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 28, 2009
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
28, 2009
|
|
|
|
May
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
453,147
|
|
|
$
|
177,809
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
7,693
|
|
|
|
14,460
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in trading securities
|
|
11,434
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in preferred stock
|
|
35,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
|
20,172,499
|
|
|
|
19,029,040
|
|
|
Less:
Allowance for loan losses
|
|
(638,583
|
)
|
|
|
(514,906
|
)
|
|
Loans
to members, net
|
|
19,533,916
|
|
|
|
18,514,134
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
268,012
|
|
|
|
258,315
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
36,592
|
|
|
|
21,045
|
|
|
|
|
|
|
|
|
|
|
|
Debt
service reserve funds
|
|
47,639
|
|
|
|
54,993
|
|
|
|
|
|
|
|
|
|
|
|
Bond
issuance costs, net
|
|
50,357
|
|
|
|
39,618
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets, net
|
|
54,414
|
|
|
|
58,961
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets
|
|
416,560
|
|
|
|
220,514
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
32,153
|
|
|
|
19,532
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,946,917
|
|
|
$
|
19,379,381
|
|
|
|
|
|
|
|
|
|
|
|
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
28,
2009
|
|
|
|
May
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
$
|
5,367,410
|
|
|
$
|
6,327,453
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest payable
|
|
349,013
|
|
|
|
244,299
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
12,224,456
|
|
|
|
10,173,587
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income
|
|
19,100
|
|
|
|
21,971
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
liability
|
|
33,814
|
|
|
|
15,034
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
50,698
|
|
|
|
27,216
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
571,481
|
|
|
|
171,390
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
deferrable debt
|
|
311,440
|
|
|
|
311,440
|
|
|
|
|
|
|
|
|
|
|
|
Members'
subordinated certificates:
|
|
|
|
|
|
|
|
|
Membership
subordinated certificates
|
|
649,465
|
|
|
|
649,465
|
|
|
Loan
and guarantee subordinated certificates
|
|
823,086
|
|
|
|
757,314
|
|
|
Member
capital securities
|
|
96,615
|
|
|
|
-
|
|
|
Total
members' subordinated certificates
|
|
1,569,166
|
|
|
|
1,406,779
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
11,057
|
|
|
|
14,247
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Retained
equity
|
|
431,013
|
|
|
|
657,138
|
|
|
Accumulated
other comprehensive income
|
|
8,269
|
|
|
|
8,827
|
|
|
Total
equity
|
|
439,282
|
|
|
|
665,965
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,946,917
|
|
|
$
|
19,379,381
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying
notes.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
(in
thousands)
For the
Three and Nine Months Ended February 28, 2009 and February 29, 2008
|
|
Three
months ended
|
|
|
|
Nine
months ended
|
|
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
271,433
|
|
|
$
|
266,576
|
|
|
$
|
806,993
|
|
|
$
|
797,817
|
|
Interest
expense
|
|
(240,116
|
)
|
|
|
(233,468
|
)
|
|
|
(694,649
|
)
|
|
|
(720,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
31,317
|
|
|
|
33,108
|
|
|
|
112,344
|
|
|
|
77,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of (provision for) loan losses
|
|
10,415
|
|
|
|
33,599
|
|
|
|
(126,577
|
)
|
|
|
47,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (loss) after recovery of (provision for)
|
|
41,732
|
|
|
|
66,707
|
|
|
|
(14,233
|
)
|
|
|
124,907
|
|
loan
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
220
|
|
|
|
367
|
|
|
|
842
|
|
|
|
1,070
|
|
Derivative
cash settlements
|
|
104,012
|
|
|
|
10,463
|
|
|
|
116,946
|
|
|
|
30,299
|
|
Results
of operations of foreclosed assets
|
|
801
|
|
|
|
2,401
|
|
|
|
3,258
|
|
|
|
6,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
105,033
|
|
|
|
13,231
|
|
|
|
121,046
|
|
|
|
37,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(10,036
|
)
|
|
|
(9,398
|
)
|
|
|
(29,799
|
)
|
|
|
(27,049
|
)
|
Other
general and administrative expenses
|
|
(6,430
|
)
|
|
|
(5,862
|
)
|
|
|
(16,354
|
)
|
|
|
(16,278
|
)
|
(Provision
for) recovery of guarantee liability
|
|
(338
|
)
|
|
|
1,000
|
|
|
|
(5,319
|
)
|
|
|
4,300
|
|
Market
adjustment on foreclosed assets
|
|
(1,652
|
)
|
|
|
(5,840
|
)
|
|
|
(1,805
|
)
|
|
|
(5,840
|
)
|
Derivative
forward value
|
|
(53,046
|
)
|
|
|
(64,266
|
)
|
|
|
(203,457
|
)
|
|
|
(173,278
|
)
|
Fair
value adjustment on investments in trading securities
|
|
-
|
|
|
|
-
|
|
|
|
(101
|
)
|
|
|
-
|
|
Loss
on sale of loans
|
|
-
|
|
|
|
(158
|
)
|
|
|
-
|
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
(71,502
|
)
|
|
|
(84,524
|
)
|
|
|
(256,835
|
)
|
|
|
(218,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes and minority interest
|
|
75,263
|
|
|
|
(4,586
|
)
|
|
|
(150,022
|
)
|
|
|
(56,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
(183
|
)
|
|
|
2,175
|
|
|
|
6,977
|
|
|
|
6,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to minority interest
|
|
75,080
|
|
|
|
(2,411
|
)
|
|
|
(143,045
|
)
|
|
|
(50,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
159
|
|
|
|
2,088
|
|
|
|
3,138
|
|
|
|
8,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
75,239
|
|
|
$
|
(323
|
)
|
|
$
|
(139,907
|
)
|
|
$
|
(41,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(in
thousands)
For the
Nine Months Ended February 28, 2009 and February 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patronage
Capital
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
|
|
|
|
|
|
|
Other
|
|
Subtotal
|
|
|
|
Unallocated
|
|
|
|
Members'
|
|
General
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
Retained
|
|
Membership
|
|
Net
|
|
Education
|
|
Capital
|
|
Reserve
|
|
|
|
|
|
|
Total
|
|
Income
(Loss)
|
|
Equity
|
|
Fees
|
|
Income
(Loss)
|
|
Fund
|
|
Reserve
|
|
Fund
|
|
Other
|
|
|
Nine
months ended February 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of May 31, 2008
|
$
|
665,965
|
|
$
|
8,827
|
|
|
$
|
657,138
|
|
|
$
|
993
|
|
|
$
|
44,003
|
|
|
$
|
1,484
|
|
|
$
|
187,409
|
|
$
|
496
|
|
|
$
|
422,753
|
|
|
|
Patronage
capital retirement
|
|
(85,526
|
)
|
|
-
|
|
|
|
(85,526
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(217
|
)
|
|
|
|
|
|
(85,309
|
)
|
|
|
Loss
prior to income taxes and minority interest
|
|
(150,022
|
)
|
|
-
|
|
|
|
(150,022
|
)
|
|
|
-
|
|
|
|
(150,022
|
)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
comprehensive loss
|
|
(558
|
)
|
|
(558
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
Income
tax benefit
|
|
6,977
|
|
|
-
|
|
|
|
6,977
|
|
|
|
-
|
|
|
|
6,977
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
Minority
interest
|
|
3,138
|
|
|
-
|
|
|
|
3,138
|
|
|
|
-
|
|
|
|
3,138
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
Other
|
|
(692
|
)
|
|
-
|
|
|
|
(692
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(691
|
)
|
|
|
(93
|
)
|
|
-
|
|
|
|
93
|
|
|
|
Balance
as of February 28, 2009
|
$
|
439,282
|
|
$
|
8,269
|
|
|
$
|
431,013
|
|
|
$
|
992
|
|
|
$
|
(95,904
|
)
|
|
$
|
793
|
|
|
$
|
187,099
|
|
$
|
496
|
|
|
$
|
337,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
tax benefit
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
For the
Nine Months Ended February 28, 2009 and February 29, 2008
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
loss
|
$
|
(139,907
|
)
|
|
$
|
(41,931
|
)
|
Add
(deduct):
|
|
|
|
|
|
|
|
Amortization
of deferred income
|
|
(4,757
|
)
|
|
|
(5,769
|
)
|
Amortization
of bond issuance costs and deferred charges
|
|
8,060
|
|
|
|
14,048
|
|
Depreciation
|
|
1,710
|
|
|
|
1,698
|
|
Provision
for (recovery of) loan losses
|
|
126,577
|
|
|
|
(47,900
|
)
|
Provision
for (recovery of) guarantee liability
|
|
5,319
|
|
|
|
(4,300
|
)
|
Results
of operations of foreclosed assets
|
|
(3,258
|
)
|
|
|
(6,217
|
)
|
Market
adjustment on foreclosed assets
|
|
1,805
|
|
|
|
5,840
|
|
Derivative
forward value
|
|
203,457
|
|
|
|
173,278
|
|
Fair
value adjustment on investments in trading securities
|
|
101
|
|
|
|
-
|
|
Loss
on sale of loans
|
|
-
|
|
|
|
676
|
|
Restricted
interest earned on restricted cash
|
|
(138
|
)
|
|
|
(17
|
)
|
Purchases
of investments in trading securities
|
|
(71,405
|
)
|
|
|
-
|
|
Sales
of investments in trading securities
|
|
59,870
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
(15,039
|
)
|
|
|
(12,684
|
)
|
Accrued
interest payable
|
|
104,714
|
|
|
|
33,375
|
|
Other
|
|
20,819
|
|
|
|
2,486
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
297,928
|
|
|
|
112,583
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Advances
made on loans
|
|
(7,508,239
|
)
|
|
|
(6,018,988
|
)
|
Principal
collected on loans
|
|
6,360,213
|
|
|
|
5,388,629
|
|
Net
investment in fixed assets
|
|
(16,339
|
)
|
|
|
(16,426
|
)
|
Net
cash provided by foreclosed assets
|
|
6,000
|
|
|
|
9,055
|
|
Net
proceeds from sale of loans
|
|
-
|
|
|
|
73,972
|
|
Investment
in preferred stock
|
|
(35,000
|
)
|
|
|
-
|
|
Change
in restricted cash
|
|
6,768
|
|
|
|
(15,706
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
(1,186,597
|
)
|
|
|
(579,464
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
(Repayments)
proceeds from issuances of short-term debt, net
|
|
(136,883
|
)
|
|
|
347,544
|
|
Proceeds
from issuance of long-term debt, net
|
|
4,341,725
|
|
|
|
1,566,151
|
|
Payments
for retirement of long-term debt
|
|
(3,130,886
|
)
|
|
|
(1,293,720
|
)
|
Payments
for retirement of subordinated deferrable debt
|
|
-
|
|
|
|
(175,000
|
)
|
Proceeds
from issuance of members' subordinated certificates
|
|
187,603
|
|
|
|
58,714
|
|
Payments
for retirement of members' subordinated certificates
|
|
(17,402
|
)
|
|
|
(16,025
|
)
|
Payments
for retirement of patronage capital
|
|
(78,479
|
)
|
|
|
(77,378
|
)
|
Payments
for retirement of RTFC patronage capital
|
|
(1,671
|
)
|
|
|
(9,771
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
1,164,007
|
|
|
|
400,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
275,338
|
|
|
|
(66,366
|
)
|
BEGINNING
CASH AND CASH EQUIVALENTS
|
|
177,809
|
|
|
|
304,107
|
|
ENDING
CASH AND CASH EQUIVALENTS
|
$
|
453,147
|
|
|
$
|
237,741
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
For the
Nine Months Ended February 28, 2009 and February 29, 2008
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
$
|
581,876
|
|
|
$
|
673,387
|
|
|
Cash
paid for income taxes
|
|
31
|
|
|
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing and investing activities:
|
|
|
|
|
|
|
|
|
Net
decrease in debt service reserve funds/debt service reserve
certificates
|
$
|
(7,354
|
)
|
|
$
|
-
|
|
|
Subordinated
certificates applied against loan balances
|
|
1,447
|
|
|
|
-
|
|
|
Patronage
capital applied against loan balances
|
|
81
|
|
|
|
-
|
|
|
Minority
interest patronage capital applied against loan balances
|
|
29
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
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 1,523 as of February 28, 2009 including
897 utility members, the majority of which are consumer-owned electric
cooperatives, 499 telecommunications members, 66 service members and 61
associates in 49 states, the District of Columbia and two U.S.
territories. The utility members included 829 distribution systems
and 68 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 included in the Company's Annual Report on Form 10-K for the fiscal
year ended
May 31,
2008.
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, 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
effect 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 for loan securitization transactions,
after elimination of 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, (“FIN 46(R)”)
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 until December 1,
2016. Under a guarantee agreement, RTFC pays National Rural a fee in
exchange for a reimbursement to RTFC for its loan losses. All loans
that require RTFC board approval also require approval by National Rural for
funding under RTFC’s credit facilities with National Rural. National Rural is
not a member of RTFC and does not elect directors to the RTFC
board. RTFC has a non-voting associate relationship with 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 renewed 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
return for 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 reimbursement to NCSC for its loan losses,
excluding losses in the consumer loan program. All loans that require
NCSC board approval also require approval by National Rural for funding under
NCSC’s credit facilities with National Rural. National Rural controls
the nomination process for 1 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 a 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 28, 2009, National Rural had guaranteed $57
million of NCSC debt and derivative instruments with third
parties. The maturities for NCSC debt guaranteed by National Rural
run through 2022. At February 28, 2009, National Rural's maximum
potential exposure totaled $75 million related to guarantees of NCSC debt and
derivatives. Guarantees related to NCSC debt and derivative
instruments are not included in Note 12, Guarantees at February 28,
2009 as the debt and derivatives are reported on the consolidated balance
sheet. All National Rural loans to RTFC and NCSC are secured by all
assets and revenues of RTFC and NCSC. At February 28, 2009, RTFC had
total assets of $1,856 million including loans outstanding to members of $1,674
million and NCSC had total assets of $464 million including loans outstanding of
$441 million. RTFC and NCSC loans outstanding to members are included
in the loans to members line item in the consolidated balance
sheets.
National
Rural takes all of the risk related to the funding of the loans to RTFC and
NCSC, and in return, National Rural earns a spread over its funding costs on the
loans to RTFC and NCSC. At February 28, 2009, National Rural had
committed to lend RTFC up to $4.0 billion of which $1.7 billion was
outstanding. At February 28, 2009, National Rural had committed to
provide up to $1,000 million of credit to NCSC of which $466 million was
outstanding, representing $409 million of outstanding loans and $57 million of
credit enhancements. RTFC and NCSC loans payable to National Rural
are eliminated in consolidation. Total liabilities for RTFC and NCSC were $1,675
million and $472 million, respectively, at February 28, 2009.
National
Rural established limited liability corporations and partnerships to hold
foreclosed assets and form loan securitization
transactions. National Rural has full ownership and control of
all such entities 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 for 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 for loan securitization
transactions.
In
accordance with ARB 51, the Company presents the amount of subsidiary equity
controlled by RTFC and NCSC as minority interest on the consolidated balance
sheets and the subsidiary earnings controlled by RTFC and NCSC as minority
interest on the consolidated statements of operations.
(c) Investments
The
Company accounts for its investments in trading securities in accordance with
Statement of Financial Accounting Standards (“SFAS”) 115, Accounting for Certain Investments in Debt and Equity
Securities (“SFAS 115”). The Company intends to sell these
assets back into the marketplace as soon as practicable and at a reasonable
price. Therefore, the Company classifies these assets as trading
securities. Trading securities are carried at fair value with changes
in fair value recorded in earnings.
The
Company accounts for its investments in preferred stock under the cost method in
accordance with Accounting Principles Board Opinion 18, The Equity Method of Accounting for
Investments in Common Stock, as these investments do not meet the
definition of a marketable security under SFAS 115. Under the cost
method of accounting, the Company records the preferred stock at cost and
recognizes as income dividends received that are earned from net accumulated
earnings. Dividends received in excess of earnings subsequent to the
date of investment are considered a return of investment and are recorded as
reductions of cost of the investment. The Company continually
monitors these investments for possible
impairment. Other-than-temporary impairments are recognized in
earnings.
(d) Allowance
for Loan Losses
The
Company maintains an allowance for loan losses at a level estimated by
management to provide for probable losses inherent in the loan portfolio. These
estimates are based upon a review of the composition of the loan portfolio, past
loss experience, specific problem loans, current economic conditions and other
pertinent factors which, in management's judgment, may contribute to expected
losses. On a quarterly basis, the Company prepares an analysis 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
recommends to the board of directors of National Rural when a loan should be
charged off. In making its recommendation to charge off all or a
portion of a loan balance, management considers various factors including cash
flow analysis and the value of the collateral securing the borrower's
loans.
Activity
in the loan loss allowance account is summarized below:
|
|
For
the nine months ended and as of
|
|
|
For
the year ended
and
as of
|
|
(in
thousands)
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
May
31,
2008
|
|
Balance
at beginning of period
|
$
|
514,906
|
|
|
$
|
561,663
|
|
$
|
561,663
|
|
Provision
for (recovery of) loan losses
|
|
126,577
|
|
|
|
(47,900
|
)
|
|
(30,262
|
)
|
Charge-offs
|
|
(3,173
|
)
|
|
|
(16,827
|
)
|
|
(16,911
|
)
|
Recoveries
|
|
273
|
|
|
|
324
|
|
|
416
|
|
Balance
at end of period
|
$
|
638,583
|
|
|
$
|
497,260
|
|
$
|
514,906
|
|
(e) Interest
Income
The
following table presents the components of interest income:
|
|
For
the three months ended
|
|
|
|
For
the nine months ended
|
|
(in
thousands)
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
Interest
on long-term fixed-rate loans (1)
|
$
|
220,791
|
|
|
$
|
220,117
|
|
|
$
|
669,454
|
|
$
|
649,860
|
|
Interest
on long-term variable-rate loans (1)
|
|
27,035
|
|
|
|
20,785
|
|
|
|
60,684
|
|
|
68,024
|
|
Interest
on short-term loans (1)
|
|
18,208
|
|
|
|
20,224
|
|
|
|
58,654
|
|
|
59,816
|
|
Interest
on investments (2)
|
|
990
|
|
|
|
1,832
|
|
|
|
4,615
|
|
|
6,668
|
|
Conversion
fees (3)
|
|
1,355
|
|
|
|
1,587
|
|
|
|
4,594
|
|
|
5,096
|
|
Make-whole
and prepayment fees (4)
|
|
203
|
|
|
|
533
|
|
|
|
1,070
|
|
|
2,287
|
|
Commitment
and guarantee fees (5)
|
|
2,196
|
|
|
|
822
|
|
|
|
5,832
|
|
|
3,742
|
|
Other
fees
|
|
655
|
|
|
|
676
|
|
|
|
2,090
|
|
|
2,324
|
|
Total
interest income
|
|
$
|
271,433
|
|
|
$
|
266,576
|
|
|
$
|
806,993
|
|
$
|
797,817
|
|
(1)
Represents interest income on loans to members.
(2)
Represents interest income on the investment of cash and trading
securities.
(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
according to the amount of the loan commitment that is advanced. Such
refundable fees are deferred and then recognized 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, including fees related to
the Company’s obligation to perform as liquidity provider, 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 $16 million and $20 million at February 28, 2009 and
May 31, 2008, respectively.
(f) Interest
Expense
The
following table presents the components of interest expense:
|
|
For
the three months ended
|
|
|
|
For
the nine months ended
|
|
(in
thousands)
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
Interest
expense (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper and bank bid notes
|
$
|
13,424
|
|
|
$
|
30,639
|
|
|
$
|
53,500
|
|
$
|
102,117
|
|
Medium-term
notes
|
|
80,503
|
|
|
|
82,555
|
|
|
|
242,016
|
|
|
249,422
|
|
Collateral
trust bonds
|
|
80,110
|
|
|
|
61,213
|
|
|
|
211,065
|
|
|
189,968
|
|
Subordinated
deferrable debt
|
|
4,916
|
|
|
|
4,916
|
|
|
|
14,747
|
|
|
14,747
|
|
Subordinated
certificates
|
|
13,475
|
|
|
|
12,297
|
|
|
|
38,723
|
|
|
36,451
|
|
Long-term
private debt
|
|
36,598
|
|
|
|
34,359
|
|
|
|
106,728
|
|
|
100,102
|
|
Debt
issuance costs (2)
|
|
2,692
|
|
|
|
2,328
|
|
|
|
7,218
|
|
|
7,625
|
|
Commitment
and guarantee fees (3)
|
|
5,871
|
|
|
|
4,602
|
|
|
|
15,884
|
|
|
13,277
|
|
Loss
on early extinguishment of debt (4)
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
5,509
|
|
Other
fees
|
|
2,527
|
|
|
|
559
|
|
|
|
4,768
|
|
|
1,592
|
|
Total
interest expense
|
|
$
|
240,116
|
|
|
$
|
233,468
|
|
|
$
|
694,649
|
|
$
|
720,810
|
|
(1)
Represents interest expense and the amortization of discounts on
debt.
(2)
Includes amortization of all deferred charges related to the issuance of debt,
principally underwriter 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 which are recognized as incurred.
(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 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 or loss includes the Company's net income (loss), as well as other
comprehensive income resulting from a transition adjustment recorded upon the
initial adoption of SFAS 133, Accounting for Derivative Financial
Instruments and Hedging Activities, as amended (“SFAS
133”). Comprehensive income (loss) is calculated as
follows:
|
|
For
the three months ended
|
|
|
|
For
the nine months ended
|
|
|
(in
thousands)
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
Net
income (loss)
|
$
|
75,239
|
|
|
$
|
(323
|
)
|
|
$
|
(139,907
|
)
|
|
$
|
(41,931
|
)
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for realized gain on derivatives
|
|
(159
|
)
|
|
|
(256
|
)
|
|
|
(558
|
)
|
|
|
(587
|
)
|
|
Comprehensive
income (loss)
|
$
|
75,080
|
|
|
$
|
(579
|
)
|
|
$
|
(140,465
|
)
|
|
$
|
(42,518
|
)
|
|
(2) Loans
and Commitments
Loans
outstanding to members and unadvanced commitments by loan type and by segment
are summarized as follows:
|
|
February
28, 2009
|
|
|
|
May
31, 2008
|
|
|
(in
thousands)
|
|
Loans
Outstanding
|
|
|
|
Unadvanced
Commitments
(1)
|
|
|
|
Loans
Outstanding
|
|
|
|
Unadvanced
Commitments
(1)
|
|
|
Total
by loan type (2)
(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
$
|
14,707,739
|
|
|
$
|
-
|
|
|
$
|
15,204,614
|
|
|
$
|
-
|
|
|
Long-term
variable-rate loans
|
|
3,179,657
|
|
|
|
6,042,073
|
|
|
|
1,882,095
|
|
|
|
5,975,541
|
|
|
Loans
guaranteed by RUS
|
|
245,015
|
|
|
|
491
|
|
|
|
250,169
|
|
|
|
491
|
|
|
Short-term
loans
|
|
2,036,467
|
|
|
|
7,802,408
|
|
|
|
1,690,117
|
|
|
|
7,597,712
|
|
|
Total
loans outstanding
|
|
20,168,878
|
|
|
|
13,844,972
|
|
|
|
19,026,995
|
|
|
|
13,573,744
|
|
|
Deferred
origination fees
|
|
3,621
|
|
|
|
-
|
|
|
|
2,045
|
|
|
|
-
|
|
|
Less:
Allowance for loan losses
|
|
(638,583
|
)
|
|
|
-
|
|
|
|
(514,906
|
)
|
|
|
-
|
|
|
Net
loans outstanding
|
$
|
19,533,916
|
|
|
$
|
13,844,972
|
|
|
$
|
18,514,134
|
|
|
$
|
13,573,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
13,845,609
|
|
|
$
|
9,818,766
|
|
|
$
|
13,438,370
|
|
|
$
|
9,579,213
|
|
|
Power
supply
|
|
4,114,046
|
|
|
|
3,107,598
|
|
|
|
3,339,112
|
|
|
|
2,960,693
|
|
|
Statewide
and associate
|
|
94,317
|
|
|
|
156,778
|
|
|
|
108,925
|
|
|
|
158,293
|
|
|
National
Rural total
|
|
18,053,972
|
|
|
|
13,083,142
|
|
|
|
16,886,407
|
|
|
|
12,698,199
|
|
|
RTFC
|
|
1,674,307
|
|
|
|
467,479
|
|
|
|
1,726,514
|
|
|
|
562,389
|
|
|
NCSC
|
|
440,599
|
|
|
|
294,351
|
|
|
|
414,074
|
|
|
|
313,156
|
|
|
Total
loans outstanding
|
|
$
|
20,168,878
|
|
|
$
|
13,844,972
|
|
|
$
|
19,026,995
|
|
|
$
|
13,573,744
|
|
|
(1)
Unadvanced loan commitments include loans for which loan contracts have been
approved and executed, but funds have not been advanced. Prior to
advancing funds, additional information may be required to assure that all
conditions for the advance of funds have been fully met and 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
National Rural’s future cash requirements. Collateral and security
requirements for advances on commitments are identical to those required at the
time of the initial loan approval. Because the interest rate on
unadvanced commitments is not set until drawn, long-term unadvanced loan
commitments have been classified in this table as variable-rate unadvanced
commitments. However, at the time of the advance, the borrower may
select a fixed or a variable rate on the new loan.
(2) Table
includes non-performing and restructured loans.
(3) Loans
are classified as long-term or short-term based on their original
maturity.
Non-performing
and restructured loans outstanding to members and unadvanced commitments by loan
type and by segment included in the table above are summarized as
follows:
|
|
February
28, 2009
|
|
|
|
May
31, 2008
|
|
(in
thousands)
|
|
Loans
|
|
|
|
Unadvanced
|
|
|
|
Loans
|
|
|
|
Unadvanced
|
|
Non-performing
and restructured loans:
|
|
Outstanding
|
|
|
|
Commitments
(1)
|
|
|
|
Outstanding
|
|
|
|
Commitments
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
$
|
8,960
|
|
|
$
|
-
|
|
|
$
|
219,912
|
|
|
$
|
-
|
|
Long-term
variable-rate loans
|
|
464,289
|
|
|
|
-
|
|
|
|
261,109
|
|
|
|
-
|
|
Short-term
loans
|
|
25,045
|
|
|
|
-
|
|
|
|
25,843
|
|
|
|
-
|
|
Total
non-performing loans
|
$
|
498,294
|
|
|
$
|
-
|
|
|
$
|
506,864
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
$
|
41,995
|
|
|
$
|
-
|
|
|
$
|
52,309
|
|
|
$
|
-
|
|
Long-term
variable-rate loans
|
|
497,935
|
|
|
|
186,673
|
|
|
|
519,257
|
|
|
|
186,673
|
|
Short-term
loans
|
|
-
|
|
|
|
12,500
|
|
|
|
-
|
|
|
|
12,500
|
|
National
Rural total restructured loans
|
|
539,930
|
|
|
|
199,173
|
|
|
|
571,566
|
|
|
|
199,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
|
5,031
|
|
|
|
-
|
|
|
|
5,545
|
|
|
|
-
|
|
Total restructured loans
|
|
$
|
544,961
|
|
|
$
|
199,173
|
|
|
$
|
577,111
|
|
|
$
|
199,173
|
|
(1)
Unadvanced loan commitments include loans for which loan contracts have been
approved and executed, but funds have not been advanced. Prior to
advancing funds, additional information may be required to assure that all
conditions for the advance of funds have been fully met and 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
National Rural’s future cash requirements. Collateral and security
requirements for advances on commitments are identical to those required at the
time of the initial loan approval. Because the interest rate on
unadvanced commitments is not set until drawn, long-term unadvanced loan
commitments have been classified in this table as variable-rate unadvanced
commitments. However, at the time of the advance, the borrower may
select a fixed or a variable rate on the new loan.
(2) Loans
are classified as long-term or short-term based on their original
maturity.
Loan
origination costs are deferred and amortized using the straight-line method,
which approximates the interest method, over the life of the loan as a reduction
to interest income.
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 assets, 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 type and by segment:
(dollar
amounts in thousands)
|
|
February
28, 2009
|
|
|
May
31, 2008
|
|
Total
by loan type:
|
|
Secured
|
|
%
|
|
|
Unsecured
|
|
%
|
|
|
Secured
|
|
%
|
|
|
Unsecured
|
|
%
|
|
|
Long-term
fixed-rate loans
|
$
|
14,164,957
|
|
96
|
%
|
$
|
542,782
|
|
4
|
%
|
$
|
14,732,058
|
|
97
|
%
|
$
|
472,556
|
|
3
|
%
|
|
Long-term
variable-rate loans
|
|
2,780,734
|
|
87
|
|
398,923
|
|
13
|
|
1,728,803
|
|
92
|
|
153,292
|
|
8
|
|
|
Loans
guaranteed by RUS
|
|
245,015
|
|
100
|
|
-
|
|
-
|
|
250,169
|
|
100
|
|
-
|
|
-
|
|
|
Short-term
loans
|
|
213,533
|
|
10
|
|
1,822,934
|
|
90
|
|
165,226
|
|
10
|
|
1,524,891
|
|
90
|
|
|
Total
loans
|
$
|
17,404,239
|
|
86
|
|
$
|
2,764,639
|
|
14
|
|
$
|
16,876,256
|
|
89
|
|
$
|
2,150,739
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,590,030
|
|
86
|
%
|
$
|
2,463,942
|
|
14
|
%
|
$
|
15,021,067
|
|
89
|
%
|
$
|
1,865,340
|
|
11
|
%
|
|
RTFC
|
|
1,436,224
|
|
86
|
|
238,083
|
|
14
|
|
1,497,487
|
|
87
|
|
229,027
|
|
13
|
|
|
NCSC
|
|
377,985
|
|
86
|
|
62,614
|
|
14
|
|
357,702
|
|
86
|
|
56,372
|
|
14
|
|
|
Total
loans
|
$
|
17,404,239
|
|
86
|
|
$
|
2,764,639
|
|
14
|
|
$
|
16,876,256
|
|
89
|
|
$
|
2,150,739
|
|
11
|
|
Pledging
of Loans
The
following table summarizes the Company’s collateral pledged to secure its
collateral trust bonds and notes payable to the Federal Agricultural Mortgage
Corporation ("Farmer Mac") and the amount of the corresponding debt
outstanding:
|
|
February
28,
2009
|
|
|
May
31,
2008
|
(in
thousands)
|
|
|
|
|
|
Collateral
Trust Bonds:
|
|
|
|
|
|
2007
indenture
|
|
|
|
|
|
Distribution
system mortgage notes
|
$
|
4,340,578
|
|
$
|
917,925
|
Collateral
trust bonds
|
|
3,000,000
|
|
|
700,000
|
|
|
|
|
|
|
1994
indenture
|
|
|
|
|
|
Distribution
system mortgage notes
|
$
|
2,411,756
|
|
$
|
3,989,443
|
RUS
guaranteed loans qualifying as permitted investments
|
|
212,355
|
|
|
215,329
|
Total
pledged collateral
|
$
|
2,624,111
|
|
$
|
4,204,772
|
Collateral
trust bonds
|
$
|
2,190,000
|
|
$
|
4,015,000
|
|
|
|
|
|
|
1972
indenture
|
|
|
|
|
|
Cash
|
$
|
2,032
|
|
$
|
2,032
|
Collateral
trust bonds
|
|
1,919
|
|
|
1,927
|
|
|
|
|
|
|
Farmer
Mac:
|
|
|
|
|
|
Utility
system notes
|
$
|
1,127,962
|
|
$
|
1,042,564
|
Farmer
Mac notes payable
|
|
900,000
|
|
|
900,000
|
The
following table shows the collateral on deposit for the notes payable to the
Federal Financing Bank ("FFB") of the United States Treasury as part of the
Rural Economic Development Loan and Grant (“REDLG”) program (see Note 6, Long-Term Debt) and the
amount of the corresponding debt outstanding:
(in
thousands)
|
|
February
28,
2009
|
|
May
31,
2008
|
REDLG:
|
|
|
|
|
Utility
system mortgage notes on deposit
|
$
|
3,788,982
|
$
|
3,191,292
|
REDLG
notes payable
|
|
3,000,000
|
|
2,500,000
|
The $3.0
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 $3,789 million at February 28, 2009, would be pledged as collateral
rather than held on deposit. At February 28, 2009, National Rural’s
senior secured debt ratings were above the rating trigger
threshold.
A total
of $2.0 billion of notes payable to the FFB has a second trigger requiring that
a director on the National Rural board satisfies the requirements of a financial
expert as defined by Section 407 of the Sarbanes-Oxley Act of 2002. A
financial expert triggering event will occur if the financial expert position
remains vacant for more than 90 consecutive days. If the Company
does not satisfy the financial expert requirement, the mortgage notes on deposit
at that time, which totaled $2,473 million at February 28, 2009, 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) Investments
During
the nine months ended February 28, 2009, the Company was required to purchase a
total of $72 million of tax-exempt bonds pursuant to its obligation as liquidity
provider. Once acquired, the Company must hold the bonds until the
remarketing agent is able to place them with third-party
investors. During this period, the Company is entitled to receive a
rate of interest on many of the bonds that is equal to or higher than the rate
investors typically receive on similar bonds in the tax-exempt
market. At February 28, 2009, the Company held $12 million of these
tax-exempt bonds. These tax-exempt bonds are recorded at fair value
and classified as investments in trading securities on the consolidated balance
sheet. Changes in fair value are recorded as fair value adjustment on
investments in trading securities on the consolidated statement of
operations.
Under
note purchase agreements entered into with Farmer Mac in December 2008 and
February 2009, the Company is required to purchase Farmer Mac Series C
cumulative, redeemable, non-voting preferred stock in an amount sufficient to
maintain a balance at all times that is at least equal to 4 percent of the
principal amount of the notes outstanding under the
agreements. During the three months ended February 28, 2009, the
Company issued notes totaling $500 million under the December 2008 Farmer Mac
agreement that resulted in the purchase of $20 million in Farmer Mac Series C
preferred stock which had an initial dividend rate of 5 percent. In
addition, the Company invested $15 million in Farmer Mac Series B-1 cumulative,
redeemable, non-voting preferred stock with an initial dividend rate of 10
percent. The investments in preferred stock are recorded at cost on
the consolidated balance sheet. See Note 6, Long-Term Debt, for
additional information on the note purchase agreements with Farmer
Mac.
(4) Foreclosed
Assets, Net
Assets
received in satisfaction of loan receivables are recorded at cost in accordance
with SFAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (“SFAS 144”) and are
evaluated periodically for impairment. These assets are classified on
the consolidated balance sheets as foreclosed assets, net. These
assets do not meet the criteria to be classified as held for sale at February
28, 2009, February 29, 2008 and May 31, 2008. At February 28, 2009
and May 31, 2008, the balance of foreclosed assets included real estate
developer notes receivables and limited partnership interests in certain real
estate developments.
The
activity for foreclosed assets is summarized below:
|
|
Nine
months ended
|
|
|
|
Year
ended
|
|
(in
thousands)
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
|
|
May
31,
2008
|
|
Beginning
balance
|
$
|
58,961
|
|
$
|
66,329
|
|
|
$
|
66,329
|
|
Results
of operations
|
|
3,258
|
|
|
6,217
|
|
|
|
7,528
|
|
Net
cash provided by foreclosed assets
|
|
(6,000
|
)
|
|
(9,055
|
)
|
|
|
(9,056
|
)
|
Fair
value adjustment
|
|
(1,805
|
)
|
|
(5,840
|
)
|
|
|
(5,840
|
)
|
Ending
balance of foreclosed assets
|
$
|
54,414
|
|
$
|
57,651
|
|
|
$
|
58,961
|
|
Foreclosed
assets include two land development loans. Primarily due to current
economic conditions, lot sales have slowed down for one of the land developers,
thereby putting a strain on cash flows and the borrower’s ability to make loan
payments as scheduled. At January 1, 2009, this loan was put on
non-accrual status. During the quarter ended February 28, 2009, the
other land development loan was restructured to lower the interest rate due to
concerns about the borrower’s ability to meet all future payments based on the
original loan terms. As a result, the Company classified both land
development 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
(“SFAS 114”), at February 28, 2009.
During
the nine months ended February 28, 2009, the Company determined that there was a
reduction of $2 million to the fair value of the collateral supporting these
land development loans.
(5) Short-Term
Debt and Credit Arrangements
The
following is a summary of short-term debt outstanding:
(in
thousands)
|
|
|
February
28,
2009
|
|
May
31,
2008
|
|
|
Short-term
debt:
|
|
|
|
|
|
|
|
Commercial
paper sold through dealers, net of discounts
|
|
$
|
1,085,948
|
$
|
1,511,953
|
|
|
Commercial
paper sold directly to members, at par
|
|
|
1,076,627
|
|
1,275,809
|
|
|
Commercial
paper sold directly to non-members, at par
|
|
|
10,812
|
|
11,752
|
|
|
Total
commercial paper
|
|
|
2,173,387
|
|
2,799,514
|
|
|
Daily
liquidity fund sold directly to members
|
|
|
364,994
|
|
250,750
|
|
|
Term
loan
|
|
|
200,000
|
|
-
|
|
|
Bank
bid notes
|
|
|
275,000
|
|
100,000
|
|
|
Subtotal
short-term debt
|
|
|
3,013,381
|
|
3,150,264
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt maturing within one year:
|
|
|
|
|
|
|
|
Medium-term
notes sold through dealers
|
|
|
1,587,489
|
|
558,776
|
|
|
Medium-term
notes sold to members
|
|
|
456,914
|
|
288,634
|
|
|
Secured
collateral trust bonds
|
|
|
204,980
|
|
1,824,995
|
|
|
Secured
notes payable
|
|
|
100,000
|
|
500,000
|
|
|
Unsecured
notes payable
|
|
|
4,646
|
|
4,784
|
|
|
Total
long-term debt maturing within one year
|
|
|
2,354,029
|
|
3,177,189
|
|
|
Total
short-term debt
|
|
$
|
5,367,410
|
$
|
6,327,453
|
|
|
|
|
|
|
|
|
|
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 that do not
require backup bank lines for liquidity purposes. National Rural does
not pay a commitment fee for bank bid notes. The commitments are
generally subject to termination at the discretion of the individual
banks.
On
January 21, 2009, the Company entered into a $200 million term loan credit
agreement with a syndicate of banks. On January 29, 2009 the Company
borrowed $200 million under this agreement. Loans outstanding under
the credit facility bear interest at variable rates based on, as determined at
National Rural's election, the Eurodollar rate plus an applicable margin or a
base rate calculated based on the greater of the prime rate, the federal funds
effective rate plus an applicable margin, or the one-month LIBOR rate plus an
applicable margin. The term loan matures on January 21,
2010. In accordance with the terms of the agreement, National Rural
is required to comply with maximum leverage and minimum times interest earned
ratio covenants, as defined in the agreement, which are similar to those
contained in National Rural’s revolving credit agreements described
below. National Rural may terminate the commitments at any time if no
amounts are outstanding, or ratably reduce the aggregate amount of the
commitments in excess of the aggregate amounts outstanding.
Revolving
Credit Agreements
The
following is a summary of the amounts available under the Company's revolving
credit agreements:
(dollar
amounts in thousands)
|
|
|
February
28,
2009
(3)
|
|
May
31,
2008
|
|
|
Termination
Date
|
|
|
Facility
fee per
year
(1)
|
|
|
Five-year
agreement
|
|
$
|
1,125,000
|
|
$
|
1,125,000
|
|
|
March
16, 2012
|
|
|
6
basis points
|
|
|
Five-year
agreement
|
|
|
1,025,000
|
|
|
1,025,000
|
|
|
March
22, 2011
|
|
|
6
basis points
|
|
|
364-day
agreement (2)
|
|
|
1,500,000
|
|
|
1,500,000
|
|
|
March
13, 2009
|
|
|
5
basis points
|
|
|
Total
|
|
|
$
|
3,650,000
|
|
$
|
3,650,000
|
|
|
|
|
|
|
|
|
(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 the agreement 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 10 basis
points per year.
(3)
Amounts include the portion of the credit facility for Lehman Brothers Bank, FSB
totaling $239 million allocated as follows: $76 million under the 5-year
facility maturing 2012, $58 million under the 5-year facility maturing in 2011,
and $105 million under the 364-day facility maturing in 2009. The
Company does not expect Lehman Brothers Bank, FSB to fund its portion of the
credit facility according to the agreements. See further discussion
below.
All three
agreements in place at February 28, 2009 contain a provision under which if
borrowings exceed 50 percent of total commitments, a utilization fee of five
basis points must be paid on the outstanding balance.
At
February 28, 2009 and May 31, 2008, the Company was in compliance with all
covenants and conditions under its revolving credit agreements and there were no
borrowings outstanding under these agreements.
In
September 2008, Lehman Brothers Holdings Inc. (“LBHI”) announced that it had
filed a petition under Chapter 11 of the United States Bankruptcy Code with the
United States Bankruptcy Court for the Southern District of New
York. As an active participant in the capital markets, National Rural
has numerous business relationships with LBHI and its
subsidiaries. Among those relationships, Lehman Brothers Bank, FSB
(“LBB”) is a participant for up to $239 million of National Rural’s revolving
credit facilities.
On
October 7, 2008, the Company was unable to issue the amount of commercial paper
necessary to fund its needs as a result of the instability in the overall credit
markets. As a result, the Company drew down $418.5 million of its
$3.65 billion revolving credit facilities by borrowing under the $1.5 billion
364-day agreement. As the amount borrowed did not exceed 50 percent
of total commitments, there was no utilization fee on the outstanding
balance. LBB did not fund its portion of the draw and the Company does not
believe that LBB’s $239 million portion of the credit facilities will be
available in the future. The Company repaid the $418.5 million
borrowed under the revolving credit facility on November 13, 2008.
For
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 (“SFAS 52”). 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 SFAS 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 nine months ended February 28,
2009 and at or for the year ended May 31, 2008:
|
|
|
|
|
|
Actual
|
|
|
|
|
|
Requirement
|
|
February
28, 2009
|
|
May
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
|
1.025
|
|
1.19
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
adjusted TIER at prior fiscal year end (1)
|
|
|
|
1.05
|
|
1.15
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
ratio of senior debt to total equity
|
|
|
|
10.00
|
|
7.51
|
|
7.33
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
Company must meet this requirement to retire patronage capital.
The
revolving credit agreements do not contain a material adverse change clause or
ratings trigger that limit the banks' obligations to fund under the terms of the
agreements, but the Company must be in compliance with their other requirements,
including financial ratios, to draw down on the facilities.
On March
13, 2009, the Company replaced the $1,500 million 364-day revolving credit
agreement in place at February 28, 2009 with a new $1,000 million 364-day
agreement that expires on March 12, 2010. The facility fee for the
new 364-day facility is currently 0.125 of 1 percent per year. The
facility fee is determined by pricing matrices in the agreement and is payable
quarterly. National Rural has the right to choose between a (i)
Eurodollar rate plus an applicable margin to be determined by pricing matrices
in the agreement or (ii) a base rate calculated based on the greater of prime
rate, the federal funds effective rate plus 2 percent or the one-month LIBOR
rate plus 2 percent, plus an applicable margin to be determined by pricing
matrices in the agreement. In the 364-day revolving credit agreement,
the Company has the right, subject to certain terms and conditions, to increase
the aggregate amount of the commitments by up to $250 million either by
increasing the commitment of one or more existing lenders or by adding one or
more new lenders, provided that no existing lender’s commitment may be increased
without the consent of the lender and administrative agent. 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 $3,016 million at March 13, 2009. This amount excludes
$134 million from LBB as National Rural does not expect LBB to fund its portion
of the credit commitment under the two five-year agreements.
(6) Long-Term
Debt
The
following is a summary of long-term debt outstanding:
(in
thousands)
|
|
February
28,
2009
|
|
|
|
|
May
31,
2008
|
|
|
Unsecured
long-term debt:
|
|
|
|
|
|
|
|
|
|
Medium-term
notes sold through dealers
|
$
|
3,204,184
|
|
|
|
$
|
4,231,982
|
|
|
Medium-term
notes sold to members
|
|
196,805
|
|
|
|
|
104,105
|
|
|
Subtotal
|
|
3,400,989
|
|
|
|
|
4,336,087
|
|
|
Unamortized
discount
|
|
(3,294
|
)
|
|
|
|
(5,483
|
)
|
|
Total
unsecured medium-term notes
|
|
3,397,695
|
|
|
|
|
4,330,604
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
notes payable
|
|
3,054,955
|
|
|
|
|
2,558,362
|
|
|
Unamortized
discount
|
|
(1,745
|
)
|
|
|
|
(1,959
|
)
|
|
Total
unsecured notes payable
|
|
3,053,210
|
|
|
|
|
2,556,403
|
|
|
Total
unsecured long-term debt
|
|
6,450,905
|
|
|
|
|
6,887,007
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
long-term debt:
|
|
|
|
|
|
|
|
|
|
Collateral
trust bonds
|
|
4,986,919
|
|
|
|
|
2,891,927
|
|
|
Unamortized
discount
|
|
(13,368
|
)
|
|
|
|
(5,347
|
)
|
|
Total
secured collateral trust bonds
|
|
4,973,551
|
|
|
|
|
2,886,580
|
|
|
Secured
notes payable
|
|
800,000
|
|
|
|
|
400,000
|
|
|
Total
secured long-term debt
|
|
5,773,551
|
|
|
|
|
3,286,580
|
|
|
Total
long-term debt
|
$
|
12,224,456
|
|
|
|
$
|
10,173,587
|
|
|
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, Loans and Commitments, for
additional information on the collateral pledged to secure National Rural’s
collateral trust bonds.
Unsecured
Notes Payable
At
February 28, 2009 and May 31, 2008, National Rural had unsecured notes payable
totaling $3.0 billion and $2.5 billion, respectively, outstanding 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. In September 2008,
the Company closed on a $500 million FFB loan facility under the REDLG program
and received an advance for the full amount available. The $500
million advance has a 2028 maturity date. As part of the REDLG
program, National Rural pays to RUS a fee of 30 basis points per year on the
total amount borrowed. At February 28, 2009, the $3.0 billion of
unsecured notes payable issued as part of the REDLG program require National
Rural to place mortgage notes on deposit in an amount at least equal to the
principal balance of the notes outstanding. See Note 2, Loans and Commitments, for additional information
on the mortgage notes held on deposit and the trigger events that result in
these mortgage notes becoming pledged as collateral.
Secured
Notes Payable
At
February 28, 2009 and May 31, 2008, National Rural had secured notes payable
totaling $900 million outstanding to Farmer Mac. Notes to Farmer Mac
totaling $100 million were reported in short-term debt and the remaining $800
million was reported in long-term debt at February 28, 2009. Notes to
Farmer Mac totaling $500 million and reported in short-term debt at May 31, 2008
matured on July 29, 2008.
In
December 2008, the Company entered into a $500 million note purchase agreement
(“the December 2008 Farmer Mac Agreement”) with Farmer Mac. In February
2009, the Company entered into another $500 million note purchase agreement
(“the February 2009 Farmer Mac Agreement”) with Farmer Mac. The
February 2009 Farmer Mac Agreement allows National Rural to borrow up to $500
million from Farmer Mac, with amounts maturing through February 29,
2016. Advances under this agreement must occur prior to February 28,
2011.
For
borrowings under the February 2009 Farmer Mac Agreement, the Company may select
a fixed rate or variable rate at the time of each advance. Notes with
a fixed interest rate are based on the applicable benchmark treasury rate plus a
spread determined at the time of the advance and mature five years from the
closing date up to February 29, 2016. Notes with a variable interest
rate are based on three-month LIBOR plus a spread determined at the time of the
advance and may have a maturity of two years or less from the closing date up to
February 28, 2013.
The
December 2008 Farmer Mac Agreement and the February 2009 Farmer Mac Agreement
require the Company to pledge eligible distribution system or power supply
system loans as collateral in an amount at least equal to the total principal
amount of notes outstanding under the agreement. See Note 2, Loans and Commitments, for
additional information on the collateral pledged to secure National Rural's
notes payable.
The
December 2008 Farmer Mac Agreement and the February 2009 Farmer Mac Agreement
require the Company to purchase Farmer Mac preferred stock. See Note
3, Investments, for
additional information about these investments.
During
the three months ended February 28, 2009, the Company issued notes totaling $500
million under the December 2008 Farmer Mac agreement at a blended fixed interest
rate of 3.871 percent with amounts maturing through February 4,
2014. The $500 million commitment under the February 2009 Farmer Mac
Agreement remains unadvanced at February 28, 2009.
(7) Subordinated
Deferrable Debt
The
following table is a summary of subordinated deferrable debt
outstanding:
(in
thousands)
|
|
February
28,
2009
|
|
|
May
31,
2008
|
|
|
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)
Callable by National Rural at par starting on February 15, 2008.
(2)
Callable by National Rural at par starting on February 1, 2009.
(3)
Callable by National Rural 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
swaps and cross currency interest rate swaps to mitigate its interest rate risk
and foreign currency exchange risk.
Consistent
with SFAS 133, 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. Generally, the Company's derivative instruments do not qualify
for hedge accounting under SFAS 133. At February 28, 2009, February
29, 2008 and May 31, 2008, the Company did not have derivative instruments
accounted for using hedge accounting.
The
following table shows the types and notional amounts of derivative financial
instruments held by the Company at February 28, 2009 and May 31,
2008:
|
|
Notional
Amounts Outstanding
|
(in
thousands)
|
|
February
28, 2009
|
|
May
31, 2008
|
Pay
fixed and receive variable
|
$
|
6,712,597
|
$
|
7,659,973
|
Pay
variable and receive fixed
|
|
5,323,239
|
|
5,256,440
|
Total
interest rate swaps
|
$
|
12,035,836
|
$
|
12,916,413
|
Income
and losses recorded for the Company’s interest rate swaps are summarized
below:
|
|
Three
months ended
|
|
|
Nine
months ended
|
(in
thousands)
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
|
February
28,
2009
|
|
|
February
29,
2008
|
Statement
of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreements
that do not qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
$
|
104,012
|
|
|
$
|
10,463
|
|
|
$
|
116,946
|
|
|
$
|
30,299
|
|
Derivative
forward value
|
|
(53,046
|
)
|
|
|
(64,266
|
)
|
|
|
(203,457
|
)
|
|
|
(173,278
|
)
|
Total
income (loss) on interest rate exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements
|
$
|
50,966
|
|
|
$
|
(53,803
|
)
|
|
$
|
(86,511
|
)
|
|
$
|
(142,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of transition adjustment
|
$
|
(159
|
)
|
|
$
|
(256
|
)
|
|
$
|
(558
|
)
|
|
$
|
(587
|
)
|
Total
comprehensive loss
|
$
|
(159
|
)
|
|
$
|
(256
|
)
|
|
$
|
(558
|
)
|
|
$
|
(587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
settlements includes periodic amounts that were paid and received related to the
Company’s interest rate swaps, as well as amounts accrued from the prior
settlement date. During the third quarter of fiscal year 2009, the
Company terminated several receive fixed, pay variable interest rate swaps with
notional amounts totaling $583 million that resulted in a payment to the Company
of $97 million that was recorded in the statement of operations as derivative
cash settlements. Of the $583 million notional amount of derivative contracts
terminated, the Company initiated the termination on $495 million, while the
counterparty initiated the request to terminate $88 million (these swaps were
terminated at par resulting in no cash payments or receipts). As a
result of these terminations, the Company recorded a charge to the derivative
forward value line for the three and nine months ended February 28, 2009 to
reduce the derivative asset by $97 million. The income recorded in cash
settlements for the payments received and the charge to derivative forward value
are offsetting, and therefore there was no effect on reported net income as a
result of these transactions. Terminating these swaps had the benefit
of reducing the Company’s counterparty risk exposure to two out of the three
counterparties to these instruments. The economic effect of
terminating these transactions was to accelerate into the current period the
benefit the Company would have realized in future periods in the form of lower
debt costs.
Lehman
Brothers Special Financing Inc. (“LBSF”) was the counterparty (with an LBHI
guarantee) to seven of the Company’s interest rate swaps. As a result of
the bankruptcy filing of LBHI, National Rural terminated the interest rate swaps
with LBSF on September 26, 2008. The payment due to National Rural
from LBSF totaling $26 million was recorded in derivative cash settlements
representing the termination net settlement amount on that day, in accordance
with the terms of the contract. On October 3, 2008, LBSF filed a
petition under Chapter 11 of the United States Bankruptcy Code with the United
States Bankruptcy Court for the Southern District of New
York. National Rural has a claim of $26 million against LBHI and
LBSF. National Rural used market data that indicated values for LBHI
bonds of 10 cents and 15 cents on the dollar as a proxy for the potential
recovery from both LBHI and LBSF. As a result, the receivable has
been reduced to $7 million. The amount recorded as a receivable does
not reduce or limit National Rural's claim of $26 million against LBHI and
LBSF. The ultimate recovery will depend on the ability of LBHI and
LBSF to maximize the value of assets through sale or assignment.
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 derivative instruments. Approximately $0.6 million of the
transition adjustment is expected to be amortized to income over the next 12
months and will continue through 2029.
The
Company classified cash activity associated with its interest rate swaps as an
operating activity in the consolidated statements of cash flows.
Rating
Triggers
The
Company has certain interest rate swaps that contain credit risk-related
contingent features referred to as rating triggers. Rating triggers
are not separate financial instruments and are not separate derivatives under
SFAS 133.
Under
certain rating triggers, 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, excluding credit risk, of the underlying
derivative instrument. These rating triggers are based on the
Company’s senior unsecured credit rating from Standard & Poor's Corporation
and Moody's Investors Service.
At
February 28, 2009, the Company had the following derivative instruments that
contain rating triggers based on the Company’s ratings from Moody's Investors
Service falling to or below Baa1 or from Standard & Poor's Corporation
falling to or below BBB+. In calculating the payments and collections
required upon termination, the Company netted the agreements for each
counterparty, as allowed by the underlying master agreements.
(in
thousands)
|
|
Notional
|
|
|
Required
Company
|
|
|
Amount
Company
|
|
|
Net
|
|
Rating
Level:
|
|
Amount
|
|
|
Payment
|
|
|
Would
Collect
|
|
|
Total
|
|
Fall
to Baa1/BBB+ and below
|
$
|
7,111,106
|
|
$
|
(174,005
|
)
|
$
|
17,726
|
|
$
|
(156,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company also has interest rate swaps with one counterparty that include rating
trigger provisions allowing the counterparty to terminate the agreements, but
the Company does not have the right to terminate based on the counterparty’s
credit rating. If the Company’s senior unsecured rating from Moody’s
Investors Service were to fall below Baa1 or if the rating from Standard &
Poor’s Corporation were to fall below BBB+, this counterparty could terminate a
total notional amount of $941 million of interest rate swaps that are in a
contingent net liability position. If these interest rate swaps had
been terminated at February 28, 2009, the Company would have been required to
make a payment to the counterparty of $9 million.
In
addition to the rating triggers listed above, at February 28, 2009, the Company
had a total notional amount of $815 million of derivative instruments with one
counterparty that would require the pledging of collateral in an amount equal to
the net cash settlement amount of the derivative instruments if the Company’s
senior unsecured ratings from Moody's Investors Service were to fall below Baa2
or if the rating from Standard & Poor's Corporation were to fall below
BBB. Based on the terms of the interest rate swaps in place with this
counterparty, if the Company’s ratings fell below the triggering levels, at
February 28, 2009, the Company would be required to post $25 million in
collateral.
The
aggregate fair value of all interest rate swaps with rating triggers that were
in a liability position at February 28, 2009 was $204
million. If the credit-risk related contingent features
contained in the Company’s interest rate swaps were to be triggered on February
28, 2009, the Company would be required to post $25 million of collateral and
would be required to make payments totaling $183 million representing the
termination settlement on that date.
(9) Members'
Subordinated Certificates
Membership
Subordinated Certificates
National
Rural's members are required to purchase membership subordinated 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 five percent semi-annually. The weighted-average maturity
for all membership subordinated certificates outstanding at February 28, 2009
and May 31, 2008 was 68 years.
Loan
and Guarantee Subordinated Certificates
Members
obtaining long-term loans, certain short-term loans, or guarantees are generally
required to purchase additional loan or guarantee subordinated certificates with
each such loan or guarantee based on the members' debt to equity ratio with
National Rural. These certificates are unsecured, subordinated debt
of the Company.
Certificates
currently purchased in conjunction with long-term loans are generally
non-interest bearing. National Rural’s policy regarding the purchase
of loan subordinated certificates requires members with a debt to equity ratio
with National Rural in excess of the limit in the policy to purchase a
non-amortizing/non-interest bearing subordinated certificate in the amount of
two percent of the loan amount for distribution systems and seven percent of the
loan amount for power supply systems. National Rural associates and
RTFC members are required to purchase loan subordinated certificates in an
amount equal to 10 percent 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. Loan and guarantee
subordinated certificates have the same maturity as the related long-term
loan. Some certificates may amortize annually based on the
outstanding loan balance.
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, Guarantees). 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.
Member
Capital Securities
National
Rural offers member capital securities to its voting members from time to time.
Member capital securities are interest-bearing unsecured obligations of National
Rural and are subordinate to all existing and future senior indebtedness of the
Company and all existing and future subordinated indebtedness of National Rural
that may be held by or transferred to non-members of National Rural, but rank
pari passu to the Company’s member subordinated certificates. Each
member capital security matures 35 years from its date of
issuance. These securities represent voluntary investments in
National Rural by the members.
(10) Minority
Interest
At
February 28, 2009 and May 31, 2008, the Company reported minority interests of
$11 million and $14 million, respectively, on the consolidated balance
sheets. Minority interest represents 100 percent of RTFC and NCSC
equity as the members of RTFC and NCSC own or control 100 percent of the
interest in their respective companies.
During
the nine months ended February 28, 2009, NCSC’s net loss of $11 million exceeded
its equity balance by $8.1 million, which eliminated the minority interest
equity in NCSC. In accordance with ARB 51, National Rural is required
to absorb the $8.1 million NCSC excess loss. NCSC’s losses during the
nine months ended February 28, 2009 were primarily due to its $17 million
derivative forward value losses. NCSC’s equity balance included in
minority interest on the consolidated balance sheets was $2.9 million at May 31,
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. National Rural calculates net earnings by adjusting
net income to exclude certain non-cash adjustments. 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 one
percent, of net earnings annually to the education fund. The
allocation to the education fund must be at least 0.25 percent of net earnings
as required by National Rural’s bylaws. Funds from the education fund
are disbursed annually to the statewide cooperative organizations to fund the
teaching of cooperative principles. 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 net 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
during the year. There is no effect 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.
In July
2008, National Rural’s board of directors allocated 2008 fiscal year net
earnings as follows: $1 million to the education fund, $103 million to members
in the form of patronage capital, and $29 million to the members' capital
reserve. In July 2008, National Rural’s board of directors authorized
the retirement of allocated net earnings totaling $85 million, representing 70
percent of the fiscal year 2008 allocation and one-ninth of the fiscal years
1991, 1992 and 1993 allocated net earnings. This amount was paid to
members in cash in October 2008. 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 current practice for allocating and retiring net
earnings at any time, subject to applicable cooperative law.
At
February 28, 2009 and May 31, 2008, equity included the following
components:
(in
thousands)
|
|
February
28,
2009
|
|
|
|
May
31,
2008
|
|
|
Membership
fees
|
$
|
992
|
|
|
$
|
993
|
|
|
Education
fund
|
|
793
|
|
|
|
1,484
|
|
|
Members'
capital reserve
|
|
187,099
|
|
|
|
187,409
|
|
|
Allocated
net income
|
|
338,033
|
|
|
|
423,249
|
|
|
Unallocated
net income (loss) (1)
|
|
46,205
|
|
|
|
(53
|
)
|
|
Total
members' equity
|
|
573,122
|
|
|
|
613,082
|
|
|
Prior
years’ cumulative derivative forward
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
44,056
|
|
|
|
131,551
|
|
|
Year-to-date
derivative forward value loss (2)
|
|
(186,165
|
)
|
|
|
(87,495
|
)
|
|
Total
retained equity
|
|
431,013
|
|
|
|
657,138
|
|
|
Accumulated
other comprehensive income
|
|
8,269
|
|
|
|
8,827
|
|
|
Total
equity
|
|
$
|
439,282
|
|
|
$
|
665,965
|
|
|
(1)
Excludes derivative forward value and foreign currency
adjustments. Unallocated net loss at February 28, 2009 includes
National Rural’s obligation to absorb NCSC losses in excess of their equity
balance totaling $8.1 million.
(2)
Represents the derivative forward value loss recorded by National Rural for the
year-to-date 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 due to a payment
default by the member so long as the Company performs under its
guarantee. The Company uses the same credit policies and monitoring
procedures in providing guarantees as it does for loans and
commitments.
The
following table summarizes total guarantees by type and segment:
(in
thousands)
|
|
February
28,
2009
|
|
|
May
31,
2008
|
Total
by type:
|
|
|
|
|
|
Long-term
tax-exempt bonds (1)
|
$
|
633,005
|
|
$
|
498,495
|
Indemnifications
of tax benefit transfers (2)
|
|
84,649
|
|
|
94,821
|
Letters
of credit (3)
|
|
453,806
|
|
|
343,424
|
Other
guarantees (4)
|
|
98,556
|
|
|
100,400
|
Total
|
$
|
1,270,016
|
|
$
|
1,037,140
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
Distribution
|
$
|
254,072
|
|
$
|
184,459
|
Power
supply
|
|
927,435
|
|
|
786,455
|
Statewide
and associate
|
|
22,526
|
|
|
22,785
|
National
Rural total
|
|
1,204,033
|
|
|
993,699
|
RTFC
|
|
500
|
|
|
260
|
NCSC
|
|
65,483
|
|
|
43,181
|
Total
|
|
$
|
1,270,016
|
|
$
|
1,037,140
|
(1) The
maturities for this type of guarantee run through 2042. Amounts in
the table represent the outstanding principal amount of the guaranteed
bonds. At February 28, 2009, National Rural's maximum potential
exposure for the $1.6 million of fixed-rate tax-exempt bonds is $1.8 million,
representing principal and interest. 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. The amounts
shown represent National Rural’s maximum potential exposure for guaranteed
indemnity payments. 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 2019. Additionally,
letters of credit totaling $5 million at February 28, 2009 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 amounts shown
represent National Rural’s maximum potential exposure, of which $229 million is
secured at February 28, 2009. When taking into consideration
reimbursement obligation agreements that National Rural has in place with other
lenders, National Rural’s maximum potential exposure related to $35 million of
letters of credit would be reduced to $10 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 $414 million in letters of credit to third parties for
the benefit of its members at February 28, 2009. At May 31, 2008,
this amount was $415 million.
(4) The
maturities for this type of guarantee run through 2015. The amounts
shown represent National Rural’s maximum potential exposure, which is
unsecured.
At
February 28, 2009 and May 31, 2008, National Rural had a total of $324 million
and $236 million of guarantees, representing 26 percent and 23 percent of total
guarantees, respectively, under which its right of recovery from its members was
not secured.
Long-term
Tax-Exempt Bonds
National
Rural guarantees debt issued in connection with the construction or acquisition
of pollution control, solid waste disposal, industrial development and electric
distribution facilities, classified as long-term tax-exempt bonds in the table
above. National Rural unconditionally guarantees to the holders or to
trustees for the benefit of holders of these bonds the full principal, interest,
and in most cases, premium, if any, on each bond when due. National
Rural has debt service reserve funds in the amount of $48 million and $55
million at February 28, 2009 and May 31, 2008, respectively, on deposit with the
bond trustee that can only be used to cover 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 member 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 member system is required to repay, on demand, any amount
advanced by National Rural with interest, pursuant to the documents evidencing
the member system's reimbursement obligation.
Of the
amounts shown in the table above, $631 million and $330 million as of February
28, 2009 and May 31, 2008, 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, in return for a fee, has
unconditionally agreed to purchase bonds tendered or put for redemption if the
remarketing agents have not previously sold such bonds to other
investors. In addition to these tax-exempt bonds, National Rural was
the guarantor, but not liquidity provider, for $155 million of tax-exempt bonds
that were in the auction rate mode at May 31, 2008.
During
the nine months ended February 28, 2009, the $155 million of auction rate bonds
guaranteed by the Company were converted to semi-annual mode. The
Company became the liquidity provider for those bonds. The Company
also entered into new agreements as the guarantor and liquidity provider for
$176 million of tax-exempt bonds that reprice semi-annually.
National
Rural's maximum potential exposure includes guaranteed principal and interest
related to its tax-exempt bonds. National Rural is unable to determine the
maximum amount of interest that it could be required to pay related to the
adjustable and floating-rate bonds. See footnote (1) to the table
above for further information about this type of guarantee.
Guarantee
Liability
At
February 28, 2009 and May 31, 2008, the Company recorded a guarantee liability
of $34 million and $15 million, respectively, which represents the contingent
and non-contingent exposures related to guarantees and liquidity obligations
associated with members' debt. The contingent guarantee liability at
February 28, 2009 and May 31, 2008 was $15 million and $10 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 $19 million at February 28, 2009 and
$5 million at May 31, 2008 relates to the Company's non-contingent obligation to
stand ready to perform over the term of its guarantees and liquidity obligations
that it has entered into or modified since January 1, 2003 in accordance with
FIN 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 and liquidity 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
|
|
(dollar
amounts in thousands)
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
|
May
31,
2008
|
|
Beginning
balance
|
$
|
15,034
|
|
$
|
18,929
|
|
$
|
18,929
|
|
Net
change in non-contingent liability
|
|
13,461
|
|
|
(971
|
)
|
|
(791
|
)
|
Provision
(recovery) of contingent guarantee losses
|
|
5,319
|
|
|
(4,300
|
)
|
|
(3,104
|
)
|
Ending
balance
|
$
|
33,814
|
|
$
|
13,658
|
|
$
|
15,034
|
|
|
|
|
|
|
|
|
|
|
|
Liability
as a percentage of total guarantees
|
|
2.66
|
%
|
|
1.29
|
%
|
|
1.45
|
%
|
(13) Fair
Value of Financial Instruments
Effective
June 1, 2008, the Company adopted SFAS 157, Fair Value Measurement (“SFAS
157”), and SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities —Including an amendment of FASB
Statement No. 115 (“SFAS 159”).
SFAS
157
SFAS 157
defines fair value, sets out a framework for measuring fair value, and expands
disclosure requirements about fair value measurement. SFAS 157, among
other things, requires the Company to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
SFAS 157
establishes the following fair value hierarchy:
·
|
Level
1 – Quoted prices for identical instruments in active
markets.
|
·
|
Level
2 – Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant
value drivers are observable.
|
·
|
Level
3 – Instruments whose significant value drivers are
unobservable.
|
The
Company’s only assets and liabilities that are measured at fair value on a
recurring or nonrecurring basis are derivative instruments, foreclosed assets,
investments in trading securities and collateral-dependent non-performing
loans. When a valuation includes inputs from multiple sources
resulting in various levels, the Company classifies the valuation category at
the lowest level for which the input has a significant effect on the overall
valuation.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The
Company accounts for derivatives in accordance with SFAS 133, which establishes
accounting and reporting standards requiring that derivative instruments
(including certain derivative instruments embedded in other contracts) are
recorded in the consolidated balance sheets as either an asset or liability
measured at fair value. Because there is not an active secondary
market for the types of interest rate swap derivative instruments the Company
uses, it obtains market quotes from the interest rate swap counterparties to
adjust all swaps to fair value on a quarterly basis. The market
quotes are based on the expected future cash flow and estimated yield
curves.
The
Company performs its own analysis to validate the market quotes obtained from
its swap counterparties. The Company adjusts the market values
received from the counterparties using credit default swap levels for the
counterparties and the Company. The credit
default swap levels represent the credit risk premium required by a market
participant based on the available information related to the counterparty and
the Company. The Company only enters into exchange agreements with
counterparties that participate in the Company’s revolving credit
agreements. The master agreements for all of the Company's exchange
agreements allow netting.
The
Company’s valuation techniques for interest rate swap derivatives are based upon
observable inputs, which reflect market data. Fair value for the
Company’s interest rate swap derivative instruments falls under Level 2, as
described above.
The
Company records the change in the fair value of its derivatives for each
reporting period in the derivative forward value line on the consolidated
statements of operations as currently none of its derivatives qualify for hedge
accounting.
Fair
value for investments in trading securities is based on observable market prices
for similar investments adjusted for credit risk related to the
issuer. All observable market transactions for these and similar
bonds have been at par value. The credit risk related to the Company
holding the bonds is based on the remaining term of the bonds, the Company's
internal risk rating for the issuer, corporate bond default tables and the
Company's specific recovery history with its borrowers. This is the same process
the Company uses to calculate the required loan loss allowance and guarantee
liability at each quarter end. Since the market for these bonds is
not an active market and the credit risk component is specific to the issuer,
the fair value of the investments in trading securities is classified as Level
3, as described above.
The
following table presents the Company’s assets and liabilities that are measured
at fair value on a recurring basis:
(in
thousands)
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
Derivative
assets
|
|
$
|
-
|
$
|
416,560
|
$
|
-
|
Derivative
liabilities
|
|
|
-
|
|
571,481
|
|
-
|
Investments
in trading securities
|
|
|
-
|
|
-
|
|
11,434
|
The
following table presents a rollforward of the Level 3 assets and liabilities
measured at fair value on a recurring basis:
|
|
|
Level
3
Investments
in Trading Securities
|
|
(in
thousands)
|
|
|
For
the three months ended February 28, 2009
|
|
For
the nine months ended February 28, 2009
|
|
Beginning
balance
|
|
$
|
11,434
|
$
|
-
|
|
Losses
included in earnings (1)
|
|
|
-
|
|
(101
|
)
|
Purchases,
sales, issuances, and settlements, net
|
|
|
-
|
|
11,535
|
|
Ending
balance
|
|
|
$
|
11,434
|
$
|
11,434
|
|
(1)
Trading loss reported in non-interest expense on the statement of
operations.
Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis
The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with GAAP. Any
adjustments to fair value usually result from application of lower-of-cost or
fair value accounting or write-downs of individual assets.
The
Company’s foreclosed assets do not meet the criteria to be classified as held
for sale at February 28, 2009 and therefore are required to be carried at cost
in accordance with SFAS 144. Foreclosed assets are evaluated periodically for
impairment by performing a fair value analysis based on estimated future cash
flows or in some instances, an assessment of the fair value of the asset or
business, which may be provided by a third party
consultant. Estimates of future cash flows are subjective and are
considered to be a significant input in the valuation. A review for
significant changes in the key assumptions and estimates of the fair value
analysis is performed on a quarterly basis.
In
certain instances when a loan is non-performing, the Company utilizes the
collateral fair value underlying non-performing loans, which may be provided by
a third party consultant, in estimating the specific reserve to be
applied. In these instances, the valuation is considered to be a
nonrecurring item.
Assets
measured at fair value on a nonrecurring basis at February 28, 2009 were
classified as Level 3 within the fair value hierarchy. The following
table provides the carrying value of the related individual assets at February
28, 2009 and the total losses for the three and nine months ended February 28,
2009.
(in
thousands)
|
|
Level
3
Fair
Value
|
|
Total
(losses) gains for the
three
months ended
February
28, 2009
|
|
Total
losses for the
nine
months ended
February
28, 2009
|
Foreclosed
assets, net
|
$
|
54,414
|
$
|
|
(1,652
|
)
|
$
|
(1,805)
|
Non-performing
loans, net of specific reserves
|
|
158,239
|
|
|
786
|
|
(116,897)
|
SFAS
159
SFAS 159
established the fair value option, which permits entities to choose to measure
eligible financial instruments at fair value. The Company elected not to measure
eligible financial instruments at fair value and therefore the adoption of SFAS
159 did not have an effect on the Company's financial position or results of
operations.
(14) Restructured/Non-performing
Loans and Contingencies
The
Company had the following loans outstanding classified as non-performing and
restructured:
(in
thousands)
|
|
February
28,
2009
|
|
|
May
31,
2008
|
|
February
29,
2008
|
Non-performing
loans
|
$
|
498,294
|
|
$
|
506,864
|
$
|
504,375
|
Restructured
loans
|
|
544,961
|
|
|
577,111
|
|
584,495
|
Total
|
$
|
1,043,255
|
|
$
|
1,083,975
|
$
|
1,088,870
|
(a) At
February 28, 2009, May 31, 2008 and February 29, 2008, all loans classified as
non-performing were on a non-accrual status with respect to the recognition of
interest income. At February 28, 2009 and May 31, 2008, $498 million
and $519 million, respectively, of restructured loans were on non-accrual status
with respect to the recognition of interest income. At February 29,
2008, $526 million of restructured loans were on non-accrual
status. A total of $1 million and $3 million, respectively, of
interest income was accrued on restructured loans during the three and nine
months ended February 28, 2009 and the three and nine months ended February 29,
2008.
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
28,
2009
|
|
February
29,
2008
|
|
|
February
28,
2009
|
|
February
29,
2008
|
Non-performing
loans
|
$
|
7,484
|
|
$
|
8,166
|
|
$
|
22,335
|
|
$
|
25,893
|
Restructured
loans
|
|
6,538
|
|
|
8,168
|
|
|
20,135
|
|
|
26,479
|
Total
|
$
|
14,022
|
|
$
|
16,334
|
|
$
|
42,470
|
|
$
|
52,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) The
Company classified $1,038 million and $1,078 million of loans as impaired
pursuant to the provisions of SFAS 114, at February 28, 2009 and May
31, 2008, respectively. The Company reserved $423 million and $331
million of the loan loss allowance for these impaired loans at February 28, 2009
and May 31, 2008, respectively. The amount included in the loan loss
allowance for these 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, respectively, of interest income on impaired loans for the three and
nine months ended February 28, 2009 and the three and nine months ended February
29, 2008. The average recorded investment in impaired loans for the
nine months ended February 28, 2009 and February 29, 2008 was $1,050 million and
$1,088 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 28, 2009 and May 31, 2008, National Rural had a total of $498 million
and $519 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 28, 2009 and May 31, 2008. Total loans to CoServ at
February 28, 2009 and May 31, 2008 represented 2.4 percent and 2.7 percent,
respectively, of the Company's total loans and guarantees
outstanding.
Under the
terms of a bankruptcy settlement from 2002, 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. Under this facility, advances are limited to
$46 million per year. Thus, as of the date of this filing, there is
$184 million available under this loan facility. 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. 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 $405
million plus an interest payment true up on or after December 13,
2008. National Rural has not received 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 28, 2009.
(d)
Innovative Communication Corporation ("ICC") is a diversified telecommunications
company headquartered in St. Croix, United States Virgin Islands
("USVI"). In the USVI, through subsidiaries including 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 provided
telecommunications, cable television, and Internet access services in the
eastern and southern Caribbean and mainland France.
At
February 28, 2009 and May 31, 2008, RTFC had $492 million in loans outstanding
to ICC. All loans to ICC have been on non-accrual status since
February 1, 2005. ICC has not made debt service payments to RTFC
since June 2005.
RTFC is
the primary secured lender to ICC. RTFC's collateral for the loans
included (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 percent 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 former chairman, Jeffrey Prosser
("Prosser").
In
February 2006, involuntary bankruptcy petitions were filed against Prosser,
Emcom and ICC-LLC; and on April 26, 2006, RTFC reached a settlement 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, thereby resolving all the
loan related litigation in RTFC’s favor. Regardless, Prosser and
related parties continue to assert claims against National Rural and certain of
its officers and directors and other parties in various
proceedings. National Rural therefore anticipates that it will
continue to be engaged in defense of the actions, as well as pursuing claims of
its own.
On July
31, 2006, ICC-LLC, Emcom and Prosser each filed a voluntary bankruptcy petition
for reorganization. The cases are pending in the United States
District Court for the Virgin Islands, Bankruptcy Division (the “Bankruptcy
Court”). A Chapter 11 trustee, Stan Springel, was later appointed for
the ICC-LLC and Emcom estates; and Prosser’s individual case was converted to
Chapter 7 liquidation in October 2007. Prosser’s Chapter 7 trustee is
in the process of marshaling Prosser’s non-exempt assets for disposition and
eventual payment in respect of creditor claims.
On
September 21, 2007, the Bankruptcy Court entered an order placing ICC in its own
bankruptcy proceeding, and on October 3, 2007 appointed Stan Springel as its
trustee. 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, including property in Prosser’s possession or
control, for disposition and eventual payment in respect of RTFC’s claims and
the claims of other parties-in-interest. Certain assets have been
sold, including certain foreign companies, aircraft, and real
estate.
On
February 1, 2008, the Court approved a motion of the Chapter 11 trustee of ICC
to sell substantially all of ICC’s assets, divided into three
groups: Group 1 consisting of ICC assets and stock in ICC
subsidiaries operating in the U.S. Virgin Islands, the British Virgin Islands
and St. Martin (the “Group 1 Assets”); Group 2 consisting of ICC assets and
stock in ICC subsidiaries operating in France and certain of its Caribbean
territories and the Netherland Antilles (the “Group 2 Assets”); and Group 3
consisting of the newspaper and media operations of ICC (the “Group 3
Assets”).
The Group
3 Assets were sold in May 2008 and the distribution of proceeds was approved by
the Court resulting in a net recovery to the Company. The Group 2
Assets were sold in December 2008 and the distribution of proceeds was approved
by the Court resulting in a net recovery to the
Company.
On March
13, 2009, RTFC and the Trustee entered into a Purchase Agreement as part of a
$250 million credit bid for the ICC Group 1 Assets. The Purchase
Agreement is conditional upon the approval of the bankruptcy court and
applicable regulators. On April 6, 2009, the Bankruptcy Judge
approved, on an interim basis, the sale of the ICC Group I Assets to
RTFC. RTFC will now begin the process of obtaining the applicable
regulatory approvals. The Court has scheduled a status hearing for
July 22, 2009, with a final hearing regarding the sale tentatively scheduled for
August 31, 2009.
Based on
its analysis, the Company believes that it is adequately reserved for its
exposure to ICC at February 28, 2009.
(e) At
February 28, 2009 and May 31, 2008, National Rural had a total of $42 million
and $52 million, respectively, in restructured loans outstanding to Pioneer
Electric Cooperative, Inc. ("Pioneer"). Pioneer was current with
respect to all debt service payments at February 28, 2009 and all loans to
Pioneer remain on accrual status. National Rural is the principal
creditor to Pioneer.
Based on
its analysis, the Company believes that it is adequately reserved for its
exposure to Pioneer at February 28, 2009.
(15) Segment
Information
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 facilitate loan securitization transactions and
intercompany transaction elimination entries. The segment
presentation for the three and nine months ended February 28, 2009 and February
29, 2008 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 a 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 table contains consolidated statements of operations for the nine
months ended February 28, 2009, and consolidated balance sheets at February 28,
2009 by segment.
(in
thousands)
|
|
National
Rural
|
|
|
|
RTFC
|
|
|
|
NCSC
|
|
|
|
Consolidated
|
|
|
Statement
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
726,270
|
|
|
$
|
57,754
|
|
|
$
|
22,969
|
|
|
$
|
806,993
|
|
|
Interest
expense
|
|
(623,819
|
)
|
|
|
(54,101
|
)
|
|
|
(16,729
|
)
|
|
|
(694,649
|
)
|
|
Net
interest income
|
|
102,451
|
|
|
|
3,653
|
|
|
|
6,240
|
|
|
|
112,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision
for) recovery of loan losses
|
|
(126,640
|
)
|
|
|
-
|
|
|
|
63
|
|
|
|
(126,577
|
)
|
|
Net
interest (loss) income after (provision for) recovery of loan
losses
|
(24,189
|
)
|
|
|
3,653
|
|
|
|
6,303
|
|
|
|
(14,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
382
|
|
|
|
-
|
|
|
|
460
|
|
|
|
842
|
|
|
Derivative
cash settlements
|
|
120,855
|
|
|
|
-
|
|
|
|
(3,909
|
)
|
|
|
116,946
|
|
|
Results
of operations of foreclosed assets
|
|
3,258
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,258
|
|
|
Total
non-interest income
|
|
124,495
|
|
|
|
-
|
|
|
|
(3,449
|
)
|
|
|
121,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(38,558
|
)
|
|
|
(4,232
|
)
|
|
|
(3,363
|
)
|
|
|
(46,153
|
)
|
|
Provision
for guarantee liability
|
|
(5,319
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,319
|
)
|
|
Market
adjustment on foreclosed assets
|
|
(1,805
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,805
|
)
|
|
Derivative
forward value
|
|
(186,165
|
)
|
|
|
-
|
|
|
|
(17,292
|
)
|
|
|
(203,457
|
)
|
|
Fair
value adjustment on investments in trading securities
|
(101
|
)
|
|
|
|
-
|
|
|
-
|
|
|
|
(101
|
)
|
|
Total
non-interest expense
|
|
(231,948
|
)
|
|
|
(4,232
|
)
|
|
|
(20,655
|
)
|
|
|
(256,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes and minority
interest
|
|
(131,642
|
)
|
|
|
(579
|
)
|
|
|
(17,801
|
)
|
|
|
(150,022
|
)
|
|
Income
tax benefit
|
|
-
|
|
|
|
220
|
|
|
|
6,757
|
|
|
|
6,977
|
|
|
Loss
per segment reporting
|
$
|
(131,642
|
)
|
|
$
|
(359
|
)
|
|
$
|
(11,044
|
)
|
|
$
|
(143,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(143,045
|
)
|
|
Minority
interest, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,138
|
|
|
Net
loss per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(139,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans outstanding
|
$
|
18,053,972
|
|
|
$
|
1,674,307
|
|
|
$
|
440,599
|
|
|
$
|
20,168,878
|
|
|
Deferred
origination fees
|
|
3,621
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,621
|
|
|
Less: Allowance
for loan losses
|
|
(638,436
|
)
|
|
|
-
|
|
|
|
(147
|
)
|
|
|
(638,583
|
)
|
|
Loans
to members, net
|
|
17,419,157
|
|
|
|
1,674,307
|
|
|
|
440,452
|
|
|
|
19,533,916
|
|
|
Other
assets
|
|
1,208,536
|
|
|
|
181,293
|
|
|
|
23,172
|
|
|
|
1,413,001
|
|
|
Total
assets
|
$
|
18,627,693
|
|
|
$
|
1,855,600
|
|
|
$
|
463,624
|
|
|
$
|
20,946,917
|
|
|
The
following table contains the consolidated statement of operations for the nine
months ended February 29, 2008 and consolidated balance sheet information at
February 29, 2008 by segment.
(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
tax (expense) benefit
|
|
-
|
|
|
|
(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 table contains the consolidated statement of operations for the three
months ended February 28, 2009 by segment.
(in
thousands)
|
|
National
Rural
|
|
|
|
RTFC
|
|
|
|
NCSC
|
|
|
|
Consolidated
|
|
Statement
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
244,884
|
|
|
$
|
18,866
|
|
|
$
|
7,683
|
|
|
$
|
271,433
|
|
Interest
expense
|
|
(216,883
|
)
|
|
|
(17,647
|
)
|
|
|
(5,586
|
)
|
|
|
(240,116
|
)
|
Net
interest income
|
|
28,001
|
|
|
|
1,219
|
|
|
|
2,097
|
|
|
|
31,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of loan losses
|
|
10,391
|
|
|
|
-
|
|
|
|
24
|
|
|
|
10,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after recovery of loan losses
|
38,392
|
|
|
|
1,219
|
|
|
|
2,121
|
|
|
|
41,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
50
|
|
|
|
-
|
|
|
|
170
|
|
|
|
220
|
|
Derivative
cash settlements
|
|
105,523
|
|
|
|
-
|
|
|
|
(1,511
|
)
|
|
|
104,012
|
|
Results
of operations of foreclosed assets
|
|
801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
801
|
|
Total
non-interest income
|
|
106,374
|
|
|
|
-
|
|
|
|
(1,341
|
)
|
|
|
105,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(13,746
|
)
|
|
|
(1,534
|
)
|
|
|
(1,186
|
)
|
|
|
(16,466
|
)
|
Provision
for guarantee liability
|
|
(338
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(338
|
)
|
Market
adjustment on foreclosed assets
|
|
(1,652
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,652
|
)
|
Derivative
forward value
|
|
(54,331
|
)
|
|
|
-
|
|
|
|
1,285
|
|
|
|
(53,046
|
)
|
Total
non-interest expense
|
|
(70,067
|
)
|
|
|
(1,534
|
)
|
|
|
99
|
|
|
|
(71,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes and minority
interest
|
|
74,699
|
|
|
|
(315
|
)
|
|
|
879
|
|
|
|
75,263
|
|
Income
tax benefit (expense)
|
|
-
|
|
|
|
151
|
|
|
|
(334
|
)
|
|
|
(183
|
)
|
Net
income (loss) per segment reporting
|
$
|
74,699
|
|
|
$
|
(164
|
)
|
|
$
|
545
|
|
|
$
|
75,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,080
|
|
Minority
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
Net
income per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
75,239
|
|
The
following table contains the consolidated statement of operations for the three
months ended February 29, 2008 by segment.
(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
tax benefit
|
|
-
|
|
|
|
-
|
|
|
|
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
|
)
|
(16) Subsequent
Events
In March
2009, the Company entered into a note purchase agreement in the amount of $400
million with Farmer Mac. This agreement is for the refinancing of a
$400 million, 5-year, variable-rate, secured private placement note that was
sold to Farmer Mac on March 27, 2008. The March 2009 agreement is a
5-year, variable-rate, collateralized, revolving credit facility that allows
National Rural to borrow, repay and re-borrow funds at any time or from time to
time; provided that the principal amount at any time outstanding under this
facility is not more than $400 million in the aggregate. The
variable-rate is based on a spread to three-month LIBOR and is determined at the
time of each advance. The maturity date of any advance under this
agreement must not be later than April 1, 2014. During April 2009,
the Company issued notes totaling $400 million under the March 2009 Farmer Mac
agreement at a blended spread over three-month LIBOR of 114 basis
points and maturities through March 2014, resulting in the full refinancing
of the $400 million outstanding under the March 2008 agreement.
The
amount of member capital securities issued by National Rural increased to a
total of $175 million as of April 7, 2009.
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. 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
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 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,
2008.
Business
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 while maintaining sound financial results as required to
obtain high credit ratings on its debt instruments. See page 55 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 is subject to fluctuation as total loans outstanding and/or
interest rates change. TIER is a measure of the Company's ability to
cover the interest expense on its debt obligations. TIER is
calculated by dividing the sum of interest expense and the net income prior to
the cumulative effect of change in accounting principle by the interest
expense. Adjusted net income is calculated by excluding the effect of
derivatives and including minority interest. Adjusted TIER is
calculated 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.
For the
nine month periods ended February 28, 2009 and February 29, 2008, the Company
reported a net loss of $140 million and $42 million, respectively, which
resulted in a TIER calculation for both periods below 1.00. For the
nine months ended February 28, 2009, the Company reported an adjusted net income
of $60 million with an adjusted TIER of 1.10, compared with an adjusted net
income of $123 million and adjusted TIER of 1.18 for the prior-year
period. The $98 million increase in net loss for the nine months
ended February 28, 2009 compared with the prior-year period was primarily due to
the $174 million increase in the provision for loan losses and the $30 million
increase in the derivative forward value expense partially offset by the $87
million increase in derivative cash settlements.
Interest
income of $807 million for the nine months ended February 28, 2009 was
relatively unchanged compared with the prior-year period. During the
nine months ended February 28, 2009, there was an increase of $1.3 billion or 7
percent to the average balance of loans outstanding which was largely offset by
a 30 basis point decline in the weighted-average yield earned on the loan
portfolio as compared with the prior-year period. The decline in the
yield earned on the loan portfolio was the result of the lower interest rates
earned on variable-rate loans.
The
Company’s interest expense and adjusted interest expense decreased by $26
million and $113 million, respectively, for the nine months ended February 28,
2009 as compared with the prior-year period. The decrease in the
interest expense was the result of the following factors:
•
|
The
lower interest rate environment: Lower interest rates on the
Company’s variable-rate debt and commercial paper
funding.
|
•
|
Lower
cost funding from Farmer Mac: A total of $500 million of notes
issued under the program with Farmer Mac at a blended interest rate of
3.871 percent between December 2008 and February
2009.
|
•
|
Lower
cost funding from REDLG: In September 2008, a total of $500
million advanced under the REDLG program at an interest rate of 57.5 basis
points above the comparable treasury
rate.
|
•
|
Lower
cost retail notes: Retail notes increased $433 million from February 29,
2008 to February 28, 2009. The Company issued retail notes at spread
levels well below the indicative collateral trust bond funding levels with
a weighted average interest rate of 4.87
percent.
|
These
factors were partially offset by the following:
•
|
Higher
interest rates on collateral trust bonds: In October 2008, the
Company issued $1 billion of collateral trust bonds at a rate of 10.375
percent which was significantly higher than the $900 million five-year
collateral trust bonds issued at a rate of 5.50 percent in June 2008 due
to the severe credit environment in the fall of 2008.
|
• |
The
$1,568 million increase in debt outstanding at February 28, 2009 compared
to February 29, 2008. |
In
addition to the factors above, the decrease in the adjusted interest expense was
due to the $97 million payment to the Company, recorded as derivative cash
settlements, for the termination of several receive fixed, pay variable interest
rate swaps during the third quarter of fiscal year 2009.
During
the nine months ended February 28, 2009, there was an increase of $174 million
to the loan loss provision as compared with the prior-year
period. The increase to the loan loss provision during the nine
months ended February 28, 2009 was due to the deterioration in the market value
of collateral supporting impaired loans. The fair value of the
collateral was negatively affected by the limited access to and high cost of
capital to support acquisitions of assets similar to the collateral supporting
impaired loans held by National Rural, which resulted in a compression of the
earning multiple that potential buyers are willing to pay for such
assets. In addition, the current economic conditions have caused
consumers and businesses to reduce spending, which resulted in, at least for the
short-term, reductions in the estimated earnings for companies whose stock is
held as collateral for impaired loans. This increase was partially
offset by payments received on impaired loans and the net decrease in the
Company’s variable interest rates from February 29, 2008 to February 28, 2009 as
described below.
The loan
loss provision is affected by changes in the calculated impairment on the
Company's impaired loans as a result of changes in interest rates because the
impairment amount for certain loans is calculated by discounting future cash
flows using the original contract rate on the loan, a portion of which is based
on the Company’s variable interest rate. Changes to the Company's
variable interest rates are based on the underlying cost of funding, competition
and other factors. Based on the current balance of impaired loans at
February 28, 2009, an increase or decrease of 25 basis points to the Company's
short-term and long-term 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.
Financial
Condition
At
February 28, 2009, the Company's total loans outstanding increased by $1,142
million or 6 percent as compared with May 31, 2008 due to a $775 million
increase in power supply loans and $407 million increase in distribution
loans. See further discussion of the Company’s loan portfolio in
Financial Condition, Loan and
Guarantee Portfolio Assessment. The Company expects moderate
loan growth because its members will need to continue to borrow funds to perform
system renewal and replacement.
The
Company’s loan growth has not been significantly affected by the slowdown in the
economy since most of the Company’s members serve residential customers as
opposed to industrial customers. The current economic conditions
reduced the competition for power supply loans from investment and commercial
banks. In addition, there is currently a need for utilities to
improve their infrastructure, including base load generation, transmission and
distribution plants, a significant portion of which is typically financed with
borrowed capital.
The
Company’s total long-term and short-term debt outstanding increased by $1,091
million at February 28, 2009 as compared with the prior-year
end. During the nine months ended February 28, 2009, there was
significant market activity to issue the debt required to fund new loan
advances, as well as to refinance maturing debt. During that period,
the Company issued $3.5 billion of new long-term debt (collateral trust bonds
and private placement notes) to replace the $2.6 billion of debt that matured
(mostly extendible collateral trust bonds).
Total
equity decreased $227 million from May 31, 2008 to February 28, 2009 primarily
due to the board authorized patronage capital retirement totaling $85 million
and the net loss of $140 million for the nine months ended February 28,
2009. The Company's reported equity balance fluctuates based on the
changes in earnings which are significantly affected by changes in the fair
value of the Company’s derivative instruments. The fair values of
these derivative instruments are sensitive to changes in interest
rates. As a result, it is difficult to predict the future changes in
the Company's reported 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 effects of Statement of Financial Accounting Standards (“SFAS”)
133, Accounting for Derivative
Instruments and Hedging Activities, as amended (“SFAS 133”), and SFAS 52,
Foreign Currency
Translation (“SFAS 52”).
Liquidity
After
Lehman Brothers Holdings Inc. (“LBHI”) filed for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code in September 2008, there were significant
disruptions in the capital markets that resulted in limited investor demand for
corporate debt and a significant decrease in the investor demand for commercial
paper investments. Those disruptions in the capital markets, while
continuing, eased during the third quarter of fiscal year 2009. The
Company has been able to achieve its funding needs by issuing member and dealer
commercial paper, collateral trust bonds, and through private placements of
debt.
Starting
with the LBHI bankruptcy and through the latter part of November 2008, there was
little investor demand for commercial paper with maturities of more than two
weeks. The majority of the investor demand for commercial paper
during that time was for maturities of one week or less and the rates required
to replace such funding were at significantly higher than normal spreads over
the federal funds rate. As a result, the Company had large volumes of
commercial paper to roll over that were, on certain days during that period, at
rates that were higher than the historical spread over the federal funds
rate.
On
October 7, 2008, the Company was uncertain of its ability to issue the required
amount of commercial paper and drew down $418.5 million on its bank
lines. The Company repaid the $418.5 million borrowed under its
revolving lines of credit on November 13, 2008.
As part
of the effort to support the capital markets, on October 7, 2008, the Federal
Reserve Board announced the creation of the Commercial Paper Funding Facility
(“CPFF”), to provide a source of liquidity to U.S. issuers of commercial paper
through a special purpose vehicle that purchased three-month unsecured and
asset-backed commercial paper directly from eligible issuers. During
the last half of November 2008, investors began to accept longer maturities in
limited amounts, which allowed the Company to issue larger volumes of commercial
paper on a daily basis. On days during the second quarter of
fiscal year 2009 when investor demand was concentrated at shorter-term
maturities, and the Company preferred to issue longer-term commercial paper to
maintain a certain percentage of the portfolio with longer maturities, the
Company was able to issue commercial paper with 90-day maturities through the
CPFF. The Company did not issue any commercial paper through the CPFF
during the quarter ended February 28, 2009. Subsequent to February
28, 2009, the $1 billion of commercial paper the Company issued through the CPFF
in the second quarter of fiscal year 2009 matured. The Company has
not issued additional commercial paper through the CPFF due to its ability to
roll over maturing commercial paper with its existing investor base and finance
its balance sheet growth with lower cost alternative sources of funding. The
Company is still qualified to use the CPFF, however, there is no intention at
this time to make use of the more expensive funding through the CPFF since there
is sufficient demand in the commercial paper market.
After the
LBHI bankruptcy, there was limited demand in the capital markets for corporate
debt. As a result, companies experienced difficulty issuing long-term
debt, and for the companies that were able to issue long-term debt, the interest
rate on the debt issued was at historically high spreads over comparable United
States Treasury rates. In October 2008, the Company issued $1 billion
of ten-year collateral trust bonds to refinance maturing long-term debt and meet
member loan growth demand. This debt was issued with an interest rate
of 10.375 percent. This interest rate represented a significant
increase in the credit spread over United States Treasury rates compared with
the $900 million 5.50 percent, five-year collateral trust bonds issued in June
2008. The Company has other lower-cost funding sources, as described
in the Results of
Operations section of this Financial
Overview.
On March
13, 2009, the Company replaced its $1,500 million 364-day revolving credit
agreement that was in place at February 28, 2009 with a new $1,000 million
364-day revolving credit agreement. Since the revolving credit lines
are required to maintain backup liquidity on the Company’s commercial paper, the
reduction in the facility reduces the Company’s capacity to issue commercial
paper in the future. Long-term debt swapped to a variable rate, which
is a more expensive form of funding, will be issued to make up for the reduction
in the amount of funding that can be obtained through the issuance of commercial
paper.
As a
result of the bankruptcy filing of LBHI, National Rural terminated interest rate
swaps with Lehman Brothers Special Financing (“LBSF”) as counterparty (with an
LBHI guarantee) on September 26, 2008. The payment due to National
Rural from LBSF of $26 million was recorded in derivative cash settlements
representing the termination net settlement amount on that day, in accordance
with the terms of the contract. On October 3, 2008, LBSF filed a
petition under Chapter 11 of the U.S. Bankruptcy Code with the United States
Bankruptcy Court for the Southern District of New York. National
Rural has a claim of $26 million on the assets of both LBHI and
LBSF. National Rural used market data that indicated values for LBHI
bonds of 10 cents and 15 cents on the dollar as a proxy for the potential
recovery from both LBHI and LBSF. As a result, the receivable has
been reduced to $7 million. The amount recorded as a receivable does
not reduce or limit National Rural's claim of $26 million against LBHI and
LBSF. The ultimate recovery will depend on the ability of LBHI and
LBSF to maximize the value of assets through sale or assignment.
At
February 28, 2009, the Company had $3,013 million of commercial paper, daily
liquidity fund, term loans, and bank bid notes and $2,354 million of medium-term
notes, collateral trust bonds and long-term notes payable scheduled to mature
during the next 12 months. Members held commercial paper (including
the daily liquidity fund) totaling $1,442 million or approximately 57 percent of
the total commercial paper and daily liquidity fund outstanding at February 28,
2009. Commercial paper issued through dealers and bank bid notes
totaled $1,361 million and represented 7 percent of total debt outstanding at
February 28, 2009. The Company intends to maintain the balance of
dealer commercial paper and bank bid notes at 15 percent or less of total debt
outstanding during fiscal year 2009. During the next 12 months, the
Company plans to replace the maturing $2,354 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.
The
Company began to offer member capital securities, an unsecured and subordinate
voluntary debt investment, to its members in December 2008. The
Company's members may take between 60 to 90 days to obtain their board approval
before they can complete the anticipated purchase of member capital
securities. As of February 28, 2009, a total of $97 million of member
capital securities had been sold with $27 million sold in December 2008, $35
million sold in January 2009 and $35 million sold in February
2009. Subsequent to the end of the quarter, the total member capital
securities issued increased to $175 million, with $63 million sold in March 2009
and $15 million sold in the first seven days of April
2009. The Company expects to continue issuing member capital
securities in the fourth quarter of fiscal year 2009 and remains focused on its
target of issuing at least $300 million of member capital
securities.
At
February 28, 2009 and May 31, 2008, the Company was the guarantor and liquidity
provider for $631 million and $330 million, respectively of tax-exempt bonds
issued for its member cooperatives. During the nine months ended
February 28, 2009, the Company was required to purchase a total of $72 million
of tax-exempt bonds pursuant to its obligation as liquidity
provider. As a result, the Company is required to hold the bonds
until the remarketing agent is able to place them with third-party
investors. At February 28, 2009, the Company was holding a total of
$12 million of these bonds, which were recorded at fair value as investments in
trading securities.
Results
of Operations
Nine Months
Ended February 28, 2009 versus February 29, 2008
The
following table presents the results of operations for the nine months ended
February 28, 2009 versus February 29, 2008.
|
|
|
For
the nine months ended
|
|
|
|
|
|
|
|
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
|
|
Increase/
(Decrease)
|
|
|
(dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
806,993
|
|
$
|
797,817
|
|
|
$
|
9,176
|
|
|
Interest
expense
|
|
|
(694,649
|
)
|
|
(720,810
|
)
|
|
|
26,161
|
|
|
Net
interest income
|
|
|
112,344
|
|
|
77,007
|
|
|
|
35,337
|
|
|
(Provision
for) recovery of loan losses
|
|
|
(126,577
|
)
|
|
47,900
|
|
|
|
(174,477
|
)
|
|
Net
interest (loss) income after (provision for) recovery of loan
losses
|
|
(14,233
|
)
|
|
124,907
|
|
|
|
(139,140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
|
842
|
|
|
1,070
|
|
|
|
(228
|
)
|
|
Derivative
cash settlements
|
|
|
116,946
|
|
|
30,299
|
|
|
|
86,647
|
|
|
Results
of operations of foreclosed assets
|
|
|
3,258
|
|
|
6,217
|
|
|
|
(2,959
|
)
|
|
Total
non-interest income
|
|
|
121,046
|
|
|
37,586
|
|
|
|
83,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
(29,799
|
)
|
|
(27,049
|
)
|
|
|
(2,750
|
)
|
|
Other
general and administrative expenses
|
|
|
(16,354
|
)
|
|
(16,278
|
)
|
|
|
(76
|
)
|
|
(Provision
for) recovery of guarantee liability
|
|
|
(5,319
|
)
|
|
4,300
|
|
|
|
(9,619
|
)
|
|
Market
adjustment on foreclosed assets
|
|
|
(1,805
|
)
|
|
(5,840
|
)
|
|
|
4,035
|
|
|
Derivative
forward value
|
|
|
(203,457
|
)
|
|
(173,278
|
)
|
|
|
(30,179
|
)
|
|
Fair
value adjustment on investments in trading securities
|
|
|
(101
|
)
|
|
-
|
|
|
|
(101
|
)
|
|
Loss
on sale of loans
|
|
|
-
|
|
|
(676
|
)
|
|
|
676
|
|
|
Total
non-interest expense
|
|
|
(256,835
|
)
|
|
(218,821
|
)
|
|
|
(38,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes and minority interest
|
|
|
(150,022
|
)
|
|
(56,328
|
)
|
|
|
(93,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
6,977
|
|
|
6,186
|
|
|
|
791
|
|
|
Minority
interest, net of income taxes
|
|
|
3,138
|
|
|
8,211
|
|
|
|
(5,073
|
)
|
|
Net
loss
|
|
$
|
(139,907
|
)
|
$
|
(41,931
|
)
|
|
$
|
(97,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
(1)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
Adjusted
TIER (2)
|
|
|
|
1.10
|
|
|
1.18
|
|
|
|
|
|
|
(1) For
the nine months ended February 28, 2009, the Company reported a net loss of $140
million. For the nine months ended February 29, 2008, the Company
reported a net loss of $42 million. Due to these losses, the TIER
calculation for those periods results in a value below 1.00.
5(2) Adjusted to exclude the
effect of the derivative forward value from net income, to include minority
interest in net income and to include all derivative cash settlements in
interest expense. See Non-GAAP Financial Measures
for further explanation and a reconciliation of these
adjustments.
The
following table summarizes the Company's operating results expressed as an
annualized percentage of average loans outstanding.
|
|
For
the nine months ended
|
|
|
|
|
|
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
|
Increase/
(Decrease)
|
|
Interest
income
|
|
5.52
|
%
|
|
|
5.82
|
%
|
|
|
(0.30
|
)%
|
Interest
expense
|
|
(4.75
|
)
|
|
|
(5.26
|
)
|
|
|
0.51
|
|
Net
interest income
|
|
0.77
|
|
|
|
0.56
|
|
|
|
0.21
|
|
(Provision
for) recovery of loan losses
|
|
(0.87
|
)
|
|
|
0.35
|
|
|
|
(1.22
|
)
|
Net
interest (loss) income after (provision for) recovery of loan
losses
|
|
(0.10
|
)
|
|
|
0.91
|
|
|
|
(1.01
|
)
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
0.01
|
|
|
|
0.01
|
|
|
|
-
|
|
Derivative
cash settlements
|
|
0.80
|
|
|
|
0.22
|
|
|
|
0.58
|
|
Results
of operations of foreclosed assets
|
|
0.02
|
|
|
|
0.04
|
|
|
|
(0.02
|
)
|
Total
non-interest income
|
|
0.83
|
|
|
|
0.27
|
|
|
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(0.20
|
)
|
|
|
(0.20
|
)
|
|
|
-
|
|
Other
general and administrative expenses
|
|
(0.12
|
)
|
|
|
(0.12
|
)
|
|
|
-
|
|
(Provision
for) recovery of guarantee liability
|
|
(0.04
|
)
|
|
|
0.03
|
|
|
|
(0.07
|
)
|
Market
adjustment on foreclosed assets
|
|
(0.01
|
)
|
|
|
(0.04
|
)
|
|
|
0.03
|
|
Derivative
forward value
|
|
(1.39
|
)
|
|
|
(1.26
|
)
|
|
|
(0.13
|
)
|
Total
non-interest expense
|
|
(1.76
|
)
|
|
|
(1.59
|
)
|
|
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes and minority interest
|
|
(1.03
|
)
|
|
|
(0.41
|
)
|
|
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
0.05
|
|
|
|
0.04
|
|
|
|
0.01
|
|
Minority
interest, net of income taxes
|
|
0.02
|
|
|
|
0.06
|
|
|
|
(0.04
|
)
|
Net
loss
|
|
(0.96
|
)%
|
|
|
(0.31
|
)%
|
|
|
(0.65
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
net interest income (1)
|
|
1.57
|
%
|
|
|
0.78
|
%
|
|
|
0.79
|
%
|
Adjusted
income prior to income taxes and minority interest (2)
|
|
|
0.36
|
%
|
|
|
0.85
|
%
|
|
|
(0.49
|
)%
|
(1)
Adjusted to include derivative cash settlements in interest
expense. See Non-GAAP Financial Measures
for further explanation and a reconciliation of these adjustments.
(2)
Adjusted to exclude derivative forward value. See Non-GAAP Financial Measures
for further explanation and a reconciliation of these adjustments.
The
Company’s net interest income will increase or decrease due to changes in loan
volume and the interest rates that it receives on its loans and pays on its
sources of funding. The Company’s loan volume substantially
determines its funding needs. The following Rate Volume 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 margin.
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. Management calculates an adjusted interest
expense, which includes all derivative cash settlements, in interest
expense. 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 interest
expense.
Rate
Volume Variance Table
(Dollar
amounts in millions)
|
|
For
the nine months ended
|
|
|
|
|
|
|
February
28, 2009
|
|
|
|
February
29, 2008
|
|
|
Change
due to
|
|
|
|
Average
Loan
Balance
|
|
Income/
(Cost)
|
|
Rate
|
|
|
|
Average
Loan
Balance
|
|
Income/
(Cost)
|
|
Rate
|
|
|
Volume
(1)
|
|
Rate
(2)
|
|
|
Total
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
17,418
|
$
|
726
|
|
5.57
|
%
|
|
$
|
15,991
|
$
|
702
|
|
5.85
|
%
|
|
$
|
60
|
|
$
|
(36
|
)
|
$
|
24
|
|
RTFC
|
|
1,702
|
|
58
|
|
4.54
|
|
|
|
1,810
|
|
69
|
|
5.09
|
|
|
|
(4
|
)
|
|
(7
|
)
|
|
(11
|
)
|
NCSC
|
|
429
|
|
23
|
|
7.16
|
|
|
|
453
|
|
27
|
|
7.75
|
|
|
|
(2
|
)
|
|
(2
|
)
|
|
(4
|
)
|
Total
|
$
|
19,549
|
$
|
807
|
|
5.52
|
|
|
$
|
18,254
|
$
|
798
|
|
5.82
|
|
|
$
|
54
|
|
$
|
(45
|
)
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
17,418
|
$
|
(624
|
)
|
(4.79
|
)%
|
|
$
|
15,991
|
$
|
(633
|
)
|
(5.28
|
)%
|
|
$
|
(54
|
)
|
$
|
63
|
|
$
|
9
|
|
RTFC
|
|
1,702
|
|
(54
|
)
|
(4.25
|
)
|
|
|
1,810
|
|
(65
|
)
|
(4.79
|
)
|
|
|
4
|
|
|
7
|
|
|
11
|
|
NCSC
|
|
429
|
|
(17
|
)
|
(5.21
|
)
|
|
|
453
|
|
(23
|
)
|
(6.55
|
)
|
|
|
1
|
|
|
5
|
|
|
6
|
|
Total
|
$
|
19,549
|
$
|
(695
|
)
|
(4.75
|
)
|
|
$
|
18,254
|
$
|
(721
|
)
|
(5.26
|
)
|
|
$
|
(49
|
)
|
$
|
75
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
17,418
|
$
|
102
|
|
0.78
|
%
|
|
$
|
15,991
|
$
|
69
|
|
0.57
|
%
|
|
$
|
6
|
|
$
|
27
|
|
$
|
33
|
|
RTFC
|
|
1,702
|
|
4
|
|
0.29
|
|
|
|
1,810
|
|
4
|
|
0.30
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
NCSC
|
|
429
|
|
6
|
|
1.95
|
|
|
|
453
|
|
4
|
|
1.20
|
|
|
|
(1
|
)
|
|
3
|
|
|
2
|
|
Total
|
$
|
19,549
|
$
|
112
|
|
0.77
|
|
|
$
|
18,254
|
$
|
77
|
|
0.56
|
|
|
$
|
5
|
|
$
|
30
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
12,845
|
$
|
121
|
|
1.26
|
%
|
|
$
|
12,888
|
$
|
30
|
|
0.31
|
%
|
|
$
|
-
|
|
$
|
91
|
|
$
|
91
|
|
NCSC
|
|
194
|
|
(4
|
)
|
(2.69
|
)
|
|
|
206
|
|
-
|
|
-
|
|
|
|
-
|
|
|
(4
|
)
|
|
(4
|
)
|
Total
|
$
|
13,039
|
$
|
117
|
|
1.20
|
|
|
$
|
13,094
|
$
|
30
|
|
0.31
|
|
|
$
|
-
|
|
$
|
87
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
interest expense (4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
19,549
|
$
|
(578
|
)
|
(3.95
|
)%
|
|
$
|
18,254
|
$
|
(691
|
)
|
(5.04
|
)%
|
|
$
|
(49
|
)
|
$
|
162
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 instruments 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 Rate Volume Variance Table above is summarized as follows by income type
and as a percentage of average loans outstanding:
|
|
For
the nine months ended
|
|
|
|
|
|
|
February
28, 2009
|
|
|
|
February
29, 2008
|
|
|
|
|
(Dollar
amounts in thousands)
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
Increase/
(Decrease)
|
|
Interest
on long-term fixed-rate loans (1)
|
$
|
669,454
|
|
|
|
|
$
|
649,860
|
|
|
|
$
|
19,594
|
|
Interest
on long-term variable-rate loans (1)
|
|
60,684
|
|
|
|
|
|
68,024
|
|
|
|
|
(7,340
|
)
|
Interest
on short-term loans (1)
|
|
58,654
|
|
|
|
|
|
59,816
|
|
|
|
|
(1,162
|
)
|
Total
interest income on loans
|
|
788,792
|
|
5.39
|
%
|
|
|
777,700
|
|
5.67
|
%
|
|
11,092
|
|
Interest
on investments (2)
|
|
4,615
|
|
0.03
|
|
|
|
6,668
|
|
0.05
|
|
|
(2,053
|
)
|
Conversion
fees (3)
|
|
4,594
|
|
0.03
|
|
|
|
5,096
|
|
0.04
|
|
|
(502
|
)
|
Make-whole
and prepayment fees (4)
|
|
1,070
|
|
0.01
|
|
|
|
2,287
|
|
0.02
|
|
|
(1,217
|
)
|
Commitment
and guarantee fees (5)
|
|
5,832
|
|
0.04
|
|
|
|
3,742
|
|
0.03
|
|
|
2,090
|
|
Other
fees
|
|
2,090
|
|
0.02
|
|
|
|
2,324
|
|
0.01
|
|
|
(234
|
)
|
Total interest
income
|
|
$
|
806,993
|
|
5.52
|
%
|
|
$
|
797,817
|
|
5.82
|
%
|
$
|
9,176
|
|
(1)
Represents interest income on loans to members.
(2)
Represents interest income on the investment of excess cash.
(3)
Conversion fees are deferred and recognized using the interest method over the
remaining original loan interest rate pricing term, except for a small portion
of the total fee charged to cover administrative costs related to the
conversion, which is recognized immediately.
(4)
Make-whole and prepayment fees are charged for the early repayment of principal
and are recognized when collected.
(5)
Commitment fees for RTFC loan commitments are, in most cases, refundable on a
pro rata basis according to the amount of the loan commitment that is
advanced. Such refundable fees are deferred and then recognized on a
pro rata 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,
including fees related to the Company’s obligation to perform as liquidity
provider, are deferred and amortized using the straight-line method into
interest income over the life of the guarantee.
The $9
million or 1 percent increase in interest income for the nine months ended
February 28, 2009, as compared with the prior-year period was due to a $1,295
million or 7 percent increase in average loan volume largely offset by a 30
basis point decline in the net yield earned on the portfolio due to lower
variable interest rates.
For the
nine months ended February 28, 2009, the Company had a reduction to interest
income of $42 million due to non-accrual loans compared with a reduction of $52
million for the prior-year period. The effect on electric interest
income of non-accrual loans was a reduction of $20 million for the nine months
ended February 28, 2009, as compared with $26 million for the comparable
prior-year period. The telecommunications interest income was reduced
by $22 million for the nine months ended February 28, 2009 as compared with $26
million for the prior-year period as a result of non-accrual
loans. The effect of non-accrual loans on interest income is included
in the rate variance in the table above.
Interest
Expense
Total
interest expense reported on the consolidated statements of operations and shown
in the Rate Volume Variance Table above is summarized as follows by expense type
and as a percentage of average loans outstanding:
|
|
For
the nine months ended
|
|
|
|
|
|
|
|
February
28, 2009
|
|
|
|
February
29, 2008
|
|
|
|
Increase/
|
|
(Dollar
amounts in thousands)
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
|
(Decrease)
|
|
Interest
expense (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper and bank bid notes
|
$
|
53,500
|
|
|
|
|
$
|
102,117
|
|
|
|
|
$
|
(48,617
|
)
|
Medium-term
notes
|
|
242,016
|
|
|
|
|
|
249,422
|
|
|
|
|
|
(7,406
|
)
|
Collateral
trust bonds
|
|
211,065
|
|
|
|
|
|
189,968
|
|
|
|
|
|
21,097
|
|
Subordinated
deferrable debt
|
|
14,747
|
|
|
|
|
|
14,747
|
|
|
|
|
|
-
|
|
Subordinated
certificates
|
|
38,723
|
|
|
|
|
|
36,451
|
|
|
|
|
|
2,272
|
|
Long-term
private debt
|
|
106,728
|
|
|
|
|
|
100,102
|
|
|
|
|
|
6,626
|
|
Total
interest expense on debt
|
|
666,779
|
|
4.56
|
%
|
|
|
692,807
|
|
5.05
|
%
|
|
|
(26,028
|
)
|
Debt
issuance costs (2)
|
|
7,218
|
|
0.05
|
|
|
|
7,625
|
|
0.06
|
|
|
|
(407
|
)
|
Commitment
and guarantee fees (3)
|
|
15,884
|
|
0.11
|
|
|
|
13,277
|
|
0.10
|
|
|
|
2,607
|
|
Loss
on extinguishment of debt (4)
|
|
-
|
|
-
|
|
|
|
5,509
|
|
0.04
|
|
|
|
(5,509
|
)
|
Other
fees
|
|
4,768
|
|
0.03
|
|
|
|
1,592
|
|
0.01
|
|
|
|
3,176
|
|
Total
interest expense
|
|
$
|
694,649
|
|
4.75
|
%
|
|
$
|
720,810
|
|
5.26
|
%
|
|
$
|
(26,161
|
)
|
(1)
Represents interest expense and the amortization of discounts on
debt.
(2)
Includes amortization of all deferred charges related to debt issuances,
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 which are recognized as incurred.
(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 $26
million or 4 percent decline in total interest expense for the nine months ended
February 28, 2009 compared with the prior-year period was due to a 51 basis
point decline in the overall cost of the Company’s debt which was partly offset
by an increase in interest expense due to a higher level of debt outstanding to
fund loan growth. The decline in debt costs was primarily
attributable to a decline in the cost of the Company’s short-term and
variable-rate debt as a result of a lower interest rate environment compared
with the prior-year period. The growth in debt outstanding was
partially attributed to amounts borrowed under the REDLG program, notes payable
issued to Farmer Mac and new issuances of collateral trust bonds since February
29, 2008.
The
adjusted interest expense, which includes all derivative cash settlements, was
$578 million for the nine months ended February 28, 2009 compared with $691
million for the prior-year period based on changes to interest expense noted
above and 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 interest
expense.
Net
Interest Income
The $35
million increase in net interest income for the nine months ended February 28,
2009 compared with the prior-year period was due to the increase in average loan
volume and the 51 basis point decline in the overall cost of debt partially
offset by additional debt required to fund the increase in loans and the 30
basis point decline in the yield of the Company’s loan portfolio. The
adjusted net interest income, which includes all derivative cash settlements,
for the nine months ended February 28, 2009 was $229 million, an increase of
$122 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 determining its adjusted
interest expense which, in turn, affects adjusted net interest
income.
Provision
for Loan Loss
The
Company recorded a loan loss provision of $127 million for the nine months ended
February 28, 2009, compared with a $48 million recovery for the prior-year
period. The loan loss provision for the nine months ended February
28, 2009, was primarily due to a reduction in the fair value of the collateral
supporting the Company’s exposure to Innovative Communication Corporation
(“ICC”). See Non-performing Loans in the
Financial Condition
section for additional discussion regarding this and other non-performing
loans. The fair value of the collateral was negatively affected by
the limited access to and high cost of capital to support acquisitions of assets
similar to the collateral supporting impaired loans held by National Rural,
which resulted in a compression of the earning multiple that potential buyers
are willing to pay for such assets. In addition, the current economic
conditions have caused consumers and businesses to reduce spending, which
resulted in, at least for the short-term, reductions in the estimated earnings
for companies. The combination of these two factors, which began to
affect market values after the LBHI bankruptcy, resulted in a decrease to the
market value of companies similar to the collateral supporting the Company’s
impaired loans. The resulting increase in the loan loss provision was
partly offset by payments received on impaired loans.
Non-interest
Income
Non-interest
income increased by $83 million for the nine months ended February 28, 2009,
compared with the prior-year period primarily due to the increase in cash
settlements on derivative financial instruments. During the third
quarter of fiscal year 2009, the Company terminated several receive fixed, pay
variable interest rate swaps with notional amounts totaling $583 million that
resulted in payments to the Company of $97 million which was recorded in the
statement of operations as derivative cash settlements. Of the $583 million
notional amount of derivative contracts terminated, the Company initiated the
termination on $495 million, while the counterparty initiated the request to
terminate $88 million (these swaps were terminated at par resulting in no cash
payments or receipts). As a result of these terminations, the Company
recorded a charge to the derivative forward value line for the three and nine
months ended February 28, 2009 to reduce the derivative asset by $97 million.
The income recorded in cash settlements for the payments received and the charge
to derivative forward value are offsetting, and therefore there is no effect on
reported net income as a result of these transactions. While there was no effect
on reported net income, adjusted net income and the related adjusted equity
increased by $97 million due to these transactions. See Non-GAAP Financial Measures
for further explanation of the adjustments the Company makes in its financial
analysis to net income and equity.
The
Company terminated these derivative instruments primarily to increase its
adjusted equity base for the fiscal year to partially offset losses from the
quarter ended November 30, 2008. Terminating these swaps also had the
benefit of reducing the Company’s counterparty risk exposure on two out of the
three counterparties to these instruments. The economic effect of
terminating these transactions was to accelerate into the current period the
benefit the Company would have realized in future periods in the form of lower
debt costs based upon expected future interest rates.
Cash
settlements also include income of $7 million representing the estimated
recovery for the $26 million due to National Rural as a result of terminating
interest rate swaps with LBSF. The amount recorded as a receivable
does not reduce or limit National Rural's claim of $26 million against LBHI and
LBSF. The ultimate recovery will depend on the ability of LBHI and
LBSF to maximize the value of assets through sale or assignment. The
cash settlements income described above was partially offset by the decrease in
cash settlements as a result of lower short-term interest rates during the nine
months ended February 28, 2009 compared with the nine months ended February 29,
2008 as the Company received a variable rate on the majority of its derivative
contracts during both periods.
Non-interest
Expense
Non-interest
expense increased by $38 million for the nine months ended February 28, 2009
compared with the prior-year period primarily due to the $30 million increase in
the derivative forward value expense explained below. Additionally,
the Company recorded a $5 million provision for guarantee liability for the nine
months ended February 28, 2009 compared with a $4 million recovery of guarantee
liability for the nine months ended February 29, 2008. The increase
to the provision for guarantee liability during the nine months ended February
28, 2009 was primarily due to the $232 million increase in guarantees
outstanding.
The $30
million increase in the derivative forward value expense during the nine months
ended February 28, 2009 compared with the prior-year period is due to the
reversal of the $97 million derivative asset related to terminated interest rate
exchange agreements and changes in the estimate of future interest rates over
the remaining life of the derivative contracts.
Minority
Interest
During
the nine months ended February 28, 2009, NCSC’s net loss exceeded its equity
balance by $8.1 million primarily due to NCSC’s $17 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 $8.1 million
excess NCSC loss. Minority interest for the nine months ended
February 28, 2009 represents $0.3 million of year-to-date RTFC net loss and $2.9
million of the $11 million year-to-date NCSC net loss. Minority
interest for the nine months ended February 29, 2008 represents the total
year-to-date RTFC and NCSC net loss since NCSC losses did not exceed its equity
during that period.
Net
Loss
The
change in the items described above resulted in an increase in net loss of $98
million for the nine months ended February 28, 2009 from the comparable
prior-year period. The adjusted net income, which excludes the effect
of the derivative forward value and adds back minority interest, was $60
million, compared with an adjusted net income of $123 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.
Three
Months Ended February 28, 2009 versus February 29, 2008
The
following table presents the results of operations for the three months ended
February 28, 2009 versus February 29, 2008.
|
|
For
the three months ended
|
|
|
|
|
|
(Dollar
amounts in thousands)
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
|
Increase/
(Decrease)
|
|
Interest
income
|
$
|
271,433
|
|
|
$
|
266,576
|
|
|
$
|
4,857
|
|
Interest
expense
|
|
(240,116
|
)
|
|
|
(233,468
|
)
|
|
|
(6,648
|
)
|
Net
interest income
|
|
31,317
|
|
|
|
33,108
|
|
|
|
(1,791
|
)
|
Recovery
of loan losses
|
|
10,415
|
|
|
|
33,599
|
|
|
|
(23,184
|
)
|
Net
interest income after recovery of loan losses
|
|
41,732
|
|
|
|
66,707
|
|
|
|
(24,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
220
|
|
|
|
367
|
|
|
|
(147
|
)
|
Derivative
cash settlements
|
|
104,012
|
|
|
|
10,463
|
|
|
|
93,549
|
|
Results
of operations of foreclosed assets
|
|
801
|
|
|
|
2,401
|
|
|
|
(1,600
|
)
|
Total
non-interest income
|
|
105,033
|
|
|
|
13,231
|
|
|
|
91,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(10,036
|
)
|
|
|
(9,398
|
)
|
|
|
(638
|
)
|
Other
general and administrative expenses
|
|
(6,430
|
)
|
|
|
(5,862
|
)
|
|
|
(568
|
)
|
(Provision
for) recovery of guarantee liability
|
|
(338
|
)
|
|
|
1,000
|
|
|
|
(1,338
|
)
|
Market
adjustment on foreclosed assets
|
|
(1,652
|
)
|
|
|
(5,840
|
)
|
|
|
4,188
|
|
Derivative
forward value
|
|
(53,046
|
)
|
|
|
(64,266
|
)
|
|
|
11,220
|
|
Loss
on sale of loans
|
|
-
|
|
|
|
(158
|
)
|
|
|
158
|
|
Total
non-interest expense
|
|
(71,502
|
)
|
|
|
(84,524
|
)
|
|
|
13,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes and minority interest
|
|
75,263
|
|
|
|
(4,586
|
)
|
|
|
79,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) benefit
|
|
(183
|
)
|
|
|
2,175
|
|
|
|
(2,358
|
)
|
Minority
interest, net of income taxes
|
|
159
|
|
|
|
2,088
|
|
|
|
(1,929
|
)
|
Net
income (loss)
|
$
|
75,239
|
|
|
$
|
(323
|
)
|
|
$
|
75,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
(1)
|
|
1.31
|
|
|
|
-
|
|
|
|
|
|
Adjusted
TIER (2)
|
|
|
1.94
|
|
|
|
1.28
|
|
|
|
|
|
(1) For
the three months ended February 29, 2008, the Company reported a net loss of
$0.3 million, thus the TIER calculation results in a value below
1.00.
(2)
Adjusted to exclude the effect of the derivative forward value from net income,
to include minority interest in net income and to include all derivative cash
settlements in interest expense. See Non-GAAP Financial Measures
for further explanation and a reconciliation of these
adjustments.
The
following table summarizes the Company's operating results expressed as an
annualized percentage of average loans outstanding.
|
|
|
For
the three months ended
|
|
|
|
|
|
|
|
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
|
Increase/
(Decrease)
|
|
|
Interest
income
|
|
|
5.51
|
%
|
|
|
5.77
|
%
|
|
|
(0.26
|
)%
|
|
Interest
expense
|
|
|
(4.87
|
)
|
|
|
(5.05
|
)
|
|
|
0.18
|
|
|
Net
interest income
|
|
|
0.64
|
|
|
|
0.72
|
|
|
|
(0.08
|
)
|
|
Recovery
of loan losses
|
|
|
0.21
|
|
|
|
0.73
|
|
|
|
(0.52
|
)
|
|
Net
interest income after recovery of loan losses
|
|
|
0.85
|
|
|
|
1.45
|
|
|
|
(0.60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
and other income
|
|
|
-
|
|
|
|
0.01
|
|
|
|
(0.01
|
)
|
|
Derivative
cash settlements
|
|
|
2.11
|
|
|
|
0.22
|
|
|
|
1.89
|
|
|
Results
of operations of foreclosed assets
|
|
|
0.02
|
|
|
|
0.05
|
|
|
|
(0.03
|
)
|
|
Total
non-interest income
|
|
|
2.13
|
|
|
|
0.28
|
|
|
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
(0.20
|
)
|
|
|
(0.20
|
)
|
|
|
-
|
|
|
Other
general and administrative expenses
|
|
|
(0.13
|
)
|
|
|
(0.13
|
)
|
|
|
-
|
|
|
(Provision
for) recovery of guarantee liability
|
|
|
(0.01
|
)
|
|
|
0.02
|
|
|
|
(0.03
|
)
|
|
Market
adjustment on foreclosed assets
|
|
|
(0.03
|
)
|
|
|
(0.13
|
)
|
|
|
0.10
|
|
|
Derivative
forward value
|
|
|
(1.08
|
)
|
|
|
(1.39
|
)
|
|
|
0.31
|
|
|
Total
non-interest expense
|
|
|
(1.45
|
)
|
|
|
(1.83
|
)
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes and minority interest
|
|
|
1.53
|
|
|
|
(0.10
|
)
|
|
|
1.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
-
|
|
|
|
0.05
|
|
|
|
(0.05
|
)
|
|
Minority
interest, net of income taxes
|
|
|
-
|
|
|
|
0.04
|
|
|
|
(0.04
|
)
|
|
Net
income (loss)
|
|
|
1.53
|
%
|
|
|
(0.01
|
)%
|
|
|
1.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
net interest income (1)
|
|
|
2.75
|
%
|
|
|
0.94
|
%
|
|
|
1.81
|
%
|
|
Adjusted
income prior to income taxes and minority interest (2)
|
|
|
|
2.61
|
%
|
|
|
1.29
|
%
|
|
|
1.32
|
%
|
|
(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. See Non-GAAP Financial Measures
for further explanation and a reconciliation of these adjustments.
The
Company’s net interest income will increase or decrease due to changes in loan
volume and the interest rates that it receives on its loans and pays on its
sources of funding. The Company’s loan volume substantially
determines its funding needs. The following Rate Volume 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 margin.
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. Management calculates an adjusted interest
expense, which includes all derivative cash settlements, in interest
expense. 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.
Rate
Volume Variance Table
(Dollar
amounts in millions)
|
|
|
For
the three months ended
|
|
|
|
|
|
|
|
February
28, 2009
|
|
|
|
February
29, 2008
|
|
|
Change
due to
|
|
|
|
|
Average
Loan
Balance
|
|
Income/
(Cost)
|
|
Rate
|
|
|
|
Average
Loan
Balance
|
|
Income/
(Cost)
|
|
Rate
|
|
|
Volume
(1)
|
|
Rate
(2)
|
|
Total
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
17,862
|
$
|
245
|
|
5.56
|
%
|
|
$
|
16,339
|
$
|
236
|
|
5.81
|
%
|
$
|
19
|
|
$
|
(10
|
)
|
$
|
9
|
|
|
RTFC
|
|
1,688
|
|
19
|
|
4.53
|
|
|
|
1,769
|
|
22
|
|
4.94
|
|
|
(1
|
)
|
|
(2
|
)
|
|
(3
|
)
|
|
NCSC
|
|
439
|
|
8
|
|
7.10
|
|
|
|
435
|
|
9
|
|
7.65
|
|
|
-
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Total
|
$
|
19,989
|
$
|
272
|
|
5.51
|
|
|
$
|
18,543
|
$
|
267
|
|
5.77
|
|
$
|
18
|
|
$
|
(13
|
)
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
17,862
|
$
|
(217
|
)
|
(4.92
|
)%
|
|
$
|
16,339
|
$
|
(206
|
)
|
(5.06
|
)%
|
$
|
(17
|
)
|
$
|
6
|
|
$
|
(11
|
)
|
|
RTFC
|
|
1,688
|
|
(18
|
)
|
(4.24
|
)
|
|
|
1,769
|
|
(20
|
)
|
(4.65
|
)
|
|
1
|
|
|
1
|
|
|
2
|
|
|
NCSC
|
|
439
|
|
(6
|
)
|
(5.17
|
)
|
|
|
435
|
|
(7
|
)
|
(6.15
|
)
|
|
-
|
|
|
1
|
|
|
1
|
|
|
Total
|
$
|
19,989
|
$
|
(241
|
)
|
(4.87
|
)
|
|
$
|
18,543
|
$
|
(233
|
)
|
(5.05
|
)
|
$
|
(16
|
)
|
$
|
8
|
|
$
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
17,862
|
$
|
28
|
|
0.64
|
%
|
|
$
|
16,339
|
$
|
30
|
|
0.75
|
%
|
$
|
2
|
|
$
|
(4
|
)
|
$
|
(2
|
)
|
|
RTFC
|
|
1,688
|
|
1
|
|
0.29
|
|
|
|
1,769
|
|
2
|
|
0.29
|
|
|
-
|
|
|
(1
|
)
|
|
(1
|
)
|
|
NCSC
|
|
439
|
|
2
|
|
1.93
|
|
|
|
435
|
|
2
|
|
1.50
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
$
|
19,989
|
$
|
31
|
|
0.64
|
|
|
$
|
18,543
|
$
|
34
|
|
0.72
|
|
$
|
2
|
|
$
|
(5
|
)
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
12,166
|
$
|
105
|
|
3.52
|
%
|
|
$
|
13,094
|
$
|
10
|
|
0.32
|
%
|
$
|
-
|
|
$
|
95
|
|
$
|
95
|
|
|
NCSC
|
|
193
|
|
(1
|
)
|
(3.18
|
)
|
|
|
201
|
|
-
|
|
-
|
|
|
-
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Total
|
$
|
12,359
|
$
|
104
|
|
3.41
|
|
|
$
|
13,295
|
$
|
10
|
|
0.32
|
|
$
|
-
|
|
$
|
94
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
interest expense (4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
19,989
|
$
|
(137
|
)
|
(2.76
|
)%
|
|
$
|
18,543
|
$
|
(223
|
)
|
(4.83
|
)%
|
$
|
(16
|
)
|
$
|
102
|
|
$
|
86
|
|
(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 Rate Volume Variance Table above is summarized as follows by income type
and as a percentage of average loans outstanding:
|
|
|
For
the three months ended
|
|
|
|
|
|
|
|
February
28, 2009
|
|
|
|
February
29, 2008
|
|
|
|
Increase/
|
|
|
(Dollar
amounts in thousands)
|
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
|
(Decrease)
|
|
|
Interest
on long-term fixed-rate loans (1)
|
|
$
|
220,791
|
|
|
|
|
$
|
220,117
|
|
|
|
|
$
|
674
|
|
|
Interest
on long-term variable-rate loans (1)
|
|
|
27,035
|
|
|
|
|
|
20,785
|
|
|
|
|
|
6,250
|
|
|
Interest
on short-term loans (1)
|
|
|
18,208
|
|
|
|
|
|
20,224
|
|
|
|
|
|
(2,016
|
)
|
|
Total
interest income on loans
|
|
|
266,034
|
|
5.40
|
%
|
|
|
261,126
|
|
5.65
|
%
|
|
|
4,908
|
|
|
Interest
on investments (2)
|
|
|
990
|
|
0.02
|
|
|
|
1,832
|
|
0.04
|
|
|
|
(842
|
)
|
|
Conversion
fees (3)
|
|
|
1,355
|
|
0.03
|
|
|
|
1,587
|
|
0.04
|
|
|
|
(232
|
)
|
|
Make-whole
and prepayment fees (4)
|
|
|
203
|
|
-
|
|
|
|
533
|
|
0.01
|
|
|
|
(330
|
)
|
|
Commitment
and guarantee fees (5)
|
|
|
2,196
|
|
0.05
|
|
|
|
822
|
|
0.02
|
|
|
|
1,374
|
|
|
Other
fees
|
|
|
655
|
|
0.01
|
|
|
|
676
|
|
0.01
|
|
|
|
(21
|
)
|
|
Total interest
income
|
|
|
$
|
271,433
|
|
5.51
|
%
|
|
$
|
266,576
|
|
5.77
|
%
|
|
$
|
4,857
|
|
|
(1)
Represents interest income on loans to members.
(2)
Represents interest income on the investment of excess cash.
(3)
Conversion fees are deferred and recognized using the interest method over the
remaining original loan interest rate pricing term, except for a small portion
of the total fee charged to cover administrative costs related to the conversion
which is recognized immediately.
(4)
Make-whole and prepayment fees are charged for the early repayment of principal
and are recognized when collected.
(5)
Commitment fees for RTFC loan commitments are, in most cases, refundable on a
pro-rata basis according to the amount of the loan commitment that is
advanced. Such refundable fees are deferred and then recognized on a
pro rata 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,
including fees related to the Company’s obligation to perform as liquidity
provider, are deferred and amortized using the straight-line method into
interest income over the life of the guarantee.
The $5
million or 2 percent increase in interest income for the three months ended
February 28, 2009, as compared with the prior-year period was due to a $1,446
million, or 8 percent, increase in average loan volume largely offset by a 26
basis point decline in the net yield earned due to lower variable interest
rates.
For the
three months ended February 28, 2009, the Company had a reduction to interest
income of $14 million due to non-accrual loans compared with a reduction of $16
million for the prior-year period. The effect on electric interest
income of non-accrual loans was a reduction of $7 million for the three months
ended February 28, 2009 as compared with $8 million for the comparable
prior-year period. The telecommunications interest income was reduced
by $7 million for the three months ended February 28, 2009 as compared with $8
million for the prior-year period as a result of non-accrual
loans. The effect of non-accrual loans on interest income is included
in the rate variance in the table above.
Interest
Expense
Total
interest expense reported on the consolidated statements of operations and shown
in the Rate Volume Variance Table above is summarized as follows by expense type
and as a percentage of average loans outstanding:
|
|
|
For
the three months ended
|
|
|
|
|
|
|
|
|
|
February
28, 2009
|
|
|
|
February
29, 2008
|
|
|
|
Increase/
|
|
|
(Dollar
amounts in thousands)
|
|
|
Amount
|
|
Rate
|
|
|
|
Amount
|
|
Rate
|
|
|
|
(Decrease)
|
|
|
Interest
expense (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper and bid notes
|
|
$
|
13,424
|
|
|
|
|
$
|
30,639
|
|
|
|
|
$
|
(17,215
|
)
|
|
Medium-term
notes
|
|
|
80,503
|
|
|
|
|
|
82,555
|
|
|
|
|
|
(2,052
|
)
|
|
Collateral
trust bonds
|
|
|
80,110
|
|
|
|
|
|
61,213
|
|
|
|
|
|
18,897
|
|
|
Subordinated
deferrable debt
|
|
|
4,916
|
|
|
|
|
|
4,916
|
|
|
|
|
|
-
|
|
|
Subordinated
certificates
|
|
|
13,475
|
|
|
|
|
|
12,297
|
|
|
|
|
|
1,178
|
|
|
Long-term
private debt
|
|
|
36,598
|
|
|
|
|
|
34,359
|
|
|
|
|
|
2,239
|
|
|
Total
interest expense on debt
|
|
|
229,026
|
|
4.65
|
%
|
|
|
225,979
|
|
4.89
|
%
|
|
|
3,047
|
|
|
Debt
issuance costs (2)
|
|
|
2,692
|
|
0.05
|
|
|
|
2,328
|
|
0.05
|
|
|
|
364
|
|
|
Commitment
and guarantee fees (3)
|
|
|
5,871
|
|
0.12
|
|
|
|
4,602
|
|
0.10
|
|
|
|
1,269
|
|
|
Other
fees
|
|
|
2,527
|
|
0.05
|
|
|
|
559
|
|
0.01
|
|
|
|
1,968
|
|
|
Total
interest expense
|
|
|
$
|
240,116
|
|
4.87
|
%
|
|
$
|
233,468
|
|
5.05
|
%
|
|
$
|
6,648
|
|
|
(1)
Represents interest expense and the amortization of discounts on
debts.
(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.
The $7
million or 3 percent increase in total interest expense for the three months
ended February 28, 2009 compared with the prior-year period was due to a 18
basis point decline in the overall cost of the Company’s debt which was partly
offset by an increase in the weighted-average level of debt outstanding to fund
loan growth. The decline in debt costs was primarily attributable to
a decline in the cost of the Company’s variable-rate debt as a result of a lower
interest rate environment compared with the prior-year period. The
growth in debt outstanding was partially attributed to amounts borrowed under
the REDLG program, notes payable issued to Farmer Mac and new issuances of
collateral trust bonds since February 29, 2008.
The
adjusted interest expense, which includes all derivative cash settlements, was
$137 million for the three months ended February 28, 2009, compared with $223
million for the prior-year period as a result of lower interest rates as noted
above and 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 $3
million decrease in net interest income for the three months ended February 28,
2009 compared with the prior-year period was due to the 26 basis point decline
in the yield of the Company’s loan portfolio and the additional debt required to
fund the increase in loans partially offset by the increase in average loan
volume and the 18 basis point decline in the overall cost of
debt. The adjusted net interest income, which includes all derivative
cash settlements, for the three months ended February 28, 2009 was $135 million,
an increase of $91 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 determining its adjusted
interest expense which, in turn, affects adjusted net interest
income.
Recovery
of Loan Losses
The $10
million recovery for loan losses for the quarter ended February 28, 2009
resulted from the decrease in calculated impairments due to lower variable rates
and payments received on impaired loans.
Non-interest
Income
Non-interest
income for the three months ended February 28, 2009 increased $92 million as
compared with the prior-year period. During the third quarter of
fiscal year 2009, the Company terminated several receive-fixed, pay-variable
interest rate swaps with notional amounts totaling $583 million that resulted in
payments to the Company totaling $97 million which was recorded in the statement
of operations as derivative cash settlements. Of the $583 million notional
amount of derivative contracts terminated, the Company initiated the termination
on $495 million of the total while the counterparty initiated the request to
terminate $88 million (these swaps were terminated at par resulting in no cash
payments or receipts). As a result of these terminations, the Company
recorded a charge to the derivative forward value line during the three and nine
months ended February 28, 2009 to reduce the derivative asset by $97 million.
The income recorded in cash settlements for the payments received and the charge
to derivative forward value are offsetting, thus there was no impact to reported
net income as a result of these transactions. While there was no effect on
reported net income, adjusted net income and the related adjusted equity
increased by $97 million as a result of these transactions. See Non-GAAP Financial Measures
for further explanation of the adjustments the Company makes in its financial
analysis to net income and equity.
The
Company terminated these derivative instruments primarily to increase its
adjusted equity base for the fiscal year to partially offset losses from the
quarter ended November 30, 2008. Terminating these swaps also had the
benefit of reducing the Company’s counterparty risk exposure to two out of the
three counterparties to these instruments. The economic effect of
terminating these transactions was to accelerate into the current period the
benefit the Company would have realized in future periods in the form of lower
debt costs based upon expected future interest rates. The cash
settlements income was partly offset by the decrease in cash settlements as a
result of lower short-term interest rates during the three months ended February
28, 2009 compared with the three months ended February 29, 2008 as the Company
received a variable rate on the majority of its derivative contracts during both
periods.
Non-interest
Expense
Non-interest
expense decreased by $13 million for the three months ended February 28, 2009
compared with the prior-year period primarily due to the $11 million decrease in
the derivative forward value expense explained below and the $4 million decrease
in the fair value adjustment on foreclosed assets. The fair value
adjustment on foreclosed assets for the three months ended February 28, 2009 is
based on decreasing collateral values.
The $11
million decrease in the derivative forward value expense during the three months
ended February 28, 2009 compared with the prior-year period was due to the
reversal of the previously recorded $97 million derivative asset related to
terminated interest rate exchange agreements, changes in the estimate of future
interest rates over the remaining life of the derivative contracts and a 7
percent reduction in the average notional amount of derivatives
outstanding.
Net
Loss
The
change in the items described above resulted in an increase in net income of $76
million for the three months ended February 28, 2009 from the comparable
prior-year period. The adjusted net income, which excludes the effect
of the derivative forward value and adds back minority interest, was $128
million, compared with an adjusted net income of $62 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 table provides the calculation of the ratio of earnings to fixed
charges. The ratio of earnings to fixed charges is the same
calculation as TIER. See Results of Operations for a
discussion of TIER and adjustments that the Company makes to the TIER
calculation.
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
(Dollar
amounts in thousands)
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
Loss
prior to cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
change
in accounting principle
|
$
|
75,239
|
|
$
|
(323
|
)
|
$
|
(139,907
|
)
|
$
|
(41,931
|
)
|
Add:
fixed charges
|
|
240,116
|
|
|
233,468
|
|
|
694,649
|
|
|
720,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
available for fixed charges
|
$
|
315,355
|
|
$
|
233,145
|
|
$
|
554,742
|
|
$
|
678,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on all debt (including amortization of
|
|
|
|
|
|
|
|
|
|
|
|
|
discount
and issuance costs)
|
$
|
240,116
|
|
$
|
233,468
|
|
$
|
694,649
|
|
$
|
720,810
|
|
Ratio
of earnings to fixed charges (1)
|
|
|
1.31
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(1) For
the nine months ended February 28, 2009, earnings were insufficient to cover
fixed charges by $140 million. 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.
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 table summarizes loans outstanding by type and by
segment:
(dollar amounts in
thousands)
|
|
February
28,
2009
|
|
|
|
May
31,
2008
|
|
|
|
|
Increase/
(Decrease)
|
|
|
Loans
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
$
|
14,918,909
|
|
74
|
%
|
|
$
|
15,418,662
|
|
81
|
%
|
|
|
$
|
(499,753
|
)
|
|
Long-term
variable-rate loans
|
|
3,213,502
|
|
16
|
|
|
|
1,918,216
|
|
10
|
|
|
|
|
1,295,286
|
|
|
Total
long-term loans
|
|
18,132,411
|
|
90
|
|
|
|
17,336,878
|
|
91
|
|
|
|
|
795,533
|
|
|
Short-term
loans (2)
|
|
2,036,467
|
|
10
|
|
|
|
1,690,117
|
|
9
|
|
|
|
|
346,350
|
|
|
Total
loans
|
$
|
20,168,878
|
|
100
|
%
|
|
$
|
19,026,995
|
|
100
|
%
|
|
|
$
|
1,141,883
|
|
|
(dollar
amounts in thousands)
|
|
February
28,
2009
|
|
|
|
May
31,
2008
|
|
|
|
|
Increase/
(Decrease)
|
|
|
Loans
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
13,845,609
|
|
69
|
%
|
|
$
|
13,438,370
|
|
71
|
%
|
|
|
$
|
407,239
|
|
|
Power
supply
|
|
4,114,046
|
|
21
|
|
|
|
3,339,112
|
|
17
|
|
|
|
|
774,934
|
|
|
Statewide
and associate
|
|
94,317
|
|
-
|
|
|
|
108,925
|
|
1
|
|
|
|
|
(14,608
|
)
|
|
National
Rural total
|
|
18,053,972
|
|
90
|
|
|
|
16,886,407
|
|
89
|
|
|
|
|
1,167,565
|
|
|
RTFC
|
|
1,674,307
|
|
8
|
|
|
|
1,726,514
|
|
9
|
|
|
|
|
(52,207
|
)
|
|
NCSC
|
|
440,599
|
|
2
|
|
|
|
414,074
|
|
2
|
|
|
|
|
26,525
|
|
|
Total
|
|
$
|
20,168,878
|
|
100
|
%
|
|
$
|
19,026,995
|
|
100
|
%
|
|
|
$
|
1,141,883
|
|
|
(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 6 percent for the nine months ended
February 28, 2009. The primary reasons for the National Rural loan
growth were an increase by members in RUS note buyouts, funding of capital
expenditures, bridge financing to fund projects prior to receipt of RUS funding
and funding for renewable energy projects.
Loans
that converted from a fixed rate to a variable rate totaled $775 million, which
was partially offset by $169 million of loans converting from a variable rate to
a fixed rate for the nine months ended February 28, 2009. The
significant shift in fixed-rate loans converting to variable rates was the
result of extremely low variable rates available due to the Federal Reserve
lowering the federal funds rate to historically low levels in the latter half of
2008. For the nine months ended February 29, 2008, loans converting
from a fixed rate to variable rate was $223 million, which was more than offset
by $251 million of loans that converted from a variable rate to a fixed
rate.
The
following table summarizes loans and guarantees outstanding by
segment:
(dollar
amounts in thousands)
|
February
28, 2009
|
|
May
31, 2008
|
|
Increase/
(Decrease)
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
14,099,681
|
|
66
|
%
|
|
$
|
13,622,829
|
|
68
|
%
|
|
$
|
476,852
|
|
Power
supply
|
|
5,041,481
|
|
23
|
|
|
|
4,125,567
|
|
20
|
|
|
|
915,914
|
|
Statewide
and associate
|
|
116,843
|
|
1
|
|
|
|
131,710
|
|
1
|
|
|
|
(14,867
|
)
|
National
Rural total
|
|
19,258,005
|
|
90
|
|
|
|
17,880,106
|
|
89
|
|
|
|
1,377,899
|
|
RTFC
|
|
1,674,807
|
|
8
|
|
|
|
1,726,774
|
|
9
|
|
|
|
(51,967
|
)
|
NCSC
|
|
506,082
|
|
2
|
|
|
|
457,255
|
|
2
|
|
|
|
48,827
|
|
Total
|
$
|
21,438,894
|
|
100
|
%
|
|
$
|
20,064,135
|
|
100
|
%
|
|
$
|
1,374,759
|
|
The
following table summarizes the RTFC segment loans and guarantees
outstanding:
(dollar
amounts in thousands)
|
|
February
28, 2009
|
|
May
31, 2008
|
|
Increase/
(Decrease)
|
Rural
local exchange carriers
|
|
$
|
1,471,172
|
|
88
|
%
|
|
$
|
1,518,197
|
|
88
|
%
|
|
$
|
(47,025
|
)
|
Cable
television providers
|
|
|
152,630
|
|
9
|
|
|
|
153,539
|
|
9
|
|
|
|
(909
|
)
|
Fiber
optic network providers
|
|
|
8,356
|
|
1
|
|
|
|
16,884
|
|
1
|
|
|
|
(8,528
|
)
|
Competitive
local exchange carriers
|
|
|
35,724
|
|
2
|
|
|
|
29,871
|
|
2
|
|
|
|
5,853
|
|
Wireless
providers
|
|
|
4,343
|
|
-
|
|
|
|
4,579
|
|
-
|
|
|
|
(236
|
)
|
Other
|
|
|
2,582
|
|
-
|
|
|
|
3,704
|
|
-
|
|
|
|
(1,122
|
)
|
Total
|
|
$
|
1,674,807
|
|
100
|
%
|
|
$
|
1,726,774
|
|
100
|
%
|
|
$
|
(51,967
|
)
|
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 28, 2009 and May 31, 2008, loans and
guarantees outstanding to members in any one state or territory did not exceed
17 percent of total loans and guarantees 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 attempts 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
policies. Management may utilize syndicated credit arrangements to
help mitigate the risk associated with credit concentrations.
Total
exposure, as defined by the policies, generally include 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.
|
The
calculation of total exposure includes facilities that might not be drawn by the
borrower, such as lines of credit and loan commitments for projects that may be
delayed or cancelled.
At
February 28, 2009 and May 31, 2008, the total exposure outstanding to any one
borrower or controlled group did not exceed 2.4 percent and 2.7 percent,
respectively, of total loans and guarantees outstanding. At February
28, 2009, the ten largest borrowers included three distribution systems, six
power supply systems and one telecommunications system. At May 31, 2008, the ten
largest borrowers included five distribution systems, four power supply systems
and one telecommunications system. Over the past five years, the
Company has reduced its single obligor concentrations in the telecommunications
portfolio resulting in outstanding loans at February 28, 2009 averaging $10
million per active, performing telecommunications borrower. The
following table shows the exposure to the ten largest borrowers as a percentage
of total exposure by type and by segment:
|
|
February
28, 2009
|
|
|
May
31, 2008
|
|
Increase/
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of Total
|
|
(Decrease)
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
3,580,096
|
|
|
|
$
|
3,395,865
|
|
|
$
|
184,231
|
|
Guarantees
|
|
352,544
|
|
|
|
|
164,740
|
|
|
|
187,804
|
|
Total
credit exposure to ten largest borrowers
|
$
|
3,932,640
|
|
18%
|
|
$
|
3,560,605
|
|
18%
|
$
|
372,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
3,410,131
|
|
|
|
$
|
3,043,905
|
|
|
$
|
366,226
|
|
RTFC
|
|
491,509
|
|
|
|
|
491,700
|
|
|
|
(191
|
)
|
NCSC
|
|
31,000
|
|
|
|
|
25,000
|
|
|
|
6,000
|
|
Total
credit exposure to ten largest borrowers
|
$
|
3,932,640
|
|
18%
|
|
$
|
3,560,605
|
|
18%
|
$
|
372,035
|
|
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 charged to customers that are
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
28, 2009
|
|
|
May
31, 2008
|
|
Increase/
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of Total
|
|
(Decrease)
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
2,764,639
|
|
|
|
$
|
2,150,739
|
|
|
$
|
613,900
|
|
Guarantees
|
|
324,240
|
|
|
|
|
235,816
|
|
|
|
88,424
|
|
Total
unsecured credit exposure
|
$
|
3,088,879
|
|
14%
|
|
$
|
2,386,555
|
|
11%
|
$
|
702,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
2,787,682
|
|
|
|
$
|
2,100,676
|
|
|
$
|
687,006
|
|
RTFC
|
|
238,583
|
|
|
|
|
229,287
|
|
|
|
9,296
|
|
NCSC
|
|
62,614
|
|
|
|
|
56,592
|
|
|
|
6,022
|
|
Total
unsecured credit exposure
|
$
|
3,088,879
|
|
14%
|
|
$
|
2,386,555
|
|
11%
|
$
|
702,324
|
|
Non-performing
Loans
A
borrower is classified as non-performing when any one of the following criteria
is 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. In certain circumstances, a performing
restructured loan can also remain on non-accrual status (see Restructured
Loans). The Company generally applies all cash received during
the non-accrual period to the reduction of principal, thereby foregoing interest
income recognition. At February 28, 2009 and May 31, 2008, the
Company had non-performing loans outstanding in the amount of $498 million and
$507 million, respectively. All loans classified as non-performing
were on a non-accrual status with respect to the recognition of interest
income.
At
February 28, 2009 and May 31, 2008, non-performing loans include $492 million to
ICC. All loans to ICC have been on non-accrual status since February
1, 2005. ICC has not made debt service payments to the Company since
June 2005. RTFC is the primary secured lender to ICC.
In
February 2006, involuntary bankruptcy petitions were filed against Prosser,
ICC's immediate parent, Emerging Communication, Inc. ("Emcom") and Emcom's
parent, Innovative Communication Company LLC ("ICC-LLC"); and on April 26, 2006,
RTFC reached a settlement 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 thereby resolving all the loan
related litigation in RTFC’s favor. Regardless, Prosser and related
parties continue to assert claims against National Rural and certain of its
officers and directors and other parties in various
proceedings. National Rural therefore anticipates that it will
continue to be engaged in defense of the actions, as well as pursuing claims of
its own.
On July
31, 2006, ICC-LLC, Emcom and Prosser each filed a voluntary bankruptcy petition
for reorganization. The cases are pending in the United States
District Court for the Virgin Island, Bankruptcy Division (the “Bankruptcy
Court”). A Chapter 11 trustee, Stan Springel, was later appointed for
the ICC-LLC and Emcom estates; and Prosser’s individual case was converted to
Chapter 7 liquidation in October 2007. Prosser’s Chapter 7 trustee is
in the process of marshaling Prosser’s non-exempt assets for disposition and
eventual payment in respect of creditor claims.
On
September 21, 2007, the Bankruptcy Court entered an order placing ICC in its own
bankruptcy proceeding, and on October 3, 2007 appointed Stan Springel as its
trustee. 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, including property in Prosser’s
possession or control, and eventual payment in respect of RTFC’s claims and the
claims of other parties-in-interest. Certain assets have been sold,
including certain foreign companies, aircraft, and real estate.
On
February 1, 2008, the Court approved a motion of the Chapter 11 trustee of ICC
to sell substantially all of ICC’s assets, divided into three
groups: Group 1 consisting of ICC assets and stock in ICC
subsidiaries operating in the U.S. Virgin Islands, the British Virgin Islands
and St. Martin (the “Group 1 Assets”); Group 2 consisting of ICC assets and
stock in ICC subsidiaries operating in France and certain of its Caribbean
territories and the Netherland Antilles (the “Group 2 Assets”); and Group 3
consisting of the newspaper and media operations of ICC (the “Group 3
Assets”).
The Group
3 Assets were sold in May 2008 and the distribution of proceeds was approved by
the Court resulting in a net recovery to the Company. The Group 2
Assets were sold in December 2008 and the distribution of proceeds was approved
by the Court resulting in a net recovery to the
Company.
On March
13, 2009, RTFC and the Trustee entered into a Purchase Agreement as part of a
$250 million credit bid for the ICC Group 1 Assets. The Purchase
Agreement is conditional upon the approval of the bankruptcy court and
applicable regulators. On April 6, 2009, the Bankruptcy Judge
approved, on an interim basis, the sale of the ICC Group I Assets to
RTFC. RTFC will now begin the process of obtaining the applicable
regulatory approvals. The Court has scheduled a status hearing for
July 22, 2009, with a final hearing regarding the sale tentatively scheduled for
August 31, 2009.
For a
more detailed description of the contingencies related to the non-performing
loans outstanding to ICC, see Note 14, Restructured/Non-performing Loans
and Contingencies, to the consolidated financial
statements. Based on its analysis, the Company believes that it is
adequately reserved for its exposure to ICC at February 28, 2009.
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 28, 2009 and May 31, 2008, restructured loans totaled $545 million and
$577 million, respectively. A total of $498 million and $519 million
of restructured loans were on non-accrual status at February 28, 2009 and May
31, 2008, respectively. At February 29, 2008, $526 million of
restructured loans were on non-accrual status.
At
February 28, 2009 and May 31, 2008, the Company had $498 million and $519
million, respectively, of restructured loans outstanding to CoServ. All
restructured CoServ loans have been on non-accrual status since January 1,
2001. In addition, $20 million was outstanding under the capital
expenditure loan facility which was classified as a performing loan at February
28, 2009 and May 31, 2008. Total loans to CoServ at February 28, 2009
and May 31, 2008 represented 2.4 percent and 2.7 percent of the Company's total
loans and guarantees outstanding, respectively.
Under the
terms of a bankruptcy settlement from 2002, 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. Under the facility, advances are limited to
$46 million per year. Thus, as of the date of this filing, there is
$184 million available under this loan facility. 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. 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 $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 28, 2009.
At
February 28, 2009 and May 31, 2008, National Rural had a total of $42 million
and $52 million, respectively, in loans outstanding to Pioneer Electric
Cooperative, Inc. ("Pioneer"). Pioneer was current with respect to
all debt service payments at February 28, 2009 and all loans to Pioneer remain
on accrual status. National Rural is the principal creditor to
Pioneer.
Based on
its analysis, the Company believes that it is adequately reserved for its
exposure to Pioneer at February 28, 2009.
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 quarterly based on the most current information available. At February
28, 2009 and May 31, 2008, the Company had impaired loans totaling $1,038
million and $1,078 million, respectively. At February 28, 2009 and
May 31, 2008, National Rural had specifically reserved $423 million and $331
million, respectively, to cover impaired loans.
The
following table 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
28,
2009
|
|
|
|
May
31,
2008
|
|
|
Non-performing
loans
|
$
|
498,294
|
|
|
$
|
506,864
|
|
|
Percent
of loans outstanding
|
|
2.47
|
%
|
|
|
2.67
|
%
|
|
Percent
of loans and guarantees outstanding
|
|
2.32
|
|
|
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans
|
$
|
544,961
|
|
|
$
|
577,111
|
|
|
Percent
of loans outstanding
|
|
2.70
|
%
|
|
|
3.03
|
%
|
|
Percent
of loans and guarantees outstanding
|
|
2.54
|
|
|
|
2.88
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing and restructured loans
|
$
|
1,043,255
|
|
|
$
|
1,083,975
|
|
|
Percent
of loans outstanding
|
|
5.17
|
%
|
|
|
5.70
|
%
|
|
Percent
of loans and guarantees outstanding
|
|
4.86
|
|
|
|
5.40
|
|
|
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. The allowance for loan losses is determined based upon
evaluation of the loan portfolio, past loss experience, specific problem loans,
economic conditions and other pertinent factors which, in management's judgment,
could affect the risk of loss in its loan portfolio. The Company
reviews and adjusts the allowance quarterly to cover estimated probable losses
in the portfolio.
Management
makes recommendations to the board of directors of National Rural regarding
charge-offs of loan balances. In making its recommendation to charge
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, charge-offs totaled $214 million and
recoveries totaled $34 million for a net loan loss of $180
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
|
|
|
(dollar
amounts in thousands)
|
|
February
28, 2009
|
|
|
|
February
29, 2008
|
|
|
|
May
31,
2008
|
|
|
Beginning
balance
|
$
|
514,906
|
|
|
$
|
561,663
|
|
|
$
|
561,663
|
|
|
Provision
for (recovery of) loan losses
|
|
126,577
|
|
|
|
(47,900
|
)
|
|
|
(30,262
|
)
|
|
Net
charge-offs
|
|
(2,900
|
)
|
|
|
(16,503
|
)
|
|
|
(16,495
|
)
|
|
Ending
balance
|
$
|
638,583
|
|
|
$
|
497,260
|
|
|
$
|
514,906
|
|
|
`
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
loss allowance by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
638,436
|
|
|
$
|
496,891
|
|
|
$
|
514,626
|
|
|
NCSC
|
|
147
|
|
|
|
369
|
|
|
|
280
|
|
|
Total
|
$
|
638,583
|
|
|
$
|
497,260
|
|
|
$
|
514,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of total loans outstanding
|
|
3.17
|
%
|
|
|
2.66
|
%
|
|
|
2.71
|
%
|
|
As
a percentage of total non-performing loans outstanding
|
|
128.15
|
|
|
|
98.59
|
|
|
|
101.59
|
|
|
As
a percentage of total restructured loans outstanding
|
|
117.18
|
|
|
|
85.08
|
|
|
|
89.22
|
|
|
As
a percentage of total loans on non-accrual
|
|
64.10
|
|
|
|
48.24
|
|
|
|
50.18
|
|
|
In late
November 2008, the Company engaged an outside consultant to renew the valuation
of ICC that had been performed during the summer of 2008. The update
of the appraisal of ICC assets was triggered by the changing economic conditions
that occurred during the Company’s second quarter of fiscal year 2009,
especially the tightening of the credit markets, coupled with indicators the
Company was receiving from potential third party investors responding to the
upcoming auction of the ICC assets. As a result of this new
information, the Company recorded an addition to the provision for loan losses
of $114 million during the quarter ended November 30, 2008. The
Company believes that, as a result of this additional provision for losses, it
is adequately reserved against losses associated with ICC at February 28,
2009. The remaining increase in the loan loss provision for the nine
months ended February 28, 2009 was due to the $1,142 million increase in loans
outstanding partly offset by principal payments received on impaired
loans.
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.
Liabilities,
Minority Interest and Equity
Outstanding
Debt
The
following table provides a breakout of debt outstanding:
(dollar
amounts in thousands)
|
|
February
28,
2009
|
|
|
|
May
31,
2008
|
|
|
|
Increase/
(Decrease)
|
|
|
Short-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper (1)
|
$
|
2,538,381
|
|
|
$
|
3,050,264
|
|
|
$
|
(511,883
|
)
|
|
Bank
bid notes
|
|
275,000
|
|
|
|
100,000
|
|
|
|
175,000
|
|
|
Term
loan
|
|
200,000
|
|
|
|
-
|
|
|
|
200,000
|
|
|
Long-term
debt with remaining maturities less than one year
|
|
2,354,029
|
|
|
|
3,177,189
|
|
|
|
(823,160
|
)
|
|
Total
short-term debt
|
|
5,367,410
|
|
|
|
6,327,453
|
|
|
|
(960,043
|
)
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
trust bonds
|
|
4,973,551
|
|
|
|
2,886,580
|
|
|
|
2,086,971
|
|
|
Notes
payable
|
|
3,853,210
|
|
|
|
2,956,403
|
|
|
|
896,807
|
|
|
Medium-term
notes
|
|
3,397,695
|
|
|
|
4,330,604
|
|
|
|
(932,909
|
)
|
|
Total
long-term debt
|
|
12,224,456
|
|
|
|
10,173,587
|
|
|
|
2,050,869
|
|
|
Subordinated
deferrable debt
|
|
311,440
|
|
|
|
311,440
|
|
|
|
-
|
|
|
Members'
subordinated certificates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
certificates
|
|
649,465
|
|
|
|
649,465
|
|
|
|
-
|
|
|
Loan
certificates
|
|
695,648
|
|
|
|
654,047
|
|
|
|
41,601
|
|
|
Guarantee
certificates
|
|
127,438
|
|
|
|
103,267
|
|
|
|
24,171
|
|
|
Member
capital securities
|
|
96,615
|
|
|
|
-
|
|
|
|
96,615
|
|
|
Total
members' subordinated certificates
|
|
1,569,166
|
|
|
|
1,406,779
|
|
|
|
162,387
|
|
|
Total
debt outstanding
|
$
|
19,472,472
|
|
|
$
|
18,219,259
|
|
|
$
|
1,253,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of fixed-rate debt (2)
|
|
84
|
%
|
|
|
82
|
%
|
|
|
|
|
|
Percentage
of variable-rate debt (3)
|
|
16
|
|
|
|
18
|
|
|
|
|
|
|
Percentage
of long-term debt
|
|
72
|
|
|
|
65
|
|
|
|
|
|
|
Percentage
of short-term debt
|
|
|
28
|
|
|
|
35
|
|
|
|
|
|
|
(1)
Includes $365 million and $251 million related to the daily liquidity fund at
February 28, 2009 and May 31, 2008, 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 28, 2009 increased compared with May 31, 2008 to
fund the $1,142 million increase in loans outstanding. Approximately
$2,575 million of collateral trust bonds, medium-term notes, and secured notes
payable matured during the nine months ended February 28, 2009. The
maturing debt was replaced with $3,500 million of new term debt issued during
the period. The Company issued the following debt through the capital
markets or in private placement of debt during the nine months ended February
28, 2009:
·
|
$900
million of 5.50 percent collateral trust bonds issued in June 2008 and due
2013;
|
·
|
$400
million of floating-rate collateral trust bonds issued in June 2008 and
due 2010;
|
·
|
$1,000
million of 10.375 percent collateral trust bonds issued in October 2008
and due 2018;
|
·
|
$200
million term loan issued in January
2009;
|
·
|
$500
million in variable-rate notes to Farmer Mac at a blended interest rate of
3.871 percent issued during the three months ended February 28, 2009;
and
|
·
|
$500
million from the FFB under a loan facility with a guarantee of repayment
by the RUS as part of the REDLG program issued in September 2008 and due
2028.
|
In
February 2009, the Company entered into a note purchase agreement in the amount
of $500 million with Farmer Mac. The agreement allows National Rural
to borrow up to $500 million from Farmer Mac through February 29,
2016. Advances under the agreement must occur prior to February 28,
2011. National Rural may select a fixed rate or variable rate at the
time of each advance. Notes with a fixed interest rate will be based
on the applicable benchmark treasury rate plus a spread determined at the time
of the advance and will mature five years from the closing date up to February
29, 2016. Notes with a variable interest rate will be based on three
month LIBOR plus a spread determined at the time of the advance and may have a
maturity of two years or less from the closing date up to February 28,
2013. At February 28, 2009, this $500 million remains
unadvanced.
At
February 28, 2009 and May 31, 2008, there was no foreign denominated debt
outstanding.
The
increase to members' subordinated certificates for the nine months ended
February 28, 2009 was due to the Company’s issuance of $97 million in member
capital securities during the nine months ended February 28, 2009 and a net
increase of $66 million to loan and guarantee certificates. A
total of $96 million of loan and guarantee certificates were issued in relation
to new loans and guarantees outstanding and were partially offset by $30 million
of subordinated certificates maturing due to loan prepayments, maturities and
normal amortization. The Company began issuing member capital
securities in the quarter ended February 28, 2009. Member capital
securities are unsecured obligations of National Rural that are subordinate to
all existing and future senior indebtedness of National Rural and all existing
and future subordinated indebtedness of National Rural that may be held by or
transferred to non-members of National Rural, but rank pari passu to National
Rural’s member subordinated certificates. Subsequent to the end of
the quarter through April 7, 2009, an additional $78 million of member capital
securities were sold bringing the total to $175 million.
Minority
Interest
At
February 28, 2009 and May 31, 2008, the Company reported minority interests of
$11 million and $14 million, respectively, on the consolidated balance
sheets. Minority interest represents 100 percent of RTFC and NCSC
equity as the members of RTFC and NCSC own or control 100 percent of the
interest in their respective companies.
During
the nine months ended February 28, 2009, NCSC’s net loss of $11 million exceeded
its equity balance by $8.1 million, which eliminated the NCSC equity presented
in minority interest. In accordance with ARB 51, National Rural is
required to absorb the $8.1 million NCSC excess loss. NCSC’s losses
during the nine months ended February 28, 2009 were primarily due to its $17
million derivative forward value losses.
NCSC’s
equity balance included in minority interest on the consolidated balance sheets
was $2.9 million at May 31, 2008.
Equity
The
following table provides a breakout of the equity balances:
(in
thousands)
|
|
February
28,
2009
|
|
|
|
May
31,
2008
|
|
|
|
Increase/
(Decrease)
|
|
|
Membership
fees
|
$
|
992
|
|
|
$
|
993
|
|
|
$
|
(1
|
)
|
|
Education
fund
|
|
793
|
|
|
|
1,484
|
|
|
|
(691
|
)
|
|
Members'
capital reserve
|
|
187,099
|
|
|
|
187,409
|
|
|
|
(310
|
)
|
|
Allocated
net income
|
|
338,033
|
|
|
|
423,249
|
|
|
|
(85,216
|
)
|
|
Unallocated
net income (loss) (1)
|
|
46,205
|
|
|
|
(53
|
)
|
|
|
46,258
|
|
|
Total
members' equity
|
|
573,122
|
|
|
|
613,082
|
|
|
|
(39,960
|
)
|
|
Prior
years’ cumulative derivative forward
|
|
|
|
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
44,056
|
|
|
|
131,551
|
|
|
|
(87,495
|
)
|
|
Year-to-date
derivative forward value loss (2)
|
|
(186,165
|
)
|
|
|
(87,495
|
)
|
|
|
(98,670
|
)
|
|
Total
retained equity
|
|
431,013
|
|
|
|
657,138
|
|
|
|
(226,125
|
)
|
|
Accumulated
other comprehensive income
|
|
8,269
|
|
|
|
8,827
|
|
|
|
(558
|
)
|
|
Total
equity
|
|
$
|
439,282
|
|
|
$
|
665,965
|
|
|
$
|
(226,683
|
)
|
|
(1)
Excludes derivative forward value and foreign currency
adjustments. Unallocated net loss at February 28, 2009 includes
National Rural’s obligation to absorb NCSC losses in excess of their equity
balance totaling $8.1 million.
(2)
Represents the derivative forward value loss recorded by National Rural for the
year-to-date period.
To become
a member, applicants are required to pay a one-time fee. 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. National Rural
calculates net earnings by adjusting net income to exclude certain non-cash
adjustments. 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
effects of
SFAS 133
and SFAS 52. National Rural allocates a small portion, less than one
percent, of net earnings annually to the education fund. The
allocation to the education fund must be at least 0.25 percent of net earnings
as required by National Rural’s bylaws. Funds from the education fund
are disbursed annually to the statewide cooperative organizations to fund the
teaching of cooperative principles. 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 net earnings that are
held by National Rural to increase equity retention. The net 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 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 during the year. There is no effect 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 its members and
by amounts disbursed from board approved reserves.
At
February 28, 2009, total equity decreased by $227 million from May 31, 2008 due
to the board authorized patronage capital retirement and the net loss of $140
million. In July 2008, National Rural's board of directors authorized
the retirement of allocated net earnings totaling $85 million, representing 70
percent of the fiscal year 2008 allocation and one-ninth of the fiscal years
1991, 1992 and 1993 allocated net earnings. This amount was paid to
members in October 2008.
Contractual
Obligations
The
following table summarizes the long-term contractual obligations at February 28,
2009 and the scheduled reductions by fiscal year.
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
More
than 5
|
|
|
Instrument
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Years
|
|
Total
|
|
Long-term
debt due in less than one year
|
|
$
|
68
|
|
|
$
|
2,286
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,354
|
|
Long-term
debt
|
|
|
-
|
|
|
|
151
|
|
|
|
1,434
|
|
|
|
2,100
|
|
|
|
440
|
|
|
|
8,099
|
|
|
|
12,224
|
|
Subordinated
deferrable debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
311
|
|
|
|
311
|
|
Members'
subordinated certificates
(1)
|
|
|
1
|
|
|
|
17
|
|
|
|
15
|
|
|
|
51
|
|
|
|
21
|
|
|
|
1,207
|
|
|
|
1,312
|
|
Operating
leases (2)
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
Contractual
interest on long-term debt (3)
|
|
|
207
|
|
|
|
752
|
|
|
|
681
|
|
|
|
630
|
|
|
|
543
|
|
|
|
4,986
|
|
|
|
7,799
|
|
Total
contractual obligations
|
|
|
$
|
277
|
|
|
$
|
3,210
|
|
|
$
|
2,131
|
|
|
$
|
2,781
|
|
|
$
|
1,004
|
|
|
$
|
14,603
|
|
|
$
|
24,006
|
|
(1)
Excludes loan subordinated certificates totaling $257 million that amortize
annually based on the outstanding balance of the related loan. There
are many items that affect 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 $30 million. In fiscal year 2008,
amortization represented 12 percent of amortizing loan subordinated certificates
outstanding.
(2)
Primarily represents the payment obligation related to the Company's lease of
office space for its headquarters facility. In September 2008, the
Company exercised the option to extend the lease for an additional one-year
period.
(3)
Represents the interest obligation on the Company's debt based on terms and
conditions at February 28, 2009.
Off-Balance
Sheet Obligations
Guarantees
The
following table provides a breakout of guarantees outstanding by type and by
segment:
|
|
February
28,
|
|
|
|
May
31,
|
|
|
|
Increase/
|
|
|
(in
thousands)
|
|
2009
|
|
|
|
2008
|
|
|
|
(Decrease)
|
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
tax-exempt bonds
|
$
|
633,005
|
|
|
$
|
498,495
|
|
|
$
|
134,510
|
|
|
Indemnifications
of tax benefit transfers
|
|
84,649
|
|
|
|
94,821
|
|
|
|
(10,172
|
)
|
|
Letters
of credit
|
|
453,806
|
|
|
|
343,424
|
|
|
|
110,382
|
|
|
Other
guarantees
|
|
98,556
|
|
|
|
100,400
|
|
|
|
(1,844
|
)
|
|
Total
|
$
|
1,270,016
|
|
|
$
|
1,037,140
|
|
|
$
|
232,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
1,204,033
|
|
|
$
|
993,699
|
|
|
$
|
210,334
|
|
|
RTFC
|
|
500
|
|
|
|
260
|
|
|
|
240
|
|
|
NCSC
|
|
65,483
|
|
|
|
43,181
|
|
|
|
22,302
|
|
|
Total
|
$
|
1,270,016
|
|
|
$
|
1,037,140
|
|
|
$
|
232,876
|
|
|
The
increase in total guarantees during the nine months ended February 28, 2009 is
primarily due to the increase in guarantees for long-term tax-exempt bonds and
letters of credit. The Company entered into new agreements as the
guarantor and liquidity provider for $176 million of tax-exempt bonds offset by
$29 million of redemptions and normal amortization
and $12
million of tax-exempt bonds purchased by the Company as liquidity provider and
recorded at fair value as investments in trading securities on the consolidated
balance sheet at February 28, 2009.
At
February 28, 2009 and May 31, 2008, the Company recorded a guarantee liability
totaling $34 million and $15 million, respectively, which represents the
contingent and non-contingent exposure related to guarantees and liquidity
obligations associated with members' debt.
The
following table summarizes the off-balance sheet obligations at February 28,
2009 and the related notional principal amortization and maturities by fiscal
year.
(in
thousands)
|
|
|
|
Principal
Amortization and Maturities
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Balance
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Remaining
Years
|
|
Guarantees
(1)
|
|
|
$1,270,016
|
|
$87,467
|
|
$281,186
|
|
$186,524
|
|
$71,184
|
|
$113,527
|
|
$530,128
|
|
(1) On a
total of $631 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 28, 2009, the Company had unadvanced loan commitments totaling $13,845
million, an increase of $271 million over the $13,574 million outstanding
at May 31, 2008. Unadvanced commitments are loans for which loan
contracts have been approved and executed, but funds have not been
advanced. Substantially all credit commitments for long-term loans
are conditioned on the absence of any material adverse change with respect to
the borrower’s financial condition. Therefore, for a borrower to
qualify for the advance of long-term funds, the Company must be satisfied that
there has been no material adverse change since the loan was approved based on
National Rural's credit underwriting policy at the time the advance is
approved. The Company offers lines of credit loans that may or may
not contain a material adverse change condition. The majority of the
short-term unadvanced commitments provide backup liquidity to the Company's
borrowers; therefore, the Company does not anticipate funding most of these
commitments. Approximately 56 percent of the outstanding commitments
at February 28, 2009 and May 31, 2008 were for short-term and line of credit
loans. Based on the conditions to the advance of funds
described above, unadvanced loan commitments do not represent off-balance sheet
liabilities and have not been included in the table summarizing off-balance
sheet obligations above. 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 28, 2009 was 49.55, an increase from 29.64 at May 31,
2008. The increase in the leverage ratio is due to an increase of
$1,797 million in total liabilities, a decrease of $227 million in total equity
and an increase of $233 million in guarantees as discussed under the Liabilities, Minority Interest and
Equity section and the Off-Balance Sheet Obligations
section of Financial
Condition. The primary reason for the increase in total
liabilities during the nine months ended February 28, 2009 was to fund the
$1,142 million increase to loans outstanding during the period.
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 determine adjusted
equity. At February 28, 2009 and May 31, 2008, the adjusted leverage
ratio was 7.74 and 7.50, 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 an increase in adjusted
liabilities of $1,240 million and an increase in guarantees of $233 million
partially offset by a $119 million increase in adjusted equity 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 28, 2009 was 46.66, an increase from 28.08 at May 31,
2008. The increase in the debt to equity ratio is due to the decrease
of $227 million in total equity and an increase of $1,797 million in 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 determine adjusted
equity. At February 28, 2009 and May 31, 2008, the adjusted debt to
equity ratio was 7.22 and 7.06, 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 an increase of $1,240 million in adjusted liabilities
partially offset by the increase of $119 million in adjusted
equity.
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 28, 2009.
|
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
|
|
|
|
F1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled
bonds
|
|
A1
|
|
|
|
A
|
|
|
|
A
|
|
|
Other
bonds
|
|
A2
|
|
|
|
A
|
|
|
|
A
|
|
|
Short-term
|
|
P-1
|
|
|
|
A-1
|
|
|
|
F1
|
|
|
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 28, 2009 and through the date of this filing, Moody's Investors
Service, Standard & Poor’s Corporation and Fitch Ratings had the Company's
ratings on stable outlook. On February 24, 2009, Standard &
Poor’s Corporation lowered the debt ratings on subordinated deferrable debt
issued by 47 issuers including those of the Company. The rating for
such debt of the Company was lowered from BBB+ to BBB.
Liquidity
and Capital Resources
The
following section discusses 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, revolving bank line facilities 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.
During
September 2008 and through November 2008, the Company experienced periods in
which access to both long-term funding and short-term funding was limited and
the cost of such funding was at credit spreads higher than in prior
periods. After the bankruptcy of LBHI and its subsidiaries, the
credit markets froze. Investors were unwilling to take the risk of
investing in corporate long-term debt without a significant premium and were
unwilling to invest in commercial paper of even the highest rated companies with
maturities longer than a week to ten days. Those disruptions in the
capital markets eased during the third quarter of fiscal year 2009 and the
Company was able to achieve its funding needs by issuing short-term and
long-term debt. Refer to Liquidity under the Business Overview for
additional details about the funding issues experienced by the Company during
the nine months ended February 28, 2009.
Sources
of Liquidity
Capital
Market Debt Issuance
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 filed an automatic shelf registration statement for an unlimited amount
of medium-term notes, member capital securities, and subordinated deferrable
debt in November 2008. Member capital securities are unsecured
obligations of National Rural and subordinate to all existing and future senior
indebtedness of National Rural and all existing and future subordinated
indebtedness of National Rural that may be held by or transferred to non-members
of National Rural, but will rank pari passu to National Rural’s member
subordinated certificates. As of February 28, 2009, National Rural
had issued $97 million of member capital securities. The amount of
member capital securities issued by National Rural increased to a total of $175
million as of April 7, 2009.
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 billion of medium-term notes in
the Australian market. At February 28, 2009, the Company did not have
any debt outstanding under the European or Australian programs. 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
agreements. The Company also obtains short-term funding from the sale
of floating-rate demand notes to members under its daily liquidity fund program.
The automatic shelf 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
The
Company also has access to liquidity through the uses of private debt
issuances. In March 2008, the Company issued to Farmer Mac $400
million of floating-rate debt due in 2013. During the three months
ended February 28, 2009, Company issued a total of $500 million notes to Farmer
Mac at a blended interest rate of 3.871 percent. Notes payable issued
to Farmer Mac are secured by the pledge of mortgage notes in an amount at least
equal to the principal balance of the notes outstanding. In February
2009, the Company entered into another $500 million note purchase agreement with
Farmer Mac. This agreement allows National Rural to borrow up to $500
million from Farmer Mac with amounts maturing through February 29,
2016. Advances under this agreement must occur prior to February 28,
2011. This $500 million commitment remains unadvanced at February 28,
2009.
Subsequent
to the end of the quarter in March 2009, the Company entered into a note
purchase agreement in the amount of $400 million with Farmer
Mac. This agreement is for the refinancing of the $400 million
secured private placement note that was sold to Farmer Mac in March
2008. The March 2009 agreement is a 5-year, variable-rate,
collateralized, revolving credit facility that allows National Rural to borrow,
repay and re-borrow funds at any time or from time to time; provided that the
principal amount at any time outstanding under this facility is not more than
$400 million in the aggregate. During April 2009, the Company issued
notes totaling $400 million under the March 2009 Farmer Mac agreement at a
blended spread over three-month LIBOR of 114 basis points and
maturities through March 2014, resulting in the full refinancing of the $400
million outstanding under the March 2008 agreement.
At
February 28, 2009, the Company had $3.0 billion of notes payable outstanding
under FFB loan facilities with bond guarantee agreements with RUS as part of the
funding mechanism for the REDLG program, including $500 million in additional
funding received from the FFB in September 2008. The $500 million
advance has a 2028 maturity date.
Member
Loan Repayments
Scheduled
repayments on long-term loans are expected to average $1,020 million a year for
fiscal years 2009 to 2013. There has been significant prepayment
activity over the past three fiscal years in the telecommunications loan
programs. The Company does not expect significant loan prepayments in
the telecommunications loan portfolio over the next few years.
Member
Loan Interest Payments
For the
nine months ended February 28, 2009, interest income on the loan portfolio was
$789 million, representing an average yield of 5.39 percent as compared with
5.67 percent for the nine months ended February 29, 2008. At February
28, 2009, 74 percent of total loans outstanding had a fixed rate of interest and
a 26 percent of loans outstanding had a variable rate of interest. At
February 28, 2009, a total of 5 percent of loans outstanding were on a
non-accrual basis with respect to the recognition of interest
income.
Term
Loan
On
January 21, 2009, the Company entered into a $200 million term loan credit
agreement with a syndicate of banks. On January 29, 2009, the Company
borrowed $200 million under this agreement. Loans outstanding under
the credit facility bear interest at variable rates based on, as determined at
National Rural's election, the Eurodollar rate plus an applicable margin or a
base rate calculated based on the greater of the prime rate, the federal funds
effective rate plus an applicable margin, or the one-month LIBOR rate plus an
applicable margin. Loans will mature on January 21,
2010. In accordance with the terms of the agreement, National Rural
is required to comply with maximum leverage and minimum times interest earned
ratio covenants, as defined in the agreement, which are similar to those
contained in National Rural’s revolving credit agreements described
below. National Rural may terminate the commitments at any time if no
amounts are outstanding, or ratably reduce the aggregate amount of the
commitments in excess of the aggregate amounts outstanding.
Bank
Revolving Credit Facility
The
following is a summary of the Company's revolving credit
agreements:
(dollar
amounts in thousands)
|
|
|
February
28,
2009
(3)
|
|
May
31,
2008
|
|
|
Termination
Date
|
|
|
Facility
fee per
year
(1)
|
|
|
Five-year
agreement
|
|
$
|
1,125,000
|
|
$
|
1,125,000
|
|
|
March
16, 2012
|
|
|
6
basis points
|
|
|
Five-year
agreement
|
|
|
1,025,000
|
|
|
1,025,000
|
|
|
March
22, 2011
|
|
|
6
basis points
|
|
|
364-day
agreement (2)
|
|
|
1,500,000
|
|
|
1,500,000
|
|
|
March
13, 2009
|
|
|
5
basis points
|
|
|
Total
|
|
|
$
|
3,650,000
|
|
$
|
3,650,000
|
|
|
|
|
|
|
|
|
(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 the agreement 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
percent per year.
(3)
Amounts include LBB’s portion of the credit facility totaling $239 million
allocated as follows: $76 million under the 5-year facility maturing 2012, $58
million under the 5-year facility maturing in 2011, and $105 million under the
364-day facility maturing in 2009. The Company does not expect LBB to
fund its portion of the credit facility according to the
agreements. See further discussion below.
All three
agreements in place at February 28, 2009 contain a provision under which if
borrowings exceed 50 percent of total commitments, a utilization fee of five
basis points must be paid on the outstanding balance.
At
February 28, 2009 and May 31, 2008, the Company was in compliance with all
covenants and conditions under its revolving credit agreements and there were no
borrowings outstanding under these agreements.
LBB, a
subsidiary of LBHI, which has filed a petition under Chapter 11 of the United
States Bankruptcy Code, is a participant for up to $239 million of National
Rural’s revolving credit facilities of which no amount has been
advanced. On October 7, 2008, the Company drew down $418.5 million
from the $1.5 billion 364-day agreement. As the amount borrowed did
not exceed 50 percent of total commitments, there was no utilization fee on the
outstanding balance. LBB did not fund its portion of the
draw. As a result, the Company does not believe that LBB’s $239
million portion of the credit facilities will be available in the
future. The Company believes that if accessing the credit markets
continues to be difficult, the remaining amounts in the credit facilities will
be adequate to fund its operations in the near term. The Company
repaid the $418.5 million borrowed under its revolving credit facility on
November 13, 2008. See the Financial Overview section
for additional information.
For
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. The
adjusted TIER, as defined by the agreements, represents the interest expense
adjusted to include the derivative cash settlements, plus minority interest net
income, plus net income prior to the cumulative effect of change in accounting
principle and dividing that total by the interest expense adjusted to include
the derivative cash settlements. In addition to the non-cash
adjustments related to SFAS 133 and SFAS 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 nine months ended February 28,
2009 and at or for the year ended May 31, 2008:
|
|
|
|
|
|
Actual
|
|
|
|
|
|
Requirement
|
|
February
28, 2009
|
|
May
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
|
1.025
|
|
1.19
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
adjusted TIER at prior fiscal year end (1)
|
|
|
|
1.05
|
|
1.15
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
ratio of senior debt to total equity
|
|
|
|
10.00
|
|
7.51
|
|
7.33
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
Company must meet this requirement to retire patronage capital.
The
revolving credit agreements do not contain a material adverse change clause or
ratings triggers that limit the banks' obligations to fund under the terms of
the agreements, but National Rural must be in compliance with their other
requirements, including financial ratios, to draw down on the
facilities.
On March
13, 2009, the Company replaced the $1,500 million 364-day revolving credit
agreement in place at February 28, 2009 with a new $1,000 million 364-day
agreement that expires on March 12, 2010. The facility fee for the
new 364-day facility is currently 0.125 of 1 percent per year. The
facility fee is determined by pricing matrices in the agreement and is payable
quarterly. National Rural has the right to choose between a (i)
Eurodollar rate plus an applicable margin to be determined by pricing matrices
in the agreement or (ii) a base rate calculated based on the greater of prime
rate, the federal funds effective rate plus 2 percent or the one-month LIBOR
rate plus 2 percent, plus an applicable margin to be determined by pricing
matrices in the agreement. In the 364-day revolving credit agreement,
the Company has the right, subject to certain terms and conditions, to increase
the aggregate amount of the commitments by up to $250 million either by
increasing the commitment of one or more existing lenders or by adding one or
more new lenders, provided that no existing lender’s commitment may be increased
without the consent of the lender and administrative agent. 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 $3,016 million at March 13, 2009. This amount excludes
$134 million from LBB as National Rural does not expect LBB to fund its portion
of the credit commitment under the two five-year agreements.
Member
Investments
At both
February 28, 2009 and May 31, 2008, members funded 20.2 percent and 20.3
percent, respectively, of total assets. Below is a table showing the
components of member investments in the Company:
|
|
|
February
28, 2009
|
|
May
31, 2008
|
|
Increase/
|
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
|
%
of Total (1)
|
|
Amount
|
|
%
of Total (1)
|
|
(Decrease)
|
|
|
Commercial
paper (2)
|
$
|
1,441,621
|
|
|
57
|
%
|
|
$
|
1,526,559
|
|
|
50
|
%
|
|
$
|
(84,938
|
)
|
|
Medium-term
notes
|
|
653,719
|
|
|
12
|
|
|
|
392,739
|
|
|
8
|
|
|
|
260,980
|
|
|
Members'
subordinated certificates
|
|
1,569,166
|
|
|
100
|
|
|
|
1,406,779
|
|
|
100
|
|
|
|
162,387
|
|
|
Members'
equity (3)
|
|
573,122
|
|
|
100
|
|
|
|
613,082
|
|
|
100
|
|
|
|
(39,960
|
)
|
|
Total
|
$
|
4,237,628
|
|
|
|
|
|
$
|
3,939,159
|
|
|
|
|
|
$
|
298,469
|
|
|
Percentage
of total assets
|
|
20.2
|
%
|
|
|
|
|
|
20.3
|
%
|
|
|
|
|
|
|
|
|
Percentage
of total assets less derivative assets (3)
|
|
20.6
|
%
|
|
|
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents the percentage of each line item outstanding to the Company’s
members.
(2)
Includes $365 million and $251 million related to the daily liquidity fund at
February 28, 2009 and May 31, 2008, 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.
The
Company has viewed member commercial paper investments as a more stable source
of funding for the Company than investor purchased commercial
paper. Member commercial paper investments have averaged $1,280
million outstanding since January 1, 2007.
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 28, 2009. At
February 28, 2009, the Company had unadvanced loan commitments totaling $13,845
million. The Company does not expect to advance the full amount of
the unadvanced commitments. Unadvanced commitments generally expire
within five years of the first advance on a loan and the majority of short-term
unadvanced commitments are used as backup liquidity for member
operations. Approximately 56 percent of the outstanding commitments
at February 28, 2009 were for short-term or line of credit loans.
Interest
Expense on Debt
For the
nine months ended February 28, 2009, interest expense on debt was $667 million
and had a weighted-average cost of 4.56 percent for the period compared with
5.05 percent for the nine months ended February 29, 2008. The decline
in the cost of debt was the result of the overall lower interest rate
environment’s effect on short-term and variable-rate debt. At
February 28, 2009, a total of 84 percent of outstanding debt had a fixed
interest rate and 16 percent 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 28, 2009 and
thereafter is as follows:
|
|
Amount
|
|
(in
thousands)
|
|
Maturing
(1)
|
|
2009
|
$
|
69,297
|
|
2010
|
|
2,453,830
|
|
2011
|
|
1,448,533
|
|
2012
|
|
2,151,497
|
|
2013
|
|
461,009
|
|
Thereafter
|
|
9,617,931
|
|
Total
|
|
$
|
16,202,097
|
|
(1)
Excludes loan subordinated certificates totaling $257 million that amortize
annually based on the outstanding balance of the related loan. There
are many items that affect 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 $30 million. In fiscal year 2008,
amortization represented 12 percent of amortizing loan subordinated certificates
outstanding.
Patronage
Capital Retirements
The
Company has made annual retirements of its allocated patronage capital in 28 of
the last 29 years. In July 2008, the National Rural board of
directors approved the allocation of a total of $103 million from fiscal year
2008 net earnings to the National Rural members. National Rural made
cash payments totaling $85 million to its members in October 2008 as retirement
of 70 percent of the amount allocated for fiscal year 2008 and one-ninth of the
amount allocated for fiscal years 1991, 1992 and 1993.
Market
Risk
The
Company's primary market risks are interest rate risk, counterparty risk as a
result of entering into derivative financial instruments and liquidity
risk.
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.
Matched
Funding Policy
To
monitor and 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 table on page 60). 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 28, 2009 and May 31, 2008, 26 percent and 19
percent, respectively, of loans carried variable interest rates.
It is the
Company's funding objective to manage the matched funding of asset and liability
repricing terms within a range of three percent of total assets excluding
derivative assets. However, at February 28, 2009, the Company’s
matched funding was outside of this range. At February 28, 2009, the
Company had $14,915 million of fixed-rate assets amortizing or repricing, funded
by $14,427 million of fixed-rate liabilities maturing during the next 30 years
and $1,677 million of members' equity and members' subordinated certificates, a
portion of which does not have a scheduled maturity. The difference
of $1,189 million, or 6 percent of total assets and total assets excluding
derivative assets, represents the fixed-rate debt and equity maturing during the
next 30 years in excess of the fixed-rate assets.
The
Company provides its members with many options on its loans with regard to
interest rates, the term for which the selected interest rate is in effect, and
the ability to prepay the loan. As a result, there is a possibility
of significant changes in the composition of the loan
portfolio. Items contributing to the prefunded position include the
following:
·
|
Over
50 percent of the long-term loans subject to repricing in January through
March of 2009 moved from a fixed rate to a variable
rate.
|
·
|
To
pay down commercial paper and refinance maturing extendible collateral
trust bonds, the Company issued $1 billion in collateral trust bonds in
October 2008. These bonds were not swapped to a variable-rate
due to the high floating-rate credit spreads to swap fixed-rate debt to a
variable rate. The floating-rate note market was not accessible
due to the disruption in the credit markets at the time when the Company
issued the collateral trust
bonds.
|
·
|
The
termination of several receive fixed, pay variable interest rate swaps
with notional amounts totaling $583 million created a larger prefund
position than was originally
anticipated.
|
Based on
experience in prior years, members that have selected a variable rate on the
repricing date to allow more time to make the decision as to whether to select a
fixed interest rate, have moved back to a fixed interest rate within a short
period of time from the repricing date. In addition, there are $184
million of pay fixed, receive variable interest rates swaps that mature during
the fourth quarter. The Company will monitor the impact of these two
factors in reducing the prefunding level during the fourth quarter and will take
additional action if required to reduce the prefunding level prior to May 31,
2009.
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 derivative
instruments 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 effect 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 the additional
interest rate risk it assumes.
The
following table shows the scheduled amortization and repricing of fixed-rate
assets and liabilities outstanding at February 28, 2009.
INTEREST
RATE GAP ANALYSIS
|
(Fixed-rate
Assets/Liabilities)
|
At
February 28, 2009
|
|
May
31,
|
|
June
1,
|
|
June
1,
|
|
June
1,
|
|
June
1,
|
|
|
|
|
|
|
2009
|
|
2009
to
|
|
2011
to
|
|
2013
to
|
|
2018
to
|
|
Beyond
|
|
|
|
|
or
|
|
May
31,
|
|
May
31,
|
|
May
31,
|
|
May
31,
|
|
June
1,
|
|
|
|
(Dollar
amounts in millions)
|
prior
|
|
2011
|
|
2013
|
|
2018
|
|
2028
|
|
2028
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
amortization and repricing
|
$
|
356
|
|
|
$
|
3,756
|
|
|
$
|
3,122
|
|
|
$
|
3,708
|
|
|
$
|
2,776
|
|
|
$
|
1,197
|
|
|
$
|
14,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and members' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
227
|
|
|
$
|
3,096
|
|
|
$
|
3,882
|
|
|
$
|
4,370
|
|
|
$
|
1,909
|
|
|
$
|
943
|
|
|
$
|
14,427
|
|
Subordinated
certificates
|
|
6
|
|
|
|
48
|
|
|
|
50
|
|
|
|
59
|
|
|
|
858
|
|
|
|
279
|
|
|
|
1,300
|
|
Members'
equity (1)
|
|
-
|
|
|
|
25
|
|
|
|
32
|
|
|
|
127
|
|
|
|
109
|
|
|
|
84
|
|
|
|
377
|
|
Total
liabilities and members' equity
|
$
|
233
|
|
|
$
|
3,169
|
|
|
$
|
3,964
|
|
|
$
|
4,556
|
|
|
$
|
2,876
|
|
|
$
|
1,306
|
|
|
$
|
16,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap (2)
|
$
|
123
|
|
|
$
|
587
|
|
|
$
|
(842
|
)
|
|
$
|
(848
|
)
|
|
$
|
(100
|
)
|
|
$
|
(109
|
)
|
|
$
|
(1,189
|
)
|
Cumulative
gap
|
|
123
|
|
|
|
710
|
|
|
|
(132
|
)
|
|
|
(980
|
)
|
|
|
(1,080
|
)
|
|
|
(1,189
|
)
|
|
|
|
|
Cumulative
gap as a % of total assets
|
|
0.59
|
%
|
|
|
3.39
|
%
|
|
|
(0.63
|
)%
|
|
|
(4.68
|
)%
|
|
|
(5.16
|
)%
|
|
|
(5.68
|
)%
|
|
|
|
|
Cumulative
gap as a % of adjusted total assets (3)
|
|
0.60
|
|
|
|
3.46
|
|
|
|
(0.64
|
)
|
|
|
(4.77
|
)
|
|
|
(5.26
|
)
|
|
|
(5.79
|
)
|
|
|
|
|
(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 28, 2009 and May 31, 2008, the Company was a party to interest rate
swaps with a total notional amount of $12,036 million and $12,916 million,
respectively. The Company uses these derivative instruments as part
of its overall interest rate matching strategy. These interest rate
swaps are used when they provide a lower cost of funding or minimize interest
rate risk. The Company enters into interest rate swaps only with
counterparties that participate in the Company’s revolving credit
agreements. National Rural used interest rate swaps to
economically convert the interest rate on $6,713 million and $7,660 million of
variable-rate debt as of February 28, 2009 and May 31, 2008, respectively, to
better match the funding of long-term fixed-rate loans. Interest rate
swaps were used to economically convert the interest rates from fixed to
variable
on $5,323 million and $5,256 million of long-term debt as of February 28, 2009
and May 31, 2008, respectively. The Company has not entered into
derivative financial instruments for trading purposes in the past and does not
anticipate doing so in the future.
At
February 28, 2009 and May 31, 2008, 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 derivative instruments. To
mitigate this risk, the Company only enters into these agreements with financial
institutions with investment grade ratings. At February 28, 2009 and
May 31, 2008, the Company was a party to derivative instruments with notional
amounts totaling $12,036 million and $12,916 million,
respectively. 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 28, 2009 and at
the date of this filing, the Company's derivative instrument counterparties had
credit ratings ranging from AAA to A- as assigned by Standard & Poor's
Corporation.
As a
result of the bankruptcy filing of LBHI, National Rural terminated seven
interest rate swaps with LBSF on September 26, 2008. The payment due
to National Rural from LBSF totaling $26 million was recorded in derivative cash
settlements representing the termination net settlement amount on that day, in
accordance with the terms of the contract. On October 3, 2008, LBSF
filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United
States Bankruptcy Court for the Southern District of New
York. National Rural has a claim of $26 million against LBHI and
LBSF. National Rural used market data that indicated values for LBHI
bonds of 10 cents and 15 cents on the dollar as a proxy for the potential
recovery from both LBHI and LBSF. As a result, the receivable has
been reduced to $7 million. The amount recorded as a receivable does
not reduce or limit National Rural's claim of $26 million against LBHI and
LBSF. The ultimate recovery will depend on the ability of LBHI and
LBSF to maximize the value of assets through sale or assignment.
Rating
Triggers
The
Company has certain interest rate swaps that contain credit risk-related
contingent features referred to as a rating trigger. Rating triggers
are not separate financial instruments and are not separate derivatives under
SFAS 133.
Under
certain rating triggers, 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, excluding credit risk, of the underlying
derivative instrument. These rating triggers are based on the
Company’s senior unsecured credit rating from Standard & Poor's Corporation
and Moody's Investors Service.
At
February 28, 2009, the Company had the following derivative instruments that
contain rating triggers based on the Company’s ratings from Moody's Investors
Service falling to or below Baa1 or from Standard & Poor's Corporation
falling to or below BBB+. In calculating the payments and collections
required upon termination, the Company netted the agreements for each
counterparty, as allowed by the underlying master agreements. See table on
page 55 for National Rural's senior unsecured credit ratings as of February 28,
2009.
(in
thousands)
|
|
Notional
|
|
|
Required
Company
|
|
|
Amount
Company
|
|
|
Net
|
|
Rating
Level:
|
|
Amount
|
|
|
Payment
|
|
|
Would
Collect
|
|
|
Total
|
|
Fall
to Baa1/BBB+ and below
|
$
|
7,111,106
|
|
$
|
(174,005
|
)
|
$
|
17,726
|
|
$
|
(156,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company also has interest rate swaps with one counterparty that include rating
trigger provisions allowing the counterparty to terminate the agreements, but
the Company does not have the right to terminate based on the counterparty’s
credit rating. If the Company’s senior unsecured rating from Moody’s
Investors Service were to fall below Baa1 or if the rating from Standard &
Poor’s Corporation were to fall below BBB+, this counterparty could terminate a
total notional amount of $941 million of interest rate swaps that are in a
contingent net liability position. If these interest rate swaps had
been terminated at February 28, 2009, the Company would have been required to
make a payment to the counterparty of $9 million.
In
addition to the rating triggers listed above, at February 28, 2009, the Company
had $815 million of notional amount of derivative instruments with one
counterparty that would require the pledging of collateral in an amount equal to
the net cash settlement amount of the derivative instruments if the Company’s
senior unsecured ratings from Moody's Investors Service were to fall below Baa2
or if the rating from Standard & Poor's Corporation were to fall below
BBB. Based on the terms of the interest rate swaps in place with this
counterparty, if the Company’s ratings fell below the triggering levels, at
February 28, 2009, the Company would be required to post $25 million in
collateral.
The
aggregate fair value of all interest rate swaps with rating triggers that were
in a liability position at February 28, 2009 was $204 million. If the
credit-risk related contingent features contained in the Company’s interest rate
swaps were to be triggered on February 28, 2009, the Company would be required
to post $25 million of collateral and would be required to make payments
totaling $183 million representing the termination settlement on that
date.
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. 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. At February 28,
2009, the Company had a total of $2,354 million of long-term debt maturing
during the next 12 months. 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. Liquidity risk is also mitigated by the
Company’s access to the CPFF through October 2009, however at this time, there
is no intention to make use of the more expensive funding through the CPFF since
there is sufficient demand in the commercial paper market. In
addition, the Company limits the amount of dealer commercial paper and bank bid
notes used in the funding of loans. The Company's objective is to
maintain the amount of dealer commercial paper and bank bid notes used to 15
percent or less of total debt outstanding. At February 28, 2009 and
May 31, 2008, there was a total of $1,361 million and $1,612 million,
respectively, of dealer commercial paper and bank bid notes outstanding,
representing 7 percent and 9 percent, respectively, of the Company's total debt
outstanding. The Company had $3.4 billion in unused lines of credit
with financial institutions available to draw upon at February 28,
2009. This amount is adjusted to exclude LBB’s $239 million portion
of the credit facility as the Company does not believe that these funds will be
available in the future. Subsequent to the end of the quarter, on
March 13, 2009, the Company decreased the total of its revolving credit
agreements to $3,016 million, which excludes $134 million from LBB as National
Rural does not expect LBB to fund its portion of the credit commitment under the
two five-year revolving credit facilities.
National
Rural continues to see significant investment support from its members with $3.7
billion of commercial paper, daily liquidity fund, medium-term notes and
subordinated certificate investments outstanding at February 28,
2009. The member debt investments represented 19 percent of the total
debt outstanding at February 28, 2009. In addition, National Rural
had a total of $4.2 billion of privately placed debt outstanding at February 28,
2009, $3.0 billion of which was guaranteed by the U.S. Government under the
REDLG program. The private placements of debt represented 20 percent
of total debt outstanding at February 28, 2009. In addition to the
$4.2 billion of privately placed debt, the Company has a $500 million note
purchase agreement with Farmer Mac entered into in February 2009, which had not
been advanced as of February 28, 2009.
At
February 28, 2009, the Company was the guarantor and liquidity provider for $631
million of tax-exempt bonds issued for its member cooperatives. A
total of $197 million of such tax-exempt bonds were in flexible and weekly mode,
which reprice every seven to thirty-five days. A total of $434
million of such tax-exempt bonds reprice semi-annually. During the
nine months ended February 28, 2009, the $155 million of auction rate bonds
guaranteed by the Company were converted to semi-annual mode. The Company became
the liquidity provider for those bonds. The Company entered into new
agreements as the guarantor and liquidity provider for $176 million of
tax-exempt bonds that reprice semi-annually. During the nine months
ended February 28, 2009, the Company was required to purchase a total of $72
million of tax-exempt bonds pursuant to its obligation as liquidity
provider. As a result, the Company is required to hold the bonds
until the remarketing agent is able to place them with third-party
investors. During this period, the Company is entitled to receive a
rate of interest on many of the bonds that is equal to or higher than the rate
investors typically receive on similar bonds in the tax-exempt
market. A total of $8 million of the tax-exempt bonds held by the
Company during the nine months ended February 28, 2009 were redeemed as a result
of a mandatory sinking fund payment and $52 million were repurchased by third
party investors. The remaining $12 million represents tax-exempt
bonds held by the Company at February 28, 2009 and recorded at fair value as
investments in trading securities on the consolidated balance
sheet.
For
additional information about the 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 table 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 effect of derivatives and to
include minority interest in net income for the three and nine months ended
February 28, 2009 and February 29, 2008. 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, 2008 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
28,
2009
|
|
|
|
February
29,
2008
|
|
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
Interest
expense
|
|
$
|
(240,116
|
)
|
|
$
|
(233,468
|
)
|
|
$
|
(694,649
|
)
|
|
$
|
(720,810
|
)
|
|
Derivative
cash settlements
|
|
|
104,012
|
|
|
|
10,463
|
|
|
|
116,946
|
|
|
|
30,299
|
|
|
Adjusted
interest expense
|
|
$
|
(136,104
|
)
|
|
$
|
(223,005
|
)
|
|
$
|
(577,703
|
)
|
|
$
|
(690,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
31,317
|
|
|
$
|
33,108
|
|
|
$
|
112,344
|
|
|
$
|
77,007
|
|
|
Derivative
cash settlements
|
|
|
104,012
|
|
|
|
10,463
|
|
|
|
116,946
|
|
|
|
30,299
|
|
|
Adjusted
net interest income
|
|
$
|
135,329
|
|
|
$
|
43,571
|
|
|
$
|
229,290
|
|
|
$
|
107,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes and minority interest
|
$
|
75,263
|
|
|
$
|
(4,586
|
)
|
|
$
|
(150,022
|
)
|
|
$
|
(56,328
|
)
|
|
Derivative
forward value
|
|
|
53,046
|
|
|
|
64,266
|
|
|
|
203,457
|
|
|
|
173,278
|
|
|
Adjusted
income prior to income taxes and minority interest
|
$
|
128,309
|
|
|
$
|
59,680
|
|
|
$
|
53,435
|
|
|
$
|
116,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
75,239
|
|
|
$
|
(323
|
)
|
|
$
|
(139,907
|
)
|
|
$
|
(41,931
|
)
|
|
Minority
interest net loss
|
|
|
(159
|
)
|
|
|
(2,088
|
)
|
|
|
(3,138
|
)
|
|
|
(8,211
|
)
|
|
Derivative
forward value
|
|
|
53,046
|
|
|
|
64,266
|
|
|
|
203,457
|
|
|
|
173,278
|
|
|
Adjusted
net income
|
|
$
|
128,126
|
|
|
$
|
61,855
|
|
|
$
|
60,412
|
|
|
$
|
123,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 table provides the TIER and adjusted TIER for the three months and
nine ended February 28, 2009 and February 29, 2008.
|
|
Three
months ended
|
|
|
|
Nine
months ended
|
|
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
|
|
February
28,
2009
|
|
|
|
February
29,
2008
|
|
TIER
(1)
|
|
1.31
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjusted
TIER
|
|
|
1.94
|
|
|
|
1.28
|
|
|
|
1.10
|
|
|
|
1.18
|
|
(1) For
the nine months ended February 28, 2009, the Company reported a net loss of $140
million. For the three and nine months ended February 29, 2008, the
Company reported a net loss of $0.3 million and $42 million,
respectively. Thus the TIER calculation for those periods results in
a value below 1.00.
Adjustments
to the Calculation of Leverage and Debt to Equity
The
following table 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 effects 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, 2008 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
28,
2009
|
|
|
|
May
31,
2008
|
|
Liabilities
|
$
|
20,496,578
|
|
|
$
|
18,699,169
|
|
Less:
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
(571,481
|
)
|
|
|
(171,390
|
)
|
Debt
used to fund loans guaranteed by RUS
|
|
(245,015
|
)
|
|
|
(250,169
|
)
|
Subordinated
deferrable debt
|
|
(311,440
|
)
|
|
|
(311,440
|
)
|
Subordinated
certificates
|
|
(1,569,166
|
)
|
|
|
(1,406,779
|
)
|
Adjusted
liabilities
|
$
|
17,799,476
|
|
|
$
|
16,559,391
|
|
|
|
|
|
|
|
|
|
Total
equity
|
$
|
439,282
|
|
|
$
|
665,965
|
|
Less:
|
|
|
|
|
|
|
|
Prior
year cumulative derivative forward value and
|
|
|
|
|
|
|
foreign
currency adjustments
|
|
(44,056
|
)
|
|
|
(131,551
|
)
|
Year-to-date
derivative forward value loss (1)
|
|
186,165
|
|
|
|
87,495
|
|
Accumulated
other comprehensive income
|
|
(8,269
|
)
|
|
|
(8,827
|
)
|
Subtotal
members' equity
|
|
573,122
|
|
|
|
613,082
|
|
Plus:
|
|
|
|
|
|
|
|
Subordinated
certificates
|
|
1,569,166
|
|
|
|
1,406,779
|
|
Subordinated
deferrable debt
|
|
311,440
|
|
|
|
311,440
|
|
Minority
interest
|
|
11,057
|
|
|
|
14,247
|
|
Adjusted
equity
|
$
|
2,464,785
|
|
|
$
|
2,345,548
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
$
|
1,270,016
|
|
|
$
|
1,037,140
|
|
(1)
Represents the derivative forward value loss recorded by National Rural for the
year-to-date 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 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 table provides the calculated ratio 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
28, 2009
|
|
May
31, 2008
|
Leverage
ratio
|
|
|
49.55
|
|
|
|
29.64
|
|
Adjusted
leverage ratio
|
|
|
7.74
|
|
|
|
7.50
|
|
|
|
|
|
|
|
|
|
|
Debt
to equity ratio
|
|
|
46.66
|
|
|
|
28.08
|
|
Adjusted
debt to equity ratio
|
|
|
7.22
|
|
|
|
7.06
|
|
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
See
Market Risk discussion beginning on page 59.
Item
4T. 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
|
Refer to Part I, Item 1A. Risk Factors
in the Company's Form 10-K for the year ended May 31, 2008 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 28, 2009.
Item
5.
|
Other
Information
|
(a) On March
13, 2009, RTFC entered into a Purchase Agreement as part of a credit bid for ICC
assets. The
Purchase Agreement is conditional upon the approval of the bankruptcy court and
applicable regulators. On April 6, 2009, the Bankruptcy Judge
approved, on an interim basis, the sale of these assets to RTFC. See
Note 14, Restructured/Non-performing Loan and
Contingencies for a more detailed discussion of contingencies related to
the non-performing loans outstanding to ICC.
4.1
|
-
|
Form
of Fixed Rate Member Capital Securities Certificate
|
|
|
|
4.2
|
-
|
Form
of Floating Rate Member Capital Securities Certificate
|
|
|
|
4.24
|
-
|
Note
Purchase Agreement dated as of March 23, 2009, for $400,000,000 between
the Registrant and Federal Agricultural Mortgage
Corporation.
|
|
|
|
4.25
|
-
|
Pledge
Agreement dated as of March 23, 2009, between the Registrant, Federal
Agricultural Mortgage Corporation and U.S. Bank Trust National
Association.
|
|
|
|
4.42
|
–
|
Term
Loan Credit Agreement dated as of January 21, 2009 for $200,000,000
expiring on January 21, 2010.
|
|
|
|
4.43
|
-
|
Note
Purchase Agreement dated as of February 5, 2009 for $500,000,000, between
the Registrant and Federal Agricultural Mortgage
Corporation.
|
|
|
|
4.44
|
-
|
Pledge
Agreement dated as of February 5, 2009, between the Registrant, Federal
Agricultural Mortgage Corporation and U.S. Bank Trust National
Association.
|
|
|
|
4.5
|
-
|
Revolving
Credit Agreement dated as of March 13, 2009 for $1,000 million expiring on
March 12, 2010.
|
|
|
|
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
Controller
(Principal Accounting
Officer)
April 8,
2009