to issue an unlimited
amount of debt under each of its public debt instruments for a three-year
period. CFC also has access to foreign debt markets with Euro
medium-term note and commercial paper programs and an Australian medium-term
note program.
The
Company can borrow amounts from the FFB with a guarantee of repayment by the
RUS
as part of the funding mechanism for the Rural Economic Development Loan and
Grant ("REDLG") program. As a result of the RUS guarantee, these
funds may represent a lower cost compared to the Company's other forms of debt
securities. Subsequent to our fiscal year-end, on August 1, 2007, CFC
submitted an application to borrow the remaining $500 million available under
FFB loan facilities. These funds were received by CFC on August 7,
2007.
Subsequent
to our fiscal year-end, on June 1, 2007, the Company redeemed the 7.40%
subordinated deferrable debt securities due 2050 totaling $175
million. The Company redeemed these securities at par and recorded a
charge of $6 million in interest expense during the first quarter of fiscal
year
2008 for the unamortized issuance costs.
Critical
Accounting Estimates
Allowance
for Loan Losses
At
May 31, 2007 and 2006, the Company had a loan loss allowance that totaled $562
million and $611 million, representing 3.10% and 3.33% of total loans
outstanding, respectively. GAAP requires loans receivable to be
reported on the consolidated balance sheets at net realizable
value. The net realizable value is the total principal amount of
loans outstanding less an estimate of the probable losses inherent in the
portfolio. The Company calculates its loss allowance on a quarterly
basis. The loan loss allowance is calculated by segmenting the
portfolio into three categories of loans: impaired, high risk and general
portfolio. There are significant subjective assumptions and estimates
used in calculating the amount of the loss allowance required by each of the
three categories. Different assumptions and estimates could also be
reasonable. Changes in these assumptions and estimates could have a
material impact on the Company's financial statements.
Impaired
Exposure
The
Company calculates impairment on certain loans in accordance with SFAS 114,
Accounting by Creditors for Impairment of a Loan - an Amendment of SFAS 5 and
SFAS 15, as amended. SFAS 114 states that a loan is impaired when a
creditor does not expect to collect all principal and interest due under the
original terms of the loan. The Company reviews its portfolio to
identify impairments at least on a quarterly basis. Factors
considered in determining an impairment include, but are not limited to: the
review of the borrower's audited financial statements and interim financial
statements if available, the borrower's payment history, communication with
the
borrower, economic conditions in the borrower's service territory, pending
legal
action involving the borrower, restructure agreements between the borrower
and
the Company, and estimates of the value of the borrower's assets that have
been
pledged as collateral to secure the Company's loans. The Company
calculates the impairment by comparing the future estimated cash flow,
discounted at the original loan interest rate, against its current investment
in
the receivable. If the current investment in the receivable is
greater than the net present value of the future payments discounted at the
original contractual interest rate, the impairment is equal to that
difference. If it is not possible to estimate the future cash
flow associated with a loan, then the impairment calculation is based on the
value of the collateral pledged as security for the loan. At May 31,
2007 and 2006, the Company had a total of $397 million and $447 million reserved
specifically against impaired exposure totaling $1,099 million and $1,201
million, respectively, representing 36% and 37%, respectively, of the total
impaired loan exposure. The $397 million and $447 million specific
reserves represented 71% and 73% of the total loan loss allowance at May 31,
2007 and 2006, respectively. The calculated impairment at May 31, 2007 was
lower
than at May 31, 2006 due to a settlement agreement with one borrower resulting
in a loan write-off of $44 million and payments received on impaired loans
offset by higher interest rates on variable rate loans. See further
discussion under “Financial Condition”. The original contract rate on
a portion of the impaired loans at May 31, 2007 will vary with the changes
in
the Company's variable interest rates. Based on the current balance
of impaired loans at May 31, 2007, a 25 basis point increase or decrease to
the
Company's variable interest rates would result in an increase or decrease,
respectively, of approximately $7 million to the calculated impairment
irrespective of a change in the credit fundamentals of the impaired
borrower.
In
calculating the impairment on a loan, the estimates of the expected future
cash
flow or collateral value are the key estimates made by management. Changes
in
the estimated future cash flow or collateral value would impact the amount
of
the calculated impairment. The change in cash flow required to make
the change in the calculated impairment material will be different for each
borrower and depend on the period covered, the original contract interest rate
and the amount of the loan outstanding. Estimates are not used to
determine the Company's investment in the receivables or the discount rate
since, in all cases, they are the loan balance outstanding at the reporting
date
and the original loan interest rate.
High
Risk Exposure
Loan
exposures considered to be high risk represent exposure in which the borrower
has had a history of late payments, the borrower's financial results do not
satisfy loan financial covenants, the borrower has contacted the Company to
discuss pending financial difficulties or for some other reason, the Company
believes that the borrower's financial results could deteriorate resulting
in an
elevated potential for loss. The Company's corporate credit committee
is responsible for determining which loans should be classified as high risk
and
the level of reserve required for each borrower. The committee meets
at least quarterly to review all loan facilities with an internal risk rating
above a certain level. Once it is determined that exposure to a
borrower should be classified as high risk, the committee sets the required
reserve level based on the facts and circumstances for each borrower, such
as
the borrower's financial condition, payment history, the Company's estimate
of
the collateral value, pending litigation, if any, and other
factors. This is an objective and subjective exercise in which the
committee uses the available information to make its best estimate as to the
level of loss allowance required. At any reporting date, the reserve
required could vary significantly depending on the facts and circumstances,
which could include, but are not limited to: changes in collateral value,
deterioration in financial condition, the borrower declaring bankruptcy,
payment
default
on the Company's loans and other factors. The borrowers in the high
risk category will generally either move to the impaired category or back to
the
general portfolio within a period of 12 to 24 months. At May 31, 2007
and 2006, the Company had reserved $3 million and $2 million against the $6
million and $12 million of exposure classified as high risk, representing
coverage of 50% and 17%, respectively. The $3 million and $2 million
reserved for loans in the high risk category represented less than 1% of the
total loan loss allowance at May 31, 2007 and 2006.
General
Portfolio
The
Company's methodology used to determine the required loan loss allowance for
the
general portfolio includes the use of an internal risk rating system, historical
default data on corporate bonds and Company specific loss recovery
data. The Company uses the following factors, in no particular order,
to determine the level of the loan loss allowance for the general portfolio
category:
·
|
Internal
risk ratings - the Company maintains risk ratings for each credit
facility
outstanding to its borrowers. The ratings are updated at least
annually and are based on the
following:
|
o
|
General
financial condition of the
borrower.
|
o
|
The
Company's internal estimated value of the collateral securing its
loans.
|
o
|
The
Company's internal evaluation of the borrower's
management.
|
o
|
The
Company's internal evaluation of the borrower's competitive position
within its service territory.
|
o
|
The
Company's estimate of potential impact of proposed regulation and
litigation.
|
o
|
Other
factors specific to individual borrowers or classes of
borrowers.
|
·
|
Standard
corporate default table - The table provides expected default rates
based
on rating level and the remaining maturity of the bond. The
Company uses the standard default table for all corporate bonds published
by Standard and Poor's Corporation to assist in estimating its reserve
levels.
|
·
|
Recovery
rates - Estimated recovery rates based on historical experience of
loan
balance at the time of default compared to the total loss on the
loan to
date.
|
The
Company aggregates the loans in the general portfolio by borrower type
(distribution, generation, telecommunications, associate and other member)
and
by internal risk rating within borrower type. The Company correlates
its internal risk ratings to the ratings used in the standard default table
based on a comparison of its rating on borrowers that have a rating from one
or
more of the recognized credit rating agencies and based on a standard matching
used by banks.
In
addition to the general portfolio reserve requirement as calculated above,
the
Company maintains an additional reserve for borrowers with a total exposure
in
excess of 1.5% of its total loans and guarantees outstanding. The
additional reserve is based on the amount of exposure in excess of 1.5% of
the
Company's total exposure and the borrower's internal risk rating. At
May 31, 2007 and 2006, the Company had a reserve of $3 million based on the
additional risk related to large exposures.
At
May 31, 2007 and 2006, the Company had a total of $16,768 million and $16,886
million of loans, respectively, in the general portfolio. This total
does not include $256 million and $261 million of loans at May 31, 2007 and
2006, respectively, that have a U.S. Government guarantee of all principal
and
interest payments. The Company does not maintain a loan loss
allowance on loans that are guaranteed by the U.S. Government. At May
31, 2007 and 2006, the Company reserved a total of $162 million (including
the
$3 million described above for additional risk related to large exposures)
for
loans in the general portfolio representing coverage of 0.97% and 0.96%,
respectively, of the total loans for the general portfolio.
In
fiscal years 2007, 2006 and 2005, CFC recorded a recovery to the loan loss
reserve totaling $7 million, provision of $23 million and provision
of $16 million, respectively.
Senior
management reviews the estimates and assumptions used in the calculations of
the
loan loss allowance for impaired loans, high risk loans and loans covered by
the
general portfolio, including large exposures related to single obligors, on
a
quarterly basis. Senior management discusses estimates with the board
of directors and audit committee and reviews all loan loss related disclosures
included in the Company's Form 10-Qs and Form 10-Ks filed with the
SEC.
Management
makes recommendations regarding loans to be written off to the CFC board of
directors. In making its recommendation to write off all or a portion
of a loan balance, management considers various factors including cash flow
analysis and collateral securing the borrower's loans.
Derivative
Financial Instruments
In
June 1998, the FASB issued SFAS 133. SFAS 133, as amended,
establishes accounting and reporting standards requiring that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the consolidated balance sheets as either an asset
or
liability measured at fair value. The statement requires that changes
in the derivative instrument's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative instrument's gains and losses to
offset related results on the
hedged
item in the consolidated statements of operations or to be recorded as other
comprehensive income, to the extent effective, and requires that a company
formally document, designate, and assess the effectiveness of transactions
that
receive hedge accounting. The Company is neither a dealer nor trader
in derivative financial instruments. The Company uses interest rate,
cross currency and cross currency interest rate exchange agreements to manage
its interest rate and foreign currency risk.
Generally,
the Company's derivatives do not qualify for hedge accounting. To
qualify for hedge accounting, there must be a high correlation between the
pay
leg of the interest rate exchange agreement and the asset being hedged or
between the receive leg of the interest rate exchange agreement and the
liability being hedged. A large portion of the Company's interest
rate exchange agreements use a 30-day composite commercial paper index as the
receive leg, which would have to be highly correlated to the Company's own
commercial paper rates to qualify for hedge accounting. The Company
sells commercial paper to its members as well as to investors in the capital
markets. The Company sets its commercial paper rates daily based on
its cash requirements. The correlation between the Company's
commercial paper rates and the 30-day composite commercial paper index has
not
been consistently high enough to qualify for hedge accounting. At May
31, 2007 and 2006, the Company did not have any interest rate exchange
agreements that were accounted for using hedge accounting.
The
Company does not plan to adjust its practice of using the 30-day composite
commercial paper or a LIBOR index as the receive portion of its interest rate
exchange agreements. The Company sets the variable interest rates on
its loans based on the cost of its short-term debt, which is comprised of
long-term debt due within one year and commercial paper. The Company
believes that it is economically hedging its net interest income on loans by
using the 30-day composite commercial paper or LIBOR index, which are the rates
that are most closely related to the rates it pays on its own commercial
paper. During certain periods, the correlation between the LIBOR
rates or the 30-day composite commercial paper rate and the Company's 90-day
and
30-day commercial paper rate has been higher than the required 90% to qualify
for hedge accounting. However, the correlation is not consistently
above the 90% threshold, therefore the interest rate exchange agreements that
use the three-month LIBOR rate or 30-day composite commercial paper rate do
not
qualify for hedge accounting. For the purposes of its own analysis,
the Company believes that the correlation is sufficiently high to consider
these
agreements effective economic hedges.
As
a result of applying SFAS 133, the Company has recorded derivative assets of
$223 million and $576 million and derivative liabilities of $72 million and
$85
million at May 31, 2007 and 2006, respectively. From inception to
date, accumulated other comprehensive income related to derivatives was $12
million and $13 million as of May 31, 2007 and 2006, respectively.
The
impact of derivatives on the Company's consolidated statements of operations
for
the years ended May 31, 2007, 2006 and 2005 was a gain of $7 million, $107
million and $98 million, respectively. For the year ended May 31,
2007, the derivative forward value includes a charge of $31 million related
to
the termination of two interest rate exchange agreements. This amount
was offset by a $31 million payment received as a result of the early
termination and recorded as income in cash settlements. The change in
the fair value of derivatives for the years ended May 31, 2007, 2006 and 2005
was a loss of $79 million, a gain of $29 million and a gain of $26 million,
respectively, recorded in the Company's derivative forward value. For
the years ended May 31, 2007, 2006 and 2005, the derivative forward value
includes $0.8 million, $0.4 million and $16 million, respectively, related
to
the transition adjustment recorded as an other comprehensive loss on June 1,
2001, the date the Company implemented SFAS 133. In addition, income
totaling $86 million, $79 million and $72 million was recorded for total net
cash settlements received by the Company during the years ended May 31, 2007,
2006 and 2005, respectively, of which $86 million, $81 million and $78 million,
respectively, relate to interest rate and cross currency interest rate exchange
agreements that do not qualify for hedge accounting under SFAS 133 and were
recorded in derivative cash settlements. The remaining expense of $2 million
and
$6 million for the years ended May 31, 2006 and 2005, respectively, relate
to
interest rate and cross currency interest rate exchange agreements that qualify
for hedge accounting under SFAS 133 and were recorded in interest
expense.
The
Company is required to determine the fair value of its derivative
instruments. Because there is not an active secondary market for the
types of derivative instruments it uses, the Company obtains market quotes
from
its dealer counterparties. The market quotes are based on the
expected future cash flow and estimated yield curves. The Company
performs its own analysis to confirm the values obtained from the
counterparties. The Company records the change in the fair value of
its derivatives for each reporting period in the derivative forward value line
on the consolidated statements of operations for the majority of its derivatives
or in the other comprehensive income account on the consolidated balance sheets
for the derivatives that qualify for hedge accounting. The counterparties are
estimating future interest rates as part of the quotes they provide to the
Company. The Company adjusts all derivatives to fair value on a
quarterly basis. The fair value recorded by the Company will change
as estimates of future interest rates change. To estimate the impact
of changes to interest rates on the forward value of derivatives, the Company
would need to estimate all changes to interest rates through the maturity of
its
outstanding derivatives. The Company has derivatives in the current
portfolio that do not mature until 2045. In addition, the Company
excludes the changes to the fair value of derivatives from its internal analysis
since they represent the net present value of all future estimated cash
settlements. Thus, the Company does not estimate the impact of
changes in future interest
rates
to the fair value of its derivatives. The Company does not believe
that volatility in the derivative forward value line on the consolidated
statements of operations is material as it represents an estimated future value
and not a cash impact for the current period.
Cash
settlements that the Company pays and receives for derivative instruments that
do not qualify for hedge accounting are recorded in the cash settlements line
in
the consolidated statements of operations. Each 25 basis point
increase or decrease to the 30-day composite commercial paper index, the
three-month LIBOR rate and the six-month LIBOR rate would result in a $5 million
increase or decrease in the Company's total cash settlements due to the
composition of the portfolio at May 31, 2007. The Company's interest
rate exchange agreements at May 31, 2007 include $7,277 million notional amount,
or 58% of the total interest rate exchange agreements in which the Company
pays
a fixed interest rate and receives a variable interest rate. For the
remaining $5,256 million notional amount, or 42% of the total interest rate
exchange agreements at May 31, 2007, the Company pays a variable interest rate
and receives a fixed interest rate. Based on the interest rate exchange
agreements in place at May 31, 2007, an increase to variable interest rates
results in an increase to cash settlements due to CFC.
New
Accounting Pronouncements
In
February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial
Instruments – an amendment of SFAS 133 and 140. SFAS 155 permits fair value
measurement of any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. SFAS 155 also clarifies
which interest-only strips and principal-only strips are not subject to the
requirements of Statement 133. It establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation. SFAS 155 also clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives. SFAS 155 is effective for all financial instruments acquired or
issued after the beginning of an entity’s first fiscal year that begins after
September 15, 2006. The Company’s adoption of SFAS 155 as of June 1,
2007 is not expected to have a material impact on the Company's financial
position or results of operations.
In
March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial
Assets. SFAS 156 requires the initial measurement of all separately
recognized servicing assets and liabilities at fair value and permits, but
does
not require, the subsequent measurement of servicing assets and liabilities
at
fair value. SFAS 156 is effective as of the beginning of the first fiscal year
that begins after September 15, 2006. The Company’s adoption of SFAS
156 as of June 1, 2007 is not expected to have a material impact on the
Company's financial position or results of operations.
In
June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies
the accounting for income taxes by prescribing a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The
Company’s adoption of FIN 48 as of June 1, 2007 is not expected to have a
material impact on the Company's financial position or results of
operations.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing an asset or liability and establishes
a fair value hierarchy that prioritizes the information used to develop those
assumptions. Under the standard, fair value measurements would be separately
disclosed by level within the fair value hierarchy. SFAS 157 is effective as
of
the beginning of the first fiscal year that begins after November 15, 2007.
The
Company's adoption of SFAS 157 as of June 1, 2008 is not expected to have a
material impact on the Company's financial position or results of
operations.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities. The fair value option established by SFAS
159
permits entities to choose to measure eligible financial instruments at fair
value. The unrealized gains and losses on items for which the fair value option
has been elected should be reported in earnings. The decision to elect the
fair
value option is determined on an instrument by instrument basis and is
irrevocable. Assets and liabilities measured at fair value pursuant to the
fair
value option should be reported separately in the balance sheet from those
instruments measured using other measurement attributes. SFAS 159 is effective
as of the beginning of the first fiscal year that begins after November 15,
2007. As part of the Company's adoption of SFAS 159 as of June 1,
2008, it does not plan to choose the option to measure eligible financial
instruments at fair value and therefore the adoption of SFAS 159 is not expected
to have a material impact on the Company's financial position or results of
operations.
Results
of Operations
Fiscal
Year 2007 versus 2006 Results
The
following chart presents the results for the year ended May 31, 2007 versus
May
31, 2006.
|
|
For
the year ended May 31,
|
|
Increase/
|
|
(Dollar
amounts in millions)
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Interest
income
|
|
$
|
1,054
|
|
|
$
|
1,008
|
|
|
$
|
46
|
|
|
Interest
expense
|
|
|
(997
|
)
|
|
|
(976
|
)
|
|
|
(21
|
)
|
|
Net
interest income
|
|
|
57
|
|
|
|
32
|
|
|
|
25
|
|
|
Recovery
of (provision for) loan losses
|
|
|
7
|
|
|
|
(23
|
)
|
|
|
30
|
|
|
Net
interest income after recovery of (provision for) loan
losses
|
|
|
64
|
|
|
|
9
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
|
2
|
|
|
|
2
|
|
|
|
-
|
|
|
Derivative
cash settlements
|
|
|
86
|
|
|
|
81
|
|
|
|
5
|
|
|
Results
of operations of foreclosed assets
|
|
|
10
|
|
|
|
16
|
|
|
|
(6
|
)
|
|
Gain
on sale of building and land
|
|
|
-
|
|
|
|
43
|
|
|
|
(43
|
)
|
|
Total
non-interest income
|
|
|
98
|
|
|
|
142
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
(34
|
)
|
|
|
(31
|
)
|
|
|
(3
|
)
|
|
Other
general and administrative expenses
|
|
|
(18
|
)
|
|
|
(21
|
)
|
|
|
3
|
|
|
Recovery
of guarantee liability
|
|
|
2
|
|
|
|
1
|
|
|
|
1
|
|
|
Derivative
forward value
|
|
|
(79
|
)
|
|
|
29
|
|
|
|
(108
|
)
|
|
Foreign
currency adjustments
|
|
|
(15
|
)
|
|
|
(23
|
)
|
|
|
8
|
|
|
Loss
on sale of loans
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
Total
non-interest expense
|
|
|
(146
|
)
|
|
|
(45
|
)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
prior to income taxes and minority interest
|
|
|
16
|
|
|
|
106
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
1
|
|
|
Minority
interest, net of income taxes
|
|
|
(2
|
)
|
|
|
(7
|
)
|
|
|
5
|
|
|
Net
income
|
|
$
|
12
|
|
|
$
|
96
|
|
|
$
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
|
|
|
1.01
|
|
|
|
1.10
|
|
|
|
|
|
|
Adjusted
TIER (1)
|
|
|
1.12
|
|
|
|
1.11
|
|
|
|
|
|
|
|
|
|
|
(1)
Adjusted to exclude the impact of the derivative forward value, foreign
currency adjustments and minority interest from net income and to
include
all derivative cash settlements in the interest expense. See
"Non-GAAP Financial Measures" for further explanation and a reconciliation
of these adjustments.
|
CFC's
net interest income will increase or decrease due to changes in loan volume
and
the rate that it receives on its loans and pays on its sources of funding,
respectively. CFC's loan volume substantially determines its funding needs.
The
following Volume Rate Variance Table provides a breakout of the change to
interest income, interest expense and net interest income due to changes in
loan
volume versus changes to interest rates. The analysis is consistent with the
May
31, 2007 and 2006 consolidated statements of operations. For
comparability purposes, average daily loan volume is used as the denominator
in
calculating interest income yield, interest expense rates and net interest
income spread.
Management
calculates an adjusted net interest income, which includes all derivative cash
settlements in interest expense. The following table also includes a breakout
of
the change to derivative cash settlements due to changes in the average notional
amount of its derivative portfolio versus changes to the net difference between
the average rate paid and the average rate received. See "Non-GAAP Financial
Measures" for further explanation of the adjustment the Company makes in its
financial analysis to include all derivative cash settlements in its interest
expense.
|
|
Volume
Rate Variance Table
|
|
|
(Dollar
amounts in millions)
|
|
|
|
|
|
|
|
For
the year ended May 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Change
due to
|
|
|
|
|
Average
Loan Balance
|
Income/
(Cost)
|
Rate
|
|
|
Average
Loan Balance
|
Income/
(Cost)
|
Rate
|
|
Volume
(1)
|
Rate
(2)
|
Total
|
Interest
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
15,803
|
$
|
917
|
|
5.80
|
%
|
|
$
|
15,605
|
$
|
847
|
|
5.43
|
%
|
|
$
|
11
|
|
$
|
59
|
|
$
|
70
|
|
|
|
RTFC
|
|
1,994
|
|
106
|
|
5.30
|
%
|
|
|
2,356
|
|
130
|
|
5.50
|
%
|
|
|
(20
|
)
|
|
(4
|
)
|
|
(24
|
)
|
|
|
NCSC
|
|
396
|
|
31
|
|
8.00
|
%
|
|
|
444
|
|
31
|
|
7.08
|
%
|
|
|
(4
|
)
|
|
4
|
|
|
-
|
|
|
|
Total
|
$
|
18,193
|
$
|
1,054
|
|
5.79
|
%
|
|
$
|
18,405
|
$
|
1,008
|
|
5.48
|
%
|
|
$
|
(13
|
)
|
$
|
59
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense |
|
|
CFC
|
$
|
15,803
|
$
|
(870
|
)
|
(5.51
|
)%
|
|
$
|
15,605
|
$
|
(827
|
)
|
(5.30
|
)%
|
|
$
|
(10
|
)
|
$
|
(33
|
)
|
$
|
(43
|
)
|
|
|
RTFC
|
|
1,994
|
|
(100
|
)
|
(4.98
|
)%
|
|
|
2,356
|
|
(123
|
)
|
(5.21
|
)%
|
|
|
18
|
|
|
5
|
|
|
23
|
|
|
|
NCSC
|
|
396
|
|
(27
|
)
|
(6.90
|
)%
|
|
|
444
|
|
(26
|
)
|
(5.92
|
)%
|
|
|
3
|
|
|
(4
|
)
|
|
(1
|
)
|
|
|
Total
|
$
|
18,193
|
$
|
(997
|
)
|
(5.48
|
)%
|
|
$
|
18,405
|
$
|
(976
|
)
|
(5.30
|
)%
|
|
$
|
11
|
|
$
|
(32
|
)
|
$
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income |
|
|
CFC
|
$
|
15,803
|
$
|
47
|
|
0.29
|
%
|
|
$
|
15,605
|
$
|
20
|
|
0.13
|
%
|
|
$
|
1
|
|
$
|
26
|
|
$
|
27
|
|
|
|
RTFC
|
|
1,994
|
|
6
|
|
0.32
|
%
|
|
|
2,356
|
|
7
|
|
0.29
|
%
|
|
|
(2
|
)
|
|
1
|
|
|
(1
|
)
|
|
|
NCSC
|
|
396
|
|
4
|
|
1.10
|
%
|
|
|
444
|
|
5
|
|
1.16
|
%
|
|
|
(1
|
)
|
|
-
|
|
|
(1
|
)
|
|
|
Total
|
$
|
18,193
|
$
|
57
|
|
0.31
|
%
|
|
$
|
18,405
|
$
|
32
|
|
0.18
|
%
|
|
$
|
(2
|
)
|
$
|
27
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (3)
|
|
|
|
|
CFC
|
$
|
12,508
|
$
|
86
|
|
0.69
|
%
|
|
$
|
15,030
|
$
|
82
|
|
0.54
|
%
|
|
$
|
(14
|
)
|
$
|
18
|
|
$
|
4
|
|
|
|
NCSC
|
|
124
|
|
1
|
|
0.33
|
%
|
|
|
110
|
|
(1
|
)
|
(0.84
|
)%
|
|
|
-
|
|
|
2
|
|
|
2
|
|
|
|
Total
|
$
|
12,632
|
$
|
87
|
|
0.68
|
%
|
|
$
|
15,140
|
$
|
81
|
|
0.53
|
%
|
|
$
|
(14
|
)
|
$
|
20
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
interest expense (4)
|
|
|
|
|
Total
|
$
|
18,193
|
$
|
(910
|
)
|
(5.00
|
)%
|
|
$
|
18,405
|
$
|
(895
|
)
|
(4.86
|
)%
|
|
$
|
(3
|
)
|
$
|
(12
|
)
|
$
|
(15
|
)
|
|
|
(1)
Variance due to volume is calculated using the following formula:
((current average balance – prior year average balance) x prior year
rate).
|
|
|
(2)
Variance due to rate is calculated using the following formula: ((current
rate – prior year rate) x current average balance).
|
|
|
(3)
For derivative cash settlements, average loan balance represents
the
average notional amount of derivative contracts outstanding and the
rate
represents the net difference between the average rate paid and the
average rate received for cash settlements during the
period.
|
|
|
(4)
See “Non-GAAP Financial Measures” for further explanation of the
adjustment the Company makes in its financial analysis to include
all
derivative cash settlements in its interest
expense.
|
Interest
Income
Total
interest income reported on the consolidated statements of operations and shown
in the chart above includes the following and the weighted average interest
rate
thereon:
|
|
|
For
the year ended May 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Dollar
amounts in millions)
|
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
Increase/
(Decrease)
|
|
|
Interest
on long-term fixed rate loans (1)
|
|
$
|
833
|
|
|
|
|
$
|
759
|
|
|
|
|
$
|
74
|
|
|
|
Interest
on long-term variable rate loans (1)
|
|
|
115
|
|
|
|
|
|
154
|
|
|
|
|
|
(39
|
)
|
|
|
Interest
on short-term loans (1)
|
|
|
73
|
|
|
|
|
|
58
|
|
|
|
|
|
15
|
|
|
|
Total
interest income on loans
|
|
|
1,021
|
|
5.61
|
%
|
|
|
971
|
|
5.28
|
%
|
|
|
50
|
|
|
|
Interest
on investments (2)
|
|
|
9
|
|
0.05
|
%
|
|
|
10
|
|
0.05
|
%
|
|
|
(1
|
)
|
|
|
Conversion
fees (3)
|
|
|
9
|
|
0.05
|
%
|
|
|
14
|
|
0.08
|
%
|
|
|
(5
|
)
|
|
|
Make-whole
and prepayment fees (4)
|
|
|
5
|
|
0.03
|
%
|
|
|
5
|
|
0.03
|
%
|
|
|
-
|
|
|
|
Commitment
and guarantee fees (5)
|
|
|
9
|
|
0.05
|
%
|
|
|
7
|
|
0.04
|
%
|
|
|
2
|
|
|
|
Other
fees
|
|
|
1
|
|
-
|
|
|
|
1
|
|
-
|
|
|
|
-
|
|
|
|
Total
interest income
|
|
$
|
1,054
|
|
5.79
|
%
|
|
$
|
1,008
|
|
5.48
|
%
|
|
$
|
46
|
|
|
|
|
|
(1)
Represents interest income on loans to members.
|
|
(2)
Represents interest income on the investment of excess
cash.
|
|
(3)
Conversion fees are deferred and recognized using the interest method
over
the remaining original loan interest rate pricing term, except for
a small
portion of the total fee charged to cover administrative costs related
to
the conversion, which is recognized immediately.
|
|
(4)
Make-whole and prepayment fees are charged for the early repayment
of
principal in full and recognized when collected.
|
|
(5)
Commitment fees for RTFC loan commitments are, in most cases, refundable
on a prorata basis according to the amount of the loan commitment
that is
advanced. Such refundable fees are deferred and then recognized
on a prorata basis based on the portion of the loan that is not advanced
prior to the expiration of the commitment. Commitment fees on
CFC loan commitments are not refundable and are billed and recognized
based on the unused portion of committed lines of
credit. Guarantee fees are charged based on the amount, type
and term of the guarantee. Guarantee fees are deferred and
amortized using the straight-line method into interest income over
the
life of the guarantee.
|
|
The
$46 million or 5% increase to the total interest income for the year ended
May
31, 2007 as compared to the prior year period was due to the increase to CFC
loan interest rates in the markets offset by lower loan
volume. During the year ended May 31, 2007, the Company raised
variable interest rates by approximately 15 basis points, while fixed interest
rates remained relatively stable. For the year ended May 31, 2007,
the Company had a reduction to interest income of $81 million due to non-accrual
loans compared to a reduction of $79 million for the prior year
period. The decrease in loan volume is due to the prepayment of RTFC
loans during the year ended May 31, 2007. The $4 million decrease in
fee and investment income earned during the year ended May 31, 2007 was due
to
lower conversion fees recognized as compared to the prior year
period.
The
$70 million increase in CFC interest income during the year ended May 31, 2007
as compared to the prior year was due to the increase in interest rates and
loan
volume partly offset by the impact of non-accrual loans. The impact on CFC
interest income of non-accrual loans was a reduction of $39 million for the
year
ended May 31, 2007 as compared to $36 million for the prior year
period. The impact of non-accrual loans on interest income is
included in the rate variance in the chart above. The $24 million
decrease in RTFC interest income during the year ended May 31, 2007 as compared
to the prior year was due to the reduction in the balance of RTFC loans
outstanding. The impact on RTFC interest income of non-accrual loans
was a reduction of $42 million for the year ended May 31, 2007 as compared
to
$43 million for the prior year period.
Interest
Expense
Total
interest expense reported on the consolidated statements of operations and
shown
in the chart above includes the following and the weighted average interest
rate
thereon:
|
|
|
For
the year ended May 31,
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Dollar
amounts in millions)
|
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
Increase/
(Decrease)
|
|
|
Interest
expense - commercial paper and bid notes (1)
|
|
$
|
179
|
|
|
|
|
$
|
133
|
|
|
|
|
$
|
46
|
|
|
|
Interest
expense - medium-term notes (1)
|
|
|
364
|
|
|
|
|
|
409
|
|
|
|
|
|
(45
|
)
|
|
|
Interest
expense - collateral trust bonds (1)
|
|
|
218
|
|
|
|
|
|
272
|
|
|
|
|
|
(54
|
)
|
|
|
Interest
expense - subordinated deferrable debt (1)
|
|
|
33
|
|
|
|
|
|
46
|
|
|
|
|
|
(13
|
)
|
|
|
Interest
expense - subordinated certificates (1)
|
|
|
48
|
|
|
|
|
|
47
|
|
|
|
|
|
1
|
|
|
|
Interest
expense - long-term private debt (1)
|
|
|
119
|
|
|
|
|
|
46
|
|
|
|
|
|
73
|
|
|
|
Total
interest expense on debt
|
|
|
961
|
|
5.28
|
%
|
|
|
953
|
|
5.18
|
%
|
|
|
8
|
|
|
|
Debt
issuance costs (2)
|
|
|
12
|
|
0.07
|
%
|
|
|
10
|
|
0.05
|
%
|
|
|
2
|
|
|
|
Derivative
cash settlements, net (3)
|
|
|
-
|
|
-
|
|
|
|
2
|
|
0.01
|
%
|
|
|
(2
|
)
|
|
|
Commitment
and guarantee fees (4)
|
|
|
16
|
|
0.09
|
%
|
|
|
11
|
|
0.06
|
%
|
|
|
5
|
|
|
|
Loss
(gain) on extinguishment of debt (5)
|
|
|
5
|
|
0.03
|
%
|
|
|
(2
|
)
|
(0.01
|
)%
|
|
|
7
|
|
|
|
Other
fees
|
|
|
3
|
|
0.01
|
%
|
|
|
2
|
|
0.01
|
%
|
|
|
1
|
|
|
|
Total
interest expense
|
|
$
|
997
|
|
5.48
|
%
|
|
$
|
976
|
|
5.30
|
%
|
|
$
|
21
|
|
|
(1)
Represents interest expense and the amortization of discounts on
debt.
|
|
(2)
Includes amortization of all deferred charges related to debt issuance,
principally underwriter's fees, legal fees, printing costs and comfort
letter fees. Amortization is calculated on the effective interest
method. Also includes issuance costs related to dealer
commercial paper.
|
|
(3)
Represents the net cost related to swaps that qualify for hedge treatment
plus the accrual from the date of the last settlement to the current
period end.
|
|
(4)
Includes various fees related to funding activities, including fees
paid
to banks participating in the Company's revolving credit agreements
and
fees paid under bond guarantee agreements with RUS as part of the
REDLG
program. Fees are recognized as incurred or amortized on a
straight-line basis over the life of the respective
agreement.
|
|
(5)
Represents the gain or loss on the early retirement of debt including
the
write-off of unamortized discount, premium and issuance
costs.
|
|
The
$21 million increase to the total interest expense for the year ended May 31,
2007 as compared to the prior year period was due to the increase to interest
rates in the markets and an increase in guarantee fees expensed due to the
increase in REDLG debt outstanding. Additionally, there was a $5
million loss on the extinguishment of debt for the year ended May 31, 2007
due
to the write-off of unamortized debt issuance costs associated with the early
redemption of subordinated deferrable debt. Debt issuance costs
increased due to the issuance of $1.6 billion of extendible term debt with
an
initial maturity, and therefore amortization period, of 13 months.
The
adjusted interest expense, which includes all derivative cash settlements for
the year ended May 31, 2007, increased by $15 million compared to the prior
year
period due to the increase to interest expense noted above and the increase
to
derivative cash settlements described below. See "Non-GAAP Financial
Measures" for further explanation of the adjustment the Company makes in its
financial analysis to include all derivative cash settlements in its interest
expense.
Net
Interest Income
The
change in the line items described above resulted in an increase in net interest
income of $25 million for the year ended May 31, 2007 compared to the prior
year
period. The net adjusted interest income, which includes all
derivative cash settlements, for the year ended May 31, 2007 was $144 million,
an increase of $31 million from the prior year period. See "Non-GAAP
Financial Measures" for further explanation of the adjustment the Company makes
in its financial analysis to include all derivative cash settlements in its
interest expense, and therefore net interest income.
Recovery
of/Provision for Loan Losses
A
recovery from the allowance for loan losses of $7 million was recorded during
the year ended May 31, 2007 due primarily to payments received on impaired
loans. The provision for loan losses of $23 million recorded during
the year ended May 31, 2006 was primarily due to an increase in the calculated
loan impairments during the year.
Derivative
Cash Settlements
The
$6 million increase in cash settlements for the year ended May 31, 2007 compared
to the prior year period is due to a $31 million payment received as a result
of
the termination of two interest rate exchange agreements offset by both a
decrease to the net rate earned by the Company on exchange agreements and the
reduction in the average notional amount of derivatives outstanding as compared
to the prior year period.
Results
of Operations of Foreclosed Assets
The
Company recorded net income of $10 million and $16 million from the operation
of
foreclosed assets for the years ended May 31, 2007 and 2006. The
results of operations of foreclosed assets for the year ended May 31, 2006
includes a gain of $4 million related to the sale of real estate assets in
August 2005. At May 31, 2007, the remaining balance of foreclosed
assets is comprised of notes receivable which the Company continues to
service.
Gain
on Sale of Building and Land
On
October 18, 2005, CFC closed on the sale of its headquarters facility in Fairfax
County, Virginia to an affiliate of Prentiss Properties Acquisition Partners,
L.P. resulting in a gain of $43 million for the year ended May 31,
2006.
Recovery
of Guarantee Liability
There
was a recovery of $2 million from the guarantee liability for the year ended
May
31, 2007 compared to a recovery of $1 million in the prior year
period. For the year ended May 31, 2007 and 2006, substantially all
guarantees were issued by CFC.
Derivative
Forward Value
The
$108 million decrease in the derivative forward value during the year ended
May
31, 2007 compared to the prior year period is due to a charge of $31
million related to the termination of two interest rate exchange agreements,
changes in the estimate of future interest rates over the remaining life of
the
derivative contracts and a 17% reduction in the average notional amount of
derivatives outstanding.
Foreign
Currency Adjustment
The
Company's foreign currency adjustment for the year ended May 31, 2007 increased
by $8 million compared to the year ended May 31, 2006. Changes in the
exchange rate between the U.S. dollar and Euro and the U.S. dollar and
Australian dollar may cause the value of foreign denominated debt outstanding
to
fluctuate. An increase in the value of the Euro or the Australian
dollar versus the value of the U.S. dollar results in an increase in the
recorded U.S. dollar value of foreign denominated debt and therefore a charge
to
expense on the consolidated statements of operations, while a decrease in
exchange rates results in a reduction in the recorded U.S. dollar value of
foreign denominated debt and income. The Company has entered into foreign
currency exchange agreements to cover all of the cash flows associated with
its
foreign denominated debt. Changes in the value of the foreign
currency exchange agreement are approximately offset by changes in the value
of
the outstanding foreign denominated debt. There were no foreign
currency exchange agreements outstanding at May 31, 2007.
Loss
on Sale of Loans
On
February 15, 2007, the Company sold distribution loans with outstanding
principal balances totaling $366 million in a loan securitization
transaction. The Company received $366 million of cash in exchange
for the loans, which represents the full principal amount of the loans
sold. The Company incurred $0.7 million of costs associated with the
transaction and had $0.9 million of unamortized deferred loan origination costs
for the loans sold and accordingly, the Company recorded a loss on sale of
loans
totaling $1.6 million during the year ended May 31, 2007. The Company has no
retained interest in the securitized loans. The Company services the loans
in
return for a market fee of 30 basis points and thus does not record a servicing
asset or liability.
Net
Income
The
change in the line items described above resulted in a decrease in net income
of
$84 million for the year ended May 31, 2007 from the prior year
period. The adjusted net income, which excludes the impact of the
derivative forward value and foreign currency adjustments and adds back minority
interest, was $108 million, compared to $97 million for the prior year
period. The
adjusted
net income for the year ended May 31, 2006 included a $43 million gain on the
sale of building and land. Adjusted net income for the year ended May
31, 2006 was $54 million excluding the $43 million gain on the sale of the
building and land. See "Non-GAAP Financial Measures" for further
explanation of the adjustments the Company makes in its financial analysis
to
net income.
Fiscal
Year 2006 versus 2005 Results
The
following chart presents the results for the year ended May 31, 2006 versus
2005.
|
|
For
the year ended May 31,
|
|
|
|
(Dollar
amounts in millions)
|
|
2006
|
|
2005
|
|
Increase/
(Decrease)
|
|
Interest
income
|
|
$
|
1,008
|
|
|
$
|
1,031
|
|
|
$
|
(23
|
)
|
|
Interest
expense
|
|
|
(976
|
)
|
|
|
(942
|
)
|
|
|
(34
|
)
|
|
Net
interest income
|
|
|
32
|
|
|
|
89
|
|
|
|
(57
|
)
|
|
Provision
for loan losses
|
|
|
(23
|
)
|
|
|
(16
|
)
|
|
|
(7
|
)
|
|
Net
interest income after provision for loan losses
|
|
|
9
|
|
|
|
73
|
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
|
2
|
|
|
|
6
|
|
|
|
(4
|
)
|
|
Derivative
cash settlements
|
|
|
81
|
|
|
|
78
|
|
|
|
3
|
|
|
Results
of operations of foreclosed assets
|
|
|
16
|
|
|
|
13
|
|
|
|
3
|
|
|
Gain
on sale of building and land
|
|
|
43
|
|
|
|
-
|
|
|
|
43
|
|
|
Total
non-interest income
|
|
|
142
|
|
|
|
97
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
(31
|
)
|
|
|
(29
|
)
|
|
|
(2
|
)
|
|
Other
general and administrative expenses
|
|
|
(21
|
)
|
|
|
(20
|
)
|
|
|
(1
|
)
|
|
Recovery
of guarantee liability
|
|
|
1
|
|
|
|
3
|
|
|
|
(2
|
)
|
|
Derivative
forward value
|
|
|
29
|
|
|
|
26
|
|
|
|
3
|
|
|
Foreign
currency adjustments
|
|
|
(23
|
)
|
|
|
(23
|
)
|
|
|
-
|
|
|
Total
non-interest expense
|
|
|
(45
|
)
|
|
|
(43
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
prior to income taxes and minority interest
|
|
|
106
|
|
|
|
127
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
Minority
interest, net of income taxes
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
|
Net
income
|
|
$
|
96
|
|
|
$
|
123
|
|
|
$
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
|
|
|
1.10
|
|
|
|
1.13
|
|
|
|
|
|
|
Adjusted
TIER (1)
|
|
|
1.11
|
|
|
|
1.14
|
|
|
|
|
|
|
|
|
|
|
(1)
Adjusted to exclude the impact of the derivative forward value and
foreign
currency adjustments from net income, to include minority interest
in net
income and to include all derivative cash settlements in the interest
expense. See "Non-GAAP Financial Measures" for further
explanation and a reconciliation of these
adjustments.
|
CFC's
net interest income will increase or decrease due to changes in loan volume
and
the rate that it receives on its loans and pays on its sources of funding,
respectively. CFC's loan volume substantially determines its funding needs.
The
following Volume Rate Variance Table provides a breakout of the change to
interest income, interest expense and net interest income due to changes in
loan
volume versus changes to interest rates. The analysis is consistent with the
May
31, 2006 and 2005 consolidated statements of operations. For
comparability purposes, average daily loan volume is used as the denominator
in
calculating interest income yield, interest expense rates and net interest
income spread.
Management
calculates an adjusted net interest income, which includes all derivative cash
settlements in its interest expense. The following table also includes a
breakout of the change to derivative cash settlements due to changes in the
average notional amount of its derivative portfolio versus changes to the net
difference between the average rate paid and the average rate received. See
"Non-GAAP Financial Measures" for further explanation of the adjustment the
Company makes in its financial analysis to include all derivative cash
settlements in its interest expense.
|
|
Volume
Rate Variance Table
|
|
|
(Dollar
amounts in millions)
|
|
|
|
|
|
|
|
For
the year ended May 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Change
due to
|
|
|
|
|
Average
Loan Balance
|
Income/
(Cost)
|
Rate
|
|
|
Average
Loan Balance
|
Income/
(Cost)
|
Rate
|
|
Volume
(1)
|
Rate
(2)
|
Total
|
|
|
Interest
income
|
|
|
CFC
|
$
|
15,605
|
$
|
847
|
|
5.43
|
%
|
|
$
|
15,494
|
$
|
737
|
|
4.76
|
%
|
|
$
|
5
|
|
$
|
105
|
|
$
|
110
|
|
|
|
RTFC
|
|
2,356
|
|
130
|
|
5.50
|
%
|
|
|
3,863
|
|
266
|
|
6.88
|
%
|
|
|
(104
|
)
|
|
(32
|
)
|
|
(136
|
)
|
|
|
NCSC
|
|
444
|
|
31
|
|
7.08
|
%
|
|
|
481
|
|
28
|
|
5.77
|
%
|
|
|
(2
|
)
|
|
5
|
|
|
3
|
|
|
|
Total
|
$
|
18,405
|
$
|
1,008
|
|
5.48
|
%
|
|
$
|
19,838
|
$
|
1,031
|
|
5.19
|
%
|
|
$
|
(101
|
)
|
$
|
78
|
|
$
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
CFC
|
$
|
15,605
|
$
|
(827
|
)
|
(5.30
|
)%
|
|
$
|
15,494
|
$
|
(662
|
)
|
(4.28
|
)%
|
|
$
|
(5
|
)
|
$
|
(160
|
)
|
$
|
(165
|
)
|
|
|
RTFC
|
|
2,356
|
|
(123
|
)
|
(5.21
|
)%
|
|
|
3,863
|
|
(261
|
)
|
(6.75
|
)%
|
|
|
102
|
|
|
36
|
|
|
138
|
|
|
|
NCSC
|
|
444
|
|
(26
|
)
|
(5.92
|
)%
|
|
|
481
|
|
(19
|
)
|
(3.90
|
)%
|
|
|
2
|
|
|
(9
|
)
|
|
(7
|
)
|
|
|
Total
|
$
|
18,405
|
$
|
(976
|
)
|
(5.30
|
)%
|
|
$
|
19,838
|
$
|
(942
|
)
|
(4.74
|
)%
|
|
$
|
99
|
|
$
|
(133
|
)
|
$
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
CFC
|
$
|
15,605
|
$
|
20
|
|
0.13
|
%
|
|
$
|
15,494
|
$
|
75
|
|
0.48
|
%
|
|
$
|
-
|
|
$
|
(55
|
)
|
$
|
(55
|
)
|
|
|
RTFC
|
|
2,356
|
|
7
|
|
0.29
|
%
|
|
|
3,863
|
|
5
|
|
0.13
|
%
|
|
|
(2
|
)
|
|
4
|
|
|
2
|
|
|
|
NCSC
|
|
444
|
|
5
|
|
1.16
|
%
|
|
|
481
|
|
9
|
|
1.87
|
%
|
|
|
-
|
|
|
(4
|
)
|
|
(4
|
)
|
|
|
Total
|
$
|
18,405
|
$
|
32
|
|
0.18
|
%
|
|
$
|
19,838
|
$
|
89
|
|
0.45
|
%
|
|
$
|
(2
|
)
|
$
|
(55
|
)
|
$
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (3)
|
|
|
|
|
CFC
|
$
|
15,030
|
$
|
82
|
|
0.54
|
%
|
|
$
|
15,103
|
$
|
80
|
|
0.53
|
%
|
|
$
|
-
|
|
$
|
2
|
|
$
|
2
|
|
|
|
NCSC
|
|
110
|
|
(1
|
)
|
(0.84
|
)%
|
|
|
71
|
|
(2
|
)
|
(3.11
|
)%
|
|
|
(1
|
)
|
|
2
|
|
|
1
|
|
|
|
Total
|
$
|
15,140
|
$
|
81
|
|
0.53
|
%
|
|
$
|
15,174
|
$
|
78
|
|
0.52
|
%
|
|
$
|
(1
|
)
|
$
|
4
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
interest expense (4)
|
|
|
|
|
Total
|
$
|
18,405
|
$
|
(895
|
)
|
(4.86
|
)%
|
|
$
|
19,838
|
$
|
(864
|
)
|
(4.35
|
)%
|
|
$
|
98
|
|
$
|
(129
|
)
|
$
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Variance due to volume is calculated using the following formula:
((current average balance – prior year average balance) x prior year
rate).
|
|
|
(2)
Variance due to rate is calculated using the following formula: ((current
rate – prior year rate) x current average balance).
|
|
|
(3)
For derivative cash settlements, average loan balance represents
the
average notional amount of derivative contracts outstanding and the
rate
represents the net difference between the average rate paid and the
average rate received for cash settlements during the
period.
|
|
|
(4)
See “Non-GAAP Financial Measures” for further explanation of the
adjustment the Company makes in its financial analysis to include
all
derivative cash settlements in its interest
expense.
|
Interest
Income
Total
interest income reported on the consolidated statements of operations and shown
in the chart above includes the following and the weighted average interest
rate
thereon:
|
|
|
For
the year ended May 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
(Dollar
amounts in millions)
|
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
Increase/
(Decrease)
|
|
|
Interest
on long-term fixed rate loans (1)
|
|
$
|
759
|
|
|
|
|
$
|
723
|
|
|
|
|
$
|
36
|
|
|
|
Interest
on long-term variable rate loans (1)
|
|
|
154
|
|
|
|
|
|
206
|
|
|
|
|
|
(52
|
)
|
|
|
Interest
on short-term loans (1)
|
|
|
58
|
|
|
|
|
|
39
|
|
|
|
|
|
19
|
|
|
|
Total
interest income on loans
|
|
|
971
|
|
5.28
|
%
|
|
|
968
|
|
4.88
|
%
|
|
|
3
|
|
|
|
Interest
on investments
(2)
|
|
|
10
|
|
0.05
|
%
|
|
|
3
|
|
0.01
|
%
|
|
|
7
|
|
|
|
Conversion
fees (3)
|
|
|
14
|
|
0.08
|
%
|
|
|
18
|
|
0.09
|
%
|
|
|
(4
|
)
|
|
|
Make-whole
and prepayment fees (4)
|
|
|
5
|
|
0.03
|
%
|
|
|
36
|
|
0.18
|
%
|
|
|
(31
|
)
|
|
|
Commitment
and guarantee fees (5)
|
|
|
7
|
|
0.04
|
%
|
|
|
6
|
|
0.03
|
%
|
|
|
1
|
|
|
|
Other
fees
|
|
|
1
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
1
|
|
|
|
Total
interest
income
|
|
$
|
1,008
|
|
5.48
|
%
|
|
$
|
1,031
|
|
5.19
|
%
|
|
$
|
(23
|
)
|
|
|
|
(1)
Represents interest income on loans to members.
|
|
(2)
Represents interest income on the investment of excess
cash.
|
|
(3)
Conversion fees are deferred and recognized using the interest
method over
the remaining original loan interest rate pricing term, except
for a small
portion of the total fee charged to cover administrative costs
related to
the conversion, which is recognized immediately.
|
|
(4)
Make-whole and prepayment fees are charged for the early repayment
of
principal in full and recognized when collected.
|
|
(5)
Commitment fees for RTFC loan commitments are, in most cases, refundable
on a prorata basis according to the amount of the loan commitment
that is
advanced. Such refundable fees are deferred and then recognized
on a prorata basis based on the portion of the loan that is not
advanced
prior to the expiration of the commitment. Commitment fees on
CFC loan commitments are not refundable and are billed and recognized
based on the unused portion of committed lines of
credit. Guarantee fees are charged based on the amount, type
and term of the guarantee. Guarantee fees are deferred and
amortized using the straight-line method into interest income over
the
life of the guarantee.
|
|
Total
interest income for the year ended May 31, 2006 represented a decrease of $23
million or 2% from the prior year primarily due to the decrease in fee
income. There were offsetting changes to interest income due to the
increase to interest rates in the markets and to a lower loan
volume. During the year ended May 31, 2006, the Company raised
variable interest rates by between approximately 180 basis points and 190 basis
points depending on the loan program, while fixed interest rates remained
relatively stable. The increase to income as a result of higher
variable interest rates was also offset by a reduction to interest income as
a
result of an increase to loans on non-accrual status. For the year
ended May 31, 2006, the Company had a reduction to interest income of $79
million due to non-accrual loans, compared to a reduction of $51 million for
the
prior year period. The decrease in loan volume is due to the
prepayment of RTFC loans during the year ended May 31, 2006.
Total
fee and investment income earned during the year ended May 31, 2006 decreased
$26 million from the prior year. The decrease to fee and investment
income for the year ended May 31, 2006 was due to a reduction of $31 million
in
prepayment and make-whole fees, offset slightly by an increase of $7 million
to
investment income. During the year ended May 31, 2005, there were
significant loan prepayments that generated a large amount of prepayment and
make-whole fees. The large loan prepayments that occurred during
fiscal year 2005 do not represent normal business activity and are not
anticipated to occur in the future. The Company does not have a goal
of maintaining an investment portfolio as part of the business plan to generate
income, but rather the Company will invest excess cash on a short-term
basis. Excess cash investments are typically the result of the
Company pre-funding debt maturities and due to commercial paper and medium-term
note investments made late in the day by its members.
The
$110 million increase in CFC interest income was due to the increase in interest
rates partly offset by the impact of non-accrual loans. CFC interest income
decreased $36 million for the year ended May 31, 2006 due to holding loans
on
non-accrual, compared to $27 million for the prior year period. The
impact of non-accrual loans on interest income is included in the rate variance
in the chart above. The $136 million decrease in RTFC interest income
was due to loan prepayments and the impact of non-accrual loans. RTFC
interest income decreased $43 million for the year ended May 31, 2006 due to
holding loans on non-accrual, compared to $24 million in the prior year
period.
Interest
Expense
Total
interest expense reported on the consolidated statements of operations and
shown
in the chart above includes the following and the weighted average interest
rate
thereon:
|
|
|
For
the year ended May 31,
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
(Dollar
amounts in millions)
|
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
Increase/
(Decrease)
|
|
|
Interest
expense - commercial paper and bid notes (1)
|
|
$
|
133
|
|
|
|
|
$
|
89
|
|
|
|
|
$
|
44
|
|
|
|
Interest
expense - medium-term notes (1)
|
|
|
409
|
|
|
|
|
|
418
|
|
|
|
|
|
(9
|
)
|
|
|
Interest
expense - collateral trust bonds (1)
|
|
|
272
|
|
|
|
|
|
315
|
|
|
|
|
|
(43
|
)
|
|
|
Interest
expense - subordinated deferrable debt (1)
|
|
|
46
|
|
|
|
|
|
41
|
|
|
|
|
|
5
|
|
|
|
Interest
expense - subordinated certificates (1)
|
|
|
47
|
|
|
|
|
|
47
|
|
|
|
|
|
-
|
|
|
|
Interest
expense - long-term private debt (1)
|
|
|
46
|
|
|
|
|
|
2
|
|
|
|
|
|
44
|
|
|
|
Total
interest expense on debt
|
|
|
953
|
|
5.18
|
%
|
|
|
912
|
|
4.60
|
%
|
|
|
41
|
|
|
|
Debt
issuance costs (2)
|
|
|
10
|
|
0.05
|
%
|
|
|
12
|
|
0.06
|
%
|
|
|
(2
|
)
|
|
|
Derivative
cash settlements, net (3)
|
|
|
2
|
|
0.01
|
%
|
|
|
6
|
|
0.03
|
%
|
|
|
(4
|
)
|
|
|
Commitment
and guarantee fees (4)
|
|
|
11
|
|
0.06
|
%
|
|
|
9
|
|
0.04
|
%
|
|
|
2
|
|
|
|
Gain
on extinguishment of debt (5)
|
|
|
(2
|
)
|
(0.01
|
)%
|
|
|
-
|
|
-
|
|
|
|
(2
|
)
|
|
|
Other
fees
|
|
|
2
|
|
0.01
|
%
|
|
|
3
|
|
0.01
|
%
|
|
|
(1
|
)
|
|
|
Total
interest expense
|
|
$
|
976
|
|
5.30
|
%
|
|
$
|
942
|
|
4.74
|
%
|
|
$
|
34
|
|
|
(1)
Represents interest expense and the amortization of discounts on
debt.
|
|
(2)
Includes amortization of all deferred charges related to debt issuance,
principally underwriter's fees, legal fees, printing costs and comfort
letter fees. Amortization is calculated on the effective interest
method. Also includes issuance costs related to dealer
commercial paper.
|
|
(3)
Represents the net cost related to swaps that qualify for hedge treatment
plus the accrual from the date of the last settlement to the current
period end.
|
|
(4)
Includes various fees related to funding activities, including fees
paid
to banks participating in the Company's revolving credit agreements
and
fees paid under bond guarantee agreements with RUS as part of the
REDLG
program. Fees are recognized as incurred or amortized on a
straight-line basis over the life of the respective
agreement.
|
|
(5)
Represents the gain on the early retirement of debt including the
write-off of unamortized discount, premium and issuance
costs.
|
|
The
$34 million increase to the total interest expense for the year ended May 31,
2006 was due to the increase to interest rates in the markets partly offset
by
lower loan volume for the year ended May 31, 2006 as compared to the prior
year.
The
adjusted interest expense, which includes all
derivative cash settlements for the year ended May 31, 2006 increased by $31
million compared to the prior year period due to the increase to interest
expense noted above partially offset by lower fees for swap
terminations. See "Non-GAAP Financial Measures" for further
explanation of the adjustment the Company makes in its financial analysis to
include all derivative cash settlements in its interest
expense. Derivative cash settlements for the year ended May 31, 2006
includes $80 million received for derivative cash settlements from the Company's
derivative counterparties and $1 million received from counterparties for the
termination of interest rate exchange agreements used as funding for the loans
that were prepaid during the period. The derivative cash settlements
for the year ended May 31, 2005 includes $100 million of derivative cash
settlements received by CFC offset by $22 million of fees paid by CFC for the
termination of exchange agreements.
Net
Interest Income
The
change in the line items described above resulted in a decrease in net interest
income of $57 million for the year ended May 31, 2006 compared to the prior
year
period. The adjusted net interest income, which includes all
derivative cash settlements, for the year ended May 31, 2006 was $113 million,
a
decrease of $54 million from the prior year period. See "Non-GAAP
Financial Measures" for further explanation of the adjustment the Company
makes
in its financial analysis to include all derivative cash settlements in its
interest expense, and therefore net interest income.
Derivative
Cash Settlements
The
increase in cash settlements for the year ended May 31, 2006 is primarily due
to
$1 million of termination fees received during the year ended May 31, 2006
compared to $22 million of termination fees paid during the year ended May
31,
2005 to unwind interest rate exchange agreements that were used as part of
the
funding for loans that were prepaid during the period. CFC is
currently collecting more on its derivative contracts than it is
paying.
Results
of Operations of Foreclosed Assets
The
Company recorded net income of $16 million and $13 million from the operation
of
foreclosed assets for the year ended May 31, 2006 and 2005. The
results of operations of foreclosed assets for the year ended May 31, 2006
includes a gain of $4 million related to the sale of real estate assets in
August 2005. At May 31, 2006, the remaining balance of foreclosed
assets is comprised of notes receivable which the Company continues to
service.
Gain
on Sale of Building and Land
On
October 18, 2005, CFC sold its headquarters facility in Fairfax County, Virginia
to an affiliate of Prentiss Properties Acquisition Partners, L.P. for $85
million. The assets had a net book value of $40 million, thus
generating a total gain of $43 million during the year ended May 31, 2006,
net
of $2 million in closing and other related costs.
Recovery
of Guarantee Liability
There
was a recovery of $1 million from the guarantee liability in the year ended
May
31, 2006 compared to $3 million in the prior year period. For the
year ended May 31, 2006 and 2005, substantially all guarantees were issued
by
CFC.
Derivative
Forward Value
During
the year ended May 31, 2006, the derivative forward value represented an
increase of $3 million compared to the prior year period. The
increase in the derivative forward value is due to changes in the estimate
of
future interest rates over the remaining life of the derivative
contracts. The derivative forward value for the year ended May 31,
2006 and 2005 also includes amortization of $0.4 million and $16 million,
respectively, related to the transition adjustment recorded as an other
comprehensive loss on June 1, 2001, the date the Company implemented SFAS
133. This adjustment will be amortized into earnings over the
remaining life of the related derivative contracts.
Foreign
Currency Adjustment
The
Company's foreign currency adjustment for the year ended May 31, 2006 did not
fluctuate compared to the year ended May 31, 2005. Changes in the
exchange rate between the U.S. dollar and Euro and the U.S. dollar and
Australian dollar may cause the value of foreign denominated debt outstanding
to
fluctuate. An increase in the value of the Euro or the Australian
dollar versus the value of the U.S. dollar results in an increase in the
recorded U.S. dollar value of foreign denominated debt and therefore a charge
to
expense on the consolidated statements of operations, while a decrease in
exchange rates results in a reduction in the recorded U.S. dollar value of
foreign denominated debt and income. The Company has entered into foreign
currency exchange agreements to cover all of the cash flows associated with
its
foreign denominated debt. Changes in the value of the foreign
currency exchange agreement will be approximately offset by changes in the
value
of the outstanding foreign denominated debt.
Net
Income
The
change in the line items described above resulted in a decrease in net income
of
$27 million for the year ended May 31, 2006 from the prior year
period. The adjusted net income, which excludes the impact of the
derivative forward value and foreign currency adjustments and adds back minority
interest, was $97 million, compared to $122 million for the prior year
period. See "Non-GAAP Financial Measures" for further explanation of
the adjustments the Company makes in its financial analysis to net
income. Adjusted
net income excluding the $43 million gain on the sale of the building and land
for the year ended May 31, 2006 was $54 million, a decrease of $68 million
from
the prior year.
Operating
Results as a Percentage of Average Loans Outstanding
The
Company's operating results as a percentage of average loans outstanding is
summarized as follows:
|
|
For
the year ended May 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Interest
income
|
|
|
5.79
|
%
|
|
|
5.48
|
%
|
|
|
5.19
|
%
|
|
Interest
expense
|
|
|
(5.48
|
)%
|
|
|
(5.30
|
)%
|
|
|
(4.74
|
)%
|
|
Net
interest income
|
|
|
0.31
|
%
|
|
|
0.18
|
%
|
|
|
0.45
|
%
|
|
Recovery
of (provision for) loan losses
|
|
|
0.04
|
%
|
|
|
(0.13
|
)%
|
|
|
(0.08
|
)%
|
|
Net
interest income after recovery of (provision for) loan
losses
|
|
|
0.35
|
%
|
|
|
0.05
|
%
|
|
|
0.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
|
0.01
|
%
|
|
|
0.01
|
%
|
|
|
0.03
|
%
|
|
Derivative
cash settlements
|
|
|
0.48
|
%
|
|
|
0.44
|
%
|
|
|
0.39
|
%
|
|
Results
of operations of foreclosed assets
|
|
|
0.05
|
%
|
|
|
0.08
|
%
|
|
|
0.07
|
%
|
|
Gain
on sale of building and land
|
|
|
-
|
|
|
|
0.23
|
%
|
|
|
-
|
|
|
Total
non-interest income
|
|
|
0.54
|
%
|
|
|
0.76
|
%
|
|
|
0.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
(0.19
|
)%
|
|
|
(0.17
|
)%
|
|
|
(0.15
|
)%
|
|
Other
general and administrative expenses
|
|
|
(0.10
|
)%
|
|
|
(0.11
|
)%
|
|
|
(0.10
|
)%
|
|
Recovery
for guarantee liability
|
|
|
0.01
|
%
|
|
|
0.01
|
%
|
|
|
0.02
|
%
|
|
Derivative
forward value
|
|
|
(0.43
|
)%
|
|
|
0.16
|
%
|
|
|
0.13
|
%
|
|
Foreign
currency adjustments
|
|
|
(0.08
|
)%
|
|
|
(0.13
|
)%
|
|
|
(0.12
|
)%
|
|
Loss
on sale of loans
|
|
|
(0.01
|
)%
|
|
|
-
|
|
|
|
-
|
|
|
Total
non-interest expense
|
|
|
(0.80
|
)%
|
|
|
(0.24
|
)%
|
|
|
(0.22
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
prior to income taxes and minority interest
|
|
|
0.09
|
%
|
|
|
0.57
|
%
|
|
|
0.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
(0.01
|
)%
|
|
|
(0.01
|
)%
|
|
|
(0.01
|
)%
|
|
Minority
interest, net of income taxes
|
|
|
(0.01
|
)%
|
|
|
(0.04
|
)%
|
|
|
(0.01
|
)%
|
|
Net
income
|
|
|
0.07
|
%
|
|
|
0.52
|
%
|
|
|
0.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
net interest income
(1)
|
|
|
0.79
|
%
|
|
|
0.62
|
%
|
|
|
0.84
|
%
|
|
Adjusted
income prior to income taxes and minority interest (2)
|
|
|
0.60
|
%
|
|
|
0.54
|
%
|
|
|
0.63
|
%
|
|
|
|
(1)
Adjusted to include derivative cash settlements in the interest
expense. See "Non-GAAP Financial Measures" for further
explanation and a reconciliation of these adjustments.
(2)
Adjusted to exclude derivative forward value and foreign currency
adjustments. See "Non-GAAP Financial Measures" for further
explanation and a reconciliation of these
adjustments.
|
Ratio
of Earnings to Fixed Charges
The
following chart provides the calculation of the ratio of earnings to fixed
charges. The ratio of earnings to fixed charges is the same
calculation as TIER. See “Results of Operations” for discussion on
TIER and adjustments that the Company makes to the TIER
calculation.
|
For
the year ended May 31,
|
|
(Dollar
amounts in millions)
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
Income
prior to cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
change
in accounting principle
|
|
$
|
12
|
|
|
$
|
96
|
|
|
$
|
123
|
|
|
Add:
fixed charges
|
|
|
997
|
|
|
|
976
|
|
|
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
available for fixed charges
|
|
$
|
1,009
|
|
|
$
|
1,072
|
|
|
$
|
1,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on all debt (including amortization of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discount
and issuance costs)
|
|
$
|
997
|
|
|
$
|
976
|
|
|
$
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of earnings to fixed charges
|
|
|
1.01
|
|
|
|
1.10
|
|
|
|
1.13
|
|
|
Financial
Condition
Loan
and Guarantee Portfolio Assessment
Loan
Programs
Loans
to members bear interest at rates determined from time to time by the Company
after considering its interest expense, operating expenses, provision for loan
losses and the maintenance of reasonable earnings levels. In keeping
with its not-for-profit, cooperative charter, the Company's policy is to set
interest rates at the lowest levels it considers to be consistent with sound
financial management.
The
following chart summarizes loans by type and by segment at May 31:
|
Loans
by Type
|
Increase/
|
|
(Dollar
amounts in millions)
|
2007
|
|
2006
|
|
(Decrease)
|
|
Long-term
loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
$
|
14,881
|
|
|
|
82%
|
|
|
$
|
14,763
|
|
|
|
80%
|
|
|
|
$
|
118
|
|
|
Long-term
variable rate loans
|
|
2,032
|
|
|
|
11%
|
|
|
|
2,570
|
|
|
|
14%
|
|
|
|
|
(538
|
)
|
|
Total
long-term loans
|
|
16,913
|
|
|
|
93%
|
|
|
|
17,333
|
|
|
|
94%
|
|
|
|
|
(420
|
)
|
|
Short-term
loans (2)
|
|
1,215
|
|
|
|
7%
|
|
|
|
1,028
|
|
|
|
6%
|
|
|
|
|
187
|
|
|
Total
loans
|
$
|
18,128
|
|
|
|
100%
|
|
|
$
|
18,361
|
|
|
|
100%
|
|
|
|
$
|
(233
|
)
|
|
|
Loans
by Segment
|
Increase/
|
|
(Dollar
amounts in millions)
|
2007
|
|
2006
|
|
(Decrease)
|
|
CFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
12,828
|
|
|
|
71%
|
|
|
$
|
12,859
|
|
|
|
70%
|
|
|
|
$
|
(31
|
)
|
|
Power
supply
|
|
2,858
|
|
|
|
16%
|
|
|
|
2,811
|
|
|
|
15%
|
|
|
|
|
47
|
|
|
Statewide
and associate
|
|
119
|
|
|
|
1%
|
|
|
|
125
|
|
|
|
1%
|
|
|
|
|
(6
|
)
|
|
CFC
Total
|
|
15,805
|
|
|
|
88%
|
|
|
|
15,795
|
|
|
|
86%
|
|
|
|
|
10
|
|
|
RTFC
|
|
1,860
|
|
|
|
10%
|
|
|
|
2,162
|
|
|
|
12%
|
|
|
|
|
(302
|
)
|
|
NCSC
|
|
463
|
|
|
|
2%
|
|
|
|
404
|
|
|
|
2%
|
|
|
|
|
59
|
|
|
Total
|
$
|
18,128
|
|
|
|
100%
|
|
|
$
|
18,361
|
|
|
|
100%
|
|
|
|
$
|
(233
|
)
|
|
___________________________________________________________
|
(1)
Includes loans classified as restructured and non-performing and
RUS
guaranteed loans.
|
(2)
Consists of secured and unsecured short-term loans that are subject
to
interest rate adjustment monthly or
semi-monthly.
|
The
Company's loans outstanding decreased $233 million or 1% during the year ended
May 31, 2007 reflecting in large part loan prepayments by RTFC
borrowers. CFC loan advances were substantially offset by the sale of
$366 million of CFC distribution loans in a loan securitization transaction
in
February 2007. Long-term fixed rate loans at May 31, 2007 and 2006 represented
88% and 85%, respectively, of total long-term loans. Loans converting
from a variable rate to a fixed rate for the year ended May 31, 2007 totaled
$372 million, which was offset by $190 million of loans that converted from
a
fixed rate to a variable rate. This resulted in a net conversion of
$182 million from a variable rate to a fixed rate for the year ended May 31,
2007. For the year ended May 31, 2006, loans converting from a
variable rate to a fixed rate totaled $1,754 million, which was offset by $77
million of loans that converted from a fixed rate to a variable
rate. This resulted in a net conversion of $1,677 million from a
variable rate to a fixed rate for the year ended May 31, 2006.
The
following chart summarizes loans and guarantees outstanding by segment at May
31:
(Dollar
amounts in millions)
|
2007
|
|
2006
|
|
2005
|
|
CFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
13,039
|
|
|
|
68%
|
|
|
$
|
12,929
|
|
|
|
67%
|
|
|
$
|
12,771
|
|
|
|
64%
|
|
|
Power
supply
|
|
3,655
|
|
|
|
19%
|
|
|
|
3,733
|
|
|
|
19%
|
|
|
|
3,707
|
|
|
|
18%
|
|
|
Statewide
and associate
|
|
145
|
|
|
|
1%
|
|
|
|
158
|
|
|
|
1%
|
|
|
|
177
|
|
|
|
1%
|
|
|
CFC
Total
|
|
16,839
|
|
|
|
88%
|
|
|
|
16,820
|
|
|
|
87%
|
|
|
|
16,655
|
|
|
|
83%
|
|
|
RTFC
|
|
1,860
|
|
|
|
10%
|
|
|
|
2,162
|
|
|
|
11%
|
|
|
|
2,992
|
|
|
|
15%
|
|
|
NCSC
|
|
503
|
|
|
|
2%
|
|
|
|
458
|
|
|
|
2%
|
|
|
|
483
|
|
|
|
2%
|
|
|
Total
|
$
|
19,202
|
|
|
|
100%
|
|
|
$
|
19,440
|
|
|
|
100%
|
|
|
$
|
20,130
|
|
|
|
100%
|
|
|
The
following table summarizes the RTFC segment loans and guarantees outstanding
as
of May 31:
(Dollar
amounts in millions)
|
|
2007
|
|
2006
|
|
2005
|
|
Rural
local exchange carriers
|
|
$
|
1,630
|
|
|
|
88%
|
|
|
$
|
1,815
|
|
|
|
84%
|
|
|
$
|
2,358
|
|
|
|
79%
|
|
|
Cable
television providers
|
|
|
155
|
|
|
|
8%
|
|
|
|
179
|
|
|
|
8%
|
|
|
|
169
|
|
|
|
6%
|
|
|
Long
distance carriers
|
|
|
9
|
|
|
|
1%
|
|
|
|
89
|
|
|
|
5%
|
|
|
|
135
|
|
|
|
5%
|
|
|
Fiber
optic network providers
|
|
|
37
|
|
|
|
2%
|
|
|
|
41
|
|
|
|
2%
|
|
|
|
67
|
|
|
|
2%
|
|
|
Competitive
local exchange carriers
|
|
|
21
|
|
|
|
1%
|
|
|
|
28
|
|
|
|
1%
|
|
|
|
45
|
|
|
|
1%
|
|
|
Wireless
providers
|
|
|
4
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
211
|
|
|
|
7%
|
|
|
Other
|
|
|
4
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
7
|
|
|
|
-
|
|
|
Total
|
|
$
|
1,860
|
|
|
|
100%
|
|
|
$
|
2,162
|
|
|
|
100%
|
|
|
$
|
2,992
|
|
|
|
100%
|
|
|
The
Company's members are widely dispersed throughout the United States and its
territories, including 49 states, the District of Columbia and two U.S.
territories. At May 31, 2007, 2006 and 2005, loans and guarantees
outstanding to members in any one state or territory did not exceed 15%, 16%
and
16%, respectively, of total loans and guarantees outstanding.
Credit
Concentration
CFC,
RTFC and NCSC each have policies that limit the amount of credit that can be
extended to individual borrowers or a controlled group of
borrowers. The credit limitation policies set the limit on the total
exposure and unsecured exposure to the borrower based on an assessment of the
borrower's risk profile and the Company's internal risk rating
system. As a member owned cooperative, the Company makes best efforts
to balance meeting the needs of its member/owners and mitigating the risk
associated with concentrations of credit exposure. The respective
boards of directors must approve new credit requests from a borrower with a
total exposure or unsecured exposure in excess of the limits in the
policy. Management of credit concentrations may include the use of
syndicated credit agreements.
Total
exposure, as defined by the policy, includes the following:
·
|
loans
outstanding, excluding loans guaranteed by
RUS,
|
·
|
the
Company's guarantees of the borrower's
obligations,
|
·
|
unadvanced
loan commitments, and
|
·
|
borrower
guarantees to the Company of another borrower's
debt.
|
At
May 31, 2007 and 2006, the total exposure outstanding to any one borrower or
controlled group did not exceed 3% of total loans and guarantees
outstanding. At May 31, 2007, the ten largest borrowers included six
distribution systems, two power supply systems and two telecommunications
systems. At May 31, 2006, the ten largest borrowers included four distribution
systems, five power supply systems and one telecommunications
systems. The following chart shows the exposure to the ten largest
borrowers as a percentage of total exposure by type and by segment at May
31:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(Dollar
amounts in millions)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of Total
|
|
|
|
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
3,307
|
|
|
|
$
|
3,140
|
|
|
|
|
|
|
|
Guarantees
|
|
77
|
|
|
|
|
267
|
|
|
|
|
|
|
|
Total
credit exposure to ten largest borrowers
|
$
|
3,384
|
|
18%
|
|
$
|
3,407
|
|
18%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
2,691
|
|
|
|
$
|
2,856
|
|
|
|
|
|
|
|
RTFC
|
|
693
|
|
|
|
|
488
|
|
|
|
|
|
|
|
NCSC
|
|
-
|
|
|
|
|
63
|
|
|
|
|
|
|
|
Total
credit exposure to ten largest borrowers
|
$
|
3,384
|
|
18%
|
|
$
|
3,407
|
|
18%
|
|
|
|
|
|
Security
Provisions
Except
when providing short-term loans, the Company typically lends to its members
on a
senior secured basis. Long-term loans are typically secured on a
parity with other secured lenders (primarily RUS), if any, by all assets and
revenues of the borrower with exceptions typical in utility
mortgages. Short-term loans are generally unsecured lines of
credit. Guarantee reimbursement obligations are typically secured on
a parity with other secured creditors by all assets and revenues of the borrower
or by the underlying financed asset. In addition to the collateral
received, borrowers are also required to set rates designed to achieve certain
financial ratios.
The
following table summarizes the Company's unsecured credit exposure as a
percentage of total exposure by type and by segment at May 31:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(Dollar
amounts in millions)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of Total
|
|
|
|
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
1,634
|
|
|
|
$
|
1,554
|
|
|
|
|
|
|
|
Guarantees
|
|
221
|
|
|
|
|
144
|
|
|
|
|
|
|
|
Total
unsecured credit exposure
|
$
|
1,855
|
|
10%
|
|
$
|
1,698
|
|
9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
1,559
|
|
|
|
$
|
1,358
|
|
|
|
|
|
|
|
RTFC
|
|
230
|
|
|
|
|
241
|
|
|
|
|
|
|
|
NCSC
|
|
66
|
|
|
|
|
99
|
|
|
|
|
|
|
|
Total
unsecured credit exposure
|
$
|
1,855
|
|
10%
|
|
$
|
1,698
|
|
9%
|
|
|
|
|
|
Non-performing
Loans
A
borrower is classified as non-performing when any one of the following criteria
are met:
·
|
principal
or interest payments on any loan to the borrower are past due 90
days or
more,
|
·
|
as
a result of court proceedings, repayment on the original terms is
not
anticipated, or
|
·
|
for
some other reason, management does not expect the timely repayment
of
principal and interest.
|
Once
a borrower is classified as non-performing, CFC typically places the loan on
non-accrual status and reverses all accrued and unpaid interest back to the
date
of the last payment. The Company generally applies all cash received
during the non-accrual period to the reduction of principal, thereby foregoing
interest income recognition. At May 31, 2007 and 2006, the Company
had non-performing loans outstanding in the amount of $502 million and $578
million, respectively. All loans classified as non-performing were on
a non-accrual status with respect to the recognition of interest
income.
At
May 31, 2007 and 2006, non-performing loans include $493 million and $488
million, respectively, to Innovative Communication Corporation
(“ICC”). All loans to ICC have been on non-accrual status since
February 1, 2005. ICC has not made debt service payments to the
Company since June 2005. RTFC is the primary secured lender to
ICC.
As
part of a settlement agreement, RTFC obtained entry of judgments against ICC
for
approximately $525 million and ICC's indirect majority shareholder and chairman,
Jeffrey Prosser ("Prosser") for approximately $100 million. RTFC also
obtained dismissals with prejudice of all counterclaims, affirmative defenses
and other lawsuits alleging wrongful acts by RTFC, certain of its officers,
and
CFC. Various parties also reached agreement for ICC to satisfy the RTFC
judgments in the third quarter of calendar year 2006, subject to certain terms
and conditions, however, on July 31, 2006, certain of the parties obligated
to
satisfy the RTFC judgments under the agreement filed voluntary bankruptcy
proceedings, as described below, in order to obtain additional time to satisfy
the judgments.
On
July 31, 2006, ICC's immediate parent, Emerging Communication, Inc., a Delaware
corporation ("Emcom"), Emcom's parent, Innovative Communication Company LLC,
a
Delaware limited liability company ("ICC-LLC") and Prosser, individually, each
filed a voluntary petition under Chapter 11 of the United States Bankruptcy
Code, now pending in the United States District Court for the Virgin
Islands, Division of St. Thomas and St. John, Bankruptcy
Division Each of the debtors is obligated to RTFC, for certain
obligations of ICC, including court judgments. On February 13, 2007,
the Bankruptcy Court ordered the appointment of a trustee for the ICC-LLC and
Emcom bankruptcy estates and an examiner for Prosser’s bankruptcy
estate.
Subsequent
to our fiscal year-end, on August 2, 2007, the Bankruptcy Court entered an
order
declaring that the debtors could not satisfy the RTFC judgments at a
discount. Prosser, individually, has filed a notice of appeal of the
order but has not sought a stay of its effect; none of the other debtors has
sought review of the order.
On
July 6, 2007, an involuntary petition under Chapter 11 of the United States
Bankruptcy Code was filed in the United States District Court for the Virgin
Islands, Bankruptcy Division, against ICC by Emcom shareholders (“the Greenlight
Entities”). ICC has contested the petition and a hearing has been
scheduled for September 6, 2007 regarding whether an order for relief in
bankruptcy will be entered.
The
debtors continue to seek a sale or refinancing of their assets in an effort
to
satisfy their debts to RTFC. Any transfer of control of a regulated
telecommunications or cable television business, or sale or assignment of such
business's regulated assets, may require the prior consent of regulatory
authorities, including the Federal Communications Commission, the U.S. Virgin
Islands Public Services Commission, and foreign governments.
For
a more detailed description of the contingencies
related to the non-performing loans outstanding to ICC, see Note 15 to the
consolidated financial statements. Based on its analysis, the Company
believes that it is adequately reserved for its exposure to ICC at May 31,
2007.
Non-performing
loans at May 31, 2007 and 2006 include a
total of $9 million and $90 million, respectively, to VarTec. VarTec
is a telecommunications company and RTFC borrower located in Dallas,
Texas. RTFC is VarTec's principal senior secured
creditor. At May 31, 2007 and 2006, all loans to VarTec were on
non-accrual status, resulting in the application of all payments received
against principal.
VarTec
and 16 of its U.S.-based affiliates, which were guarantors of VarTec's debt
to
RTFC, filed voluntary petitions under Chapter 11 of the United States Bankruptcy
Code on November 1, 2004 in Dallas, Texas. On July 29, 2005, the
court approved a sale of VarTec's remaining operating assets (the "Domestic
Assets Sale"). Final proceeds from the closing of the Domestic Assets
Sale were received in June 2006 totaling $40 million. Pursuant to a
court order, all net proceeds of asset sales, including the Domestic Assets
Sale, have been provisionally applied to RTFC's secured debt. On June
19, 2006, the Chapter 11 proceedings were converted to Chapter 7 proceedings
and
a Chapter 7 trustee was appointed for each of the estates.
On
June 10, 2005, the Official Committee of Unsecured Creditors (the "UCC")
initiated an adversary proceeding against RTFC in the United States Bankruptcy
Court for the Northern District of Texas, Dallas Division. As a result of the
conversion of the proceedings to Chapter 7, the UCC was dissolved and the
Chapter 7 trustee became the plaintiff in the adversary
proceedings. On May 15, 2007, the Chapter 7 trustee and RTFC entered
into a settlement agreement under which (a) all claims against RTFC were
dismissed with prejudice and fully released, (b) a portion of the proceeds
from
the Domestic Asset Sale that had been provisionally applied to RTFC’s secured
debt will be reallocated to the claimants, including RTFC, of the VarTec
bankruptcy estates, and (c) the administrative debtor-in-possession financing
facility owed by the VarTec bankruptcy estates to RTFC was partially
reduced. The Bankruptcy Court approved the settlement agreement on
May 24, 2007, which approval became final and non-appealable on June 4,
2007. As a result of the settlement of the Unsecured Creditor
litigation, the Company wrote off $44 million of pre-petition debt during the
fourth quarter of fiscal year 2007 and expects to write off approximately $17
million in the first quarter of fiscal year 2008.
Based
on its analysis, the Company believes that it is adequately reserved for its
exposure to VarTec at May 31, 2007.
Restructured
Loans
Loans
classified as restructured are loans for which agreements have been executed
that changed the original terms of the loan, generally a change to the
originally scheduled cash flows. The Company will make a
determination on each restructured loan with regard to the accrual of interest
income on the loan. The initial decision is based on the terms of the
restructure agreement and the anticipated performance of the borrower over
the
term of the agreement. The Company will periodically review the
decision to accrue or not to accrue interest income on restructured loans based
on the borrower's past performance and current financial condition.
At
May 31, 2007 and 2006, restructured loans totaled $603 million and $630 million,
respectively. A total of $545 million and $569 million of
restructured loans were on non-accrual status with respect to the recognition
of
interest income at May 31, 2007 and 2006, respectively.
At
May 31, 2007 and 2006, the Company had $545 million and $569 million,
respectively, of loans outstanding to CoServ. All CoServ loans have been on
non-accrual status since January 1, 2001. Total loans to CoServ at
May 31, 2007 and 2006 represented 2.9% of the Company's total loans and
guarantees outstanding.
Under
the terms of a bankruptcy settlement, CFC restructured its loans to
CoServ. CoServ is scheduled to make quarterly payments to CFC through
December 2037. As part of the restructuring, CFC may be obligated to
provide up to $204 million of senior secured capital expenditure loans to CoServ
for electric distribution infrastructure through December 2012. When
CoServ requests capital expenditure loans from CFC, these loans are provided
at
the standard terms offered to all borrowers and require debt service payments
in
addition to the quarterly payments that CoServ is required to make to
CFC. As of May 31, 2007, $20 million was advanced to CoServ under
this loan facility. To date, CoServ has made all payments required
under the restructure agreement and capital expenditure loan facility. Under
the
terms of the restructure agreement, CoServ has the option to prepay the loan
for
$415 million plus an interest payment true up on or after December 13, 2007
and
for $405 million plus an interest payment true up on or after December 13,
2008.
CoServ
and CFC have no claims related to any of the legal actions asserted prior to
or
during the bankruptcy proceedings. CFC's legal claim against CoServ
is limited to CoServ's performance under the terms of the bankruptcy
settlement.
Based
on its analysis, the Company believes that it is adequately reserved for its
exposure to CoServ at May 31, 2007.
Pioneer
Electric Cooperative, Inc. ("Pioneer") is an electric distribution cooperative
located in Greenville, Alabama. Pioneer had also invested in a
propane gas operation, which it has sold. Pioneer had experienced
deterioration in its financial condition as a result of losses in the gas
operation. At May 31, 2007 and 2006, CFC had a total of $52 million
and $54 million, respectively, in loans outstanding to
Pioneer. Pioneer was current with respect to all debt service
payments at May 31, 2007. CFC is the principal creditor to
Pioneer.
On
March 9, 2006, CFC and Pioneer agreed on the terms of a debt modification that
resulted in the loans being classified as restructured. Under the
amended agreement, CFC extended the maturity of the outstanding loans and
granted a two-year deferral of principal payments. In addition, CFC
agreed to make available a line of credit for general corporate
purposes. The restructured loans are secured by first liens on
substantially all of the assets and revenues of Pioneer. At this
time, CFC plans to maintain the loans to Pioneer on accrual status.
Based
on its analysis, the Company believes that it is adequately reserved for its
exposure to Pioneer at May 31, 2007.
Loan
Impairment
On
a quarterly basis, the Company reviews all non-performing and restructured
borrowers, as well as certain additional borrowers selected based on known
facts
and circumstances at the time of the review, to determine if the loans to the
borrower are impaired and/or to update the impairment
calculation. The Company calculates an impairment for a borrower
based on the expected future cash flow or the fair value of any collateral
held
by the Company as security for loans to the borrower. In some cases,
to estimate future cash flow, certain assumptions are required regarding, but
not limited to, the following:
·
|
changes
in collateral values,
|
·
|
changes
in economic conditions in the area in which the cooperative operates,
and
|
·
|
changes
to the industry in which the cooperative
operates.
|
As
events related to the borrower take place and economic conditions and the
Company's assumptions change, the impairment calculations will
change. The loan loss allowance specifically reserved to cover the
calculated impairments is adjusted on a quarterly basis based on the most
current information available. At May 31, 2007 and 2006, CFC had impaired loans
totaling $1,099 million and $1,201 million, respectively. At May 31,
2007 and 2006, CFC had specifically reserved a total of $397 million and $447
million, respectively, to cover impaired loans.
The
following chart presents a summary of non-performing and restructured loans
as a
percentage of total loans and total loans and guarantees
outstanding:
NON-PERFORMING
AND RESTRUCTURED LOANS
|
|
(Dollar
amounts in millions)
|
May
31, 2007
|
|
May
31, 2006
|
|
May
31, 2005
|
|
Non-performing
loans
|
$
|
502
|
|
|
$
|
578
|
|
|
$
|
617
|
|
|
Percent
of loans outstanding
|
|
2.77
|
%
|
|
|
3.15
|
%
|
|
|
3.25
|
%
|
|
Percent
of loans and guarantees outstanding
|
|
2.61
|
%
|
|
|
2.97
|
%
|
|
|
3.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans
|
$
|
603
|
|
|
$
|
630
|
|
|
$
|
601
|
|
|
Percent
of loans outstanding
|
|
3.33
|
%
|
|
|
3.43
|
%
|
|
|
3.17
|
%
|
|
Percent
of loans and guarantees outstanding
|
|
3.14
|
%
|
|
|
3.24
|
%
|
|
|
2.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing and restructured loans
|
$
|
1,105
|
|
|
$
|
1,208
|
|
|
$
|
1,218
|
|
|
Percent
of loans outstanding
|
|
6.10
|
%
|
|
|
6.58
|
%
|
|
|
6.42
|
%
|
|
Percent
of loans and guarantees outstanding
|
|
5.75
|
%
|
|
|
6.21
|
%
|
|
|
6.05
|
%
|
|
Allowance
for Loan Losses
The
Company maintains an allowance for loan losses at a level estimated by
management to provide adequately for probable losses inherent in the loan
portfolio, which are estimated based upon a review of the loan portfolio, past
loss experience, specific problem loans, economic conditions and other pertinent
factors which, in management's judgment, deserve current recognition in
estimating loan losses. The Company reviews and adjusts the allowance
on a quarterly basis to maintain it at a level to cover estimated probable
losses in the portfolio.
Management
makes recommendations to the board of directors of CFC regarding write-offs
of
loan balances. In making its recommendation to write off all or a
portion of a loan balance, management considers various factors including cash
flow analysis and the collateral securing the borrower's loans. Since
inception in 1969, write-offs totaled $195 million and recoveries totaled $35
million for a net loss amount of $160 million. In the past five
fiscal years, write-offs totaled $62 million and recoveries totaled $8 million
for a net loan loss of $54 million.
Management
believes that the allowance for loan losses is adequate to cover estimated
probable portfolio losses.
Activity
in the allowance for loan losses is summarized below for the years ended May
31:
|
For
the year ended May 31,
|
|
(Dollar
amounts in millions)
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
Beginning
balance
|
$
|
611
|
|
|
$
|
590
|
|
|
$
|
574
|
|
|
(Recovery
of) provision for loan losses
|
|
(7
|
)
|
|
|
23
|
|
|
|
16
|
|
|
Net
write-offs
|
|
(42
|
)
|
|
|
(2
|
)
|
|
|
-
|
|
|
Ending
balance
|
$
|
562
|
|
|
$
|
611
|
|
|
$
|
590
|
|
|
`
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
loss allowance by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
561
|
|
|
$
|
610
|
|
|
$
|
589
|
|
|
NCSC
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
Total
|
$
|
562
|
|
|
$
|
611
|
|
|
$
|
590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of total loans outstanding
|
|
3.10
|
%
|
|
|
3.33
|
%
|
|
|
3.11
|
%
|
|
As
a percentage of total non-performing loans outstanding
|
|
111.95
|
%
|
|
|
105.71
|
%
|
|
|
95.62
|
%
|
|
As
a percentage of total restructured loans outstanding
|
|
93.20
|
%
|
|
|
96.98
|
%
|
|
|
98.17
|
%
|
|
CFC
has agreed to indemnify RTFC and NCSC for loan losses, with the exception of
the
NCSC consumer loans that are covered by the NCSC loan loss
allowance. Therefore, there is no loan loss allowance required at
RTFC and only a small loan loss allowance is required at NCSC to cover the
exposure to consumer loans.
The
Company's loan loss allowance decreased $49 million from May 31, 2006 to May
31,
2007. Within CFC's loan loss allowance at May 31, 2007 as compared to
the prior year end, there was a decrease in the calculated impairments of $50
million and an increase of $1 million to the allowance for all other
loans. The decrease to the calculated impairments was primarily due
to a settlement agreement with VarTec resulting in a loan write-off of $44
million and payments received on impaired loans offset by higher variable
interest rates at May 31, 2007 as compared to May 31, 2006.
Liabilities,
Minority Interest and Equity
Outstanding
Debt
The
following chart provides a breakout of debt outstanding at May 31:
|
(Dollar
amounts in millions)
|
2007
|
|
2006
|
|
Increase/
(Decrease)
|
|
|
Short-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper (1)
|
$
|
2,784
|
|
|
$
|
3,255
|
|
|
$
|
(471
|
)
|
|
|
Bank
bid notes
|
|
100
|
|
|
|
100
|
|
|
|
-
|
|
|
|
Long-term
debt with remaining maturities less than one year
|
|
1,368
|
|
|
|
1,594
|
|
|
|
(226
|
)
|
|
|
Foreign
currency valuation account
|
|
-
|
|
|
|
245
|
|
|
|
(245
|
)
|
|
|
Subordinated
deferrable debt with remaining maturities less than one
year
|
|
175
|
|
|
|
150
|
|
|
|
25
|
|
|
|
Total
short-term debt
|
|
4,427
|
|
|
|
5,344
|
|
|
|
(917
|
)
|
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
trust bonds
|
|
4,017
|
|
|
|
3,847
|
|
|
|
170
|
|
|
|
Notes
payable
|
|
2,533
|
|
|
|
2,575
|
|
|
|
(42
|
)
|
|
|
Medium-term
notes
|
|
4,745
|
|
|
|
4,220
|
|
|
|
525
|
|
|
|
Total
long-term debt
|
|
11,295
|
|
|
|
10,642
|
|
|
|
653
|
|
|
|
Subordinated
deferrable debt
|
|
311
|
|
|
|
486
|
|
|
|
(175
|
)
|
|
|
Members'
subordinated certificates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
certificates
|
|
649
|
|
|
|
651
|
|
|
|
(2
|
)
|
|
|
Loan
certificates
|
|
625
|
|
|
|
641
|
|
|
|
(16
|
)
|
|
|
Guarantee
certificates
|
|
107
|
|
|
|
136
|
|
|
|
(29
|
)
|
|
|
Total
members' subordinated certificates
|
|
1,381
|
|
|
|
1,428
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt outstanding
|
$
|
17,414
|
|
|
$
|
17,900
|
|
|
$
|
(486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of fixed rate debt (2)
|
|
83%
|
|
|
|
83%
|
|
|
|
|
|
|
|
Percentage
of variable rate debt (3)
|
|
17%
|
|
|
|
17%
|
|
|
|
|
|
|
|
Percentage
of long-term debt
|
|
75%
|
|
|
|
70%
|
|
|
|
|
|
|
|
Percentage
of short-term debt
|
|
25%
|
|
|
|
30%
|
|
|
|
|
|
|
|
|
|
(1) Includes
$250 million and $267 million related to the daily liquidity fund
at May
31, 2007 and 2006, respectively.
|
|
(2) Includes
variable rate debt that has been swapped to a fixed rate less any
fixed
rate debt that has been swapped to a variable rate.
|
|
(3) The
rate on commercial paper notes does not change once the note has
been
issued. However, the rates on new commercial paper notes change
daily and commercial paper notes generally have maturities of less
than 90
days. Therefore, commercial paper notes are considered to be
variable rate debt. Also includes fixed rate debt that has been
swapped to a variable rate less any variable rate debt that has been
swapped to a fixed rate.
|
|
Other
information with regard to short-term debt at May 31 is as follows:
(Dollar
amounts in thousands)
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
Weighted
average maturity outstanding at year-end:
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt (1)
|
|
25
days
|
|
|
|
26
days
|
|
|
|
22
days
|
|
Long-term
debt maturing within one year
|
|
192
days
|
|
|
|
203
days
|
|
|
|
294
days
|
|
Total
|
|
83
days
|
|
|
|
92
days
|
|
|
|
145
days
|
|
Average
amount outstanding during the year:
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt (1)
|
$
|
3,372,639
|
|
|
$
|
3,204,852
|
|
|
$
|
4,355,579
|
|
Long-term
debt maturing within one year
|
|
1,692,083
|
|
|
|
3,502,026
|
|
|
|
1,834,883
|
|
Total
|
|
5,064,722
|
|
|
|
6,706,878
|
|
|
|
6,190,462
|
|
Maximum
amount outstanding at any month-end during the year:
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt (1)
|
|
3,847,814
|
|
|
|
4,208,796
|
|
|
|
4,816,367
|
|
Long-term
debt maturing within one year
|
|
2,549,356
|
|
|
|
4,031,102
|
|
|
|
3,591,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes the daily liquidity fund and bank bid notes and does not
include
long-term debt due in less than one
year.
|
Total
debt outstanding at May 31, 2007 decreased as compared to May 31, 2006 due
primarily to the decrease of $233 million to loans outstanding. The
decrease to loan volume reduces the amount of debt required to fund
loans. Short-term debt decreased due to the redemption and maturity
of long-term debt, offset by an increase in commercial paper at May 31,
2007.
During
fiscal year 2007, the Company redeemed the 7.625% subordinated deferrable debt
securities due 2050 totaling $150 million. The Company redeemed these
securities at par and recorded a charge of $5 million in interest expense for
the unamortized issuance costs. Subsequent to the end of the year on
June 1, 2007, the Company redeemed the 7.40% subordinated deferrable debt
securities due 2050 totaling $175 million. The Company redeemed these
securities at par and recorded a charge of $6 million in interest expense for
the unamortized issuance costs in the first quarter of fiscal year
2008.
In
December 2006, the Company issued $600 million of floating rate extendible
collateral trust bonds. The bonds mature in 2008 unless extended by
the holders, but no later than 2012. In April 2007, the Company
issued $570 million of 5.45% collateral trust bonds due April 2017, $250 million
of floating rate extendible medium-term notes with an initial maturity date
of
May 2008 which may be extended at the option of the holders to May 2014 and
$300
million of floating rate extendible medium-term notes with an initial maturity
date of April 2009 which may be extended at the option of the holders to April
2014.
At
May 31, 2007, there was no foreign denominated debt outstanding. At
May 31, 2006, the Company had a total of $960 million of foreign
denominated debt. As a result of issuing debt in foreign currencies, the Company
must adjust the value of the debt reported on the consolidated balance sheets
for changes in foreign currency exchange rates since the date of
issuance. To the extent that the current exchange rate is different
than the exchange rate at the time of issuance, there will be a change in the
value of the foreign denominated debt. The adjustment to the value of the debt
for the current period is reported on the consolidated statements of operations
as foreign currency adjustments. At the time of issuance of all
foreign denominated debt, the Company enters into a cross currency or cross
currency interest rate exchange agreement to fix the exchange rate on all
principal and interest payments through maturity. At May 31, 2006,
the reported amount of foreign denominated debt includes a valuation adjustment
of $245 million due to changes in the value of the Euro and Australian dollar
versus the U.S. dollar since the time the debt was issued.
The
decrease to members' subordinated certificates of $47 million for the year
ended
May 31, 2007 is primarily due to $87 million related to amounts applied toward
loan prepayments, normal amortization and maturities offset by the purchase
of
$42 million of new subordinated loan certificates.
Minority
Interest
Minority
interest on the consolidated balance sheets was $22 million at May 31, 2007
and
2006. During the years ended May 31, 2007, 2006 and 2005 the balance
of minority interest has been adjusted by minority interest net income less
the
offset of unretired RTFC patronage capital against loans outstanding to certain
impaired and high risk borrowers and the retirement of patronage capital to
RTFC
members in January of each fiscal year.
Equity
The
following chart provides a breakout of the equity balances at May
31:
(in
millions)
|
2007
|
|
2006
|
|
Increase/
(Decrease)
|
|
Membership
fees
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
Education
fund
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
Members'
capital reserve
|
|
158
|
|
|
|
157
|
|
|
|
1
|
|
|
Allocated
net income
|
|
406
|
|
|
|
386
|
|
|
|
20
|
|
|
Total
members' equity
|
|
566
|
|
|
|
545
|
|
|
|
21
|
|
|
Prior
years cumulative derivative forward
|
|
|
|
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
226
|
|
|
|
226
|
|
|
|
-
|
|
|
Current
period derivative forward value (1)
|
|
(79
|
)
|
|
|
22
|
|
|
|
(101
|
)
|
|
Current
period foreign currency adjustments
|
|
(15
|
)
|
|
|
(22
|
)
|
|
|
7
|
|
|
Total
retained equity
|
|
698
|
|
|
|
771
|
|
|
|
(73
|
)
|
|
Accumulated
other comprehensive income
|
|
12
|
|
|
|
13
|
|
|
|
(1
|
)
|
|
Total
equity
|
$
|
710
|
|
|
$
|
784
|
|
|
$
|
(74
|
)
|
|
|
|
(1)
Represents the derivative forward value (gain) loss recorded by CFC
for
the period.
|
Applicants
are required to pay a one-time fee to become a member. The fee varies from
two
hundred dollars to one thousand dollars depending on the membership
class. CFC is required by the District of Columbia cooperative law to
have a methodology to allocate its net earnings to its members. CFC
maintains the current year net earnings as unallocated through the end of its
fiscal year. At that time, CFC's board of directors allocates its net
earnings to its members in the form of patronage capital and to board approved
reserves. Currently, CFC has two such board approved reserves, the
education fund and the members' capital reserve. CFC adjusts the net
earnings it allocates to its members and board approved reserves to exclude
the
non-cash impacts of SFAS 133 and 52. CFC allocates a small portion,
less than 1%, of adjusted net earnings annually to the education fund as
required by cooperative law. Funds from the education fund are
disbursed annually to the statewide cooperative organizations to fund the
teaching of cooperative principles in the service territories of the
cooperatives in each state. The board of directors determines the
amount of adjusted net earnings that is allocated to the members' capital
reserve, if any. The members' capital reserve represents earnings
that are held by CFC to increase equity retention. The earnings held
in the members' capital reserve have not been specifically allocated to any
member, but may be allocated to individual members in the future as patronage
capital if authorized by CFC's board of directors. All remaining
adjusted net earnings is allocated to CFC's members in the form of patronage
capital. CFC bases the amount of adjusted net earnings allocated to
each member on the members' patronage of the CFC lending programs in the year
that the adjusted net earnings was earned. There is no impact on
CFC's total equity as a result of allocating earnings to members in the form
of
patronage capital or to board approved reserves. CFC annually retires
a portion of the patronage capital allocated to members in prior
years. CFC's total equity is reduced by the amount of patronage
capital retired to its members and by amounts disbursed from board approved
reserves.
At
May 31, 2007, total equity decreased by $74 million from May 31,
2006. During the year ended May 31, 2007, CFC retired $84 million of
patronage capital to its members and accumulated other comprehensive income
related to derivatives decreased $1 million which was offset by net income
of
$12 million.
Contractual
Obligations
The
following table summarizes the long-term contractual obligations at May 31,
2007
and the scheduled reductions by fiscal year.
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
More
than 5
|
|
|
Instrument
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Years
|
|
Total
|
|
Long-term
debt due in less than one year
|
|
$
|
1,543
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,543
|
|
Long-term
debt
|
|
|
-
|
|
|
|
2,685
|
|
|
|
1,481
|
|
|
|
522
|
|
|
|
1,516
|
|
|
|
5,091
|
|
|
|
11,295
|
|
Subordinated
deferrable debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
311
|
|
|
|
311
|
|
Members'
subordinated certificates
(1)
|
|
|
19
|
|
|
|
10
|
|
|
|
6
|
|
|
|
20
|
|
|
|
5
|
|
|
|
1,048
|
|
|
|
1,108
|
|
Operating
leases (2)
|
|
|
3
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
Contractual
interest on long-term debt (3)
|
|
|
712
|
|
|
|
536
|
|
|
|
444
|
|
|
|
403
|
|
|
|
368
|
|
|
|
4,004
|
|
|
|
6,467
|
|
Total
contractual obligations
|
|
$
|
2,277
|
|
|
$
|
3,232
|
|
|
$
|
1,931
|
|
|
$
|
945
|
|
|
$
|
1,889
|
|
|
$
|
10,454
|
|
|
$
|
20,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Excludes loan subordinated certificates totaling $273 million that
amortize annually based on the outstanding balance of the related
loan. There are many items that impact the amortization of a
loan, such as loan conversions, loan repricing at the end of an interest
rate term, prepayments, etc, thus an amortization schedule cannot
be
maintained for these certificates. Over the past three years,
annual amortization on these certificates has averaged $28
million. In fiscal year 2007, amortization represented 12% of
amortizing loan subordinated certificates outstanding.
|
(2)
Represents the payment obligation related to the Company's three-year
lease of office space for its headquarters facility. Assuming
the Company exercises the option to extend the lease for an additional
one-year period in fiscal year 2009, the future minimum lease payments
for
fiscal years 2009 and 2010 would increase to $3 million and $1 million,
respectively. Assuming the Company exercises the option to
extend the lease for an additional one-year period in fiscal year
2010,
the future minimum lease payments for fiscal years 2009, 2010 and
2011
would increase to $3 million, $4 million and $1 million,
respectively.
|
(3)
Represents the interest obligation on the Company's debt based on
terms
and conditions at May 31, 2007.
|
Off-Balance
Sheet Obligations
|
Guarantees
|
The
following chart provides a breakout of guarantees outstanding by
type and
by segment at May 31:
|
|
|
|
|
|
Increase/
|
|
(in
millions)
|
2007
|
|
2006
|
|
(Decrease)
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
tax-exempt bonds
|
$
|
526
|
|
|
$
|
608
|
|
|
$
|
(82
|
)
|
|
Indemnifications
of tax benefit transfers
|
|
108
|
|
|
|
124
|
|
|
|
(16
|
)
|
|
Letters
of credit
|
|
366
|
|
|
|
272
|
|
|
|
94
|
|
|
Other
guarantees
|
|
74
|
|
|
|
75
|
|
|
|
(1
|
)
|
|
Total
|
$
|
1,074
|
|
|
$
|
1,079
|
|
|
$
|
(5
|
)
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
1,034
|
|
|
$
|
1,025
|
|
|
$
|
9
|
|
|
NCSC
|
|
40
|
|
|
|
54
|
|
|
|
(14
|
)
|
|
Total
|
$
|
1,074
|
|
|
$
|
1,079
|
|
|
$
|
(5
|
)
|
|
The
decrease in total guarantees outstanding at May 31, 2007 compared to the prior
year period is due to the $184 million of long-term tax-exempt bonds guarantees
to two members which were refinanced or cancelled and the normal amortization
on
long-term tax-exempt bonds and tax benefit transfers offset by the $105 million
in new long-term tax-exempt bonds and the $94 million increase to letters of
credit. The increase to letters of credit is due to increases of $106 million
in
letters of credit to distribution systems and $8 million to power supply systems
offset by decreases of $7 million in letters of credit to statewide and trade
associations and $13 million to NCSC borrowers.
At
May 31, 2007 and 2006, the Company had recorded a guarantee liability totaling
$19 million and $17 million, respectively, which represents the contingent
and
non-contingent exposure related to guarantees of members' debt
obligations.
The
following table summarizes the off-balance sheet obligations at May 31, 2007
and
the related principal amortization and maturities by fiscal year.
(in
millions)
|
|
|
|
Principal
Amortization and Maturities
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
Balance
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Years
|
|
|
|
Guarantees
(1)
|
|
$
|
1,074
|
|
|
$
|
194
|
|
|
$
|
130
|
|
|
$
|
149
|
|
|
$
|
118
|
|
|
$
|
95
|
|
|
$
|
388
|
|
|
|
|
|
(1)
On a total of $396 million of tax-exempt bonds, CFC has unconditionally
agreed to purchase bonds tendered or called for redemption at any
time if
the remarketing agents have not sold such bonds to other
purchasers.
|
Contingent
Off-Balance Sheet Obligations
Unadvanced
Loan Commitments
At
May 31, 2007, the Company had unadvanced loan commitments totaling $12,904
million, an increase of $124 million compared to the balance of $12,780 million
at May 31, 2006. Unadvanced commitments are loans for which loan
contracts have been approved and executed, but funds have not been
advanced. The majority of the short-term unadvanced commitments
provide backup liquidity to the Company's borrowers; therefore, it does not
anticipate funding most of these commitments. Approximately 56% of
the outstanding commitments at May 31, 2007 and 2006 were for short-term or
line
of credit loans. Substantially all above mentioned credit commitments
contain material adverse change clauses, thus for a borrower to qualify for
the
advance of funds, the Company must be satisfied that there has been no material
change since the loan was approved.
Unadvanced
loan commitments do not represent off-balance sheet liabilities and have not
been included in the chart summarizing off-balance sheet obligations
above. The Company has no obligation to advance amounts to a borrower
that does not meet the minimum conditions as determined by CFC's credit
underwriting policy in effect at the time the loan was approved. If
there has been a material adverse change in the borrower's financial condition
or the borrower has not satisfied other terms in the agreement, the Company
is
not required to advance funds. Therefore, unadvanced commitments are
classified as contingent liabilities.
Ratio
Analysis
Leverage
Ratio
The
leverage ratio is calculated by dividing the sum of total liabilities and
guarantees outstanding by total equity. Based on this formula, the
leverage ratio at May 31, 2007 was 26.64, an increase from 24.80 at May 31,
2006. The increase in the leverage ratio is due to a decrease of $74
million in total equity offset by a decrease of $530 million to total
liabilities and a decrease of $5 million in guarantees as discussed under the
Liabilities, Minority Interest and Equity section and the Off-Balance Sheet
Obligations section of "Financial Condition".
For
the purpose of covenant compliance on its revolving credit agreements and for
internal management purposes, the leverage ratio calculation is adjusted to
exclude derivative liabilities, debt used to fund RUS guaranteed loans, the
foreign currency valuation account, subordinated deferrable debt and
subordinated certificates from liabilities, uses members' equity rather than
total equity and adds subordinated deferrable debt, subordinated certificates
and minority interest to arrive at adjusted equity. At May 31, 2007
and 2006, the adjusted leverage ratio was 6.81 and 6.38,
respectively. See "Non-GAAP Financial Measures" for further
explanation and a reconciliation of the adjustments the Company makes in its
leverage ratio calculation.
The
increase in the adjusted leverage ratio is due to a decrease of $175 million
in
adjusted equity offset by the decrease in adjusted liabilities of $70 million
and a decrease of $5 million in guarantees. The decrease to adjusted
equity is primarily due to the decreases of $150 million in subordinated
deferrable debt, the $84 million retirement of allocated earnings and $47
million in members subordinated certificates offset by adjusted net income
totaling $108 million. The decrease in adjusted liabilities is
primarily due to net decreases of $44 million in short-term and long-term debt
excluding the foreign currency valuation account and subordinated deferrable
debt included in short-term debt, $22 million to accrued interest payable and
$12 million to deferred income. In addition to the adjustments made
to the leverage ratio in the "Non-GAAP Financial Measures" section, guarantees
to member systems that have an investment grade rating from Moody's Investors
Service and Standard & Poor's Corporation are excluded from the calculation
of the leverage ratio under the terms of the revolving credit
agreements.
Debt
to Equity Ratio
The
debt to equity ratio is calculated by dividing the sum of total liabilities
outstanding by total equity. The debt to equity ratio, based on this
formula at May 31, 2007 was 25.13, an increase from 23.42 at May 31,
2006. The increase in the debt to equity ratio is due to the decrease
of $74 million to total equity offset by the decrease of $530 million to total
liabilities as discussed under the Liabilities, Minority Interest and Equity
section of "Financial Condition".
For
internal management purposes, the debt to equity ratio calculation is adjusted
to exclude derivative liabilities, debt used to fund RUS guaranteed loans,
the
foreign currency valuation account, subordinated deferrable debt and
subordinated certificates from liabilities, uses members' equity rather than
total equity and adds subordinated deferrable debt, subordinated certificates
and minority interest to arrive at adjusted equity. At May 31, 2007
and 2006, the adjusted debt to equity ratio was 6.37 and 5.97,
respectively. See "Non-GAAP Financial Measures" for further
explanation and a reconciliation of the adjustments made to the debt to equity
ratio calculation. The increase in the adjusted debt to equity ratio
is due to the decrease of $175 million in adjusted equity offset by the decrease
of $70 million in adjusted liabilities.
Credit
Ratings
The
Company's long- and short-term debt and guarantees are rated by three of the
major credit rating agencies, Moody's Investors Service, Standard & Poor's
Corporation and Fitch Ratings. The following table presents the
Company's credit ratings at May
31, 2007.
|
Moody's
Investors
|
|
Standard
& Poor's
|
|
|
|
|
Service
|
|
Corporation
|
|
Fitch
Ratings
|
|
Direct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured debt
|
|
A1
|
|
|
|
A+
|
|
|
|
A+
|
|
|
Senior
unsecured debt
|
|
A2
|
|
|
|
A
|
|
|
|
A
|
|
|
Subordinated
deferrable debt
|
|
A3
|
|
|
|
BBB+
|
|
|
|
A-
|
|
|
Commercial
paper
|
|
P-1
|
|
|
|
A-1
|
|
|
|
F-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled
bonds
|
|
A1
|
|
|
|
A
|
|
|
|
A
|
|
|
Other
bonds
|
|
A2
|
|
|
|
A
|
|
|
|
A
|
|
|
Short-term
|
|
P-1
|
|
|
|
A-1
|
|
|
|
F-1
|
|
|
The
ratings listed above have the meaning as defined by each of the respective
rating agencies, are not recommendations to buy, sell or hold securities and
are
subject to revision or withdrawal at any time by the rating
organizations.
As
of the date of the filing of this Form 10-K, Standard & Poor's Corporation
and Moody's Investors Service have the Company's ratings on stable outlook
and
Fitch Ratings has the Company’s ratings on positive outlook.
Liquidity
and Capital Resources
The
following section will discuss the Company's sources and uses of
liquidity. The Company's primary sources of liquidity include capital
market debt issuance, private debt issuance, member loan principal repayments,
member loan interest payments, a revolving bank line facility and member
investments. The Company's primary uses of liquidity include loan
advances, interest payments on debt, principal repayments on debt and patronage
capital retirements. The Company feels that its sources of liquidity
are adequate to cover the uses of liquidity.
Sources
of Liquidity
Capital
Market Debt Issuance
At
May 31, 2007, the Company had effective registration statements for the issuance
of $3,044 million of medium-term notes and $165 million of subordinated
deferrable debt. The Company plans to file a registration statement
as a well-known seasoned issuer that will allow the Company to issue an
unlimited amount of debt under each of these programs for a three-year
period. The Company has Board authorization to issue up to $1 billion
of commercial paper and $4 billion of medium-term notes in the European
market. The Company also has Board authorization to issue $1.7
billion of medium-term notes in the Australian market. At May 31,
2007, the Company has not utilized any of the European or Australian market
authorizations. In addition, the Company has a commercial paper
program under which it sells commercial paper to investors in the capital
markets. The amount of commercial paper that can be sold is limited
to the amount of backup liquidity available under the Company's revolving credit
agreement. The Company also obtains short-term funding
from the sale of floating rate demand notes under its daily liquidity fund
program. The registration statement for the daily liquidity fund program is
effective for a three-year period for a total of $20 billion with a limitation
on the aggregate principal amount outstanding at one time of $3
billion.
Private
Debt Issuance
Beginning
in fiscal year 2006, the Company made use of two sources of private debt
issuance. In July 2005, the Company issued $500 million of notes to
Farmer Mac due in 2008 and secured such issuance with the pledge of loans to
distribution systems as collateral. The Company is also authorized to
borrow up to $2.5 billion under FFB loan facilities with bond guarantee
agreements with RUS as part of the funding mechanism for the REDLG
program. At May 31, 2007, the Company had a total of $2 billion of
funding outstanding as part of the REDLG program. On August 1, 2007,
CFC submitted an application to borrow the remaining $500 million available
under FFB loan facilities. These funds were received by CFC on August
7, 2007. CFC is required to place on deposit mortgage notes in an
amount at least equal to the principal balance of the notes
outstanding.
Member
Loan Repayments
There
has been significant prepayment activity over the past three fiscal years in
the
telecommunications loan programs. It is not anticipated that there
will be significant loan prepayments over the next few
years. Amortization of long-term loans in each of the five fiscal
years following May 31, 2007 and thereafter are as follows:
(in
millions)
|
|
Amortization
(1)
|
|
|
|
2008
|
|
$
|
831
|
|
|
|
|
2009
|
|
|
785
|
|
|
|
|
2010
|
|
|
1,279
|
|
|
|
|
2011
|
|
|
806
|
|
|
|
|
2012
|
|
|
1,052
|
|
|
|
|
Thereafter
|
|
|
12,160
|
|
|
|
|
|
(1)
Represents scheduled amortization based on current rates without
consideration for loans that
reprice.
|
Member
Loan Interest Payments
During
the year ended May 31, 2007, interest income on the loan portfolio was $1,021
million, representing an average yield of 5.61% as compared to 5.28% and 4.88%
for the years ended May 31, 2006 and 2005, respectively. At May 31,
2007, 82% of the total loans outstanding had a fixed rate of interest and 18%
of
loans outstanding had a variable rate of interest. At May 31, 2007, a total
of
6% of loans outstanding were on a non-accrual basis with respect to the
recognition of interest income.
Bank
Revolving Credit Facility
The
following is a summary of the Company's revolving credit agreements at May
31:
(Dollar
amounts in millions)
|
|
|
2007
|
|
|
2006
|
|
|
Termination
Date
|
|
|
Facility
fee per annum (1)
|
|
|
364-day
agreement (2)
|
|
$
|
1,125
|
|
$
|
-
|
|
|
March
14, 2008
|
|
|
0.05
of 1%
|
|
|
Five-year
agreement
|
|
|
1,125
|
|
|
-
|
|
|
March
16, 2012
|
|
|
0.06
of 1%
|
|
|
Five-year
agreement
|
|
|
1,025
|
|
|
1,025
|
|
|
March
22, 2011
|
|
|
0.06
of 1%
|
|
|
364-day
agreement
|
|
|
-
|
|
|
1,025
|
|
|
March
21, 2007
|
|
|
0.05
of 1%
|
|
|
Five-year
agreement
|
|
|
-
|
|
|
1,975
|
|
|
March
23, 2010
|
|
|
0.09
of 1%
|
|
|
Total
|
|
$
|
3,275
|
|
$
|
4,025
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Facility fee determined by CFC's senior unsecured credit ratings
based on
the pricing schedules put in place at the initiation of the related
agreement.
|
|
|
(2)
Any amount outstanding under these agreements may be converted to
a
one-year term loan at the end of the revolving credit
periods. If converted to a term loan, the fee on the
outstanding principal amount of the term loan is 0.10 of 1% per
annum.
|
|
Up-front
fees of between 0.03 and 0.05 of 1% were paid to the banks based on their
commitment level to the five-year agreements in place at May 31, 2007, totaling
in aggregate $1 million, which will be amortized on a straight-line basis over
the life of the agreements. No upfront fees were paid to the banks
for their commitment to the 364-day facility. Each agreement contains
a provision under which if borrowings exceed 50% of total commitments, a
utilization fee must be paid on the outstanding balance. The
utilization fees are 0.05 of 1% for all three agreements in place at May 31,
2007.
Effective
May 31, 2007 and 2006, the Company was in compliance with all covenants and
conditions under its revolving credit agreements in place at that time and
there
were no borrowings outstanding under such agreements.
For
the purpose of calculating the required financial covenants contained in its
revolving credit agreements, the Company adjusts net income, senior debt and
total equity to exclude the non-cash adjustments related to SFAS 133 and
52. The adjusted TIER, as defined by the agreements, represents the
interest expense adjusted to include the derivative cash settlements, plus
net
income prior to the cumulative effect of change in accounting principle, plus
minority interest net income and dividing that total by the interest expense
adjusted to include the derivative cash settlements. In addition to
the non-cash adjustments related to SFAS 133 and 52, senior debt also excludes
RUS guaranteed loans, subordinated deferrable debt, members' subordinated
certificates and minority interest. Total equity is adjusted to
include subordinated deferrable debt, members' subordinated certificates and
minority interest. Senior debt includes guarantees; however, it
excludes:
·
|
guarantees
for members where the long-term unsecured debt of the member is rated
at
least BBB+ by Standard & Poor's Corporation or Baa1 by Moody's
Investors Service; and
|
·
|
the
payment of principal and interest by the member on the guaranteed
indebtedness if covered by insurance or reinsurance provided by an
insurer
having an insurance financial strength rating of AAA by Standard
&
Poor's Corporation or a financial strength rating of Aaa by Moody's
Investors Service.
|
The
following represents the Company's required and actual financial ratios under
the revolving credit agreements at or for the year ended May 31:
|
|
|
|
Actual
|
|
|
|
Requirement
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
|
1.025
|
|
1.09
|
|
1.11
|
|
|
|
|
|
|
|
|
|
Minimum
adjusted TIER at fiscal year end (1)
|
|
1.05
|
|
1.12
|
|
1.11
|
|
|
|
|
|
|
|
|
|
Maximum
ratio of senior debt to total equity
|
|
10.00
|
|
6.65
|
|
6.26
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
Company must meet this requirement in order to retire patronage
capital.
|
The
revolving credit agreements do not contain a material adverse change clause
or
ratings triggers that limit the banks' obligations to fund under the terms
of
the agreements, but CFC must be in compliance with their other requirements,
including financial ratios, in order to draw down on the
facilities.
Member
Investments
At
May 31, 2007 and 2006, members funded 20.9% and 19.2%, respectively, of total
assets as follows:
|
2007
|
|
2006
|
|
Increase/
|
|
(Dollar
amounts in millions)
|
Amount
|
|
%
of Total (1)
|
|
Amount
|
|
%
of Total (1)
|
|
(Decrease)
|
|
|
Commercial
paper (2)
|
$
|
1,634
|
|
|
|
59%
|
|
|
$
|
1,451
|
|
|
|
45%
|
|
|
$
|
183
|
|
|
Medium-term
notes
|
|
308
|
|
|
|
6%
|
|
|
|
255
|
|
|
|
4%
|
|
|
|
53
|
|
|
Members'
subordinated certificates
|
|
1,381
|
|
|
|
100%
|
|
|
|
1,428
|
|
|
|
100%
|
|
|
|
(47
|
)
|
|
Members'
equity (3)
|
|
566
|
|
|
|
100%
|
|
|
|
545
|
|
|
|
100%
|
|
|
|
21
|
|
|
Total
|
$
|
3,889
|
|
|
|
|
|
|
$
|
3,679
|
|
|
|
|
|
|
$
|
210
|
|
|
Percentage
of total assets
|
|
20.9
|
%
|
|
|
|
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
Percentage
of total assets less derivative assets (3)
|
|
21.2
|
%
|
|
|
|
|
|
|
19.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents the percentage of each line item outstanding to CFC
members.
|
(2)
Includes $250 million and $267 million related to the daily liquidity
fund
at May 31, 2007 and 2006, respectively.
|
(3)
See "Non-GAAP Financial Measures" for further explanation and a
reconciliation of the adjustments made to total capitalization and
a
breakout of members' equity.
|
Uses
of Liquidity
Loan
Advances
Loan
advances are the result of new loans approved to members and from the unadvanced
portion of loans that were approved prior to May 31, 2007. At May 31,
2007, the Company had unadvanced loan commitments totaling $12,904
million. The Company does not expect to advance the full amount of
the unadvanced commitments at May 31, 2007. Unadvanced commitments
generally expire within five years of the first advance on a loan and the
majority of short-term unadvanced commitments are used as backup liquidity
for
member operations. Approximately 56% of the outstanding commitments
at May 31, 2007 were for short-term or line of credit loans. The
Company anticipates that over the next twelve months, loan advances will be
approximately equal to the scheduled loan repayments.
Interest
Expense on Debt
For
the year ended May 31, 2007, interest expense on debt was $961 million,
representing 5.28% of the average loan volume for which the debt was used as
funding. The interest expense on debt represented 5.18% and 4.60% of
the average loan volume for which the debt was used as funding for the years
ended May 31, 2006 and 2005, respectively. At May 31, 2007, a total
of 83% of outstanding debt had a fixed interest rate and 17% of outstanding
debt
had a variable interest rate.
Principal
Repayments on Long-term Debt
The
principal amount of medium-term notes, collateral trust bonds, long-term notes
payable, subordinated deferrable debt and membership subordinated certificates
maturing in each of the five fiscal years following May 31, 2007 and thereafter
is as follows:
|
Amount
|
|
Weighted
Average
|
|
|
(Dollar
amounts in millions)
|
Maturing
(1)
|
|
Interest
Rate
|
|
|
2008
|
$
|
1,562
|
|
|
|
4.93
|
%
|
|
|
2009
|
|
2,695
|
|
|
|
5.24
|
%
|
|
|
2010
|
|
1,487
|
|
|
|
5.71
|
%
|
|
|
2011
|
|
542
|
|
|
|
4.44
|
%
|
|
|
2012
|
|
1,521
|
|
|
|
7.21
|
%
|
|
|
Thereafter
|
|
6,450
|
|
|
|
5.64
|
%
|
|
|
Total
|
$
|
14,257
|
|
|
|
5.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes
loan subordinated certificates totaling $273 million that amortize
annually based on the outstanding balance of the related
loan. There are many items that impact the amortization of a
loan, such as loan conversions, loan repricing at the end of an interest
rate term, prepayments, etc, thus an amortization schedule cannot
be
maintained for these certificates. Over the past three years,
annual amortization on these certificates has averaged $28
million. In fiscal year 2007, amortization represented 12% of
amortizing loan subordinated certificates
outstanding.
|
Patronage
Capital Retirements
The
Company has made annual retirements of its allocated patronage capital in 27
of
the last 28 years. In July 2007, the CFC board of directors approved
the allocation of a total of $104 million from fiscal year 2007 net earnings
to
the CFC members. CFC is scheduled to make a cash payment of $86
million to its members as retirement of 70% of the amount allocated for fiscal
year 2007 and 1/9th of the amount allocated for fiscal years 1991, 1992 and
1993.
Market
Risk
The
Company's primary market risks are interest rate risk and liquidity
risk. The Company is also exposed to counterparty risk as a result of
entering into interest rate exchange agreements.
Interest
Rate Risk
The
interest rate risk exposure is related to the funding of the fixed rate loan
portfolio. The Company does not match fund the majority of its fixed
rate loans with a specific debt issuance at the time the loans are
advanced. The Company aggregates fixed rate loans until the volume
reaches a level that will allow an economically efficient issuance of
debt. The Company uses fixed rate collateral trust bonds, medium-term
notes, subordinated deferrable debt, members' subordinated certificates,
members' equity and variable rate debt to fund fixed rate loans. The
Company allows borrowers flexibility in the selection of the period for which
a
fixed interest rate will be in effect. Long-term loans typically have
maturities of up to 35 years. Borrowers may select fixed interest
rates for periods of one year through the life of the loan. To
mitigate interest rate risk in the funding of fixed rate loans, the Company
performs a monthly gap analysis, a comparison of fixed rate assets repricing
or
maturing by year to fixed rate liabilities and members' equity maturing by
year
(see chart on page 47). The interest rate risk is deemed minimal on
variable rate loans, since the loans may be repriced either monthly or
semi-monthly to reflect the cost of the debt used to fund the
loans. At May 31, 2007 and 2006, 18% and 20%, respectively, of loans
carried variable interest rates.
Matched
Funding Policy
To
monitor interest rate risk in the funding of fixed rate loans, the Company
performs a monthly gap analysis (see chart on page 47). It is the
Company's funding objective to manage the matched funding of asset and liability
repricing terms within a range of 3% of total assets excluding derivative
assets. At May 31, 2007, the Company had $14,672 million of fixed
rate assets amortizing or repricing, funded by $12,683 million of fixed rate
liabilities maturing during the next 30 years and $1,915 million of members'
equity and members' subordinated certificates, a portion of which does not
have
a scheduled maturity. The difference of $74 million, or less than 1%
of total assets and total assets excluding derivative assets, represents the
fixed rate assets maturing during the next 30 years in excess of the fixed
rate
debt and equity. Fixed rate loans are funded with fixed rate
collateral trust bonds, medium-term notes, long-term notes payable, subordinated
deferrable debt, members' subordinated certificates and members'
equity. With the exception of members' subordinated certificates,
which are generally issued at rates below the Company's long-term cost of
funding and with extended maturities, and commercial paper, the Company's
liabilities have average maturities that closely match the repricing terms
(but
not the maturities) of its fixed interest rate loans. The Company
also uses commercial paper supported by interest rate exchange agreements to
fund its portfolio of fixed rate loans. Variable rate assets which
reprice monthly or semi-monthly are funded with short-term liabilities,
primarily commercial paper, collateral trust bonds, long-term notes payable
and
medium-term notes issued with a fixed rate and swapped to a variable rate,
medium-term notes issued at a variable rate, subordinated certificates, members'
equity and bank bid notes. The schedule allows the Company to analyze
the impact on the overall adjusted TIER of issuing a certain amount of debt
at a
fixed rate for various maturities, prior to issuance of the debt. See
"Non-GAAP Financial Measures" for further explanation and a reconciliation
of
the adjustments to TIER.
Certain
of the Company's collateral trust bonds, subordinated deferrable debt and
medium-term notes were issued with early redemption provisions. To
the extent borrowers are allowed to convert their fixed rate loans to a variable
interest rate and to the extent it is beneficial, the Company takes advantage
of
these early redemption provisions. However, because conversions and
prepayments can take place at different intervals from early redemptions, the
Company charges conversion fees designed to compensate for any additional
interest rate risk it assumes.
The
following chart shows the scheduled amortization and repricing of fixed rate
assets and liabilities outstanding at May 31, 2007.
INTEREST
RATE GAP ANALYSIS
|
(Fixed
Rate Assets/Liabilities)
|
As
of May 31, 2007
|
|
May
31,
|
|
June
1,
|
|
June
1,
|
|
June
1,
|
|
June
1,
|
|
|
|
|
|
|
2008
|
|
2008
to
|
|
2010
to
|
|
2012
to
|
|
2017
to
|
|
Beyond
|
|
|
|
|
or
|
|
May
31,
|
|
May
31,
|
|
May
31,
|
|
May
31,
|
|
June
1,
|
|
|
|
(Dollar
amounts in millions)
|
prior
|
|
2010
|
|
2012
|
|
2017
|
|
2027
|
|
2027
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
and repricing
|
$
|
1,789
|
|
|
$
|
3,143
|
|
|
$
|
2,624
|
|
|
$
|
3,541
|
|
|
$
|
2,519
|
|
|
$
|
1,056
|
|
|
$
|
14,672
|
|
Total
assets
|
$
|
1,789
|
|
|
$
|
3,143
|
|
|
$
|
2,624
|
|
|
$
|
3,541
|
|
|
$
|
2,519
|
|
|
$
|
1,056
|
|
|
$
|
14,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and members' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
1,273
|
|
|
$
|
3,061
|
|
|
$
|
3,597
|
|
|
$
|
3,437
|
|
|
$
|
895
|
|
|
$
|
420
|
|
|
$
|
12,683
|
|
Subordinated
certificates
|
|
42
|
|
|
|
56
|
|
|
|
90
|
|
|
|
84
|
|
|
|
718
|
|
|
|
290
|
|
|
|
1,280
|
|
Members'
equity (1)
|
|
13
|
|
|
|
26
|
|
|
|
28
|
|
|
|
121
|
|
|
|
101
|
|
|
|
346
|
|
|
|
635
|
|
Total
liabilities and members' equity
|
$
|
1,328
|
|
|
$
|
3,143
|
|
|
$
|
3,715
|
|
|
$
|
3,642
|
|
|
$
|
1,714
|
|
|
$
|
1,056
|
|
|
$
|
14,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap
(2)
|
$
|
461
|
|
|
$
|
-
|
|
|
$
|
(1,091
|
)
|
|
$
|
(101
|
)
|
|
$
|
805
|
|
|
$
|
-
|
|
|
$
|
74
|
|
Cumulative
gap
|
$
|
461
|
|
|
$
|
461
|
|
|
$
|
(630
|
)
|
|
$
|
(731
|
)
|
|
$
|
74
|
|
|
$
|
74
|
|
|
|
|
|
Cumulative
gap as a % of total assets
|
|
2.48
|
%
|
|
|
2.48
|
%
|
|
|
(3.39
|
)%
|
|
|
(3.94
|
)%
|
|
|
0.40
|
%
|
|
|
0.40
|
%
|
|
|
|
|
Cumulative
gap as a % of adjusted total assets (3)
|
|
2.51
|
%
|
|
|
2.51
|
%
|
|
|
(3.43
|
)%
|
|
|
(3.98
|
)%
|
|
|
0.40
|
%
|
|
|
0.40
|
%
|
|
|
|
|
|
|
(1)
|
Includes
the portion of the loan loss allowance and subordinated deferrable
debt
allocated to fund fixed rate assets. See "Non-GAAP Financial
Measures" for further explanation of why CFC uses members' equity
in its
analysis of the funding of its loan portfolio.
|
(2)
|
Assets
less liabilities and members' equity.
|
(3)
|
Adjusted
total assets represents total assets in the consolidated balance
sheet
less derivative assets.
|
Use
of Derivatives
At
May 31, 2007 and 2006, the Company was a party to interest rate exchange
agreements with a total notional amount of $12,533 million and $12,536 million,
respectively. The Company uses interest rate exchange agreements as
part of its overall interest rate matching strategy. Interest rate
exchange agreements are used when they provide a lower cost of funding or
minimize interest rate risk. The Company will enter into interest
rate exchange agreements only with highly rated financial
institutions. CFC used interest rate exchange agreements to
synthetically change the interest rate from a variable rate to a fixed rate
on
$7,277 million as of May 31, 2007 and $7,350 million as of May 31, 2006 of
debt
used to fund long-term fixed rate loans. Interest rate exchange
agreements were used to synthetically change the interest rates from fixed
to
variable on $5,256 million and $5,186 million of long-term debt as of May 31,
2007 and 2006, respectively. The Company has not invested in
derivative financial instruments for trading purposes in the past and does
not
anticipate doing so in the future.
In
December 2006, the Company terminated two $500 million pay variable and receive
fixed interest rate exchange agreements. The Company terminated these
interest rate exchange agreements in an effort to reduce the total number of
swap positions and total notional size of the swap portfolio, reduce the number
of swaps using the 30-day composite commercial paper index floating leg, reduce
exposure to certain counterparties and reduce the number of offsetting positions
in the swap portfolio. As a result of terminating these swaps, CFC
recorded a charge of $31 million representing the fair value of the $1 billion
of terminated interest rate exchange agreements. This amount was
offset by a $31 million payment received from the counterparties representing
the fair value of the agreements on the date of termination and recorded as
income in derivative cash settlements. Therefore, there was no
significant impact on net income for the year.
At
May 31, 2007, there were no foreign currency exchange agreements
outstanding. At May 31, 2006, the Company was a party to cross
currency interest rate exchange agreements with a total notional amount of
$716
million related to medium-term notes denominated in foreign
currencies. Cross currency interest rate exchange agreements with a
total notional amount of $434 million at May 31, 2006 in which the Company
receives Euros and pays U.S. dollars, and $282 million at May 31, 2006 in which
the Company receives Australian dollars and pays U.S. dollars, were used to
synthetically change the foreign denominated debt to U.S. dollar denominated
debt. In addition, the $716 million of cross currency interest rate
exchange agreements at May 31, 2006 synthetically changed the interest rate
from
the fixed rate on the foreign denominated debt to variable rate U.S. denominated
debt or from a variable rate on the foreign denominated debt to a U.S.
denominated variable rate.
The
Company enters into an exchange agreement to sell the amount of foreign currency
received from the investor for U.S. dollars on the issuance date and to buy
the
amount of foreign currency required to repay the investor principal and interest
due through or on the maturity date. By locking in the exchange rates
at the time of issuance, the Company has eliminated the possibility of any
currency gain or loss (except in the case of the Company or a counterparty
default or unwind of the transaction) which might otherwise have been produced
by the foreign currency borrowing.
Counterparty
Risk
The
Company is exposed to counterparty risk related to the performance of the
parties with which it has entered into interest rate exchange
agreements. To mitigate this risk, the Company only enters into these
agreements with financial institutions with investment grade
ratings. At May 31, 2007 and 2006, the Company was a party to
interest rate exchange agreements with notional amounts totaling $12,533 million
and $12,536 million and cross currency interest rate exchange agreements with
notional amounts totaling $716 million at May 31, 2006. To date, the
Company has not experienced a failure of a counterparty to perform as required
under any of these agreements. At the time counterparties are
selected to participate in the Company's exchange agreements, the counterparty
must be a participant in one of its revolving credit agreements. At
May 31, 2007, the Company's interest rate exchange agreement counterparties
had
credit ratings ranging from AAA to A- as assigned by Standard & Poor's
Corporation.
The
Company currently uses two types of interest rate exchange
agreements: (1) the Company pays a fixed rate and receives a variable
rate and (2) the Company pays a variable rate and receives a fixed
rate. The following chart provides a breakout of the interest rate
exchange agreements at May 31, 2007 by type of agreement.
(Dollar
amounts in millions)
|
|
Notional
Amount
|
|
Average
Rate Paid
|
|
Average
Rate Received
|
|
Pay
fixed / receive variable
|
|
$
|
7,277
|
|
|
|
4.52
|
%
|
|
|
5.35
|
%
|
|
Pay
variable / receive fixed
|
|
|
5,256
|
|
|
|
6.53
|
%
|
|
|
6.10
|
%
|
|
Total
|
|
$
|
12,533
|
|
|
|
5.36
|
%
|
|
|
5.66
|
%
|
|
Foreign
Currency Risk
The
Company may issue commercial paper, medium-term notes or bonds denominated
in
foreign currencies. At May 31, 2007, there were no foreign currency
exchange agreements outstanding. At May 31, 2006, CFC had $434
million and $282 million of medium-term notes denominated in Euros and
Australian dollars, respectively. The Company's foreign currency
valuation account, which represents the change in the foreign exchange rate
from
the date of issuance to the reporting date, increased the debt balance by $245
million at May 31, 2006. The change in the value of the foreign
denominated debt is reported in the consolidated statements of operations as
foreign currency adjustments.
Rating
Triggers
The
Company has certain interest rate exchange agreements that contain a condition
that will allow one counterparty to terminate the agreement if the credit rating
of the other counterparty drops to a certain level. This
condition is commonly called a rating trigger. Under the rating
trigger, if the credit rating for either counterparty falls to the level
specified in the agreement, the other counterparty may, but is not obligated
to,
terminate the agreement. If either counterparty terminates the
agreement, a net payment may be due from one counterparty to the other based
on
the fair value of the underlying derivative instrument. Rating
triggers are not separate financial instruments and are not separate derivatives
under SFAS 133. The Company's rating triggers are based on its senior
unsecured credit rating from Standard & Poor's Corporation and Moody's
Investors Service. At May 31, 2007, there are rating triggers
associated with $8,727 million notional amount of interest rate exchange
agreements. If the Company's rating from Moody's Investors Service
falls to Baa1 or the Company's rating from Standard & Poor's Corporation
falls to BBB+, the counterparties may terminate agreements with a total notional
amount of $1,466 million. If the Company's rating from Moody's
Investors Service falls below Baa1 or the Company's rating from Standard &
Poor's Corporation falls below BBB+, the counterparties may terminate the
agreements on the remaining total notional amount of $7,261
million.
At
May 31, 2007, the Company's exchange agreements subject to rating triggers
had a
derivative fair value of $33 million, comprised of $38 million that would be
due
to the Company and $5 million that the Company would have to pay if all interest
rate exchange agreements with a rating trigger at the level of BBB+ or Baa1
and
above were to be terminated, and a derivative fair value of $93 million,
comprised of $140 million that would be due to the Company and $47 million
that
the Company would have to pay if all interest rate exchange agreements with
a
rating trigger below the level of BBB+ or Baa1 were to be
terminated. See chart on page 43 for CFC's senior unsecured credit
ratings as of May 31, 2007.
Liquidity
Risk
The
Company faces liquidity risk in the funding of its loan portfolio and
refinancing its maturing obligations. The Company offers long-term
loans with maturities of up to 35 years and line of credit loans that are
generally required to be paid down annually. On long-term loans, the
Company offers a variety of interest rate options including the ability to
fix
the interest rate for terms of one year through maturity. At May 31,
2007, the Company has a total of $1,543 million of long-term debt maturing
during the next twelve months. The Company funds the loan portfolio
with a variety of debt instruments and its members' equity. The
Company typically does not match fund each of its loans with a debt instrument
of similar final maturity. Debt instruments such as subordinated
certificates have maturities that vary from the term of the associated loan
or
guarantee to 100 years and subordinated deferrable debt has been issued with
maturities of up to 49 years.
The
Company may issue collateral trust bonds and medium-term notes for periods
of up
to 30 years, but typically issues such debt instruments with maturities of
2, 3,
5, 7 and 10 years. Debt instruments such as commercial paper and bank
bid notes typically have maturities of 90 days or less. Therefore, the Company
is at risk if it is not able to issue new debt instruments to replace debt
that
matures prior to the maturity of the loans for which they are used as
funding. Factors that mitigate liquidity risk include the Company
maintenance of back-up liquidity through revolving credit agreements with
domestic and foreign banks and a large volume of scheduled principal repayments
received on an annual basis. At May 31, 2007 and 2006, the Company
had a total of $3,275 million and $4,025 million in revolving credit agreements
and bank lines of credit. In addition, the Company limits the amount of dealer
commercial paper and bank bid notes used in the funding of loans. The
Company's objective is to maintain the amount of dealer commercial paper and
bank bid notes used to 15% or less of total debt outstanding. At May
31, 2007 and 2006, there was a total of $1,118 million and $1,758 million,
respectively, of dealer commercial paper and bank bid notes outstanding,
representing 6% and 10%, respectively, of the Company's total debt
outstanding.
For
additional information of risks related to the Company's business, see Item
1A
"Risk Factors".
Financial
Instruments and Derivatives
All
financial instruments to which the Company was a party at May 31, 2007 were
entered into or contracted for purposes other than trading. The
following table provides the significant balances and contract terms related
to
the financial instruments at May 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Principal
Amortization and Maturities
|
(Dollar
amounts in millions)
|
Outstanding
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
Instrument
|
Balance
|
|
Value
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Years
|
Investments
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
Average
rate
|
|
5.30
|
%
|
|
|
|
|
|
|
5.30
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Long-term
fixed rate loans (1)
|
|
14,610
|
|
|
|
13,068
|
|
|
|
712
|
|
|
|
699
|
|
|
|
701
|
|
|
|
697
|
|
|
|
967
|
|
|
10,834
|
|
Average
rate
|
|
6.13
|
%
|
|
|
|
|
|
|
5.87
|
%
|
|
|
5.88
|
%
|
|
|
5.97
|
%
|
|
|
6.03
|
%
|
|
|
6.13
|
%
|
|
6.18
|
%
|
Long-term
variable rate loans (2)
|
|
1,189
|
|
|
|
1,189
|
|
|
|
99
|
|
|
|
71
|
|
|
|
98
|
|
|
|
93
|
|
|
|
68
|
|
|
760
|
|
Average
rate (3)
|
|
7.48
|
%
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Short-term
loans (4)
|
|
1,188
|
|
|
|
1,188
|
|
|
|
1,188
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Average
rate (3)
|
|
6.73
|
%
|
|
|
|
|
|
|
6.73
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
RUS
Guaranteed FFB Refinance
|
|
37
|
|
|
|
37
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
|
|
3
|
|
|
25
|
|
Average
rate (3)
|
|
5.67
|
%
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Non-performing
loans (5)
|
|
502
|
|
|
|
312
|
|
|
|
9
|
|
|
|
-
|
|
|
|
493
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Average
rate (5)
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Restructured
loans (5)
|
|
603
|
|
|
|
322
|
|
|
|
9
|
|
|
|
12
|
|
|
|
13
|
|
|
|
13
|
|
|
|
14
|
|
|
542
|
|
Average
rate (5)
|
|
0.58
|
%
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Liabilities
and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt (6)
|
|
4,427
|
|
|
|
4,405
|
|
|
|
4,427
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Average
rate
|
|
5.16
|
%
|
|
|
|
|
|
|
5.16
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Medium-term
notes
|
|
4,745
|
|
|
|
5,036
|
|
|
|
-
|
|
|
|
357
|
|
|
|
1,279
|
|
|
|
19
|
|
|
|
1,513
|
|
|
1,577
|
|
Average
rate
|
|
6.62
|
%
|
|
|
|
|
|
|
-
|
|
|
|
5.48
|
%
|
|
|
5.72
|
%
|
|
|
4.81
|
%
|
|
|
7.22
|
%
|
|
7.05
|
%
|
Collateral
trust bonds
|
|
4,017
|
|
|
|
3,969
|
|
|
|
-
|
|
|
|
1,825
|
|
|
|
200
|
|
|
|
500
|
|
|
|
-
|
|
|
1,492
|
|
Average
rate
|
|
5.30
|
%
|
|
|
|
|
|
|
-
|
|
|
|
5.36
|
%
|
|
|
5.70
|
%
|
|
|
4.39
|
%
|
|
|
-
|
|
|
5.48
|
%
|
Long-term
notes payable
|
|
2,533
|
|
|
|
2,488
|
|
|
|
-
|
|
|
|
503
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
2,021
|
|
Average
rate
|
|
5.14
|
%
|
|
|
|
|
|
|
-
|
|
|
|
4.68
|
%
|
|
|
8.11
|
%
|
|
|
8.11
|
%
|
|
|
8.11
|
%
|
|
5.25
|
%
|
Subordinated
deferrable debt
|
|
311
|
|
|
|
300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
311
|
|
Average
rate
|
|
6.31
|
%
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
6.31
|
%
|
Membership
sub certificates (7)
|
|
1,108
|
|
|
|
N/A
|
|
|
|
19
|
|
|
|
10
|
|
|
|
6
|
|
|
|
20
|
|
|
|
5
|
|
|
1,048
|
|
Average
rate
|
|
4.28
|
%
|
|
|
|
|
|
|
5.77
|
%
|
|
|
2.26
|
%
|
|
|
1.21
|
%
|
|
|
4.91
|
%
|
|
|
3.03
|
%
|
|
4.28
|
%
|
|
|
(1)
|
The
principal amount of fixed rate loans is the total of scheduled principal
amortizations without consideration for loans that
reprice. Includes $218 million of loans guaranteed by
RUS.
|
(2)
|
Long-term
variable rate loans include $1 million of loans guaranteed by
RUS.
|
(3)
|
Variable
rates are set the first day of each month.
|
(4)
|
The
principal amount of line of credit loans are generally required to
be paid
down for a period of five consecutive days each year. These
loans do not have a principal amortization schedule.
|
(5)
|
Amortization
based on expected repayment schedule. Average rate represents
current accrual rate. Interest accrual rate cannot be estimated
for future periods.
|
(6)
|
Short-term
debt includes commercial paper, bank bid notes and long-term debt
due in
less than one year.
|
(7)
|
Fair
value has not been included as it is impracticable to develop a discount
rate that measures fair value (see Note 14 to the consolidated financial
statements). Excludes loan subordinated certificates totaling $273
million
that amortize annually based on the outstanding balance of the related
loan, therefore there is no scheduled amortization. Over the past
three
years, annual amortization on these certificates has averaged $28
million. In fiscal year 2007, amortization represented 12% of
amortizing loan subordinated certificates
outstanding.
|
The
following table provides the notional amount, average rate paid,
average
rate received and maturity dates for the interest rate exchange agreements
to which the Company was a party at May 31, 2007.
|
|
(Dollar
amounts in millions)
|
|
Notional
|
|
|
|
Notional
Amortization and Maturities
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Instruments
|
|
|
Amount
|
|
Fair
Value
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Years
|
Interest
rate exchange agreements
|
|
$
|
12,533
|
|
|
$
|
151
|
|
|
$
|
1,084
|
|
|
$
|
1,045
|
|
|
$
|
2,192
|
|
|
$
|
350
|
|
|
$
|
2,910
|
|
|
$
|
4,952
|
Average
rate paid
|
|
|
5.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
rate received
|
|
|
5.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no cross currency or cross currency interest rate exchange agreements
to
which the Company was a party at May 31, 2007.
Non-GAAP
Financial Measures
The
Company makes certain adjustments to financial measures in assessing its
financial performance that are not in accordance with GAAP. These
non-GAAP adjustments fall primarily into two categories: (1)
adjustments related to the calculation of the TIER ratio, and (2) adjustments
related to the calculation of leverage and debt to equity
ratios. These adjustments reflect management's perspective on the
Company's operations, and in several cases adjustments used to measure covenant
compliance under its revolving credit agreements, and thus the Company believes
these are useful financial measures for investors. The Company refers
to its non-GAAP financial measures as "adjusted" throughout this
document.
Adjustments
to the Calculation of the TIER Ratio
The
Company's primary performance measure is TIER. TIER is calculated by
adding the interest expense to net income prior to the cumulative effect of
change in accounting principle and dividing that total by the interest
expense. The TIER is a measure of the Company's ability to cover
interest expense requirements on its debt. The Company adjusts the
TIER calculation to add the derivative cash settlements to the interest expense,
to add minority interest net income back to total net income and to remove
the
derivative forward value and foreign currency adjustments from total net
income. Adding the cash settlements back to the interest expense also
has a corresponding effect on the Company's adjusted net interest income and
adjusted income prior to income taxes and minority interest. The
Company makes these adjustments to its TIER calculation for the purpose of
covenant compliance on its revolving credit agreements. The revolving
credit agreements require the Company to achieve an average adjusted TIER ratio
over the six most recent fiscal quarters of at least 1.025 and prohibit the
retirement of patronage capital unless the Company has achieved an adjusted
TIER
ratio of at least 1.05 for the preceding fiscal year.
The
Company uses derivatives to manage interest rate and foreign currency exchange
risk on its funding of the loan portfolio. The derivative cash
settlements represent the amount that the Company receives from or pays to
its
counterparties based on the interest rate indexes in its derivatives that do
not
qualify for hedge accounting. The Company adjusts the reported cost of funding
to include the derivative cash settlements. The Company uses the
adjusted cost of funding to set interest rates on loans to its members and
believes that the interest expense adjusted to include derivative cash
settlements represents its total cost of funding for the period. For
the purpose of computing compliance with its revolving credit agreement
covenants, the Company is required to adjust its interest expense to include
the
derivative cash settlements. TIER calculated by adding the derivative
cash settlements to the interest expense reflects management's perspective
on
its operations and thus, the Company believes that it represents a useful
financial measure for investors.
The
derivative forward value and foreign currency adjustments do not represent
cash
inflows or outflows to the Company during the current period. The
derivative forward value represents a present value estimate of the future
cash
inflows or outflows that will be recognized as net cash settlements for all
periods through the maturity of its derivatives that do not qualify for hedge
accounting. Foreign currency adjustments represent the change in
value of foreign denominated debt resulting from the change in foreign currency
exchange rates during the current period. The derivative forward
value and foreign currency adjustments do not represent cash inflows or outflows
that affect the Company's current ability to cover its debt service
obligations. The forward value calculation is based on future
interest rate expectations that may change daily creating volatility in the
estimated forward value. The change in foreign currency exchange
rates adjusts the debt balance to the amount that would be due at the reporting
date. At the issuance date, the Company enters into a foreign
currency exchange agreement for all foreign denominated debt that effectively
fixes the exchange rate for all interest and principal payments. For
the purpose of making operating decisions, the Company subtracts the derivative
forward value and foreign currency adjustments from its net income when
calculating TIER and for other net income presentation purposes. The
covenants in the Company's revolving credit agreements also exclude the effects
of derivative forward value and foreign currency adjustments. In
addition, since the derivative forward value and foreign currency adjustments
do
not represent current period cash flows, the Company does not allocate such
funds to its members and thus excludes the derivative forward value and foreign
currency adjustments from net income when making certain presentations to its
members and in calculating the amount of net income to be allocated to its
members. TIER calculated by excluding the derivative forward value
and foreign currency adjustments from net income reflects management's
perspective on its operations and thus, the Company believes that it represents
a useful financial measure for investors.
The
implementation of SFAS 133 and foreign currency adjustments have also impacted
the Company's total equity. The derivative forward value and foreign
currency adjustments flow through the consolidated statements of operations
as
income or expense, increasing or decreasing the total net income for the
period. The total net income or net loss for the period represents an
increase or decrease, respectively, to total equity. As a result of
implementing SFAS 133, the Company's total equity includes other comprehensive
income, which represents unrecognized gains and losses on
derivatives. The other comprehensive income component of equity
related to derivatives that qualify for hedge accounting does not flow through
the consolidated statements of operations. As stated above, the
derivative forward value and foreign currency adjustments do not represent
current cash inflow or outflow. The other comprehensive income is
also an estimate of future gains and losses and
as
such does not represent earnings that the Company can use to fund its loan
portfolio. Financial measures calculated with members' equity, which
is total equity excluding the impact of SFAS 133 and foreign currency
adjustments, reflect management's perspective on its operations and thus, the
Company believes that they represent a useful measure of its financial
condition.
The
following chart provides a reconciliation between interest expense, net interest
income, income prior to income taxes and minority interest and net income and
these financial measures adjusted to exclude the impact of SFAS 133 and foreign
currency adjustments and to include minority interest in net income for the
years ended May 31, 2007, 2006, 2005, 2004 and 2003.
|
For
the year ended May 31,
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
$
|
(996,730
|
)
|
|
$
|
(975,936
|
)
|
|
$
|
(942,033
|
)
|
|
$
|
(941,491
|
)
|
|
$
|
(951,628
|
)
|
Adjusted
to include: Derivative cash settlements
|
|
86,442
|
|
|
|
80,883
|
|
|
|
78,287
|
|
|
|
123,363
|
|
|
|
130,686
|
|
Adjusted
interest expense
|
$
|
(910,288
|
)
|
|
$
|
(895,053
|
)
|
|
$
|
(863,746
|
)
|
|
$
|
(818,128
|
)
|
|
$
|
(820,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
$
|
57,494
|
|
|
$
|
31,976
|
|
|
$
|
88,820
|
|
|
$
|
68,365
|
|
|
$
|
123,682
|
|
Adjusted
to include: Derivative cash settlements
|
|
86,442
|
|
|
|
80,883
|
|
|
|
78,287
|
|
|
|
123,363
|
|
|
|
130,686
|
|
Adjusted
net interest income
|
$
|
143,936
|
|
|
$
|
112,859
|
|
|
$
|
167,107
|
|
|
$
|
191,728
|
|
|
$
|
254,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes and minority interest
|
$
|
16,541
|
|
|
$
|
105,762
|
|
|
$
|
126,561
|
|
|
$
|
(194,292
|
)
|
|
$
|
649,485
|
|
Adjusted
to exclude: Derivative forward value
|
|
79,281
|
|
|
|
(28,805
|
)
|
|
|
(25,849
|
)
|
|
|
228,840
|
|
|
|
(754,727
|
)
|
Foreign
currency adjustments
|
|
14,554
|
|
|
|
22,594
|
|
|
|
22,893
|
|
|
|
65,310
|
|
|
|
243,220
|
|
Adjusted
income prior to income taxes and minority interest
|
$
|
110,376
|
|
|
$
|
99,551
|
|
|
$
|
123,605
|
|
|
$
|
99,858
|
|
|
$
|
137,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) prior to cumulative effect of change in accounting
principle
|
$
|
11,701
|
|
|
$
|
95,497
|
|
|
$
|
122,503
|
|
|
$
|
(200,098
|
)
|
|
$
|
649,485
|
|
Adjusted
to include: Minority interest net income
|
|
2,444
|
|
|
|
7,089
|
|
|
|
2,540
|
|
|
|
1,989
|
|
|
|
-
|
|
Adjusted
to exclude: Derivative forward value
|
|
79,281
|
|
|
|
(28,805
|
)
|
|
|
(25,849
|
)
|
|
|
228,840
|
|
|
|
(754,727
|
)
|
Foreign
currency adjustments
|
|
14,554
|
|
|
|
22,594
|
|
|
|
22,893
|
|
|
|
65,310
|
|
|
|
243,220
|
|
Adjusted
net income
|
$
|
107,980
|
|
|
$
|
96,375
|
|
|
$
|
122,087
|
|
|
$
|
96,041
|
|
|
$
|
137,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
using GAAP financial measures is calculated as follows:
|
|
Interest
expense + net income prior to cumulative
|
|
|
TIER
=
|
effect
of change in accounting principle
|
|
|
|
Interest
expense
|
|
Adjusted
TIER is calculated as follows:
|
Adjusted
TIER =
|
Adjusted
interest expense + adjusted net income
|
|
|
|
Adjusted
interest expense
|
|
The
following chart provides the TIER and adjusted TIER for the years ended May
31,
2007, 2006, 2005, 2004 and 2003.
|
For
the year ended May 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
(1)
|
|
2003
|
|
TIER
(1)
|
|
1.01
|
|
|
|
1.10
|
|
|
|
1.13
|
|
|
|
-
|
|
|
|
1.68
|
|
|
Adjusted
TIER
|
|
1.12
|
|
|
|
1.11
|
|
|
|
1.14
|
|
|
|
1.12
|
|
|
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
For the year ended May 31, 2004, CFC reported a net loss prior to
the
cumulative effect of change in accounting principle of $200 million,
thus
the TIER calculation results in a value below
1.00.
|
Adjustments
to the Calculation of Leverage and Debt to Equity
The
Company calculates the leverage ratio by adding total liabilities to total
guarantees and dividing by total equity. The Company calculates the
debt to equity ratio by dividing total liabilities by total
equity. The Company adjusts these ratios to (i) subtract debt used to
fund loans that are guaranteed by RUS from total debt, (ii) subtract from total
debt, and add to total equity, debt with equity characteristics issued to its
members and in the capital markets, (iii) include minority interest as equity
and (iv) to exclude the impact of non-cash SFAS 133 and foreign currency
adjustments from its total liabilities and total equity. For the
purpose of computing compliance with its revolving credit agreement covenants,
the Company is required to make these adjustments to its leverage ratio
calculation. The revolving credit agreements prohibit the Company
from incurring senior debt in an amount in excess of ten times the sum of
equity, members' subordinated certificates, minority interest and subordinated
deferrable debt, as defined by the agreements. The Company makes
these same adjustments to its debt to equity ratio as the only difference
between the leverage ratio and the debt to equity ratio is the addition of
guarantees to liabilities in the leverage ratio. In addition to the
adjustments the Company makes to calculate the adjusted leverage ratio,
guarantees to the Company member systems that have an investment grade rating
from Moody's Investors Service and Standard & Poor's Corporation are
excluded from the calculation of the leverage ratio under the terms of the
revolving credit agreements.
The
Company is an eligible lender under the RUS loan guarantee
program. Loans issued under this program carry the U.S. Government's
guarantee of all interest and principal payments. Thus, the Company
has little or no risk associated with the collection of principal and interest
payments on these loans. Therefore, the Company believes that there
is little or no risk related to the repayment of the liabilities used to fund
RUS guaranteed loans and subtracts such liabilities from total liabilities
for
the purpose of calculating its leverage and debt to equity
ratios. For the purpose of computing compliance with its revolving
credit agreement covenants, the Company is required to adjust its leverage
ratio
by subtracting liabilities used to fund RUS guaranteed loans from total
liabilities. The leverage and debt to equity ratios adjusted to
subtract debt used to fund RUS guaranteed loans from total liabilities reflect
management's perspective on its operations and thus, the Company believes that
these are useful financial measures for investors.
The
Company requires that its members purchase subordinated certificates as a
condition of membership and as a condition to obtaining a loan or
guarantee. The subordinated certificates are accounted for as debt
under GAAP. The subordinated certificates have long-dated maturities
and pay no interest or pay interest that is below market and under certain
conditions the Company is prohibited from making interest payments to members
on
the subordinated certificates. For the purpose of computing
compliance with its revolving credit agreement covenants, the Company is
required to adjust its leverage ratio by subtracting members' subordinated
certificates from total liabilities and adding members' subordinated
certificates to total equity. The leverage and debt to equity ratios
adjusted to treat members' subordinated certificates as equity rather than
debt
reflect management's perspective on its operations and thus, the Company
believes that these are useful financial measures for investors.
The
Company also sells subordinated deferrable debt in the capital markets with
maturities of up to 49 years and the option to defer interest
payments. The characteristics of subordination, deferrable interest
and long-dated maturity are all equity characteristics. For the
purpose of computing compliance with its revolving credit agreement covenants,
the Company is required to adjust its leverage ratio by subtracting subordinated
deferrable debt from total liabilities and adding it to total
equity. The leverage and debt to equity ratios adjusted to treat
subordinated deferrable debt as equity rather than debt reflect management's
perspective on its operations and thus, the Company believes that these are
useful financial measures for investors.
As
a
result of implementing SFAS 133, the Company's consolidated balance sheets
include the fair value of its derivative instruments. As noted above,
the amounts recorded are estimates of the future gains and losses that CFC
may
incur related to its derivatives. The amounts do not represent
current cash flows and are not available to fund current
operations. For the purpose of computing compliance with its
revolving credit agreement covenants, the Company is required to adjust its
leverage ratio by excluding the impact of implementing SFAS 133 from liabilities
and equity. The leverage and debt to equity ratios adjusted to
exclude the impact of SFAS 133 from liabilities and equity reflect management's
perspective on its operations and thus, the Company believes that these are
useful financial measures for investors.
As
a result of issuing foreign denominated debt and the implementation of SFAS
133
which discontinued the practice of recording the foreign denominated debt and
the related currency exchange agreement as one transaction, the Company must
adjust the value of such debt reported on the consolidated balance sheets for
changes in foreign currency exchange rates since the date of issuance in
accordance with SFAS 52. At the time of issuance of all foreign
denominated debt, the Company enters into a foreign currency exchange agreement
to fix the exchange rate on all principal and interest payments through
maturity. The adjustments to the value of the debt on the
consolidated balance sheets are reported on the consolidated statements of
operations as foreign currency adjustments. The adjusted debt value
at the reporting date does not represent the amount that the Company will
ultimately pay to retire the debt, unless the current exchange rate is equal
to
the exchange rate in the related foreign currency exchange agreement or the
counterparty fails to honor its obligations under the agreement. For
the purpose of computing compliance with its revolving credit agreement
covenants, the Company is required to adjust its leverage ratio by excluding
the
impact of foreign currency valuation adjustments from liabilities and equity.
The leverage and debt to equity ratios adjusted to exclude the impact of SFAS
52
reflect management's perspective on its operations and thus, the Company
believes that these are useful financial measures for investors.
FIN
46(R) requires the Company to consolidate the results of operations
and
financial condition of RTFC and NCSC even though the Company has
no
financial interest or voting control over either company. In
consolidation, the amount of the subsidiary equity that is owned
or due to
investors other than the parent company is shown as minority
interest. Prior to consolidation, the RTFC members' equity was
combined with the Company's equity and therefore included in total
equity. For the purpose of computing compliance with its
revolving credit agreement covenants, the Company is required to
adjust
total equity to include minority interest. The leverage and
debt to equity ratio adjusted to treat minority interest as equity
reflect
management's perspective on its operations and thus, the Company
believes
that these are useful financial measures for
investors.
|
The
following chart provides a reconciliation between the liabilities and equity
used to calculate the leverage and debt to equity ratios and these financial
measures reflecting the adjustments noted above, as of the five years ended
May
31, 2007.
|
|
May
31,
|
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Liabilities
|
|
$
|
17,843,151
|
|
|
$
|
18,373,319
|
|
|
$
|
19,276,728
|
|
|
$
|
20,741,825
|
|
|
$
|
20,211,829
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
|
(71,934
|
)
|
|
|
(85,198
|
)
|
|
|
(78,471
|
)
|
|
|
(129,915
|
)
|
|
|
(353,840
|
)
|
|
Foreign
currency valuation account
|
|
|
-
|
|
|
|
(244,955
|
)
|
|
|
(260,978
|
)
|
|
|
(233,990
|
)
|
|
|
(325,810
|
)
|
|
Debt
used to fund loans guaranteed by RUS
|
|
|
(255,903
|
)
|
|
|
(261,330
|
)
|
|
|
(258,493
|
)
|
|
|
(263,392
|
)
|
|
|
(266,857
|
)
|
|
Subordinated
deferrable debt (2)
|
|
|
(486,440
|
)
|
|
|
(636,440
|
)
|
|
|
(685,000
|
)
|
|
|
(550,000
|
)
|
|
|
(650,000
|
)
|
|
Subordinated
certificates
|
|
|
(1,381,447
|
)
|
|
|
(1,427,960
|
)
|
|
|
(1,490,750
|
)
|
|
|
(1,665,158
|
)
|
|
|
(1,708,297
|
)
|
|
Adjusted
liabilities
|
|
$
|
15,647,427
|
|
|
$
|
15,717,436
|
|
|
$
|
16,503,036
|
|
|
$
|
17,899,370
|
|
|
$
|
16,907,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
equity
|
|
$
|
710,041
|
|
|
$
|
784,408
|
|
|
$
|
764,934
|
|
|
$
|
692,453
|
|
|
$
|
927,453
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
year cumulative derivative forward value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
foreign
currency adjustments
|
|
|
(225,849
|
)
|
|
|
(225,730
|
)
|
|
|
(221,868
|
)
|
|
|
(520,083
|
)
|
|
|
(8,576
|
)
|
|
Current
period derivative forward value (1)
|
|
|
79,744
|
|
|
|
(22,713
|
)
|
|
|
(26,755
|
)
|
|
|
232,905
|
|
|
|
(754,727
|
)
|
|
Current
period foreign currency adjustments
|
|
|
14,554
|
|
|
|
22,594
|
|
|
|
22,893
|
|
|
|
65,310
|
|
|
|
243,220
|
|
|
Accumulated
other comprehensive (income) loss
|
|
|
(12,204
|
)
|
|
|
(13,208
|
)
|
|
|
(15,621
|
)
|
|
|
12,541
|
|
|
|
47,006
|
|
|
Subtotal
members' equity
|
|
|
566,286
|
|
|
|
545,351
|
|
|
|
523,583
|
|
|
|
483,126
|
|
|
|
454,376
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
certificates
|
|
|
1,381,447
|
|
|
|
1,427,960
|
|
|
|
1,490,750
|
|
|
|
1,665,158
|
|
|
|
1,708,297
|
|
|
Subordinated
deferrable debt (2)
|
|
|
486,440
|
|
|
|
636,440
|
|
|
|
685,000
|
|
|
|
550,000
|
|
|
|
650,000
|
|
|
Minority
interest
(3)
|
|
|
21,989
|
|
|
|
21,894
|
|
|
|
18,652
|
|
|
|
21,165
|
|
|
|
-
|
|
|
Adjusted
equity
|
|
$
|
2,456,162
|
|
|
$
|
2,631,645
|
|
|
$
|
2,717,985
|
|
|
$
|
2,719,449
|
|
|
$
|
2,812,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
$
|
1,074,374
|
|
|
$
|
1,078,980
|
|
|
$
|
1,157,752
|
|
|
$
|
1,331,299
|
|
|
$
|
1,903,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents the derivative forward value (gain) loss recorded by CFC
for
the period.
|
(2)
At May 31, 2007 and 2006, includes $175 million and $150 million,
respectively, of subordinated deferrable debt classified in short-term
debt.
|
(3)
No adjustments required for minority interest prior to the implementation
of FIN 46(R) in fiscal year 2004.
|
The
leverage and debt to equity ratios using GAAP financial measures
are
calculated as follows:
|
|
Leverage
ratio =
|
Liabilities
+ guarantees outstanding
|
|
|
|
Total
equity
|
|
|
|
|
|
|
Debt
to equity ratio =
|
Liabilities
|
|
|
|
Total
equity
|
|
The
adjusted leverage and debt to equity ratios are calculated as
follows:
|
|
Adjusted
leverage ratio =
|
Adjusted
liabilities + guarantees outstanding
|
|
|
|
|
Adjusted
equity
|
|
|
|
Adjusted
debt to equity ratio =
|
Adjusted
liabilities
|
|
|
|
|
Adjusted
equity
|
|
|
The
following chart provides the leverage and debt to equity ratios,
as well
as the adjusted ratios, as of the five years ended May 31,
2007. The adjusted leverage ratio and the adjusted debt to
equity ratio are the same calculation except for the addition of
guarantees to adjusted liabilities in the adjusted leverage
ratio.
|
|
|
|
May
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|
|
Leverage
ratio
|
|
|
26.64
|
|
|
|
24.80
|
|
|
|
|
26.71
|
|
|
|
|
31.88
|
|
|
|
|
23.85
|
|
|
|
|
Adjusted
leverage ratio
|
|
|
6.81
|
|
|
|
6.38
|
|
|
|
|
6.50
|
|
|
|
|
7.07
|
|
|
|
|
6.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
to equity ratio
|
|
|
25.13
|
|
|
|
23.42
|
|
|
|
|
25.20
|
|
|
|
|
29.95
|
|
|
|
|
21.79
|
|
|
|
|
Adjusted
debt to equity ratio
|
|
|
6.37
|
|
|
|
5.97
|
|
|
|
|
6.07
|
|
|
|
|
6.58
|
|
|
|
|
6.01
|
|
|
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
See
Market Risk discussion beginning on page 46.
Item
8.
|
Financial
Statements and Supplementary
Data.
|
The
consolidated financial statements, auditors' reports and quarterly financial
results are included on pages 79 through 122 (see Note 18 to consolidated
financial statements for a summary of the quarterly results of CFC's
operations).
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None.
Item
9A.
|
Controls
and Procedures.
|
Evaluation
of Disclosure Controls and Procedures
Senior
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the Company's disclosure controls and procedures
as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of
1934 ("the Exchange Act"). At the end of the period covered by this
report, based on this evaluation process, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures were not effective due to the material weakness in our internal
control over financial reporting described below. See “Remediation
Steps to Address the Material Weakness” below for detail on the changes made to
controls and procedures.
Management's
Report on Internal Control Over Financial Reporting
The
management of National Rural Utilities Cooperative Finance Corporation ("the
Company") is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. The Company's internal
control system over financial reporting is designed under the supervision of
management, including the Chief Executive Officer and Chief Financial Officer,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company's internal control
over financial reporting includes those policies and procedures
that:
(i.)
|
pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the
assets;
|
(ii.)
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures
of the
Company are being made only in accordance with authorizations of
management and directors of the Company;
and
|
provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or dispositions of the assets of the Company;
Any
system of internal control, no matter how well designed, has inherent
limitations, including but not limited to the possibility that a control can
be
circumvented or overridden and misstatements due to error or fraud may occur
and
not be detected. Also, because of changes in conditions, internal control
effectiveness may vary over time. Therefore, even those systems determined
to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
A
material weakness is a significant deficiency (as defined in PCAOB Auditing
Standard No. 2), or combination of significant deficiencies, that results
in there being more than a remote likelihood that a material misstatement in
financial statements will not be prevented or detected.
The
Company's management assessed the effectiveness of its internal controls over
financial reporting as of May 31, 2007. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of
the
Treadway Commission ("COSO") in Internal Control-Integrated
Framework.
In
performing the assessment, management identified one material weakness in
internal control over financial reporting existing as of May 31, 2007 and 2006.
The error was detected and corrected prior to the release to the public of
the
Company’s consolidated financial statements for the year ended May 31,
2007. Subsequent to May 31, 2007, it was determined that the Company
had incorrectly translated interest expense on foreign denominated debt and
income received under foreign currency exchange agreements. The
Company was incorrectly using the agreed upon exchange rate from the foreign
currency exchange agreement to translate the foreign currency amounts to US
dollars rather than the market spot rate as required by the provisions of
Statement of Financial Accounting Standards No. 52, Foreign Currency
Translation. The error resulted in the restatement of the Company's
consolidated financial statements for the years ended May 31, 2006 and
2005.
As
evidenced by the material weakness described above, management has concluded
that as of May 31, 2007, the Company did not maintain effective internal control
over financial reporting.
Remediation
Steps to Address the Material Weakness
We
have implemented improvements to our internal controls and procedures over
the
accounting for transactions involving foreign currency. We have
revised procedures for foreign denominated transactions to require the use
of
the market spot rate for the translation to US dollars.
Changes
in Internal Controls over Financial Reporting
There
were no changes in the Company's internal control over financial reporting
that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. Subsequent to May 31, 2007, management identified the
material weakness described above and implemented the changes to controls and
procedures described above.
By:
|
|
/s/
SHELDON C. PETERSEN
|
By:
|
|
/s/
STEVEN L. LILLY
|
|
|
Sheldon
C. Petersen
|
|
|
Steven
L. Lilly
|
|
|
Governor
and Chief Executive Officer
|
|
|
Senior
Vice President and Chief Financial Officer
|
|
|
August
27, 2007
|
|
|
August
27, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/
STEVEN L. SLEPIAN
|
|
|
|
|
|
Steven
L. Slepian
|
|
|
|
|
|
Vice
President and Controller
|
|
|
|
|
|
August
27, 2007
|
|
|
|
Item
9B. Other
Information.
None.
PART
III
Item
10. Directors
and Executive Officers of the Registrant.
(a)
Directors |
|
|
|
|
|
|
|
|
Director
|
|
Date
present
|
|
|
|
|
Age
|
|
|
since
|
|
term
expires
|
|
Terryl
Jacobs (President of CFC)
|
|
48
|
|
|
|
2002
|
|
2008
|
|
Roger
Arthur (Vice President of CFC)
|
|
60
|
|
|
|
2003
|
|
2009
|
|
Darryl
Schriver (Secretary-Treasurer of CFC)
|
|
42
|
|
|
|
2004
|
|
2010
|
|
Roger
A. Ball
|
|
62
|
|
|
|
2003
|
|
2009
|
|
Raphael
A. Brumbeloe
|
|
66
|
|
|
|
2007
|
|
2010
|
|
Delbert
Cranford
|
|
63
|
|
|
|
2007
|
|
2010
|
|
Jimmy
Ewing, Jr.
|
|
59
|
|
|
|
2007
|
|
2010
|
|
Harold
Foley
|
|
73
|
|
|
|
2004
|
|
2010
|
|
Steven
J. Haaven
|
|
56
|
|
|
|
2003
|
|
2009
|
|
Gary
Harrison
|
|
45
|
|
|
|
2005
|
|
2009
|
|
Craig
A. Harting
|
|
49
|
|
|
|
2002
|
|
2008
|
|
Jim
Herron
|
|
50
|
|
|
|
2005
|
|
2008
|
|
Martin
Hillert, Jr.
|
|
52
|
|
|
|
2004
|
|
2010
|
|
Tom
Kirby
|
|
52
|
|
|
|
2002
|
|
2008
|
|
William
A. Kopacz
|
|
60
|
|
|
|
2006
|
|
2009
|
|
Reuben
McBride
|
|
60
|
|
|
|
2005
|
|
2008
|
|
Gale
Rettkowski
|
|
61
|
|
|
|
2001
|
|
2009
|
|
Ronald
P. Salyer
|
|
42
|
|
|
|
2003
|
|
2009
|
|
R.
Wayne Stratton
|
|
59
|
|
|
|
2007
|
|
2010
|
|
J.
David Wasson, Jr.
|
|
61
|
|
|
|
2006
|
|
2009
|
|
Charles
Wayne Whitaker
|
|
57
|
|
|
|
2003
|
|
2009
|
|
Jack
F. Wolfe, Jr.
|
|
63
|
|
|
|
2006
|
|
2008
|
|
F.
E. Wolski
|
|
56
|
|
|
|
2007
|
|
2010
|
|
(b)
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
present
|
Title
|
|
|
Name
|
|
|
Age
|
|
office
since
|
President
and Director
|
|
Terryl
Jacobs
|
|
|
48
|
|
2007
|
Vice
President and Director
|
|
Roger
Arthur
|
|
|
60
|
|
2007
|
Secretary-Treasurer
and Director
|
|
Darryl
Schriver
|
|
|
42
|
|
2007
|
Governor
and Chief Executive Officer
|
|
Sheldon
C. Petersen
|
|
|
54
|
|
1995
|
Senior
Vice President of Member Services and General Counsel
|
|
John
J. List
|
|
|
60
|
|
1997
|
Senior
Vice President and Chief Financial Officer
|
|
Steven
L. Lilly
|
|
|
57
|
|
1994
|
Senior
Vice President of Operations
|
|
John
T. Evans
|
|
|
57
|
|
1997
|
Senior
Vice President of Corporate Relations
|
|
Richard
E. Larochelle
|
|
|
54
|
|
1998
|
Senior
Vice President of RTFC
|
|
Lawrence
Zawalick
|
|
|
49
|
|
2000
|
Senior
Vice President of Credit Risk Management
|
|
John
M. Borak
|
|
|
62
|
|
2002
|
The
President, Vice-President and Secretary-Treasurer are elected annually by the
board of directors at its first organizational meeting immediately following
CFC's annual membership meeting, each to serve a term of one year; the Governor
and Chief Executive Officer serves at the pleasure of the board of directors;
and the other Executive Officers serve at the pleasure of the Governor and
Chief
Executive Officer.
(c)
Identification of Certain Significant Employees.
Inapplicable.
(d)
Family Relationships.
No
family relationship exists between any director or executive officer and any
other director or executive officer of the registrant.
(e)
(1) and (2) Business Experience and Directorships.
In
accordance with Article IV of CFC's Bylaws, each candidate for election to
the
board of directors must be a trustee, director or manager of a member of CFC
with the exception of the at-large position for the audit committee financial
expert who may also be a chief financial officer or has a comparable position
of
a member of CFC.
Ms.
Jacobs has served as board secretary of Slope Electric Cooperative, Inc. in
New
England, ND since June 1999, and has been a director of the cooperative since
1996. She is a former member of the Resolutions Committee for Midwest
Electric Consumers Association where she previously served as
vice-chairperson. Ms. Jacobs has been an insurance agent since 1986
and has worked for Commercial Insurance Agency, Inc. since 2000.
Mr.
Arthur has been a board member of Allamakee-Clayton Electric Cooperative in
Postville, IA since 1992 and has served as president since 1993. Mr.
Arthur is a director and former president of the Iowa Association of Electric
Cooperatives and chairs the Regulatory Affairs Committee. He is a board member
and secretary of the Cooperative Development Services of Iowa, Wisconsin and
Minnesota and a director of the Fayette County Economic Development
Commission. Since 1972, Mr. Arthur has been owner and operator
of Arthur’s Country Place Inc., a family farm corporation.
Mr.
Schriver has been General Manager and CEO of Taylor Electric Cooperative, Inc.
in Merkel, TX since 2002. Prior to 2002, he held staff positions at
the Texas House of Representatives, Texas Legislative Council and Texas
Senate. He serves as a director on the Golden Spread Electric
Cooperative Board, the Golden Spread Electric Generating Cooperative Board,
the
Oklaunion Electric Generating Cooperative Board, the Yoakum Electric Generating
Cooperative Board, the Mid-Tex Cooperative Board and the Texas Agricultural
Cooperative Council. Mr. Schriver is a Group 4 member of the Governmental
Relations Committee of Texas Electric Cooperatives. Mr. Schriver
formerly served as director of Government Affairs of Brazos Electric Power
Cooperative from 1996 to 1998 and of Governmental Relations of Texas Electric
Cooperative from 1998 to 2002.
Mr.
Ball has been a board member of Powell Valley Electric Cooperative in New
Tazewell, TN since 1988 and has served as president since 1995. Mr.
Ball serves as vice chairman of the Claiborne County Industrial Development
Board and is a member of the Claiborne County Planning Commission. He
served as president of the Workforce Investment Board for Service Delivery
Area
2 of Tennessee. Since 1976, Mr. Ball has been owner/ broker of Ball
Realty & Auction, Inc., specializing in development and management of
commercial property.
Mr.
Brumbeloe has served as a board director of Upson Electric Membership
Corporation in Thomaston, GA since 1978 and has been board president since
1998. Mr. Brumbeloe has served as a board member of Georgia Electric
Membership Corporation since 1983 and served as chairman from 1988 to
1989. He is also a member representative of Oglethorpe Power
Corporation. He is currently the owner of the Red Rock
Armory. Mr. Brumbeloe is retired from the Georgia State
Patrol.
Mr.
Cranford has served as a board director of Randolph Electric Membership
Corporation in Asheboro, NC since 1989 and was president from 1995 to 2002
and
vice president from 1994 to 1995. He is a director and former
president of the North Carolina Association of Electric Cooperatives, Inc.
and
also served on the North Carolina Electrical Cooperative Board. Mr.
Cranford also serves as a director of First Bank Corp, a member of the North
Carolina Pharmaceutical Association and a board member and former president
of
the Farmer Volunteer Fire Department. Mr. Cranford is currently a
retail pharmacist and an owner of retail pharmacies.
Mr.
Ewing has served as a board director of Point Coupee Electric Membership
Corporation in New Roads, LA since 1989 and has been board president since
1995. He served as secretary/treasurer from 1990 to
1995. Mr. Ewing also serves as a board member of the Association of
Louisiana Electric Cooperatives, Inc. and has been secretary/treasurer since
2006. He is a member of the Action Committee for Rural
Electrification, a board member of the Louisiana Landowners Association and
a
former board member of Cajun Electric Power Cooperative. Mr. Ewing is
currently a restaurant owner and farm manager.
Mr.
Foley has served as a director of Brown-Atchison Electric Cooperative
Association, Inc. in Horton, KS since 1984. He has been board
president of Brown-Atchison Electric Cooperative Association since 1991 and
held
the position of board vice president in 1990. He is a former
alternate trustee representative to Kansas Electric Power Cooperative, Inc.
(KEPCo) and former vice president of the KEPCo Services, Inc., Board of
Directors. He was a real estate broker with Jepson & Associates
in Valley Falls, KS from 1991 until his retirement in June 2003.
Mr.
Haaven has been president and Chief Executive Officer ("CEO") of Wild Rice
Electric Cooperative Inc. in Mahnomen, MN since 1987 and serves on the Minnkota
Power Cooperative Manager Advisory Committee. He is also a member of
the Karian/Peterson Powerline Contracting Board and president of Carr's Tree
Service Board. He previously served as CEO, under a shared management
agreement, of Wild Rice Electric Cooperative/Red River Valley Cooperative in
Halstad, MN. Mr. Haaven is a former member of the Rural Electric
Political Action Committee Board at Minnesota Rural Electric
Association.
Mr.
Harrison has served as CEO and General Manager of Dixie Electric Cooperative
in
Union Springs, AL since 1997. Mr. Harrison serves as chairman of the
Alabama Rural Electric Association since April 2005. He has served as
a board member of Alabama Electric Cooperative since April 1997 and as
secretary-treasurer of the board since May 2007. Since January 2001,
Mr. Harrison has served as CEO and president of Cooperative Utility Services,
LLC.
Mr.
Harting has been Chief Executive Officer of Sullivan County Rural Electric
Cooperative in Forksville, PA since September 1989. He has been a
member of the board of United Utility Supply, Inc., in Louisville, KY since
June
1995. Mr. Harting is a member of the Sullivan County Industrial
Development Authority, Northern Tier Regional Planning and Development
Commission, and Workforce Investment Board of Towanda, PA. Mr.
Harting also serves as treasurer of the Sullivan County Chamber of Commerce
and
serves on the board of the Five Rivers Council of the Boy Scouts of
America.
Mr.
Herron has served as General Manager of Mountain View Electric Association,
Inc.
in Limon, CO since 1996. Prior to that position, Mr. Herron was
General Manager at Farmers' Electric Cooperative in Clovis, NM from 1993 to
1996. Mr. Herron currently serves on the Colorado Electric Education
Institute. Previously, he served as chair of the Colorado Rural
Electric Managers Association and as board member of the New Mexico Rural
Electric Association.
Mr.
Hillert has been CEO and General Manager of Adams-Columbia Electric Cooperative
in Friendship, WI since 1996. In addition, he serves on the board of
Badger Energy Services in Oconto Falls, WI, board vice president of Network
2010
in Oxford, WI and as a board member of Badger Unified Cooperative Services
in
Fall Creek, WI since 2001. Mr. Hillert also serves as treasurer of
Wisconsin Cooperative Managers Association and is a board member of the Electric
Coalition of Wisconsin. Mr. Hillert serves as chairman of Adams
County Economic Development and is a member of Advisory Board of Directors
for
the University of Wisconsin Center for Cooperatives.
Mr.
Kirby has been a board member of Central Indiana Power in Greenfield, IN, since
1991 and is a past chairman of that board. He served as director of
the Indiana Statewide Association of RECs, Inc. from 1999 to
2004. Mr. Kirby has been director of Diagnostic Imaging at Hamilton
Heart, Inc., a cardiology practice in Noblesville, IN since April
2004. From April 2003 to April 2004, Mr. Kirby was director of
Diagnostic Imaging at St. Vincent's Women's Hospital of Indianapolis,
IN. Mr. Kirby was Chief Technologist at Digirad Imaging Solutions,
Inc. from June 2001 to April 2003. He was employed as a nuclear
medicine technologist at Saint John's Health Corporation from 1980 to
2001.
Mr.
Kopacz has been the General Manager of Midstate Electric Cooperative, Inc.
in La
Pine, OR since 1990. He is currently a board director of Northwest
Requirement Utilities, Northwest Irrigation Utilities and Economic Development
for Central Oregon. He is also a former board president of Economic
Development for Central Oregon. He is a former director of Ruralite
Services, a northwest electric cooperative publication, and former president
of
the Oregon Rural Electric Cooperative Association.
Mr.
McBride has been a director of Graham County Electric Cooperative in Pima,
AZ
since 1991 and vice president since 1993. Mr. McBride is
owner/operator of Reuben McBride Farms in Pima, AZ since 1980. Mr.
McBride currently serves on the board of Arizona Electric Power Co-op., Inc.
and
served as board president and chairman of the Executive Committee from May
2002
to May 2005. In addition, Mr. McBride is a member of both the
National and Arizona Action Committees for Rural Electrification.
Mr.
Rettkowski has served as a director of Inland Power and Light Company in
Spokane, WA since March 2000 and was president of the board through March
2003. He has served as board secretary-treasurer for Northwest
Irrigation Utilities since August 1992. Mr. Rettkowski has been the
president of Citizens for Irrigation for the state of Washington since September
1991. He is a former trustee of Lincoln Electric and Graingrowers
Warehouse Co-op. Mr. Rettkowski has also been president of Rettkowski
Brothers, Inc., a farming corporation in Wilbur, WA, since 1998.
Mr.
Salyer has served as the president and CEO of Pioneer Rural Electric Cooperative
in Piqua, OH since 2001 and served as executive vice president from 1999 to
2000. In addition, he is a member of the Ohio Rural Electric
Cooperatives (OREC) Facilities Attachment Committee, chairman of the OREC
Communications Systems Task Force and a trustee of Buckeye Power,
Inc. In addition, he is also a director of Rural Electric Supply
Cooperative of Ohio.
Mr.
Stratton has been a director of East Kentucky Power Cooperative in Winchester,
KY since 1990 and currently serves as Chairman of the Board. He has served
as a
director of Shelby Energy Cooperative since 1987, ACES Power Marketing since
2004, Shelbyville Municipal Water & Sewer Commission since 2000 and Republic
Bancorp since 1995. Mr. Stratton is an at- large director that serves
as the Audit Committee Financial Expert as defined by the Securities and
Exchange Commission. He is a certified public accountant in Kentucky,
accredited in Business Valuation by the AICPA, a Certified Forensic Accountant,
Certified Fraud Examiner and a Credentialed Cooperative Director through
National Rural Electric Cooperative Association (“NRECA”). Mr.
Stratton has been a member/owner of Jones, Nale & Mattingly PLC, a
full-service accounting and auditing practice since 1970. He
currently serves as the Audit Committee Chairman and Audit Committee Financial
Expert of
Republic
Bancorp, a $2.8 billion bank traded on NASDAQ. He is the former Audit
Committee Chairman of East Kentucky Power Cooperative, former team captain
for
AICPA peer reviews of other accounting firms and former Board Member of Kentucky
Higher Education Assistance Authority (1985 to 2001) where as Chairman for
eight
years, he participated in various finance transactions. He served on
the AICPA Uniform Accountancy Act Committee and is the past president of the
Kentucky Society of CPAs.
Mr.
Wasson has been the president and CEO of Laurens Electric Cooperative, Inc.
in
Laurens, SC since 1973. He has served on the board of directors of
New Horizon Electric Cooperative since 1997 and has served as chairman since
2005. Mr. Wasson has been a board member of the South Carolina
Electric Cooperative Association since 1975 and served as chairman from December
1983 to December 1985. He also serves as a director of The Palmetto
Bank.
Mr.
Whitaker has served as the president and General Manager of Southwest Arkansas
Electric Cooperative in Texarkana, AR since 1986. In addition, Mr.
Whitaker has been director and former chairman of Arkansas Electric Cooperative
Corporation, Arkansas Electric Cooperative, Inc., and the Arkansas Rural
Electric Self-Insurance Trust since 1986. He is also a former
director of the National Information Solutions Cooperative.
Mr.
Wolfe has been the president and CEO of Mid-Carolina Electric Cooperative,
Inc.
in Lexington, SC since 1975. He has also represented South Carolina's
electric cooperatives on the NRECA Board of Directors since 1999, serving as
secretary treasurer in 2005, vice president from 2005 to 2006 and currently
serving as president. Mr. Wolfe serves as a director of The Electric
Cooperatives of South Carolina, Inc. and the Central Electric Power Cooperative
and has chaired a variety of statewide committees.
Mr.
Wolski has been director of Wyrulec Company in Lingle, WY since
1986. Mr. Wolski has represented Wyoming's cooperative electric
utilities on the NRECA Board of Directors since 1999 and was recently elected
as
NRECA vice president. Prior to his election to vice president, Mr.
Wolski served as secretary-treasurer of the NRECA board. He has
served as a director of Tri-State Generation & Transmission since
2001. He served on the board of the Wyoming Rural Electric
Association for nine years, including three years as president. Mr.
Wolski is also a former board member of the Wyoming Rural Telecommunication
Cooperative. Mr. Wolski is the owner/manager of a family farm with a
commercial hunting operation and is the owner/agent of an insurance
business.
Mr.
Petersen joined CFC in August 1983 as an area representative. He
became the director of Policy Development and Internal Audit in January 1990,
director of Credit Analysis in November 1990 and Corporate Secretary on June
1,
1992. He became Assistant to the Governor on May 1,
1993. He became Assistant to the Governor and Acting Administrative
Officer on June 1, 1994. He became Governor and CEO on March 1,
1995. Mr. Petersen began his career in the rural electrification
program in 1976 as staff assistant for Nishnabotna Rural Electric Cooperative
in
Harlan, IA. He later served as General Manager of Rock County Electric
Cooperative Association in Janesville, WI.
Mr.
List joined CFC as a staff attorney in February 1972. He served as
Corporate Counsel from June 1980 to 1991. He became Senior Vice
President and General Counsel on June 1, 1992, and became Senior Vice President,
Member Services and General Counsel on February 1, 1997.
Mr.
Lilly joined CFC as a Senior Financial Consultant in October 1983. He
became director of Special Finance in June 1985 and director of Corporate
Finance in June 1986. He became Treasurer and Principal Finance
Officer on June 1, 1993, and became Senior Vice President and Chief Financial
Officer on January 1, 1994.
Mr.
Evans joined CFC as Senior Vice President of Operations in November
1997. He was Senior Vice President and Chief Operating Officer of
Suburban Hospital Healthcare System, Bethesda, MD from 1994 to
1997. He was Senior Vice President and Chief Operating Officer for
Geisinger Medical Center, Danville, PA from 1991 to 1994.
Mr.
Larochelle joined CFC as director of Corporate Relations in May
1996. He became Senior Vice President of Corporate Relations in
August 1998. Prior to joining CFC, he was the Legislative director at
NRECA where he worked for 12 years. He also worked at the U.S.
Department of Agriculture in the Rural Electrification Administration and the
Farmers Home Administration.
Mr.
Zawalick joined CFC in 1980. Throughout his career with CFC, Mr.
Zawalick has held various positions. In April 1995, he was appointed
Vice President of Business Development for CFC and Administrative Coordinator
of
RTFC. In February 2000, Mr. Zawalick was named CFC's Senior Vice
President of RTFC.
Mr.
Borak joined CFC in June 2002 as Senior Vice President, Credit Risk
Management. Previously, he was with Fleet National Bank, Boston, MA
from 1992 to 2001 where he was a Senior Credit Officer with risk management
and
loan approval responsibility for several industry banking portfolios including
investor owned utilities. Prior assignments at Fleet in Hartford, CT
included Manager of Credit Review and Manager of Loan Workout in the Connecticut
bank.
(f)
Involvement in Certain Legal Proceedings.
None
to the knowledge of the Company.
(g)
Promoters and Control Persons.
Inapplicable.
(h)
Code of Ethics
The
Company has adopted a Code of Ethics within the meaning of Item 406(b) of
Regulation S-K. This Code of Ethics applies to our principal executive officer,
our principal financial officer and principal accounting officer. This Code
of
Ethics is publicly available on our website at
http://www.nrucfc.coop/aboutcfc/pdfs/ethicsPolicyCEO-SFO.pdf.
(i)
Audit Committee
Our
Audit Committee currently consists of eleven directors: Mr. McBride
(Chairperson), Mr. Stratton (Vice-Chairperson), Mr. Ewing, Mr. Harting, Mr.
Wasson, Mr. Schriver, Mr. Salyer, Mr. Arthur, Ms. Jacobs, Mr. Hillert and Mr.
Cranford. Mr. Stratton was designated by the Board as the “audit
committee financial expert” as defined by Section 407 of the Sarbanes-Oxley Act
of 2002 ("SOX"). The members of the Audit Committee are "independent" as that
term is defined in Rule 10A-3 under the Securities Exchange
Act. Among other things, the Audit Committee reviews the Company's
financial statements and the disclosure under Management's Discussion and
Analysis in our Annual Report on Form 10-K. The Committee meets with our
independent registered public accounting firm, internal auditors, Chief
Executive Officer and financial management executives to review the scope and
results of audits and recommendations made by those persons with respect to
internal and external accounting controls and specific accounting and financial
reporting issues and to assess corporate risk. The Board has adopted a written
charter for the Audit Committee.
The
Audit Committee completed its review and discussions with management regarding
the Company’s audited financial statements for the year ended May 31, 2007. The
Audit Committee has discussed with the independent auditors the matters required
to be discussed by Statement on Auditing Standards No. 61, as amended, and
received from the independent accountants written disclosures and the letter
regarding their independence required by Independence Standards Board Standard
No. 1, and discussed with the independent accountants their
independence.
Based
on the review and discussions noted above, the Audit Committee recommended
to
the Board that the audited financial statements be included in the Company’s
Annual Report on Form 10-K for the year ended May 31, 2007 for filing with
the
Securities and Exchange Commission.
(j)
Compensation Committee
Role
of the Compensation Committee
The
Executive Committee of the Board of Directors has historically served as the
compensation committee, making recommendations on the CEO’s compensation, and
recommending the overall compensation and benefits package for all executive
officers and other employees to the full Board of Directors. On May
25, 2007, the Board of Directors established a Compensation Committee to review
and make appropriate recommendations to the full Board of Directors on CFC’s
total compensation philosophy and pay components, including, but not limited
to,
base and incentive pay programs. The Committee is responsible for
reviewing and making recommendations to the full Board of Directors on CFC’s
total compensation philosophy and pay components, including base and incentive
pay programs. The Committee is also responsible for approving the
compensation, employment agreements and perquisites for the CEO. The Committee
annually reviews all approved corporate goals and objectives relevant to
compensation, evaluates performance in light of those goals and approves the
CEO’s compensation based on this evaluation, all of which is then approved by
the full Board of Directors. The Committee has delegated authority to the CEO
for evaluating the performance and approving compensation for all of the other
named executive officers. Other than the CEO, no other named
executive officers make decisions regarding executive compensation.
The
Compensation Committee reports to the Board of Directors on its actions and
recommendations following Committee meetings and meets in executive session
without members of management present when making specific compensation
decisions. Although the Board has delegated authority to the
Committee with respect to CFC’s executive and general
employee
compensation programs and practices, the full Board of Directors also reviews
CFC’s compensation and benefits programs each year.
The
Compensation Committee’s charter can be found on CFC’s website,
www.nrucfc.coop.
The
Compensation Committee’s Processes
The
Compensation Committee has established a process to assist it in ensuring that
CFC’s executive compensation program is achieving its objectives. The
Committee uses company performance measures in two ways. First,
performance measures are used in establishing the specific company performance
targets that determine how short-term incentive and long-term incentive pay
will
be earned. Prior to the start of each fiscal year, the Committee
recommends performance measures for the corporate balanced scorecard and the
specific goal and metrics for the long-term incentive plan to the full Board
of
Directors. Additionally, the Committee considers various measures of
company performance in deciding on base pay for the CEO. The
Committee considers financial metrics, customer satisfaction and market share,
and industry leadership, but does not apply a formula or assign specific
performance measures; instead, it makes a subjective determination on the CEO’s
base pay after considering such corporate performance measures collectively,
along with benchmarking data analysis provided by the compensation
consultant.
Role
of Compensation Consultant
CFC’s
management and Board of Directors have worked with Mercer Human Resource
Consulting (“Mercer”) for many years for compensation and benefit plan design
consultation. In 2007, Mercer was hired by the board to advise on the
CEO’s total compensation. Mercer advised the Executive Committee
through an assessment of compensation data using both a one year compensation
analysis – which assesses CFC’s CEO compensation and the compensation of peer
CEOs for the most recent fiscal year, and three year compensation analysis
–
which assesses average peer CEO pay for the last three fiscal
years. Compensation analyses include base pay, annual incentives,
total cash compensation, long-term incentives and total direct
compensation.
In
addition, management has historically hired Mercer to advise CFC on the
structure and design of the existing total compensation package for all
employees, including named executive officers. Mercer assisted in the
development of both the short- and long-term incentive plans and provides data
to assist in establishing the appropriate incentive opportunities for all levels
of employees. Mercer has also periodically evaluated the ongoing
competitiveness of the existing compensation package for all employees,
including named executive officers. No work was performed in 2006, other than
the work directly for the committee on CEO pay.
Role
of Executive Officers
The
Executive Committee has delegated the authority for making annual base pay
decisions for named executive officers to the CEO. The CEO exercises
his judgment to set annual base pay rates, based on market data, overall
performance and leadership accomplishments. Other than the CEO, no
other named executives are involved in making executive compensation
decisions.
(k)
|
Director
Independence
|
Independence
Determinations
The
Board of Directors has determined the independence of each Director based on
a
review by the full Board. Our Audit Committee is subject to the independence
requirements of Rule 10A-3 under the Securities Exchange Act. To
evaluate the independence of our directors, the Board has voluntarily adopted
categorical independence standards consistent with the New York Stock Exchange
(“NYSE”) standards. However, because we only list debt securities on the NYSE,
we are not subject to most of the corporate governance listing standards of
the
NYSE, including the independence requirements.
No
Director is considered independent unless the Board has determined that he
or
she has no material relationship with CFC, either directly or as a partner,
shareholder, or officer of an organization that has a material relationship
with
CFC. Material relationships can include banking, legal, accounting, charitable,
and familial relationships, among others. A Director is not considered
independent if any of the following relationships existed within the previous
three years:
|
(i)
|
the
director is, or has been within the last three years, an employee
of CFC,
or an immediate family member is, or has been within the last three
years,
an executive officer of CFC;
|
|
(ii)
|
the
director has received, or has an immediate family member who has
received,
during any twelve-month period within the last three years, more
than
$100,000 in direct compensation from CFC, other than director and
committee fees and pension or other forms of deferred compensation
for
prior service (provided that such compensation is not contingent
in any
way on continued service);
|
|
(iii)
|
(a)
the director or an immediate family member is a current partner of
a firm
that is CFC’s external auditor; (b) the director is a current employee of
such a firm; (c) the director has an immediate family member who
is a
current employee of such a firm and who participates in the firm’s audit,
assurance or tax compliance (but not tax planning) practice for CFC;
or
(d) the director or an immediate family member was within the last
three
years (but is no longer) a partner or employee of such a firm and
personally worked on CFC’s audit within that
time;
|
|
(iv)
|
the
director or an immediate family member is, or has been within the
last
three years, employed as an executive officer of another company
where any
of CFC’s present executive officers at the same time serves or served on
that company’s compensation
committee;
|
|
(v)
|
the
director is a current employee, or an immediate family member is
a current
executive officer, of a company that has made payments to, or received
payments from, CFC for property or services in an amount which, in
any of
the last three fiscal years, exceeds the greater of $1 million, or
2% of
such other company’s consolidated gross
revenues.
|
The
Board of Directors also reviewed directors’ responses to a questionnaire asking
about their relationships with CFC and its affiliates (and those of their
immediate family members) and other potential conflicts of
interest.
In
reaching a determination that the directors are independent, the Board
considered that in addition to the categories or type of transactions described
above, loans and guarantees were made to member systems of which directors
of
CFC are members, employees or directors in the ordinary course of CFC business
on the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other members and did not involve
more than normal risk of uncollectibility or present other unfavorable features.
It is anticipated that, consistent with its loan and guarantee policies in
effect from time to time, additional loans and guarantees will be made by CFC
to
member systems and trade and service organizations of which directors of CFC
are
members, employees, officers or directors. As a cooperative, CFC was
established for the very purpose of extending financing to its members (from
whose ranks its directors must be drawn). CFC has adopted a policy
whereby substantially all extensions of credit to entities related to directors
or their immediate family members are approved only by the disinterested
directors.
Based
on the criteria above, the Board of Directors has determined that the directors
listed below are independent. The Board determined that none of the directors
listed below has had during the last three years any of the relationships listed
in (i) - (v) above or any other material relationship that would compromise
his
or her independence.
Independent
Directors
|
Terryl
Jacobs
|
Harold
Foley
|
Reuben
McBride
|
Roger
Arthur
|
Steven
J. Haaven
|
Gale
Rettkowski
|
Roger
A. Ball
|
Gary
Harrison
|
R.
Wayne Stratton
|
Raphael
A. Brumbeloe
|
Craig
A. Harting
|
J.
David Wasson, Jr.
|
Delbert
Cranford
|
Tom
Kirby
|
Jack
F. Wolfe, Jr.
|
Jimmy
Ewing, Jr.
|
William
A. Kopacz
|
F.
E. Wolski
|
|
|
|
Item
11. Executive
Compensation.
Compensation
Discussion and Analysis
Executive
Compensation Philosophy and Objectives
The
goal of our executive compensation program is to attract, motivate and retain
highly talented executives who are dedicated to helping CFC achieve its
objectives and committed to CFC’s core values of service, integrity and
excellence. Our executive compensation programs are based on the same
objectives that guide CFC in establishing all its compensation programs –
rewarding employees for individual and corporate performance and retaining
quality employees. To this end, we offer a mix of base pay and pay
for performance designed to align the interests of the executives with the
needs
of our members.
The
components of our compensation package for named executive officers (consisting
of Messrs. Petersen, Lilly, List, Evans and Zawalick) are consistent with those
offered to all employees and consist of base pay that is market competitive,
short-term incentive which is tied to the achievement of annual corporate goals
and long-term incentive which is tied to the achievement of strategic
objectives, plus retirement and other benefits. The executive
compensation program is designed to reward individual performance and
contribution through the base pay component, and recognize corporate performance
through the short and long term incentive programs. We believe that
all four elements of compensation work together to provide a competitive
compensation package that drives performance and supports executive
retention.
Performance–Named
executive officers receive base pay that is both market competitive and
reflective of the strategic management they provide to CFC. Other
components of compensation – short-term (one year) incentive bonus and long-term
(three year) incentive bonus – reflect the performance of the organization and
the success in achieving performance metrics established by the Board of
Directors.
Retention
– The relationship between CFC and its members makes the retention of
employees, including the named executive officers, vital to our business and
long-term success. The compensation package, particularly the
long-term incentive plan and the retirement benefits, assist in the retention
of
a highly qualified management team.
Benchmarking
For
2007, Mercer Human Resource Consulting (“Mercer”) was engaged by the Board of
Directors to conduct a benchmarking survey for the Chief Executive Officer
position using peer organizations identified by the Executive
Committee. The Executive Committee believes that CFC’s most direct
competitors for executive talent include a broad range of financial
institutions. As a result, the Executive Committee included companies
in the compensation comparison group that were similar to CFC in asset size
and
industry and business description. The group included financial
institutions that are premier private market, commercial and/or mission driven
lenders, offering full service financing, investment and related
services. The companies targeted as peer companies ranged between 50%
and 200% of CFC’s December 2005 total assets of $19.2
billion. Comparators included financial services organizations such
as Hudson City Bancorp, Inc., New York Community Bancorp, Inc., Student Loan
Corp., Astoria Financial Corp, Nelnet, Inc., Indymac Bancorp, Webster Financial
Corp., and Flagstar Bancorp, as well as five Farm Credit System
peers.
Mercer
led the Executive Committee through an assessment of compensation data using
both a one year compensation analysis – which assesses CFC and peer CEOs for the
most recent fiscal year, and three year compensation analysis – which assesses
average peer CEO pay for the last three fiscal years. Compensation
data analyzed included base pay, annual incentives, total cash compensation,
long-term incentives and total direct compensation.
CFC
benchmarks the compensation of the other named executive officer positions
against similar positions in national, credible compensation surveys for
financial services organizations of similar asset size. The survey
data is used primarily to ensure that the base pay component of executive
compensation is competitive, meaning generally within the fiftieth percentile
of
comparative pay for similar positions.
Elements
of Compensation
CFC’s
executive compensation program provides a balanced mix of compensation that
incorporates the following key components:
o
|
An
annual base pay salary
|
o
|
An
annual incentive cash bonus which is based on the achievement of
short-term (one year) corporate
goals
|
o
|
A
three-year incentive cash bonus which is based on the achievement
of
longer term corporate goals
|
o
|
Retirement,
health and welfare and other benefit programs provided generally
to all
CFC employees
|
While
all elements of executive compensation work together to provide a competitive
compensation package, each element of compensation is determined independently
of the other elements.
Base
Pay– CFC’s philosophy is to provide annual base pay that reflects the value
of the job in the marketplace. To attract and retain a highly skilled
work force, we must remain competitive with the pay of other employers who
compete with us for talent. Base pay for each of the named executive
officers is benchmarked against similar positions in other organizations, as
described under “Benchmarking”.
CFC’s
compensation philosophy is to target total compensation – base pay, short-term
incentive, long-term incentive and benefits – at the 75th percentile
of
market for the general employee population. However, due to the
cooperative nature of this organization, CFC cannot match the compensation
levels of named executive officers of other financial services organizations
at
the 75th
percentile since we do not offer stock or equity shares. It is
important to CFC, however, to pay the named executive officers of CFC
competitively in base pay to retain key talent. For this reason, the
Executive Committee, in consultation with Mercer, with respect to Mr. Petersen,
CEO, assessed the competitiveness of Mr. Petersen’s total cash compensation
opportunity, including base pay, short-term incentive and long-term incentive,
against the base pay only of the peer group CEOs.
Individual
performance has an impact on the compensation of all employees, including the
CEO and other named executive officers. With respect to the CEO, the
Committee meets with the CEO in executive session annually to conduct a
performance review based on his individual achievements, contribution to CFC’s
performance and other leadership accomplishments. In determining Mr.
Petersen’s base pay, the Executive Committee considered factors including
financial metrics, portfolio management, customer satisfaction and market share,
and industry leadership, but did not apply a formula
or
assign specific performance measures. Instead, it made a subjective
determination on the CEO’s base pay after considering such corporate performance
measures collectively, along with the peer group analysis discussed
above.
The
Executive Committee has delegated the authority for making annual base pay
decisions for named executive officers to the CEO. The CEO exercises
his judgment to set annual base pay rates, based on market data, overall
performance and leadership accomplishments. In 2007, Mr. Petersen
focused on the comparable market pay for similar positions, at the fiftieth
percentile of market base pay, and general market increases of approximately
4%,
to set base pay for the other named executive officers.
Short-Term
Incentive– CFC’s short-term cash incentive program is a one-year bonus that
is tied to the annual performance of the organization as a whole. CFC
believes that by paying a short-term incentive tied to the achievement of annual
operating goals, all employees, including named executive officers, will focus
their efforts on the most important strategic objectives which help CFC to
fulfill its mission to its members. Additionally, the short-term
incentive pay enhances CFC’s ability to provide competitive compensation while
at the same time tying actual incentive compensation paid to the achievement
of
corporate goals. All employees are eligible to participate in the
short-term incentive program.
Mercer
worked with CFC in the design of the short-term incentive plan. The
Board of Directors considered analysis from Mercer regarding the competitiveness
of CFC’s compensation package, along with the cooperative nature of CFC, in
determining the appropriate incentive opportunities for all
employees. The short-term incentive plan provides annual cash bonus
opportunities based upon the level of the position within CFC’s compensation
structure, ranging from 15% - 25% of base pay. Named executive
officers are eligible to receive short-term bonus compensation up to 25% of
their base pay, but otherwise participate in the annual incentive program on
an
equal basis with our other employees.
Corporate
performance is measured using a balanced scorecard approved by the Board of
Directors prior to the start of the fiscal year. The balanced
scorecard is a performance management tool that articulates the corporate
strategy of CFC into specific, quantifiable, measurable goals. By
focusing goals in four quadrants, the scorecard ensures that proper attention
is
paid to all crucial areas of business performance. The scorecard
provides balanced management indicators of business success and a focus for
all
employees as to the target results and measures that must be achieved if CFC
is
to succeed at the strategic plan. The intent is to align
organizational, departmental and individual initiatives to achieve a common
goal.
Corporate
goals for 2007, which were the basis for the short-term incentive payment,
were
Customer Satisfaction, Financial Ratios, Internal Process and Operations, and
Learning, Growth & Innovation. The Board of Directors establishes
corporate goals and measures that they believe are challenging but
achievable. For 2007, the estimated achievement of the goals equated
to 93.75% of the total opportunity. Payments under the short-term
incentive plan are subject to approval by the Board of Directors at a date
subsequent to the filing of this Form 10-K.
Long-Term
Incentive– the long term incentive plan is a three-year plan that is tied to
CFC’s long-term strategic objectives. The long-term incentive plan
was implemented to create dynamic tension between short-term objectives and
long-term goals. It is also an effective retention tool, helping the
organization to keep key employees, and supports CFC’s efforts to pay at market
competitive levels. All employees on staff on the first day of the
fiscal year, June 1, are eligible to participate in the plan cycle and will
receive performance units that are calculated at 15% - 25% of base
pay.
Performance
units are issued at the start of each fiscal year for a three-year
cycle. Performance units for named executive officers are
calculated by dividing 25% of base pay on June 1 by the rating level of the
AA-
goal – currently $100 per performance unit. The performance units
issued will have a value at the end of a three year period as described
below. The measure for all active long-term incentive plans is the
achievement of bond rating targets for our collateral trust bonds by three
rating agencies: Standard & Poors, Fitch, and
Moody’s. The value of the performance units will range from $0 to
$150 per performance unit according to the level of CFC’s secured debt ratings
by the three rating agencies. To achieve the highest value of $150,
which exceeds the targeted value, all three agencies would have to raise CFC’s
long-term secured debt rating to AA stable. If this rating level is achieved,
the incentive pay for named executive officers is 37.5% of the base pay of
the
year in which the units were issued. The collateral trust bond rating
was selected as the measure for the long-term incentive plan because, as a
financial services company, CFC is dependent on the capital markets and the
stronger ratings lead to lower interest cost and more reliable access to the
capital markets.
The
long-term incentive is paid out in one lump sum after the end of the performance
period and performance units cannot be rolled over for future
value. Payments made to named executive officers in fiscal year 2007
were for performance units issued in June 2004 and the May 31, 2007 secured
debt
rating average of A+, stable outlook, which has a value of $40 per performance
unit. There are three active long-term incentive plans in which named
executive officers are participants. Performance units issued to
named executive officers on June 1, 2005 will have a value based on bond ratings
in place on May 31, 2008; performance units issued to named executive officers
on June 1, 2006 will have a value based on bond ratings in place on May 31,
2009; and performance units issued to named executive officers on June 1, 2007
will have a value based
on
bond ratings in place on May 31, 2010. The methodology for
determining the number of performance units issued to named executive officers
for all active long-term incentive plans is consistent with the process
described above.
Authorization
and Payment of Incentive Compensation; Use of Discretion
The
Board of Directors reviews corporate performance and authorizes the payment
of
both short- and long-term incentive compensation based on that
performance. Payment is at the discretion of the Board of Directors.
If the Board of Directors authorizes short-term incentive payment, the amount
of
such payment is determined solely upon corporate performance measures
established at the start of the fiscal year. Board of Directors
authorization of long-term incentive payment is made based upon the bond ratings
in place at the end of the third fiscal year, the value of the performance
units
as established at the start of the three-year plan cycle and based upon the
formula outlined in the plan. Board of Directors authorization of the
short-term incentive payment is made after audited financial statements are
issued to ensure financial objectives have been accurately
measured.
Benefits
CFC
maintains a health and welfare program in which the named executive officers
participate that is available to all employees of CFC. This includes
medical, dental and vision insurance, flexible spending accounts, short- and
long-term disability, life insurance, 401(k) program, pension plan (discussed
below) and other voluntary insurance programs. CFC’s goals are to provide
benefit programs that are market competitive and that promote the attraction
and
retention of qualified employees, including executives.
The
401(k) Pension Plan is a company matching defined contribution plan available
to
all employees. CFC will match up to 3% of base salary with a minimum
2% employee contribution. Named executive officers’ contributions to
the 401(k) Pension Plan are limited by Internal Revenue Service (“IRS”)
regulations, capped at $15,500 for 2007 (plus an additional $5,000 catch up
contribution for named executive officers over 50 years of age).
An
important retention tool is CFC’s defined benefit pension plan, the Retirement
Security Plan. CFC participates in a multiple employer pension plan
managed by National Rural Electric Cooperative Association
(“NRECA”). We balance the effectiveness of this plan as a
compensation and retention tool with the cost of providing the
benefit. The pension plan is a qualified plan in which all employees
are eligible to participate upon one year of service, and allows employees
to
retire with unreduced benefits at age 62. The value of the pension
benefit is determined by base pay only and does not include other cash
compensation. For more information on the NRECA Retirement Security
Plan, see the Pension Benefits Table and accompanying narrative
below.
CFC
also offers as a component of the pension plan, through NRECA, a Pension
Restoration Plan to a select group of management, including the named executive
officers, to increase their retirement benefits above amounts available under
the Retirement Security Pension Plan, which is restricted by IRS limitations
on
annual pay levels. The Pension Restoration Plan restores the value of
the Retirement Security Plan for named executive officers to the level it would
be if the IRS limits on annual pay were not in place. Unlike the pension plan,
the Pension Restoration Plan is an unfunded, unsecured obligation of CFC and
is
not qualified for tax purposes.
The
Pension Restoration Plan was previously composed of both a severance pay plan
and a deferred compensation plan. In accordance with IRS regulation
409(a), the severance pay plan was frozen as of December 31,
2005. All pension restoration earned as of January 1, 2006 is earned
under the pension restoration deferred compensation plan, subject to risk of
forfeiture. For more information on the Pension Restoration
Plan, see the Pension Benefits Table and accompanying narrative
below.
As
an additional retention tool designed to assist named executive officers in
deferring compensation for use in retirement, each named executive officer
is
also eligible to participate in the Company’s non-qualified 457(b) Deferred
Compensation savings plan. Contributions to the plan are limited by
the IRS. The 2007 cap for contributions is $15,500. There
is no CFC contribution to the deferred compensation plan.
Other
Compensation
We
provide our named executive officers with other benefits, as reflected in the
All Other Compensation column in the Summary Compensation Table below, that
we
believe are reasonable and consistent with CFC’s compensation
philosophy. These benefits contribute to CFC’s ability to provide
named executives a competitive total compensation package. CFC does
not provide significant perquisites or personal benefits to the named executive
officers. All named executive officers may receive an annual
executive physical at their discretion.
The
Executive Committee considers perquisites for the CEO in connection with its
annual review of the CEO’s total compensation package described
above. The perquisites authorized are limited to Mr. Petersen, our
Chief Executive Officer, receiving an annual vehicle allowance as well as an
annual spousal air travel allowance. Prior to 2007, Mr. Petersen
received reimbursement for spousal air travel and had the use of a company
owned
and maintained vehicle. To provide these
perquisites
in a more efficient fashion, in 2007, the Board of Directors decided to provide
these perquisites through annual allowances rather than through reimbursement
or
use of company owned vehicle. The amount of the vehicle and spousal
air travel perquisites will be authorized annually by the Board of
Directors. Amounts are determined based on the estimated cost for
operation and maintenance of a vehicle and the anticipated cost of air travel
by
the CEO’s spouse.
Employment
Agreements
CFC’s
Chief Executive Officer, Mr. Petersen, has an employment agreement in place,
dated March 1, 2004 in which CFC agrees to employ Mr. Petersen as Chief
Executive Officer through February 28, 2009 (with automatic one year extensions
unless either party objects).
Pursuant
to a separate independent contractor agreement effective as of July 22, 2004,
Mr. Petersen has agreed to provide service to RTFC for a period coterminous
to
the CFC agreement that is automatically extended at each March 1 after 2009,
for
an additional year unless RTFC or Mr. Petersen does not wish to extend the
term
of the contractor agreement with RTFC.
For
details of the employment agreements for Mr. Petersen see “Employment Contracts”
below.
Other
named executive officers do not have employment, severance or change of control
agreements, with the exception of a severance agreement for Mr. John Evans,
CFC’s Senior Vice President, Operations. As part of Mr. Evans’ offer
of employment in 1997, and in order to retain his services, CFC agreed that
in
the event of involuntary termination of employment, excepting an act of
malfeasance or fraud, CFC shall pay Mr. Evans severance at the latest base
compensation level for a period of nine months, including earned incentive
pay
and benefits. See “Termination of Employment and Change-in-Control
Agreements” below.
Compensation
Committee Report
The
Compensation Committee of the Board of Directors oversees CFC’s compensation
program on behalf of the Board. In fulfilling its oversight
responsibilities, the Compensation Committee reviewed and discussed with
management the Compensation Discussion and Analysis set forth in this Form
10-K. Based upon this review and discussion, the Compensation
Committee recommended to the Board of Directors that the Compensation Discussion
and Analysis be included in this Form 10-K.
Submitted
by the Compensation
Committee
Terryl
Jacobs
Roger
Arthur
Darryl
Schriver
Steven
J. Haaven
Jim
Herron
Reuben
McBride
J.
David Wasson, Jr.
Summary
Compensation Table
The
summary compensation table below sets forth the aggregate compensation for
the
year ended May 31, 2007 earned by the named executive officers and two
additional executive officers of the Company that meet the definition of related
persons pursuant to SEC disclosure requirements.
Name
and
Principal
Position
|
Year
|
Salary
|
Non-Equity
Incentive Plan Compensation (1)
|
Change
in Pension Value and Non-qualified Deferred Compensation
Earnings
(2)
|
All
Other Compensation (3)
|
Total
|
Sheldon
C. Petersen
Governor
& CEO
|
2007
|
$
|
643,125
|
$
|
204,212
|
|
$
|
428,799
|
|
$
|
132,577
|
|
$
|
1,408,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
L. Lilly
Senior
Vice President &
Chief
Financial Officer
|
2007
|
|
364,000
|
|
117,513
|
|
|
266,788
|
|
|
50,938
|
|
|
799,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
J. List
Senior
Vice President of Member Services and General Counsel
|
2007
|
|
364,000
|
|
113,233
|
|
|
477,364
|
|
|
51,830
|
|
|
1,006,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
T. Evans
Senior
Vice President of Operations
|
2007
|
|
364,000
|
|
113,233
|
|
|
146,285
|
|
|
16,833
|
|
|
640,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence
Zawalick
Senior
Vice President of RTFC
|
2007
|
|
265,500
|
|
85,507
|
|
|
147,479
|
|
|
46,494
|
|
|
544,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
E. Larochelle (4)
Senior
Vice President of
Corporate
Relations
|
2007
|
|
265,500
|
|
85,507
|
|
|
161,864
|
|
|
18,582
|
|
|
531,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John.
M. Borak (4)
Senior
Vice President of Credit Risk Management
|
2007
|
|
233,500
|
|
75,927
|
|
|
-
|
|
|
10,860
|
|
|
320,287
|
|
(1)
Includes amounts earned during fiscal year 2007 under the long-term
and
short-term incentive plans. Payments under the short-term
incentive plan are subject to approval by the Board of Directors
at a date
subsequent to the filing of this Form 10-K.
|
|
(2)
Represents the change in the net present value of the accumulated
pension
benefit under the Company’s multi-employer defined benefit pension plan
during the year. For Mr. Borak, change in pension value was a reduction
of
$122,189 as a result of a distribution of $228,679 during fiscal
year
2007.
|
|
(3)
For Mr. Petersen, includes $18,595 of perquisites comprised of $9,674
for
personal use of vehicle and $8,921 for spousal travel. Both amounts
are
calculated based on a combination of incremental aggregate costs
to the
Company incurred prior to January 1, 2007, after which Mr. Petersen
starting receiving an annual perquisite allowance for these
costs. Additionally, for Mr. Petersen, includes $60,415 related
to RTFC contributions to the RTFC deferred compensation
plan. All other compensation also includes $38,055, $37,163,
$38,055, $3,058, $34,657, and $6,745 related to the termination of
a
retirement benefit plan for Mr. Petersen, Mr. Lilly, Mr. List, Mr.
Evans,
Mr. Zawalick and Mr. Larochelle, respectively. The remaining
amounts included in this column represent sick leave incentive bonuses
and
Company contributions to its 401(k) defined contribution
plan.
|
|
(4)
These executives are “related persons” as defined by the SEC’s disclosure
requirements and are included in the summary compensation table as
we
generally treat all of our executive officers equally.
|
|
Grants
of Plan-Based Awards
The
Company has a long-term and a short-term incentive plan for all employees under
which executive officers may receive a bonus of up to 37.5% and 25% of salary,
respectively. The incentive payouts are based on the executive
officer’s salary at the date the program becomes effective. See the
“Compensation Discussion and Analysis” above for further information on these
incentive plans.
The
following table contains the estimated possible payouts under the Company’s
short-term incentive plan and possible future payouts for grants under the
Company’s long-term incentive plan during the year ended May 31,
2007.
|
|
|
|
Estimated
Future Payouts Under Non-Equity Incentive Plan Awards
|
|
|
Grant
date
|
|
Threshold
|
Target
|
Max
|
|
|
|
|
|
|
|
Petersen
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
6/1/06
|
|
$
|
-
|
$ 63,240
|
|
$237,150
|
|
|
Short-term
Incentive Plan (2)
(3)
|
6/1/06
|
|
-
|
150,732
|
|
160,781
|
|
Lilly
|
|
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
6/1/06
|
|
-
|
36,400
|
|
136,500
|
|
|
Short-term
Incentive Plan (2)
(3)
|
6/1/06
|
|
-
|
85,313
|
|
91,000
|
|
List
|
|
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
6/1/06
|
|
-
|
36,400
|
|
136,500
|
|
|
Short-term
Incentive Plan (2)
(3)
|
6/1/06
|
|
-
|
85,313
|
|
91,000
|
|
Evans
|
|
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
6/1/06
|
|
-
|
36,400
|
|
136,500
|
|
|
Short-term
Incentive Plan (2)
(3)
|
6/1/06
|
|
-
|
85,313
|
|
91,000
|
|
Zawalick
|
|
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
6/1/06
|
|
-
|
26,560
|
|
99,600
|
|
|
Short-term
Incentive Plan (2)
(3)
|
6/1/06
|
|
-
|
62,227
|
|
66,375
|
|
Larochelle
|
|
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
6/1/06
|
|
-
|
26,560
|
|
99,600
|
|
|
Short-term
Incentive Plan (2)
(3)
|
6/1/06
|
|
-
|
62,227
|
|
66,375
|
|
Borak
|
|
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
6/1/06
|
|
-
|
23,360
|
|
87,600
|
|
|
Short-term
Incentive Plan (2)
(3)
|
6/1/06
|
|
-
|
54,727
|
|
58,375
|
|
(1)
Target payouts were calculated using unit values of $40 based on CFC’s projected
average long-term secured credit rating of A+/stable at May 31,
2009.
(2)
No units are granted by the short-term incentive plan, however the program
was
established on June 1, 2006 and was paid out based on performance at May 31,
2007.
(3)
Target represents 23.4% of May 31, 2007 base salary based on the estimated
achievement of 93.75% of performance targets established at the beginning of
the
fiscal year and evaluated at May 31, 2007 as shown in the “Summary Compensation
Table” above.
The
Board of Directors has approved a new long-term incentive plan with terms
similar to the plan in effect during fiscal year 2007. As a result,
the executives included in the chart above received grants on June 1, 2007
with
a payout to be determined on May 31, 2010.
Employment
Contracts
Pursuant
to an employment agreement effective as of March 1, 2004, CFC has agreed to
employ Mr. Petersen as Chief Executive Officer through February 28, 2009 (with
automatic one-year extensions unless either party objects) at no less than
his
base salary at the time, or $675,000 per annum, plus such incentive payments
(if
any) as may be awarded him. Certain payments have been agreed to in
the event of Mr. Petersen's termination other than for cause; for example,
Mr.
Petersen leaving for good reason, disability or termination of his employment
due to death. See “Termination of Employment and Change-In-Control
Arrangements” below for information on these amounts.
Pursuant
to a separate independent contractor agreement effective as of July 22, 2004,
Mr. Petersen has agreed to provide service to RTFC for a period coterminous
to
the CFC agreement that is automatically extended at each March 1, after 2009,
for an additional year unless RTFC or Mr. Petersen does not wish to extend
or
further extend the term of the contractor agreement with RTFC. As
compensation, RTFC must credit $30,000 to a deferred compensation account on
January 1 of each year of the term. See the “Nonqualified Deferred
Compensation Table” and accompanying narrative below.
Pension
Benefits Table
The
Company is a participant in a multi-employer defined benefit pension plan that
is administered by NRECA. Under the plan, the Company’s employees are
entitled to receive annually, under a 50% joint and surviving spouse annuity,
1.90% of the average of their five highest base salaries during their last
ten
years of employment, multiplied by the number of years of participation in
the
plan. The normal retirement age under the plan is 62. The following
table contains the years of service and the present value of the accumulated
benefit for the Company’s executive officers at May 31, 2007.
Name
|
Plan
Name
|
Number
of Years Credited Service (2)
|
Present
Value of Accumulated Benefit
|
Payments
During Last Fiscal Year
|
Petersen
|
NRECA
Retirement Security Plan (1)
|
23.75
|
|
$2,685,490
|
$
|
-
|
Lilly
|
NRECA
Retirement Security Plan (1)
|
22.58
|
|
1,798,937
|
|
-
|
List
|
NRECA
Retirement Security Plan (1)
|
34.42
|
|
2,952,668
|
|
-
|
Evans
|
NRECA
Retirement Security Plan (1)
|
8.50
|
|
625,898
|
|
-
|
Zawalick
|
NRECA
Retirement Security Plan (1)
|
26.67
|
|
1,046,068
|
|
-
|
Larochelle
|
NRECA
Retirement Security Plan (1)
|
23.00
|
|
1,018,688
|
|
-
|
Borak
(2)
|
NRECA
Retirement Security Plan (1)
|
0.92
|
|
57,554
|
|
228,679
|
(1)
CFC is a participant in a multiple employer pension
plan. Credited years of service, therefore, included not only
years of service with CFC, but also years of service with another
cooperative participant in the multiple employer pension
plan. Mr. Larochelle has 12 credited years of service with
another cooperative in addition to CFC. All other named
executive have credited years of service only with CFC.
|
(2)
At May 31, 2007, Mr. Borak is the only listed executive that is eligible
for retirement based on the required age of 62. Mr. Borak received
distributions of $226,796 as part of a quasi-retirement and $1,884
as a
result of no longer being at risk of forfeiture during the year ended
May
31, 2007. Mr. Borak earned an additional $1,534 during the year
ended May 31, 2007 as a result of no longer being at risk of forfeiture
which had not yet been paid at May 31,
2007.
|
Nonqualified
Deferred Compensation
CFC
Deferred Compensation Plan
The
CFC deferred compensation plan is a “nonqualified” deferred compensation savings
program for the senior executive group and other selected management or highly
compensated employees designated by CFC. Participants may elect to
defer up to the lesser of 100% of their compensation for the year or the
applicable IRS statutory dollar limit in effect for that
year. Compensation for the purposes of this plan is defined as the
total amount of compensation, including incentive pay, if any paid by
CFC.
The
accounts are credited with “earnings” based on the participants’ selection of
available investment options (currently, eight options) within the Homestead
Funds. When a participant ceases to be an employee for any reason,
distribution of the account will generally be made in 15 substantially equal
annual payments beginning approximately 60 days after termination (unless an
election is made to change the form and timing of the payout). The
participant may elect either a single lump sum or substantially equal annual
installments paid over no less than two and no more than 14
years. The amount paid is based on the accumulated value of the
account.
RTFC
Deferred Compensation Plan
RTFC
contributes a sum of $30,000 annually to a deferred compensation account for
Mr.
Petersen on January 1 of each year that Mr. Petersen is contracted by
RTFC. Interest will be credited to the account on December 31 of each
such year at a rate equal to CFC's 20-year medium-term note rate on that
date. On December 31, 2006, the applicable interest rate was
5.84%. The RTFC Board of Directors has approved that Mr. Petersen, at
his option, may request that the deferred component of his compensation be
directed into alternative investment vehicles that could offer the opportunity
to earn a return that is greater than the CFC 20-year MTN rate. Mr.
Petersen has not yet chosen to exercise that option. If Mr.
Petersen's service to RTFC is terminated by RTFC other than for cause, or by
Mr.
Petersen for any reason, or by his death or disability, the account will be
deemed continued for the remainder of the term of the contractor agreement
with
RTFC (but in no event less than six months nor more than a year), interest
will
be credited on a proportional basis for the calendar year during which the
continuation ends and the balance in the account will be paid to Mr. Petersen
or
his beneficiaries in a lump sum.
The
following table summarizes information related to the nonqualified deferred
compensation plans in which the named executive officers were eligible to
participate during the year ended May 31, 2007.
Name
|
|
Executive
Contributions in Last FY
(1)
|
Registrant
Contributions in Last FY
|
Aggregate
Earnings in Last FY
|
Aggregate
Withdrawals/ Distributions
|
Aggregate
Balance at Last FYE
|
Petersen
|
|
|
|
|
|
|
|
|
CFC
Deferred Compensation
|
$15,208
|
$
|
-
|
$
|
53,207
|
|
$
|
-
|
$286,045
|
|
|
RTFC
Deferred Compensation (2)
|
-
|
|
60,415
|
|
-
|
|
|
-
|
581,233
|
|
|
|
|
|
|
|
|
|
|
|
|
Lilly
|
|
|
|
|
|
|
|
|
|
|
|
CFC
Deferred Compensation
|
15,208
|
|
-
|
|
31,569
|
|
|
-
|
181,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
List
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
Deferred Compensation
|
8,208
|
|
-
|
|
8,862
|
|
|
-
|
53,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Evans
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
Deferred Compensation
|
12,250
|
|
-
|
|
19,017
|
|
|
-
|
120,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zawalick
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
Deferred Compensation
|
7,683
|
|
-
|
|
17,594
|
|
|
-
|
97,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larochelle
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
Deferred Compensation
|
15,208
|
|
-
|
|
7,679
|
|
|
-
|
201,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borak
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
Deferred Compensation
|
25,731
|
|
-
|
|
1,290
|
|
|
-
|
39,718
|
|
|
(1)
Executive contributions are also included in salary in the summary
compensation table on page 68.
|
(2)
If Mr. Petersen's employment were terminated at May 31, 2007 without
cause
or due to death or disability, interest would accrue under the RTFC
deferred compensation plan through May 31, 2008 at the CFC 20-year
medium-term note rate on December 31, 2006. On December 31,
2006, the applicable interest rate was 5.84% which would result in
additional Registrant contributions of $79,643 through May 31,
2008. Company contributions and earnings for fiscal year 2007
are included in all other compensation in the summary compensation
table
on page 68.
|
Director
Compensation Table
Directors
receive a fixed sum of $4,000 for each of the scheduled board meetings attended
and $150 for each conference call attended. Additionally, the
directors receive reimbursement for reasonable travel expenses. The
fixed amounts are paid following the conclusion of each board meeting or
conference call attended. The following chart summarizes the total
fees earned by CFC directors during the year ended May 31, 2007.
Name
|
|
Fees
Earned
|
|
Total
|
Terryl
Jacobs
|
$
|
33,950
|
$
|
33,950
|
Roger
Arthur
|
|
40,550
|
|
40,550
|
Darryl
Schriver
|
|
39,050
|
|
39,050
|
Roger
A. Ball
|
|
33,200
|
|
33,200
|
Ronald
Bergh
|
|
20,450
|
|
20,450
|
Raphael
A. Brumbeloe
|
|
8,150
|
|
8,150
|
Darlene
H. Carpenter
|
|
28,900
|
|
28,900
|
Cletus
Carter
|
|
34,300
|
|
34,300
|
Delbert
Cranford
|
|
8,150
|
|
8,150
|
Jimmy
Ewing Jr.
|
|
8,150
|
|
8,150
|
Harold
Foley
|
|
33,050
|
|
33,050
|
Steven
J. Haaven
|
|
34,250
|
|
34,250
|
Gary
Harrison
|
|
32,600
|
|
32,600
|
Craig
A. Harting
|
|
32,900
|
|
32,900
|
Jim
Herron
|
|
32,600
|
|
32,600
|
Martin
Hillert, Jr.
|
|
33,200
|
|
33,200
|
Tom
Kirby
|
|
32,900
|
|
32,900
|
William
A. Kopacz
|
|
32,900
|
|
32,900
|
Reuben
McBride
|
|
33,950
|
|
33,950
|
Gale
Rettkowski
|
|
33,050
|
|
33,050
|
Ronald
P. Salyer
|
|
35,900
|
|
35,900
|
R.
Wayne Stratton
|
|
8,300
|
|
8,300
|
J.
David Wasson, Jr.
|
|
33,050
|
|
33,050
|
Charles
Wayne Whitaker
|
|
32,750
|
|
32,750
|
Bobby
W. Williams
|
|
28,600
|
|
28,600
|
Jack
F. Wolfe, Jr.
|
|
24,600
|
|
24,600
|
F.
E. Wolski
|
|
4,150
|
|
4,150
|
Termination
of Employment and Change-In-Control Arrangements
Sheldon
Petersen, CEO, and John Evans, SVP, Operations, each have an executive agreement
with CFC under which Mr. Petersen and Mr. Evans may continue to receive base
salary and benefits in certain circumstances after resignation or termination
of
employment. No other named executive officers have termination or
change-in-control agreements.
Under
the executive agreement with Mr. Petersen, if CFC terminates his employment
without cause, or Mr. Petersen terminates his employment for good reason, CFC
is
obligated to pay him a lump sum payment equal to the product of three times
his
annual base salary at the rate in effect at the time of termination, and his
short-term incentive award, if any, for the previous year (or an amount equal
to
the annual bonus for 2003). Definitions of “cause” and “good reason”
can be found in the agreement on file. The compensation payable to
Mr. Petersen for termination without cause, assuming a termination date of
May
31, 2007 is $2,380,782. The actual payments due on a termination
without cause on different dates could materially differ from this
estimate.
Under
the executive agreement for Mr. Petersen with RTFC, if RTFC terminates his
employment without cause, or if Mr. Petersen terminates his service to RTFC,
or
by his death or disability, RTFC will pay a lump sum payment equivalent to
the
amount in his deferred compensation account. However, the account
will be deemed to be continued in effect for the lesser of (i) a period of
12
months or (ii) the remaining period of the Term of Service of the executive
agreement prior to such termination, but in no case less than six months (the
“Extended Period”) and all credits (payment and interest) outlined in the
agreement shall continue to be made. If the Extended Period ends
other than on a December 31st, when normal
interest calculations are made and added to the account, RTFC shall further
credit the account with simple interest for the period from January 1 to the
end
of the Extended Period at the same rate that was used to credit
interest on the prior December 31st. Payment
is due to Mr. Petersen within 15 days of the end of the Extended
Period. For details on the value of this compensation see the
“Nonqualified Deferred Compensation Table”.
Under
the executive agreement for Mr. Petersen with RTFC, if RTFC terminates the
service of the executive for cause, the term of service shall terminate
immediately thereafter, and Mr. Petersen shall not be entitled to any payment
with respect to the account.
Under
the executive agreement with Mr. Evans, if CFC terminates his employment without
cause, Mr. Evans would receive a continuation for nine months of his annual
base
salary in effect at the time of termination, incentive compensation for the
additional nine month period, and nine months payment of all health and welfare
and retirement plans. The compensation payable to Mr. Evans for
termination without cause, assuming a termination date of May 31, 2007 is
$385,219. The actual payments due on a termination without cause on
different dates could materially differ from this estimate.
The
estimates do not include amounts to which the named executive officers would
be
entitled to upon termination, such as base salary to date, unpaid bonuses
earned, unreimbursed expenses, paid vacation time and any earned benefits under
company plans.
Compensation
Committee Interlocks and Insider Participation
During
the year ended May 31, 2007, there were no compensation committee interlocks
or
insider participation related to executive compensation.
Item
12. Security
Ownership of Certain Beneficial Owners and Management.
Inapplicable.
Item
13. Certain
Relationships and Related Transactions.
Review
and Approval of Transactions with Related Persons
The
Board of Directors has adopted a policy for review and approval in writing
and
monitoring of transactions involving CFC and “related persons” (directors and
executive officers or their immediate family members). The policy covers any
related person transaction that meets the minimum threshold for disclosure
under
SEC disclosure requirements (generally, transactions involving amounts exceeding
$120,000 in which a related person has a direct or indirect material
interest).
Policy
and Procedures
·
|
Each
director and executive officer is required to promptly notify the
General
Counsel in writing of any material interest that such person or an
immediate family member of such person had, has or will have in a
related
person transaction.
|
·
|
The
General Counsel of CFC is responsible for the review, approval or
ratification of any related person transaction, unless the General
Counsel
refers any related person transaction to the Board of Directors for
its
review, approval or ratification. If such related person transaction
involves a director, the director may not participate in the deliberations
or vote with respect to such approval or
ratification.
|
·
|
The
General Counsel will notify the Board of Directors at each regularly
scheduled Board meeting of any action taken by the General Counsel
with
respect to a related person transaction since the last regularly
scheduled
meeting of the Board of Directors.
|
·
|
In
the event the General Counsel becomes aware of a related person
transaction that has not been approved under the Board policy prior
to its
consummation, the General Counsel will notify the Board of Directors.
The
Board of Directors will consider all of the relevant facts and
circumstances with respect to such transaction, and will evaluate
all
options available to CFC, including ratification, revision or termination
of such transaction, and shall take such course of action as the
Board of
Directors deems appropriate under the
circumstances.
|
·
|
The
General Counsel will determine whether a related person has a material
interest in a transaction on the basis of the significance of the
information to investors in CFC securities in light of all the
circumstances. Factors to be considered in determining whether a
related
person’s interest in a transaction is material may include the importance
of the interest to the related person (financially or otherwise),
the
relationship of the related person to the transaction and of related
persons with each other, and the dollar amount involved in the
transaction.
|
·
|
The
General Counsel, and where applicable, the Board of Directors, will
not
approve or ratify a related person transaction unless the General
Counsel,
or the Board, as the case may be, reasonably determines, based on
a review
of the available information, that the transaction is fair and reasonable
to CFC and consistent with the best interests of
CFC.
|
·
|
Factors
to be taken into account in making the determination may include
(i) the
business purpose of the transaction, (ii) whether the transaction
is
entered into on an arms-length basis on terms fair to CFC, and (iii)
whether such a transaction would violate other CFC
policies.
|
Related
Person Transactions
See
the Summary Compensation Table in Item 11 for a description of compensation
paid
to Rich Larochelle and John Borak, CFC’s executive officers who are not named
executive officers, but meet the definition of a “related person” as described
above.
Item
14. Principal
Accountant Fees and Services.
The
following table summarizes the aggregate professional fees for the audit of
the
financial statements for the years ended
May
31, 2007 and 2006 and fees for other services during that period by Deloitte
& Touche, LLP.
|
2007
|
|
2006
|
|
Audit
fees (1)
|
$
|
1,636,815
|
|
|
$
|
1,550,989
|
|
|
Audit-related
fees (2)
|
|
-
|
|
|
|
36,468
|
|
|
Tax
fees (3)
|
|
29,650
|
|
|
|
18,559
|
|
|
All
other fees (4)
|
|
33,000
|
|
|
|
7,000
|
|
|
Total
|
$
|
1,699,465
|
|
|
$
|
1,613,016
|
|
|
|
|
|
(1)
Audit fees in 2007 and 2006 consist of fees for the audit of the
consolidated financial statements of CFC, including RTFC and NCSC
in
accordance with FIN 46(R), totaling $1,205,928 and $586,835, respectively,
fees for the preparation of the stand-alone financial statements
for RTFC
and NCSC totaling $242,408 and $91,000, respectively, and fees for
the
audit of management's assessment of the effectiveness of CFC's internal
control over financial reporting in compliance with Section 404 of
the
Sarbanes-Oxley Act of 2002 totaling $24,900 and $773,154,
respectively. Additionally, audit fees in 2007 and 2006 include
comfort letter fees and for 2007, consents related to debt issuances
and
compliance work required by the independent auditors.
|
(2)
Audit-related fees in 2006 consist of initial consultation on compliance
with Section 404 of the Sarbanes-Oxley Act of 2002.
|
(3)
Tax fees consist of assistance with matters related to tax compliance
and
consulting.
|
(4)
These fees relate to the audit of a trust serviced by
CFC.
|
CFC’s
Audit Committee is solely responsible for the nomination, approval,
compensation, evaluation and discharge of the independent public
accountants. The independent registered public accountants report
directly to the Audit Committee and the Audit Committee is responsible for
the
resolution of disagreements between management and the independent registered
public accountants. Consistent with Securities and Exchange
Commission requirements, the Audit Committee has adopted a policy to pre-approve
all audit and permissible non-audit services provided by the independent
registered public accountants. Under the policy, the Audit
Committee's pre-approval for permissible non-audit services is not required
if
all such services 1) do not aggregate to more than five percent of total revenue
paid to the independent registered public accountants in the fiscal year when
services are provided, 2) were not recognized as non-audit services at the
time
of the engagement and 3) are promptly brought to the attention of the Audit
Committee and approved by the Audit Committee prior to the completion of the
audit. This policy was followed during the years ended May 31, 2007
and 2006. CFC's independent registered public accountants for the
current fiscal year have been appointed by the Audit Committee.
PART
IV
Item
15. Exhibits
and Financial Statement Schedules.
|
|
(a)
|
Documents
filed as a part of this report.
|
|
1.
|
Consolidated
financial statements
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
79
|
|
|
Consolidated
Balance Sheets
|
80
|
|
|
Consolidated
Statements of Operations
|
82
|
|
|
Consolidated
Statements of Changes in Equity
|
83
|
|
|
Consolidated
Statements of Cash Flows
|
84
|
|
|
Notes
to Consolidated Financial Statements
|
86
|
|
|
|
|
|
2.
|
Financial
statement schedules
|
|
|
|
All
schedules are omitted because they are not required, are inapplicable
or
the information is included in the financial statements or notes
thereto.
|
3.
|
Exhibits
|
|
3.1
|
-
|
Articles
of Incorporation. Incorporated by reference to Exhibit 3.1
to Registration Statement No. 2-46018, filed October 12,
1972.
|
|
3.2
|
-
|
Amended
Bylaws as approved by CFC's board of directors and members on March
1,
2005. Incorporated by reference to Exhibit 3.2 to CFC's Form
10-Q filed on April 14, 2005.
|
|
4.1
|
-
|
Form
of Capital Term Certificate. Incorporated by reference to
Exhibit 4.3 to Registration Statement No. 2-46018 filed October 12,
1972.
|
|
4.2
|
-
|
Indenture
dated as of February 15, 1994, between the Registrant and U.S. Bank
National Association, successor trustee. Incorporated by
reference to Exhibit 4.3 from the report on Form 8-K filed by CFC
on June
14, 1994.
|
|
4.3
|
-
|
Revolving
Credit Agreement dated as of March 22, 2006 for $1,000,000,000 maturing
on
March 22, 2011. Incorporated by reference to Exhibit 4.3 to
CFC's Form 10-Q filed on April 14, 2006.
|
|
4.4
|
-
|
Revolving
Credit Agreement dated as of March 16, 2007 for $1,125,000,000 maturing
on
March 16, 2012. Incorporated by reference to Exhibit 4.4 to
CFC's Form 10-Q filed on April 12, 2007.
|
|
4.5
|
-
|
Revolving
Credit Agreement dated as of March 16, 2007 for $1,125,000,000 maturing
on
March 14, 2008. Incorporated by reference to Exhibit 4.5 to
CFC's Form 10-Q filed on April 12, 2007.
|
|
4.6
|
-
|
Indenture
between CFC and Mellon Bank, N.A., as Trustee. Incorporated by reference
to Exhibit 4.6 to Registration Statement on Form S-3 filed on October
15,
1996 (Registration No. 33-64231).
|
|
4.7
|
-
|
Indenture
between CFC and Chemical Bank, as Trustee. Incorporated by
reference to Exhibit 4.7 to Amendment No. 1 to Registration Statement
on
Form S-3 filed on December 15, 1987 (Registration No.
33-34927).
|
|
4.8
|
-
|
First
Supplemental Indenture between CFC and Chemical Bank, as
Trustee. Incorporated by reference to Exhibit 4.8 to
Registration Statement on Form S-3 filed on October 1, 1990 (Registration
No. 33-58445).
|
|
4.9
|
-
|
Bond
Purchase Agreement between the Registrant, Federal Financing Bank
and
Rural Utilities Service dated as of April 28, 2006 for up to
$1,500,000,000.
|
|
4.10
|
-
|
Series
B Bond Guarantee Agreement between the Registrant and the Rural Utilities
Service dated as of April 28, 2006 for up to
$1,500,000,000.
|
|
4.11
|
-
|
Pledge
Agreement dated as of April 28, 2006, between the Registrant, the
Rural
Utilities Service and U.S. Bank Trust National
Association.
|
|
4.12
|
-
|
Series
B Future Advance Bond from the Registrant to the Federal Financing
Bank
dated as of April 28, 2006 for up to $1,500,000,000 maturing on July
15,
2029.
|
|
4.13
|
-
|
Bond
Purchase Agreement between the Registrant, Federal Financing Bank
and
Rural Utilities Service dated as of June 14, 2005 for up to
$1,000,000,000. Incorporated by reference to Exhibit 4.12 to
CFC's Form 10-K filed on August 24, 2005.
|
|
4.14
|
-
|
Series
A Bond Guarantee Agreement between the Registrant and the Rural Utilities
Service dated as of June 14, 2005 for up to
$1,000,000,000. Incorporated by reference to Exhibit 4.13 to
CFC's Form 10-K filed on August 24, 2005.
|
|
4.15
|
-
|
Pledge
Agreement dated as of June 14, 2005, between the Registrant, the
Rural
Utilities Service and U.S. Bank Trust National
Association. Incorporated by reference to Exhibit 4.14 to CFC's
Form 10-K filed on August 24, 2005.
|
|
4.16
|
-
|
Series
A Future Advance Bond from the Registrant to the Federal Financing
Bank
dated as of June 14, 2005 for up to $1,000,000,000 maturing on July
15,
2028. Incorporated by reference to Exhibit 4.15 to CFC's Form
10-K filed on August 24, 2005.
|
|
4.17
|
-
|
Note
Purchase Agreement dated as of July 28, 2005 for $500,000,000 between
the
Registrant and Federal Agricultural Mortgage
Corporation. Incorporated by reference to Exhibit 4.16 to CFC's
Form 10-K filed on August 24, 2005.
|
|
4.18
|
-
|
Pledge
Agreement dated as of July 28, 2005, between the Registrant, Federal
Agricultural Mortgage Corporation and U.S. Bank Trust National
Association. Incorporated by reference to Exhibit 4.17 to CFC's
Form 10-K filed on August 24, 2005.
|
|
4.19
|
-
|
Registration
Rights Agreement dated as of July 28, 2005 between the Registrant
and
Federal Agricultural Mortgage Corporation. Incorporated by
reference to Exhibit 4.18 to CFC's Form 10-K filed on August 24,
2005.
|
|
4.20
|
-
|
4.656%
Senior Notes due 2008 dated as of July 29, 2005 from the Registrant
to
Federal Agricultural Mortgage Corporation. Incorporated by
reference to Exhibit 4.19 to CFC's Form 10-K filed on August 24,
2005.
|
|
|
-
|
Registrant
agrees to furnish to the Commission a copy of all other instruments
defining the rights of holders of its long-term debt upon
request.
|
|
10.1
|
-
|
Plan
Document for CFC's Deferred Compensation Program amended and restated
as
of July 1, 2003. Incorporated by reference to Exhibit 10.1 to
CFC's Form 10-K filed on August 24, 2005.
|
|
10.2
|
-
|
Employment
Contract between CFC and Sheldon C. Petersen, dated as of March 1,
2004. Incorporated by reference to Exhibit 10.2 to CFC's Form
10-K filed on August 20, 2004.
|
|
10.3
|
-
|
Supplemental
Benefit Agreement between RTFC and Sheldon C. Petersen, dated as
of July
22, 2004. Incorporated by reference to Exhibit 10.3 to CFC's
Form 10-K filed on August 20, 2004.
|
|
10.4
|
-
|
Employment
Contract between CFC and John T. Evans, dated as of September 17,
1997
including termination of employment arrangement.
|
|
12
|
-
|
Computations
of ratio of margins to fixed charges.
|
|
14.1
|
-
|
Ethics
Policy for CEO and Senior Financial Officers. Incorporated by
reference to Exhibit 14.1 to CFC's Form 10-Q filed on October 14,
2004.
|
|
23
|
-
|
Consent
of Deloitte & Touche LLP.
|
|
31.1
|
-
|
Certification
of the Chief Executive Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
-
|
Certification
of the Chief Financial Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
-
|
Certification
of the Chief Executive Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32.2
|
-
|
Certification
of the Chief Financial Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the County of Fairfax, Commonwealth of Virginia, on the
27th day of
August 2007.
NATIONAL
RURAL UTILITIES
COOPERATIVE
FINANCE
CORPORATION
By: /s/ SHELDON
C. PETERSEN
Sheldon
C. Petersen
Governor
and Chief Executive
Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ SHELDON
C. PETERSEN
|
|
Governor
and Chief Executive Officer
|
|
|
|
Sheldon
C. Petersen
|
|
|
|
|
|
|
|
|
|
|
|
/s/ STEVEN
L. LILLY
|
|
Senior
Vice President and Chief Financial
|
|
|
|
Steven
L. Lilly
|
|
Officer
|
|
|
|
|
|
|
|
|
|
/s/ STEVEN
L. SLEPIAN
|
|
Vice
President and Controller (Principal
|
|
|
|
Steven
L. Slepian
|
|
Accounting
Officer)
|
|
|
|
|
|
|
|
|
|
/s/ TERRYL
JACOBS
|
|
President
and Director
|
|
|
|
Terryl
Jacobs
|
|
|
|
|
|
|
|
|
|
|
|
/s/ ROGER
ARTHUR
|
|
Vice
President and Director
|
|
|
|
Roger
Arthur
|
|
|
|
|
|
|
|
|
|
August
27, 2007
|
|
/s/ DARRYL
SCHRIVER
|
|
Secretary-Treasurer
and Director
|
|
|
|
Darryl
Schriver
|
|
|
|
|
|
|
|
|
|
|
|
/s/ ROGER
A. BALL
|
|
Director
|
|
|
|
Roger
A. Ball
|
|
|
|
|
|
|
|
|
|
|
|
/s/ RAPHAEL
A. BRUMBELOE
|
|
Director
|
|
|
|
Raphael
A. Brumbeloe
|
|
|
|
|
|
|
|
|
|
|
|
/s/ DELBERT
CRANFORD
|
|
Director
|
|
|
|
Delbert
Cranford
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JIMMY
EWING, JR.
|
|
Director
|
|
|
|
Jimmy
Ewing, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ HAROLD
FOLEY
|
|
Director
|
|
|
|
Harold
Foley
|
|
|
|
|
|
|
|
|
|
|
|
/s/ STEVEN
J. HAAVEN
|
|
Director
|
|
|
|
Steven
J. Haaven
|
|
|
|
|
|
|
|
|
|
|
|
/s/ GARY
HARRISON
|
|
Director
|
|
|
|
Gary
Harrison
|
|
|
|
|
|
|
|
|
|
|
|
/s/ CRAIG
A. HARTING
|
|
Director
|
|
|
|
Craig
A. Harting
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ JIM
HERRON
|
|
Director
|
|
|
|
Jim
Herron
|
|
|
|
|
|
|
|
|
|
|
|
/s/ MARTIN
HILLERT, JR.
|
|
Director
|
|
|
|
Martin
Hillert, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ TOM
KIRBY
|
|
Director
|
|
|
|
Tom
Kirby
|
|
|
|
|
|
|
|
|
|
|
|
/s/ WILLIAM
A. KOPACZ
|
|
Director
|
|
|
|
William
A. Kopacz
|
|
|
|
|
|
|
|
|
|
|
|
/s/ REUBEN
MCBRIDE
|
|
Director
|
|
|
|
Reuben
McBride
|
|
|
|
|
|
|
|
|
|
|
|
/s/ GALE
RETTKOWSKI
|
|
Director
|
|
August
27, 2007
|
|
Gale
Rettkowski
|
|
|
|
|
|
|
|
|
|
|
|
/s/ RONALD
P. SALYER
|
|
Director
|
|
|
|
Ronald
P. Salyer
|
|
|
|
|
|
|
|
|
|
|
|
/s/ R.
WAYNE STRATTON
|
|
Director
|
|
|
|
R.
Wayne Stratton
|
|
|
|
|
|
|
|
|
|
|
|
/s/ J.
DAVID WASSON, JR.
|
|
Director
|
|
|
|
J.
David Wasson, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ CHARLES
WAYNE WHITAKER
|
|
Director
|
|
|
|
Charles
Wayne Whitaker
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JACK
F. WOLFE, JR.
|
|
Director
|
|
|
|
Jack
F. Wolfe, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ F.
E. WOLSKI
|
|
Director
|
|
|
|
F.
E. Wolski
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Members of
National
Rural Utilities Cooperative Finance Corporation
Herndon,
Virginia
We
have audited the accompanying consolidated balance sheets of National Rural
Utilities Cooperative Finance Corporation and subsidiaries (the “Company”) as of
May 31, 2007 and 2006, and the related consolidated statements of operations,
changes in equity, and cash flows for each of the three years in the period
ended May 31, 2007. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of National Rural Utilities
Cooperative Finance Corporation and subsidiaries as of May 31, 2007 and 2006,
and the results of their operations and their cash flows for each of the three
years in the period ended May 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
As
discussed in Note 1(w), the accompanying 2006 and 2005 consolidated financial
statements have been restated.
/s/
DELOITTE & TOUCHE LLP
McLean,
Virginia
August
27, 2007
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
May
31, 2007 and 2006
|
|
(in
thousands)
|
|
A
S S E T S
|
|
|
|
|
|
2007
|
|
|
|
2006
(As
restated)*
|
|
|
Cash
and cash equivalents
|
$
|
304,107
|
|
|
$
|
260,338
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
|
18,128,207
|
|
|
|
18,360,905
|
|
|
Less: Allowance
for loan losses
|
|
(561,663
|
)
|
|
|
(611,443
|
)
|
|
Loans
to members, net
|
|
17,566,544
|
|
|
|
17,749,462
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
291,637
|
|
|
|
317,364
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
4,555
|
|
|
|
6,146
|
|
|
|
|
|
|
|
|
|
|
|
Debt
service reserve funds
|
|
54,993
|
|
|
|
80,159
|
|
|
|
|
|
|
|
|
|
|
|
Bond
issuance costs, net
|
|
45,611
|
|
|
|
51,064
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
66,329
|
|
|
|
120,889
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets
|
|
222,774
|
|
|
|
575,669
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
18,631
|
|
|
|
18,530
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,575,181
|
|
|
$
|
19,179,621
|
|
|
See
accompanying notes.
*See
Note 1 (w)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
May
31, 2007 and 2006
|
|
(in
thousands)
|
|
L
I A B I L I T I E S A N D E Q U I T
Y
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
2006
(As
restated)*
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$
|
4,427,123
|
|
|
$
|
5,343,824
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest payable
|
|
|
281,458
|
|
|
|
302,959
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
11,295,219
|
|
|
|
10,642,028
|
|
|
|
|
|
|
|
|
|
|
Deferred
income
|
|
|
27,990
|
|
|
|
40,086
|
|
|
|
|
|
|
|
|
|
|
Guarantee
liability
|
|
|
18,929
|
|
|
|
16,750
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
27,611
|
|
|
|
28,074
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
|
71,934
|
|
|
|
85,198
|
|
|
|
|
|
|
|
|
|
|
Subordinated
deferrable debt
|
|
|
311,440
|
|
|
|
486,440
|
|
|
|
|
|
|
|
|
|
|
Members'
subordinated certificates:
|
|
|
|
|
|
|
|
|
Membership
subordinated certificates
|
|
|
649,424
|
|
|
|
650,799
|
|
Loan
and guarantee subordinated certificates
|
|
|
732,023
|
|
|
|
777,161
|
|
Total
members' subordinated certificates
|
|
|
1,381,447
|
|
|
|
1,427,960
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
21,989
|
|
|
|
21,894
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Retained
equity
|
|
|
697,837
|
|
|
|
771,200
|
|
Accumulated
other comprehensive income
|
|
|
12,204
|
|
|
|
13,208
|
|
Total
equity
|
|
|
710,041
|
|
|
|
784,408
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,575,181
|
|
|
$
|
19,179,621
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
*See
Note 1 (w)
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
(in
thousands)
|
|
For
the Years Ended May 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
2006
(As
restated)*
|
|
|
|
2005
(As
restated)*
|
Interest
income
|
$
|
1,054,224
|
|
|
$
|
1,007,912
|
|
|
$
|
1,030,853
|
|
Interest
expense
|
|
(996,730
|
)
|
|
|
(975,936
|
)
|
|
|
(942,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
57,494
|
|
|
|
31,976
|
|
|
|
88,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of (provision for) loan losses
|
|
6,922
|
|
|
|
(23,240
|
)
|
|
|
(16,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after recovery of (provision for) loan
losses
|
|
64,416
|
|
|
|
8,736
|
|
|
|
72,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
1,533
|
|
|
|
2,398
|
|
|
|
5,645
|
|
Derivative
cash settlements
|
|
86,442
|
|
|
|
80,883
|
|
|
|
78,287
|
|
Results
of operations of foreclosed assets
|
|
9,758
|
|
|
|
15,492
|
|
|
|
13,024
|
|
Gain
on sale of building and land
|
|
-
|
|
|
|
43,431
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
97,733
|
|
|
|
142,204
|
|
|
|
96,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(33,817
|
)
|
|
|
(31,494
|
)
|
|
|
(29,417
|
)
|
Other
general and administrative expenses
|
|
(18,072
|
)
|
|
|
(20,595
|
)
|
|
|
(19,459
|
)
|
Recovery
of guarantee liability
|
|
1,700
|
|
|
|
700
|
|
|
|
3,107
|
|
Derivative
forward value
|
|
(79,281
|
)
|
|
|
28,805
|
|
|
|
25,849
|
|
Foreign
currency adjustments
|
|
(14,554
|
)
|
|
|
(22,594
|
)
|
|
|
(22,893
|
)
|
Loss
on sale of loans
|
|
(1,584
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
(145,608
|
)
|
|
|
(45,178
|
)
|
|
|
(42,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
prior to income taxes and minority interest
|
|
16,541
|
|
|
|
105,762
|
|
|
|
126,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
(2,396
|
)
|
|
|
(3,176
|
)
|
|
|
(1,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
prior to minority interest
|
|
14,145
|
|
|
|
102,586
|
|
|
|
125,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest, net of income taxes
|
|
(2,444
|
)
|
|
|
(7,089
|
)
|
|
|
(2,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
11,701
|
|
|
$
|
95,497
|
|
|
$
|
122,503
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
*See
Note 1 (w)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
|
|
(in
thousands)
|
|
For
the Years Ended May 31, 2007, 2006 and
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patronage
Capital
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
|
|
|
|
|
Other
|
|
Subtotal
|
|
|
|
|
|
|
|
Members'
|
|
General
|
|
|
|
|
|
|
Comprehensive
|
|
Retained
|
|
Membership
|
|
Unallocated
|
|
Education
|
|
Capital
|
|
Reserve
|
|
|
|
|
Total
|
|
(Loss)
Income
|
|
Equity
|
|
Fees
|
|
Net
Income
|
|
Fund
|
|
Reserve
|
|
Fund
|
|
Other
|
Balance
as of May 31, 2004 (As restated) *
|
$
|
692,453
|
|
$
|
(12,541
|
)
|
|
$
|
704,994
|
|
|
$
|
993
|
|
|
$
|
219,762
|
|
|
$
|
1,322
|
|
|
$
|
131,296
|
|
|
$
|
497
|
|
|
$
|
351,124
|
|
Patronage
capital retirement
|
|
(77,755
|
)
|
|
-
|
|
|
|
(77,755
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(77,755
|
)
|
Income
prior to income taxes and minority interest (As restated)
*
|
|
126,561
|
|
|
-
|
|
|
|
126,561
|
|
|
|
-
|
|
|
|
10,026
|
|
|
|
778
|
|
|
|
32,771
|
|
|
|
-
|
|
|
|
82,986
|
|
Other
comprehensive income (As
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restated)*
|
|
28,162
|
|
|
28,162
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income
taxes
|
|
(1,518
|
)
|
|
-
|
|
|
|
(1,518
|
)
|
|
|
-
|
|
|
|
(1,518
|
)
|
-
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Minority
interest
|
|
(2,540
|
)
|
|
-
|
|
|
|
(2,540
|
)
|
|
|
-
|
|
|
|
(2,540
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
(429
|
)
|
|
-
|
|
|
|
(429
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(900
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
471
|
|
Balance
as of May 31, 2005 (As restated) *
|
$
|
764,934
|
|
$
|
15,621
|
|
|
$
|
749,313
|
|
|
$
|
993
|
|
|
$
|
225,730
|
|
|
$
|
1,200
|
|
|
$
|
164,067
|
|
|
$
|
497
|
|
|
$
|
356,826
|
|
Patronage
capital retirement
|
|
(72,912
|
)
|
|
-
|
|
|
|
(72,912
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(72,912
|
)
|
Income
prior to income taxes and minority interest (As restated)
*
|
|
105,762
|
|
|
-
|
|
|
|
105,762
|
|
|
|
-
|
|
|
|
10,384
|
|
|
|
780
|
|
|
|
-
|
|
|
|
-
|
|
|
|
94,598
|
|
Other
comprehensive loss (As
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restated)*
|
|
(2,413
|
)
|
|
(2,413
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income
taxes
|
|
(3,176
|
)
|
|
-
|
|
|
|
(3,176
|
)
|
|
|
-
|
|
|
|
(3,176
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Minority
interest
|
|
(7,089
|
)
|
|
-
|
|
|
|
(7,089
|
)
|
|
|
-
|
|
|
|
(7,089
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
(698
|
)
|
|
-
|
|
|
|
(698
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
(699
|
)
|
|
|
(7,223
|
)
|
|
-
|
|
|
|
7,223
|
|
Balance
as of May 31, 2006 (As restated) *
|
$
|
784,408
|
|
$
|
13,208
|
|
|
$
|
771,200
|
|
|
$
|
994
|
|
|
$
|
225,849
|
|
|
$
|
1,281
|
|
|
$
|
156,844
|
|
|
$
|
497
|
|
|
$
|
385,735
|
|
Patronage
capital retirement
|
|
(84,247
|
)
|
|
-
|
|
|
|
(84,247
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(84,247
|
)
|
Income
prior to income taxes and minority interest
|
|
16,541
|
|
|
-
|
|
|
|
16,541
|
|
|
|
-
|
|
|
|
(89,481
|
)
|
|
|
945
|
|
|
|
1,464
|
|
|
|
1
|
|
|
|
103,612
|
|
Other
comprehensive loss
|
|
(1,004
|
)
|
|
(1,004
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income
taxes
|
|
(2,396
|
)
|
|
-
|
|
|
|
(2,396
|
)
|
|
|
-
|
|
|
|
(2,396
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Minority
interest
|
|
(2,444
|
)
|
|
-
|
|
|
|
(2,444
|
)
|
|
|
-
|
|
|
|
(2,444
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
(817
|
)
|
|
-
|
|
|
|
(817
|
)
|
|
|
3
|
|
|
|
-
|
|
|
|
(820
|
)
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Balance
as of May 31, 2007
|
$
|
710,041
|
|
$
|
12,204
|
|
|
$
|
697,837
|
|
|
$
|
997
|
|
|
$
|
131,528
|
|
|
$
|
1,406
|
|
|
$
|
158,308
|
|
|
$
|
498
|
|
|
$
|
405,100
|
|
See
accompanying notes.
*See
Note 1 (w)
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(in
thousands)
|
|
For
the Years Ended May 31, 2007, 2006 and 2005
|
|
|
2007
|
|
2006
(As
restated)*
|
|
2005
(As
restated)*
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
Net
income
|
$
|
11,701
|
|
$
|
95,497
|
|
$
|
122,503
|
|
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred income
|
|
(12,248
|
)
|
|
(14,444
|
)
|
|
(17,597
|
)
|
Amortization
of bond issuance costs and deferred charges
|
|
17,406
|
|
|
12,124
|
|
|
14,255
|
|
Depreciation
|
|
2,182
|
|
|
2,154
|
|
|
3,559
|
|
(Recovery
of) provision for loan losses
|
|
(6,922
|
)
|
|
23,240
|
|
|
16,402
|
|
Recovery
of guarantee liability
|
|
(1,700
|
)
|
|
(700
|
)
|
|
(3,107
|
)
|
Results
of operations of foreclosed assets
|
|
(9,758
|
)
|
|
(15,492
|
)
|
|
(13,024
|
)
|
Derivative
forward value
|
|
79,281
|
|
|
(28,805
|
)
|
|
(25,849
|
)
|
Foreign
currency adjustments
|
|
14,554
|
|
|
22,594
|
|
|
22,893
|
|
Gain
on sale of building and land
|
|
-
|
|
|
(43,431
|
)
|
|
-
|
|
Loss
on sale of loans
|
|
1,584
|
|
|
-
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
27,203
|
|
|
(12,626
|
)
|
|
56,001
|
|
Accrued
interest payable
|
|
(21,501
|
)
|
|
28,895
|
|
|
(17,387
|
)
|
Other
|
|
(702
|
)
|
|
4,902
|
|
|
(6,517
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
101,080
|
|
|
73,908
|
|
|
152,132
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Advances
made on loans
|
|
(7,228,143
|
)
|
|
(6,162,154
|
)
|
|
(6,466,367
|
)
|
Principal
collected on loans
|
|
7,052,334
|
|
|
6,768,252
|
|
|
7,883,988
|
|
Net
investment in fixed assets
|
|
(591
|
)
|
|
(4,665
|
)
|
|
(3,367
|
)
|
Net
cash provided by foreclosed assets
|
|
63,831
|
|
|
6,401
|
|
|
116,134
|
|
Net
proceeds from sale of foreclosed assets
|
|
487
|
|
|
29,152
|
|
|
3,600
|
|
Net
proceeds from sale of building and land
|
|
-
|
|
|
83,428
|
|
|
-
|
|
Net
proceeds from sale of loans
|
|
364,100
|
|
|
-
|
|
|
-
|
|
Net
cash provided by investing activities
|
|
252,018
|
|
|
720,414
|
|
|
1,533,988
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
(Repayments
of) proceeds from issuances of short-term debt, net
|
|
(470,591
|
)
|
|
(1,005,995
|
)
|
|
736,466
|
|
Proceeds
from issuance of long-term debt, net
|
|
2,066,332
|
|
|
3,792,566
|
|
|
289,757
|
|
Payments
for retirement of long-term debt
|
|
(1,645,848
|
)
|
|
(3,580,731
|
)
|
|
(2,394,391
|
)
|
Proceeds
from issuance of subordinated deferrable debt, net
|
|
-
|
|
|
-
|
|
|
131,246
|
|
Payments
for retirement of subordinated deferrable debt
|
|
(150,000
|
)
|
|
(48,560
|
)
|
|
-
|
|
Proceeds
from issuance of members' subordinated certificates
|
|
45,605
|
|
|
77,081
|
|
|
97,016
|
|
Payments
for retirement of members' subordinated certificates
|
|
(68,319
|
)
|
|
(113,819
|
)
|
|
(199,844
|
)
|
Payments
for retirement of CFC patronage capital
|
|
(74,094
|
)
|
|
(57,328
|
)
|
|
(51,356
|
)
|
Payments
for retirement of RTFC patronage capital
|
|
(12,414
|
)
|
|
(15,712
|
)
|
|
(16,807
|
)
|
Net
cash used in financing activities
|
|
(309,329
|
)
|
|
(952,498
|
)
|
|
(1,407,913
|
)
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
43,769
|
|
|
(158,176
|
)
|
|
278,207
|
|
BEGINNING
CASH AND CASH EQUIVALENTS
|
|
260,338
|
|
|
418,514
|
|
|
140,307
|
|
ENDING
CASH AND CASH EQUIVALENTS
|
$
|
304,107
|
|
$
|
260,338
|
|
$
|
418,514
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
*See
Note 1 (w)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(in
thousands)
|
|
For
the Years Ended May 31, 2007, 2006 and 2005
|
|
|
|
2007
|
|
|
2006
(As
restated)*
|
|
|
2005
(As
restated)*
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash
paid during year for interest
|
$
|
1,000,826
|
|
$
|
945,303
|
|
$
|
943,652
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing and investing activities:
|
|
|
|
|
|
|
|
|
|
Subordinated
certificates applied against loan balances
|
$
|
-
|
|
$
|
-
|
|
$
|
84,228
|
|
Patronage
capital applied against loan balances
|
|
-
|
|
|
1,829
|
|
|
8,486
|
|
Minority
interest patronage capital applied against loan balances
|
|
-
|
|
|
1,689
|
|
|
5,528
|
|
Net
(decrease) increase in debt service reserve funds/debt
service
|
|
|
|
|
|
|
|
|
|
reserve
certificates
|
|
(25,166
|
)
|
|
(13,023
|
)
|
|
8,946
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
*See
Note 1 (w)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
(1) General
Information and Accounting Policies
(a) General
Information
National
Rural Utilities Cooperative Finance Corporation ("CFC" or "the Company") is
a
private, not-for-profit cooperative association incorporated under the laws
of
the District of Columbia in April 1969. The principal purpose of CFC
is to provide its members with a source of financing to supplement the loan
programs of the Rural Utilities Service ("RUS") of the United States Department
of Agriculture. CFC makes loans to its rural utility system members
("utility members") to enable them to acquire, construct and operate electric
distribution, generation, transmission and related facilities. CFC
also provides its members with credit enhancements in the form of letters of
credit and guarantees of debt obligations. CFC is exempt from payment
of federal income taxes under the provisions of Section 501(c)(4) of the
Internal Revenue Code. CFC is a not-for-profit member-owned finance
cooperative, thus its objective is not to maximize its net income, but to offer
its members the lowest cost financial products and services consistent with
sound financial management.
Rural
Telephone Finance Cooperative ("RTFC") was incorporated as a private
not-for-profit cooperative association in the state of South Dakota in September
1987. In February 2005, RTFC reincorporated as a not-for-profit
cooperative association in the District of Columbia. The principal
purpose of RTFC is to provide and arrange financing for its rural
telecommunications members and their affiliates. RTFC's results of
operations and financial condition are consolidated with those of CFC in the
accompanying financial statements. RTFC is headquartered with CFC in
Herndon, Virginia. RTFC is a taxable cooperative that pays income tax
based on its net income, excluding net income allocated to its members, as
allowed by law under Subchapter T of the Internal Revenue Code.
National
Cooperative Services Corporation ("NCSC") was incorporated in 1981 in the
District of Columbia as a private non-profit cooperative
association. The principal purpose of NCSC is to provide financing to
the for-profit or non-profit entities that are owned, operated or controlled
by
or provide substantial benefit to, members of CFC. NCSC also markets,
through its cooperative members, a consumer loan program for home improvements
and an affinity credit card program. NCSC's membership consists of
CFC and distribution systems that are members of CFC or are eligible for such
membership. NCSC's results of operations and financial condition are
consolidated with those of CFC in the accompanying financial
statements. NCSC is headquartered with CFC in Herndon,
Virginia. NCSC is a taxable corporation.
The
Company's consolidated membership was 1,544 as of May 31, 2007 including 899
utility members, the majority of which are consumer-owned electric cooperatives,
513 telecommunications members, 66 service members and 66 associates in 49
states, the District of Columbia and two U.S. territories. The
utility members included 830 distribution systems and 69 generation and
transmission ("power supply") systems. Memberships among CFC, RTFC
and NCSC have been eliminated in consolidation.
(b) Principles
of Consolidation
The
accompanying financial statements include the consolidated accounts of CFC,
RTFC
and NCSC and certain entities controlled by CFC created to hold foreclosed
assets and effect loan securitization transactions, after elimination of all
material intercompany accounts and transactions. Financial Accounting
Standards Board ("FASB") Interpretation No. ("FIN") 46(R), Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51, requires CFC to consolidate the financial results of RTFC and
NCSC. CFC is the primary beneficiary of variable interests in RTFC
and NCSC due to its exposure to absorbing the majority of expected
losses.
CFC
is the sole lender to and manages the lending and financial affairs of RTFC
through a management agreement in effect through December 1,
2016. Under a guarantee agreement, RTFC pays CFC a fee in exchange
for which CFC reimburses RTFC for loan losses. All loans that require
RTFC board approval also require CFC board approval. CFC is not a member of
RTFC
and does not elect directors to the RTFC board. RTFC is an associate
member of CFC.
CFC
is the primary source of funding to and manages the lending and financial
affairs of NCSC through a management agreement which is automatically renewable
on an annual basis unless terminated by either party. NCSC funds its
programs either through loans from CFC or commercial paper and long-term notes
issued by NCSC and guaranteed by CFC. In connection with these
guarantees, NCSC must pay a guarantee fee and purchase from CFC interest-bearing
subordinated term certificates in proportion to the related
guarantee. Under a guarantee agreement, NCSC pays CFC a fee in
exchange for which CFC reimburses NCSC for loan losses, excluding losses in
the
consumer loan program. Effective January 1, 2007, all loans that
require NCSC board approval also require CFC board approval. CFC does
not control the election of directors to the NCSC board. NCSC is a
service organization member of CFC.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
RTFC and NCSC creditors have no recourse against CFC in
the
event of a default by RTFC and NCSC, unless there is a guarantee agreement
under
which CFC has guaranteed NCSC and RTFC debt obligations to a third
party. At May 31, 2007, CFC had guaranteed $321 million of NCSC debt,
derivative instruments and guarantees with third parties. Guarantees
related to debt and derivative instruments are not included in Note 13 at May
31, 2007 as they are reported on the consolidated balance sheet. At
May 31, 2007, CFC had no guarantees of RTFC debt to third party
creditors. All CFC loans to RTFC and NCSC are secured by all assets
and revenues of RTFC and NCSC. At May 31, 2007, RTFC had total assets
of $2,050 million including loans outstanding to members of $1,860 million
and
NCSC had total assets of $513 million including loans outstanding of $463
million. At May 31, 2007, CFC had committed to lend RTFC up to $4
billion, of which $2 billion was outstanding. Effective December 1,
2006, CFC’s commitment to RTFC was reduced to $4 billion compared to $10 billion
prior to that date. At May 31, 2007, CFC had committed to provide
credit to NCSC of up to $1 billion. At May 31, 2007, CFC had provided
a total of $526 million of credit to NCSC, representing $205 million of
outstanding loans and $321 million of credit enhancements.
CFC established limited liability corporations and
partnerships to hold foreclosed assets and effect loan securitization
transactions. CFC has full ownership and control of all such
companies and thus consolidates their financial results. CFC presents
the companies formed to hold foreclosed assets in one line on the consolidated
balance sheets and the consolidated statements of operations. A full
consolidation is presented for the companies formed to effect loan
securitization transactions.
Unless
stated otherwise, references to the Company relate to the consolidation of
CFC,
RTFC, NCSC and certain entities controlled by CFC and created to hold foreclosed
assets and effect loan securitization transactions.
|
(c)
|
Cash
and Cash Equivalents
|
CFC
includes cash, certificates of deposit and other investments with remaining
maturities of less than 90 days as cash and cash equivalents.
(d) Allowance
for Loan Losses
The
Company maintains an allowance for loan losses at a level estimated by
management to adequately provide for probable losses inherent in the loan
portfolio, which are estimated based upon a review of the loan portfolio, past
loss experience, specific problem loans, economic conditions and other pertinent
factors which, in management's judgment, deserve current recognition in
estimating loan losses. On a quarterly basis, the Company prepares an analysis
of the adequacy of the loan loss allowance and makes adjustments to the
allowance as necessary. The allowance is based on estimates and,
accordingly, actual loan losses may differ from the allowance
amount.
Management
makes recommendations of loans to be written off to the board of directors
of
CFC. In making its recommendation to write off all or a portion of a
loan balance, management considers various factors including cash flow analysis
and collateral securing the borrower's loans.
Activity
in the loan loss allowance account is summarized below for the years ended
May
31:
(in
thousands)
|
|
2007
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Balance
at beginning of year
|
$
|
611,443
|
|
|
$
|
589,749
|
|
$
|
573,939
|
|
|
|
(Recovery
of) provision for loan losses
|
|
(6,922
|
)
|
|
|
23,240
|
|
|
16,402
|
|
|
|
Write-offs
|
|
(44,668
|
)
|
|
|
(2,197
|
)
|
|
(1,354
|
)
|
|
|
Recoveries
|
|
1,810
|
|
|
|
651
|
|
|
762
|
|
|
|
Balance
at end of year
|
$
|
561,663
|
|
|
$
|
611,443
|
|
$
|
589,749
|
|
|
|
(e) Non-performing
Loans
CFC
classifies a borrower as non-performing when any one of the following criteria
are met:
· principal
or interest payments on any loan to the borrower are past due 90 days or
more,
· as
a result of court proceedings, repayment on the original terms is not
anticipated, or
· for
some other reason, management does not expect the timely repayment of principal
and interest.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
Once
a borrower is classified as non-performing, CFC typically places the loan on
non-accrual status and reverses all accrued and unpaid interest. CFC
generally applies all cash received during the non-accrual period to the
reduction of principal, thereby foregoing interest income
recognition. The decision to return a loan to accrual status is
determined on a case by case basis.
CFC
calculates impairment of loans receivable by comparing the present value of
the
estimated future cash flows associated with the loan discounted at the original
loan interest rate(s) and/or the estimated fair value of the collateral securing
the loan to the recorded investment in the loan in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") 114,
Accounting by Creditors for Impairment of a Loan - an Amendment of SFAS 5 and
SFAS 15, as amended. Loss reserves are specifically recorded based on
the calculated impairment.
(g) Fixed
Assets
Buildings,
furniture and fixtures and related equipment are stated at cost less accumulated
depreciation and amortization of $10 million and $8 million as of May 31, 2007
and 2006, respectively. Depreciation expense ($2 million, $2 million
and $4 million in fiscal years 2007, 2006 and 2005, respectively) is computed
primarily on the straight-line method over estimated useful lives ranging from
2
to 40 years.
(h) Foreclosed
Assets
CFC
records foreclosed assets received in satisfaction of loan receivables at fair
value or fair value less costs to sell and maintains these assets on the
consolidated balance sheets as foreclosed assets. It is CFC's intent
to sell the foreclosed assets, but the assets do not currently meet conditions
to qualify for assets held for sale under SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Accordingly, CFC records
depreciation of foreclosed assets. Foreclosed assets are assessed for
impairment on a periodic basis. The results of operations from
foreclosed assets are shown separately on the consolidated statements of
operations.
(i) Derivative
Financial Instruments
CFC
is neither a dealer nor a trader in derivative financial
instruments. CFC uses interest rate, cross currency and cross
currency interest rate exchange agreements to manage its interest rate and
foreign currency exchange risk.
In
accordance with SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of SFAS 133, CFC records derivative
instruments on the consolidated balance sheets as either an asset or liability
measured at fair value. Changes in the fair value of derivative
instruments are recognized in the derivative forward value line of the
consolidated statements of operations unless specific hedge accounting criteria
are met. The change to the fair value is recorded to other comprehensive income
if cash flow hedge accounting criteria are met. In the case of
certain foreign currency exchange agreements that meet hedge accounting
criteria, the change in fair value is recorded to other comprehensive income
and
then reclassified to offset the related change in the dollar value of foreign
denominated debt in the consolidated statements of operations. CFC
formally documents, designates, and assesses the effectiveness of transactions
that receive hedge accounting.
Net
settlements for derivative instruments that qualify for hedge accounting are
recorded in interest expense. CFC records net settlements related to
derivative instruments that do not qualify for hedge accounting in derivative
cash settlements. Prior to the implementation of SFAS 133, the net
settlements for all interest rate exchange agreements were included in interest
expense.
(j) Guarantee
Liability
CFC
guarantees certain contractual obligations of its members so that they may
obtain various forms of financing. With the exception of letters of credit,
the
underlying obligations may not be accelerated so long as CFC performs under
its
guarantee. CFC records a guarantee liability which represents CFC’s contingent
and non-contingent exposure related to its guarantees of its members’ debt
obligations. CFC’s contingent guarantee liability is based on management’s
estimate of CFC exposure to losses within the guarantee
portfolio. CFC uses factors such as borrower risk rating, maturity
bonds, corporate bond default probabilities and historical recovery rates in
estimating its contingent exposure. Adjustments to the contingent
guarantee liability are recorded in CFC’s provision for guarantee
losses. CFC has recorded a non-contingent guarantee liability for
all
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
new
or modified guarantees since January 1, 2003 in accordance with FIN No. 45,
Guarantor's Accounting and Disclosure Requirement for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34).
CFC's non-contingent guarantee liability represents CFC's obligation to stand
ready to perform pursuant to the terms of its guarantees that it has entered
into since January 1, 2003. CFC's non-contingent obligation is
estimated based on guarantee fees charged for guarantees issued, which
represents management's estimate of the fair value of its obligation to stand
ready to perform. The fees are deferred and amortized using the
straight-line method into interest income over the term of the
guarantee.
(k) Amortization
of Bond Discounts and Bond Issuance Costs
Bond
discounts and bond issuance costs are deferred and amortized as interest expense
using the effective interest method or a method approximating the effective
interest method over the initial legal maturity of each bond issue.
(l) Membership
Fees
Members
are charged a one-time membership fee based on member class. CFC
distribution system members, power supply system members and national
associations of cooperatives pay a $1,000 membership fee. CFC service
organization members pay a $200 membership fee. CFC associates pay a
$1,000 fee. RTFC voting members pay a $1,000 membership
fee. RTFC associates pay a $100 fee. NCSC members pay a
$100 membership fee. Membership fees are accounted for as members'
equity.
(m) Financial
Instruments with Off-Balance Sheet Risk
In
the normal course of business, CFC is a party to financial instruments with
off-balance sheet risk to meet the financing needs of its member
borrowers. These financial instruments include commitments to extend
credit, standby letters of credit and guarantees of members'
obligations. The expected inherent loss related to CFC's off-balance
sheet financial instruments is covered in CFC's guarantee
liability.
(n) Interest
Income
Interest
income includes the following for the years ended May 31:
(in
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Interest
on long-term fixed rate loans (1)
|
|
$
|
833,247
|
|
|
$
|
759,618
|
|
|
$
|
722,648
|
|
|
Interest
on long-term variable rate loans (1)
|
|
|
114,786
|
|
|
|
153,613
|
|
|
|
206,343
|
|
|
Interest
on short-term loans (1)
|
|
|
72,632
|
|
|
|
57,636
|
|
|
|
38,688
|
|
|
Interest
on investments (2)
|
|
|
9,662
|
|
|
|
10,391
|
|
|
|
3,214
|
|
|
Conversion
fees (3)
|
|
|
9,162
|
|
|
|
14,444
|
|
|
|
17,597
|
|
|
Make-whole
and prepayment fees (4)
|
|
|
4,748
|
|
|
|
5,409
|
|
|
|
36,448
|
|
|
Commitment
and guarantee fees (5)
|
|
|
9,161
|
|
|
|
6,488
|
|
|
|
5,740
|
|
|
Other
fees
|
|
|
826
|
|
|
|
313
|
|
|
|
175
|
|
|
Total
interest income
|
|
$
|
1,054,224
|
|
|
$
|
1,007,912
|
|
|
$
|
1,030,853
|
|
|
|
|
(1)
Represents interest income on loans to members.
|
(2)
Represents interest income on the investment of cash.
|
(3)
Conversion fees are deferred and recognized using the interest method
over
the remaining original loan interest rate pricing term, except for
a small
portion of the total fee charged to cover administrative costs related
to
the conversion, which is recognized immediately.
|
(4)
Make-whole and prepayment fees are charged for the early repayment
of
principal in full and recognized when collected.
|
(5)
Commitment fees for RTFC loan commitments are, in most cases, refundable
on a prorata basis according to the amount of the loan commitment
that is
advanced. Such refundable fees are deferred and then recognized
on a prorata basis based on the portion of the loan that is not advanced
prior to the expiration of the commitment. Commitment fees on
CFC loan commitments are not refundable and are billed and recognized
based on the unused portion of committed lines of
credit. Guarantee fees are charged based on the amount, type
and term of the guarantee. Guarantee fees are deferred and
amortized using the straight-line method into interest income over
the
life of the guarantee.
|
Deferred
income on the consolidated balance sheets is comprised primarily of deferred
conversion fees totaling $25 million and $37 million at May 31, 2007 and 2006,
respectively.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
(o) Interest
Expense
Interest
expense includes the following for the years ended May 31:
(in
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Interest
expense - commercial paper and bid notes (1)
|
|
$
|
178,687
|
|
|
$
|
133,035
|
|
|
$
|
88,419
|
|
|
Interest
expense - medium-term notes (1)
|
|
|
363,760
|
|
|
|
409,454
|
|
|
|
418,080
|
|
|
Interest
expense - collateral trust bonds (1)
|
|
|
218,523
|
|
|
|
271,980
|
|
|
|
314,873
|
|
|
Interest
expense - subordinated deferrable debt (1)
|
|
|
33,089
|
|
|
|
45,349
|
|
|
|
41,268
|
|
|
Interest
expense - subordinated certificates (1)
|
|
|
47,852
|
|
|
|
47,017
|
|
|
|
46,930
|
|
|
Interest
expense - long-term private debt (1)
|
|
|
118,722
|
|
|
|
46,201
|
|
|
|
2,119
|
|
|
Debt
issuance costs (2)
|
|
|
12,328
|
|
|
|
9,662
|
|
|
|
12,456
|
|
|
Derivative
cash settlements, net (3)
|
|
|
-
|
|
|
|
2,278
|
|
|
|
5,782
|
|
|
Commitment
and guarantee fees (4)
|
|
|
16,023
|
|
|
|
10,595
|
|
|
|
9,137
|
|
|
Loss
(gain) on extinguishment of debt (5)
|
|
|
4,806
|
|
|
|
(1,907
|
)
|
|
|
-
|
|
|
Other
fees
|
|
|
2,940
|
|
|
|
2,272
|
|
|
|
2,969
|
|
|
Total
interest expense
|
|
$
|
996,730
|
|
|
$
|
975,936
|
|
|
$
|
942,033
|
|
|
|
|
(1)
Represents interest expense and the amortization of discounts on
debt.
|
(2)
Includes amortization of all deferred charges related to debt issuance,
principally underwriter's fees, legal fees, printing costs and comfort
letter fees. Amortization is calculated on the effective interest
method. Also includes issuance costs related to dealer
commercial paper.
|
(3)
Represents the net cost related to swaps that qualify for hedge accounting
treatment plus the accrual from the date of the last settlement to
the
current period end.
|
(4)
Includes various fees related to funding activities, including fees
paid
to banks participating in the Company's revolving credit agreements
and
fees paid under bond guarantee agreements with RUS as part of the
Rural
Economic Development Loan and Grant ("REDLG") program. Fees are recognized
as incurred or amortized on a straight-line basis over the life of
the
respective agreement.
|
(5)
Represents the gain or loss on the early retirement of debt including
the
write-off of unamortized discount, premium and issuance
costs.
|
|
The
Company does not include indirect costs, if any, related to funding activities
in interest expense.
(p) Income
Taxes
While
CFC is exempt under Section 501(c)(4) of the Internal Revenue Code, it
is subject to tax on its unrelated business taxable income. RTFC takes a
deduction for the amount of the net income that it allocates to its
members. Approximately 99% of the RTFC net income is allocated to its
members annually. NCSC pays tax on the full amount of its net
income.
The
income tax expense recorded in the consolidated statement of operations for
the
years ended May 31, 2007, 2006 and 2005 represents the income tax expense for
RTFC and NCSC at the combined federal and state of Virginia income tax rate
of
approximately 38%. During the year ended May 31, 2005, NCSC used the
remainder of its prior year loss carryforwards and is currently paying Virginia
state and federal income taxes.
(q) Allocation
of Net Income
CFC
is required by the District of Columbia cooperative law to have a methodology
to
allocate its net income to its members. Annually, CFC's board of
directors allocates its net income, excluding certain non-cash adjustments,
to
its members in the form of patronage capital and to board approved
reserves. Currently, CFC has two such board approved reserves, the
education fund and the members' capital reserve. CFC allocates a
small portion, less than 1%, of net income annually to the education fund to
further the teaching of cooperative principles as required by cooperative
law. Funds from the education fund are disbursed annually to the
statewide cooperative organizations to fund the teaching of cooperative
principles in the service territories of the cooperatives in each
state. The board of directors will determine the amount of income
that is allocated to the members' capital reserve, if any. The
members' capital reserve represents income that is held by CFC to increase
equity retention.
The
income held in the members' capital reserve has not been specifically allocated
to any member, but may be allocated to individual members in the future as
patronage capital if authorized by CFC's board of directors. All
remaining income is annually allocated to CFC's members in the form of patronage
capital. CFC bases the amount of income allocated to each member on
the members' patronage of the CFC lending programs in the year that the income
was earned. There is no impact on CFC's total equity as a result of
allocating income to members in the form of patronage capital or to board
approved reserves. CFC's board of directors has annually voted to
retire a portion of the patronage capital allocated to members in prior
years. CFC's total equity is reduced by the amount of patronage
capital retired to its members and by disbursements from the education
fund.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
(r) Comprehensive
Income
Comprehensive
income includes the Company's net income, as well as other comprehensive income
related to derivatives. Comprehensive income for the years ended May
31, 2007, 2006 and 2005 is calculated as follows:
(in
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Net
income
|
|
$
|
11,701
|
|
|
$
|
95,497
|
|
|
$
|
122,503
|
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on derivatives
|
|
|
-
|
|
|
|
(2,639
|
)
|
|
|
11,921
|
|
|
Reclassification
adjustment for realized (gains) losses on derivatives
|
|
|
(1,004
|
)
|
|
|
226
|
|
|
|
16,241
|
|
|
Comprehensive
income
|
|
$
|
10,697
|
|
|
$
|
93,084
|
|
|
$
|
150,665
|
|
|
(s) Operating
Lease Obligations
On
October 18, 2005, the Company entered into an agreement to lease 107,228 square
feet of office, meeting and storage space in two office buildings located in
Herndon, Virginia. The lease is for three years, terminating on
October 17, 2008. The Company has the option to extend the lease for
two additional one-year periods with terms similar to the initial three-year
lease. The Company had previously owned these two buildings which
were sold at the commencement of the agreement (see Note 16).
The
following represents the future minimum lease payments related to the Company’s
three-year lease of office space for the years ended May 31:
(in
thousands)
|
2008
|
|
2009
|
|
|
Lease
Payments (1)
|
$3,130
|
|
$1,198
|
|
|
|
|
(1)
Assuming the Company exercises the option to extend the lease for
an
additional one-year period, the future minimum lease payments for
fiscal
years 2009 and 2010 would increase to $3,301 thousand and $1,284
thousand,
respectively. Assuming the Company exercises the option to
extend the lease for two additional one-year periods, the future
minimum
lease payments for fiscal years 2009, 2010 and 2011 would increase
to
$3,301 thousand, $3,503 thousand and $1,355 thousand,
respectively.
|
Contingent
rental payments may be due if the building operating expenses exceed the base
year amount included in the lease agreement. The Company would be
required to pay contingent rental payments based on the amount of space leased
in the building divided by total rentable space in the building times the amount
that operating expenses exceeded the base year amount in the lease
agreement. To date, the Company has not been required to make
contingent rental payments.
The
Company recognizes rental expense on a straight-line basis, which requires
taking the total scheduled payments and dividing by the number of months in
the
lease term. During the years ended May 31, 2007 and 2006, the Company
recognized rental expense of $3 million and $2 million,
respectively.
(t) Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the assets and liabilities and the revenue and expenses reported in
the
financial statements, as well as amounts included in the notes thereto,
including discussion and disclosure of contingent liabilities. While
CFC uses its best estimates and judgments based on the known facts at the date
of the financial statements, actual results could differ from these estimates
as
future events occur.
CFC
does not believe it is vulnerable to the risk of a near-term severe impact
as a
result of any concentrations of its activities.
(u) Reclassifications
Certain
reclassifications of prior year amounts have been made to conform to the current
reporting format.
(v) New
Accounting Pronouncements
In
February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial
Instruments – an amendment of SFAS 133 and 140. SFAS 155 permits fair value
measurement of any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation. SFAS 155 also clarifies
which interest-only strips and principal-only strips are not subject to the
requirements of Statement 133. It establishes a requirement to evaluate
interests in securitized
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
financial
assets to identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative requiring
bifurcation. SFAS 155 also clarifies that concentrations of credit risk in
the
form of subordination are not embedded derivatives. SFAS 155 is effective for
all financial instruments acquired or issued after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. The Company’s
adoption of SFAS 155 as of June 1, 2007 is not expected to have a material
impact on the Company's financial position or results of
operations.
In
March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial
Assets. SFAS 156 requires the initial measurement of all separately
recognized servicing assets and liabilities at fair value and permits, but
does
not require, the subsequent measurement of servicing assets and liabilities
at
fair value. SFAS 156 is effective as of the beginning of the first fiscal year
that begins after September 15, 2006. The Company’s adoption of SFAS
156 as of June 1, 2007 is not expected to have a material impact on the
Company's financial position or results of operations.
In
June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies
the accounting for income taxes by prescribing a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The
Company’s adoption of FIN 48 as of June 1, 2007 is not expected to have a
material impact on the Company's financial position or results of
operations.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing an asset or liability and establishes
a fair value hierarchy that prioritizes the information used to develop those
assumptions. Under the standard, fair value measurements would be separately
disclosed by level within the fair value hierarchy. SFAS 157 is effective as
of
the beginning of the first fiscal year that begins after November 15, 2007.
The
Company's adoption of SFAS 157 as of June 1, 2008 is not expected to have a
material impact on the Company's financial position or results of
operations.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities. The fair value option established by SFAS
159
permits entities to choose to measure eligible financial instruments at fair
value. The unrealized gains and losses on items for which the fair value option
has been elected should be reported in earnings. The decision to elect the
fair
value option is determined on an instrument by instrument basis and is
irrevocable. Assets and liabilities measured at fair value pursuant to the
fair
value option should be reported separately in the balance sheet from those
instruments measured using other measurement attributes. SFAS 159 is effective
as of the beginning of the first fiscal year that begins after November 15,
2007. As part of the Company's adoption of SFAS 159 as of June 1,
2008, it does not plan to choose the option to measure eligible financial
instruments at fair value and therefore the adoption of SFAS 159 is not expected
to have a material impact on the Company's financial position or results of
operations.
(w) Restatement
Subsequent
to the issuance of the May 31, 2006 consolidated financial statements, the
Company’s management identified an error in the recording of interest expense on
foreign denominated debt and the cash settlement income from foreign currency
exchange agreements, as well as the related accrued interest payable and accrued
interest receivable. The Company was using the agreed upon foreign
exchange rate from the foreign currency exchange agreement rather than the
average spot foreign currency exchange rate during the income statement period
to convert the interest expense on the foreign denominated debt and foreign
exchange agreement income to U.S. dollars. The Company was also using
the agreed upon foreign exchange rate from the foreign currency exchange
agreement rather than the spot foreign currency exchange rate at the end of
the
balance sheet period to convert the accrued interest payable and accrued
interest receivable to U.S. dollars. The interest expense on the foreign
denominated debt and the cash settlement income from the foreign currency
exchange agreement are equal and offsetting amounts, as the Company uses the
amount received under the exchange agreement to pay the interest expense on
the
foreign denominated debt. The amounts for the accrued interest
payable and accrued interest receivable are also offsetting. As a
result of this error, interest expense and cash settlement income were
understated by $13 million and $15 million for the years ended May 31, 2006
and
2005, respectively. The Company subtracts the net accrual from the
last settlement date on its derivatives at each period end in the calculation
of
the related fair value, so the error in the calculation of the income receivable
on the foreign exchange agreements also impacted the fair value of the
derivatives recorded as a derivative asset. Thus this correction also
impacts the change in the fair value of the derivatives reported in the
derivative forward value line on the consolidated statement of
operations. The derivative forward value line and net income were
overstated by $0.2 million and $0.5 million for the years ended May 31, 2006
and
2005, respectively. There is no impact on cash flows from operating
activities or the total change in cash in the consolidated statements of cash
flows. The amounts
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
reported
on the consolidated balance sheet for accrued interest payable and accrued
interest and other receivables at May 31, 2006 were understated by $4 million
and the amounts reported for the derivative asset and retained equity at May
31,
2006 were overstated by $4 million.
A
summary of the significant effects of the restatement on the May 31, 2006
consolidated balance sheet and consolidated statement of operations is as
follows:
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Accrued
interest and other receivables
|
$
|
313,796
|
|
$
|
3,568
|
|
$
|
317,364
|
|
Derivative
assets
|
|
579,237
|
|
|
(3,568
|
)
|
|
575,669
|
|
Accrued
interest payable
|
|
299,391
|
|
|
3,568
|
|
|
302,959
|
|
Retained
equity
|
|
774,768
|
|
|
(3,568
|
)
|
|
771,200
|
|
Total
equity
|
|
787,976
|
|
|
(3,568
|
)
|
|
784,408
|
|
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Interest
expense
|
$
|
(962,656
|
)
|
$
|
(13,280
|
)
|
$
|
(975,936
|
)
|
Net
interest income
|
|
45,256
|
|
|
(13,280
|
)
|
|
31,976
|
|
Net
interest income after provision for loan losses
|
|
22,016
|
|
|
(13,280
|
)
|
|
8,736
|
|
Derivative
cash settlements
|
|
67,603
|
|
|
13,280
|
|
|
80,883
|
|
Total
non-interest income
|
|
128,924
|
|
|
13,280
|
|
|
142,204
|
|
Derivative
forward value
|
|
29,054
|
|
|
(249
|
)
|
|
28,805
|
|
Total
non-interest expense
|
|
(44,929
|
)
|
|
(249
|
)
|
|
(45,178
|
)
|
Income
prior to income taxes and minority interest
|
|
106,011
|
|
|
(249
|
)
|
|
105,762
|
|
Income
prior to minority interest
|
|
102,835
|
|
|
(249
|
)
|
|
102,586
|
|
Net
income
|
|
95,746
|
|
|
(249
|
)
|
|
95,497
|
|
A
summary of the significant effects of the restatement on the May 31, 2005
consolidated statement of operations is as follows:
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Interest
expense
|
$
|
(926,790
|
)
|
$
|
(15,243
|
)
|
$
|
(942,033
|
)
|
Net
interest income
|
|
104,063
|
|
|
(15,243
|
)
|
|
88,820
|
|
Net
interest income after provision for loan losses
|
|
87,661
|
|
|
(15,243
|
)
|
|
72,418
|
|
Derivative
cash settlements
|
|
63,044
|
|
|
15,243
|
|
|
78,287
|
|
Total
non-interest income
|
|
81,713
|
|
|
15,243
|
|
|
96,956
|
|
Derivative
forward value
|
|
26,320
|
|
|
(471
|
)
|
|
25,849
|
|
Total
non-interest expense
|
|
(42,342
|
)
|
|
(471
|
)
|
|
(42,813
|
)
|
Income
prior to income taxes and minority interest
|
|
127,032
|
|
|
(471
|
)
|
|
126,561
|
|
Income
prior to minority interest
|
|
125,514
|
|
|
(471
|
)
|
|
125,043
|
|
Net
income
|
|
122,974
|
|
|
(471
|
)
|
|
122,503
|
|
The
quarterly results for all impacted interim periods in fiscal year 2007 and
2006
have also been restated to correct the error. See Note 18 Selected
Quarterly Financial Data for an explanation of the changes and a reconciliation
from the amounts previously filed with the SEC and the restated amounts shown
in
this May 31, 2007 Form 10-K.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
(2) Loans
and Commitments
Loans
to members bear interest at rates determined from time to time by the Company
after considering its interest expense, operating expenses, provision for loan
losses and the maintenance of reasonable earnings levels. In keeping
with its not-for-profit, cooperative charter, the Company's policy is to set
interest rates at the lowest levels it considers to be consistent with sound
financial management.
Loans
outstanding to members and unadvanced commitments by loan type and by segment
are summarized as follows at
May
31:
|
2007
|
|
2006
|
|
|
|
|
|
Unadvanced
|
|
|
|
Unadvanced
|
|
(in
thousands)
|
|
Loans
Outstanding
|
|
Commitments
(1)
|
|
Loans
Outstanding
|
|
Commitments
(1)
|
|
Total
by loan type: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
$
|
14,663,340
|
|
|
$
|
-
|
|
|
$
|
14,546,850
|
|
|
$
|
-
|
|
|
Long-term
variable rate loans
|
|
1,993,534
|
|
|
|
5,703,313
|
|
|
|
2,524,722
|
|
|
|
6,146,618
|
|
|
Loans
guaranteed by RUS
|
|
255,903
|
|
|
|
491
|
|
|
|
261,330
|
|
|
|
591
|
|
|
Short-term
loans
|
|
1,215,430
|
|
|
|
7,200,156
|
|
|
|
1,028,003
|
|
|
|
6,632,704
|
|
|
Total
loans
|
|
18,128,207
|
|
|
|
12,903,960
|
|
|
|
18,360,905
|
|
|
|
12,779,913
|
|
|
Less:
Allowance for loan losses
|
|
(561,663
|
)
|
|
|
-
|
|
|
|
(611,443
|
)
|
|
|
-
|
|
|
Net
loans
|
$
|
17,566,544
|
|
|
$
|
12,903,960
|
|
|
$
|
17,749,462
|
|
|
$
|
12,779,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
12,827,772
|
|
|
$
|
9,176,686
|
|
|
$
|
12,859,076
|
|
|
$
|
8,905,434
|
|
|
Power
supply
|
|
2,858,040
|
|
|
|
2,798,124
|
|
|
|
2,810,663
|
|
|
|
2,635,502
|
|
|
Statewide
and associate
|
|
119,478
|
|
|
|
139,156
|
|
|
|
124,633
|
|
|
|
110,839
|
|
|
CFC
Total
|
|
15,805,290
|
|
|
|
12,113,966
|
|
|
|
15,794,372
|
|
|
|
11,651,775
|
|
|
RTFC
|
|
1,860,379
|
|
|
|
473,762
|
|
|
|
2,162,464
|
|
|
|
550,990
|
|
|
NCSC
|
|
462,538
|
|
|
|
316,232
|
|
|
|
404,069
|
|
|
|
577,148
|
|
|
Total
loans
|
$
|
18,128,207
|
|
|
$
|
12,903,960
|
|
|
$
|
18,360,905
|
|
|
$
|
12,779,913
|
|
|
|
|
(1) Unadvanced
loan commitments are loans for which loan contracts have been approved
and
executed, but funds have not been advanced. Additional
information may be required to assure that all conditions for advance
of
funds have been fully met and that there has been no material change
in
the member's condition as represented in the supporting
documents. Since commitments may expire without being fully
drawn upon and a significant amount of the commitments are for standby
liquidity purposes, the total unadvanced loan commitments do not
necessarily represent future cash requirements. Collateral and
security requirements for advances on commitments are identical to
those
on initial loan approval. As the interest rate on unadvanced
commitments is not set, long-term unadvanced commitments have been
classified in this chart as variable rate unadvanced
commitments. However, at the time of the advance, the borrower
may select a fixed or variable rate.
|
(2)
Loans are classified as long-term or short-term based on their original
maturity.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
The
following table summarizes non-performing and restructured loans outstanding
and
unadvanced commitments to those borrowers by segment and by loan program at
May
31:
|
2007
|
|
2006
|
|
|
|
|
|
Unadvanced
|
|
|
|
Unadvanced
|
|
(in
thousands)
|
|
Loans
Outstanding
|
|
Commitments
(1)
|
|
Loans
Outstanding
|
|
Commitments
(1)
|
|
Non-performing
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans (2)
|
$
|
212,984
|
|
|
$
|
-
|
|
|
$
|
212,984
|
|
|
$
|
-
|
|
|
Long-term
variable rate loans (2)
|
|
261,081
|
|
|
|
-
|
|
|
|
314,987
|
|
|
|
-
|
|
|
Short-term
loans (2)
|
|
27,799
|
|
|
|
418
|
|
|
|
49,817
|
|
|
|
296
|
|
|
Total
RTFC loans
|
|
501,864
|
|
|
|
418
|
|
|
|
577,788
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NCSC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans (2)
|
|
-
|
|
|
|
-
|
|
|
|
81
|
|
|
|
-
|
|
|
Total
non-performing loans
|
$
|
501,864
|
|
|
$
|
418
|
|
|
$
|
577,869
|
|
|
$
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans (2)
|
$
|
52,420
|
|
|
$
|
-
|
|
|
$
|
51,670
|
|
|
$
|
-
|
|
|
Long-term
variable rate loans (2)
|
|
544,697
|
|
|
|
186,673
|
|
|
|
571,640
|
|
|
|
203,000
|
|
|
Short-term
loans (2)
|
|
-
|
|
|
|
12,500
|
|
|
|
258
|
|
|
|
12,242
|
|
|
Total
CFC loans
|
|
597,117
|
|
|
|
199,173
|
|
|
|
623,568
|
|
|
|
215,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans (2)
|
|
6,188
|
|
|
|
-
|
|
|
|
6,786
|
|
|
|
-
|
|
|
Total
restructured loans
|
$
|
603,305
|
|
|
$
|
199,173
|
|
|
$
|
630,354
|
|
|
$
|
215,242
|
|
|
|
|
(1) Unadvanced
loan commitments are loans for which loan contracts have been approved
and
executed, but funds have not been advanced. Additional
information may be required to assure that all conditions for advance
of
funds have been fully met and that there has been no material change
in
the member's condition as represented in the supporting
documents. Since commitments may expire without being fully
drawn upon and a significant amount of the commitments are for standby
liquidity purposes, the total unadvanced loan commitments do not
necessarily represent future cash requirements. Collateral and
security requirements for advances on commitments are identical to
those
on initial loan approval. As the interest rate on unadvanced
commitments is not set, long-term unadvanced commitments have been
classified in this chart as variable rate unadvanced
commitments. However, at the time of the advance, the borrower
may select a fixed or variable rate.
|
(2)
Loans are classified as long-term or short-term based on their original
maturity.
|
Loan
origination costs are deferred and amortized using the straight-line method,
which approximates the interest method, over the life of the loan as a reduction
to interest income. At May 31, 2007 and 2006, the balance for
deferred loan origination costs related to loans outstanding totaled $4 million
and $3 million, respectively.
Credit
Concentration
The
Company's loan portfolio is widely dispersed throughout the United States and
its territories, including 48 states, the District of Columbia, American Samoa
and the U.S. Virgin Islands. At May 31, 2007 and 2006, loans
outstanding to borrowers in any state or territory did not exceed 15% and 16%,
respectively, of total loans outstanding. In addition to the
geographic diversity of the portfolio, the Company limits its exposure to any
one borrower. At May 31, 2007 and 2006, the total exposure
outstanding to any one borrower or controlled group did not exceed 3% of total
loans and guarantees outstanding. At May 31, 2007, the ten largest
borrowers included six distribution systems, two power supply systems and two
telecommunications systems. At May 31, 2006, the ten largest borrowers included
four distribution systems, five power supply systems and one telecommunications
system. The following chart shows the exposure to the ten largest
borrowers as a percentage of total exposure by type and by segment at May
31:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(Dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of Total
|
|
|
|
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
3,306,986
|
|
|
|
$
|
3,140,666
|
|
|
|
|
|
|
|
Guarantees
|
|
76,867
|
|
|
|
|
266,479
|
|
|
|
|
|
|
|
Total
credit exposure
|
$
|
3,383,853
|
|
18%
|
|
$
|
3,407,145
|
|
18%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
2,691,060
|
|
|
|
$
|
2,855,874
|
|
|
|
|
|
|
|
RTFC
|
|
692,793
|
|
|
|
|
488,391
|
|
|
|
|
|
|
|
NCSC
|
|
-
|
|
|
|
|
62,880
|
|
|
|
|
|
|
|
Total
credit exposure
|
$
|
3,383,853
|
|
18%
|
|
$
|
3,407,145
|
|
18%
|
|
|
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
Interest
Rates
Set
forth below is the weighted average interest rate earned on all loans
outstanding during the fiscal years ended May 31:
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
Long-term
fixed rate
|
|
5.87%
|
|
|
|
5.64%
|
|
|
|
5.62%
|
|
|
Long-term
variable rate
|
|
7.58%
|
|
|
|
6.43%
|
|
|
|
4.50%
|
|
|
Loans
guaranteed by RUS
|
|
5.59%
|
|
|
|
5.34%
|
|
|
|
4.90%
|
|
|
Short-term
|
|
7.06%
|
|
|
|
6.07%
|
|
|
|
3.97%
|
|
|
Non-performing
|
|
0.02%
|
|
|
|
0.01%
|
|
|
|
0.00%
|
|
|
Restructured
|
|
0.61%
|
|
|
|
0.08%
|
|
|
|
0.05%
|
|
|
Total
|
|
5.79%
|
|
|
|
5.48%
|
|
|
|
5.19%
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
|
5.80%
|
|
|
|
5.43%
|
|
|
|
4.76%
|
|
|
RTFC
|
|
5.30%
|
|
|
|
5.50%
|
|
|
|
6.88%
|
|
|
NCSC
|
|
8.00%
|
|
|
|
7.08%
|
|
|
|
5.77%
|
|
|
Total
|
|
5.79%
|
|
|
|
5.48%
|
|
|
|
5.19%
|
|
|
In
general, a borrower can select a fixed interest rate on long-term loans for
periods of one to 35 years or the variable rate. Upon expiration of
the selected fixed interest rate term, the borrower must select the variable
rate or select another fixed rate term for a period that does not exceed the
remaining loan maturity. The Company sets long-term fixed rates daily
and variable rates monthly. On notification to borrowers, the Company
may adjust the variable interest rate semi-monthly. Under the
policies in effect for each company, the maximum interest rate which may be
charged on short-term loans for CFC is the prevailing bank prime rate plus
1%
per annum; for RTFC, it is the prevailing bank prime rate plus 11/2%
per annum; and for
NCSC, it is the prevailing bank prime rate plus 1% per annum.
Loan
Repricing
Long-term
fixed rate loans outstanding at May 31, 2007, which will be subject to the
repricing of their interest rates during the next five fiscal years, are
summarized as follows (due to principal repayments, amounts subject to interest
rate repricing may be lower at the actual time of interest rate
repricing):
|
Weighted
Average
|
|
|
|
|
(Dollar
amounts in thousands)
|
Interest
Rate
|
|
Amount
Repricing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
5.37%
|
|
|
$
|
1,151,391
|
|
|
|
2009
|
|
|
5.50%
|
|
|
|
1,068,606
|
|
|
|
2010
|
|
|
5.79%
|
|
|
|
954,506
|
|
|
|
2011
|
|
|
5.88%
|
|
|
|
799,805
|
|
|
|
2012
|
|
|
6.32%
|
|
|
|
919,866
|
|
|
|
Thereafter
|
|
|
6.27%
|
|
|
|
2,737,153
|
|
|
|
During
the year ended May 31, 2007, long-term fixed rate loans totaling $989 million
had their interest rates repriced.
Loan
Amortization
On
most long-term loans, level quarterly payments are required with respect to
principal and interest in amounts sufficient to repay the loan principal,
generally over periods of up to 35 years from the date of the secured promissory
note.
Amortization
of long-term loans in each of the five fiscal years following May 31, 2007
and
thereafter are as follows:
(in
thousands)
|
Amortization
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
831,181
|
|
|
|
|
|
|
|
2009
|
|
|
784,621
|
|
|
|
|
|
|
|
2010
|
|
|
1,279,012
|
|
|
|
|
|
|
|
2011
|
|
|
805,703
|
|
|
|
|
|
|
|
2012
|
|
|
1,051,788
|
|
|
|
|
|
|
|
Thereafter
|
|
|
12,160,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents scheduled amortization based on current rates without
consideration for loans that
reprice.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
Loan
Security
The
Company evaluates each borrower's creditworthiness on a case-by-case
basis. It is generally the Company's policy to require collateral for
long-term loans. Such collateral usually consists of a first mortgage
lien on the borrower's total system, including plant and equipment, and a pledge
of future revenues. The loan and security documents also contain
various provisions with respect to the mortgaging of the borrower's property
and
debt service coverage ratios, maintenance of adequate insurance coverage as
well
as certain other restrictive covenants.
The
following tables summarize the Company's secured and unsecured loans
outstanding by loan program and by segment at
May
31:
|
|
(Dollar
amounts in thousands)
|
|
2007
|
|
2006
|
Total
by loan program:
|
|
Secured
|
|
%
|
|
Unsecured
|
|
%
|
|
Secured
|
|
%
|
|
Unsecured
|
|
%
|
|
Long-term
fixed rate loans
|
$
|
14,180,956
|
|
97%
|
$
|
482,384
|
|
3%
|
$
|
13,984,404
|
|
96%
|
$
|
562,446
|
|
4%
|
|
Long-term
variable rate loans
|
|
1,865,821
|
|
94%
|
|
127,713
|
|
6%
|
|
2,414,737
|
|
96%
|
|
109,985
|
|
4%
|
|
Loans
guaranteed by RUS
|
|
255,903
|
|
100%
|
|
-
|
|
-
|
|
261,330
|
|
100%
|
|
-
|
|
-
|
|
Short-term
loans
|
|
191,231
|
|
16%
|
|
1,024,199
|
|
84%
|
|
146,835
|
|
14%
|
|
881,168
|
|
86%
|
|
Total
loans
|
$
|
16,493,911
|
|
91%
|
$
|
1,634,296
|
|
9%
|
$
|
16,807,306
|
|
92%
|
$
|
1,553,599
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
14,462,448
|
|
92%
|
$
|
1,342,842
|
|
8%
|
$
|
14,575,691
|
|
92%
|
$
|
1,218,681
|
|
8%
|
|
RTFC
|
|
1,630,079
|
|
88%
|
|
230,300
|
|
12%
|
|
1,921,635
|
|
89%
|
|
240,829
|
|
11%
|
|
NCSC
|
|
401,384
|
|
87%
|
|
61,154
|
|
13%
|
|
309,980
|
|
77%
|
|
94,089
|
|
23%
|
|
Total
loans
|
$
|
16,493,911
|
|
91%
|
$
|
1,634,296
|
|
9%
|
$
|
16,807,306
|
|
92%
|
$
|
1,553,599
|
|
8%
|
Concurrent
Loans
CFC
makes loans to borrowers both as the sole lender of the loan commitment and
on a
concurrent basis with RUS. Under default provisions of common
mortgages securing long-term CFC loans to distribution system members that
also
borrow from RUS, RUS has the sole right to act within 30 days or, if RUS is
not
legally entitled to act on behalf of all noteholders, CFC may exercise
remedies. Under common default provisions of mortgages securing
long-term CFC loans to, or guarantee reimbursement obligations of, power supply
members, RUS retains substantial control over the exercise of mortgage
remedies. As of May 31, 2007 and 2006, CFC had $2,302 million and
$2,563 million outstanding, respectively, of loans issued on a concurrent basis
with RUS.
Pledging
of Loans
As
of May 31, 2007 and 2006, distribution system mortgage notes related to
outstanding long-term loans totaling $5,797 million and $5,472 million,
respectively, and RUS guaranteed loans qualifying as permitted investments
totaling $219 million and $223 million, respectively, were pledged as collateral
to secure CFC's collateral trust bonds under the 1994 indenture. In
addition, $2 million of cash was pledged under the 1972 indenture at May 31,
2007 and 2006.
As
of May 31, 2007 and 2006, distribution system mortgage notes related to
outstanding long-term loans totaling $592 million and $574 million,
respectively, were pledged as collateral to secure CFC's notes to Federal
Agricultural Mortgage Corporation ("Farmer Mac") issued in July 2005 and due
in
2008.
In
addition to the loans pledged as collateral at May 31, 2007 and May 31, 2006,
CFC had $2,765 million and $2,302 million, respectively, of mortgage notes
on
deposit with the trustee for the $2 billion of notes payable to the Federal
Financing Bank ("FFB") of the United States Treasury (see Note
6). There are certain rating triggers related to the $2 billion of
notes payable to the FFB that would result in the mortgage notes being pledged
as collateral rather than held on deposit.
The
$2 billion of notes payable to the FFB contain a rating trigger related to
the
Company's senior secured credit ratings from Standard & Poor's Corporation,
Moody's Investors Service and Fitch Ratings. A rating trigger event
exists if the Company's senior secured debt does not have at least two of the
following ratings: (i) A- or higher from Standard & Poor's Corporation, (ii)
A3 or higher from Moody's Investors Service, (iii) A- or higher from Fitch
Ratings and (iv) an equivalent rating from a successor rating agency to any
of
the above rating agencies. If the Company's senior secured credit
ratings fall below the levels listed above, the total $2,765 million of mortgage
notes would be pledged as collateral rather than held on deposit.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
A
total of $1 billion of notes payable to the FFB has a second rating trigger
related to a financial expert to the Company's board of directors. A
rating trigger event will exist if the financial expert position (as defined
by
Section 407 of the Sarbanes-Oxley Act of 2002) remains vacant for more than
90 consecutive days. In November 2006, the CFC Board elected an
at-large director who qualifies as a financial expert who will serve on the
audit committee. The director took his seat on the board following
the CFC annual meeting in March 2007. If the Company does not satisfy
the financial expert rating trigger, $1,394 million of mortgage notes would
be
pledged as collateral rather than held on deposit.
RUS
Guaranteed Loans
At
May 31, 2007 and 2006, CFC had a total of $256 million and $261 million,
respectively, of loans outstanding on which RUS had guaranteed the repayment
of
principal and interest. There are two programs under which these
loans were advanced. At May
31, 2007 and 2006, CFC had a total of $37 million and $38 million, respectively,
under a program in which RUS previously allowed certain qualifying cooperatives
to repay loans held by the FFB early and allowed the transfer of the guarantee
to the new lender. At May 31, 2007 and 2006, CFC had a total of $219
million and $223 million, respectively, under a program in which RUS approved
CFC, in February 1999, as a lender under its current loan guarantee
program.
(3) Loan
Securitizations
The
Company accounts for the sale of loans in securitization transactions according
to the provisions of SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. The Company
derecognizes financial assets when control has been surrendered. The
Company has no retained interest in securitized loans and therefore is not
required to record such retained interests at fair value. The Company
services the loans in return for a market fee and thus does not record a
servicing asset or liability. The Company recognizes the service fee
on an accrual basis over the period for which servicing activity is
provided. Deferred transactions costs and unamortized deferred loan
origination costs related to the loans sold are expensed as part of the
calculation of the gain or loss on the sale.
On
February 15, 2007, the Company sold CFC distribution loans with outstanding
principal balances totaling $366 million in a loan securitization
transaction. The transaction qualified for sale treatment under SFAS
140. The Company received $366 million of cash in exchange for the
loans, which represents the full principal amount of the loans
sold. The Company incurred $0.7 million of costs associated with the
transaction and had $0.9 million of unamortized deferred loan origination costs
for the loans sold and accordingly, the Company recorded a loss on sale of
loans
totaling $1.6 million.
The
Company does not hold any continuing interest in the loans sold and has no
obligation to repurchase loans from the purchaser. The holders of the
certificates of beneficial interest issued by the purchaser have no claim
against the Company nor any of the Company’s assets in the event of a default on
the loans held by the purchaser.
The
Company services the loans for the purchaser in exchange for a fee of 30 basis
points of the outstanding loan principal. The fee the Company earns
for servicing does not include late fees, other administrative fees or income
from the investment of funds. The Company considers the 30 basis
point fee to be a market fee based on market quotes from other
providers. As a result the Company has not recorded a servicing asset
or liability. The servicing fee has a payment priority over any other
disbursement made by the purchaser. During fiscal year 2007, the
Company recognized $0.3 million in servicing fees.
(4) Foreclosed
Assets
Net
assets received in satisfaction of loan receivables are recorded at the lower
of
cost or market and classified on the consolidated balance sheets as foreclosed
assets. At May 31, 2007 and 2006, the balance of foreclosed assets
included real estate developer notes receivable and limited partnership
interests in certain real estate developments.
The
activity for foreclosed assets is summarized below for the years ended May
31:
(in
thousands)
|
|
2007
|
|
2006
|
|
2005
|
Beginning
balance
|
|
$
|
120,889
|
|
|
$
|
140,950
|
|
|
$
|
247,660
|
|
Results
of operations
|
|
|
9,758
|
|
|
|
15,492
|
|
|
|
13,079
|
|
Net
cash provided by foreclosed assets
|
|
|
(63,831
|
)
|
|
|
(6,401
|
)
|
|
|
(116,134
|
)
|
Impairment
to fair value write down
|
|
|
-
|
|
|
|
-
|
|
|
|
(55
|
)
|
Sale
of foreclosed assets
|
|
|
(487
|
)
|
|
|
(29,152
|
)
|
|
|
(3,600
|
)
|
Ending
balance of foreclosed assets
|
|
$
|
66,329
|
|
|
$
|
120,889
|
|
|
$
|
140,950
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
Net
cash provided by foreclosed assets increased significantly during the year
ended
May 31, 2007 due to full and partial paydowns of notes primarily by two limited
partnership interests in certain real estate developments. At May 31,
2005, the balance of foreclosed assets also included partnership interests
in
real estate properties. CFC operated the real estate properties
before selling such properties in August 2005 for $30 million. A gain
of $4 million was included in the results of operations of foreclosed assets
during the year ended May 31, 2006.
(5)
|
Short-Term
Debt and Credit
Arrangements
|
The
following is a summary of short-term debt and the weighted average interest
rates thereon at May 31:
|
|
2007
|
|
2006
|
(Dollar
amounts in thousands)
|
|
Debt
Outstanding
|
|
Weighted
Average Interest Rate
|
|
Debt
Outstanding
|
|
Weighted
Average Interest Rate
|
Short-term
debt:
|
|
|
|
|
|
|
|
|
Commercial
paper sold through dealers, net of discounts
|
$
|
1,017,879
|
|
5.30%
|
$
|
1,658,222
|
|
5.05%
|
Commercial
paper sold directly to members, at par
|
|
1,383,090
|
|
5.28%
|
|
1,184,030
|
|
5.06%
|
Commercial
paper sold directly to non-members, at par
|
|
133,087
|
|
5.29%
|
|
146,294
|
|
5.01%
|
Total
commercial paper
|
|
2,534,056
|
|
5.29%
|
|
2,988,546
|
|
5.05%
|
Daily
liquidity fund
|
|
250,563
|
|
5.23%
|
|
266,664
|
|
5.05%
|
Bank
bid notes
|
|
100,000
|
|
5.36%
|
|
100,000
|
|
5.13%
|
Subtotal
short-term debt
|
|
2,884,619
|
|
5.29%
|
|
3,355,210
|
|
5.05%
|
|
|
|
|
|
|
|
|
|
Long-term
debt maturing within one year:
|
|
|
|
|
|
|
|
|
Medium-term
notes sold through dealers (1)
|
|
133,801
|
|
4.32%
|
|
1,278,142
|
|
6.18%
|
Medium-term
notes sold through members
|
|
231,158
|
|
5.35%
|
|
199,626
|
|
4.74%
|
Foreign
currency valuation account (1)
|
|
-
|
|
-
|
|
244,955
|
|
-
|
Secured
collateral trust bonds
|
|
999,560
|
|
4.45%
|
|
99,991
|
|
7.30%
|
Subordinated
deferrable debt (2)
|
|
175,000
|
|
7.40%
|
|
150,000
|
|
7.63%
|
Unsecured
notes payable
|
|
2,985
|
|
8.52%
|
|
15,900
|
|
4.23%
|
Total
long-term debt maturing within one year
|
|
1,542,504
|
|
4.91%
|
|
1,988,614
|
|
6.19%
|
|
|
|
|
|
|
|
|
|
Total
short-term debt
|
$
|
4,427,123
|
|
5.16%
|
$
|
5,343,824
|
|
5.48%
|
|
|
(1)
At May 31, 2006, medium-term notes includes $434 million of medium-term
notes denominated in Euros and $282 million of medium-term notes
denominated in Australian dollars. The foreign currency valuation
account
represents the change in the dollar value of foreign denominated
debt due
to changes in currency exchange rates from the date the debt was
issued to
the reporting date as required under SFAS 52, Foreign Currency
Translation.
|
(2)
Redeemed in June 2007 and 2006,
respectively.
|
CFC
issues commercial paper for periods of one to 270 days. CFC also
enters into short-term bank bid note agreements, which are unsecured obligations
of CFC and do not require backup bank lines for liquidity
purposes. Bank bid note facilities are uncommitted lines of credit
for which CFC does not pay a fee. The commitments are generally
subject to termination at the discretion of the individual banks.
Foreign
Denominated Short-Term Debt
At
May 31, 2007, there was no foreign denominated debt
outstanding. Included in short-term debt at May 31, 2006 are $716
million of medium-term notes due within one year that are denominated in a
foreign currency. At the time of issuance of short-term debt
denominated in a foreign currency, CFC enters into a cross currency or cross
currency interest rate exchange agreement to fix the exchange rate on all
principal and interest payments through maturity. The foreign
denominated short-term debt is revalued at each reporting date based on the
current exchange rate. To the extent that the current exchange rate
is different than the exchange rate at the time of issuance, there will be
a
change in the reported value of the foreign denominated short-term debt. The
adjustment to the reported value of the short-term debt on the consolidated
balance sheets is also reported on the consolidated statements of operations
as
foreign currency adjustments. As a result of entering cross currency
and cross currency interest rate exchange agreements, the adjusted short-term
debt value at the reporting date does not represent the amount that CFC will
ultimately pay to retire the short-term debt, unless the counterparty to the
exchange agreement does not perform as required under the
agreement.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
Revolving
Credit Agreements
The
following is a summary of the Company's revolving credit agreements at May
31:
(Dollar
amounts in thousands)
|
|
|
2007
|
|
|
2006
|
|
|
Termination
Date
|
|
|
Facility
fee per annum (1)
|
|
|
364-day
agreement (2)
|
|
$
|
1,125,000
|
|
$
|
-
|
|
|
March
14, 2008
|
|
|
0.05
of 1%
|
|
|
Five-year
agreement
|
|
|
1,125,000
|
|
|
-
|
|
|
March
16, 2012
|
|
|
0.06
of 1%
|
|
|
Five-year
agreement
|
|
|
1,025,000
|
|
|
1,025,000
|
|
|
March
22, 2011
|
|
|
0.06
of 1%
|
|
|
364-day
agreement
|
|
|
-
|
|
|
1,025,000
|
|
|
March
21, 2007
|
|
|
0.05
of 1%
|
|
|
Five-year
agreement
|
|
|
-
|
|
|
1,975,000
|
|
|
March
23, 2010
|
|
|
0.09
of 1%
|
|
|
Total
|
|
$
|
3,275,000
|
|
$
|
4,025,000
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Facility fee determined by CFC's senior unsecured credit ratings
based on
the pricing schedules put in place at the initiation of the related
agreement.
|
|
(2)
Any amount outstanding under these agreements may be converted to
a
one-year term loan at the end of the revolving credit
periods. If converted to a term loan, the fee on the
outstanding principal amount of the term loan is 0.10 of 1% per
annum.
|
|
Up-front
fees of between 0.03 and 0.05 of 1% were paid to the banks based on their
commitment level to the five-year agreements in place at May 31, 2007, totaling
in aggregate $1 million, which will be amortized on a straight-line basis over
the life of the agreements. No upfront fees were paid to the banks
for their commitment to the 364-day facility. Each agreement contains
a provision under which if borrowings exceed 50% of total commitments, a
utilization fee must be paid on the outstanding balance. The
utilization fees are 0.05 of 1% for all three agreements in place at May 31,
2007.
Effective
May 31, 2007 and 2006, the Company was in compliance with all covenants and
conditions under its revolving credit agreements in place at that time and
there
were no borrowings outstanding under such agreements.
For
the purpose of calculating the required financial covenants contained in its
revolving credit agreements, the Company adjusts net income, senior debt and
total equity to exclude the non-cash adjustments related to SFAS 133 and
52. The adjusted TIER, as defined by the agreements, represents the
interest expense adjusted to include the derivative cash settlements, plus
minority interest net income, plus net income prior to the cumulative effect
of
change in accounting principle and dividing that total by the interest expense
adjusted to include the derivative cash settlements. In addition to
the non-cash adjustments related to SFAS 133 and 52, senior debt also excludes
RUS guaranteed loans, subordinated deferrable debt, members' subordinated
certificates and minority interest. Total equity is adjusted to
include subordinated deferrable debt, members' subordinated certificates and
minority interest. Senior debt includes guarantees; however, it
excludes:
·
|
guarantees
for members where the long-term unsecured debt of the member is rated
at
least BBB+ by Standard & Poor's Corporation or Baa1 by Moody's
Investors Service; and
|
·
|
the
payment of principal and interest by the member on the guaranteed
indebtedness if covered by insurance or reinsurance provided by an
insurer
having an insurance financial strength rating of AAA by Standard
&
Poor's Corporation or a financial strength rating of Aaa by Moody's
Investors Service.
|
The
following represents the Company's required and actual financial ratios under
the revolving credit agreements at or for the year ended May 31:
|
|
|
|
|
|
Actual
|
|
|
|
|
|
Requirement
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
|
1.025
|
|
1.09
|
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
adjusted TIER at fiscal year end (1)
|
|
|
|
1.05
|
|
1.12
|
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
ratio of senior debt to total equity
|
|
|
|
10.00
|
|
6.65
|
|
6.26
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
Company must meet this requirement in order to retire patronage
capital.
|
The
revolving credit agreements do not contain a material adverse change clause
or
ratings triggers that limit the banks' obligations to fund under the terms
of
the agreements, but CFC must be in compliance with their other requirements,
including financial ratios, in order to draw down on the
facilities.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
(6) Long-Term
Debt
The
following is a summary of long-term debt and the weighted average interest
rates
thereon at May 31:
|
2007
|
|
2006
|
|
|
|
Debt
|
|
Weighted
Average
|
|
Debt
|
|
Weighted
Average
|
|
|
(Dollar
amounts in thousands)
|
Outstanding
|
|
Interest
Rate
|
|
Outstanding
|
|
Interest
Rate
|
|
|
Unsecured
long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term
notes, sold through dealers (1)
|
$
|
4,676,176
|
|
|
|
|
|
|
$
|
4,174,200
|
|
|
|
|
|
|
|
Medium-term
notes, sold directly to members (2)
|
|
76,464
|
|
|
|
|
|
|
|
55,052
|
|
|
|
|
|
|
|
Subtotal
|
|
4,752,640
|
|
|
|
|
|
|
|
4,229,252
|
|
|
|
|
|
|
|
Unamortized
discount
|
|
(7,408
|
)
|
|
|
|
|
|
|
(9,203
|
)
|
|
|
|
|
|
|
Total
unsecured medium-term notes
|
|
4,745,232
|
|
|
|
6.62%
|
|
|
|
4,220,049
|
|
|
|
6.73%
|
|
|
|
Unsecured
notes payable
|
|
2,032,630
|
|
|
|
5.26%
|
|
|
|
2,074,565
|
|
|
|
5.30%
|
|
|
|
Total
unsecured long-term debt
|
|
6,777,862
|
|
|
|
6.21%
|
|
|
|
6,294,614
|
|
|
|
6.26%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
trust bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.25%,
Bonds, due 2007 (3)
|
|
-
|
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
6.20%,
Bonds, due 2008 (3)
|
|
-
|
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
3.875%,
Bonds, due 2008 (3)
|
|
-
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
Floating
Rate Bonds, due 2008
|
|
1,000,000
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
Floating
Rate Bonds, due 2008
|
|
600,000
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
5.75%,
Bonds, due 2008
|
|
225,000
|
|
|
|
|
|
|
|
225,000
|
|
|
|
|
|
|
|
Floating
Rate Bonds, Series E-2, due 2010
|
|
1,953
|
|
|
|
|
|
|
|
1,981
|
|
|
|
|
|
|
|
5.70%,
Bonds, due 2010
|
|
200,000
|
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
4.375%,
Bonds, due 2010
|
|
500,000
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
4.75%,
Bonds, due 2014
|
|
600,000
|
|
|
|
|
|
|
|
600,000
|
|
|
|
|
|
|
|
7.20%,
Bonds, due 2015
|
|
50,000
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
5.45%,
Bonds, due 2017
|
|
570,000
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
6.55%,
Bonds, due 2018
|
|
175,000
|
|
|
|
|
|
|
|
175,000
|
|
|
|
|
|
|
|
7.35%,
Bonds, due 2026
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
Subtotal
|
|
4,021,953
|
|
|
|
|
|
|
|
3,851,981
|
|
|
|
|
|
|
|
Unamortized
discount
|
|
(4,596
|
)
|
|
|
|
|
|
|
(4,567
|
)
|
|
|
|
|
|
|
Total
secured collateral trust bonds
|
|
4,017,357
|
|
|
|
5.30%
|
|
|
|
3,847,414
|
|
|
|
5.00%
|
|
|
|
Secured
notes payable
|
|
500,000
|
|
|
|
4.66%
|
|
|
|
500,000
|
|
|
|
4.66%
|
|
|
|
Total
secured long-term debt
|
|
4,517,357
|
|
|
|
5.23%
|
|
|
|
4,347,414
|
|
|
|
4.96%
|
|
|
|
Total
long-term debt
|
$
|
11,295,219
|
|
|
|
5.82%
|
|
|
$
|
10,642,028
|
|
|
|
5.73%
|
|
|
|
|
|
(1)
|
Medium-term
notes sold through dealers mature through 2032 as of May 31, 2007
and
2006. Does not include $134 million and $1,523 million of
medium-term notes sold through dealers that were reclassified as
short-term debt at May 31, 2007 and 2006, respectively.
|
(2)
|
Medium-term
notes sold directly to members mature through 2023 as of May 31,
2007 and
2006. Does not include $231 million and $200 million of
medium-term notes sold to members that were reclassified as short-term
debt at May 31, 2007 and 2006, respectively.
|
(3)
|
Amounts
outstanding at May 31, 2007 are included as short-term
debt.
|
The
principal amount of medium-term notes, collateral trust bonds and long-term
notes payable maturing in each of the five fiscal years following May 31, 2007
and thereafter is as follows:
|
Amount
|
|
Weighted
Average
|
|
|
(Dollar
amounts in thousands)
|
Maturing
|
|
Interest
Rate
|
|
|
2008
(1)
|
$
|
-
|
|
|
|
-
|
|
|
|
2009
|
|
2,684,912
|
|
|
|
5.25%
|
|
|
|
2010
|
|
1,481,404
|
|
|
|
5.72%
|
|
|
|
2011
|
|
521,910
|
|
|
|
4.42%
|
|
|
|
2012
|
|
1,516,059
|
|
|
|
7.22%
|
|
|
|
Thereafter
|
|
5,090,934
|
|
|
|
5.87%
|
|
|
|
Total
|
$
|
11,295,219
|
|
|
|
5.82%
|
|
|
|
____________________
|
(1)
The amount scheduled to mature in fiscal year 2008 has been presented
as
long-term debt due in one year under short-term
debt.
|
Collateral
trust bonds are secured by the pledge of mortgage notes or eligible securities
in an amount at least equal to the principal balance of the bonds
outstanding. See Note 2 for additional information on the collateral
pledged to secure the Company's collateral trust bonds. Medium-term
notes are unsecured obligations of CFC.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
Unsecured
Notes Payable
At
May 31, 2007 and 2006, CFC had a total of $2 billion under a bond purchase
agreement with the FFB and a bond guarantee agreement with RUS as part of the
funding mechanism for the Rural Economic Development Loan and Grant ("REDLG")
program. As part of the REDLG program, CFC is eligible to borrow up
to the amount of the outstanding loans that it has issued concurrent with RUS
loans. At May 31, 2007 and 2006, CFC had a total of $2.3 billion and
$2.6 billion, respectively, outstanding on loans issued concurrently with
RUS. As part of the REDLG program, CFC will pay to RUS a fee of 30
basis points per annum on the total amount borrowed. At May 31, 2007
and 2006, the $2 billion of unsecured notes payable issued as part of the REDLG
program require CFC to place on deposit mortgage notes in an amount at least
equal to the principal balance of the notes outstanding. See Note 2
for additional information on the mortgage notes held on deposit.
Secured
Notes Payable
At
May 31, 2007 and 2006, the Company had outstanding a total of $500 million
of
4.656% notes to Farmer Mac due in 2008. The $500 million of notes
payable sold to Farmer Mac are secured by the pledge of mortgage notes in an
amount at least equal to the principal balance of the notes
outstanding. See Note 2 for additional information on the collateral
pledged to secure the Company's notes payable.
(7) Subordinated
Deferrable Debt
Subordinated
deferrable debt represents quarterly income capital securities and subordinated
notes that are long-term obligations subordinated to CFC's outstanding debt
and
senior to subordinated certificates held by CFC's members. CFC's subordinated
deferrable debt is issued for terms of up to 49 years, pays interest quarterly,
may be called at par after five years and allows CFC to defer the payment of
interest for up to 20 consecutive quarters. To date, CFC has not
exercised its right to defer interest payments. The following table
is a summary of subordinated deferrable debt outstanding at May 31:
|
|
2007
|
|
2006
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Amounts
|
|
Average
|
|
Amounts
|
|
Average
|
|
(Dollar
amounts in thousands)
|
|
Outstanding
|
|
Interest
Rate
|
|
Outstanding
|
|
Interest
Rate
|
|
6.75%
due 2043
|
|
$
|
125,000
|
|
|
|
|
|
|
$
|
125,000
|
|
|
|
|
|
|
6.10%
due 2044
|
|
|
88,201
|
|
|
|
|
|
|
|
88,201
|
|
|
|
|
|
|
5.95%
due 2045
|
|
|
98,239
|
|
|
|
|
|
|
|
98,239
|
|
|
|
|
|
|
7.40%
due 2050 (1)
|
|
|
-
|
|
|
|
|
|
|
|
175,000
|
|
|
|
|
|
|
Total
|
|
$
|
311,440
|
|
|
|
6.31%
|
|
|
$
|
486,440
|
|
|
|
6.70%
|
|
|
|
|
(1)
Amount outstanding at May 31, 2007 was called in June 2007 and reported
in
short-term debt.
|
(8) Derivative
Financial Instruments
The
Company is neither a dealer nor a trader in derivative financial
instruments. The Company uses interest rate, cross currency and cross
currency interest rate exchange agreements to manage its interest rate risk
and
foreign currency exchange risk.
Consistent
with SFAS 133, as amended, the Company records derivative instruments on the
consolidated balance sheet as either an asset or liability measured at fair
value. Changes in the fair value of derivative instruments are
recognized in the derivative forward value line item of the consolidated
statement of operations unless specific hedge accounting criteria are
met. Net settlements paid and received for derivative instruments
that qualify for hedge accounting are recorded in interest
expense. Net settlements related to derivative instruments that do
not qualify for hedge accounting are recorded as derivative cash settlements
in
the consolidated statement of operations. The Company formally
documents, designates, and assesses the effectiveness of transactions that
receive hedge accounting.
Interest
Rate Exchange Agreements
Generally,
the Company's interest rate exchange agreements do not qualify for hedge
accounting under SFAS 133. The majority of the Company's interest
rate exchange agreements use a 30-day composite commercial paper index as either
the pay or receive leg. The 30-day composite commercial paper index
is the best match for the commercial paper that is the underlying debt used
as
the cost basis in setting the Company's variable interest
rates. However, the correlation between movement in the 30-day
composite commercial paper index and movement in the Company's commercial paper
rates is not consistently high enough to qualify for hedge
accounting. The Company's commercial paper rates are not indexed to
the 30-day composite commercial paper index and the Company does not solely
issue its commercial paper with maturities of 30 days. At May 31,
2007 and 2006, the Company did not have any interest rate exchange agreements
that were accounted for using hedge accounting.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
The
Company was a party to the following interest rate exchange agreements at May
31:
|
|
Notional
Amounts Outstanding
|
(in
thousands)
|
|
2007
|
|
2006
|
Pay
fixed and receive variable
|
$
|
7,276,473
|
$
|
7,349,584
|
Pay
variable and receive fixed
|
|
5,256,440
|
|
5,186,440
|
Total
interest rate exchange agreements
|
$
|
12,532,913
|
$
|
12,536,024
|
The
Company has classified cash activity associated with derivatives as an operating
activity in the consolidated statements of cash flows.
Interest
rate exchange agreements had the following impact on the Company for the years
ended May 31:
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Statement
of Operations Impact
|
|
|
|
|
|
|
|
|
|
Agreements
that qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
$
|
-
|
|
$
|
2,688
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
Agreements
that do not qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
|
77,342
|
|
|
61,690
|
|
|
43,137
|
|
Derivative
forward value
|
|
(83,322
|
)
|
|
28,744
|
|
|
3,433
|
|
Total
(loss) gain on interest rate exchange agreements
|
$
|
(5,980
|
)
|
$
|
93,122
|
|
$
|
46,777
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income Impact
|
|
|
|
|
|
|
|
|
|
Agreements
that qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on derivatives
|
$
|
-
|
|
$
|
(2,322
|
)
|
$
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
Amortization
of transition adjustment
|
|
(1,004
|
)
|
|
226
|
|
|
16,241
|
|
Total
comprehensive (loss) income
|
$
|
(1,004
|
)
|
$
|
(2,096
|
)
|
$
|
16,188
|
|
Cash
settlements includes periodic amounts that were paid and received related to
its
interest rate exchange agreements. In December 2006, the Company
terminated two $500 million pay variable and receive fixed interest rate
exchange agreements prior to the maturity dates. The early
termination resulted in the Company receiving a payment of $31 million, the
fair
value of the agreements on that date. At termination, the Company
also recorded a charge to the derivative fair value line to reduce the
derivative asset by $31 million, the fair value of the agreements on that
date. The payment received and the reduction to the recorded
derivative asset are offsetting, thus there was no impact to reported net income
as a result of this transaction. During the year ended May 31, 2006,
cash settlements includes a payment of $1 million received from counterparties
representing the fair value of interest rate exchange agreements terminated
by
the Company. These agreements were terminated due to the prepayment
of RTFC loans during the year ended May 31, 2006, the proceeds of which were
used to pay down the underlying debt for the terminated interest rate exchange
agreements.
For
the years ended May 31, 2007 and 2006, the derivative forward value also
includes amortization of $0.8 million and $0.4 million, respectively, related
to
a total transition adjustment of $62 million recorded as an other comprehensive
loss on
June
1, 2001, the date the Company implemented SFAS 133. The transition
adjustment will be amortized into earnings over the remaining life of the
related interest rate exchange agreements. Approximately $0.8 million
is expected to be amortized over the next twelve months related to the
transition adjustment and will continue through April 2029.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
Cross
Currency Interest Rate Exchange Agreements
There
were no cross currency or cross currency interest rate exchange agreements
outstanding at May 31, 2007. At May 31, 2006, the Company was a party
to the following cross currency interest rate exchange agreements, none of
which
were accounted for using hedge accounting.
(Currency
amounts in thousands)
|
Notional
Principal Amount
|
|
|
|
|
Original
|
|
U.S.
Dollars (5)
|
|
Foreign
Currency
|
|
|
|
Exchange
|
|
May
31,
|
|
|
May
31,
|
|
May
31,
|
|
May
31,
|
|
Maturity
Date
|
|
Rate
|
|
2007
|
|
|
2006
|
|
2007
|
|
2006
|
|
July
7, 2006
|
|
1.506
|
$
|
-
|
|
$
|
166,000
|
(3)
|
|
-
|
|
250,000
|
|
AUD
(2)
|
|
July
7, 2006
|
|
1.506
|
|
-
|
|
|
116,200
|
(4)
|
|
-
|
|
175,000
|
|
AUD
(2)
|
|
March
14, 2007
|
|
1.153
|
|
-
|
|
|
433,500
|
(4)
|
|
-
|
|
500,000
|
|
EU
(1)
|
|
Total
|
|
|
$
|
-
|
|
$
|
715,700
|
|
|
-
|
|
925,000
|
|
|
(1)
EU – Euros
|
(2)
AUD Australian dollars
|
(3)
These agreements also change the interest rate from a foreign denominated
variable rate to a U.S. dollar denominated variable
rate.
|
(4)
These agreements also change the interest rate from a foreign denominated
fixed rate to a U.S. dollar denominated variable rate.
|
(5)
Amounts in the chart represent the U.S. dollar value at the initiation
of
the exchange agreement. At May 31, 2006, one U.S. dollar was
the equivalent of 0.780 Euros and 1.329 Australian dollars,
respectively.
|
Cross
currency interest rate exchange agreements had the following impact on the
Company for the years ended May 31:
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Statement
of Operations Impact
|
|
|
|
|
|
|
|
|
|
Agreements
that qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
$
|
-
|
|
$
|
(4,966
|
)
|
$
|
(5,989
|
)
|
|
|
|
|
|
|
|
|
|
|
Agreements
that do not qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
|
9,100
|
|
|
19,193
|
|
|
35,150
|
|
Derivative
forward value
|
|
4,041
|
|
|
61
|
|
|
22,416
|
|
Total
gain on cross currency exchange agreements
|
$
|
13,141
|
|
$
|
14,288
|
|
$
|
51,577
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income Impact
|
|
|
|
|
|
|
|
|
|
Agreements
that qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on derivatives
|
$
|
-
|
|
$
|
(317
|
)
|
$
|
11,974
|
|
Rating
Triggers
The
Company has certain interest rate exchange agreements that contain a provision
called a rating trigger. Under a rating trigger, if the credit rating
for either counterparty falls to the level specified in the agreement, the
other
counterparty may, but is not obligated to, terminate the
agreement. If either counterparty terminates the agreement, a net
payment may be due from one counterparty to the other based on the fair value
of
the underlying derivative instrument. Rating triggers are not
separate financial instruments and are not separate derivatives under SFAS
133. The rating triggers contained in certain of the Company's
derivative contracts are based on its senior unsecured credit rating from
Standard & Poor's Corporation and Moody's Investors Service.
At
May 31, 2007, the Company has the following notional amount and fair values
associated with exchange agreements that contain rating triggers. For
the purpose of the presentation, the Company has grouped the rating triggers
into two categories, (1) ratings from Moody's Investors Service falls to Baa1
or
from Standard & Poor's Corporation falls to BBB+ and (2) ratings from
Moody's Investors Service falls below Baa1 or from Standard & Poor's
Corporation falls below BBB+.
(in
thousands)
Rating
Level:
|
|
Notional
Amount
|
|
Required
Company Payment
|
|
Amount
Company Would Collect
|
|
Net
Total
|
Fall
to Baa1/BBB+
|
$
|
1,466,017
|
$
|
(4,946)
|
$
|
37,572
|
$
|
32,626
|
Fall
below Baa1/BBB+
|
|
7,261,386
|
|
(47,263)
|
|
140,604
|
|
93,341
|
Total
|
$
|
8,727,403
|
$
|
(52,209)
|
$
|
178,176
|
$
|
125,967
|
(9) Members'
Subordinated Certificates
Membership
Subordinated Certificates
To
join CFC and to establish eligibility to borrow, CFC members (other than service
organizations and associates) are required to execute agreements to subscribe
to
membership subordinated certificates. Such certificates are
interest-bearing, unsecured, subordinated debt of CFC. CFC is
authorized to issue membership subordinated certificates without limitation
as
to the total principal amount.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
Generally,
membership subordinated certificates mature
in the years 2020 through 2095 and bear interest at 5% per annum. The
maturity dates and interest rates payable on such certificates vary in
accordance with applicable CFC policy.
Loan
and Guarantee Subordinated Certificates
Members
obtaining long-term loans, certain short-term loans or guarantees are generally
required to purchase additional loan or guarantee subordinated certificates
with
each such loan or guarantee based on the members' CFC debt to equity
ratio. These certificates are unsecured, subordinated debt of the
Company.
Certificates
currently purchased in conjunction with long-term loans are generally
non-interest bearing. CFC's policy regarding the purchase of loan
subordinated certificates requires members with a CFC debt to equity ratio
in
excess of the limit in the policy to purchase a non-amortizing/non-interest
bearing subordinated certificate in the amount of 2% of the long-term loan
for
distribution systems and 7% of the long-term loan for power supply
systems. CFC associates and RTFC members are required to purchase
loan subordinated certificates of 10% of each long-term loan
advance. For non-standard credit facilities, the borrower is required
to purchase interest bearing certificates in amounts determined appropriate
by
CFC based on the circumstances of the transaction.
The
maturity dates and the interest rates payable on guarantee subordinated
certificates purchased in conjunction with CFC's guarantee program vary in
accordance with applicable CFC policy. Members may be required to
purchase non-interest bearing debt service reserve subordinated certificates
in
connection with CFC's guarantee of long-term tax-exempt bonds (see Note
13). CFC pledges proceeds from the sale of such certificates to the
debt service reserve fund established in connection with the bond issue and
any
earnings from the investments of the fund inure solely to the benefit of the
members for whom the bonds are issued. These certificates have
varying maturities not exceeding the longest maturity of the guaranteed
obligation.
Information
with respect to members' subordinated certificates at May 31, is as
follows:
|
2007
|
|
2006
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Amounts
|
|
Average
|
|
Amounts
|
|
Average
|
|
(Dollar
amounts in thousands)
|
Outstanding
|
|
Interest
Rate
|
|
Outstanding
|
|
Interest
Rate
|
|
Number
of subscribing members
|
|
899
|
|
|
|
|
|
|
|
898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
subordinated certificates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
maturing 2020 through 2095
|
$
|
627,875
|
|
|
|
|
|
|
$
|
628,914
|
|
|
|
|
|
|
Subscribed
and unissued
|
|
21,549
|
|
|
|
|
|
|
|
21,885
|
|
|
|
|
|
|
Total
membership subordinated certificates
|
|
649,424
|
|
|
|
4.88%
|
|
|
|
650,799
|
|
|
|
4.88%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
and guarantee subordinated certificates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3%
certificates maturing through 2040
|
|
113,501
|
|
|
|
|
|
|
|
115,662
|
|
|
|
|
|
|
2%
to 12% certificates maturing through 2042
|
|
200,779
|
|
|
|
|
|
|
|
201,174
|
|
|
|
|
|
|
Non-interest
bearing certificates maturing through 2042
|
|
369,037
|
|
|
|
|
|
|
|
414,435
|
|
|
|
|
|
|
Subscribed
and unissued
|
|
48,706
|
|
|
|
|
|
|
|
45,890
|
|
|
|
|
|
|
Total
loan and guarantee subordinated certificates
|
|
732,023
|
|
|
|
2.07%
|
|
|
|
777,161
|
|
|
|
1.94%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
members' subordinated certificates
|
$
|
1,381,447
|
|
|
|
3.39%
|
|
|
$
|
1,427,960
|
|
|
|
3.28%
|
|
|
Membership
subordinated certificates generally mature in 100 years from
issuance. The weighted average maturity for membership subordinated
certificates outstanding at May 31, 2007 and 2006 was 69 years and 70 years,
respectively. Loan and guarantee subordinated certificates have the
same maturity as the related long-term loan. Some certificates may
also amortize annually based on the outstanding loan balance.
The
subscribed and unissued subordinated certificates represent subordinated
certificates that members are required to purchase, but are not yet paid
for. Upon collection of the full amount of the subordinated
certificate, the amount of the certificate will be reclassified from subscribed
and unissued to outstanding.
(10) Minority
Interest
At
May 31, 2007 and 2006, the Company reported minority interests of $22 million
on
the consolidated balance sheets. Minority interest represents the
100% interest that RTFC and NCSC members have in their respective
organizations. The members of RTFC and NCSC own or control 100% of
the interest in the respective company.
During
the year ended May 31, 2007, the balance of minority interest increased by
$2
million of minority interest net income for the year ended May 31, 2007 offset
by the retirement of $2 million of patronage capital to RTFC members in January
2007.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
(11) Equity
CFC
is required by the District of Columbia cooperative law to have a methodology
to
allocate its net earnings to its members. CFC maintains the current
year net earnings as unallocated through the end of its fiscal
year. At that time, CFC's board of directors allocates its net
earnings to members in the form of patronage capital and to board approved
reserves. Currently, CFC has two such board approved reserves, the
education fund and the members' capital reserve. CFC allocates a
small portion, less than 1%, of net earnings annually to the education
fund. The allocation to the education fund must be at least 0.25% of
net earnings as required by CFC's bylaws. Funds from the education
fund are disbursed annually to fund cooperative education among employees and
directors of cooperatives in the service territories of each
state. The board of directors determines the amount of net earnings
that is allocated to the members' capital reserve, if any. The
members' capital reserve represents earnings that are held by CFC to increase
equity retention. The net earnings held in the members' capital
reserve have not been allocated to any member, but may be allocated to
individual members in the future as patronage capital if authorized by CFC's
board of directors. All remaining net earnings are allocated to CFC's
members in the form of patronage capital. CFC bases the amount of net
earnings allocated to each member on the members' patronage of the CFC lending
programs in the year that the net earnings were earned. There is no
impact on CFC's total equity as a result of allocating net earnings to members
in the form of patronage capital or to board approved reserves. CFC's
board of directors has annually voted to retire a portion of the patronage
capital allocated to members in prior years. CFC's total equity is
reduced by the amount of patronage capital retired to members and by amounts
disbursed from board approved reserves. CFC adjusts the net earnings
it allocates to members and board approved reserves to exclude the non-cash
impacts of SFAS 133 and 52.
CFC's
board of directors authorized the retirement of $84 million of allocated net
earnings in July 2006, representing 70% of the allocated net earnings for fiscal
year 2006 and one-ninth of the allocated net earnings for fiscal years 1991,
1992 and 1993. This amount was retired in August 2006. Under current
policy, the remaining 30% of the fiscal year 2006 allocated net earnings will
be
retained by CFC and used to fund operations for 15 years and then may be
retired. The retirement of allocated net earnings for fiscal years
1991, 1992 and 1993 is done as part of the transition to the current retirement
cycle adopted in 1994 and will last through fiscal year 2008. After
that time and under current policy, retirements will be comprised of the 70%
of
allocated net earnings from the prior year as approved by the board of directors
and the remaining portion of allocated net earnings retained by CFC from prior
years (50% for 1994 and 30% for all years thereafter).
In
July 2007, CFC's board of directors authorized the allocation of the fiscal
year
2007 adjusted net earnings as follows: $1 million to the education fund and
$104
million to members in the form of patronage capital. The board of
directors also authorized the allocation of $1 million to the members' capital
reserve. In July 2007, CFC's board of directors authorized the
retirement of allocated net earnings totaling $86 million, representing 70%
of
the fiscal year 2007 allocation and one-ninth of the fiscal years 1991, 1992
and
1993 allocated net earnings. This amount will be returned to members
in cash at the end of August 2007. Future allocations and retirements
of net earnings will be made annually as determined by CFC's board of directors
with due regard for CFC's financial condition. The board of directors
for CFC has the authority to change the policy for allocating and retiring
net
earnings at any time, subject to applicable cooperative law.
At
May 31, 2007 and 2006, equity included the following components:
(in
thousands)
|
2007
|
|
2006
|
|
Membership
fees
|
$
|
997
|
|
|
$
|
994
|
|
|
Education
fund
|
|
1,406
|
|
|
|
1,281
|
|
|
Members'
capital reserve
|
|
158,308
|
|
|
|
156,844
|
|
|
Allocated
net income
|
|
405,598
|
|
|
|
386,232
|
|
|
Unallocated
net income
|
|
(23
|
)
|
|
|
-
|
|
|
Total
members' equity
|
|
566,286
|
|
|
|
545,351
|
|
|
Prior
years cumulative derivative forward
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
225,849
|
|
|
|
225,730
|
|
|
Current
period derivative forward value (1)
|
|
(79,744
|
)
|
|
|
22,713
|
|
|
Current
period foreign currency adjustments
|
|
(14,554
|
)
|
|
|
(22,594
|
)
|
|
Total
retained equity
|
|
697,837
|
|
|
|
771,200
|
|
|
Accumulated
other comprehensive income
|
|
12,204
|
|
|
|
13,208
|
|
|
Total
equity
|
$
|
710,041
|
|
|
$
|
784,408
|
|
|
|
|
|
(1)
Represents the derivative forward value gain recorded by CFC for
the
period.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
(12) Employee
Benefits
CFC
is a participant in the National Rural Electric Cooperative Association
("NRECA") Retirement Security Plan. This plan is available to all
qualified CFC employees. Under the plan, participating employees are
entitled to receive annually, under a 50% joint and surviving spouse annuity,
1.90% of the average of their five highest base salaries during their last
ten
years of employment, multiplied by the number of years of participation in
the
plan. CFC contributed $3.3 million, $3.0 million and $2.8 million to
the Retirement Security Plan during fiscal years 2007, 2006 and 2005,
respectively. Funding requirements that are billed are charged to
general and administrative expenses on a monthly basis. This is a
multi-employer plan, available to all member cooperatives of NRECA, and
therefore the projected benefit obligation and plan assets are not determined
or
allocated separately by individual employer.
The
Economic Growth and Tax Relief Act of 2001 set a limit of $225,000 for calendar
year 2007 on the compensation to be used in the calculation of pension
benefits. In order to restore potential lost benefits, CFC has
adopted a Pension Restoration Plan administered by NRECA. Under the
plan, the amount that NRECA invoices CFC for the Retirement Security Plan will
continue to be based on the full compensation paid to each
employee. Upon the retirement of a covered employee, NRECA will
calculate the retirement and security benefit to be paid with consideration
of
the compensation limits and will pay the maximum benefit
thereunder. NRECA will also calculate the retirement and security
benefit that would have been available without consideration of the compensation
limits and CFC will pay the difference. NRECA will then give CFC a
credit against future retirement and security contribution liabilities in the
amount paid by CFC to the covered employee.
CFC
has paid such additional benefits to the covered employee through two components
of the Pension Restoration Plan, a Severance Pay Plan and a Deferred
Compensation Plan. Under the Severance Pay Plan, the employee was
paid an amount equal to the lost pension benefits but not exceeding twice the
employee's annual compensation for the prior year. The benefit was
paid within 24 months of termination of employment. To the extent
that the Severance Pay Plan could not pay all of the lost pension benefits,
the
remainder was paid under a Deferred Compensation Plan in a lump sum or in
installments of up to 60 months.
The
Severance Pay Plan component of the Pension Restoration Plan has been eliminated
effective January 1, 2005. Any benefit earned prior to December 31,
2004 will be held for the employee and will be paid out as outlined
above. Benefits earned as of January 1, 2005, however, will be paid
solely under the Deferred Compensation component of the Pension Restoration
Plan, which carries a substantial risk of forfeiture.
As
of December 31, 2006, the NRECA Retirement Security Plan meets the ERISA
standards for a funded plan and CFC was current with regard to its obligations
to NRECA, the plan provider.
CFC
offers a 401(k) defined contribution savings program, the 401(k) Pension Plan,
to all employees that have completed a minimum of 1,000 hours of service in
either the first 12 consecutive months or first full calendar year of
employment. CFC contributes an amount up to 3% of an employee's
salary each year for all employees participating in the program with a minimum
2% employee contribution. During the years ended May 31, 2007, 2006
and 2005, CFC contributed $0.5 million each year under the program.
(13) Guarantees
The
Company guarantees certain contractual obligations of its members so that they
may obtain various forms of financing. With the exception of letters
of credit, the underlying obligations may not be accelerated so long as the
Company performs under its guarantee. At May 31, 2007 and 2006, the Company
had
recorded a guarantee liability totaling $19 million and $17 million,
respectively, which represents the contingent and non-contingent exposure
related to guarantees of members' debt obligations. The contingent guarantee
liability at May 31, 2007 and 2006 totaled $13 million and $15 million,
respectively, based on management's estimate of exposure to losses within the
guarantee portfolio. The Company uses factors such as internal risk rating,
remaining term of guarantee, corporate bond default probabilities and estimated
recovery rates in estimating its contingent exposure. The remaining
balance of the total guarantee liability of $6 million and $2 million at May
31,
2007 and 2006, respectively, relates to the Company's non-contingent obligation
to stand ready to perform over the term of its guarantees that it has entered
into or modified since January 1, 2003 in accordance with FIN 45. The
non-contingent obligation is estimated based on guarantee fees
received. The fees are deferred and amortized on the straight-line
method into
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
interest
income over the term of the guarantees. The Company deferred fees of
$6 million, $2 million and $0.6 million for the years ended May 31, 2007, 2006
and 2005, respectively, related to new guarantees issued during the
periods. Activity in the guarantee liability account is summarized
below for the years ended May 31:
(Dollar
amounts in thousands)
|
2007
|
|
2006
|
|
2005
|
|
Beginning
balance
|
$
|
16,750
|
|
|
$
|
16,094
|
|
|
$
|
19,184
|
|
|
Net
change in non-contingent liability
|
|
3,879
|
|
|
|
1,356
|
|
|
|
17
|
|
|
Recovery
of contingent guarantee losses
|
|
(1,700
|
)
|
|
|
(700
|
)
|
|
|
(3,107
|
)
|
|
Ending
balance
|
$
|
18,929
|
|
|
$
|
16,750
|
|
|
$
|
16,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
as percentage of total guarantees
|
|
1.76%
|
|
|
|
1.55%
|
|
|
|
1.39%
|
|
|
The
following chart summarizes total guarantees by type and segment at
May
31:
|
(in
thousands)
|
2007
|
|
2006
|
|
|
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
Long-term
tax exempt bonds
(1)
|
$
|
526,185
|
|
|
$
|
607,655
|
|
|
|
|
Indemnifications
of tax benefit transfers (2)
|
|
107,741
|
|
|
|
123,544
|
|
|
|
|
Letters
of credit (3)
|
|
365,766
|
|
|
|
272,450
|
|
|
|
|
Other
guarantees (4)
|
|
74,682
|
|
|
|
75,331
|
|
|
|
|
Total
|
$
|
1,074,374
|
|
|
$
|
1,078,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
CFC:
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
211,320
|
|
|
$
|
70,166
|
|
|
|
|
Power
supply
|
|
797,009
|
|
|
|
921,930
|
|
|
|
|
Statewide
and associate
|
|
25,359
|
|
|
|
32,873
|
|
|
|
|
CFC
total
|
|
1,033,688
|
|
|
|
1,024,969
|
|
|
|
|
NCSC
|
|
40,686
|
|
|
|
54,011
|
|
|
|
|
Total
|
$
|
1,074,374
|
|
|
$
|
1,078,980
|
|
|
|
|
|
(1)
|
The
maturities for this type of guarantee run through 2037. CFC has
guaranteed debt issued in connection with the construction or acquisition
of pollution control, solid waste disposal, industrial development
and
electric distribution facilities. CFC has unconditionally guaranteed
to
the holders or to trustees for the benefit of holders of these bonds
the
full principal, premium, if any, and interest on each bond when
due. In addition, CFC has agreed to make up, at certain times,
deficiencies in the debt service reserve funds for certain of these
issues
of bonds. In the event of default by a system for non-payment
of debt service, CFC is obligated to pay any required amounts under
its
guarantees, which will prevent the acceleration of the bond
issue. The system is required to repay, on demand, any amount
advanced by CFC and interest thereon pursuant to the documents evidencing
the system's reimbursement obligation.
|
|
|
|
Of
the amounts shown above, $396 million and $572 million as of May
31, 2007
and 2006, respectively, are adjustable or floating/fixed rate
bonds. The floating interest rate on such bonds may be
converted to a fixed rate as specified in the indenture for each
bond
offering. During the variable rate period (including at the
time of conversion to a fixed rate), CFC has unconditionally agreed
to
purchase bonds tendered or put for redemption if the remarketing
agents
have not previously sold such bonds to other purchasers. CFC's
maximum potential exposure includes guaranteed principal and interest
related to the bonds. CFC is unable to determine the maximum
amount of interest that it could be required to pay related to the
floating rate bonds. As of May 31, 2007, CFC's maximum
potential exposure for the $25 million of fixed rate tax-exempt bonds
is
$33 million. Many of these bonds have a call provision that in
the event of a default would allow CFC to trigger the call
provision. This would limit CFC's exposure to future interest
payments on these bonds. CFC's maximum potential exposure is
secured by a mortgage lien on substantially all of the system's assets
and
future revenues. However, if the debt is accelerated because of
a determination that the interest thereon is not tax-exempt, then
in
nearly all cases, the system's obligation to reimburse CFC for any
guarantee payments will be treated as a long-term loan.
|
|
|
(2)
|
The
maturities for this type of guarantee run through 2015. CFC has
unconditionally guaranteed to lessors certain indemnity payments,
which
may be required to be made by the lessees in connection with tax
benefit
transfers. In the event of default by a system for non-payment
of indemnity payments, CFC is obligated to pay any required amounts
under
its guarantees, which will prevent the acceleration of the indemnity
payments. The member is required to repay any amount advanced
by CFC and interest thereon pursuant to the documents evidencing
the
system's reimbursement obligation. The amounts shown represent
CFC's maximum potential exposure for guaranteed indemnity
payments. A member's obligation to reimburse CFC for any
guarantee payments would be treated as a long-term loan to the extent
of
any cash received by the member at the outset of the
transaction. This amount is secured by a mortgage lien on
substantially all of the system's assets and future
revenues. The remainder would be treated as a short-term loan
secured by a subordinated mortgage on substantially all of the member's
property. Due to changes in federal tax law, no further
guarantees of this nature are
anticipated.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
|
|
(3)
|
The
maturities for this type of guarantee run through
2017. Additionally, letters of credit totaling $9 million at
May 31, 2007 have a term of one year and automatically extend for
a period
of one year unless the Company cancels the agreement within 120 days
of
maturity (in which case, the beneficiary may draw on the letter of
credit). The Company issues irrevocable letters of credit to
support members' obligations to energy marketers and other third
parties
and to the Rural Business and Cooperative Development Service with
issuance fees as may be determined from time to time. Each
letter of credit issued is supported by a reimbursement agreement
with the
member on whose behalf the letter of credit was issued. In the
event a beneficiary draws on a letter of credit, the agreement generally
requires the member to reimburse the Company within one year from
the date
of the draw. Interest would accrue from the date of the draw at
the line of credit variable rate of interest in effect on such
date. The agreement also requires the member to pay, as
applicable, a late payment charge and all costs of collection, including
reasonable attorneys' fees. As of May 31, 2007, the Company's
maximum potential exposure is $366 million, of which $217 million
is
secured. When taking into consideration reimbursement
obligation agreements that CFC has in place with other lenders, CFC's
maximum potential exposure related to $24 million of letters of credit
would be reduced to $9 million in the event of
default. Security provisions include a mortgage lien on
substantially all of the system's assets, future revenues, and the
system's commercial paper invested at the Company. In addition to
the
letters of credit listed in the table, under master letter of credit
facilities, the Company may be required to issue up to an additional
$339
million in letters of credit to third parties for the benefit of
its
members at May 31, 2007. At May 31, 2006, this amount was $217
million.
|
|
|
(4)
|
The
maturities for this type of guarantee run through 2025. CFC
provides other guarantees for its members. In the event of
default by a system for non-payment of the obligation, CFC must pay
any
required amounts under its guarantees, which will prevent the acceleration
of the obligation. Such guarantees may be made on a secured or
unsecured basis with guarantee fees set to cover CFC's general and
administrative expenses, a provision for losses and a reasonable
margin. The member is required to repay any amount advanced by
CFC and interest thereon pursuant to the documents evidencing the
system's
reimbursement obligation. Of CFC's maximum potential exposure
for guaranteed principal and interest totaling $75 million at May
31,
2007, $3 million is secured by a mortgage lien on substantially all
of the
system's assets and future revenues and the remaining $72 million
is
unsecured.
|
CFC
uses the same credit policies and monitoring procedures in providing guarantees
as it does for loans and commitments.
The
following table details the scheduled reductions of CFC's outstanding guarantees
in each of the fiscal years following
May
31, 2007:
(in
thousands)
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
2008
|
|
|
|
|
$
|
194,433
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
129,502
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
149,335
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
118,368
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
95,250
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
387,486
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
1,074,374
|
|
|
|
|
|
|
At
May 31, 2007 and 2006, CFC had a total of $221 million and $144 million of
guarantees, representing 21% and 13% of total guarantees, respectively, under
which its right of recovery from its members was not secured.
(14) Fair
Value of Financial Instruments
The
following disclosure of the estimated fair value of financial instruments is
made in accordance with SFAS 107, Disclosure about Fair Value of Financial
Instruments. Whenever possible, the estimated fair value amounts have
been determined using quoted market information as of May 31, 2007 and
2006. The estimated fair value information presented is not
necessarily indicative of amounts the Company could realize currently in a
market sale since it may be unable to sell such instruments due to contractual
restrictions or to the lack of an established market. The estimated
market values have not been updated since May 31, 2007; therefore, current
estimates of fair value may differ significantly from the amounts
presented. With the exception of redeeming collateral trust bonds and
subordinated deferrable debt under early redemption provisions, terminating
derivative instruments under early termination provisions and allowing borrowers
to prepay their loans, the Company has held and intends to hold all financial
instruments to maturity. Below is a summary of significant
methodologies used in estimating fair value amounts and a schedule of fair
values at May 31, 2007 and 2006.
Cash
and Cash Equivalents
Includes
cash and certificates of deposit with remaining maturities of less than 90
days,
which are valued at the carrying value.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
Loans
to Members
Fair
values are estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. Loans with different
risk characteristics, specifically non-performing and restructured loans, are
valued using a discount rate commensurate with the risk
involved. Loans with interest rate repricing scheduled within 90 days
of year end are valued at carrying value, which approximates fair
value. Variable rate loans are valued at cost, which approximates
fair value since the Company has the option to reset rates every 30
days.
Debt
Service Reserve Funds
The
Company considers the carrying value of debt service reserve funds to be equal
to fair value. Debt service reserve funds represent cash or
short-term investments on deposit with the trustee of collateral trust bonds
and
thus carrying value is considered to be equal to fair value.
Short-Term
Debt
Short-term
debt consists of commercial paper, bank bid notes and other debt due within
one
year. The fair value of short-term debt with maturities greater than
90 days is estimated based on quoted market rates for debt with similar
maturities. The fair value of short-term debt with maturities less
than or equal to 90 days is carrying value, which is a reasonable estimate
of
fair value.
Long-Term
Debt
Long-term
debt consists of collateral trust bonds, medium-term notes and long-term notes
payable. The fair value of long-term debt is estimated based on
published bid prices or dealer quotes or is estimated using quoted market prices
for similar securities when no market quote is available and based on current
exchange rates for long-term debt denominated in a foreign
currency.
Long-term
debt with a variable interest rate is valued at carrying value, which
approximates fair value since rates may be adjusted every 30 days.
Subordinated
Deferrable Debt
The
fair value of subordinated deferrable debt is estimated based on published
market prices.
Members'
Subordinated Certificates
As
it is impracticable to develop a discount rate that measures fair value,
subordinated certificates have not been valued. Members' subordinated
certificates are extended long-term obligations of the Company; many have
original maturities of 70 to 100 years. These certificates are issued
to the Company's members as a condition of membership or as a condition of
obtaining loan funds or guarantees and are non-transferable. As these
certificates were not issued primarily for their future payment stream but
mainly as a condition of membership and to receiving future loan funds, there
is
no ready market from which to obtain fair value quotes.
Interest
Rate and Cross Currency Interest Rate Exchange Agreements
Derivative
instruments are recorded in the consolidated balance sheets at fair
value. The fair value of the interest rate and cross currency
interest rate exchange agreements is estimated taking into account the expected
future market rate of interest and the current creditworthiness of the exchange
counterparties. The fair value of cross currency interest rate
exchange agreements additionally takes into account the expected future currency
exchange rate. The fair value of the cross currency exchange agreements is
estimated taking into account the expected future currency exchange rate and
the
current creditworthiness of the exchange counterparties.
Commitments
The
fair value is estimated as the carrying value, or zero. Extensions of
credit under these commitments, if exercised, would result in loans priced
at
market rates.
Guarantees
It
is impracticable to supply fair value information related to guarantees based
on
market comparisons as there is no other company that provides guarantees to
rural electric utility companies from which to obtain market rate
information. The fair value of CFC's guarantees shown is based on the
amount recorded as a guarantee liability which represents CFC's contingent
and
non-contingent exposure related to its guarantees.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
Carrying
and fair values as of May 31, 2007 and 2006 are presented as
follows:
|
|
2007
|
|
2006
|
|
(in
thousands)
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
304,107
|
|
|
$
|
304,107
|
|
|
$
|
260,338
|
|
|
$
|
260,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to members, net
|
|
|
17,566,544
|
|
|
|
15,743,632
|
|
|
|
17,749,462
|
|
|
|
15,055,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
service reserve funds
|
|
|
54,993
|
|
|
|
54,993
|
|
|
|
80,159
|
|
|
|
80,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow interest rate exchange agreements
|
212,143
|
|
|
|
212,143
|
|
|
|
320,201
|
|
|
|
320,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow cross currency interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rate
exchange agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
22,226
|
|
|
|
22,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value interest rate exchange agreements
|
10,631
|
|
|
|
10,631
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value cross currency interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
rate
exchange agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
233,242
|
|
|
|
233,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
4,427,123
|
|
|
|
4,404,590
|
|
|
|
5,343,824
|
|
|
|
5,339,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
11,295,219
|
|
|
|
11,492,645
|
|
|
|
10,642,028
|
|
|
|
10,725,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
liability (1)
|
|
|
18,929
|
|
|
|
18,929
|
|
|
|
16,750
|
|
|
|
16,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow interest rate exchange agreement
|
12,869
|
|
|
|
12,869
|
|
|
|
6,844
|
|
|
|
6,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value interest rate exchange agreement
|
59,065
|
|
|
|
59,065
|
|
|
|
78,354
|
|
|
|
78,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
deferrable debt
|
|
|
311,440
|
|
|
|
299,964
|
|
|
|
486,440
|
|
|
|
462,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The carrying value represents CFC's exposure related to its guarantees
and
therefore will not equal total guarantees shown in Note
13.
|
(15) Contingencies
The
Company had the following loans classified as non-performing and restructured
at
May 31:
(in
thousands)
|
|
2007
|
|
|
2006
|
|
|
Non-performing
loans
|
$
|
501,864
|
|
$
|
577,869
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans
|
|
603,305
|
|
|
630,354
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,105,169
|
|
$
|
1,208,223
|
|
|
(a)
At May 31, 2007 and 2006, all loans classified as non-performing were on a
non-accrual status with respect to the recognition of interest
income. At May 31, 2007 and 2006, $545 million and $569 million,
respectively, of restructured loans were on non-accrual status with respect
to
the recognition of interest income. A total of $4 million and $1
million of interest income was accrued on restructured loans during the year
ended May 31, 2007 and 2006.
Interest
income was reduced as follows as a result of holding loans on non-accrual status
for the years ended May 31:
|
|
Reduction
to interest income
|
|
(in
thousands)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Non-performing
loans
|
|
$
|
41,448
|
|
$
|
42,725
|
|
$
|
24,424
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans
|
|
|
39,177
|
|
|
35,947
|
|
|
26,969
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
80,625
|
|
$
|
78,672
|
|
$
|
51,393
|
|
(b)
The Company classified $1,099 million and $1,201 million of loans as impaired
pursuant to the provisions of SFAS 114 at May 31, 2007 and 2006,
respectively. The Company reserved $397 million and $447 million of
the loan loss allowance for such impaired loans at May 31, 2007 and 2006,
respectively. The amount included in the loan loss allowance for such
loans was based on a comparison of the present value of the expected future
cash
flow associated with the loan discounted at the
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
original
contract interest rate and/or the estimated fair value of the collateral
securing the loan to the recorded investment in the loan. Impaired
loans may be on accrual or non-accrual status with respect to the recognition
of
interest income based on a review of the terms of the restructure agreement
and
borrower performance. The Company accrued a total of $3 million and
$1 million of interest income on impaired loans for the years ended May 31,
2007
and 2006, respectively. The Company did not accrue interest income on
loans classified as impaired during the year ended May 31, 2005. The
average recorded investment in impaired loans for the year ended May 31, 2007
and 2006 was $1,144 million and $1,162 million, respectively.
The
Company updates impairment calculations on a quarterly basis. Since a
borrower's original contract rate may include a variable rate component,
calculated impairment could vary with changes to the Company's variable rate,
independent of a borrower's underlying financial performance or
condition. In addition, the calculated impairment for a borrower will
fluctuate based on changes to certain assumptions. Changes to
assumptions include, but are not limited to the following:
· court
rulings,
· changes
to collateral values, and
· changes
to expected future cash flows both as to timing and amount.
(c)
At May 31, 2007 and 2006, CFC had a total of $545 million and $569 million,
respectively, of loans outstanding to Denton County Electric Cooperative, d/b/a
CoServ Electric ("CoServ"), a large electric distribution cooperative located
in
Denton County, Texas, that provides retail electric service to residential
and
business customers. All loans have been on non-accrual status since
January 1, 2001. Total loans to CoServ at May 31, 2007 and 2006 represented
2.9%
of the Company's total loans and guarantees outstanding.
Under
the terms of a bankruptcy settlement, CFC restructured its loans to
CoServ. CoServ is scheduled to make quarterly payments to CFC through
December 2037. As part of the restructuring, CFC may be obligated to
provide up to $204 million of senior secured capital expenditure loans to CoServ
for electric distribution infrastructure through December 2012. When
CoServ requests capital expenditure loans from CFC, these loans are provided
at
the standard terms offered to all borrowers and require debt service payments
in
addition to the quarterly payments that CoServ is required to make to
CFC. As of May
31, 2007, $20 million was advanced to CoServ under this loan
facility. To date, CoServ has made all payments required under the
restructure agreement and capital expenditure loan facility. Under the terms
of
the restructure agreement, CoServ has the option to prepay the loan for $415
million plus an interest payment true up on or after December 13, 2007 and
for
$405 million plus an interest payment true up on or after December 13,
2008.
CoServ
and CFC have no claims related to any of the legal actions asserted prior to
or
during the bankruptcy proceedings. CFC's legal claim against CoServ
is limited to CoServ's performance under the terms of the bankruptcy
settlement.
Based
on its analysis, the Company believes that it is adequately reserved for its
exposure to CoServ at May 31, 2007.
(d)
VarTec Telecom, Inc. ("VarTec") is a telecommunications company and RTFC
borrower located in Dallas, Texas. RTFC is VarTec's principal senior
secured creditor. At May 31, 2007 and 2006 RTFC had a total of $9
million and $90 million, respectively, of loans outstanding to
VarTec. At May 31, 2007 and 2006, all loans to VarTec were on
non-accrual status, resulting in the application of all payments received
against principal.
VarTec
and 16 of its U.S.-based affiliates, which were guarantors of VarTec's debt
to
RTFC, filed voluntary petitions under Chapter 11 of the United States Bankruptcy
Code on November 1, 2004 in Dallas, Texas. On July 29, 2005, the
court approved a sale of VarTec's remaining operating assets (the "Domestic
Assets Sale"). Final proceeds from the closing of the Domestic Assets
Sale were received in June 2006 totaling $40 million. Pursuant to a
court order, all net proceeds of asset sales, including the Domestic Assets
Sale, have been provisionally applied to RTFC's secured debt. On June
19, 2006, the Chapter 11 proceedings were converted to Chapter 7 proceedings
and
a Chapter 7 trustee was appointed for each of the estates.
On
June 10, 2005, the Official Committee of Unsecured Creditors (the "UCC")
initiated an adversary proceeding against RTFC in the United States Bankruptcy
Court for the Northern District of Texas, Dallas Division. As a result of the
conversion of the proceedings to Chapter 7, the UCC was dissolved and the
Chapter 7 trustee became the plaintiff in the adversary
proceedings. On May 15, 2007, the Chapter 7 trustee and RTFC entered
into a settlement agreement under which (a) all claims against RTFC were
dismissed with prejudice and fully released, (b) a portion of the proceeds
from
the Domestic Asset Sale that had been provisionally applied to RTFC’s secured
debt will be reallocated to the claimants, including RTFC, of the VarTec
bankruptcy estates, and (c) the administrative debtor-in-possession financing
facility owed by the VarTec bankruptcy estates to RTFC was partially
reduced. The Bankruptcy Court approved the settlement agreement on
May 24, 2007, which approval became final and non-appealable on June 4,
2007. As a result of the settlement of the Unsecured Creditor
litigation,
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
the
Company wrote off $44 million of pre-petition debt during the fourth quarter
of
fiscal year 2007 and expects to write off approximately $17 million in the
first
quarter of fiscal year 2008.
Based
on its analysis, the Company believes that it is adequately reserved for its
exposure to VarTec at May 31, 2007.
(e)
Innovative Communication Corporation ("ICC") is a diversified telecommunications
company and RTFC borrower headquartered in St. Croix, United States Virgin
Islands ("USVI"). In the USVI, through its subsidiary Virgin Islands
Telephone Corporation d/b/a Innovative Telephone ("Vitelco"), ICC provides
wire
line local and long-distance telephone services and well as other communications
and media services in the eastern and southern Caribbean and mainland
France.
As
of May 31, 2007 and 2006, RTFC had $493 million and $488 million, respectively,
in loans outstanding to ICC. All loans to ICC have been on
non-accrual status since February 1, 2005. ICC has not made debt
service payments to the Company since June 2005.
RTFC
is the primary secured lender to ICC. RTFC's collateral for the loans
includes (i) a series of mortgages, security agreements, financing statements,
pledges and guaranties creating liens in favor of RTFC on substantially all
of
the assets and voting stock of ICC, (ii) a direct pledge of 100% of the voting
stock of ICC's USVI local exchange carrier subsidiary, Vitelco, (iii) secured
guaranties, mortgages and direct and indirect stock pledges encumbering the
assets and ownership interests in substantially all of ICC's other operating
subsidiaries and certain of its parent entities, including ICC's immediate
parent, Emerging Communication, Inc., a Delaware corporation ("Emcom") and
Emcom's parent, Innovative Communication Company LLC, a Delaware limited
liability company ("ICC-LLC"), and (iv) a personal guaranty of the loans from
ICC's indirect majority shareholder and chairman, Jeffrey Prosser
("Prosser").
Beginning
on June 1, 2004, RTFC filed a series of lawsuits against ICC, Prosser and others
for failure to comply with the terms of ICC's loan agreement with RTFC dated
August 27, 2001 as amended on April 4, 2003 (hereinafter, the "RTFC
Lawsuits"). In response to the RTFC Lawsuits, ICC, Vitelco and
Prosser denied liability and asserted claims, by way of counterclaim and by
filing its own lawsuits against RTFC, CFC and certain of RTFC's officers,
seeking various remedies, including reformation of the loan agreement,
injunctive relief, and damages. The remedies were based on various
theories including a claim that RTFC breached an alleged funding obligation
for
the settlement of litigation brought by Emcom shareholders (the "Greenlight
Entities") against ICC-LLC, ICC and some of ICC's directors, and a claim that
Emcom and ICC-LLC were entitled to contribution from RTFC and CFC in connection
with judgments that the Greenlight Entities had been awarded (the "ICC Claims,"
together with the RTFC Lawsuits, the "Loan Litigation"). Venue of the
Loan Litigation ultimately was fixed in the United States District Court for
the
District of the Virgin Islands.
On
February 10, 2006, Greenlight filed petitions for involuntary bankruptcy against
Prosser, Emcom and ICC-LLC in the United States Bankruptcy Court for the
District of Delaware, later transferred to the United States District Court
for
the Virgin Islands, Bankruptcy Division. RTFC appeared in the
proceedings as a party-in-interest in accordance with the provisions of the
United States Bankruptcy Code.
On
April 26, 2006, RTFC reached a settlement of the Loan Litigation with ICC,
Vitelco, ICC-LLC, Emcom, their directors and Prosser,
individually. Under the settlement, RTFC obtained entry of judgments
in the District Court for the District of the Virgin Islands against ICC for
approximately $525 million and Prosser for approximately $100
million. RTFC also obtained dismissals with prejudice of all
counterclaims, affirmative defenses and other lawsuits alleging wrongful acts
by
RTFC, certain of its officers, and CFC. Various parties also reached agreement
for ICC to satisfy the RTFC judgments in the third quarter of calendar year
2006, subject to certain terms and conditions, however, on July 31, 2006,
certain of the parties obligated to satisfy the RTFC judgments under the
agreement filed voluntary bankruptcy proceedings, as described below, in order
to obtain additional time to satisfy the judgments.
On
July 31, 2006, ICC-LLC, Emcom and Prosser, individually, each filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code, now
pending in the United States District Court for the Virgin Islands,
Division of St. Thomas and St. John, Bankruptcy Division Each of the
debtors is obligated to RTFC, for certain obligations of ICC, including court
judgments. On February 13, 2007, the Bankruptcy Court ordered the
appointment of a trustee for the ICC-LLC and Emcom bankruptcy estates and an
examiner for Prosser’s bankruptcy estate.
Subsequent
to the Company’s fiscal year end, on August 2, 2007, the Bankruptcy Court
entered an order declaring that the debtors could not satisfy the RTFC judgments
at a discount. Prosser, individually, has filed a notice of appeal of
the order but has not sought a stay of its effect; none of the other debtors
has
sought review of the order.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
On
July 6, 2007, an involuntary petition under Chapter 11 of the United States
Bankruptcy Code was filed in the United States District Court for the Virgin
Islands, Bankruptcy Division, against ICC by the Greenlight
Entities. ICC has contested the petition and a hearing has been
scheduled for September 6, 2007 regarding whether an order for relief in
bankruptcy will be entered.
The
debtors continue to seek a sale or refinancing of their assets in an effort
to
satisfy their debts to RTFC. Any transfer of control of a regulated
telecommunications or cable television business, or sale or assignment of such
business's regulated assets, may require the prior consent of regulatory
authorities, including the Federal Communications Commission, the U.S. Virgin
Islands Public Services Commission, and foreign governments.
Based
on its analysis, the Company believes that it is adequately reserved for its
exposure to ICC at May 31, 2007.
(f)
Pioneer Electric Cooperative, Inc. ("Pioneer") is an electric distribution
cooperative located in Greenville, Alabama. Pioneer had also invested
in a propane gas operation, which it has sold. Pioneer had
experienced deterioration in its financial condition as a result of losses
in
the gas operation. At May 31, 2007 and 2006, CFC had a total of $52
million and $54 million, respectively, in loans outstanding to
Pioneer. Pioneer was current with respect to all debt service
payments at May
31, 2007. All loans to Pioneer remain on accrual status with respect
to the recognition of interest income. CFC is the principal creditor
to Pioneer.
On
March 9, 2006, CFC and Pioneer agreed on the terms of a debt modification that
resulted in the loans being classified as restructured. Under the
amended agreement, CFC extended the maturity of the outstanding loans and
granted a two-year deferral of principal payments. In addition, CFC
agreed to make available a line of credit for general corporate
purposes. The restructured loans are secured by first liens on
substantially all of the assets and revenues of Pioneer.
Based
on its analysis, the Company believes that it is adequately reserved for its
exposure to Pioneer at May 31, 2007.
(16)
Gain on Sale of Building and Land
On
October 18, 2005, CFC sold its headquarters facility in Fairfax County, Virginia
to an affiliate of Prentiss Properties Acquisition Partners, L.P. for $85
million. The assets had a net book value of $40 million, thus
generating a total gain of $43 million during the year ended May 31, 2006,
net
of $2 million in closing and other related costs. The headquarters
facility consists of two six-story buildings and adjacent parking garages
situated on ten acres of land and two acres of unimproved land adjacent to
the
office buildings. On the sale date, CFC entered into a three-year
lease with the new building owner for approximately one-third of the office
space. CFC has the option to extend the lease for two additional
one-year terms.
(17) Segment
Information
The
Company's consolidated financial statements include the financial results of
CFC, RTFC and NCSC. Full financial statements are produced for each
of the three companies and are the primary reports that management reviews
in
evaluating performance. The CFC segment includes the consolidation of
entities controlled by CFC and created to hold foreclosed assets and effect
loan
securitization transactions and intercompany transaction elimination
entries. The segment presentation for the years ended May 31, 2007,
2006 and 2005 reflect the operating results of each of the three companies
as a
separate segment.
As
stated elsewhere in the consolidated financial statements, CFC is the sole
lender to RTFC and the primary source of funding for NCSC. NCSC also
obtains funding from third parties with a CFC guarantee. Thus, CFC
takes all of the risk related to the funding of the loans to RTFC and NCSC,
and
in return, CFC earns a net interest income on the loans to RTFC and
NCSC.
Pursuant
to guarantee agreements, CFC has agreed to indemnify RTFC and NCSC for loan
losses, with the exception of the NCSC consumer loan program. Thus,
CFC maintains the majority of the total consolidated loan loss
allowance. A small loan loss allowance is maintained by NCSC to cover
its consumer loan exposure.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
The
following chart contains consolidated statements of operations for the years
ended May 31, 2007, 2006 and 2005 and consolidated balance sheets as of May
31,
2007 and 2006.
|
For
the year ended May 31, 2007
|
|
(in
thousands)
|
CFC
|
|
RTFC
|
|
NCSC
|
|
Consolidated
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
916,913
|
|
|
$
|
105,614
|
|
|
$
|
31,697
|
|
|
$
|
1,054,224
|
|
|
Interest
expense
|
|
(870,186
|
)
|
|
|
(99,224
|
)
|
|
|
(27,320
|
)
|
|
|
(996,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
46,727
|
|
|
|
6,390
|
|
|
|
4,377
|
|
|
|
57,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of loan losses
|
|
5,499
|
|
|
|
-
|
|
|
|
1,423
|
|
|
|
6,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after recovery of loan losses
|
|
52,226
|
|
|
|
6,390
|
|
|
|
5,800
|
|
|
|
64,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
888
|
|
|
|
-
|
|
|
|
645
|
|
|
|
1,533
|
|
|
Derivative
cash settlements
|
|
86,040
|
|
|
|
-
|
|
|
|
402
|
|
|
|
86,442
|
|
|
Results
of operations of foreclosed assets
|
|
9,758
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
96,686
|
|
|
|
-
|
|
|
|
1,047
|
|
|
|
97,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(43,029
|
)
|
|
|
(5,373
|
)
|
|
|
(3,487
|
)
|
|
|
(51,889
|
)
|
|
Recovery
of guarantee liability
|
|
1,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,700
|
|
|
Derivative
forward value
|
|
(79,744
|
)
|
|
|
-
|
|
|
|
463
|
|
|
|
(79,281
|
)
|
|
Foreign
currency adjustments
|
|
(14,554
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,554
|
)
|
|
Loss
on sale of loans
|
|
(1,584
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
(137,211
|
)
|
|
|
(5,373
|
)
|
|
|
(3,024
|
)
|
|
|
(145,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
prior to income taxes and minority
interest
|
|
11,701
|
|
|
|
1,017
|
|
|
|
3,823
|
|
|
|
16,541
|
|
|
Income
taxes
|
|
-
|
|
|
|
(945
|
)
|
|
|
(1,451
|
)
|
|
|
(2,396
|
)
|
|
Income
per segment reporting
|
$
|
11,701
|
|
|
$
|
72
|
|
|
$
|
2,372
|
|
|
$
|
14,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,145
|
|
|
Minority
interest, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,444
|
)
|
|
Net
income per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
$
|
15,805,290
|
|
|
$
|
1,860,379
|
|
|
$
|
462,538
|
|
|
$
|
18,128,207
|
|
|
Less: Allowance
for loan losses
|
|
(561,113
|
)
|
|
|
-
|
|
|
|
(550
|
)
|
|
|
(561,663
|
)
|
|
Loans
to members, net
|
|
15,244,177
|
|
|
|
1,860,379
|
|
|
|
461,988
|
|
|
|
17,566,544
|
|
|
Other
assets
|
|
768,194
|
|
|
|
189,716
|
|
|
|
50,727
|
|
|
|
1,008,637
|
|
|
Total
assets
|
$
|
16,012,371
|
|
|
$
|
2,050,095
|
|
|
$
|
512,715
|
|
|
$
|
18,575,181
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
|
For
the year ended May 31, 2006
|
|
(in
thousands)
|
CFC
|
|
RTFC
|
|
NCSC
|
|
Consolidated
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
846,806
|
|
|
$
|
129,665
|
|
|
$
|
31,441
|
|
|
$
|
1,007,912
|
|
|
Interest
expense
|
|
(826,836
|
)
|
|
|
(122,824
|
)
|
|
|
(26,276
|
)
|
|
|
(975,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
19,970
|
|
|
|
6,841
|
|
|
|
5,165
|
|
|
|
31,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision
for) recovery of loan losses
|
|
(23,452
|
)
|
|
|
-
|
|
|
|
212
|
|
|
|
(23,240
|
)
|
|
Net
interest (loss) income after (provision for) recovery of loan
losses
|
|
(3,482
|
)
|
|
|
6,841
|
|
|
|
5,377
|
|
|
|
8,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
2,017
|
|
|
|
-
|
|
|
|
381
|
|
|
|
2,398
|
|
|
Derivative
cash settlements
|
|
81,809
|
|
|
|
-
|
|
|
|
(926
|
)
|
|
|
80,883
|
|
|
Results
of operations of foreclosed assets
|
|
15,492
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,492
|
|
|
Gain
on sale of building and land
|
|
43,431
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
142,749
|
|
|
|
-
|
|
|
|
(545
|
)
|
|
|
142,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(44,589
|
)
|
|
|
(4,849
|
)
|
|
|
(2,651
|
)
|
|
|
(52,089
|
)
|
|
Recovery
of guarantee liability
|
|
700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700
|
|
|
Derivative
forward value
|
|
22,713
|
|
|
|
-
|
|
|
|
6,092
|
|
|
|
28,805
|
|
|
Foreign
currency adjustments
|
|
(22,594
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
(43,770
|
)
|
|
|
(4,849
|
)
|
|
|
3,441
|
|
|
|
(45,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
prior to income taxes and minority interest
|
|
95,497
|
|
|
|
1,992
|
|
|
|
8,273
|
|
|
|
105,762
|
|
|
Income
taxes
|
|
-
|
|
|
|
(36
|
)
|
|
|
(3,140
|
)
|
|
|
(3,176
|
)
|
|
Income
per segment reporting
|
$
|
95,497
|
|
|
$
|
1,956
|
|
|
$
|
5,133
|
|
|
$
|
102,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
102,586
|
|
|
Minority
interest, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,089
|
)
|
|
Net
income per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
95,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
$
|
15,794,372
|
|
|
$
|
2,162,464
|
|
|
$
|
404,069
|
|
|
$
|
18,360,905
|
|
|
Less: Allowance
for loan losses
|
|
(610,617
|
)
|
|
|
-
|
|
|
|
(826
|
)
|
|
|
(611,443
|
)
|
|
Loans
to members, net
|
|
15,183,755
|
|
|
|
2,162,464
|
|
|
|
403,243
|
|
|
|
17,749,462
|
|
|
Other
assets
|
|
1,179,059
|
|
|
|
209,868
|
|
|
|
41,232
|
|
|
|
1,430,159
|
|
|
Total
assets
|
$
|
16,362,814
|
|
|
$
|
2,372,332
|
|
|
$
|
444,475
|
|
|
$
|
19,179,621
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
|
For
the year ended May 31, 2005
|
|
(in
thousands)
|
CFC
|
|
RTFC
|
|
NCSC
|
|
Consolidated
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
737,267
|
|
|
$
|
265,811
|
|
|
$
|
27,775
|
|
|
$
|
1,030,853
|
|
|
Interest
expense
|
|
(662,719
|
)
|
|
|
(260,537
|
)
|
|
|
(18,777
|
)
|
|
|
(942,033
|
)
|
|
Net
interest income
|
|
74,548
|
|
|
|
5,274
|
|
|
|
8,998
|
|
|
|
88,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
(16,402
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
58,146
|
|
|
|
5,274
|
|
|
|
8,998
|
|
|
|
72,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
5,645
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,645
|
|
|
Derivative
cash settlements
|
|
80,476
|
|
|
|
-
|
|
|
|
(2,189
|
)
|
|
|
78,287
|
|
|
Results
of operations of foreclosed assets
|
|
13,024
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
99,145
|
|
|
|
-
|
|
|
|
(2,189
|
)
|
|
|
96,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(43,863
|
)
|
|
|
(2,959
|
)
|
|
|
(2,054
|
)
|
|
|
(48,876
|
)
|
|
Recovery
of guarantee liability
|
|
3,107
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,107
|
|
|
Derivative
forward value
|
|
26,755
|
|
|
|
-
|
|
|
|
(906
|
)
|
|
|
25,849
|
|
|
Foreign
currency adjustments
|
|
(22,893
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(22,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
(36,894
|
)
|
|
|
(2,959
|
)
|
|
|
(2,960
|
)
|
|
|
(42,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
prior to income taxes and minority interest
|
|
120,397
|
|
|
|
2,315
|
|
|
|
3,849
|
|
|
|
126,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
-
|
|
|
|
(57
|
)
|
|
|
(1,461
|
)
|
|
|
(1,518
|
)
|
|
Income
per segment reporting
|
$
|
120,397
|
|
|
$
|
2,258
|
|
|
$
|
2,388
|
|
|
$
|
125,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125,043
|
|
|
Minority
interest, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,540
|
)
|
|
Net
income per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,503
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
(18) Selected
Quarterly Financial Data (Unaudited)
The
Company has restated its consolidated financial statements to correct an error
in the amount of interest expense recorded on foreign denominated debt and
cash
settlement income recorded from foreign currency exchange agreements (see
further discussion in Note 1(w) to the consolidated financial
statements).
As
a result, the following tables summarizing the quarterly consolidated statements
of operating data for the four quarters of fiscal years 2007 and 2006 give
effect to the restatements described in Note 1(w).
|
Fiscal
Year 2007
|
|
Quarters
Ended
|
(in
thousands)
|
|
August
31,
|
|
|
November
30,
|
|
|
February
28,
|
|
|
May
31,
|
|
|
Total
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
264,689
|
|
$
|
260,244
|
|
$
|
264,873
|
|
$
|
264,418
|
|
$
|
1,054,224
|
|
Interest
expense
|
|
(256,004
|
|
|
(248,591
|
)
|
|
(247,441
|
)
|
|
(244,694
|
)
|
|
(996,730
|
)
|
Net
interest income
|
|
8,685
|
|
|
11,653
|
|
|
17,432
|
|
|
19,724
|
|
|
57,494
|
|
Recovery
of loan losses
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,922
|
|
|
6,922
|
|
Net
interest income after recovery of loan losses
|
|
8,685
|
|
|
11,653
|
|
|
17,432
|
|
|
26,646
|
|
|
64,416
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
|
15,255
|
|
|
16,493
|
|
|
44,442
|
|
|
10,252
|
|
|
86,442
|
|
Other
non-interest income
|
|
3,319
|
|
|
3,297
|
|
|
2,313
|
|
|
2,362
|
|
|
11,291
|
|
Total
non-interest income
|
|
18,574
|
|
|
19,790
|
|
|
46,755
|
|
|
12,614
|
|
|
97,733
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
forward value
|
|
(63,351
|
)
|
|
(53,239
|
)
|
|
(4,189
|
)
|
|
41,498
|
|
|
(79,281
|
)
|
Foreign
currency adjustments
|
|
3,321
|
|
|
(20,620
|
)
|
|
1,886
|
|
|
859
|
|
|
(14,554
|
)
|
Other
non-interest expense
|
|
(11,328
|
)
|
|
(14,577
|
)
|
|
(13,188
|
)
|
|
(12,680
|
)
|
|
(51,773
|
)
|
Total
non-interest expense
|
|
(71,358
|
)
|
|
(88,436
|
)
|
|
(15,491
|
)
|
|
29,677
|
|
|
(145,608
|
)
|
(Loss)
income prior to income taxes and minority interest
|
|
(44,099
|
)
|
|
(56,993
|
)
|
|
48,696
|
|
|
68,937
|
|
|
16,541
|
|
Income
taxes
|
|
714
|
|
|
486
|
|
|
(627
|
)
|
|
(2,969
|
)
|
|
(2,396
|
)
|
Minority
interest, net of income taxes
|
|
366
|
|
|
312
|
|
|
566
|
|
|
(3,688
|
)
|
|
(2,444
|
)
|
Net
(loss) income
|
$
|
(43,019
|
)
|
$
|
(56,195
|
)
|
$
|
48,635
|
|
$
|
62,280
|
|
$
|
11,701
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
|
Fiscal
Year 2006
|
|
Quarters
Ended
|
(in
thousands)
|
|
August
31,
|
|
|
November
30,
|
|
|
February
28,
|
|
|
May
31,
|
|
|
Total
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
249,877
|
|
$
|
243,326
|
|
$
|
253,659
|
|
$
|
261,050
|
|
$
|
1,007,912
|
|
Interest
expense
|
|
(238,767
|
|
|
(239,346
|
)
|
|
(243,176
|
)
|
|
(254,647
|
)
|
|
(975,936
|
)
|
Net
interest income
|
|
11,110
|
|
|
3,980
|
|
|
10,483
|
|
|
6,403
|
|
|
31,976
|
|
(Provision
for) recovery of loan losses
|
|
-
|
|
|
(3,886
|
)
|
|
(19,566
|
)
|
|
212
|
|
|
(23,240
|
)
|
Net
interest income (loss) after (provision for) recovery of loan
losses
|
|
11,110
|
|
|
94
|
|
|
(9,083
|
)
|
|
6,615
|
|
|
8,736
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
|
23,690
|
|
|
20,069
|
|
|
17,884
|
|
|
19,240
|
|
|
80,883
|
|
Other
non-interest income (1)
|
|
6,154
|
|
|
41,631
|
|
|
9,474
|
|
|
4,062
|
|
|
61,321
|
|
Total
non-interest income
|
|
29,844
|
|
|
61,700
|
|
|
27,358
|
|
|
23,302
|
|
|
142,204
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
forward value
|
|
(37,427
|
)
|
|
(17,505
|
)
|
|
(16,892
|
)
|
|
100,629
|
|
|
28,805
|
|
Foreign
currency adjustments
|
|
(1,260
|
)
|
|
35,739
|
|
|
(8,122
|
)
|
|
(48,951
|
)
|
|
(22,594
|
)
|
Other
non-interest expense
|
|
(8,817
|
)
|
|
(13,451
|
)
|
|
(16,545
|
)
|
|
(12,576
|
)
|
|
(51,389
|
)
|
Total
non-interest expense
|
|
(47,504
|
)
|
|
4,783
|
|
|
(41,559
|
)
|
|
39,102
|
|
|
(45,178
|
)
|
(Loss)
income prior to income taxes and minority interest
|
|
(6,550
|
)
|
|
66,577
|
|
|
(23,284
|
)
|
|
69,019
|
|
|
105,762
|
|
Income
taxes
|
|
(199
|
)
|
|
(1,530
|
)
|
|
(319
|
)
|
|
(1,128
|
)
|
|
(3,176
|
)
|
Minority
interest, net of income taxes
|
|
(1,106
|
)
|
|
(3,107
|
)
|
|
(864
|
)
|
|
(2,012
|
)
|
|
(7,089
|
)
|
Net
(loss) income
|
$
|
(7,855
|
)
|
$
|
61,940
|
|
$
|
(24,467
|
)
|
$
|
65,879
|
|
$
|
95,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes $38 million and $6 million gain on sale of building and land for
the
quarters ended November 30 and February 28, respectively.
The
following is a reconciliation of the amounts previously reported as filed
with
the SEC and the restated amounts as reported in this May 31, 2007
10-K.
|
|
August
31, 2006
|
|
(in
thousands)
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Interest
expense
|
$
|
(252,455
|
)
|
$
|
(3,549
|
)
|
$
|
(256,004
|
)
|
Net
interest income
|
|
12,234
|
|
|
(3,549
|
)
|
|
8,685
|
|
Net
interest income after provision for loan losses
|
|
12,234
|
|
|
(3,549
|
)
|
|
8,685
|
|
Derivative
cash settlements
|
|
11,706
|
|
|
3,549
|
|
|
15,255
|
|
Total
non-interest income
|
|
15,025
|
|
|
3,549
|
|
|
18,574
|
|
Derivative
forward value
|
|
(60,454
|
)
|
|
(2,897
|
)
|
|
(63,351
|
)
|
Total
non-interest expense
|
|
(68,461
|
)
|
|
(2,897
|
)
|
|
(71,358
|
)
|
Loss
prior to income taxes and minority interest
|
|
(41,202
|
)
|
|
(2,897
|
)
|
|
(44,099
|
)
|
Net
loss
|
|
(40,122
|
)
|
|
(2,897
|
)
|
|
(43,019
|
)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
|
|
November
30, 2006
|
|
(in
thousands)
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Interest
expense
|
$
|
(245,261
|
)
|
$
|
(3,330
|
)
|
$
|
(248,591
|
)
|
Net
interest income
|
|
14,983
|
|
|
(3,330
|
)
|
|
11,653
|
|
Net
interest income after provision for loan losses
|
|
14,983
|
|
|
(3,330
|
)
|
|
11,653
|
|
Derivative
cash settlements
|
|
13,163
|
|
|
3,330
|
|
|
16,493
|
|
Total
non-interest income
|
|
16,460
|
|
|
3,330
|
|
|
19,790
|
|
Derivative
forward value
|
|
(49,080
|
)
|
|
(4,159
|
)
|
|
(53,239
|
)
|
Total
non-interest expense
|
|
(84,277
|
)
|
|
(4,159
|
)
|
|
(88,436
|
)
|
Loss
prior to income taxes and minority interest
|
|
(52,834
|
)
|
|
(4,159
|
)
|
|
(56,993
|
)
|
Net
loss
|
|
(52,036
|
)
|
|
(4,159
|
)
|
|
(56,195
|
)
|
|
|
February
28, 2007
|
|
(in
thousands)
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Interest
expense
|
$
|
(243,969
|
)
|
$
|
(3,472
|
)
|
$
|
(247,441
|
)
|
Net
interest income
|
|
20,904
|
|
|
(3,472
|
)
|
|
17,432
|
|
Net
interest income after provision for loan losses
|
|
20,904
|
|
|
(3,472
|
)
|
|
17,432
|
|
Derivative
cash settlements
|
|
40,970
|
|
|
3,472
|
|
|
44,442
|
|
Total
non-interest income
|
|
43,283
|
|
|
3,472
|
|
|
46,755
|
|
Derivative
forward value
|
|
(583
|
)
|
|
(3,606
|
)
|
|
(4,189
|
)
|
Total
non-interest expense
|
|
(11,885
|
)
|
|
(3,606
|
)
|
|
(15,491
|
)
|
Income
prior to income taxes and minority interest
|
|
52,302
|
|
|
(3,606
|
)
|
|
48,696
|
|
Net
income
|
|
52,241
|
|
|
(3,606
|
)
|
|
48,635
|
|
|
|
August
31, 2005
|
|
(in
thousands)
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Interest
expense
|
$
|
(235,277
|
)
|
$
|
(3,490
|
)
|
$
|
(238,767
|
)
|
Net
interest income
|
|
14,600
|
|
|
(3,490
|
)
|
|
11,110
|
|
Net
interest income after provision for loan losses
|
|
14,600
|
|
|
(3,490
|
)
|
|
11,110
|
|
Derivative
cash settlements
|
|
20,200
|
|
|
3,490
|
|
|
23,690
|
|
Total
non-interest income
|
|
26,354
|
|
|
3,490
|
|
|
29,844
|
|
Derivative
forward value
|
|
(34,889
|
)
|
|
(2,538
|
)
|
|
(37,427
|
)
|
Total
non-interest expense
|
|
(44,966
|
)
|
|
(2,538
|
)
|
|
(47,504
|
)
|
Loss
prior to income taxes and minority interest
|
|
(4,012
|
)
|
|
(2,538
|
)
|
|
(6,550
|
)
|
Net
loss
|
|
(5,317
|
)
|
|
(2,538
|
)
|
|
(7,855
|
)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
|
|
November
30, 2005
|
|
(in
thousands)
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Interest
expense
|
$
|
(236,093
|
)
|
$
|
(3,253
|
)
|
$
|
(239,346
|
)
|
Net
interest income
|
|
7,233
|
|
|
(3,253
|
)
|
|
3,980
|
|
Net
interest income after provision for loan losses
|
|
3,347
|
|
|
(3,253
|
)
|
|
94
|
|
Derivative
cash settlements
|
|
16,816
|
|
|
3,253
|
|
|
20,069
|
|
Total
non-interest income
|
|
58,447
|
|
|
3,253
|
|
|
61,700
|
|
Derivative
forward value
|
|
(15,716
|
)
|
|
(1,789
|
)
|
|
(17,505
|
)
|
Total
non-interest expense
|
|
6,572
|
|
|
(1,789
|
)
|
|
4,783
|
|
Income
prior to income taxes and minority interest
|
|
68,366
|
|
|
(1,789
|
)
|
|
66,577
|
|
Net
income
|
|
63,729
|
|
|
(1,789
|
)
|
|
61,940
|
|
|
|
February
28, 2006
|
|
(in
thousands)
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Interest
expense
|
$
|
(240,198
|
)
|
$
|
(2,978
|
)
|
$
|
(243,176
|
)
|
Net
interest income
|
|
13,461
|
|
|
(2,978
|
)
|
|
10,483
|
|
Net
interest income after provision for loan losses
|
|
(6,105
|
)
|
|
(2,978
|
)
|
|
(9,083
|
)
|
Derivative
cash settlements
|
|
14,906
|
|
|
2,978
|
|
|
17,884
|
|
Total
non-interest income
|
|
24,380
|
|
|
2,978
|
|
|
27,358
|
|
Derivative
forward value
|
|
(14,344
|
)
|
|
(2,548
|
)
|
|
(16,892
|
)
|
Total
non-interest expense
|
|
(39,011
|
)
|
|
(2,548
|
)
|
|
(41,559
|
)
|
Loss
prior to income taxes and minority interest
|
|
(20,736
|
)
|
|
(2,548
|
)
|
|
(23,284
|
)
|
Net
loss
|
|
(21,919
|
)
|
|
(2,548
|
)
|
|
(24,467
|
)
|
|
|
May
31, 2006
|
|
(in
thousands)
|
|
As
previously reported
|
|
|
Adjustment
|
|
|
As
restated
|
|
Interest
expense
|
$
|
(251,088
|
)
|
$
|
(3,559
|
)
|
$
|
(254,647
|
)
|
Net
interest income
|
|
9,962
|
|
|
(3,559
|
)
|
|
6,403
|
|
Net
interest income after recovery of loan losses
|
|
10,174
|
|
|
(3,559
|
)
|
|
6,615
|
|
Derivative
cash settlements
|
|
15,681
|
|
|
3,559
|
|
|
19,240
|
|
Total
non-interest income
|
|
19,743
|
|
|
3,559
|
|
|
23,302
|
|
Derivative
forward value
|
|
94,003
|
|
|
6,626
|
|
|
100,629
|
|
Total
non-interest expense
|
|
32,476
|
|
|
6,626
|
|
|
39,102
|
|
Income
prior to income taxes and minority interest
|
|
62,393
|
|
|
6,626
|
|
|
69,019
|
|
Net
income
|
|
59,253
|
|
|
6,626
|
|
|
65,879
|
|
(19) Subsequent
Events
On
June 1, 2007, the Company redeemed the 7.40% subordinated deferrable debt
securities due 2050 totaling $175 million. The Company redeemed these
securities at par and recorded a charge of $6 million in interest expense during
the first quarter of fiscal year 2008 for the unamortized issuance
costs.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
(Continued)
On
August 1, 2007, CFC submitted an application to borrow an additional $500
million under FFB loan facilities with bond guarantee agreements with RUS as
part of the funding mechanism for the REDLG program (see Note 6). These funds
were received by CFC on August 7, 2007.
On
August 10, 2007, the Company entered into an agreement to sell $74 million
of
distribution mortgage loans to Farmer Mac for $74 million. The
distribution mortgage loans were sold at 100% of the outstanding principal
balance on August 10, 2007. A total of $40 million of the
distribution mortgage loans were transferred on August 10, 2007 and the
remaining $34 million will be transferred on January 2, 2008. The
transaction qualifies for sale treatment under SFAS 140. An
immaterial loss associated with transaction costs and the write-off of
unamortized deferred loan origination costs will be recognized on the
sale. The Company does not hold any continuing interest in the loans
sold and had no obligation to repurchase loans from the
purchaser. The Company will service the loans for the purchaser in
exchange for a fee of 30 basis points of the outstanding loan
principal.