may312009_10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended May 31, 2009
OR
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period
from to
Commission
File Number 1-7102
NATIONAL
RURAL UTILITIES COOPERATIVE
FINANCE
CORPORATION
(Exact
name of registrant as specified in its charter)
DISTRICT
OF COLUMBIA
(State or
other jurisdiction of incorporation or organization)
52-0891669
(I.R.S.
Employer Identification Number)
2201
COOPERATIVE WAY, HERNDON, VA 20171
(Address
of principal executive offices)
(Registrant's
telephone number, including area code, is 703-709-6700)
Securities
registered pursuant to Section 12(b) of the Act:
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Name
of each
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Name
of each
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exchange
on
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exchange
on
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Title
of each class
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which
registered
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Title
of each class
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which
registered
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5.70%
Collateral Trust Bonds, due 2010
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NYSE
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6.75%
Subordinated Notes, due 2043
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NYSE
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7.20%
Collateral Trust Bonds, due 2015
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NYSE
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6.10%
Subordinated Notes, due 2044
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NYSE
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6.55%
Collateral Trust Bonds, due 2018
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NYSE
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5.95%
Subordinated Notes, due 2045
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NYSE
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7.35%
Collateral Trust Bonds, due 2026
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NYSE
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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 Act). Yes ¨ No x
The
Registrant is a tax-exempt cooperative and consequently is unable to issue any
equity capital stock.
TABLE OF CONTENTS
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Part No.
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Item No.
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Page
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I.
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1.
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Business
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1
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General
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1
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Members
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2
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Distribution
Systems
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3
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Power
Supply Systems
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3
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Service
Organizations and Associate Systems
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4
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Telecommunications
Systems
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4
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Loan
Programs
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4
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Interest
Rates on Loans
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5
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National
Rural Loan Programs
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5
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RTFC
Loan Programs
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6
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NCSC
Loan Programs
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6
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RUS
Guaranteed Loans for Rural Electric Systems
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7
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Conversion
of Loans
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7
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Prepayment
of Loans
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7
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Loan
Security
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7
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Guarantee
Programs
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7
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Guarantees
of Long-Term Tax-Exempt Bonds
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8
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Guarantees
of Tax Benefit Transfers
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8
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Letters
of Credit
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8
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Other
Guarantees
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8
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Member
Regulation and Competition
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9
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Disaster
Recovery
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12
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Tax
Status
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13
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Investment
Policy
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13
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Employees
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13
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1A.
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Risk
Factors
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13
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1B.
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Unresolved
Staff Comments
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15
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2.
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Properties
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16
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3.
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Legal
Proceedings
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16
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4.
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Submission
of Matters to a Vote of Security Holders
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16
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II.
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5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of
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Equity
Securities
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17
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6.
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Selected
Financial Data
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17
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7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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18
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Business
Overview
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18
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Financial
Overview
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19
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Critical
Accounting Estimates
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22
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New
Accounting Pronouncements
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25
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Results
of Operations
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26
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Ratio
of Earnings to Fixed Charges
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33
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Financial
Condition
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33
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Off-Balance
Sheet Obligations
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45
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Liquidity
and Capital Resources
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47
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Market
Risk
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51
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Non-GAAP
Financial Measures
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56
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7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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60
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8.
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Financial
Statements and Supplementary Data
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60
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9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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60
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9A(T).
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Controls
and Procedures
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61
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9B.
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Other
Information
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62
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III.
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10.
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Directors,
Executive Officers and Corporate Governance
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63
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11.
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Executive
Compensation
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68
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12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder
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Matters
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79
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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79
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14.
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Principal
Accounting Fees and Services
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81
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IV.
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15.
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Exhibits,
Financial Statement Schedules
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83
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Signatures
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87
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Form 10-K contains forward-looking statements defined by 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 about future expectations or
projections, 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 materially differ. 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, changes in our ability to access external financing and other
economic and governmental factors affecting our operations. Some of
these and other factors are discussed in our annual and quarterly reports
previously filed with the Securities and Exchange Commission
("SEC"). Except as required by law, we undertake no obligation to
update or publicly release any revisions to forward-looking statements to
reflect events, circumstances or changes in expectations after the date on which
the statement is made.
The
information in this section should be read with our consolidated financial
statements and related notes and the information contained elsewhere in this
Form 10-K, including that set forth under Item 1A, Risk
Factors.
PART
I
General
National
Rural Utilities Cooperative Finance Corporation (referred to as "National
Rural," "we," "our," or "us") is a private, cooperative association
incorporated under the laws of the District of Columbia in April
1969. Our principal purpose is to provide our members with financing
to supplement the loan programs of the Rural Utilities Service ("RUS") of the
United States Department of Agriculture. We make loans to our rural
utility system members ("utility members") so they can acquire, construct and
operate electric distribution, generation, transmission and related
facilities. We also provide our members with credit enhancements in
the form of letters of credit and guarantees of debt obligations. We
are exempt from federal income taxes under Section 501(c)(4) of the Internal
Revenue Code. National Rural’s objective is not to maximize net
income, but to offer our members low cost financial products and services
consistent with sound financial management.
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports, are available, free of charge, at
www.nrucfc.coop (select "Investors," then "Financial Reports") as soon as
reasonably practicable after they are electronically filed with or furnished to
the SEC. They are also available free of charge on the SEC’s website
at www.sec.gov. Information posted on our website is not incorporated
by reference into this Form 10-K.
For
financial statement purposes, National Rural’s results of operations and
financial condition are consolidated with and include Rural Telephone Finance
Cooperative ("RTFC") and National Cooperative Services Corporation
("NCSC"). Unless stated otherwise, references to "we," "our," or
"us" relate to the consolidation of National Rural, RTFC, NCSC and certain
entities created and controlled by National Rural to hold foreclosed assets and
accommodate loan securitization transactions. The operations for
National Rural, RTFC and NCSC are reported as separate segments. See
Note 17 to the consolidated financial statements for further information on
our segment reporting.
RTFC is a
private cooperative association originally incorporated in South Dakota in 1987
and reincorporated in the District of Columbia in 2005. RTFC’s
principal purpose is to provide and arrange financing for its rural
telecommunications members and their affiliates. National Rural is
the sole lender to and manages the lending activities and business affairs of
RTFC through a long-term management agreement. Under a guarantee
agreement, RTFC pays National Rural a fee and in exchange National Rural
reimburses RTFC for loan losses. 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.
NCSC was
incorporated in 1981 in the District of Columbia as a private cooperative
association. The principal purpose of NCSC is to provide financing to
the for-profit and non-profit entities that are owned, operated or controlled
by, or provide substantial benefit to, members of National
Rural. NCSC's membership consists of National Rural and distribution
systems that are members of National Rural or are eligible for such
membership. National Rural is the primary source of funding
to and manages the lending activities and business affairs of NCSC through
a management agreement which is automatically
renewable
on an annual basis unless terminated by either party. Under a
guarantee agreement, NCSC pays National Rural a fee and in exchange National
Rural reimburses NCSC for loan losses. NCSC is headquartered with
National Rural in Herndon, Virginia. NCSC is a taxable
corporation.
Members
Our
consolidated membership totaling 1,522 members at May 31, 2009 is made up
of:
·
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829
distribution systems and 68 generation and transmission ("power supply")
systems, totaling 897 utility members, the majority of which are
consumer-owned electric
cooperatives;
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·
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498
telecommunications members;
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·
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66
service members; and
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Each
member (other than associates) is entitled to one vote. Our members
are located in 49 states, the District of Columbia and two U.S.
territories. Memberships between National Rural, RTFC and NCSC have
been eliminated in consolidation.
We
currently have four classes of electric members:
·
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Class
A - cooperative or not-for-profit distribution systems that receive
or are eligible to receive loans or other assistance from
RUS;
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·
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Class
B - cooperative or not-for-profit power supply
systems;
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·
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Class
C - statewide and regional associations wholly-owned or controlled by
Class A or Class B members; and
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·
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Class
D - national associations of
cooperatives.
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In
addition to members, associates are not-for-profit entities organized on a
cooperative basis which are owned, controlled or operated by Class A, B or C
members and which provide non-electric services primarily for the benefit of
consumers. Associates are not entitled to vote at any meeting of the
members and are not eligible to be represented on our board of
directors. All references to members within this document include
members and associates.
Membership
in RTFC is limited to commercial (for-profit) or cooperative (not-for-profit)
telecommunications systems that receive or are eligible to receive loans or
other assistance from RUS, and that are engaged (or plan to be engaged) in
providing telecommunications services to their users.
Membership
in NCSC is limited to National Rural and organizations that are Class A members
of National Rural or are eligible to be Class A members of National
Rural.
In many
cases, the residential and commercial customers of our electric members are also
the customers of RTFC's telecommunications members, as the service territories
of the electric and telecommunications members overlap in many of the rural
areas of the United States.
The table
below shows the total number of National Rural, RTFC and NCSC
members by state or U.S. territory, the percentage of total loans, and the
percentage of total loans and guarantees outstanding at May 31,
2009.
State/Territory
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Number
of
Members
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Loan
%
|
|
|
Loan
and
Guarantee
%
|
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State/Territory
|
|
Number
of
Members
|
|
Loan
%
|
|
|
Loan
and
Guarantee
%
|
|
Alabama
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30
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2.13
|
%
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|
2.93
|
%
|
|
Missouri
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|
64
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|
3.94
|
%
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|
4.03
|
%
|
Alaska
|
|
30
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|
1.69
|
|
|
1.61
|
|
|
Montana
|
|
39
|
|
0.64
|
|
|
0.66
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|
American
Samoa
|
|
1
|
|
-
|
|
|
-
|
|
|
Nebraska
|
|
40
|
|
0.07
|
|
|
0.06
|
|
Arizona
|
|
26
|
|
1.22
|
|
|
1.29
|
|
|
Nevada
|
|
7
|
|
0.85
|
|
|
0.97
|
|
Arkansas
|
|
30
|
|
3.05
|
|
|
2.90
|
|
|
New
Hampshire
|
|
4
|
|
0.66
|
|
|
0.73
|
|
California
|
|
10
|
|
0.18
|
|
|
0.20
|
|
|
New
Jersey
|
|
1
|
|
0.09
|
|
|
0.09
|
|
Colorado
|
|
39
|
|
4.68
|
|
|
4.65
|
|
|
New
Mexico
|
|
25
|
|
0.16
|
|
|
0.16
|
|
Connecticut
|
|
1
|
|
0.99
|
|
|
0.93
|
|
|
New
York
|
|
20
|
|
0.07
|
|
|
0.07
|
|
Delaware
|
|
1
|
|
0.18
|
|
|
0.17
|
|
|
North
Carolina
|
|
40
|
|
2.32
|
|
|
2.67
|
|
District
of Columbia
|
|
4
|
|
0.05
|
|
|
0.12
|
|
|
North
Dakota
|
|
32
|
|
0.34
|
|
|
0.35
|
|
Florida
|
|
19
|
|
3.23
|
|
|
3.05
|
|
|
Ohio
|
|
42
|
|
2.20
|
|
|
2.10
|
|
Georgia
|
|
67
|
|
7.85
|
|
|
7.49
|
|
|
Oklahoma
|
|
49
|
|
2.48
|
|
|
2.33
|
|
Guam
|
|
1
|
|
-
|
|
|
-
|
|
|
Oregon
|
|
39
|
|
1.50
|
|
|
1.55
|
|
Hawaii
|
|
1
|
|
0.03
|
|
|
0.04
|
|
|
Pennsylvania
|
|
23
|
|
1.86
|
|
|
1.84
|
|
Idaho
|
|
17
|
|
0.78
|
|
|
0.75
|
|
|
South
Carolina
|
|
38
|
|
2.30
|
|
|
2.16
|
|
Illinois
|
|
52
|
|
3.28
|
|
|
3.47
|
|
|
South
Dakota
|
|
46
|
|
0.71
|
|
|
0.66
|
|
Indiana
|
|
53
|
|
4.16
|
|
|
3.91
|
|
|
Tennessee
|
|
29
|
|
0.38
|
|
|
0.38
|
|
Iowa
|
|
118
|
|
2.45
|
|
|
2.33
|
|
|
Texas
|
|
107
|
|
16.51
|
|
|
16.53
|
|
Kansas
|
|
49
|
|
3.97
|
|
|
3.93
|
|
|
Utah
|
|
11
|
|
2.78
|
|
|
2.65
|
|
Kentucky
|
|
33
|
|
2.34
|
|
|
2.63
|
|
|
Vermont
|
|
7
|
|
0.39
|
|
|
0.37
|
|
Louisiana
|
|
17
|
|
1.92
|
|
|
1.81
|
|
|
Virgin
Islands
|
|
-
|
|
2.59
|
|
|
2.44
|
|
Maine
|
|
5
|
|
0.02
|
|
|
0.02
|
|
|
Virginia
|
|
27
|
|
1.00
|
|
|
0.95
|
|
Maryland
|
|
2
|
|
1.07
|
|
|
1.25
|
|
|
Washington
|
|
19
|
|
0.80
|
|
|
0.84
|
|
Massachusetts
|
|
1
|
|
-
|
|
|
-
|
|
|
West
Virginia
|
|
4
|
|
0.01
|
|
|
0.01
|
|
Michigan
|
|
27
|
|
1.38
|
|
|
1.33
|
|
|
Wisconsin
|
|
60
|
|
2.08
|
|
|
1.95
|
|
Minnesota
|
|
73
|
|
3.93
|
|
|
3.70
|
|
|
Wyoming
|
|
15
|
|
0.60
|
|
|
0.59
|
|
Mississippi
|
|
27
|
|
2.09
|
|
|
2.35
|
|
|
Total
|
|
1,522
|
|
100.00
|
%
|
|
100.00
|
%
|
Distribution
Systems
Distribution
systems are utilities engaged in retail sales of electricity to consumers in
their defined service areas on an exclusive basis. Most distribution
systems have all-requirements power purchase contracts with their power supply
systems, which are owned and controlled by the member distribution
systems. Wholesale power for resale also comes from other sources,
including power supply contracts with government agencies, investor-owned
utilities and other entities, and in rare cases, the distribution systems own
generating facilities.
Wholesale
power supply contracts ordinarily do not guarantee an uninterrupted supply nor a
constant cost of power. Contracts with RUS-financed power supply
systems (which generally require the distribution system to purchase all its
power requirements from the power supply system) provide for rate increases to
pass along increases in sellers' costs. The wholesale power contracts
permit the power supply system, subject to approval by RUS and, in certain
circumstances, regulatory agencies, to establish rates to its members so as to
produce revenues sufficient, with revenues from all other sources, to meet the
costs of operation and maintenance (including replacements, insurance, taxes and
administrative and general overhead expenses) of all generating, transmission
and related facilities, to pay the cost of any power and energy purchased for
resale, to pay the costs of generation and transmission, to make all payments on
account of all indebtedness and lease obligations of the power supply system and
to provide for the establishment and maintenance of reasonable
reserves. The board of directors of the power supply system typically
review the rates under the wholesale power contracts at least
annually.
Power
contracts with investor-owned utilities and power supply systems which do not
borrow from RUS generally have rates subject to regulation by the Federal Energy
Regulatory Commission ("FERC"). Contracts with federal agencies
generally permit rate changes by the selling agency (subject, in some cases, to
federal regulatory approval).
Power
Supply Systems
Power
supply systems are utilities that purchase or generate electric power and
provide it on a wholesale basis to distribution systems for delivery to the
consumer. Of the 61 operating power supply systems that have
financing commitments from us at December 31, 2008 (the most recent year for
which data is available as of the date of filing this Form 10-K), 35 had
generating capacity of at least 100 megawatts, 7 had less than 100 megawatts of
generating capacity and 19 had no generating capacity. The systems
with no generating capacity generally operated transmission lines to supply
certain distribution systems or managed power supply purchase arrangements for
the benefit of their distribution system members. Certain other power
supply systems have been formed but do not yet own generating or transmission
facilities or have financing commitments from us.
Service
Organizations and Associate Systems
Service
organizations include National Rural Electric Cooperative Association ("NRECA"),
statewide and regional cooperative associations. NRECA represents
cooperatives nationally.
Associates
include organizations that are owned, controlled or operated by Class A, B or C
members and that provide non-electric services primarily for the benefit of
consumers.
Telecommunications
Systems
Telecommunications
systems include not-for-profit cooperative organizations and for-profit
commercial organizations that primarily provide local exchange and access
telecommunications services to rural areas.
Independent
rural telecommunications companies provide service throughout many of the rural
areas of the United States. These approximately 1,300 companies
are called independent because they are not affiliated with Verizon, AT&T or
Qwest. Included in the 1,300 total are approximately 250
not-for-profit cooperative telecommunications companies. A majority
of the remainder of these independent rural telecommunications companies are
family-owned or privately-held commercial companies. Less than 20 of
these commercial companies are publicly traded or have issued bonds in the
capital markets.
Rural
telecommunications companies, including all local exchange carriers ("LECs")
other than Verizon, AT&T, Qwest, Cincinnati Bell and Embarq (formerly
Sprint's local exchange properties) comprise less than 15% of a local exchange
telecommunications industry that provides service to over 163 million access
lines. These rural companies range in size from fewer than 100
customers to more than three million. Rural telecommunications
companies' annual operating revenues range from less than $100,000 to over $2
billion. In addition to basic local exchange and access
telecommunications service, most independents offer other communications
services including wireless telephone, cable television and internet
access. Most rural telecommunications companies' networks incorporate
digital switching, fiber optics, internet protocol telephony and other advanced
technologies.
Loan
Programs
The table
below shows the weighted-average loans outstanding to borrowers and the
weighted-average interest rates thereon by loan type and by segment during
fiscal years ended May 31:
|
|
2009
|
|
|
|
2008
|
|
|
|
|
Weighted-
average
|
|
|
Weighted-
average
|
|
|
|
Weighted-
average
|
|
|
Weighted-
average
|
|
|
|
|
loans
outstanding
|
|
|
interest
rate
|
|
|
|
loans
outstanding
|
|
|
interest
rate
|
|
|
(dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by loan type: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
|
$
|
14,710,754
|
|
|
5.93
|
%
|
|
$
|
14,573,227
|
|
|
5.90
|
%
|
Long-term
variable-rate loans
|
|
|
1,654,355
|
|
|
5.34
|
|
|
|
1,170,017
|
|
|
6.94
|
|
Loans
guaranteed by RUS
|
|
|
246,789
|
|
|
5.09
|
|
|
|
252,788
|
|
|
5.49
|
|
Short-term
loans
|
|
|
2,034,736
|
|
|
4.05
|
|
|
|
1,310,313
|
|
|
5.89
|
|
Non-performing
loans
|
|
|
495,014
|
|
|
-
|
|
|
|
504,310
|
|
|
0.01
|
|
Restructured
loans
|
|
|
556,892
|
|
|
0.63
|
|
|
|
589,662
|
|
|
0.64
|
|
Total
loans
|
|
$
|
19,698,540
|
|
|
5.38
|
|
|
$
|
18,400,317
|
|
|
5.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
|
$
|
17,579,888
|
|
|
5.43
|
%
|
|
$
|
16,167,441
|
|
|
5.67
|
%
|
RTFC
|
|
|
1,693,123
|
|
|
4.50
|
|
|
|
1,791,100
|
|
|
4.96
|
|
NCSC
|
|
|
425,529
|
|
|
6.59
|
|
|
|
441,776
|
|
|
7.10
|
|
Total
|
|
|
$
|
19,698,540
|
|
|
5.
38
|
|
|
$
|
18,400,317
|
|
|
5.63
|
|
(1) Loans
are classified as long-term or short-term based on their original
maturity.
Total
loans outstanding by state or U.S. territory based on the location of the
system's headquarters are summarized below at
May
31:
(dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State/Territory
|
|
2009
|
|
|
2008
|
|
|
|
2007
|
|
|
|
State/Territory
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
Alabama
|
$
|
430,065
|
|
$
|
414,961
|
|
|
$
|
347,723
|
|
|
|
Montana
|
$
|
128,563
|
|
|
$
|
133,655
|
|
|
$
|
132,603
|
|
|
Alaska
|
|
340,861
|
|
|
371,768
|
|
|
|
335,352
|
|
|
|
Nebraska
|
|
13,844
|
|
|
|
18,756
|
|
|
|
16,447
|
|
|
American
Samoa
|
|
489
|
|
|
769
|
|
|
|
769
|
|
|
|
Nevada
|
|
171,754
|
|
|
|
155,625
|
|
|
|
147,401
|
|
|
Arizona
|
|
246,171
|
|
|
206,558
|
|
|
|
178,659
|
|
|
|
New
Hampshire
|
|
132,741
|
|
|
|
143,417
|
|
|
|
149,496
|
|
|
Arkansas
|
|
615,429
|
|
|
522,018
|
|
|
|
518,273
|
|
|
|
New
Jersey
|
|
18,806
|
|
|
|
17,747
|
|
|
|
18,217
|
|
|
California
|
|
37,270
|
|
|
25,968
|
|
|
|
27,283
|
|
|
|
New
Mexico
|
|
32,254
|
|
|
|
36,636
|
|
|
|
32,344
|
|
|
Colorado
|
|
944,938
|
|
|
942,179
|
|
|
|
922,558
|
|
|
|
New
York
|
|
14,523
|
|
|
|
19,735
|
|
|
|
19,844
|
|
|
Connecticut
|
|
200,000
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
North
Carolina
|
|
468,240
|
|
|
|
487,249
|
|
|
|
519,214
|
|
|
Delaware
|
|
36,253
|
|
|
37,950
|
|
|
|
39,582
|
|
|
|
North
Dakota
|
|
68,758
|
|
|
|
69,120
|
|
|
|
77,072
|
|
|
District
of Columbia
|
|
9,298
|
|
|
9,514
|
|
|
|
9,717
|
|
|
|
Ohio
|
|
444,565
|
|
|
|
455,491
|
|
|
|
390,350
|
|
|
Florida
|
|
651,564
|
|
|
677,365
|
|
|
|
617,010
|
|
|
|
Oklahoma
|
|
500,189
|
|
|
|
483,623
|
|
|
|
480,536
|
|
|
Georgia
|
|
1,584,178
|
|
|
1,567,108
|
|
|
|
1,566,308
|
|
|
|
Oregon
|
|
303,926
|
|
|
|
303,166
|
|
|
|
305,506
|
|
|
Hawaii
|
|
6,443
|
|
|
6,804
|
|
|
|
7,157
|
|
|
|
Pennsylvania
|
|
375,549
|
|
|
|
357,337
|
|
|
|
376,193
|
|
|
Idaho
|
|
158,013
|
|
|
157,703
|
|
|
|
168,253
|
|
|
|
South
Carolina
|
|
464,125
|
|
|
|
484,733
|
|
|
|
476,139
|
|
|
Illinois
|
|
661,632
|
|
|
600,571
|
|
|
|
543,389
|
|
|
|
South
Dakota
|
|
142,582
|
|
|
|
147,916
|
|
|
|
161,247
|
|
|
Indiana
|
|
839,473
|
|
|
530,008
|
|
|
|
481,243
|
|
|
|
Tennessee
|
|
76,553
|
|
|
|
107,575
|
|
|
|
96,073
|
|
|
Iowa
|
|
493,722
|
|
|
465,056
|
|
|
|
482,513
|
|
|
|
Texas
|
|
3,332,283
|
|
|
|
3,044,117
|
|
|
|
2,618,010
|
|
|
Kansas
|
|
801,389
|
|
|
878,630
|
|
|
|
849,864
|
|
|
|
Utah
|
|
561,050
|
|
|
|
570,971
|
|
|
|
565,768
|
|
|
Kentucky
|
|
472,693
|
|
|
363,720
|
|
|
|
355,503
|
|
|
|
Vermont
|
|
79,131
|
|
|
|
74,957
|
|
|
|
75,905
|
|
|
Louisiana
|
|
388,490
|
|
|
333,984
|
|
|
|
320,765
|
|
|
|
Virgin
Islands
|
|
523,758
|
|
|
|
491,706
|
|
|
|
492,795
|
|
|
Maine
|
|
4,093
|
|
|
4,566
|
|
|
|
9,884
|
|
|
|
Virginia
|
|
201,798
|
|
|
|
235,916
|
|
|
|
184,986
|
|
|
Maryland
|
|
216,468
|
|
|
224,754
|
|
|
|
206,491
|
|
|
|
Washington
|
|
161,099
|
|
|
|
122,674
|
|
|
|
110,907
|
|
|
Michigan
|
|
279,490
|
|
|
265,116
|
|
|
|
271,541
|
|
|
|
West
Virginia
|
|
2,341
|
|
|
|
6,109
|
|
|
|
5,355
|
|
|
Minnesota
|
|
792,863
|
|
|
655,576
|
|
|
|
731,883
|
|
|
|
Wisconsin
|
|
418,898
|
|
|
|
384,748
|
|
|
|
369,427
|
|
|
Mississippi
|
|
422,625
|
|
|
395,423
|
|
|
|
366,989
|
|
|
|
Wyoming
|
|
121,011
|
|
|
|
133,087
|
|
|
|
117,374
|
|
|
Missouri
|
|
795,956
|
|
|
682,860
|
|
|
|
630,289
|
|
|
|
Total
|
$
|
20,188,207
|
|
|
$
|
19,026,995
|
|
|
$
|
18,128,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our loan
portfolio is widely dispersed throughout the United States and its territories,
including 49 states, the District of Columbia, American Samoa and the U.S.
Virgin Islands. At May 31, 2009, 2008 and 2007, loans outstanding to
borrowers located in any one state or territory did not exceed 17 percent, 16
percent and 15 percent, respectively, of total loans outstanding.
Interest
Rates on Loans
As a
cooperatively-owned finance company, we set rates that provide our members with
low cost financing while maintaining investment grade credit ratings on our debt
instruments. Our interest rates are set primarily based on our cost
of funding, as well as applicable discounts, general and administrative
expenses, the loan loss provision and a reasonable level of
earnings. Various discounts reduce the stated interest rates for
borrowers meeting certain criteria related to business type, performance, volume
and whether they only borrow from us.
National
Rural Loan Programs
Long-Term
Loans
National
Rural’s long-term loans generally have the following
characteristics:
·
|
terms
of up to 35 years on a senior secured
basis;
|
·
|
either
amortizing or bullet loans with serial payment
structures;
|
·
|
used
to finance electric plant and equipment which typically have a useful life
equal to or in excess of the loan
maturity;
|
·
|
borrower
can select a fixed interest rate for periods of one to 35 years or a
variable rate; and
|
·
|
may
be divided into various tranches with either a fixed or variable interest
rate for each tranche.
|
When a
selected fixed interest rate term expires, the borrower may select another
fixed-rate term or the variable rate. We set electric long-term fixed
rates daily and the long-term variable rate is set on the first business day of
each month. The fixed rate on a loan is determined on the day the
loan is advanced or repriced based on the term selected.
In
addition to our customary loan standards, to be eligible for long-term loan
advances, distribution systems generally must maintain an average modified debt
service coverage ratio ("MDSC"), as defined in the loan agreement, of 1.35 or
greater. Similarly, power supply systems generally must maintain an
average times interest earned ratio ("TIER") and MDSC, as defined in the loan
agreement, of 1.0 or greater. We may make long-term loans to
distribution and power supply systems that do not meet these criteria as these
are only general guidelines.
Short-Term
Loans
Our line
of credit loans are generally advanced at variable interest
rates. These variable interest rates may be set on the first business
day of each month or mid-month. The principal amount of line of
credit loans with maturities of greater than one year generally must be paid
down to a zero outstanding principal balance for five consecutive days during
each 12-month period.
Interim
financing line of credit loans are also made available to our members that have
a loan application pending with RUS and have received approval from RUS to
obtain interim financing. Advances under these interim facilities
must be repaid with advances from RUS long-term loans.
RTFC
Loan Programs
The RTFC
loan portfolio is concentrated in the core rural local exchange carrier ("RLEC")
segment of the telecommunications market. Most of these RLECs have
evolved from solely being voice service providers to being providers of voice,
data and, often times, video and wireless services. RLECs are
generally characterized by the low population density of their service
territories. Services are generally delivered over networks that
include fiber optic cable and digital switching. There is generally a
significant barrier to competitive entry.
The
businesses to which the remaining RTFC loans have been made support the
operations of the RLECs and are owned, operated or controlled by
RLECs. Many such loans are supported by payment guarantees from the
sponsoring RLECs.
Long-Term
Loans
RTFC
makes long-term loans to rural telecommunications companies and their affiliates
for the acquisition, construction or upgrade of wireline telecommunications
systems, wireless telecommunications systems, fiber optic networks, cable
television systems and other corporate purposes. RTFC’s long-term
loans generally have the following characteristics:
·
|
terms
not exceeding 10 years on a senior secured
basis;
|
·
|
borrower
can select a fixed interest rate for periods from one year to the final
loan maturity or a variable interest
rate;
|
·
|
may
be divided into various tranches with either a fixed or variable interest
rate for each tranche.
|
When a
selected fixed interest rate term expires, the borrower may select another
fixed-rate term or a variable rate. We set
long-term
fixed rates for telecommunications loans daily and the long-term variable rate
is set on the first business day of each month. The fixed rate on a
loan is determined on the day the loan is advanced or converted to a fixed rate
based on the term selected.
To borrow
from RTFC, a wireline telecommunications system generally must be able to
demonstrate the ability to achieve and maintain an annual debt service coverage
ratio ("DSC") and an annual TIER of 1.25 and 1.50, respectively. To
borrow from RTFC, a cable television system, fiber optic network or wireless
telecommunications system generally must be able to demonstrate the ability to
achieve and maintain an annual DSC of 1.25.
Short-Term
Loans
RTFC
provides line of credit loans to telecommunications systems for periods
generally not to exceed five years. These line of credit loans are
typically revolving facilities and generally require the borrower to pay off the
principal balance for five consecutive business days at least once during each
12-month period. These line of credit loans may be provided on a
secured or unsecured basis and are designed primarily to assist borrowers with
liquidity and cash management.
Interim
financing line of credit loans are also made available to telecommunications
systems that have a loan application pending with RUS and have received approval
from RUS to obtain interim financing. These loans are for terms up to
24 months and the borrower must repay the RTFC loan with advances from the RUS
long-term loans.
NCSC
Loan Programs
NCSC
makes long-term and short-term loans to rural utility members and organizations
affiliated with its members. Loans may be secured or
unsecured. The loans to the affiliated organizations may have a
guarantee of repayment to NCSC from the National Rural member cooperative with
which it is affiliated.
Lease
and General Loan Program
NCSC has,
in the past, provided financing for the purchase of utility plant and/or related
equipment, in some cases by a third party in a sale/leaseback
transaction. Collateral for these loans consists of a senior secured
mortgage on the leased utility asset, utility plant and/or related utility
equipment. NCSC is not a party to these lease
agreements. NCSC no longer provides new financing of this
type.
Associate
Member Loan Program
NCSC
provides financing to for-profit or not-for-profit affiliated entities of member
cooperatives for economic and community development
purposes. Collateral for these loans generally consists of a first
mortgage lien on the assets of the associate member and/or project. These loans
are also generally guaranteed by the sponsoring cooperative.
RUS
Guaranteed Loans for Rural Electric Systems
At May
31, 2009 and 2008, we had $244 million and $250 million, respectively, of loans
outstanding on which RUS had guaranteed the repayment of all principal and
interest. There are two programs under which these loans were
advanced. We have been an eligible lender in the RUS loan guarantee
program under the terms and conditions of a master loan guarantee and servicing
agreement between RUS and National Rural since February 1999. Under
this agreement, we may make long-term secured loans to eligible members for
periods of up to 35 years, at fixed or variable rates
established. RUS guarantees the full amount of principal and interest
payments on the notes evidencing such loans. At May 31, 2009 and
2008, we had a total of $211 million and $215 million, respectively, under this
program. In addition, at May 31, 2009 and 2008, we held certificates totaling
$33 million and $35 million which represent interests in trusts that hold RUS
guaranteed loans. These certificates were the result of a program in
which RUS previously allowed certain qualifying cooperatives to repay loans held
by the Federal Financing Bank (“FFB”) early, and allowed the transfer of the
guarantee to a new lender.
Conversion
of Loans
A
borrower may convert a long-term loan from a variable interest rate to a fixed
interest rate at any time without a fee. Such conversion will be
effective on the first day of the following month. Generally, in exchange for a
fee, a borrower may convert its long-term loan from a fixed rate to another
fixed rate or to a variable rate at any time. The fee on the
conversion of a fixed interest rate to a variable interest rate is 25 basis
points plus a make-whole premium, if applicable, per current loan
policies.
Prepayment
of Loans
Generally,
borrowers may prepay long-term loans at any time, subject to a prepayment fee of
33 to 50 basis points and a make-whole premium, if
applicable. Variable-rate line of credit loans may be repaid at any
time without a premium.
Loan
Security
Except
when providing short-term loans, we typically lend to our members on a senior
secured basis. Long-term loans are typically secured on parity with
other secured lenders (primarily RUS), if any, by all assets and revenues of the
borrower with exceptions typical in utility mortgages. Short-term
loans are generally unsecured lines of credit.
The
following tables summarize our secured and unsecured loans outstanding by loan
type and by segment at May 31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
|
Total
by loan type:
|
|
Secured
|
|
%
|
|
|
Unsecured
|
|
%
|
|
|
Secured
|
|
%
|
|
|
Unsecured
|
|
%
|
|
|
Long-term
fixed-rate loans
|
$
|
14,044,469
|
|
96
|
%
|
$
|
557,896
|
|
4
|
%
|
$
|
14,732,058
|
|
97
|
%
|
$
|
472,556
|
|
3
|
%
|
|
Long-term
variable-rate loans
|
|
2,835,451
|
|
87
|
|
|
408,265
|
|
13
|
|
|
1,728,803
|
|
92
|
|
|
153,292
|
|
8
|
|
|
Loans
guaranteed by RUS
|
|
243,997
|
|
100
|
|
|
-
|
|
-
|
|
|
250,169
|
|
100
|
|
|
-
|
|
-
|
|
|
Short-term
loans
|
|
233,179
|
|
11
|
|
|
1,864,950
|
|
89
|
|
|
165,226
|
|
10
|
|
|
1,524,891
|
|
90
|
|
|
Total
loans
|
$
|
17,357,096
|
|
86
|
|
$
|
2,831,111
|
|
14
|
|
$
|
16,876,256
|
|
89
|
|
$
|
2,150,739
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,562,761
|
|
86
|
%
|
$
|
2,528,572
|
|
14
|
%
|
$
|
15,021,067
|
|
89
|
%
|
$
|
1,865,340
|
|
11
|
%
|
|
RTFC
|
|
1,443,395
|
|
86
|
|
|
236,759
|
|
14
|
|
|
1,497,487
|
|
87
|
|
|
229,027
|
|
13
|
|
|
NCSC
|
|
350,940
|
|
84
|
|
|
65,780
|
|
16
|
|
|
357,702
|
|
86
|
|
|
56,372
|
|
14
|
|
|
Total
loans
|
$
|
17,357,096
|
|
86
|
|
$
|
2,831,111
|
|
14
|
|
$
|
16,876,256
|
|
89
|
|
$
|
2,150,739
|
|
11
|
|
Guarantee
Programs
We use
the same credit policies and monitoring procedures for guarantees as for loans
and commitments. The following table provides a breakout of
guarantees outstanding by type and segment at May 31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
Long-term
tax-exempt bonds
|
$
|
644,540
|
|
|
$
|
498,495
|
|
|
|
|
|
Indemnifications
of tax benefit transfers
|
|
81,574
|
|
|
|
94,821
|
|
|
|
|
|
Letters
of credit
|
|
450,659
|
|
|
|
343,424
|
|
|
|
|
|
Other
guarantees
|
|
98,682
|
|
|
|
100,400
|
|
|
|
|
|
Total
|
$
|
1,275,455
|
|
|
$
|
1,037,140
|
|
|
|
|
|
(dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
2009
|
|
|
|
2008
|
|
|
Distribution
|
$
|
264,084
|
|
|
21
|
%
|
|
$
|
184,459
|
|
|
|
18
|
%
|
|
Power
supply
|
|
945,624
|
|
|
74
|
|
|
|
786,455
|
|
|
|
76
|
|
|
Statewide
and associate
|
|
23,625
|
|
|
2
|
|
|
|
22,785
|
|
|
|
2
|
|
|
National
Rural Total
|
|
1,233,333
|
|
|
97
|
|
|
|
993,699
|
|
|
|
96
|
|
|
RTFC
|
|
500
|
|
|
-
|
|
|
|
260
|
|
|
|
-
|
|
|
NCSC
|
|
41,622
|
|
|
3
|
|
|
|
43,181
|
|
|
|
4
|
|
|
Total
|
$
|
1,275,455
|
|
|
100
|
%
|
|
$
|
1,037,140
|
|
|
|
100
|
%
|
|
Guarantees
of Long-Term Tax-Exempt Bonds
We
guarantee debt issued for our members’ construction or acquisition of pollution
control, solid waste disposal, industrial development and electric distribution
facilities. Governmental authorities issue such debt and the interest
thereon is exempt from federal taxation. The proceeds of the offering
are made available to the member system, which in turn is obligated to pay the
governmental authority amounts sufficient to service the debt. The
debt, which we guarantee, may include short- and long-term
obligations.
If a
system defaults because it doesn’t make the debt payments, we are obligated to
pay, after available debt service reserve funds have been exhausted, scheduled
debt service under our guarantee. The bond issue may not be
accelerated because of non-payment by the system as long as we perform under our
guarantee. The system is required to repay, on demand, any amount
that we advance pursuant to our guarantee. This repayment obligation
is secured on parity with other lenders (including, in most cases, RUS), by a
lien on substantially all of the system’s assets. If the security
instrument is a common mortgage with RUS, then in general, we may not exercise
remedies for up to two years following default. However, if the debt
is accelerated under the common mortgage because of a determination that the
related interest is not tax-exempt, the system's obligation to reimburse us for
any guarantee payments will be treated as a long-term loan. The
system is required to pay us initial and/or on-going guarantee fees in
connection with these transactions.
Certain
guaranteed long-term debt bears interest at variable rates which are adjusted at
intervals of one to 270 days, weekly, each five weeks or semi-annually to a
level favorable to their resale or auction at par. If funding sources
are available, the member who issued the debt may choose a fixed interest rate
on the debt. When the variable rate is reset, holders of
variable-rate debt have the right to tender the debt for purchase at
par. We have committed to purchase this debt as liquidity provider if
it cannot otherwise be remarketed. If we hold the securities, the
cooperative pays interest to us at our short-term variable rate. At
May 31, 2009, we were the guarantor and liquidity provider for $643 million of
tax-exempt bonds issued for our member cooperatives. During the year
ended May 31, 2009, we purchased $72 million of these securities pursuant to our
obligation as the liquidity provider. At May 31, 2009, all tax-exempt
bonds we held had been redeemed or repurchased by third-party investors with no
gain or loss on the transactions.
Guarantees
of Tax Benefit Transfers
We have
also guaranteed members' obligations to indemnify against loss of tax benefits
in certain tax benefit transfers that occurred in 1981 and 1982. A
member's obligation to reimburse us for any guarantee payments would be treated
as a long-term loan, secured proportionally with RUS by a first lien on
substantially all the member's property to the extent of any cash received by
the member at the outset of the transaction. The remainder would be
treated as a short-term loan secured by a subordinated mortgage on substantially
all of the member's property. Due to changes in federal tax law, no
guarantees of this nature have been put in place since 1982. The
maturities for this type of guarantee run through 2015.
Letters
of Credit
In
exchange for a fee, we issue irrevocable letters of credit to support members'
obligations to energy marketers, other third parties and to the Rural Business
and Cooperative Development Service. Letters of credit may be on a
secured or unsecured basis. Each letter of credit is supported by a
reimbursement agreement with the member on whose behalf the letter of credit was
issued. In the event a beneficiary draws on a letter of credit, the
agreement generally requires the member to reimburse us within one year from the
date of the draw, with interest accruing from that date at our short-term
variable interest rate.
Other
Guarantees
We may
provide other guarantees as requested by our members. These
guarantees may be made on a secured or unsecured basis with guarantee fees set
to cover our general and administrative expenses, a provision for losses and a
reasonable margin.
Total
guarantees outstanding by state and territory based on the location of the
system's headquarters, is summarized as follows at May 31:
(dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State/Territory
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
State/Territory
|
|
|
2009
|
|
|
|
2008
|
|
|
2007
|
|
|
Alabama
|
|
$
|
198,506
|
|
|
$
|
72,070
|
|
|
$
|
72,348
|
|
|
|
Missouri
|
|
$
|
68,363
|
|
|
$
|
75,102
|
|
$
|
85,268
|
|
|
Alaska
|
|
|
3,860
|
|
|
|
1,900
|
|
|
|
1,900
|
|
|
|
Montana
|
|
|
12,772
|
|
|
|
9,056
|
|
|
9,029
|
|
|
Arizona
|
|
|
29,869
|
|
|
|
33,745
|
|
|
|
38,301
|
|
|
|
Nebraska
|
|
|
7
|
|
|
|
4
|
|
|
6
|
|
|
Arkansas
|
|
|
6,166
|
|
|
|
8,008
|
|
|
|
12,027
|
|
|
|
Nevada
|
|
|
37,452
|
|
|
|
5,400
|
|
|
5,400
|
|
|
California
|
|
|
6,247
|
|
|
|
6,110
|
|
|
|
1,010
|
|
|
|
New
Hampshire
|
|
|
24,763
|
|
|
|
32,767
|
|
|
34,550
|
|
|
Colorado
|
|
|
52,690
|
|
|
|
53,467
|
|
|
|
54,236
|
|
|
|
New
Mexico
|
|
|
1,036
|
|
|
|
1,048
|
|
|
1,020
|
|
|
Delaware
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
New
York
|
|
|
113
|
|
|
|
-
|
|
|
-
|
|
|
District
of Columbia
|
|
|
16,000
|
|
|
|
17,448
|
|
|
|
20,998
|
|
|
|
North
Carolina
|
|
|
105,905
|
|
|
|
99,729
|
|
|
100,630
|
|
|
Florida
|
|
|
2,851
|
|
|
|
3,725
|
|
|
|
4,623
|
|
|
|
North
Dakota
|
|
|
5,825
|
|
|
|
6,474
|
|
|
7,115
|
|
|
Georgia
|
|
|
23,718
|
|
|
|
26,775
|
|
|
|
26,027
|
|
|
|
Ohio
|
|
|
7,000
|
|
|
|
8,000
|
|
|
5,500
|
|
|
Hawaii
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
|
Oklahoma
|
|
|
764
|
|
|
|
754
|
|
|
3,056
|
|
|
Idaho
|
|
|
3,173
|
|
|
|
3,173
|
|
|
|
3,173
|
|
|
|
Oregon
|
|
|
28,511
|
|
|
|
29,034
|
|
|
29,439
|
|
|
Illinois
|
|
|
82,927
|
|
|
|
229
|
|
|
|
219
|
|
|
|
Pennsylvania
|
|
|
18,747
|
|
|
|
17,416
|
|
|
17,519
|
|
|
Indiana
|
|
|
23
|
|
|
|
13
|
|
|
|
7
|
|
|
|
South
Carolina
|
|
|
506
|
|
|
|
6,300
|
|
|
7,819
|
|
|
Iowa
|
|
|
6,961
|
|
|
|
8,271
|
|
|
|
8,240
|
|
|
|
South
Dakota
|
|
|
19
|
|
|
|
20
|
|
|
6
|
|
|
Kansas
|
|
|
41,318
|
|
|
|
60,797
|
|
|
|
55,472
|
|
|
|
Tennessee
|
|
|
3,939
|
|
|
|
1,460
|
|
|
296
|
|
|
Kentucky
|
|
|
91,741
|
|
|
|
102,423
|
|
|
|
124,013
|
|
|
|
Texas
|
|
|
216,443
|
|
|
|
194,214
|
|
|
152,307
|
|
|
Louisiana
|
|
|
501
|
|
|
|
389
|
|
|
|
4,733
|
|
|
|
Utah
|
|
|
6,961
|
|
|
|
13,495
|
|
|
17,193
|
|
|
Maine
|
|
|
4
|
|
|
|
2
|
|
|
|
1
|
|
|
|
Vermont
|
|
|
1,350
|
|
|
|
1,250
|
|
|
3,500
|
|
|
Maryland
|
|
|
52,078
|
|
|
|
11,725
|
|
|
|
25,266
|
|
|
|
Virginia
|
|
|
2,874
|
|
|
|
3,447
|
|
|
3,935
|
|
|
Michigan
|
|
|
5,236
|
|
|
|
2,232
|
|
|
|
2,123
|
|
|
|
Washington
|
|
|
19,050
|
|
|
|
19,050
|
|
|
23,171
|
|
|
Minnesota
|
|
|
1,601
|
|
|
|
3,025
|
|
|
|
10,585
|
|
|
|
Wisconsin
|
|
|
305
|
|
|
|
320
|
|
|
32
|
|
|
Mississippi
|
|
|
81,143
|
|
|
|
83,549
|
|
|
|
88,312
|
|
|
|
Wyoming
|
|
|
4,829
|
|
|
|
13,724
|
|
|
13,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,275,455
|
|
|
$
|
1,037,140
|
|
$
|
1,074,374
|
|
|
Member
Regulation and Competition
Electric
Systems
The
movement toward electric competition at the retail level has faltered, while the
wholesale level has become largely competitive. The electric utility
industry has settled into a "hybrid" model in which there are significant
differences in the retail regulatory approaches followed in different states and
regions.
Customer
choice regulation, where customers have a choice of alternative energy
suppliers, has had little to no impact on distribution and power supply
cooperatives and we do not expect a material impact going forward. As of May 31,
2009, retail customer choice has been implemented in 15 states. Those
states are Arizona, Connecticut, Delaware, Illinois, Maine, Maryland,
Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio,
Pennsylvania, Rhode Island, and Texas. In general, even in those
states, very few customers have switched from the traditional
supplier.
There are
many factors that may influence the choices that customers have available to
them and therefore have mitigated the effect of customer choice and competition
in areas served by cooperatives. These factors include, but are not
limited to, the following:
|
·
|
Utilities
in many states may still be regulated regarding rates on non-competitive
services, such as distribution;
|
|
·
|
20
states regulate the securities issued by utilities, including
cooperatives;
|
|
·
|
FERC
regulation of rates as well as terms and conditions of transmission
service;
|
|
·
|
The
fact that few competitors have demonstrated much interest in providing
electric energy to residential or rural
customers;
|
·
|
Distribution
systems own the lines to the customer and it would not be feasible for a
competitor to build a second line to serve the same customers in almost
all situations. Therefore, the distribution systems will still
be charging a fee or access tariff for the service of delivering power,
regardless of who supplies the
power.
|
In
addition to retail customer choice laws, some state agencies regulate the rates
and borrowing of electric cooperatives. There are 15 states that
regulate the rates electric cooperative systems charge. Those states
are Arizona, Arkansas, Georgia, Hawaii, Kentucky, Louisiana, Maine, Maryland,
Michigan, New Mexico, New York, Utah, Vermont, Virginia, and West
Virginia. In these 15 states, we had 161 distribution members and 14
power supply members with a total of $4,424 million of loans outstanding at May
31, 2009. Two of these states (Georgia and Utah) have partial
oversight authority over the cooperatives' rates, but not the specific authority
to set rates. As of May 31, 2009, we had loans outstanding in the
amount of $2,035 million in those states. Ten states allow
cooperatives the right to opt in or out of state regulation. There
are 20 states
that
regulate electric systems’ issuance of debt. FERC also has
jurisdiction to regulate transmission rates, wholesale rates, terms and
conditions of service, and the issuance of securities by public utilities within
its jurisdiction, which includes only a few cooperatives.
Global
climate legislation remains a hotly debated issue on Capitol Hill. On
June 26, 2009, the House of Representatives passed H.R. 2454, the “American
Clean Energy and Security Act of 2009”, also known as the Waxman-Markey climate
change bill. This bill would cap U.S. carbon dioxide emissions,
including those of electric utilities. Specifically, the bill would
require that carbon dioxide emissions be reduced below 2005 levels by 17 percent
by 2020, 42 percent by 2030 and 83 percent by 2050. The bill would
provide allowances free of charge to certain entities, including to electric
utilities. These allowances would permit entities to emit above the
capped level and would be allocated to certain entities to cover a portion of
the required reductions.
Currently,
the Senate is considering similar legislation. As of this time, it is
unclear whether global climate change legislation will become law, and, if
enacted, what specific requirements will be imposed on electric
utilities. We closely monitor the legislative activity on climate
change and we will continue to monitor this activity as well as the debate on
the various proposals under consideration. Because of the continuing
uncertainty regarding the context and timing of potential climate change
legislation, we are unable, at this time, to determine the impact of such
potential requirements on us or our members.
We
compete with other electric lenders on price, the variety of financing options
offered and additional services provided to our member/owners. We are
primarily in competition with other banks for the business of electric
members. Our main bank competitor is CoBank, ACB ("CoBank"), a
government sponsored enterprise and member of the Farm Credit System whose
status gives it the ability to access funding at a lower cost, therefore
potentially enabling CoBank to offer lower interest rates in many
situations. In addition, some members are large enough to directly
access the capital markets for funding. In these instances, we are
competing with the pricing and funding options the member is able to obtain in
the capital markets. We attempt to minimize the impact of competition
by offering a variety of loan options, complimentary services and by leveraging
the working relationship we have developed with the majority of our
members.
RUS is
generally the members' first financing option because it can offer members
interest rates that are generally lower than the rates National Rural and the
other banks are able to offer. However, National Rural and other
banks compete for bridge loans in anticipation of long-term funding from RUS,
the portion of a loan that RUS is unable to provide, loans to members that
cannot borrow from RUS and loans to members that have elected not to borrow from
RUS.
According
to financial data as of December 31, 2008 provided to us by our 809 reporting
electric cooperative distribution and 59 reporting power supply systems and as
of December 31, 2007 provided to us by our 810 reporting electric cooperative
distribution and 58 reporting power supply systems, those entities had long-term
debt outstanding to National Rural, RUS and other lenders in the electric
cooperative industry as summarized below:
(dollar amounts in
millions)
|
|
2008
|
|
|
2007
|
|
National
Rural
|
$
|
16,787
|
|
27
|
%
|
$
|
15,888
|
|
27
|
%
|
RUS
|
|
32,238
|
|
51
|
|
|
30,884
|
|
53
|
|
Other
lenders
|
|
13,841
|
|
22
|
|
|
11,924
|
|
20
|
|
Total
|
$
|
62,866
|
|
100
|
%
|
$
|
58,696
|
|
100
|
%
|
National
Rural’s total long-term loan exposure is further summarized by type below at
December 31:
(dollar amounts in
millions)
|
|
2008
|
|
|
2007
|
Total
by type:
|
|
|
|
|
|
Distribution
|
$
|
12,710
|
|
$
|
12,226
|
Power
supply
|
|
2,895
|
|
|
2,678
|
Total
loans outstanding
|
|
15,605
|
|
|
14,904
|
Guarantees
|
|
1,182
|
|
|
984
|
Total
long-term exposure
|
$
|
16,787
|
|
$
|
15,888
|
Since the
enactment of the Rural Electrification Act in 1936 (the "RE Act"), RUS has
financed the construction of electric generating plants, transmission facilities
and distribution systems to provide electricity to rural
areas. Principally through the creation of local electric
cooperatives that were originally financed under the RE Act loan program in 48
states and three U.S. territories, the percentage of farms
and residences in rural areas of the United States receiving central
station electric service increased from 11 percent in 1934 to almost 100 percent
currently. Rural electric systems currently serve approximately 12
percent of all consumers of electricity in the United States and its territories
and account for approximately 8 percent of total sales of electricity and own
about 5 percent of electricity generating capacity.
The RE
Act provides for RUS to make insured loans and to provide other forms of
financial assistance to electric borrowers. However, RUS is currently
not offering loans to finance the construction of new coal or nuclear baseload
electric generation facilities. RUS is authorized to make direct
loans to systems that qualify for the hardship program (5 percent interest rate)
or the municipal rate program (based on a municipal government obligation
index). RUS is also authorized to guarantee loans that bear interest
at a rate agreed upon by the borrower and the lender (which generally has been
the FFB). RUS also provides financing at the U.S. Treasury
rate. The RUS exercises financial and technical supervision over
borrowers' operations. Its loans and guarantees are generally secured
by a mortgage on substantially all of the system's property and
revenues.
For the
fiscal year ending September 30, 2010, the President’s budget requests $100
million for hardship loans and $6.5 billion for loan guarantees. It
is unclear whether Congress will ultimately appropriate funds at the President’s
requested budget levels. Electric funding levels for fiscal year 2009
were: $100 million for hardship loans and $6.5 billion in loan
guarantees.
Telecommunications
Systems
Rural
telecommunications systems generally are regulated at the state and federal
levels. Most state commissions regulate local service rates,
intrastate access rates and telecommunications company borrowing. The
Federal Communications Commission ("FCC") regulates interstate access rates and
the issuance of licenses required to operate certain types of telecom
operations. Some rural telecommunications systems have affiliated
companies that are not regulated.
The
Telecommunications Act of 1996 (the "Telecom Act") created a framework for
competition and deregulation in the local telecommunications
market. The Telecom Act has four basic goals:
1.
|
Competition
- to be achieved by requiring all carriers to interconnect with all others
and requiring LECs to provide competitors with access to elements of their
networks.
|
2.
|
Universal
service - that is, a mandate that telecommunications service in rural
areas of the U.S. be comparable in quality and price to service in urban
areas.
|
3.
|
Deregulation
– reducing the regulatory burden on incumbent LECs to allow them to
compete with new, largely unregulated
entities.
|
4.
|
Fostering
advanced telecommunications and information technologies – the dynamic
environment created by a competitive telecommunications marketplace should
result in new products and
services.
|
Competition
continues to be a significant factor in the telecommunications
industry. An August 2008 FCC report on telecom trends states that as
of June 2007, competitive local exchange carriers ("CLECs") provided service to
29 million access lines - 18 percent of the nation's 163 million end-user
switched access lines. Wireless carriers are providing service to 238
million mobile telephone service subscriptions - more than LECs and CLECs
combined. For the most part, local exchange competition has benefited
RLECs by enabling them to enter nearby towns and cities as CLECs, leveraging
their existing infrastructure and reputation for providing quality, modern
telecommunications service. The Telecom Act grants RLECs an exemption
from the requirement to provide competitors with access to their networks,
absent a determination that it would be in the public
interest. Relatively few RLECs have had CLECs request access to their
networks.
The
Telecom Act mandate for universal service is accomplished through a support
mechanism (the “Universal Service Fund,” or “USF”) that is required to be: (1)
sufficient to ensure that rural customers receive reasonably comparable rates
and services when compared to urban customers; and (2) portable, that is,
available to all eligible providers. The USF provides support for
RLECs with costs significantly above the national average. In
addition, implicit subsidies long contained in the access charges local
telecommunications companies’ levy on long distance carriers have largely been
eliminated. As these access charges have been reduced, RLECs have
been made whole by cost recovery being moved to the Universal Service
Fund. USF is an important revenue source for most RLECs.
The nexus
between competition and universal service is the issue of competitor eligibility
for universal service funding – the “portability” feature of USF. As
noted above, few wireline competitors have attempted to enter rural
markets. Numerous wireless carriers however have extended their
coverage areas into rural markets. By obtaining competitive eligible
telecommunications carrier (“CETC”) status from state regulators (as provided
for in the Telecom Act), these wireless carriers are able to receive universal
service funds based on the incumbent LEC's costs (the “identical support”
rule). This has led to growth in claims on the fund and great concern
for its sustainability. USF's current funding base of interstate
telecommunications revenues is shrinking as long distance minutes-of-use go down
due to wireless, email and voice over internet protocol
substitution. Increased demand for USF funding has resulted in the
rate assessed on all participants in the nationwide network (the “contribution
factor”) becoming unsustainably high. The third quarter 2009
contribution factor is 12.9 percent of interstate and international long
distance revenue.
While
nearly all industry participants agree that changes need to be made regarding
eligibility and the funding mechanism for USF, there is no agreement on what
those changes should be. In May 2008, the FCC ordered that payments
to CETCs be capped. Total support for a CETC is capped at what they
were eligible to receive in March 2009. In January 2008 the FCC
opened proceedings on universal service funding. These related
proceedings addressed creation of separate funds for incumbents and CETCs,
elimination of the “identical support” rule, and a transition to a reverse
auction regime for determining amounts of USF support an eligible carrier would
receive. No consensus solution was reached by the FCC and the same
issues await the newly constituted FCC. It is unclear what action, if
any, the FCC ultimately will take with respect to this matter.
The FCC
also has a proceeding open on intercarrier compensation – the most important
components of which are access fees LECs charge to interexchange carriers that
originate or terminate long distance traffic on LEC networks. While
the large LECs (most of which now own long distance companies) would like to see
these fees transition to zero, RLECs depend heavily on access charges and have
been active participants in the FCC proceeding. No action has yet
been taken in this proceeding and, like USF, it awaits the newly constituted
FCC. At this point, it is unclear what action, if any, will be
taken.
While
uncertainty exists regarding USF and access, we do not anticipate that any
changes to the USF regime will result in our member RLECs suffering revenue
losses significant enough to cause material losses on our outstanding
loans.
Deregulation
has not had a significant effect on the wireline LEC business segment thus
far. The FCC has promulgated a series of rules to implement the
Telecom Act, and eliminated very few existing regulatory
requirements. States continue to regulate RLECs
extensively. Internet, video, wireless and competitive local exchange
services are much less regulated. Most RLECs are expanding their
service offerings to customers in these business segments. With few
competitors in the most rural parts of their service areas, RLECs have generally
been successful in these growth and diversification efforts.
Finally
the Telecom Act dealt with fostering advanced telecommunications and information
technologies. RLECs have used the rate-of-return cost recovery
mechanisms discussed above to modernize their infrastructure. Most
have pushed fiber optic cable into their distribution networks, allowing for
higher data speeds to customers. Many RLECs are evolving their
networks from the traditional circuit-switched architecture to what is termed
“soft switch”, i.e., distributing intelligence throughout their networks, not
just at the central office.
In 1949,
the RE Act was amended to allow lending for furnishing and improving rural
telecommunications service. For fiscal year 2009, RUS has $690
million in lending authority for rural telephone systems. To provide
debt capital for RLEC modernization, Congress created the RUS broadband loan
program in 2002. Congress authorized $406 million of broadband
lending authority in fiscal year 2009. In addition, the American
Recovery and Reinvestment Act (ARRA) provides RUS with $2.5 billion of budget
authority to provide loans and grants. These funds are to be obligated by
September 30, 2010. For fiscal year 2009, RUS was allocated $1
billion in ARRA lending authority. The appropriation for fiscal year
2010 broadband lending has been proposed at $532 million. ARRA
broadband loans of $6.1 billion are proposed for fiscal year 2010. In
addition to RUS, ARRA authorizes the Department of Commerce’s National
Telecommunications and Information Administration to administer $4.7 billion in
budget authority to provide broadband grants for service to unserved and
underserved areas.
RTFC does
not compete with the RUS lending programs. Its focus is to be
supplementary and complementary to RUS telecom lending. Given the
increased availability of government financing for rural broadband, it is
unlikely that we will be participating in this financing to any significant
degree outside of incremental lending to existing RLEC borrowers to provide
broadband services to their customers or interim financing in connection with
the federal funding programs.
The
competitive market for providing credit to the rural telecommunications industry
is difficult to quantify. Many rural telecommunications companies are
not RUS borrowers, and CoBank and commercial banks generally do not publish
information solely on their telecom portfolios. At December 31, 2008,
RUS had approximately $4.0 billion in loans outstanding to telecommunications
borrowers. As noted previously, RTFC is not in direct competition
with RUS, but rather competes with other lenders for supplemental lending and
for the full lending requirement of the rural telecommunications companies that
have decided not to borrow from RUS or for projects not eligible for RUS
financing. RTFC's competition includes commercial banks, CoBank and
insurance companies. At December 31, 2008, RTFC had a total of $1.6
billion in long-term loans outstanding to telecommunications
borrowers.
Disaster
Recovery
We have
had a comprehensive disaster recovery and business continuity plan since May of
2001. The plan includes a duplication of our production information
systems at an off-site facility coupled with an extensive business recovery plan
to use those remote systems. Our production data is replicated in real time to
the recovery site 24 hours a day, 7 days a week.
The plan
also includes steps for each of our operating groups to conduct business with a
view to minimizing disruption for customers. We conduct Disaster Recovery
exercises twice a year that include both the information technology group and
business areas. We contract with an external vendor for the facilities to house
the backup systems that we own as well as office space and related office
equipment. In January 2009, we moved our disaster recovery off-site
facility from New Jersey to a location in western Virginia to allow for quicker
access by employees to the site in the event of a disaster. We have
also implemented data duplication technology to provide back-up to disks where
backup data are also replicated to our Disaster Recovery site.
Tax
Status
In 1969,
National Rural obtained a ruling from the Internal Revenue Service recognizing
National Rural’s exemption from the payment of federal income taxes under
Section 501(c)(4) of the Internal Revenue Code. Such exempt status
could be revoked as a result of changes in legislation or in administrative
policy or as a result of changes in National Rural’s
business. National Rural believes that its operations have not
changed materially from those described to the Internal Revenue Service in its
exemption filing. RTFC is a taxable cooperative under Subchapter T of
the Internal Revenue Code. As long as RTFC continues to qualify under
Subchapter T of the Internal Revenue Code, it is allowed to exclude from taxable
income the amount of net income allocated to its members. RTFC pays
income tax based on its net income, excluding net income allocated to its
members. NCSC is a taxable corporation which pays income tax annually
based on its net income for the period.
Investment
Policy
Surplus
funds are invested based on policies adopted by our board of
directors. Under present policy, surplus funds may be invested in
direct obligations of, or guaranteed by, the United States or agencies thereof
or other highly liquid investment grade securities. Current
investments may include highly-rated securities such as commercial paper,
obligations of foreign governments, Eurodollar deposits, bankers' acceptances,
bank letters of credit, certificates of deposit or working capital
acceptances. The policy also permits investments in certain types of
repurchase agreements with highly-rated financial institutions, whereby the
assets consist of eligible securities of a type listed above set aside in a
segregated account. In addition, this policy permits investments in
the Federal Agricultural Mortgage Corporation.
Employees
At May
31, 2009, we had 232 employees, including financial and legal personnel,
management specialists, credit analysts, accountants and support
staff. We believe that our relations with our employees are
good.
Our
financial condition and results of operations are subject to various risks
inherent in our business. The material risks and uncertainties that management
believes affect us are described below. If any of the events or
circumstances described in the following risks actually occur, our business,
financial condition or results of operations could suffer. You should
consider all of the following risks together with all of the other information
in this Annual Report on Form 10-K.
Our
ability to maintain and grow our business depends on access to external
financing.
We depend
on access to the capital markets to refinance our long-term and short-term debt,
to fund new loan advances and, if necessary, to fulfill our obligations under
our guarantee and repurchase agreements. At May 31, 2009, we had
$2,288 million of commercial paper, daily liquidity fund, term loans, and bank
bid notes and $2,580 million of medium-term notes, collateral trust bonds and
long-term notes payable scheduled to mature during the next twelve
months. At May 31, 2009, we were the guarantor and liquidity provider
for $643 million of tax-exempt bonds issued for our member
cooperatives. We cannot assure that we will be able to raise capital
in the future at all or on terms that are acceptable to
us. Downgrades to our long-term debt ratings and/or commercial paper
ratings or other events that may deny or limit our access to the capital markets
could negatively affect our operations, including our ability to refinance our
debt and make loans. We have no control over certain items that the
credit rating agencies and investors consider when they analyze us, such as the
overall outlook for the financial, electric and telecommunications
industries.
The
capital constraints of banks could affect future commitment levels under our
revolving credit agreements. A restriction on access to the revolving lines of
credit would impair our ability to issue short-term debt, as such lines are
required for backup liquidity to maintain preferred rating levels on our
short-term debt.
Fluctuating
interest rates could adversely affect our income, margin and cash
flow.
We are
exposed to interest rate risk in our core lending and borrowing
activities. If we do not set interest rates on our loans at levels to
cover our cost of funding and to compensate for the credit risk on the loans,
there would be an adverse effect on net interest income and net
income.
We
provide our members with many options on our loans related to interest rates,
the term for the selected interest rate and the ability to prepay the
loan. As a result, there is a possibility of significant changes in
the composition of the loan portfolio. If we are unable to adjust the
repricing and/ or maturities of our outstanding debt portfolio to match the
changes in the loan portfolio, there could be an adverse impact on net interest
income and net income.
In
addition, the calculated impairment on non-performing and restructured loans
will increase as our long-term variable and short-term interest rates
increase. Based on the current balance of impaired loans at May 31,
2009, an increase or decrease of 25 basis points to our 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. As of August 1, 2009, we had
decreased our long-term variable interest rates by 45 basis points, resulting in
a decrease to the calculated impairment on loans of $6 million.
Competition
from other lenders could impair our financial results.
The
majority of our members are eligible to borrow from RUS. The rates
that RUS offers are generally lower than our rates or rates that other lenders
can offer. As a result, the members' first financing option generally
is to borrow funds under the RUS program. The RUS funding level is
determined by the U.S. Congress each year. Increases to the amount of
RUS funding could limit the amount of our loan growth.
We
compete with other lenders for the portion of the loan commitment that RUS will
not lend, for the loans to members that cannot borrow from RUS or for loans to
members that have elected not to borrow from RUS. If other lenders
are more successful than us in the competition for this loan volume, it could
have an adverse impact on our financial results.
We
may not recover the value of amounts that we lend which could impair our
financial results.
Our
allowance for loan losses is established through a provision charged to expense
that represents management's best estimate of probable losses that have been
incurred within the existing loan portfolio. The level of the
allowance reflects management's continuing evaluation of: industry
concentrations; economic conditions; specific credit risks; loan loss
experience; current loan portfolio quality; present economic, political and
regulatory conditions and unidentified losses and risks inherent in the current
loan portfolio. The determination of the appropriate level of the
allowance for loan losses involves a high degree of subjectivity and requires us
to make significant estimates of current credit risks and future trends, all of
which may undergo material changes. Changes in economic conditions
affecting borrowers, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of our
control, may require an increase in the allowance for loan losses. In
addition, if actual losses incurred exceed current estimates of probable losses
currently included in the allowance for loan losses, we will need additional
provisions to increase the allowance for loan losses. Any increases
in the allowance for loan losses will result in a decrease in net income, and
may have a material adverse effect on our financial results and credit
ratings.
We have
been and may in the future be in litigation with borrowers related to
enforcement or collection actions pursuant to loan documents. In such cases, the
borrower or others may assert counterclaims against us or initiate actions
against us related to the loan documents. Unfavorable rulings in
these cases which result in loan losses that exceed the related allowance could
have a material adverse effect on our financial results and credit
ratings.
The
performance of assets we obtain through foreclosure could impair our financial
results.
Periodically,
we foreclose on assets that are pledged as collateral on loans as a result of
the failure of the borrower to make the agreed upon payments. When we
foreclose on these assets, we are attempting to maximize our recovery on the
loan through the ongoing operations and future sale of the underlying
assets.
As the
owner of foreclosed assets, we are subject to the same performance and financial
risks as any owner of similar assets. In particular, we are at risk
that the value of the foreclosed assets deteriorates, negatively affecting our
results of operations. Each quarter, the foreclosed assets are
revalued at the lower of cost or market. Decreases in value in any
period are recorded as a loss on the income statement. In the event
that there is not an active market from which to gain a valuation, there is
substantial judgment used in the determination of the fair value of the
foreclosed assets. In addition, when the assets are sold to a third
party, the sales price we receive may be below the amount previously recorded in
our financial statements, which will result in a loss being recorded in the
period of the sale. If these events occur, it could have a material
adverse effect on our financial results, to the extent of the carrying value of
such assets.
The
non-performance of a counterparty to our derivative agreements could impair our
financial results.
We use
interest rate and cross currency swaps to manage our interest rate and currency
risk. There is a risk that the counterparties to these agreements
will not perform as agreed, which could adversely affect our results of
operations. The non-performance of a counterparty on an agreement
would result in the derivative no longer being an effective risk management tool
which could negatively affect our overall interest rate risk
position. In addition, if a counterparty fails to perform on our
derivative obligation, we could incur a financial loss to replace the derivative
with another counterparty and/or a loss through the failure of the counterparty
to pay us amounts owed.
A
decline in our credit rating could trigger payments under our derivative
agreements and impair our financial results.
We have
certain interest rate swaps that contain credit risk-related contingent features
referred to as rating triggers. 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 our senior unsecured credit rating from Standard
& Poor's Corporation and Moody's Investors Service. Based on the fair
market value of our interest rate exchange agreements subject to rating triggers
at May 31, 2009, we may be required to make a payment of up to $147 million if
our senior unsecured ratings from Moody's Investors Service falls to or below
Baa1 or from Standard & Poor's Corporation falls to or below
BBB+. In calculating the required payments, we only considered
agreements which, when netted for each counterparty as allowed by the underlying
master agreement, would require a payment upon termination. In the
event that we are required to make a payment as a result of a rating trigger, it
could have a material adverse impact on our financial results.
Our
ability to comply with covenants related to our revolving credit agreements and
debt indentures may affect our ability to obtain financing and maintain
preferred rating levels on our debt.
We must
maintain compliance with all covenants and conditions related to our revolving
credit agreements, including the adjusted TIER, adjusted leverage and amount of
loans pledged to have access to the funds available under the revolving lines of
credit. See "Non-GAAP Financial Measures" for further explanation and a
reconciliation of adjusted ratios. A restriction on access to the
revolving lines of credit would impair our ability to issue short-term debt, as
it is required for backup-liquidity to maintain preferred rating levels on our
short-term debt.
If we do
not maintain compliance with covenants and conditions on our collateral trust
bond, medium-term note and subordinated deferrable debt indentures, the holders
of such debt could declare an event of default and accelerate the repayment of
the full amount of the outstanding debt principal before the stated maturity of
such debt. Additionally, we could not issue new debt under such
indentures. Such an event would require us to obtain new funding to
repay the accelerated debt as a result of the covenant default and could have a
material adverse impact on our financial results and credit
ratings.
Our
concentration of loans to borrowers within rural electric and telephone
industries could impair our revenues if either or both of those industries
experience economic difficulties.
Credit
concentration is one of the risk factors considered by the rating agencies in
the evaluation of our credit ratings. Substantially all of our credit
exposure is to the rural electric and telecommunications industries and is
subject to risks associated with those industries.
Our
credit concentration to our ten largest borrowers could increase from the
current 19 percent of total loans and guarantees outstanding, if:
·
|
we
extended additional loans and/or guarantees to the current ten largest
borrowers;
|
·
|
our
total loans and/or guarantees outstanding decreased, with a
disproportionately large share of the decrease to borrowers not in the
current ten largest; or
|
·
|
we
advanced large new loans and/or guarantees to one of the borrowers below
the ten largest.
|
We
could jeopardize our federal tax exemption if we fail to conduct our business in
accordance with our exemption from the Internal Revenue Service.
Legislation
that removes or imposes new conditions on the federal tax exemption for
501(c)(4) social welfare organizations could have a negative impact on our net
income. National Rural’s continued exemption depends on it conducting
our business in accordance with our 501(c)(4) status.
Item
1B.
|
Unresolved
Staff Comments.
|
None.
National
Rural leases office space that serves as its headquarters in Fairfax County,
Virginia. In October 2005, National Rural entered into a three-year
lease with the building owner for approximately 107,228 square feet of the
facility’s office, meeting and storage space. In both September 2007
and 2008, we exercised the option to extend the lease for additional one-year
periods. In March 2009, we amended the office space lease to extend
the term until October 17, 2011 with the option to extend the lease for up to
two additional one-year periods in fiscal year 2012 and 2013. The
terms of these extensions are similar to the initial three-year
lease.
National
Rural finalized a contract in May 2008 to purchase 42 acres of land located in
Loudoun County, Virginia. National Rural plans to use the purchased
land to construct a new headquarters facility.
Item
3.
|
Legal
Proceedings.
|
None.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
None.
PART
II
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Inapplicable.
Item
6.
|
Selected
Financial Data.
|
The
following is a summary of selected financial data for the years ended and as of
May 31:
|
|
|
|
|
|
|
|
|
|
|
|
(dollar
amounts in thousands)
|
|
|
2009
|
|
|
|
2008 (10)
|
|
|
|
2007 (10)
|
|
|
|
2006 (10)
|
|
|
|
2005 (10)
|
|
|
For
the year ended May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
1,070,764
|
|
|
$
|
1,051,393
|
|
|
$
|
1,039,650
|
|
|
$
|
995,882
|
|
|
$
|
988,174
|
|
|
Net
interest income
|
|
|
135,743
|
|
|
|
120,125
|
|
|
|
47,896
|
|
|
|
18,682
|
|
|
|
46,776
|
|
|
Derivative
cash settlements (1)
|
|
|
112,989
|
|
|
|
27,033
|
|
|
|
86,442
|
|
|
|
80,883
|
|
|
|
78,287
|
|
|
Derivative
forward value (1)
|
|
|
(160,017
|
)
|
|
|
(98,743
|
)
|
|
|
(79,281
|
)
|
|
|
28,805
|
|
|
|
25,849
|
|
|
Foreign
currency adjustments (2)
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,554
|
)
|
|
|
(22,594
|
)
|
|
|
(22,893
|
)
|
|
(Loss)
income prior to income taxes, minority
interest
(3)
|
|
|
(78,871
|
)
|
|
|
36,311
|
|
|
|
16,541
|
|
|
|
105,762
|
|
|
|
126,561
|
|
|
Net
(loss) income
|
|
|
(69,870
|
)
|
|
|
45,745
|
|
|
|
11,701
|
|
|
|
95,497
|
|
|
|
122,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
charge coverage ratio (TIER) (4)(5)
|
|
|
-
|
|
|
|
1.05
|
|
|
|
1.01
|
|
|
|
1.10
|
|
|
|
1.13
|
|
|
Adjusted
fixed charge coverage ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Adjusted
TIER)
(6)
|
|
|
1.10
|
|
|
|
1.15
|
|
|
|
1.12
|
|
|
|
1.11
|
|
|
|
1.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of May 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
|
$
|
20,192,309
|
|
|
$
|
19,029,040
|
|
|
$
|
18,131,873
|
|
|
$
|
18,363,954
|
|
|
$
|
18,974,108
|
|
|
Allowance
for loan losses
|
|
|
(622,960
|
)
|
|
|
(514,906
|
)
|
|
|
(561,663
|
)
|
|
|
(611,443
|
)
|
|
|
(589,749
|
)
|
|
Assets
|
|
|
20,982,705
|
|
|
|
19,379,381
|
|
|
|
18,575,181
|
|
|
|
19,179,621
|
|
|
|
20,060,314
|
|
|
Short-term
debt (7)
|
|
|
4,867,864
|
|
|
|
6,327,453
|
|
|
|
4,427,123
|
|
|
|
5,343,824
|
|
|
|
7,952,579
|
|
|
Long-term
debt (8)
|
|
|
12,720,055
|
|
|
|
10,173,587
|
|
|
|
11,295,219
|
|
|
|
10,642,028
|
|
|
|
8,701,955
|
|
|
Subordinated
deferrable debt (9)
|
|
|
311,440
|
|
|
|
311,440
|
|
|
|
311,440
|
|
|
|
486,440
|
|
|
|
685,000
|
|
|
Members'
subordinated certificates
|
|
|
1,740,054
|
|
|
|
1,406,779
|
|
|
|
1,381,447
|
|
|
|
1,427,960
|
|
|
|
1,490,750
|
|
|
Members'
equity (1)
|
|
|
604,316
|
|
|
|
613,082
|
|
|
|
566,286
|
|
|
|
545,351
|
|
|
|
523,583
|
|
|
Total
equity
|
|
|
508,938
|
|
|
|
665,965
|
|
|
|
710,041
|
|
|
|
784,408
|
|
|
|
764,934
|
|
|
Guarantees
|
|
|
1,275,455
|
|
|
|
1,037,140
|
|
|
|
1,074,374
|
|
|
|
1,078,980
|
|
|
|
1,157,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
ratio (5)
|
|
|
42.71
|
|
|
|
29.64
|
|
|
|
26.64
|
|
|
|
24.80
|
|
|
|
26.71
|
|
|
Adjusted
leverage ratio (6)
|
|
|
7.11
|
|
|
|
7.50
|
|
|
|
6.81
|
|
|
|
6.38
|
|
|
|
6.50
|
|
|
Debt
to equity ratio (5)
|
|
|
40.21
|
|
|
|
28.08
|
|
|
|
25.13
|
|
|
|
23.42
|
|
|
|
25.20
|
|
|
Adjusted
debt to equity ratio (6)
|
|
|
|
6.63
|
|
|
|
7.06
|
|
|
|
6.37
|
|
|
|
5.97
|
|
|
|
6.07
|
|
|
(1)
Derivative cash settlements represent the net settlements received/paid on
interest rate and cross currency exchange agreements that do not qualify for
hedge accounting. The derivative forward value represents the change
in fair value on exchange agreements that do not qualify for hedge accounting,
as well as amortization related to the transition adjustment recorded as an
other comprehensive loss on June 1, 2001. Members' equity represents
total equity excluding foreign currency adjustments, derivative forward value
and accumulated other comprehensive income. See Non-GAAP Financial Measures
in Management's Discussion and Analysis for further explanation of members'
equity and a reconciliation to total equity.
(2)
Foreign currency adjustments represent the change on foreign denominated debt
that is not related to an exchange agreement that qualifies for hedge accounting
during the period. The foreign denominated debt is revalued at each
reporting date based on the current exchange rate. To the extent that
the current exchange rate is different than the exchange rate at the time of
issuance, there will be a change in the value of the foreign denominated
debt. We enter into foreign currency exchange agreements at the time
of each foreign denominated debt issuance to lock in the exchange rate for all
principal and interest payments required through maturity.
(3)
Includes $43 million gain on sale of building and land for the year ended May
31, 2006.
(4) For
the years ended prior to May 31, 2009, the fixed charge coverage ratio is the
same calculation as our Times Interest Earned Ratio ("TIER"). For the
year ended May 31, 2009, the fixed charge coverage ratio includes capitalized
interest in total fixed charges which is not included in our TIER
calculation.
For the
year ended May 31, 2009, earnings were insufficient to cover fixed charges by
$70 million.
(5) See
Non-GAAP Financial
Measures in Management's Discussion and Analysis for the GAAP
calculations of these ratios.
(6) For
the years ended prior to May 31, 2009, the adjusted fixed charge coverage ratio
is the same calculation as our adjusted TIER. For the year ended May
31, 2009, the adjusted fixed charge coverage ratio includes capitalized interest
in total fixed charges which is not included in our adjusted TIER
calculation. Adjusted ratios include non-GAAP adjustments that we make to
financial measures in assessing our financial performance. See Non-GAAP Financial Measures
in Management's Discussion and Analysis for further explanation of these
calculations and a reconciliation of the adjustments.
(7)
Includes the foreign currency valuation account of $245 million and $40 million
at May 31, 2006 and 2005, respectively.
(8)
Excludes $2,580 million, $3,177 million, $1,368 million, $1,839 million, and
$3,591 million in long-term debt that comes due, matures and/or will be redeemed
during fiscal years 2010, 2009, 2008, 2007 and 2006, respectively (see Note 5 to
the consolidated financial statements). Includes the foreign currency
valuation account of $221 million at May 31, 2005.
(9)
Excludes $175 million called in June 2007 and $150 million called in June 2006
at May 31, 2007 and 2006, respectively, reported in short-term
debt.
(10)
See Note 1 (y) to the
consolidated financial statements for further explanation of reclassifications
of the consolidated statement of operations data for fiscal years 2008 and
2007. Prior year periods have been revised to reflect the adjustments
related to the reclassification described in Note 1(y).
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Unless
stated otherwise, references to “we,” “our,” or “us” relate to the consolidation
of National Rural Utilities Cooperative Finance Corporation ("National Rural"),
Rural Telephone Finance Cooperative ("RTFC"), National Cooperative Services
Corporation ("NCSC") and certain entities created and controlled by National
Rural to hold foreclosed assets and accommodate loan securitization
transactions. The following discussion and analysis is designed to
provide a better understanding of our consolidated financial condition and
results of operations and as such should be read in conjunction with the
consolidated financial statements, including the notes thereto. We refer to our
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.
Business
Overview
National
Rural was formed in 1969 by rural electric cooperatives to provide a source of
financing to supplement the loan programs of the Rural Utilities Service
("RUS"). National Rural is organized as a cooperative and is a
tax-exempt entity under Section 501(c)(4) of the Internal Revenue
Code.
RTFC is a
private cooperative association created to provide and/or arrange financing for
its rural telecommunications members and their affiliates. RTFC is a
taxable cooperative that pays income tax based on its net income, excluding net
income allocated to its members, as allowed by law under Subchapter T of the
Internal Revenue Code. NCSC also is a private 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 is
a taxable corporation.
Our
primary objective as a cooperative is to provide financial products to our rural
electric and telecommunications members at a low cost while maintaining sound
financial results required for investment grade credit ratings on our debt
instruments. Our goal is not to maximize profit on loans to members,
but to balance charging our members low rates on loans and maintaining the
financial performance required to access the capital markets on behalf of our
members. Therefore, the rates we charge our borrowers reflect our
funding costs plus a spread to cover our operating expenses and a provision for
loan losses and to provide earnings sufficient to preserve interest coverage to
meet our financial objectives.
We obtain
funding from the capital markets, private placements of debt and our
members. We enter the capital markets, based on the combined strength
of our members, to borrow the funds to fulfill our members’ financing
requirements. We regularly obtain funding in the capital markets by
issuing:
·
|
fixed-rate
or variable-rate secured collateral trust
bonds;
|
·
|
fixed-rate
or variable-rate unsecured medium-term notes including retail
notes;
|
·
|
bank
bid note agreements; and
|
·
|
fixed-rate
subordinated deferrable debt.
|
We issue
fixed-rate and variable-rate debt to private funding sources. We also
obtain debt financing from our members and other qualified investors through the
direct sale of our commercial paper, daily liquidity fund and unsecured
medium-term notes.
As a
condition of membership, rural electric cooperatives were generally required to
purchase membership subordinated certificates from us. Members may be
required to make an additional investment in us by purchasing loan or guarantee
subordinated certificates as a condition for obtaining long-term loans or
guarantees. The membership subordinated certificates and the loan and
guarantee subordinated certificates are unsecured and subordinate to our senior
debt.
National
Rural is required by District of Columbia cooperative law to have a mechanism to
allocate our net income to our members. We allocate our net income,
excluding the non-cash effects of the accounting for derivative financial
instruments and foreign currency translation, annually to a cooperative
educational fund, a members' capital reserve and to members based on each
member's patronage of our loan programs during the year. RTFC
annually allocates its net income to a cooperative educational fund and to its
members based on each member's patronage of its loan programs during the
year. NCSC does not allocate its net income to its members, but does
allocate a portion of its margins to a cooperative educational
fund.
Our
performance is closely tied to the performance of our member rural electric and
telecommunications systems due to the near 100 percent concentration of our loan
and guarantee portfolio in those industries.
Financial
Overview
In this
section, we analyze our results of operations, financial condition, liquidity
and market risk. We also analyze trends and significant transactions
completed in the years covered by this Form 10-K.
Results
of Operations
We use a
times interest earned ratio (“TIER”) instead of the dollar amount of net
interest income or net income as our primary performance indicator, since net
income can fluctuate as total loans outstanding and/or interest rates
change. TIER is a measure of our ability to cover the interest
expense on our 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 we make to our financial results for our
own analysis and covenant compliance.
For the
year ended May 31, 2009, we reported a net loss of $70 million, which resulted
in a TIER calculation below 1.00 compared to a net income of $46 million and
TIER of 1.05 for the prior year. For the year ended May 31, 2009, we
reported an adjusted net income of $86 million with an adjusted TIER of 1.10,
compared with an adjusted net income of $138 million and adjusted TIER of 1.15
for the prior-year period. The $116 million decrease in net income
for the year ended May 31, 2009 compared with the prior-year period was
primarily due to the $144 million increase in the provision for loan losses and
the $61 million increase in the derivative forward value expense partially
offset by the $86 million increase in derivative cash settlements.
Interest
income of $1,071 million for the year ended May 31, 2009 increased two percent
compared with the prior-year period. During the year ended May 31,
2009, there was an increase of $1.3 billion or seven percent to the average
balance of loans outstanding which was largely offset by a 25 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.
Our
interest expense was relatively unchanged for the year ended May 31, 2009 as
compared with the prior-year period despite lower short-term interest
rates. The small increase in interest expense was the result of the
following factors:
·
|
The
$2,707 million increase in average debt outstanding at May 31, 2009
compared with May 31, 2008.
|
·
|
Higher
interest rates on our collateral trust bonds. In October 2008,
we 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 calendar year
2008.
|
·
|
For
a short period of time during the latter part of calendar year 2008, the
cost of issuing commercial paper increased because of disruptions in the
financial markets.
|
These
factors were mostly offset by the following:
·
|
The
lower interest rate environment: Lower interest rates on our
variable-rate debt and commercial paper funding particularly in the latter
half of the fiscal year.
|
·
|
Lower
cost funding from Federal Agricultural Mortgage Corporation (“Farmer
Mac”): Notes issued under note purchase agreements with Farmer
Mac totaling $700 million at a blended spread over three-month LIBOR of
119 basis points and $500 million at a blended fixed rate of 3.871 percent
between December 2008 and May 2009.
|
·
|
Lower
cost funding from the Rural Economic Development Loan and Grant (“REDLG”)
program: In September 2008, $500 million was
advanced to us under the REDLG program at an interest rate of 57.5 basis
points above the comparable U.S. Treasury
rate.
|
·
|
Lower
cost retail notes: Retail notes increased $783 million from May 31, 2008
to May 31, 2009. We issued retail notes at spread levels well below the
indicative collateral trust bond funding levels with a weighted-average
interest rate of 4.50 percent.
|
Our
adjusted interest expense decreased by $82 million for the year ended May 31,
2009. In addition to the factors above, the decrease in the adjusted
interest expense was largely due to the $97 million payment to us, recorded as
derivative cash settlements, for the termination of certain receive fixed, pay
variable interest rate swaps during fiscal year 2009.
During
fiscal year 2009, there was an increase of $144 million to the loan loss
provision as compared with the prior-year period. The increase to the
loan loss provision during the year ended May 31, 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 these impaired loans, which resulted in a compression of the earning
multiple that potential buyers were willing to pay for such
assets. In addition, the current economic conditions 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, changes in estimates of future
expected cash flows and the net decrease in our variable interest rates from May
31, 2008 to May 31, 2009 as described below.
The loan
loss provision is affected by changes in the calculated impairment on our
impaired loans due to changes in interest rates. The impairment
amount for certain loans is calculated by discounting future expected cash flows
using the original contract interest rate on the loan, a portion of which is
based on our variable interest rate. Changes to our variable interest
rates are based on the underlying cost of funding, competition and other
factors. Based on the current balance of impaired loans at May 31,
2009, an increase or decrease of 25 basis points to our 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. As of
August 1, 2009, we had decreased our long-term variable interest rates by 45
basis points, resulting in a decrease to the calculated impairment on loans of
$6 million.
Financial
Condition
At May
31, 2009, total loans outstanding increased by $1,161 million or six percent as
compared with May 31, 2008 due to a $929 million increase in power supply loans
and a $292 million increase in distribution loans. See further
discussion of our loan portfolio in Financial Condition, Loan and
Guarantee Portfolio Assessment. We expect loan growth to
remain relatively stable during fiscal year 2010.
Our loan
growth has not been significantly affected by the slowdown in the economy since
most of our 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
current difficult economic conditions have not resulted in a significant rise in
delinquencies or defaults in our members’ receivables. Calendar year
2008 data from member systems shows no significant increase in late payments or
write-offs for the year ended December 31, 2008 compared to the prior calendar
year. The majority of the cooperatives' customers are residential,
and electricity is considered an essential service, so we believe the impact of
the recession on collections will likely be moderate.
Our total
long-term and short-term debt outstanding increased by $1,087 million at May 31,
2009 as compared with the prior-year end. During the year ended May
31, 2009, there was a need to issue debt required to fund new loan advances, as
well as to refinance maturing debt. During that period, we issued
$5.8 billion of new term debt (collateral trust bonds, medium-term
notes and private placement notes) to replace the $3.6 billion of debt that
matured (mostly extendible collateral trust bonds). Some of the debt
issued during fiscal year 2009 was to prefund debt maturing in the first quarter
of fiscal year 2010. As part of our ongoing efforts to manage the
liquidity risks associated with maturing debt, we regularly pre-fund large
expected debt obligations prior to the maturity to ensure the availability of
funds.
Total
equity decreased $157 million from May 31, 2008 to May 31, 2009 primarily due to
the board authorized patronage capital retirement totaling $85 million and the
net loss of $70 million for the year ended May 31, 2009. Total equity
fluctuates based on the changes in earnings which are significantly affected by
changes in the fair value of our 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
equity due to the uncertainty of the movement in future interest
rates. In our internal analysis and for covenant compliance under our
credit agreements, we adjust equity to exclude the non-cash effects of the
accounting for derivative financial instruments and foreign currency
translation. In July 2009, National Rural’s board of directors
authorized the retirement of allocated net earnings totaling $41 million,
representing 50 percent of the fiscal year 2009 allocation. This
amount will be returned to members in cash at the end of September
2009.
Liquidity
After
Lehman Brothers Holdings Inc. (“LBHI”) filed for bankruptcy protection under
Chapter 11 of the U.S. Bankruptcy Code in September 2008 and through the latter
part of November 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 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
historical spreads over the federal funds rate. As a result, we had
large volumes of commercial paper to roll over that were, on certain days during
that period, at rates that were higher than normal. During that time,
we met our
funding
needs by issuing member and dealer commercial paper, collateral trust bonds, and
through private placements of debt. Those disruptions in the capital
markets, while continuing, eased during the third and fourth quarters of fiscal
year 2009.
We
evaluate and make decisions about our daily cash needs early in the day to be
certain we can meet our funding requirements. On October 7, 2008, we
were uncertain of our ability to issue the required amount of commercial paper
for that day and drew down $418.5 million on our bank lines. We
repaid the $418.5 million borrowed under our 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 highly-rated 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 us 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 we preferred to issue longer-term commercial paper
to maintain a certain percentage of the portfolio with longer maturities, we
were able to issue commercial paper with 90-day maturities through the
CPFF. We did not issue any commercial paper through the CPFF during
the third and fourth quarter of fiscal year 2009. The $1 billion of
commercial paper we issued through the CPFF in the second quarter of fiscal year
2009 matured in March 2009. We have not issued additional commercial
paper through the CPFF due to our ability to roll over maturing commercial paper
with our existing investor base and finance our balance sheet growth with lower
cost alternative sources of funding. We are still qualified to use the CPFF as
the expiration date of the program was extended to February 1,
2010. However, there is no intention at this time to use the more
expensive funding through the CPFF since there is sufficient demand in the
commercial paper market.
As with
other companies, we were negatively affected by the severe credit crisis in the
fall of 2008 as the demand in the capital markets for corporate debt was reduced
and corporate debt that was issued was at historically high spreads over
comparable U.S. Treasury rates.
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 U.S.
Treasury rates. In October 2008, we 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 a coupon interest rate of
10.375 percent. This interest rate represented a significant increase
in the credit spread over Treasury rates compared with the $900 million 5.50
percent, five-year collateral trust bonds issued in June 2008. We
used other lower-cost funding sources during fiscal year 2009, as described in
the Results of
Operations section of this Financial
Overview.
On March
13, 2009, we replaced our $1,500 million 364-day revolving credit agreement with
a new $1,000 million 364-day revolving credit agreement. Since the
revolving credit lines are required to maintain backup liquidity on our
commercial paper, we cannot issue as much commercial paper in the future because
of the $500 million reduction in the facility. We will issue
long-term debt and swap the debt to a variable rate to make up for the reduction
to commercial paper. This is a more expensive form of
funding.
As a
result of the bankruptcy filing of LBHI, we terminated interest rate swaps with
Lehman Brothers Special Financing (“LBSF”) as counterparty (with an LBHI
guarantee) on September 26, 2008. The payment due to us from LBSF of
$26 million was recorded in derivative cash settlements representing the
termination net settlement amount on that day, based on 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. We have a claim of $26 million on the
assets of both LBHI and LBSF. We 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 our 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 or the price
that we can obtain through the sale of our claim. As of July 24,
2009, market sales for similar claims against LBHI and LBSF were between 37
cents and 41 cents on the dollar.
At May
31, 2009, we had $2,288 million of commercial paper, daily liquidity fund, term
loans, and bank bid notes and $2,580 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 $1,226 million or approximately 67 percent of the total
commercial paper and daily liquidity fund outstanding at May 31,
2009. Commercial paper issued through dealers and bank bid notes
totaled $850 million and represented four percent of total debt outstanding at
May 31, 2009. We intend to maintain the balance of dealer commercial
paper and bank bid notes at 15 percent or less of total debt
outstanding
during fiscal year 2010. During the next 12 months, we plan to
replace the maturing $2,580 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. At May 31, 2009, we had $1.2 billion available under note
purchase agreements with Farmer Mac, $625 million of which was advanced through
August 2009.
We began
offering member capital securities, unsecured and subordinate voluntary debt
investments, to members in December 2008. As of May 31, 2009, a total
of $278 million of member capital securities had been
sold. Subsequent to our fiscal year-end, we met our target of issuing
at least $300 million of member capital securities. After the end of
the fiscal year through August 7, 2009, an additional $53 million of member
capital securities were sold bringing the total to $331 million.
At May
31, 2009 and 2008, we were the guarantor and liquidity provider for $643 million
and $330 million, respectively of tax-exempt bonds issued for our member
cooperatives. During the year ended May 31, 2009, we were required to
purchase $72 million of tax-exempt bonds pursuant to our obligation as liquidity
provider. As a result, we were required to hold the bonds until the
remarketing agent was able to place them with third-party
investors. At May 31, 2009, all tax-exempt bonds we held during
fiscal year 2009 had been redeemed or repurchased by third-party investors with
no gain or loss on the transactions.
Critical
Accounting Estimates
Our
significant accounting principles, as described in Note 1, General Information and Accounting Polices, to
the consolidated financial statements are essential in understanding the Management’s Discussion and Analysis
of Financial Condition and Results of Operations. Many of our
significant accounting principles require complex judgments to estimate values
of assets and liabilities. We have procedures and processes to
facilitate making these judgments.
We have
identified the allowance for loan losses and the determination of fair value of
certain items on our balance sheet as critical accounting policies because they
require significant estimations and judgments by management. The more
judgmental estimates are summarized below. We have identified and
described the development of the variables most important in the estimation
process. In many cases, there are numerous alternative judgments that
could be used in the process of determining the inputs to the
model. Where alternatives exist, we have used the factors that we
believe represent the most reasonable value in developing the
inputs. Actual performance that differs from our estimates of the key
variables could affect net income. Separate from the possible future
effect to net income from our model inputs, market sensitive assets and
liabilities may change subsequent to the balance sheet date, often
significantly, due to the nature and magnitude of future credit and market
conditions. Such credit and market conditions may change quickly and
in unforeseen ways and the resulting volatility could have a significant,
negative effect on future operating results.
Below is
a description of the process used in determining the adequacy of the allowance
for loan losses and the determination of fair value for certain items on our
balance sheet.
Allowance
for Loan Losses
At May
31, 2009 and 2008, our loan loss allowance totaled $623 million and $515
million, representing 3.09 percent and 2.71 percent of total loans outstanding,
respectively. GAAP requires loans receivable to be reported on the
consolidated balance sheets at net realizable value. The net
realizable value is the total principal amount of loans outstanding less an
estimate of the probable losses inherent in the portfolio. We
calculate the loss allowance on a quarterly basis. The loan loss
allowance is calculated by segmenting the portfolio into three categories of
loans: impaired, high risk and general portfolio. There are
significant subjective assumptions and estimates used in calculating the amount
of the loss allowance required by each of the three
categories. Different assumptions and estimates could also be
reasonable. Changes in these assumptions and estimates could have a
material impact on our financial statements.
Impaired
Loans
We
calculate the impairment on loans based on GAAP. A loan is impaired
when a creditor does not expect to collect all principal and interest due under
the original terms of the loan, other than an insignificant delay or an
insignificant shortfall in amount. We review our portfolio to
identify impairments at least quarterly. Factors considered in
determining an impairment include, but are not limited to:
·
|
the
review of the borrower's audited financial statements and interim
financial statements if available,
|
·
|
the
borrower's payment history,
|
·
|
communication
with the borrower,
|
·
|
economic
conditions in the borrower's service
territory,
|
·
|
pending
legal action involving the
borrower,
|
·
|
restructure
agreements between us and the borrower,
and
|
·
|
estimates
of the value of the borrower's assets that have been pledged as collateral
to secure our loans.
|
We
calculate the impairment by comparing the future expected cash flow discounted
at the interest rate on the loans at the time the loans became impaired, against
our current investment in the receivable. If the current investment
in the receivable is greater than the net present value of the future payments
discounted at the original contractual interest rate, the impairment is equal to
that difference. If it is not possible to estimate the future
cash flow associated with a loan, then the impairment calculation is based on
the value of the collateral pledged as security for the loan.
At May
31, 2009 and 2008, we reserved a total of $414 million and $331 million
specifically against impaired loans totaling $1,056 million and $1,078 million,
respectively, representing 39 percent and 31 percent, respectively, of total
impaired loans. The $414 million and $331 million specific reserves
represented 66 percent and 64 percent of the total loan loss allowance at May
31, 2009 and 2008, respectively. The original contract interest rate
on a portion of the impaired loans at May 31, 2009 will vary with the changes in
our variable interest rates. Based on the current balance of impaired
loans at May 31, 2009, a 25 basis point increase or decrease to our variable
interest rates would result in an increase or decrease, respectively, of
approximately $9 million to the calculated impairment irrespective of a change
in the credit fundamentals of the impaired borrower.
In
calculating the impairment on a loan, the estimates of the expected future cash
flow or collateral value are the key estimates made by
management. Changes in the estimated future cash flow or collateral
value would impact the amount of the calculated impairment. The
change in cash flow required to make the change in the calculated impairment
material will be different for each borrower and depend on the period covered,
the original contract interest rate and the amount of the loan
outstanding. Estimates are not used to determine our investment in
the receivables or the discount rate since, in all cases, the investment is
equal to the loan balance outstanding at the reporting date and the discount
rate is equal to the interest rate on the loans at the time the loans became
impaired.
High
Risk Loans
We define
a loan exposure as high risk when:
·
|
the
borrower has a history of late
payments;
|
·
|
the
borrower's financial results do not satisfy loan financial
covenants;
|
·
|
the
borrower contacts us to discuss pending financial difficulties;
or
|
·
|
for
some other reason, we believe the borrower's financial results could
deteriorate resulting in an elevated potential for
loss.
|
Our
corporate credit committee determines which loans to classify as high
risk. The committee meets at least quarterly to review all loan
facilities with an internal risk rating above a certain level.
The
corporate credit committee sets the required reserve for each borrower based on
their facts and circumstances, such as:
·
|
the
borrower's financial condition;
|
·
|
the
borrower’s payment history;
|
·
|
our
estimate of the collateral value;
|
·
|
pending
litigation, if any; and
|
This is
an objective and subjective exercise where the committee uses the available
information to make its best estimate of the reserve. At any
reporting date, the reserve required could vary significantly depending on the
facts and circumstances, which could include, but are not limited
to:
·
|
changes
in collateral value;
|
·
|
deterioration
in financial condition;
|
·
|
bankruptcy
of the borrower;
|
·
|
payment
default on our loans; and
|
The
borrowers in the high risk category will generally either move to the impaired
category or back to the general portfolio within 12 to 24 months. At
May 31, 2009 and 2008, we reserved $11 million and $3 million against the $30
million and $8 million of exposure classified as high risk, representing
coverage of 37 percent and 38 percent, respectively. The $11 million
and $3 million reserved for loans in the high risk category represented 2
percent and less than 1 percent of the total loan loss allowance at May 31, 2009
and 2008, respectively.
General
Portfolio
We
determine the required loan loss allowance for the general portfolio by using
our internal risk rating system, Standard & Poor’s historical default data
on corporate bonds and our specific loss recovery data. We use the
following factors to determine the loan loss allowance for the general portfolio
category:
·
|
Internal
risk ratings - We maintain risk ratings for each credit facility
outstanding to our borrowers. The ratings are updated at least
annually and are based on the
following:
|
-
|
general
financial condition of the
borrower;
|
-
|
our
estimated value of the collateral securing our
loans;
|
-
|
our
judgment of the borrower's
management;
|
-
|
our
judgment of the borrower's competitive position within its service
territory and industry;
|
-
|
our
estimate of potential impact of proposed regulation and litigation;
and
|
-
|
other
factors specific to individual borrowers or classes of
borrowers.
|
·
|
Standard
corporate bond default table - The table provides expected default rates
based on rating level and the remaining maturity of the
bond. We use the standard default table for all corporate bonds
published by Standard and Poor's Corporation to assist in estimating our
reserve levels because we have limited history from which to develop loss
expectations and because we have been unable to identify utility specific
default rates.
|
·
|
Recovery
rates - Estimated recovery rates based on historical experience of loan
balance at the time of default compared with the total loss on the loan to
date.
|
We
aggregate the loans in the general portfolio by borrower type (distribution,
power supply, telecommunications, associate and other member) and by internal
risk rating within borrower type. We correlate our internal risk
ratings to the ratings used in the standard default table for borrowers with
ratings from Standard and Poor’s Corporation and based on a standard matching
used by banks.
At May
31, 2009 and 2008, we had a total of $18,858 million and $17,690 million of
loans, respectively, in the general portfolio. This total excludes
$244 million and $250 million of loans at May 31, 2009 and 2008, respectively,
that have a U.S. Government guarantee of all principal and interest
payments. We do not maintain a loan loss allowance on loans that are
guaranteed by the U.S. Government. At May 31, 2009 and 2008, we
reserved a total of $162 million and $155 million, respectively, for loans in
the general portfolio representing coverage of approximately one percent of the
total loans for the general portfolio at both dates.
In
addition to the general portfolio reserve requirement as calculated above, we
maintain an unallocated reserve to cover the additional risk associated with
large loan exposures and to cover economic and environmental factors that may be
currently affecting the financial results of borrowers, but have not shown up in
the borrower’s annual audited financial statements.
The first
component of the unallocated reserve is a single obligor reserve to cover the
additional risk related to large loan exposures. We set the exposure
threshold at one percent of total loans and guarantees outstanding and provide
coverage equal to one percent times the internal risk rating associated with the
loan exposure. We believe this reflects our assessment of the
additional risk related to large loan exposures. At May 31, 2009 and
2008, our single obligor reserve was $30 million and $23 million,
respectively.
The
second component of the unallocated reserve is an economic and environmental
reserve to cover factors that we believe are currently affecting the financial
results of borrowers, but are not reflected in our internal risk rating process
and therefore present an increased risk of losses incurred as of the balance
sheet date. We use annual audited financial statements from our
borrowers as part of our internal risk rating process. There could be
a lag between the time that various environmental and economic factors occur and
the time when these factors are reflected in the annual audited financial
statements of the borrower and therefore the internal risk rating we determine
for the borrower. This reserve component may be set at up to five
percent of the amount of the calculated general reserve for each type of loan
exposure. Our corporate credit committee will make a quarterly
determination of the percentage of general reserve to be held and the portions
of the loan portfolio that the additional reserve percentage shall be
applied. At May 31, 2009, the corporate credit committee set the
economic and environmental component of the unallocated reserve to be $6 million
or four percent of the total general reserve, representing 3.5 percent of
electric loans and five percent of telecommunications loans. This
amount took into consideration the effect on electric and telecommunications
borrowers from (1) the current economic downturn, (2) the increase in the
unemployment rate, (3) the decline in the housing market that has led to a
significant increase in foreclosures and (4) specifically for telecommunications
borrowers, reduced discretionary spending for telecommunications services,
increased competition from wireless providers and continued loss of access lines
among rural local exchange carriers. At May 31, 2008, the
economic and environmental component of the unallocated reserve was $3 million
or two percent of the total general reserve.
Senior
management reviews the estimates and assumptions used in the calculations of the
loan loss allowance for impaired loans, high risk loans, the general portfolio
and the unallocated reserve on a quarterly basis. Senior management
discusses estimates with the board of directors and audit committee and reviews
all loan loss-related disclosures included in our Form 10-Qs and Form 10-Ks
filed with the SEC.
Management
makes recommendations regarding loans to be written off to the National Rural
board of directors. In making its recommendation to write off all or
a portion of a loan balance, management considers various factors including cash
flow analysis and collateral securing the borrower's loans.
Fair
Value
We have
determined the accounting for certain items on our balance sheet at fair value
to be a critical accounting policy because of the subjective nature and the
requirement for management to make significant estimations in determining the
amounts to be recorded. Different assumptions and estimates could
also be reasonable and changes in the assumptions used and estimates made could
have a material effect on our financial statements.
The
primary instruments recorded on our balance sheet at fair value are derivative
financial instruments. Because we generally do not apply hedge
accounting to these instruments, the accounting guidance requires us to record
all derivative instruments at fair value on the balance sheet with changes in
fair value reported in earnings. We record the change in the fair
value of our derivatives for each reporting period in the derivative forward
value line on the consolidated statements of operations.
Because
there is not an active secondary market for the types of derivative instruments
we use, we obtain market quotes from our dealer counterparties. The
market quotes are based on the expected future cash flow and estimated yield
curves. We perform our own analysis to confirm the values obtained
from the counterparties. The counterparties are estimating future
interest rates as part of the quotes they provide to us. We adjust
all derivatives to fair value on a quarterly basis. The fair value we
record will change as estimates of future interest rates change. To
estimate the impact of changes to interest rates on the forward value of
derivatives, we would need to estimate all changes to interest rates through the
maturity of our outstanding derivatives. We have derivatives in the
current portfolio that do not mature until 2045. Because many of the
derivative instruments we use for risk management have such long-dated
maturities, the valuation of these derivatives may require extrapolation of
market data that is subject to significant judgment. Accounting
guidance on fair value requires that credit risk be considered in determining
the market value of any asset or liability carried at fair value. We adjust the
market values of our derivatives received from the counterparties based on our
counterparties’ and our credit spreads observed in the credit default swap
market. The credit default swap levels represent the credit risk
premium required by a market participant based on the available information
related to the creditor.
In
addition to the valuation associated with derivative financial instruments, we
also periodically are required to record foreclosed assets at the lower of cost
or fair value. In many instances the valuation of these assets are
judgmental and dependent upon comparisons to similar assets or estimations of
future cash flows that are expected to be generated by the underlying foreclosed
properties. In both of these instances, management uses its best
estimates, based upon available market data and/or projections of future cash
flows. However, because of the subjective nature of these estimates,
other estimates could be reasonable and changes in the assumptions used and our
estimates could have a material effect on our financial statements.
New
Accounting Pronouncements
In May
2009, the FASB issued SFAS 165, Subsequent Events (“SFAS
165”) to establish a general standard of accounting for the disclosure of events
that occur after the balance sheet date, but before financial statements are
issued or are available to be issued. SFAS 165 does not change the
kinds of events that an entity must recognize or disclose in its financial
statements. It does, however, require the disclosure of the date through
which an entity has evaluated subsequent events and the basis for that date.
This statement is effective on a prospective basis for interim or annual periods
ending after June 15, 2009. Our adoption of SFAS 165 in the first
quarter of fiscal year 2010 is not expected to have a material impact on our
financial position or results of operations.
In April
2009, FASB issued FSP SFAS 115-2 and SFAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments which amends the recognition guidance
for other-than-temporary impairments (“OTTI”) of debt securities and expands the
financial statement disclosures for OTTI on debt and equity
securities. Under this FSP, the difference between the amortized cost
basis and fair value on debt securities that an entity intends to sell or would
more-likely-than-not be required to sell before the expected recovery of the
amortized cost basis is recorded in earnings. For available-for-sale and
held-to-maturity debt securities that management has no intent to sell and
believes that it is more-likely-than-not will not be required to be sold prior
to recovery, only the credit loss component of the impairment is recognized in
earnings, while the
rest of
the fair value loss is recognized in accumulated other comprehensive
income. This FSP is effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. Our adoption of this FSP in the first quarter of
fiscal year 2010 is not expected to have a material impact on our financial
position or results of operations.
In April
2009, FASB issued FSP SFAS 157-4, Determining Fair Value When the
Volume and Level of
Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not
Orderly. The FSP reaffirms
that fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date under current market conditions. The FSP also reaffirms the
need to use judgment in determining if a formerly active market has become
inactive and in determining fair values when the market has become
inactive. This FSP is effective for interim and annual reporting
periods ending after June 15, 2009, and shall be applied prospectively. Early
adoption is permitted for periods ending after March 15, 2009. Our adoption of
this FSP in the first quarter of fiscal year 2010 is not expected to have a
material impact on our financial position or results of operations.
In April
2009, FASB issued FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. The FSP requires disclosing qualitative and
quantitative information about the fair value of all financial instruments on a
quarterly basis, including methods and significant assumptions used to estimate
fair value during the period. These disclosures were previously only done
annually. The disclosures required by the FSP are effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. Our adoption of this FSP
in the first quarter of fiscal year 2010 is not expected to have a material
impact on our financial position or results of operations.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51 (“SFAS 160”),
to establish accounting and reporting standards for the noncontrolling interests
in a subsidiary and for the deconsolidation of a subsidiary. It also amends
certain consolidation procedures for consistency with the requirements of
guidance covering business combinations. Noncontrolling interests
shall be reclassified to equity, consolidated net income shall be adjusted to
include net income attributable to noncontrolling interests and consolidated
comprehensive income shall be adjusted to include comprehensive income
attributable to the noncontrolling interests. This statement is
effective for fiscal years beginning on or after December 15,
2008. SFAS 160 shall be applied prospectively as of the beginning of
the fiscal year in which it is initially applied, except for the presentation
and disclosure requirements. The presentation and disclosure requirements shall
be applied retrospectively for all periods presented.
The
principal effect of recasting the consolidated balance sheets upon the adoption
of the new standard on June 1, 2009 is to move the noncontrolling interests from
long-term liabilities to equity attributable to noncontrolling interests, thus
increasing the total of consolidated equity by that amount. The
following table shows the expected effect of adopting SFAS 160 on the periods
presented on the consolidated balance sheets as of May 31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
Balance
Sheet:
|
|
|
|
|
|
Total
equity, as previously reported
|
$
|
508,938
|
|
$
|
665,965
|
Increase
for SFAS 160 reclassification
|
|
|
|
|
|
of
noncontrolling interests
|
|
10,162
|
|
|
14,247
|
Total
equity, as adjusted
|
$
|
519,100
|
|
$
|
680,212
|
Additionally,
the adoption of SFAS 160 requires that net income, as previously reported prior
to the adoption of SFAS 160, be adjusted to include the net income attributable
to the noncontrolling interests in the consolidated statement of
earnings. Thus, after the adoption of SFAS 160, consolidated net loss
increases by $4 million for the year ended May 31, 2009 and net income decreases
by $6 million for the year ended May 31, 2008.
Our
adoption of SFAS 160 in the first quarter of fiscal year 2010 is not expected to
have a material impact on our financial position or results of
operations.
Results
of Operations
Reclassifications
of prior period amounts for fiscal years 2008 and 2007 have been made to conform
to the current reporting format for the following two items. Fees and
other income totaling $18 million and $15 million for the years ended May 31,
2008 and 2007 have been reclassified from interest income to the fee and other
income line of non-interest income on the consolidated statements of operations
to conform with the May 31, 2009 presentation. The loss on early
extinguishment of debt and other expense totaling $6 million and $5 million for
the years ended May 31, 2008 and 2007 have been reclassified from interest
expense to those line items in non-interest expense on the consolidated
statements of operations to conform with the May 31, 2009
presentation.
Fiscal
Year 2009 versus 2008 Results
The
following table presents the results of operations for the years ended May 31,
2009 and 2008.
|
|
|
For
the year ended May 31,
|
|
|
|
Increase/
|
|
|
(dollar
amounts in thousands)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
(Decrease)
|
|
|
Interest
income
|
|
$
|
1,070,764
|
|
|
$
|
1,051,393
|
|
|
$
|
19,371
|
|
|
Interest
expense
|
|
|
(935,021
|
)
|
|
|
(931,268
|
)
|
|
|
(3,753
|
)
|
|
Net
interest income
|
|
|
135,743
|
|
|
|
120,125
|
|
|
|
15,618
|
|
|
(Provision
for) recovery of loan losses
|
|
|
(113,699
|
)
|
|
|
30,262
|
|
|
|
(143,961
|
)
|
|
Net
interest income after (provision for) recovery of loan
losses
|
|
|
22,044
|
|
|
|
150,387
|
|
|
|
(128,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
|
13,163
|
|
|
|
19,608
|
|
|
|
(6,445
|
)
|
|
Derivative
cash settlements
|
|
|
112,989
|
|
|
|
27,033
|
|
|
|
85,956
|
|
|
Results
of operations of foreclosed assets
|
|
|
3,774
|
|
|
|
7,528
|
|
|
|
(3,754
|
)
|
|
Total
non-interest income
|
|
|
129,926
|
|
|
|
54,169
|
|
|
|
75,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
(36,865
|
)
|
|
|
(36,428
|
)
|
|
|
(437
|
)
|
|
Other
general and administrative expenses
|
|
|
(23,977
|
)
|
|
|
(24,041
|
)
|
|
|
64
|
|
|
(Provision
for) recovery of guarantee liability
|
|
|
(1,615
|
)
|
|
|
3,104
|
|
|
|
(4,719
|
)
|
|
Market
adjustment on foreclosed assets
|
|
|
(8,014
|
)
|
|
|
(5,840
|
)
|
|
|
(2,174
|
)
|
|
Derivative
forward value
|
|
|
(160,017
|
)
|
|
|
(98,743
|
)
|
|
|
(61,274
|
)
|
|
Loss
on sale of loans
|
|
|
-
|
|
|
|
(676
|
)
|
|
|
676
|
|
|
Loss
on early extinguishment of debt
|
|
|
-
|
|
|
|
(5,509
|
)
|
|
|
5,509
|
|
|
Other
|
|
|
(353
|
)
|
|
|
(112
|
)
|
|
|
(241
|
)
|
|
Total
non-interest expense
|
|
|
(230,841
|
)
|
|
|
(168,245
|
)
|
|
|
(62,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income prior to income taxes and minority interest
|
|
|
(78,871
|
)
|
|
|
36,311
|
|
|
|
(115,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
5,101
|
|
|
|
3,335
|
|
|
|
1,766
|
|
|
Minority
interest, net of income taxes
|
|
|
3,900
|
|
|
|
6,099
|
|
|
|
(2,199
|
)
|
|
Net
(loss) income
|
|
$
|
(69,870
|
)
|
|
$
|
45,745
|
|
|
$
|
(115,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
(1)
|
|
|
-
|
|
|
|
1.05
|
|
|
|
|
|
|
Adjusted
TIER (2)
|
|
|
|
1.10
|
|
|
|
1.15
|
|
|
|
|
|
|
(1) For
the year ended May 31, 2009, earnings were insufficient to cover the fixed
charges by $70 million.
(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 the interest expense. See Non-GAAP Financial Measures
for further explanation and a reconciliation of these adjustments.
The
following tables provide a breakout of the average yield on loans, the average
rate on debt and the change to interest income, interest expense and net
interest income due to changes in average loan and debt volume versus changes to
interest rates summarized by loan and debt type. The following tables
also include a breakout of the change to derivative cash settlements due to
changes in the average notional amount of our 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 we make in our
financial analysis to include all derivative cash settlements in our interest
expense.
Average balances and
interest rates – Assets
|
|
Average
volume
|
|
Interest
income
|
|
Average
yield
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans (1)
|
$
|
15,052,425
|
$
|
14,782,141
|
$
|
14,542,951
|
$
|
890,367
|
$
|
872,488
|
$
|
833,247
|
|
5.92
|
%
|
5.90
|
%
|
5.73
|
%
|
Long-term
variable-rate loans (1)
|
2,255,538
|
|
1,803,553
|
|
2,086,792
|
|
92,975
|
|
86,787
|
|
114,786
|
|
4.12
|
|
4.81
|
|
5.50
|
|
Short-term
loans (1)
|
|
1,895,563
|
|
1,310,313
|
|
1,028,585
|
|
75,604
|
|
77,145
|
|
72,632
|
|
3.99
|
|
5.89
|
|
7.06
|
|
Non-performing
loans
|
495,014
|
|
504,310
|
|
534,701
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Total
|
|
19,698,540
|
|
18,400,317
|
|
18,193,029
|
|
1,058,946
|
|
1,036,420
|
|
1,020,665
|
|
5.38
|
|
5.63
|
|
5.61
|
|
Investments
(2)
|
|
489,228
|
|
234,831
|
|
215,409
|
|
5,683
|
|
7,394
|
|
9,662
|
|
1.16
|
|
3.15
|
|
4.49
|
|
Fee
income
|
|
-
|
|
-
|
|
-
|
|
6,135
|
|
7,579
|
|
9,323
|
|
-
|
|
-
|
|
-
|
|
Total
|
$
|
20,187,768
|
$
|
18,635,148
|
$
|
18,408,438
|
$
|
1,070,764
|
$
|
1,051,393
|
$
|
1,039,650
|
|
5.30
|
%
|
5.64
|
%
|
5.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Interest income on loans to members.
(2)
Interest income on the investment of excess cash, preferred stock and trading
securities.
Average balances and
interest rates – Liabilities
|
|
Average
volume
|
|
Interest
expense
|
|
Average
cost
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2007
|
|
Commercial
paper and bank bid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
notes
(1)
|
$
|
3,188,189
|
$
|
2,719,598
|
$
|
3,170,196
|
$
|
58,688
|
$
|
122,786
|
$
|
178,687
|
|
1.84
|
%
|
4.51
|
%
|
5.64
|
%
|
Medium-term
notes (1)
|
|
5,278,445
|
|
4,101,955
|
|
5,336,846
|
|
326,313
|
|
330,193
|
|
363,760
|
|
6.18
|
|
8.05
|
|
6.82
|
|
Collateral
trust bonds (1)
|
|
5,232,731
|
|
4,880,885
|
|
4,226,306
|
|
290,152
|
|
243,579
|
|
218,523
|
|
5.54
|
|
4.99
|
|
5.17
|
|
Subordinated
deferrable debt (1)
|
|
294,592
|
|
301,771
|
|
476,764
|
|
19,663
|
|
19,663
|
|
33,089
|
|
6.67
|
|
6.52
|
|
6.94
|
|
Subordinated
certificates (1)
|
|
1,428,083
|
|
1,326,216
|
|
1,317,373
|
|
55,330
|
|
48,717
|
|
47,852
|
|
3.87
|
|
3.67
|
|
3.63
|
|
Long-term
private debt (1)
|
|
3,595,048
|
|
2,980,097
|
|
2,499,501
|
|
164,306
|
|
151,694
|
|
130,568
|
|
4.57
|
|
5.09
|
|
5.22
|
|
Total
|
|
19,017,088
|
|
16,310,522
|
|
17,026,986
|
|
914,452
|
|
916,632
|
|
972,479
|
|
4.81
|
|
5.62
|
|
5.71
|
|
Debt
issuance costs (2)
|
|
-
|
|
-
|
|
-
|
|
10,158
|
|
9,605
|
|
12,328
|
|
-
|
|
-
|
|
-
|
|
Fee
expense (3)
|
|
-
|
|
-
|
|
-
|
|
10,411
|
|
5,031
|
|
6,947
|
|
-
|
|
-
|
|
-
|
|
Total
|
$
|
19,017,088
|
$
|
16,310,522
|
$
|
17,026,986
|
$
|
935,021
|
$
|
931,268
|
$
|
991,754
|
|
4.92
|
%
|
5.71
|
%
|
5.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (4)
|
$
|
12,764,394
|
$
|
13,055,651
|
$
|
12,631,758
|
$
|
112,989
|
$
|
27,033
|
$
|
86,442
|
|
0.89
|
%
|
0.21
|
%
|
0.68
|
%
|
Adjusted
interest expense (5)
|
|
19,017,088
|
|
16,310,522
|
|
17,026,986
|
|
822,032
|
|
904,235
|
|
905,312
|
|
4.32
|
|
5.54
|
|
5.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income/Net yield
|
|
|
|
|
|
|
$
|
135,743
|
$
|
120,125
|
$
|
47,896
|
|
0.38
|
%
|
(0.07
|
)%
|
(0.17
|
)%
|
Adjusted
net interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income/Adjusted
net yield (5)
|
|
|
|
|
|
|
|
248,732
|
|
147,158
|
|
134,338
|
|
0.98
|
|
0.10
|
|
0.33
|
|
(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 our revolving credit agreements. Fees are
recognized as incurred or amortized on a straight-line basis over the life of
the respective agreement.
(4) For
derivative cash settlements, average volume represents the average notional
amount of derivative contracts outstanding and the average cost represents the
net difference between the average rate paid and the average rate received for
cash settlements during the period.
(5) See
Non-GAAP Financial
Measures for further explanation of the adjustment we make in our
financial analysis to include the derivative cash settlements in interest
expense.
|
|
Analysis
of changes in net interest income
|
|
|
|
2009
vs. 2008
|
|
|
2008
vs. 2007
|
|
|
|
Increase
(decrease)
due
to change in:
|
|
|
|
|
|
Increase
(decrease)
due
to change in:
|
|
|
|
|
(dollar
amounts in thousands)
|
|
Average
volume
(1)
|
|
|
Average
rate
(2)
|
|
|
Net
change
|
|
|
Average
volume
(1)
|
|
|
Average
rate
(2)
|
|
|
Net
change
|
|
Increase
(decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
$
|
15,952
|
|
$
|
1,927
|
|
$
|
17,879
|
|
$
|
13,705
|
|
$
|
25,536
|
|
$
|
39,241
|
|
Long-term
variable-rate loans
|
|
21,750
|
|
|
(15,562
|
)
|
|
6,188
|
|
|
(15,580
|
)
|
|
(12,419
|
)
|
|
(27,999
|
)
|
Short-term
loans
|
|
34,457
|
|
|
(35,998
|
)
|
|
(1,541
|
)
|
|
19,894
|
|
|
(15,381
|
)
|
|
4,513
|
|
Total
interest income on loans
|
|
72,159
|
|
|
(49,633
|
)
|
|
22,526
|
|
|
18,019
|
|
|
(2,264
|
)
|
|
15,755
|
|
Investments
|
|
8,010
|
|
|
(9,721
|
)
|
|
(1,711
|
)
|
|
871
|
|
|
(3,139
|
)
|
|
(2,268
|
)
|
Fee
income
|
|
-
|
|
|
(1,444
|
)
|
|
(1,444
|
)
|
|
-
|
|
|
(1,744
|
)
|
|
(1,744
|
)
|
Total
interest income
|
$
|
80,169
|
|
$
|
(60,798
|
)
|
$
|
19,371
|
|
$
|
18,890
|
|
$
|
(7,147
|
)
|
$
|
11,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper and bank bid notes
|
$
|
21,156
|
|
$
|
(85,254
|
)
|
$
|
(64,098
|
)
|
$
|
(25,398
|
)
|
$
|
(30,503
|
)
|
$
|
(55,901
|
)
|
Medium-term
notes
|
|
94,703
|
|
|
(98,583
|
)
|
|
(3,880
|
)
|
|
(84,170
|
)
|
|
50,603
|
|
|
(33,567
|
)
|
Collateral
trust bonds
|
|
17,559
|
|
|
29,014
|
|
|
46,573
|
|
|
33,845
|
|
|
(8,789
|
)
|
|
25,056
|
|
Subordinated
deferrable debt
|
|
(468
|
)
|
|
468
|
|
|
-
|
|
|
(12,145
|
)
|
|
(1,281
|
)
|
|
(13,426
|
)
|
Subordinated
certificates
|
|
3,742
|
|
|
2,871
|
|
|
6,613
|
|
|
321
|
|
|
544
|
|
|
865
|
|
Long-term
private debt
|
|
31,303
|
|
|
(18,691
|
)
|
|
12,612
|
|
|
25,105
|
|
|
(3,979
|
)
|
|
21,126
|
|
Total
interest expense on debt
|
|
167,995
|
|
|
(170,175
|
)
|
|
(2,180
|
)
|
|
(62,442
|
)
|
|
6,595
|
|
|
(55,847
|
)
|
Debt
issuance costs
|
|
-
|
|
|
553
|
|
|
553
|
|
|
-
|
|
|
(2,723
|
)
|
|
(2,723
|
)
|
Fee
expense
|
|
-
|
|
|
5,380
|
|
|
5,380
|
|
|
-
|
|
|
(1,916
|
)
|
|
(1,916
|
)
|
Total
interest expense
|
|
167,995
|
|
|
(164,242
|
)
|
|
3,753
|
|
|
(62,442
|
)
|
|
1,956
|
|
|
(60,486
|
)
|
Net
interest income
|
$
|
(87,826
|
)
|
$
|
103,444
|
|
$
|
15,618
|
|
$
|
81,332
|
|
$
|
(9,103
|
)
|
$
|
72,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (3)
|
$
|
(603
|
)
|
$
|
86,559
|
|
$
|
85,956
|
|
$
|
2,901
|
|
$
|
(62,310
|
)
|
$
|
(59,409
|
)
|
Adjusted
interest expense (4)
|
|
150,049
|
|
|
(232,252
|
)
|
|
(82,203
|
)
|
|
(38,094
|
)
|
|
37,017
|
|
|
(1,077
|
)
|
(1)
Calculated using the following formula: (current period average balance – prior
year period average balance) x prior year period average rate.
(2)
Calculated using the following formula: (current period average rate – prior
year period average rate) x current period average balance.
(3) For
derivative cash settlements, variance due to average volume represents the
change in derivative cash settlements from the change in average notional amount
of derivative contracts outstanding. Variance due to average rate
represents the change in derivative cash settlements from a change in
rates. The change in 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 we make in our
financial analysis to include the derivative cash settlements in interest
expense.
Interest
Income
The $19
million or two percent increase in interest income for the year ended May 31,
2009, as compared with the prior-year period was due to a $1.3 billion or seven
percent increase in average loan volume largely offset by a 25 basis point
decline in the average yield earned on the portfolio due to lower variable
interest rates.
For the
year ended May 31, 2009, we had a reduction to interest income of $56 million
due to non-accrual loans compared with a reduction of $67 million for the
prior-year period. The effect on electric interest income of
non-accrual loans was a reduction of $26 million for the year ended May 31,
2009, as compared with $34 million for the prior-year period. The
telecommunications interest income was reduced by $30 million for the year ended
May 31, 2009 as compared with $33 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
The $4
million or less than one percent increase in total interest expense for the year
ended May 31, 2009 compared with the prior-year period was due to the higher
level of debt outstanding to fund loan growth partially offset by the 79 basis
point decline in the overall cost of our debt. The decline in debt
costs was primarily attributable to a decline in the cost of our 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
primarily attributed to amounts borrowed under the REDLG program, notes payable
issued to Farmer Mac and new issuances of collateral trust bonds since May 31,
2008.
The
adjusted interest expense, which includes all derivative cash settlements, was
$822 million for the year ended May 31, 2009 compared with $904 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 we make in our financial analysis to
include all derivative cash settlements in interest expense.
Net
Interest Income
The $16
million increase in net interest income for the year ended May 31, 2009 compared
with the prior-year period was due to the increase in average loan volume and
the 79 basis point decline in the overall cost of debt partially offset by
additional debt required to fund the increase in loans and the 25 basis point
decline in the yield of our loan portfolio. The adjusted net interest
income, which includes all derivative cash settlements, for the year ended May
31, 2009 was $249 million, an increase of $102 million from the prior-year
period. See Non-GAAP Financial Measures
for further explanation of the adjustment we make in our financial analysis to
include all derivative cash settlements in determining our adjusted interest
expense which, in turn, affects adjusted net interest income.
Provision
for Loan Loss
We
recorded a loan loss provision of $114 million for the year ended May 31, 2009,
compared with a $30 million recovery for the prior-year period. The
loan loss provision for the year ended May 31, 2009, was primarily due to a
reduction in the fair value of the collateral supporting our 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 the high cost of capital to support acquisitions of
assets similar to the collateral supporting our impaired loans, 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 our impaired
loans and an increase in the required reserve for impaired loans. The
resulting increase in the loan loss provision was partly offset by payments
received and changes in estimates of future expected cash flows for certain
other impaired loans. See further discussion in Allowance for Loan Losses in
the Financial Condition
section.
Non-interest
Income
Non-interest
income increased by $76 million for the year ended May 31, 2009, compared with
the prior-year period primarily due to the increase in cash settlements on
derivative financial instruments. During the year ended May 31, 2009,
we terminated certain receive fixed, pay variable interest rate swaps with
notional amounts totaling $583 million that resulted in payments to us 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, we 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, we recorded a charge to the derivative forward value line for the
year ended May 31, 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 we make in our financial analysis to
net income and equity.
We
terminated these derivative instruments primarily to increase our adjusted
equity base for the fiscal year to partially offset losses from the quarter
ended November 30, 2008 primarily due to the increase in the loan loss provision
noted above. Terminating these swaps also had the benefit of reducing
our 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 we 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 us as a result of terminating interest rate
swaps with LBSF. The amount recorded as a receivable does not reduce
or limit our 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 or the price that we can obtain through the
sale of our claim. 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 year ended May 31, 2009 compared with the
year ended May 31, 2008 as we received a variable rate on the majority of our
derivative contracts during both periods. Additionally, the
weighted-average rate received on pay fixed, receive variable interest rate
swaps decreased from 2.64 percent for fiscal year 2008 to 0.62 percent for
fiscal year 2009.
Non-interest
Expense
Non-interest
expense increased by $63 million for the year ended May 31, 2009 compared with
the prior-year period primarily due to the $61 million increase in the
derivative forward value expense explained below. Additionally, we
recorded a $2 million provision for guarantee liability for the year ended May
31, 2009 compared with a $3 million recovery of guarantee liability for the year
ended May 31, 2008. The increase to the provision for guarantee
liability during the year ended May 31, 2009 was primarily due to the $238
million increase in guarantees outstanding. The $61 million increase in the
derivative forward value expense during the year ended May 31, 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.
We
recorded a decrease to the fair value of foreclosed assets of $8 million and $6
million for the years ended May 31, 2009 and 2008, respectively, based on
decreasing collateral values. The balance of foreclosed assets
includes land development loans and limited partnership interests in certain
real estate developments. The reduction to the fair value of the
collateral supporting these land development loans during the years ended May
31, 2009 and 2008 was primarily due to residential home market weakness which
has caused lot sales to slow down. Additionally, lower gas prices
resulted in a decrease in the fair value of the underlying collateral in fiscal
year 2009.
Minority
Interest
During
the year ended May 31, 2009, NCSC’s net loss exceeded its equity balance by $6
million primarily due to NCSC’s $12 million in derivative forward value losses
during the period. In accordance with consolidation accounting rules,
National Rural is required to absorb the $6 million excess NCSC
loss. Minority interest for the year ended May 31, 2009, represents
RTFC’s net loss of $1 million and $3 million of NCSC’s net loss of $9
million. Minority interest for the year ended May 31, 2008 represents
the total RTFC and NCSC net loss since NCSC losses did not exceed its equity
during that period.
Net
(Loss) Income
The
change in the items described above resulted in a net loss of $70 million for
the year ended May 31, 2009, compared to net income of $46 million for the
prior-year period. The adjusted net income, which excludes the effect
of the derivative forward value and adds back minority interest, was $86
million, compared to $138 million for the prior-year period. See
Non-GAAP Financial
Measures for further explanation of the adjustments we make in our
financial analysis to net income.
Fiscal
Year 2008 versus 2007 Results
The
following table presents the results of operations for the year ended May 31,
2008 versus May 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended May 31,
|
|
|
|
Increase/
|
|
|
(dollar
amounts in thousands)
|
|
|
2008
|
|
|
|
2007
|
|
|
|
(Decrease)
|
|
|
Interest
income
|
|
$
|
1,051,393
|
|
|
$
|
1,039,650
|
|
|
$
|
11,743
|
|
|
Interest
expense
|
|
|
(931,268
|
)
|
|
|
(991,754
|
)
|
|
|
60,486
|
|
|
Net
interest income
|
|
|
120,125
|
|
|
|
47,896
|
|
|
|
72,229
|
|
|
Recovery
of loan losses
|
|
|
30,262
|
|
|
|
6,922
|
|
|
|
23,340
|
|
|
Net
interest income after recovery of loan losses
|
|
|
150,387
|
|
|
|
54,818
|
|
|
|
95,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
|
19,608
|
|
|
|
16,106
|
|
|
|
3,502
|
|
|
Derivative
cash settlements
|
|
|
27,033
|
|
|
|
86,442
|
|
|
|
(59,409
|
)
|
|
Results
of operations of foreclosed assets
|
|
|
7,528
|
|
|
|
9,758
|
|
|
|
(2,230
|
)
|
|
Total
non-interest income
|
|
|
54,169
|
|
|
|
112,306
|
|
|
|
(58,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
(36,428
|
)
|
|
|
(33,817
|
)
|
|
|
(2,611
|
)
|
|
Other
general and administrative expenses
|
|
|
(24,041
|
)
|
|
|
(18,072
|
)
|
|
|
(5,969
|
)
|
|
Recovery
of guarantee liability
|
|
|
3,104
|
|
|
|
1,700
|
|
|
|
1,404
|
|
|
Market
adjustment on foreclosed assets
|
|
|
(5,840
|
)
|
|
|
-
|
|
|
|
(5,840
|
)
|
|
Derivative
forward value
|
|
|
(98,743
|
)
|
|
|
(79,281
|
)
|
|
|
(19,462
|
)
|
|
Foreign
currency adjustments
|
|
|
-
|
|
|
|
(14,554
|
)
|
|
|
14,554
|
|
|
Loss
on sale of loans
|
|
|
(676
|
)
|
|
|
(1,584
|
)
|
|
|
908
|
|
|
Loss
on early extinguishment of debt
|
|
|
(5,509
|
)
|
|
|
(4,806
|
)
|
|
|
(703
|
)
|
|
Other
|
|
|
(112
|
)
|
|
|
(169
|
)
|
|
|
(57
|
)
|
|
Total
non-interest expense
|
|
|
(168,245
|
)
|
|
|
(150,583
|
)
|
|
|
(17,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
prior to income taxes and minority interest
|
|
|
36,311
|
|
|
|
16,541
|
|
|
|
19,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
|
3,335
|
|
|
|
(2,396
|
)
|
|
|
5,731
|
|
|
Minority
interest, net of income taxes
|
|
|
6,099
|
|
|
|
(2,444
|
)
|
|
|
8,543
|
|
|
Net
income
|
|
$
|
45,745
|
|
|
$
|
11,701
|
|
|
$
|
34,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
|
|
|
1.05
|
|
|
|
1.01
|
|
|
|
|
|
|
Adjusted
TIER (1)
|
|
|
|
1.15
|
|
|
|
1.12
|
|
|
|
|
|
|
5(1) 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.
Interest
Income
The $12
million or 1 percent increase in interest income for the year ended May 31, 2008
as compared with the prior-year period was due to the increase in National Rural
and NCSC loan volume and long-term fixed-rate loans that repriced at higher
interest rates partly offset by the decrease in RTFC loan volume and lower
variable interest rates. Interest rates for approximately $703
million of National Rural long-term fixed-rate loans were repriced in January
2008 with 85 percent selecting a new fixed rate. The weighted-average
interest rate of long-term loans subject to repricing in January 2008 was
approximately 5.37 percent, which is lower than the National Rural fixed
interest rates available to members at that time of between 5.65 percent and
7.25 percent (depending on the term selected). The increase in
interest income was offset by the impact of our decreasing variable interest
rates by approximately 215 to 250 basis points, depending on the loan program,
since May 31, 2007.
For the
year ended May 31, 2008, we had a reduction to interest income of $67 million
due to non-accrual loans compared with a reduction of $81 million for the prior
year period. The effect on electric interest income of non-accrual
loans was a reduction of $34 million for the year ended May 31, 2008 as compared
with $39 million for the prior year period. The impact on RTFC
interest income of non-accrual loans was a reduction of $33 million for the year
ended May 31, 2008 as compared with $42 million for the prior year
period. The impact of non-accrual loans on interest income is
included in the rate variance in the table on page 28.
Interest
Expense
The $60
million or 6 percent decrease in total interest expense for the year ended May
31, 2008 as compared with the prior year period was due to lower interest
expense on commercial paper and variable-rate long-term debt as a result of a
325 basis point decrease in the federal funds rate from the rate in effect at
May 31, 2007. The $500 million borrowed under the
REDLG
program in August 2007 represents a lower cost compared with our other forms of
long-term debt as a result of the guarantee of repayment by the
RUS. In addition, the $175 million of 7.40 percent subordinated
deferrable debt redeemed in June 2007 resulted in a 39 basis point decrease in
the weighted-average cost of subordinated deferrable debt.
The
adjusted interest expense, which includes all derivative cash settlements, was
consistent for the year ended May 31, 2008 with 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 we make in our financial analysis to
include all derivative cash settlements in our interest expense.
Net
Interest Income
The
change in the line items described above resulted in an increase in net interest
income of $72 million for the year ended May 31, 2008 compared with the
prior-year period. The adjusted net interest income, which includes
all derivative cash settlements, for the year ended May 31, 2008 was $147
million, an increase of $13 million from the prior year period. See
Non-GAAP Financial
Measures for further explanation of the adjustment we make in our
financial analysis to include all derivative cash settlements in our interest
expense, and therefore net interest income.
Recovery
of Loan Losses
The $30
million recovery of loan losses for the year ended May 31, 2008 resulted from
the decrease in calculated impairments due to lower variable rates and payments
received on impaired loans.
Non-interest
Income
Non-interest
income decreased by $58 million for the year ended May 31, 2008 compared with
the prior year primarily due to decreases in cash settlements and income from
the operations of foreclosed assets. The $59 million decrease in cash
settlements for the year ended May 31, 2008 from the prior year period is
primarily due to a $31 million payment received during the prior year for the
termination of two exchange agreements compared with $8 million paid during the
year ended May 31, 2008 for the termination of three exchange
agreements. Additionally, cash settlements decreased for the year
ended May 31, 2008 due to the 325 basis point decrease in the federal funds rate
from May 31, 2007 to May 31, 2008 as we received a variable rate on 59 percent
of our interest rate exchange agreements during fiscal year 2008 compared with
41 percent of our interest rate exchange agreements for which we pay a variable
rate. Income from the operation of foreclosed assets decreased by $2
million for the year ended May 31, 2008 compared with the prior year due to a
lower outstanding balance in foreclosed assets. At May 31, 2008, the
foreclosed assets are comprised of real estate developer notes receivable and
limited partnership interests in certain real estate developments.
Non-interest
Expense
Non-interest
expense increased by $18 million for the year ended May 31, 2008 compared with
the prior year.
Salaries
and employee benefits increased by $3 million for the year ended May 31, 2008 as
compared with the prior year period primarily due to additional headcount and
higher medical insurance rates. We had 13 additional employee
positions filled at May 31, 2008 as compared with the prior-year period
end.
General
and administrative expenses increased by $6 million for the year ended May 31,
2008 compared with the prior-year period because of increased expenditures for
the acceleration of information systems projects and the write-off of site work
expenses on property we had under contract, but the seller was unable to meet
the conditions to close the sale. Increased membership meeting
expenses, marketing and audit fees also contributed to higher general and
administrative expenses for the year ended May 31, 2008.
For the
year ended May 31, 2008, we determined that there was a reduction of $6 million
to the market value of the real estate developer notes receivable held as
foreclosed assets. The reduction to the market value was primarily as
a result of the slowdown in lot sales due to residential home market
weakness.
The $19
million decrease in the derivative forward value during the year ended May 31,
2008 compared with the prior year period was due to changes in the estimate of
future interest rates over the remaining life of the derivative
contracts.
There was
no foreign denominated debt outstanding during the year ended May 31, 2008,
therefore there was no foreign currency adjustments compared with $15 million in
the prior year period. When we issue debt in foreign currencies, we
must adjust the value of the debt reported on the consolidated balance sheets
for changes in foreign currency exchange rates since the date of
issuance. To
the extent that the current exchange rate is different than the exchange rate at
the time of issuance, there will be a change in the value of the foreign
denominated debt. The adjustment to the value of the debt is reported on the
consolidated statements of operations as foreign currency
adjustments. At the time of issuance of all foreign denominated debt,
we typically enter into a cross currency or cross currency interest rate
exchange agreement to fix the exchange rate on all principal and interest
payments through maturity.
In June
2007, we redeemed the $175 million of 7.40 percent subordinated deferrable debt
at par and recorded a charge of $6 million as loss on the early extinguishment
of debt for the unamortized issuance costs in the first quarter of fiscal year
2008. There was a $5 million loss on the extinguishment of debt for
the year ended May 31, 2007 due to the write-off of unamortized debt issuance
costs associated with the early redemption of subordinated deferrable
debt.
Minority
Interest
Minority
interest represents $0.3 million and $5.8 million of net loss for RTFC and NCSC,
respectively, for the year ended May 31, 2008 compared with $0.1 million and
$2.3 million of net income for RTFC and NCSC, respectively, for the prior year
period. The decrease in NCSC net income is primarily due to
fluctuations in the fair value of its derivative instruments.
Net
Income
The
change in the line items described above resulted in an increase in net income
of $34 million for the year ended May 31, 2008 from the prior year
period. The adjusted net income, which excludes the impact of the
derivative forward value and foreign currency adjustments and adds back minority
interest, was $138 million, compared with $108 million for the prior year
period. See Non-GAAP Financial Measures
for further explanation of the adjustments we make in our 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. For fiscal years prior to May 31, 2009, the ratio of
earnings to fixed charges is the same calculation as TIER. For the
year ended May 31, 2009, the fixed charge coverage ratio includes capitalized
interest in total fixed charges which is not included in our TIER
calculation. See Results of Operations for a
discussion of TIER and adjustments that we make to the TIER
calculation.
|
|
For
the year ended May 31,
|
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
(Loss)
income prior to cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
change
in accounting principle
|
$
|
(69,870
|
)
|
$
|
45,745
|
|
$
|
11,701
|
|
|
Add:
fixed charges
|
|
935,194
|
|
|
931,268
|
|
|
991,754
|
|
|
Less:
interest capitalized
|
|
(173
|
)
|
|
-
|
|
|
-
|
|
|
Earnings
available for fixed charges
|
$
|
865,151
|
|
$
|
977,013
|
|
$
|
1,003,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed charges:
|
|
|
|
|
|
|
|
|
|
|
Interest
on all debt (including amortization of
|
|
|
|
|
|
|
|
|
|
|
discount
and issuance costs)
|
$
|
935,021
|
|
$
|
931,268
|
|
$
|
991,754
|
|
|
Interest
capitalized
|
|
173
|
|
|
-
|
|
|
-
|
|
|
Total
fixed charges
|
$
|
935,194
|
|
$
|
931,268
|
|
$
|
991,754
|
|
|
Ratio
of earnings to fixed charges (1)
|
|
|
-
|
|
|
1.05
|
|
|
1.01
|
|
|
(1) For
the year ended May 31, 2009, earnings were insufficient to cover the fixed
charges by $70 million.
Financial
Condition
Loan
and Guarantee Portfolio Assessment
Loan
Programs
Loans to
members bear interest at rates we determine from time to time after considering
our interest expense, operating expenses, provision for loan losses and the
maintenance of reasonable earnings levels. In keeping with the
cooperative charter, our policy is to set interest rates at the lowest levels we
consider to be consistent with sound financial management.
The
following table summarizes loans outstanding by type and by segment at May
31:
(dollar
amounts in millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Loans
by type:
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
Long-term
loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
$
|
14,813
|
|
74
|
%
|
$
|
15,419
|
|
81
|
%
|
$
|
14,881
|
|
82
|
%
|
$
|
14,763
|
|
80
|
%
|
$
|
12,936
|
|
68
|
%
|
Long-term
variable-rate loans
|
|
3,277
|
|
16
|
|
|
1,918
|
|
10
|
|
|
2,032
|
|
11
|
|
|
2,570
|
|
14
|
|
|
5,009
|
|
27
|
|
Total
long-term loans
|
|
18,090
|
|
90
|
|
|
17,337
|
|
91
|
|
|
16,913
|
|
93
|
|
|
17,333
|
|
94
|
|
|
17,945
|
|
95
|
|
Short-term
loans (2)
|
|
2,098
|
|
10
|
|
|
1,690
|
|
9
|
|
|
1,215
|
|
7
|
|
|
1,028
|
|
6
|
|
|
1,027
|
|
5
|
|
Total
loans
|
$
|
20,188
|
|
100
|
%
|
$
|
19,027
|
|
100
|
%
|
$
|
18,128
|
|
100
|
%
|
$
|
18,361
|
|
100
|
%
|
$
|
18,972
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
13,730
|
|
68
|
%
|
$
|
13,438
|
|
71
|
%
|
$
|
12,828
|
|
71
|
%
|
$
|
12,859
|
|
70
|
%
|
$
|
12,729
|
|
67
|
%
|
Power
supply
|
|
4,268
|
|
21
|
|
|
3,339
|
|
17
|
|
|
2,858
|
|
16
|
|
|
2,811
|
|
15
|
|
|
2,641
|
|
14
|
|
Statewide
and associate
|
|
93
|
|
1
|
|
|
109
|
|
1
|
|
|
119
|
|
1
|
|
|
125
|
|
1
|
|
|
135
|
|
1
|
|
National
Rural total
|
|
18,091
|
|
90
|
|
|
16,886
|
|
89
|
|
|
15,805
|
|
88
|
|
|
15,795
|
|
86
|
|
|
15,505
|
|
82
|
|
RTFC
|
|
1,680
|
|
8
|
|
|
1,727
|
|
9
|
|
|
1,860
|
|
10
|
|
|
2,162
|
|
12
|
|
|
2,992
|
|
16
|
|
NCSC
|
|
417
|
|
2
|
|
|
414
|
|
2
|
|
|
463
|
|
2
|
|
|
404
|
|
2
|
|
|
475
|
|
2
|
|
Total
|
|
$
|
20,188
|
|
100
|
%
|
$
|
19,027
|
|
100
|
%
|
$
|
18,128
|
|
100
|
%
|
$
|
18,361
|
|
100
|
%
|
$
|
18,972
|
|
100
|
%
|
(1)
Includes loans classified as restructured and non-performing and RUS guaranteed
loans.
(2)
Consists of secured and unsecured short-term loans, where the interest rate
could be adjusted monthly or semi-monthly.
Loans
outstanding increased by six percent for the year ended May 31,
2009. The primary reasons for the loan growth at National Rural were
an increase in RUS note buyouts, funding of capital expenditures, bridge
financing to fund projects before receipt of RUS funding and funding for
renewable energy projects.
Loans
that converted from a fixed rate to a variable rate totaled $856 million, which
was partially offset by $205 million of loans converting from a variable rate to
a fixed rate for the year ended May 31, 2009. The significant shift
in fixed-rate loans converting to variable rates was the result of extremely low
variable rates because the Federal Reserve lowered the federal funds rate to
historically low levels in the latter half of calendar year 2008. For
the year ended May 31, 2008, loans converting from a variable rate to fixed rate
totaled $711 million, which was offset by $274 million of loans that converted
from a fixed rate to a variable rate.
The
following table summarizes loans and guarantees outstanding by segment at May
31:
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
|
|
National
Rural:
|
|
Amount
|
|
%
of Total
|
|
|
|
Amount
|
|
%
of Total
|
|
|
|
(Decrease)
|
|
Distribution
|
$
|
13,994,595
|
|
65
|
%
|
|
$
|
13,622,829
|
|
68
|
%
|
|
$
|
371,766
|
|
Power
supply
|
|
5,213,868
|
|
24
|
|
|
|
4,125,567
|
|
20
|
|
|
|
1,088,301
|
|
Statewide
and associate
|
|
116,203
|
|
1
|
|
|
|
131,710
|
|
1
|
|
|
|
(15,507
|
)
|
National
Rural total
|
|
19,324,666
|
|
90
|
|
|
|
17,880,106
|
|
89
|
|
|
|
1,444,560
|
|
RTFC
|
|
1,680,654
|
|
8
|
|
|
|
1,726,774
|
|
9
|
|
|
|
(46,120
|
)
|
NCSC
|
|
458,342
|
|
2
|
|
|
|
457,255
|
|
2
|
|
|
|
1,087
|
|
Total
|
$
|
21,463,662
|
|
100
|
%
|
|
$
|
20,064,135
|
|
100
|
%
|
|
$
|
1,399,527
|
|
The
following table summarizes the loans and guarantees outstanding at RTFC as of
May 31:
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total
|
|
|
|
Amount
|
|
%
of Total
|
|
|
|
(Decrease)
|
|
Rural
local exchange carriers
|
$
|
1,476,402
|
|
88
|
%
|
|
$
|
1,518,197
|
|
88
|
%
|
|
$
|
(41,795
|
)
|
Cable
television providers
|
|
152,326
|
|
9
|
|
|
|
153,539
|
|
9
|
|
|
|
(1,213
|
)
|
Fiber
optic network providers
|
|
8,126
|
|
1
|
|
|
|
16,884
|
|
1
|
|
|
|
(8,758
|
)
|
Competitive
local exchange carriers
|
|
37,294
|
|
2
|
|
|
|
29,871
|
|
2
|
|
|
|
7,423
|
|
Wireless
providers
|
|
3,924
|
|
-
|
|
|
|
4,579
|
|
-
|
|
|
|
(655
|
)
|
Other
|
|
2,582
|
|
-
|
|
|
|
3,704
|
|
-
|
|
|
|
(1,122
|
)
|
Total
|
|
$
|
1,680,654
|
|
100
|
%
|
|
$
|
1,726,774
|
|
100
|
%
|
|
$
|
(46,120
|
)
|
Our
members are widely dispersed throughout the United States and its territories,
including 49 states, the District of Columbia and two U.S.
territories. At May 31, 2009, 2008 and 2007, loans and guarantees
outstanding to members in any one state or territory did not exceed 17 percent,
17 percent and 15 percent, respectively, 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 our internal risk rating system. As a
member-owned cooperative, we balance the needs of our member/owners and the risk
associated with concentrations of credit exposure. The respective
boards of directors must approve new credit requests from borrowers with total
exposure or unsecured exposure in excess of the limits in the
policies. Management may use syndicated credit arrangements to
minimize credit concentrations.
Total
exposure, as defined by the policies, generally includes the
following:
·
|
loans
outstanding, excluding loans guaranteed by
RUS;
|
·
|
our
guarantees of the borrower's
obligations;
|
·
|
unadvanced
loan commitments;
|
·
|
borrower
guarantees to us of another borrower's debt;
and
|
·
|
any
other indebtedness with us, 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 May
31, 2009 and 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 May 31, 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, our single
obligor concentrations in the telecommunications portfolio have decreased
resulting in outstanding loans at May 31, 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 at May 31:
|
|
2009
|
|
|
2008
|
|
|
Increase/
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of Total
|
|
|
(Decrease)
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
3,686,956
|
|
|
17
|
%
|
$
|
3,395,865
|
|
|
17
|
%
|
$
|
291,091
|
|
Guarantees
|
|
363,883
|
|
|
2
|
|
|
164,740
|
|
|
1
|
|
|
199,143
|
|
Total
credit exposure to ten largest borrowers
|
$
|
4,050,839
|
|
|
19
|
%
|
$
|
3,560,605
|
|
|
18
|
%
|
$
|
490,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
3,497,331
|
|
|
16
|
%
|
$
|
3,043,905
|
|
|
15
|
%
|
$
|
453,426
|
|
RTFC
|
|
523,758
|
|
|
3
|
|
|
491,700
|
|
|
3
|
|
|
32,058
|
|
NCSC
|
|
29,750
|
|
|
-
|
|
|
25,000
|
|
|
-
|
|
|
4,750
|
|
Total
credit exposure to ten largest borrowers
|
$
|
4,050,839
|
|
|
19
|
%
|
$
|
3,560,605
|
|
|
18
|
%
|
$
|
490,234
|
|
Security
Provisions
Except
when providing short-term loans, we typically lend to our members on a senior
secured basis. Long-term loans are typically secured on 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 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 to achieve certain financial
ratios.
The
following table summarizes our unsecured credit exposure as a percentage of
total exposure by type and by segment at May 31:
|
|
2009
|
|
|
2008
|
|
|
Increase/
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of Total
|
|
|
(Decrease)
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
2,831,111
|
|
|
13
|
%
|
$
|
2,150,739
|
|
|
10
|
%
|
$
|
680,372
|
|
Guarantees
|
|
347,325
|
|
|
2
|
|
|
235,816
|
|
|
1
|
|
|
111,500
|
|
Total
unsecured credit exposure
|
$
|
3,178,436
|
|
|
15
|
%
|
$
|
2,386,555
|
|
|
11
|
%
|
$
|
791,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
2,875,396
|
|
|
14
|
%
|
$
|
2,100,676
|
|
|
10
|
%
|
$
|
774,720
|
|
RTFC
|
|
237,259
|
|
|
1
|
|
|
229,287
|
|
|
1
|
|
|
7,972
|
|
NCSC
|
|
65,781
|
|
|
-
|
|
|
56,592
|
|
|
-
|
|
|
9,189
|
|
Total
unsecured credit exposure
|
$
|
3,178,436
|
|
|
15
|
%
|
$
|
2,386,555
|
|
|
11
|
%
|
$
|
791,881
|
|
Pledging
of Loans
We are
required to pledge collateral equal to at least 100 percent of the outstanding
balance of debt issued under the collateral trust bond indentures and the
revolving debt issuance agreements with Farmer Mac. We pledge
distribution mortgage loans and permitted investments under our collateral trust
bond indentures. We pledge distribution and power supply mortgage
loans under the debt issuance agreements with Farmer Mac, which permit up to 20
percent of loans pledged to be from power supply systems. In
addition, we are required to maintain collateral on deposit equal to at least
100 percent of the outstanding balance of debt under the REDLG
program. Distribution and power supply loans may be deposited for the
REDLG program.
Although
not required, we typically maintain pledged collateral and collateral on deposit
in excess of the required 100 percent of the outstanding balance of debt
issued. However, our revolving credit agreements limit pledged
collateral to 150 percent of the outstanding balance of debt
issued. The excess collateral ensures that required collateral levels
are maintained and, when an opportunity exists, facilitates timely execution of
debt issuances by limiting or eliminating the lead time required to gather
collateral. Collateral levels fluctuate because:
·
|
distribution
and power supply loans typically amortize, while the debt issued under the
collateral trust bond indenture, the Farmer Mac debt issuance agreements
and the REDLG program have bullet
maturities;
|
·
|
individual
loans may become ineligible for various reasons, some of which may be
temporary; and
|
·
|
distribution
and power supply borrowers have the ability to prepay their
loans.
|
We may
request the return of collateral pledged or held on deposit in excess of the 100
percent of the principal balance requirement or may move the collateral from one
program to another to facilitate a new debt issuance, provided that all
conditions of eligibility under the different programs are
satisfied.
The
following table summarizes our secured debt or debt requiring collateral on
deposit, the excess collateral pledged and our unencumbered loans at May
31:
(dollar
amounts in thousands)
|
|
2008
|
|
|
2007
|
|
Total
loans to members
|
$
|
20,188,207
|
|
$
|
19,026,995
|
|
Less:
Total secured debt or debt requiring
|
|
|
|
|
|
|
collateral
on deposit
|
|
(9,390,000
|
)
|
|
(8,115,000
|
)
|
Less:
Excess collateral pledged or on deposit
|
|
(2,566,723
|
)
|
|
(1,241,554
|
)
|
Unencumbered
loans
|
$
|
8,231,484
|
|
$
|
9,670,441
|
|
|
|
|
|
|
|
|
Unencumbered
loans as a percentage of total loans
|
|
41
|
%
|
|
51
|
%
|
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, we typically place the loan on
non-accrual status and reverse 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). We generally apply all cash received during the
non-accrual period to the reduction of principal, thereby foregoing interest
income recognition. At May 31, 2009, we had one non-performing loan
outstanding in the amount of $524 million. At May 31, 2008, we had
non-performing loans of $507 million outstanding. All loans
classified as non-performing were on non-accrual status.
We
monitor our borrowers’ performance and contact borrowers frequently when
payments are delinquent. The table below shows our delinquency rates
for the past six years. This table breaks out the delinquency rates
including and excluding our loan to ICC. The one loan to ICC drives
the vast majority of our delinquent loans and we are in the process of
foreclosing upon the collateral of this borrower.
(dollar
amounts in thousands)
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans outstanding
|
$
|
20,488,523
|
|
$
|
18,972,068
|
|
$
|
18,360,905
|
|
$
|
18,128,207
|
|
$
|
19,026,995
|
|
$
|
20,188,207
|
|
Unpaid
principal balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
>60 and < 90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
days
past due
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
> 90 days past due
|
|
-
|
|
|
480,963
|
|
|
488,392
|
|
|
492,795
|
|
|
499,234
|
|
|
523,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ICC
|
|
-
|
|
|
479,196
|
|
|
488,392
|
|
|
492,795
|
|
|
491,706
|
|
|
523,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
>60 and < 90 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
past
due
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Loans
> 90 days past due
|
|
0.00
|
|
|
2.54
|
|
|
2.66
|
|
|
2.72
|
|
|
2.62
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
rates less ICC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
>60 and < 90 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
past
due
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Loans
> 90 days past due
|
|
0.00
|
|
|
0.01
|
|
|
0.00
|
|
|
0.00
|
|
|
0.04
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
>30
|
$
|
-
|
|
$
|
480,963
|
|
$
|
488,392
|
|
$
|
492,795
|
|
$
|
499,234
|
|
$
|
523,758
|
|
Delinquency
rate >30
|
|
0.00
|
%
|
|
2.54
|
%
|
|
2.66
|
%
|
|
2.72
|
%
|
|
2.62
|
%
|
|
2.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
info less ICC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
>30
|
$
|
-
|
|
$
|
1,767
|
|
$
|
-
|
|
$
|
-
|
|
$
|
7,528
|
|
$
|
-
|
|
Delinquency
rate >30
|
|
0.00
|
%
|
|
0.01
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.04
|
%
|
|
0.00
|
%
|
At May
31, 2009 and 2008, non-performing loans include $524 million and $492 million,
respectively, to ICC. All loans to ICC have been on non-accrual
status since February 1, 2005. ICC has not made debt service payments
to us since June 2005. RTFC is the primary secured lender to
ICC.
In
February 2006, involuntary bankruptcy petitions were filed against ICC's
indirect majority shareholder and former chairman, Jeffrey Prosser ("Prosser"),
ICC's immediate parent, Emerging Communication, Inc. ("Emcom") and Emcom's
parent, Innovative Communication Company LLC ("ICC-LLC"); and in April 2006,
RTFC reached a settlement with ICC, Virgin Islands Telephone Corporation d/b/a
Innovative Telephone ("Vitelco"), ICC-LLC, Emcom, their directors and Prosser,
individually. Under the settlement, RTFC obtained entry of judgments
in the District Court of the Virgin Islands against ICC for approximately $525
million and Prosser for approximately $100 million. RTFC also
obtained dismissals with prejudice and releases 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 and
forums. National Rural therefore anticipates that it will continue to
be engaged in defense of those assertions on many fronts, as well as pursuing
claims of its own.
ICC-LLC,
Emcom and Prosser each have bankruptcy proceedings pending in the United States
District Court for the Virgin Islands, Bankruptcy Division (the “Bankruptcy
Court”). A Chapter 11 trustee has been appointed for the ICC-LLC and
Emcom estates; and a Chapter 7 trustee was appointed in Prosser’s individual
case. 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 a
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 2 Assets
and Group 3 Assets were sold in December 2008 and May 2008, respectively, and in
each case, the distribution of proceeds was approved by the Court and resulted
in a net recovery to us.
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 1 Assets to
RTFC. RTFC has begun the process of obtaining the applicable
regulatory approvals.
In April
2009, RTFC acquired $85 million of Vitelco preferred stock and $12.5 million of
accrued and unpaid dividends relating to such shares for a total purchase price
of $30 million. We believe that the acquisition of the preferred
shareholders interests at a discount has improved our estimated recovery from
the collateral.
For a
more detailed description of the contingencies related to the non-performing
loans outstanding to ICC, see Note 16 Restructured /Non-performing Loans
and Contingencies, to the consolidated financial
statements. Based on its analysis, we believe that we have adequately
reserved for our exposure to ICC at May 31, 2009.
Restructured
Loans
When
agreements are executed to change the original terms of a loan, generally a
change to the originally scheduled cash flows, we classify the loan as
restructured unless the new terms are deemed to be market terms. We
make a determination about the accrual of interest income for these loans on a
loan-by-loan basis. 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. We will periodically review the decision
whether or not to accrue interest income on restructured loans based on the
borrower's past performance and current financial condition.
At May
31, 2009 and 2008, restructured loans totaled $538 million and $577 million,
respectively. A total of $491 million and $519 million of
restructured loans were on non-accrual status at May 31, 2009 and 2008,
respectively.
At May
31, 2009 and 2008, restructured loans outstanding to Denton County Electric
Cooperative, d/b/a CoServ Electric ("CoServ") were $491 million and $519
million, respectively. 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 classified as a
performing loan at both May 31, 2009 and 2008. Total loans to CoServ
at May 31, 2009 and 2008 represented 2.4 percent and 2.7 percent of our total
loans and guarantees outstanding, respectively.
Under the
terms of a bankruptcy settlement from 2002, National Rural restructured the
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. 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 made 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 the
lesser of their outstanding balance or $405 million plus an interest payment
true up on or after December 13, 2008. To date, 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 before 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
our analysis, we believe that we have adequately reserved for our exposure to
CoServ at May 31, 2009.
At May
31, 2009 and 2008, we had a total of $42 million and $52 million, respectively,
in restructured loans outstanding to Pioneer Electric Cooperative, Inc.
("Pioneer"). Pioneer is current with respect to all debt service
payments at May 31, 2009 and all loans to Pioneer remain on accrual
status. National Rural is the principal creditor to
Pioneer.
Based on
our analysis, we believe that we have adequately reserved for our exposure to
Pioneer at May 31, 2009.
Loan
Impairment
On a
quarterly basis, we review 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. We calculate a borrower’s impairment based on the
expected future cash flow or the fair value of any collateral securing our 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,
|
·
|
changes
to the industry in which the cooperative operates,
and
|
·
|
likelihood
of repayment amount and timing.
|
As events
related to the borrower take place and economic conditions and our assumptions
change, the impairment calculations will change. The loan loss
allowance specifically reserved to cover the calculated impairments is adjusted
on a quarterly basis based on the most current information available. At May 31,
2009 and 2008, impaired loans totaled $1,056 million and $1,078 million,
respectively. At May 31, 2009 and 2008, we specifically reserved a
total of $414 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 at May
31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
Non-performing loans
(1)
|
$
|
523,758
|
|
|
$
|
506,864
|
|
|
$
|
501,864
|
|
|
$
|
577,869
|
|
|
$
|
616,626
|
|
Percent
of loans outstanding
|
|
2.59
|
%
|
|
|
2.67
|
%
|
|
|
2.77
|
%
|
|
|
3.15
|
%
|
|
|
3.25
|
%
|
Percent
of loans and guarantees outstanding
|
|
2.44
|
|
|
|
2.52
|
|
|
|
2.61
|
|
|
|
2.97
|
|
|
|
3.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans
|
$
|
537,587
|
|
|
$
|
577,111
|
|
|
$
|
603,305
|
|
|
$
|
630,354
|
|
|
$
|
600,926
|
|
Percent
of loans outstanding
|
|
2.66
|
%
|
|
|
3.03
|
%
|
|
|
3.33
|
%
|
|
|
3.43
|
%
|
|
|
3.17
|
%
|
Percent
of loans and guarantees outstanding
|
|
2.50
|
|
|
|
2.88
|
|
|
|
3.14
|
|
|
|
3.24
|
|
|
|
2.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-performing and restructured loans
|
$
|
1,061,345
|
|
|
$
|
1,083,975
|
|
|
$
|
1,105,169
|
|
|
$
|
1,208,223
|
|
|
$
|
1,217,552
|
|
Percent
of loans outstanding
|
|
5.25
|
%
|
|
|
5.70
|
%
|
|
|
6.10
|
%
|
|
|
6.58
|
%
|
|
|
6.42
|
%
|
Percent
of loans and guarantees outstanding
|
|
4.94
|
|
|
|
5.40
|
|
|
|
5.75
|
|
|
|
6.21
|
|
|
|
6.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-accrual loans
|
$
|
1,014,585
|
|
|
$
|
1,026,121
|
|
|
$
|
1,046,561
|
|
|
$
|
1,147,009
|
|
|
$
|
1,210,210
|
|
Percent
of loans outstanding
|
|
5.03
|
%
|
|
|
5.39
|
%
|
|
|
5.77
|
%
|
|
|
6.25
|
%
|
|
|
6.38
|
%
|
Percent
of loans and guarantees outstanding
|
|
4.73
|
|
|
|
5.11
|
|
|
|
5.45
|
|
|
|
5.90
|
|
|
|
6.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) All
loans classified as non-performing were on non-accrual status.
Allowance
for Loan Losses
We
maintain 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. We review and
adjust the allowance quarterly to cover estimated probable losses in the
portfolio.
Management
makes recommendations to our board of directors 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 flows and
the collateral securing the borrower's loans. Since inception in
1969, charge-offs totaled $217 million and recoveries totaled $34 million for a
net loan loss of $183 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 year ended May 31,
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
Beginning
balance
|
$
|
514,906
|
|
|
$
|
561,663
|
|
|
$
|
611,443
|
|
|
$
|
589,749
|
|
|
$
|
573,939
|
|
Provision
for (recovery of) loan losses
|
|
113,699
|
|
|
|
(30,262
|
)
|
|
|
(6,922
|
)
|
|
|
23,240
|
|
|
|
16,402
|
|
Net
charge-offs
|
|
(5,645
|
)
|
|
|
(16,495
|
)
|
|
|
(42,858
|
)
|
|
|
(1,546
|
)
|
|
|
(592
|
)
|
Ending
balance
|
$
|
622,960
|
|
|
$
|
514,906
|
|
|
$
|
561,663
|
|
|
$
|
611,443
|
|
|
$
|
589,749
|
|
`
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
loss allowance by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
622,851
|
|
|
$
|
514,626
|
|
|
$
|
561,113
|
|
|
$
|
610,617
|
|
|
$
|
588,365
|
|
NCSC
|
|
109
|
|
|
|
280
|
|
|
|
550
|
|
|
|
826
|
|
|
|
1,384
|
|
Total
|
$
|
622,960
|
|
|
$
|
514,906
|
|
|
$
|
561,663
|
|
|
$
|
611,443
|
|
|
$
|
589,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of total loans outstanding
|
|
3.09
|
%
|
|
|
2.71
|
%
|
|
|
3.10
|
%
|
|
|
3.33
|
%
|
|
|
3.11
|
%
|
As
a percentage of total non-performing loans outstanding
|
|
118.94
|
|
|
|
101.59
|
|
|
|
111.95
|
|
|
|
105.71
|
|
|
|
95.62
|
|
As
a percentage of total restructured loans outstanding
|
|
115.88
|
|
|
|
89.22
|
|
|
|
93.20
|
|
|
|
96.98
|
|
|
|
98.17
|
|
As
a percentage of total loans on non-accrual
|
|
61.40
|
|
|
|
50.18
|
|
|
|
53.67
|
|
|
|
53.31
|
|
|
|
48.73
|
|
Our loan
loss allowance increased $108 million from May 31, 2008 to May 31,
2009. Within our loan loss allowance at May 31, 2009 as compared to
the prior year end, there was an increase in the calculated impairments of $130
million due to the deterioration in the market value of collateral supporting
impaired loans offset by $28 million of payments received on impaired loans and
a $13 million decrease due to changes in estimates of future expected cash flows
of certain impaired loans. The remaining increase in the loan loss
provision for the year ended May 31, 2009 was primarily due to the $1,161
million increase in loans.
In late
November 2008, we 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 our second quarter of fiscal year 2009, especially the
tightening of the credit markets, coupled with indicators we were receiving from
potential third party investors responding to the upcoming auction of the ICC
assets. As a result of this new information, we recorded an addition
to the provision for loan losses of $114 million during the quarter ended
November 30, 2008. We believe that, as a result of this additional
provision for losses and an additional $13 million provision in the third and
fourth quarter, we have adequately reserved against losses associated with ICC
at May 31, 2009.
At May
31, 2008, we estimated the collection of cash flows according to the contractual
payments due, and reduced those amounts based on the risk rating assigned by the
corporate credit committee to each loan using detailed knowledge of the
financial condition of our members with impaired loans. We improved
the process for estimating the future expected cash flows on impaired loans at
May 31, 2009. We modeled expected cash flows based upon various
probabilities of collection. We believe the new process is a better
measure of impairment for these loans. The effect of the change in the
estimation process reduced the impairment amount for impaired loans by
approximately $13 million.
We have
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 $0.1 million loan loss allowance required at NCSC to cover the exposure
for consumer loans of $0.7 million.
Liabilities,
Minority Interest and Equity
Outstanding
Debt
The
following table provides a breakout of debt outstanding at May 31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
Increase/
(Decrease)
|
|
|
Short-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper (1)
|
$
|
1,833,273
|
|
|
$
|
3,050,264
|
|
$
|
(1,216,991
|
)
|
|
Bank
bid notes
|
|
255,000
|
|
|
|
100,000
|
|
|
155,000
|
|
|
Term
loan
|
|
200,000
|
|
|
|
-
|
|
|
200,000
|
|
|
Long-term
debt with remaining maturities less than one year
|
|
2,579,591
|
|
|
|
3,177,189
|
|
|
(597,598
|
)
|
|
Total
short-term debt
|
|
4,867,864
|
|
|
|
6,327,453
|
|
|
(1,459,589
|
)
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
trust bonds
|
|
4,968,771
|
|
|
|
2,886,580
|
|
|
2,082,191
|
|
|
Notes
payable
|
|
4,064,211
|
|
|
|
2,956,403
|
|
|
1,107,808
|
|
|
Medium-term
notes
|
|
3,687,073
|
|
|
|
4,330,604
|
|
|
(643,531
|
)
|
|
Total
long-term debt
|
|
12,720,055
|
|
|
|
10,173,587
|
|
|
2,546,468
|
|
|
Subordinated
deferrable debt
|
|
311,440
|
|
|
|
311,440
|
|
|
-
|
|
|
Members'
subordinated certificates:
|
|
|
|
|
|
|
|
|
|
|
|
Membership
certificates
|
|
642,960
|
|
|
|
649,465
|
|
|
(6,505
|
)
|
|
Loan
certificates
|
|
692,806
|
|
|
|
654,047
|
|
|
38,759
|
|
|
Guarantee
certificates
|
|
126,193
|
|
|
|
103,267
|
|
|
22,926
|
|
|
Member
capital securities
|
|
278,095
|
|
|
|
-
|
|
|
278,095
|
|
|
Total
members' subordinated certificates
|
|
1,740,054
|
|
|
|
1,406,779
|
|
|
333,276
|
|
|
Total
debt outstanding
|
$
|
19,639,413
|
|
|
$
|
18,219,259
|
|
$
|
1,420,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of fixed-rate debt (2)
|
|
87
|
%
|
|
|
82
|
%
|
|
|
|
|
Percentage
of variable-rate debt (3)
|
|
13
|
|
|
|
18
|
|
|
|
|
|
Percentage
of long-term debt
|
|
75
|
|
|
|
65
|
|
|
|
|
|
Percentage
of short-term debt
|
|
|
25
|
|
|
|
35
|
|
|
|
|
|
(1)
Includes $291 million and $251 million related to the daily liquidity fund at
May 31, 2009 and 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 classified as
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.
The
following table provides additional information on the debt instruments we offer
and related credit ratings at
May 31,
2009. Subsequent to that date, Fitch Ratings announced downgrades,
with a stable outlook, on all of our secured and unsecured debt (for further
information, including the new ratings, see Credit Ratings on page
47).
Debt
Instrument
|
Maturity
Range
|
Rate
Options
|
Market
|
Security
|
Credit
Rating (1)
|
Daily
liquidity fund
|
Demand
note
|
Rate
may change daily
|
Members
|
Unsecured
|
NA
|
Bank
bid notes
|
Up
to 3 months
|
Fixed
rate
|
Bank
institutions
|
Unsecured
|
NA
|
Commercial
paper
|
1
to 270 days
|
Fixed
rate
|
Public
capital markets and members
|
Unsecured
|
P-1,
A-1, F-1
|
Collateral
trust bonds
|
Range
from 2 years to 30 years
|
Fixed
or Variable rate
|
Public
capital markets
|
Secured
(2)
|
A1,
A+, A+
|
Medium-term
notes
|
Range
from 9 months to 30 years
|
Fixed
or Variable rate
|
Public
capital markets and members
|
Unsecured
|
A2,
A, A
|
Notes
payable
|
Range
from 1 year to 30 years
|
Fixed
or Variable rate
|
Private
placement
|
Varies
(3)
|
Varies
(3)
|
Subordinated
deferrable debt (4)
|
Up
to 39 yrs
|
Fixed
or Variable rate
|
Public
capital markets
|
Unsecured
(5)
|
A3,
BBB, A-
|
Subordinated
certificates
|
Up
to 100 years (6)
|
Varies
|
Members
|
Unsecured
(7)
|
NA
|
|
|
|
|
|
|
(1) Based
on ratings defined by Moody’s Investors Service, Standard & Poor’s
Corporation and Fitch Ratings, respectively.
(2)
Secured by the pledge of permitted investments and eligible mortgage notes from
distribution system borrowers, in an amount at least equal to the outstanding
principal amount of collateral trust bonds.
(3) At
May 31, 2009, notes payable primarily represent unsecured notes payable issued
under the REDLG program and secured notes payable to Farmer Mac. We
must obtain credit ratings on certain senior secured debt from two rating
agencies on an annual basis. The most recent credit ratings obtained
on Farmer Mac notes were A+ by Standard & Poor’s Corporation and A by Fitch
Ratings. Unsecured notes payable issued under the REDLG program
do not have a credit rating. However, we must obtain one credit
rating on an annual basis for REDLG notes payable without regard to the bond
guarantee agreement with RUS. The most recent credit rating obtained
on REDLG notes payable without regard to the bond guarantee agreement with RUS
was A by Standard and Poor’s Corporation. See further
discussion of our private debt issuances under Sources of
Liquidity.
(4) We
have the right at any time and from time to time during the term of the
subordinated deferrable debt to suspend interest payments for a period not
exceeding 20 consecutive quarters. We have the right to call the
subordinated deferrable debt any time after five years, at par. To
date, we have not exercised our option to suspend interest
payments.
(5)
Subordinate and junior in right of payment to senior debt and the debt
obligations we guarantee, but senior to subordinated certificates.
(6)
Membership subordinated certificates generally mature 100 years from
issuance. Loan and guarantee subordinated certificates have the same
maturity as the related long-term loan. Some certificates may also
amortize annually based on the outstanding loan balance. Member capital securities
mature 35 years from issuance.
(7)
Subordinate and junior in right of payment to senior and subordinated debt and
debt obligations we guarantee.
The
following is a summary of short-term debt outstanding and the effective interest
rates thereon at May 31:
|
|
2009
|
|
|
2008
|
|
|
2007
|
(dollar
amounts in thousands)
|
|
Debt
Outstanding
|
|
Effective
Interest
Rate
|
|
|
Debt
Outstanding
|
|
Effective
Interest
Rate
|
|
|
Debt
Outstanding
|
|
Effective
Interest
Rate
|
|
Short-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper sold through dealers, net of discounts
|
$
|
594,533
|
|
0.33
|
%
|
$
|
1,511,953
|
|
2.33
|
%
|
$
|
1,017,879
|
|
5.36
|
%
|
Commercial
paper sold directly to members, at par
|
|
934,897
|
|
0.35
|
|
|
1,275,809
|
|
2.31
|
|
|
1,383,090
|
|
5.29
|
|
Commercial
paper sold directly to non-members, at par
|
|
12,502
|
|
1.58
|
|
|
11,752
|
|
4.26
|
|
|
133,087
|
|
5.31
|
|
Total
commercial paper
|
|
1,541,932
|
|
0.35
|
|
|
2,799,514
|
|
2.33
|
|
|
2,534,056
|
|
5.32
|
|
Daily
liquidity fund sold directly to members
|
|
291,341
|
|
0.22
|
|
|
250,750
|
|
2.05
|
|
|
250,563
|
|
5.23
|
|
Term
loan
|
|
200,000
|
|
3.31
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
Bank
bid notes
|
|
255,000
|
|
1.49
|
|
|
100,000
|
|
2.80
|
|
|
100,000
|
|
5.43
|
|
Subtotal
short-term debt
|
|
2,288,273
|
|
0.72
|
|
|
3,150,264
|
|
2.32
|
|
|
2,884,619
|
|
5.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt maturing within one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term
notes sold through dealers
|
|
1,674,760
|
|
4.88
|
|
|
558,776
|
|
4.40
|
|
|
133,801
|
|
4.47
|
|
Medium-term
notes sold to members
|
|
502,396
|
|
4.65
|
|
|
288,634
|
|
4.77
|
|
|
231,158
|
|
5.37
|
|
Secured
collateral trust bonds
|
|
209,985
|
|
5.71
|
|
|
1,824,995
|
|
3.27
|
|
|
999,560
|
|
4.65
|
|
Secured
notes payable
|
|
187,800
|
|
1.20
|
|
|
500,000
|
|
4.66
|
|
|
-
|
|
-
|
|
Subordinated
deferrable debt (1)
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
175,000
|
|
7.65
|
|
Unsecured
notes payable
|
|
4,650
|
|
5.22
|
|
|
4,784
|
|
5.50
|
|
|
2,985
|
|
8.52
|
|
Total
long-term debt maturing within one year
|
|
2,579,591
|
|
4.64
|
|
|
3,177,189
|
|
3.83
|
|
|
1,542,504
|
|
5.09
|
|
Total
short-term debt
|
|
$
|
4,867,864
|
|
2.79
|
|
$
|
6,327,453
|
|
3.08
|
|
$
|
4,427,123
|
|
5.24
|
|
(1)
Redeemed in June 2007
Other
information about short-term debt at May 31 is as follows:
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
Weighted-average
maturity outstanding at year-end:
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt (1)
|
|
41
days
|
|
|
|
26
days
|
|
|
|
25
days
|
|
Long-term
debt maturing within one year
|
|
131
days
|
|
|
|
116
days
|
|
|
|
192
days
|
|
Total
|
|
89
days
|
|
|
|
71
days
|
|
|
|
83
days
|
|
Average
amount outstanding during the year:
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt (1)
|
$
|
3,280,895
|
|
|
$
|
2,892,202
|
|
|
$
|
3,372,639
|
|
Long-term
debt maturing within one year
|
|
2,688,165
|
|
|
|
2,961,714
|
|
|
|
1,692,083
|
|
Total
|
$
|
5,969,060
|
|
|
$
|
5,853,916
|
|
|
$
|
5,064,722
|
|
Maximum
amount outstanding at any month-end during the year:
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt (1)
|
$
|
4,183,905
|
|
|
$
|
3,259,556
|
|
|
$
|
3,847,814
|
|
Long-term
debt maturing within one year
|
|
|
4,224,816
|
|
|
|
3,981,567
|
|
|
|
2,549,356
|
|
(1)
Includes the daily liquidity fund and bank bid notes and excludes long-term debt
due in less than one year.
Total
debt outstanding at May 31, 2009 increased compared with May 31, 2008 to fund
the $1,161 million increase in loans outstanding. Approximately
$3,606 million of collateral trust bonds, medium-term notes, and secured notes
payable matured during the year ended May 31, 2009. The maturing debt
was replaced with $5,765 million of new term debt issued during the
period. We issued the following debt through the capital markets or
in private placements during the year ended May 31, 2009:
·
|
$900
million of 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 collateral trust bonds issued in October 2008 and due
2018;
|
·
|
$200
million term loan issued in January 2009 and paid off early in June
2009;
|
·
|
$500
million in fixed-rate notes to Farmer Mac with maturities through
2014;
|
·
|
$300
million in variable-rate notes to Farmer Mac with maturities through
2014;
|
·
|
$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;
|
·
|
$400
million refinance of notes sold to Farmer Mac in March 2008 with
maturities through 2014; and
|
·
|
$1,565
million of various member and dealer MTNs including retail
notes.
|
At May
31, 2009 and 2008, we had no foreign denominated debt outstanding.
During
fiscal year 2009, we replaced some of our commercial paper with term
debt. The amount of commercial paper outstanding decreased $1,217
million compared with the balance at May 31, 2008 because of new debt issuances
of $800 million to Farmer Mac, the net increase of $734 million in retail notes,
and the $278 million issuance of member capital securities.
The
increase to members' subordinated certificates for the year ended May 31, 2009
was due to our issuance of $278 million in member capital securities during the
year ended May 31, 2009 and a net increase of $62 million to loan and guarantee
certificates. A total of $113 million of loan and guarantee
certificates were issued in relation to new loans and guarantees outstanding and
were partially offset by $50 million of subordinated certificates maturing due
to loan prepayments, maturities and normal amortization. We began
issuing member capital securities during the quarter ended February 28,
2009. Member capital securities are unsecured obligations that are
subordinate to our existing and future senior indebtedness and our existing and
future subordinated indebtedness that may be held by or transferred to our
non-members, but rank on parity with our member subordinated
certificates. After the end of the fiscal year through August 7,
2009, an additional $53 million of member capital securities were sold bringing
the total to $331 million.
Minority
Interest
At May
31, 2009 and 2008, we reported minority interests of $10 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 year ended May 31, 2009, NCSC’s net loss of $9 million exceeded its equity
balance by $6 million, which eliminated the NCSC equity presented in minority
interest. Based on the accounting guidance governing
consolidations, National Rural is required to absorb the $6 million NCSC excess
loss. NCSC’s losses during the year ended May 31, 2009 were primarily
due to its $12 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 at May
31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
|
Increase/
(Decrease)
|
|
|
Membership
fees
|
$
|
990
|
|
|
$
|
993
|
|
|
$
|
(3
|
)
|
|
Education
fund
|
|
1,592
|
|
|
|
1,484
|
|
|
|
108
|
|
|
Members'
capital reserve
|
|
187,098
|
|
|
|
187,409
|
|
|
|
(311
|
)
|
|
Allocated
net income
|
|
420,834
|
|
|
|
423,249
|
|
|
|
(2,415
|
)
|
|
Unallocated
net loss (1)
|
|
(6,198
|
)
|
|
|
(53
|
)
|
|
|
(6,145
|
)
|
|
Total
members' equity
|
|
604,316
|
|
|
|
613,082
|
|
|
|
(8,766
|
)
|
|
Prior
years cumulative derivative forward
|
|
|
|
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
44,056
|
|
|
|
131,551
|
|
|
|
(87,495
|
)
|
|
Year-to-date
derivative forward value loss (2)
|
|
(147,549
|
)
|
|
|
(87,495
|
)
|
|
|
(60,054
|
)
|
|
Total
retained equity
|
|
500,823
|
|
|
|
657,138
|
|
|
|
(156,315
|
)
|
|
Accumulated
other comprehensive income
|
|
8,115
|
|
|
|
8,827
|
|
|
|
(712
|
)
|
|
Total
equity
|
|
$
|
508,938
|
|
|
$
|
665,965
|
|
|
$
|
(157,027
|
)
|
|
(1)
Excludes derivative forward value. Unallocated net loss at May 31,
2009 includes National Rural’s obligation to absorb NCSC losses in excess of
their equity balance totaling $6 million.
(2)
Represents the derivative forward value loss recorded by National Rural for the
year-to-date period.
To become
a member, applicants may be required to pay a one-time fee which we treat as an
equity investment. 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. After 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 cooperative educational
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 the accounting for derivative financial instruments and
foreign currency translation. National Rural allocates a small
portion, less than one percent, of net earnings annually to the cooperative
educational fund. The allocation to the
cooperative
educational fund must be at least 0.25 percent of net earnings as required by
National Rural’s bylaws. Funds from the cooperative educational fund
are disbursed annually to statewide cooperative organizations to fund the
teaching of cooperative principles and for other cooperative education
programs. 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
members, 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 May
31, 2009, total equity decreased by $157 million from May 31, 2008 due to the
board authorized patronage capital retirement and the net loss of $70
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. The remaining 30 percent of the fiscal year
2008 allocated net earnings will be retained by National Rural and used to fund
operations for 25 years and then may be retired under the new policy described
below. The retirement of allocated net earnings for fiscal years
1991, 1992 and 1993 was done as part of the transition to the retirement cycle
adopted in 1994 and in effect through fiscal year 2009.
In June
2009, we revised our guidelines related to the timing and amount of patronage
capital to be distributed. The purpose of the revision, which was
approved by National Rural’s board of directors, is to continue strengthening
National Rural’s equity position. Under the new guidelines, National
Rural will retire 50 percent of prior year’s margins and hold the remaining 50
percent for 25 years. The retirement amount and timing remains
subject to annual approval by National Rural’s board of directors.
In July
2009, National Rural’s board of directors authorized the allocation of the
fiscal year 2009 net earnings as follows: $1 million to the cooperative
educational fund and $83 million to members in the form of patronage
capital. In July 2009, National Rural’s board of directors authorized
the retirement of allocated net earnings totaling $41 million, representing 50
percent of the fiscal year 2009 allocation. This amount will be
returned to members in cash at the end of September 2009. 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.
Contractual
Obligations
The
following table summarizes our long-term contractual obligations at May 31, 2009
and the scheduled reductions by fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
More
than 5
|
|
|
(dollar
amounts in millions)
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Years
|
|
Total
|
|
Long-term
debt due in less than one year
|
|
$
|
2,580
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,580
|
|
Long-term
debt
|
|
|
-
|
|
|
|
1,831
|
|
|
|
1,948
|
|
|
|
123
|
|
|
|
2,181
|
|
|
|
6,637
|
|
|
|
12,720
|
|
Subordinated
deferrable debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
311
|
|
|
|
311
|
|
Members'
subordinated certificates
(1)
|
|
|
17
|
|
|
|
15
|
|
|
|
55
|
|
|
|
23
|
|
|
|
15
|
|
|
|
1,374
|
|
|
|
1,499
|
|
Operating
leases (2)
|
|
|
4
|
|
|
|
4
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9
|
|
Contractual
interest on long-term debt (3)
|
|
|
851
|
|
|
|
772
|
|
|
|
708
|
|
|
|
613
|
|
|
|
547
|
|
|
|
7,437
|
|
|
|
10,928
|
|
Total
contractual obligations
|
|
|
$
|
3,452
|
|
|
$
|
2,622
|
|
|
$
|
2,712
|
|
|
$
|
759
|
|
|
$
|
2,743
|
|
|
$
|
15,759
|
|
|
$
|
28,047
|
|
(1)
Excludes loan subordinated certificates totaling $241 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, therefore an
amortization schedule cannot be maintained for these
certificates. Over the past three years, annual amortization on these
certificates has averaged $28 million. In fiscal year 2009,
amortization represented 8 percent of amortizing loan subordinated certificates
outstanding.
(2)
Primarily represents the payment obligation related to our lease of office space
for our headquarters facility through the term of the lease ending on October
17, 2011. Assuming we exercise the option to extend the lease for an
additional one-year period in fiscal year 2012, the future minimum lease
payments for fiscal years 2012 and 2013 would increase to $4 million and $1
million, respectively. Assuming we exercise the option to extend the
lease for an additional one-year period in fiscal year 2013, the future minimum
lease payments for fiscal years 2012, 2013 and 2014 would increase to $4
million, $4 million and $1 million, respectively.
(3)
Represents the interest obligation on our debt based on terms and conditions at
May 31, 2009.
Off-Balance
Sheet Obligations
Guarantees
The
following table provides a breakout of guarantees outstanding by type and by
segment at May 31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
|
Increase/
(Decrease)
|
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
tax-exempt bonds
|
$
|
644,540
|
|
|
$
|
498,495
|
|
|
$
|
146,045
|
|
|
Indemnifications
of tax benefit transfers
|
|
81,574
|
|
|
|
94,821
|
|
|
|
(13,247
|
)
|
|
Letters
of credit
|
|
450,659
|
|
|
|
343,424
|
|
|
|
107,235
|
|
|
Other
guarantees
|
|
98,682
|
|
|
|
100,400
|
|
|
|
(1,718
|
)
|
|
Total
|
$
|
1,275,455
|
|
|
$
|
1,037,140
|
|
|
$
|
238,315
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
1,233,333
|
|
|
$
|
993,699
|
|
|
$
|
239,634
|
|
|
RTFC
|
|
500
|
|
|
|
260
|
|
|
|
240
|
|
|
NCSC
|
|
41,622
|
|
|
|
43,181
|
|
|
|
(1,559
|
)
|
|
Total
|
$
|
1,275,455
|
|
|
$
|
1,037,140
|
|
|
$
|
238,315
|
|
|
We
guarantee certain contractual obligations of our 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 we perform under our guarantee. We use the same
credit policies and monitoring procedures in providing guarantees as we do for
loans and commitments. At May 31, 2009 and 2008, 73 percent and 77
percent of total guarantees, respectively, were secured by a mortgage lien on
substantially all of the system's assets and future
revenues. Members' interest expense for the years ended May 31, 2009
and 2008 on debt obligations that we guaranteed was approximately $21 million
representing the amount of interest that we would have to pay in a year if our
members were to default.
The
increase in total guarantees during the year ended May 31, 2009 is primarily due
to the increase in guarantees for long-term tax-exempt bonds and letters of
credit. We entered into new agreements as the guarantor and liquidity
provider for $176 million of tax-exempt bonds offset by $30 million of
redemptions and normal amortization.
At May
31, 2009 and 2008, we had recorded a guarantee liability totaling $30 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 May 31, 2009 and
the related notional principal amortization and maturities by fiscal
year.
|
|
|
|
Principal
Amortization and Maturities
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
(dollar
amounts in thousands)
|
|
Balance
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Years
|
|
|
|
Guarantees
(1)
|
|
$
|
1,275,455
|
|
|
$
|
326,570
|
|
|
$
|
214,291
|
|
|
$
|
81,035
|
|
|
$
|
120,596
|
|
|
$
|
51,089
|
|
|
$
|
481,874
|
|
|
(1) On a
total of $643 million of tax-exempt bonds, we have unconditionally agreed to
purchase bonds tendered or called for redemption at any time if the remarketing
agents have not sold such bonds to other purchasers.
Contingent
Off-Balance Sheet Obligations
Unadvanced
Loan Commitments
At May
31, 2009, our unadvanced loan commitments totaled $13,551 million, a decrease of
$23 million over the $13,574 million outstanding at May 31,
2008. These are unadvanced commitments because we approved and
executed loan contracts, but the funds have not been advanced. For
most long-term advances of unadvanced commitments, we confirm there have been no
material adverse changes in the borrower’s financial statement
condition based on our credit underwriting policy since we approved
the loan.
It would
be unlikely for members to draw all of their unadvanced commitments in the near
term because of the following reasons:
·
|
electric
cooperatives typically execute loan contracts, but do not advance the
funds at the inception of the loan, to cover multi-year work
plans;
|
·
|
electric
cooperatives generate a significant amount of cash from the collection of
invoices from their customers, so they usually do not need to draw down on
loan commitments for operating cash flows;
and
|
·
|
unadvanced
commitments generally expire within five years of the first advance on a
loan.
|
Approximately
$4 billion of long-term commitments are scheduled to expire if not advanced over
the next three years.
Our line
of credit loans generally contain material adverse change
conditions. The majority of the short-term unadvanced commitments
provide backup liquidity to our borrowers; therefore, we do not anticipate
funding most of these commitments. Approximately 59 percent and 56
percent of the outstanding commitments at May 31, 2009 and 2008, respectively,
were for short-term and line of credit loans.
Unadvanced
commitments are classified as contingent liabilities. Based on the
conditions to advance 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.
Ratio
Analysis
Leverage
Ratio
The
leverage ratio is calculated by dividing the sum of total liabilities and
guarantees outstanding by total equity. Based on this formula, the
leverage ratio at May 31, 2009 was 42.71, an increase from 29.64 at May 31,
2008. The increase in the leverage ratio is due to an increase of
$1,764 million in total liabilities, a decrease of $157 million in total equity
and an increase of $238 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 year ended May 31, 2009 was to fund the $1,161 million
increase to loans outstanding during the period and to increase the amount of
cash on hand in anticipation of debt maturing shortly after
year-end.
For
covenant compliance on our 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 calculate adjusted
equity. At May 31, 2009 and 2008, the adjusted leverage ratio was
7.11 and 7.50, respectively. See Non-GAAP Financial Measures
for further explanation and a reconciliation of the adjustments we make in our
leverage ratio calculation.
The
decrease in the adjusted leverage ratio is due to an increase of $320 million in
adjusted equity offset by an increase in adjusted liabilities of $1,116 million
and an increase of $238 million to guarantees 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
certain investment grade ratings from Moody's Investors Service and Standard
& Poor's Corporation are excluded from the calculation of the leverage ratio
under the terms of the revolving credit agreements.
Debt
to Equity Ratio
The debt
to equity ratio is calculated by dividing the sum of total liabilities
outstanding by total equity. The debt to equity ratio, based on this
formula at May 31, 2009 was 40.21, an increase from 28.08 at May 31,
2008. The increase in the debt to equity ratio is due to the decrease
of $157 million in total equity and an increase of $1,764 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 May 31, 2009 and 2008, the adjusted debt to equity ratio
was 6.63 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 decrease in the adjusted debt to
equity ratio is due to the increase of $320 million in adjusted equity offset by
an increase of $1,116 million in adjusted liabilities.
Credit
Ratings
Our 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
our credit ratings at May 31, 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 (1)
|
|
A3
|
|
|
|
BBB
|
|
|
|
A-
|
|
|
Commercial
paper
|
|
P-1
|
|
|
|
A-1
|
|
|
|
F-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled
bonds
|
|
A1
|
|
|
|
A
|
|
|
|
A
|
|
|
Other
bonds
|
|
A2
|
|
|
|
A
|
|
|
|
A
|
|
|
Short-term
|
|
|
P-1
|
|
|
|
A-1
|
|
|
|
F-1
|
|
|
(1) On
February 24, 2009, Standard & Poor’s Corporation lowered the debt ratings on
subordinated deferrable debt issued by 47 issuers, and our rating was lowered
from BBB+ to BBB.
The
ratings listed above are defined by each of the respective rating agencies, are
not recommendations to buy, sell or hold securities and can be revised or
withdrawn at any time by the rating organizations.
At May
31, 2009 and through the date of this filing, Moody's Investors Service and
Standard & Poor’s Corporation had our ratings on stable outlook. On July 24,
2009, Fitch Ratings announced downgrades, with a stable outlook, on all of our
secured and unsecured debt resulting in the following new ratings:
|
Fitch
Ratings
|
Senior
secured debt
|
|
A
|
|
Senior
unsecured debt
|
|
A-
|
|
Subordinated
deferrable debt
|
|
BBB
|
|
Commercial
paper
|
|
F-2
|
|
Liquidity
and Capital Resources
The
following section discusses our sources and uses of liquidity. Our
primary sources of liquidity include capital market debt issuances, private debt
issuances, member loan principal repayments, member loan interest payments,
revolving bank line facilities and member investments. Our primary
uses of liquidity include loan advances, interest payments on debt, principal
repayments on debt and patronage capital retirements. We believe that
our sources of liquidity are adequate to cover the uses of
liquidity.
After the
bankruptcy of LBHI and its subsidiaries in September and through the latter part
of November 2008, we 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. 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, while continuing, eased during the third and
fourth quarters of fiscal year 2009. Refer to Liquidity under the Business Overview for
additional details about the funding issues we experienced during the year ended
May 31, 2009.
Sources
of Liquidity
Capital
Market Debt Issuance
We
qualify as a well-known seasoned issuer under SEC rules and we 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. We
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
that are subordinate to our existing and future senior indebtedness and our
existing and future subordinated indebtedness that may be held by or transferred
to our non-members, but will rank on parity with our member subordinated
certificates. As of May 31, 2009, National Rural had issued $278
million of member capital securities. The amount of member capital
securities issued by National Rural increased to a total of $331 million as of
August 7, 2009.
We have
Board authorization to issue up to $1 billion of commercial paper and $4 billion
of medium-term notes in the European market. We also have Board
authorization to issue $2 billion of medium-term notes in the Australian
market. At May 31, 2009, there was no debt outstanding under our
European or Australian programs. In addition, we have a
commercial
paper
program to sell commercial paper to investors in the capital
markets. We limit the amount of commercial paper that can be sold to
the amount of backup liquidity available under our revolving credit
agreements. We also obtain short-term funding from the sale of
floating-rate demand notes to members under our 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 $3 billion limitation on the aggregate principal amount
outstanding at any time.
Private
Debt Issuance
We have
access to liquidity from private debt issuances through the Farmer Mac and REDLG
programs. Under the note purchase agreements with Farmer Mac,
we have the option to draw or advance multiple issuances not to exceed the total
amount of the note purchase agreements with Farmer Mac. When Farmer
Mac communicates favorable pricing indications and investor interest to us, we
may elect to advance under note purchase agreements. We are 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 with Farmer Mac.
During
the year ended May 31, 2009, we issued new debt totaling $800 million to Farmer
Mac. Fixed-rate notes totaling $500 million were issued under a
December 2008 note purchase agreement. Variable-rate notes totaling
$300 million were issued under a February 2009 note purchase
agreement. Additionally, under a March 2009 note purchase agreement,
we refinanced a $400 million five-year, variable-rate note sold to Farmer Mac in
2008 with notes totaling $400 million and maturities through 2014. In May 2009, we entered
into a $1,000 million seven-year revolving note purchase agreement with Farmer
Mac. We may select a fixed rate or variable rate at the time of each
advance with maturities no later than December 31, 2016. This $1,000
million commitment remained unadvanced at May 31, 2009. In June 2009,
the remaining $200 million available under the February 2009 note purchase
agreement was advanced in the form of variable-rate five-year
notes. In July 2009, we amended the two Farmer Mac note purchase
agreements entered into in December 2008 and February 2009 to make them
revolving credit facilities that allow us to borrow, repay and re-borrow funds
at any time or from time to time as market conditions permit; provided that the
principal amount at any time outstanding under each of the note purchase
agreements is not more than $500 million.
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. Those mortgage notes must meet certain ratio and
concentration requirements to be eligible to pledge under our agreements with
Farmer Mac.
At May
31, 2009, we 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 and due in 2028. As part of
the REDLG program, we pay RUS a fee of 30 basis points per year on the total
amount borrowed. At May 31, 2009, the $3.0 billion of unsecured notes
payable issued as part of the REDLG program require us to place mortgage notes
on deposit in an amount at least equal to the principal balance of the notes
outstanding. These mortgage notes become pledged as collateral based
on certain triggering events.
Member
Loan Repayments
Scheduled
repayments on long-term loans are expected to average $1,028 million a year for
fiscal years 2010 to 2014. Scheduled repayments include loan
amortization and anticipated resolutions of impaired loans based on current
expectations.
(dollar
amounts in thousands)
|
|
Amortization
(1)
|
2010 (2)
|
$
|
1,106,754
|
2011
|
|
860,033
|
2012
|
|
1,451,411
|
2013
|
|
863,403
|
2014
|
|
858,133
|
Thereafter
|
|
|
12,483,880
|
Total
|
|
$
|
17,623,614
|
(1)
Represents scheduled amortization based on current rates without consideration
for loans that reprice.
(2)
Excludes the anticipated settlement of long-term loans to ICC totaling $466
million.
Member
Loan Interest Payments
During
the year ended May 31, 2009, interest income on the loan portfolio was $1,059
million, representing an average yield of 5.38 percent as compared with 5.63
percent and 5.61 percent for the years ended May 31, 2008 and 2007,
respectively. For the past three fiscal years, interest income on the
loan portfolio has averaged $1,039 million. At May 31, 2009, 73
percent of the total loans outstanding had a fixed rate of interest and 27
percent of loans outstanding had a variable rate of interest. At May 31, 2009, a
total of 5 percent of loans outstanding were on non-accrual status.
Bank
Revolving Credit Facility
The
following is a summary of our revolving credit agreements:
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
|
Termination
Date
|
|
|
Facility
fee per
year
(1)
|
Five-year
agreement (2)
|
$
|
1,125,000
|
|
$
|
1,125,000
|
|
March
16, 2012
|
|
|
6
basis points
|
Five-year
agreement (2)
|
|
1,025,000
|
|
|
1,025,000
|
|
March
22, 2011
|
|
|
6
basis points
|
364-day
agreement
|
|
1,000,000
|
|
|
-
|
|
March
12, 2010
|
|
|
12.5
basis points
|
364-day
agreement
|
|
-
|
|
|
1,500,000
|
|
March
13, 2009
|
|
|
5
basis points
|
Total
|
|
$
|
3,150,000
|
|
$
|
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)
Amounts include Lehman Brother’s Bank, FSB’s (“LBB”) portion of the credit
facility totaling $134 million allocated as follows: $76 million under the
five-year facility maturing 2012, and $58 million under the five-year facility
maturing in 2011. We do not expect LBB to fund our portion of the
credit facility according to the agreements. See further discussion
below.
We have
the right under the 364-day revolving credit agreement, 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.
Both
five-year agreements 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 May
31, 2009 and 2008, we were in compliance with all covenants and conditions under
our revolving credit agreements and there were no borrowings outstanding under
these agreements.
LBB, a
subsidiary of LBHI, was a participant for up to $239 million of our revolving
credit facilities at the time LBB filed a petition under Chapter 11 of the
United States Bankruptcy Code in September 2008. No amount had been
advanced. On October 7, 2008, we 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, we do not believe that LBB’s $134 million current portion of the credit
facilities will be available in the future. We believe that if
accessing the credit markets continues to be difficult, the remaining amounts in
the credit facilities will be adequate to fund our operations in the near
term. We repaid the $418.5 million borrowed under our revolving
credit facility on November 13, 2008. See the Financial Overview section
for additional information.
To
calculate the required financial covenants in our revolving credit agreements,
we adjust net income, senior debt and total equity to exclude the non-cash
adjustments related to the accounting for derivative financial instruments and
foreign currency translation. 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 the
accounting for derivative financial instruments and foreign currency
translation, 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 our required and actual financial ratios under the
revolving credit agreements at or for the year ended May 31:
|
|
|
|
Actual
|
|
|
|
Requirement
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
|
1.025
|
|
1.18
|
|
1.16
|
|
|
|
|
|
|
|
|
|
Minimum
adjusted TIER at fiscal year end (1)
|
|
1.05
|
|
1.10
|
|
1.15
|
|
|
|
|
|
|
|
|
|
Maximum
ratio of senior debt to total equity
|
|
|
10.00
|
|
6.90
|
|
7.33
|
|
(1) We
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 we must be in compliance with their other requirements,
including financial ratios, to draw down on the facilities.
Member
Investments
At May
31, 2009 and 2008, members funded 20.5 percent and 20.3 percent, respectively,
of total assets. Below is a table showing the components of our
member investments:
|
|
2009
|
|
|
2008
|
|
|
Increase/
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total (1)
|
|
|
Amount
|
|
%
of Total (1)
|
|
|
(Decrease)
|
|
Commercial
paper (2)
|
$
|
1,226,238
|
|
67
|
%
|
$
|
1,526,559
|
|
50
|
%
|
$
|
(300,321
|
)
|
Medium-term
notes
|
|
723,009
|
|
12
|
|
|
392,739
|
|
8
|
|
|
330,270
|
|
Members'
subordinated certificates
|
|
1,740,054
|
|
100
|
|
|
1,406,779
|
|
100
|
|
|
333,275
|
|
Members'
equity (3)
|
|
604,316
|
|
100
|
|
|
613,082
|
|
100
|
|
|
(8,766
|
)
|
Total
|
$
|
4,293,617
|
|
|
|
$
|
3,939,159
|
|
|
|
$
|
354,458
|
|
Percentage
of total assets
|
|
20.5
|
%
|
|
|
|
20.3
|
%
|
|
|
|
|
|
Percentage
of total assets less derivative assets (3)
|
|
20.8
|
|
|
|
|
20.6
|
|
|
|
|
|
|
(1)
Represents the percentage of each line item outstanding to our
members.
(2)
Includes $291 million and $251 million related to the daily liquidity fund at
May 31, 2009 and 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.
We view
member commercial paper investments as a more stable source of funding than
investor-purchased commercial paper. Member commercial paper
investments have averaged $1,240 million outstanding since January 1,
2007.
Uses
of Liquidity
Loan
Advances
Loan
advances are either from new loans approved to members or from the unadvanced
portion of loans that were previously approved. At May 31, 2009, we
had unadvanced loan commitments totaling $13,551 million. We do 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 $4 billion of long-term commitments are
scheduled to expire if not advanced over the next three
years. Approximately 59 percent of the outstanding commitments at May
31, 2009 were for short-term or line of credit loans. We expect to
fund loan advances, either from new loans approved to members or from unadvanced
commitments, totaling $1.3 billion during fiscal year 2010.
Interest
Expense on Debt
For the
year ended May 31, 2009, interest expense on debt was $914 million, representing
4.81 percent of the average debt volume. The interest expense on debt
represented 5.62 percent and 5.71 percent of the average debt volume for the
years ended May 31, 2008 and 2007, respectively. For the past three
fiscal years, interest expense on debt has averaged $935 million. At
May 31, 2009, a total of 87 percent of outstanding debt had a fixed interest
rate and 13 percent of outstanding debt had a variable interest
rate.
Principal
Repayments on Long-term Debt
The
principal amount and weighted-average interest rates of medium-term notes,
collateral trust bonds, long-term notes payable, subordinated deferrable debt
and membership subordinated certificates maturing in each of the five fiscal
years following May 31, 2009 and thereafter is as follows:
|
|
Amount
|
|
Weighted-Average
|
|
(dollar
amounts in thousands)
|
|
Maturing
(1)
|
|
Interest
Rate
|
|
2010
|
$
|
2,596,768
|
|
4.48
|
%
|
2011
|
|
1,845,606
|
|
3.86
|
|
2012
|
|
2,003,512
|
|
6.28
|
|
2013
|
|
145,877
|
|
3.82
|
|
2014
|
|
2,195,993
|
|
4.81
|
|
Thereafter
|
|
8,322,455
|
|
6.10
|
|
Total
|
|
$
|
17,110,211
|
|
5.45
|
%
|
(1)
Excludes loan subordinated certificates totaling $241 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, therefore an
amortization schedule cannot be maintained for these
certificates. Over the past three years, annual amortization on these
certificates has averaged $28 million. In fiscal year 2009,
amortization represented 8 percent of amortizing loan subordinated certificates
outstanding.
Patronage
Capital Retirements
We have
made annual retirements of our allocated patronage capital in 29 of the last 30
years. In July 2009, the National Rural board of directors approved
the allocation of a total of $83 million from fiscal year 2009 net earnings to
the National Rural members. National Rural is scheduled to make a
cash payment of $41 million to its members in September 2009 as retirement of 50
percent of allocated net earnings from the prior year as approved by the board
of directors. The remaining portion of allocated net earnings will be
retained by National Rural for 25 years under new guidelines starting in June
2009.
Market
Risk
Our
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. We do not match fund the majority of our fixed-rate loans
with a specific debt issuance at the time the loans are advanced. We
aggregate fixed-rate loans until the volume reaches a level that will allow an
economically efficient issuance of debt to fund fixed-rate loans. We
allow borrowers flexibility when choosing the period 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. Each time borrowers select a rate,
that rate is at our then-current market for that type of loan.
Matched
Funding Policy
To
monitor and mitigate interest rate risk in the funding of fixed-rate loans, we
perform a monthly interest rate 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 52). The interest rate risk is
deemed minimal on variable-rate loans, since the loans may be repriced either
monthly or semi-monthly to reflect the cost of the debt used to fund the
loans. At May 31, 2009 and 2008, 27 percent and 19 percent,
respectively, of loans carried variable interest rates.
Our
funding objective is 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 May 31, 2009, our matched funding was
outside of this range. At May 31, 2009, we had $14,810 million of
fixed-rate assets amortizing or repricing, funded by $14,571 million of
fixed-rate liabilities maturing during the next 30 years and $1,805 million of
members' equity and members' subordinated certificates, a portion of which does
not have a scheduled maturity. The difference of $1,566 million, or
7.46 percent of total assets and 7.60 percent of 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. At May 31, 2008,
the fixed rate assets maturing during the next 30 years exceeded fixed rate debt
and equity by $308 million, or less than 2% of each of total assets and total
assets excluding derivative assets.
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 our
long-term cost of funding and with extended maturities, and commercial paper,
our liabilities have average maturities that closely match the repricing terms
(but not the maturities) of our fixed-interest rate loans. We also
use commercial paper supported by derivative instruments to fund our 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 us to analyze the effect on the overall
adjusted TIER of issuing a certain amount of debt at a fixed rate for various
maturities, before issuance of the debt. See Non-GAAP Financial Measures
for further explanation and a reconciliation of the adjustments to
TIER.
We
provide our members with many options on 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 and the management of the
interest rate gap is very fluid. Items contributing to the prefunded
position at May 31, 2009 include the following:
·
|
To
pay down commercial paper and refinance maturing extendible collateral
trust bonds, we 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 we issued the
collateral trust bonds.
|
·
|
The
termination of certain receive fixed, pay variable interest rate swaps
with notional amounts totaling $583 million created a larger prefund
position than was originally
anticipated.
|
·
|
The
success of our retail notes program and member capital securities, which
are both fixed-rate debt instruments. During the fiscal year
ended May 31, 2009, we sold $278 million in member capital securities and
retail notes increased by $734
million.
|
·
|
The
decrease in commercial paper of $1.3 billion compared to the prior year as
a result of prefunding floating-rate debt maturing in the first quarter of
fiscal year 2010 with long-term fixed-rate funding. As part of
our ongoing efforts to manage the liquidity risks associated with maturing
debt, we regularly pre-fund large expected debt obligations prior to the
maturity to ensure the availability of
funds.
|
Certain
of our 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, we take advantage of these early
redemption provisions. However, because conversions and prepayments
can take place at different intervals from early redemptions, we charge
conversion fees designed to compensate for the additional interest rate risk we
assume.
The
following table shows the scheduled amortization and repricing of fixed-rate
assets and liabilities outstanding at May 31,
2009.
Interest
Rate Gap Analysis
|
(Fixed-rate
Assets/Liabilities)
|
As
of May 31, 2009
|
|
May
31,
|
|
June
1,
|
|
June
1,
|
|
June
1,
|
|
June
1,
|
|
|
|
|
|
|
2010
|
|
2010
to
|
|
2012
to
|
|
2014
to
|
|
2019
to
|
|
Beyond
|
|
|
|
|
or
|
|
May
31,
|
|
May
31,
|
|
May
31,
|
|
May
31,
|
|
June
1,
|
|
|
|
(dollar
amounts in millions)
|
prior
|
|
2012
|
|
2014
|
|
2019
|
|
2029
|
|
2029
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
amortization and repricing
|
$
|
1,937
|
|
|
$
|
3,860
|
|
|
$
|
2,341
|
|
|
$
|
3,257
|
|
|
$
|
2,400
|
|
|
$
|
1,015
|
|
|
$
|
14,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and members' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
1,655
|
|
|
$
|
4,705
|
|
|
$
|
2,245
|
|
|
$
|
4,391
|
|
|
$
|
662
|
|
|
$
|
913
|
|
|
$
|
14,571
|
|
Subordinated
certificates
|
|
17
|
|
|
|
58
|
|
|
|
27
|
|
|
|
48
|
|
|
|
1,013
|
|
|
|
289
|
|
|
|
1,452
|
|
Members'
equity (1)
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
206
|
|
|
|
132
|
|
|
|
353
|
|
Total
liabilities and members' equity
|
$
|
1,672
|
|
|
$
|
4,763
|
|
|
$
|
2,272
|
|
|
$
|
4,454
|
|
|
$
|
1,881
|
|
|
$
|
1,334
|
|
|
$
|
16,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap
(2)
|
$
|
265
|
|
|
$
|
(903
|
)
|
|
$
|
69
|
|
|
$
|
(1,197
|
)
|
|
$
|
519
|
|
|
$
|
(319
|
)
|
|
$
|
(1,566
|
)
|
Cumulative
gap
|
|
265
|
|
|
|
(638
|
)
|
|
|
(569
|
)
|
|
|
(1,766
|
)
|
|
|
(1,247
|
)
|
|
|
(1,566
|
)
|
|
|
|
|
Cumulative
gap as a % of total assets
|
|
1.26
|
%
|
|
|
(3.04
|
)%
|
|
|
(2.71
|
)%
|
|
|
(8.42
|
)%
|
|
|
(5.94
|
)%
|
|
|
(7.46
|
)%
|
|
|
|
|
Cumulative gap as a % of adjusted total
assets (3)
|
|
1.29
|
|
|
|
(3.10
|
)
|
|
|
(2.76
|
)
|
|
|
(8.57
|
)
|
|
|
(6.05
|
)
|
|
|
(7.60
|
)
|
|
|
|
|
(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 we use members' equity in our analysis of the
funding of our loan portfolio.
(2)
Assets less liabilities and members' equity.
(3)
Adjusted total assets represents total assets in the consolidated balance sheet
less derivative assets.
Subsequent
to May 31, 2009, the gap between fixed-rate debt and equity in excess of
fixed-rate assets was reduced to within our funding objective of 3 percent
primarily as a result of the following that occurred subsequent to fiscal year
2009: (1) the maturity of pay fixed, receive variable interest rates swaps, (2)
the execution of four pay variable, receive fixed interest rate swaps due to
tighter floating-rate credit spreads to swap fixed-rate debt to a variable rate
and (3) the conversion of variable-rate loans to fixed-rate loans by members
that initially selected a variable rate during fiscal year 2009 on their
respective repricing dates.
Derivative
Financial Instruments
We
account for derivatives based on the guidance for derivative financial
instruments which require that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the
consolidated balance sheets as either an asset or liability measured at fair
value. Changes in the derivative instrument's fair value are required
to be recognized currently in earnings unless specific hedge accounting criteria
are met. We are neither a dealer or trader in derivative financial
instruments. We use interest rate, cross currency and cross currency
interest rate exchange agreements to manage our interest rate and foreign
currency risk.
Generally,
our derivatives do not qualify for hedge accounting. To qualify for
hedge accounting, there must be a high correlation between the pay leg of the
interest rate exchange agreement and the asset being hedged or between the
receive leg of the interest rate exchange agreement and the liability being
hedged. A large portion of our interest rate exchange agreements use
a 30-day composite commercial paper index as the receive leg, which would have
to be highly correlated to our own commercial paper rates to qualify for hedge
accounting. We sell commercial paper to our members as well as to
investors in the capital markets. We set our commercial paper rates
daily based on our cash requirements. The correlation between our
commercial paper rates and the 30-day composite commercial paper index has not
been consistently high enough to qualify for hedge accounting. At May
31, 2009 and 2008, we did not have any interest rate exchange agreements that
were accounted for using hedge accounting.
We do not
plan to adjust our practice of using the 30-day composite commercial paper or a
LIBOR index as the receive portion of our interest rate exchange
agreements. We set the variable interest rates on our loans based on
the cost of our short-term debt, which is comprised of long-term debt due within
one year and commercial paper. We believe that we are economically
hedging our net interest income on loans by using the 30-day composite
commercial paper or LIBOR index, which are the rates that are most closely
related to the rates we pay on our own commercial paper. During
certain periods, the correlation between the LIBOR rates or the 30-day composite
commercial paper rate and our 90-day and 30-day commercial paper rate has been
higher than the required 90 percent to qualify for hedge
accounting. However, the correlation is not consistently above the 90
percent threshold, and therefore the interest rate exchange agreements that use
the LIBOR rates or the 30-day composite commercial paper rates do not qualify
for hedge accounting. For the purposes of our own analysis, however,
we believe that the correlation is sufficiently high to consider these
agreements effective economic hedges.
Cash
settlements that we pay and receive for derivative instruments that do not
qualify for hedge accounting are recorded in the cash settlements line in the
consolidated statements of operations. Each 25 basis point increase
or decrease to the 30-day composite commercial paper index and the three-month
LIBOR rate would result in a $3 million increase or decrease, respectively, in
our net cash settlements due to the composition of the portfolio at May 31,
2009.
We
currently use two types of interest rate exchange agreements: (1) we
pay a fixed rate and receive a variable rate and (2) we pay a variable rate and
receive a fixed rate. The following chart provides a breakout of the
interest rate exchange agreements at May 31, 2009 by type of
agreement.
|
|
2009
|
|
|
2008
|
|
(dollar
amounts in thousands)
|
|
Notional
Amount
|
|
Weighted-
Average
Rate
Paid
|
|
Weighted-
Average
Rate
Received
|
|
|
Notional
Amount
|
|
Weighted-
Average
Rate
Paid
|
|
Weighted-
Average
Rate
Received
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay
fixed, receive variable
|
$
|
6,506,603
|
|
4.67
|
%
|
0.62
|
%
|
$
|
7,659,973
|
|
4.59
|
%
|
2.64
|
%
|
Pay
variable, receive fixed
|
|
5,323,239
|
|
1.39
|
|
5.82
|
|
|
5,256,440
|
|
3.50
|
|
6.15
|
|
Total
|
$
|
11,829,842
|
|
3.20
|
|
2.96
|
|
$
|
12,916,413
|
|
4.15
|
|
4.07
|
|
We use
these derivative instruments as part of our overall interest rate matching
strategy. These interest rate swaps are used when they provide a
lower cost of funding or minimize interest rate risk. We enter into
interest rate swaps only with counterparties that participate in our revolving
credit agreements. We have not entered into derivative financial
instruments for trading purposes in the past and do not anticipate doing so in
the future.
At May
31, 2009 and 2008, there were no foreign currency exchange agreements
outstanding.
Counterparty
Risk
We are
exposed to counterparty risk related to the performance of the parties with
which we have entered into derivative instruments. To mitigate this
risk, we only enter into these agreements with financial institutions with
investment grade ratings. At May 31, 2009 and 2008, we were a party
to derivative instruments with notional amounts totaling $11,830 million and
$12,916 million, respectively. At the time counterparties are
selected to participate in our exchange agreements, the counterparty must be a
participant in one of our revolving credit agreements. At the date of
this filing, our derivative instrument counterparties had credit ratings ranging
from AAA to BBB+ as assigned by Standard & Poor's Corporation.
As a
result of the bankruptcy filing of LBHI, we terminated seven interest rate swaps
with LBSF on September 26, 2008. The payment due to us 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. We have a claim of $26 million
against LBHI and LBSF. We 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 our 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 or the
price that we can obtain through the sale of our claim.
Rating
Triggers
Some of
our interest rate swaps have credit risk-related contingent features referred to
as rating triggers. Rating triggers are not separate financial
instruments and are not required to be accounted for separately as
derivatives.
At May
31, 2009, the following derivative instruments had rating triggers based on our
senior unsecured credit ratings from Moody's Investors Service or Standard &
Poor’s Corporation falling to a level specified in the agreement and grouped
into the
categories
below. In calculating the payments and collections required upon
termination, we netted the agreements for each counterparty, as allowed by the
underlying master agreements. See table on page 47 for National
Rural's senior unsecured credit ratings as of May 31, 2009.
(dollar
amounts in thousands)
|
|
Notional
|
|
|
Required
Company
|
|
|
Amount
Company
|
|
|
Net
|
|
Rating
Level:
|
|
Amount
|
|
|
Payment
|
|
|
Would
Collect
|
|
|
Total
|
|
Mutual
rating trigger if ratings fall to Baa1/BBB+
|
|
|
|
|
|
|
|
|
|
|
|
|
and
below (1)
|
$
|
6,917,396
|
|
$
|
(141,453
|
)
|
$
|
21,194
|
|
$
|
(120,259
|
)
|
Counterparty
may terminate if ratings fall below
|
|
|
|
|
|
|
|
|
|
|
|
|
Baa1/BBB+
(2)
|
|
938,064
|
|
|
(5,503
|
)
|
|
-
|
|
|
(5,503
|
)
|
Total
|
|
$
|
7,855,460
|
|
$
|
(146,956
|
)
|
$
|
21,194
|
|
$
|
(125,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Stated ratings are for Moody's Investors Service and Standard & Poor’s
Corporation, respectively. Under these 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.
(2)
Stated ratings are for Moody's Investors Service and Standard & Poor’s
Corporation, respectively. The rating trigger provisions on the
interest rate swaps with one counterparty allow the counterparty to terminate
the agreements based on our credit rating, but we do not have the right to
terminate based on the counterparty’s credit rating.
In
addition to the rating triggers listed above, at May 31, 2009, we had a total
notional amount of $815 million of derivative instruments with one counterparty
that would require the pledging of collateral totaling $23 million representing
the net cash settlement amount of the derivative instruments if our 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. The aggregate fair value of all interest rate swaps with rating
triggers that were in a net liability position at May 31, 2009 was $163
million.
Liquidity
Risk
We face
liquidity risk in funding our loan portfolio and refinancing our maturing
obligations. We offer 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, we offer a variety of interest rate
options including the ability to fix the interest rate for terms of one year
through maturity. We fund the loan portfolio with a variety of debt
instruments and our members' equity. We typically do not match fund
each of our loans with a debt instrument of similar final
maturity. Debt instruments such as membership subordinated
certificates and loan and guarantee subordinated certificates have maturities
that vary from the term of the associated loan or guarantee to 100 years, member
capital securities have maturities of 35 years and subordinated deferrable debt
has been issued with maturities of up to 49 years. We may issue
collateral trust bonds and medium-term notes for periods of up to 30 years, but
typically issue such debt instruments with maturities of 2, 3, 5, 7 and 10
years.
At May
31, 2009, we had a total of $2,580 million of long-term debt maturing during the
next 12 months with $245 million maturing in July 2009 (that debt was prefunded
as of May 31, 2009) and $1,250 million maturing in August 2009. As
part of our ongoing efforts to manage the liquidity risks associated with
maturing debt, we regularly pre-fund large expected debt obligations prior to
the maturity to ensure the availability of funds. On August 10, 2009,
we had $1,704 million of cash on hand that will be used to satisfy the $1,250
million debt obligation maturing on August 28, 2009. Debt instruments
such as commercial paper and bank bid notes typically have maturities of 90 days
or less. Therefore, we are at risk if we are unable to issue new debt
instruments to replace debt that matures before the maturity of the loans for
which they are used as funding. Factors that mitigate liquidity risk
include our maintenance of back-up liquidity through revolving credit agreements
with domestic and foreign banks and a large volume of scheduled principal
repayments received on an annual basis. At May 31, 2009, we had $3
billion in lines of credit with financial institutions, with approximately $1.1
billion available for funding as a portion of these bank lines are required for
liquidity purposes on our commercial paper and guarantees under which we are the
liquidity provider. This amount is adjusted to exclude LBB’s $134
million portion of the credit facility as we do not believe that these funds
will be available in the future. The capital constraints of banks
could affect future commitment levels under our revolving credit agreements. Our
$1.0 billion 364-day revolving credit agreement matures in March
2010. Liquidity risk is also mitigated by our access to the CPFF
through February 2010 where we have the capacity to issue a maximum of $3.1
billion of commercial paper. 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, we
limit the amount of dealer commercial paper and bank bid notes used in the
funding of loans. Our 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 May 31, 2009 and 2008, there was a total of $850
million and $1,612 million, respectively, of dealer commercial paper and bank
bid notes outstanding, representing 4 percent and 9 percent, respectively, of
our total debt outstanding.
We
continue to see significant investment support from our members with $3.7
billion of commercial paper, daily liquidity fund, medium-term notes and
subordinated certificate investments outstanding at May 31, 2009. The
member debt
investments
represented 19 percent of the total debt outstanding at May 31,
2009. In addition, we had a total of $4.3 billion of privately placed
debt outstanding at May 31, 2009, $3 billion of which was guaranteed by the U.S.
Government under the REDLG program. The private placements of debt
represented 22 percent of total debt outstanding at May 31, 2009. In
addition to the $4.3 billion of privately placed debt outstanding at May 31,
2009, the remaining $200 million available under the February 2009 note purchase
agreement with Farmer Mac was advanced in June 2009 and $425 million of the
$1,000 million May 2009 note purchase agreement with Farmer Mac was advanced in
August 2009. Access to the remaining $575 million from Farmer Mac
under the May 2009 note purchase agreement is subject to market
conditions. From December 2008 to the date of this filing, Farmer Mac
placed with investors $1,825 million of notes issued under our note purchase
agreements with Farmer Mac.
At May
31, 2009, we were the guarantor and liquidity provider for $643 million of
tax-exempt bonds issued for our 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 $446 million of such
tax-exempt bonds reprice semi-annually. During the year ended May 31,
2009, the $155 million of auction rate bonds we guaranteed were converted to
semi-annual mode. We became the liquidity provider for those
bonds. We entered into new agreements as the guarantor and liquidity
provider for $176 million of tax-exempt bonds that reprice
semi-annually. During the year ended May 31, 2009, we were required
to purchase a total of $72 million of tax-exempt bonds pursuant to our
obligation as liquidity provider. Once acquired, we were required to
hold the bonds until the remarketing agent was able to place them with
third-party investors. During this period, we were 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. While we held the bonds, they were recorded at fair value and
classified as investments in trading securities on the consolidated balance
sheet. Changes in fair value were recorded as fair value adjustment
on investments in trading securities on the consolidated statement of
operations. At May 31, 2009, all tax-exempt bonds we held had been
redeemed or repurchased at par by third-party
investors.
For
additional information about the risks related to our business, see Item 1A.
Risk
Factors.
Financial
Instruments and Derivatives
The
tables below provide information about our derivative financial instruments and
other financial instruments that are sensitive to changes in interest rates,
including interest rate swaps and debt obligations. All of our financial
instruments at May 31, 2009 were entered into or contracted for purposes other
than trading except for the investments in preferred stock. For debt
obligations, the table presents principal cash flows and related average
interest rates by expected maturity dates at May 31, 2009.
|
|
|
|
|
Principal
Amortization and Maturities
|
(dollar
amounts in millions)
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Instrument
|
|
Balance
|
|
Fair
Value
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Years
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in preferred stock
|
$
|
47
|
|
|
$
|
47
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
47
|
|
Long-term
fixed-rate loans (1)
|
|
14,757
|
|
|
|
14,107
|
|
|
|
698
|
|
|
|
719
|
|
|
|
1,160
|
|
|
|
721
|
|
|
|
713
|
|
|
10,746
|
|
Average
rate
|
|
6.21
|
%
|
|
|
|
|
|
|
5.98
|
%
|
|
|
6.00
|
%
|
|
|
5.80
|
%
|
|
|
6.07
|
%
|
|
|
6.11
|
%
|
|
6.30
|
%
|
Long-term
variable-rate loans (2)
|
$
|
2,297
|
|
|
$
|
2,297
|
|
|
$
|
395
|
|
|
$
|
126
|
|
|
$
|
276
|
|
|
$
|
127
|
|
|
$
|
129
|
|
$
|
1,244
|
|
Average
rate (3)
|
|
5.42
|
%
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Short-term
loans (4)
|
$
|
2,041
|
|
|
$
|
2,041
|
|
|
$
|
2,041
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
Average
rate (3)
|
|
3.51
|
%
|
|
|
|
|
|
|
3.51
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
RUS
Guaranteed FFB Refinance
|
$
|
33
|
|
|
$
|
33
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
4
|
|
$
|
18
|
|
Average
rate (3)
|
|
0.57
|
%
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Non-performing
loans (5)
|
$
|
524
|
|
|
$
|
174
|
|
|
$
|
524
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
Average
rate (5)
|
|
-
|
%
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Restructured
loans (5)
|
$
|
538
|
|
|
$
|
324
|
|
|
$
|
11
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
13
|
|
$
|
478
|
|
Average
rate (5)
|
|
0.54
|
%
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Liabilities
and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt (6)
|
$
|
4,868
|
|
|
$
|
4,886
|
|
|
$
|
4,868
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
Average
rate
|
|
2.71
|
%
|
|
|
|
|
|
|
2.71
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Medium-term
notes
|
$
|
3,687
|
|
|
$
|
3,743
|
|
|
$
|
-
|
|
|
$
|
846
|
|
|
$
|
1,695
|
|
|
$
|
39
|
|
|
$
|
60
|
|
$
|
1,047
|
|
Average
rate
|
|
6.61
|
%
|
|
|
|
|
|
|
-
|
|
|
|
4.54
|
%
|
|
|
6.92
|
%
|
|
|
4.73
|
%
|
|
|
5.54
|
%
|
|
7.91
|
%
|
Collateral
trust bonds
|
$
|
4,969
|
|
|
$
|
5,134
|
|
|
$
|
-
|
|
|
$
|
906
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
1,504
|
|
$
|
2,549
|
|
Average
rate
|
|
6.08
|
%
|
|
|
|
|
|
|
-
|
|
|
|
3.34
|
%
|
|
|
7.35
|
%
|
|
|
7.35
|
%
|
|
|
5.21
|
%
|
|
7.53
|
%
|
Long-term
notes payable
|
$
|
4,064
|
|
|
$
|
4,284
|
|
|
$
|
-
|
|
|
$
|
79
|
|
|
$
|
248
|
|
|
$
|
79
|
|
|
$
|
617
|
|
$
|
3,041
|
|
Average
rate
|
|
4.35
|
%
|
|
|
|
|
|
|
-
|
|
|
|
2.44
|
%
|
|
|
2.29
|
%
|
|
|
3.14
|
%
|
|
|
3.77
|
%
|
|
4.72
|
%
|
Subordinated
deferrable debt
|
$
|
311
|
|
|
$
|
275
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
311
|
|
Average
rate
|
|
6.31
|
%
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
6.31
|
%
|
Membership
sub certificates (7)
|
$
|
1,499
|
|
|
$
|
1,499
|
|
|
$
|
17
|
|
|
$
|
15
|
|
|
$
|
55
|
|
|
$
|
23
|
|
|
$
|
15
|
|
$
|
1,374
|
|
Average
rate
|
|
|
4.99
|
%
|
|
|
|
|
|
|
3.25
|
%
|
|
|
4.17
|
%
|
|
|
4.35
|
%
|
|
|
3.84
|
%
|
|
|
4.43
|
%
|
|
5.07
|
%
|
(1) The
principal amount of fixed-rate loans is the total of scheduled principal
amortizations without consideration for loans that reprice. Includes
$210 million of loans guaranteed by RUS.
(2)
Long-term variable-rate loans include $1 million of loans guaranteed by
RUS.
(3)
Variable rates are set the first day of each month.
(4) The
principal amount of line of credit loans are generally required to be paid down
for a period of five consecutive days each year. These loans do not
have a principal amortization schedule.
(5)
Amortization based on expected repayment schedule. Average rate
represents current accrual rate. Interest accrual rate cannot be
estimated for future periods.
(6)
Short-term debt includes commercial paper, bank bid notes and long-term debt due
in less than one year.
(7) Fair
value is estimated at par as there is no ready market to obtain fair value
quotes and it is impracticable to estimate fair value (see Note 15 to the
consolidated financial statements). Excludes loan subordinated certificates
totaling $241 million that amortize annually based on the outstanding balance of
the related loan, therefore there is no scheduled amortization. Over the past
three years, annual amortization on these certificates has averaged $28
million. In fiscal year 2009, amortization represented 8 percent of
amortizing loan subordinated certificates outstanding.
The
following table provides the notional amount, average rate paid, average rate
received and maturity dates for the interest rate exchange agreements to which
we were a party at May 31, 2009.
(dollar
amounts in millions)
|
|
Notional
|
|
|
|
Notional
Amortization and Maturities
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Instruments
|
|
|
Amount
|
|
Fair
Value
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Years
|
Interest
rate exchange agreements
|
|
$
|
11,830
|
|
|
$
|
(112
|
)
|
|
$
|
2,360
|
|
|
$
|
454
|
|
|
$
|
2,962
|
|
|
$
|
888
|
|
|
$
|
1,312
|
|
|
$
|
3,854
|
Average
rate paid
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
rate received
|
|
|
2.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no cross currency or cross currency interest rate exchange agreements to
which we were a party at May 31, 2009 and 2008.
Non-GAAP
Financial Measures
We make
certain adjustments to financial measures in assessing our 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 our operations, and in several cases adjustments
used to measure covenant compliance under our revolving credit agreements, and
therefore we believe these are useful financial measures for
investors. We refer to our non-GAAP financial measures as "adjusted"
throughout this document.
Adjustments
to Net Income and the Calculation of the TIER Ratio
Our
primary performance measure is TIER. TIER is calculated by adding the
interest expense to net income prior to the cumulative effect of change in
accounting principle and dividing that total by the interest
expense. The TIER is a measure of our ability to cover interest
expense requirements on our debt. We adjust the TIER calculation to
add the derivative cash settlements to the interest expense, to add minority
interest net income back to total net income and to remove the derivative
forward value and foreign currency adjustments from total net
income. Adding the cash settlements back to the interest expense also
has a corresponding effect on our adjusted net interest income and adjusted
income prior to income taxes and minority interest. We make these
adjustments to our TIER calculation for covenant compliance on our revolving
credit agreements. The revolving credit agreements require us to
achieve an average adjusted TIER ratio over the six most recent fiscal quarters
of at least 1.025 and prohibit the retirement of patronage capital unless we
have achieved an adjusted TIER ratio of at least 1.05 for the preceding fiscal
year.
We use
derivatives to manage interest rate and foreign currency exchange risk on our
funding of the loan portfolio. The derivative cash settlements
represent the amount that we receive from or pay to our counterparties based on
the interest rate indexes in our derivatives that do not qualify for hedge
accounting. We adjust the reported cost of funding to include the derivative
cash settlements. We use the adjusted cost of funding to set interest
rates on loans to our members and believe that the interest expense adjusted to
include derivative cash settlements represents our total cost of funding for the
period. For computing compliance with our revolving credit agreement
covenants, we are required to adjust our interest expense to include the
derivative cash settlements. TIER is calculated by adding the
derivative cash settlements to the interest expense and reflects management's
perspective on our operations and therefore, we believe that it represents a
useful financial measure for investors.
The
derivative forward value and foreign currency adjustments do not represent cash
inflows or outflows to us during the current period. The derivative
forward value represents a present value estimate of the future cash inflows or
outflows that will be recognized as net cash settlements for all periods through
the maturity of our derivatives that do not qualify for hedge
accounting. Foreign currency adjustments represent the change in
value of foreign denominated debt resulting from the change in foreign currency
exchange rates during the current period. The derivative forward
value and foreign currency
adjustments
do not represent cash inflows or outflows that affect our current ability to
cover our debt service obligations. The forward value calculation is
based on future interest rate expectations that may change daily creating
volatility in the estimated forward value. The change in foreign
currency exchange rates adjusts the debt balance to the amount that would be due
at the reporting date. At the issuance date, we enter into a foreign
currency exchange agreement for all foreign denominated debt that effectively
fixes the exchange rate for all interest and principal payments. For
making operating decisions, we subtract the derivative forward value and foreign
currency adjustments from our net income when calculating TIER and for other net
income presentation purposes. The covenants in our revolving credit
agreements also exclude the effects of derivative forward value and foreign
currency adjustments. In addition, since the derivative forward value
and foreign currency adjustments do not represent current period cash flows, we
do not allocate such funds to our members and therefore exclude the derivative
forward value and foreign currency adjustments from net income when making
certain presentations to our members and in calculating the amount of net income
to be allocated to our members. TIER calculated by excluding the
derivative forward value and foreign currency adjustments from net income
reflects management's perspective on our operations and therefore, we believe
that it represents a useful financial measure for investors.
The
accounting for derivative financial instruments and foreign currency adjustments
have also affected our total equity. The derivative forward value and
foreign currency adjustments flow through the consolidated statements of
operations as income or expense, increasing or decreasing the total net income
for the period. The total net income or net loss for the period
represents an increase or decrease, respectively, to total equity. As
a result of implementing the accounting for derivative financial instruments,
our total equity includes other comprehensive income, which represents
unrecognized gains and losses on derivatives. The other comprehensive
income component of equity related to derivatives that qualify for hedge
accounting does not flow through the consolidated statements of
operations. As stated above, the derivative forward value and foreign
currency adjustments do not represent current cash inflow or
outflow. The other comprehensive income is also an estimate of future
gains and losses and as such does not represent earnings that we can use to fund
our loan portfolio. Financial measures calculated with members'
equity, which is total equity excluding the accounting for derivative financial
instruments and foreign currency adjustments, reflect management's perspective
on our operations and therefore, we believe that we represent a useful measure
of our financial condition.
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 impact of derivatives and
foreign currency adjustments and to include minority interest in net income for
the years ended May 31, 2009, 2008, 2007, 2005 and 2004.
|
|
For
the year ended May 31,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
(dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
$
|
(935,021
|
)
|
|
$
|
(931,268
|
)
|
|
$
|
(991,754
|
)
|
|
$
|
(977,200
|
)
|
|
$
|
(941,398
|
)
|
Derivative
cash settlements
|
|
112,989
|
|
|
|
27,033
|
|
|
|
86,442
|
|
|
|
80,883
|
|
|
|
78,287
|
|
Adjusted
interest expense
|
$
|
(822,032
|
)
|
|
$
|
(904,235
|
)
|
|
$
|
(905,312
|
)
|
|
$
|
(896,317
|
)
|
|
$
|
(863,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
$
|
135,743
|
|
|
$
|
120,125
|
|
|
$
|
47,896
|
|
|
$
|
18,682
|
|
|
$
|
46,776
|
|
Derivative
cash settlements
|
|
112,989
|
|
|
|
27,033
|
|
|
|
86,442
|
|
|
|
80,883
|
|
|
|
78,287
|
|
Adjusted
net interest income
|
$
|
248,732
|
|
|
$
|
147,158
|
|
|
$
|
134,338
|
|
|
$
|
99,565
|
|
|
$
|
125,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income prior to income taxes and minority interest
|
$
|
(78,871
|
)
|
|
$
|
36,311
|
|
|
$
|
16,541
|
|
|
$
|
105,762
|
|
|
$
|
126,561
|
|
Derivative
forward value
|
|
160,017
|
|
|
|
98,743
|
|
|
|
79,281
|
|
|
|
(28,805
|
)
|
|
|
(25,849
|
)
|
Foreign
currency adjustments
|
|
-
|
|
|
|
-
|
|
|
|
14,554
|
|
|
|
22,594
|
|
|
|
22,893
|
|
Adjusted
income prior to income taxes and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
minority
interest
|
$
|
81,146
|
|
|
$
|
135,054
|
|
|
$
|
110,376
|
|
|
$
|
99,551
|
|
|
$
|
123,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income prior to cumulative effect of change in accounting
principle
|
$
|
(69,870
|
)
|
|
$
|
45,745
|
|
|
$
|
11,701
|
|
|
$
|
95,497
|
|
|
$
|
122,503
|
|
Minority
interest net (loss) income
|
|
(3,900
|
)
|
|
|
(6,099
|
)
|
|
|
2,444
|
|
|
|
7,089
|
|
|
|
2,540
|
|
Derivative
forward value
|
|
160,017
|
|
|
|
98,743
|
|
|
|
79,281
|
|
|
|
(28,805
|
)
|
|
|
(25,849
|
)
|
Foreign
currency adjustments
|
|
-
|
|
|
|
-
|
|
|
|
14,554
|
|
|
|
22,594
|
|
|
|
22,893
|
|
Adjusted
net income
|
$
|
86,247
|
|
|
$
|
138,389
|
|
|
$
|
107,980
|
|
|
$
|
96,375
|
|
|
$
|
122,087
|
|
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
|
|
Our
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 years ended May 31,
2009, 2008, 2007, 2006 and 2005.
|
For
the year ended May 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
TIER (1)
|
|
-
|
|
|
|
1.05
|
|
|
|
1.01
|
|
|
|
1.10
|
|
|
|
1.13
|
|
|
Adjusted
TIER
|
|
1.10
|
|
|
|
1.15
|
|
|
|
1.12
|
|
|
|
1.11
|
|
|
|
1.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
For the year ended May 31, 2009, we reported a net loss prior to the
cumulative effect of change in accounting principle of $70 million, thus
the TIER calculation results in a value below
1.00.
|
Adjustments
to the Calculation of Leverage and Debt to Equity
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
|
|
|
Our
adjusted leverage and debt to equity ratios include adjustments to:
·
|
subtract
debt used to fund loans that are guaranteed by RUS from total
liabilities;
|
·
|
subtract
from total liabilities, and add to total equity, debt with equity
characteristics issued to our members and in the capital
markets;
|
·
|
include
minority interest as equity; and
|
·
|
exclude
the non-cash impact of derivative financial instruments and foreign
currency adjustments from total liabilities and total
equity.
|
For
computing compliance with our revolving credit agreement covenants, we are
required to make these adjustments to our leverage ratio
calculation. The revolving credit agreements prohibit us from
incurring senior debt in an amount in excess of ten times the sum of equity,
members' subordinated certificates, minority interest and subordinated
deferrable debt, as defined by the agreements. In addition to the
adjustments we make to calculate the adjusted leverage ratio, guarantees to our
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.
We are an
eligible lender under the RUS loan guarantee program. Loans issued
under this program carry the U.S. Government's guarantee of all interest and
principal payments. Therefore, we have little or no risk associated
with the collection of principal and interest payments on these
loans. Therefore, we believe that there is little or no risk related
to the repayment of the liabilities used to fund RUS guaranteed loans and
subtracts such liabilities from total liabilities to calculate our leverage and
debt to equity ratios. For computing compliance with our revolving
credit agreement covenants, we are required to adjust our leverage ratio by
subtracting liabilities used to fund RUS guaranteed loans from total
liabilities. The leverage and debt to equity ratios adjusted to
subtract debt used to fund RUS guaranteed loans from total liabilities reflect
management's perspective on our operations and therefore, we believe that these
are useful financial measures for investors.
Members
have been required to purchase subordinated certificates as a condition of
membership and as a condition to obtaining a loan or guarantee. The
subordinated certificates are accounted for as debt under GAAP. The
subordinated certificates have long-dated maturities and pay no interest or pay
interest that is below market and under certain conditions we are prohibited
from making interest payments to members on the subordinated
certificates. For computing compliance with our revolving credit
agreement covenants, we are required to adjust our leverage ratio by subtracting
members' subordinated certificates from total liabilities and adding members'
subordinated certificates to total equity. The leverage and debt to
equity ratios adjusted to treat members' subordinated certificates as equity
rather than debt reflect management's perspective on our operations and
therefore, we believe that these are useful financial measures for
investors.
We also
sell subordinated deferrable debt in the capital markets with maturities of up
to 39 years and the option to defer interest payments. The
characteristics of subordination, deferrable interest and long-dated maturity
are all equity characteristics. For computing compliance with our
revolving credit agreement covenants, we are required to adjust our leverage
ratio by subtracting subordinated deferrable debt from total liabilities and
adding it to total equity. The leverage and debt to equity ratios
adjusted to treat subordinated deferrable debt as equity rather than debt
reflect management's perspective on our operations and therefore, we believe
that these are useful financial measures for investors.
We record
derivative instruments at fair value on our consolidated balance
sheets. The fair values are estimates of the future gains and losses
we may incur related to derivatives. The amounts do not represent
current cash flows and are not available to fund current
operations. For computing compliance with our revolving credit
agreement covenants, we are required to adjust our leverage ratio by excluding
the non-cash impact of our derivative accounting from liabilities and
equity. The leverage and debt to equity ratios adjusted to exclude
the impact of our derivative accounting from liabilities and equity reflect
management's perspective on our operations and therefore, we believe that these
are useful financial measures for investors.
As a
result of issuing foreign denominated debt and the accounting guidance for
derivative financial instruments which discontinued the practice of recording
the foreign denominated debt and the related currency exchange agreement as one
transaction, we must adjust the value of such debt reported on the consolidated
balance sheets for changes in foreign currency exchange rates since the date of
issuance based on the accounting for foreign currency translation. At
the time of issuance of all foreign denominated debt, we enter into a foreign
currency exchange agreement to fix the exchange rate on all principal and
interest payments through maturity. The adjustments to the value of
the debt on the consolidated balance sheets are reported on the consolidated
statements of operations as foreign currency adjustments. The
adjusted debt value at the reporting date does not represent the amount that we
will ultimately pay to retire the debt unless the current exchange rate is equal
to the exchange rate in the related foreign currency exchange agreement or the
counterparty fails to honor its obligations under the agreement. For
computing compliance with our revolving credit agreement covenants, we are
required to adjust our leverage ratio by excluding the impact of foreign
currency valuation adjustments from liabilities and equity. The leverage and
debt to equity ratios adjusted to exclude the effect of foreign currency
translation reflect management's perspective on our operations and therefore, we
believe that these are useful financial measures for investors.
The
accounting guidance governing variable interest entities requires that
National Rural consolidate the results of operations and financial
condition of RTFC and NCSC even though we have no financial interest or
voting control over either company. In consolidation, the amount of the
subsidiary equity that is owned or due to investors other than the parent
company is shown as minority interest. Before accounting
guidance required that we consolidate RTFC, the RTFC members' equity was
combined with our equity and therefore included in total
equity. For computing compliance with our revolving credit
agreement covenants, we are required to adjust total equity to include
minority interest. The leverage and debt to equity ratio
adjusted to treat minority interest as equity reflect management's
perspective on our operations and therefore, we believe that these are
useful financial measures for
investors.
|
The
following table reconciles the liabilities and equity on the consolidated
balance sheets to the amounts used to calculate the adjusted leverage and debt
to equity ratios as of the five years ended May 31, 2009.
|
|
May
31,
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
Liabilities
|
|
$
|
20,463,605
|
|
|
$
|
18,699,169
|
|
|
$
|
17,843,151
|
|
|
$
|
18,373,319
|
|
|
$
|
19,276,728
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
|
(493,002
|
)
|
|
|
(171,390
|
)
|
|
|
(71,934
|
)
|
|
|
(85,198
|
)
|
|
|
(78,471
|
)
|
|
Foreign
currency valuation account
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(244,955
|
)
|
|
|
(260,978
|
)
|
|
Debt
used to fund loans guaranteed by RUS
|
|
|
(243,997
|
)
|
|
|
(250,169
|
)
|
|
|
(255,903
|
)
|
|
|
(261,330
|
)
|
|
|
(258,493
|
)
|
|
Subordinated
deferrable debt (2)
|
|
|
(311,440
|
)
|
|
|
(311,440
|
)
|
|
|
(486,440
|
)
|
|
|
(636,440
|
)
|
|
|
(685,000
|
)
|
|
Subordinated
certificates
|
|
|
(1,740,054
|
)
|
|
|
(1,406,779
|
)
|
|
|
(1,381,447
|
)
|
|
|
(1,427,960
|
)
|
|
|
(1,490,750
|
)
|
|
Adjusted
liabilities
|
|
$
|
17,675,112
|
|
|
$
|
16,559,391
|
|
|
$
|
15,647,427
|
|
|
$
|
15,717,436
|
|
|
$
|
16,503,036
|
|
|
Total
equity
|
|
$
|
508,938
|
|
|
$
|
665,965
|
|
|
$
|
710,041
|
|
|
$
|
784,408
|
|
|
$
|
764,934
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
year cumulative derivative forward
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
|
(44,056
|
)
|
|
|
(131,551
|
)
|
|
|
(225,849
|
)
|
|
|
(225,730
|
)
|
|
|
(221,868
|
)
|
|
Year-to-date
derivative forward value (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss
(1)
|
|
|
147,549
|
|
|
|
87,495
|
|
|
|
79,744
|
|
|
|
(22,713
|
)
|
|
|
(26,755
|
)
|
|
Current
period foreign currency adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
14,554
|
|
|
|
22,594
|
|
|
|
22,893
|
|
|
Accumulated
other comprehensive loss
|
|
|
(8,115
|
)
|
|
|
(8,827
|
)
|
|
|
(12,204
|
)
|
|
|
(13,208
|
)
|
|
|
(15,621
|
)
|
|
Subtotal
members' equity
|
|
|
604,316
|
|
|
|
613,082
|
|
|
|
566,286
|
|
|
|
545,351
|
|
|
|
523,583
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
certificates
|
|
|
1,740,054
|
|
|
|
1,406,779
|
|
|
|
1,381,447
|
|
|
|
1,427,960
|
|
|
|
1,490,750
|
|
|
Subordinated
deferrable debt (2)
|
|
|
311,440
|
|
|
|
311,440
|
|
|
|
486,440
|
|
|
|
636,440
|
|
|
|
685,000
|
|
|
Minority
interest
|
|
|
10,162
|
|
|
|
14,247
|
|
|
|
21,989
|
|
|
|
21,894
|
|
|
|
18,652
|
|
|
Adjusted
equity
|
|
$
|
2,665,972
|
|
|
$
|
2,345,548
|
|
|
$
|
2,456,162
|
|
|
$
|
2,631,645
|
|
|
$
|
2,717,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
$
|
1,275,455
|
|
|
$
|
1,037,140
|
|
|
$
|
1,074,374
|
|
|
$
|
1,078,980
|
|
|
$
|
1,157,752
|
|
|
(1)
Represents the derivative forward value loss (gain) recorded by National Rural
for the period.
(2) At
May 31, 2007 and 2006, includes $175 million and $150 million, respectively, of
subordinated deferrable debt classified in short-term debt.
The
following table provides the calculated ratio for leverage and debt to equity,
as well as the adjusted ratio calculations, as of the five years ended May 31,
2009. The adjusted leverage ratio and the adjusted debt to equity
ratio are the same calculation except for the addition of guarantees to adjusted
liabilities in the adjusted leverage ratio.
|
|
|
May
31,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
Leverage
ratio
|
|
|
42.71
|
|
|
|
29.64
|
|
|
|
|
26.64
|
|
|
|
|
24.80
|
|
|
|
|
26.71
|
|
|
|
Adjusted
leverage ratio
|
|
|
7.11
|
|
|
|
7.50
|
|
|
|
|
6.81
|
|
|
|
|
6.38
|
|
|
|
|
6.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
to equity ratio
|
|
|
40.21
|
|
|
|
28.08
|
|
|
|
|
25.13
|
|
|
|
|
23.42
|
|
|
|
|
25.20
|
|
|
|
Adjusted
debt to equity ratio
|
|
|
6.63
|
|
|
|
7.06
|
|
|
|
|
6.37
|
|
|
|
|
5.97
|
|
|
|
|
6.07
|
|
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
See
Market Risk discussion beginning on page 51.
Item
8.
|
Financial
Statements and Supplementary Data.
|
The
consolidated financial statements, auditors' reports and quarterly financial
results are included on pages 89 through 133 (see Note 18 to consolidated
financial statements for a summary of the quarterly results of our
operations).
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None.
Item
9A(T).
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Senior
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under 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 our disclosure controls and procedures are
effective at the reasonable assurance level.
Management's
Report on Internal Control Over Financial Reporting
The
management of National Rural Utilities Cooperative Finance Corporation ("we,"
“our,” or “us”) is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. Our internal control system
over financial reporting is designed under the supervision of management,
including the Chief Executive Officer and Chief Financial Officer, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Our internal control over financial
reporting includes those policies and procedures that:
(i)
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the
assets;
|
(ii)
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of ours
are being made only in accordance with authorizations of management and
our directors; and
|
(iii)
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or dispositions of our
assets.
|
Any
system of internal control, no matter how well designed, has inherent
limitations, including but not limited to the possibility that a control can be
circumvented or overridden and misstatements due to error or fraud may occur and
not be detected. Also, because of changes in conditions, internal control
effectiveness may vary over time. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
A
material weakness (as defined in PCAOB Auditing Standard No. 5) is a
deficiency or combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement in financial statements will not be prevented or detected on a
timely basis.
Our
management assessed the effectiveness of internal control over financial
reporting as of May 31, 2009. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO") in Internal Control-Integrated
Framework.
Based on
management's assessment and those criteria, management believes that we
maintained effective internal control over financial reporting as of May 31,
2009.
This
annual report on Form 10-K does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to furnish only management’s report with this
annual report on Form 10-K.
Changes in Internal Control over
Financial Reporting
There
were no changes in our 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.
By:
|
|
/s/
SHELDON C. PETERSEN
|
By:
|
|
/s/
STEVEN L. LILLY
|
|
|
Sheldon
C. Petersen
|
|
|
Steven
L. Lilly
|
|
|
Governor
and Chief Executive Officer
|
|
|
Senior
Vice President and Chief Financial Officer
|
|
|
August
17, 2009
|
|
|
August
17, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/
ROBERT E. GEIER
|
|
|
|
|
|
Robert
E. Geier
|
|
|
|
|
|
Vice
President and Controller
|
|
|
|
|
|
August
17, 2009
|
|
|
|
Item
9B.
|
Other
Information.
|
None.
PART
III
Item
10.
|
Directors,
Executive Officers and Corporate
Governance.
|
(a)
Directors
|
|
|
|
|
|
|
|
Director
|
|
Date
present
|
|
|
|
Age
|
|
|
since
|
|
term
expires
|
Darryl
Schriver (President of National Rural)
|
|
44
|
|
|
|
2004
|
|
2010
|
Reuben
McBride (Vice President of National Rural)
|
|
62
|
|
|
|
2005
|
|
2011
|
J.
David Wasson, Jr. (Secretary – Treasurer of National
Rural)
|
|
63
|
|
|
|
2006
|
|
2012
|
Fred
Anderson
|
|
57
|
|
|
|
2008
|
|
2011
|
Charles
Ayers
|
|
67
|
|
|
|
2009
|
|
2012
|
Fred
Brog
|
|
64
|
|
|
|
2009
|
|
2012
|
Raphael
A. Brumbeloe
|
|
68
|
|
|
|
2007
|
|
2010
|
Delbert
Cranford
|
|
65
|
|
|
|
2007
|
|
2010
|
Joel
Cunningham
|
|
55
|
|
|
|
2009
|
|
2012
|
Jim
L. Doerstler
|
|
61
|
|
|
|
2008
|
|
2011
|
Jimmy
Ewing, Jr.
|
|
61
|
|
|
|
2007
|
|
2010
|
Michael
J. Guidry
|
|
60
|
|
|
|
2009
|
|
2010
|
Christopher
L. Hamon
|
|
46
|
|
|
|
2009
|
|
2012
|
Scott
W. Handy
|
|
51
|
|
|
|
2009
|
|
2012
|
Jim
Herron
|
|
52
|
|
|
|
2005
|
|
2011
|
Martin
Hillert, Jr.
|
|
54
|
|
|
|
2004
|
|
2010
|
William
A. Kopacz
|
|
62
|
|
|
|
2006
|
|
2012
|
Burns
E. Mercer
|
|
58
|
|
|
|
2008
|
|
2011
|
Glenn
Miller
|
|
45
|
|
|
|
2009
|
|
2012
|
Randy
D. Renth
|
|
45
|
|
|
|
2009
|
|
2012
|
Dwight
Rossow
|
|
47
|
|
|
|
2008
|
|
2011
|
R.
Wayne Stratton
|
|
61
|
|
|
|
2007
|
|
2010
|
F.
E. Wolski
|
|
58
|
|
|
|
2007
|
|
2010
|
Under
National Rural’s bylaws, the board of directors must be composed of the
following 23 individuals:
·
|
20
directors including one general manager and one director of a member
system from each of ten districts;
|
·
|
two
directors designated by the National Rural Electric Cooperative
Association; and
|
·
|
one
at-large director who satisfies the requirements of an audit committee
financial expert as defined by the Sarbanes-Oxley Act of 2002 and must be
a trustee, director, manager, Chief Executive Officer or Chief Financial
Officer of a member.
|
National
Rural directors are elected for a three-year term and can serve a maximum of two
consecutive terms. Each National Rural member (other than associates)
is entitled to one vote with respect to the election of directors and other
matters.
(b)
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held
present
|
Title
|
|
|
Name
|
|
|
Age
|
|
office
since
|
President
and Director
|
|
Darryl
Schriver
|
|
|
44
|
|
2009
|
Vice
President and Director
|
|
Reuben
McBride
|
|
|
62
|
|
2009
|
Secretary
– Treasurer and Director
|
|
J.
David Wasson, Jr
|
|
|
63
|
|
2009
|
Governor
and Chief Executive Officer
|
|
Sheldon
C. Petersen
|
|
|
56
|
|
1995
|
Senior
Vice President of Member Services and General Counsel
|
|
John
J. List
|
|
|
62
|
|
1997
|
Senior
Vice President and Chief Financial Officer
|
|
Steven
L. Lilly
|
|
|
59
|
|
1994
|
Senior
Vice President of Operations
|
|
John
T. Evans
|
|
|
59
|
|
1997
|
Senior
Vice President of Corporate Relations
|
|
Richard
E. Larochelle
|
|
|
56
|
|
1998
|
Senior
Vice President of RTFC
|
|
Lawrence
Zawalick
|
|
|
51
|
|
2000
|
Senior
Vice President of Credit Risk Management
|
|
John
M. Borak
|
|
|
64
|
|
2002
|
The
President, Vice President and Secretary-Treasurer are elected annually by the
board of directors at its first organizational meeting immediately following
National Rural’s annual membership meeting, each to serve a term of one year;
the Governor and Chief Executive Officer serves at the pleasure of the Board of
Directors; and the other Executive Officers serve at the pleasure of the
Governor and Chief Executive Officer.
(c)
Identification of Certain Significant Employees.
Inapplicable.
(d)
Family Relationships.
No family
relationship exists between any director or executive officer and any other
director or executive officer of the registrant.
(e) (1)
and (2) Business Experience and Directorships.
Mr.
Schriver has been General Manager and CEO of Taylor Electric Cooperative, Inc.
in Merkel, TX since 2002. Prior to 2002, he held staff positions at
the Texas House of Representatives, Texas Legislative Council and Texas
Senate. He serves as a director on the Golden Spread Electric
Cooperative Board, the Golden Spread Electric Generating Cooperative Board, the
Oklaunion Electric Generating Cooperative Board, the Yoakum Electric Generating
Cooperative Board, the Mid-Tex Cooperative Board, Fort Concho Gas EC, SEDC
Board, Abilene Industrial Board and the Texas Agricultural Cooperative Council.
Mr. Schriver is a former Group 4 member of the Governmental Relations Committee
of Texas Electric Cooperatives. Mr. Schriver formerly served as
director of Government Affairs of Brazos Electric Power Cooperative from 1996 to
1998 and of Governmental Relations of Texas Electric Cooperative from 1998 to
2002.
Mr.
McBride has been a director of Graham County Electric Cooperative in Pima, AZ
since 1991 and vice president since 1993. Mr. McBride is
owner/operator of Reuben McBride Farms in Pima, AZ since 1980. Mr.
McBride currently serves as president on the board of Arizona Electric Power
Co-op., Inc. and chairman of the Executive Committee. In addition,
Mr. McBride is a member of both the National and Arizona Action Committees for
Rural Electrification.
Mr.
Wasson has been the president and CEO of Laurens Electric Cooperative, Inc. in
Laurens, SC since 1973. He has served on the board of directors of
Central Electric Cooperative since 2009 and the board of directors of New
Horizon Electric Cooperative since 1997. Mr. Wasson has been a board
member of the South Carolina Electric Cooperative Association since 1975 and
served as chairman from December 1983 to December 1985. He also
serves as a director of The Palmetto Bank.
Mr.
Anderson has been the president and CEO of New Hampshire Electric Cooperative,
Inc. in Plymouth, NH since 1992. He is a founding board member of the NHEC
Foundation. Mr. Anderson is also a board member of the Cooperative Research
Council and a former board member of Northway Bank and former member of Northway
Bank’s audit committee. Mr. Anderson is the former director of
Finance and Administration/CFO, New Hampshire Electric Cooperative, Inc.;
systems accountant, Rural Electrification Administration; president, vice
president and treasurer, Northeast Association of Electric Cooperatives;
president, Northeast Public Power Association; and president, Consumer-Owned
Energy Foundation.
Mr. Ayers
has been a trustee of Wheatland Electric Cooperative in Scott City, KS since
1985. He has been the owner and operator of a family farm corporation
in Leoti, Kansas for the past 35 years. Mr. Ayers serves as board
member of Sunflower Electric Cooperative and chairperson of Sunflower Electric
Cooperative. In addition, he previously served as board member of
Western Fuels Association and ACES Power Marketing.
Mr. Brog
has been director of Lower Valley Energy in Afton, WY since 1988. He
has been a rancher and farmer in Freedom, Wyoming since 1970. Mr.
Brog served as secretary-treasurer of NCSC and serves as a board member of Snake
River Power Association. He was past president of Idaho
Consumer-Owned Utilities Association and former director of Wyoming Rural
Electric Association. In addition, Mr. Brog serves as President of
Star Valley Cooperative Milk Marketing Association and adviser to the State of
Wyoming Economic Development Committee.
Mr.
Brumbeloe has served as a board director of Upson Electric Membership
Corporation in Thomaston, GA since 1978 and has been board president since
1998. Mr. Brumbeloe has served as a board member of Georgia Electric
Membership Corporation since 1983 and served as chairman from 1988 to
1989. He is also a member representative of Oglethorpe Power
Corporation. Mr. Brumbeloe retired from the Georgia State Patrol
in 1995 and has been the owner of the Red Rock Armory since 1996.
Mr.
Cranford has served as a board director of Randolph Electric Membership
Corporation in Asheboro, NC since 1989 and was president from 1995 to 2002 and
vice president from 1994 to 1995. He is a director and former
president of the North Carolina Association of Electric Cooperatives, Inc. and
also served on the North Carolina Electrical Cooperative Board. Mr.
Cranford also serves as a director of First Bank Corp, a member of the North
Carolina Pharmaceutical Association and a board member and former president of
the Farmer Volunteer Fire Department. He has been a retail pharmacist
since 1966 and an owner of retail pharmacies since 1984.
Mr.
Cunningham has been a director of Twin County Electric Power Association in
Hollandale, MS since 2004. He has been a self-employed certified
public accountant in Belzoni, Mississippi since 1981. Mr. Cunningham
is a member of the Mississippi Society of CPAs and the American Institute of
CPAs. He is also a credentialed cooperative director through National
Rural Electric Cooperative Association (“NRECA”).
Mr.
Doerstler has served as a board director and assistant secretary-treasurer of
Whitewater Valley REMC in Liberty, IN since 1994. He serves as an
executive committee member and board member of the Indiana Statewide Association
of Rural Electric Cooperatives. Mr. Doerstler has served as vice
president of Farm Credit Banks of Louisville, vice president of Credit for
Wabash Valley Production Credit Association and branch manager of Greencastle
Production Credit Association. He is retired and formerly owned and
operated Louie’s Boot Barn from 1987 until it was sold in June
2008.
Mr. Ewing
has served as a board director of Pointe Coupee Electric Membership Corporation
in New Roads, LA since 1989 and has been board president since
1995. He served as secretary/treasurer from 1990 to
1995. He also serves as a board member of the Association of
Louisiana Electric Cooperatives, Inc. and has been secretary/treasurer since
2006. He is a member of the Action Committee for Rural
Electrification, a board member of the Louisiana Landowners Association and a
former board member of Cajun Electric Power Cooperative. Mr. Ewing
has been a restaurant owner since 1988 and a farm manager since
2002.
Mr.
Guidry has been general manager of South Louisiana Electric Association in
Houma, LA since 1989. Mr. Guidry currently serves as an alternate
Director for the Association of Louisiana Electric Cooperatives and previously
served as alternate director of Cajun Electric Power Cooperative and president
of Louisiana Distribution Co-op Managers Association. In
addition, he is a former member of the NRECA Management Advisory Committee and
former member of the NRECA Resolutions Committee, as well as a current director
of the South Louisiana Economic Council and chairman of the South Louisiana
Economic Council Regional Economic Development Committee.
Mr. Hamon
has been the CEO of White River Valley Electric Cooperative, Inc in Branson, MO
since 1985. He currently serves as director and served as past
president of Sho-Me Power Electric Cooperative and alternate director of KAMO
Power. Mr. Hamon serves on the Executive Board, as president of
the Alternative Fuel Taskforce and on multiple committees for the Association of
Missouri Electric Cooperatives (AMEC) and was past president of the Cooperative
Managers Group. In addition, he was the former Operations and
Engineering manager for White River Valley Electric Cooperative. Mr.
Hamon is a member of the Energy Efficiency/Demand Side Management Team for
Associated Electric Cooperative, Inc., the Distribution Advisory Committee for
Electric Power Research Institute, the Institute of Electrical & Electronic
Engineers and the Missouri Society of Professional Engineers.
Mr. Handy
has been the president and CEO of Cass County Electric Cooperative, Inc. in
Kindred, ND since February 2002. He currently serves as chairman for
the Rural Electric Management Development Council and the Minnkota Power
Cooperative Manager’s Advisory Committee, and previously served as chairman for
the North Dakota Association of Rural Electric Cooperatives Manager’s Advisory
Committee. In addition, he is board chairman for Greater Fargo-Moorhead Economic
Development Corporation’s Growth Initiative Fund, a public/private loan pool
that lends money for business expansion, and board member of the North Dakota
State University Quentin N. Burdick Center for Cooperatives and board member of
the North Dakota State University Alumni Association.
Mr.
Herron has served as General Manager of Mountain View Electric Association, Inc.
in Limon, CO since 1996. Prior to that position, he was General
Manager at Farmers' Electric Cooperative in Clovis, NM from 1993 to
1996. Mr. Herron currently serves on the Colorado Electric Education
Institute. Previously, he served as chair of the Colorado Rural
Electric Managers Association and as board member of the New Mexico Rural
Electric Association.
Mr.
Hillert has been CEO and General Manager of Adams-Columbia Electric Cooperative
in Friendship, WI since 1996. In addition, he serves on the board of
Badger Energy Services in Oconto Falls, WI, board vice president of Network 2010
in Oxford, WI and as a board member of Badger Unified Cooperative Services in
Fall Creek, WI since 2001. Mr. Hillert also serves as treasurer of
Wisconsin Cooperative Managers Association and is a board member of the Electric
Coalition of Wisconsin. He serves on Adams County Economic
Development and is a member of the advisory board of directors for the
University of Wisconsin Center for Cooperatives and the board of Cooperative
Research Network.
Mr.
Kopacz has been the General Manager of Midstate Electric Cooperative, Inc. in La
Pine, OR since 1990. He is currently a board director of Northwest
Requirement Utilities, Northwest Irrigation Utilities and Mid Oregon Credit
Union. He is also a former board president of Economic Development
for Central Oregon. He is a former director of Ruralite Services, a
northwest electric cooperative publication, and former president of the Oregon
Rural Electric Cooperative Association.
Mr.
Mercer has served as president and CEO of Meade County R.E.C.C. in Brandenburg,
KY since 1994. He serves as a board member for Kentucky Association
of Electric Cooperatives, United Utility Supply Cooperative and Farmers
Bank. Mr. Mercer is a former NCSC board member and was a member of
the Kentucky Society of Certified Public Accountants.
Mr.
Miller has been the president and CEO of Holmes-Wayne Electric Cooperative, Inc.
in Millersburg, OH since 2004. He currently serves on the board of
Buckeye Power, Inc. including the Executive, Audit and Rate
committees. Mr. Miller is a certified public accountant and owner of
Glenn W. Miller, CPA. In addition, he is a board member and treasurer of Holmes
County Economic Development Council, Inc. and board member of Holmes-Wayne
Electric Foundation, Inc. Mr. Miller is a part-owner and vice
president of The Pines Golf Club in Orraville, OH.
Mr. Renth
has been director of Clinton County Electric Cooperative in Breese, IL since
March 1997. He is a certified public accountant and has been at
Rickhoff & Associates, Ltd in O’Fallon, IL since October
2007. Mr. Renth was the Controller of Auffenberg Auto Group, in St.
Louis, Missouri from September 2006 to July 2007. He served as the
Plant Controller for Cenveo, Inc., in St. Louis Missouri from June 2006 to
September 2006. Mr. Renth served as the Chief Financial Officer of Archway
International Trucks/Gateway City International in St. Louis Missouri from
December 1997 to June 2006. In addition, he is a member of the
American Institute of CPAs and the Illinois Society of CPAs. Mr.
Renth is also owner and operator of RDR Acres Inc., a family farm
corporation.
Mr.
Rossow has served as a board director of Cam Wal Electric Cooperative in
Herreid, SD since 1996. Mr. Rossow is also a board member of South
Dakota Rural Electric Association. He has been self-employed as a
rancher in Herreid, SD since 1980. Mr Rossow is the owner of Rossow
Feedlot Cleaning L.L.C.
Mr.
Stratton has been a board director of East Kentucky Power Cooperative in
Winchester, KY since 1990 and currently serves as Chairman of the Board. He has
served as a director of Shelby Energy Cooperative since 1987, ACES Power
Marketing since 2004, Shelbyville Municipal Water & Sewer Commission since
2000 and Republic Bancorp since 1995. He is an at- large director
that serves as the Audit Committee Financial Expert as defined by the Securities
and Exchange Commission. He is a certified public accountant in
Kentucky, accredited in Business Valuation by the AICPA, a Certified Forensic
Accountant, Certified Fraud Examiner and a Credentialed Cooperative Director
through NRECA. Mr. Stratton has been a member/owner of Jones, Nale
& Mattingly PLC, a full-service accounting and auditing practice since
1970. He currently serves as the Audit Committee Chairman and Audit
Committee Financial Expert of Republic Bancorp, a $3.2 billion bank traded on
NASDAQ. Mr. Stratton is the former Audit Committee Chairman of East
Kentucky Power Cooperative, former team captain for AICPA peer reviews of other
accounting firms and former board member of Kentucky Higher Education Assistance
Authority (1985 to 2001) where as Chairman for eight years, he participated in
various finance transactions. He served on the AICPA Uniform
Accountancy Act Committee and is the past president of the Kentucky Society of
CPAs.
Mr.
Wolski has served as a board director of Wyrulec Company in Lingle, WY since
1986. He has represented Wyoming's cooperative electric utilities on
the NRECA Board of Directors since 1999 and was recently elected as NRECA
president. Prior to his election to president, Mr. Wolski served as
vice president and secretary-treasurer of the NRECA board. He has
served as a director of Tri-State Generation & Transmission since
2001. He served on the board of the Wyoming Rural Electric
Association for nine years, including three years as president. Mr.
Wolski is also a former board member of the Wyoming Rural Telecommunication
Cooperative. He has been the owner/manager of a family farm with a
commercial hunting operation since 1976 and is the owner/agent of an insurance
business since 1987.
Mr.
Petersen joined National Rural in August 1983 as an area
representative. He became the director of Policy Development and
Internal Audit in January 1990, director of Credit Analysis in November 1990 and
Corporate Secretary on June 1, 1992. He became Assistant to the
Governor on May 1, 1993. He became Assistant to the Governor and
Acting Administrative Officer on June 1, 1994. He became Governor and
CEO on March 1, 1995. Mr. Petersen began his career in the rural
electrification program in 1976 as staff assistant for Nishnabotna Rural
Electric Cooperative in Harlan, IA. He later served as General Manager of Rock
County Electric Cooperative Association in Janesville, WI.
Mr. List
joined National Rural as a staff attorney in February 1972. He served
as Corporate Counsel from June 1980 to 1991. He became Senior Vice
President and General Counsel on June 1, 1992, and became Senior Vice President,
Member Services and General Counsel on February 1, 1997.
Mr. Lilly
joined National Rural as a Senior Financial Consultant in October
1983. He became director of Special Finance in June 1985 and director
of Corporate Finance in June 1986. He became Treasurer and Principal
Finance Officer on June 1, 1993, and became Senior Vice President and Chief
Financial Officer on January 1, 1994.
Mr. Evans
joined National Rural as Senior Vice President of Operations in November
1997. He was Senior Vice President and Chief Operating Officer of
Suburban Hospital Healthcare System, Bethesda, MD from 1994 to
1997. He was Senior Vice President and Chief Operating Officer for
Geisinger Medical Center, Danville, PA from 1991 to 1994.
Mr.
Larochelle joined National Rural as director of Corporate Relations in May
1996. He became Senior Vice President of Corporate Relations in
August 1998. Before joining National Rural, he was the Legislative
director at NRECA where he worked for 12 years. He also worked at the
U.S. Department of Agriculture in the Rural Electrification Administration and
the Farmers Home Administration.
Mr.
Zawalick joined National Rural in 1980. Throughout his career with
National Rural, Mr. Zawalick has held various positions. In April
1995, he was appointed Vice President of Business Development for National Rural
and Administrative Coordinator of RTFC. In February 2000, Mr.
Zawalick was named National Rural’s Senior Vice President of RTFC.
Mr. Borak
joined National Rural in June 2002 as Senior Vice President, Credit Risk
Management. Previously, he was with Fleet National Bank, Boston, MA
from 1992 to 2001 where he was a Senior Credit Officer with risk management and
loan approval responsibility for several industry banking portfolios including
investor owned utilities. Prior assignments at Fleet in Hartford, CT
included Manager of Credit Review and Manager of Loan Workout in the Connecticut
bank.
(f)
Involvement in Certain Legal Proceedings.
None to
our knowledge.
(g)
Promoters and Control Persons.
Inapplicable.
(h) Code
of Ethics
We have
adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-K.
This Code of Ethics applies to our principal executive officer, principal
financial officer and principal accounting officer. This Code of Ethics is
publicly available on our website at http://www.nrucfc.coop/aboutcfc/pdfs/ethicsPolicyCEO-SFO.pdf.
(i) Audit
Committee
Our Audit
Committee currently consists of 14 directors: Mr. Stratton (Chairperson),
Mr. Anderson (Vice-Chairperson), Mr. Schriver (Ex Officio), Mr. Brog, Mr.
Cunningham, Mr. Ewing, Mr. Guidry, Mr. Herron, Mr. Hillert, Mr. McBride, Mr.
Miller, Mr. Renth, Mr. Wasson and Mr. Wolski. Mr. Stratton was
designated by the Board as the “audit committee financial expert” as defined by
Section 407 of the Sarbanes-Oxley Act of 2002 ("SOX"). The members of the Audit
Committee are "independent" as that term is defined in Rule 10A-3 under the
Securities Exchange Act. Among other things, the Audit Committee
reviews our financial statements and the disclosure under Management's
Discussion and Analysis in our Annual Report on Form 10-K. The Committee
meets with our independent registered public accounting firm, internal auditors,
Chief Executive Officer and financial management executives to review the scope
and results of audits and recommendations made by those persons with respect to
internal and external accounting controls and specific accounting and financial
reporting issues and to assess corporate risk. The Board has adopted a written
charter for the Audit Committee which may be found on our website,
www.nrucfc.coop.
The Audit
Committee completed its review and discussions with management regarding our
audited financial statements for the year ended May 31, 2009. The Audit
Committee has discussed with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61, as amended, and received
from the independent accountants written disclosures and the letter from the
independent accountant required by applicable requirements of the Public Company
Accounting Oversight Board regarding the independent accountant’s communications
with the audit committee concerning independence, and discussed with the
independent accountants their independence.
Based on
the review and discussions noted above, the Audit Committee recommended to the
Board that the audited financial statements be included in our Annual Report on
Form 10-K for the year ended May 31, 2009 for filing with the Securities and
Exchange Commission.
(j)
Compensation Committee
Role
of the Compensation Committee
Our
Compensation Committee currently consists of seven directors: Mr.
Schriver, Mr. McBride, Mr. Cranford, Mr. Wasson, Mr. Ewing, Mr. Brumbeloe and
Mr. Stratton. The Compensation Committee of the Board of Directors
reviews and makes appropriate recommendations to the full Board of Directors
regarding National Rural’s total compensation philosophy and pay components,
including, but not limited to, base and incentive pay programs. The
Compensation Committee is also responsible for approving the compensation,
employment agreements and perquisites for the Chief Executive
Officer
(“CEO”). The
Compensation Committee annually reviews all approved corporate goals and
objectives relevant to compensation, evaluates performance in light of those
goals and approves the CEO’s compensation based on this evaluation, all of which
is then submitted to the full Board of Directors for
ratification. The Compensation Committee has delegated authority to
the CEO for evaluating the performance and approving the annual base
compensation for all of the other named executive officers as identified in the
Summary Compensation Table below. Other than the CEO, no other named
executive officer makes decisions regarding executive compensation.
The
Compensation Committee reports to the Board of Directors on its actions and
recommendations following committee meetings and meets in executive session
without members of management present when making specific compensation
decisions. Although the Board has delegated authority to the
Compensation Committee with respect to National Rural’s executive and general
employee compensation programs and practices, the full Board of Directors also
reviews and ratifies National Rural’s compensation and benefits programs each
year.
The
Compensation Committee’s charter can be found on National Rural’s website,
www.nrucfc.coop.
The
Compensation Committee’s Processes
The
Compensation Committee has established a process to assist it in ensuring that
National Rural’s executive compensation program is achieving its
objectives. Prior to the start of each fiscal year, the Board of
Directors approves performance measures for the corporate balanced scorecard,
which is the basis of the short-term incentive plan, and the specific goal and
metrics for the long-term incentive plan. After the end of the fiscal
year, the Compensation Committee reviews and assesses the accomplishment of
goals and determines whether to authorize the payment of incentive
compensation. This authorization is then submitted to the full Board
of Directors for ratification.
The
President, Vice President and Secretary/Treasurer of the Board of Directors meet
with the CEO to review his performance based on his individual achievements,
contribution to National Rural’s performance and other leadership
accomplishments. In determining Mr. Petersen’s base pay, the
Compensation Committee subjectively considers a variety of corporate performance
measures, including financial metrics, portfolio management, customer
satisfaction and market share, industry leadership, and peer group compensation
data provided by the compensation consultant, as discussed below.
Role
of Compensation Consultant
In fiscal
year 2009, the Compensation Committee hired Mercer Human Resource Consulting
(“Mercer”) to advise it on the CEO’s compensation as compared to the
compensation of CEOs of peer group organizations. Through individual
interviews with each member of the Compensation Committee, Mercer established a
peer group of companies to use in assessing the competitiveness of the CEO’s
compensation (see “Compensation Analysis” in the Compensation Discussion and
Analysis section below). Mercer advised the Compensation Committee
through an assessment of compensation data from this peer group using both a
one-year compensation analysis – which assesses National Rural’s CEO
compensation and the compensation of peer CEOs for the most recent fiscal year,
and a three-year compensation analysis – which assesses average peer CEO pay for
the last three fiscal years. Compensation analyses include peer group
CEO base pay, annual incentives, total cash compensation, long-term incentives
and total direct compensation. Mercer did not determine or provide
the Compensation Committee with a specific recommendation on any component of
executive compensation.
Role
of Executive Officers
As
described above, the Compensation Committee has delegated the authority for
making annual base pay decisions for the other named executive officers to the
CEO. The CEO exercises his judgment to set annual base pay rates,
based on general market data, overall corporate performance and leadership
accomplishments. For additional information about the CEO’s role in
compensation decisions, see “Base Pay” under the Compensation Discussion and
Analysis section below.
(k)
Section 16(a) Beneficial Ownership Reporting Compliance
Inapplicable.
Item
11. Executive
Compensation.
Compensation
Discussion and Analysis
Executive
Compensation Philosophy and Objectives
The
components of National Rural’s compensation package for the named executive
officers (consisting of Messrs. Petersen, Lilly, List, Evans and Larochelle) are
consistent with those offered to all employees and consist of base pay,
short-term (one-year) incentive, tied to the achievement of annual corporate
goals, and long-term (three-year) incentive, tied to the achievement of
strategic objectives, plus retirement and other benefits. We believe
that all four elements of compensation work together to provide a competitive
compensation package that drives performance and supports executive
retention.
Performance –Named
executive officers receive base pay that is both market competitive and
reflective of the strategic management they provide to National
Rural. Other components of compensation – short-term and long-term
incentives – reflect the performance of the organization and the success in
achieving performance metrics established by the Board of
Directors.
Retention – The
relationship between National Rural and its members makes the retention of
employees, including the named executive officers, vital to our business and
long-term success. The compensation package, particularly the
long-term incentive plan and the retirement benefits, assist in the retention of
a highly qualified management team.
Compensation
Analysis
In fiscal
year 2009, Mercer was engaged by the Compensation Committee to conduct a
compensation survey to provide compensation data for the CEO position using peer
organizations identified by Mercer through interviews with each member of the
Compensation Committee. Mercer included companies in the compensation
comparison group that were similar to National Rural in asset size, industry and
business description. The group included financial institutions that
are premier private market, commercial and/or mission-driven lenders, offering
full service financing, investment and related services. The
companies targeted as peer companies had assets ranging from 50% to 200% of
National Rural’s December 2007 total assets of $19.38 billion. The
comparator group consisted of financial services organizations New York
Community Bancorp, Inc., Student Loan Corp., Astoria Financial Corp, Nelnet,
Inc., Indymac Bancorp*, Webster Financial Corp., and Flagstar Bancorp, as well
as three Farm Credit System peers. (*The Federal government took
control of IndyMac Bank in July 2008, and, therefore, this organization will not
be a peer organization in Mercer’s 2009 survey, which will be considered by the
Compensation Committee with respect to fiscal 2010. Since 2007
compensation data was available however, it was used in the 2008 peer group
summary prepared by Mercer which the Compensation Committee considered with
respect to fiscal 2009.)
Mercer
led the Compensation Committee through an assessment of compensation data using
both a one-year and a three-year compensation analysis. In their
analysis, Mercer captured actual compensation (current base salary, actual bonus
paid for fiscal year 2007 and three year average actual long-term incentives
paid) and target compensation (current base salary, target bonus for fiscal
2008, and three year average actual long-term incentives paid). Peer
CEO compensation data analyzed included base pay, annual incentives, total cash
compensation (the sum of base salary and annual incentives for the last fiscal
year), long-term incentives (including stock awards valued at market value on
the date of grant and stock options valued at grant date utilizing the
Black-Scholes option pricing model) and cash awards valued at actual payout on
date of award (if target value is not disclosed), as well as sign-on awards and
total direct compensation (the sum of total cash compensation and the long-term
incentive award
paid in the most recent fiscal year for the one-year
analysis, or the sum of total cash compensation and the three-year average of
long-term incentives for the three-year analysis), each as reported in the
annual report or proxy statement for the most recent fiscal year. The
Compensation Committee reviewed total compensation data for the peer group for
informational purposes and used this data solely to determine the
competitiveness of National Rural’s CEO base pay.
In
determining the base compensation paid to our other named executive officers,
the CEO reviewed national, credible compensation surveys for financial services
organizations of similar asset size to obtain a general understanding of current
compensation practices and to ensure that the base pay component of compensation
for the other named executive officers is competitive, meaning generally within
the 50th
percentile of comparative pay for similar positions. The CEO did not
review or consider the underlying organizations comprising the survey
information, but instead considered only the aggregate compensation
data.
Elements
of Compensation
National
Rural’s executive compensation program provides a balanced mix of compensation
that incorporates the following key components:
o
|
Annual
base pay, generally targeted at the 50th
percentile of market for similar
positions
|
o
|
An
annual cash incentive which is based on the achievement of short-term
(one-year) corporate goals
|
o
|
A
three year cash incentive which is based on the achievement of longer-term
corporate goals
|
o
|
Retirement,
health and welfare and other benefit programs provided generally to all
National Rural employees
|
While all
elements of executive compensation work together to provide a competitive
compensation package, each element of compensation is determined independently
of the other elements.
National
Rural’s compensation philosophy is to target total compensation for employees –
base pay, short-term incentive, long-term incentive and benefits – at the
75th
percentile of market for the general employee population. However,
due to the cooperative nature of the organization, National Rural cannot match
the compensation levels of named executive officers of other financial services
organizations at the 75th
percentile since we do not offer stock or other equity
compensation. It is
important
to National Rural, however, to pay the named executive officers of National
Rural competitively in base pay to retain key talent.
Base Pay – National
Rural’s philosophy is to provide annual base pay that reflects the value of the
job in the marketplace, targeted at the 50th
percentile. To attract and retain a highly-skilled work force,
National Rural must remain competitive with the pay of other employers that
compete with us for talent. The Compensation Committee assessed
the CEO’s compensation using the peer group data and general market increases
for executives during the 2008 calendar year. The Compensation
Committee decided to adjust the CEO’s base pay by 3.5%, which was consistent
with average national market increases for executives at the time (December
2008). In reaching this decision, the Compensation Committee
acknowledged the strong performance of the CEO and the Company during
challenging times for financial services organizations.
As
discussed under “Role of the Compensation Committee” above, the CEO exercised
his judgment to set the annual base pay for the other named executive officers
based on general market data, overall performance and leadership
accomplishments. On June 1, 2008, because Messrs. Lilly, Evans, and
List were performing well in their individual roles, Mr. Petersen focused on the
comparable general merit increase for similar positions at the time in the
Washington, DC metropolitan area, and raised base pay for Messrs. Lilly, Evans
and List by 5%.
The
compensation for the SVP, Corporate Relations was increased to better align this
position with its peers in the organization. Mr. Larochelle’s role has evolved
to incorporate a mix of responsibilities that combine some of the most important
aspects of National Rural’s long term success, including government and industry
relations, marketing and public relations. This position was assessed
based on average compensation of executives at peer group organizations, and the
internal value of this role relative to the other named executive positions
within National Rural. Mr. Larochelle’s base salary, therefore, was
increased on June 1, 2008 to $397,700. The new salary reflects the
compensation assessment as well as Mr. Larochelle’s outstanding performance in
the role.
Short-Term Incentive
– National Rural’s short-term cash incentive program is a one-year cash
incentive that is tied to the annual performance of the organization as a
whole. National Rural believes that by paying a short-term incentive
tied to the achievement of annual operating goals, all employees, including
named executive officers, will focus their efforts on the most important
strategic objectives which help National Rural to fulfill its mission to its
members and its obligations to the financial markets. Additionally,
the short-term incentive pay enhances our ability to provide competitive
compensation while at the same time tying actual incentive compensation paid to
the achievement of corporate goals. Every employee participates in
the short-term incentive program, and the corporate strategic goals are the same
for all employees, including the named executives. Since its
inception in 1999, the actual payout percentage has ranged from 55% to 94% of
total opportunity, with an average over the eleven years of
81.4%. This equates to an 11 year average payout of 15.6% of base
salaries.
The
short-term incentive program provides annual cash incentive opportunities based
upon the level of the position within National Rural’s base pay structure,
ranging from 15% - 25% of base pay. Named executive officers are
eligible to receive short-term cash incentive compensation up to 25% of their
base pay. While 25% of base pay is below market for incentive pay for
the Company’s named executive officers, it is reflective of the cooperative
nature of National Rural.
National
Rural’s approach to establishing corporate goals for short-term incentive
compensation has not changed since the plan’s inception. Corporate performance
is measured using a balanced scorecard approved by the Board of Directors prior
to the start of the fiscal year. The balanced scorecard is a
performance management tool that articulates the corporate strategy of National
Rural into specific, quantifiable, measurable goals. The goals have
always been tied to enhancing service to our member owners while ensuring all
aspects of the business are effectively managed.
The
scorecard is divided into four quadrants, reflecting crucial areas of business
performance. Specific goals are established within those quadrants,
to focus all employees as to the target results and measures that must be
achieved if National Rural is to succeed at realizing its strategic
plan. The intent is to align organizational, departmental and
individual initiatives to achieve a common goal.
The four
quadrants for fiscal year 2009, which were the basis for the short-term
incentive payment, are the same as they have been in previous years: Customer
Engagement, Financial Ratios, Internal Process and Operations, and Learning,
Growth and Innovation. For 2009, the Board of Directors established
five corporate goals within these four quadrants. The Board of
Directors establishes corporate goals and measures that they believe are
achievable only if each individual performs well in his or her role and the
Company meets its internal business plan goals.
The goals
for FY2009 were:
Customer
Engagement: Two goals supporting efforts to maintain or increase
market share of borrowers in key segments of the loan portfolio.
Internal
Process and Operations: Manage National Rural’s operating expense
levels.
Financial
Ratios: Meet or exceed established financial targets to maintain
National Rural’s financial strength.
Learning,
Growth & Innovation: Achieve optimum business results through the
discipline of project management.
For
fiscal year 2009, it is expected that three of the five goals will be achieved,
equating to 55% of the total opportunity. Goals successfully achieved
were within the Customer Engagement, Internal Process and Operations, and
Learning, Growth and Innovation quadrants of the balanced
scorecard. The evaluation of goal achievement and payout under the
short-term incentive plan are subject to approval by the Board of Directors at a
date subsequent to the filing of this Form 10-K.
Long-Term Incentive –
the long-term incentive program is a three-year plan that is tied to National
Rural’s long-term strategic objectives. The long-term incentive
program was implemented to create dynamic tension between short-term objectives
and long-term goals. It is also an effective retention tool, helping
the Company keep key employees, and supports National Rural’s efforts to pay at
market competitive levels. All employees employed on the first day of
the fiscal year, June 1, are eligible to participate in the plan cycle and will
receive performance units that are calculated at 15% - 25% of base
pay.
Performance
units are issued at the start of each fiscal year for a three-year
cycle. Performance units for named executive officers are
calculated by dividing 25% of base pay on June 1 by the plan payout unit value
assigned to the target rating level of AA- stable, valued at $100 per
performance unit for the plan cycle ending May 31, 2009. The measure
for all active long-term incentive plans is the achievement of bond rating
targets for our senior secured debt by three rating
agencies: Standard & Poor’s Corporation, Fitch Ratings, and
Moody’s Investors Service. The value of the performance units will
range from $0 to $150 per performance unit according to the level of National
Rural’s secured debt ratings by the three rating agencies. To achieve
the highest value of $150, which exceeds the targeted value, all three agencies
would have to raise National Rural’s long-term secured debt rating to
AA. If this rating level is achieved, the long-term incentive pay for
named executive officers is 37.5% of the base pay for the year in which the
units were issued. The chart below indicates the performance unit
values for the plan cycle that ended May 31, 2009.
Senior
Secured Debt Rating - Incentive-Performance Linkage
Rating
|
A+
|
AA-
|
AA
|
Outlook
|
negative
|
stable
|
positive
|
negative
|
stable
|
positive
|
|
Numerical
Score
|
1
|
2
|
3
|
4
|
5
|
6
|
|
Plan
Pay-Out Unit Value
|
$0
|
$40
|
$60
|
$60
|
$100
|
$120
|
$150
|
* The
target objective is in bold.
The
senior secured debt rating was selected as the measure for the long-term
incentive plan because, as a financial services company, National Rural is
dependent on the capital markets and stronger ratings lead to lower interest
cost and more reliable access to the capital markets.
As of May
31, 2009, there were three active long-term incentive plans in which named
executive officers are participants. Performance units issued to
named executive officers in June 2006 had a value based on senior secured debt
ratings in place on May 31, 2009; performance units issued to named executive
officers in June 2007 will have a value based on senior secured debt ratings in
place on May 31, 2010; and performance units issued to named executive officers
in June 2008 will have a value based on senior secured debt ratings in place on
May 31, 2011. The methodology for determining the number of
performance units issued to named executive officers for all active long-term
incentive plans is consistent with the process described above. The
long-term incentive is paid out in one lump sum after the end of the performance
period, subject to approval by the Board of
Directors. To
be eligible to receive the incentive payout, a participant must be an employee
of National Rural on the date of payment. Payments made to named
executive officers for fiscal year 2009 were for performance units issued in
June 2006 and were based on the May 31, 2009 senior secured debt rating level of
A+ stable outlook, which has a value of $40 per performance unit, which is 40%
of the targeted opportunity.
Benefits
An
important retention tool is National Rural’s defined benefit pension plan, the
Retirement Security Plan. National Rural participates in a multiple
employer pension plan managed by NRECA. We balance the effectiveness
of this plan as a compensation and retention tool with the cost of the annual
premium incurred to participate in this pension plan. The value of
the pension benefit is determined by base pay only and does not include other
cash compensation.
National
Rural also offers a Pension Restoration Plan, which is a component of the NRECA
Retirement Security Plan, to a select group of management, including the named
executive officers, to increase their retirement benefits above amounts
available under the Retirement Security Plan, which is restricted by IRS
limitations on annual pay levels and maximum annual annuity
benefits. The Pension Restoration Plan restores the value of the
Retirement Security Plan for named executive officers to the level it would be
if the IRS limits on annual pay and annual annuity benefits were not in place.
Unlike the Retirement Security Plan, the Pension Restoration Plan is an
unfunded, unsecured obligation of National Rural and is not qualified for tax
purposes. National Rural pays the amount owed to the named executive
officers for the pension restoration benefit; amounts paid are then deducted
from the premium due for the next Retirement Security Plan invoice(s) from
NRECA.
For more
information on the Retirement Security Plan and the Pension Restoration Plan,
see the Pension Benefits Table and accompanying narrative below.
As an
additional retention tool designed to assist named executive officers in
deferring compensation for use in retirement, each named executive officer is
also eligible to participate in National Rural’s non-qualified 457(b) deferred
compensation savings plan. Contributions to the plan are limited by
IRS regulations. The calendar year 2009 cap for contributions is
$16,500. There is no National Rural contribution to the deferred
compensation plan. For more information see “Nonqualified Deferred
Compensation” below.
Other
Compensation
National
Rural provides named executive officers with other benefits, as reflected in the
All Other Compensation column in the Summary Compensation Table below, that we
believe are reasonable and consistent with National Rural’s compensation
philosophy. National Rural does not provide significant perquisites
or personal benefits to the named executive officers.
The
Compensation Committee considers perquisites for the CEO in connection with its
annual review of the CEO’s total compensation package described
above. The perquisites provided to Mr. Petersen are limited to an
annual automobile allowance as well as an annual spousal air travel allowance to
permit Mr. Petersen’s spouse to accompany him on business travel. To
provide these perquisites in an efficient fashion, the Board of Directors
authorizes an annual allowance rather than providing unlimited reimbursement or
use of a company-owned vehicle. The amount of each allowance is
authorized annually by the Board of Directors and is determined based on the
estimated cost for operation and maintenance of an automobile and the
anticipated cost of air travel by the CEO’s spouse. For fiscal year
2009, the Board of Directors authorized an aggregate of $28,500 to cover these
allowances. Additionally, Mr. Petersen received an annual executive
physical paid for by National Rural.
Severance/Change
In Control Agreements
Mr.
Petersen, CEO, and Mr. Evans, SVP, Operations, each have an executive agreement
with National Rural under which they may continue to receive compensation and
benefits in certain circumstances after resignation or termination of
employment. The value of Mr. Petersen’s severance package was
determined to be customary for a CEO and approved by the Compensation Committee
as part of his employment contract. The value of Mr. Evans’ severance
package was negotiated by the CEO and Mr. Evans as part of Mr. Evans’ employment
offer. No other named executive officers have termination or change
in control agreements. For more information on these severance
arrangements, see “Termination of Employment and Change In Control Arrangements”
below.
Compensation
Committee Report
The
Compensation Committee of the Board of Directors oversees National Rural’s
compensation program on behalf of the Board. In fulfilling its
oversight responsibilities, the Compensation Committee reviewed and discussed
with management the Compensation Discussion and Analysis set forth in this Form
10-K. Based upon this review and discussion, the Compensation
Committee recommended to the Board of Directors that the Compensation Discussion
and Analysis be included in this Form 10-K.
Submitted by the Compensation
Committee
Darryl Schriver
Reuben McBride
Delbert Cranford
J. David Wasson, Jr.
Jimmy Ewing, Jr.
Raphael A. Brumbeloe
R. Wayne Stratton
Summary
Compensation Table
The
summary compensation table below sets forth the aggregate compensation for the
years ended May 31, 2009, 2008 and 2007 earned by the named executive officers
and two additional executive officers of National Rural that meet the definition
of “related persons” pursuant to SEC disclosure requirements.
Name and Principal
Position
|
|
Year
|
|
Salary
|
|
Non-Equity
Incentive
Plan
Compensation
(1)
|
|
Change
in
Pension
Value and
Nonqualified
Deferred Compensation Earnings (2)
|
|
All
Other
Compensation
(3)
|
|
Total
|
|
Sheldon
C. Petersen
|
|
2009
|
$
|
720,354
|
$
|
162,289
|
$
|
601,402
|
$
|
124,465
|
$
|
1,608,510
|
|
Governor
& CEO
|
|
2008
|
|
689,583
|
|
162,681
|
|
475,626
|
|
112,698
|
|
1,440,588
|
|
|
|
2007
|
|
643,125
|
|
204,212
|
|
428,799
|
|
132,577
|
|
1,408,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
L. Lilly
|
|
2009
|
|
397,700
|
|
91,084
|
|
353,179
|
|
10,311
|
|
852,274
|
|
Senior
Vice President &
|
|
2008
|
|
378,750
|
|
92,759
|
|
294,967
|
|
14,219
|
|
780,695
|
|
Chief
Financial Officer
|
|
2007
|
|
364,000
|
|
117,513
|
|
266,788
|
|
50,938
|
|
799,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
J. List
|
|
2009
|
|
397,700
|
|
91,084
|
|
539,927
|
|
14,785
|
|
1,043,496
|
|
Senior
Vice President of
|
|
2008
|
|
378,750
|
|
92,759
|
|
523,478
|
|
9,848
|
|
1,004,835
|
|
Member
Services and
|
|
2007
|
|
364,000
|
|
113,233
|
|
477,364
|
|
51,830
|
|
1,006,427
|
|
General
Counsel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
T. Evans
|
|
2009
|
|
397,700
|
|
91,084
|
|
206,755
|
|
14,785
|
|
710,324
|
|
Senior
Vice President of
|
|
2008
|
|
378,750
|
|
92,759
|
|
167,845
|
|
14,218
|
|
653,572
|
|
Operations
|
|
2007
|
|
364,000
|
|
113,233
|
|
146,285
|
|
16,833
|
|
640,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
E. Larochelle
|
|
2009
|
|
397,700
|
|
81,244
|
|
361,225
|
|
16,069
|
|
856,238
|
|
Senior
Vice President of
|
|
2008
|
|
276,000
|
|
67,610
|
|
180,744
|
|
12,189
|
|
536,543
|
|
Corporate
Relations
|
|
2007
|
|
265,500
|
|
85,507
|
|
161,864
|
|
18,581
|
|
531,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence
Zawalick (4)
|
|
2009
|
|
289,800
|
|
66,408
|
|
255,055
|
|
12,646
|
|
623,909
|
|
Senior
Vice President of
|
|
2008
|
|
276,000
|
|
67,610
|
|
177,749
|
|
12,189
|
|
533,548
|
|
RTFC
|
|
2007
|
|
265,500
|
|
85,507
|
|
147,479
|
|
46,494
|
|
544,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
M. Borak (4)
|
|
2009
|
|
254,950
|
|
58,416
|
|
64,880
|
|
11,955
|
|
390,201
|
|
Senior
Vice President of
|
|
2008
|
|
242,800
|
|
59,547
|
|
69,951
|
|
11,535
|
|
383,833
|
|
Credit
Risk Management
|
|
2007
|
|
233,500
|
|
75,927
|
|
106,490
|
|
10,860
|
|
426,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes amounts earned during each respective fiscal year and payable at May 31
under the long-term and short-term incentive plans. The amounts
earned by each named executive officer under these incentive plans are as
follows:
Name
|
|
Year
|
|
Short-term
Incentive Plan
|
|
Long-term
Incentive
Plan
|
|
Sheldon
C. Petersen
|
|
2009
|
$$
|
99,049
|
$$
|
63,240
|
|
|
|
2008
|
|
105,161
|
|
57,520
|
|
|
|
2007
|
|
150,732
|
|
53,480
|
|
|
|
|
|
|
|
|
|
Steven
L. Lilly
|
|
2009
|
|
54,684
|
|
36,400
|
|
|
|
2008
|
|
57,759
|
|
35,000
|
|
|
|
2007
|
|
85,313
|
|
32,200
|
|
|
|
|
|
|
|
|
|
John
J. List
|
|
2009
|
|
54,684
|
|
36,400
|
|
|
|
2008
|
|
57,759
|
|
35,000
|
|
|
|
2007
|
|
85,313
|
|
27,920
|
|
|
|
|
|
|
|
|
|
John
T. Evans
|
|
2009
|
|
54,684
|
|
36,400
|
|
|
|
2008
|
|
57,759
|
|
35,000
|
|
|
|
2007
|
|
85,313
|
|
27,920
|
|
|
|
|
|
|
|
|
|
Richard
E. Larochelle
|
|
2009
|
|
54,684
|
|
26,560
|
|
|
|
2008
|
|
42,090
|
|
25,520
|
|
|
|
2007
|
|
62,227
|
|
23,280
|
|
|
|
|
|
|
|
|
|
Lawrence
Zawalick (4)
|
|
2009
|
|
39,848
|
|
26,560
|
|
|
|
2008
|
|
42,090
|
|
25,520
|
|
|
|
2007
|
|
62,227
|
|
23,280
|
|
|
|
|
|
|
|
|
|
John
M. Borak (4)
|
|
2009
|
|
35,056
|
|
23,360
|
|
|
|
2008
|
|
37,027
|
|
22,520
|
|
|
|
2007
|
|
54,727
|
|
21,200
|
|
Payments
under the fiscal year 2009 short-term incentive plan are subject to approval by
the Board of Directors at a date subsequent to the filing of this Form
10-K. For a discussion of the long-term and short-term incentive
plans, see “Elements of Compensation” in “Compensation Discussion and Analysis”
above.
(2)
Represents solely the aggregate change in the actuarial present value of the
accumulated pension benefit under the NRECA Retirement Security Plan, the
multiple employer defined benefit pension plan in which National Rural
participates, during each respective fiscal year.
(3) For
Mr. Petersen, includes $32,177 of perquisites comprised of $13,500 pursuant to
Mr. Petersen’s automobile allowance, $15,000 pursuant to his spousal air travel
allowance and the remainder for an annual physical examination paid for by
National Rural, in each case for fiscal year 2009. The annual
automobile allowance is calculated based on estimated costs associated with
maintenance, use and insurance of a personal automobile for company
business. The annual spousal travel allowance is calculated based on
the anticipated air travel for Mrs. Petersen during the fiscal
year. Additionally, for Mr. Petersen, includes $75,399 related to
Rural Telephone Finance Cooperative (“RTFC”) contributions to the RTFC deferred
compensation plan. For more information on this arrangement, see
“Employment Contracts” and “Nonqualified Deferred Compensation”
below. For Mr. Petersen, also includes $9,539 related to a sick leave
incentive bonus for fiscal year 2009. The remaining amounts included
in this column represent sick leave incentive bonuses for each named executive
officer other than Mr. Petersen, and National Rural contributions on behalf of
each named executive officer pursuant to the National Rural 401(k) defined
contribution plan.
(4)
These executives are “related persons” as defined by the SEC’s disclosure
requirements and are included in the Summary Compensation Table as we generally
treat all of our executive officers equally.
Grants
of Plan-Based Awards
The
Company has a long-term and a short-term incentive plan for all employees, under
which the named executive officers may receive a cash incentive up to 37.5% and
25% of salary, respectively. The incentive payouts are based on the
executive officer’s salary at the date the program becomes
effective. See the “Compensation Discussion and Analysis” above for
further information on these incentive plans.
The
following table contains the estimated possible payouts under the Company’s
short-term incentive plan and possible future payouts for grants under the
Company’s long-term incentive plan during the year ended May 31,
2009.
|
|
|
|
Estimated
Future Payouts Under
Non-Equity
Incentive Plan Awards
|
|
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
Sheldon
C. Petersen
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
$
|
-
|
$
|
177,500
|
$
|
266,250
|
Short-term
Incentive Plan (2)
|
|
-
|
|
180,089
|
|
180,089
|
Steven
L. Lilly
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
|
-
|
|
99,400
|
|
149,100
|
Short-term
Incentive Plan (2)
|
|
-
|
|
99,425
|
|
99,425
|
John
J. List
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
|
-
|
|
99,400
|
|
149,100
|
Short-term
Incentive Plan (2)
|
|
-
|
|
99,425
|
|
99,425
|
John
T. Evans
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
|
-
|
|
99,400
|
|
149,100
|
Short-term
Incentive Plan (2)
|
|
-
|
|
99,425
|
|
99,425
|
Richard
E. Larochelle
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
|
-
|
|
99,400
|
|
149,100
|
Short-term
Incentive Plan (2)
|
|
-
|
|
99,425
|
|
99,425
|
Lawrence
Zawalick
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
|
-
|
|
72,500
|
|
108,750
|
Short-term
Incentive Plan (2)
|
|
-
|
|
72,450
|
|
72,450
|
John
M. Borak
|
|
|
|
|
|
|
Long-term
Incentive Plan (1)
|
|
-
|
|
63,700
|
|
95,550
|
Short-term
Incentive Plan (2)
|
|
-
|
|
63,738
|
|
63,738
|
|
|
|
|
|
|
|
(1)
Target payouts are calculated using unit values of $100 based on the Company’s
goal of achieving an average long-term senior secured credit rating
of AA- stable at May 31, 2011.
(2)
Target and maximum payouts represent 25% of May 31, 2009 base
salary. For the expected payout under the fiscal year 2009 short-term
incentive plan, see the Non-Equity Incentive Plan Compensation column of the
Summary Compensation Table above.
As
discussed in the Compensation Discussion and Analysis above, the Board of
Directors has approved a new long-term incentive plan with terms similar to the
plan in effect during fiscal year 2009. As a result, the executives
included in the chart above received grants on June 1, 2009 with a payout to be
determined on May 31, 2012.
Employment
Contracts
Pursuant
to an employment agreement effective as of January 1, 2008, National Rural has
agreed to employ Mr. Petersen as Chief Executive Officer through February 29,
2012 (with automatic one-year extensions unless either party objects) at no less
than his base salary at the time, or $710,000 per annum, plus such incentive
payments (if any) as may be awarded him. In addition, pursuant to the
employment agreement, Mr. Petersen is entitled to certain payments in the event
of his termination other than for cause (e.g., Mr. Petersen leaving for good
reason, disability or termination due to death). See “Termination of
Employment and Change In Control Arrangements” below for a description of these
provisions and for information on these amounts.
Pursuant
to a separate independent contractor agreement (“Amended and Restated
Supplemental Benefit Agreement”) effective as of December 4, 2006, as amended,
Mr. Petersen has agreed to provide service as an executive officer of
RTFC. Pursuant to the Amended and Restated Supplemental Benefit
Agreement, RTFC was required to credit $30,000 to a deferred compensation
account on January 1 of each year. Effective as of May 19, 2009, RTFC
and Mr. Petersen entered into an amendment to the Amended and Restated
Supplemental Benefit Agreement. Pursuant to the amendment, no further
contributions will be made to the deferred compensation account other than
interest earned up to the liquidation of the account. All amounts in
the account will be liquidated and distributed in a lump sum to Mr. Petersen no
earlier than May 19, 2010, and no later than May 18, 2011, subject to compliance
with applicable law, at which time the agreement will terminate. For
additional information, see “RTFC Deferred Compensation Plan” and “Nonqualified
Deferred Compensation” below.
For
information about Mr. Evans’ termination agreement, see “Termination of
Employment and Change In Control Arrangements.”
Pension
Benefits Table
The
Company is a participant in a multiple employer defined benefit pension plan,
the Retirement Security Plan, which is administered by NRECA. Since the plan is
a multiple employer plan in which National Rural participates, National Rural is
not
liable
for the amounts shown and such amounts are not reflected in National Rural's
audited financial statements. National Rural’s expense is limited to the annual
premium to participate in the plan. There is no funding liability for
National Rural for the plan.
The
Retirement Security Plan is a qualified plan in which all employees are eligible
to participate upon completion of one year of service. Each of the
named executive officers participates in the qualifed pension plan component of
the Retirement Security Plan. Under the plan, participants are entitled to
receive annually, under a 50% joint and surviving spouse annuity, 1.90% of the
average of their five highest base salaries during their last ten years of
employment, multiplied by the number of years of participation in the
plan. The value of the pension benefit is determined by base pay only
and does not include other cash compensation. Normal retirement age
under the qualified pension plan is age 62; however, the plan does allow for
early retirement with reduced benefits. For early retirement, the
pension benefit will be reduced by 1/15 for each of the first five years and
1/30 for each of the next five years by which the elected early retirement date
precedes the normal retirement date. Each of the named executive
officers is eligible for early retirement under the plan.
National
Rural also offers a Pension Restoration Plan which is a component of the
Retirement Security Plan. Each of the named executive officers
participates in the Pension Restoration Plan component of the Retirement
Security Plan, the purpose of which is to increase their retirement benefits
above amounts available under the Retirement Security Plan, which is restricted
by IRS limitations on annual pay levels and maximum annual annuity
benefits. The Pension Restoration Plan restores the value of the
Retirement Security Plan for each officer to the level it would be if the IRS
limits on annual pay and annual annuity benefits were not in place.
Prior to
December 31, 2004, there were two components of the Pension Restoration Plan – a
deferred compensation component (“Deferred Compensation Pension Restoration
Plan”) and a severance pay component (“Pension Restoration Severance
Plan”). The Pension Restoration Severance Plan was frozen, effective
December 31, 2004. The funds accrued by each named executive officer
under the Pension Restoration Severance Plan prior to December 31, 2004 were
frozen and did not increase in value since that date. Effective as of
May 21, 2009, the Board of Directors of National Rural approved the termination
of the Pension Restoration Severance Plan. All benefits accrued under
the Pension Restoration Severance Plan prior to the effective date of the
termination were paid to each participant in a single lump sum in May 2009, as
reflected in the Pension Benefits Table below.
The
Deferred Compensation Pension Restoration Plan remains in place. The
benefit and payout formula under this restoration component of the Retirement
Security Plan is similar to that under the qualified plan
component. However, each of the named executive officers has
satisfied the provisions established to receive the benefit from this
plan. Since there is no longer a risk of forfeiture of the benefit
under the Pension Restoration Plan, distributions will be made from the plan to
each named executive officer annually.
The
following table contains the years of service, the present value of the
accumulated benefit for the executive officers listed in the Summary
Compensation Table at May 31, 2009 and distributions from the plan for the
fiscal year then ended.
Name
|
Plan Name
|
Number
of Years
Credited Service (1)
|
|
Present
Value of
Accumulated Benefit (2)
|
|
Payments
During
Last
Fiscal Year (3)
|
Sheldon
C. Petersen
|
NRECA
Retirement Security Plan
|
25.75
|
|
$
|
1,757,852
|
$
|
1,160,354
|
Steven
L. Lilly
|
NRECA
Retirement Security Plan
|
24.58
|
|
|
1,639,852
|
|
410,162
|
John
J. List (4)
|
NRECA
Retirement Security Plan
|
0.92
|
|
|
93,009
|
|
3,160,888
|
John
T. Evans
|
NRECA
Retirement Security Plan
|
10.50
|
|
|
724,047
|
|
121,264
|
Richard
E. Larochelle
|
NRECA
Retirement Security Plan
|
25.00
|
|
|
1,397,537
|
|
61,965
|
Lawrence
Zawalick
|
NRECA
Retirement Security Plan
|
28.67
|
|
|
1,314,095
|
|
63,187
|
John
M. Borak (5)
|
NRECA
Retirement Security Plan
|
2.92
|
|
|
187,709
|
|
2,308
|
(1)
National Rural is a participant in a multiple employer pension
plan. Credited years of service, therefore, includes not only years
of service with National Rural, but also years of service with another
cooperative participant in the multiple employer pension plan. Mr.
Larochelle has 12 credited years of service with another cooperative in addition
to National Rural. All other executives have credited years of
service only with National Rural.
(2)
Amount represents the actuarial present value of the executive officer's
accumulated benefit under the plan as of May 31, 2009 as
provided
by the plan administrator, NRECA, using interest rates ranging from 4.0% to
5.69% per annum and mortality according to tables prescribed by the IRS as
published in Revenue Rulings 2001-62 and 2007-67.
(3)
Distributions during fiscal year 2009 were as a result of the termination of the
Pension Restoration Severance Plan and the executive officers no longer being at
risk of forfeiture with respect to these amounts provided under the deferred
compensation restoration component of the Retirement Security
Plan. For Mr. List, includes the distribution due to his
quasi-retirement.
(4) At
May 31, 2009, Mr. List is eligible for retirement based on the normal retirement
age of 62. Due to Mr. List’s quasi-retirement in January 2009, his
credited years of service were reduced to zero at that
time. Subsequent to the quasi-retirement, Mr. List received credited
years of service for the remainder of the 2009 calendar year and receives 12
months of credited service in January of each year thereafter. During
fiscal year 2009, Mr. List received a distribution of $2,416,323 due to his
quasi-retirement. He also received a $744,565 distribution from no
longer being at risk of forfeiture from the restoration component of the
Retirement Security Plan during the year ended May 31, 2009 and from the
termination of the Pension Restoration Severance Plan in May 2009.
5) At May
31, 2009, Mr. Borak is eligible for retirement based on the normal retirement
age of 62. Due to Mr. Borak’s quasi-retirement in January 2007, his
credited years of service were reduced to zero at that
time. Subsequent to the quasi-retirement, Mr. Borak received credited
years of service for the remainder of the 2007 calendar year and receives 12
months of credited service in January of each year thereafter.
Nonqualified
Deferred Compensation
National
Rural Deferred Compensation Plan
The
National Rural deferred compensation plan is a nonqualified deferred
compensation savings program for the senior executive group, including each of
the named executive officers, and other selected management or highly
compensated employees designated by National Rural. Participants may
elect to defer up to the lesser of 100% of their compensation for the year or
the applicable IRS statutory dollar limit in effect for that calendar
year. The calendar year 2009 cap for contributions is
$16,500. Compensation for the purpose of this plan is defined as the
total amount of compensation, including incentive pay, if any, paid by National
Rural. National Rural does not make any contributions to the
plan.
The
accounts are credited with “earnings” based on the participants’ selection of
available investment options (currently, eight options) within the Homestead
Funds. When a participant ceases to be an employee for any reason,
distribution of the account will generally be made in 15 substantially equal
annual payments beginning approximately 60 days after termination (unless an
election is made to change the form and timing of the payout). The
participant may elect either a single lump sum or substantially equal annual
installments paid over no less than two and no more than 14
years. The amount paid is based on the accumulated value of the
account.
RTFC
Deferred Compensation Plan
As
described under “Employment Contracts” above, prior to the May 19, 2009
amendment to the Amended and Restated Supplemental Benefit Agreement, RTFC
contributed a sum of $30,000 annually to a deferred compensation account for Mr.
Petersen on January 1 of each year that Mr. Petersen provided executive services
to RTFC. Interest was credited to the account on December 31 of each
such year at a rate equal to National Rural’s 20-year medium-term note rate on
that date. On December 31, 2008, the applicable interest rate was
7%. As approved by the RTFC Board of Directors, Mr. Petersen, at his
option, may request that the deferred component of his compensation be directed
into alternative investment vehicles that could offer the opportunity to earn a
return that is greater than the National Rural 20-year medium-term note
rate. Mr. Petersen has not yet chosen to exercise that
option. As stated under “Employment Contracts” above, the RTFC Board
of Directors and Mr. Petersen have agreed to liquidate the deferred compensation
account no earlier than May 19, 2010, and no later than May 18, 2011, subject to
compliance with applicable law.
The
following table summarizes information related to the nonqualified deferred
compensation plans in which the executive officers listed in the Summary
Compensation Table were eligible to participate during the year ended May 31,
2009.
Name
|
|
Executive
Contributions
in
Last
Fiscal
Year
(1)
|
Registrant
Contributions
in
Last
Fiscal
Year
|
Aggregate
Earnings
in Last
Fiscal
Year
|
Aggregate
Withdrawals/
Distributions
|
Aggregate
Balance
at Last
Fiscal
Year End
|
Sheldon
C. Petersen
|
|
|
|
|
|
|
|
National
Rural Deferred Compensation
|
$15,917
|
$$
|
-
|
$
|
$(87,966
|
)
|
$$
|
-
|
$198,894
|
|
|
RTFC
Deferred Compensation (2)
|
-
|
|
30,000
|
|
45,399
|
|
|
-
|
723,947
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
Steven
L. Lilly
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural Deferred Compensation
|
9,729
|
|
-
|
|
(61,927
|
)
|
|
-
|
132,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
J. List
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural Deferred Compensation
|
15,500
|
|
-
|
|
(21,782
|
)
|
|
-
|
56,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
T. Evans
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural Deferred Compensation
|
20,500
|
|
-
|
|
(31,590
|
)
|
|
-
|
115,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard
E. Larochelle
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural Deferred Compensation
|
15,917
|
|
-
|
|
(31,418
|
)
|
|
-
|
197,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence
Zawalick
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural Deferred Compensation
|
15,500
|
|
-
|
|
(34,588
|
)
|
|
-
|
84,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
M. Borak
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural Deferred Compensation
|
12,375
|
|
-
|
|
9
|
|
|
-
|
69,780
|
|
(1)
Executive contributions are also included in the fiscal year 2009 Salary column
in the Summary Compensation Table above.
(2) The
Amended and Restated Supplemental Benefit Agreement will terminate once funds
earned are liquidated and distributed to Mr. Petersen no earlier than May 19,
2010 and no later than May 18, 2011. No additional contributions will
be made to the account other than interest earned up to the liquidation of the
account. Interest will accrue at the National Rural 20-year
medium-term note rate on December 31, 2009 and December 31, 2010, depending on
when the liquidation occurs, and would result in additional RTFC interest of
$71,326 through May 19, 2010 or $147,486 through May 18, 2011 using the
applicable interest rate on December 31, 2008, or 7%, as the estimated interest
rate. Until such time as the agreement is terminated, however, if
RTFC terminates Mr. Petersen’s employment without cause, or if Mr. Petersen
terminates his service to RTFC for any reason, or due to his death or
disability,
RTFC is
required to pay a lump sum payment equivalent to the amount in his deferred
compensation account. RTFC’s contribution plus interest earned of
$75,399 for fiscal year 2009 is also included in the fiscal year 2009 All Other
Compensation column in the Summary Compensation Table above.
(3) The
aggregate balance for the RTFC Deferred Compensation plan includes $648,548
reported in the Summary Compensation Table in prior years.
Termination
of Employment and Change In Control Arrangements
Each of
Mr. Petersen and Mr. Evans have an executive agreement with National Rural (and,
for Mr. Petersen only, with RTFC) under which each such officer may continue to
receive base salary and benefits in certain circumstances after resignation or
termination of employment. No other named executive officers have
termination or change in control agreements.
Mr.
Petersen
Under the
executive agreement with Mr. Petersen, if National Rural terminates his
employment without “cause,” or Mr. Petersen terminates his employment for “good
reason” (each term as defined below), National Rural is obligated to pay him a
lump sum payment equal to the product of three times his annual base salary at
the rate in effect at the time of termination, and his short-term incentive
bonus, if any, for the previous year (or an amount equal to the short-term
incentive bonus for fiscal year 2007). Assuming a triggering event of
May 31, 2009, the compensation payable to Mr. Petersen for termination without
cause would be $2,520,033. The actual payments due on a termination
without cause on different dates could materially differ from this
estimate.
For
purposes of Mr. Petersen’s executive agreement, “cause” generally means (i) the
willful and continued failure by Mr. Petersen to perform his duties under the
agreement or comply with written policies of National Rural, (ii) willful
conduct materially injurious to National Rural, or (iii) conviction of a felony
involving moral turpitude. “Good reason” generally means (i) a
reduction in the rate of Mr. Petersen’s base salary, (ii) a decrease in his
titles, duties or responsibilities, or the assignment of new responsibilities
which, in either case, is materially less favorable to Mr. Petersen when
compared to his titles, duties and responsibilities which were in effect
immediately prior to such assignment, or (iii) the relocation of National
Rural’s principal office, or the relocation of Mr. Petersen to a
location more than 50 miles from the principal office of National
Rural.
As
described under “Employment Contracts” above, the agreement between RTFC and Mr.
Petersen will terminate once funds earned are liquidated and distributed to Mr.
Petersen no earlier than May 19, 2010 and no later than May 18,
2011. No additional contributions will be made to the account other
than interest earned up to liquidation of the account. Until such
time as the agreement is terminated, however, if RTFC terminates Mr. Petersen’s
employment without cause, or if Mr. Petersen terminates his service to RTFC for
any reason, or due to his death or disability, RTFC is required to pay a lump
sum payment equivalent to the amount in his deferred compensation
account. For details on the value of this compensation payable to Mr.
Petersen under the RTFC executive agreement, see the Nonqualified Deferred
Compensation Table above.
Under the
terms of the agreement, if RTFC terminates his service for cause, the term of
service will terminate immediately thereafter, and Mr. Petersen will not be
entitled to any payment with respect to the account.
Mr.
Evans
Under the
executive agreement with Mr. Evans, if National Rural terminates his employment
without cause, Mr. Evans would receive nine months of continued annual base
salary in effect at the time of termination, incentive compensation for the
additional nine-month period, and nine months of payment for all health and
welfare and retirement plans. Assuming a termination date of May 31,
2009, the cost of compensation payable to Mr. Evans for termination without
cause would be $424,032. The actual payments due for a termination
without cause on different dates could materially differ from this
estimate.
The
estimates do not include amounts to which the named executive officers would be
entitled to upon termination, such as base salary to date, unpaid bonuses
earned, unreimbursed expenses, paid vacation time and any other earned benefits
under company plans.
Director Compensation
Table
Directors
receive a fixed sum of $4,000 for each of the scheduled board meetings attended
and $150 for each conference call attended. Additionally, the
directors receive reimbursement for reasonable travel expenses. The
fixed amounts are paid following the conclusion of each board meeting or
conference call attended. The following chart summarizes the total
compensation earned by National Rural to its directors during the year ended May
31, 2009.
Name
|
|
Fees
Earned
|
|
Total
|
Darryl
Schriver
|
$
|
37,050
|
$
|
37,050
|
Reuben
McBride
|
|
37,200
|
|
37,200
|
J.
David Wasson, Jr.
|
|
37,800
|
|
37,800
|
Fred
Anderson
|
|
37,650
|
|
37,650
|
Roger
Arthur
|
|
33,350
|
|
33,350
|
Charles
Ayers
|
|
8,000
|
|
8,000
|
Roger
A. Ball
|
|
36,600
|
|
36,600
|
Raphael
A. Brumbeloe
|
|
37,800
|
|
37,800
|
Fred
Brog
|
|
8,000
|
|
8,000
|
Delbert
Cranford
|
|
36,900
|
|
36,900
|
Joel
Cunningham
|
|
8,150
|
|
8,150
|
Jim
L. Doerstler
|
|
38,100
|
|
38,100
|
Jimmy
Ewing Jr.
|
|
37,800
|
|
37,800
|
Harold
Foley
|
|
12,600
|
|
12,600
|
Michael
J. Guidry
|
|
4,000
|
|
4,000
|
Steven
J. Haaven
|
|
32,750
|
|
32,750
|
Christopher
Hamon
|
|
8,000
|
|
8,000
|
Scott
Handy
|
|
8,150
|
|
8,150
|
Jim
Herron
|
|
32,300
|
|
32,300
|
Martin
Hillert, Jr.
|
|
37,350
|
|
37,350
|
William
A. Kopacz
|
|
33,500
|
|
33,500
|
Burns
Mercer
|
|
37,800
|
|
37,800
|
Glenn
Miller
|
|
8,150
|
|
8,150
|
Randy
D. Renth
|
|
8,000
|
|
8,000
|
Gale
Rettkowski
|
|
32,750
|
|
32,750
|
Dwight
Rossow
|
|
36,750
|
|
36,750
|
Ronald
P. Salyer
|
|
32,000
|
|
32,000
|
R.
Wayne Stratton
|
|
38,150
|
|
38,150
|
Charles
Wayne Whitaker
|
|
32,150
|
|
32,150
|
Jack
F. Wolfe, Jr.
|
|
24,000
|
|
24,000
|
F.
E. Wolski
|
|
29,500
|
|
29,500
|
Compensation
Committee Interlocks and Insider Participation
During
the year ended May 31, 2009, there were no compensation committee interlocks or
insider participation related to executive compensation.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
Inapplicable.
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Review
and Approval of Transactions with Related Persons
The Board
of Directors has adopted a written policy for review and approval in writing and
monitoring of transactions involving National Rural and “related persons” (which
include our directors and executive officers and their immediate family
members). The policy covers any related person transaction that meets the
minimum threshold for disclosure under SEC disclosure requirements (generally,
transactions involving amounts exceeding $120,000 in which a related person had,
has or will have a direct or indirect material interest).
Policy
and Procedures
·
|
Each
director and executive officer is required to promptly notify the General
Counsel in writing of any material interest that such person or an
immediate family member of such person had, has or will have in a related
person transaction.
|
·
|
The
General Counsel of National Rural is responsible for the review, approval
or ratification of any related person transaction, unless the General
Counsel refers any related person transaction to the Board of Directors
for its review,
|
approval
or ratification. If such related person transaction involves a director, the
director may not participate in the deliberations or vote with respect to such
approval or ratification.
·
|
The
General Counsel will notify the Board of Directors at each regularly
scheduled Board meeting of any action taken by the General Counsel with
respect to a related person transaction since the last regularly scheduled
meeting of the Board of Directors.
|
·
|
In
the event the General Counsel becomes aware of a related person
transaction that has not been approved under the Board policy before its
consummation, the General Counsel will notify the Board of Directors. The
Board of Directors will consider all of the relevant facts and
circumstances with respect to such transaction, and will evaluate all
options available to National Rural, including ratification, revision or
termination of such transaction, and shall take such course of action as
the Board of Directors deems appropriate under the
circumstances.
|
·
|
The
General Counsel will determine whether a related person has a material
interest in a transaction based on the significance of the information to
investors in National Rural securities in light of all the circumstances.
Factors to be considered in determining whether a related person’s
interest in a transaction is material may include the importance of the
interest to the related person (financially or otherwise), the
relationship of the related person to the transaction and of related
persons with each other, and the dollar amount involved in the
transaction.
|
·
|
The
General Counsel, and where applicable, the Board of Directors, will not
approve or ratify a related person transaction unless the General Counsel,
or the Board, as the case may be, reasonably determines, based on a review
of the available information, that the transaction is fair and reasonable
to National Rural and consistent with the best interests of National
Rural.
|
·
|
Factors
to be taken into account in making the determination may include (i) the
business purpose of the transaction, (ii) whether the transaction is
entered into on an arms-length basis on terms fair to National Rural, and
(iii) whether such a transaction would violate other National Rural
policies.
|
Related
Person Transactions
See the
Summary Compensation Table in Item 11 for a description of compensation paid to
Larry Zawalick and John Borak, National Rural’s executive officers who are not
named executive officers, but meet the definition of a “related person” as
described above.
Independence
Determinations
The Board
of Directors has determined the independence of each Director based on a review
by the full Board. The Audit Committee is subject to the independence
requirements of Rule 10A-3 under the Securities Exchange Act. To
evaluate the independence of our directors, the Board has voluntarily adopted
categorical independence standards consistent with the New York Stock Exchange
(“NYSE”) standards. However, because we only list debt securities on the NYSE,
we are not subject to most of the corporate governance listing standards of the
NYSE, including the independence requirements.
No
Director is considered independent unless the Board has affirmatively determined
that he or she has no material relationship with National Rural, either directly
or as a partner, shareholder, or officer of an organization that has a
relationship with National Rural. Material relationships can include banking,
legal, accounting, charitable, and familial relationships, among
others. In addition, Director is not considered independent if any of
the following relationships existed:
|
(i)
|
the
director is, or has been within the last three years, an employee of
National Rural, or an immediate family member is, or has been within the
last three years, an executive officer of National
Rural;
|
|
(ii)
|
the
director has received, or has an immediate family member who has received,
during any twelve-month period within the last three years, more than
$120,000 in direct compensation from National Rural, other than director
and committee fees and pension or other forms of deferred compensation for
prior service (provided that such compensation is not contingent in any
way on continued service);
|
|
(iii)
|
(a)
the director or an immediate family member is a current partner of a firm
that is National Rural’s internal or external auditor; (b) the director is
a current employee of such a firm; (c) the director has an immediate
family member who is a current employee of such a firm and personally
works on National Rurals’audit; or (d) the director or an immediate family
member was within the last three years (but is no longer) a partner or
employee of such a firm and personally worked on National Rural’s audit
within that time;
|
|
(iv)
|
the
director or an immediate family member is, or has been within the last
three years, employed as an executive officer of another company where any
of National Rural’s present executive officers at the same time serves or
served on that company’s compensation committee;
or
|
|
(v)
|
the
director is a current employee, or an immediate family member is a current
executive officer, of a company that has made payments to, or received
payments from, National Rural for property or services in an amount which,
in any of the last three fiscal years, exceeds the greater of $1 million,
or 2 percent of such other company’s consolidated gross
revenues.
|
The Board
of Directors also reviewed directors’ responses to a questionnaire asking about
their relationships with National Rural and its affiliates (and those of their
immediate family members) and other potential conflicts of
interest.
In
reaching a determination that the directors are independent, the Board
considered that in addition to the categories or types of transactions described
above, loans and guarantees were made to member systems of which directors of
National Rural are members, employees, officers or directors. As a
cooperative, National Rural was established for the very purpose of extending
financing to its members (from whose ranks its directors must be drawn). Loans
and guarantees to members with which Directors are affiliated were made in the
ordinary course of National Rural business on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other members and did not involve more than normal risk of
uncollectibility or present other unfavorable features. It is anticipated that,
consistent with its loan and guarantee policies in effect from time to time,
additional loans and guarantees will be made by National Rural to member systems
and trade and service organizations of which directors of National Rural are
members, employees, officers or directors. National Rural has adopted
a policy whereby substantially all extensions of credit to entities related to
directors or their immediate family members are approved only by the
disinterested directors.
Based on
the criteria above, the Board of Directors has determined that the directors
listed below are independent for the period of time served by such Directors
during fiscal year 2009. The Board determined that none of the directors listed
below had any of the relationships listed in (i) - (v) above or any other
material relationship that would compromise his or her
independence.
Independent
Directors
|
Roger
Arthur (1)
|
Jimmy
Ewing Jr.
|
Randy
D. Renth
|
Charles
Ayers
|
Harold
Foley (1)
|
Gale
Rettkowski (1)
|
Roger
A. Ball (1)
|
Michael
J. Guidry
|
Dwight
Rossow
|
Raphael
A. Brumbeloe
|
Steven
J. Haaven (1)
|
R.
Wayne Stratton
|
Fred
Brog
|
Jim
Herron
|
J.
David Wasson, Jr.
|
Delbert
Cranford
|
Reuben
McBride
|
Jack
F. Wolfe, Jr.
(1)
|
Joel
Cunningham
|
Glenn
Miller
|
F.
E. Wolski
|
Jim
L. Doerstler
|
|
|
(1)
These directors served during the year ended May 31, 2009, however they
were no longer a director at May 31,
2009.
|
Item
14.
|
Principal
Accounting Fees and Services.
|
The
following table summarizes the aggregate professional fees for the audit of the
financial statements for the years ended
May 31,
2009 and 2008 and fees for other services during that period by Deloitte &
Touche, LLP.
|
|
2009
|
|
|
|
2008
|
|
|
Audit
fees (1)
|
$
|
1,736,488
|
|
|
$
|
1,641,790
|
|
|
Audit-related
fees
|
|
-
|
|
|
|
-
|
|
|
Tax
fees (2)
|
|
63,710
|
|
|
|
111,571
|
|
|
All
other fees (3)
|
|
15,000
|
|
|
|
28,500
|
|
|
Total
|
|
$
|
1,815,198
|
|
|
$
|
1,781,861
|
|
|
(1) Audit
fees in 2009 and 2008 consist of fees for the audit of the consolidated
financial statements of National Rural, including RTFC and NCSC in accordance
with the accounting guidance governing variable interest entities, totaling
$1,289,000 and $1,315,450, respectively, and fees for the preparation of the
stand-alone financial statements for RTFC and NCSC totaling $186,000 and
$185,000, respectively. Additionally, audit fees in 2009 and 2008
include comfort letter fees and consents related to debt issuances and
compliance work required by the independent auditors.
(2) Tax
fees consist of assistance with matters related to tax compliance and
consulting.
(3) These
fees relate to the audit of a trust serviced by National Rural.
National
Rural’s Audit Committee is solely responsible for the nomination, approval,
compensation, evaluation and discharge of the independent public
accountants. The independent registered public accountants report
directly to the Audit Committee and the Audit Committee is responsible for the
resolution of disagreements between management and the independent registered
public accountants. Consistent with Securities and Exchange
Commission requirements, the Audit Committee has adopted a policy to pre-approve
all audit and permissible non-audit services provided by the independent
registered public accountants. Under the policy, the Audit
Committee's pre-approval for permissible non-audit services is not required if
all such services 1) do not aggregate to more than five percent of total revenue
paid to the independent registered public accountants in the fiscal year when
services are provided, 2) were not recognized as non-audit services at the time
of the engagement and 3) are promptly brought to the attention of the Audit
Committee and approved by the Audit Committee before the completion of the
audit. All fiscal 2009 and fiscal 2008 services were pre-approved by
the Audit Committee. National Rural’s independent registered public
accountants for the current fiscal year have been appointed by the Audit
Committee.
PART
IV
Item
15.
|
Exhibits,
Financial Statement Schedules.
|
|
|
(a)
|
Documents
filed as a part of this report.
|
|
1.
|
Consolidated
financial statements
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
89
|
|
|
Consolidated
Balance Sheets
|
90
|
|
|
Consolidated
Statements of Operations
|
92
|
|
|
Consolidated
Statements of Changes in Equity
|
93
|
|
|
Consolidated
Statements of Cash Flows
|
94
|
|
|
Notes
to Consolidated Financial Statements
|
96
|
|
|
|
|
|
2.
|
Financial
statement schedules
|
|
|
All
schedules are omitted because they are not required, are inapplicable or the
information is included in the financial statements or notes
thereto.
3.
|
Exhibits
|
|
3.1
|
-
|
Articles
of Incorporation. Incorporated by reference to Exhibit 3.1
to Registration Statement No. 2-46018, filed October 12,
1972.
|
|
3.2
|
-
|
Amended
Bylaws as approved by National Rural’s board of directors and members on
March 1, 2005. Incorporated by reference to Exhibit 3.2 to
National Rural’s Form 10-Q filed on April 15, 2005.
|
|
4.1
|
-
|
Form
of Capital Term Certificate. Incorporated by reference to
Exhibit 4.3 to Registration Statement No. 2-46018 filed October 12,
1972.
|
|
4.2
|
-
|
Indenture
dated as of February 15, 1994, between the Registrant and U.S. Bank
National Association, successor trustee. Incorporated by
reference to Exhibit 4.2 to National Rural’s Form 10-Q filed on October
15, 2007.
|
|
4.3
|
-
|
Revolving
Credit Agreement dated as of March 22, 2006 for $1,000,000,000 maturing on
March 22, 2011. Incorporated by reference to Exhibit 4.3 to
National Rural’s Form 10-Q filed on April 14, 2006.
|
|
4.4
|
-
|
Revolving
Credit Agreement dated as of March 16, 2007 for $1,125,000,000 maturing on
March 16, 2012. Incorporated by reference to Exhibit 4.4 to
National Rural’s Form 10-Q filed on April 12, 2007.
|
|
4.5
|
-
|
Revolving
Credit Agreement dated as of March 13, 2009 for $1,000,000,000 expiring on
March 12, 2010. Incorporated by reference to Exhibit 4.5 to
National Rural’s Form 10-Q filed on April 8, 2009.
|
|
4.6
|
-
|
Indenture
between National Rural and Mellon Bank, N.A., as Trustee. Incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-3 filed on
November 14, 1995 (Registration No. 33-64231).
|
|
4.7
|
-
|
Indenture
between National Rural and Chemical Bank, as
Trustee. Incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-3ASR filed on November 24, 2008
(Registration No. 33-155631).
|
|
4.8
|
-
|
First
Supplemental Indenture between National Rural and Chemical Bank, as
Trustee. Incorporated by reference to Exhibit 4.8 to
Registration Statement on Form S-3 filed on October 1, 1990 (Registration
No. 33-58445).
|
|
4.9
|
-
|
Bond
Purchase Agreement between the Registrant, Federal Financing Bank and
Rural Utilities Service dated as of April 28, 2006 for up to
$1,500,000,000. Incorporated by reference to Exhibit 4.11 to
National Rural’s Form 10-K filed on August 25, 2006.
|
|
4.10
|
-
|
Series
B Bond Guarantee Agreement between the Registrant and the Rural Utilities
Service dated as of April 28, 2006 for up to
$1,500,000,000. Incorporated by reference to Exhibit 4.12 to
National Rural’s Form 10-K filed on August 25, 2006.
|
|
4.11
|
-
|
Pledge
Agreement dated as of April 28, 2006, between the Registrant, the Rural
Utilities Service and U.S. Bank Trust National
Association. Incorporated by reference to Exhibit 4.13 to
National Rural’s Form 10-K filed on August 25, 2006.
|
|
4.12
|
-
|
Series
B Future Advance Bond from the Registrant to the Federal Financing Bank
dated as of April 28, 2006 for up to $1,500,000,000 maturing on July 15,
2029. Incorporated by reference to Exhibit 4.14 to National
Rural’s Form 10-K filed on August 25, 2006.
|
|
4.13
|
-
|
Bond
Purchase Agreement between the Registrant, Federal Financing Bank and
Rural Utilities Service dated as of June 14, 2005 for up to
$1,000,000,000. Incorporated by reference to Exhibit 4.12 to
National Rural’s Form 10-K filed on August 24, 2005.
|
|
4.14
|
-
|
Series
A Bond Guarantee Agreement between the Registrant and the Rural Utilities
Service dated as of June 14, 2005 for up to
$1,000,000,000. Incorporated by reference to Exhibit 4.13 to
National Rural’s Form 10-K filed on August 24,
2005.
|
|
4.15
|
-
|
Pledge
Agreement dated as of June 14, 2005, between the Registrant, the Rural
Utilities Service and U.S. Bank Trust National
Association. Incorporated by reference to Exhibit 4.14 to
National Rural’s Form 10-K filed on August 24, 2005.
|
|
4.16
|
-
|
Series
A Future Advance Bond from the Registrant to the Federal Financing Bank
dated as of June 14, 2005 for up to $1,000,000,000 maturing on July 15,
2028. Incorporated by reference to Exhibit 4.15 to National
Rural’s Form 10-K filed on August 24, 2005.
|
|
4.17
|
-
|
Form
of Fixed-Rate MTN. Incorporated by reference to Exhibit 4.3 to
National Rural’s Form 8-K filed on November 26, 2008.
|
|
4.18
|
-
|
Form
of Floating-Rate MTN. Incorporated by reference to Exhibit 4.4
to National Rural’s Form 8-K filed on November 26,
2008.
|
|
4.19
|
-
|
Form
of Fixed-Rate Internotes. Incorporated by reference to Exhibit
4.5 to National Rural’s Form 8-K filed on November 26,
2008.
|
|
4.20
|
-
|
Form
of Floating-Rate Internotes. Incorporated by reference to
Exhibit 4.6 to National Rural’s Form 8-K filed on November 26,
2008.
|
|
4.21
|
-
|
Indenture
dated as of May 15, 2000, between the Registrant and Bank One Trust
Company, National Association, as trustee. Incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-3 filed on
May 25, 2000 (Registration No. 333-37940).
|
|
4.22
|
-
|
First
Supplemental Indenture dated as of March 12, 2007, between the Registrant
and U.S. Bank National Association, as trustee. Incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-3ASR filed on
April 19, 2007 (Registration No. 333-142230).
|
|
4.23
|
-
|
Indenture
for Clean Renewable Energy Bonds, Tax Credit Series dated as of January 1,
2008, between the Registrant and U.S. Bank Trust National
Association. The Indenture has been omitted and will be
furnished supplementally to the Securities and Exchange Commission upon
request. Incorporated by reference to Exhibit 4.21 to National
Rural’s Form 10-Q filed on April 14, 2008.
|
|
4.24
|
-
|
Note
Purchase Agreement dated as of March 23, 2009, for $400,000,000 between
the Registrant and Federal Agricultural Mortgage Corporation. Incorporated
by reference to Exhibit 4.24 to National Rural’s Form 10-Q filed on April
8, 2009.
|
|
4.25
|
-
|
Pledge
Agreement dated as of March 23, 2009, between the Registrant, Federal
Agricultural Mortgage Corporation and U.S. Bank Trust National
Association. Incorporated by reference to Exhibit 4.25 to National Rural’s
Form 10-Q filed on April 8, 2009.
|
|
4.26
|
-
|
Indenture
dated as of October 25, 2007, between the Registrant and U.S. Bank
National Association, as trustee. Incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-3ASR filed on October 26,
2007 (Registration No. 333-146960).
|
|
4.27
|
-
|
Bond
Purchase Agreement between the Registrant, Federal Financing Bank and
Rural Utilities Service dated as of September 19, 2008 for up to
$500,000,000. Incorporated by reference to Exhibit 4.29 to
National Rural’s Form 10-Q filed on October 14, 2008.
|
|
4.28
|
-
|
Series
C Bond Guarantee Agreement between the Registrant and the Rural Utilities
Service dated as of September 19, 2008 for up to
$500,000,000. Incorporated by reference to Exhibit 4.30 to
National Rural’s Form 10-Q filed on October 14, 2008.
|
|
4.29
|
-
|
Pledge
Agreement dated as of September 19, 2008, between the Registrant, the
Rural Utilities Service and U.S. Bank Trust National
Association. Incorporated by reference to Exhibit 4.31 to
National Rural’s Form 10-Q filed on October 14, 2008.
|
|
4.30
|
-
|
Series
C Future Advance Bond from the Registrant to the Federal Financing Bank
dated as of September 19, 2008 for up to $500,000,000 maturing on October
15, 2031. Incorporated by reference to Exhibit 4.32 to National
Rural’s Form 10-Q filed on October 14, 2008.
|
|
4.31
|
-
|
Amendment
No. 1 dated as of September 19, 2008 to the Pledge Agreement dated as of
April 28, 2006, between the Registrant, the Rural Utilities Service and
U.S. Bank Trust National Association. Incorporated by reference
to Exhibit 4.33 to National Rural’s Form 10-Q filed on October 14,
2008.
|
|
4.32
|
-
|
Amendment
No. 2 dated as of December 9, 2008 to the Revolving Credit Agreement dated
as of March 16, 2007 for $1,125,000,000 expiring on March 16,
2012. Incorporated by reference to Exhibit 4.35 to National
Rural’s Form 10-Q filed on January 9, 2009.
|
|
4.33
|
-
|
Amendment
No. 4 dated as of December 9, 2008 to the Revolving Credit Agreement dated
as of March 22, 2006 for $1,000,000,000 expiring on March 22,
2011. Incorporated by reference to Exhibit 4.36 to National
Rural’s Form 10-Q filed on January 9,
2009.
|
|
4.34
|
-
|
Amendment
No. 3 dated as of December 19, 2008 to the Revolving Credit Agreement
dated as of March 16, 2007 for $1,125,000,000 expiring on March 16,
2012. Incorporated by reference to Exhibit 4.40 to National
Rural’s Form 10-Q filed on January 9, 2009.
|
|
4.35
|
-
|
Amendment
No. 5 dated as of December 19, 2008 to the Revolving Credit Agreement
dated as of March 22, 2006 for $1,000,000,000 expiring on March 22,
2011. Incorporated by reference to Exhibit 4.41 to National
Rural’s Form 10-Q filed on January 9, 2009.
|
|
4.36
|
-
|
Term
Loan Credit Agreement dated as of January 21, 2009 for $200,000,000
expiring on January 21, 2010. Incorporated by reference to
Exhibit 4.42 to National Rural’s Form 10-Q filed on April 8,
2009.
|
|
4.37
|
-
|
Note
Purchase Agreement dated as of December 15, 2008 for $500,000,000 between
the Registrant and Federal Agricultural Mortgage
Corporation. Incorporated by reference to Exhibit 4.37 to
National Rural’s Form 10-Q filed on January 9, 2009.
|
|
4.38
|
-
|
Pledge
Agreement dated as of December 15, 2008, between the Registrant, Federal
Agricultural Mortgage Corporation and U.S. Bank Trust National
Association. Incorporated by reference to Exhibit 4.38 to
National Rural’s Form 10-Q filed on January 9, 2009.
|
|
4.39
|
-
|
Note
Purchase Agreement dated as of February 5, 2009 for $500,000,000, between
the Registrant and Federal Agricultural Mortgage
Corporation. Incorporated by reference to Exhibit 4.43 to
National Rural’s Form 10-Q filed on April 8, 2009.
|
|
4.40
|
-
|
Pledge
Agreement dated as of February 5, 2009, between the Registrant, Federal
Agricultural Mortgage Corporation and U.S. Bank Trust National
Association. Incorporated by reference to Exhibit 4.44 to
National Rural’s Form 10-Q filed on April 8, 2009.
|
|
4.41
|
-
|
Form
of Fixed Rate Member Capital Securities Certificate. Incorporated by
reference to Exhibit 4.1 to National Rural’s Form 10-Q filed on April 8,
2009.
|
|
4.42
|
-
|
Form
of Floating Rate Member Capital Securities Certificate. Incorporated by
reference to Exhibit 4.2 to National Rural’s Form 10-Q filed on April 8,
2009.
|
|
4.43
|
-
|
Note
Purchase Agreement dated as of May 22, 2009 for $1,000,000,000 between the
Registrant and Federal Agricultural Mortgage
Corporation.
|
|
4.44
|
-
|
Pledge
Agreement dated as of May 22, 2009, between the Registrant, Federal
Agricultural Mortgage Corporation and U.S. Bank Trust National
Association.
|
|
4.45
|
-
|
Amendment
No. 1 dated as of July 13, 2009 to the Note Purchase Agreement dated as of
December 15, 2008 for $500,000,000 between the Registrant and Federal
Agricultural Mortgage Corporation.
|
|
4.46
|
-
|
Amendment
No. 1 dated as of July 13, 2009 to the Note Purchase Agreement dated as of
February 5, 2009 for $500,000,000, between the Registrant and Federal
Agricultural Mortgage Corporation.
|
|
4.47
|
-
|
Master
Sale and Servicing Agreement dated as of July 24, 2009, between the
Registrant and Federal Agricultural Mortgage
Corporation.
|
|
|
-
|
Registrant
agrees to furnish to the Commission a copy of all other instruments
defining the rights of holders of its long-term debt upon
request.
|
|
10.1
|
-
|
Plan
Document for National Rural’s Deferred Compensation Program amended and
restated as of July 1, 2003. Incorporated by reference to
Exhibit 10.1 to National Rural’s Form 10-K filed on August 24, 2005.*
|
|
10.2
|
-
|
Employment
Contract between National Rural and Sheldon C. Petersen, effective as of
January 1, 2008. Incorporated by reference to Exhibit 10.2 to
National Rural’s Form 10-Q filed on January 11, 2008. *
|
|
10.3
|
-
|
Supplemental
Benefit Agreement between Rural Telephone Finance Cooperative and Sheldon
C. Petersen, dated as of July 22, 2004. Incorporated by
reference to Exhibit 10.3 to National Rural’s Form 10-K filed on August
20, 2004.
*
|
|
10.4
|
-
|
Amended
and Restated Supplemental Benefit Agreement between RTFC and Sheldon C.
Petersen, dated as of December 4, 2006. Incorporated by
reference to Exhibit 10.4 to National Rural’s Form 10-K filed on August
27, 2008.*
|
|
10.5
|
-
|
First
Amendment to Amended and Restated Supplemental Agreement between Rural
Telephone Finance Cooperative and Sheldon C. Petersen, effective as of
January 1, 2008. Incorporated by reference to Exhibit 10.5 to
National Rural’s Form 10-Q filed on January 11, 2008. *
|
|
10.6
|
-
|
Employment
Contract between National Rural and John T. Evans, dated as of September
17, 1997 including termination of employment
arrangement. Incorporated by reference to Exhibit 10.4 to
National Rural’s Form 10-K filed on August 27, 2007. *
|
|
10.7
|
-
|
Agreement
of Purchase and Sale between National Rural and Loudoun Land Venture, LLC
dated as of November 28, 2007. Exhibit C to the Agreement of
Purchase and Sale has been omitted and will be furnished supplementally to
the Securities and Exchange Commission upon
request. Incorporated by reference to Exhibit 10.6 to National
Rural’s Form 10-Q filed on January 11, 2008.
|
|
10.8
|
-
|
First
Amendment to Agreement of Purchase and Sale between National Rural and
Loudoun Land Venture, LLC dated as of December 17,
2007. Incorporated by reference to Exhibit 10.7 to National
Rural’s Form 10-Q filed on January 11,
2008.
|
|
10.9
|
-
|
Second
Amendment to Agreement of Purchase and Sale between National Rural and
Loudoun Land Venture, LLC dated as of December 21,
2007. Exhibits A and C to the Second Amendment to Agreement of
Purchase and Sale have been omitted and will be furnished supplementally
to the Securities and Exchange Commission upon
request. Incorporated by reference to Exhibit 10.8 to National
Rural’s Form 10-Q filed on January 11, 2008.
|
|
10.10
|
-
|
Agreement
of Purchase and Sale between National Rural and DTC Partners, LLC dated as
of May 2, 2008. Exhibits A, E and G to the Agreement of
Purchase and Sale have been omitted and will be furnished supplementally
to the Securities and Exchange Commission upon
request. Incorporated by reference to Exhibit 10.10 to National
Rural’s Form 10-K filed on August 27, 2008.
|
|
10.11
|
-
|
First
Amendment to Agreement of Purchase and Sale between National Rural and DTC
Partners, LLC dated as of June 30, 2008. Incorporated by
reference to Exhibit 10.11 to National Rural’s Form 10-K filed on August
27, 2008.
|
|
10.12
|
-
|
Second
Amendment to Agreement of Purchase and Sale between National Rural and DTC
Partners, LLC dated as of July 29, 2008. Incorporated by
reference to Exhibit 10.12 to National Rural’s Form 10-K filed on August
27, 2008.
|
|
10.13
|
-
|
Third
Amendment to Agreement of Purchase and Sale between National Rural and DTC
Partners, LLC dated as of August 25, 2008. Graphics to the
Third Amendment to Agreement of Purchase and Sale have been omitted and
will be furnished supplementally to the Securities and Exchange Commission
upon request. Incorporated by reference to Exhibit 10.13 to
National Rural’s Form 10-Q filed on October 14, 2008.
|
|
10.14
|
-
|
Fourth
Amendment to Agreement of Purchase and Sale between National Rural and DTC
Partners, LLC dated as of December 3, 2008. Incorporated by
reference to Exhibit 10.14 to National Rural’s Form 10-Q filed on January
9, 2009.
|
|
10.15
|
-
|
Second
Amendment to Amended and Restated Supplemental Agreement between Rural
Telephone Finance Cooperative and Sheldon C. Petersen, effective as of May
19, 2009.*
|
|
10.16
|
-
|
Plan
Document for National Rural’s Deferred Compensation Pension Restoration
Plan dated as of January 1, 2005.*
|
|
12
|
-
|
Computations
of ratio of margins to fixed charges.
|
|
23
|
-
|
Consent
of Deloitte & Touche LLP.
|
|
31.1
|
-
|
Certification
of the Chief Executive Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
-
|
Certification
of the Chief Financial Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
-
|
Certification
of the Chief Executive Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
32.2
|
-
|
Certification
of the Chief Financial Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
*
Identifies a management contract or compensatory plan or
arrangement.
|
|
|
|
|
|
|
|
|
SIGNATURES
Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the County of Fairfax, Commonwealth of Virginia, on the 17th
day of August 2009.
NATIONAL RURAL UTILITIES
COOPERATIVE
FINANCE CORPORATION
By: /s/ SHELDON C.
PETERSEN
Sheldon C. Petersen
Governor and Chief Executive
Officer
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ SHELDON
C. PETERSEN
|
|
Governor
and Chief Executive Officer
|
|
|
|
Sheldon
C. Petersen
|
|
|
|
|
|
|
|
|
|
|
|
/s/ STEVEN
L. LILLY
|
|
Senior
Vice President and Chief Financial
|
|
|
|
Steven
L. Lilly
|
|
Officer
|
|
|
|
|
|
|
|
|
|
/s/ ROBERT
E. GEIER
|
|
Vice
President and Controller
|
|
|
|
Robert
E. Geier
|
|
|
|
|
|
|
|
|
|
|
|
/s/ DARRYL
SCHRIVER
|
|
President
and Director
|
|
|
|
Darryl
Schriver
|
|
|
|
|
|
|
|
|
|
|
|
/s/ REUBEN
MCBRIDE
|
|
Vice
President and Director
|
|
|
|
Reuben
McBride
|
|
|
|
|
|
|
|
|
|
|
|
/s/ J.
DAVID WASSON, JR.
|
|
Secretary-Treasurer
and Director
|
|
|
|
J.
David Wasson, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ FRED
ANDERSON
|
|
Director
|
|
August
17, 2009
|
|
Fred
Anderson
|
|
|
|
|
|
|
|
|
|
|
|
/s/ CHARLES
AYERS
|
|
Director
|
|
|
|
Charles
Ayers
|
|
|
|
|
|
|
|
|
|
|
|
/s/ FRED
BROG
|
|
Director
|
|
|
|
Fred
Brog
|
|
|
|
|
|
|
|
|
|
|
|
/s/ RAPHAEL
A. BRUMBELOE
|
|
Director
|
|
|
|
Raphael
A. Brumbeloe
|
|
|
|
|
|
|
|
|
|
|
|
/s/ DELBERT
CRANFORD
|
|
Director
|
|
|
|
Delbert
Cranford
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JOEL
CUNNIGHAM
|
|
Director
|
|
|
|
Joel
Cunningham
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JIM
L. DOERSTLER
|
|
Director
|
|
|
|
Jim
L. Doerstler
|
|
|
|
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ JIMMY
EWING, JR.
|
|
Director
|
|
|
|
Jimmy
Ewing, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ MICHAEL
J. GUIDRY
|
|
Director
|
|
|
|
Michael
J. Guidry
|
|
|
|
|
|
|
|
|
|
|
|
/s/ CHRISTOPHER
L. HAMON
|
|
Director
|
|
|
|
Christopher
L. Hamon
|
|
|
|
|
|
|
|
|
|
|
|
/s/ SCOTT
W. HANDY
|
|
Director
|
|
|
|
Scott
W. Handy
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JIM
HERRON
|
|
Director
|
|
|
|
Jim
Herron
|
|
|
|
|
|
|
|
|
|
|
|
/s/ MARTIN
HILLERT, JR.
|
|
Director
|
|
|
|
Martin
Hillert, Jr.
|
|
|
|
August
17, 2009
|
|
|
|
|
|
|
|
/s/ WILLIAM
A. KOPACZ
|
|
Director
|
|
|
|
William
A. Kopacz
|
|
|
|
|
|
|
|
|
|
|
|
/s/ BURNS
E. MERCER
|
|
Director
|
|
|
|
Burns
E. Mercer
|
|
|
|
|
|
|
|
|
|
|
|
/s/ GLENN
MILLER
|
|
Director
|
|
|
|
Glenn
Miller
|
|
|
|
|
|
|
|
|
|
|
|
/s/ RANDY
D. RENTH
|
|
Director
|
|
|
|
Randy
D. Renth
|
|
|
|
|
|
|
|
|
|
|
|
/s/ DWIGHT
ROSSOW
|
|
Director
|
|
|
|
Dwight
Rossow
|
|
|
|
|
|
|
|
|
|
|
|
/s/ WAYNE
STRATTON
|
|
Director
|
|
|
|
R.
Wayne Stratton
|
|
|
|
|
|
|
|
|
|
|
|
/s/ F.
E. WOLSKI
|
|
Director
|
|
|
|
F.
E. Wolski
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Members of
National
Rural Utilities Cooperative Finance Corporation
Herndon,
Virginia
We have
audited the accompanying consolidated balance sheets of National Rural Utilities
Cooperative Finance Corporation and subsidiaries (the "Company") as of May 31,
2009 and 2008, and the related consolidated statements of operations, changes in
equity, and cash flows for each of the three years in the period ended May 31,
2009. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of National Rural Utilities Cooperative Finance
Corporation and subsidiaries as of May 31, 2009 and 2008, and the results of
their operations and their cash flows for each of the three years in the period
ended May 31, 2009, in conformity with accounting principles generally accepted
in the United States of America.
/s/
DELOITTE & TOUCHE LLP
McLean,
Virginia
August
14, 2009
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
BALANCE SHEETS
May
31, 2009 and 2008
(in
thousands)
A
S S E T S
|
|
2009
|
|
|
|
2008
|
|
|
Cash
and cash equivalents
|
$
|
504,999
|
|
|
$
|
177,809
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
8,207
|
|
|
|
14,460
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in preferred stock
|
|
47,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
|
20,192,309
|
|
|
|
19,029,040
|
|
|
Less: Allowance
for loan losses
|
|
(622,960
|
)
|
|
|
(514,906
|
)
|
|
Loans
to members, net
|
|
19,569,349
|
|
|
|
18,514,134
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
260,428
|
|
|
|
258,315
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
43,162
|
|
|
|
21,045
|
|
|
|
|
|
|
|
|
|
|
|
Debt
service reserve funds
|
|
46,662
|
|
|
|
54,993
|
|
|
|
|
|
|
|
|
|
|
|
Bond
issuance costs, net
|
|
50,414
|
|
|
|
39,618
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets, net
|
|
48,721
|
|
|
|
58,961
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets
|
|
381,356
|
|
|
|
220,514
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
22,407
|
|
|
|
19,532
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,982,705
|
|
|
$
|
19,379,381
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
BALANCE SHEETS
May
31, 2009 and 2008
(in
thousands)
L
I A B I L I T I E S A N D E Q U I T
Y
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$
|
4,867,864
|
|
|
$
|
6,327,453
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest payable
|
|
|
249,601
|
|
|
|
244,299
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
12,720,055
|
|
|
|
10,173,587
|
|
|
|
|
|
|
|
|
|
|
Deferred
income
|
|
|
18,962
|
|
|
|
21,971
|
|
|
|
|
|
|
|
|
|
|
Guarantee
liability
|
|
|
29,672
|
|
|
|
15,034
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
32,955
|
|
|
|
27,216
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
|
493,002
|
|
|
|
171,390
|
|
|
|
|
|
|
|
|
|
|
Subordinated
deferrable debt
|
|
|
311,440
|
|
|
|
311,440
|
|
|
|
|
|
|
|
|
|
|
Members'
subordinated certificates:
|
|
|
|
|
|
|
|
|
Membership
subordinated certificates
|
|
|
642,960
|
|
|
|
649,465
|
|
Loan
and guarantee subordinated certificates
|
|
|
818,999
|
|
|
|
757,314
|
|
Member
capital securities
|
|
|
278,095
|
|
|
|
-
|
|
Total
members' subordinated certificates
|
|
|
1,740,054
|
|
|
|
1,406,779
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
10,162
|
|
|
|
14,247
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Retained
equity
|
|
|
500,823
|
|
|
|
657,138
|
|
Accumulated
other comprehensive income
|
|
|
8,115
|
|
|
|
8,827
|
|
Total
equity
|
|
|
508,938
|
|
|
|
665,965
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,982,705
|
|
|
$
|
19,379,381
|
|
|
|
|
|
|
|
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands)
For
the Years Ended May 31, 2009, 2008 and 2007
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Interest
income
|
$
|
1,070,764
|
|
$
|
1,051,393
|
|
$
|
1,039,650
|
|
|
Interest
expense
|
|
(935,021
|
)
|
|
(931,268
|
)
|
|
(991,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
135,743
|
|
|
120,125
|
|
|
47,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision
for) recovery of loan losses
|
|
(113,699
|
)
|
|
30,262
|
|
|
6,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after (provision for) recovery of loan
losses
|
|
22,044
|
|
|
150,387
|
|
|
54,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
13,163
|
|
|
19,608
|
|
|
16,106
|
|
|
Derivative
cash settlements
|
|
112,989
|
|
|
27,033
|
|
|
86,442
|
|
|
Results
of operations of foreclosed assets
|
|
3,774
|
|
|
7,528
|
|
|
9,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
129,926
|
|
|
54,169
|
|
|
112,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(36,865
|
)
|
|
(36,428
|
)
|
|
(33,817
|
)
|
|
Other
general and administrative expenses
|
|
(23,977
|
)
|
|
(24,041
|
)
|
|
(18,072
|
)
|
|
(Provision
for) recovery of guarantee liability
|
|
(1,615
|
)
|
|
3,104
|
|
|
1,700
|
|
|
Market
adjustment on foreclosed assets
|
|
(8,014
|
)
|
|
(5,840
|
)
|
|
-
|
|
|
Derivative
forward value
|
|
(160,017
|
)
|
|
(98,743
|
)
|
|
(79,281
|
)
|
|
Foreign
currency adjustments
|
|
-
|
|
|
-
|
|
|
(14,554
|
)
|
|
Loss
on sale of loans
|
|
-
|
|
|
(676
|
)
|
|
(1,584
|
)
|
|
Loss
on early extinguishment of debt
|
|
-
|
|
|
(5,509
|
)
|
|
(4,806
|
)
|
|
Other
|
|
(353
|
)
|
|
(112
|
)
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
(230,841
|
)
|
|
(168,245
|
)
|
|
(150,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income prior to income taxes and minority interest
|
|
(78,871
|
)
|
|
36,311
|
|
|
16,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (expense)
|
|
5,101
|
|
|
3,335
|
|
|
(2,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income prior to minority interest
|
|
(73,770
|
)
|
|
39,646
|
|
|
14,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest, net of income taxes
|
|
3,900
|
|
|
6,099
|
|
|
(2,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
$
|
(69,870
|
)
|
$
|
45,745
|
|
$
|
11,701
|
|
|
|
|
|
|
|
|
|
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
(in
thousands)
For
the Years Ended May 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patronage
Capital
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
|
|
|
|
|
Other
|
|
Subtotal
|
|
|
|
Unallocated
|
|
|
|
Members'
|
|
General
|
|
|
|
|
|
|
Comprehensive
|
|
Retained
|
|
Membership
|
|
Net
|
|
Education
|
|
Capital
|
|
Reserve
|
|
|
|
|
Total
|
|
(Loss)
Income
|
|
Equity
|
|
Fees
|
|
Income
(Loss)
|
|
Fund
|
|
Reserve
|
|
Fund
|
|
Other
|
Balance
as of May 31, 2006
|
$
|
784,408
|
|
$
|
13,208
|
|
|
$
|
771,200
|
|
|
$
|
994
|
|
|
$
|
225,849
|
|
|
$
|
1,281
|
|
|
$
|
156,844
|
|
$
|
497
|
|
|
$
|
385,735
|
|
Patronage
capital retirement
|
|
(84,247
|
)
|
|
-
|
|
|
|
(84,247
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
(84,247
|
)
|
Income
prior to income taxes and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
minority
interest
|
|
16,541
|
|
|
-
|
|
|
|
16,541
|
|
|
|
-
|
|
|
|
(89,481
|
)
|
|
|
945
|
|
|
|
1,464
|
|
|
1
|
|
|
|
103,612
|
|
Other
comprehensive loss
|
|
(1,004
|
)
|
|
(1,004
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Income
tax expense
|
|
(2,396
|
)
|
|
-
|
|
|
|
(2,396
|
)
|
|
|
-
|
|
|
|
(2,396
|
)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Minority
interest
|
|
(2,444
|
)
|
|
-
|
|
|
|
(2,444
|
)
|
|
|
-
|
|
|
|
(2,444
|
)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
(817
|
)
|
|
-
|
|
|
|
(817
|
)
|
|
|
3
|
|
|
|
-
|
|
|
|
(820
|
)
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Balance
as of May 31, 2007
|
$
|
710,041
|
|
$
|
12,204
|
|
|
$
|
697,837
|
|
|
$
|
997
|
|
|
$
|
131,528
|
|
|
$
|
1,406
|
|
|
$
|
158,308
|
|
$
|
498
|
|
|
$
|
405,100
|
|
Patronage
capital retirement
|
|
(85,494
|
)
|
|
-
|
|
|
|
(85,494
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
(85,494
|
)
|
Income
prior to income taxes and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
minority
interest
|
|
36,311
|
|
|
-
|
|
|
|
36,311
|
|
|
|
-
|
|
|
|
(96,959
|
)
|
|
|
1,024
|
|
|
|
29,061
|
|
|
(2
|
)
|
|
|
103,187
|
|
Other
comprehensive loss
|
|
(3,377
|
)
|
|
(3,377
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Income
tax expense
|
|
3,335
|
|
|
-
|
|
|
|
3,335
|
|
|
|
-
|
|
|
|
3,335
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Minority
interest
|
|
6,099
|
|
|
-
|
|
|
|
6,099
|
|
|
|
-
|
|
|
|
6,099
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
(950
|
)
|
|
-
|
|
|
|
(950
|
)
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(946
|
)
|
|
|
40
|
|
|
-
|
|
|
|
(40
|
)
|
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
|
|
(78,871
|
)
|
|
-
|
|
|
|
(78,871
|
)
|
|
|
-
|
|
|
|
(162,695
|
)
|
|
|
1,024
|
|
|
|
(94
|
)
|
|
-
|
|
|
|
82,894
|
|
Other
comprehensive loss
|
|
(712
|
)
|
|
(712
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Income
tax benefit
|
|
5,101
|
|
|
-
|
|
|
|
5,101
|
|
|
|
-
|
|
|
|
5,101
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Minority
interest
|
|
3,900
|
|
|
-
|
|
|
|
3,900
|
|
|
|
-
|
|
|
|
3,900
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
(919
|
)
|
|
-
|
|
|
|
(919
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(916
|
)
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Balance
as of May 31, 2009
|
$
|
508,938
|
|
$
|
8,115
|
|
|
$
|
500,823
|
|
|
$
|
990
|
|
|
$
|
(109,691
|
)
|
|
$
|
1,592
|
|
|
$
|
187,098
|
|
$
|
496
|
|
|
$
|
420,338
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
For
the Years Ended May 31, 2009, 2008 and 2007
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
$
|
(69,870
|
)
|
$
|
45,745
|
|
$
|
11,701
|
|
Add
(deduct):
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred income
|
|
(6,125
|
)
|
|
(6,954
|
)
|
|
(12,248
|
)
|
Amortization
of bond issuance costs and deferred charges
|
|
11,431
|
|
|
16,241
|
|
|
17,406
|
|
Depreciation
|
|
2,284
|
|
|
2,274
|
|
|
2,182
|
|
Provision
for (recovery of) loan losses
|
|
113,699
|
|
|
(30,262
|
)
|
|
(6,922
|
)
|
Provision
for (recovery of) guarantee liability
|
|
1,615
|
|
|
(3,104
|
)
|
|
(1,700
|
)
|
Results
of operations of foreclosed assets
|
|
(3,774
|
)
|
|
(7,528
|
)
|
|
(9,758
|
)
|
Market
adjustment on foreclosed assets
|
|
8,014
|
|
|
5,840
|
|
|
-
|
|
Derivative
forward value
|
|
160,017
|
|
|
98,743
|
|
|
79,281
|
|
Purchases
of investment in trading securities
|
|
(71,405
|
)
|
|
-
|
|
|
-
|
|
Sales
of investments in trading securities
|
|
71,405
|
|
|
-
|
|
|
-
|
|
Foreign
currency adjustments
|
|
-
|
|
|
-
|
|
|
14,554
|
|
Loss
on sale of loans
|
|
-
|
|
|
676
|
|
|
1,584
|
|
Restricted
interest earned on restricted cash
|
|
(138
|
)
|
|
(123
|
)
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
(12,249
|
)
|
|
24,816
|
|
|
27,203
|
|
Accrued
interest payable
|
|
5,302
|
|
|
(37,159
|
)
|
|
(21,501
|
)
|
Other
|
|
5,917
|
|
|
(7,696
|
)
|
|
(702
|
)
|
Net
cash provided by operating activities
|
|
216,123
|
|
|
101,509
|
|
|
101,080
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Advances
made on loans
|
|
(9,541,927
|
)
|
|
(8,013,327
|
)
|
|
(7,228,143
|
)
|
Principal
collected on loans
|
|
8,371,234
|
|
|
7,019,075
|
|
|
7,052,334
|
|
Net
investment in fixed assets
|
|
(20,940
|
)
|
|
(17,253
|
)
|
|
(591
|
)
|
Net
cash provided by foreclosed assets
|
|
6,000
|
|
|
9,056
|
|
|
63,831
|
|
Net
proceeds from sale of foreclosed assets
|
|
-
|
|
|
-
|
|
|
487
|
|
Net
proceeds from sale of loans
|
|
-
|
|
|
73,972
|
|
|
364,100
|
|
Net
investment in preferred stock
|
|
(47,000
|
)
|
|
-
|
|
|
-
|
|
Change
in restricted cash
|
|
6,253
|
|
|
(12,428
|
)
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
(1,226,380
|
)
|
|
(940,905
|
)
|
|
252,018
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds
from (repayments of) issuances of short-term debt, net
|
|
(861,991
|
)
|
|
265,645
|
|
|
(470,591
|
)
|
Proceeds
from issuance of long-term debt, net
|
|
5,138,404
|
|
|
2,061,744
|
|
|
2,066,332
|
|
Payments
for retirement of long-term debt
|
|
(3,208,325
|
)
|
|
(1,380,423
|
)
|
|
(1,645,848
|
)
|
Payments
for retirement of subordinated deferrable debt
|
|
-
|
|
|
(175,000
|
)
|
|
(150,000
|
)
|
Proceeds
from issuance of members' subordinated certificates
|
|
387,557
|
|
|
76,589
|
|
|
45,605
|
|
Payments
for retirement of members' subordinated certificates
|
|
(38,048
|
)
|
|
(48,308
|
)
|
|
(68,319
|
)
|
Payments
for retirement of patronage capital
|
|
(78,479
|
)
|
|
(77,378
|
)
|
|
(74,094
|
)
|
Payments
for retirement of RTFC patronage capital
|
|
(1,671
|
)
|
|
(9,771
|
)
|
|
(12,414
|
)
|
Net
cash provided by financing activities
|
|
1,337,447
|
|
|
713,098
|
|
|
(309,329
|
)
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
327,190
|
|
|
(126,298
|
)
|
|
43,769
|
|
BEGINNING
CASH AND CASH EQUIVALENTS
|
|
177,809
|
|
|
304,107
|
|
|
260,338
|
|
ENDING
CASH AND CASH EQUIVALENTS
|
$
|
504,999
|
|
$
|
177,809
|
|
$
|
304,107
|
|
|
|
|
|
|
|
|
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
For
the Years Ended May 31, 2009, 2008 and 2007
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
$
|
918,288
|
|
$
|
957,806
|
|
$
|
1,000,826
|
|
Cash
paid for income taxes
|
|
419
|
|
|
1,429
|
|
|
1,376
|
|
Non-cash
financing and investing activities:
|
|
|
|
|
|
|
|
|
|
Subordinated
certificates applied against loan balance
|
|
1,447
|
|
|
-
|
|
|
-
|
|
Patronage
capital applied against loan balances
|
|
87
|
|
|
-
|
|
|
-
|
|
Minority
interest patronage capital applied against loan balances
|
|
43
|
|
|
-
|
|
|
-
|
|
Net
decrease in debt service reserve funds/debt service
|
|
|
|
|
|
|
|
|
|
reserve
certificates
|
|
(8,331
|
)
|
|
-
|
|
|
(25,166
|
)
|
|
|
|
|
|
|
|
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1) General
Information and Accounting Policies
(a) General
Information
National
Rural Utilities Cooperative Finance Corporation (referred to as "National
Rural," "we," "our," or "us") is a private, 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’s 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 cooperative
association in the state of South Dakota in September 1987. In
February 2005, RTFC reincorporated as a cooperative association in the District
of Columbia. RTFC’s principal purpose is to provide and arrange
financing for its rural telecommunications members and their
affiliates. RTFC’s objective is not to maximize its net income, but
to offer its members low cost financial products and services consistent with
sound financial management. RTFC's results of operations and financial
condition are consolidated with 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 cooperative association. NCSC’s
principal purpose 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 is a member-owned finance
cooperative, therefore 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. 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.
Our
consolidated membership totaling 1,522 members at May 31, 2009 is made up
of:
·
|
829
distribution systems and 68 generation and transmission ("power supply")
systems, totaling 897 utility members, the majority of which are
consumer-owned electric
cooperatives;
|
·
|
498
telecommunications members;
|
·
|
66
service members; and
|
Our
members are located in 49 states, the District of Columbia and two U.S.
territories. Memberships between National Rural, RTFC and NCSC have
been eliminated in consolidation. All references to members within
this document include members and associates.
(b) Principles
of Consolidation
The
accompanying financial statements include the consolidated accounts of National
Rural, RTFC and NCSC and certain entities created and controlled by National
Rural to hold foreclosed assets and accommodate loan securitization
transactions, after elimination of intercompany accounts and
transactions. We are required to consolidate the financial results of
RTFC and NCSC because we are the primary beneficiary of variable interests in
RTFC and NCSC due to our exposure to absorbing the majority of expected
losses.
National
Rural is the sole lender to and manages the lending activities and business
affairs of RTFC through a management agreement in effect until December 1,
2016. Under a guarantee agreement, RTFC pays National Rural a fee to
reimburse 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 UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
National
Rural is the primary source of funding to and manages the lending activities and
business 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 to reimburse NCSC for loan losses, excluding
losses in the consumer loan program. All loans that require NCSC
board approval also require National Rural approval. National Rural
controls the nomination process for one out of 11 NCSC
directors. NCSC members elect directors based on 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 May 31, 2009, National Rural guaranteed $84 million of NCSC
debt, derivative instruments and guarantees with third parties. The
maturities for NCSC obligations guaranteed by National Rural run through
2031. As of May 31, 2009, National Rural's maximum potential exposure
totaled $98 million for guarantees of NCSC debt, derivatives and guarantees with
third parties. Guarantees related to NCSC debt and derivative
instruments are not included in Note 13 Guarantees at May 31, 2009 as
the debt and derivatives are reported on the consolidated balance
sheet. At May 31, 2009, National Rural had $0.5 of million guarantees
of RTFC debt to third party creditors. All National Rural loans to
RTFC and NCSC are secured by all assets and revenues of RTFC and
NCSC. At May 31, 2009, RTFC had total assets of $1,853 million
including loans outstanding to members of $1,680 million and NCSC had total
assets of $436 million including loans outstanding of $417
million. At May 31, 2009 and 2008, National Rural had committed to
lend RTFC up to $4 billion of which $1,663 million and $1,715 million was
outstanding at both period ends, respectively. At May 31, 2009,
National Rural had committed to provide credit to NCSC of up to $1.0
billion. At May 31, 2009, National Rural had provided a total of $469
million of credit to NCSC, representing $385 million of outstanding loans and
$84 million of credit enhancements. RTFC and NCSC loans payable to
National Rural are eliminated in consolidation. Total liabilities for
RTFC and NCSC were $1,773 million and $442 million, respectively, at May 31,
2009.
National
Rural established limited liability corporations and partnerships to hold
foreclosed assets and form loan securitization transactions. National
Rural owns and controls all of these entities and therefore 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 entity formed for loan securitization
transactions.
Unless
stated otherwise, references to “we,” “our,” or “us” represent the consolidation
of National Rural, RTFC, NCSC and certain entities created and controlled by
National Rural to hold foreclosed assets and to accommodate loan securitization
transactions.
Based on
the accounting guidance governing consolidations, we present the 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)
|
Cash
and Cash Equivalents
|
Cash,
certificates of deposit and other investments with original maturities of less
than 90 days are classified as cash and cash equivalents.
Restricted
cash represents cash and cash equivalents for which use is contractually
restricted. Restricted cash is disclosed separately on the balance
sheet. Restricted cash includes four different contractual
restrictions on the use of certain cash.
Three of
the restricted cash accounts totaling $6 million and $12 million at May 31, 2009
and 2008, respectively, are related to Clean Renewable Energy Bonds (“CREBs”)
that were issued in February 2008 and represent the following:
·
|
Cash
proceeds from the issuance of CREBs that may only be used for the funding
of CREBs loan advances to participating members to reimburse them for
costs related to construction, refinancing, and reimbursement of capital
expenditures related to qualifying projects. We may invest these funds and
the interest earned on the invested cash is restricted as it may only be
used to fund qualifying projects.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
·
|
Cash
proceeds from the issuance of CREBs that may only be used to reimburse us
for the costs of issuing the CREBs. These funds are held by the
trustee and are only released to us to cover the costs of issuance, for
which we must submit invoices for reimbursement. We may invest
these funds and the interest earned on the invested cash is restricted and
may only be used to cover issuance expenses and to fund qualifying
projects.
|
·
|
Cash
from principal payments from members on CREBs loans that may only be used
to make debt service payments to bond investors. We collect principal and
interest payments from borrowers quarterly. We may withdraw the
interest collected on CREBs loans at any time. We may invest
these funds and the interest earned on the invested cash is not restricted
and may be withdrawn at any time.
|
The
fourth restricted cash account represents cash pledged as collateral for
collateral trust bonds issued under our 1972 indenture totaling $2 million at
May 31, 2009 and 2008. This cash is classified in restricted cash
because the funds are pledged with our collateral trust bond
trustee. We may invest these funds and the interest earned on the
invested cash is not restricted and may be withdrawn at any time.
Interest
earned on restricted cash accounts where use is contractually restricted is
presented as an investing activity in the statement of cash
flows. Interest earned on restricted cash accounts where use is not
contractually restricted is presented as an operating activity in the statement
of cash flows. Changes in the principal balances of restricted cash
accounts are reported as investing activities in the statement of cash
flows.
We
account for our investments in trading securities based on the accounting
guidance for debt and equity securities. Trading securities are
carried at fair value with changes in fair value recorded in
earnings.
We
account for our investments in preferred stock under the cost method based on
applicable accounting guidance as these investments do not meet the definition
of a marketable security. Under the cost method of accounting, we
record the preferred stock at cost and recognize as income dividends received
that are earned from net accumulated earnings. Dividends received in
excess of earnings after the date of investment are considered a return of
investment and are recorded as reductions of cost of the
investment. We continually monitor these investments for possible
impairment. Other-than-temporary impairments are recognized in
earnings.
We
account for the sale of loans in securitization transactions by derecognizing
financial assets when control has been surrendered. We retain no
interest in the securitized loans. We service the loans in return for
a market fee and therefore do not record a servicing asset or
liability. We recognize the service fee on an accrual basis over the
period for which servicing activity is provided. Deferred
transactions costs and unamortized deferred loan origination costs related to
the loans sold are included in the calculation of the gain or loss on the
sale.
During
each of the years ended May 31, 2009 and 2008, we recognized $1 million in
servicing fees on all loan securitization transactions.
(g) Loans
to Members
Loans to
members are reported at historical cost based on their outstanding principal
balances. 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.
(h) Allowance
for Loan Losses
We
maintain 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, we 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.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 and the value of the collateral securing the loans.
(i) Non-performing
Loans
We
classify a borrower as non-performing when any one of the following criteria are
met:
·
|
principal
or interest payments on any loan to the borrower are past due 90 days or
more,
|
·
|
as
a result of court proceedings, repayment on the original terms is not
anticipated, or
|
·
|
for
some other reason, management does not expect the timely repayment of
principal and interest.
|
Once a
borrower is classified as non-performing, we typically place the loan on
non-accrual status and reverse all accrued and unpaid interest. We
generally apply all cash received during the non-accrual period to the reduction
of principal, thereby foregoing interest income recognition. The
decision to return a loan to accrual status is determined on a case by case
basis.
We review
the loan portfolio on a quarterly basis for impairments. A loan is
considered to be impaired when we do not expect to collect all principal and
interest payments as scheduled per the original loan terms other than an
insignificant delay or an insignificant shortfall in amount. Factors
considered in determining an impairment include, but are not limited
to:
·
|
the
review of the borrower's audited financial statements and interim
financial statements if available,
|
·
|
the
borrower's payment history,
|
·
|
communication
with the borrower,
|
·
|
economic
conditions in the borrower's service
territory,
|
·
|
pending
legal action involving the
borrower,
|
·
|
restructure
agreements between us and the borrower,
and
|
·
|
estimates
of the value of the borrower's assets that have been pledged as collateral
to secure our loans.
|
We
calculate the impairment of a loan receivable by comparing the present value of
the estimated future cash flows associated with the loan discounted at the
interest rate on the loan at the time the loan became impaired and/or the
estimated fair value of the collateral securing the loan to the recorded
investment in the loan. Loss reserves are specifically recorded based
on the calculated impairment.
(k) Fixed
Assets
Fixed
assets are stated at cost less accumulated depreciation and
amortization. Depreciation expense ($2 million in fiscal years 2009,
2008 and 2007) is computed primarily on the straight-line method over estimated
useful lives ranging from 2 to 40 years. Fixed assets consisted of
the following as of May 31:
(dollar
amounts in thousands)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
Furniture,
fixtures, equipment and other
|
|
$
|
19,452
|
|
|
$
|
16,361
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(13,666
|
)
|
|
|
(11,489
|
)
|
|
|
|
|
|
Land
|
|
|
31,367
|
|
|
|
16,173
|
|
|
|
|
|
|
Construction-in-progress,
building and software
|
|
|
6,009
|
|
|
|
-
|
|
|
|
|
|
|
Fixed
assets
|
|
|
$
|
43,162
|
|
|
$
|
21,045
|
|
|
|
|
|
|
(l) Foreclosed
Assets
We record
foreclosed assets received in satisfaction of loan receivables at fair value or
fair value less costs to sell and maintain these assets on the consolidated
balance sheets as foreclosed assets. Generally, we intend to sell
foreclosed assets. We evaluate whether assets meet the conditions to
qualify for assets held for sale and, if so, we record these assets at the lower
of the carrying amount or fair value less costs to sell at each reporting date
with changes for the period recorded in the consolidated statement of
operations. Gains for any subsequent increase in fair value may not
exceed the cumulative loss recognized for previous write-downs to fair
value. If the assets do not qualify as assets held for sale, we
periodically evaluate the assets for impairment. Any loss due to
impairment for the period is recorded in the consolidated statement of
operations and establishes a new cost basis. If
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
applicable,
no depreciation is recorded on such foreclosed assets. The results of
operations from foreclosed assets are shown separately on the consolidated
statements of operations.
(m) Derivative
Financial Instruments
We are
neither a dealer nor a trader in derivative financial instruments. We
use derivatives such as interest rate swaps and cross currency interest rate
swaps to mitigate interest rate and foreign currency exchange
risk. Consistent with the accounting guidance for derivative
financial instruments,
we record derivative instruments on the consolidated balance sheets as either an
asset or liability measured at fair value. In recording the fair
value of derivative assets and liabilities, we do not net our positions under
contracts with individual counterparties. Changes in the fair value
of derivative instruments are recognized in the derivative forward value line of
the consolidated statements of operations unless specific hedge accounting
criteria are met. The change to the fair value is recorded to other
comprehensive income if cash flow hedge accounting criteria are
met. In the case of certain foreign currency exchange agreements that
meet hedge accounting criteria, the change in fair value is recorded to other
comprehensive income and then reclassified to offset the related change in the
dollar value of foreign denominated debt in the consolidated statements of
operations. We formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
Net
settlements for derivative instruments that qualify for hedge accounting are
recorded in interest expense. We record net settlements related to
derivative instruments that do not qualify for hedge accounting in derivative
cash settlements.
(n) Guarantee
Liability
We
guarantee certain contractual obligations of our members so they may obtain
various forms of financing. With the exception of letters of credit, the
underlying obligations may not be accelerated due to payment default by the
member so long as we perform under our guarantee. We record a guarantee
liability which represents our contingent and non-contingent exposure related to
guarantees of our members’ debt obligations. Our contingent guarantee liability
is based on management’s estimate of our exposure to losses within the guarantee
portfolio. We use factors such as borrower risk rating, remaining
maturity, corporate bond default probabilities and historical recovery rates in
estimating our contingent guarantee liability. Adjustments to the
contingent guarantee liability are recorded in our provision for guarantee
losses. We record a non-contingent guarantee liability for all new or
modified guarantees since January 1, 2003. Our non-contingent guarantee
liability represents our obligation to stand ready to perform pursuant to the
terms of our guarantees that we entered into since January 1,
2003. Our non-contingent obligation is estimated based on guarantee
fees charged for guarantees issued, which represents management's estimate of
the fair value of our obligation to stand ready to perform. The fees
are deferred and amortized using the straight-line method into interest income
over the term of the guarantee.
(o) Debt
Debt
securities are reported at historical cost net of discounts or
premiums. Bond discounts and bond issuance costs are deferred and
amortized as interest expense using the effective interest method or a method
approximating the effective interest method over the legal maturity of each bond
issue.
(p) Membership
Fees
Members
are charged a one-time membership fee based on member class. National
Rural distribution system members, power supply system members and national
associations of cooperatives pay a $1,000 membership fee. National
Rural service organization members pay a $200 membership
fee. National Rural associates pay a $1,000 fee. RTFC
voting members pay a $1,000 membership fee. RTFC associates pay a
$100 fee. NCSC members pay a $100 membership
fee. Membership fees are accounted for as members'
equity.
(q) Financial
Instruments with Off-Balance Sheet Risk
In the
normal course of business, we are a party to financial instruments with
off-balance sheet risk to meet the financing needs of our member
borrowers. These financial instruments include commitments to extend
credit, standby letters of credit and guarantees of members'
obligations. The expected inherent loss related to our off-balance
sheet financial instruments is covered in our guarantee liability.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(r) Interest
Income
The
following table presents the components of interest income for the years ended
May 31:
(dollar
amounts in thousands)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
Interest
on long-term fixed-rate loans (1)
|
|
$
|
890,367
|
|
|
$
|
872,488
|
|
|
$
|
833,247
|
|
|
Interest
on long-term variable-rate loans (1)
|
|
|
92,975
|
|
|
|
86,787
|
|
|
|
114,786
|
|
|
Interest
on short-term loans (1)
|
|
|
75,604
|
|
|
|
77,145
|
|
|
|
72,632
|
|
|
Interest
on investments (2)
|
|
|
5,683
|
|
|
|
7,394
|
|
|
|
9,662
|
|
|
Fee
income
|
|
|
6,135
|
|
|
|
7,579
|
|
|
|
9,323
|
|
|
Total
interest income
|
|
|
$
|
1,070,764
|
|
|
$
|
1,051,393
|
|
|
$
|
1,039,650
|
|
|
(1)
Represents interest income on loans to members.
(2)
Represents interest income on the investment of cash and trading
securities.
Deferred
income on the consolidated balance sheets is comprised primarily of deferred
conversion fees totaling $16 million and $20 million at May 31, 2009 and 2008,
respectively.
(s) Interest
Expense
The
following table presents the components of interest expense for the years ended
May 31:
(dollar
amounts in thousands)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
Commercial
paper and bank bid notes interest expense (1)
|
|
$
|
58,688
|
|
|
$
|
122,786
|
|
|
$
|
178,687
|
|
|
Medium-term
notes interest expense (1)
|
|
|
326,313
|
|
|
|
330,193
|
|
|
|
363,760
|
|
|
Collateral
trust bonds interest expense (1)
|
|
|
290,152
|
|
|
|
243,579
|
|
|
|
218,523
|
|
|
Subordinated
deferrable debt interest expense (1)
|
|
|
19,663
|
|
|
|
19,663
|
|
|
|
33,089
|
|
|
Subordinated
certificates interest expense (1)
|
|
|
55,330
|
|
|
|
48,717
|
|
|
|
47,852
|
|
|
Long-term
private debt interest expense (1)
|
|
|
164,306
|
|
|
|
151,694
|
|
|
|
130,568
|
|
|
Debt
issuance costs (2)
|
|
|
10,158
|
|
|
|
9,605
|
|
|
|
12,328
|
|
|
Fee
expense (3)
|
|
|
10,411
|
|
|
|
5,031
|
|
|
|
6,947
|
|
|
Total
interest expense
|
|
|
$
|
935,021
|
|
|
$
|
931,268
|
|
|
$
|
991,754
|
|
|
(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'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. Fees are recognized as incurred or amortized on a
straight-line basis over the life of the respective agreement.
We
exclude indirect costs, if any, related to funding activities in interest
expense.
(t) Income
Taxes
While
National Rural is exempt under Section 501(c)(4) of the Internal Revenue Code,
we are subject to tax on our unrelated business taxable income. RTFC
is allowed to exclude from net income the amount of the net income that it
allocates to its members. RTFC allocates approximately 99 percent of
net income to its members annually. NCSC pays tax on the full amount
of its net income.
The
income tax expense recorded in the consolidated statement of operations for the
years ended May 31, 2009, 2008 and 2007 represents the income tax expense for
RTFC and NCSC at the combined federal and state of Virginia income tax rate of
approximately 38 percent. Additionally, any fines or penalties
assessed against RTFC and NCSC are recorded in income tax expense.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(u) Allocation
of Net Income
District
of Columbia cooperative law requires National Rural to have a methodology to
allocate its net income to its members. Annually, National Rural’s
board of directors allocates its net earnings, which is net income excluding
certain non-cash adjustments, to its members in the form of patronage capital
and to board approved reserves. Currently, National Rural has two
such board approved reserves, the cooperative educational fund and the members'
capital reserve. National Rural allocates a small portion, less than
1 percent, of net earnings annually to the cooperative educational fund to
further the teaching of cooperative principles as required by cooperative
law. Funds from the cooperative educational fund are disbursed
annually to the statewide cooperative organizations to fund the teaching of
cooperative principles in the service territories of the cooperatives in each
state. The board of directors will determine the amount of net
earnings that is allocated to the members' capital reserve, if
any. The members' capital reserve represents net earnings 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 annually allocated to
National Rural’s members in the form of patronage capital. National
Rural bases the amount of net earnings allocated to each member on the members'
patronage of the National Rural lending programs in the year in which
such net earnings were reported. There is no impact on National
Rural’s total equity as a result of allocating net earnings to members in the
form of patronage capital or to board approved reserves. National
Rural’s board of directors has annually voted to retire a portion of the
patronage capital allocated to members in prior years. National
Rural’s total equity is reduced by the amount of patronage capital retired to
its members and by disbursements from the cooperative educational
fund.
(v) Comprehensive
Income
Comprehensive
income includes our net income, as well as other comprehensive income resulting
from a transition adjustment recorded upon the initial adoption of the
accounting guidance for derivative financial instruments.
Comprehensive
income is calculated as follows for the years ended May 31:
(dollar
amounts in thousands)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
|
Net
(loss) income
|
$
|
|
(69,870
|
)
|
|
$
|
45,745
|
|
|
$
|
11,701
|
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for realized gains on derivatives
|
|
|
(712
|
)
|
|
|
(3,377
|
)
|
|
|
(1,004
|
)
|
|
Comprehensive
(loss) income
|
$
|
|
(70,582
|
)
|
|
$
|
42,368
|
|
|
$
|
10,697
|
|
|
(w) Operating
Lease Obligations
On
October 18, 2005, we entered into a three-year agreement to lease 107,228 square
feet of office, meeting and storage space in two office buildings located in
Herndon, Virginia. We subsequently exercised options to extend the
lease for two additional one-year periods. In April 2009, we
amended the lease to further extend the term until October 2011 with the option
for us to extend the lease for two additional one-year periods. The
terms of these extensions are similar to the initial three-year
lease. We had previously owned these two buildings which were sold at
the commencement of the leasing arrangement.
The
following represents the future minimum lease payments related to our lease of
office space for the years ended May 31:
(dollar
amounts in thousands)
|
2010
|
|
2011
|
|
2012
|
Lease
Payments (1)
|
$
|
3,503
|
$
|
3,520
|
$
|
1,322
|
(1)
Assuming we exercise the option to extend the lease for an additional one-year
period in fiscal year 2012, the future minimum lease payments for fiscal years
2012 and 2013 would increase to $4 million and $1 million,
respectively. Assuming we exercise the option to extend the lease for
an additional one-year period in fiscal year 2013, the future minimum lease
payments for fiscal years 2012, 2013 and 2014 would increase to $4 million, $4
million and $1 million, respectively.
Contingent
rental payments may be due if the building operating expenses exceed the base
year amount included in the lease agreement. We would be required to
pay contingent rental payments based on the amount of space leased in the
building
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
divided
by total rentable space in the building times the amount that operating expenses
exceeded the base year amount in the lease agreement. To date, we
have not been required to make contingent rental payments.
We
recognize rental expense on a straight-line basis, which requires taking the
total scheduled payments and dividing by the number of months in the lease
term. During each of the years ended May 31, 2009, 2008 and 2007, we
recognized rental expense of $3 million.
(x) Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“GAAP”) requires management to make
estimates and assumptions that affect the assets, liabilities, revenues and
expenses reported in the financial statements, as well as amounts included in
the notes thereto, including discussion and disclosure of contingent
liabilities. While we use our 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.
(y) Reclassifications
Reclassifications
of prior period amounts have been made to conform to the current reporting
format for the following two items. Fees and other income totaling
$18 million and $15 million for the years ended May 31, 2008 and 2007 have been
reclassified from interest income to the fee and other income line of
non-interest income on the consolidated statements of operations to conform with
the May 31, 2009 presentation. The loss on early extinguishment of
debt and other expense totaling $6 million and $5 million for the years ended
May 31, 2008 and 2007 have been reclassified from interest expense to those line
items in non-interest expense on the consolidated statements of operations to
conform with the May 31, 2009 presentation.
(z) New
Accounting Pronouncements
In May
2009, the FASB issued SFAS 165, Subsequent Events (“SFAS
165”) to establish a general standard of accounting for the disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. SFAS 165 does
not change the kinds of events that an entity must recognize or disclose in its
financial statements. It does, however, require the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date. This statement is effective on a
prospective basis for interim
or annual periods ending after June 15, 2009. Our adoption of SFAS
165 in the first quarter of fiscal year 2010 is not expected to have a material
impact on our financial position or results of operations.
In April
2009, FASB issued FSP SFAS 115-2 and SFAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, which amends the recognition guidance
for other-than-temporary impairments (“OTTI”) of debt securities and expands the
financial statement disclosures for OTTI on debt and equity
securities. Under this FSP, the difference between the amortized cost
basis and fair value on debt securities that an entity intends to sell or would
more-likely-than-not be required to sell before the expected recovery of the
amortized cost basis is recorded in earnings. For available-for-sale and
held-to-maturity debt securities that management has no intent to sell and
believes that it is more-likely-than-not will not be required to be sold prior
to recovery, only the credit loss component of the impairment is recognized in
earnings, while the rest of the fair value loss is recognized in accumulated
other comprehensive income. This FSP is effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. Our adoption of this FSP in the
first quarter of fiscal year 2010 is not expected to have a material impact on
our financial position or results of operations.
In April
2009, FASB issued FSP SFAS 157-4, Determining Fair Value When the
Volume and Level of
Activity
for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not
Orderly. The FSP reaffirms
that fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date under current market conditions. The FSP also reaffirms the
need to use judgment in determining if a formerly active market has become
inactive and in determining fair values when the market has become
inactive. This FSP is effective for interim and annual reporting
periods ending after June 15, 2009, and shall be applied prospectively. Early
adoption is permitted for periods ending after March 15, 2009. Our adoption of
this FSP in the first quarter of fiscal year 2010 is not expected to have a
material impact on our financial position or results of operations.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In April
2009, FASB issued FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments. The FSP requires the disclosure of qualitative
and quantitative information about the fair value of all financial instruments
on a quarterly basis, including methods and significant assumptions used to
estimate fair value during the period. These disclosures were previously only
done annually. The disclosures required by the FSP are effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. Our adoption of this FSP
in the first quarter of fiscal year 2010 is not expected to have a material
impact on our financial position or results of operations.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51 (“SFAS 160”),
to establish accounting and reporting standards for the noncontrolling interests
in a subsidiary and for the deconsolidation of a subsidiary. It also amends
certain consolidation procedures for consistency with the requirements of
guidance covering business combinations. Noncontrolling interests
shall be reclassified to equity, consolidated net income shall be adjusted to
include net income attributable to noncontrolling interests and consolidated
comprehensive income shall be adjusted to include comprehensive income
attributable to the noncontrolling interests. This statement is
effective for fiscal years beginning on or after December 15,
2008. SFAS 160 shall be applied prospectively as of the beginning of
the fiscal year in which it is initially applied, except for the presentation
and disclosure requirements. The presentation and disclosure requirements shall
be applied retrospectively for all periods presented.
The
principal effect of recasting the consolidated balance sheets upon the adoption
of the new standard on June 1, 2009 is to move the noncontrolling interests from
long-term liabilities to equity attributable to noncontrolling interests, thus
increasing the total of consolidated equity by that amount. The
following table shows the expected effect of adopting SFAS 160 on the periods
presented on the consolidated balance sheets as of May 31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
Balance
Sheet:
|
|
|
|
|
|
Total
equity, as previously reported
|
$
|
508,938
|
|
$
|
665,965
|
Increase
for SFAS 160 reclassification
|
|
|
|
|
|
of
noncontrolling interests
|
|
10,162
|
|
|
14,247
|
Total
equity, as adjusted
|
$
|
519,100
|
|
$
|
680,212
|
Additionally,
the adoption of SFAS 160 requires that net income, as previously reported prior
to the adoption of SFAS 160, be adjusted to include the net income attributable
to the noncontrolling interests in the consolidated statement of earnings. Thus,
after the adoption of SFAS 160, consolidated net loss increases by $4 million
for the year ended May 31, 2009 and net income decreases by $6 million for the
year ended May 31, 2008.
Our
adoption of SFAS 160 in the first quarter of fiscal year 2010 is not expected to
have a material impact on our financial position or results of
operations.
(2) Loans
and Commitments
Loans to
members bear interest at rates determined from time to time by us after
considering our interest expense, operating expenses, provision for loan losses
and the maintenance of reasonable earnings levels. In compliance with
our cooperative charter, our policy is to set interest rates at the lowest level
we consider to be consistent with sound financial management.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Loans
outstanding to members and unadvanced commitments by loan type and by segment
are summarized as follows at May
31:
|
|
2009
|
|
|
|
2008
|
|
|
(dollar
amounts in thousands)
|
|
Loans
Outstanding
|
|
|
|
Unadvanced
Commitments
(1)
|
|
|
|
Loans
Outstanding
|
|
|
|
Unadvanced
Commitments
(1)
|
|
|
Total
by loan type (2)
(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans (4)
|
$
|
14,602,365
|
|
|
$
|
-
|
|
|
$
|
15,204,614
|
|
|
$
|
-
|
|
|
Long-term
variable-rate loans (4)
|
|
3,243,716
|
|
|
|
5,609,977
|
|
|
|
1,882,095
|
|
|
|
5,975,541
|
|
|
Loans
guaranteed by RUS
|
|
243,997
|
|
|
|
-
|
|
|
|
250,169
|
|
|
|
491
|
|
|
Short-term
loans
|
|
2,098,129
|
|
|
|
7,941,146
|
|
|
|
1,690,117
|
|
|
|
7,597,712
|
|
|
Total
loans outstanding
|
|
20,188,207
|
|
|
|
13,551,123
|
|
|
|
19,026,995
|
|
|
|
13,573,744
|
|
|
Deferred
origination fees
|
|
4,102
|
|
|
|
-
|
|
|
|
2,045
|
|
|
|
-
|
|
|
Less:
Allowance for loan losses
|
|
(622,960
|
)
|
|
|
-
|
|
|
|
(514,906
|
)
|
|
|
-
|
|
|
Net
loans outstanding
|
$
|
19,569,349
|
|
|
$
|
13,551,123
|
|
|
$
|
18,514,134
|
|
|
$
|
13,573,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
13,730,511
|
|
|
$
|
9,472,849
|
|
|
$
|
13,438,370
|
|
|
$
|
9,579,213
|
|
|
Power
supply
|
|
4,268,244
|
|
|
|
3,178,471
|
|
|
|
3,339,112
|
|
|
|
2,960,693
|
|
|
Statewide
and associate
|
|
92,578
|
|
|
|
152,701
|
|
|
|
108,925
|
|
|
|
158,293
|
|
|
National
Rural total
|
|
18,091,333
|
|
|
|
12,804,021
|
|
|
|
16,886,407
|
|
|
|
12,698,199
|
|
|
RTFC
|
|
1,680,154
|
|
|
|
457,022
|
|
|
|
1,726,514
|
|
|
|
562,389
|
|
|
NCSC
|
|
416,720
|
|
|
|
290,080
|
|
|
|
414,074
|
|
|
|
313,156
|
|
|
Total
loans outstanding
|
|
$
|
20,188,207
|
|
|
$
|
13,551,123
|
|
|
$
|
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. Before
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 our
future cash requirements. Collateral and security requirements for
advances on commitments are identical to those required at the time of the
initial loan approval.
(2) Table
includes non-performing and restructured loans.
(3) Loans
are classified as long-term or short-term based on their original
maturity.
(4)
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.
Non-Performing
and Restructured Loans
Non-performing
and restructured loans outstanding and unadvanced commitments to members by loan
type and by segment included in the table above are summarized as
follows:
|
|
2009
|
|
|
|
2008
|
|
(dollar
amounts in thousands)
|
|
Loans
|
|
|
|
Unadvanced
|
|
|
|
Loans
|
|
|
|
Unadvanced
|
|
|
|
Outstanding
|
|
|
|
Commitments
(1)
|
|
|
|
Outstanding
|
|
|
|
Commitments
(1)
|
|
Non-performing
and restructured loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
$
|
8,960
|
|
|
$
|
-
|
|
|
$
|
219,912
|
|
|
$
|
-
|
|
Long-term
variable-rate loans
|
|
457,504
|
|
|
|
-
|
|
|
|
261,109
|
|
|
|
-
|
|
Short-term
loans
|
|
57,294
|
|
|
|
-
|
|
|
|
25,843
|
|
|
|
-
|
|
Total
non-performing loans
|
$
|
523,758
|
|
|
$
|
-
|
|
|
$
|
506,864
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term fixed-rate loans
(3)
|
$
|
41,907
|
|
|
$
|
-
|
|
|
$
|
52,309
|
|
|
$
|
-
|
|
Long-term
variable-rate loans (3)
|
|
490,827
|
|
|
|
186,673
|
|
|
|
519,257
|
|
|
|
186,673
|
|
Short-term
loans
|
|
-
|
|
|
|
12,500
|
|
|
|
-
|
|
|
|
12,500
|
|
National
Rural total restructured loans
|
532,734
|
|
|
|
199,173
|
|
|
|
571,566
|
|
|
|
199,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
|
4,853
|
|
|
|
-
|
|
|
|
5,545
|
|
|
|
-
|
|
Total
restructured loans
|
|
$
|
537,587
|
|
|
$
|
199,173
|
|
|
$
|
577,111
|
|
|
$
|
199,173
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(1)
Unadvanced loan commitments include loans for which loan contracts have been
approved and executed, but funds have not been advanced. Before
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.
(2) Loans
are classified as long-term or short-term based on their original
maturity.
(3)
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.
Loan
Loss Allowance
We
maintain an allowance for loan losses at a level estimated by management to
provide for probable losses inherent in the loan portfolio.
Activity
in the loan loss allowance account is summarized below for the years ended May
31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Balance
at beginning of year
|
$
|
514,906
|
|
|
$
|
561,663
|
|
$
|
611,443
|
|
|
|
(Recovery of) provision for loan losses
|
|
113,699
|
|
|
|
(30,262
|
)
|
|
(6,922
|
)
|
|
|
Charge-offs
|
|
(5,988
|
)
|
|
|
(16,911
|
)
|
|
(44,668
|
)
|
|
|
Recoveries
|
|
343
|
|
|
|
416
|
|
|
1,810
|
|
|
|
Balance
at end of year
|
$
|
622,960
|
|
|
$
|
514,906
|
|
$
|
561,663
|
|
|
|
Credit
Concentration
Our loan
portfolio is widely dispersed throughout the United States and its territories,
including 48 states, the District of Columbia, America Samoa and U.S. Virgin
Islands. At May 31, 2009 and 2008, loans outstanding to borrowers in
any state or territory did not exceed 17 percent and 16 percent, respectively,
of total loans outstanding. In addition to the geographic diversity
of the portfolio, we limit our exposure to any one borrower. At May
31, 2009 and 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 May 31, 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. The following table shows the exposure to
the ten largest borrowers as a percentage of total exposure by type and by
segment at May 31:
|
|
2009
|
|
|
2008
|
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
%
|
|
|
Amount
|
|
%
|
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
3,686,956
|
|
17
|
%
|
$
|
3,395,865
|
|
17
|
%
|
|
Guarantees
|
|
363,883
|
|
2
|
|
|
164,740
|
|
1
|
|
|
Total
credit exposure to ten largest borrowers
|
$
|
4,050,839
|
|
19
|
%
|
$
|
3,560,605
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
3,497,331
|
|
16
|
%
|
$
|
3,043,905
|
|
15
|
%
|
|
RTFC
|
|
523,758
|
|
3
|
|
|
491,700
|
|
3
|
|
|
NCSC
|
|
29,750
|
|
-
|
|
|
25,000
|
|
-
|
|
|
Total
credit exposure to ten largest borrowers
|
$
|
4,050,839
|
|
19
|
%
|
$
|
3,560,605
|
|
18
|
%
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Interest
Rates
Below is
the average loan balance and weighted-average interest rate earned during the
fiscal years ended May 31:
|
|
2009
|
|
|
2008
|
|
|
(dollar
amounts in thousands)
|
|
Average
Loans
Outstanding
|
|
Weighted-
Average
Interest
Rate
|
|
|
Average
Loans
Outstanding
|
|
Weighted-
Average
Interest
Rate
|
|
|
Total
by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate
|
$
|
14,710,754
|
|
5.93
|
%
|
$
|
14,573,227
|
|
5.90
|
%
|
|
Long-term
variable rate
|
|
1,654,355
|
|
5.34
|
|
|
1,170,017
|
|
6.94
|
|
|
Loans
guaranteed by RUS
|
|
246,789
|
|
5.09
|
|
|
252,788
|
|
5.49
|
|
|
Short-term
|
|
2,034,736
|
|
4.05
|
|
|
1,310,313
|
|
5.89
|
|
|
Non-performing
|
|
495,014
|
|
-
|
|
|
504,310
|
|
0.01
|
|
|
Restructured
|
|
556,892
|
|
0.63
|
|
|
589,662
|
|
0.64
|
|
|
Total
|
$
|
19,698,540
|
|
5.38
|
|
$
|
18,400,317
|
|
5.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
17,579,888
|
|
5.43
|
%
|
$
|
16,167,441
|
|
5.67
|
%
|
|
RTFC
|
|
1,693,123
|
|
4.50
|
|
|
1,791,100
|
|
4.96
|
|
|
NCSC
|
|
425,529
|
|
6.59
|
|
|
441,776
|
|
7.10
|
|
|
Total
|
$
|
19,698,540
|
|
5.38
|
|
$
|
18,400,317
|
|
5.63
|
|
|
In
general, a borrower can select a fixed interest rate on long-term loans for
periods of one to 35 years or a variable rate. Upon expiration of the
selected fixed interest rate term, the borrower must select a variable rate or
select another fixed-rate term for a period that does not exceed the remaining
loan maturity. We set long-term fixed rates daily and variable rates
monthly. Upon notification to borrowers, we may adjust the variable
interest rate semi-monthly.
Loan
Repricing
Long-term
fixed-rate loans outstanding at May 31, 2009, which will be subject to the
repricing of their interest rates during the next five fiscal years, are
summarized as follows (due to principal repayments, amounts subject to interest
rate repricing may be lower at the actual time of interest rate
repricing):
(dollar
amounts in thousands)
|
Amount
Repricing
|
|
Weighted-Average
Interest
Rate
|
|
|
|
2010
|
$
|
1,272,180
|
|
5.67
|
%
|
|
|
2011
|
|
1,215,472
|
|
5.84
|
|
|
|
2012
|
|
1,135,457
|
|
6.25
|
|
|
|
2013
|
|
765,228
|
|
6.07
|
|
|
|
2014
|
|
625,021
|
|
6.17
|
|
|
|
Thereafter
|
|
2,127,232
|
|
6.36
|
|
|
|
During
the year ended May 31, 2009, we repriced interest rates on long-term fixed-rate
loans totaling $1,108 million.
Loan
Amortization
On most
long-term loans, level quarterly payments are required with respect to principal
and interest in amounts sufficient to repay the loan principal, generally over
periods of up to 35 years from the date of the secured promissory
note.
Amortization
of long-term loans in each of the five fiscal years following May 31, 2009 and
thereafter are as follows:
(dollar
amounts in thousands)
|
|
Amortization
(1)
|
|
2010
|
$
|
1,573,218
|
|
2011
|
|
860,033
|
|
2012
|
|
1,451,411
|
|
2013
|
|
863,403
|
|
2014
|
|
858,133
|
|
Thereafter
|
|
12,483,880
|
|
Total
|
|
$
|
18,090,078
|
|
(1)
Represents scheduled amortization based on current rates without consideration
for loans that reprice.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Loan
Security
We
evaluate each borrower's creditworthiness on a case-by-case basis. It
is generally our 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 our secured and unsecured loans outstanding by loan
type and by segment at May 31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
|
Total
by loan type:
|
|
Secured
|
|
%
|
|
|
Unsecured
|
|
%
|
|
|
Secured
|
|
%
|
|
|
Unsecured
|
|
%
|
|
|
Long-term
fixed-rate loans
|
$
|
14,044,469
|
|
96
|
%
|
$
|
557,896
|
|
4
|
%
|
$
|
14,732,058
|
|
97
|
%
|
$
|
472,556
|
|
3
|
%
|
|
Long-term
variable-rate loans
|
|
2,835,451
|
|
87
|
|
|
408,265
|
|
13
|
|
|
1,728,803
|
|
92
|
|
|
153,292
|
|
8
|
|
|
Loans
guaranteed by RUS
|
|
243,997
|
|
100
|
|
|
-
|
|
-
|
|
|
250,169
|
|
100
|
|
|
-
|
|
-
|
|
|
Short-term
loans
|
|
233,179
|
|
11
|
|
|
1,864,950
|
|
89
|
|
|
165,226
|
|
10
|
|
|
1,524,891
|
|
90
|
|
|
Total
loans
|
$
|
17,357,096
|
|
86
|
|
$
|
2,831,111
|
|
14
|
|
$
|
16,876,256
|
|
89
|
|
$
|
2,150,739
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
Rural
|
$
|
15,562,761
|
|
86
|
%
|
$
|
2,528,572
|
|
14
|
%
|
$
|
15,021,067
|
|
89
|
%
|
$
|
1,865,340
|
|
11
|
%
|
|
RTFC
|
|
1,443,395
|
|
86
|
|
|
236,759
|
|
14
|
|
|
1,497,487
|
|
87
|
|
|
229,027
|
|
13
|
|
|
NCSC
|
|
350,940
|
|
84
|
|
|
65,780
|
|
16
|
|
|
357,702
|
|
86
|
|
|
56,372
|
|
14
|
|
|
Total
loans
|
$
|
17,357,096
|
|
86
|
|
$
|
2,831,111
|
|
14
|
|
$
|
16,876,256
|
|
89
|
|
$
|
2,150,739
|
|
11
|
|
Concurrent
Loans
National
Rural makes loans to borrowers both as the sole lender of the loan commitment
and on a concurrent basis with RUS. Under default provisions of
common mortgages securing long-term National Rural loans to distribution system
members that also borrow from RUS, RUS has the sole right to act within 30 days
or, if RUS is not legally entitled to act on behalf of all noteholders, National
Rural may exercise remedies. Under common default provisions of
mortgages securing long-term National Rural loans to, or guarantee reimbursement
obligations of, power supply members, RUS retains substantial control over the
exercise of mortgage remedies. As of May 31, 2009 and 2008, National
Rural had $2,032 million and $2,159 million, respectively, of loans outstanding
issued on a concurrent basis with RUS.
Pledging
of Loans
The
following table summarizes our collateral pledged to secure our collateral trust
bonds and notes payable to the Federal Agricultural Mortgage Corporation
("Farmer Mac") and the amount of the corresponding debt outstanding at May
31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
Collateral
trust bonds:
|
|
|
|
|
|
2007
indenture
|
|
|
|
|
|
Distribution
system mortgage notes
|
$
|
4,176,760
|
|
$
|
917,925
|
Collateral
trust bonds
|
|
3,000,000
|
|
|
700,000
|
|
|
|
|
|
|
1994
indenture
|
|
|
|
|
|
Distribution
system mortgage notes
|
$
|
2,308,713
|
|
$
|
3,989,443
|
RUS
guaranteed loans qualifying as permitted investments
|
|
211,337
|
|
|
215,329
|
Total
pledged collateral
|
$
|
2,520,050
|
|
$
|
4,204,772
|
Collateral
trust bonds
|
|
2,190,000
|
|
|
4,015,000
|
|
|
|
|
|
|
1972
indenture
|
|
|
|
|
|
Cash
|
$
|
2,032
|
|
$
|
2,032
|
Collateral
trust bonds
|
|
1,736
|
|
|
1,927
|
|
|
|
|
|
|
Farmer
Mac:
|
|
|
|
|
|
Utility
system notes
|
$
|
1,488,929
|
|
$
|
1,042,564
|
Farmer
Mac notes payable
|
|
1,200,000
|
|
|
900,000
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 at May 31:
(dollar
amounts in thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
Utility
system mortgage notes on deposit
|
$
|
3,770,983
|
$
|
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 our
senior secured credit ratings from Standard & Poor's Corporation, Moody's
Investors Service and Fitch Ratings. A rating trigger event exists if our 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 our senior secured credit ratings fall below the levels
listed above, the mortgage notes on deposit at that time, which totaled $3,771
million at May 31, 2009, would be pledged as collateral rather than held on
deposit. At May 31, 2009 and 2008, 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 have 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 we do not
satisfy the financial expert requirement, the mortgage notes on deposit at that
time, which totaled $2,468 million at May 31, 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.
RUS
Guaranteed Loans
At May
31, 2009 and 2008, we had $244 million and $250 million, respectively, of loans
outstanding on which RUS had guaranteed the repayment of principal and
interest. There are two programs under which these loans were
advanced. We have been an eligible lender in the RUS loan guarantee
program under the terms and conditions of a master loan guarantee and servicing
agreement between RUS and National Rural since February 1999. Under
this agreement, we may make long-term fixed or variable rates secured loans to
eligible members for periods of up to 35 years. RUS guarantees the
principal and interest payments on the notes evidencing such
loans. At May 31, 2009 and 2008, we had a total of $211 million and
$215 million, respectively, in loans outstanding under this program. In
addition, at May 31, 2009 and 2008, we held certificates totaling $33 million
and $35 million which represent interests in trusts that hold RUS guaranteed
loans. These certificates were the result of a program in which RUS
previously allowed certain qualifying cooperatives to repay loans held by the
FFB early, and allowed the transfer of the guarantee to a new
lender.
(3) Investments
During
the year ended May 31, 2009, we purchased a total of $72 million of tax-exempt
bonds pursuant to our obligation as liquidity provider. Once
acquired, we were required to hold the bonds until the remarketing agent was
able to place them with third-party investors. During this period, we
were 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. While we held the bonds, they were recorded at
fair value and classified as investments in trading securities on the
consolidated balance sheet. Changes in fair value were recorded as a
fair value adjustment on investments in trading securities on the consolidated
statement of operations. At May 31, 2009, all tax-exempt bonds we
held had been redeemed or repurchased by third-party investors with no gain or
loss on the transactions.
In
December 2008, we invested $15 million in Farmer Mac Series B-1 cumulative,
redeemable, non-voting preferred stock with an initial dividend rate of 10
percent. The dividend rate on this preferred stock increases from the
initial dividend rate of 10 percent for the first year to 12 percent in the
second year, 14 percent for the third year and 16 percent for the period
following the third anniversary of the issue date. The preferred
stock can be redeemed at Farmer Mac’s sole discretion and subject to receipt of
the prior written approval of the Farm Credit Administration, if required, on
the date that is nine months from the issue date and on each subsequent dividend
payment date. The investments in preferred stock are recorded at cost on the
consolidated balance sheet.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In
addition, under note purchase agreements entered into with Farmer Mac in
December 2008, February 2009 and May 2009, we were 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 four
percent of the principal amount of the notes outstanding under the
agreements. Cash dividends compound quarterly at the annual rate of
five percent for the first five years, seven percent for the second five years,
and nine percent following the tenth anniversary of the issue date, so long as
the preferred stock remains outstanding. Farmer Mac is entitled, in
its sole discretion, to redeem some or all of the issued and outstanding shares
of the Series C preferred stock subject to receipt of the prior written approval
of the Farm Credit Administration, if required, and the consent of at least
two-thirds of the then-outstanding shares of the Series B-1 preferred stock, if
any, on the first anniversary of the issue date and on each subsequent dividend
payment date.
During
the year ended May 31, 2009, we issued notes totaling $800 million under the
December 2008 and February 2009 Farmer Mac agreements that resulted in the
purchase of $32 million in Farmer Mac Series C preferred stock. See
Note 6, Long-Term Debt,
for additional information on the note purchase agreements with Farmer
Mac.
(4) Foreclosed
Assets
Assets
received in satisfaction of loan receivables are recorded at cost 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 May 31, 2009, 2008 or 2007.
The
activity for foreclosed assets is summarized below for the years ended May
31:
|
|
|
|
|
|
|
(dollar
amounts in thousands)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2007
|
|
Beginning
balance
|
|
$
|
58,961
|
|
|
$
|
66,329
|
|
|
$
|
120,889
|
|
Results
of operations
|
|
|
3,774
|
|
|
|
7,528
|
|
|
|
9,758
|
|
Net
cash provided by foreclosed assets
|
|
|
(6,000
|
)
|
|
|
(9,056
|
)
|
|
|
(63,831
|
)
|
Market
adjustment
|
|
|
(8,014
|
)
|
|
|
(5,840
|
)
|
|
|
-
|
|
Sale
of foreclosed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(487
|
)
|
Ending
balance
|
|
$
|
48,721
|
|
|
$
|
58,961
|
|
|
$
|
66,329
|
|
At May
31, 2009, 2008 and 2007, the balance of foreclosed assets included land
development loans and limited partnership interests in certain real estate
developments. The reduction to the fair value of the collateral
supporting these land development loans during the years ended May 31, 2009 and
2008 was primarily due to residential home market weakness which have caused lot
sales to slow down. Additionally, lower gas prices resulted in a
decrease in the fair value of the underlying collateral in fiscal year
2009. During the year ended May 31, 2009, current economic conditions
put a strain on cash flows for one of the land developers and their ability to
make loan payments as scheduled. At January 1, 2009, this borrower’s
loan was put on non-accrual status. During the year ended May 31,
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, we classified both
land development loans as impaired at May 31, 2009.
Net cash
provided by foreclosed assets was significantly higher during the year ended May
31, 2007 due to full and partial paydowns of notes primarily by two limited
partnership interests in certain real estate developments.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(5) Short-Term
Debt and Credit Arrangements
The
following is a summary of short-term debt outstanding and the effective interest
rates thereon at May 31:
|
|
2009
|
|
|
2008
|
|
(dollar
amounts in thousands)
|
|
Debt
Outstanding
|
|
Effective
Interest
Rate
|
|
|
Debt
Outstanding
|
|
Effective
Interest
Rate
|
|
Short-term
debt:
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper sold through dealers, net of discounts
|
$
|
594,533
|
|
0.33
|
%
|
$
|
1,511,953
|
|
2.33
|
%
|
Commercial
paper sold directly to members, at par
|
|
934,897
|
|
0.35
|
|
|
1,275,809
|
|
2.31
|
|
Commercial
paper sold directly to non-members, at par
|
|
12,502
|
|
1.58
|
|
|
11,752
|
|
4.26
|
|
Total
commercial paper
|
|
1,541,932
|
|
0.35
|
|
|
2,799,514
|
|
2.33
|
|
Daily
liquidity fund sold directly to members
|
|
291,341
|
|
0.22
|
|
|
250,750
|
|
2.05
|
|
Term
loan
|
|
200,000
|
|
3.31
|
|
|
-
|
|
-
|
|
Bank
bid notes
|
|
255,000
|
|
1.49
|
|
|
100,000
|
|
2.80
|
|
Subtotal
short-term debt
|
|
2,288,273
|
|
0.72
|
|
|
3,150,264
|
|
2.32
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt maturing within one year:
|
|
|
|
|
|
|
|
|
|
|
Medium-term
notes sold through dealers
|
|
1,674,760
|
|
4.88
|
|
|
558,776
|
|
4.40
|
|
Medium-term
notes sold to members
|
|
502,396
|
|
4.65
|
|
|
288,634
|
|
4.77
|
|
Secured
collateral trust bonds
|
|
209,985
|
|
5.71
|
|
|
1,824,995
|
|
3.27
|
|
Secured
notes payable
|
|
187,800
|
|
1.20
|
|
|
500,000
|
|
4.66
|
|
Unsecured
notes payable
|
|
4,650
|
|
5.22
|
|
|
4,784
|
|
5.50
|
|
Total
long-term debt maturing within one year
|
|
2,579,591
|
|
4.64
|
|
|
3,177,189
|
|
3.83
|
|
Total
short-term debt
|
|
$
|
4,867,864
|
|
2.79
|
|
$
|
6,327,453
|
|
3.08
|
|
We issue
commercial paper for periods of one to 270 days. We also enter into
short-term bank bid note agreements, which are unsecured obligations that do not
require backup bank lines for liquidity purposes. We do not pay a
commitment fee for bank bid notes. The commitments are generally
subject to termination at the discretion of the individual banks.
Revolving
Credit Agreements
The
following is a summary of the amounts available under our revolving credit
agreements:
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
Termination
Date
|
|
|
Facility
fee per
year
(1)
|
Five-year
agreement (2)
|
$
|
1,125,000
|
|
$
|
1,125,000
|
|
|
March
16, 2012
|
|
|
6
basis points
|
Five-year
agreement (2)
|
|
1,025,000
|
|
|
1,025,000
|
|
|
March
22, 2011
|
|
|
6
basis points
|
364-day
agreement
|
|
1,000,000
|
|
|
-
|
|
|
March
12, 2010
|
|
|
12.5
basis points
|
364-day
agreement
|
|
-
|
|
|
1,500,000
|
|
|
March
13, 2009
|
|
|
5
basis points
|
Total
|
|
$
|
3,150,000
|
|
$
|
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)
Amounts include Lehman Brothers Bank, FSB’s portion of the credit facility
totaling $134 million allocated as follows: $76 million under the five-year
facility maturing 2012, and $58 million under the five-year facility maturing in
2011. We do not expect LBB to fund its portion of the credit facility
according to the agreements. See further discussion
below.
We have
the right under the 364-day revolving credit agreement, 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.
Both
five-year agreements 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 May
31, 2009 and 2008, we were in compliance with all covenants and conditions under
our revolving credit agreements and there were no borrowings outstanding under
these agreements.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, we have
numerous business relationships with LBHI and its subsidiaries. Among
those relationships, Lehman Brothers Bank, FSB (“LBB”) was a participant for up
to $239 million of our revolving credit facilities at that time.
On
October 7, 2008, we were uncertain of our ability to issue the required amount
of commercial paper for that day. As a result, we drew down $418.5
million of our $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 we do not believe
that LBB’s $134 million current portion of the credit facilities will be
available in the future. We repaid the $418.5 million borrowed under
the revolving credit facility on November 13, 2008.
For
calculating the required financial covenants in our revolving credit agreements,
we adjust net income, senior debt and total equity to exclude the non-cash
adjustments from the accounting for derivative financial instruments and
foreign currency translation. The adjusted times interest earned
ratio ("TIER"), as defined by the agreements, represents the interest expense
adjusted to include the derivative cash settlements, plus minority interest net
income, plus net income prior to the cumulative effect of change in accounting
principle and dividing that total by the interest expense adjusted to include
the derivative cash settlements. In addition to the non-cash
adjustments discussed above, 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 our required and actual financial ratios under the
revolving credit agreements at or for the years ended May 31:
|
|
|
|
|
|
Actual
|
|
|
|
|
|
Requirement
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
|
1.025
|
|
1.18
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
adjusted TIER at fiscal year end (1)
|
|
|
|
1.05
|
|
1.10
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
ratio of senior debt to total equity
|
|
|
|
10.00
|
|
6.90
|
|
7.33
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) We
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 we must be in compliance with the other requirements, including
financial ratios, to draw down on the facilities.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(6) Long-Term
Debt
The
following is a summary of long-term debt outstanding and the effective interest
rates thereon at May 31:
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
Debt
|
|
|
|
Effective
|
|
|
|
Debt
|
|
|
|
Effective
|
|
|
|
(dollar
amounts in thousands)
|
|
Outstanding
|
|
|
|
Interest
Rate
|
|
|
|
Outstanding
|
|
|
|
Interest
Rate
|
|
|
|
Unsecured
long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-term
notes, sold through dealers (1)
|
$
|
3,469,580
|
|
|
|
6.87
|
%
|
|
$
|
4,231,982
|
|
|
|
6.70
|
%
|
|
|
Medium-term
notes, sold to members (2)
|
|
220,613
|
|
|
|
4.65
|
|
|
|
104,105
|
|
|
|
4.77
|
|
|
|
Subtotal
|
|
3,690,193
|
|
|
|
6.74
|
|
|
|
4,336,087
|
|
|
|
6.65
|
|
|
|
Unamortized
discount
|
|
(3,120
|
)
|
|
|
|
|
|
|
(5,483
|
)
|
|
|
|
|
|
|
Total
unsecured medium-term notes
|
|
3,687,073
|
|
|
|
|
|
|
|
4,330,604
|
|
|
|
|
|
|
|
Unsecured
notes payable
|
|
3,053,705
|
|
|
|
4.17
|
|
|
|
2,558,362
|
|
|
|
5.09
|
|
|
|
Unamortized
discount
|
|
(1,694
|
)
|
|
|
|
|
|
|
(1,959
|
)
|
|
|
|
|
|
|
Total
unsecured notes payable
|
|
3,052,011
|
|
|
|
|
|
|
|
2,556,403
|
|
|
|
|
|
|
|
Total
unsecured long-term debt
|
|
6,739,084
|
|
|
|
5.58
|
|
|
|
6,887,007
|
|
|
|
6.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral
trust bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating
Rate Bonds, due 2009 (3)
|
|
-
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
2.93
|
|
|
|
5.70%,
Bonds, due 2010 (3)
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
5.80
|
|
|
|
Floating
Rate Bonds, Series E-2, due 2010
|
|
1,736
|
|
|
|
7.50
|
|
|
|
1,927
|
|
|
|
7.50
|
|
|
|
Floating
Rate Bonds, due 2010
|
|
400,000
|
|
|
|
2.18
|
|
|
|
-
|
|
|
|
|
|
|
|
4.375%,
Bonds, due 2010
|
|
500,000
|
|
|
|
4.60
|
|
|
|
500,000
|
|
|
|
4.60
|
|
|
|
5.50%,
Bonds, due 2013
|
|
900,000
|
|
|
|
5.68
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4.75%,
Bonds, due 2014
|
|
600,000
|
|
|
|
4.84
|
|
|
|
600,000
|
|
|
|
4.84
|
|
|
|
7.20%,
Bonds, due 2015
|
|
50,000
|
|
|
|
7.32
|
|
|
|
50,000
|
|
|
|
7.32
|
|
|
|
5.45%,
Bonds, due 2017
|
|
570,000
|
|
|
|
5.58
|
|
|
|
570,000
|
|
|
|
5.58
|
|
|
|
5.45%,
Bonds, due 2018
|
|
700,000
|
|
|
|
5.57
|
|
|
|
700,000
|
|
|
|
5.57
|
|
|
|
6.55%,
Bonds, due 2018
|
|
175,000
|
|
|
|
6.68
|
|
|
|
175,000
|
|
|
|
6.68
|
|
|
|
10.375%,
Bonds, due 2018
|
|
1,000,000
|
|
|
|
10.61
|
|
|
|
-
|
|
|
|
|
|
|
|
7.35%,
Bonds, due 2026 (4)
|
|
85,000
|
|
|
|
7.45
|
|
|
|
90,000
|
|
|
|
7.45
|
|
|
|
Subtotal
|
|
4,981,736
|
|
|
|
6.23
|
|
|
|
2,891,927
|
|
|
|
5.42
|
|
|
|
Unamortized
discount
|
|
(12,965
|
)
|
|
|
|
|
|
|
(5,347
|
)
|
|
|
|
|
|
|
Total
secured collateral trust bonds
|
|
4,968,771
|
|
|
|
|
|
|
|
2,886,580
|
|
|
|
|
|
|
|
Secured
notes payable
|
|
1,012,200
|
|
|
|
2.82
|
|
|
|
400,000
|
|
|
|
3.38
|
|
|
|
Total
secured long-term debt
|
|
5,980,971
|
|
|
|
5.66
|
|
|
|
3,286,580
|
|
|
|
5.17
|
|
|
|
Total
long-term debt
|
|
$
|
12,720,055
|
|
|
|
5.62
|
|
|
$
|
10,173,587
|
|
|
|
5.78
|
|
|
|
(1)
Medium-term notes sold through dealers mature through 2032 as of May 31, 2009
and 2008. Excludes $1,675 million and $559 million of medium-term
notes sold through dealers that were reclassified as short-term debt at May 31,
2009 and 2008, respectively.
(2)
Medium-term notes sold directly to members mature through 2029 and 2023 as of
May 31, 2009 and 2008, respectively. Excludes $502 million and $289
million of medium-term notes sold to members that were reclassified as
short-term debt at May 31, 2009 and 2008, respectively.
(3)
Amounts outstanding at May 31, 2009 are included as short-term
debt.
(4) We
are required to make mandatory sinking fund payments for these bonds on November
1 of each year through 2025 totaling $5 million to retire 95 percent of the
principal amount before maturity.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
amount of long-term debt maturing in each of the five fiscal years following May
31, 2009 and thereafter is as follows:
|
|
Amount
|
|
|
|
Weighted-Average
|
|
|
|
(dollar
amounts in thousands)
|
|
Maturing
|
|
|
|
Interest
Rate
|
|
|
|
2010
(1)
|
$
|
2,579,591
|
|
|
|
4.49
|
%
|
|
|
2011
|
|
1,830,742
|
|
|
|
3.86
|
|
|
|
2012
|
|
1,948,230
|
|
|
|
6.33
|
|
|
|
2013
|
|
123,210
|
|
|
|
3.82
|
|
|
|
2014
|
|
2,180,966
|
|
|
|
4.81
|
|
|
|
Thereafter
|
|
6,636,907
|
|
|
|
6.30
|
|
|
|
Total
|
|
$
|
15,299,646
|
|
|
|
5.48
|
|
|
|
(1) The
amount scheduled to mature in fiscal year 2010 has been presented as long-term
debt due in one year under short-term debt.
Collateral
trust bonds are secured by the pledge of mortgage notes or eligible securities
in an amount at least equal to the principal balance of the bonds
outstanding. See Note 2, Loans and Commitments, for
additional information on the collateral pledged to secure collateral trust
bonds.
Unsecured
Notes Payable
At May
31, 2009 and 2008, we 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, we 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, we pay RUS a fee of 30 basis
points per year on the total amount borrowed. At May 31, 2009, the
$3.0 billion of unsecured notes payable issued as part of the REDLG program
require us 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 triggering events that result in
these mortgage notes becoming pledged as collateral.
Secured
Notes Payable
At May
31, 2009 and 2008, we had secured notes payable totaling $1,200 million and $900
million outstanding to Farmer Mac, respectively. Notes to Farmer Mac
totaling $188 million and $500 million were reported in short-term debt and the
remaining amounts were reported in long-term debt at May 31, 2009 and 2008,
respectively. The $500 million notes to Farmer Mac were reported in
short-term debt at May 31, 2008 matured on July 29, 2008.
In
December 2008, we entered into a $500 million note purchase agreement with
Farmer Mac. During the year ended May 31, 2009, we fully advanced the
$500 million available under the December 2008 Farmer Mac agreement with
maturities through 2014. In February 2009, we entered into another $500
million note purchase agreement with Farmer Mac. During the year
ended May 31, 2009, we advanced $300 million under the February 2009 Farmer Mac
agreement with maturities through 2014.
In March
2009, we entered into a $400 million note purchase agreement with
Farmer Mac to refinance the $400 million, 5-year, variable-rate, secured
private placement note that was sold to Farmer Mac on March 27,
2008. This agreement is a 5-year, variable-rate, collateralized,
revolving credit facility that allows us 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, we issued notes totaling $400 million under this
agreement with maturities through 2014, resulting in the full refinancing
of the $400 million issued in March 2008.
In May
2009, we entered into a $1,000 million note purchase agreement with
Farmer Mac. The agreement is structured as a seven-year revolving
credit facility that allows us to borrow, repay and re-borrow funds at any time
or from time to time as market conditions permit; provided that the principal
amount at any time outstanding under this facility is not more than
$1,000 million. We 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 U.S. Treasury rate plus a spread determined at the
time of the advance and will mature seven years from the closing date up to
December 31, 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 no later than the final maturity date of December 31,
2016. The $1,000 million available under the May 2009 Farmer Mac Agreement
remained unadvanced at May 31, 2009.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
All of
these agreements with Farmer Mac require us 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 notes payable to
Farmer Mac. These agreements also require us to purchase Farmer Mac
preferred stock. See Note 3, Investments, for additional
information about these investments.
(7) Subordinated
Deferrable Debt
Subordinated
deferrable debt represents quarterly income capital securities and subordinated
notes that are long-term obligations subordinated to National Rural’s
outstanding debt and senior to subordinated certificates held by National
Rural’s members. National Rural’s outstanding subordinated deferrable debt was
issued for terms of up to 49 years. This debt pays interest
quarterly, may be called at par after five years, and allows National Rural to
defer the payment of interest for up to 20 consecutive quarters. To
date, National Rural has not exercised its right to defer interest
payments. The following table is a summary of subordinated deferrable
debt outstanding at May 31:
|
|
2009
|
|
2008
|
|
|
|
|
Amounts
|
|
|
|
Effective
|
|
|
|
Amounts
|
|
|
|
Effective
|
|
|
(dollar
amounts in thousands)
|
|
|
Outstanding
|
|
|
|
Interest
Rate
|
|
|
|
Outstanding
|
|
|
|
Interest
Rate
|
|
|
6.75%
due 2043 (1)
|
|
$
|
125,000
|
|
|
|
7.00
|
%
|
|
$
|
125,000
|
|
|
|
7.00
|
%
|
|
6.10% due 2044
(2)
|
|
|
88,201
|
|
|
|
6.33
|
|
|
|
88,201
|
|
|
|
6.33
|
|
|
5.95% due 2045
(3)
|
|
|
98,239
|
|
|
|
6.14
|
|
|
|
98,239
|
|
|
|
6.14
|
|
|
Total
|
|
|
$
|
311,440
|
|
|
|
6.54
|
|
|
$
|
311,440
|
|
|
|
6.54
|
|
|
(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
Generally,
our derivative instruments do not qualify for hedge accounting. The
majority of our interest rate exchange agreements use a 30-day composite
commercial paper index as either the pay or receive leg. The 30-day
composite commercial paper index is the best match for the commercial paper that
is the underlying debt used as the cost basis in setting our variable interest
rates for our borrowers. However, the correlation between movement in
the 30-day composite commercial paper index and movement in our commercial paper
rates is not consistently high enough to qualify for hedge
accounting. Our commercial paper rates are not indexed to the 30-day
composite commercial paper index and we do not solely issue our commercial paper
with maturities of 30 days. As of and for the years ended May 31,
2009 and 2008, we did not apply hedge accounting for any of our derivative
instruments.
The
following table shows the types and notional amounts of our derivative financial
instruments at May 31:
|
|
Notional
Amounts Outstanding
|
(dollar
amounts in thousands)
|
|
2009
|
|
2008
|
Pay
fixed-receive variable
|
$
|
6,506,603
|
$
|
7,659,973
|
Pay
variable-receive fixed
|
|
5,323,239
|
|
5,256,440
|
Total
interest rate swaps
|
$
|
11,829,842
|
$
|
12,916,413
|
Interest
Rate Swaps
Income
and losses recorded for our interest rate swaps are summarized below for the
year ended May 31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Statement
of operations:
|
|
|
|
|
|
|
|
|
|
Agreements
that do not qualify for hedge accounting:
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
$
|
112,989
|
|
$
|
27,033
|
|
$
|
77,342
|
|
Derivative
forward value
|
|
(160,017
|
)
|
|
(98,743
|
)
|
|
(83,322
|
)
|
Total
loss on interest rate swaps
|
$
|
(47,028
|
)
|
$
|
(71,710
|
)
|
$
|
(5,980
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
Amortization
of transition adjustment
|
$
|
(712
|
)
|
$
|
(3,377
|
)
|
$
|
(1,004
|
)
|
Total
comprehensive loss
|
$
|
(712
|
)
|
$
|
(3,377
|
)
|
$
|
(1,004
|
)
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Cash
settlements includes periodic amounts that were paid and received related to our
interest rate swaps, as well as amounts accrued from the prior settlement
date.
During
the year ended May 31, 2009, we terminated certain receive fixed, pay variable
interest rate swaps with notional amounts totaling $583 million that resulted in
a payment to us of $97 million recorded in the statement of operations as
derivative cash settlements. Of the $583 million notional amount of
derivative contracts terminated, we 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, we recorded a charge to
the derivative forward value line for the year ended May 31, 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 our
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 we 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 our interest rate swaps. As a result of the
bankruptcy filing of LBHI, we terminated the interest rate swaps with LBSF on
September 26, 2008. The payment due to us 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. We have a claim of $26 million
against LBHI and LBSF. We 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 at May 31, 2009. The amount recorded as a
receivable does not reduce or limit our 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 or the price
that we can obtain through the sale of our claim.
During
the year ended May 31, 2008, cash settlements included a payment of $8 million
paid to counterparties representing the fair value of interest rate exchange
agreements we terminated. These agreements were terminated due to the
prepayment of RTFC loans during the year ended May 31, 2008, the proceeds of
which were used to pay down the underlying debt for the terminated interest rate
exchange agreements. A make-whole payment of $8 million was paid to
us for the cost of unwinding these swaps, which was recorded in interest income
for the year ended May 31, 2008.
During
the year ended May 31, 2007, we terminated two $500 million pay variable and
receive fixed interest rate exchange agreements before the maturity
dates. The early termination resulted in us receiving a payment of
$31 million, the fair value of the agreements on that date. At
termination, we also recorded a charge to the derivative fair value line to
reduce the derivative asset by $31 million, the fair value of the agreements on
that date. The payment received and the reduction to the recorded
derivative asset are offsetting, therefore there was no impact to reported net
income as a result of this transaction.
A
transition adjustment of $62 million was recorded as an other comprehensive loss
on June 1, 2001, the date we implemented the accounting guidance for derivative
financial instruments. Approximately $2 million of the amortization
of the transition adjustment for the year ended May 31, 2008 related to the
early termination of two swaps which were in place on June 1,
2001. The unamortized amount for these swaps was amortized when the
swaps were terminated. 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 April 2029.
We
classified cash activity associated with interest rate swaps as an operating
activity in the consolidated statements of cash flows.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Cross
Currency Interest Rate Swaps
There
were no cross currency or cross currency interest rate exchange agreements
outstanding at May 31, 2009, 2008 and 2007. Income and losses
recorded for our cross currency interest rate swaps are summarized below for the
year ended May 31, 2007:
(dollar
amounts in thousands)
|
|
2007
|
|
Statement
of operations:
|
|
|
|
Agreements
that do not qualify for hedge accounting:
|
|
|
|
Derivative
cash settlements
|
$
|
9,100
|
|
Derivative
forward value
|
|
4,041
|
|
Total
gain on cross currency interest rate swaps
|
$
|
13,141
|
|
Rating
Triggers
Some of
our interest rate swaps have credit risk-related contingent features referred to
as rating triggers. Rating triggers are not separate financial
instruments and are not required to be accounted for separately as
derivatives.
At May
31, 2009, the following derivative instruments had rating triggers based on our
senior unsecured credit ratings from Moody's Investors Service or Standard &
Poor’s Corporation falling to a level specified in the agreement and grouped
into the categories below. In calculating the payments and
collections required upon termination, we netted the agreements for each
counterparty, as allowed by the underlying master agreements.
|
|
Notional
|
|
|
Required
Company
|
|
|
Amount
Company
|
|
|
Net
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
|
Payment
|
|
|
Would
Collect
|
|
|
Total
|
|
Rating
Level:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual
rating trigger if ratings fall to
|
|
|
|
|
|
|
|
|
|
|
|
|
Baa1/BBB+
and below (1)
|
$
|
6,917,396
|
|
$
|
(141,453
|
)
|
$
|
21,194
|
|
$
|
(120,259
|
)
|
Counterparty
may terminate if ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
fall
below Baa1/BBB+ (2)
|
|
938,064
|
|
|
(5,503
|
)
|
|
-
|
|
|
(5,503
|
)
|
Total
|
|
$
|
7,855,460
|
|
$
|
(146,956
|
)
|
$
|
21,194
|
|
$
|
(125,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Stated ratings are for Moody's Investors Service and Standard & Poor’s
Corporation, respectively. Under these 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.
(2)
Stated ratings are for Moody's Investors Service and Standard & Poor’s
Corporation, respectively. The rating trigger provisions on the
interest rate swaps with one counterparty allow the counterparty to terminate
the agreements based on our credit rating, but we do not have the right to
terminate based on the counterparty’s credit rating.
In
addition to the rating triggers listed above, at May 31, 2009, we had a total
notional amount of $815 million of derivative instruments with one counterparty
that would require the pledging of collateral totaling $23 million representing
the net cash settlement amount of the derivative instruments if our 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. The aggregate fair value of all interest rate swaps with rating
triggers that were in a net liability position at May 31, 2009 was $163
million.
(9) Members'
Subordinated Certificates
Membership
Subordinated Certificates
National
Rural's members may be 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 May 31, 2009 and
2008 was 67 years and 68 years, respectively.
Loan
and Guarantee Subordinated Certificates
Members
obtaining long-term loans, certain short-term loans, or guarantees were
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 our
unsecured, subordinated debt.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Certificates
purchased in conjunction with long-term loans were generally non-interest
bearing. National Rural’s policy regarding the purchase of loan
subordinated certificates required 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 may be 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 13, 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.
Effective
June 1, 2009, National Rural changed its equity policies, including equity
certificate requirements and patronage capital rotation. Most members
requesting standard loans will not be required to buy equity certificates as a
condition of a loan or guarantee. Borrowers meeting certain criteria,
including but not limited to, high leverage ratios or with loan portfolios
significantly higher than the norm, or members requesting large facilities, may
be required to purchase member capital securities or other equity certificates
as a condition of the loan. Non-members that wish to borrow from
National Rural may be required to buy member capital securities or other equity
certificates as a percentage of any long-term loan facility.
Member
Capital Securities
During
the 2009 fiscal year, National Rural began offering member capital securities to
its voting members. Member capital securities are interest-bearing unsecured
obligations of National Rural and are subordinate to all of our existing and
future senior indebtedness 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 proportionally to our 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.
Information
with respect to members' subordinated certificates at May 31 is as
follows:
|
2009
|
|
2008
|
|
|
|
Weighted-
|
|
|
|
Weighted-
|
|
|
Amounts
|
|
Average
|
|
Amounts
|
|
Average
|
|
(dollar
amounts in thousands)
|
Outstanding
|
|
Interest
Rate
|
|
Outstanding
|
|
Interest
Rate
|
|
Number
of subscribing members
|
|
897
|
|
|
|
|
|
|
|
898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
subordinated certificates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
maturing 2020 through 2095
|
$
|
628,988
|
|
|
|
|
|
|
$
|
628,471
|
|
|
|
|
|
|
Subscribed
and unissued (1)
|
|
13,972
|
|
|
|
|
|
|
|
20,994
|
|
|
|
|
|
|
Total
membership subordinated certificates
|
|
642,960
|
|
|
|
4.90
|
%
|
|
|
649,465
|
|
|
|
4.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
and guarantee subordinated certificates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3%
certificates maturing through 2040
|
|
111,095
|
|
|
|
|
|
|
|
111,095
|
|
|
|
|
|
|
3%
to 12% certificates maturing through 2042
|
|
314,456
|
|
|
|
|
|
|
|
239,079
|
|
|
|
|
|
|
Non-interest
bearing certificates maturing through 2044
|
|
352,581
|
|
|
|
|
|
|
|
362,085
|
|
|
|
|
|
|
Subscribed
and unissued (1)
|
|
40,867
|
|
|
|
|
|
|
|
45,055
|
|
|
|
|
|
|
Total
loan and guarantee subordinated certificates
|
|
818,999
|
|
|
|
2.52
|
|
|
|
757,314
|
|
|
|
2.24
|
|
|
Member
capital securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.50%
securities maturing through 2044
|
|
278,095
|
|
|
|
7.50
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
members' subordinated certificates
|
|
$
|
1,740,054
|
|
|
|
4.20
|
|
|
$
|
1,406,779
|
|
|
|
3.46
|
|
|
(1) The
subscribed and unissued subordinated certificates represent subordinated
certificates that members are required to purchase, but are not yet paid
for. Upon collection of the full amount of the subordinated
certificate, the amount of the certificate will be reclassified from subscribed
and unissued to outstanding.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(10) Minority
Interest
At May
31, 2009 and 2008, we reported minority interests of $10 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 year ended May 31, 2009, NCSC’s net loss of $9 million exceeded its equity
balance by $6 million, which eliminated the minority interest equity in
NCSC. Based on accounting guidance governing consolidation, National
Rural is required to absorb the $6 million NCSC excess loss. NCSC’s
losses during the year ended May 31, 2009 were primarily due to its $12 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. After 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 cooperative educational fund and the members' capital
reserve. National Rural allocates a small portion, less than one
percent, of net earnings annually to the cooperative educational
fund. The allocation to the cooperative educational fund must be at
least 0.25 percent of net earnings as required by National Rural’s
bylaws. Funds from the cooperative educational fund are disbursed
annually to statewide cooperative organizations to fund the teaching of
cooperative principles and for the other cooperative education
programs. 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 members, 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.
National
Rural’s board of directors authorized the retirement of $85 million of allocated
net earnings in July 2008, representing 70 percent of the allocated net earnings
for fiscal year 2008 and one-ninth of the allocated net earnings for fiscal
years 1991, 1992 and 1993. This amount was paid to members in cash in
October 2008. The remaining 30 percent of the fiscal year 2008 allocated net
earnings will be retained by National Rural and used to fund operations for 25
years and then may be retired under the new policy described
below. The retirement of allocated net earnings for fiscal years
1991, 1992 and 1993 was done as part of the transition to the retirement cycle
adopted in 1994 and in effect through fiscal year 2009.
In June
2009, we revised our guidelines related to the timing and amount of patronage
capital to be distributed. The purpose of the revision, which was
approved by National Rural’s board of directors, is to continue strengthening
National Rural’s equity position. Under the new guidelines, National
Rural will retire 50 percent of prior year’s margins and hold the remaining 50
percent for 25 years. The retirement amount and timing remains
subject to annual approval by National Rural’s board of directors.
In July
2009, National Rural’s board of directors authorized the allocation of the
fiscal year 2009 net earnings as follows: $1 million to the cooperative
educational fund and $83 million to members in the form of patronage
capital. In July 2009, National Rural’s board of directors authorized
the retirement of allocated net earnings totaling $41 million, representing 50
percent of the fiscal year 2009 allocation. This amount will be
returned to members in cash at the end of September 2009. 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.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Equity
included the following components at May 31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
Membership
fees
|
$
|
990
|
|
|
$
|
993
|
|
|
Education
fund
|
|
1,592
|
|
|
|
1,484
|
|
|
Members'
capital reserve
|
|
187,098
|
|
|
|
187,409
|
|
|
Allocated
net income
|
|
420,834
|
|
|
|
423,249
|
|
|
Unallocated
net loss (1)
|
|
(6,198
|
)
|
|
|
(53
|
)
|
|
Total
members' equity
|
|
604,316
|
|
|
|
613,082
|
|
|
Prior
years cumulative derivative forward
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
44,056
|
|
|
|
131,551
|
|
|
Year-to-date
derivative forward value loss (2)
|
|
(147,549
|
)
|
|
|
(87,495
|
)
|
|
Total
retained equity
|
|
500,823
|
|
|
|
657,138
|
|
|
Accumulated
other comprehensive income
|
|
8,115
|
|
|
|
8,827
|
|
|
Total
equity
|
|
$
|
508,938
|
|
|
$
|
665,965
|
|
|
(1)
Excludes derivative forward value. Unallocated net loss at May 31,
2009 includes National Rural’s obligation to absorb NCSC losses in excess of
their equity balance totaling $6 million.
(2)
Represents the derivative forward value loss recorded by National Rural for the
year-to-date period.
(12) Employee
Benefits
National
Rural is a participant in the National Rural Electric Cooperative Association
("NRECA") Retirement Security Plan. This plan is available to all
qualified National Rural employees. Under the plan, participating
employees are entitled to receive annually, under a 50 percent joint and
surviving spouse annuity, 1.90 percent of the average of their five highest base
salaries during their last ten years of employment, multiplied by the number of
years of participation in the plan. National Rural contributed $4.3
million, $3.8 million and $3.3 million to the Retirement Security Plan during
fiscal years 2009, 2008 and 2007, respectively. Funding requirements
that are billed are charged to general and administrative expenses on a monthly
basis. This is a multiple employer plan, available to all member
cooperatives of NRECA, and therefore the projected benefit obligation and plan
assets are not determined or allocated separately by individual
employer.
The
Economic Growth and Tax Relief Act of 2001 set a limit of $245,000 for calendar
year 2009 on the compensation to be used in the calculation of pension
benefits. To restore potential lost benefits, National Rural has
adopted a Pension Restoration Plan which is a component of the Retirement
Security Plan administered by NRECA. Under the plan, the amount that
NRECA invoices National Rural for the Retirement Security Plan will continue to
be based on the full compensation paid to each employee. Upon the
retirement of a covered employee, NRECA will calculate the retirement and
security benefit to be paid with consideration of the compensation limits and
will pay the maximum benefit thereunder. NRECA will also calculate
the retirement and security benefit that would have been available without
consideration of the compensation limits and National Rural will pay the
difference. NRECA will then give National Rural a credit against
future retirement and security contribution liabilities in the amount paid by
National Rural to the covered employee.
National
Rural has paid such additional benefits to the covered employees through two
components of the Pension Restoration Plan, a Severance Pay Plan and a Deferred
Compensation Plan. Under the Severance Pay Plan, the employee was
paid an amount equal to the lost pension benefits but not exceeding twice the
employee's annual compensation for the prior year. The benefit was
paid within 24 months of termination of employment. To the extent
that the Severance Pay Plan could not pay all of the lost pension benefits, the
remainder was paid under a Deferred Compensation Plan in a lump sum or in
installments of up to 60 months.
Prior to
January 1, 2005, there were two components of the Pension Restoration Plan – a
deferred compensation component (Deferred Compensation Pension Restoration Plan)
and a severance pay component (Pension Restoration Severance
Plan). The Pension Restoration Severance Plan was frozen, effective
December 31, 2004. The funds accrued by each named executive in the
Pension Restoration Severance Plan prior to December 31, 2004 were frozen and
did not increase in value since that date. Effective as of May 21,
2009, the Board of Directors of National Rural approved the termination of the
Pension Restoration Severance Plan. All benefits accrued under the
Pension Restoration Severance Plan prior to the effective date of the
termination were paid to each participant in a single lump sum in May
2009. National Rural will be credited an amount equal to the benefits
paid out to participants on future pension plan invoices from
NRECA.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
Deferred Compensation Pension Restoration Plan remains in place. The
benefit and payout formula under the restoration component of the Retirement
Security Plan is similar to that under the qualified plan
component. However, each of the named executive officers has
satisfied the provisions established to receive the benefit from this
plan. Since there is no longer a risk of forfeiture of the benefit
under the Pension Restoration Plan, distributions will be made from the plan to
each named executive officer annually and credited back to National Rural by
NRECA on following pension invoices.
As of
December 31, 2008, the NRECA Retirement Security Plan was funded at 63 percent,
as compared to 101 percent on December 31, 2007. At May 31, 2009,
National Rural was current with regard to its obligations to NRECA, the plan
provider.
National
Rural offers a 401(k) defined contribution savings program, the 401(k) Pension
Plan, to all employees that have completed a minimum of 1,000 hours of service
in either the first 12 consecutive months or first full calendar year of
employment. National Rural contributes an amount up to three percent
of an employee's salary each year for all employees participating in the program
with a minimum two percent employee contribution. During the years
ended May 31, 2009, 2008 and 2007, National Rural contributed $0.6 million, $0.6
million and $0.5 million, respectively, each year under the
program.
(13) Guarantees
We
guarantee certain contractual obligations of our 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 we perform under our guarantee. We use the same
credit policies and monitoring procedures in providing guarantees as we do for
loans and commitments.
The
following table summarizes total guarantees by type and segment at May
31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
Total
by type:
|
|
|
|
|
|
Long-term
tax-exempt bonds (1)
|
$
|
644,540
|
|
$
|
498,495
|
Indemnifications
of tax benefit transfers (2)
|
|
81,574
|
|
|
94,821
|
Letters
of credit (3)
|
|
450,659
|
|
|
343,424
|
Other
guarantees (4)
|
|
98,682
|
|
|
100,400
|
Total
|
$
|
1,275,455
|
|
$
|
1,037,140
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
National
Rural:
|
|
|
|
|
|
Distribution
|
$
|
264,084
|
|
$
|
184,459
|
Power
supply
|
|
945,624
|
|
|
786,455
|
Statewide
and associate
|
|
23,625
|
|
|
22,785
|
National
Rural total
|
|
1,233,333
|
|
|
993,699
|
RTFC
|
|
500
|
|
|
260
|
NCSC
|
|
41,622
|
|
|
43,181
|
Total
|
|
$
|
1,275,455
|
|
$
|
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 May 31, 2009, our 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 us to trigger the call provision. This
would limit our exposure to future interest payments on these
bonds. Our 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 us 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 our maximum potential exposure for guaranteed indemnity
payments. A member's obligation to reimburse National Rural for any
guarantee payments would be treated as a long-term loan to the extent of any
cash received by the member at the outset of the transaction. This
amount is secured by a mortgage lien on substantially all of the system's assets
and future revenues. The remainder would be treated as a short-term
loan secured by a subordinated mortgage on substantially all of the member's
property. Due to changes in federal tax law, no further guarantees of
this nature are anticipated.
(3) The
maturities for this type of guarantee run through 2024. Additionally,
letters of credit totaling $5 million at May 31, 2009 have a term of one year
and automatically extend for a period of one year unless we cancel 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 $202 million is secured at May 31,
2009. When taking into consideration reimbursement obligation
agreements that we have in place with other lenders, our maximum potential
exposure related to $17 million of letters of credit would be reduced to $5
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 with us. In addition to the letters of
credit listed in the table, under master letter of credit facilities, we may be
required to issue up to an additional $440 million in letters of credit to third
parties for the benefit of our members at May 31, 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 our maximum potential exposure, which is unsecured.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At May
31, 2009 and 2008, we had a total of $347 million and $236 million of
guarantees, representing 27 percent and 23 percent of total guarantees,
respectively, under which our right of recovery from our members was not
secured.
Long-term
Tax-Exempt Bonds
We
guarantee 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. we unconditionally guarantee 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. We have debt service
reserve funds in the amount of $47 million and $55 million at May 31, 2009 and
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, we are obligated to pay any required amounts under our guarantees,
which will prevent the acceleration of the bond issue. The member
system is required to repay, on demand, any amount advanced by us with interest,
pursuant to the documents evidencing the member system's reimbursement
obligation.
Of the
amounts shown in the table above, $643 million and $330 million as of May 31,
2009 and 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), we have, in return for a fee, unconditionally
agreed to purchase bonds tendered or put for redemption if the remarketing
agents have not previously sold such bonds to other investors. During
the year ended May 31, 2009, we were required to purchase a total of $72 million
of tax-exempt bonds pursuant to our obligation as liquidity provider, all of
which had been redeemed or repurchased by third-party investors at May 31,
2009. See Note 3, Investments, for additional
information on these transactions.
During
the year ended May 31, 2009, the $155 million of auction rate bonds we
guaranteed were converted to semi-annual mode. We became the
liquidity provider for those bonds. We 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 May
31, 2009 and 2008, we recorded a guarantee liability of $30 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 May 31, 2009 and
2008 was $12 million and $10 million, respectively, based on management's
estimate of exposure to losses within the guarantee portfolio. We use factors
such as internal risk rating, remaining term of guarantee, corporate bond
default probabilities and estimated recovery rates in estimating our contingent
exposure. The remaining balance of the total guarantee liability of
$18 million and $5 million at May 31, 2009 and 2008, respectively, relates to
our non-contingent obligation to stand ready to perform over the term of our
guarantees and liquidity obligations that we have entered into or modified since
January 1, 2003. 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 years ended May
31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
$
|
15,034
|
|
$
|
18,929
|
|
$
|
16,750
|
|
Net
change in non-contingent liability
|
|
13,023
|
|
|
(791
|
)
|
|
3,879
|
|
Provision
for (recovery of) contingent guarantee losses
|
|
1,615
|
|
|
(3,104
|
)
|
|
(1,700
|
)
|
Ending
balance
|
$
|
29,672
|
|
$
|
15,034
|
|
$
|
18,929
|
|
|
|
|
|
|
|
|
|
|
|
Liability
as a percentage of total guarantees
|
|
2.33
|
%
|
|
1.45
|
%
|
|
1.76
|
%
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
following table details the scheduled reductions of our outstanding guarantees
in each of the fiscal years following May 31, 2009:
(dollar
amounts in thousands)
|
|
Amount
|
2010
|
$
|
326,570
|
2011
|
|
214,291
|
2012
|
|
81,035
|
2013
|
|
120,596
|
2014
|
|
51,089
|
Thereafter
|
|
481,874
|
Total
|
$
|
1,275,455
|
(14) Fair
Value Measurement
Effective
June 1, 2008, we adopted new accounting guidance related to the determination of
fair value.
Fair
Value
Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. The new fair value
guidance, among other things, requires that we maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair
value.
The new
guidance 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.
|
Our only
assets and liabilities measured at fair value on a recurring or nonrecurring
basis at May 31, 2009 and 2008 are derivative instruments, foreclosed assets,
and collateral-dependent non-performing loans. When a valuation
includes inputs from multiple sources at various levels in the fair value
hierarchy, we classify 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
We
account for derivative instruments (including certain derivative instruments
embedded in other contracts) 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 we use, we obtain 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.
We
perform analysis to validate the market quotes obtained from our swap
counterparties. We adjust the market values received from the
counterparties using credit default swap levels for us and the counterparties.
The credit default swap levels represent the credit risk premium required by a
market participant based on the available information related to us and the
counterparty. We only enter into exchange agreements with
counterparties that participate in our revolving credit
agreements. All of our exchange agreements are subject to master
netting agreements.
Our
valuation techniques for interest rate swap derivatives are based upon
observable inputs, which reflect market data. Fair value for our
interest rate swap derivative instruments are classified as a Level 2
valuation.
We record
the change in the fair value of our derivatives for each reporting period in the
derivative forward value line on the consolidated statements of operations as
currently none of our derivatives qualify for hedge accounting.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The
following table presents our assets and liabilities that are measured at fair
value on a recurring basis at May 31, 2009:
(dollar
amounts in thousands)
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
Derivative
assets
|
|
$
|
-
|
$
|
381,356
|
$
|
-
|
Derivative
liabilities
|
|
|
-
|
|
493,002
|
|
-
|
Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis
We 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.
Our
foreclosed assets do not meet the criteria to be classified as held for sale at
May 31, 2009, and therefore are required to be carried at cost. 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, we utilize 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 May 31, 2009 were classified
as Level 3 within the fair value hierarchy. The following table
provides the carrying value of the related individual assets at May 31, 2009 and
the total losses for the year ended May 31, 2009.
(dollar
amounts in thousands)
|
|
Level
3
Fair
Value
|
|
Total
losses for the
year
ended
May
31, 2009
|
|
Foreclosed
assets, net
|
$
|
48,721
|
$
|
|
(8,014
|
)
|
Non-performing
loans, net of specific reserves
|
|
173,880
|
|
|
(129,480
|
)
|
(15) Fair
Value of Financial Instruments
The
following disclosure of the estimated fair value of financial instruments is
based on the applicable accounting guidance. See Note 14, Fair Value Measurement, for more details about
how fair value is determined for assets and liabilities measured at fair value
on a recurring or nonrecurring basis. Due to the adoption of
new guidance regarding the determination of fair value, we amended the
techniques used in measuring the fair value of some financial
instruments. We consider relevant and observable prices in the
appropriate principal market in our valuations where possible. The
estimated fair value information presented is not necessarily indicative of
amounts we could realize currently in a market sale since we may be unable to
sell such instruments due to contractual restrictions or to the lack of an
established market.
The
estimated market values have not been updated since May 31, 2009; therefore,
current estimates of fair value may differ significantly from the amounts
presented. With the exception of redeeming subordinated deferrable
debt under early redemption provisions, terminating derivative instruments under
early termination provisions and allowing borrowers to prepay their loans, we
have held and intend to hold all financial instruments to
maturity. Below is a summary of significant methodologies used in
estimating fair value amounts and a schedule of fair values at May 31, 2009 and
2008.
Cash
and Cash Equivalents
Includes
cash and certificates of deposit with original maturities of less than 90
days. Cash and cash equivalents are valued at the carrying value
which approximates fair value.
Restricted
Cash
Restricted
cash consists of cash and cash equivalents for which use is contractually
restricted. Restricted cash is valued at the carrying value which approximates
fair value.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Loans
to Members
As part
of receiving a loan from us, our members have additional requirements and rights
that are not typical of other financial institutions, such as the right to
receive a patronage capital allocation, the requirement to purchase subordinated
certificates, the option to select fixed rates from one year to maturity with
the fixed rate resetting or repricing at the end of each selected rate term, the
ability to convert from a fixed rate to another fixed rate or the variable rate
at any time and certain discounts that are specific to the borrower’s activity
with us. These features make it difficult to find market data for
similar loans. Therefore, we must use other methods to estimate the
fair value. Fair values are estimated by discounting the future cash
flows using the current rates at which similar loans would be made by us to new
borrowers for the same remaining maturities. Because our borrowers
must reprice their loans at various times throughout the life of the loan at the
then current market rate, for purposes of determining fair value, we use the
next repricing date as the maturity date for the remaining balance of the
loan. The fair value at May 31, 2008 does not incorporate repricings
into the loan maturity schedule. Loans with different risk
characteristics, specifically non-performing and restructured loans, are valued
by using collateral valuations or by adjusting cash flows for credit risk and
discounting those cash flows using the current rates at which similar loans
would be made by us to borrowers for the same remaining
maturities. See Note 14, Fair Value Measurement, for
more details about how we calculate the fair value of certain non-performing
loans. Credit risk for the remainder of the loan portfolio is
estimated based on the associated reserve in our allowance for loan
losses. Variable-rate loans are valued at cost, which approximates
fair value since we can reset rates every 15 days.
Investments
in Preferred Stock
The fair
value of our investments in Series B-1 preferred stock is estimated at par based
upon dealer quotes. The Series C preferred stock is estimated at par
because we continue to enter into new transactions with the issuer at the same
terms and the stock is callable at par. Both of these securities do
not meet the definition of a marketable security.
Debt
Service Reserve Funds
We
consider the carrying value of debt service reserve funds to be equal to fair
value. Debt service reserve funds represent cash on deposit with the
bond trustee for pollution control bonds that we guarantee and therefore,
carrying value is considered to be equal to fair value.
Short-Term
Debt
Short-term
debt consists of commercial paper, bank bid notes and other debt due within one
year. The fair value of short-term debt with maturities greater than
90 days is estimated based on quoted market rates for debt with similar
maturities. The fair value of short-term debt with maturities less
than or equal to 90 days is carrying value, which is a reasonable estimate of
fair value.
Long-Term
Debt
Long-term
debt consists of collateral trust bonds, medium-term notes and long-term notes
payable. We issue all collateral trust bonds and some medium-term
notes in underwritten public transactions. There is
not active secondary trading for all underwritten collateral trust bonds and
medium-term notes; therefore, dealer quotes and recent market prices are both
used in estimating fair value. There is essentially no secondary
market for the medium-term notes issued to our members or in transactions that
are not underwritten, therefore fair value is estimated based on observable
benchmark yields and spreads for similar instruments supplied by banks that
underwrite our other debt transactions. The long-term notes payable
are issued in private placement transactions and there is no secondary trading
of such debt. Therefore, the fair value is estimated based on
underwriter quotes for similar instruments, if available, or based on cash flows
discounted at current rates for similar instruments supplied by underwriters or
by the original issuer. Secondary trading for our debt instruments
used in the determination of fair value at May 31, 2009 and 2008 incorporate our
credit risk.
Long-term
debt with a variable interest rate is valued based on quotes from the secondary
trading market if the debt is underwritten. For transactions that are
not underwritten and there is no secondary market, variable-rate long-term debt
is valued at carrying value, which approximates fair value since rates may be
adjusted every 30 days to 90 days.
Subordinated
Deferrable Debt
Our
subordinated deferrable debt is traded on the New York Stock Exchange, therefore
daily market quotes are available. The fair value for May 31, 2009 is
based on the closing market quotes from the last day of the reporting
period. At May 31, 2008, we based the fair value estimate on tender
offer prices supplied by the underwriters of the securities as there is
typically limited trading volume. The use of the tender offer prices
results in a slightly different valuation than the use of the market quotes from
the New York Stock Exchange.
Members'
Subordinated Certificates
Members’
subordinated certificates include membership subordinated certificates issued to
our members as a condition of
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
membership,
loan and guarantee subordinated certificates as a condition of obtaining loan
funds or guarantees and member capital securities issued as voluntary
investments by our members. All members’ subordinated certificates
are non-transferable other than among members. As there is no ready
market from which to obtain fair value quotes, it is impracticable to estimate
fair value and members’ subordinated certificates are valued at
par. The fair value of members’ subordinated certificates at May 31,
2008 are also included in the table below at par.
Derivative
Instruments
See Note
14, Fair Value
Measurement, for details about how we calculate the fair value of
derivative instruments.
Commitments
The fair
value is estimated as the carrying value, or zero. Extensions of
credit under these commitments, if exercised, would result in loans priced at
market rates.
Guarantees
The fair
value of our guarantee liability at May 31, 2009 is based on the fair value of
our contingent and non-contingent exposure related to our
guarantees. The fair value of our contingent exposure for guarantees
is based on management’s estimate of our exposure to losses within the guarantee
portfolio. The fair value of our non-contingent exposure for guarantees issued
is estimated based on the total unamortized balance of guarantee fees paid and
guarantee fees to be paid discounted at our current short-term funding rate,
which represents management's estimate of the fair value of our obligation to
stand ready to perform. At May 31, 2008, the fair value of the our
guarantees shown is based on the amount recorded as a guarantee liability which
represented our contingent and non-contingent exposure related to guarantees
without the adjustment to discount future cash flows at the current short-term
funding rate.
Carrying
and fair values as of May 31, 2009 and 2008 are presented as
follows:
|
|
|
2009
|
|
|
|
2008
|
|
|
(dollar
amounts in thousands)
|
|
|
Carrying
Value
|
|
|
|
Fair
Value
|
|
|
|
Carrying
Value
|
|
|
|
Fair
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
504,999
|
|
|
$
|
504,999
|
|
|
$
|
177,809
|
|
|
$
|
177,809
|
|
|
Restricted
cash
|
|
|
8,207
|
|
|
|
8,207
|
|
|
|
14,460
|
|
|
|
14,460
|
|
|
Investments
in preferred stock
|
|
|
47,000
|
|
|
|
47,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Loans
to members, net
|
|
|
19,569,349
|
|
|
|
18,766,573
|
|
|
|
18,514,134
|
|
|
|
17,659,808
|
|
|
Debt
service reserve funds
|
|
|
46,662
|
|
|
|
46,662
|
|
|
|
54,993
|
|
|
|
54,993
|
|
|
Interest
rate exchange agreements
|
|
|
381,356
|
|
|
|
381,356
|
|
|
|
220,514
|
|
|
|
220,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
4,867,864
|
|
|
|
4,885,919
|
|
|
|
6,327,453
|
|
|
|
6,334,426
|
|
|
Long-term
debt
|
|
|
12,720,055
|
|
|
|
13,160,498
|
|
|
|
10,173,587
|
|
|
|
10,548,133
|
|
|
Guarantee
liability (1)
|
|
|
29,672
|
|
|
|
33,181
|
|
|
|
15,034
|
|
|
|
15,034
|
|
|
Interest
rate exchange agreements
|
493,002
|
|
|
|
493,002
|
|
|
|
171,390
|
|
|
|
171,390
|
|
|
Subordinated
deferrable debt
|
|
|
311,440
|
|
|
|
274,759
|
|
|
|
311,440
|
|
|
|
291,551
|
|
|
Members
subordinate certificates
|
|
|
1,740,0544
|
|
|
|
1,740,054
|
|
|
|
1,406,779
|
|
|
|
1,406,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance
sheet instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1) The
carrying value represents our exposure related to guarantees and therefore will
not equal total guarantees shown in Note 13.
(16) Restructured/Non-performing
Loans and Contingencies
The
following loans outstanding were classified as non-performing and restructured
at May 31:
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
Non-performing
loans
|
$
|
523,758
|
|
$
|
506,864
|
|
|
Restructured
loans
|
|
537,587
|
|
|
577,111
|
|
|
Total
|
$
|
1,061,345
|
|
$
|
1,083,975
|
|
|
(a) At
May 31, 2009 and 2008, all loans classified as non-performing were on
non-accrual status with respect to the recognition of interest
income. At May 31, 2009 and 2008, $491 million and $519 million,
respectively, of restructured loans were on non-accrual status. A
total of $4 million of interest income was accrued on restructured loans during
the year ended May 31, 2009 and 2008.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Interest
income was reduced as follows as a result of holding loans on non-accrual status
for the years ended May 31:
|
|
Reduction
to interest income
|
|
(dollar
amounts in thousands)
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Non-performing
loans
|
|
$
|
29,817
|
|
$
|
33,492
|
|
$
|
41,448
|
|
Restructured
loans
|
|
|
26,421
|
|
|
33,400
|
|
|
39,177
|
|
Total
|
|
$
|
56,238
|
|
$
|
66,892
|
|
$
|
80,625
|
|
(b) We
classified $1,056 million and $1,078 million of loans as impaired at May 31,
2009 and 2008, respectively. We reserved $414 million and $331
million of the loan loss allowance for these impaired loans at May 31, 2009 and
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. We accrued a total of $3 million of interest income on
impaired loans for each of the years ended May 31, 2009, 2008 and 2007,
respectively. The average recorded investment in impaired loans for
the year ended May 31, 2009 and 2008 was $1,046 million and $1,083 million,
respectively.
We update
impairment calculations on a quarterly basis. Since a borrower's
original contract interest rate may include a variable-rate component,
calculated impairment could vary with changes to our variable rate, independent
of a borrower's underlying financial performance or condition. In
addition, the calculated impairment for a borrower will fluctuate based on
changes to certain assumptions. Changes to assumptions include, but
are not limited to the following:
· court
rulings,
· changes
to collateral values, and
· changes
to expected future cash flows both as to timing and amount.
(c) At
May 31, 2009 and 2008, National Rural had a total of $491 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 May 31, 2009 and 2008. Total loans to CoServ at May 31, 2009 and
2008 represented 2.4 percent and 2.7 percent, respectively, of our 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. 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 the
lesser of their outstanding balance or $405 million plus an interest payment
true up on or after December 13, 2008. To date, 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 before 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
our analysis, we believe that we are adequately reserved for our exposure to
CoServ at May 31, 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.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At May
31, 2009 and 2008, RTFC had $524 million and $492 million in loans outstanding
to ICC, respectively. 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 in April 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 of the Virgin Islands against ICC for approximately $525
million and Prosser for approximately $100 million. RTFC also
obtained dismissals with prejudice and releases 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 and
forums. National Rural therefore anticipates that it will continue to
be engaged in defense of those assertions on many fronts, as well as pursuing
claims of its own.
ICC-LLC,
Emcom and Prosser each have bankruptcy proceedings pending in the United States
District Court for the Virgin Islands, Bankruptcy Division (the “Bankruptcy
Court”). A Chapter 11 trustee has been appointed for the ICC-LLC and
Emcom estates; and a Chapter 7 trustee was appointed in Prosser’s individual
case. 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 a
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 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 2 Assets and Group 3 Assets were sold in December
2008 and May 2008, respectively, and in each case, the distribution of proceeds
was approved by the Court and resulted in a net recovery to us.
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 1 Assets to
RTFC. RTFC has begun the process of obtaining the applicable
regulatory approvals.
In April
2009, RTFC acquired $85 million of Vitelco preferred stock and $12.5 million of
accrued and unpaid dividends relating to such shares for a total purchase price
of $30 million. We believe that the acquisition of the preferred
shareholders interests at a discount has improved our estimated recovery from
the collateral.
Based on
our analysis, we believe that we are adequately reserved for our exposure to ICC
at May 31, 2009.
(e) At
May 31, 2009 and 2008, National Rural had a total of $42 million and $52
million, respectively, in restructured loans outstanding to Pioneer Electric
Cooperative, Inc. ("Pioneer"), an electric distribution cooperative located in
Greenville, Alabama. Pioneer was current with respect to all debt
service payments at May 31, 2009 and all loans to Pioneer remain on accrual
status. National Rural is the principal creditor to
Pioneer.
Based on
our analysis, we believe that we are adequately reserved for our exposure to
Pioneer at May 31, 2009.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(17) Segment
Information
Our
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 years ended May 31, 2009, 2008 and 2007 reflect the
operating results of each of the three companies as a separate
segment.
National
Rural is the sole lender to RTFC and the primary source of funding for
NCSC. NCSC also obtains funding from third parties with a National
Rural guarantee. Therefore, National Rural takes all of the risk
related to the funding of the loans to RTFC and NCSC, and in return, National
Rural earns net interest income on the loans to RTFC and NCSC.
Pursuant
to guarantee agreements, National Rural has agreed to indemnify RTFC and NCSC
for loan losses, with the exception of the NCSC consumer loan
program. Therefore, 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 years
ended May 31, 2009, 2008 and 2007 and consolidated balance sheets as of May 31,
2009, 2008 and 2007 by segment.
|
|
For
the year ended May 31, 2009
|
|
|
(dollar
amounts in thousands)
|
|
National
Rural
|
|
|
|
RTFC
|
|
|
|
NCSC
|
|
|
|
Consolidated
|
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
965,609
|
|
|
$
|
76,138
|
|
|
$
|
29,017
|
|
|
$
|
1,070,764
|
|
|
Interest
expense
|
|
(841,729
|
)
|
|
|
(71,514
|
)
|
|
|
(21,778
|
)
|
|
|
(935,021
|
)
|
|
Net
interest income
|
|
123,880
|
|
|
|
4,624
|
|
|
|
7,239
|
|
|
|
135,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision
of) recovery of loan losses
|
|
(113,764
|
)
|
|
|
-
|
|
|
|
65
|
|
|
|
(113,699
|
)
|
|
Net
interest income after recovery of loan losses
|
|
10,116
|
|
|
|
4,624
|
|
|
|
7,304
|
|
|
|
22,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
11,662
|
|
|
|
209
|
|
|
|
1,292
|
|
|
|
13,163
|
|
|
Derivative
cash settlements
|
|
118,566
|
|
|
|
-
|
|
|
|
(5,577
|
)
|
|
|
112,989
|
|
|
Results
of operations of foreclosed assets
|
|
3,774
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,774
|
|
|
Total
non-interest income
|
|
134,002
|
|
|
|
209
|
|
|
|
(4,285
|
)
|
|
|
129,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(50,267
|
)
|
|
|
(5,923
|
)
|
|
|
(4,652
|
)
|
|
|
(60,842
|
)
|
|
Recovery
of guarantee liability
|
|
(1,615
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,615
|
)
|
|
Market
adjustment on foreclosed assets
|
|
(8,014
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,014
|
)
|
|
Derivative
forward value
|
|
(147,549
|
)
|
|
|
-
|
|
|
|
(12,468
|
)
|
|
|
(160,017
|
)
|
|
Other
|
|
(221
|
)
|
|
|
-
|
|
|
|
(132
|
)
|
|
|
(353
|
)
|
|
Total
non-interest expense
|
|
(207,666
|
)
|
|
|
(5,923
|
)
|
|
|
(17,252
|
)
|
|
|
(230,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes and minority
interest
|
|
(63,548
|
)
|
|
|
(1,090
|
)
|
|
|
(14,233
|
)
|
|
|
(78,871
|
)
|
|
Income
tax (expense) benefit
|
|
(185
|
)
|
|
|
(39
|
)
|
|
|
5,325
|
|
|
|
5,101
|
|
|
Loss
per segment reporting
|
$
|
(63,733
|
)
|
|
$
|
(1,129
|
)
|
|
$
|
(8,908
|
)
|
|
$
|
(73,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(73,770
|
)
|
|
Minority
interest, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,900
|
|
|
Net
loss per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(69,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
$
|
18,091,333
|
|
|
$
|
1,680,154
|
|
|
$
|
416,720
|
|
|
$
|
20,188,207
|
|
|
Deferred
origination fees
|
|
4,102
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,102
|
|
|
Less: Allowance
for loan losses
|
|
(622,851
|
)
|
|
|
-
|
|
|
|
(109
|
)
|
|
|
(622,960
|
)
|
|
Loans
to members, net
|
|
17,472,584
|
|
|
|
1,680,154
|
|
|
|
416,611
|
|
|
|
19,569,349
|
|
|
Other
assets
|
|
1,221,881
|
|
|
|
172,410
|
|
|
|
19,065
|
|
|
|
1,413,356
|
|
|
Total
assets
|
$
|
18,694,465
|
|
|
$
|
1,852,564
|
|
|
$
|
435,676
|
|
|
$
|
20,982,705
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
For
the year ended May 31, 2008
|
|
|
(dollar
amounts in thousands)
|
|
National
Rural
|
|
|
|
RTFC
|
|
|
|
NCSC
|
|
|
|
Consolidated
|
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
929,379
|
|
|
$
|
88,865
|
|
|
$
|
33,149
|
|
|
$
|
1,051,393
|
|
|
Interest
expense
|
|
(820,572
|
)
|
|
|
(83,767
|
)
|
|
|
(26,929
|
)
|
|
|
(931,268
|
)
|
|
Net
interest income
|
|
108,807
|
|
|
|
5,098
|
|
|
|
6,220
|
|
|
|
120,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of loan losses
|
|
30,097
|
|
|
|
-
|
|
|
|
165
|
|
|
|
30,262
|
|
|
Net
interest income after recovery of loan losses
|
|
138,904
|
|
|
|
5,098
|
|
|
|
6,385
|
|
|
|
150,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
18,005
|
|
|
|
207
|
|
|
|
1,396
|
|
|
|
19,608
|
|
|
Derivative
cash settlements
|
|
28,416
|
|
|
|
-
|
|
|
|
(1,383
|
)
|
|
|
27,033
|
|
|
Results
of operations of foreclosed assets
|
|
7,528
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,528
|
|
|
Total
non-interest income
|
|
53,949
|
|
|
|
207
|
|
|
|
13
|
|
|
|
54,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(50,976
|
)
|
|
|
(5,366
|
)
|
|
|
(4,127
|
)
|
|
|
(60,469
|
)
|
|
Recovery
of guarantee liability
|
|
3,104
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,104
|
|
|
Market
adjustment on foreclosed assets
|
|
(5,840
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,840
|
)
|
|
Derivative
forward value
|
|
(87,496
|
)
|
|
|
-
|
|
|
|
(11,247
|
)
|
|
|
(98,743
|
)
|
|
Foreign
currency adjustments
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Loss
on sale of loans
|
|
(676
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(676
|
)
|
|
Loss
on early extinguishment of debt
|
|
(5,509
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,509
|
)
|
|
Other
|
|
285
|
|
|
|
-
|
|
|
|
(397
|
)
|
|
|
(112
|
)
|
|
Total
non-interest expense
|
|
(147,108
|
)
|
|
|
(5,366
|
)
|
|
|
(15,771
|
)
|
|
|
(168,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes and minority
interest
|
|
45,745
|
|
|
|
(61
|
)
|
|
|
(9,373
|
)
|
|
|
36,311
|
|
|
Income
tax (expense) benefit
|
|
-
|
|
|
|
(231
|
)
|
|
|
3,566
|
|
|
|
3,335
|
|
|
Income
(loss) per segment reporting
|
$
|
45,745
|
|
|
$
|
(292
|
)
|
|
$
|
(5,807
|
)
|
|
$
|
39,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,646
|
|
|
Minority
interest, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,099
|
|
|
Net
income per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans outstanding
|
$
|
16,886,407
|
|
|
$
|
1,726,514
|
|
|
$
|
414,074
|
|
|
$
|
19,026,995
|
|
|
Deferred
origination fees
|
|
2,045
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,045
|
|
|
Less: Allowance
for loan losses
|
|
(514,626
|
)
|
|
|
-
|
|
|
|
(280
|
)
|
|
|
(514,906
|
)
|
|
Loans
to members, net
|
|
16,373,826
|
|
|
|
1,726,514
|
|
|
|
413,794
|
|
|
|
18,514,134
|
|
|
Other
assets
|
|
639,115
|
|
|
|
182,388
|
|
|
|
43,744
|
|
|
|
865,247
|
|
|
Total
assets
|
$
|
17,012,941
|
|
|
$
|
1,908,902
|
|
|
$
|
457,538
|
|
|
$
|
19,379,381
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
For
the year ended May 31, 2007
|
|
|
(dollar
amounts in thousands)
|
|
National
Rural
|
|
|
|
RTFC
|
|
|
|
NCSC
|
|
|
|
Consolidated
|
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
903,783
|
|
|
$
|
105,427
|
|
|
$
|
30,440
|
|
|
$
|
1,039,650
|
|
|
Interest
expense
|
|
(865,664
|
)
|
|
|
(99,224
|
)
|
|
|
(26,866
|
)
|
|
|
(991,754
|
)
|
|
Net
interest income
|
|
38,119
|
|
|
|
6,203
|
|
|
|
3,574
|
|
|
|
47,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of loan losses
|
|
5,499
|
|
|
|
-
|
|
|
|
1,423
|
|
|
|
6,922
|
|
|
Net
interest income after recovery of loan losses
|
|
43,618
|
|
|
|
6,203
|
|
|
|
4,997
|
|
|
|
54,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
14,017
|
|
|
|
187
|
|
|
|
1,902
|
|
|
|
16,106
|
|
|
Derivative
cash settlements
|
|
86,040
|
|
|
|
-
|
|
|
|
402
|
|
|
|
86,442
|
|
|
Results
of operations of foreclosed assets
|
|
9,758
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,758
|
|
|
Total
non-interest income
|
|
109,815
|
|
|
|
187
|
|
|
|
2,304
|
|
|
|
112,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(43,029
|
)
|
|
|
(5,373
|
)
|
|
|
(3,487
|
)
|
|
|
(51,889
|
)
|
|
Recovery
of guarantee liability
|
|
1,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,700
|
|
|
Derivative
forward value
|
|
(79,744
|
)
|
|
|
-
|
|
|
|
463
|
|
|
|
(79,281
|
)
|
|
Foreign
currency adjustments
|
|
(14,554
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,554
|
)
|
|
Loss
on sale of loans
|
|
(1,584
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,584
|
)
|
|
Loss
on early extinguishment of debt
|
|
(4,806
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,806
|
)
|
|
Other
|
|
285
|
|
|
|
|
|
|
|
(454
|
)
|
|
|
(169
|
)
|
|
Total
non-interest expense
|
|
(141,732
|
)
|
|
|
(5,373
|
)
|
|
|
(3,478
|
)
|
|
|
(150,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
prior to income taxes and minority
interest
|
|
11,701
|
|
|
|
1,017
|
|
|
|
3,823
|
|
|
|
16,541
|
|
|
Income
tax expense
|
|
-
|
|
|
|
(945
|
)
|
|
|
(1,451
|
)
|
|
|
(2,396
|
)
|
|
Income
per segment reporting
|
$
|
11,701
|
|
|
$
|
72
|
|
|
$
|
2,372
|
|
|
$
|
14,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,145
|
|
|
Minority
interest, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,444
|
)
|
|
Net
income per consolidated statement of operations
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
$
|
15,805,290
|
|
|
$
|
1,860,379
|
|
|
$
|
462,538
|
|
|
$
|
18,128,207
|
|
|
Deferred
origination fees
|
|
3,666
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,666
|
|
|
Less: Allowance
for loan losses
|
|
(561,113
|
)
|
|
|
-
|
|
|
|
(550
|
)
|
|
|
(561,663
|
)
|
|
Loans
to members, net
|
|
15,247,843
|
|
|
|
1,860,379
|
|
|
|
461,988
|
|
|
|
17,570,210
|
|
|
Other
assets
|
|
764,528
|
|
|
|
189,716
|
|
|
|
50,727
|
|
|
|
1,004,971
|
|
|
Total
assets
|
$
|
16,012,371
|
|
|
$
|
2,050,095
|
|
|
$
|
512,715
|
|
|
$
|
18,575,181
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(18) Selected
Quarterly Financial Data (Unaudited)
Summarized
results of operations for the four quarters of fiscal years 2009 and 2008 are as
follows:
|
|
Fiscal
Year 2009
|
|
|
|
Quarters
Ended
|
|
(dollar
amounts in thousands)
|
|
August
31,
|
|
|
November
30,
|
|
|
February 28,
|
|
|
May
31,
|
|
|
Total
Year
|
|
Interest
income
|
$
|
263,117
|
|
$
|
266,746
|
|
$
|
268,453
|
|
$
|
272,448
|
|
$
|
1,070,764
|
|
Interest
expense
|
|
(220,149
|
|
|
(234,187
|
)
|
|
(239,744
|
)
|
|
(240,941
|
)
|
|
(935,021
|
)
|
Net
interest income
|
|
42,968
|
|
|
32,559
|
|
|
28,709
|
|
|
31,507
|
|
|
135,743
|
|
(Provision
for) recovery of loan losses
|
|
(10,681
|
)
|
|
(126,311
|
)
|
|
10,415
|
|
|
12,878
|
|
|
(113,699
|
)
|
Net
interest income after (provision for) recovery of loan losses (1)
|
|
32,287
|
|
|
(93,752
|
)
|
|
39,124
|
|
|
44,385
|
|
|
22,044
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (2)
|
|
431
|
|
|
12,503
|
|
|
104,012
|
|
|
(3,957
|
)
|
|
112,989
|
|
Other
non-interest income
|
|
4,828
|
|
|
3,948
|
|
|
4,001
|
|
|
4,160
|
|
|
16,937
|
|
Total
non-interest income
|
|
5,259
|
|
|
16,451
|
|
|
108,013
|
|
|
203
|
|
|
129,926
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
forward value
|
|
(11,028
|
)
|
|
(139,383
|
)
|
|
(53,046
|
)
|
|
43,440
|
|
|
(160,017
|
)
|
Other
non-interest expense
|
|
(14,048
|
)
|
|
(21,071
|
)
|
|
(18,828
|
)
|
|
(16,877
|
)
|
|
(70,824
|
)
|
Total
non-interest expense
|
|
(25,076
|
)
|
|
(160,454
|
)
|
|
(71,874
|
)
|
|
26,563
|
|
|
(230,841
|
)
|
Income
(loss) prior to income taxes and minority interest
|
|
12,470
|
|
|
(237,755
|
)
|
|
75,263
|
|
|
71,151
|
|
|
(78,871
|
)
|
Income
tax benefit (expense)
|
|
760
|
|
|
6,400
|
|
|
(183
|
)
|
|
(1,876
|
)
|
|
5,101
|
|
Minority
interest, net of income taxes
|
|
1,241
|
|
|
1,738
|
|
|
159
|
|
|
762
|
|
|
3,900
|
|
Net
income (loss)
|
$
|
14,471
|
|
$
|
(229,617
|
)
|
$
|
75,239
|
|
$
|
70,037
|
|
$
|
(69,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes $114 million provision for loan losses related to the change in the
valuation of ICC assets during the quarter ended November 30, 2008.
(2)
Includes $97 million in income related to the termination of interest rate swaps
during the quarter ended February 28, 2009.
|
Fiscal
Year 2008
|
|
|
Quarters
Ended
|
|
(dollar
amounts in thousands)
|
|
August
31,
|
|
|
November
30,
|
|
|
February 28,
|
|
|
May
31,
|
|
|
Total
Year
|
|
Interest
income
|
$
|
264,192
|
|
$
|
261,177
|
|
$
|
264,594
|
|
$
|
261,430
|
|
$
|
1,051,393
|
|
Interest
expense
|
|
(241,688
|
|
|
(239,900
|
)
|
|
(233,347
|
)
|
|
(216,333
|
)
|
|
(931,268
|
)
|
Net
interest income
|
|
22,504
|
|
|
21,277
|
|
|
31,247
|
|
|
45,097
|
|
|
120,125
|
|
Recovery
of (provision for) loan losses
|
|
-
|
|
|
14,301
|
|
|
33,599
|
|
|
(17,638
|
)
|
|
30,262
|
|
Net
interest income after recovery of (provision for) loan
losses
|
|
22,504
|
|
|
35,578
|
|
|
64,846
|
|
|
27,459
|
|
|
150,387
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
|
8,329
|
|
|
11,507
|
|
|
10,463
|
|
|
(3,266
|
)
|
|
27,033
|
|
Other
non-interest income
|
|
6,073
|
|
|
4,318
|
|
|
4,750
|
|
|
11,995
|
|
|
27,136
|
|
Total
non-interest income
|
|
14,402
|
|
|
15,825
|
|
|
15,213
|
|
|
8,729
|
|
|
54,169
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
forward value
|
|
(33,600
|
)
|
|
(75,412
|
)
|
|
(64,266
|
)
|
|
74,535
|
|
|
(98,743
|
)
|
Other
non-interest expense
|
|
(17,365
|
)
|
|
(13,674
|
)
|
|
(20,379
|
)
|
|
(18,084
|
)
|
|
(69,502
|
)
|
Total
non-interest expense
|
|
(50,965
|
)
|
|
(89,086
|
)
|
|
(84,645
|
)
|
|
56,451
|
|
|
(168,245
|
)
|
(Loss)
income prior to income taxes and minority interest
|
|
(14,059
|
)
|
|
(37,683
|
)
|
|
(4,586
|
)
|
|
92,639
|
|
|
36,311
|
|
Income
tax benefit (expense)
|
|
1,099
|
|
|
2,912
|
|
|
2,175
|
|
|
(2,851
|
)
|
|
3,335
|
|
Minority
interest, net of income taxes
|
|
1,578
|
|
|
4,545
|
|
|
2,088
|
|
|
(2,112
|
)
|
|
6,099
|
|
Net
(loss) income
|
$
|
(11,382
|
)
|
$
|
(30,226
|
)
|
$
|
(323
|
)
|
$
|
87,676
|
|
$
|
45,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(19) Subsequent
Events
In June
2009, we issued five-year notes totaling $200 million under the February 2009
Farmer Mac agreements at a blended spread over three-month LIBOR of 124.1 basis
points. As a result, we were required to purchase a total of $8 million of
Farmer Mac Series C cumulative, non-voting preferred stock with an initial
dividend rate of five percent.
In June
2009, we paid off a $200 million term loan borrowed under a credit agreement
with a syndicate of banks in January 2009. The term loan was due to
mature on January 21, 2010, but was paid off early without any termination
fee.
In July
2009, we amended the December 2008 and February 2009 Farmer Mac note purchase
agreements to make them revolving credit facilities that allow us to borrow,
repay and re-borrow funds at any time or from time to time as market conditions
permit; provided that the principal amount at any time outstanding under each of
the note purchase agreements is not more than $500 million.
In August
2009, we issued notes totaling $425 million under the May 2009 Farmer Mac
agreements. The notes included a $50 million three-year note at a
blended spread over three-month LIBOR of 91 basis points, a $200 million
three-year note at a fixed rate of 2.91 percent and a $175 million five-year
note at a fixed rate of 4.06 percent. As a result, we were required to purchase
a total of $17 million of Farmer Mac Series C cumulative, non-voting preferred
stock with an initial dividend rate of five percent.