N
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 February 29, 2008
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, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer x Smaller
reporting company ¨
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
|
February
29, 2008
|
|
May
31, 2007
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
237,741
|
|
|
$
|
304,107
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
17,738
|
|
|
|
2,032
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
|
18,665,439
|
|
|
|
18,131,873
|
|
Less:
Allowance for loan losses
|
|
(497,260
|
)
|
|
|
(561,663
|
)
|
Loans
to members, net
|
|
18,168,179
|
|
|
|
17,570,210
|
|
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
291,732
|
|
|
|
291,637
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
20,794
|
|
|
|
4,555
|
|
|
|
|
|
|
|
|
|
Debt
service reserve funds
|
|
54,993
|
|
|
|
54,993
|
|
|
|
|
|
|
|
|
|
Bond
issuance costs, net
|
|
40,074
|
|
|
|
45,611
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets
|
|
57,651
|
|
|
|
66,329
|
|
|
|
|
|
|
|
|
|
Derivative
assets
|
|
347,857
|
|
|
|
222,774
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
22,919
|
|
|
|
12,933
|
|
|
|
|
|
|
|
|
|
|
$
|
19,259,678
|
|
|
$
|
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
|
February
29, 2008
|
|
May
31, 2007
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
$
|
6,439,129
|
|
|
$
|
4,427,123
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest payable
|
|
314,834
|
|
|
|
281,458
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
9,732,902
|
|
|
|
11,295,219
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income
|
|
23,915
|
|
|
|
27,990
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
liability
|
|
13,658
|
|
|
|
18,929
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
38,739
|
|
|
|
27,611
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
370,761
|
|
|
|
71,934
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
deferrable debt
|
|
311,440
|
|
|
|
311,440
|
|
|
|
|
|
|
|
|
|
|
|
Members'
subordinated certificates:
|
|
|
|
|
|
|
|
|
Membership
subordinated certificates
|
|
649,461
|
|
|
|
649,424
|
|
|
Loan
and guarantee subordinated certificates
|
|
771,424
|
|
|
|
732,023
|
|
|
Total
members' subordinated certificates
|
|
1,420,885
|
|
|
|
1,381,447
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
12,086
|
|
|
|
21,989
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Retained
equity
|
|
569,712
|
|
|
|
697,837
|
|
|
Accumulated
other comprehensive income
|
|
11,617
|
|
|
|
12,204
|
|
|
Total
equity
|
|
581,329
|
|
|
|
710,041
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,259,678
|
|
|
$
|
18,575,181
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
(in
thousands)
For the
Three and Nine Months Ended February 29, 2008 and February 28, 2007
|
Three
months ended
|
|
Nine
months ended
|
|
February
29,
2008
|
|
February
28,
2007
(As
restated)*
|
|
February
29,
2008
|
|
February
28,
2007
(As
restated)*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
266,576
|
|
|
$
|
264,873
|
|
|
$
|
797,817
|
|
|
$
|
789,806
|
|
Interest
expense
|
|
(233,468
|
)
|
|
|
(247,441
|
)
|
|
|
(720,810
|
)
|
|
|
(752,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
33,108
|
|
|
|
17,432
|
|
|
|
77,007
|
|
|
|
37,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of loan losses
|
|
33,599
|
|
|
|
-
|
|
|
|
47,900
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after recovery of loan losses
|
|
66,707
|
|
|
|
17,432
|
|
|
|
124,907
|
|
|
|
37,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
367
|
|
|
|
417
|
|
|
|
1,070
|
|
|
|
1,042
|
|
Derivative
cash settlements
|
|
10,463
|
|
|
|
44,442
|
|
|
|
30,299
|
|
|
|
76,190
|
|
Results
of operations of foreclosed assets
|
|
2,401
|
|
|
|
1,896
|
|
|
|
6,217
|
|
|
|
7,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
13,231
|
|
|
|
46,755
|
|
|
|
37,586
|
|
|
|
85,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(9,398
|
)
|
|
|
(8,461
|
)
|
|
|
(27,049
|
)
|
|
|
(25,222
|
)
|
Other
general and administrative expenses
|
|
(5,862
|
)
|
|
|
(3,177
|
)
|
|
|
(16,278
|
)
|
|
|
(11,921
|
)
|
Recovery
of (provision for) guarantee liability
|
|
1,000
|
|
|
|
-
|
|
|
|
4,300
|
|
|
|
(400
|
)
|
Market
adjustment on foreclosed assets
|
|
(5,840
|
)
|
|
|
-
|
|
|
|
(5,840
|
)
|
|
|
-
|
|
Derivative
forward value
|
|
(64,266
|
)
|
|
|
(4,189
|
)
|
|
|
(173,278
|
)
|
|
|
(120,779
|
)
|
Foreign
currency adjustments
|
|
-
|
|
|
|
1,886
|
|
|
|
-
|
|
|
|
(15,413
|
)
|
Loss
on sale of loans
|
|
(158
|
)
|
|
|
(1,550
|
)
|
|
|
(676
|
)
|
|
|
(1,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
(84,524
|
)
|
|
|
(15,491
|
)
|
|
|
(218,821
|
)
|
|
|
(175,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income prior to income taxes and minority interest
|
|
(4,586
|
)
|
|
|
48,696
|
|
|
|
(56,328
|
)
|
|
|
(52,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
2,175
|
|
|
|
(627
|
)
|
|
|
6,186
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income prior to minority interest
|
|
(2,411
|
)
|
|
|
48,069
|
|
|
|
(50,142
|
)
|
|
|
(51,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
2,088
|
|
|
|
566
|
|
|
|
8,211
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
$
|
(323
|
)
|
|
$
|
48,635
|
|
|
$
|
(41,931
|
)
|
|
$
|
(50,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
*See
Note 1(j)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(in
thousands)
For the
Nine Months Ended February 29, 2008 and February 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended February 29, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
(56,328
|
)
|
|
-
|
|
|
|
(56,328
|
)
|
|
-
|
|
|
|
(56,328
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
comprehensive loss
|
|
(587
|
)
|
|
(587
|
)
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Income
taxes
|
|
6,186
|
|
|
-
|
|
|
|
6,186
|
|
|
-
|
|
|
|
6,186
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Minority
interest
|
|
8,211
|
|
|
-
|
|
|
|
8,211
|
|
|
-
|
|
|
|
8,211
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
|
|
(700
|
)
|
|
-
|
|
|
|
(700
|
)
|
|
(3
|
)
|
|
|
-
|
|
|
|
(697
|
)
|
|
|
40
|
|
|
|
-
|
|
|
|
(40
|
)
|
|
Balance
as of February 29, 2008
|
$
|
581,329
|
|
$
|
11,617
|
|
|
$
|
569,712
|
|
$
|
994
|
|
|
$
|
89,597
|
|
|
$
|
709
|
|
|
$
|
158,348
|
|
|
$
|
498
|
|
|
$
|
319,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended February 28, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)*
|
|
(52,396
|
)
|
|
-
|
|
|
|
(52,396
|
)
|
|
-
|
|
|
|
(52,396
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
comprehensive loss
|
|
(753
|
)
|
|
(753
|
)
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Income
taxes
|
|
573
|
|
|
-
|
|
|
|
573
|
|
|
-
|
|
|
|
573
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Minority
interest
|
|
1,244
|
|
|
-
|
|
|
|
1,244
|
|
|
-
|
|
|
|
1,244
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other
|
|
(590
|
)
|
|
-
|
|
|
|
(590
|
)
|
|
(1
|
)
|
|
|
-
|
|
|
|
(589
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance
as of February 28, 2007 (As restated)*
|
$
|
648,239
|
|
$
|
12,455
|
|
|
$
|
635,784
|
|
$
|
993
|
|
|
$
|
175,270
|
|
|
$
|
692
|
|
|
$
|
156,844
|
|
|
$
|
497
|
|
|
$
|
301,488
|
|
|
|
|
See
accompanying notes.
|
|
|
*See
Note 1(j)
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
For the
Nine Months Ended February 29, 2008 and February 28, 2007
|
February
29,
2008
|
|
February
28,
2007
(As
restated)*
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(41,931
|
)
|
|
$
|
(50,579
|
)
|
Add
(deduct):
|
|
|
|
|
|
|
|
Amortization
of deferred income
|
|
(5,769
|
)
|
|
|
(10,377
|
)
|
Amortization
of bond issuance costs and deferred charges
|
|
14,048
|
|
|
|
14,096
|
|
Depreciation
|
|
1,698
|
|
|
|
1,643
|
|
Recovery
of loan losses
|
|
(47,900
|
)
|
|
|
-
|
|
(Recovery
of) provision for guarantee liability
|
|
(4,300
|
)
|
|
|
400
|
|
Results
of operations of foreclosed assets
|
|
(6,217
|
)
|
|
|
(7,887
|
)
|
Market
adjustment on foreclosed assets
|
|
5,840
|
|
|
|
-
|
|
Derivative
forward value
|
|
173,278
|
|
|
|
120,779
|
|
Foreign
currency adjustments
|
|
-
|
|
|
|
15,413
|
|
Loss
on sale of loans
|
|
676
|
|
|
|
1,550
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
(12,684
|
)
|
|
|
(26,057
|
)
|
|
Accrued
interest payable
|
|
33,375
|
|
|
|
82,262
|
|
|
Other
|
|
2,469
|
|
|
|
(8,871
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
112,583
|
|
|
|
132,372
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Advances
made on loans
|
|
(6,018,988
|
)
|
|
|
(5,245,383
|
)
|
Principal
collected on loans
|
|
5,388,629
|
|
|
|
5,411,973
|
|
Net
investment in fixed assets
|
|
(16,426
|
)
|
|
|
(380
|
)
|
Net
cash provided by foreclosed assets
|
|
9,055
|
|
|
|
62,831
|
|
Net
proceeds from sale of foreclosed assets
|
|
-
|
|
|
|
487
|
|
Net
proceeds from sale of loans
|
|
73,972
|
|
|
|
364,100
|
|
Change
in restricted cash
|
|
(15,706
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by investing activities
|
|
(579,464
|
)
|
|
|
593,628
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from (repayments of) issuances of short-term debt, net
|
|
347,544
|
|
|
|
(266,334
|
)
|
Proceeds
from issuance of long-term debt, net
|
|
1,566,151
|
|
|
|
863,808
|
|
Payments
for retirement of long-term debt
|
|
(1,293,720
|
)
|
|
|
(592,485
|
)
|
Payments
for retirement of subordinated deferrable debt
|
|
(175,000
|
)
|
|
|
(150,000
|
)
|
Proceeds
from issuance of members' subordinated certificates
|
|
58,714
|
|
|
|
27,089
|
|
Payments
for retirement of members' subordinated certificates
|
|
(16,025
|
)
|
|
|
(27,886
|
)
|
Payments
for retirement of patronage capital
|
|
(77,378
|
)
|
|
|
(74,094
|
)
|
Payments
for retirement of RTFC patronage capital
|
|
(9,771
|
)
|
|
|
(12,414
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
400,515
|
|
|
|
(232,316
|
)
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
(66,366
|
)
|
|
|
493,684
|
|
BEGINNING
CASH AND CASH EQUIVALENTS
|
|
304,107
|
|
|
|
260,338
|
|
ENDING
CASH AND CASH EQUIVALENTS
|
$
|
237,741
|
|
|
$
|
754,022
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
*See
Note 1(j)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
For the
Nine Months Ended February 29, 2008 and February 28, 2007
|
|
February
29,
2008
|
|
|
|
February
28,
2007
(As
restated)*
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
$
|
673,387
|
|
|
$
|
655,678
|
|
|
Cash
paid for income taxes
|
|
1,088
|
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
*See
Note 1(j)
|
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 Columbia in 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 Dakota in September
1987. In February 2005, RTFC reincorporated as a not-for-profit
cooperative association in the District of Columbia. The principal
purpose of RTFC is to provide and arrange financing for its rural
telecommunications members and their affiliates. RTFC's results of
operations and financial condition are consolidated with those of 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 1,540 as of February 29, 2008 including
899 utility members, the majority of which are consumer-owned electric
cooperatives, 511 telecommunications members, 66 service members and 64
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 ("ARB") 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 February 29, 2008, National Rural had guaranteed $280
million of NCSC debt and derivative instruments with third
parties. The maturities for NCSC debt guaranteed by National Rural
run through 2031. As of February 29, 2008, National Rural's maximum
potential exposure totaled $298 million related to guarantees of NCSC debt and
derivatives. Guarantees related to NCSC debt and derivative
instruments are not included in Note 12 at February 29, 2008 as the debt and
derivatives are reported on the consolidated balance sheet. At
February 29, 2008, 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 February 29, 2008, RTFC
had total assets of $1,921 million including loans outstanding to members of
$1,727 million and NCSC had total assets of $465 million including loans
outstanding of $417 million. At February 29, 2008 and May 31, 2007,
National Rural had committed to lend RTFC up to $4 billion of which $2 billion
was outstanding at February 29, 2008. At February 29, 2008 and May
31, 2007, National Rural had committed to provide credit to NCSC of up to $1
billion. At February 29, 2008, National Rural had provided a total of
$461 million of credit to NCSC, representing $181 million of outstanding loans
and $280 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.
In accordance
with ARB 51, the Company presents the amount of subsidiary equity controlled by
unrelated parties as minority interest on the consolidated balance sheet and the
subsidiary earnings controlled by unrelated parties as minority interest on the
consolidated statement of operations
(c) Restricted
Cash
Restricted
cash represents cash and cash equivalents for which use is contractually
restricted. Restricted cash is disclosed separately on the balance
sheet. At February 29, 2008, the Company has four different contractual
restrictions on the use of certain cash. Three of the restricted cash
accounts totaling $16 million are related to the issuance of the Clean Renewable
Energy Bonds (“CREBs”) in February 2008. The fourth restricted cash
account represents cash pledged as collateral for collateral trust bonds issued
under the Company’s 1972 indenture. At May 31, 2007, the $2 million
of cash pledged as collateral under the 1972 indenture was the only restricted
cash, which was classified in other assets due to
immateriality.
Restricted
cash at February 29, 2008 represents:
·
|
cash
proceeds from the issuance of CREBs that may only be used for the funding
of CREBs loan advances to participating members to reimburse them for
costs related to qualifying
projects;
|
·
|
cash
proceeds from the issuance of CREBs that may only be used to reimburse the
Company for the costs of issuing the
CREBs;
|
·
|
cash
from principal payments from members on CREBs loans that may only be used
to make debt service payments to bond investors;
and
|
·
|
cash
held as collateral for the Company’s collateral trust bonds issued under
the 1972 indenture.
|
The
Company uses the proceeds from the issuance of CREBs to make loans to borrowers
for the construction, refinancing, and reimbursement of capital expenditures
related to qualified projects. These funds may be invested by the
Company. The interest earned is restricted and may only be used to
fund qualifying projects.
The
Company also uses the proceeds from the issuance of CREBs to cover all costs
associated with the issuance of the CREBs. These funds are held by
the trustee and may only be released to the Company to cover the cost of
issuance. The Company must submit invoices to support the issuance
cost for which it is seeking reimbursement. These funds may be
invested by the Company. The interest earned is restricted and may
only be used to cover issuance expenses and to fund qualifying
projects.
The
Company collects principal and interest payments from borrowers
quarterly. The Company may withdraw the interest collected on CREBs
loans at any time. The principal collected on CREBs loans may only be
used to repay principal to bond investors. These funds may be invested by
the Company. The interest earned is not restricted and may be
withdrawn by the Company at any time.
At
February 29, 2008 and May 31, 2007, $2 million of cash was pledged to secure the
Company’s collateral trust bonds under the 1972 indenture. This cash
is classified in restricted cash because the funds are on deposit with the
Company’s collateral trust bond trustee. These funds may be invested by the
Company. The interest earned is not restricted and may be withdrawn
by the Company at any time.
The
restricted cash may be invested by the Company. Interest earned on
the Company’s restricted cash is not restricted. Interest earned on
restricted cash accounts is presented as an operating activity in the statement
of cash flows. Changes in the principal balances of restricted cash
accounts are reported as investing activities in the statement of cash
flows.
(d) Allowance
for Loan Losses
The
Company maintains an allowance for loan losses at a level estimated by
management to adequately provide for probable losses inherent in the loan
portfolio, which are estimated based upon a review of the loan portfolio, past
loss experience, specific problem loans, economic conditions and other pertinent
factors which, in management's judgment, deserve current recognition in
estimating loan losses. On a quarterly basis, the Company prepares an analysis
of the adequacy of the loan loss allowance and makes adjustments to the
allowance as necessary. The allowance is based on estimates and,
accordingly, actual loan losses may differ from the allowance
amount.
Management
makes recommendations of loans to be written off to the board of directors of
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 nine months ended and as of
|
|
Year
ended and as of
|
(in
thousands)
|
February
29,
2008
|
|
|
February
28,
2007
|
|
May
31,
2007
|
Balance
at beginning of period
|
$
|
561,663
|
|
|
$
|
611,443
|
|
|
$
|
611,443
|
|
Recovery
of loan losses
|
|
(47,900
|
)
|
|
|
-
|
|
|
|
(6,922
|
)
|
Write-offs
|
|
(16,827
|
)
|
|
|
(397
|
)
|
|
|
(44,668
|
)
|
Recoveries
of prior write-offs
|
|
324
|
|
|
|
320
|
|
|
|
1,810
|
|
Balance
at end of period
|
$
|
497,260
|
|
|
$
|
611,366
|
|
|
$
|
561,663
|
|
(e) Interest
Income
Interest
income includes the following:
|
For
the three months ended
|
|
For
the nine months ended
|
(in
thousands)
|
February
29,
2008
|
|
February
28,
2007
|
|
February
29,
2008
|
|
February
28,
2007
|
Interest
on long-term fixed rate loans (1)
|
$
|
220,117
|
|
|
$
|
208,262
|
|
|
$
|
649,860
|
|
|
$
|
619,889
|
|
Interest
on long-term variable rate loans (1)
|
|
20,785
|
|
|
|
28,028
|
|
|
|
68,024
|
|
|
|
90,199
|
|
Interest
on short-term loans (1)
|
|
20,224
|
|
|
|
17,761
|
|
|
|
59,816
|
|
|
|
53,691
|
|
Interest
on investments (2)
|
|
1,832
|
|
|
|
2,626
|
|
|
|
6,668
|
|
|
|
6,075
|
|
Conversion
fees (3)
|
|
1,587
|
|
|
|
2,412
|
|
|
|
5,096
|
|
|
|
7,366
|
|
Make-whole
and prepayment fees (4)
|
|
533
|
|
|
|
3,368
|
|
|
|
2,287
|
|
|
|
4,193
|
|
Commitment
and guarantee fees (5)
|
|
822
|
|
|
|
1,658
|
|
|
|
3,742
|
|
|
|
7,127
|
|
Other
fees
|
|
676
|
|
|
|
758
|
|
|
|
2,324
|
|
|
|
1,266
|
|
Total
interest income
|
|
$
|
266,576
|
|
|
$
|
264,873
|
|
|
$
|
797,817
|
|
|
$
|
789,806
|
|
(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 $21 million and $25 million at February 29, 2008 and
May 31, 2007, respectively.
(f) Interest
Expense
Interest
expense includes the following:
|
For
the three months ended
|
|
For
the nine months ended
|
(in
thousands)
|
February
29,
2008
|
|
February
28,
2007
|
|
February
29,
2008
|
|
February
28,
2007
|
Interest
expense - commercial paper and bid notes (1)
|
$
|
30,639
|
|
|
$
|
38,758
|
|
|
$
|
102,117
|
|
|
$
|
134,760
|
|
Interest
expense - medium-term notes (1)
|
|
82,555
|
|
|
|
93,876
|
|
|
|
249,422
|
|
|
|
282,050
|
|
Interest
expense - collateral trust bonds (1)
|
|
61,213
|
|
|
|
56,069
|
|
|
|
189,968
|
|
|
|
156,629
|
|
Interest
expense - subordinated deferrable debt (1)
|
|
4,916
|
|
|
|
8,153
|
|
|
|
14,747
|
|
|
|
24,936
|
|
Interest
expense - subordinated certificates (1)
|
|
12,297
|
|
|
|
11,755
|
|
|
|
36,451
|
|
|
|
35,671
|
|
Interest
expense - long-term private debt (1)
|
|
34,359
|
|
|
|
29,180
|
|
|
|
100,102
|
|
|
|
89,484
|
|
Debt
issuance costs (2)
|
|
2,328
|
|
|
|
5,230
|
|
|
|
7,625
|
|
|
|
9,332
|
|
Commitment
and guarantee fees (3)
|
|
4,602
|
|
|
|
3,967
|
|
|
|
13,277
|
|
|
|
11,981
|
|
Loss
on extinguishment of debt (4)
|
|
-
|
|
|
|
-
|
|
|
|
5,509
|
|
|
|
4,806
|
|
Other
fees
|
|
559
|
|
|
|
453
|
|
|
|
1,592
|
|
|
|
2,387
|
|
Total
interest expense
|
|
$
|
233,468
|
|
|
$
|
247,441
|
|
|
$
|
720,810
|
|
|
$
|
752,036
|
|
(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.
(g) 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
|
|
For
the nine months ended
|
(in
thousands)
|
February
29,
2008
|
|
February
28,
2007
|
|
February
29,
2008
|
|
February
28,
2007
|
|
Net
(loss) income
|
$
|
(323
|
)
|
|
$
|
48,635
|
|
|
$
|
(41,931
|
)
|
|
$
|
(50,579
|
)
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized
gain on derivatives
|
|
(256
|
)
|
|
|
(251
|
)
|
|
|
(587
|
)
|
|
|
(753
|
)
|
|
Comprehensive
(loss) income
|
$
|
(579
|
)
|
|
$
|
48,384
|
|
|
$
|
(42,518
|
)
|
|
$
|
(51,332
|
)
|
|
(h) 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 February 29, 2008 presentation. The May
31, 2007 balance of cash held as collateral totaling $2 million was reclassified
from other assets to restricted cash on the consolidated balance sheet to
conform with the February 29, 2008 presentation.
(i) 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.
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and
Hedging Activities. This statement requires enhanced disclosures about an
entity’s derivative and hedging activities. The statement is
effective for fiscal years beginning after November 15, 2008. The
Company’s adoption of SFAS 161 is not expected to have a material impact on the
Company’s financial position or results of operations.
(j) 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 $10 million for the three and nine months ended
February 28, 2007, 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 line was understated by
$4 million and $11 million for the three and nine months ended February 28,
2007, respectively. The net income line was overstated by $4 million
for the three months ended February 28, 2007 and the net loss line was
understated by $11 million for the nine months ended February 28,
2007. 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 effects of the restatement on the consolidated statements of operations
for the three and nine months ended February 28, 2007 is as
follows:
|
|
For
the three months ended February 28, 2007
|
(in
thousands)
|
|
As
previously reported
|
|
Adjustment
|
|
As
restated
|
Interest
expense
|
$
|
(243,969
|
)
|
$
|
(3,472
|
)
|
$
|
(247,441
|
)
|
Net
interest income
|
|
20,904
|
|
|
(3,472
|
)
|
|
17,432
|
|
Net
interest income after recovery of loan losses
|
|
20,904
|
|
|
(3,472
|
)
|
|
17,432
|
|
Derivative
cash settlements
|
|
40,970
|
|
|
3,472
|
|
|
44,442
|
|
Total
non-interest income
|
|
43,283
|
|
|
3,472
|
|
|
46,755
|
|
Derivative
forward value
|
|
(583
|
)
|
|
(3,606
|
)
|
|
(4,189
|
)
|
Total
non-interest expense
|
|
(11,885
|
)
|
|
(3,606
|
)
|
|
(15,491
|
)
|
Income
prior to income taxes and minority interest
|
|
52,302
|
|
|
(3,606
|
)
|
|
48,696
|
|
Income
prior to minority interest
|
|
51,675
|
|
|
(3,606
|
)
|
|
48,069
|
|
Net
income
|
|
52,241
|
|
|
(3,606
|
)
|
|
48,635
|
|
|
|
For
the nine months ended February 28, 2007
|
|
(in
thousands)
|
|
As
previously reported
|
|
Adjustment
|
|
As
restated
|
|
Interest
expense
|
$
|
(741,685
|
)
|
$
|
(10,351
|
)
|
$
|
(752,036
|
)
|
Net
interest income
|
|
48,121
|
|
|
(10,351
|
)
|
|
37,770
|
|
Net
interest income after recovery of loan losses
|
|
48,121
|
|
|
(10,351
|
)
|
|
37,770
|
|
Derivative
cash settlements
|
|
65,839
|
|
|
10,351
|
|
|
76,190
|
|
Total
non-interest income
|
|
74,768
|
|
|
10,351
|
|
|
85,119
|
|
Derivative
forward value
|
|
(110,117
|
)
|
|
(10,662
|
)
|
|
(120,779
|
)
|
Total
non-interest expense
|
|
(164,623
|
)
|
|
(10,662
|
)
|
|
(175,285
|
)
|
Loss
prior to income taxes and minority interest
|
|
(41,734
|
)
|
|
(10,662
|
)
|
|
(52,396
|
)
|
Loss
prior to minority interest
|
|
(41,161
|
)
|
|
(10,662
|
)
|
|
(51,823
|
)
|
Net
loss
|
|
(39,917
|
)
|
|
(10,662
|
)
|
|
(50,579
|
)
|
(2)
|
Loans
and Commitments
|
Loans
outstanding to members and unadvanced commitments by loan type and by segment
are summarized as follows:
|
February
29, 2008
|
|
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
|
$
|
14,851,196
|
|
|
$
|
-
|
|
|
$
|
14,663,340
|
|
|
$
|
-
|
|
Long-term
variable rate loans
|
|
1,978,068
|
|
|
|
5,577,717
|
|
|
|
1,993,534
|
|
|
|
5,703,313
|
|
Loans
guaranteed by RUS
|
|
251,135
|
|
|
|
491
|
|
|
|
255,903
|
|
|
|
491
|
|
Short-term
loans
|
|
1,580,813
|
|
|
|
7,416,504
|
|
|
|
1,215,430
|
|
|
|
7,200,156
|
|
Total
loans outstanding
|
|
18,661,212
|
|
|
|
12,994,712
|
|
|
|
18,128,207
|
|
|
|
12,903,960
|
|
Deferred
origination fees
|
|
4,227
|
|
|
|
-
|
|
|
|
3,666
|
|
|
|
-
|
|
Less:
Allowance for loan losses
|
|
(497,260
|
)
|
|
|
-
|
|
|
|
(561,663
|
)
|
|
|
-
|
|
Net
loans
|
$
|
18,168,179
|
|
|
$
|
12,994,712
|
|
|
$
|
17,570,210
|
|
|
$
|
12,903,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
13,213,526
|
|
|
$
|
9,120,408
|
|
|
$
|
12,827,772
|
|
|
$
|
9,176,686
|
|
Power
supply
|
|
3,198,956
|
|
|
|
2,960,783
|
|
|
|
2,858,040
|
|
|
|
2,798,124
|
|
Statewide
and associate
|
|
104,258
|
|
|
|
129,415
|
|
|
|
119,478
|
|
|
|
139,156
|
|
National
Rural total
|
|
16,516,740
|
|
|
|
12,210,606
|
|
|
|
15,805,290
|
|
|
|
12,113,966
|
|
RTFC
|
|
1,727,344
|
|
|
|
488,081
|
|
|
|
1,860,379
|
|
|
|
473,762
|
|
NCSC
|
|
417,128
|
|
|
|
296,025
|
|
|
|
462,538
|
|
|
|
316,232
|
|
Total
loans outstanding
|
$
|
18,661,212
|
|
|
$
|
12,994,712
|
|
|
$
|
18,128,207
|
|
|
$
|
12,903,960
|
|
|
February
29, 2008
|
|
May
31, 2007
|
(in
thousands)
|
Loans
|
|
Unadvanced
|
|
Loans
|
|
Unadvanced
|
Non-performing and restructured
loans (2):
|
Outstanding
|
|
Commitments
(1)
|
|
Outstanding
|
|
Commitments
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
$
|
219,853
|
|
|
$
|
-
|
|
|
$
|
212,984
|
|
|
$
|
-
|
|
Long-term
variable rate loans
|
|
253,480
|
|
|
|
2,160
|
|
|
|
261,081
|
|
|
|
-
|
|
Short-term
loans
|
|
31,042
|
|
|
|
-
|
|
|
|
27,799
|
|
|
|
418
|
|
Total
non-performing loans
|
$
|
504,375
|
|
|
$
|
2,160
|
|
|
$
|
501,864
|
|
|
$
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
$
|
52,420
|
|
|
$
|
-
|
|
|
$
|
52,420
|
|
|
$
|
-
|
|
Long-term
variable rate loans
|
|
526,365
|
|
|
|
186,673
|
|
|
|
544,697
|
|
|
|
186,673
|
|
Short-term
loans
|
|
-
|
|
|
|
12,500
|
|
|
|
-
|
|
|
|
12,500
|
|
National
Rural total restructured loans
|
|
578,785
|
|
|
|
199,173
|
|
|
|
597,117
|
|
|
|
199,173
|
|
RTFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
|
5,710
|
|
|
|
-
|
|
|
|
6,188
|
|
|
|
-
|
|
Total
restructured loans
|
|
$
|
584,495
|
|
|
$
|
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)
Included in total by loan type chart above.
(3) Loans
are classified as long-term or short-term based on their original
maturity.
Loan
origination costs are deferred and amortized using the straight-line method,
which approximates the interest method, over the life of the loan as a reduction
to interest income.
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)
|
|
February
29, 2008
|
|
May
31, 2007
|
Total
by loan program:
|
|
Secured
|
|
%
|
|
Unsecured
|
|
%
|
|
Secured
|
|
%
|
|
Unsecured
|
|
%
|
|
Long-term
fixed rate loans
|
$
|
14,430,587
|
|
97%
|
$
|
420,609
|
|
3%
|
$
|
14,180,956
|
|
97%
|
$
|
482,384
|
|
3%
|
|
Long-term
variable rate loans
|
|
1,837,562
|
|
93%
|
|
140,506
|
|
7%
|
|
1,865,821
|
|
94%
|
|
127,713
|
|
6%
|
|
Loans
guaranteed by RUS
|
|
251,135
|
|
100%
|
|
-
|
|
-
|
|
255,903
|
|
100%
|
|
-
|
|
-
|
|
Short-term
loans
|
|
164,613
|
|
10%
|
|
1,416,200
|
|
90%
|
|
191,231
|
|
16%
|
|
1,024,199
|
|
84%
|
|
Total
loans
|
$
|
16,683,897
|
|
89%
|
$
|
1,977,315
|
|
11%
|
$
|
16,493,911
|
|
91%
|
$
|
1,634,296
|
|
9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
14,826,254
|
|
90%
|
$
|
1,690,486
|
|
10%
|
$
|
14,462,448
|
|
92%
|
$
|
1,342,842
|
|
8%
|
|
RTFC
|
|
1,497,634
|
|
87%
|
|
229,710
|
|
13%
|
|
1,630,079
|
|
88%
|
|
230,300
|
|
12%
|
|
NCSC
|
|
360,009
|
|
86%
|
|
57,119
|
|
14%
|
|
401,384
|
|
87%
|
|
61,154
|
|
13%
|
|
Total
loans
|
$
|
16,683,897
|
|
89%
|
$
|
1,977,315
|
|
11%
|
$
|
16,493,911
|
|
91%
|
$
|
1,634,296
|
|
9%
|
Pledging
of Loans
As of
February 29, 2008 and May 31, 2007, distribution system mortgage notes related
to outstanding long-term loans totaling $4,593 million and $5,797 million,
respectively, and RUS guaranteed loans qualifying as permitted investments
totaling $216 million and $219 million, respectively, were pledged as collateral
to secure National Rural's collateral trust bonds under the 1994 indenture
totaling $4,015 million and $5,020 million, respectively. Under the
2007 indenture, distribution system mortgage notes related to outstanding
long-term loans totaling $935 million as of February 29, 2008 were pledged as
collateral to secure National Rural's collateral trust bonds totaling $700
million. In addition, $2 million of cash was pledged to secure $2
million of collateral trust bonds outstanding under the 1972 indenture at
February 29, 2008 and May 31, 2007.
As of
February 29, 2008 and May 31, 2007, distribution system mortgage notes totaling
$577 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 February 29, 2008 and May 31,
2007, National Rural had $3,204 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 as part of the REDLG program (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 $3,204 million at February 29, 2008, would be pledged as collateral
rather than held on deposit. At February 29, 2008, 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 $1,848 million at February 29, 2008, 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.
(3) Loan
Securitizations
The
Company accounts for the sale of loans in securitization transactions according
to the provisions of SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, 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
Company recorded a loss on sale of loans totaling $0.7 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 has no obligation to repurchase loans from the
purchaser. The holders of the certificates of beneficial interest
issued by the purchaser have no claim against the Company 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 nine months ended February 29, 2008, the Company recognized $0.3
million and $0.9 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 February 29, 2008 and May 31, 2007, the balance of
foreclosed assets included real estate developer notes receivable and limited
partnership interests in certain real estate developments.
At
February 29, 2008, the Company determined that there was a reduction of $6
million to the market value of one of the land development loans held as a
foreclosed asset. The reduction to the market value was
primarily as a result of the slow down in lot sales due to residential home
market weakness.
The
activity for foreclosed assets is summarized below:
|
Nine
months ended
|
|
Year
ended
|
(in
thousands)
|
February
29, 2008
|
|
February
28, 2007
|
|
May
31, 2007
|
Beginning
balance
|
$
|
66,329
|
|
|
$
|
120,889
|
|
|
$
|
120,889
|
|
Results
of operations
|
|
6,217
|
|
|
|
7,887
|
|
|
|
9,758
|
|
Net
cash provided by foreclosed assets
|
|
(9,055
|
)
|
|
|
(62,831
|
)
|
|
|
(63,831
|
)
|
Market
adjustment
|
|
(5,840
|
)
|
|
|
-
|
|
|
|
-
|
|
Sale
of foreclosed assets
|
|
-
|
|
|
|
(487
|
)
|
|
|
(487
|
)
|
Ending
balance of foreclosed assets
|
$
|
57,651
|
|
|
$
|
65,458
|
|
|
$
|
66,329
|
|
(5) Short-Term
Debt and Credit Arrangements
The
following is a summary of short-term debt outstanding:
(in
thousands)
|
February
29, 2008
|
|
May
31, 2007
|
Short-term
debt:
|
|
|
|
|
|
|
|
Commercial
paper sold through dealers, net of discounts
|
$
|
1,479,506
|
|
|
$
|
1,017,879
|
|
Commercial
paper sold directly to members, at par
|
|
1,113,316
|
|
|
|
1,383,090
|
|
Commercial
paper sold directly to non-members, at par
|
|
141,582
|
|
|
|
133,087
|
|
Total
commercial paper
|
|
2,734,404
|
|
|
|
2,534,056
|
|
Daily
liquidity fund sold directly to members, at par
|
|
297,759
|
|
|
|
250,563
|
|
Bank
bid notes
|
|
200,000
|
|
|
|
100,000
|
|
Subtotal
short-term debt
|
|
3,232,163
|
|
|
|
2,884,619
|
|
Long-term
debt maturing within one year:
|
|
|
|
|
|
|
|
Medium-term
notes sold through dealers
|
|
595,748
|
|
|
|
133,801
|
|
Medium-term
notes sold to members
|
|
281,437
|
|
|
|
231,158
|
|
Secured
collateral trust bonds
|
|
1,824,993
|
|
|
|
999,560
|
|
Secured
notes payable
|
|
500,000
|
|
|
|
-
|
|
Subordinated
deferrable debt (1)
|
|
-
|
|
|
|
175,000
|
|
Unsecured
notes payable
|
|
4,788
|
|
|
|
2,985
|
|
Total
long-term debt maturing within one year
|
|
3,206,966
|
|
|
|
1,542,504
|
|
Total
short-term debt
|
|
$
|
6,439,129
|
|
|
$
|
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)
|
|
February
29,
2008
|
|
|
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.
Upfront
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 February 29, 2008,
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 February 29, 2008.
At
February 29, 2008 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 periods ended February 29, 2008
and May 31, 2007:
|
Actual
|
|
Requirement
|
|
February
29, 2008
|
|
May
31, 2007
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
1.025
|
|
1.16
|
|
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
|
|
7.26
|
|
6.65
|
|
(1) The
Company must meet this requirement in order to retire patronage
capital. The adjusted TIER reported at February 29, 2008 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.
Subsequent
to the end of the quarter, the 364-day revolving credit agreement in place at
February 29, 2008 totaling $1,125 million was replaced on March 14, 2008 with a
new 364-day agreement totaling $1,500 million expiring on March 13,
2009. Any amount outstanding under the new 364-day agreement may be
converted to a one-year term loan at the end of the revolving credit period with
a 0.10 of 1% per annum fee on the outstanding principal amount of the term
loan. The facility fee for the 364-day facility is 0.05 of 1% per
annum based on the pricing schedule in place at March 14,
2008. Upfront fees of $147,000 were paid to the
banks
based on
their commitment level to the 364-day agreement. The agreement
contains a provision under which if borrowings exceed 50% of total commitments,
a utilization fee of 0.05 of 1% must be paid on the outstanding
balance. National Rural's five-year agreement totaling $1,025 million
is still in effect and expires on March 22, 2011. National Rural's
five-year agreement totaling $1,125 million is still in effect and expires on
March 16, 2012. The total committed credit available under these
three current facilities was $3,650 million at March 14, 2008.
(6) Long-Term
Debt
The
following is a summary of long-term debt outstanding:
(in
thousands)
|
February
29,
2008
|
|
May
31,
2007
|
Unsecured
long-term debt:
|
|
|
|
|
|
|
|
Medium-term
notes, sold through dealers
|
$
|
4,216,284
|
|
|
$
|
4,676,176
|
|
Medium-term
notes, sold directly to members
|
|
76,632
|
|
|
|
76,464
|
|
Subtotal
|
|
4,292,916
|
|
|
|
4,752,640
|
|
Unamortized
discount
|
|
(5,984
|
)
|
|
|
(7,408
|
)
|
Total
unsecured medium-term notes
|
|
4,286,932
|
|
|
|
4,745,232
|
|
|
|
|
|
|
|
|
|
Unsecured
notes payable
|
|
2,559,612
|
|
|
|
2,032,630
|
|
Total
unsecured long-term debt
|
|
6,846,544
|
|
|
|
6,777,862
|
|
|
|
|
|
|
|
|
|
Secured
long-term debt:
|
|
|
|
|
|
|
|
Collateral
trust bonds
|
|
2,891,927
|
|
|
|
4,021,953
|
|
Unamortized
discount
|
|
(5,569
|
)
|
|
|
(4,596
|
)
|
Total
secured collateral trust bonds
|
|
2,886,358
|
|
|
|
4,017,357
|
|
|
|
|
|
|
|
|
|
Secured
notes payable
|
|
-
|
|
|
|
500,000
|
|
Total
secured long-term debt
|
|
2,886,358
|
|
|
|
4,517,357
|
|
Total
long-term debt
|
$
|
9,732,902
|
|
|
$
|
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
February 29, 2008 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 February 29, 2008, 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)
|
February
29,
2008
|
|
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 February 29, 2008 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)
|
|
February
29, 2008
|
|
May
31, 2007
|
Pay
fixed and receive variable
|
$
|
7,700,865
|
$
|
7,276,473
|
Pay
variable and receive fixed
|
|
5,256,440
|
|
5,256,440
|
Total
interest rate exchange agreements
|
$
|
12,957,305
|
$
|
12,532,913
|
The
Company classifies 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
|
|
Nine
months ended
|
(in
thousands)
|
|
February
29,
2008
|
|
February
28,
2007
|
|
February
29,
2008
|
|
February
28,
2007
|
Statement
of Operations Impact
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreements
that do not qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
|
$
|
10,463
|
|
|
$
|
41,527
|
|
|
$
|
30,299
|
|
|
$
|
67,529
|
|
Derivative
forward value
|
|
|
(64,266
|
)
|
|
|
(770
|
)
|
|
|
(173,278
|
)
|
|
|
(127,318
|
)
|
Total
(loss) gain on interest rate exchange agreements
|
|
$
|
(53,803
|
)
|
|
$
|
40,757
|
|
|
$
|
(142,979
|
)
|
|
$
|
(59,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income Impact
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of transition adjustment
|
|
$
|
(256
|
)
|
|
$
|
(251
|
)
|
|
$
|
(587
|
)
|
|
$
|
(753
|
)
|
Total
comprehensive loss
|
|
$
|
(256
|
)
|
|
$
|
(251
|
)
|
|
$
|
(587
|
)
|
|
$
|
(753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 February
29, 2008 and May 31, 2007. As of February 28, 2007, 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
|
|
Nine
months ended
|
(in
thousands)
|
|
February
29,
2008
|
|
February
28,
2007
|
|
February
29,
2008
|
|
February
28,
2007
|
Statement
of Operations Impact
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreements
that do not qualify for hedge accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
|
$
|
-
|
|
|
$
|
2,915
|
|
|
$
|
-
|
|
|
$
|
8,661
|
|
Derivative
forward value
|
|
|
-
|
|
|
|
(3,419
|
)
|
|
|
-
|
|
|
|
6,539
|
|
Total
(loss) gain on interest rate exchange agreements
|
|
$
|
-
|
|
|
$
|
(504
|
)
|
|
$
|
-
|
|
|
$
|
15,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
February 29, 2008, the Company had 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+
|
|
$
|
1,739,419
|
|
|
$
|
(45,283)
|
|
|
$
|
82,534
|
|
|
$
|
37,251
|
|
Fall
below Baa1/BBB+
|
|
|
7,183,620
|
|
|
|
(203,636)
|
|
|
|
136,855
|
|
|
|
(66,781
|
)
|
Total
|
|
$
|
8,923,039
|
|
|
$
|
(248,919)
|
|
|
$
|
219,389
|
|
|
$
|
(29,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
February 29, 2008, the net obligation totaled $18 million for the $718 million
notional amount of exchange agreements 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% semi-annually. The weighted average maturity for all membership
subordinated certificates outstanding at February 29, 2008 and May 31, 2007 was
68 years and 69 years, respectively.
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
February 29, 2008 and May 31, 2007, the Company reported minority interests of
$12 million and $22 million, respectively, on the consolidated balance
sheets. Minority interest represents 100% of RTFC and NCSC equity as
the members of RTFC and NCSC own or control 100% of the interest in their
respective companies.
During
the nine months ended February 29, 2008, NCSC’s net loss of $10.1 million
exceeded its equity balance by $1.6 million, which eliminated the minority
interest equity in NCSC. In accordance with ARB 51, Consolidated
Financial Statements, National Rural is required to absorb the $1.6 million NCSC
excess loss. NCSC’s losses during the nine months ended February 29,
2008 were primarily due to its $18 million in derivative forward value
losses. NCSC’s equity balance included in minority interest on the
consolidated balance sheets was $8.6 million at May 31, 2007.
Minority
interest at February 29, 2008 also decreased due to the retirement of $2 million
of patronage capital to RTFC members in January 2008.
(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
February 29, 2008 and May 31, 2007, equity included the following
components:
(in
thousands)
|
February
29,
2008
|
|
May
31,
2007
|
Membership
fees
|
$
|
994
|
|
|
$
|
997
|
|
Education
fund
|
|
709
|
|
|
|
1,406
|
|
Members'
capital reserve
|
|
158,348
|
|
|
|
158,308
|
|
Allocated
net income
|
|
320,064
|
|
|
|
405,598
|
|
Unallocated
net income (1)
|
|
113,440
|
|
|
|
(23
|
)
|
Total
members' equity
|
|
593,555
|
|
|
|
566,286
|
|
Prior
years cumulative derivative forward
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
131,551
|
|
|
|
225,849
|
|
Current
period derivative forward value (2)
|
|
(155,394
|
)
|
|
|
(79,744
|
)
|
Current
period foreign currency adjustments
|
|
-
|
|
|
|
(14,554
|
)
|
Total
retained equity
|
|
569,712
|
|
|
|
697,837
|
|
Accumulated
other comprehensive income
|
|
11,617
|
|
|
|
12,204
|
|
Total
equity
|
|
$
|
581,329
|
|
|
$
|
710,041
|
|
(1)
Excludes derivative forward value and foreign currency
adjustments. Unallocated net income at February 29, 2008 includes
National Rural’s obligation to absorb NCSC losses in excess of their equity
balance totaling $1.6 million.
(2)
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 February 29, 2008 and May 31, 2007, the
Company had recorded a guarantee liability totaling $14 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 February 29, 2008 and May 31, 2007 totaled $9 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 February 29, 2008 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 using the
straight-line method into interest income over the term of the
guarantees.
Activity
in the guarantee liability account is summarized below:
|
|
For
the nine months ended
|
|
|
Year
ended
|
|
(in
thousands)
|
|
February
29,
2008
|
|
|
February
28,
2007
|
|
|
May
31,
2007
|
|
Beginning
balance
|
$
|
18,929
|
|
|
$
|
16,750
|
|
$
|
16,750
|
|
Net
change in non-contingent liability
|
|
(971
|
)
|
|
|
1,527
|
|
|
3,879
|
|
(Recovery
of) provision for contingent guarantee losses
|
|
(4,300
|
)
|
|
|
400
|
|
|
(1,700
|
)
|
Ending
balance
|
$
|
13,658
|
|
|
$
|
18,677
|
|
$
|
18,929
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
as a percentage of total guarantees
|
|
1.29
|
%
|
|
|
1.58
|
%
|
|
1.76
|
%
|
The
following chart summarizes total guarantees by type and segment:
(in
thousands)
|
February
29, 2008
|
|
|
May
31, 2007
|
Total
by type:
|
|
|
|
|
|
|
Long-term
tax exempt bonds (1)
|
$
|
499,605
|
|
|
$
|
526,185
|
Indemnifications
of tax benefit transfers (2)
|
|
97,393
|
|
|
|
107,741
|
Letters
of credit (3)
|
|
381,436
|
|
|
|
365,766
|
Other
guarantees (4)
|
|
80,415
|
|
|
|
74,682
|
Total
|
$
|
1,058,849
|
|
|
$
|
1,074,374
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
Distribution
|
$
|
203,591
|
|
|
$
|
211,320
|
Power
supply
|
|
763,226
|
|
|
|
797,009
|
Statewide
and associate
|
|
23,655
|
|
|
|
25,359
|
National
Rural total
|
|
990,472
|
|
|
|
1,033,688
|
RTFC
|
|
260
|
|
|
|
-
|
NCSC
|
|
68,117
|
|
|
|
40,686
|
Total
|
|
$
|
1,058,849
|
|
|
$
|
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 February 29, 2008 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, $261 million and $277 million as of February 29, 2008 and
May 31, 2007, respectively, are adjustable or floating/fixed rate bonds that 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. In addition to these tax-exempt bonds, National Rural was
the guarantor, but not liquidity provider, for $224 million of tax-exempt bonds
that were in the auction rate mode at February 29, 2008 and May 31,
2007. National Rural is unable to determine the maximum amount of
interest that it could be required to pay related to the adjustable, floating
and auction rate bonds. As of February 29, 2008, National Rural's
maximum potential exposure for the $15 million of fixed rate tax-exempt bonds is
$22 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 $6 million at February 29, 2008 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 February 29, 2008, the Company's maximum potential
exposure is $381 million, of which $239 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 $49 million of letters of credit would be reduced to $14
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 $402 million in letters
of credit to third parties for the benefit of its members at February 29,
2008. 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
February 29, 2008, $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
February 29, 2008 and May 31, 2007, National Rural had a total of $219 million
and $221 million of guarantees, respectively, representing 21% of total
guarantees at each date under which its right of recovery from its members was
not secured.
(13) Restructured
/Non-performing Loans and Contingencies
The
Company had the following loans outstanding classified as non-performing and
restructured:
(in
thousands)
|
|
|
February
29, 2008
|
|
May
31, 2007
|
|
February
28, 2007
|
Non-performing
loans
|
|
$
|
504,375
|
$
|
501,864
|
$
|
541,510
|
Restructured
loans
|
|
|
584,495
|
|
603,305
|
|
609,570
|
Total
|
|
$
|
1,088,870
|
$
|
1,105,169
|
$
|
1,151,080
|
(a) At
February 29, 2008, May 31, 2007 and February 28, 2007, all loans classified as
non-performing were on non-accrual status with respect to the recognition of
interest income. At February 29, 2008 and May 31, 2007, $526 million
and $545 million, respectively, of restructured loans were on non-accrual status
with respect to the recognition of interest income. At February 28,
2007, there were $551 million of restructured loans on non-accrual
status. A total of $1 million and $3 million of interest income was
accrued on restructured loans during the three and nine months, respectively,
ended February 29, 2008 and February 28, 2007.
Interest
income was reduced as follows as a result of holding loans on non-accrual
status:
|
Three
months ended
|
|
Nine
months ended
|
(in
thousands)
|
February
29,
2008
|
|
February
28,
2007
|
|
February
29,
2008
|
|
February
28,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans
|
$
|
8,166
|
|
|
$
|
10,297
|
|
|
$
|
25,893
|
|
|
$
|
31,200
|
|
Restructured
loans
|
|
8,168
|
|
|
|
9,828
|
|
|
|
26,479
|
|
|
|
29,640
|
|
Total
|
$
|
16,334
|
|
|
$
|
20,125
|
|
|
$
|
52,372
|
|
|
$
|
60,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) The
Company classified $1,083 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 February 29, 2008
and May 31, 2007, respectively. The Company reserved $317 million and
$397 million of the loan loss allowance for such impaired loans at February 29,
2008 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 $3 million of interest income on impaired
loans for the three and nine months ended February 29, 2008,
respectively. The Company accrued a total of $1 million and $3
million of interest income on impaired loans for the three and nine months ended
February 28, 2007, respectively. The average recorded investment in
impaired loans for the nine months ended February 29, 2008 and February 28, 2007
was $1,088 million and $1,150 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
February 29, 2008 and May 31, 2007, National Rural had a total of $526 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 February 29, 2008 and May 31, 2007. Total loans to CoServ at
February 29, 2008 and May 31, 2007 represented 2.8% and 2.9% respectively, 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
February 29, 2008, a total of $20 million was outstanding 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 February 29, 2008.
(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.
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. At February 29, 2008, the Company had a
receivable for $3 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.
(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
February 29, 2008 and May 31, 2007, RTFC had $498 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. The Court has
entered an order approving certain sale motions presented 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 has closed, with net proceeds of
approximately $2.2 million.
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 February 29, 2008.
(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 February 29, 2008 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 February 29, 2008. 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 February 29, 2008.
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
nine months ended February 29, 2008 and February 28, 2007 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 nine
months ended February 29, 2008 and consolidating balance sheet information as of
February 29, 2008.
(in
thousands)
|
National
Rural
|
|
RTFC
|
|
NCSC
|
|
Consolidated
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
702,284
|
|
|
$
|
69,152
|
|
|
$
|
26,381
|
|
|
$
|
797,817
|
|
Interest
expense
|
|
(633,472
|
)
|
|
|
(65,041
|
)
|
|
|
(22,297
|
)
|
|
|
(720,810
|
)
|
Net
interest income
|
|
68,812
|
|
|
|
4,111
|
|
|
|
4,084
|
|
|
|
77,007
|
|
Recovery
of loan losses
|
|
47,777
|
|
|
|
-
|
|
|
|
123
|
|
|
|
47,900
|
|
Net
interest income after recovery of loan losses
|
|
116,589
|
|
|
|
4,111
|
|
|
|
4,207
|
|
|
|
124,907
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
604
|
|
|
|
-
|
|
|
|
466
|
|
|
|
1,070
|
|
Derivative
cash settlements
|
|
30,572
|
|
|
|
-
|
|
|
|
(273
|
)
|
|
|
30,299
|
|
Results
of operations of foreclosed assets
|
|
6,217
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,217
|
|
Total
non-interest income
|
|
37,393
|
|
|
|
-
|
|
|
|
193
|
|
|
|
37,586
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(36,719
|
)
|
|
|
(3,792
|
)
|
|
|
(2,816
|
)
|
|
|
(43,327
|
)
|
Recovery
of guarantee liability
|
|
4,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,300
|
|
Market
adjustment on foreclosed assets
|
|
(5,840
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,840
|
)
|
Derivative
forward value
|
|
(155,395
|
)
|
|
|
-
|
|
|
|
(17,883
|
)
|
|
|
(173,278
|
)
|
Loss
on sale of loans
|
|
(676
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(676
|
)
|
Total
non-interest expense
|
|
(194,330
|
)
|
|
|
(3,792
|
)
|
|
|
(20,699
|
)
|
|
|
(218,821
|
)
|
|
|
(Loss)
income prior to income taxes and minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
(40,348
|
)
|
|
|
319
|
|
|
|
(16,299
|
)
|
|
|
(56,328
|
)
|
Income
taxes
|
|
-
|
|
|
|
(1
|
)
|
|
|
6,187
|
|
|
|
6,186
|
|
Net
(loss) income per segment reporting
|
$
|
(40,348
|
)
|
|
$
|
318
|
|
|
$
|
(10,112
|
)
|
|
$
|
(50,142
|
)
|
|
|
Reconciliation
of net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(50,142
|
)
|
Minority
interest, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,211
|
|
Net
loss per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(41,931
|
)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
$
|
16,516,740
|
|
|
$
|
1,727,344
|
|
|
$
|
417,128
|
|
|
$
|
18,661,212
|
|
Deferred
origination fees
|
|
4,227
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,227
|
|
Less: Allowance
for loan losses
|
|
(496,891
|
)
|
|
|
-
|
|
|
|
(369
|
)
|
|
|
(497,260
|
)
|
Loans
to members, net
|
|
16,024,076
|
|
|
|
1,727,344
|
|
|
|
416,759
|
|
|
|
18,168,179
|
|
Other
assets
|
|
849,970
|
|
|
|
193,518
|
|
|
|
48,011
|
|
|
|
1,091,499
|
|
Total
assets
|
$
|
16,874,046
|
|
|
$
|
1,920,862
|
|
|
$
|
464,770
|
|
|
$
|
19,259,678
|
|
The
following chart contains the consolidating statement of operations for the nine
months ended February 28, 2007 and consolidating balance sheet information at
February 28, 2007.
(in
thousands)
|
National
Rural
|
|
RTFC
|
|
NCSC
|
|
Consolidated
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
685,758
|
|
|
$
|
81,070
|
|
|
$
|
22,978
|
|
|
$
|
789,806
|
|
|
Interest
expense
|
|
(656,005
|
)
|
|
|
(76,110
|
)
|
|
|
(19,921
|
)
|
|
|
(752,036
|
)
|
|
Net
interest income
|
|
29,753
|
|
|
|
4,960
|
|
|
|
3,057
|
|
|
|
37,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
29,753
|
|
|
|
4,960
|
|
|
|
3,057
|
|
|
|
37,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
570
|
|
|
|
-
|
|
|
|
472
|
|
|
|
1,042
|
|
|
Derivative
cash settlements
|
|
75,927
|
|
|
|
-
|
|
|
|
263
|
|
|
|
76,190
|
|
|
Results
of operations of foreclosed assets
|
|
7,887
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,887
|
|
|
Total
non-interest income
|
|
84,384
|
|
|
|
-
|
|
|
|
735
|
|
|
|
85,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(30,698
|
)
|
|
|
(4,007
|
)
|
|
|
(2,438
|
)
|
|
|
(37,143
|
)
|
|
Provision
for guarantee liability
|
|
(400
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(400
|
)
|
|
Derivative
forward value
|
|
(116,654
|
)
|
|
|
-
|
|
|
|
(4,125
|
)
|
|
|
(120,779
|
)
|
|
Foreign
currency adjustments
|
|
(15,413
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,413
|
)
|
|
Loss
on sale of loans
|
|
(1,550
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,550
|
)
|
|
Total
non-interest expense
|
|
(164,715
|
)
|
|
|
(4,007
|
)
|
|
|
(6,563
|
)
|
|
|
(175,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income prior to income taxes and minority interest
|
|
(50,578
|
)
|
|
|
953
|
|
|
|
(2,771
|
)
|
|
|
(52,396
|
)
|
|
Income
taxes
|
|
-
|
|
|
|
(479
|
)
|
|
|
1,052
|
|
|
|
573
|
|
|
Net
(loss) income per segment reporting
|
$
|
(50,578
|
)
|
|
$
|
474
|
|
|
$
|
(1,719
|
)
|
|
$
|
(51,823
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(51,823
|
)
|
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,244
|
|
|
Net
loss per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(50,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
$
|
15,556,390
|
|
|
$
|
1,929,552
|
|
|
$
|
342,646
|
|
|
$
|
17,828,588
|
|
|
Deferred
origination fees
|
|
3,353
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,353
|
|
|
Less: Allowance
for loan losses
|
|
(610,778
|
)
|
|
|
-
|
|
|
|
(588
|
)
|
|
|
(611,366
|
)
|
|
Loans
to members, net
|
|
14,948,965
|
|
|
|
1,929,552
|
|
|
|
342,058
|
|
|
|
17,220,575
|
|
|
Other
assets
|
|
1,466,705
|
|
|
|
221,327
|
|
|
|
32,437
|
|
|
|
1,720,469
|
|
|
Total
assets
|
$
|
16,415,670
|
|
|
$
|
2,150,879
|
|
|
$
|
374,495
|
|
|
$
|
18,941,044
|
|
|
The
following chart contains the consolidating statement of operations for the three
months ended February 29, 2008.
(in
thousands)
|
National
Rural
|
|
RTFC
|
|
NCSC
|
|
Consolidated
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
236,494
|
|
|
$
|
21,786
|
|
|
$
|
8,296
|
|
|
$
|
266,576
|
|
Interest
expense
|
|
(206,308
|
)
|
|
|
(20,490
|
)
|
|
|
(6,670
|
)
|
|
|
(233,468
|
)
|
Net
interest income
|
|
30,186
|
|
|
|
1,296
|
|
|
|
1,626
|
|
|
|
33,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of loan losses
|
|
33,476
|
|
|
|
-
|
|
|
|
123
|
|
|
|
33,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after recovery of loan losses
|
|
63,662
|
|
|
|
1,296
|
|
|
|
1,749
|
|
|
|
66,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
215
|
|
|
|
-
|
|
|
|
152
|
|
|
|
367
|
|
Derivative
cash settlements
|
|
10,893
|
|
|
|
-
|
|
|
|
(430
|
)
|
|
|
10,463
|
|
Results
of operations of foreclosed assets
|
|
2,401
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,401
|
|
Total
non-interest income
|
|
13,509
|
|
|
|
-
|
|
|
|
(278
|
)
|
|
|
13,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(12,865
|
)
|
|
|
(1,413
|
)
|
|
|
(982
|
)
|
|
|
(15,260
|
)
|
Recovery
of guarantee liability
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
Market
adjustment on foreclosed assets
|
|
(5,840
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,840
|
)
|
Derivative
forward value
|
|
(58,048
|
)
|
|
|
-
|
|
|
|
(6,218
|
)
|
|
|
(64,266
|
)
|
Loss
on whole loan sale
|
|
(158
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(158
|
)
|
Total
non-interest expense
|
|
(75,911
|
)
|
|
|
(1,413
|
)
|
|
|
(7,200
|
)
|
|
|
(84,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes and minority
interest
|
|
1,260
|
|
|
|
(117
|
)
|
|
|
(5,729
|
)
|
|
|
(4,586
|
)
|
Income
taxes
|
|
-
|
|
|
|
-
|
|
|
|
2,175
|
|
|
|
2,175
|
|
Net
income (loss) per segment reporting
|
$
|
1,260
|
|
|
$
|
(117
|
)
|
|
$
|
(3,554
|
)
|
|
$
|
(2,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,411
|
)
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,088
|
|
Net
loss per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(323
|
)
|
The
following chart contains the consolidating statement of operations for the three
months ended February 28, 2007.
(in
thousands)
|
National
Rural
|
|
RTFC
|
|
NCSC
|
|
Consolidated
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
231,519
|
|
|
$
|
25,668
|
|
|
$
|
7,686
|
|
|
$
|
264,873
|
|
|
Interest
expense
|
|
(217,047
|
)
|
|
|
(24,056
|
)
|
|
|
(6,338
|
)
|
|
|
(247,441
|
)
|
|
Net
interest income
|
|
14,472
|
|
|
|
1,612
|
|
|
|
1,348
|
|
|
|
17,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
14,472
|
|
|
|
1,612
|
|
|
|
1,348
|
|
|
|
17,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
263
|
|
|
|
-
|
|
|
|
154
|
|
|
|
417
|
|
|
Derivative
cash settlements
|
|
44,371
|
|
|
|
-
|
|
|
|
71
|
|
|
|
44,442
|
|
|
Results
of operations of foreclosed assets
|
|
1,896
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,896
|
|
|
Total
non-interest income
|
|
46,530
|
|
|
|
-
|
|
|
|
225
|
|
|
|
46,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(9,438
|
)
|
|
|
(1,467
|
)
|
|
|
(733
|
)
|
|
|
(11,638
|
)
|
|
Provision
for guarantee liability
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Derivative
forward value
|
|
(3,264
|
)
|
|
|
-
|
|
|
|
(925
|
)
|
|
|
(4,189
|
)
|
|
Foreign
currency adjustments
|
|
1,886
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,886
|
|
|
Loss
on sale of loans
|
|
(1,550
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,550
|
)
|
|
Total
non-interest expense
|
|
(12,366
|
)
|
|
|
(1,467
|
)
|
|
|
(1,658
|
)
|
|
|
(15,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes and minority
interest
|
|
48,636
|
|
|
|
145
|
|
|
|
(85
|
)
|
|
|
48,696
|
|
|
Income
taxes
|
|
-
|
|
|
|
(659
|
)
|
|
|
32
|
|
|
|
(627
|
)
|
|
Net
income (loss) per segment reporting
|
$
|
48,636
|
|
|
$
|
(514
|
)
|
|
$
|
(53
|
)
|
|
$
|
48,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,069
|
|
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
566
|
|
|
Net
income per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,635
|
|
|
(15) Subsequent
Events
In March
2008, the Company sold to Farmer Mac $400 million of floating rate debt due
in 2013 and secured by the pledge of National Rural distribution system mortgage
notes.
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 $10 million for the three
and nine months ended February 28, 2007, 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 line was understated by $4 million and $11 million for the three and nine
months ended February 28, 2007, respectively. The net income line was
overstated by $4 million for the three months ended February 28, 2007 and the
net loss line was understated by $11 million for the nine months ended February
28, 2007. 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 57 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
nine months ended February 29, 2008, the Company reported a net loss of $42
million compared to a net loss of $51 million for the prior year period; thus,
the TIER calculation for both periods results in a value below
1.00. For the nine months ended February 29, 2008, the Company
reported an adjusted net income of $123 million and adjusted TIER of 1.18,
compared to an adjusted net income of $84 million and adjusted TIER of 1.12 for
the prior year period. The $39 million increase in the adjusted net
income during the nine months ended February 29, 2008 was primarily due to the
recovery of loan losses resulting from the decrease in calculated impairments
due to lower variable rates and payments received on impaired
loans. 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 nine months ended February 29, 2008, 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 $52 million and $61 million to
reported interest income for the nine months ended February 29, 2008 and 2007,
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 February 29, 2008, an increase or decrease of 25
basis points to the Company's variable interest rates results in an increase or
decrease of approximately $9 million, respectively, to the calculated impairment
on loans irrespective of a change in the credit fundamentals of the impaired
borrower. On April 1, 2008, National Rural lowered variable interest
rates by 40 basis points which will result in a reduction of approximately $15
million to the calculated impairment on loans.
Financial
Condition
At
February 29, 2008, the Company's total loans outstanding increased by $533
million or 3% from May 31, 2007. At February 29, 2008, National Rural
loans outstanding increased by $711 million, RTFC loans outstanding decreased by
$133 million, and NCSC loans outstanding decreased by $45 million compared to
May 31, 2007. National Rural loans outstanding increased due to net
advances of $785 million offset by the sale of $74 million of National Rural
distribution loans at par in loan securitization transactions during the nine
months ended February 29, 2008. National Rural expects to continue
such loan sales on a periodic basis. RUS recently suspended a
low-interest lending program for rural electric cooperatives seeking federal
assistance to build new coal-fired power plants. The lack of RUS
funding for new coal-fired power plants contributed to an increase in National
Rural’s power supply loans at February 29, 2008. 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 nine months ended February 29, 2008, short-term debt increased by $2,012
million and long-term debt decreased by $1,562 million primarily due to an
increase of $1,664 million to the amount of long-term debt that will mature in
the next twelve months. Holders of $2,140 million of the Company’s
extendible debt elected not to extend the maturity during the nine months ended
February 29, 2008. As a result, $1,845 million of extendible debt was
reclassified from long-term debt to short-term debt based on maturity dates
ranging from August 2008 through February 2009. The remaining $295
million of extendible debt will mature in fiscal year
2010. Additionally, $500 million of secured notes payable was
reclassified to short-term debt based on the July 2008 maturity of the
debt.
The
decrease in long-term debt was offset by the issuance of $700 million of 5.45%
collateral trust bonds due 2018 in January 2008 and an additional $500 million
borrowed under the Rural Economic Development Loan and Grant (“REDLG”) program
in August 2007.
Total
equity decreased $129 million from May 31, 2007 to February 29, 2008 due to the
board authorized patronage capital retirement totaling $86 million and a net
loss of $42 million for the nine months ended February 29,
2008. 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
February 29, 2008, the Company had $3,232 million of commercial paper, daily
liquidity fund and bank bid notes and $3,207 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 $1,411 million or approximately 47% of the
total commercial paper outstanding at February 29, 2008. Commercial
paper issued through dealers and bank bid notes totaled $1,680 million and
represented 9% of total debt outstanding at February 29, 2008. 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 $3,207 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
registration statements on file with the SEC. The Company qualifies
as a well-known seasoned issuer under SEC rules.
At
February 29, 2008, the Company was the guarantor and liquidity provider for $261
million of tax-exempt bonds issued for its member cooperatives. A
total of $133 million of such tax-exempt bonds were in flexible and weekly mode,
which reprice every seven to thirty-five days. A total of $51 million
of such tax-exempt bonds reprice semi-annually. A total of $77
million of such bonds were in unit price mode and reprice approximately every 30
days. National Rural has not been required to purchase any of the
bonds in its role as liquidity provider. In addition to these
tax-exempt bonds, National Rural was the guarantor, but not liquidity provider,
for $224 million of tax-exempt bonds that were in the auction rate
mode. National Rural has not been required to perform under the
guarantee of its members’ tax-exempt bonds.
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.
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and
Hedging Activities. This statement requires enhanced disclosures about an
entity’s derivative and hedging activities. The statement is
effective for fiscal years beginning after November 15, 2008. The
Company’s adoption of SFAS 161 is not expected to have a material impact on the
Company’s financial position or results of operations.
Results
of Operations
Nine
Months Ended February 29, 2008 versus February 28, 2007
The
following chart presents the results of operations for the nine months ended
February 29, 2008 versus February 28, 2007.
|
For
the nine months ended
|
|
|
(Dollar
amounts in thousands)
|
February
29,
2008
|
|
February
28,
2007
|
|
Increase/
(Decrease)
|
Interest
income
|
$
|
797,817
|
|
|
$
|
789,806
|
|
|
$
|
8,011
|
|
Interest
expense
|
|
(720,810
|
)
|
|
|
(752,036
|
)
|
|
|
31,226
|
|
Net
interest income
|
|
77,007
|
|
|
|
37,770
|
|
|
|
39,237
|
|
Recovery
of loan losses
|
|
47,900
|
|
|
|
-
|
|
|
|
47,900
|
|
Net
interest income after recovery of loan losses
|
|
124,907
|
|
|
|
37,770
|
|
|
|
87,137
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
1,070
|
|
|
|
1,042
|
|
|
|
28
|
|
Derivative
cash settlements
|
|
30,299
|
|
|
|
76,190
|
|
|
|
(45,891
|
)
|
Results
of operations of foreclosed assets
|
|
6,217
|
|
|
|
7,887
|
|
|
|
(1,670
|
)
|
Total
non-interest income
|
|
37,586
|
|
|
|
85,119
|
|
|
|
(47,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(27,049
|
)
|
|
|
(25,222
|
)
|
|
|
(1,827
|
)
|
Other
general and administrative expenses
|
|
(16,278
|
)
|
|
|
(11,921
|
)
|
|
|
(4,357
|
)
|
Recovery
of guarantee liability
|
|
4,300
|
|
|
|
(400
|
)
|
|
|
4,700
|
|
Market
adjustment on foreclosed assets
|
|
(5,840
|
)
|
|
|
-
|
|
|
|
(5,840
|
)
|
Derivative
forward value
|
|
(173,278
|
)
|
|
|
(120,779
|
)
|
|
|
(52,499
|
)
|
Foreign
currency adjustments
|
|
-
|
|
|
|
(15,413
|
)
|
|
|
15,413
|
|
Loss
on sale of loans
|
|
(676
|
)
|
|
|
(1,550
|
)
|
|
|
874
|
|
Total
non-interest expense
|
|
(218,821
|
)
|
|
|
(175,285
|
)
|
|
|
(43,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes and minority interest
|
|
(56,328
|
)
|
|
|
(52,396
|
)
|
|
|
(3,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
6,186
|
|
|
|
573
|
|
|
|
5,613
|
|
Minority
interest, net of income taxes
|
|
8,211
|
|
|
|
1,244
|
|
|
|
6,967
|
|
Net
loss
|
$
|
(41,931
|
)
|
|
$
|
(50,579
|
)
|
|
$
|
8,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
(1)
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Adjusted
TIER (2)
|
|
|
1.18
|
|
|
|
1.12
|
|
|
|
|
|
(1) For
the nine months ended February 29, 2008 and February 28, 2007, the Company
reported a net loss of $42 million and $51 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 nine months ended
|
|
|
|
|
February
29,
2008
|
|
February
28,
2007
|
|
Increase/
(Decrease)
|
|
Interest
income
|
|
5.82
|
%
|
|
|
5.79
|
%
|
|
|
0.03
|
%
|
|
Interest
expense
|
|
(5.26
|
)%
|
|
|
(5.51
|
)%
|
|
|
0.25
|
%
|
|
Net
interest income
|
|
0.56
|
%
|
|
|
0.28
|
%
|
|
|
0.28
|
%
|
|
Recovery
of loan losses
|
|
0.35
|
%
|
|
|
-
|
|
|
|
0.35
|
%
|
|
Net
interest income after recovery of loan losses
|
|
0.91
|
%
|
|
|
0.28
|
%
|
|
|
0.63
|
%
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
0.01
|
%
|
|
|
0.01
|
%
|
|
|
-
|
|
|
Derivative
cash settlements
|
|
0.22
|
%
|
|
|
0.55
|
%
|
|
|
(0.33
|
)%
|
|
Results
of operations of foreclosed assets
|
|
0.04
|
%
|
|
|
0.06
|
%
|
|
|
(0.02
|
)%
|
|
Total
non-interest income
|
|
0.27
|
%
|
|
|
0.62
|
%
|
|
|
(0.35
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(0.20
|
)%
|
|
|
(0.18
|
)%
|
|
|
(0.02
|
)%
|
|
Other
general and administrative expenses
|
|
(0.12
|
)%
|
|
|
(0.09
|
)%
|
|
|
(0.03
|
)%
|
|
Recovery
of guarantee liability
|
|
0.03
|
%
|
|
|
-
|
|
|
|
0.03
|
%
|
|
Market
adjustment on foreclosed assets
|
|
(0.04
|
)%
|
|
|
-
|
|
|
|
(0.04
|
)%
|
|
Derivative
forward value
|
|
(1.26
|
)%
|
|
|
(0.89
|
)%
|
|
|
(0.37
|
)%
|
|
Foreign
currency adjustments
|
|
-
|
|
|
|
(0.12
|
)%
|
|
|
0.12
|
%
|
|
Loss
on sale of loans
|
|
-
|
|
|
|
(0.01
|
)%
|
|
|
0.01
|
%
|
|
Total
non-interest expense
|
|
(1.59
|
)%
|
|
|
(1.29
|
)%
|
|
|
(0.30
|
)%
|
|
Loss
prior to income taxes and minority interest
|
|
(0.41
|
)%
|
|
|
(0.39
|
)%
|
|
|
(0.02
|
)%
|
|
Income
taxes
|
|
0.04
|
%
|
|
|
0.01
|
%
|
|
|
0.03
|
%
|
|
Minority
interest, net of income taxes
|
|
0.06
|
%
|
|
|
0.01
|
%
|
|
|
0.05
|
%
|
|
Net
loss
|
|
(0.31
|
)%
|
|
|
(0.37
|
)%
|
|
|
0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
net interest income (1)
|
|
0.78
|
%
|
|
|
0.83
|
%
|
|
|
(0.05
|
)%
|
|
Adjusted
loss prior to income taxes and minority interest (2)
|
|
0.85
|
%
|
|
|
0.62
|
%
|
|
|
0.23
|
%
|
|
|
|
(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 nine months ended
|
|
|
|
|
|
February
29, 2008
|
|
February
28, 2007
|
|
Change
due to
|
|
|
|
Average
Loan
Balance
|
Income
/ (Cost)
|
Rate
|
|
Average
Loan
Balance
|
Income
/ (Cost)
|
Rate
|
|
Volume
(1)
|
Rate
(2)
|
Total
|
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,991
|
$
|
702
|
|
5.85
|
%
|
|
$
|
15,832
|
$
|
686
|
|
5.79
|
%
|
|
$
|
9
|
|
$
|
7
|
|
$
|
16
|
|
|
|
RTFC
|
|
1,810
|
|
69
|
|
5.09
|
%
|
|
|
2,018
|
|
81
|
|
5.37
|
%
|
|
|
(8
|
)
|
|
(4
|
)
|
|
(12
|
)
|
|
|
NCSC
|
|
453
|
|
27
|
|
7.75
|
%
|
|
|
385
|
|
23
|
|
7.97
|
%
|
|
|
4
|
|
|
-
|
|
|
4
|
|
|
|
Total
|
$
|
18,254
|
$
|
798
|
|
5.82
|
%
|
|
$
|
18,235
|
$
|
790
|
|
5.79
|
%
|
|
$
|
5
|
|
$
|
3
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,991
|
$
|
(633
|
)
|
(5.28
|
)%
|
|
$
|
15,832
|
$
|
(656
|
)
|
(5.54
|
)%
|
|
$
|
(9
|
)
|
$
|
32
|
|
$
|
23
|
|
|
|
RTFC
|
|
1,810
|
|
(65
|
)
|
(4.79
|
)%
|
|
|
2,018
|
|
(76
|
)
|
(5.04
|
)%
|
|
|
8
|
|
|
3
|
|
|
11
|
|
|
|
NCSC
|
|
453
|
|
(23
|
)
|
(6.55
|
)%
|
|
|
385
|
|
(20
|
)
|
(6.91
|
)%
|
|
|
(4
|
)
|
|
1
|
|
|
(3
|
)
|
|
|
Total
|
$
|
18,254
|
$
|
(721
|
)
|
(5.26
|
)%
|
|
$
|
18,235
|
$
|
(752
|
)
|
(5.51
|
)%
|
|
$
|
(5
|
)
|
$
|
36
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,991
|
$
|
69
|
|
0.57
|
%
|
|
$
|
15,832
|
$
|
30
|
|
0.25
|
%
|
|
$
|
-
|
|
$
|
39
|
|
$
|
39
|
|
|
|
RTFC
|
|
1,810
|
|
4
|
|
0.30
|
%
|
|
|
2,018
|
|
5
|
|
0.33
|
%
|
|
|
-
|
|
|
(1
|
)
|
|
(1
|
)
|
|
|
NCSC
|
|
453
|
|
4
|
|
1.20
|
%
|
|
|
385
|
|
3
|
|
1.06
|
%
|
|
|
-
|
|
|
1
|
|
|
1
|
|
|
|
Total
|
$
|
18,254
|
$
|
77
|
|
0.56
|
%
|
|
$
|
18,235
|
$
|
38
|
|
0.28
|
%
|
|
$
|
-
|
|
$
|
39
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
12,888
|
$
|
30
|
|
0.31
|
%
|
|
$
|
12,635
|
$
|
76
|
|
0.80
|
%
|
|
$
|
1
|
|
$
|
(47
|
)
|
$
|
(46
|
)
|
|
|
NCSC
|
|
206
|
|
-
|
|
-
|
|
|
|
93
|
|
-
|
|
-
|
|
|
|
1
|
|
|
(1
|
)
|
|
-
|
|
|
|
Total
|
$
|
13,094
|
$
|
30
|
|
0.31
|
%
|
|
$
|
12,728
|
$
|
76
|
|
0.80
|
%
|
|
$
|
2
|
|
$
|
(48
|
)
|
$
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
interest expense (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
18,254
|
$
|
(691
|
)
|
(5.04
|
)%
|
|
$
|
18,235
|
$
|
(676
|
)
|
(4.96
|
)%
|
|
$
|
(3
|
)
|
$
|
(12
|
)
|
$
|
(15
|
)
|
|
|
|
|
|
(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 nine months ended
|
|
|
February
29, 2008
|
|
February
28, 2007
|
|
(Dollar
amounts in thousands)
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
Increase/
(Decrease)
|
Interest
on long-term fixed rate loans (1)
|
$
|
649,860
|
|
|
|
|
$
|
619,889
|
|
|
|
$
|
29,971
|
|
Interest
on long-term variable rate loans (1)
|
|
68,024
|
|
|
|
|
|
90,199
|
|
|
|
|
(22,175
|
)
|
Interest
on short-term loans (1)
|
|
59,816
|
|
|
|
|
|
53,691
|
|
|
|
|
6,125
|
|
Total
interest income on loans
|
|
777,700
|
|
5.67
|
%
|
|
|
763,779
|
|
5.60
|
%
|
|
13,921
|
|
Interest
on investments (2)
|
|
6,668
|
|
0.05
|
%
|
|
|
6,075
|
|
0.04
|
%
|
|
593
|
|
Conversion
fees (3)
|
|
5,096
|
|
0.04
|
%
|
|
|
7,366
|
|
0.06
|
%
|
|
(2,270
|
)
|
Make-whole
and prepayment fees (4)
|
|
2,287
|
|
0.02
|
%
|
|
|
4,193
|
|
0.03
|
%
|
|
(1,906
|
)
|
Commitment
and guarantee fees (5)
|
|
3,742
|
|
0.03
|
%
|
|
|
7,127
|
|
0.05
|
%
|
|
(3,385
|
)
|
Other
fees
|
|
2,324
|
|
0.01
|
%
|
|
|
1,266
|
|
0.01
|
%
|
|
1,058
|
|
Total
interest income
|
|
$
|
797,817
|
|
5.82
|
%
|
|
$
|
789,806
|
|
5.79
|
%
|
$
|
8,011
|
|
(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 $8
million or 1% increase to the total interest income for the nine months ended
February 29, 2008 as compared to the prior year period was due to the repricing
of fixed rate loans at higher interest rates and higher 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 repricing of long-term fixed rate loans in
January 2008 also had a slight impact on the interest income for the nine months
ended February 29, 2008. Interest rates for approximately $703
million of National Rural long-term fixed rate loans were repriced in January
2008 with 85% selecting a new fixed rate. The weighted average
interest rate of long-term loans subject to repricing in January 2008 was
approximately 5.37%, which is lower than the National Rural fixed interest rates
available to members at that time of between 5.65% and 7.25% (depending on the
term selected). The increase in National Rural and NCSC loan volume
was partly offset by the decrease in RTFC loan volume.
For the
nine months ended February 29, 2008, the Company had a reduction to interest
income of $52 million due to non-accrual loans compared to a reduction of $61
million for the prior year period. The impact on National Rural
interest income of non-accrual loans was a reduction of $26 million and $30
million, respectively, for the nine months ended February 29, 2008 and February
28, 2007. The impact on RTFC interest income of non-accrual loans was
a reduction of $26 million and $31 million, respectively, for the nine months
ended February 29, 2008 and February 28, 2007. 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 nine months ended
|
|
|
February
29, 2008
|
|
February
28, 2007
|
|
(Dollar
amounts in thousands)
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
Increase/
(Decrease)
|
Interest
expense - commercial paper and bid notes (1)
|
$
|
102,117
|
|
|
|
|
$
|
134,760
|
|
|
|
|
$
|
(32,643
|
)
|
Interest
expense - medium-term notes (1)
|
|
249,422
|
|
|
|
|
|
282,050
|
|
|
|
|
|
(32,628
|
)
|
Interest
expense - collateral trust bonds (1)
|
|
189,968
|
|
|
|
|
|
156,629
|
|
|
|
|
|
33,339
|
|
Interest
expense - subordinated deferrable debt (1)
|
|
14,747
|
|
|
|
|
|
24,936
|
|
|
|
|
|
(10,189
|
)
|
Interest
expense - subordinated certificates (1)
|
|
36,451
|
|
|
|
|
|
35,671
|
|
|
|
|
|
780
|
|
Interest
expense - long-term private debt (1)
|
|
100,102
|
|
|
|
|
|
89,484
|
|
|
|
|
|
10,618
|
|
Total
interest expense on debt
|
|
692,807
|
|
5.05
|
%
|
|
|
723,530
|
|
5.30
|
%
|
|
|
(30,723
|
)
|
Debt
issuance costs (2)
|
|
7,625
|
|
0.06
|
%
|
|
|
9,332
|
|
0.07
|
%
|
|
|
(1,707
|
)
|
Commitment
and guarantee fees (3)
|
|
13,277
|
|
0.10
|
%
|
|
|
11,981
|
|
0.09
|
%
|
|
|
1,296
|
|
Loss
on extinguishment of debt (4)
|
|
5,509
|
|
0.04
|
%
|
|
|
4,806
|
|
0.03
|
%
|
|
|
703
|
|
Other
fees
|
|
1,592
|
|
0.01
|
%
|
|
|
2,387
|
|
0.02
|
%
|
|
|
(795
|
)
|
Total
interest expense
|
|
$
|
720,810
|
|
5.26
|
%
|
|
$
|
752,036
|
|
5.51
|
%
|
|
$
|
(31,226
|
)
|
(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 $31
million decrease to total interest expense for the nine months ended February
29, 2008 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 225 basis
point decrease in the federal funds rate from the rate in effect at February 28,
2007. The $500 million borrowed under the REDLG program in August
2007 represents a lower cost compared to the Company's other forms of long-term
debt as a result of the guarantee of repayment by the RUS. 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
adjusted interest expense, which includes all derivative cash settlements, for
the nine months ended February 29, 2008 increased by $15 million compared to the
prior year period due to the $31 million decrease to interest expense noted
above offset by the $46 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 $39 million for the nine months ended February 29, 2008 compared to
the prior year period. The adjusted net interest income, which
includes all derivative cash settlements, for the nine months ended February 29,
2008 was $107 million, a decrease 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 $48
million recovery for loan losses for the nine months ended February 29, 2008
resulted from the decrease in calculated impairments due to lower variable rates
and payments received on impaired loans.
Non-interest
Income
Non-interest
income decreased by $48 million for the nine months ended February 29, 2008
compared to the prior year period primarily due to decreases in cash settlements
and income from the operations of foreclosed assets. The $46 million
decrease in cash settlements for the nine months ended February 29, 2008
compared to the prior year period is primarily due to a $31 million payment
received during the prior year period for the termination of two exchange
agreements. Income from the operation of foreclosed assets decreased
by $2 million for the nine months ended February 29, 2008 compared to the prior
year period due to a lower outstanding balance in foreclosed
assets. At February 29, 2008, the foreclosed assets are comprised of
real estate developer notes receivable and limited partnership interests in
certain real estate developments.
Non-interest
Expense
Non-interest
expense increased by $44 million for the nine months ended February 29, 2008
compared to the prior year period.
Salaries
and employee benefits increased by $2 million for the nine months ended February
29, 2008 as compared to the prior year period primarily due to additional
headcount and higher medical insurance rates paid by the Company. The
Company had eight additional employee positions filled at February 29, 2008 as
compared to the prior year period end.
General
and administrative expenses increased by $4 million for the nine months ended
February 29, 2008 compared to the prior year period because of the increased
expenditures for the acceleration of information systems projects and the
write-off of site work expenses on property the Company had under contract, but
the seller was unable to meet the conditions to close the
sale. Increased membership meeting expenses, marketing and audit fees
also contributed to the increased general and administrative expenses for the
nine months ended February 29, 2008.
The $4
million recovery of guarantee liability was the result of a decrease in the
outstanding balance, weighted average maturity and weighted average risk rating
of guarantees outstanding.
At
February 29, 2008, the Company determined that there was a reduction of $6
million to the market value of one of the land development loans held as a
foreclosed asset. The reduction to the market value was
primarily as a result of the slow down in lot sales due to residential home
market weakness.
The $52
million increase in the derivative forward value during the nine months ended
February 29, 2008 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.
There was
no foreign denominated debt outstanding during the nine months ended February
29, 2008, therefore resulting in no foreign currency adjustments compared to $15
million in the prior year period. During the nine months ended
February 28, 2007, 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.
Minority
Interest
During
the nine months ended February 29, 2008, NCSC’s net loss exceeded its equity
balance by $1.6 million, primarily due to NCSC’s $18 million in derivative
forward value losses during the period. In accordance with Accounting
Research Bulletin (“ARB”) No. 51, Consolidated Financial Statements, National
Rural is required to absorb the $1.6 million excess NCSC
loss. Minority interest for the nine months ended February 29, 2008
represents $0.3 million of year-to-date RTFC net income and $8.6 million of the
$10.1 million year-to-date NCSC net loss. Minority interest for the
nine months ended February 28, 2007 represents the total year-to-date RTFC and
NCSC net income since NCSC losses did not exceed its equity during that
period.
Net
Loss
The
change in the line items described above result in a net loss of $42 million for
the nine months ended February 29, 2008 compared to a net loss of $51 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 $123 million, compared to $84 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 February 29, 2008 versus February 28, 2007
The
following chart presents the results of operations for the three months ended
February 29, 2008 versus February 28, 2007.
|
For
the three months ended
|
|
|
(Dollar
amounts in thousands)
|
February
29,
2008
|
|
February
28,
2007
|
|
Increase/
(Decrease)
|
Interest
income
|
$
|
266,576
|
|
|
$
|
264,873
|
|
|
$
|
1,703
|
|
Interest
expense
|
|
(233,468
|
)
|
|
|
(247,441
|
)
|
|
|
13,973
|
|
Net
interest income
|
|
33,108
|
|
|
|
17,432
|
|
|
|
15,676
|
|
Recovery
of loan losses
|
|
33,599
|
|
|
|
-
|
|
|
|
33,599
|
|
Net
interest income after recovery of loan losses
|
|
66,707
|
|
|
|
17,432
|
|
|
|
49,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
367
|
|
|
|
417
|
|
|
|
(50
|
)
|
Derivative
cash settlements
|
|
10,463
|
|
|
|
44,442
|
|
|
|
(33,979
|
)
|
Results
of operations of foreclosed assets
|
|
2,401
|
|
|
|
1,896
|
|
|
|
505
|
|
Total
non-interest income
|
|
13,231
|
|
|
|
46,755
|
|
|
|
(33,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(9,398
|
)
|
|
|
(8,461
|
)
|
|
|
(937
|
)
|
Other
general and administrative expenses
|
|
(5,862
|
)
|
|
|
(3,177
|
)
|
|
|
(2,685
|
)
|
Recovery
of (provision for) guarantee liability
|
|
1,000
|
|
|
|
-
|
|
|
|
1,000
|
|
Market
adjustment on foreclosed assets
|
|
(5,840
|
)
|
|
|
-
|
|
|
|
(5,840
|
)
|
Derivative
forward value
|
|
(64,266
|
)
|
|
|
(4,189
|
)
|
|
|
(60,077
|
)
|
Foreign
currency adjustments
|
|
-
|
|
|
|
1,886
|
|
|
|
(1,886
|
)
|
Loss
on sale of loans
|
|
(158
|
)
|
|
|
(1,550
|
)
|
|
|
1,392
|
|
Total
non-interest expense
|
|
(84,524
|
)
|
|
|
(15,491
|
)
|
|
|
(69,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes and minority interest
|
|
(4,586
|
)
|
|
|
48,696
|
|
|
|
(53,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
2,175
|
|
|
|
(627
|
)
|
|
|
2,802
|
|
Minority
interest, net of income taxes
|
|
2,088
|
|
|
|
566
|
|
|
|
1,522
|
|
Net
(loss) income
|
$
|
(323
|
)
|
|
$
|
48,635
|
|
|
$
|
(48,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
(1)
|
|
-
|
|
|
|
1.20
|
|
|
|
|
|
Adjusted
TIER (2)
|
|
|
1.28
|
|
|
|
1.25
|
|
|
|
|
|
(1) For
the three months ended February 29, 2008, the Company reported a loss of $0.3
million; 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
|
|
|
|
|
|
February
29,
2008
|
|
February
28,
2007
|
|
Increase/
(Decrease)
|
|
Interest
income
|
|
|
5.77
|
%
|
|
|
5.94
|
%
|
|
|
(0.17
|
)%
|
|
Interest
expense
|
|
|
(5.05
|
)%
|
|
|
(5.55
|
)%
|
|
|
0.50
|
%
|
|
Net
interest income
|
|
|
0.72
|
%
|
|
|
0.39
|
%
|
|
|
0.33
|
%
|
|
Recovery
of loan losses
|
|
|
0.73
|
%
|
|
|
-
|
|
|
|
0.73
|
%
|
|
Net
interest income after recovery of loan losses
|
|
|
1.45
|
%
|
|
|
0.39
|
%
|
|
|
1.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
|
0.01
|
%
|
|
|
-
|
|
|
|
0.01
|
%
|
|
Derivative
cash settlements
|
|
|
0.22
|
%
|
|
|
1.00
|
%
|
|
|
(0.78
|
)%
|
|
Results
of operations of foreclosed assets
|
|
|
0.05
|
%
|
|
|
0.05
|
%
|
|
|
-
|
|
|
Total
non-interest income
|
|
|
0.28
|
%
|
|
|
1.05
|
%
|
|
|
(0.77
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
(0.20
|
)%
|
|
|
(0.18
|
)%
|
|
|
(0.02
|
)%
|
|
Other
general and administrative expenses
|
|
|
(0.13
|
)%
|
|
|
(0.07
|
)%
|
|
|
(0.06
|
)%
|
|
Recovery
of (provision for) guarantee liability
|
|
|
0.02
|
%
|
|
|
-
|
|
|
|
0.02
|
%
|
|
Market
adjustment on foreclosed assets
|
|
|
(0.13
|
)%
|
|
|
-
|
|
|
|
(0.13
|
)%
|
|
Derivative
forward value
|
|
|
(1.39
|
)%
|
|
|
(0.10
|
)%
|
|
|
(1.29
|
)%
|
|
Foreign
currency adjustments
|
|
|
-
|
|
|
|
0.04
|
%
|
|
|
(0.04
|
)%
|
|
Loss
on sale of loans
|
|
|
-
|
|
|
|
(0.04
|
)%
|
|
|
0.04
|
%
|
|
Total
non-interest expense
|
|
|
(1.83
|
)%
|
|
|
(0.35
|
)%
|
|
|
(1.48
|
)%
|
|
(Loss)
income prior to income taxes and minority interest
|
|
|
(0.10
|
)%
|
|
|
1.09
|
%
|
|
|
(1.19
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
0.05
|
%
|
|
|
-
|
|
|
|
0.05
|
%
|
|
Minority
interest, net of income taxes
|
|
|
0.04
|
%
|
|
|
-
|
|
|
|
0.04
|
%
|
|
Net
(loss) income
|
|
|
(0.01
|
)%
|
|
|
1.09
|
%
|
|
|
(1.10
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
net interest income (1)
|
|
|
0.94
|
%
|
|
|
1.39
|
%
|
|
|
(0.45
|
)%
|
|
Adjusted
income prior to income taxes and minority interest (2)
|
|
|
|
1.29
|
%
|
|
|
1.15
|
%
|
|
|
0.14
|
%
|
|
(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
February
29, 2008 and February 28, 2007 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
|
|
|
|
|
|
|
|
|
|
|
February
29, 2008
|
|
February
28, 2007
|
|
Change
due to
|
|
Average
Loan
Balance
|
Income
/ (Cost)
|
Rate
|
|
Average
Loan
Balance
|
Income
/ (Cost)
|
Rate
|
|
Volume
(1)
|
Rate
(2)
|
Total
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
16,339
|
$
|
236
|
|
5.81
|
%
|
|
$
|
15,754
|
$
|
232
|
|
5.96
|
%
|
|
$
|
10
|
|
$
|
(6
|
)
|
$
|
4
|
|
RTFC
|
|
1,769
|
|
22
|
|
4.94
|
%
|
|
|
1,966
|
|
26
|
|
5.29
|
%
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(4
|
)
|
NCSC
|
|
435
|
|
9
|
|
7.65
|
%
|
|
|
360
|
|
7
|
|
8.67
|
%
|
|
|
2
|
|
|
-
|
|
|
2
|
|
Total
|
$
|
18,543
|
$
|
267
|
|
5.77
|
%
|
|
$
|
18,080
|
$
|
265
|
|
5.94
|
%
|
|
$
|
10
|
|
$
|
(8
|
)
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
16,339
|
$
|
(206
|
)
|
(5.06
|
)%
|
|
$
|
15,754
|
$
|
(217
|
)
|
(5.59
|
)%
|
|
$
|
(10
|
)
|
$
|
21
|
|
$
|
11
|
|
RTFC
|
|
1,769
|
|
(20
|
)
|
(4.65
|
)%
|
|
|
1,966
|
|
(24
|
)
|
(4.96
|
)%
|
|
|
2
|
|
|
2
|
|
|
4
|
|
NCSC
|
|
435
|
|
(7
|
)
|
(6.15
|
)%
|
|
|
360
|
|
(6
|
)
|
(7.15
|
)%
|
|
|
(2
|
)
|
|
1
|
|
|
(1
|
)
|
Total
|
$
|
18,543
|
$
|
(233
|
)
|
(5.05
|
)%
|
|
$
|
18,080
|
$
|
(247
|
)
|
(5.55
|
)%
|
|
$
|
(10
|
)
|
$
|
24
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
16,339
|
$
|
30
|
|
0.75
|
%
|
|
$
|
15,754
|
$
|
15
|
|
0.37
|
%
|
|
$
|
-
|
|
$
|
15
|
|
$
|
15
|
|
RTFC
|
|
1,769
|
|
2
|
|
0.29
|
%
|
|
|
1,966
|
|
2
|
|
0.33
|
%
|
|
|
-
|
|
|
-
|
|
|
-
|
|
NCSC
|
|
435
|
|
2
|
|
1.50
|
%
|
|
|
360
|
|
1
|
|
1.52
|
%
|
|
|
-
|
|
|
1
|
|
|
1
|
|
Total
|
$
|
18,543
|
$
|
34
|
|
0.72
|
%
|
|
$
|
18,080
|
$
|
18
|
|
0.39
|
%
|
|
$
|
-
|
|
$
|
16
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
13,094
|
$
|
10
|
|
0.32
|
%
|
|
$
|
12,636
|
$
|
44
|
|
1.42
|
%
|
|
$
|
2
|
|
$
|
(36
|
)
|
$
|
(34
|
)
|
NCSC
|
|
201
|
|
-
|
|
-
|
|
|
|
89
|
|
-
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
13,295
|
$
|
10
|
|
0.32
|
%
|
|
$
|
12,725
|
$
|
44
|
|
1.42
|
%
|
|
$
|
2
|
|
$
|
(36
|
)
|
$
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
interest expense (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
18,543
|
$
|
(223)
|
|
(4.83
|
)%
|
|
$
|
18,080
|
$
|
(203
|
)
|
(4.55
|
)%
|
|
$
|
(8
|
)
|
$
|
(12
|
)
|
$
|
(20
|
)
|
(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
|
|
|
|
|
|
February
29, 2008
|
|
February
28, 2007
|
|
Increase/
|
|
(Dollar
amounts in thousands)
|
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
(Decrease)
|
|
Interest
on long-term fixed rate loans (1)
|
|
$
|
220,117
|
|
|
|
|
$
|
208,262
|
|
|
|
|
$
|
11,855
|
|
|
Interest
on long-term variable rate loans (1)
|
|
|
20,785
|
|
|
|
|
|
28,028
|
|
|
|
|
|
(7,243
|
)
|
|
Interest
on short-term loans (1)
|
|
|
20,224
|
|
|
|
|
|
17,761
|
|
|
|
|
|
2,463
|
|
|
Total
interest income on loans
|
|
|
261,126
|
|
5.65
|
%
|
|
|
254,051
|
|
5.70
|
%
|
|
|
7,075
|
|
|
Interest
on investments (2)
|
|
|
1,832
|
|
0.04
|
%
|
|
|
2,626
|
|
0.07
|
%
|
|
|
(794
|
)
|
|
Conversion
fees (3)
|
|
|
1,587
|
|
0.04
|
%
|
|
|
2,412
|
|
0.04
|
%
|
|
|
(825
|
)
|
|
Make-whole
and prepayment fees (4)
|
|
|
533
|
|
0.01
|
%
|
|
|
3,368
|
|
0.07
|
%
|
|
|
(2,835
|
)
|
|
Commitment
and guarantee fees (5)
|
|
|
822
|
|
0.02
|
%
|
|
|
1,658
|
|
0.04
|
%
|
|
|
(836
|
)
|
|
Other
fees
|
|
|
676
|
|
0.01
|
%
|
|
|
758
|
|
0.02
|
%
|
|
|
(82
|
)
|
|
Total interest
income
|
|
|
$
|
266,576
|
|
5.77
|
%
|
|
$
|
264,873
|
|
5.94
|
%
|
|
$
|
1,703
|
|
|
(1)
Represents interest income on loans to members.
(2)
Represents interest income on the investment of cash.
(3)
Conversion fees are deferred and recognized using the interest method over the
remaining original loan interest rate pricing term, except for a small portion
of the total fee charged to cover administrative costs related to the conversion
which is recognized immediately.
(4)
Make-whole and prepayment fees are charged for the early repayment of principal
in full and recognized when collected.
(5)
Commitment fees for RTFC loan commitments are, in most cases, refundable on a
prorata basis according to the amount of the loan commitment that is
advanced. Such refundable fees are deferred and then recognized on a
prorata basis based on the portion of the loan that is not advanced prior to
the
expiration
of the commitment. Commitment fees on 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 $2
million or 1% increase to the total interest income for the quarter ended
February 29, 2008 as compared to the prior year period was due to higher loan
volume and fixed rate loans that repriced at higher interest rates offset by
lower variable rates. Interest rates for approximately $703 million
of National Rural long-term fixed rate loans were repriced in January 2008 with
85% selecting a new fixed rate. The weighted average interest rate of
long-term loans subject to repricing in January 2008 was approximately 5.37%,
which is lower than the National Rural fixed interest rates available to members
at that time of between 5.65% and 7.25% (depending on the term
selected). Lower variable rates were the result of the Company
decreasing variable interest rates by approximately 200 basis points since
February 28, 2007, of which 125 basis points occurred during the three months
ended February 29, 2008.
For the
quarter ended February 29, 2008, the Company had a reduction to interest income
of $16 million due to non-accrual loans compared to a decrease 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
February 29, 2008 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 $8 million and $10 million, respectively for the
quarter ended February 29, 2008 and February 28, 2007.
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
|
|
|
|
|
|
February
29, 2008
|
|
February
28, 2007
|
|
Increase/
|
|
(Dollar
amounts in thousands)
|
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
(Decrease)
|
|
Interest
expense - commercial paper and bid notes (1)
|
|
$
|
30,639
|
|
|
|
|
$
|
38,758
|
|
|
|
|
$
|
(8,119
|
)
|
|
Interest
expense - medium-term notes (1)
|
|
|
82,555
|
|
|
|
|
|
93,876
|
|
|
|
|
|
(11,321
|
)
|
|
Interest
expense - collateral trust bonds (1)
|
|
|
61,213
|
|
|
|
|
|
56,069
|
|
|
|
|
|
5,144
|
|
|
Interest
expense - subordinated deferrable debt (1)
|
|
|
4,916
|
|
|
|
|
|
8,153
|
|
|
|
|
|
(3,237
|
)
|
|
Interest
expense - subordinated certificates (1)
|
|
|
12,297
|
|
|
|
|
|
11,755
|
|
|
|
|
|
542
|
|
|
Interest
expense - long-term private debt (1)
|
|
|
34,359
|
|
|
|
|
|
29,180
|
|
|
|
|
|
5,179
|
|
|
Total
interest expense on debt
|
|
|
225,979
|
|
4.89
|
%
|
|
|
237,791
|
|
5.33
|
%
|
|
|
(11,812
|
)
|
|
Debt
issuance costs (2)
|
|
|
2,328
|
|
0.05
|
%
|
|
|
5,230
|
|
0.12
|
%
|
|
|
(2,902
|
)
|
|
Commitment
and guarantee fees (3)
|
|
|
4,602
|
|
0.10
|
%
|
|
|
3,967
|
|
0.09
|
%
|
|
|
635
|
|
|
Other
fees
|
|
|
559
|
|
0.01
|
%
|
|
|
453
|
|
0.01
|
%
|
|
|
106
|
|
|
Total
interest expense
|
|
|
$
|
233,468
|
|
5.05
|
%
|
|
$
|
247,441
|
|
5.55
|
%
|
|
$
|
(13,973
|
)
|
|
(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 $14
million decrease to total interest expense for the three months ended February
29, 2008 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 225 basis point decrease in the federal funds rate from the rate in effect
at February 28, 2007.
The
adjusted total interest expense, which includes all derivative cash settlements,
for the quarter ended February 29, 2008 increased by $20 million compared to the
prior year period due to the $14 million decrease to interest expense noted
above offset by the $34 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 $16 million for the quarter ended February 29, 2008 compared to the
prior year period. The adjusted net interest income, which includes
all derivative cash settlements, for the quarter ended February 29, 2008 was $43
million, a decrease of $19 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 $34
million recovery for loan losses for the quarter ended February 29, 2008
resulted from the decrease in calculated impairments due to lower variable rates
and payments received on impaired loans.
Non-interest
Income
Non-interest
income decreased by $34 million for the quarter ended February 29, 2008 compared
to the prior year period due primarily to a decrease in cash
settlements. The $34 million decrease in derivative cash settlements
for the quarter ended February 29, 2008 is due to a $31 million payment received
during the prior year period for the termination of two exchange
agreements.
Non-interest
Expense
Non-interest
expense increased by $69 million for the quarter ended February 29, 2008
compared to the prior year period.
At
February 29, 2008, the Company determined that there was a reduction of $6
million to the market value of one of the land development loans held as a
foreclosed asset. The reduction to the market value was
primarily as a result of the slow down in lot sales due to residential home
market weakness.
The $60
million increase in the derivative forward value expense during the quarter
ended February 29, 2008 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.
There was
no foreign denominated debt outstanding during the quarter ended February 29,
2008, therefore resulting in no foreign currency adjustments compared to $2
million in the prior year period. During the quarter ended February
28, 2007, 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.
Minority
Interest
During
the three months ended February 29, 2008, NCSC’s net loss exceeded its equity
balance by $1.6 million, primarily due to NCSC’s $6 million in derivative
forward value losses during the period. In accordance with ARB 51,
National Rural is required to absorb the $1.6 million excess NCSC
loss. Minority interest for the three months ended February 29, 2008
represents $0.1 million of RTFC net loss and $2 million of the $3.6 million NCSC
net loss for the period. Minority interest for the three months ended
February 28, 2007 represents the total year-to-date RTFC and NCSC net income
since NCSC losses did not exceed its equity during that period.
Net
(Loss) Income
The
change in the line items described above resulted in a net loss of $0.3 million
for the quarter ended February 29, 2008 compared to net income of $49 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 $62 million compared to $50 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 nine months ended February 29, 2008 and February 28,
2007. 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
|
|
|
Nine
months ended
|
|
(Dollar
amounts in thousands)
|
February
29,
2008
|
|
|
February
28,
2007
|
|
|
February
29,
2008
|
|
February
28,
2007
|
|
|
(Loss)
income prior to cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
change
in accounting principle
|
$
|
(323
|
)
|
|
$
|
48,635
|
|
|
$
|
(41,931
|
)
|
|
$
|
(50,579
|
)
|
|
Add:
fixed charges
|
|
233,468
|
|
|
|
247,441
|
|
|
|
720,810
|
|
|
|
752,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
available for fixed charges
|
$
|
233,145
|
|
|
$
|
296,076
|
|
|
$
|
678,879
|
|
|
$
|
701,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on all debt (including amortization of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discount
and issuance costs)
|
$
|
233,468
|
|
|
$
|
247,441
|
|
|
$
|
720,810
|
|
|
$
|
752,036
|
|
|
Ratio
of earnings to fixed charges (1)
|
|
|
-
|
|
|
|
1.20
|
|
|
|
-
|
|
|
|
-
|
|
(1) For
the three and nine months ended February 29, 2008, earnings were insufficient to
cover fixed charges by $0.3 million and $42 million,
respectively. For the nine months ended February 28, 2007, earnings
were insufficient to cover fixed charges by $51 million.
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 thousands)
|
February
29, 2008
|
|
May
31, 2007
|
|
(Decrease)
|
Loans
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
$
|
15,066,178
|
|
|
81%
|
|
|
$
|
14,881,046
|
|
82%
|
|
|
|
$
|
185,132
|
|
Long-term
variable rate loans
|
|
2,014,221
|
|
|
11%
|
|
|
|
2,031,731
|
|
11%
|
|
|
|
|
(17,510
|
)
|
Total
long-term loans
|
|
17,080,399
|
|
|
92%
|
|
|
|
16,912,777
|
|
93%
|
|
|
|
|
167,622
|
|
Short-term
loans (2)
|
|
1,580,813
|
|
|
8%
|
|
|
|
1,215,430
|
|
7%
|
|
|
|
|
365,383
|
|
Total
loans
|
$
|
18,661,212
|
|
|
100%
|
|
|
$
|
18,128,207
|
|
100%
|
|
|
|
$
|
533,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
13,213,526
|
|
|
71%
|
|
|
$
|
12,827,772
|
|
71%
|
|
|
|
$
|
385,754
|
|
Power
supply
|
|
3,198,956
|
|
|
17%
|
|
|
|
2,858,040
|
|
16%
|
|
|
|
|
340,916
|
|
Statewide
and associate
|
|
104,258
|
|
|
1%
|
|
|
|
119,478
|
|
1%
|
|
|
|
|
(15,220
|
)
|
National
Rural total
|
|
16,516,740
|
|
|
89%
|
|
|
|
15,805,290
|
|
88%
|
|
|
|
|
711,450
|
|
RTFC
|
|
1,727,344
|
|
|
9%
|
|
|
|
1,860,379
|
|
10%
|
|
|
|
|
(133,035
|
)
|
NCSC
|
|
417,128
|
|
|
2%
|
|
|
|
462,538
|
|
2%
|
|
|
|
|
(45,410
|
)
|
Total
loans
|
|
$
|
18,661,212
|
|
|
100%
|
|
|
$
|
18,128,207
|
|
100%
|
|
|
|
$
|
533,005
|
|
(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 3% during the nine months ended
February 29, 2008. National Rural loans outstanding increased due to net
advances of $785 million offset by the sale of $74 million of National Rural
distribution loans in loan securitization transactions during the nine months
ended February 29, 2008. Long-term fixed rate loans at February 29,
2008 and May 31, 2007 represented 88% of total long-term loans. Loans
converting from a variable rate to a fixed rate for the nine months ended
February 29, 2008 totaled $251 million, which was offset by $223 million of
loans that converted from a fixed rate to a variable rate. This
resulted in a net conversion of $28 million from a variable rate to a fixed rate
for the nine months ended February 29, 2008. For the nine months
ended February 28, 2007 loans converting from a variable rate to a fixed rate
totaled $288 million, which was offset by $165 million of loans that converted
from a fixed rate to a variable rate. This resulted in a net
conversion of $123 million from a variable rate to a fixed rate for the nine
months ended February 28, 2007.
The
following chart summarizes loans and guarantees outstanding by
segment:
(Dollar
amounts in thousands)
|
February
29, 2008
|
|
May
31, 2007
|
|
Increase/
(Decrease)
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
13,417,117
|
|
68%
|
|
$
|
13,039,092
|
|
68%
|
$
|
378,025
|
|
Power
supply
|
|
3,962,182
|
|
20%
|
|
|
3,655,049
|
|
19%
|
|
307,133
|
|
Statewide
and associate
|
|
127,913
|
|
1%
|
|
|
144,837
|
|
1%
|
|
(16,924
|
)
|
National
Rural Total
|
|
17,507,212
|
|
89%
|
|
|
16,838,978
|
|
88%
|
|
668,234
|
|
RTFC
|
|
1,727,604
|
|
9%
|
|
|
1,860,379
|
|
10%
|
|
(132,775
|
)
|
NCSC
|
|
485,245
|
|
2%
|
|
|
503,224
|
|
2%
|
|
(17,979
|
)
|
Total
|
$
|
19,720,061
|
|
100%
|
|
$
|
19,202,581
|
|
100%
|
$
|
517,480
|
|
The
following table summarizes the RTFC segment loans and guarantees
outstanding:
(Dollar
amounts in thousands)
|
|
February
29, 2008
|
|
May
31, 2007
|
|
Increase/
(Decrease)
|
Rural
local exchange carriers
|
$
|
1,521,369
|
|
88%
|
|
$
|
1,630,246
|
|
88%
|
$
|
(108,877
|
)
|
Cable
television providers
|
|
153,840
|
|
9%
|
|
|
154,738
|
|
8%
|
|
(898
|
)
|
Fiber
optic network providers
|
|
16,772
|
|
1%
|
|
|
37,422
|
|
2%
|
|
(20,650
|
)
|
Competitive
local exchange carriers
|
|
27,596
|
|
2%
|
|
|
21,039
|
|
1%
|
|
6,557
|
|
Wireless
providers
|
|
3,922
|
|
-
|
|
|
3,609
|
|
-
|
|
313
|
|
Long
distance carriers
|
|
-
|
|
-
|
|
|
9,069
|
|
1%
|
|
(9,069
|
)
|
Other
|
|
4,105
|
|
-
|
|
|
4,256
|
|
-
|
|
(151
|
)
|
Total
|
$
|
1,727,604
|
|
100%
|
|
$
|
1,860,379
|
|
100%
|
$
|
(132,775
|
)
|
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 February 29, 2008 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
February 29, 2008 and May 31, 2007, the total exposure outstanding to any one
borrower or controlled group did not exceed 2.9% and 3.0%, respectively, of
total loans and guarantees outstanding. At February 29, 2008, the ten
largest borrowers included four distribution systems, four 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:
|
|
February
29, 2008
|
|
May
31, 2007
|
|
Increase/
(Decrease)
|
(Dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of Total
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
3,370,729
|
|
|
|
$
|
3,306,986
|
|
|
$
|
63,743
|
Guarantees
|
|
163,940
|
|
|
|
|
76,867
|
|
|
|
87,073
|
Total
credit exposure to ten largest borrowers
|
$
|
3,534,669
|
|
18%
|
|
$
|
3,383,853
|
|
18%
|
$
|
150,816
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
2,810,864
|
|
|
|
$
|
2,691,060
|
|
|
$
|
119,804
|
RTFC
|
|
697,505
|
|
|
|
|
692,793
|
|
|
|
4,712
|
NCSC
|
|
26,300
|
|
|
|
|
-
|
|
|
|
26,300
|
Total
credit exposure to ten largest borrowers
|
$
|
3,534,669
|
|
18%
|
|
$
|
3,383,853
|
|
18%
|
$
|
150,816
|
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:
|
|
February
29, 2008
|
|
May
31, 2007
|
|
Increase/
(Decrease)
|
(Dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of Total
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
1,977,315
|
|
|
|
$
|
1,634,296
|
|
|
$
|
343,019
|
|
Guarantees
|
|
219,436
|
|
|
|
|
220,983
|
|
|
|
(1,547
|
)
|
Total
unsecured credit exposure
|
$
|
2,196,751
|
|
11%
|
|
$
|
1,855,279
|
|
10%
|
$
|
341,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
1,909,442
|
|
|
|
$
|
1,559,097
|
|
|
$
|
350,345
|
|
RTFC
|
|
229,970
|
|
|
|
|
230,300
|
|
|
|
(330
|
)
|
NCSC
|
|
57,339
|
|
|
|
|
65,882
|
|
|
|
(8,543
|
)
|
Total
unsecured credit exposure
|
$
|
2,196,751
|
|
11%
|
|
$
|
1,855,279
|
|
10%
|
$
|
341,472
|
|
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 February 29, 2008 and May
31, 2007, the Company had non-performing loans outstanding in the amount of $504
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
February 29, 2008 and May 31, 2007, non-performing loans include $498 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. The Court has
entered an order approving certain sale motions presented 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 has closed, with net proceeds of
approximately $2.2 million.
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 February 29, 2008.
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.
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. At February 29, 2008, the Company had a
receivable for $3 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.
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
February 29, 2008 and May 31, 2007, restructured loans totaled $584 million and
$603 million, respectively. A total of $526 million and $545 million
of restructured loans were on non-accrual status with respect to the recognition
of interest income at February 29, 2008 and May 31, 2007,
respectively. At February 28, 2007, there were $551 million of
restructured loans on non-accrual status.
At
February 29, 2008 and May 31, 2007, the Company had $526 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 February 29, 2008 and May 31, 2007. Total loans to CoServ at
February 29, 2008 and May 31, 2007 represented 2.8% and 2.9% of the Company's
total loans and guarantees outstanding, respectively.
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
February 29, 2008, a total of $20 million was outstanding 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 February 29, 2008.
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 February 29, 2008 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 February 29,
2008. 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 February 29, 2008.
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 February 29, 2008 and May 31, 2007, National Rural had impaired loans
totaling $1,083 million and $1,099 million, respectively. At February
29, 2008 and May 31, 2007, National Rural had specifically reserved a total of
$317 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 thousands)
|
February
29, 2008
|
|
May
31, 2007
|
Non-performing
loans
|
$
|
504,375
|
|
|
$
|
501,864
|
|
Percent
of loans outstanding
|
|
2.70
|
%
|
|
|
2.77
|
%
|
Percent
of loans and guarantees outstanding
|
|
2.56
|
%
|
|
|
2.61
|
%
|
|
|
|
|
|
|
|
|
Restructured
loans
|
$
|
584,495
|
|
|
$
|
603,305
|
|
Percent
of loans outstanding
|
|
3.13
|
%
|
|
|
3.33
|
%
|
Percent
of loans and guarantees outstanding
|
|
2.96
|
%
|
|
|
3.14
|
%
|
|
|
|
|
|
|
|
|
Total
non-performing and restructured loans
|
$
|
1,088,870
|
|
|
$
|
1,105,169
|
|
Percent
of loans outstanding
|
|
5.83
|
%
|
|
|
6.10
|
%
|
Percent
of loans and guarantees outstanding
|
|
5.52
|
%
|
|
|
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 $34 million for a net write-off of $177
million. For the period from June 1, 2002 to February 29, 2008,
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 nine months ended
and
as of
|
|
For
the year ended
and
as of
|
|
|
February
29,
|
|
|
February
28,
|
|
|
May
31,
|
|
|
(Dollar
amounts in thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
Beginning
balance
|
$
|
561,663
|
|
$
|
611,443
|
|
$
|
611,443
|
|
|
Recovery
of loan losses
|
|
(47,900
|
)
|
|
-
|
|
|
(6,922
|
)
|
|
Net
write-offs
|
|
(16,503
|
)
|
|
(77
|
)
|
|
(42,858
|
)
|
|
Ending
balance
|
$
|
497,260
|
|
$
|
611,366
|
|
$
|
561,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
loss allowance by segment:
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
496,891
|
|
$
|
610,778
|
|
$
|
561,113
|
|
|
NCSC
|
|
369
|
|
|
588
|
|
|
550
|
|
|
Total
|
$
|
497,260
|
|
$
|
611,366
|
|
$
|
561,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of total loans outstanding
|
|
2.66
|
%
|
|
3.43
|
%
|
|
3.10
|
%
|
|
As
a percentage of total non-performing loans outstanding
|
|
98.59
|
%
|
|
112.94
|
%
|
|
111.95
|
%
|
|
As
a percentage of total restructured loans outstanding
|
|
85.08
|
%
|
|
100.16
|
%
|
|
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 $64 million from May 31, 2007 to
February 29, 2008. Within National Rural's loan loss allowance at
February 29, 2008 as compared to the prior year end, there was a decrease in the
calculated impairments of $80 million. 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 and lower
variable interest rates at February 29, 2008 as compared to May 31,
2007.
In
addition to the general portfolio reserve, the Company maintains an additional
reserve for borrowers with a total exposure in excess of 1.5% of its total loans
and guarantees outstanding. The additional reserve is based on the
amount of exposure in excess of 1.5% of the Company's total exposure, and the
borrower's internal risk rating. At February 29, 2008, the Company
lowered the total exposure threshold from 1.5% to 1.0%, which provides a better
match to the Company’s top ten credit exposures. At February 29,
2008, the Company increased the reserve for the additional risk related to large
exposures by $18 million.
The
allowance for all other loans decreased by $2 million.
Liabilities,
Minority Interest and Equity
Outstanding
Debt
The
following chart provides a breakout of debt outstanding:
(Dollar
amounts in thousands)
|
February
29,
2008
|
|
May
31,
2007
|
|
Increase/
(Decrease)
|
Short-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper (1)
|
$
|
3,032,163
|
|
|
$
|
2,784,619
|
|
|
$
|
247,544
|
|
Bank
bid notes
|
|
200,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Long-term
debt with remaining maturities less than one year
|
|
3,206,966
|
|
|
|
1,367,504
|
|
|
|
1,839,462
|
|
Subordinated
deferrable debt with remaining maturities less than one
year
|
|
-
|
|
|
|
175,000
|
|
|
|
(175,000
|
)
|
Total
short-term debt
|
|
6,439,129
|
|
|
|
4,427,123
|
|
|
|
2,012,006
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
trust bonds
|
|
2,886,358
|
|
|
|
4,017,357
|
|
|
|
(1,130,999
|
)
|
Notes
payable
|
|
2,559,612
|
|
|
|
2,532,630
|
|
|
|
26,982
|
|
Medium-term
notes
|
|
4,286,932
|
|
|
|
4,745,232
|
|
|
|
(458,300
|
)
|
Total
long-term debt
|
|
9,732,902
|
|
|
|
11,295,219
|
|
|
|
(1,562,317
|
)
|
Subordinated
deferrable debt
|
|
311,440
|
|
|
|
311,440
|
|
|
|
-
|
|
Members'
subordinated certificates:
|
|
|
|
|
|
|
|
|
|
|
|
Membership
certificates
|
|
649,461
|
|
|
|
649,424
|
|
|
|
37
|
|
Loan
certificates
|
|
670,113
|
|
|
|
624,888
|
|
|
|
45,225
|
|
Guarantee
certificates
|
|
101,311
|
|
|
|
107,135
|
|
|
|
(5,824
|
)
|
Total
members' subordinated certificates
|
|
1,420,885
|
|
|
|
1,381,447
|
|
|
|
39,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt outstanding
|
$
|
17,904,356
|
|
|
$
|
17,415,229
|
|
|
$
|
489,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of fixed rate debt (2)
|
|
84%
|
|
|
|
83%
|
|
|
|
|
|
Percentage
of variable rate debt (3)
|
|
16%
|
|
|
|
17%
|
|
|
|
|
|
Percentage
of long-term debt
|
|
64%
|
|
|
|
75%
|
|
|
|
|
|
Percentage
of short-term debt
|
|
|
36%
|
|
|
|
25%
|
|
|
|
|
|
(1)
Includes $298 million and $250 million related to the daily liquidity fund at
February 29, 2008 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 February 29, 2008 increased as compared to May 31, 2007 due
primarily to the increase of $533 million loans outstanding. During
the first nine months of fiscal year 2008, $1,595 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. In January 2008, the Company issued $700 million of 5.45%
collateral trust bonds due February 2018. 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.
The
increase to members' subordinated certificates of $45 million for the nine
months ended February 29, 2008 is primarily due to $60 million of new loan
certificates related to the increase in loans outstanding offset by loan
prepayments, normal amortization and maturities.
Minority
Interest
At
February 29, 2008 and May 31, 2007, the Company reported minority interests of
$12 million and $22 million, respectively, on the consolidated balance
sheets. Minority interest represented 100% of RTFC and NCSC equity as
the members of RTFC and NCSC own or control 100% of the interest in their
respective companies.
During
the nine months ended February 29, 2008, NCSC’s net loss of $10.1 million
exceeded its equity balance by $1.6 million, which eliminated the minority
interest equity in NCSC. In accordance with ARB 51, National Rural is
required to absorb the $1.6 million NCSC excess loss. NCSC’s losses
during the nine months ended February 29, 2008 were primarily due to its $18
million in derivative forward value losses. Future NCSC earnings will
be used to offset NCSC losses absorbed by National Rural.
Minority
interest at February 29, 2008 also decreased due to the retirement of $2 million
of patronage capital to RTFC members in January 2008.
NCSC’s
equity balance included in minority interest on the consolidated balance sheets
was $8.6 million at May 31, 2007.
Equity
The
following chart provides a breakout of the equity balances:
(in
thousands)
|
February
29, 2008
|
|
May
31, 2007
|
|
Increase/
(Decrease)
|
Membership
fees
|
$
|
994
|
|
|
$
|
997
|
|
|
$
|
(3
|
)
|
Education
fund
|
|
709
|
|
|
|
1,406
|
|
|
|
(697
|
)
|
Members'
capital reserve
|
|
158,348
|
|
|
|
158,308
|
|
|
|
40
|
|
Allocated
net income
|
|
320,064
|
|
|
|
405,598
|
|
|
|
(85,534
|
)
|
Unallocated
net income (1)
|
|
113,440
|
|
|
|
(23
|
)
|
|
|
113,463
|
|
Total
members' equity
|
|
593,555
|
|
|
|
566,286
|
|
|
|
27,269
|
|
Prior
years cumulative derivative forward
|
|
|
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
131,551
|
|
|
|
225,849
|
|
|
|
(94,298
|
)
|
Current
period derivative forward value (2)
|
|
(155,394
|
)
|
|
|
(79,744
|
)
|
|
|
(75,650
|
)
|
Current
period foreign currency adjustments
|
|
-
|
|
|
|
(14,554
|
)
|
|
|
14,554
|
|
Total
retained equity
|
|
569,712
|
|
|
|
697,837
|
|
|
|
(128,125
|
)
|
Accumulated
other comprehensive income
|
|
11,617
|
|
|
|
12,204
|
|
|
|
(587
|
)
|
Total
equity
|
|
$
|
581,329
|
|
|
$
|
710,041
|
|
|
$
|
(128,712
|
)
|
(1)
Excludes derivative forward value and foreign currency
adjustments. Unallocated net income at February 29, 2008 includes
National Rural’s obligation to absorb NCSC losses in excess of their equity
balance totaling $1.6 million.
(2)
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 are 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
February 29, 2008, total equity decreased by $129 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 February 29,
2008 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
|
|
$
|
84
|
|
|
$
|
3,123
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,207
|
Long-term
debt
|
|
|
-
|
|
|
|
33
|
|
|
|
1,824
|
|
|
|
539
|
|
|
|
1,546
|
|
|
|
5,791
|
|
|
|
9,733
|
Subordinated
deferrable debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
311
|
|
|
|
311
|
Members'
subordinated certificates
(1)
|
|
|
1
|
|
|
|
10
|
|
|
|
36
|
|
|
|
23
|
|
|
|
9
|
|
|
|
1,061
|
|
|
|
1,140
|
Operating
leases (2)
|
|
|
1
|
|
|
|
3
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
Contractual
interest on long-term debt (3)
|
|
|
178
|
|
|
|
623
|
|
|
|
518
|
|
|
|
468
|
|
|
|
421
|
|
|
|
4,566
|
|
|
|
6,774
|
Total
contractual obligations
|
|
|
$
|
264
|
|
|
$
|
3,792
|
|
|
$
|
2,380
|
|
|
$
|
1,030
|
|
|
$
|
1,976
|
|
|
$
|
11,729
|
|
|
$
|
21,171
|
(1)
Excludes loan subordinated certificates totaling $281 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 February 29, 2008.
Off-Balance
Sheet Obligations
Guarantees
The
following chart provides a breakout of guarantees outstanding by type and by
segment:
|
|
|
|
|
Increase/
|
(in
thousands)
|
February
29, 2008
|
|
May
31, 2007
|
|
(Decrease)
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
tax-exempt bonds
|
$
|
499,605
|
|
|
$
|
526,185
|
|
|
$
|
(26,580
|
)
|
Indemnifications
of tax benefit transfers
|
|
97,393
|
|
|
|
107,741
|
|
|
|
(10,348
|
)
|
Letters
of credit
|
|
381,436
|
|
|
|
365,766
|
|
|
|
15,670
|
|
Other
guarantees
|
|
80,415
|
|
|
|
74,682
|
|
|
|
5,733
|
|
Total
|
$
|
1,058,849
|
|
|
$
|
1,074,374
|
|
|
$
|
(15,525
|
)
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
990,472
|
|
|
$
|
1,033,688
|
|
|
$
|
(43,216
|
)
|
RTFC
|
|
260
|
|
|
|
-
|
|
|
|
260
|
|
NCSC
|
|
68,117
|
|
|
|
40,686
|
|
|
|
27,431
|
|
Total
|
$
|
1,058,849
|
|
|
$
|
1,074,374
|
|
|
$
|
(15,525
|
)
|
The
decrease in total guarantees outstanding at February 29, 2008 compared to May
31, 2007 is primarily due to the normal amortization on long-term tax-exempt
bonds and tax benefit transfers offset by a $27 million increase to NCSC letters
of credit outstanding.
At
February 29, 2008 and May 31, 2007, the Company had recorded a guarantee
liability totaling $14 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 February 29,
2008 and the related principal amortization and maturities by fiscal
year.
(in
thousands)
|
|
|
|
Principal
Amortization and Maturities
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
Balance
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Years
|
|
|
|
Guarantees
(1)
|
|
|
$
|
1,058,849
|
|
$
|
11,207
|
|
$
|
250,435
|
|
$
|
157,296
|
|
$
|
146,293
|
|
$
|
101,306
|
|
$
|
392,312
|
|
(1) On a
total of $261 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
February 29, 2008, the Company had unadvanced loan commitments totaling $12,995
million, an increase of $91 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 February 29, 2008 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 February 29, 2008 was 33.93, an increase from 26.64 at May 31,
2007. The increase in the leverage ratio is due to a decrease of $129
million in total equity and an increase of $823 million to total liabilities
offset by a decrease of $16 million in guarantees as discussed under the
Liabilities, Minority Interest and Equity section and the Off-Balance Sheet
Obligations section of "Financial Condition".
For the
purpose of covenant compliance on its revolving credit agreements and for
internal management purposes, the leverage ratio calculation is adjusted to
exclude derivative liabilities, debt used to fund RUS guaranteed loans,
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 February 29, 2008 and May 31, 2007, the adjusted leverage
ratio was 7.43 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 $118 million in
adjusted equity and an increase in adjusted liabilities of $665 million offset
by a decrease in guarantees of $16 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 February 29, 2008 was 32.11, an increase from 25.13 at May 31,
2007. The increase in the debt to equity ratio is due to the decrease
of $129 million to total equity and an increase of $823 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 February 29, 2008 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 $118 million in adjusted equity
and an increase of $665 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 February 29, 2008.
|
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
February 29, 2008, Standard & Poor’s Corporation and Fitch Ratings had the
Company’s ratings on positive outlook and Moody's Investors Service had the
Company's ratings on stable outlook.
Liquidity
and Capital Resources
The
following section will discuss the Company's sources and uses of
liquidity. The Company's primary sources of liquidity include capital
market debt issuance, private debt issuance, member loan principal repayments,
member loan interest payments,
a revolving bank line facility and member investments. The Company's
primary uses of liquidity include loan advances, interest payments on debt,
principal repayments on debt and patronage capital retirements. The
Company believes that its sources of liquidity are adequate to cover the uses of
liquidity.
Sources
of Liquidity
Capital
Market Debt Issuance
At
February 29, 2008, the Company had effective registration statements for the
issuance of $2,703 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 $1.9 billion of medium-term notes in the Australian market. At
February 29, 2008, 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 July 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 February 29, 2008. 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.
In March
2008, the Company sold to Farmer Mac $400 million of floating rate debt due in
2013 and secured by the pledge of National Rural distribution system mortgage
notes.
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 nine months ended February 29, 2008, interest income on the loan portfolio
was $778 million, representing an average yield of 5.67% as compared to 5.60%
for the nine months ended February 28, 2007. At February 29, 2008,
81% of the total loans outstanding had a fixed rate of interest and 19% of loans
outstanding had a variable rate of interest. At February 29, 2008, 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 thousands)
|
|
|
February
29, 2008
|
|
|
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.
Upfront
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 February 29, 2008,
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 February 29, 2008.
Effective
February 29, 2008 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 periods ended February 29, 2008
and May 31, 2007:
|
Actual
|
|
Requirement
|
|
February
29,
2008
|
|
May
31,
2007
|
|
|
|
|
|
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
1.025
|
|
1.16
|
|
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
|
|
7.26
|
|
6.65
|
|
|
(1) The
Company must meet this requirement in order to retire patronage
capital. The adjusted TIER reported at February 29, 2008 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.
Subsequent
to the end of the quarter, the 364-day revolving credit agreement in place at
February 29, 2008 totaling $1,125 million was replaced on March 14, 2008 with a
new 364-day agreement totaling $1,500 million expiring on March 13,
2009. Any amount outstanding under the new 364-day agreement may be
converted to a one-year term loan at the end of the revolving credit period with
a 0.10 of 1% per annum fee on the outstanding principal amount of the term
loan. The facility fee for the 364-day facility is 0.05 of 1% per
annum based on the pricing schedule in place at March 14,
2008. Upfront fees of $147,000 were paid to the banks based on their
commitment level to the 364-day agreement. The agreement contains a
provision under which if borrowings exceed 50% of total commitments, a
utilization fee of 0.05 of 1% must be paid on the outstanding
balance. National Rural's five-year agreement totaling $1,025 million
is still in effect and expires on March 22, 2011. National Rural's
five-year agreement totaling $1,125 million is still in effect and expires on
March 16, 2012. The total committed credit available under these
three current facilities was $3,650 million at March 14, 2008.
Member
Investments
At
February 29, 2008 and May 31, 2007, members funded 19.6% and 20.9%,
respectively, of total assets as follows:
|
February
29, 2008
|
|
May
31, 2007
|
|
Increase/
|
|
(Dollar
amounts in thousands)
|
Amount
|
|
%
of Total (1)
|
|
Amount
|
|
%
of Total (1)
|
|
(Decrease)
|
|
|
Commercial
paper (2)
|
$
|
1,411,075
|
|
|
47%
|
|
|
$
|
1,633,653
|
|
59%
|
|
|
$
|
(222,578
|
)
|
|
Medium-term
notes
|
|
358,069
|
|
|
7%
|
|
|
|
307,622
|
|
6%
|
|
|
|
50,447
|
|
|
Members'
subordinated certificates
|
|
1,420,885
|
|
|
100%
|
|
|
|
1,381,447
|
|
100%
|
|
|
|
39,438
|
|
|
Members'
equity (3)
|
|
593,555
|
|
|
100%
|
|
|
|
566,286
|
|
100%
|
|
|
|
27,269
|
|
|
Total
|
$
|
3,783,584
|
|
|
|
|
|
$
|
3,889,008
|
|
|
|
|
$
|
(105,424
|
)
|
|
Percentage
of total assets
|
|
19.6
|
%
|
|
|
|
|
|
20.9
|
%
|
|
|
|
|
|
|
|
Percentage
of total assets less derivative assets (3)
|
|
20.0
|
%
|
|
|
|
|
|
21.2
|
%
|
|
|
|
|
|
|
(1)
Represents the percentage of each line item outstanding to National Rural
members.
(2)
Includes $298 million and $250 million related to the daily liquidity fund at
February 29, 2008 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 February 29, 2008. At
February 29, 2008, the Company had unadvanced loan commitments totaling $12,995
million. The Company does not expect to advance the full amount of
the unadvanced commitments at February 29, 2008. 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 February 29, 2008 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
nine months ended February 29, 2008, interest expense on debt was $693 million,
representing 5.05% of the average loan volume for which the debt was used as
funding. The interest expense on debt represented 5.30% of the
average loan volume for which the debt was used as funding for the nine months
ended February 28, 2007. At February 29, 2008, a total of 84% of
outstanding debt had a fixed interest rate and 16% 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 February 29, 2008 and
thereafter is as follows:
|
|
Amount
|
(Dollar
amounts in millions)
|
|
Maturing (1)
|
2008
|
$
|
85
|
2009
|
|
3,166
|
2010
|
|
1,860
|
2011
|
|
562
|
2012
|
|
1,555
|
Thereafter
|
|
7,163
|
Total
|
|
$
|
14,391
|
(1)
Excludes loan subordinated certificates totaling $281 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 61). 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 February 29, 2008 and May 31, 2007, 19%, and 18%,
respectively, of loans carried variable interest rates.
Matched
Funding Policy
To
monitor interest rate risk in the funding of fixed rate loans, the Company
performs a monthly gap analysis (see chart on page 61). 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 February 29, 2008, the Company had $14,851 million of
fixed rate assets amortizing or repricing, funded by $14,299 million of fixed
rate liabilities maturing during the next 30 years and $424 million of members'
equity and members' subordinated certificates, a portion of which does not have
a scheduled maturity. The difference of $128 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 February 29, 2008.
INTEREST
RATE GAP ANALYSIS
(Fixed
Rate Assets/Liabilities)
As of
February 29, 2008
|
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
|
$
|
245
|
|
$
|
3,617
|
|
|
$
|
3,182
|
|
|
$
|
3,838
|
|
|
$
|
2,801
|
|
|
$
|
1,168
|
|
|
$
|
14,851
|
|
Total
assets
|
$
|
245
|
|
$
|
3,617
|
|
|
$
|
3,182
|
|
|
$
|
3,838
|
|
|
$
|
2,801
|
|
|
$
|
1,168
|
|
|
$
|
14,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and members' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
243
|
|
$
|
3,312
|
|
|
$
|
3,881
|
|
|
$
|
3,756
|
|
|
$
|
1,625
|
|
|
$
|
254
|
|
|
$
|
13,071
|
|
Subordinated
certificates
|
|
6
|
|
|
47
|
|
|
|
82
|
|
|
|
70
|
|
|
|
243
|
|
|
|
780
|
|
|
|
1,228
|
|
Members'
equity (1)
|
|
13
|
|
|
26
|
|
|
|
28
|
|
|
|
121
|
|
|
|
101
|
|
|
|
135
|
|
|
|
424
|
|
Total
liabilities and members' equity
|
$
|
262
|
|
$
|
3,385
|
|
|
$
|
3,991
|
|
|
$
|
3,947
|
|
|
$
|
1,969
|
|
|
$
|
1,169
|
|
|
$
|
14,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap (2)
|
$
|
(17
|
)
|
$
|
232
|
|
|
$
|
(809
|
)
|
|
$
|
(109
|
)
|
|
$
|
832
|
|
|
$
|
(1
|
)
|
|
$
|
128
|
|
Cumulative
gap
|
$
|
(17
|
)
|
$
|
215
|
|
|
$
|
(594
|
)
|
|
$
|
(703
|
)
|
|
$
|
129
|
|
|
$
|
128
|
|
|
|
|
|
Cumulative
gap as a % of total assets
|
|
(0.09
|
)%
|
|
1.12
|
%
|
|
|
(3.08
|
)%
|
|
|
(3.65
|
)%
|
|
|
0.67
|
%
|
|
|
0.66
|
%
|
|
|
|
|
Cumulative
gap as a % of adjusted total assets (3)
|
|
(0.09
|
)%
|
|
1.14
|
%
|
|
|
(3.14
|
)%
|
|
|
(3.72
|
)%
|
|
|
0.68
|
%
|
|
|
0.68
|
%
|
|
|
|
|
(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
February 29, 2008 and May 31, 2007, the Company was a party to interest rate
exchange agreements with a total notional amount of $12,957 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 $7,701 million as of February 29, 2008 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 $5,256 million of long-term debt as of February 29, 2008 and May 31,
2007. 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
February 29, 2008 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 February 29, 2008 and May 31, 2007, the Company was a
party to interest rate exchange agreements with notional amounts totaling
$12,957 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
February 29, 2008, 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 February
29, 2008 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.
At
February 29, 2008, the Company had 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+
|
|
$
|
1,739,419
|
|
|
$
|
(45,283)
|
|
|
$
|
82,534
|
|
|
$
|
37,251
|
|
Fall
below Baa1/BBB+
|
|
|
7,183,620
|
|
|
|
(203,636)
|
|
|
|
136,855
|
|
|
|
(66,781
|
)
|
Total
|
|
$
|
8,923,039
|
|
|
$
|
(248,919)
|
|
|
$
|
219,389
|
|
|
$
|
(29,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See chart
on page 57 for National Rural's senior unsecured credit ratings as of
February 29, 2008.
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
February 29, 2008, the net obligation totaled $18 million for the $718 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 February
29, 2008, the Company had a total of $3,207 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 February 29, 2008 and May 31, 2007,
the Company had a total of $3,275 million in revolving credit agreements and
bank lines of credit. Subsequent to the end of the quarter, on March
14, 2008, the Company increased the total of its revolving credit agreements to
$3,650 million. 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 February 29, 2008 and May 31, 2007, there was a total
of $1,680 million and $1,118 million, respectively, of dealer commercial paper
and bank bid notes outstanding, representing 9% and 6%, respectively, of the
Company's total debt outstanding.
National
Rural continues to see significant investment support from its members with $3.2
billion of commercial paper, daily liquidity fund, medium-term notes and
subordinated certificate investments outstanding at February 29,
2008. The member debt investments represented 18% of the total debt
outstanding at February 29, 2008. In addition, National Rural had a
total of $3 billion of privately placed debt outstanding at February 29, 2008,
$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 nine months ended February 29,
2008, which limited the amount of long-term public debt required during the
period. The private placements of debt represented 17% of total debt
outstanding at February 29, 2008. 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 nine months ended February 29,
2008. 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 8% 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 $2,140 million of the Company’s extendible debt elected not to extend the
maturity during the nine months ended February 29, 2008. As a result,
$1,845 million of extendible debt was reclassified from long-term debt to
short-term debt based on maturity dates ranging from August 2008 through
February 2009. The remaining $295 million of extendible debt will
mature in fiscal year 2010.
At
February 29, 2008, the Company was the guarantor and liquidity provider for $261
million of tax-exempt bonds issued for its member cooperatives. A
total of $133 million of such tax-exempt bonds were in flexible and weekly mode,
which reprice every seven to thirty-five days. A total of $51 million
of such tax-exempt bonds reprice semi-annually. A total of $77
million of such bonds were in unit price mode and reprice approximately every 30
days. National Rural has not been required to purchase any of the
bonds in its role as liquidity provider. In addition to these
tax-exempt bonds, National Rural was the guarantor, but not liquidity provider,
for $224 million of tax-exempt bonds that were in the auction rate
mode. National Rural has not been required to perform under the
guarantee of its members’ tax-exempt bonds.
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
|
|
Nine
months ended
|
(in
thousands)
|
|
February
29, 2008
|
|
February
28, 2007
|
|
February
29, 2008
|
|
February
28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
(233,468
|
)
|
|
$
|
(247,441
|
)
|
|
$
|
(720,810
|
)
|
|
$
|
(752,036
|
)
|
Adjusted
to include: Derivative cash settlements
|
|
|
10,463
|
|
|
|
44,442
|
|
|
|
30,299
|
|
|
|
76,190
|
|
Adjusted
interest expense
|
|
$
|
(223,005
|
)
|
|
$
|
(202,999
|
)
|
|
$
|
(690,511
|
)
|
|
$
|
(675,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
33,108
|
|
|
$
|
17,432
|
|
|
$
|
77,007
|
|
|
$
|
37,770
|
|
Adjusted
to include: Derivative cash settlements
|
|
|
10,463
|
|
|
|
44,442
|
|
|
|
30,299
|
|
|
|
76,190
|
|
Adjusted
net interest income
|
|
$
|
43,571
|
|
|
$
|
61,874
|
|
|
$
|
107,306
|
|
|
$
|
113,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income prior to income taxes and minority interest
|
|
$
|
(4,586
|
)
|
|
$
|
48,696
|
|
|
$
|
(56,328
|
)
|
|
$
|
(52,396
|
)
|
Adjusted
to exclude: Derivative forward value
|
|
|
64,266
|
|
|
|
4,189
|
|
|
|
173,278
|
|
|
|
120,779
|
|
Foreign
currency adjustments
|
|
-
|
|
|
|
(1,886
|
)
|
|
|
-
|
|
|
|
15,413
|
|
Adjusted
income prior to income taxes and minority interest
|
|
$
|
59,680
|
|
|
$
|
50,999
|
|
|
$
|
116,950
|
|
|
$
|
83,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(323
|
)
|
|
$
|
48,635
|
|
|
$
|
(41,931
|
)
|
|
$
|
(50,579
|
)
|
Adjusted
to include: Minority interest net income
|
|
|
(2,088
|
)
|
|
|
(566
|
)
|
|
|
(8,211
|
)
|
|
|
(1,244
|
)
|
Adjusted
to exclude: Derivative forward value
|
|
|
64,266
|
|
|
|
4,189
|
|
|
|
173,278
|
|
|
|
120,779
|
|
Foreign
currency adjustments
|
|
|
-
|
|
|
|
(1,886
|
)
|
|
|
-
|
|
|
|
15,413
|
|
Adjusted
net income
|
|
$
|
61,855
|
|
|
$
|
50,372
|
|
|
$
|
123,136
|
|
|
$
|
84,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Nine
months ended
|
|
February
29, 2008
|
|
February
28, 2007
|
|
February
29, 2008
|
|
February
28, 2007
|
TIER
(1)
|
|
-
|
|
|
|
1.20
|
|
|
|
-
|
|
|
|
-
|
|
Adjusted
TIER
|
|
|
1.28
|
|
|
|
1.25
|
|
|
|
1.18
|
|
|
|
1.12
|
|
(1) For
the three and nine months ended February 29, 2008, the Company reported a net
loss of $0.3 million and $42 million, respectively. For the nine
months ended February 28, 2007, the Company reported a net loss of $51
million. Thus, the TIER calculation for those periods result 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)
|
|
February
29, 2008
|
|
May
31, 2007
|
Liabilities
|
|
$
|
18,666,263
|
|
|
$
|
17,843,151
|
|
Less:
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
|
(370,761
|
)
|
|
|
(71,934
|
)
|
Debt
used to fund loans guaranteed by RUS
|
|
|
(251,135
|
)
|
|
|
(255,903
|
)
|
Subordinated
deferrable debt
|
|
|
(311,440
|
)
|
|
|
(486,440
|
)
|
Subordinated
certificates
|
|
|
(1,420,885
|
)
|
|
|
(1,381,447
|
)
|
Adjusted
liabilities
|
|
$
|
16,312,042
|
|
|
$
|
15,647,427
|
|
|
|
|
|
|
|
|
|
|
Total
equity
|
|
$
|
581,329
|
|
|
$
|
710,041
|
|
Less:
|
|
|
|
|
|
|
|
|
Prior
years cumulative derivative forward value and
|
|
|
|
|
|
|
|
|
foreign
currency adjustments
|
|
|
(131,551
|
)
|
|
|
(225,849
|
)
|
Current
period derivative forward value (1)
|
|
|
155,394
|
|
|
|
79,744
|
|
Current
period foreign currency adjustments
|
|
|
-
|
|
|
|
14,554
|
|
Accumulated
other comprehensive income
|
|
|
(11,617
|
)
|
|
|
(12,204
|
)
|
Subtotal
members' equity
|
|
|
593,555
|
|
|
|
566,286
|
|
Plus:
|
|
|
|
|
|
|
|
|
Subordinated
certificates
|
|
|
1,420,885
|
|
|
|
1,381,447
|
|
Subordinated
deferrable debt
|
|
|
311,440
|
|
|
|
486,440
|
|
Minority
interest
|
|
|
12,086
|
|
|
|
21,989
|
|
Adjusted
equity
|
|
$
|
2,337,966
|
|
|
$
|
2,456,162
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
|
$
|
1,058,849
|
|
|
$
|
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.
|
|
February
29, 2008
|
|
May
31, 2007
|
Leverage
ratio
|
|
|
33.93
|
|
|
|
26.64
|
|
Adjusted
leverage ratio
|
|
|
7.43
|
|
|
|
6.81
|
|
|
|
|
|
|
|
|
|
|
Debt
to equity ratio
|
|
|
32.11
|
|
|
|
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 60.
Item
4. Controls
and Procedures
Senior
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the Company's disclosure controls and procedures
as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934 ("the Exchange Act"). At the end of the period covered by this
report, based on this evaluation process, the Chief Executive Officer
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are effective. 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 February 29, 2008.
Item
6.
Exhibits
4.5
|
–
|
Revolving
Credit Agreement dated as of March 14, 2008 for $1,500 million expiring on
March 13, 2009.
|
|
|
|
4.21
|
–
|
Indenture
for Clean Renewable Energy Bonds, Tax Credit Series dated as of January 1,
2008, between the Registrant and U.S. Bank Trust National
Association. The Indenture has been omitted and will be
furnished supplementally to the Securities and Exchange Commission upon
request.
|
|
|
|
4.22
|
–
|
Note
Purchase Agreement dated as of March 27, 2008 for $400,000,000 between the
Registrant and Federal Agricultural Mortgage
Corporation.
|
|
|
|
4.23
|
–
|
Pledge
Agreement dated as of March 27, 2008, between the Registrant, Federal
Agricultural Mortgage Corporation and U.S. Bank Trust National
Association.
|
|
|
|
4.24
|
–
|
Registration
Rights Agreement dated as of March 27, 2008 between the Registrant and
Federal Agricultural Mortgage Corporation.
|
|
|
|
4.25
|
–
|
Variable
Rate Senior Note due 2013 dated as of March 27, 2008 from the Registrant
to Federal Agricultural Mortgage Corporation.
|
|
|
|
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)
April 14,
2008