nov3007_10q.htm
FORM
10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the Quarterly Period Ended November 30, 2007
OR
o 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
telephone number, including area code, is 703-709-6700.
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 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.
PART
1. FINANCIAL
INFORMATION
Item
1.
Financial Statements.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
(in
thousands)
A
S S E T S
|
November
30, 2007
|
|
May
31, 2007
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
188,655
|
|
|
$
|
304,107
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
|
18,261,923
|
|
|
|
18,131,873
|
|
Less:
Allowance for loan losses
|
|
(530,802
|
)
|
|
|
(561,663
|
)
|
Loans
to members, net
|
|
17,731,121
|
|
|
|
17,570,210
|
|
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
286,009
|
|
|
|
291,637
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
5,692
|
|
|
|
4,555
|
|
|
|
|
|
|
|
|
|
Debt
service reserve funds
|
|
54,993
|
|
|
|
54,993
|
|
|
|
|
|
|
|
|
|
Bond
issuance costs, net
|
|
36,409
|
|
|
|
45,611
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
70,145
|
|
|
|
66,329
|
|
|
|
|
|
|
|
|
|
Derivative
assets
|
|
211,507
|
|
|
|
222,774
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
22,364
|
|
|
|
14,965
|
|
|
|
|
|
|
|
|
|
|
$
|
18,606,895
|
|
|
$
|
18,575,181
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
(in
thousands)
L
I A B I L I T I E S A N D E Q U I T
Y
|
November
30, 2007
|
|
May
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
$
|
6,492,588
|
|
|
$
|
4,427,123
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest payable
|
|
281,556
|
|
|
|
281,458
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
9,275,267
|
|
|
|
11,295,219
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income
|
|
25,044
|
|
|
|
27,990
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
liability
|
|
14,681
|
|
|
|
18,929
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
29,860
|
|
|
|
27,611
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
169,928
|
|
|
|
71,934
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
deferrable debt
|
|
311,440
|
|
|
|
311,440
|
|
|
|
|
|
|
|
|
|
|
|
Members'
subordinated certificates:
|
|
|
|
|
|
|
|
|
Membership
subordinated certificates
|
|
649,424
|
|
|
|
649,424
|
|
|
Loan
and guarantee subordinated certificates
|
|
759,053
|
|
|
|
732,023
|
|
|
Total
members' subordinated certificates
|
|
1,408,477
|
|
|
|
1,381,447
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
15,933
|
|
|
|
21,989
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Retained
equity
|
|
570,248
|
|
|
|
697,837
|
|
|
Accumulated
other comprehensive income
|
|
11,873
|
|
|
|
12,204
|
|
|
Total
equity
|
|
582,121
|
|
|
|
710,041
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,606,895
|
|
|
$
|
18,575,181
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
(in
thousands)
For
the Three and Six Months Ended November 30, 2007 and
2006
|
Three
months ended
|
|
Six
months ended
|
|
November
30,
|
|
November
30,
|
|
2007
|
|
2006
(As
restated)*
|
|
2007
|
|
2006
(As
restated)*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
263,287
|
|
|
$
|
260,244
|
|
|
$
|
531,241
|
|
|
$
|
524,933
|
|
Interest
expense
|
|
(240,017
|
)
|
|
|
(248,591
|
)
|
|
|
(487,342
|
)
|
|
|
(504,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
23,270
|
|
|
|
11,653
|
|
|
|
43,899
|
|
|
|
20,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of loan losses
|
|
14,301
|
|
|
|
-
|
|
|
|
14,301
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after recovery of loan losses
|
|
37,571
|
|
|
|
11,653
|
|
|
|
58,200
|
|
|
|
20,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
352
|
|
|
|
308
|
|
|
|
703
|
|
|
|
625
|
|
Derivative
cash settlements
|
|
11,507
|
|
|
|
16,493
|
|
|
|
19,836
|
|
|
|
31,748
|
|
Results
of operations of foreclosed assets
|
|
1,856
|
|
|
|
2,989
|
|
|
|
3,816
|
|
|
|
5,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
13,715
|
|
|
|
19,790
|
|
|
|
24,355
|
|
|
|
38,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(8,828
|
)
|
|
|
(8,209
|
)
|
|
|
(17,651
|
)
|
|
|
(16,761
|
)
|
Other
general and administrative expenses
|
|
(5,929
|
)
|
|
|
(4,568
|
)
|
|
|
(10,416
|
)
|
|
|
(8,744
|
)
|
Recovery
of (provision for) guarantee liability
|
|
1,200
|
|
|
|
(1,800
|
)
|
|
|
3,300
|
|
|
|
(400
|
)
|
Derivative
forward value
|
|
(75,412
|
)
|
|
|
(53,239
|
)
|
|
|
(109,012
|
)
|
|
|
(116,590
|
)
|
Foreign
currency adjustments
|
|
-
|
|
|
|
(20,620
|
)
|
|
|
-
|
|
|
|
(17,299
|
)
|
Loss
on sale of loans
|
|
-
|
|
|
|
-
|
|
|
|
(518
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
(88,969
|
)
|
|
|
(88,436
|
)
|
|
|
(134,297
|
)
|
|
|
(159,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes and minority interest
|
|
(37,683
|
)
|
|
|
(56,993
|
)
|
|
|
(51,742
|
)
|
|
|
(101,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
2,912
|
|
|
|
486
|
|
|
|
4,011
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to minority interest
|
|
(34,771
|
)
|
|
|
(56,507
|
)
|
|
|
(47,731
|
)
|
|
|
(99,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
4,545
|
|
|
|
312
|
|
|
|
6,123
|
|
|
|
678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(30,226
|
)
|
|
$
|
(56,195
|
)
|
|
$
|
(41,608
|
)
|
|
$
|
(99,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
*See
Note 1(i)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(in
thousands)
For
the Six Months Ended November 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patronage
Capital
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
|
|
|
|
|
|
Other
|
|
Subtotal
|
|
|
|
|
|
|
|
Members'
|
|
General
|
|
|
|
|
|
|
|
Comprehensive
|
|
Retained
|
|
Membership
|
|
Unallocated
|
|
Education
|
|
Capital
|
|
Reserve
|
|
|
|
|
|
Total
|
|
Income
(Loss)
|
|
Equity
|
|
Fees
|
|
Net
Income
|
|
Fund
|
|
Reserve
|
|
Fund
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended November 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of May 31, 2007
|
$
|
710,041
|
|
$
|
12,204
|
|
|
$
|
697,837
|
|
$
|
997
|
|
|
$
|
131,528
|
|
|
$
|
1,406
|
|
|
$
|
158,308
|
|
|
$
|
498
|
|
|
$
|
405,100
|
|
|
Patronage
capital retirement
|
|
(85,494
|
)
|
|
-
|
|
|
|
(85,494
|
)
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(85,494
|
)
|
|
Loss
prior to income taxes and
minority
interest
|
|
(51,742
|
)
|
|
-
|
|
|
|
(51,742
|
)
|
|
-
|
|
|
|
(51,742
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
comprehensive loss
|
|
(331
|
)
|
|
(331
|
)
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Income
taxes
|
|
4,011
|
|
|
-
|
|
|
|
4,011
|
|
|
-
|
|
|
|
4,011
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Minority
interest
|
|
6,123
|
|
|
-
|
|
|
|
6,123
|
|
|
-
|
|
|
|
6,123
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
|
|
(487
|
)
|
|
-
|
|
|
|
(487
|
)
|
|
(1
|
)
|
|
|
1
|
|
|
|
(487
|
)
|
|
|
40
|
|
|
|
-
|
|
|
|
(40
|
)
|
|
Balance
as of November 30, 2007
|
$
|
582,121
|
|
$
|
11,873
|
|
|
$
|
570,248
|
|
$
|
996
|
|
|
$
|
89,921
|
|
|
$
|
919
|
|
|
$
|
158,348
|
|
|
$
|
498
|
|
|
$
|
319,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended November 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of May 31, 2006
|
$
|
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
|
)
|
|
Loss
prior to income taxes and
minority
interest (As restated)*
|
|
(101,092
|
)
|
|
-
|
|
|
|
(101,092
|
)
|
|
-
|
|
|
|
(101,092
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
comprehensive loss
|
|
(502
|
)
|
|
(502
|
)
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Income
taxes
|
|
1,200
|
|
|
-
|
|
|
|
1,200
|
|
|
-
|
|
|
|
1,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Minority
interest
|
|
678
|
|
|
-
|
|
|
|
678
|
|
|
-
|
|
|
|
678
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
|
|
(481
|
)
|
|
-
|
|
|
|
(481
|
)
|
|
(1
|
)
|
|
|
-
|
|
|
|
(480
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance
as of November 30, 2006 (As restated)*
|
$
|
599,964
|
|
$
|
12,706
|
|
|
$
|
587,258
|
|
$
|
993
|
|
|
$
|
126,635
|
|
|
$
|
801
|
|
|
$
|
156,844
|
|
|
$
|
497
|
|
|
$
|
301,488
|
|
|
|
|
See
accompanying notes.
|
|
|
*See
Note 1(i)
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
For
the Six Months Ended November 30, 2007 and 2006
|
2007
|
|
2006
(As
restated)*
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(41,608
|
)
|
|
$
|
(99,214
|
)
|
Add
(deduct):
|
|
|
|
|
|
|
|
Amortization
of deferred income
|
|
(4,240
|
)
|
|
|
(7,840
|
)
|
Amortization
of bond issuance costs and deferred charges
|
|
11,463
|
|
|
|
9,510
|
|
Depreciation
|
|
1,118
|
|
|
|
1,105
|
|
Recovery
of loan losses
|
|
(14,301
|
)
|
|
|
-
|
|
(Recovery
of) provision for guarantee liability
|
|
(3,300
|
)
|
|
|
400
|
|
Results
of operations of foreclosed assets
|
|
(3,816
|
)
|
|
|
(5,991
|
)
|
Derivative
forward value
|
|
109,012
|
|
|
|
116,590
|
|
Foreign
currency adjustments
|
|
-
|
|
|
|
17,299
|
|
Loss
on sale of loans
|
|
518
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
(9,068
|
)
|
|
|
(18,141
|
)
|
Accrued
interest payable
|
|
98
|
|
|
|
27,765
|
|
Other
|
|
(5,264
|
)
|
|
|
(6,271
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
40,612
|
|
|
|
35,212
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Advances
made on loans
|
|
(3,595,700
|
)
|
|
|
(3,347,118
|
)
|
Principal
collected on loans
|
|
3,403,193
|
|
|
|
3,550,432
|
|
Net
investment in fixed assets
|
|
(744
|
)
|
|
|
(333
|
)
|
Net
cash provided by foreclosed assets
|
|
-
|
|
|
|
56,831
|
|
Net
proceeds from sale of foreclosed assets
|
|
-
|
|
|
|
487
|
|
Net
proceeds from sale of loans
|
|
39,580
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by investing activities
|
|
(153,671
|
)
|
|
|
260,299
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
(Repayments
of) proceeds from issuances of short-term debt, net
|
|
(103,653
|
)
|
|
|
136,133
|
|
Proceeds
from issuance of long-term debt, net
|
|
668,890
|
|
|
|
111,154
|
|
Payments
for retirement of long-term debt
|
|
(346,590
|
)
|
|
|
(478,913
|
)
|
Payments
for retirement of subordinated deferrable debt
|
|
(175,000
|
)
|
|
|
(150,000
|
)
|
Proceeds
from issuance of members' subordinated certificates
|
|
43,189
|
|
|
|
18,710
|
|
Payments
for retirement of members' subordinated certificates
|
|
(11,851
|
)
|
|
|
(17,322
|
)
|
Payments
for retirement of National Rural patronage capital
|
|
(77,378
|
)
|
|
|
(74,094
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
(2,393
|
)
|
|
|
(454,332
|
)
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
(115,452
|
)
|
|
|
(158,821
|
)
|
BEGINNING
CASH AND CASH EQUIVALENTS
|
|
304,107
|
|
|
|
260,338
|
|
ENDING
CASH AND CASH EQUIVALENTS
|
$
|
188,655
|
|
|
$
|
101,517
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
*See
Note 1(i)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
For
the Six Months Ended November 30, 2007 and 2006
|
|
2007
|
|
|
|
2006
(As
restated)*
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
$
|
475,781
|
|
|
$
|
467,321
|
|
|
Cash
paid for income taxes
|
|
767
|
|
|
|
982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
*See
Note 1(i)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1)
|
General
Information and Accounting Policies
|
(a)
General Information
National
Rural Utilities Cooperative
Finance Corporation ("National Rural" or "the Company") is a private,
not-for-profit cooperative association incorporated under the laws of the
District of
Columbiain April
1969. The principal purpose of National Rural 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. National Rural 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. National Rural also provides its members with credit
enhancements in the form of letters of credit and guarantees of debt
obligations. National Rural is exempt from payment of federal income
taxes under the provisions of Section 501(c)(4) of the Internal Revenue
Code. National Rural 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.
Rural
Telephone Finance Cooperative
("RTFC") was incorporated as a private not-for-profit cooperative association
in
the state of South
Dakotain 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 National Rural in the
accompanying financial statements. RTFC is headquartered with
National Rural 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 National Rural. 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 National Rural and distribution systems that are members of National
Rural or are eligible for such membership. NCSC's results of
operations and financial condition are consolidated with those of National
Rural
in the accompanying financial statements. NCSC is headquartered with
National Rural in Herndon,
Virginia. NCSC
is a taxable
corporation.
The
Company's consolidated membership
was 1,543 as of November 30, 2007 including 899 utility members, the majority
of
which are consumer-owned electric cooperatives, 513 telecommunications members,
66 service members and 65 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 National Rural, RTFC and
NCSC have been eliminated in consolidation. All references to members
within this document include members and associates.
In
the opinion of management, the
accompanying consolidated financial statements contain all adjustments (which
consist only of normal recurring accruals) necessary for a fair statement of
the
Company's results for the interim periods presented.
These
interim unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended May 31, 2007.
The
preparation of financial statements
in conformity with accounting principles generally accepted in the United States
("GAAP") requires management to make estimates and assumptions that affect
the
assets, liabilities, revenues and expenses reported in the financial statements,
as well as amounts included in the notes thereto, including discussion and
disclosure of contingent liabilities. While the Company 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.
The
Company does not believe it is
vulnerable to the risk of a near term severe impact as a result of any
concentrations of its activities.
(b)
Principles of Consolidation
The
accompanying financial statements
include the consolidated accounts of National Rural, RTFC and NCSC and certain
entities controlled by National Rural and 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 National Rural to consolidate the financial results of RTFC
and
NCSC. National Rural is the primary beneficiary of variable interests
in RTFC and NCSC due to its exposure to absorbing the majority of expected
losses.
National
Rural 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 National Rural a fee in exchange for which National Rural reimburses RTFC
for loan losses. All loans that require RTFC board approval also
require National Rural approval. National Rural is not a member of
RTFC and does not elect directors to the RTFC board. RTFC is an
associate member of National Rural.
National
Rural 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 National Rural or commercial paper and long-term notes issued by
NCSC
and guaranteed by National Rural. In connection with these
guarantees, NCSC must pay a guarantee fee and purchase from National Rural
interest-bearing subordinated term certificates in proportion to the related
guarantee. Under a guarantee agreement, NCSC pays National Rural a
fee in exchange for which National Rural reimburses NCSC for loan losses,
excluding losses in the consumer loan program. All loans that require
NCSC board approval also require National Rural approval. National
Rural controls the nomination process for
one out of 11 NCSC
directors. The full membership of NCSC elects directors on the basis
of one vote for each
member. NCSC
is
a service organization member of National Rural.
RTFC
and NCSC creditors have no recourse
against National Rural in the event of default by RTFC and NCSC, unless there
is
a guarantee agreement under which National Rural has guaranteed NCSC or RTFC
debt obligations to a third party. At November 30, 2007, National
Rural had guaranteed $287 million of NCSC debt and derivative instruments with
third parties. The maturities for NCSC debt guaranteed by
National Ruralrun
through 2031. As of November 30,
2007, National
Rural's maximum potential
exposure totaled $305 million related to guarantees of NCSC debt and
derivatives. Guarantees related to NCSC debt and derivative
instruments are not included in Note 12 at November 30, 2007 as the debt and
derivatives are reported on the consolidated balance sheet. At
November 30, 2007, National Rural had no guarantees of RTFC debt to third party
creditors. All National Rural loans to RTFC and NCSC are secured by
all assets and revenues of RTFC and NCSC. At November 30, 2007, RTFC
had total assets of $1,986 million including loans outstanding to members of
$1,792 million and NCSC had total assets of $518 million including loans
outstanding of $464 million. At November 30, 2007 and May 31, 2007,
National Rural had committed to lend RTFC up to $4 billion of which $2 billion
was outstanding at November 30, 2007. At November 30, 2007 and May
31, 2007, National Rural had committed to provide credit to NCSC of up to $1
billion. At November 30, 2007, National Rural had provided a total of
$510 million of credit to NCSC, representing $223 million of outstanding loans
and $287 million of credit enhancements.
National
Rural established limited
liability corporations and partnerships to hold foreclosed assets and effect
loan securitization transactions. National Rural has full ownership
and control of all such companies and thus consolidates their financial
results. National Rural 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 company formed to effect loan securitization
transactions.
Unless
stated otherwise, references to
the Company relate to the consolidation of National Rural, RTFC, NCSC and
certain entities controlled by National Rural and created to hold foreclosed
assets and effect loan securitization transactions.
(c)
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 National
Rural. 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 six months ended November
30,
|
|
|
Year
ended
|
(in
thousands)
|
|
2007
|
|
|
|
2006
|
|
|
|
May
31,
2007
|
Balance
at beginning of period
|
$
|
561,663
|
|
|
$
|
611,443
|
|
|
$
|
611,443
|
|
Recovery
of loan losses
|
|
(14,301
|
)
|
|
|
-
|
|
|
|
(6,922
|
)
|
Write-offs
|
|
(16,755
|
)
|
|
|
(304
|
)
|
|
|
(44,668
|
)
|
Recoveries
of prior write-offs
|
|
195
|
|
|
|
219
|
|
|
|
1,810
|
|
Balance
at end of period
|
$
|
530,802
|
|
|
$
|
611,358
|
|
|
$
|
561,663
|
|
(d)
Interest Income
Interest
income includes the following:
|
For
the three months ended November 30,
|
|
For
the six months ended November 30,
|
(in
thousands)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Interest
on long-term fixed rate loans (1)
|
$
|
215,183
|
|
|
$
|
206,054
|
|
|
$
|
429,743
|
|
|
$
|
411,627
|
|
Interest
on long-term variable rate loans (1)
|
|
22,690
|
|
|
|
30,546
|
|
|
|
47,239
|
|
|
|
62,171
|
|
Interest
on short-term loans (1)
|
|
19,244
|
|
|
|
17,877
|
|
|
|
39,592
|
|
|
|
35,930
|
|
Interest
on investments (2)
|
|
1,900
|
|
|
|
1,421
|
|
|
|
4,836
|
|
|
|
3,449
|
|
Conversion
fees (3)
|
|
1,735
|
|
|
|
2,442
|
|
|
|
3,509
|
|
|
|
4,954
|
|
Make-whole
and prepayment fees
(4)
|
|
65
|
|
|
|
382
|
|
|
|
1,754
|
|
|
|
825
|
|
Commitment
and guarantee fees
(5)
|
|
1,385
|
|
|
|
1,260
|
|
|
|
2,920
|
|
|
|
5,469
|
|
Other
fees
|
|
1,085
|
|
|
|
262
|
|
|
|
1,648
|
|
|
|
508
|
|
Total
interest income
|
|
$
|
263,287
|
|
|
$
|
260,244
|
|
|
$
|
531,241
|
|
|
$
|
524,933
|
|
(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 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 National Rural 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
$22
million and $25 million at November 30, 2007 and May 31, 2007,
respectively.
(e)
Interest Expense
Interest
expense includes the
following:
|
For
the three months ended November 30,
|
|
For
the six months ended November 30,
|
(in
thousands)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Interest
expense - commercial
paper and bid notes (1)
|
$
|
33,192
|
|
|
$
|
49,068
|
|
|
$
|
71,478
|
|
|
$
|
96,002
|
|
Interest
expense - medium-term
notes (1)
|
|
83,681
|
|
|
|
93,307
|
|
|
|
166,867
|
|
|
|
188,174
|
|
Interest
expense - collateral
trust bonds (1)
|
|
63,405
|
|
|
|
49,488
|
|
|
|
128,755
|
|
|
|
100,560
|
|
Interest
expense - subordinated
deferrable debt (1)
|
|
4,916
|
|
|
|
8,153
|
|
|
|
9,831
|
|
|
|
16,783
|
|
Interest
expense - subordinated
certificates (1)
|
|
12,030
|
|
|
|
11,876
|
|
|
|
24,154
|
|
|
|
23,916
|
|
Interest
expense - long-term
private debt (1)
|
|
34,960
|
|
|
|
30,022
|
|
|
|
65,743
|
|
|
|
60,304
|
|
Debt
issuance costs (2)
|
|
2,767
|
|
|
|
2,067
|
|
|
|
5,297
|
|
|
|
4,102
|
|
Commitment
and guarantee fees (3)
|
|
4,605
|
|
|
|
4,000
|
|
|
|
8,675
|
|
|
|
8,014
|
|
Loss
on extinguishment of debt (4)
|
|
-
|
|
|
|
-
|
|
|
|
5,509
|
|
|
|
4,806
|
|
Other
fees
|
|
461
|
|
|
|
610
|
|
|
|
1,033
|
|
|
|
1,934
|
|
Total
interest expense
|
|
$
|
240,017
|
|
|
$
|
248,591
|
|
|
$
|
487,342
|
|
|
$
|
504,595
|
|
(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)
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.
(4)
Represents the 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.
(f)
Comprehensive Income
Comprehensive
income includes the
Company's net income, as well as other comprehensive income related
to
derivatives. Comprehensive income is calculated as
follows:
|
For
the three months ended
November
30,
|
|
For
the six months ended
November
30,
|
(in
thousands)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
loss
|
$
|
(30,226
|
)
|
|
$
|
(56,195
|
)
|
|
$
|
(41,608
|
)
|
|
$
|
(99,214
|
)
|
|
Other
comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized
gain on derivatives
|
|
(256
|
)
|
|
|
(251
|
)
|
|
|
(331
|
)
|
|
|
(502
|
)
|
|
Comprehensive
loss
|
$
|
(30,482
|
)
|
|
$
|
(56,446
|
)
|
|
$
|
(41,939
|
)
|
|
$
|
(99,716
|
)
|
|
(g)
Reclassifications
Certain
reclassifications of prior
period amounts have been made to conform to the current reporting
format.
The
May 31, 2007 balance of deferred
loan origination costs
totaling $4 million was
reclassified from other assets to loans to members on the consolidated balance
sheet to conform with the November 30, 2007 presentation.
(h)
New Accounting Pronouncements
On
June 1, 2007, the Company adopted
Statement of Financial Accounting Standard (“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 SFAS 133, Accounting for
Derivative
Instruments and Hedging Activities, as amended. 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 did not have a
material impact on the Company's financial position or results of
operations.
On
June 1, 2007, the Company adopted
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 did not have a
material impact on the Company's financial position or results of
operations.
On
June 1, 2007, the Company adopted FIN
No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS
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 did not have a
material impact on the Company's financial position or results of
operations. The Company classifies interest and penalties assessed as
tax expense.
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.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51. This
statement amends ARB 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It also amends certain
of ARB 51’s consolidation procedures for consistency with the requirements of
SFAS 141, Business Combinations. Noncontrolling interests shall be
reclassified to equity, consolidated net income shall be adjusted to include
net
income attributable to noncontrolling interests and consolidated comprehensive
income shall be adjusted to include comprehensive income attributable to the
noncontrolling interests. This statement is effective for fiscal
years beginning on or after December 15, 2008. The Company’s adoption
of SFAS 160 on June 1, 2009 is not expected to have a material impact on the
Company’s financial position or results of operations.
(i)
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 $3 million and $7 million for the three and six months ended
November 30, 2006, 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 loss and net loss lines were
understated by $4 million and $7 million for the three and six months ended
November 30, 2006, respectively. There is no impact on cash flows
from operating activities or the total change in cash in the consolidated
statements of cash flows.
A
summary of the significant effects of the restatement on the consolidated
statements of operations for the three and six months ended November 30, 2006
is
as follows:
|
|
For
the three months ended 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
|
)
|
Loss
prior to minority interest
|
|
(52,348
|
)
|
|
(4,159
|
)
|
|
(56,507
|
)
|
Net
loss
|
|
(52,036
|
)
|
|
(4,159
|
)
|
|
(56,195
|
)
|
|
|
For
the six months ended November 30, 2006
|
|
(in
thousands)
|
|
As
previously reported
|
|
Adjustment
|
|
As
restated
|
|
Interest
expense
|
$
|
(497,716
|
)
|
$
|
(6,879
|
)
|
$
|
(504,595
|
)
|
Net
interest income
|
|
27,217
|
|
|
(6,879
|
)
|
|
20,338
|
|
Net
interest income after provision for loan losses
|
|
27,217
|
|
|
(6,879
|
)
|
|
20,338
|
|
Derivative
cash settlements
|
|
24,869
|
|
|
6,879
|
|
|
31,748
|
|
Total
non-interest income
|
|
31,485
|
|
|
6,879
|
|
|
38,364
|
|
Derivative
forward value
|
|
(109,534
|
)
|
|
(7,056
|
)
|
|
(116,590
|
)
|
Total
non-interest expense
|
|
(152,738
|
)
|
|
(7,056
|
)
|
|
(159,794
|
)
|
Loss
prior to income taxes and minority interest
|
|
(94,036
|
)
|
|
(7,056
|
)
|
|
(101,092
|
)
|
Loss
prior to minority interest
|
|
(92,836
|
)
|
|
(7,056
|
)
|
|
(99,892
|
)
|
Net
loss
|
|
(92,158
|
)
|
|
(7,056
|
)
|
|
(99,214
|
)
|
(2)
|
Loans
and Commitments
|
Loans
outstanding to members and unadvanced commitments by loan type and by segment
are summarized as follows:
|
November
30, 2007
|
|
May
31, 2007
|
|
Loans
|
|
Unadvanced
|
|
Loans
|
|
Unadvanced
|
(in
thousands)
|
Outstanding
|
|
Commitments
(1)
|
|
Outstanding
|
|
Commitments
(1)
|
Total
by loan type (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
$
|
14,806,429
|
|
|
$
|
-
|
|
|
$
|
14,663,340
|
|
|
$
|
-
|
|
Long-term
variable rate loans
|
|
1,918,327
|
|
|
|
5,646,720
|
|
|
|
1,993,534
|
|
|
|
5,703,313
|
|
Loans
guaranteed by RUS
|
|
252,087
|
|
|
|
491
|
|
|
|
255,903
|
|
|
|
491
|
|
Short-term
loans
|
|
1,281,060
|
|
|
|
7,462,247
|
|
|
|
1,215,430
|
|
|
|
7,200,156
|
|
Total
loans outstanding
|
|
18,257,903
|
|
|
|
13,109,458
|
|
|
|
18,128,207
|
|
|
|
12,903,960
|
|
Deferred
origination fees
|
|
4,020
|
|
|
|
-
|
|
|
|
3,666
|
|
|
|
-
|
|
Less:
Allowance for loan losses
|
|
(530,802
|
)
|
|
|
-
|
|
|
|
(561,663
|
)
|
|
|
-
|
|
Net
loans
|
$
|
17,731,121
|
|
|
$
|
13,109,458
|
|
|
$
|
17,570,210
|
|
|
$
|
12,903,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
12,881,373
|
|
|
$
|
9,191,590
|
|
|
$
|
12,827,772
|
|
|
$
|
9,176,686
|
|
Power
supply
|
|
3,007,262
|
|
|
|
2,998,166
|
|
|
|
2,858,040
|
|
|
|
2,798,124
|
|
Statewide
and associate
|
|
114,081
|
|
|
|
120,737
|
|
|
|
119,478
|
|
|
|
139,156
|
|
National
Rural total
|
|
16,002,716
|
|
|
|
12,310,493
|
|
|
|
15,805,290
|
|
|
|
12,113,966
|
|
RTFC
|
|
1,791,504
|
|
|
|
508,336
|
|
|
|
1,860,379
|
|
|
|
473,762
|
|
NCSC
|
|
463,683
|
|
|
|
290,629
|
|
|
|
462,538
|
|
|
|
316,232
|
|
Total
loans outstanding
|
$
|
18,257,903
|
|
|
$
|
13,109,458
|
|
|
$
|
18,128,207
|
|
|
$
|
12,903,960
|
|
|
November
30, 2007
|
|
May
31, 2007
|
|
Loans
|
|
Unadvanced
|
|
Loans
|
|
Unadvanced
|
(in
thousands)
|
Outstanding
|
|
Commitments
(1)
|
|
Outstanding
|
|
Commitments
(1)
|
Non-performing
and restructured
loans (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
$
|
219,734
|
|
|
$
|
-
|
|
|
$
|
212,984
|
|
|
$
|
-
|
|
Long-term
variable rate loans
|
|
253,480
|
|
|
|
2,160
|
|
|
|
261,081
|
|
|
|
-
|
|
Short-term
loans
|
|
29,984
|
|
|
|
-
|
|
|
|
27,799
|
|
|
|
418
|
|
Total
non-performing loans
|
$
|
503,198
|
|
|
$
|
2,160
|
|
|
$
|
501,864
|
|
|
$
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
$
|
52,420
|
|
|
$
|
-
|
|
|
$
|
52,420
|
|
|
$
|
-
|
|
Long-term
variable rate loans
|
|
532,476
|
|
|
|
186,673
|
|
|
|
544,697
|
|
|
|
186,673
|
|
Short-term
loans
|
|
-
|
|
|
|
12,500
|
|
|
|
-
|
|
|
|
12,500
|
|
National
Rural total restructured loans
|
|
584,896
|
|
|
|
199,173
|
|
|
|
597,117
|
|
|
|
199,173
|
|
RTFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
|
5,872
|
|
|
|
-
|
|
|
|
6,188
|
|
|
|
-
|
|
Total
restructured loans
|
|
$
|
590,768
|
|
|
$
|
199,173
|
|
|
$
|
603,305
|
|
|
$
|
199,173
|
|
(1)
Unadvanced loan commitments include 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 loan
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 a variable rate.
(2)
Loans are classified as long-term or short-term based on their original
maturity.
(3)
Included in total by loan type chart above.
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.
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:
(Dollar
amounts in thousands)
|
|
November
30, 2007
|
|
May
31, 2007
|
Total
by loan program:
|
|
Secured
|
|
%
|
|
Unsecured
|
|
%
|
|
Secured
|
|
%
|
|
Unsecured
|
|
%
|
|
Long-term
fixed rate loans
|
$
|
14,382,726
|
|
97%
|
$
|
423,703
|
|
3%
|
$
|
14,180,956
|
|
97%
|
$
|
482,384
|
|
3%
|
|
Long-term
variable rate loans
|
|
1,771,391
|
|
92%
|
|
146,936
|
|
8%
|
|
1,865,821
|
|
94%
|
|
127,713
|
|
6%
|
|
Loans
guaranteed by RUS
|
|
252,087
|
|
100%
|
|
-
|
|
-
|
|
255,903
|
|
100%
|
|
-
|
|
-
|
|
Short-term
loans
|
|
206,952
|
|
16%
|
|
1,074,108
|
|
84%
|
|
191,231
|
|
16%
|
|
1,024,199
|
|
84%
|
|
Total
loans
|
$
|
16,613,156
|
|
91%
|
$
|
1,644,747
|
|
9%
|
$
|
16,493,911
|
|
91%
|
$
|
1,634,296
|
|
9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
14,642,961
|
|
92%
|
$
|
1,359,755
|
|
8%
|
$
|
14,462,448
|
|
92%
|
$
|
1,342,842
|
|
8%
|
|
RTFC
|
|
1,564,352
|
|
87%
|
|
227,152
|
|
13%
|
|
1,630,079
|
|
88%
|
|
230,300
|
|
12%
|
|
NCSC
|
|
405,843
|
|
88%
|
|
57,840
|
|
12%
|
|
401,384
|
|
87%
|
|
61,154
|
|
13%
|
|
Total
loans
|
$
|
16,613,156
|
|
91%
|
$
|
1,644,747
|
|
9%
|
$
|
16,493,911
|
|
91%
|
$
|
1,634,296
|
|
9%
|
Pledging
of Loans
As
of November 30, 2007 and May 31, 2007, distribution system mortgage notes
related to outstanding long-term loans totaling $5,575 million and $5,797
million, respectively, and RUS guaranteed loans qualifying as permitted
investments totaling $217 million and $219 million, respectively, were pledged
as collateral to secure National Rural's collateral trust bonds under the 1994
indenture totaling $4,815 million and $5,020 million,
respectively. In addition, $2 million of cash was pledged to secure
$2 million of collateral trust bonds outstanding under the 1972 indenture at
November 30, 2007 and May 31, 2007.
As
of November 30, 2007 and May 31, 2007, distribution system mortgage notes
totaling $575 million and $592 million, respectively, were pledged as collateral
to secure National Rural's notes to the Federal Agricultural Mortgage
Corporation ("Farmer Mac") totaling $500 million.
In
addition to the loans pledged as collateral at November 30, 2007 and May 31,
2007, National Rural had $3,163 million and $2,765 million, respectively, of
mortgage notes on deposit with the trustee for the $2.5 billion and $2 billion,
respectively, of notes payable to the Federal Financing Bank ("FFB") of the
United States Treasury (see Note 6). The $2.5 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 mortgage notes on deposit at that time, which
totaled $3,163 million at November 30, 2007, would be pledged as collateral
rather than held on deposit. At November 30, 2007, the Company’s
senior secured debt ratings were above the rating trigger
threshold.
A
total of $1.5 billion of notes payable to the FFB has a second trigger event
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. If the Company does not satisfy the
financial expert rating trigger, the mortgage notes on deposit at that time,
which totaled $1,804 million at November 30, 2007, would be pledged as
collateral rather than held on deposit. The financial expert position
on National Rural’s board of directors has been filled since March
2007.
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, as amended. The
Company derecognizes financial assets when control has been
surrendered. The Company has no retained interest in securitized
loans. The Company services the loans in return for a market fee and
therefore 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
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 that date. A total of $40 million of the distribution
mortgage loans were transferred on August 10, 2007 and the remaining $34 million
were transferred on January 2, 2008. The transaction qualifies for
sale treatment under SFAS 140.
The
$34 million of loans transferred in January 2008 were reported in loans to
members (see Note 2) at November 30, 2007.
The
Company recorded a loss on sale of loans totaling $0.5 million related to costs
associated with the transaction and unamortized deferred loan origination costs
for the loans sold. The Company does not hold any continuing interest
in the loans sold and had 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 or any of the
Company’s assets in the event of a default on the loans held by 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. 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 trust holding the assets.
During
the three and six months ended November 30, 2007, the Company recognized $0.3
million and $0.6 million, respectively, in servicing fees on all loan
securitization transactions.
(4)
Foreclosed Assets
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 November 30, 2007 and May 31, 2007, 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:
|
Six
months ended November 30,
|
|
Year
ended
|
(in
thousands)
|
2007
|
|
2006
|
|
May
31, 2007
|
Beginning
balance
|
$
|
66,329
|
|
|
$
|
120,889
|
|
|
$
|
120,889
|
|
Results
of operations
|
|
3,816
|
|
|
|
5,991
|
|
|
|
9,758
|
|
Net
cash provided by foreclosed assets
|
|
-
|
|
|
|
(56,831
|
)
|
|
|
(63,831
|
)
|
Sale
of foreclosed assets
|
|
-
|
|
|
|
(487
|
)
|
|
|
(487
|
)
|
Ending
balance of foreclosed assets
|
$
|
70,145
|
|
|
$
|
69,562
|
|
|
$
|
66,329
|
|
(5)
Short-Term Debt and Credit Arrangements
The
following is a summary of short-term
debt outstanding:
(in
thousands)
|
November
30, 2007
|
|
May
31, 2007
|
Short-term
debt:
|
|
|
|
|
|
|
|
Commercial
paper sold through dealers, net of discounts
|
$
|
911,616
|
|
|
$
|
1,017,879
|
|
Commercial
paper sold directly to members, at par
|
|
1,325,776
|
|
|
|
1,383,090
|
|
Commercial
paper sold directly to non-members, at par
|
|
144,879
|
|
|
|
133,087
|
|
Total
commercial paper
|
|
2,382,271
|
|
|
|
2,534,056
|
|
Daily
liquidity fund
|
|
298,694
|
|
|
|
250,563
|
|
Bank
bid notes
|
|
100,000
|
|
|
|
100,000
|
|
Subtotal
short-term debt
|
|
2,780,965
|
|
|
|
2,884,619
|
|
Long-term
debt maturing within one year:
|
|
|
|
|
|
|
|
Medium-term
notes sold through dealers
|
|
355,605
|
|
|
|
133,801
|
|
Medium-term
notes sold to members
|
|
256,088
|
|
|
|
231,158
|
|
Secured
collateral trust bonds
|
|
2,596,890
|
|
|
|
999,560
|
|
Secured
notes payable
|
|
500,000
|
|
|
|
-
|
|
Subordinated
deferrable debt (1)
|
|
-
|
|
|
|
175,000
|
|
Unsecured
notes payable
|
|
3,040
|
|
|
|
2,985
|
|
Total
long-term debt maturing within one year
|
|
3,711,623
|
|
|
|
1,542,504
|
|
Total
short-term debt
|
|
$
|
6,492,588
|
|
|
$
|
4,427,123
|
|
(1)
Redeemed in June 2007.
|
|
|
|
|
|
|
|
|
National
Rural issues commercial paper
for periods of one to 270 days. National Rural also enters into
short-term bank bid note agreements, which are unsecured obligations of National
Rural and do not require backup bank lines for liquidity
purposes. Bank bid note facilities are uncommitted lines of credit
for which National Rural does not pay a fee. The commitments are
generally subject to termination at the discretion of the individual
banks.
Revolving
Credit
Agreements
The
following is a summary of the
amounts available under the Company's revolving credit
agreements:
(Dollar
amounts in thousands)
|
|
November
30, 2007
|
|
|
May
31, 2007
|
|
Termination
Date
|
|
Facility
fee per annum (1)
|
364-day
agreement (2)
|
$
|
1,125,000
|
|
$
|
1,125,000
|
|
March
14, 2008
|
|
0.05
of 1%
|
Five-year
agreement
|
|
1,125,000
|
|
|
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%
|
Total
|
|
$
|
3,275,000
|
|
$
|
3,275,000
|
|
|
|
|
(1)
Facility fee determined by National Rural'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 November 30, 2007, totaling in aggregate $1 million,
which will be amortized on a straight-line basis over the life of the
agreements. No up-front 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 November
30, 2007.
At
November 30, 2007 and May 31, 2007,
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 SFAS 52, Foreign Currency
Translation. The
adjusted times interest earned ratio ("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 six months ended November 30,
2007
and the year ended May 31, 2007:
|
Actual
|
|
Requirement
|
|
November
30, 2007
|
|
May
31, 2007
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
1.025
|
|
1.13
|
|
1.09
|
|
Minimum
adjusted TIER at fiscal year end (1)
|
1.05
|
|
1.12
|
|
1.12
|
|
Maximum
ratio of senior debt to total equity
|
|
10.00
|
|
7.30
|
|
6.65
|
|
(1)
The Company must meet this requirement in order to retire patronage
capital. The adjusted TIER reported at November 30, 2007 is the
amount from the prior year end, the last measurement date for this
ratio.
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 National Rural must be in compliance with their other
requirements, including financial ratios, in order to draw down on the
facilities.
(6)
Long-Term Debt
The
following is a summary of long-term
debt outstanding:
(in
thousands)
|
November
30,
2007
|
|
May
31,
2007
|
Unsecured
long-term debt:
|
|
|
|
|
|
|
|
Medium-term
notes, sold through dealers
|
$
|
4,437,049
|
|
|
$
|
4,676,176
|
|
Medium-term
notes, sold directly to members
|
|
96,611
|
|
|
|
76,464
|
|
Subtotal
|
|
4,533,660
|
|
|
|
4,752,640
|
|
Unamortized
discount
|
|
(6,466
|
)
|
|
|
(7,408
|
)
|
Total
unsecured medium-term notes
|
|
4,527,194
|
|
|
|
4,745,232
|
|
|
|
|
|
|
|
|
|
Unsecured
notes payable
|
|
2,532,355
|
|
|
|
2,032,630
|
|
Total
unsecured long-term debt
|
|
7,059,549
|
|
|
|
6,777,862
|
|
|
|
|
|
|
|
|
|
Secured
long-term debt:
|
|
|
|
|
|
|
|
Collateral
trust bonds
|
|
2,219,927
|
|
|
|
4,021,953
|
|
Unamortized
discount
|
|
(4,209
|
)
|
|
|
(4,596
|
)
|
Total
secured collateral trust bonds
|
|
2,215,718
|
|
|
|
4,017,357
|
|
|
|
|
|
|
|
|
|
Secured
notes payable
|
|
-
|
|
|
|
500,000
|
|
Total
secured long-term debt
|
|
2,215,718
|
|
|
|
4,517,357
|
|
Total
long-term debt
|
$
|
9,275,267
|
|
|
$
|
11,295,219
|
|
Medium-term
notes are unsecured obligations of National Rural. 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.
Unsecured
Notes Payable
At
November 30, 2007 and May 31, 2007, National Rural had outstanding a total
of
$2.5 billion and $2 billion, respectively, under a bond purchase agreement
with
the FFB and a bond guarantee agreement with RUS as part of the funding mechanism
for the REDLG program. On August 7, 2007, National Rural received the
advance of the remaining $500 million under the REDLG program. The
$500 million advance has a July 2027 maturity date. As part of the
REDLG program, National Rural will pay to RUS a fee of 30 basis points per
annum
on the total amount borrowed. At November 30, 2007, the $2.5 billion
of unsecured notes payable issued as part of the REDLG program require National
Rural 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, the Company had outstanding a total of $500 million of 4.656%
notes to Farmer Mac due in 2008. See Note 2 for additional
information on the collateral pledged to secure the Company's notes
payable. Based on the July 29, 2008 maturity, this debt was
reclassified to short-term debt during the quarter ended August 31,
2007.
(7)
Subordinated Deferrable Debt
The
following table is a summary of subordinated deferrable debt
outstanding:
(Dollar
amounts in thousands)
|
November
30,
2007
|
|
May
31,
2007
|
6.75%
due 2043 (1)
|
$
|
125,000
|
|
|
$
|
125,000
|
|
6.10%
due 2044
(2)
|
|
88,201
|
|
|
|
88,201
|
|
5.95%
due 2045 (3)
|
|
98,239
|
|
|
|
98,239
|
|
Total
|
|
$
|
311,440
|
|
|
$
|
311,440
|
|
(1)
The 6.75% subordinated deferrable
securities due 2043 are callable by the Company at par starting on February
15,
2008.
(2)
The 6.10%
subordinated deferrable securities due
2044
are callable by the Company at par
starting on February 1, 2009.
(3)
The 5.95%
subordinated deferrable securities
due 2045
are callable by the Company at par
starting on February 15, 2010.
(8)
Derivative Financial Instruments
The
Company is neither a dealer nor a trader in derivative financial
instruments. The Company utilizes derivatives such
as interest rate and cross currency interest rate exchange agreements
to mitigate 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. At November 30, 2007 and 2006 and May 31,
2007, the Company did not have any interest rate exchange agreements that were
accounted for using hedge accounting.
The
Company was a party to the following interest rate exchange
agreements:
|
|
Notional
Amounts Outstanding
|
(in
thousands)
|
|
November
30, 2007
|
|
May
31, 2007
|
Pay
fixed and receive variable
|
$
|
7,630,351
|
$
|
7,276,473
|
Pay
variable and receive fixed
|
|
5,756,440
|
|
5,256,440
|
Total
interest rate exchange agreements
|
$
|
13,386,791
|
$
|
12,532,913
|
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:
|
|
Three
months ended
|
|
Six
months ended
|
|
|
November
30,
|
|
November
30,
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Statement
of Operations Impact
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreements
that do not qualify for hedge accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
|
$
|
11,507
|
|
|
$
|
13,822
|
|
|
$
|
19,836
|
|
|
$
|
26,002
|
|
Derivative
forward value
|
|
|
(75,412
|
)
|
|
|
(72,223
|
)
|
|
|
(109,012
|
)
|
|
|
(126,548
|
)
|
Total
loss on interest rate exchange agreements
|
|
$
|
(63,905
|
)
|
|
$
|
(58,401
|
)
|
|
$
|
(89,176
|
)
|
|
$
|
(100,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income Impact
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreements
that qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of transition adjustment
|
|
$
|
(256
|
)
|
|
$
|
(251
|
)
|
|
$
|
(331
|
)
|
|
$
|
(502
|
)
|
Total
comprehensive loss
|
|
$
|
(256
|
)
|
|
$
|
(251
|
)
|
|
$
|
(331
|
)
|
|
$
|
(502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
transition adjustment of $62 million was 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 of the
transition adjustment is expected to be amortized to income over the next twelve
months and will continue through April 2029.
Cross
Currency Interest Rate Exchange Agreements
There
were no cross currency interest rate exchange agreements outstanding at November
30, 2007 and May 31, 2007. As of November 30, 2006, the Company was a
party to cross currency interest rate exchange agreements with a total notional
amount of $434 million related to medium-term notes denominated in foreign
currencies in which the Company received Euros and paid U.S.
dollars. These cross currency interest rate exchange agreements did
not qualify for hedge accounting. Generally, the Company’s cross
currency interest rate exchange agreements do not qualify for hedge accounting
under SFAS 133.
Cross
currency interest rate exchange agreements had the following impact on the
Company:
|
|
Three
months ended
|
|
Six
months ended
|
|
|
November
30,
|
|
November
30,
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Statement
of Operations Impact
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreements
that do not qualify for hedge accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
|
$
|
-
|
|
|
$
|
2,671
|
|
|
$
|
-
|
|
|
$
|
5,746
|
|
Derivative
forward value
|
|
|
-
|
|
|
|
18,984
|
|
|
|
-
|
|
|
|
9,958
|
|
Total
gain on interest rate exchange agreements
|
|
$
|
-
|
|
|
$
|
21,655
|
|
|
$
|
-
|
|
|
$
|
15,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
November 30, 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)
|
|
|
Notional
Amount
|
|
|
|
Required
Company Payment
|
|
|
|
Amount
Company Would Collect
|
|
|
|
Net
Total
|
|
Rating
Level:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fall
to Baa1/BBB+
|
|
$
|
1,685,509
|
|
|
$
|
(16,470
|
)
|
|
$
|
49,590
|
|
|
$
|
33,120
|
|
Fall
below Baa1/BBB+
|
|
|
7,705,622
|
|
|
|
(85,166
|
)
|
|
|
80,569
|
|
|
|
(4,597
|
)
|
Total
|
|
$
|
9,391,131
|
|
|
$
|
(101,636
|
)
|
|
$
|
130,159
|
|
|
$
|
28,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally,
if ratings from Moody's
Investors Service fall below Baa2 or from Standard & Poor's Corporation fall
below BBB, the Company would be required to pledge collateral equal to the
net
obligation, or net fair value, of the related exchange agreements due to the
affected counterparty, if any. At November 30, 2007, the net
obligation totaled $11 million for the $619 million notional amount subject
to
this rating trigger.
(9)
Members' Subordinated Certificates
Membership
Subordinated Certificates
National
Rural's members are required to
purchase membership certificates as a condition of membership. Such
certificates are interest-bearing, unsecured, subordinated debt of National
Rural. Members may purchase the certificates over time as a
percentage of the amount they borrow from National Rural. RTFC and
NCSC members are not required to purchase membership certificates as a condition
of membership. National Rural membership certificates typically have
an original maturity of 100 years and pay interest at 5%. The
weighted average maturity for all membership subordinated certificates
outstanding at November 30, 2007 and May 31, 2007 was 69
years.
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' debt to equity ratio with National
Rural. These certificates are unsecured, subordinated debt of the
Company.
Certificates
currently purchased in
conjunction with long-term loans are generally non-interest
bearing. National Rural's policy regarding the purchase of loan
subordinated certificates requires members with a debt to equity ratio with
National Rural in excess of the limit in the policy to purchase a
non-amortizing/non-interest bearing subordinated certificate in the amount
of 2%
for distribution systems and 7% for power supply systems. National
Rural 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 National Rural based on the
circumstances of the transaction.
The
maturity dates and the interest
rates payable on guarantee subordinated certificates purchased in conjunction
with National Rural's guarantee program vary in accordance with applicable
National Rural policy. Members may be required to purchase
non-interest-bearing debt service reserve subordinated certificates in
connection with National Rural's guarantee of long-term tax-exempt bonds (see
Note 12). National Rural 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.
(10)
Minority Interest
At
November 30, 2007 and May 31, 2007, the Company reported minority interests
of
$16 million and $22 million, respectively, 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 six months ended November 30, 2007, the balance of minority interest
decreased by $6 million of minority interest net loss.
(11)
Equity
National
Rural is required by the District of Columbia cooperative law to have a
methodology to allocate its net earnings to its members. National
Rural maintains the current year net earnings as unallocated through the end
of
its fiscal year. Subsequent to the end of the fiscal year, National
Rural's board of directors allocates its net earnings to members in the form
of
patronage capital and to board approved reserves. Currently, National
Rural has two such board approved reserves, the education fund and the members'
capital reserve. National Rural 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
National Rural's bylaws. Funds from the education fund are disbursed
annually to fund cooperative education 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 National Rural
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 National
Rural's board of directors. All remaining net earnings are allocated
to National Rural's members in the form of patronage
capital. National Rural bases the amount of net earnings allocated to
each member on the members' patronage of the National Rural lending programs
in
the year that the net earnings were earned. There is no impact on
National Rural's total equity as a result of allocating net earnings to members
in the form of patronage capital or to board approved
reserves. National Rural's board of directors has annually voted to
retire a portion of the patronage capital allocated to members in prior
years. National Rural's total equity is reduced by the amount of
patronage capital retired to members and by amounts disbursed from board
approved reserves. National Rural adjusts the net earnings it
allocates to members and board approved reserves to exclude the non-cash impacts
of SFAS 133 and 52.
In
July 2007, National Rural'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, National
Rural'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 was returned to members in cash in September
2007. Future allocations and retirements of net earnings will be made
annually as determined by National Rural's board of directors with due regard
for National Rural's financial condition. The board of directors for
National Rural has the authority to change the policy for allocating and
retiring net earnings at any time, subject to applicable cooperative
law.
At
November 30, 2007 and May 31, 2007, equity included the following
components:
(in
thousands)
|
November
30,
2007
|
|
May
31,
2007
|
Membership
fees
|
$
|
996
|
|
|
$
|
997
|
|
Education
fund
|
|
919
|
|
|
|
1,406
|
|
Members'
capital reserve
|
|
158,348
|
|
|
|
158,308
|
|
Allocated
net income
|
|
320,064
|
|
|
|
405,598
|
|
Unallocated
net income
|
|
55,717
|
|
|
|
(23
|
)
|
Total
members' equity
|
|
536,044
|
|
|
|
566,286
|
|
Prior
years cumulative derivative forward
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
131,551
|
|
|
|
225,849
|
|
Current
period derivative forward value (1)
|
|
(97,347
|
)
|
|
|
(79,744
|
)
|
Current
period foreign currency adjustments
|
|
-
|
|
|
|
(14,554
|
)
|
Total
retained equity
|
|
570,248
|
|
|
|
697,837
|
|
Accumulated
other comprehensive income
|
|
11,873
|
|
|
|
12,204
|
|
Total
equity
|
|
$
|
582,121
|
|
|
$
|
710,041
|
|
(1)
Represents the derivative forward value loss recorded by National Rural for
the
period.
(12)
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 November 30, 2007 and May 31, 2007,
the
Company had recorded a guarantee liability totaling $15 million and $19 million,
respectively, which represents the contingent and non-contingent exposure
related to guarantees of members' debt obligations. The contingent guarantee
liability at November 30, 2007 and May 31, 2007 totaled $10 million and $13
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 $5 million and $6 million,
respectively, at November 30, 2007 and May 31, 2007 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 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). The non-contingent obligation is estimated
based on guarantee fees collectible over the life of the
guarantee. The fees are deferred and amortized on the straight-line
method into interest income over the term of the guarantees.
Activity
in the guarantee liability account is summarized below:
|
|
For
the six months ended November 30,
|
|
|
Year
ended
|
|
(in
thousands)
|
|
2007
|
|
|
|
2006
|
|
|
May
31, 2007
|
|
Beginning
balance
|
$
|
18,929
|
|
|
$
|
16,750
|
|
$
|
16,750
|
|
Net
change in non-contingent liability
|
|
(948
|
)
|
|
|
1,575
|
|
|
3,879
|
|
(Recovery
of) provision for contingent guarantee losses
|
|
(3,300
|
)
|
|
|
400
|
|
|
(1,700
|
)
|
Ending
balance
|
$
|
14,681
|
|
|
$
|
18,725
|
|
$
|
18,929
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
as a percentage of total guarantees
|
|
1.35
|
%
|
|
|
1.64
|
%
|
|
1.76
|
%
|
The
following chart summarizes total guarantees by type and segment:
(in
thousands)
|
November
30, 2007
|
|
|
May
31, 2007
|
Total
by type:
|
|
|
|
|
|
|
Long-term
tax exempt bonds (1)
|
$$
|
510,715
|
|
|
$$
|
526,185
|
Indemnifications
of tax benefit transfers (2)
|
|
102,419
|
|
|
|
107,741
|
Letters
of credit (3)
|
|
395,296
|
|
|
|
365,766
|
Other
guarantees (4)
|
|
79,688
|
|
|
|
74,682
|
Total
|
$$
|
1,088,118
|
|
|
$$
|
1,074,374
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
Distribution
|
$$
|
218,000
|
|
|
$$
|
211,320
|
Power
supply
|
|
774,264
|
|
|
|
797,009
|
Statewide
and associate
|
|
23,553
|
|
|
|
25,359
|
National
Rural total
|
|
1,015,817
|
|
|
|
1,033,688
|
RTFC
|
|
260
|
|
|
|
-
|
NCSC
|
|
72,041
|
|
|
|
40,686
|
Total
|
|
$$
|
1,088,118
|
|
|
$$
|
1,074,374
|
(1)
The maturities for this type of guarantee run through 2037. National
Rural has guaranteed debt issued in connection with the construction or
acquisition of pollution control, solid waste disposal, industrial development
and electric distribution facilities. National Rural 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. National Rural has debt service reserve funds in the amount of
$55 million at November 30, 2007 and May 31, 2007 on deposit with the bond
trustee that can only be used for the purpose of covering any deficiencies
in
the bond principal, premium or interest payments. The member systems
have agreed to make up 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, National Rural 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 National Rural and interest thereon pursuant to the documents
evidencing the system's reimbursement obligation.
Of
the amounts shown above, $384 million and $396 million as of November 30, 2007
and May 31, 2007, 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), National Rural has unconditionally agreed to
purchase bonds tendered or put for redemption if the remarketing agents have
not
previously sold such bonds to other purchasers. National Rural's
maximum potential exposure includes guaranteed principal and interest related
to
the bonds. National Rural is unable to determine the maximum amount
of interest that it could be required to pay related to the floating rate
bonds. As of November 30, 2007, National Rural's maximum potential
exposure for the $22 million of fixed rate tax-exempt bonds is $29
million. Many of these bonds have a call provision that in the event
of a default would allow National Rural to trigger the call
provision. This would limit National Rural's exposure to future
interest payments on these bonds. National Rural's maximum potential
exposure is secured by a mortgage lien on 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, the system's
obligation to reimburse National Rural for any guarantee payments will be
treated as a long-term loan.
(2)
The maturities for this type of guarantee run through 2015. National
Rural 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, National Rural 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
National Rural and interest thereon pursuant to the documents evidencing the
system's reimbursement obligation. The amounts shown represent
National Rural's maximum potential exposure for guaranteed indemnity
payments. A member's obligation to reimburse National Rural 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.
(3) The
maturities for this type of guarantee run through 2017. Additionally,
letters of credit totaling $8 million at November 30, 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 November 30, 2007, the Company's maximum potential
exposure is $395 million, of which $251 million is secured. When taking into consideration
reimbursement obligation agreements that National Rural has in place with other
lenders, National Rural's maximum potential exposure related to $51 million
of
letters of credit would be reduced to $15 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 $391 million in letters of credit
to
third parties for the benefit of its members at November 30, 2007. At
May 31, 2007, this amount was $339 million.
(4)
The maturities for this type of guarantee run through 2025. National
Rural provides other guarantees for its members. In the event of
default by a system for non-payment of the obligation, National Rural 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 National Rural's general and
administrative expenses, a provision for losses and a reasonable
margin. The member is required to repay any amount advanced by
National Rural and interest thereon pursuant to the documents evidencing the
system's reimbursement obligation. Of National Rural's maximum
potential exposure for guaranteed principal and interest totaling $80 million
at
November 30, 2007, $3 million is secured by a mortgage lien on all of the
system's assets and future revenues and the remaining $77 million is
unsecured.
National
Rural uses the same credit policies and monitoring procedures in providing
guarantees as it does for loans and commitments.
At
November 30, 2007 and May 31, 2007, National Rural had a total of $144 million
and $221 million of guarantees, respectively, representing 13% and 21% of total
guarantees, respectively, under which its right of recovery from its members
was
not secured.
(13)
Contingencies
The
Company had the following loans outstanding classified as non-performing and
restructured:
(in
thousands)
|
|
|
November
30, 2007
|
|
May
31, 2007
|
|
November
30, 2006
|
Non-performing
loans
|
|
$
|
503,198
|
$
|
501,864
|
$
|
539,117
|
Restructured
loans
|
|
|
590,768
|
|
603,305
|
|
615,832
|
Total
|
|
$
|
1,093,966
|
$
|
1,105,169
|
$
|
1,154,949
|
(a)
At November 30, 2007, May 31, 2007 and November 30, 2006, all loans classified
as non-performing were on a non-accrual status with respect to the recognition
of interest income. At November 30, 2007 and May 31, 2007, $532
million and $545 million,
respectively, of restructured loans were on non-accrual status with respect
to
the recognition of interest income. At November 30, 2006, there were
$557 million of restructured loans on non-accrual status. A total of
$1 million and $2 million, respectively, of interest income was accrued on
restructured loans during the three and six months ended November 30, 2007
and
2006.
Interest
income was reduced as follows as a result of holding loans on non-accrual
status:
|
Three
months ended
|
|
Six
months ended
|
|
November
30,
|
|
November
30,
|
(in
thousands)
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans
|
$
|
8,513
|
|
|
$
|
10,429
|
|
|
$
|
17,727
|
|
|
$
|
20,903
|
|
Restructured
loans
|
|
8,970
|
|
|
|
9,972
|
|
|
|
18,311
|
|
|
|
19,812
|
|
Total
|
$
|
17,483
|
|
|
$
|
20,401
|
|
|
$
|
36,038
|
|
|
$
|
40,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
The Company classified $1,081 million and $1,099 million
of loans as impaired pursuant to the provisions of SFAS 114, Accounting by
Creditors for Impairment of a Loan - an Amendment of SFAS 5 and SFAS 15, as
amended, at November 30, 2007 and May 31, 2007, respectively. The
Company reserved $359 million and $397 million of the loan loss allowance for
such impaired loans at November 30, 2007 and May 31, 2007,
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 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 $1 million and $2
million, respectively, of interest income on impaired loans for the three and
six months ended November 30, 2007 and 2006. The average recorded
investment in impaired loans for the six months ended November 30, 2007 and
2006
was $1,088 million and $1,153 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:
·
|
changes
to collateral values, and
|
·
|
changes
to expected future cash flows both as to timing and
amount.
|
(c)
At November 30, 2007 and May 31, 2007, National Rural had a total of $532
million and $545 million, respectively, of restructured 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
restructured loans have been on non-accrual status since January 1, 2001. In
addition, a total of $20 million was outstanding under the capital expenditure
loan facility which was classified as a performing loan at both November 30,
2007 and May 31, 2007. Total loans to CoServ at November 30, 2007 and
May 31, 2007 represented 2.9% of the Company's total loans and guarantees
outstanding.
Under
the terms of a bankruptcy settlement, National Rural restructured its loans
to
CoServ. CoServ is scheduled to make quarterly payments to National
Rural through December 2037. As part of the restructuring, National
Rural 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
National Rural, 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 National Rural. As of
November 30, 2007, $20 million has been 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. National Rural has received no notice from CoServ that it
intends to prepay the loan.
CoServ
and National Rural have no claims related to any of the legal actions asserted
prior to or during the bankruptcy proceedings. National Rural'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 November 30, 2007.
(d)
VarTec Telecom, Inc. ("VarTec") was a telecommunications company and RTFC
borrower located in Dallas, Texas. The Company was VarTec's principal
senior secured creditor.
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. The cases were converted
in 2006 to Chapter 7 proceedings, administered by a Chapter 7
trustee.
Non-performing
loans at May 31, 2007 included $9 million to VarTec. On June 4, 2007,
the Bankruptcy Court approval of a settlement of litigation against the Company
became final, pursuant to which (a) all claims against the Company were
dismissed with prejudice and fully released, (b) a portion of the proceeds
from
the collateral that had been provisionally applied to the Company’s secured debt
was reallocated to VarTec creditors, including the Company, and (c) an
administrative debtor-in-possession (“DIP”) financing facility owed by the
VarTec bankruptcy estates to the Company was reduced to $6
million. The Company’s remaining DIP and unsecured claims will share
in further recoveries by the bankruptcy estates. As a result of the
settlement of the litigation, the Company wrote off $44 million of pre-petition
debt during the fourth quarter of fiscal year 2007 and wrote off $17 million
in
the first quarter of fiscal year 2008.
At
November 30, 2007, the Company had a receivable for $6 million, which has a
payment priority from the bankruptcy estates; in addition, the Company will
share in recoveries that are in excess of the amount required to repay the
DIP
financing and cover expenses of the estates. On December 26, 2007,
the Company received $3 million, which is a share of the settlement proceeds
from the VarTec estates’ litigation against certain former directors and
officers. As a result of this $3 million payment to the Company, the
balance of the receivable was reduced from $6 million to $3 million subsequent
to the end of the quarter.
(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
cellular, wireline local and long-distance telephone, cable television, and
Internet access services. Through other subsidiaries, ICC provides
telecommunications, cable television, and Internet access services in the
eastern and southern Caribbean and mainland France.
As
of November 30, 2007 and May 31, 2007, RTFC had $496 million and $493 million,
respectively, in loans outstanding to ICC. Loans outstanding to ICC
continue to increase due to accrued legal costs associated with ongoing
litigation to recover the outstanding loan balance. 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, National Rural 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 National Rural
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 National Rural. 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 Chapter 11 trustee for the ICC-LLC and Emcom bankruptcy estates
and an examiner for Prosser’s bankruptcy estate.
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; none of the other
debtors has sought review of the order.
On
September 7, 2007, the Bankruptcy Court entered an order authorizing the Chapter
11 trustee for the Emcom bankruptcy estate to exercise control over the common
stock of ICC, including authority to vote the stock to, among other things,
facilitate a refinancing or sale of ICC and its assets.
On
September 21, 2007, the United States District Court for the Virgin Islands,
Bankruptcy Division, in response to an involuntary petition filed by the
Greenlight Entities, entered an order for relief under Chapter 11 of the United
States Bankruptcy Code thereby placing ICC in its own bankruptcy
proceeding. In response to a motion by RTFC, the Bankruptcy Court
ordered appointment of a Chapter 11 trustee on October 3,
2007. Certain parties have moved for reconsideration of and/or
appealed one or more orders of the Bankruptcy Court and have requested a stay
pending ruling by the District Court. RTFC believes both that the
moving parties have no standing and that the motions to reconsider and appeal
have no merit. Pending the appeal, the Chapter 11 trustee of ICC has
assumed ownership and control of ICC, including its subsidiaries, and has begun
to marshal RTFC collateral and other assets for disposition and eventual payment
in respect of RTFC’s claims and the claims of other
parties-in-interest. On January 2, 2008, the Chapter 11 trustee of
ICC filed a motion seeking authority to sell substantially all of ICC’s assets,
including stock in ICC’s operating subsidiaries. A hearing on the
motion is expected to be held on February 1, 2008.
In
response to a motion by the Greenlight Entities, joined by RTFC, the Bankruptcy
Court converted Prosser’s individual Chapter 11 bankruptcy to a Chapter 7
liquidation on October 3, 2007. Prosser has filed a notice of appeal
of the conversion order. RTFC believes that the appeal has no
merit. Pending the appeal, the Chapter 7 trustee has advised that he
intends to marshal Prosser’s non-exempt assets for disposition and eventual
payment in respect of creditor claims. On December 3, 2007, the
Chapter 7 trustee of Prosser’s estate filed a motion to approve sale procedures
and for authority to sell Prosser’s controlling shares in the Virgin Islands
Community Bank Corp. The sale procedures were approved by the court
on December 14, 2007 and on December 26, 2007, the Chapter 7 trustee issued
notice that a purchaser had been selected. On January 3, 2008, the
Court announced it would enter an order approving a sale of the bank stock
to
FirstBank Puerto Rico, subject to approval by third parties, including the
Federal Deposit Insurance Corporation.
In
most cases, the sale (as part of the reorganization process) of ICC or any
of
its subsidiaries engaged in a regulated telecommunications or cable television
business, or of the regulated assets of ICC or its subsidiaries, will require
the prior consent of the respective regulators in the United States (including
the Federal Communications Commission and the U.S. Virgin Islands Public
Services Commission), the British Virgin Islands, France and its Caribbean
territories, and the Netherlands Antilles. In certain limited cases,
only a post-transaction notification will be required.
Based
on its analysis, the Company believes that it is adequately reserved for its
exposure to ICC at November 30, 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 has
experienced deterioration in its financial condition as a result of losses
in
the gas operation. At November 30, 2007 and May 31, 2007, National
Rural had a total of $52 million in loans outstanding to
Pioneer. Pioneer was current with respect to all debt service
payments at November 30, 2007. All loans to Pioneer remain on accrual
status with respect to the recognition of interest income. National
Rural is the principal creditor to Pioneer.
On
March 9, 2006, National Rural and Pioneer agreed on the terms of a debt
modification that resulted in the loans being classified as
restructured. Under the amended agreement, National Rural extended
the maturity of the outstanding loans and granted a two-year deferral of
principal payments. In addition, National Rural 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 November 30, 2007.
The
Company's consolidated financial statements include the financial results of
National Rural, RTFC and NCSC. Financial statements are produced for
each of the three companies and are the primary reports that management reviews
in evaluating performance. The National Rural segment includes the
consolidation of entities controlled by National Rural and created to hold
foreclosed assets and effect loan securitization transactions and intercompany
transaction elimination entries. The segment presentation for the six
months ended November 30, 2007 and 2006 reflect the operating results of each
of
the three companies as a separate segment.
National
Rural is the sole lender to RTFC and the primary source of funding for
NCSC. NCSC also obtains funding from third parties with a National
Rural guarantee. Thus, National Rural takes all of the risk related
to the funding of the loans to RTFC and NCSC, and in return, National Rural
earns net interest income on the loans to RTFC and NCSC.
Pursuant
to guarantee agreements, National Rural has agreed to indemnify RTFC and NCSC
for loan losses, with the exception of the NCSC consumer loan
program. Thus, National Rural 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.
The
following chart contains the consolidating statement of operations for the
six
months ended November 30, 2007 and consolidating balance sheet information
as of
November 30, 2007.
(in
thousands)
|
National
Rural
|
|
RTFC
|
|
NCSC
|
|
Consolidated
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
465,790
|
|
|
$
|
47,366
|
|
|
$
|
18,085
|
|
|
$
|
531,241
|
|
Interest
expense
|
|
(427,164
|
)
|
|
|
(44,551
|
)
|
|
|
(15,627
|
)
|
|
|
(487,342
|
)
|
Net
interest income
|
|
38,626
|
|
|
|
2,815
|
|
|
|
2,458
|
|
|
|
43,899
|
|
Recovery
of loan losses
|
|
14,301
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,301
|
|
Net
interest income after recovery of loan losses
|
|
52,927
|
|
|
|
2,815
|
|
|
|
2,458
|
|
|
|
58,200
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
389
|
|
|
|
-
|
|
|
|
314
|
|
|
|
703
|
|
Derivative
cash settlements
|
|
19,679
|
|
|
|
-
|
|
|
|
157
|
|
|
|
19,836
|
|
Results
of operations of foreclosed assets
|
|
3,816
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,816
|
|
Total
non-interest income
|
|
23,884
|
|
|
|
-
|
|
|
|
471
|
|
|
|
24,355
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(23,854
|
)
|
|
|
(2,379
|
)
|
|
|
(1,834
|
)
|
|
|
(28,067
|
)
|
Recovery
of guarantee liability
|
|
3,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,300
|
|
Derivative
forward value
|
|
(97,347
|
)
|
|
|
-
|
|
|
|
(11,665
|
)
|
|
|
(109,012
|
)
|
Loss
on sale of loans
|
|
(518
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(518
|
)
|
Total
non-interest expense
|
|
(118,419
|
)
|
|
|
(2,379
|
)
|
|
|
(13,499
|
)
|
|
|
(134,297
|
)
|
|
|
(Loss)
income prior to income taxes and minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
(41,608
|
)
|
|
|
436
|
|
|
|
(10,570
|
)
|
|
|
(51,742
|
)
|
Income
taxes
|
|
-
|
|
|
|
(1
|
)
|
|
|
4,012
|
|
|
|
4,011
|
|
Net
(loss) income per segment reporting
|
$
|
(41,608
|
)
|
|
$
|
435
|
|
|
$
|
(6,558
|
)
|
|
$
|
(47,731
|
)
|
|
|
Reconciliation
of net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(47,731
|
)
|
Minority
interest, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,123
|
|
Net
loss per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(41,608
|
)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
$
|
16,002,716
|
|
|
$
|
1,791,504
|
|
|
$
|
463,683
|
|
|
$
|
18,257,903
|
|
Deferred
origination fees
|
|
4,020
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,020
|
|
Less: Allowance
for loan losses
|
|
(530,313
|
)
|
|
|
-
|
|
|
|
(489
|
)
|
|
|
(530,802
|
)
|
Loans
to members, net
|
|
15,476,423
|
|
|
|
1,791,504
|
|
|
|
463,194
|
|
|
|
17,731,121
|
|
Other
assets
|
|
626,539
|
|
|
|
194,850
|
|
|
|
54,385
|
|
|
|
875,774
|
|
Total
assets
|
$
|
16,102,962
|
|
|
$
|
1,986,354
|
|
|
$
|
517,579
|
|
|
$
|
18,606,895
|
|
The
following chart contains the consolidating statement of operations for the
six
months ended November 30, 2006 and consolidating balance sheet information
at
November 30, 2006.
(in
thousands)
|
National
Rural
|
|
RTFC
|
|
NCSC
|
|
Consolidated
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
454,239
|
|
|
$
|
55,402
|
|
|
$
|
15,292
|
|
|
$
|
524,933
|
|
Interest
expense
|
|
(438,958
|
)
|
|
|
(52,054
|
)
|
|
|
(13,583
|
)
|
|
|
(504,595
|
)
|
Net
interest income
|
|
15,281
|
|
|
|
3,348
|
|
|
|
1,709
|
|
|
|
20,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Net
interest income after provision for loan losses
|
15,281
|
|
|
|
3,348
|
|
|
|
1,709
|
|
|
|
20,338
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
307
|
|
|
|
-
|
|
|
|
318
|
|
|
|
625
|
|
Derivative
cash settlements
|
|
31,556
|
|
|
|
-
|
|
|
|
192
|
|
|
|
31,748
|
|
Results
of operations of foreclosed assets
|
|
5,991
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,991
|
|
Total
non-interest income
|
|
37,854
|
|
|
|
-
|
|
|
|
510
|
|
|
|
38,364
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(21,260
|
)
|
|
|
(2,540
|
)
|
|
|
(1,705
|
)
|
|
|
(25,505
|
)
|
Provision
for guarantee liability
|
|
(400
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(400
|
)
|
Derivative
forward value
|
|
(113,390
|
)
|
|
|
-
|
|
|
|
(3,200
|
)
|
|
|
(116,590
|
)
|
Foreign
currency adjustments
|
|
(17,299
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,299
|
)
|
Total
non-interest expense
|
|
(152,349
|
)
|
|
|
(2,540
|
)
|
|
|
(4,905
|
)
|
|
|
(159,794
|
)
|
|
(Loss)
income prior to income taxes and minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
(99,214
|
)
|
|
|
808
|
|
|
|
(2,686
|
)
|
|
|
(101,092
|
)
|
Income
taxes
|
|
-
|
|
|
|
180
|
|
|
|
1,020
|
|
|
|
1,200
|
|
Net
(loss) income per segment reporting
|
$
|
(99,214
|
)
|
|
$
|
988
|
|
|
$
|
(1,666
|
)
|
|
$
|
(99,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(99,892
|
)
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
678
|
|
Net
loss per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(99,214
|
)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
$
|
15,738,645
|
|
|
$
|
2,016,915
|
|
|
$
|
401,946
|
|
|
$
|
18,157,506
|
|
Deferred
origination fees
|
|
3,249
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,249
|
|
Less: Allowance
for loan losses
|
|
(610,725
|
)
|
|
|
-
|
|
|
|
(633
|
)
|
|
|
(611,358
|
)
|
Loans
to members, net
|
|
15,131,169
|
|
|
|
2,016,915
|
|
|
|
401,313
|
|
|
|
17,549,397
|
|
Other
assets
|
|
840,198
|
|
|
|
215,451
|
|
|
|
33,300
|
|
|
|
1,088,949
|
|
Total
assets
|
$
|
15,971,367
|
|
|
$
|
2,232,366
|
|
|
$
|
434,613
|
|
|
$
|
18,638,346
|
|
The
following chart contains the consolidating statement of operations for the
three
months ended November 30, 2007.
(in
thousands)
|
National
Rural
|
|
RTFC
|
|
NCSC
|
|
Consolidated
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
230,984
|
|
|
$
|
23,337
|
|
|
$
|
8,966
|
|
|
$
|
263,287
|
|
Interest
expense
|
|
(210,403
|
)
|
|
|
(21,921
|
)
|
|
|
(7,693
|
)
|
|
|
(240,017
|
)
|
Net
interest income
|
|
20,581
|
|
|
|
1,416
|
|
|
|
1,273
|
|
|
|
23,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of loan losses
|
|
14,301
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after recovery of loan losses
|
|
34,882
|
|
|
|
1,416
|
|
|
|
1,273
|
|
|
|
37,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
200
|
|
|
|
-
|
|
|
|
152
|
|
|
|
352
|
|
Derivative
cash settlements
|
|
11,514
|
|
|
|
-
|
|
|
|
(7
|
)
|
|
|
11,507
|
|
Results
of operations of foreclosed assets
|
|
1,856
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,856
|
|
Total
non-interest income
|
|
13,570
|
|
|
|
-
|
|
|
|
145
|
|
|
|
13,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
(12,593
|
)
|
|
|
(1,200
|
)
|
|
|
(964
|
)
|
|
|
(14,757
|
)
|
Provision
for guarantee losses
|
|
1,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,200
|
|
Derivative forward value
|
|
(67,285
|
)
|
|
|
-
|
|
|
|
(8,127
|
)
|
|
|
(75,412
|
)
|
Total
non-interest expense
|
|
(78,678
|
)
|
|
|
(1,200
|
)
|
|
|
(9,091
|
)
|
|
|
(88,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income prior to income taxes and minority
interest
|
|
(30,226
|
)
|
|
|
216
|
|
|
|
(7,673
|
)
|
|
|
(37,683
|
)
|
Income
taxes
|
|
-
|
|
|
|
-
|
|
|
|
2,912
|
|
|
|
2,912
|
|
Net
(loss) income per segment reporting
|
$
|
(30,226
|
)
|
|
$
|
216
|
|
|
$
|
(4,761
|
)
|
|
$
|
(34,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(34,771
|
)
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,545
|
|
Net
loss per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(30,226
|
)
|
The
following chart contains the consolidating statement of operations for the
three
months ended November 30, 2006.
(in
thousands)
|
National
Rural
|
|
RTFC
|
|
NCSC
|
|
Consolidated
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
225,247
|
|
|
$
|
27,289
|
|
|
$
|
7,708
|
|
|
$
|
260,244
|
|
Interest
expense
|
|
(216,214
|
)
|
|
|
(25,546
|
)
|
|
|
(6,831
|
)
|
|
|
(248,591
|
)
|
Net
interest income
|
|
9,033
|
|
|
|
1,743
|
|
|
|
877
|
|
|
|
11,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
9,033
|
|
|
|
1,743
|
|
|
|
877
|
|
|
|
11,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
154
|
|
|
|
-
|
|
|
|
154
|
|
|
|
308
|
|
Derivative
cash settlements
|
|
16,404
|
|
|
|
-
|
|
|
|
89
|
|
|
|
16,493
|
|
Results
of operations of foreclosed assets
|
|
2,989
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,989
|
|
Total
non-interest income
|
|
19,547
|
|
|
|
-
|
|
|
|
243
|
|
|
|
19,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(10,614
|
)
|
|
|
(1,214
|
)
|
|
|
(949
|
)
|
|
|
(12,777
|
)
|
Provision
for guarantee liability
|
|
(1,800
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,800
|
)
|
Derivative
forward value
|
|
(51,741
|
)
|
|
|
-
|
|
|
|
(1,498
|
)
|
|
|
(53,239
|
)
|
Foreign
currency adjustments
|
|
(20,620
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,620
|
)
|
Total
non-interest expense
|
|
(84,775
|
)
|
|
|
(1,214
|
)
|
|
|
(2,447
|
)
|
|
|
(88,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income prior to income taxes and minority
interest
|
|
(56,195
|
)
|
|
|
529
|
|
|
|
(1,327
|
)
|
|
|
(56,993
|
)
|
Income
taxes
|
|
-
|
|
|
|
(18
|
)
|
|
|
504
|
|
|
|
486
|
|
Net
(loss) income per segment reporting
|
$
|
(56,195
|
)
|
|
$
|
511
|
|
|
$
|
(823
|
)
|
|
$
|
(56,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(56,507
|
)
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312
|
|
Net
loss per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(56,195
|
)
|
On
December 21, 2007, National Rural finalized a contract with Loudoun Land Venture
LLC to purchase 27.6 acres of land located in Loudoun County, Virginia for
$16
million. The land purchase was approved by National Rural’s board of
directors.
Subsequent
to the end of the quarter, in December 2007, National Rural received cash
proceeds totaling $9 million resulting from the sale of real estate properties
and the paydown of related notes which reduced the foreclosed asset balance
outstanding.
Item
2.
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 ("National Rural"
or
"the Company"), Rural Telephone Finance Cooperative ("RTFC"), National
Cooperative Services Corporation ("NCSC") and certain entities controlled by
National Rural 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. National Rural 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.
This
Form 10-Q 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, 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-Q, in addition to Part I, Item 1A,
Risk Factors in the Company's Form 10-K for the year ended May 31,
2007.
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 $3
million and $7 million for the three and six months ended November 30, 2006,
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 loss and net loss lines were understated by $4 million and $7
million for the three and six months ended November 30, 2006,
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
Company has revised this
Management’s Discussion and Analysis for the effects of the
restatement.
Overview
In
this report the Company will provide analysis on its results of operations,
financial condition, liquidity and market risk. The Company will also
provide analysis of trends and significant transactions completed in the period
covered by the report.
The
Company provides financial products to its rural electric and telecommunications
members at a low cost in relation to the financial performance and strength
required to maintain strong credit ratings. The Company's access to
the capital markets at levels that allow it to keep cost to the members low
is
dependent on maintaining strong credit ratings. See page 54 for
detail on the current ratings for the Company's public debt.
Financial
Overview
Results
of Operations
The
Company uses a times interest earned ratio (“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 (loss) prior to the
cumulative effect of change in accounting principle by the interest
expense.
For
the six months ended November 30, 2007, the Company reported a net loss of
$42
million compared to a net loss of $99 million for the prior year period, thus
the TIER calculation for both periods results in a value below
1.00. For the six months ended November 30, 2007, the Company
reported an adjusted net income of $61 million and adjusted TIER of 1.13,
compared to an adjusted net income of $34 million and adjusted TIER of 1.07
for
the prior year period. We calculate adjusted net income by excluding
the impact of derivatives and foreign currency adjustments and including
minority interest. We calculate adjusted TIER by using adjusted net
income and including all derivative cash settlements in the interest
expense. 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 six months ended November 30, 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 $36 million and $41 million to
reported interest income for the six months ended November 30, 2007 and 2006,
respectively. During fiscal year 2008, the Company expects the
outstanding balance on the current loans on non-accrual status to decrease
due
to loan write-offs and principal repayments. The Company wrote off
$17 million related to VarTec Telecom, Inc. (“VarTec”) during the first quarter
of fiscal year 2008. 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 in fiscal year 2008, which
will all be applied as a reduction to principal.
The
reduction to the amount of loans on non-accrual status should result in an
increase to the adjusted net interest income yield over the remainder of fiscal
year 2008. Changes to the Company's variable interest rates may
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 November 30, 2007, an increase or decrease of
25
basis points to the Company's variable interest rates results in an increase
or
decrease of approximately $8 million, respectively, to the calculated impairment
on loans irrespective of a change in the credit fundamentals of the impaired
borrower.
Financial
Condition
At
November 30, 2007, the Company's total loans outstanding increased by $130
million or less than 1% from May 31, 2007. At November 30, 2007,
National Rural loans outstanding increased by $197 million, RTFC loans
outstanding decreased by $68 million, and NCSC loans outstanding increased
by $1
million compared to May 31, 2007. National Rural loans outstanding
increased due to net advances of $237 million offset by the sale of $40 million
of National Rural distribution loans at par in a loan securitization transaction
in August 2007. National Rural expects to continue such loan sales on
a periodic basis. See further discussion in “Results of
Operations”.
The
Company expects that the balance of the loan portfolio will remain relatively
stable during the remainder of fiscal year 2008. Loans from the
Federal Financing Bank ("FFB"), a division of the U.S. Treasury Department,
with
a Rural Utilities Service (“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 fund the loan,
and from power supply systems. The Company anticipates that the RTFC
loan balance will continue to slowly decline due to long-term loan amortization,
the strong liquidity position of rural telecommunication companies and a general
slowdown in merger and acquisition activities.
On
December 26, 2007, the President of the United States signed the Appropriations Act for Fiscal
Year 2008 which set the
fiscal year
2008 RUS electric and telephone loan program levels. Electric funding
levels for fiscal year 2008 are $6.5 billion for FFB loans and $100 million
for
five percent loans. Telephone funding levels for fiscal year 2008 are
$145 million for five percent loans, $250 million for FFB loans, $295 million
for treasury rate loans and $300 million for broadband loans.
During
the six months ended November 30, 2007, short-term debt increased by $2,066
million and long-term debt decreased by $2,020 million due to the
reclassification of $1,567 million of extendible CTBs and $250 million of
extendible MTNs from long-term debt to short-term debt. Holders of
$2,062 million of the Company’s extendible debt elected not to extend the
maturity during the six months ended November 30, 2007. As a result,
$1,817 million of extendible debt was reclassified from long-term debt to
short-term debt based on maturity dates ranging from August through November
of
2008. The remaining $245 million of extendible debt will mature in
July 2009.
Long-term
debt was also impacted by the additional $500 million borrowed under the Rural
Economic Development Loan and Grant (“REDLG”) program in August 2007 offset by
$500 million of secured notes payable reclassified to short-term debt based
on
the maturity of the debt. The additional REDLG funds were used to pay
down maturing medium-term notes and commercial paper, which decreased short-term
debt. Short-term debt was also impacted by the redemption of $175
million of subordinated deferrable debt in June 2007.
Total
equity decreased $128 million from May 31, 2007 to November 30, 2007 due to
the
board authorized patronage capital retirement totaling $86 million and a net
loss of $42 million for the six months ended November 30, 2007. 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 Statement of Financial
Accounting Standards (“SFAS”) 133, Accounting for Derivative Instruments and
Hedging Activities and SFAS 52, Foreign Currency Translation.
Liquidity
At
November 30, 2007, the Company had $2,781 million of commercial paper, daily
liquidity fund and bank bid notes and $3,712 million of medium-term notes,
collateral trust bonds and long-term notes payable scheduled to mature during
the next twelve months. Members held commercial paper (including the
daily liquidity fund) which totaled $1,624 million or approximately 61% of
the
total commercial paper outstanding at November 30, 2007. Commercial
paper issued through dealers and bank bid notes totaled $1,012 million and
represented 6% of total debt outstanding at November 30, 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 the remainder of fiscal
year 2008. During the next twelve months, the Company plans to
refinance the $3,712 million of medium-term notes, collateral trust bonds 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.
National
Rural 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. National Rural 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, National
Rural is a regular issuer of debt, maintains strong credit ratings and has
shelf
registrations on file with the SEC. The Company qualifies as a
well-known seasoned issuer under SEC rules.
New
Accounting Pronouncements
On
June 1, 2007, the Company adopted
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 SFAS
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 did not have a
material impact on the Company's financial position or results of
operations.
On
June 1, 2007, the Company adopted 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 did not have a material impact on the Company's financial
position or results of operations.
On
June 1, 2007, the Company adopted FIN No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of SFAS 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 did not 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.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51. This
statement amends ARB 51, Consolidated Financial Statements, to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It also amends certain
of ARB 51’s consolidation procedures for consistency with the requirements of
SFAS 141, Business Combinations. Noncontrolling interests shall be
reclassified to equity, consolidated net income shall be adjusted to include
net
income attributable to noncontrolling interests and consolidated comprehensive
income shall be adjusted to include comprehensive income attributable to the
noncontrolling interests. This statement is effective for fiscal
years beginning on or after December 15, 2008. The Company’s adoption
of SFAS 160 on June 1, 2009 is not expected to have a material impact on the
Company’s financial position or results of operations.
Results
of
Operations
Six
Months Ended November 30, 2007
versus November 30, 2006
The
following chart presents the results of operations for the six months ended
November 30, 2007 versus 2006.
|
For
the six months ended
November
30,
|
|
Increase/
|
(Dollar
amounts in millions)
|
2007
|
|
2006
|
|
(Decrease)
|
Interest
income
|
$
|
531
|
|
|
$
|
525
|
|
|
$
|
6
|
|
Interest
expense
|
|
(487
|
)
|
|
|
(505
|
)
|
|
|
18
|
|
Net
interest income
|
|
44
|
|
|
|
20
|
|
|
|
24
|
|
Recovery
of loan losses
|
|
14
|
|
|
|
-
|
|
|
|
14
|
|
Net
interest income after recovery of loan losses
|
|
58
|
|
|
|
20
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
Derivative
cash settlements
|
|
20
|
|
|
|
32
|
|
|
|
(12
|
)
|
Results
of operations of foreclosed assets
|
|
4
|
|
|
|
6
|
|
|
|
(2
|
)
|
Total
non-interest income
|
|
25
|
|
|
|
39
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(18
|
)
|
|
|
(17
|
)
|
|
|
(1
|
)
|
Other
general and administrative expenses
|
|
(10
|
)
|
|
|
(9
|
)
|
|
|
(1
|
)
|
Recovery
of guarantee liability
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Derivative
forward value
|
|
(109
|
)
|
|
|
(117
|
)
|
|
|
8
|
|
Foreign
currency adjustments
|
|
-
|
|
|
|
(17
|
)
|
|
|
17
|
|
Loss
on sale of loans
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
Total
non-interest expense
|
|
(135
|
)
|
|
|
(160
|
)
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes and minority interest
|
|
(52
|
)
|
|
|
(101
|
)
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
4
|
|
|
|
1
|
|
|
|
3
|
|
Minority
interest, net of income taxes
|
|
6
|
|
|
|
1
|
|
|
|
5
|
|
Net
loss
|
$
|
(42
|
)
|
|
$
|
(99
|
)
|
|
$
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
(1)
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Adjusted
TIER (2)
|
|
|
1.13
|
|
|
|
1.07
|
|
|
|
|
|
(1)
For the six months ended November 30, 2007 and 2006, the Company reported a
net
loss of $42 million and $99 million, respectively thus the TIER calculation
results in a value below 1.00.
(2)
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.
The
following chart summarizes the Company's operating results expressed as an
annualized percentage of average loans outstanding.
|
For
the six months ended
November
30,
|
|
Increase/
|
|
2007
|
|
2006
|
|
(Decrease)
|
Interest
income
|
|
5.85
|
%
|
|
|
5.72
|
%
|
|
|
0.13
|
%
|
Interest
expense
|
|
(5.37
|
)%
|
|
|
(5.50
|
)%
|
|
|
0.13
|
%
|
Net
interest income
|
|
0.48
|
%
|
|
|
0.22
|
%
|
|
|
0.26
|
%
|
Recovery
of loan losses
|
|
0.16
|
%
|
|
|
-
|
|
|
|
0.16
|
%
|
Net
interest income after recovery of loan losses
|
|
0.64
|
%
|
|
|
0.22
|
%
|
|
|
0.42
|
%
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
0.01
|
%
|
|
|
0.01
|
%
|
|
|
-
|
|
Derivative
cash settlements
|
|
0.22
|
%
|
|
|
0.35
|
%
|
|
|
(0.13
|
)%
|
Results
of operations of foreclosed assets
|
|
0.05
|
%
|
|
|
0.07
|
%
|
|
|
(0.02
|
)%
|
Total
non-interest income
|
|
0.28
|
%
|
|
|
0.43
|
%
|
|
|
(0.15
|
)%
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(0.20
|
)%
|
|
|
(0.19
|
)%
|
|
|
(0.01
|
)%
|
Other
general and administrative expenses
|
|
(0.11
|
)%
|
|
|
(0.10
|
)%
|
|
|
(0.01
|
)%
|
Recovery
of guarantee liability
|
|
0.03
|
%
|
|
|
-
|
|
|
|
0.03
|
%
|
Derivative
forward value
|
|
(1.20
|
)%
|
|
|
(1.27
|
)%
|
|
|
0.07
|
%
|
Foreign
currency adjustments
|
|
-
|
|
|
|
(0.19
|
)%
|
|
|
0.19
|
%
|
Loss
on sale of loans
|
|
(0.01
|
)%
|
|
|
-
|
|
|
|
(0.01
|
)%
|
Total
non-interest expense
|
|
(1.49
|
)%
|
|
|
(1.75
|
)%
|
|
|
0.26
|
%
|
Loss
prior to income taxes and minority interest
|
|
(0.57
|
)%
|
|
|
(1.10
|
)%
|
|
|
0.53
|
%
|
Income
taxes
|
|
0.04
|
%
|
|
|
0.01
|
%
|
|
|
0.03
|
%
|
Minority
interest, net of income taxes
|
|
0.07
|
%
|
|
|
0.01
|
%
|
|
|
0.06
|
%
|
Net
loss
|
|
(0.46
|
)%
|
|
|
(1.08
|
)%
|
|
|
0.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
net interest income (1)
|
|
0.70
|
%
|
|
|
0.57
|
%
|
|
|
0.13
|
%
|
Adjusted
loss prior to income taxes and minority interest (2)
|
|
|
0.63
|
%
|
|
|
0.36
|
%
|
|
|
0.27
|
%
|
(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.
National
Rural's net interest income will increase or decrease due to changes in loan
volume and the rates that it receives on its loans and pays on its sources
of
funding. National Rural'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. For
comparability purposes, average daily loan volume is used as the denominator
in
calculating interest income yield, interest expense rates and net interest
income yield.
Management
calculates an adjusted net interest expense, which includes all derivative
cash
settlements. 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 six months ended November 30,
|
|
|
2007
|
|
2006
|
|
Change
due to
|
|
|
Income
/ (Cost)
|
Rate
|
|
Average
Loan
Balance
|
Income
/ (Cost)
|
Rate
|
|
Volume
(1)
|
Rate
(2)
|
Total
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,818
|
$
|
466
|
|
5.87
|
%
|
|
$
|
15,870
|
$
|
454
|
|
5.71
|
%
|
|
$
|
(1
|
)
|
$
|
13
|
|
$
|
12
|
|
RTFC
|
|
1,831
|
|
47
|
|
5.16
|
%
|
|
|
2,044
|
|
55
|
|
5.41
|
%
|
|
|
(6
|
)
|
|
(2
|
)
|
|
(8
|
)
|
NCSC
|
|
462
|
|
18
|
|
7.80
|
%
|
|
|
398
|
|
16
|
|
7.66
|
%
|
|
|
2
|
|
|
-
|
|
|
2
|
|
Total
|
$
|
18,111
|
$
|
531
|
|
5.85
|
%
|
|
$
|
18,312
|
$
|
525
|
|
5.72
|
%
|
|
$
|
(5
|
)
|
$
|
11
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,818
|
$
|
(427
|
)
|
(5.39
|
)%
|
|
$
|
15,870
|
$
|
(439
|
)
|
(5.52
|
)%
|
|
$
|
1
|
|
$
|
11
|
|
$
|
12
|
|
RTFC
|
|
1,831
|
|
(44
|
)
|
(4.85
|
)%
|
|
|
2,044
|
|
(52
|
)
|
(5.08
|
)%
|
|
|
6
|
|
|
2
|
|
|
8
|
|
NCSC
|
|
462
|
|
(16
|
)
|
(6.74
|
)%
|
|
|
398
|
|
(14
|
)
|
(6.81
|
)%
|
|
|
(2
|
)
|
|
-
|
|
|
(2
|
)
|
Total
|
$
|
18,111
|
$
|
(487
|
)
|
(5.37
|
)%
|
|
$
|
18,312
|
$
|
(505
|
)
|
(5.50
|
)%
|
|
$
|
5
|
|
$
|
13
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,818
|
$
|
39
|
|
0.48
|
%
|
|
$
|
15,870
|
$
|
15
|
|
0.19
|
%
|
|
$
|
-
|
|
$
|
24
|
|
$
|
24
|
|
RTFC
|
|
1,831
|
|
3
|
|
0.31
|
%
|
|
|
2,044
|
|
3
|
|
0.33
|
%
|
|
|
-
|
|
|
-
|
|
|
-
|
|
NCSC
|
|
462
|
|
2
|
|
1.06
|
%
|
|
|
398
|
|
2
|
|
0.85
|
%
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
18,111
|
$
|
44
|
|
0.48
|
%
|
|
$
|
18,312
|
$
|
20
|
|
0.22
|
%
|
|
$
|
-
|
|
$
|
24
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
12,786
|
$
|
20
|
|
0.31
|
%
|
|
$
|
12,635
|
$
|
32
|
|
0.50
|
%
|
|
$
|
-
|
|
$
|
(12
|
)
|
$
|
(12
|
)
|
NCSC
|
|
208
|
|
-
|
|
-
|
|
|
|
95
|
|
-
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
12,994
|
$
|
20
|
|
0.31
|
%
|
|
$
|
12,730
|
$
|
32
|
|
0.50
|
%
|
|
$
|
-
|
|
$
|
(12
|
)
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
interest expense (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
18,111
|
$
|
(467
|
)
|
(5.15
|
)%
|
|
$
|
18,312
|
$
|
(473
|
)
|
(5.15
|
)%
|
|
$
|
5
|
|
$
|
1
|
|
$
|
6
|
|
(1)
Variance due to volume is calculated using the following formula: [(current
period average balance - prior year period average balance) x prior year period
average rate].
(2)
Variance due to rate is calculated using the following formula: [(current period
average rate - prior year period average rate) x current period 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 the 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 is summarized as follows by income type and as a percentage
of average loans outstanding:
|
For
the six months ended November 30,
|
|
|
2007
|
|
2006
|
|
(Dollar
amounts in millions)
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
Increase/
(Decrease)
|
Interest
on long-term fixed rate loans (1)
|
$
|
430
|
|
|
|
|
$
|
412
|
|
|
|
$
|
18
|
|
Interest
on long-term variable rate loans (1)
|
|
47
|
|
|
|
|
|
62
|
|
|
|
|
(15
|
)
|
Interest
on short-term loans (1)
|
|
39
|
|
|
|
|
|
36
|
|
|
|
|
3
|
|
Total
interest income on loans
|
|
516
|
|
5.69
|
%
|
|
|
510
|
|
5.56
|
%
|
|
6
|
|
Interest
on investments (2)
|
|
5
|
|
0.06
|
%
|
|
|
3
|
|
0.03
|
%
|
|
2
|
|
Conversion
fees (3)
|
|
3
|
|
0.03
|
%
|
|
|
5
|
|
0.06
|
%
|
|
(2
|
)
|
Make-whole
and prepayment fees (4)
|
|
2
|
|
0.02
|
%
|
|
|
1
|
|
0.01
|
%
|
|
1
|
|
Commitment
and guarantee fees (5)
|
|
3
|
|
0.03
|
%
|
|
|
5
|
|
0.05
|
%
|
|
(2
|
)
|
Other
fees
|
|
2
|
|
0.02
|
%
|
|
|
1
|
|
0.01
|
%
|
|
1
|
|
Total
interest
income
|
|
$
|
531
|
|
5.85
|
%
|
|
$
|
525
|
|
5.72
|
%
|
$
|
6
|
|
(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
and are 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 National Rural 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
$6 million or 1% increase to the total interest income for the six months
ended
November 30, 2007 as compared to the prior year period was due to the repricing
of fixed rate loans at higher interest rates offset by slightly lower loan
volume. Interest rates for approximately $846 million of National
Rural long-term fixed rate loans were repriced in January 2007 with 89%
selecting a new fixed rate. The weighted average interest rate of
long-term loans subject to repricing in January 2007 was approximately 4.72%,
which is significantly lower than the National Rural fixed interest rates
available to members at that time of between 6.95% and 7.30% (depending on
the
term selected). The increase in National Rural fixed interest rates
was partly offset by the decrease in RTFC loan volume.
The
$6 million or 1% increase to the total interest income for the six months ended
November 30, 2007 as compared to the prior year period was due to the repricing
of fixed rate loans at higher interest rates offset by slightly lower loan
volume. Interest rates for approximately $846 million of National
Rural long-term fixed rate loans were repriced in January 2007 with 89%
selecting a new fixed rate. The weighted average interest rate of
long-term loans subject to repricing in January 2007 was approximately 4.72%,
which is significantly lower than the National Rural fixed interest rates
available to members at that time of between 6.95% and 7.30% (depending on
the
term selected). The increase in National Rural fixed interest rates
was partly offset by the decrease in RTFC loan volume.
For
the six months ended November 30, 2007, the Company had a reduction to
interest
income of $36 million due to non-accrual loans compared to a reduction
of $41
million for the prior year period. The impact on National Rural
interest income of non-accrual loans was a reduction of $18 million and
$20
million, respectively, for the six months ended November 30, 2007 and
2006. The impact on RTFC interest income of non-accrual loans was a
reduction of $18 million and $21 million, respectively, for the six months
ended
November 30, 2007 and 2006. The impact of non-accrual loans on
interest income is included in the rate variance in the chart
above.
Interest
Expense
Total
interest expense reported on the consolidated statements of operations and
shown
in the chart above is summarized as follows by expense type and as a percentage
of average loans outstanding:
|
For
the six months ended November 30,
|
|
|
2007
|
|
2006
|
|
(Dollar
amounts in millions)
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
Increase/
(Decrease)
|
Interest
expense - commercial paper and bid notes (1)
|
$
|
71
|
|
|
|
|
$
|
96
|
|
|
|
|
$
|
(25
|
)
|
Interest
expense - medium-term notes (1)
|
|
167
|
|
|
|
|
|
188
|
|
|
|
|
|
(21
|
)
|
Interest
expense - collateral trust bonds (1)
|
|
129
|
|
|
|
|
|
101
|
|
|
|
|
|
28
|
|
Interest
expense - subordinated deferrable debt (1)
|
|
10
|
|
|
|
|
|
17
|
|
|
|
|
|
(7
|
)
|
Interest
expense - subordinated certificates (1)
|
|
24
|
|
|
|
|
|
24
|
|
|
|
|
|
-
|
|
Interest
expense - long-term private debt (1)
|
|
66
|
|
|
|
|
|
60
|
|
|
|
|
|
6
|
|
Total
interest expense on debt
|
|
467
|
|
5.14
|
%
|
|
|
486
|
|
5.29
|
%
|
|
|
(19
|
)
|
Debt
issuance costs (2)
|
|
5
|
|
0.06
|
%
|
|
|
4
|
|
0.05
|
%
|
|
|
1
|
|
Commitment
and guarantee fees (3)
|
|
8
|
|
0.09
|
%
|
|
|
8
|
|
0.09
|
%
|
|
|
-
|
|
Loss
on extinguishment of debt (4)
|
|
6
|
|
0.07
|
%
|
|
|
5
|
|
0.05
|
%
|
|
|
1
|
|
Other
fees
|
|
1
|
|
0.01
|
%
|
|
|
2
|
|
0.02
|
%
|
|
|
(1
|
)
|
Total
interest expense
|
|
$
|
487
|
|
5.37
|
%
|
|
$
|
505
|
|
5.50
|
%
|
|
$
|
(18
|
)
|
(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)
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.
(4)
Represents the loss on the early retirement of debt including the write-off
of
unamortized discount, premium and issuance costs.
The
$18 million decrease to total interest expense for the six months ended November
30, 2007 as compared to the prior year period was due to lower interest expense
on commercial paper and variable rate long-term debt as a result of a 75 basis
point decrease in the federal funds rate from the rate in effect at November
30,
2006. The $500 million borrowed under the REDLG program in August
2007 was used to pay down commercial paper and maturing medium-term
notes. As a result of the guarantee of repayment by the RUS, these funds often represent
a lower cost compared to the Company's other forms of long-term
debt. In addition, the $175 million of 7.40% subordinated deferrable
debt redeemed in June 2007 resulted in a 39 basis point decrease in the weighted
average cost of subordinated deferrable debt. 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. The Company also had an overall reduction in the amount of debt
outstanding.
The
adjusted interest expense, which includes all derivative cash settlements,
for
the six months ended November 30, 2007 decreased by $6 million compared to
the
prior year period due to the $18 million decrease to interest expense noted
above offset by the $12 million decrease in 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 $24 million for the six months ended November 30, 2007 compared to
the
prior year period. The adjusted net interest income, which includes
all derivative cash settlements, for the six months ended November 30, 2007
was
$64 million, an increase of $12 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 Loan Losses
The
$14 million recovery for loan losses for the six months ended November 30,
2007
resulted from the decrease in calculated impairments due to lower variable
rates, an increase to collateral valuation and payments received on impaired
loans.
Derivative
Cash Settlements
The
$12 million decrease in cash settlements for the six months ended November
30,
2007 compared to the prior year period is due to the decrease to the net rate
earned by the Company on exchange agreements as compared to the prior year
period.
Results
of Operations of Foreclosed Assets
Income
from the operation of foreclosed assets decreased by $2 million for the six
months ended November 30, 2007 compared to the prior year period. At
November 30, 2007, the foreclosed assets are comprised of real estate developer
notes receivable and limited partnership interests in certain real estate
developments.
Derivative
Forward Value
The
$8 million decrease in the derivative forward value during the six months ended
November 30, 2007 compared to the prior year period is due to changes in the
estimate of future interest rates over the remaining life of the derivative
contracts.
Foreign
Currency Adjustments
There
was no foreign denominated debt outstanding during the six months ended November
30, 2007, therefore resulting in a $17 million increase to foreign currency
adjustments compared to the prior year period. During the six months
ended November 30, 2006, the Company had medium-term notes denominated in Euros
and Australian dollars totaling $434 million and $282 million,
respectively. 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
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.
Loss
on Sale of Loans
On
August 10, 2007, the Company entered into an agreement to sell $74 million
of
distribution mortgage loans to the Federal Agricultural Mortgage Corporation
(“Farmer Mac”) for $74 million. The distribution mortgage loans were
sold at 100% of the outstanding principal balance. A total of $40
million of the distribution mortgage loans were transferred on August 10, 2007
and the remaining $34 million were transferred on January 2,
2008. The transaction qualifies for sale treatment under SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of
Liabilities, as amended. The Company recorded a loss on sale of loans
totaling $0.5 million related to costs associated with the transaction and
unamortized deferred loan origination costs for the loans sold. The
Company does not hold any continuing interest in the loans sold and had no
obligation to repurchase loans from the purchaser. The Company
services the loans in return for a market fee of 30 basis points and thus does
not record a serving asset or liability.
Net
Loss
The
change in the line items described above result in a net loss of $42 million
for
the six months ended November 30, 2007 compared to a net loss of $99 million
for
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 $61 million, compared to $34 million for the prior
year period. See “Non-GAAP Financial Measures” for the further
explanation of the adjustments the Company makes in its financial analysis
to
net income.
Three
Months Ended November 30, 2007
versus November 30, 2006
The
following chart presents the results of operations for the three months ended
November 30, 2007 versus November 30, 2006.
|
For
the three months ended
November
30,
|
|
Increase/
|
(Dollar
amounts in millions)
|
2007
|
|
2006
|
|
(Decrease)
|
Interest
income
|
$
|
263
|
|
|
$
|
260
|
|
|
$
|
3
|
|
Interest
expense
|
|
(240
|
)
|
|
|
(249
|
)
|
|
|
9
|
|
Net
interest income
|
|
23
|
|
|
|
11
|
|
|
|
12
|
|
Recovery
of loan losses
|
|
14
|
|
|
|
-
|
|
|
|
14
|
|
Net
interest income after recovery of loan losses
|
|
37
|
|
|
|
11
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
Derivative
cash settlements
|
|
12
|
|
|
|
17
|
|
|
|
(5
|
)
|
Results
of operations of foreclosed assets
|
|
2
|
|
|
|
3
|
|
|
|
(1
|
)
|
Total
non-interest income
|
|
15
|
|
|
|
21
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
(1
|
)
|
Other
general and administrative expenses
|
|
(6
|
)
|
|
|
(5
|
)
|
|
|
(1
|
)
|
Recovery
of (provision for) guarantee liability
|
|
1
|
|
|
|
(2
|
)
|
|
|
3
|
|
Derivative
forward value
|
|
(76
|
)
|
|
|
(54
|
)
|
|
|
(22
|
)
|
Foreign
currency adjustments
|
|
-
|
|
|
|
(20
|
)
|
|
|
20
|
|
Total
non-interest expense
|
|
(90
|
)
|
|
|
(89
|
)
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes and minority interest
|
|
(38
|
)
|
|
|
(57
|
)
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
3
|
|
|
|
-
|
|
|
|
3
|
|
Minority
interest, net of income taxes
|
|
5
|
|
|
|
1
|
|
|
|
4
|
|
Net
loss
|
$
|
(30
|
)
|
|
$
|
(56
|
)
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
(1)
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Adjusted
TIER (2)
|
|
|
1.18
|
|
|
|
1.07
|
|
|
|
|
|
(1)
For the three months ended November 30, 2007 and 2006, the Company reported
a
net loss of $30 million and $56 million, respectively; thus the TIER calculation
results in a value below 1.00.
(2)
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.
The
following chart summarizes the Company's operating results expressed as an
annualized percentage of average loans outstanding.
|
|
For
the three months ended
November
30,
|
|
Increase/
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
|
|
Interest
income
|
|
|
5.83
|
%
|
|
|
5.71
|
%
|
|
|
0.12
|
%
|
|
Interest
expense
|
|
|
(5.32
|
)%
|
|
|
(5.47
|
)%
|
|
|
0.15
|
%
|
|
Net
interest income
|
|
|
0.51
|
%
|
|
|
0.24
|
%
|
|
|
0.27
|
%
|
|
Recovery
of loan losses
|
|
|
0.31
|
%
|
|
|
-
|
|
|
|
0.31
|
%
|
|
Net
interest income after recovery of loan losses
|
|
|
0.82
|
%
|
|
|
0.24
|
%
|
|
|
0.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
|
0.02
|
%
|
|
|
0.02
|
%
|
|
|
-
|
|
|
Derivative
cash settlements
|
|
|
0.27
|
%
|
|
|
0.37
|
%
|
|
|
(0.10
|
)%
|
|
Results
of operations of foreclosed assets
|
|
|
0.04
|
%
|
|
|
0.07
|
%
|
|
|
(0.03
|
)%
|
|
Total
non-interest income
|
|
|
0.33
|
%
|
|
|
0.46
|
%
|
|
|
(0.13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
(0.20
|
)%
|
|
|
(0.18
|
)%
|
|
|
(0.02
|
)%
|
|
Other
general and administrative expenses
|
|
|
(0.13
|
)%
|
|
|
(0.11
|
)%
|
|
|
(0.02
|
)%
|
|
Recovery
of (provision for) guarantee liability
|
|
|
0.02
|
%
|
|
|
(0.04
|
)%
|
|
|
0.06
|
%
|
|
Derivative
forward value
|
|
|
(1.69
|
)%
|
|
|
(1.19
|
)%
|
|
|
(0.50
|
)%
|
|
Foreign
currency adjustments
|
|
|
-
|
|
|
|
(0.44
|
)%
|
|
|
0.44
|
%
|
|
Total
non-interest expense
|
|
|
(2.00
|
)%
|
|
|
(1.96
|
)%
|
|
|
(0.04
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes and minority interest
|
|
|
(0.85
|
)%
|
|
|
(1.26
|
)%
|
|
|
0.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
0.07
|
%
|
|
|
-
|
|
|
|
0.07
|
%
|
|
Minority
interest, net of income taxes
|
|
|
0.11
|
%
|
|
|
0.02
|
%
|
|
|
0.09
|
%
|
|
Net
loss
|
|
|
(0.67
|
)%
|
|
|
(1.24
|
)%
|
|
|
0.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
net interest income (1)
|
|
|
0.78
|
%
|
|
|
0.61
|
%
|
|
|
0.17
|
%
|
|
Adjusted
income prior to income taxes and minority interest (2)
|
|
|
|
0.84
|
%
|
|
|
0.37
|
%
|
|
|
0.47
|
%
|
|
(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.
National
Rural’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. National Rural’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 November 30, 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 yield.
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 three months ended November 30,
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
due to
|
|
Average
Loan
Balance
|
Income
/ (Cost)
|
Rate
|
|
Average
Loan Balance
|
Income
/ (Cost)
|
Rate
|
|
Volume
(1)
|
Rate
(2)
|
Total
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,816
|
$
|
231
|
|
5.86
|
%
|
|
$
|
15,845
|
$
|
225
|
|
5.70
|
%
|
|
$
|
-
|
|
$
|
6
|
|
$
|
6
|
|
RTFC
|
|
1,806
|
|
23
|
|
5.18
|
%
|
|
|
2,023
|
|
27
|
|
5.41
|
%
|
|
|
(3
|
)
|
|
(1
|
)
|
|
(4
|
)
|
NCSC
|
|
463
|
|
9
|
|
7.77
|
%
|
|
|
399
|
|
8
|
|
7.75
|
%
|
|
|
1
|
|
|
-
|
|
|
1
|
|
Total
|
$
|
18,085
|
$
|
263
|
|
5.83
|
%
|
|
$
|
18,267
|
$
|
260
|
|
5.71
|
%
|
|
$
|
(2
|
)
|
$
|
5
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,816
|
$
|
(210
|
)
|
(5.34
|
)%
|
|
$
|
15,845
|
$
|
(217
|
)
|
(5.47
|
)%
|
|
$
|
1
|
|
$
|
6
|
|
$
|
7
|
|
RTFC
|
|
1,806
|
|
(22
|
)
|
(4.87
|
)%
|
|
|
2,023
|
|
(25
|
)
|
(5.06
|
)%
|
|
|
3
|
|
|
-
|
|
|
3
|
|
NCSC
|
|
463
|
|
(8
|
)
|
(6.67
|
)%
|
|
|
399
|
|
(7
|
)
|
(6.87
|
)%
|
|
|
(1
|
)
|
|
-
|
|
|
(1
|
)
|
Total
|
$
|
18,085
|
$
|
(240
|
)
|
(5.32
|
)%
|
|
$
|
18,267
|
$
|
(249
|
)
|
(5.47
|
)%
|
|
$
|
3
|
|
$
|
6
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,816
|
$
|
21
|
|
0.52
|
%
|
|
$
|
15,845
|
$
|
8
|
|
0.23
|
%
|
|
$
|
2
|
|
$
|
11
|
|
$
|
13
|
|
RTFC
|
|
1,806
|
|
1
|
|
0.31
|
%
|
|
|
2,023
|
|
2
|
|
0.35
|
%
|
|
|
(1
|
)
|
|
-
|
|
|
(1
|
)
|
NCSC
|
|
463
|
|
1
|
|
1.10
|
%
|
|
|
399
|
|
1
|
|
0.88
|
%
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
18,085
|
$
|
23
|
|
0.51
|
%
|
|
$
|
18,267
|
$
|
11
|
|
0.24
|
%
|
|
$
|
1
|
|
$
|
11
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
13,152
|
$
|
12
|
|
0.35
|
%
|
|
$
|
12,828
|
$
|
17
|
|
0.51
|
%
|
|
$
|
-
|
|
$
|
(5
|
)
|
$
|
(5
|
)
|
NCSC
|
|
205
|
|
-
|
|
-
|
|
|
|
93
|
|
-
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
13,357
|
$
|
12
|
|
0.35
|
%
|
|
$
|
12,921
|
$
|
17
|
|
0.51
|
%
|
|
$
|
-
|
|
$
|
(5
|
)
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
interest expense (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
18,085
|
$
|
(228
|
)
|
(5.05
|
)%
|
|
$
|
18,267
|
$
|
(232
|
)
|
(5.10
|
)%
|
|
$
|
3
|
|
$
|
1
|
|
$
|
4
|
|
(1)
Variance due to volume is calculated using the following formula: ((current
period average balance - prior year period average balance) x prior year period
average rate).
(2)
Variance due to rate is calculated using the following formula: ((current period
average rate - prior year period average rate) x current period 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 the 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 as a percentage of average loans
outstanding:
|
|
For
the three months ended November 30,
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollar
amounts in millions)
|
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
Increase/
(Decrease)
|
|
Interest
on long-term fixed rate loans (1)
|
|
$
|
215
|
|
|
|
|
$
|
206
|
|
|
|
|
$
|
9
|
|
|
Interest
on long-term variable rate loans (1)
|
|
|
23
|
|
|
|
|
|
31
|
|
|
|
|
|
(8
|
)
|
|
Interest
on short-term loans (1)
|
|
|
19
|
|
|
|
|
|
18
|
|
|
|
|
|
1
|
|
|
Total
interest income on loans
|
|
|
257
|
|
5.71
|
%
|
|
|
255
|
|
5.60
|
%
|
|
|
2
|
|
|
Interest
on investments (2)
|
|
|
2
|
|
0.04
|
%
|
|
|
1
|
|
0.02
|
%
|
|
|
1
|
|
|
Conversion
fees (3)
|
|
|
2
|
|
0.04
|
%
|
|
|
3
|
|
0.07
|
%
|
|
|
(1
|
)
|
|
Commitment
and guarantee fees (4)
|
|
|
1
|
|
0.02
|
%
|
|
|
1
|
|
0.02
|
%
|
|
|
-
|
|
|
Other
fees
|
|
|
1
|
|
0.02
|
%
|
|
|
-
|
|
-
|
|
|
|
1
|
|
|
Total
interest
income
|
|
|
$
|
263
|
|
5.83
|
%
|
|
$
|
260
|
|
5.71
|
%
|
|
$
|
3
|
|
|
(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)
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 National Rural 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
$3 million or 1% increase to the total interest income for the quarter ended
November 30, 2007 as compared to the prior year period was due to the repricing
of fixed rate loans at higher interest rates offset by slightly lower loan
volume. Interest rates for approximately $846 million of National
Rural long-term fixed rate loans were repriced in January 2007 with 89%
selecting a new fixed rate. The weighted average interest rate of
long-term loans subject to repricing in January 2007 was approximately 4.72%,
which is significantly lower than the National Rural fixed interest rates
available to members at that time of between 6.95% and 7.30% (depending on
the
term selected). The increase in National Rural fixed interest rates
was partly offset by the decrease in RTFC loan volume.
For
the quarter ended November 30, 2007, the Company had a reduction to interest
income of $17 million due to non-accrual loans compared to a reduction of $20
million for the prior year period. The impact on National Rural’s
interest income of non-accrual loans was a reduction of $8 million for the
quarter ended November 30, 2007 as compared to $10 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 $4 million
decrease in RTFC interest income 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 $9 million and $10 million, respectively for the
quarter ended November 30, 2007 and 2006.
Interest
Expense
Total
interest expense reported on the consolidated statements of operations and
shown
in the chart above includes the following as a percentage of average loans
outstanding:
|
|
For
the three months ended November 30,
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
(Dollar
amounts in millions)
|
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
Increase/
(Decrease)
|
|
Interest
expense - commercial paper and bid notes (1)
|
|
$
|
33
|
|
|
|
|
$
|
49
|
|
|
|
|
$
|
(16
|
)
|
|
Interest
expense - medium-term notes (1)
|
|
|
84
|
|
|
|
|
|
93
|
|
|
|
|
|
(9
|
)
|
|
Interest
expense - collateral trust bonds (1)
|
|
|
63
|
|
|
|
|
|
50
|
|
|
|
|
|
13
|
|
|
Interest
expense - subordinated deferrable debt (1)
|
|
|
5
|
|
|
|
|
|
8
|
|
|
|
|
|
(3
|
)
|
|
Interest
expense - subordinated certificates (1)
|
|
|
12
|
|
|
|
|
|
12
|
|
|
|
|
|
-
|
|
|
Interest
expense - long-term private debt (1)
|
|
|
35
|
|
|
|
|
|
30
|
|
|
|
|
|
5
|
|
|
Total
interest expense on debt
|
|
|
232
|
|
5.14
|
%
|
|
|
242
|
|
5.31
|
%
|
|
|
(10
|
)
|
|
Debt
issuance costs (2)
|
|
|
3
|
|
0.07
|
%
|
|
|
2
|
|
0.05
|
%
|
|
|
1
|
|
|
Commitment
and guarantee fees (3)
|
|
|
5
|
|
0.11
|
%
|
|
|
4
|
|
0.09
|
%
|
|
|
1
|
|
|
Other
fees
|
|
|
-
|
|
-
|
|
|
|
1
|
|
0.02
|
%
|
|
|
(1
|
)
|
|
Total
interest expense
|
|
|
$
|
240
|
|
5.32
|
%
|
|
$
|
249
|
|
5.47
|
%
|
|
$
|
(9
|
)
|
|
(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 and debt issuance costs fully
amortized as part of the early retirement of debt.
(3)
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.
The
$9 million decrease to total interest expense for the three months ended
November 30, 2007 as compared to the prior year period was primarily due to
lower interest expense on commercial paper and variable rate long-term debt
as
result of a 75 basis point decrease in the federal funds rate from the rate
in
effect at November 30, 2006. The Company also had an overall
reduction in the amount of debt outstanding.
The
adjusted total interest expense, which includes all derivative cash settlements,
for the quarter ended November 30, 2007 decreased by $4 million compared to
the
prior year period due to the $9 million decrease to interest expense noted
above
offset by the $5 million decrease in 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 $12 million for the quarter ended November 30, 2007 compared to the
prior year period. The adjusted net interest income, which includes
all derivative cash settlements, for the quarter ended November 30, 2007 was
$35
million, an increase of $7 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 Loan Losses
The
$14 million recovery for loan losses for the quarter ended November 30, 2007
resulted from the decrease in calculated impairments due to lower variable
rates, an increase to collateral valuation and payments received on impaired
loans.
Derivative
Cash Settlements
The
$5 million decrease in derivative cash settlements for the quarter ended
November 30, 2007 compared to the prior year period is primarily due to a
reduction in the net rate earned by the Company on exchange
agreements.
Results
of Operations of Foreclosed Assets
Income
from the operation of foreclosed assets decreased by $1 million for the quarter
ended November 30, 2007 compared to the prior year period. At
November 30, 2007, the foreclosed assets are comprised of real estate developer
notes receivable and limited partnership interests in certain real estate
developments.
Derivative
Forward Value
The
$22 million increase in the derivative forward value during the quarter ended
November 30, 2007 compared to the prior year period is due to changes in the
estimate of future interest rates over the remaining life of the derivative
contracts.
Foreign
Currency Adjustment
There
was no foreign denominated debt outstanding during the quarter ended November
30, 2007, therefore resulting in a $20 million decrease to foreign currency
adjustments compared to the prior year period. During the quarter
ended November 30, 2006, the Company had medium-term notes denominated in Euros
totaling $434 million. 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 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.
Net
Loss
The
change in the line items described above resulted in a net loss of $30 million
for the quarter ended November 30, 2007 compared to a net loss of $56 million
for 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 $41 million compared to $17 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.
Ratio
of Earnings to Fixed Charges
The
following chart provides the calculation of the ratio of earnings to fixed
charges for the three and six months ended November 30, 2007 and
2006. 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.
|
Three
months ended
November
30,
|
|
|
Six
months ended
November
30,
|
|
(Dollar
amounts in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
2006
|
|
Loss
prior to cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
change
in accounting principle
|
$
|
(30,226
|
)
|
$
|
(56,195
|
)
|
$
|
(41,608
|
)
|
$
|
(99,214
|
)
|
Add:
fixed charges
|
|
240,017
|
|
|
248,591
|
|
|
487,342
|
|
|
504,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
available for fixed charges
|
$
|
209,791
|
|
$
|
192,396
|
|
$
|
445,734
|
|
$
|
405,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on all debt (including amortization of
|
|
|
|
|
|
|
|
|
|
|
|
|
discount
and issuance costs)
|
$
|
240,017
|
|
$
|
248,591
|
|
$
|
487,342
|
|
$
|
504,595
|
|
Ratio
of earnings to fixed charges (1)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(1)
For the three and six months ended November 30, 2007, earnings were insufficient
to cover fixed charges by $30 million and $42 million,
respectively. For the three and six months ended November 30, 2006,
earnings were insufficient to cover fixed charges by $56 million and $99
million, respectively.
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:
|
Increase/
|
(Dollar
amounts in millions)
|
November
30, 2007
|
|
May
31, 2007
|
|
(Decrease)
|
Loans
by
type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed
rate loans
|
$
|
15,022
|
|
|
|
82%
|
|
|
$
|
14,881
|
|
|
|
82%
|
|
|
|
$
|
141
|
|
Long-term
variable rate loans
|
|
1,955
|
|
|
|
11%
|
|
|
|
2,032
|
|
|
|
11%
|
|
|
|
|
(77
|
)
|
Total
long-term loans
|
|
16,977
|
|
|
|
93%
|
|
|
|
16,913
|
|
|
|
93%
|
|
|
|
|
64
|
|
Short-term
loans (2)
|
|
1,281
|
|
|
|
7%
|
|
|
|
1,215
|
|
|
|
7%
|
|
|
|
|
66
|
|
Total
loans
|
$
|
18,258
|
|
|
|
100%
|
|
|
$
|
18,128
|
|
|
|
100%
|
|
|
|
$
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
12,881
|
|
|
|
71%
|
|
|
$
|
12,828
|
|
|
|
71%
|
|
|
|
$
|
53
|
|
Power
supply
|
|
3,007
|
|
|
|
16%
|
|
|
|
2,858
|
|
|
|
16%
|
|
|
|
|
149
|
|
Statewide
and associate
|
|
114
|
|
|
|
1%
|
|
|
|
119
|
|
|
|
1%
|
|
|
|
|
(5
|
)
|
National
Rural total
|
|
16,002
|
|
|
|
88%
|
|
|
|
15,805
|
|
|
|
88%
|
|
|
|
|
197
|
|
RTFC
|
|
1,792
|
|
|
|
10%
|
|
|
|
1,860
|
|
|
|
10%
|
|
|
|
|
(68
|
)
|
NCSC
|
|
464
|
|
|
|
2%
|
|
|
|
463
|
|
|
|
2%
|
|
|
|
|
1
|
|
Total
loans
|
|
$
|
18,258
|
|
|
|
100%
|
|
|
$
|
18,128
|
|
|
|
100%
|
|
|
|
$
|
130
|
|
(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 increased by less than 1% during the six months
ended November 30, 2007. National Rural loans outstanding increased due to
net
advances of $237 million offset by the sale of $40 million of National Rural
distribution loans in a loan securitization transaction in August
2007. Long-term fixed rate loans at November 30, 2007 and May 31,
2007 represented 88% of total long-term loans. Loans converting from
a variable rate to a fixed rate for the six months ended November 30, 2007
totaled $128 million, which was offset by $62 million of loans that converted
from a fixed rate to a variable rate. This resulted in a net
conversion of $66 million from a variable rate to a fixed rate for the six
months ended November 30, 2007. For the six months ended November 30,
2006, loans converting from a variable rate to a fixed rate totaled $181
million, which was offset by $54 million of loans that converted from a fixed
rate to a variable rate. This resulted in a net conversion of $127
million from a variable rate to a fixed rate for the six months ended November
30, 2006.
The
following chart summarizes loans and guarantees outstanding by
segment:
(Dollar
amounts in millions)
|
November
30, 2007
|
|
May
31, 2007
|
|
Increase/
Decrease
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
13,099
|
|
|
|
|
68%
|
|
|
$
|
13,039
|
|
|
|
68%
|
$
|
60
|
|
Power
supply
|
|
3,781
|
|
|
|
|
19%
|
|
|
|
3,655
|
|
|
|
19%
|
|
126
|
|
Statewide
and associate
|
|
138
|
|
|
|
|
1%
|
|
|
|
145
|
|
|
|
1%
|
|
(7
|
)
|
National
Rural Total
|
|
17,018
|
|
|
|
|
88%
|
|
|
|
16,839
|
|
|
|
88%
|
|
179
|
|
RTFC
|
|
1,792
|
|
|
|
|
9%
|
|
|
|
1,860
|
|
|
|
10%
|
|
(68
|
)
|
NCSC
|
|
536
|
|
|
|
|
3%
|
|
|
|
503
|
|
|
|
2%
|
|
33
|
|
Total
|
$
|
19,346
|
|
|
|
|
100%
|
|
|
$
|
19,202
|
|
|
|
100%
|
$
|
144
|
|
The
following table summarizes the RTFC segment loans and guarantees
outstanding:
(Dollar
amounts in
millions)
|
|
November
30, 2007
|
|
May
31, 2007
|
|
Increase/
Decrease
|
|
Rural
local exchange
carriers
|
|
$
|
1,568
|
|
|
|
|
88%
|
|
|
$
|
1,630
|
|
|
|
88%
|
$
|
(62
|
)
|
Cable
television
providers
|
|
|
154
|
|
|
|
|
9%
|
|
|
|
155
|
|
|
|
8%
|
|
(1
|
)
|
Fiber
optic network
providers
|
|
|
34
|
|
|
|
|
2%
|
|
|
|
37
|
|
|
|
2%
|
|
(3
|
)
|
Competitive
local exchange
carriers
|
|
|
26
|
|
|
|
|
1%
|
|
|
|
21
|
|
|
|
1%
|
|
5
|
|
Wireless
providers
|
|
|
3
|
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
(1
|
)
|
Long
distance
carriers
|
|
|
-
|
|
|
|
|
-
|
|
|
|
9
|
|
|
|
1%
|
|
(9
|
)
|
Other
|
|
|
7
|
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
3
|
|
Total
|
|
$
|
1,792
|
|
|
|
|
100%
|
|
|
$
|
1,860
|
|
|
|
100%
|
$
|
(68
|
)
|
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 November 30, 2007 and May 31, 2007, loans outstanding
to members in any one state or territory did not exceed 16% and 15%,
respectively, of total loans outstanding.
Credit
Concentration
National
Rural, 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,
|
·
|
borrower
guarantees to the Company of another borrower's debt,
and
|
·
|
other
indebtedness of any kind unless guaranteed by the U.S.
government.
|
At
November 30, 2007 and May 31, 2007, the total exposure outstanding to any one
borrower or controlled group did not exceed 3.0% of total loans and guarantees
outstanding. At November 30, 2007, the ten largest borrowers included
five distribution systems, three power supply systems and two telecommunications
systems. At May 31, 2007, the ten largest borrowers included six
distribution systems, two power supply systems and two telecommunication
systems. The following chart shows the exposure to the ten largest
borrowers as a percentage of total exposure by type and by segment:
|
|
November
30,
2007
|
|
|
May
31,
2007
|
(Dollar
amounts in
millions)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of
Total
|
Total
by
type:
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
3,399
|
|
|
|
$
|
3,307
|
|
|
Guarantees
|
|
79
|
|
|
|
|
77
|
|
|
Total
credit exposure to ten largest borrowers
|
$
|
3,478
|
|
18%
|
|
$
|
3,384
|
|
18%
|
|
|
|
|
|
|
|
|
|
|
Total
by
segment:
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
2,782
|
|
|
|
$
|
2,691
|
|
|
RTFC
|
|
|
|
|
|
|
693
|
|
|
Total
credit exposure to ten largest borrowers
|
$
|
3,478
|
|
18%
|
|
$
|
3,384
|
|
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:
|
|
November
30,
2007
|
|
|
May
31,
2007
|
(Dollar
amounts in
millions)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of
Total
|
Total
by
type:
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
1,645
|
|
|
|
$
|
1,634
|
|
|
Guarantees
|
|
221
|
|
|
|
|
221
|
|
|
Total
unsecured credit exposure
|
$
|
1,866
|
|
10%
|
|
$
|
1,855
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
Total
by
segment:
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
1,576
|
|
|
|
$
|
1,559
|
|
|
RTFC
|
|
228
|
|
|
|
|
230
|
|
|
NCSC
|
|
62
|
|
|
|
|
66
|
|
|
Total
unsecured credit exposure
|
$
|
1,866
|
|
10%
|
|
$
|
1,855
|
|
10%
|
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, the Company 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 November 30, 2007 and May
31, 2007, the Company had non-performing loans outstanding in the amount of
$503
million and $502 million, respectively. All loans classified as
non-performing were on a non-accrual status with respect to the recognition
of
interest income.
At
November 30, 2007 and May 31, 2007, non-performing loans include $496 million
and $493 million, respectively, to Innovative Communication Corporation
(“ICC”). Loans outstanding to ICC continue to increase due to accrued
legal costs associated with ongoing litigation to recover the outstanding loan
balance. 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
National Rural. 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 Chapter 11 trustee for the ICC-LLC and Emcom bankruptcy estates
and an examiner for Prosser’s bankruptcy estate.
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; none of the other
debtors has sought review of the order.
On
September 7, 2007, the Bankruptcy Court entered an order authorizing the Chapter
11 trustee for the Emcom bankruptcy estate to exercise control over the common
stock of ICC, including authority to vote the stock to, among other things,
facilitate a refinancing or sale of ICC and its assets.
On
September 21, 2007, the United States District Court for the Virgin Islands,
Bankruptcy Division, in response to an involuntary petition filed by the
Greenlight Entities, entered an order for relief under Chapter 11 of the United
States
Bankruptcy
Code thereby placing ICC in its own bankruptcy proceeding. In
response to a motion by RTFC, the Bankruptcy Court ordered appointment of a
Chapter 11 trustee for ICC on October 3, 2007. Certain parties have
moved for reconsideration of and/or appealed one or more orders of the
Bankruptcy Court and have requested a stay pending ruling by the District
Court. RTFC believes both that the moving parties have no standing
and that the motions to reconsider and appeal have no merit. Pending
the appeal, the Chapter 11 trustee of ICC has assumed ownership and control
of
ICC, including its subsidiaries, and has begun to marshal RTFC collateral and
other assets for disposition and eventual payment in respect of RTFC’s claims
and the claims of other parties-in-interest. On January 2, 2008, the
Chapter 11 trustee of ICC filed a motion seeking authority to sell substantially
all of ICC’s assets, including stock in ICC’s operating
subsidiaries. A hearing on the motion is expected to be held on
February 1, 2008.
In
response to a motion by the Greenlight Entities, joined by RTFC, the Bankruptcy
Court converted Prosser’s individual Chapter 11 bankruptcy to a Chapter 7
liquidation on October 3, 2007. Prosser has filed a notice of appeal
of the conversion order. RTFC believes that the appeal has no
merit. Pending the appeal, the Chapter 7 trustee has advised that he
intends to marshal Prosser’s non-exempt assets for disposition and eventual
payment in respect of creditor claims. On December 3, 2007, the
Chapter 7 trustee of Prosser’s estate filed a motion to approve sale procedures
and for authority to sell Prosser’s controlling shares in the Virgin Islands
Community Bank Corp. The sale procedures were approved by the court
on December 14, 2007 and on December 26, 2007, the Chapter 7 trustee issued
notice that a purchaser had been selected. On January 3, 2008, the
Court announced it would enter an order approving a sale of the bank stock
to
FirstBank Puerto Rico, subject to approval by third parties, including the
Federal Deposit Insurance Corporation.
In
most cases, the sale (as part of the reorganization process) of ICC or any
of
its subsidiaries engaged in a regulated telecommunications or cable television
business, or of the regulated assets of ICC or its subsidiaries, will require
the prior consent of the respective regulators in the United States (including
the Federal Communications Commission and the U.S. Virgin Islands Public
Services Commission), the British Virgin Islands, France and its Caribbean
territories, and the Netherlands Antilles. In certain limited cases,
only a post-transaction notification will be required.
For
a more detailed description of the contingencies related to the non-performing
loans outstanding to ICC, see Note 13 to the consolidated financial
statements. Based on its analysis, the Company believes that it is
adequately reserved for its exposure to ICC at November 30, 2007.
VarTec
was a telecommunications company and RTFC borrower located in Dallas,
Texas. The Company was VarTec's principal senior secured
creditor.
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. The cases were converted
in 2006 to Chapter 7 proceedings, administered by a Chapter 7
trustee.
Non-performing
loans at May 31, 2007 included $9 million to VarTec. On June 4, 2007,
the Bankruptcy Court approval of a settlement of litigation against the Company
became final, pursuant to which (a) all claims against the Company were
dismissed with prejudice and fully released, (b) a portion of the proceeds
from
the collateral that had been provisionally applied to the Company’s secured debt
was reallocated to VarTec creditors, including the Company, and (c) an
administrative debtor-in-possession (“DIP”) financing facility owed by the
VarTec bankruptcy estates to the Company was reduced to $6
million. The Company’s remaining DIP and unsecured claims will share
in further recoveries by the bankruptcy estates. As a result of the
settlement of the litigation, the Company wrote off $44 million of pre-petition
debt during the fourth quarter of fiscal year 2007 and wrote off $17 million
in
the first quarter of fiscal year 2008.
At
November 30, 2007, the Company had a receivable for $6 million, which has a
payment priority from the bankruptcy estates; in addition, the Company will
share in recoveries that are in excess of the amount required to repay the
DIP
financing and cover expenses of the estates. On December 26, 2007,
the Company received $3 million, which is a share of the settlement proceeds
from the VarTec estates’ litigation against certain former directors and
officers. As a result of this $3 million payment to the Company, the
balance of the receivable was reduced from $6 million to $3 million subsequent
to the end of the quarter.
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
November 30, 2007 and May 31, 2007, restructured loans totaled $591 million
and
$603 million, respectively. A total of $532 million and $545 million
of restructured loans were on non-accrual status with respect to the recognition
of interest income at November 30, 2007 and May 31, 2007,
respectively. At November 30, 2006, there were $557 million of
restructured loans on non-accrual status.
At
November 30, 2007 and May 31, 2007, the Company had $532 million and $545
million, respectively, of restructured loans outstanding to CoServ. All
restructured CoServ loans have been on non-accrual status since January 1,
2001. In addition, a total of $20 million was outstanding under the
capital expenditure loan facility which was classified as a performing loan
at
both November 30, 2007 and May 31, 2007. Total loans to CoServ at
November 30, 2007 and May 31, 2007 represented 2.9% of the Company's total
loans
and guarantees outstanding.
Under
the terms of a bankruptcy settlement, National Rural restructured its loans
to
CoServ. CoServ is scheduled to make quarterly payments to National
Rural through December 2037. As part of the restructuring, National
Rural 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
National Rural, 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 National Rural. As of
November 30, 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. National Rural has received no notice from CoServ that it
intends to prepay the loan.
CoServ
and National Rural have no claims related to any of the legal actions asserted
prior to or during the bankruptcy proceedings. National Rural'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 November 30, 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 November 30, 2007 and May 31, 2007, National Rural had
a total of $52 million in loans outstanding to Pioneer. Pioneer was
current with respect to all debt service payments at November 30,
2007. National Rural is the principal creditor to
Pioneer.
On
March 9, 2006, National Rural and Pioneer agreed on the terms of a debt
modification that resulted in the loans being classified as
restructured. Under the amended agreement, National Rural extended
the maturity of the outstanding loans and granted a two-year deferral of
principal payments. In addition, National Rural 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, National Rural 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 November 30, 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 November 30, 2007 and May 31, 2007, National
Rural had impaired loans totaling $1,081 million and $1,099 million,
respectively. At November 30, 2007 and May 31, 2007, National Rural
had specifically reserved a total of $359 million and $397 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:
(Dollar
amounts in millions)
|
November
30, 2007
|
|
May
31, 2007
|
Non-performing
loans
|
$
|
503
|
|
|
$
|
502
|
|
Percent
of loans outstanding
|
|
2.75
|
%
|
|
|
2.77
|
%
|
Percent
of loans and guarantees outstanding
|
|
2.60
|
%
|
|
|
2.61
|
%
|
|
|
|
|
|
|
|
|
Restructured
loans
|
$
|
591
|
|
|
$
|
603
|
|
Percent
of loans outstanding
|
|
3.24
|
%
|
|
|
3.33
|
%
|
Percent
of loans and guarantees outstanding
|
|
3.05
|
%
|
|
|
3.14
|
%
|
|
|
|
|
|
|
|
|
Total
non-performing and restructured loans
|
$
|
1,094
|
|
|
$
|
1,105
|
|
Percent
of loans outstanding
|
|
5.99
|
%
|
|
|
6.10
|
%
|
Percent
of loans and guarantees outstanding
|
|
5.65
|
%
|
|
|
5.75
|
%
|
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 National Rural 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 $211 million and
recoveries totaled $33 million for a net write-off of $178
million. For the period from June 1, 2002 to November 30, 2007,
write-offs totaled $78 million and recoveries totaled $7 million for a net
write-off of $71 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 six months ended
and
as of
|
|
For
the year ended
and
as of
|
|
|
November
30,
|
|
|
November
30,
|
|
|
May
31,
|
|
|
(Dollar
amounts in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Beginning
balance
|
$
|
562
|
|
$
|
611
|
|
$
|
611
|
|
|
Recovery
of loan losses
|
|
(14
|
)
|
|
-
|
|
|
(7
|
)
|
|
Net
write-offs
|
|
(17
|
)
|
|
-
|
|
|
(42
|
)
|
|
Ending
balance
|
$
|
531
|
|
$
|
611
|
|
$
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
loss allowance by segment:
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
530
|
|
$
|
610
|
|
$
|
561
|
|
|
NCSC
|
|
1
|
|
|
1
|
|
|
1
|
|
|
Total
|
$
|
531
|
|
$
|
611
|
|
$
|
562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of total loans outstanding
|
|
2.91
|
%
|
|
3.36
|
%
|
|
3.10
|
%
|
|
As
a percentage of total non-performing loans outstanding
|
|
105.57
|
%
|
|
113.36
|
%
|
|
111.95
|
%
|
|
As
a percentage of total restructured loans outstanding
|
|
89.85
|
%
|
|
99.19
|
%
|
|
93.20
|
%
|
|
National
Rural 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 $31 million from May 31, 2007 to
November 30, 2007. Within National Rural's loan loss allowance at
November 30, 2007 as compared to the prior year end, there was a decrease in
the
calculated impairments of $38 million and an increase of $7 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 $17 million, payments received on impaired loans, an
increase to collateral valuation and lower variable interest rates at November
30, 2007 as compared to May 31, 2007.
Liabilities,
Minority Interest and Equity
Outstanding
Debt
The
following chart provides a breakout of debt outstanding:
(Dollar
amounts in millions)
|
November
30,
2007
|
|
May
31,
2007
|
|
Increase/
(Decrease)
|
Short-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper (1)
|
$
|
2,681
|
|
|
$
|
2,784
|
|
|
$
|
(103
|
)
|
Bank
bid notes
|
|
100
|
|
|
|
100
|
|
|
|
-
|
|
Long-term
debt with remaining maturities less than one year
|
|
3,712
|
|
|
|
1,368
|
|
|
|
2,344
|
|
Subordinated
deferrable debt with remaining maturities less than one
year
|
|
-
|
|
|
|
175
|
|
|
|
(175
|
)
|
Total
short-term debt
|
|
6,493
|
|
|
|
4,427
|
|
|
|
2,066
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
trust bonds
|
|
2,216
|
|
|
|
4,017
|
|
|
|
(1,801
|
)
|
Notes
payable
|
|
2,532
|
|
|
|
2,533
|
|
|
|
(1
|
)
|
Medium-term
notes
|
|
4,527
|
|
|
|
4,745
|
|
|
|
(218
|
)
|
Total
long-term debt
|
|
9,275
|
|
|
|
11,295
|
|
|
|
(2,020
|
)
|
Subordinated
deferrable debt
|
|
311
|
|
|
|
311
|
|
|
|
-
|
|
Members'
subordinated certificates:
|
|
|
|
|
|
|
|
|
|
|
|
Membership
certificates
|
|
649
|
|
|
|
649
|
|
|
|
-
|
|
Loan
certificates
|
|
656
|
|
|
|
625
|
|
|
|
31
|
|
Guarantee
certificates
|
|
103
|
|
|
|
107
|
|
|
|
(4
|
)
|
Total
members' subordinated certificates
|
|
1,408
|
|
|
|
1,381
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt outstanding
|
$
|
17,487
|
|
|
$
|
17,414
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of fixed rate debt (2)
|
|
83%
|
|
|
|
83%
|
|
|
|
|
|
Percentage
of variable rate debt (3)
|
|
17%
|
|
|
|
17%
|
|
|
|
|
|
Percentage
of long-term debt
|
|
63%
|
|
|
|
75%
|
|
|
|
|
|
Percentage
of short-term debt
|
|
|
37%
|
|
|
|
25%
|
|
|
|
|
|
(1)
Includes $299 million and $250 million related to the daily liquidity fund
at
November 30, 2007 and May 31, 2007, 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.
Total
debt outstanding at November 30, 2007 increased as compared to May 31, 2007
due
primarily to the increase of $130 million to loans
outstanding. During the first six months of FY2008, $1,567 million of
extendible CTBs and $250 million of extendible MTNs were reclassified from
long-term debt to short-term debt because investors elected not to extend the
maturity of the debt. An additional $500 million was borrowed under
FFB loan facilities with bond guarantee agreements with RUS as part of the
funding mechanism for the REDLG program in August 2007. These funds
were used to pay down maturing short-term debt. Short-term debt was
also reduced by the redemption of $175 million of 7.40% subordinated deferrable
debt securities due 2050 in June 2007.
Minority
Interest
Minority
interest on the consolidated balance sheets was $16 million and $22 million
at
November 30, 2007 and May 31, 2007, respectively. During the six
months ended November 30, 2007, the balance of minority interest has been
adjusted by minority interest net loss. There was a loss of $6
million recorded on minority interest for the six months ended November 30,
2007
due to a decrease of $12 million to the fair value of derivatives at
NCSC.
Equity
The
following chart provides a breakout of the equity balances:
(in
millions)
|
November
30, 2007
|
|
May
31, 2007
|
|
Increase/
(Decrease)
|
Membership
fees
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
-
|
|
Education
fund
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
Members'
capital reserve
|
|
158
|
|
|
|
158
|
|
|
|
-
|
|
Allocated
net income
|
|
320
|
|
|
|
406
|
|
|
|
(86
|
)
|
Unallocated
net income
|
|
56
|
|
|
|
-
|
|
|
|
56
|
|
Total
members' equity
|
|
536
|
|
|
|
566
|
|
|
|
(30
|
)
|
Prior
years cumulative derivative forward
|
|
|
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
132
|
|
|
|
226
|
|
|
|
(94
|
)
|
Current
period derivative forward value (1)
|
|
(98
|
)
|
|
|
(79
|
)
|
|
|
(19
|
)
|
Current
period foreign currency adjustments
|
|
-
|
|
|
|
(15
|
)
|
|
|
15
|
|
Total
retained equity
|
|
570
|
|
|
|
698
|
|
|
|
(128
|
)
|
Accumulated
other comprehensive income
|
|
12
|
|
|
|
12
|
|
|
|
-
|
|
Total
equity
|
|
$
|
582
|
|
|
$
|
710
|
|
|
$
|
(128
|
)
|
(1)
|
Represents
the derivative forward value loss recorded by National Rural 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. National Rural is required by the District of Columbia
cooperative law to have a methodology to allocate its net earnings to its
members. National Rural maintains the current year net earnings as
unallocated through the end of its fiscal year. Subsequent to the end
of the fiscal year, National Rural's board of directors allocates its net
earnings to its members in the form of patronage capital and to board approved
reserves. Currently, National Rural has two such board approved
reserves, the education fund and the members' capital
reserve. National Rural adjusts the net earnings it allocates to its
members and board approved reserves to exclude the non-cash impacts of SFAS
133
and 52. National Rural 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 National Rural 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 National Rural's board of directors. All remaining
adjusted net earnings is allocated to National Rural's members in the form
of
patronage capital. National Rural bases the amount of adjusted net
earnings allocated to each member on the members' patronage of the National
Rural lending programs in the year that the adjusted net earnings was
earned. There is no impact on National Rural's total equity as a
result of allocating earnings to members in the form of patronage capital or
to
board approved reserves. National Rural annually retires a portion of
the patronage capital allocated to members in prior years. National
Rural's total equity is reduced by the amount of patronage capital retired
to
its members and by amounts disbursed from board approved reserves.
At
November 30, 2007, total equity
decreased by $128
million from May 31, 2007 due to the
board authorized patronage capital retirement and a net loss of $42
million. In July 2007,
National Rural'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 was returned to members in cash in September
2007.
Contractual
Obligations
The
following table summarizes the long-term contractual obligations at November
30,
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
|
|
$
|
1,032
|
|
|
$
|
2,680
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,712
|
Long-term
debt
|
|
|
-
|
|
|
|
354
|
|
|
|
1,515
|
|
|
|
539
|
|
|
|
1,526
|
|
|
|
5,341
|
|
|
|
9,275
|
Subordinated
deferrable debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
311
|
|
|
|
311
|
Members'
subordinated certificates
(1)
|
|
|
14
|
|
|
|
10
|
|
|
|
33
|
|
|
|
22
|
|
|
|
5
|
|
|
|
1,054
|
|
|
|
1,138
|
Operating
leases (2)
|
|
|
2
|
|
|
|
3
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
Contractual
interest on long-term debt (3)
|
|
|
362
|
|
|
|
596
|
|
|
|
478
|
|
|
|
431
|
|
|
|
395
|
|
|
|
4,399
|
|
|
|
6,661
|
Total
contractual obligations
|
|
|
$
|
1,410
|
|
|
$
|
3,643
|
|
|
$
|
2,028
|
|
|
$
|
992
|
|
|
$
|
1,926
|
|
|
$
|
11,105
|
|
|
$
|
21,104
|
(1)
Excludes loan subordinated certificates totaling $270 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 and prepayments, 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 lease of office
space
for its headquarters facility. In September 2007, the Company
exercised the option to extend the lease for an additional one-year
period. 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 2010 and 2011 would increase to $4 million and $2
million, respectively.
(3)
Represents the interest obligation on the Company's debt based on terms and
conditions at November 30, 2007.
Off-Balance
Sheet
Obligations
Guarantees
The
following chart provides a breakout of guarantees outstanding by type and by
segment:
|
|
|
|
|
Increase/
|
(in
millions)
|
November
30, 2007
|
|
May
31, 2007
|
|
(Decrease)
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
tax-exempt bonds
|
$
|
511
|
|
|
$
|
526
|
|
|
$
|
(15
|
)
|
Indemnifications
of tax benefit transfers
|
|
102
|
|
|
|
108
|
|
|
|
(6
|
)
|
Letters
of credit
|
|
395
|
|
|
|
366
|
|
|
|
29
|
|
Other
guarantees
|
|
80
|
|
|
|
74
|
|
|
|
6
|
|
Total
|
$
|
1,088
|
|
|
$
|
1,074
|
|
|
$
|
14
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
1,016
|
|
|
$
|
1,034
|
|
|
$
|
(18
|
)
|
NCSC
|
|
72
|
|
|
|
40
|
|
|
|
32
|
|
Total
|
$
|
1,088
|
|
|
$
|
1,074
|
|
|
$
|
14
|
|
The
increase in total guarantees outstanding at November 30, 2007 compared to May
31, 2007 is primarily due to the $29 million increase to letters of credit
offset by the normal amortization on long-term tax-exempt bonds and tax benefit
transfers.
At
November 30, 2007 and May 31, 2007, the Company had recorded a guarantee
liability totaling $15 million and $19 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 November 30,
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) |
|
|
|
$
|
1,088
|
|
|
$
|
183
|
|
|
$
|
130
|
|
|
$
|
157
|
|
|
$
|
126
|
|
|
$
|
101
|
|
|
$
|
391
|
|
|
(1)
On a total of $384 million of tax-exempt bonds, National Rural 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
November 30, 2007, the Company had unadvanced loan commitments totaling $13,109
million, an increase of $205 million compared to the balance of $12,904 million
at May 31, 2007. 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 57% and
56% of the outstanding commitments at November 30, 2007 and May 31, 2007,
respectively, 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 National Rural'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 generally 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 November 30, 2007 was 32.81, an increase from 26.64 at May
31,
2007. The increase in the leverage ratio is due to a decrease of $128
million in total equity, an increase of $14 million in guarantees and an
increase of $166 million to total liabilities 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,
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 November 30, 2007 and May 31, 2007, the adjusted leverage
ratio was 7.46 and 6.81, 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 $184 million
in
adjusted equity and increases in adjusted liabilities of $219 million and
guarantees of $14 million as discussed under the Liabilities, Minority Interest
and Equity section and the Off-Balance Sheet Obligations section of "Financial
Condition". 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 November 30, 2007 was 30.94, an increase from 25.13 at May 31,
2007. The increase in the debt to equity ratio is due to the decrease
of $128 million to total equity and an increase of $166 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,
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 November 30, 2007 and May 31, 2007, the adjusted debt to
equity ratio was 6.98 and 6.37, 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 $184 million in adjusted equity
and an increase of $219 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 registered with the SEC, Moody's Investors Service,
Standard & Poor's Corporation and Fitch Ratings. The following
table presents the Company's credit ratings at November 30, 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.
At
November 30, 2007, Moody's Investors Service and Standard & Poor’s
Corporation had the Company's ratings on stable outlook and Fitch Ratings had
the Company’s ratings on positive outlook. In December 2007, Standard
& Poor's Corporation revised its outlook of the Company’s ratings from
stable to positive.
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 believes that its sources of
liquidity are adequate to cover the uses of liquidity.
Sources
of Liquidity
Capital
Market Debt Issuance
At
November 30, 2007, the Company had effective registration statements for the
issuance of $2,875 million of medium-term notes and $165 million of subordinated
deferrable debt. The Company qualifies as a well-known seasoned
issuer under SEC rules and filed an automatic shelf registration statement
for
collateral trust bonds in October 2007. This automatic shelf
registration statement is effective for three years for an unlimited amount
of
collateral trust bonds. 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 $1.8 billion of medium-term notes in the Australian market. At
November 30, 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 Company limits the amount of commercial
paper that can be sold 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 ending April 2010 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,
of
which $2.5 billion was outstanding at November 30, 2007. On August 7,
2007, National Rural received the remaining $500 million available
under
FFB
loan facilities, as $2 billion of funding was outstanding at May 31,
2007. National Rural is required to place on deposit mortgage notes
in an amount at least equal to the principal balance of the notes
outstanding.
On
December 26, 2007, the President of the United States signed the Appropriations
Act for Fiscal Year 2008 which
provides an additional $500 million in funding from the FFB with a guarantee
of
repayment by the RUS as part of the funding mechanism for REDLG. The
Company is not currently eligible to borrow that additional $500 million because
of a limitation in current law based on the amount of loans the Company has
issued on a concurrent basis with RUS. If that limitation is removed
in future legislation, the Company would be eligible to apply for the additional
$500 million.
Member
Loan Repayments
Scheduled
repayments on long-term loans are expected to average $950 million a year for
fiscal years 2008 to 2012. There has been significant prepayment
activity over the past two fiscal years in the telecommunications loan
programs. It is not anticipated that there will be significant loan
prepayments over the next few years.
Member
Loan Interest Payments
During
the six months ended November 30, 2007, interest income on the loan portfolio
was $516 million, representing an average yield of 5.69% as compared to 5.56%
for the six months ended November 30, 2006. At November 30, 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 November 30, 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 amounts available under the Company's revolving
credit agreements:
(Dollar
amounts in millions)
|
|
|
November
30, 2007
|
|
|
May
31, 2007
|
|
|
Termination
Date
|
|
|
Facility
fee per
annum
(1)
|
364-day
agreement (2)
|
|
$
|
1,125
|
|
$
|
1,125
|
|
|
March
14, 2008
|
|
|
0.05
of 1%
|
Five-year
agreement
|
|
|
1,125
|
|
|
1,125
|
|
|
March
16, 2012
|
|
|
0.06
of 1%
|
Five-year
agreement
|
|
|
1,025
|
|
|
1,025
|
|
|
March
22, 2011
|
|
|
0.06
of 1%
|
Total
|
|
|
$
|
3,275
|
|
$
|
3,275
|
|
|
|
|
|
|
(1)
Facility fee determined by National Rural'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 November 30, 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 November 30, 2007.
Effective
November 30, 2007 and May 31,
2007, 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 six months ended November 30,
2007
and at or for the year ended May 31, 2007:
|
Actual
|
|
Requirement
|
|
November
30,
2007
|
|
May
31,
2007
|
|
|
|
|
|
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
1.025
|
|
1.13
|
|
1.09
|
Minimum
adjusted TIER at fiscal year end (1)
|
1.05
|
|
1.12
|
|
1.12
|
Maximum
ratio of senior debt to total equity |
|
10.00
|
|
7.30
|
|
6.65
|
(1)
The Company must meet this requirement in order to retire patronage
capital. The adjusted TIER reported at November 30, 2007 is the
amount from the prior year end, the last measurement date for this
ratio.
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 National Rural must be in compliance with their other
requirements, including financial ratios, in order to draw down on the
facilities.
Member
Investments
At
November 30, 2007 and May 31, 2007, members funded 21.1% and 20.9%, respectively
of total assets as follows:
|
November
30, 2007
|
|
May
31, 2007
|
|
Increase/
|
|
(Dollar
amounts in millions)
|
Amount
|
|
%
of Total (1)
|
|
Amount
|
|
%
of Total (1)
|
|
(Decrease)
|
|
|
Commercial
paper (2)
|
$
|
1,624
|
|
|
|
61%
|
|
|
$
|
1,634
|
|
|
59%
|
|
|
$
|
(10
|
)
|
|
Medium-term
notes
|
|
353
|
|
|
|
7%
|
|
|
|
308
|
|
|
6%
|
|
|
|
45
|
|
|
Members'
subordinated certificates
|
|
1,408
|
|
|
|
100%
|
|
|
|
1,381
|
|
|
100%
|
|
|
|
27
|
|
|
Members'
equity (3)
|
|
536
|
|
|
|
100%
|
|
|
|
566
|
|
|
100%
|
|
|
|
(30
|
)
|
|
Total
|
$
|
3,921
|
|
|
|
|
|
|
$
|
3,889
|
|
|
|
|
|
$
|
32
|
|
|
Percentage
of total assets
|
|
21.1
|
%
|
|
|
|
|
|
|
20.9
|
%
|
|
|
|
|
|
|
|
|
Percentage
of total assets less derivative assets (3)
|
|
21.3
|
%
|
|
|
|
|
|
|
21.2
|
%
|
|
|
|
|
|
|
|
(1)
Represents the percentage of each line item outstanding to National Rural
members.
(2)
Includes $299 million and $250 million related to the daily liquidity fund
at
November 30, 2007 and May 31, 2007, 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 November 30, 2007. At
November 30, 2007, the Company had unadvanced loan commitments totaling $13,109
million. The Company does not expect to advance the full amount of
the unadvanced commitments at November 30, 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 57% of the outstanding
commitments at November 30, 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 six months ended November 30, 2007, interest expense on debt was $467
million, representing 5.14% of the average loan volume for which the debt was
used as funding. The interest expense on debt represented 5.29% of
the average loan volume for which the debt was used as funding for the six
months ended November 30, 2006. At November 30, 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 November 30, 2007 and
thereafter is as follows:
|
|
Amount
|
(Dollar
amounts in millions)
|
|
Maturing
(1)
|
2008
|
$
|
1,046
|
2009
|
|
3,044
|
2010
|
|
1,548
|
2011
|
|
561
|
2012
|
|
1,531
|
Thereafter
|
|
6,706
|
Total
|
|
$
|
14,436
|
(1)
Excludes loan subordinated certificates totaling $270 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 and prepayments 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 National Rural board of
directors approved the allocation of a total of $104 million from fiscal year
2007 net earnings to the National Rural members. In September 2007,
National Rural made 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 58). 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 November 30, 2007 and May 31, 2007, 18% 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 58). 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 November 30, 2007, the Company had $14,813 million of
fixed rate assets amortizing or repricing, funded by $12,839 million of fixed
rate liabilities maturing during the next 30 years and $1,836 million of
members' equity and members' subordinated certificates, a portion of which
does
not have a scheduled maturity. The difference of $138 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 November 30, 2007.
INTEREST
RATE GAP ANALYSIS
(Fixed
Rate Assets/Liabilities)
As
of November 30, 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
|
$
|
1,179
|
|
|
$
|
3,424
|
|
|
$
|
2,875
|
|
|
$
|
3,653
|
|
|
$
|
2,588
|
|
|
$
|
1,094
|
|
|
$
|
14,813
|
|
Total
assets
|
$
|
1,179
|
|
|
$
|
3,424
|
|
|
$
|
2,875
|
|
|
$
|
3,653
|
|
|
$
|
2,588
|
|
|
$
|
1,094
|
|
|
$
|
14,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and members' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
979
|
|
|
$
|
3,277
|
|
|
$
|
3,750
|
|
|
$
|
3,684
|
|
|
$
|
895
|
|
|
$
|
254
|
|
|
$
|
12,839
|
|
Subordinated
certificates
|
|
25
|
|
|
|
59
|
|
|
|
92
|
|
|
|
88
|
|
|
|
443
|
|
|
|
579
|
|
|
|
1,286
|
|
Members'
equity (1)
|
|
13
|
|
|
|
26
|
|
|
|
28
|
|
|
|
121
|
|
|
|
101
|
|
|
|
261
|
|
|
|
550
|
|
Total
liabilities and members' equity
|
$
|
1,017
|
|
|
$
|
3,362
|
|
|
$
|
3,870
|
|
|
$
|
3,893
|
|
|
$
|
1,439
|
|
|
$
|
1,094
|
|
|
$
|
14,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap
(2)
|
$
|
162
|
|
|
$
|
62
|
|
|
$
|
(995
|
)
|
|
$
|
(240
|
)
|
|
$
|
1,149
|
|
|
$
|
-
|
|
|
$
|
138
|
|
Cumulative
gap
|
$
|
162
|
|
|
$
|
224
|
|
|
$
|
(771
|
)
|
|
$
|
(1,011
|
)
|
|
$
|
138
|
|
|
$
|
138
|
|
|
|
|
|
Cumulative
gap as a % of total assets
|
|
0.87
|
%
|
|
|
1.20
|
%
|
|
|
(4.14
|
)%
|
|
|
(5.43
|
)%
|
|
|
0.74
|
%
|
|
|
0.74
|
%
|
|
|
|
|
Cumulative
gap as a % of adjusted total assets (3)
|
|
0.88
|
%
|
|
|
1.22
|
%
|
|
|
(4.19
|
)%
|
|
|
(5.50
|
)%
|
|
|
0.75
|
%
|
|
|
0.75
|
%
|
|
|
|
|
(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 National Rural 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
November 30, 2007 and May 31, 2007, the Company was a party to interest rate
exchange agreements with a total notional amount of $13,387 million and $12,533
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. National Rural used interest rate exchange
agreements to synthetically change the interest rate from a variable rate to
a
fixed rate on $7,630 million as of November 30, 2007 and $7,277 million as
of
May 31, 2007 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 $5,757 million and $5,256
million of long-term debt as of November 30, 2007 and May 31, 2007,
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.
At
November 30, 2007 and May 31, 2007, there were no foreign currency exchange
agreements outstanding.
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 November 30, 2007 and May 31, 2007, the Company was a
party to interest rate exchange agreements with notional amounts totaling
$13,387 million and $12,533 million, respectively. 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
November 30, 2007, the Company's interest rate exchange agreement counterparties
had credit ratings ranging from AAA to A- as assigned by Standard & Poor's
Corporation.
Foreign
Currency Risk
The
Company may issue commercial paper, medium-term notes or bonds denominated
in
foreign currencies. At November 30, 2007 and May 31, 2007, there was
no foreign denominated debt outstanding. When the Company issues
foreign denominated debt, it typically mitigates foreign currency risk by
entering into an exchange agreement to lock in the exchange rate for all
interest and principal payments through maturity.
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 November 30, 2007, there are rating triggers associated
with $9,391 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 $1,685 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 $7,706
million.
At
November 30, 2007, the Company's exchange agreements subject to rating triggers
had a derivative fair value of $33 million, comprised of $50 million that would
be due to the Company and $17 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 $5 million,
comprised of $80 million that would be due to the Company and $85 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 54 for National Rural's senior
unsecured credit ratings as of November 30, 2007.
Additionally,
if ratings from Moody's
Investors Service fall below Baa2 or from Standard & Poor's Corporation fall
below BBB, the Company would be required to pledge collateral equal to the
net
obligation, or net fair value, of the related exchange agreements, due to the
affected counterparty, if any. At November 30, 2007, the net
obligation totaled $11 million for the $619 million notional amount of exchange
agreements subject to this rating trigger.
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 November
30, 2007, the Company has a total of $3,712 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 November 30, 2007 and May 31, 2007,
the Company had a total of $3,275 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 outstanding in the funding of
loans. The Company's objective is to maintain the amount of dealer
commercial paper and bank bid notes outstanding at 15% or less of total debt
outstanding. At November 30, 2007 and May 31, 2007, there was a total
of $1,012 million and $1,118 million, respectively, of dealer commercial paper
and bank bid notes outstanding, representing 6% of the Company's total debt
outstanding.
National
Rural continues to see
significant investment support from its members with $3.4 billion of commercial
paper, daily liquidity fund, medium-term notes and subordinated certificate
investments outstanding at November 30, 2007. The member debt
investments represented 19% of the total debt outstanding at November 30,
2007. In addition, National Rural had a total of $3.0 billion of
privately placed debt outstanding at November 30, 2007, $2.5 billion of which
was guaranteed by the U.S. Government under the REDLG
program. National Rural borrowed the remaining $500 million
authorized under the REDLG program during the six months ended November 30,
2007, which limitedthe
amount of long-term public debt
required during the period. The private placements of debt
represented 17% of total debt outstanding at November 30,
2007. National Rural did not experience any difficulty issuing
its commercial paper in the
capital markets, although there was a slight widening of the spread demanded
by
investors. NCSC did experience some issues with the issuance of its
commercial paper, which carries a guarantee from National Rural. Due
to the significant
increase in spread demanded
by investors, NCSC was limited to issuing very short maturities for a period
of
time during the six months ended November 30, 2007. The slightly
higher spread paid on dealer commercial paper did not have a significant impact
on National Rural's funding cost, as dealer commercial paper has represented
6%
or less of total debt during this period. At the time of this filing,
neither National Rural
or
NCSC are experiencing any
difficulties issuing commercial paper and current spreads
are
consistent with National Rural’s
historic trading levels.
National
Rural lends only to its
electric and telephone utility members and their affiliates and thus does not
have any residential mortgage exposure. National Rural's loan
portfolio is heavily weighted by electric distribution systems, which provide
an
essential service to their customers in a defined service territory where,
in
many cases, there is no competition.
Holders
of $2,062 million of the Company’s extendible debt elected not to extend the
maturity during the six months ended November 30, 2007. As a result,
$1,817 million of extendible debt was reclassified from long-term debt to
short-term debt based on maturity dates ranging from August through November
of
2008. The remaining $245 million of extendible debt will mature in
July 2009.
For
additional information of risks related to the Company's business, see Item
1A
"Risk Factors".
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 Net Income and the Calculation of the TIER Ratio
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 derivatives and
foreign currency adjustments and to include minority interest in net
income. Refer to Non-GAAP Financial Measures in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations in
the
Company's Form 10-K for the year ended May 31, 2007 for an explanation of why
these adjustments to net income and the calculation of the TIER ratio reflect
management's perspective on the Company's operations and why the Company
believes these are useful financial measures for investors.
|
|
Three
months ended
|
|
Six
months ended
|
|
|
November
30,
|
|
November
30,
|
(in
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
(240,017
|
)
|
|
$
|
(248,591
|
)
|
|
$
|
(487,342
|
)
|
|
$
|
(504,595
|
)
|
Adjusted
to include: Derivative cash settlements
|
|
|
11,507
|
|
|
|
16,493
|
|
|
|
19,836
|
|
|
|
31,748
|
|
Adjusted
interest expense
|
|
$
|
(228,510
|
)
|
|
$
|
(232,098
|
)
|
|
$
|
(467,506
|
)
|
|
$
|
(472,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
23,270
|
|
|
$
|
11,653
|
|
|
$
|
43,899
|
|
|
$
|
20,338
|
|
Adjusted
to include: Derivative cash settlements
|
|
|
11,507
|
|
|
|
16,493
|
|
|
|
19,836
|
|
|
|
31,748
|
|
Adjusted
net interest income
|
|
$
|
34,777
|
|
|
$
|
28,146
|
|
|
$
|
63,735
|
|
|
$
|
52,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes and minority interest
|
|
$
|
(37,683
|
)
|
|
$
|
(56,993
|
)
|
|
$
|
(51,742
|
)
|
|
$
|
(101,092
|
)
|
Adjusted
to exclude: Derivative forward value
|
|
|
75,412
|
|
|
|
53,239
|
|
|
|
109,012
|
|
|
|
116,590
|
|
Foreign
currency adjustments
|
|
-
|
|
|
|
20,620
|
|
|
|
-
|
|
|
|
17,299
|
|
Adjusted
income prior to income taxes and minority interest
|
|
$
|
37,729
|
|
|
$
|
16,866
|
|
|
$
|
57,270
|
|
|
$
|
32,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(30,226
|
)
|
|
$
|
(56,195
|
)
|
|
$
|
(41,608
|
)
|
|
$
|
(99,214
|
)
|
Adjusted
to include: Minority interest net income
|
|
|
(4,545
|
)
|
|
|
(312
|
)
|
|
|
(6,123
|
)
|
|
|
(678
|
)
|
Adjusted
to exclude: Derivative forward value
|
|
|
75,412
|
|
|
|
53,239
|
|
|
|
109,012
|
|
|
|
116,590
|
|
Foreign
currency adjustments
|
|
|
-
|
|
|
|
20,620
|
|
|
|
-
|
|
|
|
17,299
|
|
Adjusted
net income
|
|
$
|
40,641
|
|
|
$
|
17,352
|
|
|
$
|
61,281
|
|
|
$
|
33,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 calculations for TIER and adjusted
TIER.
|
Three
months ended
|
|
Six
months ended
|
|
November
30,
|
|
November
30,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
TIER
(1)
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjusted
TIER
|
|
|
1.18
|
|
|
|
1.07
|
|
|
|
1.13
|
|
|
|
1.07
|
|
(1)
For the three and six months ended November 30, 2007, the Company reported
a net
loss of $30 million and $42 million, respectively. For the three and
six months ended November 30, 2006, the Company reported a net loss of $56
million and $99 million, respectively. Thus the TIER calculation for
those periods results in a value below 1.00.
Adjustments
to the Calculation of Leverage and Debt to Equity Ratios
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 adjusted to exclude the non-cash impacts of derivatives and foreign
currency adjustments, to subtract debt used to fund loans that are guaranteed
by
RUS from total liabilities, to subtract from total liabilities, and add to
total
equity, debt with equity characteristics and to include minority interest as
equity. Refer to Non-GAAP Financial Measures in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations in
the
Company's Form 10-K for the year ended May 31, 2007 for an explanation of why
these adjustments to the calculation of leverage and debt to equity ratios
reflect management's perspective on the Company's operations and why the Company
believes these are useful financial measures for investors.
(in
thousands)
|
|
November
30, 2007
|
|
May
31, 2007
|
Liabilities
|
|
$
|
18,008,841
|
|
|
$
|
17,843,151
|
|
Less:
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
|
(169,928
|
)
|
|
|
(71,934
|
)
|
Debt
used to fund loans guaranteed by RUS
|
|
|
(252,087
|
)
|
|
|
(255,903
|
)
|
Subordinated
deferrable debt
|
|
|
(311,440
|
)
|
|
|
(486,440
|
)
|
Subordinated
certificates
|
|
|
(1,408,477
|
)
|
|
|
(1,381,447
|
)
|
Adjusted
liabilities
|
|
$
|
15,866,909
|
|
|
$
|
15,647,427
|
|
|
|
|
|
|
|
|
|
|
Total
equity
|
|
$
|
582,121
|
|
|
$
|
710,041
|
|
Less:
|
|
|
|
|
|
|
|
|
Prior
years cumulative derivative forward value and
|
|
|
|
|
|
|
|
|
foreign
currency adjustments
|
|
|
(131,551
|
)
|
|
|
(225,849
|
)
|
Current
period derivative forward value (1)
|
|
|
97,347
|
|
|
|
79,744
|
|
Current
period foreign currency adjustments
|
|
|
-
|
|
|
|
14,554
|
|
Accumulated
other comprehensive income
|
|
|
(11,873
|
)
|
|
|
(12,204
|
)
|
Subtotal
members' equity
|
|
|
536,044
|
|
|
|
566,286
|
|
Plus:
|
|
|
|
|
|
|
|
|
Subordinated
certificates
|
|
|
1,408,477
|
|
|
|
1,381,447
|
|
Subordinated
deferrable debt
|
|
|
311,440
|
|
|
|
486,440
|
|
Minority
interest
|
|
|
15,933
|
|
|
|
21,989
|
|
Adjusted
equity
|
|
$
|
2,271,894
|
|
|
$
|
2,456,162
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
|
$
|
1,088,118
|
|
|
$
|
1,074,374
|
|
(1)
Represents the derivative forward value loss recorded by National Rural for
the
period.
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 adjusted 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 calculated ratios for leverage and debt to equity,
as well as the adjusted ratio calculations. 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.
|
|
November
30, 2007
|
|
May
31, 2007
|
Leverage
ratio
|
|
|
32.81
|
|
|
|
26.64
|
|
Adjusted
leverage ratio
|
|
|
7.46
|
|
|
|
6.81
|
|
|
|
|
|
|
|
|
|
|
Debt
to equity ratio
|
|
|
30.94
|
|
|
|
25.13
|
|
Adjusted
debt to equity ratio
|
|
|
6.98
|
|
|
|
6.37
|
|
Item
3.
Quantitative and Qualitative Disclosures About Market Risk
See
Market Risk discussion beginning on page 57.
Item
4.
Controls and Procedures
As
reported in our Form 10-K for the year ended May 31, 2007, as a result of items
determined subsequent to our fiscal year end, during the six months ended
November 30, 2007 management implemented improvements to our internal controls
and procedures over the accounting for transactions involving foreign
currency.
As
for the period covered by this report, 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 are
effective. Other than the changes referred to in our May 31, 2007
Form 10-K, 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.
PART
II.OTHER INFORMATION
Item
1A.
Risk Factors
Refer
to Part I, Item 1A. Risk Factors in the Company's Form 10-K for the year ended
May 31, 2007 for information regarding factors that could affect the Company's
results of operations, financial condition and liquidity. There have
been no changes to the Company's risk factors during the quarter ended November
30, 2007.
Item
6.
Exhibits
|
10.2
– Employment Contract between National Rural and Sheldon C. Petersen,
effective as of January 1, 2008.
|
|
10.5
– Amendment to Supplemental Agreement between the Rural Telephone Finance
Cooperative and Sheldon C. Petersen, effective as of January 1, 2008.
|
|
10.6
– Agreement of Purchase and Sale between National Rural and Loudoun
Land
Venture, LLC dated as of November 28, 2007. Exhibit C to the
Agreement of Purchase and Sale has been omitted and will be furnished
supplementally to the Securities and Exchange Commission upon request.
|
|
10.7
– First Amendment to Agreement of Purchase and Sale between National
Rural
and Loudoun Land Venture, LLC dated as of December 17, 2007.
|
|
10.8
– Second Amendment to Agreement of Purchase and Sale between National
Rural and Loudoun Land Venture, LLC dated as of December 21,
2007. Exhibits A and C to the Second Amendment to Agreement of
Purchase and Sale have been omitted and will be furnished supplementally
to the Securities and Exchange Commission upon request.
|
|
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 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.
NATIONAL
RURAL UTILITIES
COOPERATIVE
FINANCE
CORPORATION
/s/
STEVEN L.
LILLY
Steven
L. Lilly
Chief
Financial Officer
/s/
ROBERT E.
GEIER
Robert
E. Geier
Acting
Controller
(Acting
Principal Accounting
Officer)
January
11, 2008
64