UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
Quarterly Period Ended November 30, 2009
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
Transition Period
From To
Commission
File Number 1-7102
NATIONAL
RURAL UTILITIES COOPERATIVE
FINANCE
CORPORATION
(Exact
name of registrant as specified in its charter)
DISTRICT
OF COLUMBIA
(State or
other jurisdiction of incorporation or organization)
52-0891669
(I.R.S.
Employer Identification Number)
2201
COOPERATIVE WAY, HERNDON, VA 20171
(Address
of principal executive offices)
Registrant's
telephone number, including area code, is 703-709-6700.
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant 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 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.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer x Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x.
The
Registrant is a tax-exempt cooperative and consequently is unable to issue any
equity capital stock.
PART
1.
|
FINANCIAL
INFORMATION
|
Item
1.
|
Financial
Statements.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
(in
thousands)
A
S S E T S
|
|
November
30,
2009
|
|
|
|
May
31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
355,900}
|
|
|
$
|
504,999
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
17,598}
|
|
|
|
8,207
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in equity securities
|
|
73,076}
|
|
|
|
47,000
|
|
|
|
|
|
|
|
|
|
|
|
Loans
to members
|
|
19,732,902}
|
|
|
|
20,192,309
|
|
|
Less:
Allowance for loan losses
|
|
(608,458)
|
|
|
|
(622,960
|
)
|
|
Loans
to members, net
|
|
19,124,444}
|
|
|
|
19,569,349
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
225,800}
|
|
|
|
260,428
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
48,843}
|
|
|
|
43,162
|
|
|
|
|
|
|
|
|
|
|
|
Debt
service reserve funds
|
|
45,662}
|
|
|
|
46,662
|
|
|
|
|
|
|
|
|
|
|
|
Bond
issuance costs, net
|
|
50,856}
|
|
|
|
50,414
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
assets, net
|
|
47,579}
|
|
|
|
48,721
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets
|
|
429,401}
|
|
|
|
381,356
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
18,767}
|
|
|
|
22,407
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,437,926}
|
|
|
$
|
20,982,705
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
BALANCE SHEETS
(UNAUDITED)
(in
thousands)
L I A B I
L I T I E S A N D E Q U I T Y
|
|
November
30,
2009
|
|
|
|
May
31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
$
|
4,187,659}
|
|
|
$
|
4,867,864
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
interest payable
|
|
226,539}
|
|
|
|
249,601
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
12,784,373}
|
|
|
|
12,720,055
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income
|
|
19,445}
|
|
|
|
18,962
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee
liability
|
|
25,113}
|
|
|
|
29,672
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
32,895}
|
|
|
|
32,955
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
544,655}
|
|
|
|
493,002
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
deferrable debt
|
|
311,440}
|
|
|
|
311,440
|
|
|
|
|
|
|
|
|
|
|
|
Members'
subordinated certificates:
|
|
|
|
|
|
|
|
|
Membership
subordinated certificates
|
|
643,148}
|
|
|
|
642,960
|
|
|
Loan
and guarantee subordinated certificates
|
|
786,633}
|
|
|
|
818,999
|
|
|
Member
capital securities
|
|
360,425}
|
|
|
|
278,095
|
|
|
Total
members' subordinated certificates
|
|
1,790,206}
|
|
|
|
1,740,054
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
equity:
|
|
|
|
|
|
|
|
|
Retained
equity
|
|
499,066}
|
|
|
|
500,823
|
|
|
Accumulated
other comprehensive income
|
|
7,789}
|
|
|
|
8,115
|
|
|
Total
CFC equity
|
|
506,855}
|
|
|
|
508,938
|
|
|
Noncontrolling
interest
|
|
8,746}
|
|
|
|
10,162
|
|
|
Total
equity
|
|
515,601}
|
|
|
|
519,100
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,437,926}
|
|
|
$
|
20,982,705
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
(in
thousands)
|
Three
months ended
|
|
Six
months ended
|
|
November
30,
|
|
November
30,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
264,919}
|
|
|
$
|
266,746
|
|
|
$
|
534,376}
|
|
|
$
|
529,863
|
|
Interest
expense
|
|
(226,977)
|
|
|
|
(234,187
|
)
|
|
|
(469,606)
|
|
|
|
(454,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
37,942}
|
|
|
|
32,559
|
|
|
|
64,770}
|
|
|
|
75,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision
for) recovery of loan losses
|
|
(1,577)
|
|
|
|
(126,311
|
)
|
|
|
14,594}
|
|
|
|
(136,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (loss) after (provision for) recovery of loan
losses
|
|
36,365}
|
|
|
|
(93,752
|
)
|
|
|
79,364}
|
|
|
|
(61,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
4,106}
|
|
|
|
2,737
|
|
|
|
7,840}
|
|
|
|
6,319
|
|
Derivative
cash settlements
|
|
(10,706)
|
|
|
|
12,503
|
|
|
|
(14,200)
|
|
|
|
12,934
|
|
Results
of operations of foreclosed assets
|
|
21}
|
|
|
|
1,211
|
|
|
|
608}
|
|
|
|
2,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
(6,579)
|
|
|
|
16,451
|
|
|
|
(5,752)
|
|
|
|
21,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(9,766)
|
|
|
|
(9,912
|
)
|
|
|
(19,684)
|
|
|
|
(19,763
|
)
|
Other
general and administrative expenses
|
|
(6,650)
|
|
|
|
(5,182
|
)
|
|
|
(13,758)
|
|
|
|
(9,924
|
)
|
Recovery
of (provision for) guarantee liability
|
|
821}
|
|
|
|
(5,686
|
)
|
|
|
3,216}
|
|
|
|
(4,981
|
)
|
Derivative
forward value
|
|
7,562}
|
|
|
|
(139,383
|
)
|
|
|
(3,272)
|
|
|
|
(150,411
|
)
|
Market
adjustment on foreclosed assets
|
|
-}
|
|
|
|
(153
|
)
|
|
|
(1,750)
|
|
|
|
(153
|
)
|
Other
|
|
(175)
|
|
|
|
(138
|
)
|
|
|
(321)
|
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
(8,208)
|
|
|
|
(160,454
|
)
|
|
|
(35,569)
|
|
|
|
(185,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes
|
|
21,578}
|
|
|
|
(237,755
|
)
|
|
|
38,043}
|
|
|
|
(225,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
841}
|
|
|
|
6,400
|
|
|
|
809}
|
|
|
|
7,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
22,419}
|
|
|
|
(231,355
|
)
|
|
|
38,852}
|
|
|
|
(218,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Net loss attributable to the noncontrolling interest
|
1,568}
|
|
|
|
1,738
|
|
|
|
1,377}
|
|
|
|
2,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to CFC
|
$
|
23,987}
|
|
|
$
|
(229,617
|
)
|
|
$
|
40,229}
|
|
|
$
|
(215,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
(in
thousands)
For the
Six Months Ended November 30, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National
|
|
Accumulated
|
|
National
|
|
|
|
|
|
|
|
Membership
|
|
|
|
|
|
|
Rural
|
|
Other
|
|
Rural
|
|
|
|
Members'
|
|
Patronage
|
|
Fees
and
|
|
|
|
|
Noncontrolling
|
|
Total
|
|
Comprehensive
|
|
Retained
|
|
Unallocated
|
|
Capital
|
|
Capital
|
|
Education
|
|
|
Total
|
|
Interest
|
|
Equity
|
|
Income
(Loss)
|
|
Equity
|
|
Net
Income
|
|
Reserve
|
|
Allocated
|
|
Fund
|
Six
months ended November 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of May 31, 2009
|
$
|
519,100}
|
|
$
|
10,162}
|
|
$
|
508,938}
|
|
$
|
8,115}
|
|
$
|
500,823}
|
$
|
(109,691)
|
|
$
|
187,098}
|
$
|
420,834}
|
|
$
|
2,582}
|
|
Patronage
capital retirement
|
|
(41,400)
|
|
|
-}
|
|
|
(41,400)
|
|
|
-}
|
|
|
(41,400)
|
|
-}
|
|
|
-}
|
|
(41,400)
|
|
|
-}
|
|
Net
income (loss)
|
|
38,852}
|
|
|
(1,377)
|
|
|
40,229}
|
|
|
-}
|
|
|
40,229}
|
|
40,229}
|
|
|
-}
|
|
-}
|
|
|
-}
|
|
Other
comprehensive loss
|
|
(340)
|
|
|
(14)
|
|
|
(326)
|
|
|
(326)
|
|
|
-}
|
|
-}
|
|
|
-}
|
|
-}
|
|
|
-}
|
|
Other
|
|
(611)
|
|
|
(25)
|
|
|
(586)
|
|
|
-}
|
|
|
(586)
|
|
-}
|
|
|
-}
|
|
-}
|
|
|
(586)
|
|
Balance
as of November 30, 2009
|
$
|
515,601}
|
|
$
|
8,746}
|
|
$
|
506,855}
|
|
$
|
7,789}
|
|
$
|
499,066}
|
$
|
(69,462)
|
|
$
|
187,098}
|
$
|
379,434}
|
|
$
|
1,996}
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended November 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of May 31, 2008
|
$
|
680,212}
|
|
$
|
14,247}
|
|
$
|
665,965}
|
|
$
|
8,827}
|
|
$
|
657,138}
|
$
|
44,003}
|
|
$
|
187,409}
|
$
|
423,249}
|
|
$
|
2,477}
|
|
Patronage
capital retirement
|
|
(85,454)
|
|
|
-
|
|
|
(85,454)
|
|
|
-
|
|
|
(85,454)
|
|
-
|
|
|
(217)
|
|
(85,237)
|
|
|
-
|
|
Net
loss
|
|
(218,125)
|
|
|
(2,979)
|
|
|
(215,146)
|
|
|
-
|
|
|
(215,146)
|
|
(215,146)
|
|
|
-
|
|
-
|
|
|
-
|
|
Other
comprehensive loss
|
|
(411)
|
|
|
(12)
|
|
|
(399)
|
|
|
(399)
|
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
|
-
|
|
Other
|
|
(609)
|
|
|
4}
|
|
|
(613)
|
|
|
-
|
|
|
(613)
|
|
-
|
|
|
(93)
|
|
93}
|
|
|
(613)
|
|
Balance
as of November 30, 2008
|
$
|
375,613}
|
|
$
|
11,260}
|
|
$
|
364,353}
|
|
$
|
8,428}
|
|
$
|
355,925}
|
$
|
(171,143)
|
|
$
|
187,099}
|
$
|
338,105}
|
|
$
|
1,864}
|
|
See
accompanying notes.
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
For the
Six Months Ended November 30, 2009 and 2008
|
|
2009
|
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
38,852}
|
|
|
$
|
(218,125
|
)
|
Add
(deduct):
|
|
|
|
|
|
|
|
Amortization
of deferred income
|
|
(3,087)
|
|
|
|
(3,273
|
)
|
Amortization
of bond issuance costs and deferred charges
|
|
10,842}
|
|
|
|
5,102
|
|
Depreciation
|
|
1,069}
|
|
|
|
1,176
|
|
Provision
for (recovery of) loan losses
|
|
(14,594)
|
|
|
|
136,992
|
|
Provision
for (recovery of) guarantee liability
|
|
(3,216)
|
|
|
|
4,981
|
|
Results
of operations of foreclosed assets
|
|
(608)
|
|
|
|
(2,457
|
)
|
Market
adjustment on foreclosed assets
|
|
1,750}
|
|
|
|
153
|
|
Derivative
forward value
|
|
3,272}
|
|
|
|
150,411
|
|
Purchases
of trading securities
|
|
-}
|
|
|
|
(71,405
|
)
|
Sales
of trading securities
|
|
-}
|
|
|
|
59,870
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accrued
interest and other receivables
|
|
25,375}
|
|
|
|
(49,542
|
)
|
Accrued
interest payable
|
|
(23,062)
|
|
|
|
30,856
|
|
Other
|
|
(3,382)
|
|
|
|
6,763
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
33,211}
|
|
|
|
51,502
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Advances
made on loans
|
|
(3,781,896)
|
|
|
|
(4,943,573
|
)
|
Principal
collected on loans
|
|
4,212,578}
|
|
|
|
4,402,006
|
|
Net
investment in fixed assets
|
|
(6,750)
|
|
|
|
760
|
|
Net
proceeds from sale of loans
|
|
28,626}
|
|
|
|
-
|
|
Investments
in equity securities
|
|
(26,089)
|
|
|
|
-
|
|
Change
in restricted cash
|
|
(9,391)
|
|
|
|
5,374
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
417,078}
|
|
|
|
(535,433
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from (repayments) issuances of short-term debt, net
|
|
(237,818)
|
|
|
|
253,271
|
|
Proceeds
from issuance of long-term debt, net
|
|
1,502,215}
|
|
|
|
3,237,972
|
|
Payments
for retirement of long-term debt
|
|
(1,885,195)
|
|
|
|
(2,695,698
|
)
|
Proceeds
from issuance of members' subordinated certificates
|
|
103,262}
|
|
|
|
71,675
|
|
Payments
for retirement of members' subordinated certificates
|
|
(38,524)
|
|
|
|
(9,345
|
)
|
Payments
for retirement of patronage capital
|
|
(43,328)
|
|
|
|
(78,479
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
(599,388)
|
|
|
|
779,396
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
(149,099)
|
|
|
|
295,465
|
|
BEGINNING
CASH AND CASH EQUIVALENTS
|
|
504,999}
|
|
|
|
177,809
|
|
ENDING
CASH AND CASH EQUIVALENTS
|
$
|
355,900}
|
|
|
$
|
473,274
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in
thousands)
For the
Six Months Ended November 30, 2009 and 2008
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
$
|
481,827
|
|
|
$
|
418,575
|
|
|
Cash
paid for income taxes
|
|
206
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing and investing activities:
|
|
|
|
|
|
|
|
|
Subordinated
certificates applied against loan balances
|
$
|
-
|
|
|
$
|
675
|
|
|
Patronage
capital applied against loan balances
|
|
-
|
|
|
|
15
|
|
|
Membership
fee applied against loan balances
|
|
1
|
|
|
|
-
|
|
|
Net
decrease in debt service reserve funds/debt service reserve
certificates
|
|
(4,673
|
)
|
|
|
(4,658
|
)
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
NATIONAL
RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General
Information and Accounting Policies
(a) General
Information
National Rural Utilities Cooperative Finance Corporation
(referred to as "CFC," "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 CFC is to provide its members with a
source of financing to supplement the loan programs of the Rural Utilities
Service ("RUS") of the United States Department of Agriculture. CFC
makes loans to its rural utility system members ("utility members") to enable
them to acquire, construct and operate electric distribution, generation,
transmission and related facilities. CFC also provides its members
with credit enhancements in the form of letters of credit and guarantees of debt
obligations. CFC is exempt from payment of federal income taxes under
the provisions of Section 501(c)(4) of the Internal Revenue Code. As a member owned cooperative, our objective is not to
maximize net income, but to offer our members financial products and services at
the lowest cost that is 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. As a member owned cooperative, RTFC’s objective is not to maximize its net income, but to
offer its members financial products and services at the lowest cost that is
consistent with sound financial management. RTFC's results of
operations and financial condition are consolidated with CFC in the accompanying
financial statements. RTFC is headquartered with CFC in Herndon,
Virginia. RTFC is a taxable cooperative that pays income tax based on
its net income, excluding net income allocated to its members, as allowed by law
under Subchapter T of the Internal Revenue Code.
National Cooperative Services Corporation ("NCSC") was
incorporated in 1981 in the District of Columbia as a private 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 CFC. NCSC is a
member-owned finance cooperative, therefore its objective is not to maximize its
net income, but to offer its members financial products and services at the
lowest cost that is consistent with sound financial
management. NCSC's membership consists of CFC and
distribution systems that are members of
CFC or are eligible for such membership. NCSC's results of operations
and financial condition are consolidated with those of CFC in the accompanying
financial statements. NCSC is headquartered with CFC in Herndon,
Virginia. NCSC is a taxable corporation.
Our
consolidated membership totaling 1,518 members at November 30, 2009 is made up
of:
·
|
831
distribution systems and 68 generation and transmission ("power supply")
systems, totaling 899 utility members, the majority of which are
consumer-owned electric
cooperatives;
|
·
|
495
telecommunications members;
|
·
|
65
service members; and
|
Our
members are located in 49 states, the District of Columbia and two U.S.
territories. Memberships between CFC, RTFC and NCSC have been
eliminated in consolidation. All references to members within this
document include members and associates.
In the
opinion of management, the accompanying consolidated financial statements
contain all adjustments (which consist only of normal recurring accruals)
necessary for a fair statement of our results for the interim periods
presented.
These
interim unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the fiscal year ended May 31,
2009.
(b) Principles
of Consolidation
The
accompanying financial statements include the consolidated accounts of CFC, RTFC
and NCSC and certain entities created and controlled by CFC 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.
CFC 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 CFC a fee to reimburse
RTFC for its loan losses. All loans that require RTFC board approval
also require approval by CFC for funding under RTFC’s credit facilities with
CFC. CFC is not a member of RTFC and does not elect directors to the RTFC
board. RTFC has a non-voting associate relationship with
CFC. RTFC members elect directors to the RTFC board based on one vote
for each member.
CFC is
the primary source of funding to and manages the lending and financial affairs
of NCSC through a management agreement which is automatically renewable on an
annual basis unless terminated by either party. NCSC funds its
lending programs either through loans from CFC or commercial paper and long-term
notes issued by NCSC and guaranteed by CFC. In connection with these
guarantees, NCSC must pay a guarantee fee and purchase from CFC interest-bearing
subordinated term certificates in proportion to the related
guarantee. Under a guarantee agreement, NCSC pays CFC a fee to
reimburse NCSC for its loan losses, excluding losses in the consumer loan
program. All loans that require NCSC board approval also require CFC
approval. CFC controls the nomination process for one out of 11 NCSC
directors. NCSC members elect directors to the NCSC board based on
one vote for each member. NCSC is a service organization member of
CFC.
RTFC and
NCSC creditors have no recourse against CFC in the event of a default by RTFC
and NCSC, unless there is a guarantee agreement under which CFC has guaranteed
NCSC or RTFC debt obligations to a third party. At November 30, 2009,
CFC had guaranteed $329 million of NCSC debt, derivative instruments and
guarantees with third parties. The maturities for NCSC obligations
guaranteed by CFC run through 2031. At November 30, 2009, CFC's
maximum potential exposure totaled $345 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 10, Guarantees at November 30,
2009 as the debt and derivatives are reported on the consolidated balance
sheet. At November 30, 2009, CFC had $0.6 million of guarantees of
RTFC debt to third party creditors. All CFC loans to RTFC and NCSC
are secured by all assets and revenues of RTFC and NCSC. At November
30, 2009, RTFC had total assets of $1,896 million including loans outstanding to
members of $1,718 million and NCSC had total assets of $405 million including
loans outstanding of $361 million. At November 30, 2009, CFC had
committed to lend RTFC up to $4 billion of which $1,706 million was
outstanding. At November 30, 2009, CFC had committed to provide up to
$1.5 billion of credit to NCSC of which $459 million was outstanding,
representing $130 million of outstanding loans and $329 million of credit
enhancements.
CFC has
established limited liability corporations and partnerships to hold foreclosed
assets and facilitate loan securitization transactions. CFC
owns and controls all of these entities and therefore consolidates their
financial results. CFC presents the companies formed to hold
foreclosed assets in one line on the consolidated balance sheets and the
consolidated statements of operations. A full consolidation is
presented for the entity formed for loan securitization
transactions.
Unless
stated otherwise, references to “we,” “our,” or “us” represent the consolidation
of CFC, RTFC, NCSC and certain entities created and controlled by CFC to hold
foreclosed assets and to accommodate loan securitization
transactions.
Based on
the accounting guidance governing consolidations, affiliate equity controlled by
RTFC and NCSC is classified as noncontrolling interest on the consolidated
balance sheet and the subsidiary earnings controlled by RTFC and NCSC is net
income attributable to the noncontrolling interest on the consolidated statement
of operations.
(c) 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.
(d) Subsequent
Events
We
evaluated all subsequent events that occurred after the balance sheet date and
through the date our unaudited consolidated financial statements were issued on
January 13, 2010.
(e) Reclassifications
Reclassifications
of prior period amounts have been made to conform to the current reporting
format and the presentation in our Form 10-K for the year ended May 31,
2009. Fees and other income totaling $2 million and $6 million for
the three and six months ended November 30, 2008, respectively, 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 November 30, 2009 presentation. Other expense totaling $0.2
million for the six months ended November 30, 2008 has been reclassified from
interest expense to the other expense line item in non-interest expense on the
consolidated statements of operations to conform with the November 30, 2009
presentation.
(f) Interest
Income
The
following table presents the components of interest income:
|
|
For
the three months ended
November
30,
|
|
|
|
For
the six months ended
November
30,
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
Interest
on long-term fixed rate loans (1)
|
$
|
225,550}
|
|
|
$
|
224,261
|
|
|
$
|
449,076}
|
|
|
$
|
448,663
|
|
Interest
on long-term variable rate loans (1)
|
|
21,686}
|
|
|
|
18,469
|
|
|
|
48,251}
|
|
|
|
33,649
|
|
Interest
on short-term loans (1)
|
|
14,641}
|
|
|
|
20,942
|
|
|
|
30,676}
|
|
|
|
40,446
|
|
Interest
on investments (2)
|
|
1,329}
|
|
|
|
1,444
|
|
|
|
2,986}
|
|
|
|
3,625
|
|
Fee
income
|
|
1,713}
|
|
|
|
1,630
|
|
|
|
3,387}
|
|
|
|
3,480
|
|
Total
interest income
|
|
$
|
264,919}
|
|
|
$
|
266,746
|
|
|
$
|
534,376}
|
|
|
$
|
529,863
|
|
(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 $14 million and $16 million at November 30, 2009 and
May 31, 2009, respectively.
(g) Interest
Expense
The
following table presents the components of interest expense:
|
|
For
the three months ended
November
30,
|
|
|
|
For
the six months ended
November
30,
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
Interest
expense (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper and bank bid notes
|
$
|
1,964}
|
|
|
$
|
23,638
|
|
|
$
|
5,186}
|
|
|
$
|
40,076
|
|
Medium-term
notes
|
|
65,902}
|
|
|
|
81,055
|
|
|
|
150,497}
|
|
|
|
161,513
|
|
Collateral
trust bonds
|
|
81,585}
|
|
|
|
68,035
|
|
|
|
160,178}
|
|
|
|
130,955
|
|
Subordinated
deferrable debt
|
|
4,915}
|
|
|
|
4,915
|
|
|
|
9,831}
|
|
|
|
9,831
|
|
Subordinated
certificates
|
|
19,787}
|
|
|
|
12,831
|
|
|
|
38,807}
|
|
|
|
25,248
|
|
Long-term
private debt
|
|
47,568}
|
|
|
|
38,916
|
|
|
|
93,554}
|
|
|
|
78,355
|
|
Debt
issuance costs (2)
|
|
2,625}
|
|
|
|
2,391
|
|
|
|
5,605}
|
|
|
|
4,526
|
|
Fee
expense (3)
|
|
2,631}
|
|
|
|
2,406
|
|
|
|
5,948}
|
|
|
|
3,832
|
|
Total
interest expense
|
|
$
|
226,977}
|
|
|
$
|
234,187
|
|
|
$
|
469,606}
|
|
|
$
|
454,336
|
|
(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 our revolving credit agreements. Fees are
recognized as incurred or amortized on a straight-line basis over the life of
the respective agreement.
We do not
include indirect costs, if any, related to funding activities in interest
expense.
(h) Comprehensive
Income
Comprehensive
income includes our net income, as well as other comprehensive income related to
derivatives. Comprehensive income is calculated as
follows:
|
|
For
the three months ended
November
30,
|
|
|
|
For
the six months ended
November
30,
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
Net
income (loss)
|
$
|
22,419
|
|
|
$
|
(231,355
|
)
|
|
$
|
38,852}
|
|
|
$
|
(218,125
|
)
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities
|
|
(12)
|
|
|
|
-
|
|
|
|
(12)
|
|
|
|
-
|
|
Less:
Realized gain on derivatives
|
|
(166)
|
|
|
|
(212
|
)
|
|
|
(328)
|
|
|
|
(411
|
)
|
Comprehensive
income (loss)
|
|
22,241
|
|
|
|
(231,567
|
)
|
|
|
38,512}
|
|
|
|
(218,536
|
)
|
Less:
Comprehensive loss attributable to the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling
interest
|
|
1,576
|
|
|
|
1,745
|
|
|
|
1,391}
|
|
|
|
2,991
|
|
Comprehensive
income (loss) attributable to CFC
|
$
|
23,817
|
|
|
$
|
(229,822
|
)
|
|
$
|
39,903}
|
|
|
$
|
(215,545
|
)
|
Due to
our adoption of new accounting guidance related to noncontrolling interest on
June 1, 2009, our consolidated comprehensive income for the three and six months
ended November 30, 2008 was adjusted to include comprehensive income
attributable to our noncontrolling interest.
(2) Investments
in Equity Securities
Our
investments in equity securities at November 30, 2009 and May 31, 2009 includes
Farmer Mac Series B-1 preferred stock and Farmer Mac Series C preferred stock
totaling $73 million. The preferred stock is valued at
cost. At November 30, 2009, our investments in equity securities also
include investments in Farmer Mac Series A common stock totaling less than $1
million, which is accounted for as available-for-sale securities and recorded in
the consolidated balance sheets at fair value.
(3) 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. As a member-owned
cooperative, our objective is to set interest rates at the lowest level we
consider to be consistent with sound financial management.
Loans
outstanding to members and unadvanced commitments by loan type and by segment
are summarized as follows:
|
|
November
30, 2009
|
|
|
|
May
31, 2009
|
|
|
(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)
|
$
|
15,185,508}
|
|
|
$
|
-}
|
|
|
$
|
14,602,365
|
|
|
$
|
-
|
|
|
Long-term
variable-rate loans (4)
|
|
2,574,801}
|
|
|
|
5,594,800}
|
|
|
|
3,243,716
|
|
|
|
5,609,977
|
|
|
Loans
guaranteed by RUS
|
|
239,482}
|
|
|
|
-}
|
|
|
|
243,997
|
|
|
|
-
|
|
|
Short-term
loans
|
|
1,729,503}
|
|
|
|
8,319,095}
|
|
|
|
2,098,129
|
|
|
|
7,941,146
|
|
|
Total
loans outstanding
|
|
19,729,294}
|
|
|
|
13,913,895}
|
|
|
|
20,188,207
|
|
|
|
13,551,123
|
|
|
Deferred
origination fees
|
|
3,608}
|
|
|
|
-}
|
|
|
|
4,102
|
|
|
|
-
|
|
|
Less:
Allowance for loan losses
|
|
(608,458)
|
|
|
|
-}
|
|
|
|
(622,960
|
)
|
|
|
-
|
|
|
Net
loans outstanding
|
$
|
19,124,444}
|
|
|
$
|
13,913,895}
|
|
|
$
|
19,569,349
|
|
|
$
|
13,551,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
13,536,574}
|
|
|
$
|
9,467,148}
|
|
|
$
|
13,730,511
|
|
|
$
|
9,472,849
|
|
|
Power
supply
|
|
4,024,587}
|
|
|
|
3,560,065}
|
|
|
|
4,268,244
|
|
|
|
3,178,471
|
|
|
Statewide
and associate
|
|
89,072}
|
|
|
|
120,081}
|
|
|
|
92,578
|
|
|
|
152,701
|
|
|
CFC
total
|
|
17,650,233}
|
|
|
|
13,147,294}
|
|
|
|
18,091,333
|
|
|
|
12,804,021
|
|
|
RTFC
|
|
1,717,962}
|
|
|
|
446,428}
|
|
|
|
1,680,154
|
|
|
|
457,022
|
|
|
NCSC
|
|
361,099}
|
|
|
|
320,173}
|
|
|
|
416,720
|
|
|
|
290,080
|
|
|
Total
loans outstanding
|
|
$
|
19,729,294}
|
|
|
$
|
13,913,895}
|
|
|
$
|
20,188,207
|
|
|
$
|
13,551,123
|
|
|
(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)
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:
|
|
November
30, 2009
|
|
|
|
May
31, 2009
|
|
(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}
|
|
|
$
|
-}
|
|
|
$
|
8,960
|
|
|
$
|
-
|
|
Long-term
variable-rate loans
|
|
457,504}
|
|
|
|
-}
|
|
|
|
457,504
|
|
|
|
-
|
|
Short-term
loans
|
|
57,385}
|
|
|
|
-}
|
|
|
|
57,294
|
|
|
|
-
|
|
Total
non-performing loans
|
$
|
523,849}
|
|
|
$
|
-}
|
|
|
$
|
523,758
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term fixed-rate loans
(3)
|
$
|
41,726}
|
|
|
$
|
-}
|
|
|
$
|
41,907
|
|
|
$
|
-
|
|
Long-term
variable-rate loans (3)
|
|
476,612}
|
|
|
|
186,673}
|
|
|
|
490,827
|
|
|
|
186,673
|
|
Short-term
loans
|
|
-}
|
|
|
|
12,500}
|
|
|
|
-
|
|
|
|
12,500
|
|
CFC
total restructured loans
|
518,338}
|
|
|
|
199,173}
|
|
|
|
532,734
|
|
|
|
199,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RTFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
|
4,488}
|
|
|
|
-}
|
|
|
|
4,853
|
|
|
|
-
|
|
Total
restructured loans
|
|
$
|
522,826}
|
|
|
$
|
199,173}
|
|
|
$
|
537,587
|
|
|
$
|
199,173
|
|
(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) 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 six months ended and as of November 30,
|
|
|
For
the year ended and as of
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
|
|
2008
|
|
|
May
31, 2009
|
|
Balance
at beginning of period
|
$
|
622,960}
|
|
|
$
|
514,906
|
|
$
|
514,906
|
|
(Recovery
of) provision for loan losses
|
|
(14,594)
|
|
|
|
136,992
|
|
|
113,699
|
|
Charge-offs
|
|
(56)
|
|
|
|
(3,118
|
)
|
|
(5,988
|
)
|
Recoveries
|
|
148}
|
|
|
|
166
|
|
|
343
|
|
Balance
at end of period
|
$
|
608,458}
|
|
|
$
|
648,946
|
|
$
|
622,960
|
|
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:
(dollar
amounts in thousands)
|
|
November
30, 2009
|
|
|
May
31, 2009
|
|
Total
by loan type:
|
|
Secured
|
|
%
|
|
|
Unsecured
|
|
%
|
|
|
Secured
|
|
%
|
|
|
Unsecured
|
|
%
|
|
|
Long-term
fixed-rate loans
|
$
|
14,568,846}
|
|
96
|
%
|
$
|
616,662}
|
|
4
|
%
|
$
|
14,044,469
|
|
96
|
%
|
$
|
557,896
|
|
4
|
%
|
|
Long-term
variable-rate loans
|
|
2,301,177}
|
|
89
|
|
|
273,624}
|
|
11
|
|
|
2,835,451
|
|
87
|
|
|
408,265
|
|
13
|
|
|
Loans
guaranteed by RUS
|
|
239,482}
|
|
100
|
|
|
-}
|
|
-
|
|
|
243,997
|
|
100
|
|
|
-
|
|
-
|
|
|
Short-term
loans
|
|
234,430}
|
|
14
|
|
|
1,495,073}
|
|
86
|
|
|
233,179
|
|
11
|
|
|
1,864,950
|
|
89
|
|
|
Total
loans
|
$
|
17,343,935}
|
|
88
|
|
$
|
2,385,359}
|
|
12
|
|
$
|
17,357,096
|
|
86
|
|
$
|
2,831,111
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
15,572,397}
|
|
88
|
%
|
$
|
2,077,836}
|
|
12
|
%
|
$
|
15,562,761
|
|
86
|
%
|
$
|
2,528,572
|
|
14
|
%
|
|
RTFC
|
|
1,474,350}
|
|
86
|
|
|
243,612}
|
|
14
|
|
|
1,443,395
|
|
86
|
|
|
236,759
|
|
14
|
|
|
NCSC
|
|
297,188}
|
|
82
|
|
|
63,911}
|
|
18
|
|
|
350,940
|
|
84
|
|
|
65,780
|
|
16
|
|
|
Total
loans
|
$
|
17,343,935}
|
|
88
|
|
$
|
2,385,359}
|
|
12
|
|
$
|
17,357,096
|
|
86
|
|
$
|
2,831,111
|
|
14
|
|
Pledging
of Loans and Loans on Deposit
The
following table summarizes our collateral pledged to secure our collateral trust
bonds, Clean Renewable Energy Bonds (“CREBs”) and notes payable to the Federal
Agricultural Mortgage Corporation ("Farmer Mac") (see Note 5, Long-Term Debt) and the
amount of the corresponding debt outstanding:
(dollar
amounts in thousands)
|
November
30,
2009
|
|
|
May
31,
2009
|
Collateral
trust bonds:
|
|
|
|
|
|
2007
indenture
|
|
|
|
|
|
Distribution
system mortgage notes
|
$
|
4,000,398}
|
|
$
|
4,176,760
|
Collateral
trust bonds outstanding
|
|
3,500,000}
|
|
|
3,000,000
|
|
|
|
|
|
|
1994
indenture
|
|
|
|
|
|
Distribution
system mortgage notes
|
$
|
2,235,215}
|
|
$
|
2,308,713
|
RUS
guaranteed loans qualifying as permitted investments
|
|
209,262}
|
|
|
211,337
|
Total
pledged collateral
|
$
|
2,444,477}
|
|
$
|
2,520,050
|
Collateral
trust bonds outstanding
|
|
2,185,000}
|
|
|
2,190,000
|
|
|
|
|
|
|
1972
indenture
|
|
|
|
|
|
Cash
|
$
|
2,032}
|
|
$
|
2,032
|
Collateral
trust bonds outstanding
|
|
1,736}
|
|
|
1,736
|
|
|
|
|
|
|
Farmer
Mac:
|
|
|
|
|
|
Utility
system notes
|
$
|
2,228,800}
|
|
$
|
1,488,929
|
Farmer
Mac notes payable
|
|
1,825,000}
|
|
|
1,200,000
|
|
|
|
|
|
|
CREBs:
|
|
|
|
|
|
Utility
system notes
|
$
|
35,651}
|
|
$
|
-
|
CREB’s
notes payable
|
|
28,908}
|
|
|
-
|
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 5, Long-Term Debt) and the
amount of the corresponding debt outstanding:
(dollar
amounts in thousands)
|
|
November
30,
2009
|
|
May
31,
2009
|
Utility
system mortgage notes on deposit
|
$
|
3,699,532}
|
$
|
3,770,983
|
REDLG
notes payable
|
|
3,000,000}
|
|
3,000,000
|
The $3
billion of notes payable to the FFB at November 30, 2009 and May 31, 2009
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 $3,700 million at
November
30, 2009, would be pledged as collateral rather than held on
deposit. At November 30, 2009 and May 31, 2009, our senior secured
debt ratings were above the rating trigger threshold.
A total
of $2 billion of notes payable to the FFB at November 30, 2009 and May 31, 2009
have a second trigger requiring that a director on the CFC 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 $2,476
million at November 30, 2009, would be pledged as collateral rather than held on
deposit. The financial expert position on CFC’s board of directors
has been filled since March 2007.
(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 November 30, 2009 and May 31, 2009.
The
activity for foreclosed assets is summarized below:
|
|
|
Six
months ended November 30,
|
|
|
|
Year
ended
|
|
(dollar
amounts in thousands)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
May
31, 2009
|
|
Beginning
balance
|
|
$
|
48,721}
|
|
|
$
|
58,961
|
|
|
$
|
58,961
|
|
Results
of operations
|
|
|
608}
|
|
|
|
2,457
|
|
|
|
3,774
|
|
Net
cash provided by foreclosed assets
|
|
|
-}
|
|
|
|
-
|
|
|
|
(6,000
|
)
|
Market
adjustment
|
|
|
(1,750)
|
|
|
|
(153
|
)
|
|
|
(8,014
|
)
|
Ending
balance
|
|
$
|
47,579}
|
|
|
$
|
61,265
|
|
|
$
|
48,721
|
|
The
balance of foreclosed assets includes land development loans and limited
partnership interests in certain real estate developments for all periods
presented. In the first quarter of fiscal year 2010, we had a $2
million reduction in the fair value of the collateral supporting these land
development loans primarily due to lower gas prices which decreased the fair
value of the underlying collateral. There was no further reduction in
the second quarter of fiscal year 2010 due to a recovery in gas prices
offsetting a reduction in commercial property values. At November 30,
2009, both land development loans were impaired and on non-accrual
status.
(5) Short-Term
Debt and Credit Arrangements
The
following is a summary of short-term debt outstanding:
(dollar
amounts in thousands)
|
|
November
30,
2009
|
|
|
May
31,
2009
|
|
Short-term
debt:
|
|
|
|
|
|
|
Commercial
paper sold through dealers, net of discounts
|
$
|
338,492}
|
|
$
|
594,533
|
|
Commercial
paper sold directly to members, at par
|
|
1,016,673}
|
|
|
934,897
|
|
Commercial
paper sold directly to non-members, at par
|
|
57,585}
|
|
|
12,502
|
|
Total
commercial paper
|
|
1,412,750}
|
|
|
1,541,932
|
|
Daily
liquidity fund sold directly to members
|
|
537,705}
|
|
|
291,341
|
|
Term
loan
|
|
-}
|
|
|
200,000
|
|
Bank
bid notes
|
|
100,000}
|
|
|
255,000
|
|
Subtotal
short-term debt
|
|
2,050,455}
|
|
|
2,288,273
|
|
|
|
|
|
|
|
|
Long-term
debt maturing within one year:
|
|
|
|
|
|
|
Medium-term
notes sold through dealers
|
|
406,030}
|
|
|
1,674,760
|
|
Medium-term
notes sold to members
|
|
425,669}
|
|
|
502,396
|
|
Secured
collateral trust bonds
|
|
1,111,241}
|
|
|
209,985
|
|
Secured
notes payable
|
|
189,607}
|
|
|
187,800
|
|
Unsecured
notes payable
|
|
4,657}
|
|
|
4,650
|
|
Total
long-term debt maturing within one year
|
|
2,137,204}
|
|
|
2,579,591
|
|
Total
short-term debt
|
$
|
4,187,659}
|
|
$
|
4,867,864
|
|
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)
|
|
November
30,
2009
|
|
|
May
31,
2009
|
|
|
Termination
Date
|
|
|
Facility
fee per
year
(1)
|
Five-year
agreement (2)
|
$
|
1,049,000
|
|
$
|
1,125,000
|
|
|
March
16, 2012
|
|
|
6
basis points
|
Five-year
agreement (2)
|
|
967,313
|
|
|
1,025,000
|
|
|
March
22, 2011
|
|
|
6
basis points
|
364-day
agreement
|
|
1,000,000
|
|
|
1,000,000
|
|
|
March
12, 2010
|
|
|
12.5
basis points
|
Total
|
|
$
|
3,016,313
|
|
$
|
3,150,000
|
|
|
|
|
|
|
(1)
Facility fee determined by CFC’s senior unsecured credit ratings based on the
pricing schedules put in place at the initiation of the related
agreement.
(2)
Amounts as of November 30, 2009 exclude 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. These amounts were assigned to NCSC by
Lehman Brothers Bank, FSB in September 2009 and are eliminated in
consolidation.
At
November 30, 2009 and May 31, 2009, we were in compliance with all covenants and
conditions under our revolving credit agreements and there were no borrowings
outstanding under these agreements.
The
following represents our required and actual financial ratios under the
revolving credit agreements:
|
|
|
|
|
|
Actual
|
|
|
|
|
|
Requirement
|
|
November
30,
2009
|
|
May
31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
|
1.025
|
|
1.15
|
|
1.18
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
adjusted TIER at fiscal year end (1)
|
|
|
|
1.05
|
|
NA
|
|
1.10
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
ratio of senior debt to total equity
|
|
|
|
10.00
|
|
6.52
|
|
6.90
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
(6) Long-Term
Debt
The
following is a summary of long-term debt outstanding:
(dollar
amounts in thousands)
|
|
November
30, 2009
|
|
|
|
|
May
31, 2009
|
|
|
Unsecured
long-term debt:
|
|
|
|
|
|
|
|
|
|
Medium-term
notes sold through dealers
|
$
|
3,306,844}
|
|
|
|
$
|
3,469,580
|
|
|
Medium-term
notes sold to members
|
|
201,869}
|
|
|
|
|
220,613
|
|
|
Subtotal
|
|
3,508,713}
|
|
|
|
|
3,690,193
|
|
|
Unamortized
discount
|
|
(2,762)
|
|
|
|
|
(3,120
|
)
|
|
Total
unsecured medium-term notes
|
|
3,505,951}
|
|
|
|
|
3,687,073
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
notes payable
|
|
3,053,705}
|
|
|
|
|
3,053,705
|
|
|
Unamortized
discount
|
|
(1,590)
|
|
|
|
|
(1,694
|
)
|
|
Total
unsecured notes payable
|
|
3,052,115}
|
|
|
|
|
3,052,011
|
|
|
Total
unsecured long-term debt
|
|
6,558,066}
|
|
|
|
|
6,739,084
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured
long-term debt:
|
|
|
|
|
|
|
|
|
|
Collateral
trust bonds
|
|
4,575,000}
|
|
|
|
|
4,981,736
|
|
|
Unamortized
discount
|
|
(12,994)
|
|
|
|
|
(12,965
|
)
|
|
Total
secured collateral trust bonds
|
|
4,562,006}
|
|
|
|
|
4,968,771
|
|
|
Secured
notes payable
|
|
1,664,301}
|
|
|
|
|
1,012,200
|
|
|
Total
secured long-term debt
|
|
6,226,307}
|
|
|
|
|
5,980,971
|
|
|
Total
long-term debt
|
$
|
12,784,373}
|
|
|
|
$
|
12,720,055
|
|
|
Medium-term notes are our unsecured
obligations. 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 3, Loans and Commitments, for
additional information on the collateral pledged to secure our collateral trust
bonds. See Note 5, Short-Term Debt and Credit
Arrangements for the portion of long-term debt maturing within one
year.
Unsecured
Notes Payable
At
November 30, 2009 and May 31, 2009, we had unsecured notes payable totaling $3
billion 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. As part of the REDLG program, we pay RUS a fee of 30 basis
points per year on the total amount borrowed. At November 30, 2009,
the $3 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 3, 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
Details
about our note purchase agreements and outstanding notes payable with Farmer Mac
are shown below.
|
|
|
|
|
Amount
Outstanding
|
|
|
(dollar
amounts in thousands)
Note
Purchase Agreement
|
|
Amount
Available
|
|
|
November
30,
2009
|
|
|
May
31,
2009
|
|
|
December
2008 (1)
|
$
|
500,000
|
|
$
|
500,000
|
|
$
|
500,000
|
|
|
February
2009
|
|
500,000
|
|
|
500,000
|
|
|
300,000
|
|
|
March 2009
(1)
|
|
400,000
|
|
|
400,000
|
|
|
400,000
|
|
|
May
2009
|
|
1,000,000
|
|
|
425,000
|
|
|
-
|
|
|
Total
|
|
$
|
2,400,000
|
|
$
|
1,825,000
|
|
$
|
1,200,000
|
|
|
(1)
Includes $100 million and $87.8 million of secured notes payable with Farmer Mac
that were classified as short-term debt at November 30, 2009 and May 31, 2009,
respectively, under the December 2008 and March 2009 note purchase agreements,
respectively.
All of the agreements with Farmer Mac
are 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 the total available under each
agreement. All of the agreements 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 3, 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
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. See Note 2, Investments in
Equity Securities, for additional information about the
Farmer Mac preferred stock that we purchased.
(7) Subordinated
Deferrable Debt
The
following table is a summary of subordinated deferrable debt
outstanding:
|
|
|
|
|
|
(dollar
amounts in thousands)
|
|
|
November
30,
2009
|
|
|
May
31,
2009
|
|
NRN 6.75% due 2043
(1)
|
|
$
|
125,000
|
|
$
|
125,000
|
|
NRC
6.10% due 2044 (2)
|
|
|
88,201
|
|
|
88,201
|
|
NRU
5.95% due 2045 (3)
|
|
|
98,239
|
|
|
98,239
|
|
Total
|
|
|
$
|
311,440
|
|
$
|
311,440
|
|
(1) Callable by CFC at par starting on February 15,
2008.
(2) Callable by CFC at par starting on February 1,
2009.
(3) Callable by CFC at par starting on February 15,
2010.
(8)
|
Derivative
Financial Instruments
|
We are
neither a dealer nor a trader in derivative financial instruments. We
utilize derivatives such as interest rate swaps and cross currency interest rate
swaps to mitigate interest rate risk and foreign currency exchange
risk.
Consistent
with the accounting guidance for derivative financial instruments, we record
derivative instruments on the consolidated balance sheet as either an asset or
liability measured at fair value. Changes in the fair value of
derivative instruments are recognized in the derivative forward value line item
of the consolidated statement of operations unless specific hedge accounting
criteria are met. Generally, our derivative instruments do not
qualify for hedge accounting under the accounting guidance for derivative
financial instruments. At November 30, 2009 and 2008 and May 31,
2009, we did not have any derivative instruments that were accounted for using
hedge accounting.
Interest
Rate Swaps
The
following table shows the types and notional amounts of our interest rate
swaps:
|
|
Notional
Amounts Outstanding
|
(dollar
amounts in thousands)
|
|
November
30, 2009
|
|
May
31, 2009
|
Pay
fixed-receive variable
|
$
|
5,869,599}
|
$
|
6,506,603
|
Pay
variable-receive fixed
|
|
5,551,440}
|
|
5,323,239
|
Total
interest rate swaps
|
$
|
11,421,039}
|
$
|
11,829,842
|
Income
and losses recorded for our interest rate swaps are summarized
below:
|
|
|
Three
months ended
|
|
|
|
Six
months ended
|
|
|
|
|
November
30,
|
|
|
|
November
30,
|
|
(dollar
amounts in thousands)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
Statement
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreements
that do not qualify for hedge accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements
|
|
$
|
(10,706)
|
|
|
$
|
12,503
|
|
|
$
|
(14,200)
|
|
|
$
|
12,934
|
|
Derivative
forward value
|
|
|
7,562}
|
|
|
|
(139,383
|
)
|
|
|
(3,272)
|
|
|
|
(150,411
|
)
|
Total
loss on derivative instruments
|
|
$
|
(3,144)
|
|
|
$
|
(126,880
|
)
|
|
$
|
(17,472)
|
|
|
$
|
(137,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of transition adjustment
|
|
$
|
(166)
|
|
|
$
|
(212
|
)
|
|
$
|
(328)
|
|
|
$
|
(411
|
)
|
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.
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. The transition adjustment will be amortized
into earnings over the remaining life of the related derivative
instruments. Approximately $0.7 million of the transition adjustment
is expected to be amortized to income over the next 12 months and will continue
through April 2029.
We
classify cash activity associated with interest rate swaps as an operating
activity in the consolidated statements of cash flows.
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 November 30, 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)
|
$
|
6,904,235}
|
|
$
|
(111,256)
|
|
$
|
23,527}
|
|
$
|
(87,729)}
|
|
Counterparty
may terminate if ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
fall
below Baa1/BBB+ (2)
|
|
1,319,280}
|
|
|
-}
|
|
|
8,754}
|
|
|
8,754}
|
|
Total
|
|
$
|
8,223,515}
|
|
$
|
(111,256)
|
|
$
|
32,281}
|
|
$
|
(78,975)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Stated senior unsecured credit 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 senior unsecured credit 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 November 30, 2009, we had a
total notional amount of $745 million of derivative instruments with one
counterparty that would require the pledging of collateral totaling $25 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 November 30, 2009 was $131 million.
(9) Equity
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 our board of directors, is to increase equity
retention. Under the new guidelines, we will retire 50 percent of
prior year’s allocated patronage capital and hold the remaining 50 percent for
25 years. The retirement amount and timing remains subject to annual
approval by our board of directors.
In July
2009, our 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,
our board of directors authorized the retirement of allocated net earnings
totaling $41 million, representing 50 percent of the fiscal year 2009
allocation. This amount was returned to members in cash at the end of
September 2009. Future allocations and retirements of net earnings
may be made annually as determined by our board of directors with due regard for
our financial condition. Our board of directors has the authority to
change the current practice for allocating and retiring net earnings at any
time, subject to applicable cooperative law.
Noncontrolling
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. On June 1, 2009, we implemented new accounting
guidance for noncontrolling interests in consolidated financial statements and
as a result, total equity includes the noncontrolling interest at November 30,
2009 of $9 million. In accordance with the retrospective presentation
and disclosure requirements, noncontrolling interest on the consolidated balance
sheet at May 31, 2009 was reclassified from long-term liabilities to equity
attributable to noncontrolling interests, increasing the total of consolidated
equity by $10 million. Additionally, the net loss attributable to the
noncontrolling interest totaling $2 million and $3 million for the three and six
month periods ended November 30, 2008, respectively, has been included in net
income reported on the consolidated statement of operations to conform with the
November 30, 2009 presentation. The change in presentation for
noncontrolling interests is reflected in our footnote disclosures for all
periods presented in this Form 10-Q where applicable.
At May
31, 2009, based on the consolidation accounting guidance in effect at that time,
consolidated equity was required to absorb the $6 million equity deficit of NCSC
rather than being reflected in minority interest. The loss absorbed
by consolidated equity was caused by the decline in the fair value of the NCSC
derivatives and therefore does not represent a loss that was funded by
us. Under prior accounting guidance, NCSC future earnings would have
been used to offset the equity deficit absorbed by consolidated
equity. Based on the provisions of the new guidance, the application
of the NCSC future earnings to offset the unfunded loss reported in consolidated
equity at November 30, 2009 is not permitted. As a result of this new
guidance, the $6 million unfunded loss absorbed at May 31, 2009 will be reported
as part of consolidated retained equity for as long as NCSC is in
business. Additionally, the reported noncontrolling interest will be
$6 million greater than the total equity reported on the separate RTFC and NCSC
financial statements.
Equity
includes the following components:
(dollar
amounts in thousands)
|
|
November
30,
2009
|
|
|
|
May
31,
2009
|
|
|
|
|
|
|
Membership
fees
|
$
|
991}
|
|
|
$
|
990
|
|
|
|
|
|
|
Education
fund
|
|
1,005}
|
|
|
|
1,592
|
|
|
|
|
|
|
Members'
capital reserve
|
|
187,098}
|
|
|
|
187,098
|
|
|
|
|
|
|
Allocated
net income
|
|
379,434}
|
|
|
|
420,834
|
|
|
|
|
|
|
Unallocated
net income (loss) (1)
|
|
34,956}
|
|
|
|
(6,198
|
)
|
|
|
|
|
|
Total
members' equity
|
|
603,484}
|
|
|
|
604,316
|
|
|
|
|
|
|
Prior
years cumulative derivative forward
|
|
|
|
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
(103,493)
|
|
|
|
44,056
|
|
|
|
|
|
|
Year-to-date
derivative forward value loss (2)
|
|
(925)
|
|
|
|
(147,549
|
)
|
|
|
|
|
|
Total
CFC retained equity
|
|
499,066}
|
|
|
|
500,823
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
7,789}
|
|
|
|
8,115
|
|
|
|
|
|
|
Total
CFC equity
|
|
|
506,855}
|
|
|
|
508,938
|
|
|
|
|
|
|
Noncontrolling
interest
|
|
|
8,746}
|
|
|
|
10,162
|
|
|
|
|
|
|
Total
equity
|
|
$
|
515,601}
|
|
|
$
|
519,100
|
|
|
|
|
|
|
(1)
Excludes derivative forward value.
(2)
Represents the derivative forward value loss recorded by CFC for the
year-to-date period.
(10) 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:
(dollar
amounts in thousands)
|
|
November
30,
2009
|
|
|
May
31,
2009
|
Total
by type:
|
|
|
|
|
|
Long-term
tax-exempt bonds (1)
|
$
|
609,030}
|
|
$
|
644,540
|
Indemnifications
of tax benefit transfers (2)
|
|
76,936}
|
|
|
81,574
|
Letters
of credit (3)
|
|
410,450}
|
|
|
450,659
|
Other
guarantees (4)
|
|
99,323}
|
|
|
98,682
|
Total
|
$
|
1,195,739}
|
|
$
|
1,275,455
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
CFC:
|
|
|
|
|
|
Distribution
|
$
|
207,882}
|
|
$
|
264,084
|
Power
supply
|
|
910,423}
|
|
|
945,624
|
Statewide
and associate
|
|
22,061}
|
|
|
23,625
|
CFC
total
|
|
1,140,366}
|
|
|
1,233,333
|
RTFC
|
|
637}
|
|
|
500
|
NCSC
|
|
54,736}
|
|
|
41,622
|
Total
|
|
$
|
1,195,739}
|
|
$
|
1,275,455
|
(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 November 30, 2009, our maximum potential exposure for the
$1 million of fixed-rate tax-exempt bonds is $1 million, representing principal
and interest. CFC is unable to determine the maximum amount of
interest that it could be required to pay related to the remaining adjustable
and floating-rate bonds. See below for further information about this
type of guarantee. 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. 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 CFC for any guarantee
payments would be treated as a long-term loan to the extent of any cash received
by the member at the outset of the transaction. This amount is
secured by a mortgage lien on substantially all of the system's assets and
future revenues. The remainder would be treated as a short-term loan
secured by a subordinated mortgage on substantially all of the member's
property. Due to changes in federal tax law, no further guarantees of
this nature are anticipated.
(3) The
maturities for this type of guarantee run through 2024. Additionally,
letters of credit totaling $5 million at November 30, 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 CFC’s maximum
potential exposure, of which $196 million is secured at November 30,
2009. When taking into consideration
reimbursement obligation agreements that we have in place with other lenders,
our maximum potential exposure related to $31 million of letters of credit would
be reduced to $9 million in the event of default. Security
provisions include a mortgage lien on substantially all of the system's assets,
future revenues, and the system's commercial paper invested 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 $422 million in
letters of credit to third parties for the benefit of our members at November
30, 2009. At May 31, 2009, this amount was $440 million.
(4) The
maturities for this type of guarantee run through 2015. The amounts
shown represent our maximum potential exposure, which is unsecured.
At
November 30, 2009 and May 31, 2009, we had a total of $313 million and $347
million of guarantees, representing 26 percent and 27 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 had debt service
reserve funds in the amount of $46 million and $47 million at November 30, 2009
and May 31, 2009, 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, $608 million and $643 million as of November
30, 2009 and May 31, 2009, 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.
Guarantee
Liability
At
November 30, 2009 and May 31, 2009, we recorded a guarantee liability of $25
million and $30 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
November 30, 2009 and May 31, 2009 was $8 million and $12 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 $17 million and $18 million at November 30, 2009
and May 31, 2009, 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 six months ended
November
30,
|
|
|
|
Year
ended
May
31,
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
2009
|
|
Beginning
balance
|
$
|
29,672
|
|
$
|
15,034
|
|
|
$
|
15,034
|
|
Net
change in non-contingent liability
|
|
(1,343)
|
|
|
12,809
|
|
|
|
13,023
|
|
(Recovery
of) provision for guarantee liability
|
|
(3,216)
|
|
|
4,981
|
|
|
|
1,615
|
|
Ending
balance
|
$
|
25,113
|
|
$
|
32,824
|
|
|
$
|
29,672
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
as a percentage of total guarantees
|
|
2.10
|
%
|
|
2.65
|
%
|
|
|
2.33
|
%
|
(11) Fair
Value Measurement
Assets
and liabilities measured at fair value on either a recurring or nonrecurring
basis on the consolidated balance sheets at November 30, 2009 and May 31, 2009
consist of derivative instruments, foreclosed assets, and collateral-dependent
non-performing loans. Additionally, assets measured at fair value
included investments in common stock at November 30, 2009.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
At
November 30, 2009, our investments in equity securities includes investments in
Farmer Mac Series A common stock that is recorded in the consolidated balance
sheets at fair value. We calculate fair value based on the quoted
price on the stock exchange where the stock is traded. That stock
exchange is an active market based on the volume of shares
transacted. Fair values for these securities are classified as a
Level 1 valuation.
The
following table presents our assets and liabilities that are measured at fair
value on a recurring basis at November 30, 2009:
(dollar
amounts in thousands)
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
Derivative
assets
|
|
$
|
-}
|
$
|
429,401}
|
$
|
-}
|
Derivative
liabilities
|
|
|
-}
|
|
544,655}
|
|
-}
|
Investments
in common stock
|
|
|
498}
|
|
-}
|
|
-}
|
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
November 30, 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 November 30, 2009 were
classified as Level 3 within the fair value hierarchy. The following
table provides the carrying value of the related individual assets at November
30, 2009 and the total losses for the three and six months ended November 30,
2009.
(dollar
amounts in thousands)
|
|
Level
3
Fair
Value
|
|
Total
losses for the
three
months ended
November
30, 2009
|
|
Total
losses for the
six
months ended
November
30, 2009
|
Foreclosed
assets, net
|
$
|
47,579}
|
|
$
|
-}
|
$
|
(1,750)
|
Non-performing
loans, net of specific reserves
|
|
172,021}
|
|
|
(2,146)
|
|
(1,859)
|
(12) Fair
Value of Financial Instrument
The
following disclosure of the estimated fair value of financial instruments is
based on the applicable accounting guidance. See Note 11, 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 on our consolidated balance sheets. 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 November 30, 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 at November 30, 2009 and May 31,
2009.
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.
Investments
in Equity Securities
At
November 30, 2009, our investments in equity securities includes investments in
Farmer Mac Series A common stock acquired during the quarter that is recorded in
the consolidated balance sheets at fair value. We calculate fair
value based on the quoted price on the stock exchange where the stock is
traded. That stock exchange is an active market based on the volume
of shares transacted. Fair values for these securities are classified
as a Level 1 valuation. The carrying value of the Series B-1 and
Series C preferred stock is equal to cost, which approximates fair
value. Our investments in Series B-1 preferred stock is callable at
par and fair value is estimated at cost based upon dealer quotes. The
fair value for the Series C preferred stock is estimated at cost because we
continue to enter into new transactions with the issuer at the same terms and
the stock is callable at par. The preferred stock securities do not
meet the definition of marketable securities.
Loans
to Members, Net
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 general requirement to purchase
subordinated certificates or member capital securities to meet their capital
contribution requirements as a condition of obtaining additional credit from us,
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 interest rate 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. 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
11, 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.
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 quotes for our debt instruments
used in the determination of fair value incorporate our credit
risk.
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 subordinated
deferrable debt is based on the closing market quotes from the last day of the
reporting period.
Members'
Subordinated Certificates
Members’
subordinated certificates include membership subordinated certificates issued to
our members as a condition of 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.
Derivative
Instruments
See Note
11, Fair Value
Measurement, for details about how we calculate the fair value of
derivative instruments.
Commitments
The fair
value of our commitments 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 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.
Carrying
and fair values of our financial instruments are presented as
follows:
|
|
|
November
30, 2009
|
|
|
|
May
31, 2009
|
|
|
(dollar
amounts in thousands)
|
|
|
Carrying
Value
|
|
|
|
Fair
Value
|
|
|
|
Carrying
Value
|
|
|
|
Fair
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
355,900}
|
|
|
$
|
355,900}
|
|
|
$
|
504,999
|
|
|
$
|
504,999
|
|
|
Restricted
cash
|
|
|
17,598}
|
|
|
|
17,598}
|
|
|
|
8,207
|
|
|
|
8,207
|
|
|
Investments
in equity securities
|
|
|
73,076}
|
|
|
|
73,076}
|
|
|
|
47,000
|
|
|
|
47,000
|
|
|
Loans
to members, net
|
|
|
19,124,444}
|
|
|
|
19,454,422}
|
|
|
|
19,569,349
|
|
|
|
18,766,573
|
|
|
Debt
service reserve funds
|
|
|
45,662}
|
|
|
|
45,662}
|
|
|
|
46,662
|
|
|
|
46,662
|
|
|
Interest
rate exchange agreements
|
|
|
429,401}
|
|
|
|
429,401}
|
|
|
|
381,356
|
|
|
|
381,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
debt
|
|
|
4,187,659}
|
|
|
|
4,213,717}
|
|
|
|
4,867,864
|
|
|
|
4,885,919
|
|
|
Long-term
debt
|
|
|
12,784,373}
|
|
|
|
14,161,007}
|
|
|
|
12,720,055
|
|
|
|
13,160,498
|
|
|
Guarantee
liability (1)
|
|
|
25,113}
|
|
|
|
28,351}
|
|
|
|
29,672
|
|
|
|
33,181
|
|
|
Interest
rate exchange agreements
|
544,655}
|
|
|
|
544,655}
|
|
|
|
493,002
|
|
|
|
493,002
|
|
|
Subordinated
deferrable debt
|
|
|
311,440}
|
|
|
|
303,499}
|
|
|
|
311,440
|
|
|
|
274,759
|
|
|
Members’
subordinated certificates
|
|
|
1,790,206}
|
|
|
|
1,790,206}
|
|
|
|
1,740,054
|
|
|
|
1,740,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 10.
(13) Restructured/Non-performing
Loans and Contingencies
The
following loans outstanding were classified as non-performing and
restructured:
(dollar
amounts in thousands)
|
|
November
30,
2009
|
|
|
May
31,
2009
|
|
November
30,
2008
|
Non-performing
loans
|
$
|
523,849}
|
|
$
|
523,758
|
$
|
493,024
|
Restructured
loans
|
|
522,826}
|
|
|
537,587
|
|
562,329
|
Total
|
$
|
1,046,675}
|
|
$
|
1,061,345
|
$
|
1,055,353
|
(a) At
November 30, 2009, May 31, 2009 and November 30, 2008, all loans classified as
non-performing were on a non-accrual status with respect to the recognition of
interest income. At November 30, 2009 and May 31, 2009, $477 million
and $491 million, respectively, of restructured loans were on non-accrual status
with respect to the recognition of interest income. At November 30,
2008, $505 million of restructured loans were on non-accrual
status. Approximately $1 million and $2 million, respectively, of
interest income was accrued on restructured loans during the three and six
months ended November 30, 2009 and 2008.
Interest
income was reduced as follows as a result of holding loans on non-accrual
status:
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
November
30,
|
|
|
November
30,
|
(dollar
amounts in thousands)
|
|
2009
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans
|
$
|
7,264}
|
|
$
|
7,417
|
|
$
|
14,673}
|
|
$
|
14,851
|
Restructured
loans
|
|
5,951}
|
|
|
6,893
|
|
|
11,991}
|
|
|
13,597
|
Total
|
$
|
13,215}
|
|
$
|
14,310
|
|
$
|
26,664}
|
|
$
|
28,448
|
(b) We
classified $1,042 million and $1,056 million of loans as impaired at November
30, 2009 and May 31, 2009, respectively. We reserved $400 million and
$414 million of the loan loss allowance for such impaired loans at November 30,
2009 and May 31, 2009, respectively. The amount included in the loan
loss allowance for such loans was based on a comparison of the present value of
the expected future cash flow associated with the loan (discounted at the
original contract interest rate) and/or the estimated
fair value of the collateral securing the loan to the recorded investment in the
loan. Impaired loans may be on accrual or non-accrual status with
respect to the recognition of interest income based on a review of the terms of
the restructure agreement and borrower performance. We accrued a
total of $1 million and $2 million of interest income on impaired loans for the
six months ended November 30, 2009 and 2008, respectively. The
average recorded investment in impaired loans for the six months ended November
30, 2009 and 2008 was $1,046 million and $1,055 million,
respectively.
We update
impairment calculations on a quarterly basis. Since a borrower's
original contract rate may include a variable-rate component, calculated
impairment could vary with changes to 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
November 30, 2009 and May 31, 2009, we had a total of $477 million and $491
million, respectively, of restructured loans outstanding to Denton County Electric Cooperative, d/b/a CoServ
Electric ("CoServ"), a large electric distribution cooperative located in
Denton County, Texas, that provides retail electric service to residential and
business customers. All restructured loans have been on non-accrual
status since January 1, 2001. In addition, a total of $20 million was
outstanding under the capital expenditure loan facility which was classified as
a performing loan at both November 30, 2009 and May 31, 2009. Total
loans to CoServ at November 30, 2009 and May 31, 2009 represented 2.4
percent of our total loans and guarantees outstanding.
Under the
terms of a bankruptcy settlement from 2002, we restructured our loans to
CoServ. CoServ is scheduled to make quarterly payments to CFC through
December 2037. As part of the restructuring, CFC may be obligated to
provide up to $204 million of senior secured capital expenditure loans to CoServ
for electric distribution infrastructure through December 2012. Under
this facility, advances are limited to $46 million per year. As of
the date of this filing, there is $138 million available under this loan
facility. When CoServ requests capital expenditure loans from us,
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 us. 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, we
have not received notice from CoServ that it intends to prepay the
loan. CoServ and CFC have no claims related to any of the legal
actions asserted before or during the bankruptcy proceedings. Our
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 November 30, 2009.
(d)
Innovative Communication Corporation ("ICC") is a diversified telecommunications
company headquartered in St. Croix, United States Virgin Islands
("USVI"). In the USVI, through subsidiaries including Virgin Islands
Telephone Corporation d/b/a Innovative Telephone ("Vitelco"), ICC provides
cellular, wireline local and long-distance telephone, cable television, and
Internet access services. Through other subsidiaries, ICC provided
telecommunications, cable television, and Internet access services in the
eastern and southern Caribbean and mainland France.
At
November 30, 2009 and May 31, 2009, RTFC had $524 million in loans outstanding
to ICC. All loans to ICC have been on non-accrual status since
February 1, 2005. ICC has not made debt service payments to RTFC
since June 2005.
RTFC is
the primary secured lender to ICC. RTFC's collateral for the loans
included (i) a series of mortgages, security agreements, financing statements,
pledges and guaranties creating liens in favor of RTFC on substantially all of
the assets and voting stock of ICC, (ii) a direct pledge of 100 percent of the
voting stock of ICC's USVI local exchange carrier subsidiary, Vitelco, (iii)
secured guaranties, mortgages and direct and indirect stock pledges encumbering
the assets and ownership interests in substantially all of ICC's other operating
subsidiaries and certain of its parent entities, including ICC's immediate
parent, Emerging Communication, Inc., a Delaware corporation ("Emcom") and
Emcom's parent, Innovative Communication Company LLC, a Delaware limited
liability company ("ICC-LLC"), and (iv) a personal guaranty of the loans from
ICC's indirect majority shareholder and former chairman, Jeffrey Prosser
("Prosser").
In
February 2006, involuntary bankruptcy petitions were filed against Prosser,
Emcom and ICC-LLC; and 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 CFC, thereby resolving all the loan-related litigation in
RTFC’s favor. Regardless, Prosser and related parties continue to
assert claims against CFC and certain of its officers and directors and other
parties in various proceedings and forums. CFC 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 corporate
estates;
and a
Chapter 7 trustee was appointed in Prosser’s individual case. The
Chapter 11 trustee of ICC has assumed ownership and control of ICC, including
its subsidiaries.
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 USVI, the British Virgin Islands (“BVI”) and St.
Maarten (the “Group 1 Assets”); Group 2 consisting of stock in ICC subsidiaries
operating in France and certain of its Caribbean territories (the “Group 2
Assets”); and Group 3 consisting of the newspaper operations of ICC (the “Group
3 Assets”). The Group 2 Assets and Group 3 Assets were sold in
December 2008 and May 2008, respectively. Certain ancillary assets have also been sold including
aircraft, art and real estate. In each instance, 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, with
RTFC reserving the right to assign its rights under the Purchase Agreement to
CFC. CFC, together with certain of its subsidiaries, has begun the
process of obtaining the applicable regulatory approvals. In October
2009, the BVI regulatory approval process was successfully completed, and in
December 2009, FCC approval was granted. There are two remaining
applications that are still pending action by the regulators.
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 November 30, 2009.
(e) At
November 30, 2009 and May 31, 2009, we had a total of $42 million 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 November 30, 2009 and all loans to Pioneer remain on accrual
status. We are the principal creditor to Pioneer.
Based on
our analysis, we believe that we are adequately reserved for our exposure to
Pioneer at November 30, 2009.
(14) Segment
Information
Our
consolidated financial statements include the financial results of CFC, 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 CFC segment includes the consolidation of entities
controlled by CFC and created to hold foreclosed assets and facilitate loan
securitization transactions and intercompany transaction elimination
entries. The segment presentation for the three months ended November
30, 2009 and 2008 reflect the operating results of each of the three companies
as a separate segment.
CFC is
the sole lender to RTFC and the primary source of funding for
NCSC. NCSC also obtains funding from third parties with a CFC
guarantee. Thus, CFC takes all of the risk related to the funding of
the loans to RTFC and NCSC, and in return, CFC earns a net interest income on
the loans to RTFC and NCSC.
Pursuant
to guarantee agreements, CFC has agreed to indemnify RTFC and NCSC for loan
losses, with the exception of the NCSC consumer loan program. Thus,
CFC maintains the majority of the total consolidated loan loss
allowance. A small loan loss allowance is maintained by NCSC to cover
its consumer loan exposure.
The
following table contains consolidated statements of operations for the six
months ended November 30, 2009, and consolidated balance sheets at November 30,
2009.
(dollar
amounts in thousands)
|
|
CFC
|
|
|
|
RTFC
|
|
|
|
NCSC
|
|
|
|
Consolidated
|
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
484,576
|
|
|
$
|
36,790
|
|
|
$
|
13,010
|
|
|
$
|
534,376
|
|
|
Interest
expense
|
|
(428,944
|
)
|
|
|
(34,348
|
)
|
|
|
(6,314
|
)
|
|
|
(469,606
|
)
|
|
Net
interest income
|
|
55,632
|
|
|
|
2,442
|
|
|
|
6,696
|
|
|
|
64,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
of loan losses
|
|
14,556
|
|
|
|
-
|
|
|
|
38
|
|
|
|
14,594
|
|
|
Net
interest income after recovery of loan losses
|
|
70,188
|
|
|
|
2,442
|
|
|
|
6,734
|
|
|
|
79,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
7,095
|
|
|
|
77
|
|
|
|
668
|
|
|
|
7,840
|
|
|
Derivative
cash settlements
|
|
(9,765
|
)
|
|
|
-
|
|
|
|
(4,435
|
)
|
|
|
(14,200
|
)
|
|
Results
of operations from foreclosed assets
|
|
608
|
|
|
|
-
|
|
|
|
-
|
|
|
|
608
|
|
|
Total
non-interest income
|
|
(2,062
|
)
|
|
|
77
|
|
|
|
(3,767
|
)
|
|
|
(5,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(28,227
|
)
|
|
|
(3,011
|
)
|
|
|
(2,204
|
)
|
|
|
(33,442
|
)
|
|
Recovery
of guarantee liability
|
|
3,216
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,216
|
|
|
Derivative
forward value
|
|
(925
|
)
|
|
|
-
|
|
|
|
(2,347
|
)
|
|
|
(3,272
|
)
|
|
Market
adjustment of foreclosed assets
|
|
(1,750
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,750
|
)
|
|
Other
expenses
|
|
(211
|
)
|
|
|
-
|
|
|
|
(110
|
)
|
|
|
(321
|
)
|
|
Total
non-interest expense
|
|
(27,897
|
)
|
|
|
(3,011
|
)
|
|
|
(4,661
|
)
|
|
|
(35,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes
|
|
40,229
|
|
|
|
(492
|
)
|
|
|
(1,694
|
)
|
|
|
38,043
|
|
|
Income
tax (expense) benefit
|
|
-
|
|
|
|
(8
|
)
|
|
|
817
|
|
|
|
809
|
|
|
Net
income (loss)
|
$
|
40,229
|
|
|
$
|
(500
|
)
|
|
$
|
(877
|
)
|
|
$
|
38,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,852
|
|
|
Less:
Net loss attributable to the noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,377
|
|
|
Net
income attributable to CFC
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans outstanding
|
$
|
17,650,233
|
|
|
$
|
1,717,962
|
|
|
$
|
361,099
|
|
|
$
|
19,729,294
|
|
|
Deferred
origination fees
|
|
3,608
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,608
|
|
|
Less: Allowance
for loan losses
|
|
(608,402
|
)
|
|
|
-
|
|
|
|
(56
|
)
|
|
|
(608,458
|
)
|
|
Loans
to members, net
|
|
17,045,439
|
|
|
|
1,717,962
|
|
|
|
361,043
|
|
|
|
19,124,444
|
|
|
Other
assets
|
|
1,090,841
|
|
|
|
178,297
|
|
|
|
44,344
|
|
|
|
1,313,482
|
|
|
Total
assets
|
$
|
18,136,280
|
|
|
$
|
1,896,259
|
|
|
$
|
405,387
|
|
|
$
|
20,437,926
|
|
|
The
following table contains consolidated statements of operations for the six
months ended November 30, 2008, and consolidated balance sheets at November 30,
2008.
(in
thousands)
|
|
CFC
|
|
|
RTFC
|
|
|
|
NCSC
|
|
|
Consolidated
|
|
Statement
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
476,112
|
|
|
$
|
38,770
|
|
|
$
|
14,981
|
|
|
$
|
529,863
|
|
|
Interest
expense
|
|
(406,888
|
)
|
|
|
(36,454
|
)
|
|
|
(10,994
|
)
|
|
|
(454,336
|
)
|
|
Net
interest income
|
|
69,224
|
|
|
|
2,316
|
|
|
|
3,987
|
|
|
|
75,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision
for) recovery of loan losses
|
|
(137,031
|
)
|
|
|
-
|
|
|
|
39
|
|
|
|
(136,992
|
)
|
|
Net
interest (loss) income after (provision for) recovery of loan
losses
|
(67,807
|
)
|
|
|
2,316
|
|
|
|
4,026
|
|
|
|
(61,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
5,606
|
|
|
|
118
|
|
|
|
595
|
|
|
|
6,319
|
|
|
Derivative
cash settlements
|
|
15,332
|
|
|
|
-
|
|
|
|
(2,398
|
)
|
|
|
12,934
|
|
|
Results
of operations from foreclosed assets
|
|
2,457
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,457
|
|
|
Total
non-interest income
|
|
23,395
|
|
|
|
118
|
|
|
|
(1,803
|
)
|
|
|
21,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(24,812
|
)
|
|
|
(2,698
|
)
|
|
|
(2,177
|
)
|
|
|
(29,687
|
)
|
|
Provision
for guarantee liability
|
|
(4,981
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,981
|
)
|
|
Derivative
forward value
|
|
(131,834
|
)
|
|
|
-
|
|
|
|
(18,577
|
)
|
|
|
(150,411
|
)
|
|
Market
adjustment on foreclosed assets
|
|
(153
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(153
|
)
|
|
Other
|
|
(149
|
)
|
|
|
-
|
|
|
|
(149
|
)
|
|
|
(298
|
)
|
|
Total
non-interest expense
|
|
(161,929
|
)
|
|
|
(2,698
|
)
|
|
|
(20,903
|
)
|
|
|
(185,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes
|
|
(206,341
|
)
|
|
|
(264
|
)
|
|
|
(18,680
|
)
|
|
|
(225,285
|
)
|
|
Income
tax benefit
|
|
-
|
|
|
|
69
|
|
|
|
7,091
|
|
|
|
7,160
|
|
|
Net
loss
|
$
|
(206,341
|
)
|
|
$
|
(195
|
)
|
|
$
|
(11,589
|
)
|
|
$
|
(218,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(218,125
|
)
|
|
Less:
Net loss attributable to the noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
2,979
|
|
|
Net
loss attributable to CFC
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(215,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans outstanding
|
$
|
17,419,131
|
|
|
$
|
1,697,907
|
|
|
$
|
446,504
|
|
|
$
|
19,563,542
|
|
|
Deferred
origination fees
|
|
3,397
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,397
|
|
|
Less: Allowance
for loan losses
|
|
(648,755
|
)
|
|
|
-
|
|
|
|
(191
|
)
|
|
|
(648,946
|
)
|
|
Loans
to members, net
|
|
16,773,773
|
|
|
|
1,697,907
|
|
|
|
446,313
|
|
|
|
18,917,993
|
|
|
Other
assets
|
|
1,267,704
|
|
|
|
183,022
|
|
|
|
49,581
|
|
|
|
1,500,307
|
|
|
Total
assets
|
$
|
18,041,477
|
|
|
$
|
1,880,929
|
|
|
$
|
495,894
|
|
|
$
|
20,418,300
|
|
|
The
following table contains the consolidated statement of operations for the three
months ended November 30, 2009 by segment.
(dollar
amounts in thousands)
|
|
CFC
|
|
|
|
RTFC
|
|
|
|
NCSC
|
|
|
|
Consolidated
|
|
Statement
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
240,183
|
|
|
$
|
18,336
|
|
|
$
|
6,400
|
|
|
$
|
264,919
|
|
Interest
expense
|
|
(206,990
|
)
|
|
|
(17,046
|
)
|
|
|
(2,941
|
)
|
|
|
(226,977
|
)
|
Net
interest income
|
|
33,193
|
|
|
|
1,290
|
|
|
|
3,459
|
|
|
|
37,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision
for) recovery of loan losses
|
|
(1,586
|
)
|
|
|
-
|
|
|
|
9
|
|
|
|
(1,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (loss) after (provision for) recovery of loan
losses
|
31,607
|
|
|
|
1,290
|
|
|
|
3,468
|
|
|
|
36,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
3,738
|
|
|
|
37
|
|
|
|
331
|
|
|
|
4,106
|
|
Derivative
cash settlements
|
|
(8,427
|
)
|
|
|
-
|
|
|
|
(2,279
|
)
|
|
|
(10,706
|
)
|
Results
of operations of foreclosed assets
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21
|
|
Total
non-interest income
|
|
(4,668
|
)
|
|
|
37
|
|
|
|
(1,948
|
)
|
|
|
(6,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(13,888
|
)
|
|
|
(1,497
|
)
|
|
|
(1,031
|
)
|
|
|
(16,416
|
)
|
Recovery
of guarantee liability
|
|
821
|
|
|
|
-
|
|
|
|
-
|
|
|
|
821
|
|
Derivative
forward value
|
|
10,230
|
|
|
|
-
|
|
|
|
(2,668
|
)
|
|
|
7,562
|
|
Other
|
|
(115
|
)
|
|
|
-
|
|
|
|
(60
|
)
|
|
|
(175
|
)
|
Total
non-interest expense
|
|
(2,952
|
)
|
|
|
(1,497
|
)
|
|
|
(3,759
|
)
|
|
|
(8,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes
|
|
23,987
|
|
|
|
(170
|
)
|
|
|
(2,239
|
)
|
|
|
21,578
|
|
Income
tax (expense) benefit
|
|
-
|
|
|
|
(9
|
)
|
|
|
850
|
|
|
|
841
|
|
Net
income (loss)
|
$
|
23,987
|
|
|
$
|
(179
|
)
|
|
$
|
(1,389
|
)
|
|
$
|
22,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,419
|
|
Less:
Net loss attributable to the noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,568
|
|
Net
income attributable to CFC
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,987
|
|
The
following table contains the consolidated statement of operations for the three
months ended November 30, 2008 by segment.
(dollar
amounts in thousands)
|
|
CFC
|
|
|
|
RTFC
|
|
|
|
NCSC
|
|
|
|
Consolidated
|
|
Statement
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
239,748
|
|
|
$
|
19,393
|
|
|
$
|
7,605
|
|
|
$
|
266,746
|
|
Interest
expense
|
|
(209,929
|
)
|
|
|
(18,208
|
)
|
|
|
(6,050
|
)
|
|
|
(234,187
|
)
|
Net
interest income
|
|
29,819
|
|
|
|
1,185
|
|
|
|
1,555
|
|
|
|
32,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision
for) recovery of loan losses
|
|
(126,350
|
)
|
|
|
-
|
|
|
|
39
|
|
|
|
(126,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest (loss) income after (provision for) recovery of loan
losses
|
(96,531
|
)
|
|
|
1,185
|
|
|
|
1,594
|
|
|
|
(93,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
2,509
|
|
|
|
(77
|
)
|
|
|
305
|
|
|
|
2,737
|
|
Derivative
cash settlements
|
|
13,707
|
|
|
|
-
|
|
|
|
(1,204
|
)
|
|
|
12,503
|
|
Results
of operations of foreclosed assets
|
|
1,211
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,211
|
|
Total
non-interest income
|
|
17,427
|
|
|
|
(77
|
)
|
|
|
(899
|
)
|
|
|
16,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
(12,671
|
)
|
|
|
(1,373
|
)
|
|
|
(1,050
|
)
|
|
|
(15,094
|
)
|
Provision
for guarantee liability
|
|
(5,686
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,686
|
)
|
Derivative
forward value
|
|
(123,096
|
)
|
|
|
-
|
|
|
|
(16,287
|
)
|
|
|
(139,383
|
)
|
Market
adjustment on foreclosed assets
|
|
(153
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(153
|
)
|
Other
|
|
(102
|
)
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
(138
|
)
|
Total
non-interest expense
|
|
(141,708
|
)
|
|
|
(1,373
|
)
|
|
|
(17,373
|
)
|
|
|
(160,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
prior to income taxes
|
|
(220,812
|
)
|
|
|
(265
|
)
|
|
|
(16,678
|
)
|
|
|
(237,755
|
)
|
Income
tax benefit
|
|
-
|
|
|
|
69
|
|
|
|
6,331
|
|
|
|
6,400
|
|
Net
loss
|
$
|
(220,812
|
)
|
|
$
|
(196
|
)
|
|
$
|
(10,347
|
)
|
|
$
|
(231,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per segment reporting
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(231,355
|
)
|
Less:
Net loss attributable to the noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,738
|
|
Net
loss attributable to CFC
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(229,617
|
)
|
(15) Subsequent
Events
In December 2009, CFC exercised the
call option on a $150 million 4.95 percent note with Farmer Mac at
par. The note was originally issued under the December 2008 note
purchase agreement with Farmer Mac and as a result, the amount available under
revolving note purchase agreements with Farmer Mac increased from $575 million
to $725 million subsequent to November 30, 2009.
Item
2. 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 ("CFC"), Rural
Telephone Finance Cooperative ("RTFC"), National Cooperative Services
Corporation ("NCSC") and certain entities created and controlled by CFC to hold
foreclosed assets and accommodate loan securitization
transactions. 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.
This Form
10-Q contains forward-looking statements within the meaning of the Securities
Act of 1933, as amended, and the Exchange Act of 1934, as
amended. Forward-looking statements, which are based on certain
assumptions and describe our future plans, strategies and expectations, are
generally identified by our use of words such as "intend," "plan," "may,"
"should," "will," "project," "estimate," "anticipate," "believe," "expect,"
"continue," "potential," "opportunity," and similar expressions, whether in the
negative or affirmative. All statements that address expectations or projections
about the future, including statements about loan growth, the adequacy of the
loan loss allowance, net income growth, leverage and debt to equity ratios, and
borrower financial performance are forward-looking
statements. Although we believe that the expectations reflected in
our forward-looking statements are based on reasonable assumptions, actual
results and performance could differ materially from those set forth in the
forward-looking statements. Factors that could cause future results
to vary from current expectations include, but are not limited to, general
economic conditions, legislative changes, governmental monetary and fiscal
policies, changes in tax policies, changes in interest rates, demand for our
loan products, changes in the quality or composition of our loan and investment
portfolios, changes in accounting principles, policies or guidelines, and other
economic and governmental factors affecting our operations. Some of
these and other factors are discussed in our annual and quarterly reports
previously filed with the Securities and Exchange Commission
("SEC"). The reader should not place any undue reliance on
forward-looking statements, which speak only as of the date of this
report. Except as required by law, we undertake no obligation to
update or publicly release any revisions to forward-looking statements to
reflect events, circumstances or changes in expectations after the date on which
the statement is made.
The
following discussion and analysis is designed to provide a better understanding
of 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 and the information contained elsewhere in this Form
10-Q, in addition to Part I, Item 1A. Risk Factors in our Form 10-K/A for the
year ended May 31, 2009.
Business
Overview
CFC was
formed in 1969 by rural electric cooperatives to provide a source of financing
to supplement the loan programs of the Rural Utilities Service
("RUS"). CFC is organized as a cooperative 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 CFC. NCSC is a taxable
corporation.
Our
primary objective as a member-owned cooperative is to provide financial products
and services to our rural electric and telecommunications members at the lowest
cost that is consistent with sound financial management 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 have generally been
required to purchase membership subordinated certificates from
us. Members are sometimes 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. Requirements for the
purchase of such equity certificates depend upon several factors, including but
not limited to the borrower’s debt to equity ratio with us, the relative size of
the credit facility, and the relative risk of the transaction. The
membership subordinated certificates and the loan and guarantee subordinated
certificates are unsecured and subordinate to our senior debt. During
the 2009 fiscal year, we began offering member capital securities to our voting
members. These securities represent members’ voluntary investments in
us. Effective June 1, 2009, member capital securities may be
purchased by members in an amount we determine to meet their capital
contribution requirements as a condition of obtaining additional credit
facilities from us.
CFC 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 periods covered by this Form 10-Q.
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. Due to
the adoption of new accounting guidance regarding noncontrolling interests on
June 1, 2009, minority interest net income is included in total net income in
the consolidated income statement. As a result, it is not necessary
to adjust net income to include minority interest net income as it was in prior
periods. As required, we have reflected changes in presentation and
disclosure of noncontrolling interest in our consolidated financial statements
for all periods presented in this Form 10-Q, including the adjusted net income
and adjusted TIER calculations for the six months ended November 30,
2008. Adjusted TIER is calculated by using adjusted net income and
including all derivative cash settlements in 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
six months ended November 30, 2009, we reported net income of $39 million, which
resulted in a TIER calculation of 1.08 compared to net loss of $218 million
which resulted in a TIER calculation below 1.00 for the prior-year
period. For the six months ended November 30, 2009, we reported an
adjusted net income of $42 million with an adjusted TIER of 1.09, compared with
an adjusted net loss of $68 million which resulted in an adjusted TIER below
1.00 for the prior-year period. The $257 million increase in net
income for the six months ended November 30, 2009 compared with the prior-year
period was primarily due to the $152 million increase in the recovery for loan
losses and the $147 million decrease in derivative forward value loss which was
partly offset by the $11 million decrease in net interest income and the $27
million decrease in derivative cash settlements.
Interest
income of $534 million for the six months ended November 30, 2009 increased 1
percent compared with the prior-year period. During the six months
ended November 30, 2009, there was an increase of $781 million or 4 percent to
the average balance of loans outstanding which was largely offset by a 15 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 primarily the result of the lower interest rates
earned on short-term loans.
Our
interest expense increased by $15 million or 3 percent for the six months ended
November 30, 2009 as compared with the prior-year period primarily due to the
$848 million or 5 percent increase in average debt outstanding for the six
months ended
November
30, 2009 compared with the prior-year period. Average debt
outstanding increased due to the 4 percent increase in average loans outstanding
and the prefunding of first quarter 2010 debt maturities. The
increase in debt volume came primarily from notes issued to Federal Agricultural
Mortgage Corporation (“Farmer Mac”), retail notes and member capital
securities. An 8 basis point decrease in the weighted average cost of
debt resulted primarily from lower interest rates on our variable-rate debt and
commercial paper funding, partly offset by a shift from commercial paper funding
to higher-cost term debt and member capital securities, as well as higher
interest rates on our collateral trust bonds issued in October
2008.
Our
adjusted interest expense, which includes derivative cash settlements in
interest expense, increased by $42 million for the six months ended November 30,
2009 compared to the prior-year period. In addition to the factors
above, the increase in the adjusted interest expense was largely due to the $27
million decrease in cash settlements for the six months ended November 30, 2009
from the prior-year period resulting from lower short-term interest rates on the
receive leg of pay fixed-receive variable swaps during the six months ended
November 30, 2009 compared with the prior-year period.
During
the six months ended November 30, 2009, there was a loan loss recovery of $15
million compared to a provision of $137 million in the prior-year
period. The recovery of loan losses during the six months ended
November 30, 2009 was primarily due to the decrease to the reserve for impaired
loans due to payments received and the net decrease in our variable interest
rates, as well as the decrease in exposure and the weighted average maturity in
the general portfolio, partly offset by an increase to the exposure for high
risk loans during the period. See further discussion in Allowance for Loan Losses in
the Financial Condition
section.
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 rates. 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
November 30, 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.
Financial
Condition
At
November 30, 2009, total loans outstanding decreased by $459 million compared to
May 31, 2009 with a $441 million decrease in electric loans and a $56 million
decrease in NCSC loans partly offset by a $38 million increase in RTFC
loans. Short-term loans accounted for $369 million of the $459
million decrease in total loans outstanding, which was primarily due to the
repayment of power supply bridge loans with RUS funding. See further
discussion of our loan portfolio in Financial Condition, Loan and
Guarantee Portfolio Assessment. We are anticipating a slight
decline in loans outstanding during fiscal year 2010 due to the expected
settlement of impaired loans and the expected repayment of bridge facilities
with RUS funding.
Based on
the calendar year 2008 data from member systems, the difficult economic
conditions during that period did not result in a rise in delinquencies or
defaults in our members’ receivables. Calendar year 2008 data from
member systems also showed no increase in late payments or write-offs for the
year ended December 31, 2008 compared to the prior calendar year.
Total
debt outstanding decreased by $566 million at November 30, 2009 as compared with
May 31, 2009 primarily due to the $459 million decrease to loans outstanding and
the $149 million decrease in cash. During the six months ended
November 30, 2009 there was a shift in the type of funding used to obtain the
lowest interest rates available in the market. Approximately $1,876
million of medium-term notes that matured during the period were primarily
refinanced with collateral trust bond issuances totaling $500 million, notes
issued to Farmer Mac totaling $625 million and the issuance of retail
medium-term notes.
Total
equity decreased $3 million from May 31, 2009 to November 30, 2009 primarily due
to the board authorized patronage capital retirement totaling $41 million offset
by net income of $39 million for the six months ended November 30,
2009. The remaining decrease relates to the loss attributable to the
noncontrolling interest and decreases to accumulated other comprehensive income
and the education fund. The patronage capital retirement was returned
to members in cash at the end of September 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.
Liquidity
Our
primary sources of liquidity include:
·
|
scheduled
member loan principal prepayments and repayments and the interest on those
loans;
|
·
|
member
investments (member commercial paper, the daily liquidity fund, member
medium-term notes, member subordinated certificates and member capital
securities);
|
·
|
revolving
bank line facilities;
|
·
|
capital
market debt issuances (dealer commercial paper, collateral trust bonds,
medium-term notes and retail notes);
and
|
·
|
private
debt issuances (Farmer Mac).
|
Our
primary uses of liquidity include:
·
|
repayment
of principal and interest on debt;
|
·
|
patronage
capital retirements.
|
We face
liquidity risk in refinancing maturing obligations. At November 30,
2009, we had $2,050 million of commercial paper, daily liquidity fund, and bank
bid notes scheduled to mature during the next 12 months. Based on
past history, we expect to continue to maintain member investments in commercial
paper at approximately the current level of $1,017 million at November 30,
2009. Due to reductions in loans outstanding, we currently have less
dealer commercial paper and bank bid notes outstanding than in prior periods,
however, we expect that we have the market access to maintain dealer commercial
paper and bank bid notes at approximately $1 billion to $1.5 billion, if
required.
At
November 30, 2009, we had $3 billion in available lines of credit with financial
institutions. These revolving credit agreements provide backup
liquidity for 100% of our dealer and member commercial paper. We
expect to be in compliance with the covenants under our revolving credit
agreements, therefore we could draw on these facilities to repay any amount of
dealer or member commercial paper that cannot be rolled over in the event of
market disruptions.
We also
have access to the Commercial Paper Funding Facility (“CPFF”) created by the
Federal Reserve Board to provide liquidity to highly-rated U.S. issuers of
commercial paper through February 2010. This facility provides us
with the capacity to issue a maximum of $3 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
dealer and member commercial paper markets.
At
November 30, 2009, we had long-term debt maturing in the next 12 months totaling
$2,137 million. This amount includes $406 million of medium-term
notes sold through dealers (including retail notes) and $425 million of
medium-term notes sold to members. Based on past history, we expect
to maintain the level of member and dealer investments in medium-term notes
within a range of the current outstanding balance. We have
experienced a significant increase in demand for our retail notes since January
2009 and expect that we should be able to access the retail note market at least
at the current level. The total balance of retail notes outstanding
has increased $821 million over the past 12 months to $1,093 million at November
30, 2009.
Additionally,
our long-term funding includes the following sources:
·
|
We
expect to maintain the ability to obtain funding through the capital
markets, as indicated by our $500 million issuance of collateral trust
bonds in September 2009.
|
·
|
We
had $575 million available under revolving note purchase agreements with
Farmer Mac at November 30, 2009, subject to market
conditions. In December 2009, CFC exercised the call option on
a $150 million 4.95 percent note with Farmer Mac, which increased the
amount available under revolving note purchase agreements with Farmer Mac
to $725 million.
|
·
|
Secured
notes payable scheduled to mature in the next twelve months were issued
under revolving credit facilities with Farmer Mac that allow us to borrow,
repay and re-borrow funds as market conditions
permit.
|
We face
liquidity risk in the funding of our loan portfolio based on member demand for
new loans, although we expect loans outstanding to decrease slightly during
fiscal year 2010. We also face liquidity risk in our ability to renew
our revolving credit agreements at current commitment levels. Our
$1.0 billion 364-day revolving credit agreement matures in March
2010. If we are not able to renew this agreement at the current
commitment level, it would reduce the amount of commercial paper funding we
could obtain in the future.
At
November 30, 2009, we expect that our $356 million of cash on hand and our
current sources of liquidity will allow us to issue the debt required to fund
our operations over the next 12 to 18 months.
Results
of Operations
Six
months ended November 30, 2009 versus November 30, 2008 results
The
following table presents the results of operations for the six months ended
November 30, 2009 and 2008.
|
|
|
For
the six months ended November 30,
|
|
|
|
Increase/
|
|
|
(dollar
amounts in thousands)
|
|
|
2009
|
|
|
|
2008
|
|
|
|
(Decrease)
|
|
|
Interest
income
|
|
$
|
534,376}
|
|
|
$
|
529,863
|
|
|
$
|
4,513
|
|
|
Interest
expense
|
|
|
(469,606)
|
|
|
|
(454,336
|
)
|
|
|
(15,270)
|
|
|
Net
interest income
|
|
|
64,770}
|
|
|
|
75,527
|
|
|
|
(10,757)
|
|
|
Recovery
of (provision for) loan losses
|
|
|
14,594}
|
|
|
|
(136,992
|
)
|
|
|
151,586
|
|
|
Net
interest income (loss) after recovery of (provision for) loan
losses
|
|
79,364}
|
|
|
|
(61,465
|
)
|
|
|
140,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
|
7,840}
|
|
|
|
6,319
|
|
|
|
1,521
|
|
|
Derivative
cash settlements
|
|
|
(14,200)
|
|
|
|
12,934
|
|
|
|
(27,134)
|
|
|
Results
of operations from foreclosed assets
|
|
|
608}
|
|
|
|
2,457
|
|
|
|
(1,849)
|
|
|
Total
non-interest income
|
|
|
(5,752)
|
|
|
|
21,710
|
|
|
|
(27,462)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
(19,684)
|
|
|
|
(19,763
|
)
|
|
|
79
|
|
|
Other
general and administrative expenses
|
|
|
(13,758)
|
|
|
|
(9,924
|
)
|
|
|
(3,834)
|
|
|
Recovery
of (provision for) guarantee liability
|
|
|
3,216}
|
|
|
|
(4,981
|
)
|
|
|
8,197
|
|
|
Derivative
forward value
|
|
|
(3,272)
|
|
|
|
(150,411
|
)
|
|
|
147,139
|
|
|
Market
adjustment on foreclosed assets
|
|
|
(1,750)
|
|
|
|
(153
|
)
|
|
|
(1,597)
|
|
|
Other
|
|
|
(321)
|
|
|
|
(298
|
)
|
|
|
(23)
|
|
|
Total
non-interest expense
|
|
|
(35,569)
|
|
|
|
(185,530
|
)
|
|
|
149,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes
|
|
|
38,043}
|
|
|
|
(225,285
|
)
|
|
|
263,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
809}
|
|
|
|
7,160
|
|
|
|
(6,351)
|
|
|
Net
income (loss)
|
|
|
38,852}
|
|
|
|
(218,125
|
)
|
|
|
256,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net
loss attributable to noncontrolling interest
|
|
|
1,377}
|
|
|
|
2,979
|
|
|
(1,602)
|
|
|
Net
income (loss) attributable to CFC
|
|
$
|
40,229}
|
|
|
$
|
(215,146)
|
|
$
|
255,375}
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
(1)
|
|
|
1.08}
|
|
|
|
-
|
|
|
|
|
|
Adjusted
TIER (1) (2)
|
|
|
|
1.09}
|
|
|
|
-
|
|
|
|
|
|
(1) For
the six months ended November 30, 2008, we reported a net loss of $218 million
and an adjusted net loss of $68 million. Thus, the TIER and adjusted
TIER calculations for that period results in a value below 1.00.
(2)
Adjusted to exclude the effect of the derivative forward value from net income
and to include all derivative cash settlements in the interest
expense. See Non-GAAP Financial Measures
for further explanation and a reconciliation of these adjustments.
The
following tables break out the average yield on loans, the average cost 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 break out
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 interest expense.
|
|
Average balances and interest rates –
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
volume
|
|
Interest
income
|
|
|
Average
yield
|
|
|
|
For
the six months ended November 30,
|
|
For
the six months ended November 30,
|
|
|
For
the six months ended November 30,
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans (1)
|
$
|
15,325,993}
|
$
|
15,223,849
|
$
|
449,076}
|
$
|
448,663
|
|
|
5.84
|
%
|
5.88
|
%
|
Long-term
variable-rate loans (1)
|
2,458,061}
|
|
1,792,395
|
|
48,251}
|
|
33,649
|
|
|
3.92
|
|
3.74
|
|
Short-term
loans
(1)
|
1,806,136}
|
|
1,821,234
|
|
30,676}
|
|
40,446
|
|
|
3.39
|
|
4.43
|
|
Non-performing
loans
|
523,777}
|
|
495,320
|
|
-}
|
|
-
|
|
|
-}
|
|
-}
|
|
Total
loans
|
|
20,113,967}
|
|
19,332,798
|
|
528,003}
|
|
522,758
|
|
|
5.24
|
|
5.39
|
|
Investments
(2)
|
|
637,631}
|
|
466,061
|
|
2,986}
|
|
3,625
|
|
|
0.93
|
|
1.55
|
|
Fee
income
|
|
-}
|
|
-
|
|
3,387}
|
|
3,480
|
|
|
-}
|
|
-}
|
|
Total
|
$
|
20,751,598}
|
$
|
19,798,859
|
$
|
534,376}
|
$
|
529,863
|
|
|
5.14
|
%
|
5.34
|
%
|
(1)
Interest income on loans to members.
(2)
Interest income on the investment of excess cash and equity
securities.
|
|
Average balances and interest rates –
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
volume
|
|
Interest
expense
|
|
|
Average
cost
|
|
|
|
For
the six months ended November 30,
|
|
For
the six months ended November 30,
|
|
|
For
the six months ended November 30,
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
2009
|
|
2008
|
|
Commercial
paper and bank bid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
notes
(1)
|
$
|
2,350,929}
|
$
|
3,210,542
|
$
|
(5,186)
|
$
|
(40,076
|
)
|
|
(0.44)
|
%
|
(2.49)
|
%
|
Medium-term
notes
(1)
|
4,987,385}
|
|
5,163,846
|
|
(150,497)
|
|
(161,513
|
)
|
|
(6.02)
|
|
(6.24)
|
|
Collateral
trust bonds (1)
|
|
5,393,709}
|
|
5,275,751
|
|
(160,178)
|
|
(130,955
|
)
|
|
(5.92)
|
|
(4.95)
|
|
Subordinated deferrable debt
(1)
|
301,895}
|
|
301,822
|
|
(9,831)
|
|
(9,831
|
)
|
|
(6.50)
|
|
(6.50)
|
|
Subordinated
certificates
(1)
|
|
1,728,401}
|
|
1,363,937
|
|
(38,807)
|
|
(25,248
|
)
|
|
(4.48)
|
|
(3.69)
|
|
Long-term
private debt (1)
|
|
4,645,023}
|
|
3,243,680
|
|
(93,554)
|
|
(78,355
|
)
|
|
(4.02)
|
|
(4.82)
|
|
Total
debt
|
|
19,407,342}
|
|
18,559,578
|
|
(458,053)
|
|
(445,978
|
)
|
|
(4.71)
|
|
(4.79)
|
|
Debt
issuance costs
(2)
|
|
-}
|
|
-
|
|
(5,605)
|
|
(4,526
|
)
|
|
-
|
|
-
|
|
Fee
expense (3)
|
|
-}
|
|
-
|
|
(5,948)
|
|
(3,832
|
)
|
|
-
|
|
-
|
|
Total
|
$
|
19,407,342}
|
$
|
18,559,578
|
$
|
(469,606)
|
$
|
(454,336
|
)
|
|
(4.83)
|
%
|
(4.88)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (4)
|
$
|
11,665,572}
|
$
|
13,373,908
|
$
|
(14,200)
|
$
|
12,934
|
|
|
(0.24)
|
%
|
0.19
|
%
|
Adjusted
interest expense (5)
|
|
19,407,342}
|
|
18,559,577
|
|
(483,806)
|
|
(441,402
|
)
|
|
(4.97)
|
|
(4.74)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income/Net yield
|
|
|
|
|
$
|
64,770
|
$
|
75,527
|
|
|
0.31
|
%
|
0.46
|
%
|
Adjusted
net interest income/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
net yield (5)
|
|
|
|
|
|
50,570
|
|
88,461
|
|
|
0.17
|
|
0.60
|
|
(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
|
|
|
|
|
|
|
|
|
|
For
the six months ended November 30,
2009
vs. 2008
|
|
|
|
|
Change
due to:
|
|
|
|
|
(dollar
amounts in thousands)
|
|
Average
volume
(1)
|
|
Average
rate
(2)
|
|
Net
change
|
|
|
Increase
(decrease) in interest income:
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
$
|
3,010}
|
$
|
(2,597)
|
$
|
413}
|
|
|
Long-term
variable-rate loans
|
|
12,497}
|
|
2,105}
|
|
14,602}
|
|
|
Short-term
loans
|
|
(335)
|
|
(9,435)
|
|
(9,770)
|
|
|
Total
interest income on loans
|
|
15,172}
|
|
(9,927)
|
|
5,245}
|
|
|
Investments
|
|
1,334}
|
|
(1,973)
|
|
(639)
|
|
|
Fee
income
|
|
-}
|
|
(93)
|
|
(93)
|
|
|
Total
interest income
|
$
|
16,506}
|
$
|
(11,993)
|
$
|
4,513}
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in interest expense:
|
|
|
|
|
|
|
|
|
Commercial
paper and bank bid notes
|
$
|
10,730}
|
$
|
24,160}
|
$
|
34,890}
|
|
|
Medium-term
notes
|
|
5,519}
|
|
5,497}
|
|
11,016}
|
|
|
Collateral
trust bonds
|
|
(2,928)
|
|
(26,295)
|
|
(29,223)
|
|
|
Subordinated
deferrable debt
|
|
(2)
|
|
2}
|
|
-}
|
|
|
Subordinated
certificates
|
|
(6,747)
|
|
(6,812)
|
|
(13,559)
|
|
|
Long-term
private debt
|
|
(33,851)
|
|
18,652}
|
|
(15,199)
|
|
|
Total
interest expense on debt
|
|
(27,279)
|
|
15,204}
|
|
(12,075)
|
|
|
Debt
issuance costs
|
|
-}
|
|
(1,079)
|
|
(1,079)
|
|
|
Fee
expense
|
|
-}
|
|
(2,116)
|
|
(2,116)
|
|
|
Total
interest expense
|
|
(27,279)
|
|
12,009}
|
|
(15,270)
|
|
|
Increase
(decrease) in net interest income
|
$
|
(10,773)
|
$
|
16}
|
$
|
(10,757)
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (3)
|
$
|
(1,652)
|
$
|
(25,482)
|
$
|
(27,134)
|
|
|
Adjusted
interest expense (4)
|
|
(20,162)
|
|
(22,242)
|
|
(42,404)
|
|
|
(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 due to the net difference
between the average rate paid and the average rate received for interest rate
swaps 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 $5
million or 1 percent increase in interest income for the six months ended
November 30, 2009 as compared with the prior-year period was due to a $781
million or 4 percent increase in average loan volume largely offset by a 15
basis point decline in the average yield earned on the portfolio. The
decline in the yield earned on the loan portfolio was primarily the result of
the 104 basis point decrease in interest rates earned on short-term
loans. At November 30, 2009,
approximately 29 percent of the outstanding balance of our line of credit loans
was priced at rates significantly lower than our standard line of credit
interest rates. Of the line of credit loans priced lower than our
standard rates at November 30, 2009, 55 percent were made as part of loan
syndications where the pricing is agreed upon by all of the participating banks
and is based on current market conditions. In addition, 98 percent
were not eligible to earn patronage capital. We also had a
reduction to interest income of $27 million due to non-accrual loans for the six
months ended November 30, 2009, compared with a reduction of $28 million for the
prior-year period. The effect on electric interest income of
non-accrual loans was a reduction of $12 million for the six months ended
November 30, 2009, as compared with $13 million for the prior-year
period. The telecommunications interest income was reduced by $15
million for both the six months ended November 30, 2009 and 2008 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
Our
interest expense increased by $15 million or 3 percent for the six months ended
November 30, 2009 as compared with the prior-year period. The
increase in interest expense was primarily due to the $848 million or 5 percent
increase in average debt outstanding partly offset by an 8 basis point decrease
in the weighted average cost of debt during the six months ended November 30,
2009 compared with November 30, 2008. The increase to the average balance of
debt outstanding was primarily due to the 4 percent increase in average loan
volume period over period and the prefunding of $1,250 million of debt that
matured on August 29, 2009.
The
increase in interest expense is further explained by the following
factors:
·
|
We
replaced some of our commercial paper with term debt which represents a
higher cost of funding. The average balance of commercial paper
for the six months ended November 30, 2009 decreased $860 million or 27
percent compared with the prior-year period. Since the
revolving credit lines are required to maintain backup liquidity on our
commercial paper, the $500 million reduction to the 364-day revolving
credit agreement in March 2009 decreased the amount of commercial paper we
can have outstanding.
|
·
|
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.
|
·
|
At
November 30, 2009, we had $360 million of member capital securities
outstanding, which represents a higher cost of funding at a fixed interest
rate of 7.5 percent compared with commercial paper and private placements
of debt. We initiated the member capital securities program in
late November 2008 and there was no impact on interest expense during the
prior-year period.
|
These
factors were partly offset by the following:
·
|
The
lower interest rate environment for variable-rate debt. The
weighted average cost of funding for commercial paper decreased 205 basis
points from November 30, 2008 to November 30,
2009.
|
·
|
The
$1,401 million or 43 percent increase in the average balance of long-term
private placement debt during the six months ended November 30, 2009 at an
average rate of 4.02 percent, a 80 basis point reduction from the
prior-year period. The average rate on long-term private
placement debt decreased primarily due to the $1,425 million increase in
Farmer Mac debt outstanding from November 30, 2008 to November 30, 2009
which had a lower interest rate compared with other term debt in place
during the prior-year period.
|
·
|
The
22 basis point decrease in the weighted average cost of funding for
medium-term notes due primarily to the $821 million increase in retail
notes from November 30, 2008 to November 30, 2009 that were issued at a
lower rate relative to other medium-term
notes.
|
The
adjusted interest expense, which includes all derivative cash settlements, was
$484 million for the six months ended November 30, 2009 compared with $441
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 $11
million decrease in net interest income for the six months ended November 30,
2009 compared with the prior-year period was due primarily to the following
factors described in more detail above:
·
|
the
$848 million or 5 percent increase in the average debt volume due to the
$781 million or 4 percent increase in average loan volume and the
prefunding of maturing debt,
|
·
|
the
15 basis point decline in the yield of our loan portfolio due primarily to
lower interest rates earned on short-term loans partly offset
by
|
·
|
the
8 basis point decrease in the overall cost of
debt.
|
The
adjusted net interest income, which includes all derivative cash settlements,
for the six months ended November 30, 2009 was $51 million, a decrease of $38
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.
Recovery
of/Provision for Loan Losses
During
the six months ended November 30, 2009, there was a loan loss recovery of $15
million compared to a provision of $137 million in the prior-year
period. The recovery of loan losses during the six months ended
November 30, 2009 was primarily due to the decrease to the reserve for impaired
loans due to payments received and the net decrease in our variable interest
rates, as well as the decrease in exposure and the weighted average maturity in
the general portfolio, partly offset by an increase to the exposure for high
risk loans during the period. See further discussion in Allowance for Loan Losses in
the Financial Condition
section.
Non-interest
Income
Non-interest
income decreased by $27 million for the six months ended November 30, 2009
compared with the prior-year period primarily due to the decrease in cash
settlements on derivative financial instruments. The $27 million
decrease in cash settlements for the six months ended November 30, 2009 was due
to lower short-term interest rates during the period compared with the
prior-year period as we received a variable rate on the majority of our
derivative contracts. In addition, during the prior-year period, we
recorded $7 million of income in derivative cash settlements representing the
estimated
recovery
for the $26 million due to CFC as a result of terminating interest rate swaps
with Lehman Brothers Special Financing Inc.
Non-interest
Expense
Non-interest
expense decreased by $150 million for the six months ended November 30, 2009
compared with the prior-year period primarily due to the $147 million decrease
in the derivative forward value loss. The decrease in the derivative
forward value loss was because of a shift in the composition of our derivative
portfolio. At November 30, 2009, 51% of our interest rate swaps were
pay fixed-receive variable versus 55% at November 30, 2008. The low
interest rate environment negatively impacts the value of those
swaps. The recovery of the guarantee liability during the six months
ended November 30, 2009 was primarily due to the $80 million decrease in
guarantees outstanding, partially due to the early redemption of a $20 million
tax-exempt bond guarantee.
Net
Income (Loss)
The
change in the items described above resulted in a net income of $39 million for
the six months ended November 30, 2009, compared to net loss of $218 million for
the prior-year period. The adjusted net income, which excludes the
effect of the derivative forward value, was $42 million, compared to an adjusted
net loss of $68 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.
Noncontrolling
Interest
Noncontrolling
interest represents $0.5 million of net loss for RTFC and $0.9 million of net
loss for NCSC for the six months ended November 30,
2009. Noncontrolling interest for the six months ended November 30,
2008 represents $0.2 million of RTFC net loss and $2.8 million of the $11.6
million NCSC net loss for the period. During the six months ended
November 30, 2008, NCSC’s net loss exceeded its equity balance by $8.8
million. Under prior accounting guidance, CFC was required to absorb
the $8.8 million excess NCSC loss. Based on the provisions of new
accounting guidance, the noncontrolling interest is required to absorb the full
amount of its losses, even if the losses exceed its equity
balance. The decrease in the loss attributable to the noncontrolling
interest was primarily due to the decrease in the derivative forward value loss
recorded at NCSC for the six months ended November 30, 2009 compared to the
prior-year period.
Three
months ended November 30, 2009 versus November 30, 2008 results
The
following table presents the results of operations for the three months ended
November 30, 2009 and 2008.
|
For
the three months ended November 30,
|
|
Increase/
|
(dollar
amounts in thousands)
|
2009
|
|
2008
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
$
|
264,919}
|
|
|
$
|
266,746
|
|
|
$
|
(1,827)
|
|
Interest
expense
|
|
(226,977)
|
|
|
|
(234,187
|
)
|
|
|
7,210}
|
|
Net
interest income
|
|
37,942}
|
|
|
|
32,559
|
|
|
|
5,383}
|
|
Provision
for loan losses
|
|
(1,577)
|
|
|
|
(126,311
|
)
|
|
|
124,734}
|
|
Net
interest income (loss) after provision for loan losses
|
|
36,365}
|
|
|
|
(93,752
|
)
|
|
|
130,117}
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Fee
and other income
|
|
4,106}
|
|
|
|
2,737
|
|
|
|
1,369}
|
|
Derivative
cash settlements
|
|
(10,706)
|
|
|
|
12,503
|
|
|
|
(23,209)
|
|
Results
of operations of foreclosed assets
|
|
21}
|
|
|
|
1,211
|
|
|
|
(1,190)
|
|
Total
non-interest income
|
|
(6,579)
|
|
|
|
16,451
|
|
|
|
(23,030)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
(9,766)
|
|
|
|
(9,912
|
)
|
|
|
146}
|
|
Other
general and administrative expenses
|
|
(6,650)
|
|
|
|
(5,182
|
)
|
|
|
(1,468)
|
|
Recovery
of (provision for) guarantee liability
|
|
821}
|
|
|
|
(5,686
|
)
|
|
|
6,507}
|
|
Derivative
forward value
|
|
7,562}
|
|
|
|
(139,383
|
)
|
|
|
146,945}
|
|
Market
adjustment on foreclosed assets
|
|
-}
|
|
|
|
(153
|
)
|
|
|
153}
|
|
Other
|
|
(175)
|
|
|
|
(138
|
)
|
|
|
(37)
|
|
Total
non-interest expense
|
|
(8,208)
|
|
|
|
(160,454
|
)
|
|
|
152,246}
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes
|
|
21,578}
|
|
|
|
(237,755
|
)
|
|
|
259,333}
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
841}
|
|
|
|
6,400
|
|
|
|
(5,559)
|
|
Net
income (loss)
|
|
22,419}
|
|
|
|
(231,355
|
)
|
|
|
253,774}
|
|
Less: Net
loss attributable to noncontrolling interest
|
|
1,568}
|
|
|
|
1,738
|
|
|
|
(170)
|
|
Net
income (loss) attributable to CFC
|
$
|
23,987}
|
|
|
$
|
(229,617
|
)
|
|
$
|
253,604}
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIER
(1)
|
|
1.10}
|
|
|
|
-
|
|
|
|
|
|
Adjusted
TIER (1)
(2)
|
|
|
1.06}
|
|
|
|
-
|
|
|
|
|
|
(1) For
the three months ended November 30, 2008, we reported a net loss of $231 million
and an adjusted net loss of $92 million. Thus the TIER and adjusted
TIER calculations for this period result in a value below 1.00.
(2)
Adjusted to exclude the effect of the derivative forward value from net income
and to include all derivative cash settlements in the interest
expense. See Non-GAAP Financial Measures
for further explanation and a reconciliation of these adjustments.
The
following tables break out the average yield on loans, the average cost 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 break out
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 interest expense.
|
|
Average balances and interest rates –
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
volume
|
|
|
Interest
income
|
|
|
Average
yield
|
|
|
|
For
the three months ended November 30,
|
|
|
For
the three months ended November 30,
|
|
|
For
the three months ended November 30,
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
2008
|
|
|
2009
|
|
2008
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans (1)
|
$
|
15,476,573}
|
$
|
15,235,995
|
|
$
|
225,550}
|
$
|
224,261
|
|
|
5.85
|
%
|
5.90
|
%
|
Long-term
variable-rate loans (1)
|
2,295,925}
|
|
1,874,854
|
|
|
21,686}
|
|
18,469
|
|
|
3.79
|
|
3.95
|
|
Short-term
loans
(1)
|
1,713,386}
|
|
1,892,912
|
|
|
14,641}
|
|
20,942
|
|
|
3.43
|
|
4.44
|
|
Non-performing
loans
|
523,795}
|
|
492,192
|
|
|
-}
|
|
-
|
|
|
-}
|
|
-}
|
|
Total
loans
|
|
20,009,679}
|
|
19,495,953
|
|
|
261,877}
|
|
263,672
|
|
|
5.25
|
|
5.42
|
|
Investments
(2)
|
|
287,051}
|
|
427,836
|
|
|
1,329}
|
|
1,444
|
|
|
1.86
|
|
1.35
|
|
Fee
income
|
|
-}
|
|
-
|
|
|
1,713}
|
|
1,630
|
|
|
-}
|
|
-}
|
|
Total
|
$
|
20,296,730}
|
$
|
19,923,789
|
|
$
|
264,919}
|
$
|
266,746
|
|
|
5.24
|
%
|
5.37
|
%
|
(1)
Interest income on loans to members.
(2)
Interest income on the investment of excess cash and equity
securities.
|
|
Average balances and interest rates –
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
volume
|
|
Interest
expense
|
|
|
Average
cost
|
|
|
|
For
the three months ended November 30,
|
|
For
the three months ended November 30,
|
|
|
For
the three months ended November 30,
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
2008
|
|
Commercial
paper and bank bid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
notes
(1)
|
$
|
2,230,910}
|
$
|
3,758,955
|
$
|
(1,964)
|
|
$
|
(23,638)
|
|
|
(0.35)
|
%
|
(2.52)
|
%
|
Medium-term
notes
(1)
|
4,339,188}
|
|
5,121,414
|
|
(65,902)
|
|
|
(81,055)
|
|
|
(6.09)
|
|
(6.35)
|
|
Collateral
trust bonds (1)
|
|
5,607,943}
|
|
4,940,431
|
|
(81,585)
|
|
|
(68,035)
|
|
|
(5.84)
|
|
(5.52)
|
|
Subordinated deferrable debt
(1)
|
301,904}
|
|
301,831
|
|
(4,915)
|
|
|
(4,915)
|
|
|
(6.53)
|
|
(6.53)
|
|
Subordinated
certificates
(1)
|
|
1,757,277}
|
|
1,384,523
|
|
(19,787)
|
|
|
(12,831)
|
|
|
(4.52)
|
|
(3.72)
|
|
Long-term
private debt (1)
|
|
4,824,387}
|
|
3,273,049
|
|
(47,568)
|
|
|
(38,916)
|
|
|
(3.95)
|
|
(4.77)
|
|
Total
debt
|
|
19,061,609}
|
|
18,780,203
|
|
(221,721)
|
|
|
(229,390)
|
|
|
(4.67)
|
|
(4.90)
|
|
Debt
issuance costs
(2)
|
|
-}
|
|
-
|
|
(2,625)
|
|
|
(2,391)
|
|
|
-
|
|
-
|
|
Fee
expense (3)
|
|
-}
|
|
-
|
|
(2,631)
|
|
|
(2,406)
|
|
|
-
|
|
-
|
|
Total
|
$
|
19,061,609}
|
$
|
18,780,203
|
$
|
(226,977)
|
|
$
|
(234,187)
|
|
|
(4.78)
|
%
|
(5.00)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (4)
|
$
|
11,573,493}
|
$
|
13,066,771
|
$
|
(10,706)
|
|
$
|
12,503
|
|
|
(0.37)
|
%
|
0.38
|
%
|
Adjusted
interest expense (5)
|
|
19,061,609}
|
|
18,780,203
|
|
(237,683)
|
|
|
(221,684)
|
|
|
(5.00)
|
|
(4.73)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income/Net yield
|
|
|
|
|
$
|
37,942}
|
|
$
|
32,559
|
|
|
0.46
|
%
|
0.37
|
%
|
Adjusted
net interest income/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
net yield (5)
|
|
|
|
|
|
27,236}
|
|
|
45,062
|
|
|
0.24
|
|
0.64
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended November 30,
2009
vs. 2008
|
|
|
|
|
Change
due to:
|
|
|
|
|
|
(dollar
amounts in thousands)
|
|
Average
volume
(1)
|
|
Average
rate
(2)
|
|
|
Net
change
|
|
|
Increase
(decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
Long-term
fixed-rate loans
|
$
|
3,541}
|
$
|
(2,252)
|
|
$
|
1,289}
|
|
|
Long-term
variable-rate loans
|
|
4,148}
|
|
(931)
|
|
|
3,217}
|
|
|
Short-term
loans
|
|
(1,986)
|
|
(4,315)
|
|
|
(6,301)
|
|
|
Total
interest income on loans
|
|
5,703}
|
|
(7,498)
|
|
|
(1,795)
|
|
|
Investments
|
|
(475)
|
|
360}
|
|
|
(115)
|
|
|
Fee
income
|
|
-}
|
|
83}
|
|
|
83}
|
|
|
Total
interest income
|
$
|
5,228}
|
$
|
(7,055)
|
|
$
|
(1,827)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in interest expense:
|
|
|
|
|
|
|
|
|
|
Commercial
paper and bank bid notes
|
$
|
9,609}
|
$
|
12,065}
|
|
$
|
21,674}
|
|
|
Medium-term
notes
|
|
12,380}
|
|
2,773}
|
|
|
15,153}
|
|
|
Collateral
trust bonds
|
|
(9,192)
|
|
(4,358)
|
|
|
(13,550)
|
|
|
Subordinated
deferrable debt
|
|
(1)
|
|
1}
|
|
|
-}
|
|
|
Subordinated
certificates
|
|
(3,454)
|
|
(3,502)
|
|
|
(6,956)
|
|
|
Long-term
private debt
|
|
(18,445)
|
|
9,793}
|
|
|
(8,652)
|
|
|
Total
interest expense on debt
|
|
(9,103)
|
|
16,772}
|
|
|
7,669}
|
|
|
Debt
issuance costs
|
|
-}
|
|
(234)
|
|
|
(234)
|
|
|
Fee
expense
|
|
-}
|
|
(225)
|
|
|
(225)
|
|
|
Total
interest expense
|
|
(9,103)
|
|
16,313}
|
|
|
7,210}
|
|
|
Increase
(decrease) in net interest income
|
$
|
(3,875)
|
$
|
9,258}
|
|
$
|
5,383}
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
cash settlements (3)
|
$
|
(1,429)
|
$
|
(21,780)
|
|
$
|
(23,209)
|
|
|
Adjusted
interest expense (4)
|
|
(3,322)
|
|
(12,677)
|
|
|
(15,999)
|
|
|
(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 due to the net difference
between the average rate paid and the average rate received for interest rate
swaps 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 $2
million or 1 percent decrease in interest income for the three months ended
November 30, 2009 compared to the prior-year period was due to a 17 basis point
decline in the average yield earned on the portfolio partly offset by the $514
million or 3 percent increase in average loan volume. The decline in the yield earned on the loan portfolio
was primarily the result of the 101 basis point decrease in interest rates
earned on short-term loans. At November 30, 2009, approximately
29 percent of our total outstanding line of credit loans were priced at rates
significantly lower than our standard line of credit interest
rates. Of the line of credit loans priced lower than our standard
rates at November 30, 2009, 55 percent were made as part of loan syndications
where the pricing is agreed upon by all of the participating banks and is based
on current market conditions. In addition, 98 percent were not
eligible to earn patronage capital. We had a reduction to
interest income of $13 million due to non-accrual loans for the three months
ended November 30, 2009, compared with a reduction of $14 million for the
prior-year period. The effect on electric interest income of
non-accrual loans was a reduction of $6 million for the three months ended
November 30, 2009, as compared with $7 million for the prior-year
period. The telecommunications interest income was reduced by $7
million for both the three months ended November 30, 2009 and 2008 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
Our
interest expense decreased by $7 million or 3 percent for the three months ended
November 30, 2009 compared to the prior-year period primarily due to the 23
basis points decline in the overall cost of debt which was partly offset by an
increase in interest expense due to a $281 million or 1% increase in average
debt outstanding. The increase in the average debt balance is the
result of the 3 percent increase in average loan volume period over
period.
The
decrease in interest expense is further explained by the following
factors:
·
|
The
lower interest rate environment. Lower interest rates on our
variable-rate debt and commercial paper
funding.
|
·
|
The
$1,551 million or 47 percent increase in the average balance of long-term
private placement debt during the three months ended November 30, 2009 at
an average rate of 3.95 percent, a 82 basis point reduction from the prior
year period. The average rate on long-term private placement
debt decreased primarily due to the $1,425 million increase in Farmer Mac
debt outstanding from November 30, 2008 to November 30, 2009 which had a
lower interest rate compared with other term debt in place during the
prior-year period.
|
·
|
The
26 basis point decrease in the weighted average cost of funding for
medium-term notes due primarily to the $821 million increase in retail
notes from November 30, 2008 to November 30, 2009 that were issued at a
lower rate relative to other medium-term
notes.
|
These
factors were partly offset by the following:
·
|
We
replaced some of our commercial paper with term debt which represents a
higher cost of funding. The average balance of commercial paper
for the three months ended November 30, 2009 decreased $1,528 million or
41 percent compared with the prior-year period. Since the
revolving credit lines are required to maintain backup liquidity on our
commercial paper, the $500 million reduction to the 364-day revolving
credit agreement in March 2009 decreased the amount of commercial paper we
can have outstanding.
|
·
|
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.
|
·
|
At
November 30, 2009, we had $360 million of member capital securities
outstanding, which represents a higher cost of funding at a fixed interest
rate of 7.5 percent compared with commercial paper and private placements
of debt. We initiated the member capital securities program in
late November 2008 and there was no impact on interest expense during the
prior-year period.
|
The
adjusted interest expense, which includes all derivative cash settlements, was
$238 million for the three months ended November 30, 2009 compared with $222
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 $5
million increase in net interest income for the three months ended November 30,
2009 compared with the prior-year period was due primarily to the following
factors described in more detail above:
·
|
the
23 basis point decrease in the overall cost of debt offset
by
|
·
|
the
17 basis point decline in the yield of our loan portfolio due primarily to
lower interest rates earned on variable-rate loans,
and
|
·
|
the
$281 million or 1 percent increase in the average debt volume to fund the
$514 million or 3 percent higher average loan
balance.
|
The
adjusted net interest income, which includes all derivative cash settlements,
for the three months ended November 30, 2009 was $27 million, a decrease of $18
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/ Recovery of Loan Losses
During
the three months ended November 30, 2009, there was a loan loss provision of $2
million compared to a provision of $126 million in the prior-year
period. The provision of loan losses during the three months ended
November 30, 2009 was primarily due to the increase to the exposure for high
risk loans, partly offset by the decrease to the reserve for impaired loans due
to payments received, as well as the decrease in exposure in the general
portfolio during the period. See further discussion in Allowance for Loan Losses in
the Financial Condition
section.
Non-interest
Income
Non-interest
income decreased by $23 million for the three months ended November 30, 2009
compared with the prior-year period primarily due to the decrease in cash
settlements on derivative financial instruments. The $23 million
decrease in cash settlements for the three months ended November 30, 2009 was
due to lower short-term interest rates during the period compared with the
prior-year period as we received a variable rate on the majority of our
derivative contracts. Approximately $400 million of pay fixed-receive
variable swaps matured during the quarter ended November 30, 2009. In
addition, during the prior-year period, we recorded $7 million of income in
derivative cash settlements representing the estimated recovery for the $26
million due to CFC as a result of terminating interest rate swaps with Lehman
Brothers Special Financing Inc.
Non-interest
Expense
Non-interest
expense decreased by $152 million for the three months ended November 30, 2009
compared with the prior-year period primarily due to the $147 million change in
the derivative forward value recorded because of a shift in the composition of
our derivatives portfolio. We recorded an $8 million derivative
forward value gain for the three months ended November 30, 2009 compared with a
$139 million derivative forward value loss for the three months ended November
30, 2008. At November 30, 2009, 51% of our interest rate swaps were
pay fixed-receive variable versus 55% at November 30, 2008. The low
interest rate environment negatively impacts the value of those
swaps.
We
recorded a $1 million recovery of guarantee liability for the three months ended
November 30, 2009 compared with a $6 million provision during the three months
ended November 30, 2008. Guarantees decreased by $55 million over the
three months ended November 30, 2009, partially due to the early redemption of a
$20 million tax-exempt bond guarantee. The provision for guarantee liability
during the three months ended November 30, 2008 was primarily due to the $206
million increase in guarantees outstanding during that period.
Net
Income (Loss)
The
change in the items described above resulted in a net income of $22 million for
the three months ended November 30, 2009, compared to net loss of $231 million
for the prior-year period. The adjusted net income, which excludes
the effect of the derivative forward value, was $15 million, compared to a loss
of $92 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.
Noncontrolling
Interest
Noncontrolling
interest represents $1.4 million of net loss for NCSC and $0.2 million of net
loss for RTFC for the three months ended November 30,
2009. Noncontrolling interest for the three months ended November 30,
2008 represents $0.2 million of RTFC net loss and $1.5 million of the $10.3
million NCSC net loss for the period. During the three months ended
November 30, 2008, NCSC’s net loss exceeded its equity balance by $8.8 million.
Under prior accounting guidance CFC was required to absorb the $8.8 million
excess NCSC loss. Based on the provisions of new accounting guidance,
the noncontrolling interest is required to absorb the full amount of its losses,
even if the losses exceed its equity balance. The decrease in the
loss attributable to the noncontrolling interest was primarily due to the
decrease in the derivative forward value loss recorded at NCSC for the three
months ended November 30, 2009 compared to the prior-year period.
Ratio
of Earnings to Fixed Charges
The
following table provides the calculation of the ratio of earnings to fixed
charges. 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.
|
|
Three
months ended
November
30,
|
|
|
Six
months ended
November
30,
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Income (loss)
prior to cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
change
in accounting principle
|
$
|
22,419}
|
|
$
|
(231,355
|
)
|
$
|
38,852}
|
|
$
|
(218,125
|
)
|
Add:
fixed charges
|
|
227,005}
|
|
|
234,239
|
|
|
469,665}
|
|
|
454,388
|
|
Less:
interest capitalized
|
|
(28)
|
|
|
(52
|
)
|
|
(59)
|
|
|
(52
|
)
|
Earnings
available for fixed charges
|
$
|
249,396}
|
|
$
|
2,832
|
|
$
|
508,458}
|
|
$
|
236,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fixed charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on all debt (including amortization of discount
|
|
|
|
|
|
|
|
|
|
|
|
|
and
issuance costs)
|
$
|
226,977}
|
|
$
|
234,187
|
|
$
|
469,606}
|
|
$
|
454,336
|
|
Interest
capitalized
|
|
28}
|
|
|
52
|
|
|
59}
|
|
|
52
|
|
Total
fixed charges
|
$ |
227,005}
|
|
$ |
234,239
|
|
$ |
469,665}
|
|
$ |
454,388
|
|
Ratio
of earnings to fixed charges (1)
|
|
|
1.10}
|
|
|
-
|
|
|
1.08}
|
|
|
-
|
|
(1) For
the three and six months ended November 30, 2008, earnings were insufficient to
cover fixed charges by $231 million and $218 million, respectively.
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:
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
(dollar
amounts in thousands)
|
|
November
30, 2009
|
|
|
|
May
31, 2009
|
|
|
|
|
(Decrease)
|
|
|
Loans
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
fixed rate loans
|
$
|
15,393,682}
|
|
78
|
%
|
|
$
|
14,812,550
|
|
74
|
%
|
|
|
$
|
581,132}
|
|
|
Long-term
variable rate loans
|
|
2,606,109}
|
|
13
|
|
|
|
3,277,528
|
|
16
|
|
|
|
|
(671,419)
|
|
|
Total
long-term loans
|
|
17,999,791}
|
|
91
|
|
|
|
18,090,078
|
|
90
|
|
|
|
|
(90,287)
|
|
|
Short-term
loans (2)
|
|
1,729,503}
|
|
9
|
|
|
|
2,098,129
|
|
10
|
|
|
|
|
(368,626)
|
|
|
Total
loans
|
$
|
19,729,294}
|
|
100
|
%
|
|
$
|
20,188,207
|
|
100
|
%
|
|
|
$
|
(458,913)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/
|
|
|
(dollar
amounts in thousands)
|
|
November
30, 2009
|
|
|
|
May
31, 2009
|
|
|
|
(Decrease)
|
|
|
Loans
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
$
|
13,536,574}
|
|
69
|
%
|
|
$
|
13,730,511
|
|
68
|
%
|
|
$
|
(193,937)
|
|
|
Power
supply
|
|
4,024,587}
|
|
20
|
|
|
|
4,268,244
|
|
21
|
|
|
|
(243,657)
|
|
|
Statewide
and associate
|
|
89,072}
|
|
-}
|
|
|
|
92,578
|
|
1
|
|
|
|
(3,506)
|
|
|
CFC
total
|
|
17,650,233}
|
|
89
|
|
|
|
18,091,333
|
|
90
|
|
|
|
(441,100)
|
|
|
RTFC
|
|
1,717,962}
|
|
9
|
|
|
|
1,680,154
|
|
8
|
|
|
|
37,808}
|
|
|
NCSC
|
|
361,099}
|
|
2
|
|
|
|
416,720
|
|
2
|
|
|
|
(55,621)
|
|
|
Total
|
|
$
|
19,729,294}
|
|
100
|
%
|
|
$
|
20,188,207
|
|
100
|
%
|
|
$
|
(458,913)
|
|
|
(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.
Our loans
outstanding decreased by $459 million or 2 percent for the six months ended
November 30, 2009. The primary reasons for this decline are
repayments from power supply bridge loans with RUS funding and the decrease in
the funding of our members’ capital expenditures due to the current economic
climate. We currently expect a slight decline over the remainder of
fiscal year 2010 in our loan portfolio as a result of further power supply
repayments of bridge loans, as well as our power supply borrowers’ increased
access in the capital markets.
Loans
converting from a variable rate to a fixed rate for the six months ended
November 30, 2009 totaled $696 million, which was partially offset by loans that
converted from a fixed rate to a variable rate totaling $89
million. The significant shift in variable-rate loans converting to
fixed rates was the result of the decrease of our long-term fixed rates offered
during the six months ended November 30, 2009 of between 145 and 195 basis
points for electric loans and between 180 and 255 basis points for RTFC loans,
depending on the type and maturity of the loan. For the six months
ended November 30, 2008, loans converting from a fixed rate to variable rate
totaled $115 million, which was partially offset by $102 million of loans that
converted from a variable rate to a fixed rate.
The
following table summarizes loans and guarantees outstanding by
segment:
(dollar
amounts in thousands)
|
|
November
30, 2009
|
|
|
|
May
31, 2009
|
|
|
|
Increase/
|
|
CFC:
|
|
Amount
|
|
%
of Total
|
|
|
|
Amount
|
|
%
of Total
|
|
|
|
(Decrease)
|
|
Distribution
|
$
|
13,744,456}
|
|
66
|
%
|
|
$
|
13,994,595
|
|
65
|
%
|
|
$
|
(250,139)
|
|
Power
supply
|
|
4,935,010}
|
|
23
|
|
|
|
5,213,868
|
|
24
|
|
|
|
(278,858)
|
|
Statewide
and associate
|
|
111,133}
|
|
1
|
|
|
|
116,203
|
|
1
|
|
|
|
(5,070)
|
|
CFC
total
|
|
18,790,599}
|
|
90
|
|
|
|
19,324,666
|
|
90
|
|
|
|
(534,067)
|
|
RTFC
|
|
1,718,599}
|
|
8
|
|
|
|
1,680,654
|
|
8
|
|
|
|
37,945}
|
|
NCSC
|
|
415,835}
|
|
2
|
|
|
|
458,342
|
|
2
|
|
|
|
(42,507)
|
|
Total
|
$
|
20,925,033}
|
|
100
|
%
|
|
$
|
21,463,662
|
|
100
|
%
|
|
$
|
(538,629)
|
|
The
following table summarizes the loans and guarantees outstanding at RTFC by
type:
|
|
November
30, 2009
|
|
|
|
May
31, 2009
|
|
|
|
Increase/
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total
|
|
|
|
Amount
|
|
%
of Total
|
|
|
|
(Decrease)
|
|
Rural
local exchange carriers
|
$
|
1,515,179}
|
|
89
|
%
|
|
$
|
1,476,402
|
|
88
|
%
|
|
$
|
38,777}
|
|
Cable
television providers
|
|
151,713}
|
|
9
|
|
|
|
152,326
|
|
9
|
|
|
|
(613)
|
|
Fiber
optic network providers
|
|
7,256}
|
|
-
|
|
|
|
8,126
|
|
1
|
|
|
|
(870)
|
|
Competitive
local exchange carriers
|
|
34,452}
|
|
2
|
|
|
|
37,294
|
|
2
|
|
|
|
(2,842)
|
|
Wireless
providers
|
|
7,417}
|
|
-
|
|
|
|
3,924
|
|
-
|
|
|
|
3,493}
|
|
Other
|
|
2,582}
|
|
-
|
|
|
|
2,582
|
|
-
|
|
|
|
-}
|
|
Total
|
|
$
|
1,718,599}
|
|
100
|
%
|
|
$
|
1,680,654
|
|
100
|
%
|
|
$
|
37,945}
|
|
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 November 30, 2009 and May 31, 2009, loans outstanding
to members in any one state or territory did not exceed 17 percent of total
loans outstanding.
Credit
Concentration
CFC, RTFC
and NCSC each have policies that limit the amount of credit that can be extended
to individual borrowers or a controlled group of borrowers. The
credit limitation policies set the limit on the total exposure and unsecured
exposure to the borrower based on an assessment of the borrower's risk profile
and 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
November 30, 2009 and May 31, 2009, the total exposure outstanding to any one
borrower or controlled group did not exceed 2.5 percent and 2.4 percent,
respectively, of total loans and guarantees outstanding. At November
30, 2009 and May 31, 2009, the 10 largest borrowers included three distribution
systems, six 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:
|
|
November
30, 2009
|
|
|
May
31, 2009
|
|
|
Increase/
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of Total
|
|
|
(Decrease)
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
3,725,165}
|
|
|
18
|
%
|
$
|
3,686,956
|
|
|
17
|
%
|
$
|
38,209}
|
|
Guarantees
|
|
273,878}
|
|
|
1
|
|
|
363,883
|
|
|
2
|
|
|
(90,005)
|
|
Total
credit exposure to ten largest borrowers
|
$
|
3,999,043}
|
|
|
19
|
%
|
$
|
4,050,839
|
|
|
19
|
%
|
$
|
(51,796)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
3,451,444}
|
|
|
16
|
%
|
$
|
3,497,331
|
|
|
16
|
%
|
$
|
(45,887)
|
|
RTFC
|
|
523,849}
|
|
|
3
|
|
|
523,758
|
|
|
3
|
|
|
91}
|
|
NCSC
|
|
23,750}
|
|
|
-}
|
|
|
29,750
|
|
|
-
|
|
|
(6,000)
|
|
Total
credit exposure to ten largest borrowers
|
$
|
3,999,043}
|
|
|
19
|
%
|
$
|
4,050,839
|
|
|
19
|
%
|
$
|
(51,796)
|
|
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:
|
|
November
30, 2009
|
|
|
May
31, 2009
|
|
|
Increase/
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total
|
|
|
Amount
|
|
%
of Total
|
|
|
(Decrease)
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
2,385,359}
|
|
|
11
|
%
|
$
|
2,831,111
|
|
|
13
|
%
|
$
|
(445,752)
|
|
Guarantees
|
|
313,279}
|
|
|
2
|
|
|
347,325
|
|
|
2
|
|
|
(34,046)
|
|
Total
unsecured credit exposure
|
$
|
2,698,638}
|
|
|
13
|
%
|
$
|
3,178,436
|
|
|
15
|
%
|
$
|
(479,798)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
2,390,478}
|
|
|
11
|
%
|
$
|
2,875,396
|
|
|
14
|
%
|
$
|
(484,918)
|
|
RTFC
|
|
243,612}
|
|
|
2
|
|
|
237,259
|
|
|
1
|
|
|
6,353}
|
|
NCSC
|
|
64,548}
|
|
|
-}
|
|
|
65,781
|
|
|
-
|
|
|
(1,233)
|
|
Total
unsecured credit exposure
|
$
|
2,698,638}
|
|
|
13
|
%
|
$
|
3,178,436
|
|
|
15
|
%
|
$
|
(479,798)
|
|
Pledging
of Loans and Loans on Deposit
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. 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.
The
following table summarizes our secured debt or debt requiring collateral on
deposit, the excess collateral pledged and our unencumbered loans:
(dollar
amounts in thousands)
|
|
November
30,
2009
|
|
|
May
31,
2009
|
|
Total
loans to members
|
$
|
19,729,294}
|
|
$
|
20,188,207
|
|
Less:
Total secured debt or debt requiring
|
|
|
|
|
|
|
collateral
on deposit
|
|
(10,538,908)
|
|
|
(9,390,000
|
)
|
Less:
Excess collateral pledged or on deposit
|
|
(1,869,950)
|
|
|
(2,566,723
|
)
|
Unencumbered
loans
|
$
|
7,320,436}
|
|
$
|
8,231,484
|
|
|
|
|
|
|
|
|
Unencumbered
loans as a percentage of total loans
|
|
37
|
%
|
|
41
|
%
|
Non-performing
and Restructured Loans
The
following table presents a summary of non-performing and restructured loans as a
percentage of total loans and total loans and guarantees
outstanding:
(dollar
amounts in thousands)
|
|
|
November
30,
2009
|
|
|
May
31,
2009
|
|
Non-performing
loans (1)
|
|
$
|
523,849
|
|
$
|
523,758
|
|
Percent
of loans outstanding
|
|
|
2.66
|
%
|
|
2.59
|
%
|
Percent
of loans and guarantees outstanding
|
|
|
2.50
|
|
|
2.44
|
|
|
|
|
|
|
|
|
|
Restructured
loans
|
|
$
|
522,826
|
|
$
|
537,587
|
|
Percent
of loans outstanding
|
|
|
2.65
|
%
|
|
2.66
|
%
|
Percent
of loans and guarantees outstanding
|
|
|
2.50
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
Total
non-performing and restructured loans
|
|
$
|
1,046,675
|
|
$
|
1,061,345
|
|
Percent
of loans outstanding
|
|
|
5.31
|
%
|
|
5.25
|
%
|
Percent
of loans and guarantees outstanding
|
|
|
5.00
|
|
|
4.94
|
|
|
|
|
|
|
|
|
|
Total
non-accrual loans
|
|
$
|
1,000,461
|
|
$
|
1,014,585
|
|
Percent
of loans outstanding
|
|
|
5.07
|
%
|
|
5.03
|
%
|
Percent
of loans and guarantees outstanding
|
|
|
4.78
|
|
|
4.73
|
|
|
|
|
|
|
|
|
|
(1) All
loans classified as non-performing were on non-accrual status.
At November 30, 2009 and May 31, 2009, all loans
classified as restructured were performing according to the restructure
agreements. A total of $46 million and $47 million of restructured
loans at November 30, 2009 and May 31, 2009, respectively, have been on accrual
status since the time of the loan restructuring. There has been no
principal written off on these loans. Approximately $1 million
and $2 million, respectively, of interest income was accrued on restructured
loans during the three and six months ended November 30, 2009 and
2008.
At
November 30, 2009 and May 31, 2009 $477 million and $491 million, respectively,
of the loans on non-accrual status were performing as required under the loan
agreement with the borrower. During the six months ended November 30,
2009, this borrower made scheduled payments of $14 million, all of which were
applied as a reduction to the loan principal balance and resulted in a reduction
of $11 million to the calculated impairment. There has been no
principal written off on the exposure to this borrower.
At
November 30, 2009 and May 31, 2009, non-performing loans consist of loans to
Innovative Communication Corporation (“ICC”) totaling $524
million. 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 CFC
thereby resolving all the loan-related litigation in RTFC’s
favor. Regardless, Prosser and related parties continue to assert
claims against CFC and certain of its officers and directors and other parties
in various proceedings and forums. CFC 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 corporate
estates; and a Chapter 7 trustee was appointed in Prosser’s individual
case. The Chapter 11 trustee of ICC has assumed ownership and control
of ICC, including its subsidiaries.
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 USVI, the British Virgin Islands (“BVI”) and St.
Maarten (the “Group 1 Assets”); Group 2 consisting of stock in ICC subsidiaries
operating in France and certain of its Caribbean territories (the “Group 2
Assets”); and Group 3 consisting of the newspaper operations of ICC (the “Group
3 Assets”). The Group 2 Assets and Group 3 Assets were sold in
December 2008 and May 2008, respectively. Certain ancillary assets
have also been sold including aircraft, art and real estate. In each
instance, 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, with
RTFC reserving the right to assign its rights under the Purchase Agreement to
CFC. CFC, together with certain of its subsidiaries, has begun the
process of obtaining the applicable regulatory approvals. In October
2009, the BVI regulatory approval process was successfully completed, and in
December 2009, FCC approval was granted. There are two remaining
applications that are still pending action by the regulators.
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 13 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 November 30, 2009.
At
November 30, 2009 and May 31, 2009, restructured loans totaled $523 million and
$538 million, respectively. A total of $477 million and $491 million
of restructured loans were on non-accrual status at November 30, 2009 and May
31, 2009, respectively. 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
November 30, 2009 and May 31, 2009, restructured loans outstanding to Denton
County Electric Cooperative, d/b/a CoServ Electric ("CoServ") were $477 million
and $491 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 November 30, 2009 and May 31,
2009. Total loans to CoServ at November 30, 2009 and May 31, 2009
represented in each case 2.4 percent of our total loans and guarantees
outstanding.
Under the
terms of a bankruptcy settlement from 2002, we restructured the loans to
CoServ. CoServ is scheduled to make quarterly payments to us through
December 2037. As part of the restructuring, we 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 $138 million available under this loan facility.
When CoServ requests capital expenditure loans under this facility, 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
on the restructured loan. 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, we
have not received notice from CoServ that it intends to prepay the
loan.
Based on
our analysis, we believe that we have adequately reserved for our exposure to
CoServ at November 30, 2009.
At each
of November 30, 2009 and May 31, 2009, we had a total of $42 million in
restructured loans outstanding to Pioneer Electric Cooperative, Inc.
("Pioneer"). Pioneer is current with respect to all debt service
payments at November 30, 2009 and all loans to Pioneer remain on accrual
status. We are the principal creditor to Pioneer.
Based on
our analysis, we believe that we have adequately reserved for our exposure to
Pioneer at November 30, 2009.
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 the 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 loan. Since our inception in 1969,
charge-offs totaled $217 million and recoveries totaled $34 million for a total
net charge-off 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 six months ended and as of
|
|
|
For
the year ended
and
as of
|
|
|
|
|
November
30,
|
|
|
May
31,
|
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Beginning
balance
|
$
|
622,960}
|
|
$
|
514,906
|
|
$
|
514,906
|
|
|
(Recovery
of) provision for loan losses
|
|
(14,594)
|
|
|
136,992
|
|
|
113,699
|
|
|
Net
recoveries (charge-offs)
|
|
92}
|
|
|
(2,952
|
)
|
|
(5,645
|
)
|
|
Ending
balance
|
$
|
608,458}
|
|
$
|
648,946
|
|
$
|
622,960
|
|
|
`
|
|
|
|
|
|
|
|
|
|
|
Loan
loss allowance by segment:
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
608,402}
|
|
$
|
648,755
|
|
$
|
622,851
|
|
|
NCSC
|
|
56}
|
|
|
191
|
|
|
109
|
|
|
Total
|
$
|
608,458}
|
|
$
|
648,946
|
|
$
|
622,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percentage of total loans outstanding
|
|
3.08
|
%
|
|
3.32
|
%
|
|
3.09
|
%
|
|
As
a percentage of total non-performing loans outstanding
|
|
116.15
|
%
|
|
131.63
|
%
|
|
118.94
|
%
|
|
As
a percentage of total restructured loans outstanding
|
|
116.38
|
%
|
|
115.40
|
%
|
|
115.88
|
%
|
|
As
a percentage of total loans on non-accrual
|
|
60.82
|
%
|
|
65.02
|
%
|
|
61.40
|
%
|
|
Our loan
loss allowance decreased $15 million from May 31, 2009 to November 30,
2009. The reserve for impaired loans decreased by $14 million during
the six months ended November 30, 2009 due to loan repayments received on
impaired loans
and lower
variable interest rates. The decrease in the loan loss allowance for
the six months ended November 30, 2009 was also due to decreases in the balance
of loans outstanding and the weighted average maturity of loans in the general
portfolio. This decrease was offset by an increase to the exposure
for high risk loans.
We 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 $0.06 million loan loss allowance required at NCSC to cover the
exposure for consumer loans of $0.4 million.
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 November 30, 2009 and May 31, 2009, impaired loans
totaled $1,042 million and $1,056 million, respectively. At November
30, 2009 and May 31, 2009, we specifically reserved a total of $400 million and
$414 million, respectively, to cover impaired loans.
Liabilities
and Equity
Outstanding
Debt
The
following table breaks out our debt outstanding:
(dollar
amounts in thousands)
|
|
November
30,
2009
|
|
|
|
May
31,
2009
|
|
|
Increase/
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper (1)
|
$
|
1,950,455}
|
|
|
$
|
1,833,273
|
|
$
|
117,182}
|
|
|
Bank
bid notes
|
|
100,000}
|
|
|
|
255,000
|
|
|
(155,000)
|
|
|
Term
loan
|
|
-}
|
|
|
|
200,000
|
|
|
(200,000)
|
|
|
Collateral
trust bonds
|
|
5,673,247}
|
|
|
|
5,178,756
|
|
|
494,491}
|
|
|
Notes
payable
|
|
4,910,680}
|
|
|
|
4,256,661
|
|
|
654,019}
|
|
|
Medium-term
notes
|
|
4,337,650}
|
|
|
|
5,864,229
|
|
|
(1,526,579)
|
|
|
Subordinated
deferrable debt
|
|
311,440}
|
|
|
|
311,440
|
|
|
-}
|
|
|
Membership
certificates
|
|
643,148}
|
|
|
|
642,960
|
|
|
188}
|
|
|
Loan
certificates
|
|
663,239}
|
|
|
|
692,806
|
|
|
(29,567)
|
|
|
Guarantee
certificates
|
|
123,394}
|
|
|
|
126,193
|
|
|
(2,799)
|
|
|
Member
capital securities
|
|
360,425}
|
|
|
|
278,095
|
|
|
82,330}
|
|
|
Total
debt outstanding
|
$
|
19,073,678}
|
|
|
$
|
19,639,413
|
|
$
|
(565,735)
|
|
|
|
|
November
30,
2009
|
|
|
|
May
31,
2009
|
|
|
|
|
|
Percentage
of fixed-rate debt (2)
|
|
83
|
%
|
|
|
87
|
%
|
|
|
|
|
Percentage
of variable-rate debt (3)
|
|
17
|
|
|
|
13
|
|
|
|
|
|
Percentage
of long-term debt
|
|
78
|
|
|
|
75
|
|
|
|
|
|
Percentage
of short-term debt
|
|
|
22
|
|
|
|
25
|
|
|
|
|
|
(1)
Includes $538 million and $291 million related to the daily liquidity fund at
November 30, 2009 and May 31, 2009, 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 November 30, 2009.
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
|
P1,
A1, F2
|
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, BBB
|
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
November 30, 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+ from Standard & Poor’s
Corporation and A from Fitch Ratings. Unsecured guaranteed
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. We are required to maintain collateral on deposit
equal to at least 100 percent of the outstanding balance of debt under the REDLG
program.
(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.
Total
debt outstanding decreased by $566 million at November 30, 2009 as compared with
May 31, 2009 primarily due to the $459 million decrease to loans outstanding and
the $149 million decrease in cash. During the six months ended
November 30, 2009 there was a shift in the type of funding used in order to
obtain the lowest interest rates available in the
market. Approximately $1,876 million of medium-term notes that
matured during the period were primarily refinanced with collateral trust bond
issuances totaling $500 million, notes issued to Farmer Mac totaling $625
million and the issuance of retail medium-term notes.
Our
members also continue to support the member capital securities program with the
purchase of $360 million of securities as of November 30, 2009, an increase of
$82 million from May 31, 2009. Subsequent to November 30, 2009 and
through January 7, 2010, an additional $38 million of member capital securities
were purchased by members bringing the total to $398
million. Effective January 1, 2010, the fixed interest rate earned on
our member capital securities changed from 7.5 percent for purchases on or
before December 31, 2009 to 5 percent for purchases after that
date.
Equity
The
following table breaks out our equity balances:
(dollar
amounts in thousands)
|
|
November
30,
2009
|
|
|
|
May
31,
2009
|
|
|
|
Increase/
(Decrease)
|
|
|
Membership
fees
|
$
|
991}
|
|
|
$
|
990
|
|
|
$
|
1}
|
|
|
Education
fund
|
|
1,005}
|
|
|
|
1,592
|
|
|
|
(587)
|
|
|
Members'
capital reserve
|
|
187,098}
|
|
|
|
187,098
|
|
|
|
-}
|
|
|
Allocated
net income
|
|
379,434}
|
|
|
|
420,834
|
|
|
|
(41,400)
|
|
|
Unallocated
net income (loss) (1)
|
|
34,956}
|
|
|
|
(6,198
|
)
|
|
|
41,154}
|
|
|
Total
members' equity
|
|
603,484}
|
|
|
|
604,316
|
|
|
|
(832)
|
|
|
Prior
years cumulative derivative forward
|
|
|
|
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
(103,493)
|
|
|
|
44,056
|
|
|
|
(147,549)
|
|
|
Year-to-date
derivative forward value loss (2)
|
|
(925)
|
|
|
|
(147,549
|
)
|
|
|
146,624}
|
|
|
Total
CFC retained equity
|
|
499,066}
|
|
|
|
500,823
|
|
|
|
(1,757)
|
|
|
Accumulated
other comprehensive income
|
|
7,789}
|
|
|
|
8,115
|
|
|
|
(326)
|
|
|
Total
CFC equity
|
|
|
506,855}
|
|
|
|
508,938
|
|
|
|
(2,083)
|
|
|
Noncontrolling
interest
|
|
|
8,746}
|
|
|
|
10,162
|
|
|
|
(1,416)
|
|
|
Total
equity
|
|
$
|
515,601}
|
|
|
$
|
519,100
|
|
|
$
|
(3,499)
|
|
|
(1)
Excludes derivative forward value.
(2)
Represents the derivative forward value loss recorded by CFC for the
year-to-date period.
At
November 30, 2009, total equity decreased by $3 million from May 31, 2009
primarily due to the board authorized patronage capital retirement of $41
million offset by net income of $39 million. The remaining decrease
relates to the loss attributable to the noncontrolling interest, changes to
accumulated other comprehensive income and the education fund.
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 our board of directors, is to increase equity
retention. Under the new guidelines, we will retire 50 percent of
prior year’s allocated patronage capital and hold the remaining 50 percent for
25 years. The retirement amount and timing remains subject to annual
approval by our board of directors.
In July
2009, our 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,
our board of directors authorized the retirement of allocated net earnings
totaling $41 million, representing 50 percent of the fiscal year 2009
allocation. This amount was returned to members in cash in September
2009. Future allocations and retirements of net earnings will be made
annually as determined by our board of directors with due regard to our
financial condition. Our board of directors has the authority to
change the current practice for allocating and retiring net earnings at any
time, subject to applicable cooperative law.
Noncontrolling
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. On June 1, 2009, CFC implemented new accounting guidance
for noncontrolling interests in consolidated financial statements and as a
result, total equity includes the noncontrolling interest at November 30, 2009
of $9 million. Additionally, noncontrolling interest totaling $10
million was reclassified from liabilities to equity at May 31, 2009 due to the
retrospective presentation and disclosure requirements of the new accounting
guidance.
At May
31, 2009, based on the consolidation accounting guidance in effect at that time,
consolidated equity was required to absorb the $6 million equity deficit of NCSC
rather than being reflected in minority interest. The loss absorbed
by consolidated equity was caused by the decline in the fair value of the NCSC
derivatives and therefore did not represent a loss that was funded by
CFC. Under prior accounting guidance, NCSC future earnings would have
been used to offset the equity deficit absorbed by consolidated
equity. Based on the provisions of the new guidance, the application
of the NCSC future earnings to offset the unfunded loss reported in consolidated
equity at May 31, 2009 is not permitted. As a result of this new
guidance, the $6 million unfunded loss absorbed at May 31, 2009 will be reported
as part of consolidated retained equity for as long as NCSC is in
business. Additionally, the reported noncontrolling interest will be
$6 million greater than the total equity reported on the separate RTFC and NCSC
financial statements.
Contractual
Obligations
The
following table summarizes our long-term contractual obligations at November 30,
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
|
|
$
|
617
|
|
|
$
|
1,520
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,137
|
|
Long-term
debt
|
|
|
-
|
|
|
|
614
|
|
|
|
2,006
|
|
|
|
645
|
|
|
|
2,226
|
|
|
|
7,293
|
|
|
|
12,784
|
|
Subordinated
deferrable debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
311
|
|
|
|
311
|
|
Members'
subordinated certificates
(1)
|
|
|
5
|
|
|
|
15
|
|
|
|
39
|
|
|
|
25
|
|
|
|
17
|
|
|
|
1,452
|
|
|
|
1,553
|
|
Operating
leases (2)
|
|
|
2
|
|
|
|
4
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
Contractual
interest on long-term debt (3)
|
|
|
440
|
|
|
|
811
|
|
|
|
746
|
|
|
|
642
|
|
|
|
573
|
|
|
|
7,469
|
|
|
|
10,681
|
|
Total
contractual obligations
|
|
|
$
|
1,064
|
|
|
$
|
2,964
|
|
|
$
|
2,792
|
|
|
$
|
1,312
|
|
|
$
|
2,816
|
|
|
$
|
16,525
|
|
|
$
|
27,473
|
|
(1)
Excludes loan subordinated certificates totaling $237 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
November 30, 2009.
Off-Balance
Sheet Obligations
Guarantees
The
following table breaks out our guarantees outstanding by type and by
segment:
(dollar
amounts in thousands)
|
|
November
30,
2009
|
|
|
|
May
31,
2009
|
|
|
|
Increase/
(Decrease)
|
|
|
Total
by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
tax-exempt bonds
|
$
|
609,030}
|
|
|
$
|
644,540
|
|
|
$
|
(35,510)
|
|
|
Indemnifications
of tax benefit transfers
|
|
76,936}
|
|
|
|
81,574
|
|
|
|
(4,638)
|
|
|
Letters
of credit
|
|
410,450}
|
|
|
|
450,659
|
|
|
|
(40,209)
|
|
|
Other
guarantees
|
|
99,323}
|
|
|
|
98,682
|
|
|
|
641}
|
|
|
Total
|
$
|
1,195,739}
|
|
|
$
|
1,275,455
|
|
|
$
|
(79,716)
|
|
|
Total
by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
CFC
|
$
|
1,140,366}
|
|
|
$
|
1,233,333
|
|
|
$
|
(92,967)
|
|
|
RTFC
|
|
637}
|
|
|
|
500
|
|
|
|
137}
|
|
|
NCSC
|
|
54,736}
|
|
|
|
41,622
|
|
|
|
13,114}
|
|
|
Total
|
$
|
1,195,739}
|
|
|
$
|
1,275,455
|
|
|
$
|
(79,716)
|
|
|
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 November 30, 2009 and May 31, 2009, 74
percent and 73 percent, respectively, of total guarantees were secured by a
mortgage lien on substantially all of the system's assets and future
revenues.
The
decrease in total guarantees during the six months ended November 30, 2009 is
primarily due to letters of credit that expired during the period, the early
redemption of a $20 million tax-exempt bond guarantee and normal
amortization. At November 30, 2009 and May 31, 2009, we had recorded
a guarantee liability totaling $25 million and $30 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 November 30,
2009 and the related notional principal amortization and maturities by fiscal
year.
|
|
|
|
Principal
Amortization and Maturities of Guaranteed Obligations
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
(dollar
amounts in thousands)
|
|
Balance
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
|
Years
|
|
|
|
Guarantees
(1)
|
|
$
|
1,195,739
|
|
|
$
|
183,030
|
|
|
$
|
284,165
|
|
|
$
|
65,846
|
|
|
$
|
108,432
|
|
|
$
|
37,392
|
|
|
$
|
516,874
|
|
|
(1) On a
total of $609 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
November 30, 2009, our unadvanced loan commitments totaled $13,914 million, an
increase of $363 million over the $13,551 million unadvanced at May 31,
2009. 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 based on our
credit underwriting policy that there have been no material adverse changes in
the borrower’s financial statement condition since we approved the
loan.
It would
be unlikely for members to draw all of their unadvanced commitments in the near
term for the following reasons:
·
|
electric
cooperatives typically execute loan contracts to cover multi-year work
plans; therefore advances occur over the period of the 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
$2 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
clauses. The majority of the short-term unadvanced commitments
provide working capital liquidity to our borrowers; therefore, we do not
anticipate funding most of these commitments. Approximately 60
percent and 59 percent of the unadvanced commitments at November 30, 2009 and
May 31, 2009, respectively, were for short-term 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. Due to the retrospective
presentation and disclosure requirements of the accounting guidance for
noncontrolling interests that we adopted on June 1, 2009, we have reflected the
changes in presentation and disclosure of noncontrolling interest in our
consolidated financial statements for all periods presented in this Form
10-Q. The leverage ratio for May 31, 2009 has been adjusted
accordingly. Based on this formula, the leverage ratio at November
30, 2009 was 40.96, a decrease from 41.88 at May 31, 2009. The
decrease in the leverage ratio is due to a decrease of $541 million in total
liabilities and a decrease of $80 million in guarantees partially offset by a
decrease of $3 million in total equity as discussed under the Liabilities and Equity
section and the Off-Balance
Sheet Obligations section of Financial
Condition.
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. Due to the recent adoption of new accounting guidance on
noncontrolling interests, minority interest is reported as equity on the
consolidated balance sheets as of November 30, 2009 and May 31,
2009. As a result, it is not necessary to adjust equity to include
minority interest.
At
November 30, 2009 and May 31, 2009, the adjusted leverage ratio was 6.72 and
7.11, 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 a decrease of $639 million in adjusted liabilities, an increase
of $48 million in adjusted equity and a decrease of $80 million to guarantees as
discussed under the Liabilities 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. Due to the retrospective presentation
and disclosure requirements of the accounting guidance for noncontrolling
interests that we adopted on June 1, 2009, we have reflected the changes in
presentation and disclosure of noncontrolling interest in our consolidated
financial statements for all periods presented in this Form 10-Q. The
debt to equity ratio for May 31, 2009 has been adjusted
accordingly.
The debt
to equity ratio, based on this formula at November 30, 2009 was 38.64, a
decrease from 39.42 at May 31, 2009. The decrease in the debt to
equity ratio is due to the decrease of $541 million in total liabilities
partially offset by a decrease of $3 million in total equity as discussed under
the Liabilities 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 and subordinated certificates to determine adjusted equity. At
November 30, 2009 and May 31, 2009, the adjusted debt to equity ratio was 6.28
and 6.63, 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 a decrease of $639 million in adjusted liabilities and an
increase of $48 million in adjusted equity.
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 November 30, 2009.
|
Moody's
Investors
|
|
Standard
& Poor's
|
|
|
|
|
Service
|
|
Corporation
|
|
Fitch
Ratings
|
|
Direct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured debt
|
|
A1
|
|
|
|
A+
|
|
|
|
A
|
|
|
Senior
unsecured debt
|
|
A2
|
|
|
|
A
|
|
|
|
A-
|
|
|
Subordinated
deferrable debt
|
|
A3
|
|
|
|
BBB
|
|
|
|
BBB
|
|
|
Commercial
paper
|
|
P1
|
|
|
|
A1
|
|
|
|
F2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pooled
bonds
|
|
A2
|
|
|
|
A
|
|
|
|
A-
|
|
|
Other
bonds
|
|
A2
|
|
|
|
A
|
|
|
|
A-
|
|
|
Short-term
|
|
|
P1
|
|
|
|
A1
|
|
|
|
F2
|
|
|
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
November 30, 2009 and through the date of this filing, Moody's Investors Service
and Fitch Ratings had our ratings on stable outlook and Standard & Poor’s
Corporation had our ratings on a negative outlook. On July 24, 2009, Fitch
Ratings announced downgrades, with a stable outlook, on all of our secured and
unsecured debt, which are reflected in the chart above. On August 24,
2009, Standard & Poor’s Corporation affirmed our ratings and changed our
outlook from stable to negative.
On
November 24, 2009, Moody’s Investors Service affirmed our ratings and the stable
outlook and downgraded our pooled bonds guarantees to correspond to our senior
unsecured debt rating of A2.
Liquidity
and Capital Resources
The
following section discusses our expected sources and uses of
liquidity. At November 30, 2009, we expect that our current
sources of liquidity will allow us to issue the debt required to fund our
operations over the next 12 to 18 months.
The table
below shows the projected sources and uses of cash by quarter through May
2011. In analyzing our projected liquidity position, we track the key
items identified in the chart below. The long-term debt
maturities represent the scheduled maturities of our outstanding term debt for
the period presented. The long-term loan advances represent our
current best estimate of the member demand for our loans, the amount and the
timing of which are subject to change. The long-term loan
amortization and prepayments represent the scheduled long-term loan amortization
for the outstanding loans at November 30, 2009, as well as our current estimate
for the prepayment of long-term loans. The estimate of the amount and
timing of long-term loan prepayments is subject to change. We
assumed a level of member medium-term notes and retail note investments that we
expect is attainable based on our recent historical trend. We assumed
the issuance of other long-term debt, including collateral trust bonds and
private placement of term debt, to maintain matched funding within our fixed
rate loan portfolio and to allow our revolving lines of credit to provide 100%
backup liquidity for our outstanding commercial paper. The commercial
paper repayments in the table below do not represent scheduled maturities, but
rather the assumed use of excess cash to pay down the commercial paper
balance. We assumed the issuance or repayment of commercial paper to
maintain excess liquidity within a range of $350 million to $450
million.
|
Projected
Uses of Liquidity
|
|
Projected
Sources of Liquidity
|
|
|
|
|
|
|
|
|
|
|
|
Debt-Issuance
|
|
|
|
(dollar
amounts in millions)
|
Long-term
debt
maturities
|
|
Debt
repayment-commercial paper
|
|
Long-term
loan advances
|
Total
uses of liquidity
|
|
Long-term
loan amortization & prepayment
|
Commercial
paper
|
|
Other
long-term debt
|
|
Internotes
/ medium-term notes
|
Total
sources of liquidity
|
|
Cumulative
excess sources over uses of liquidity
|
2Q10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 356
|
3Q10
|
|
$ 340
|
|
$
-
|
|
$
360
|
$
700
|
|
$
640
|
|
$
-
|
|
|
$
-
|
|
$
80
|
$
720
|
|
376
|
4Q10
|
|
275
|
|
-
|
|
560
|
835
|
|
250
|
|
350
|
|
|
130
|
|
80
|
810
|
|
351
|
1Q11
|
|
710
|
|
50
|
|
215
|
975
|
|
385
|
|
-
|
|
|
500
|
|
90
|
975
|
|
351
|
2Q11
|
|
810
|
|
-
|
|
215
|
1,025
|
|
200
|
|
-
|
|
|
740
|
|
90
|
1,030
|
|
356
|
3Q11
|
|
370
|
|
-
|
|
215
|
585
|
|
310
|
|
-
|
|
|
200
|
|
90
|
600
|
|
371
|
4Q11
|
|
250
|
|
-
|
|
220
|
470
|
|
210
|
|
-
|
|
|
200
|
|
90
|
500
|
|
401
|
Totals
|
|
$2,755
|
|
$ 50
|
|
$
1,785
|
$ 4,590
|
|
$
1,995
|
|
$ 350
|
|
|
$ 1,770
|
|
$ 520
|
$ 4,635
|
|
|
The above
chart represents our best estimate of the funding requirements and how we expect
to manage such funding requirements through May 31, 2011. These
estimates will change on a quarterly basis based on many factors. We
currently do not anticipate significant growth in the loan portfolio, thus our
liquidity focus will be on refinancing maturing debt. The renewal of
the $1 billion 364-day revolving credit agreement, scheduled for March 2010,
could also have an impact on the amount of commercial paper we can issue, and
therefore could affect the timing of the issuance of term debt.
Sources
of Liquidity
Capital
Market Debt Issuance
As a
well-known seasoned issuer, we have the following automatic shelf registration
statements for the issuance of debt:
·
|
Unlimited
amount of collateral trust bonds until October
2010;
|
·
|
Unlimited
amount of medium-term notes, member capital securities, and subordinated
deferrable debt until November 2011;
and
|
·
|
Daily
liquidity fund until April 2010 for a total of $20 billion with a $3
billion limitation on the aggregate principal amount outstanding at any
time.
|
In
September 2009, we issued $250 million of 2.625 percent collateral trust bonds
due 2012 and $250 million of 3.875 percent collateral trust bonds due
2015. As of November 30, 2009, a total of $360 million of member
capital securities had been sold.
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
have authorization from our board of directors to issue in the European market
up to $1 billion of commercial paper and $4 billion of medium-term notes, as
well as $2 billion of medium-term notes in the Australian market. At
November 30, 2009, there was no debt outstanding under our European or
Australian programs.
Private
Debt Issuance
We have
access to liquidity from private debt issuances through note purchase agreements
with Farmer Mac. During the six months ended November 30, 2009, we
issued the following debt totaling $625 million to Farmer Mac:
·
|
In
June 2009, the remaining $200 million available under our February 2009
note purchase agreement with Farmer Mac was advanced in the form of
variable-rate five-year notes at a blended spread over three-month LIBOR
of 124.1 basis points.
|
·
|
In
August 2009, we issued a $50 million three-year note at a blended spread
over three-month LIBOR of 91 basis
points.
|
·
|
In
August 2009, we also issued 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.
|
When
Farmer Mac communicates favorable pricing indications and investor interest to
us, we may elect to issue all or a portion of the $575 million that remains
unadvanced at November 30, 2009 under the May 2009 note purchase agreement with
Farmer Mac. In December 2009, CFC exercised the call option on a $150
million 4.95 percent note with Farmer Mac, which increased the amount available
under revolving note purchase agreements with Farmer Mac to $725 million. All of the Farmer Mac
agreements are 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 the total amount available under each
of the agreements.
Member
Loan Repayments
Repayments
on long-term loans are scheduled to be $890 million for the remainder of fiscal
year 2010, including $312 million of expected long-term loan repayments of power
supply bridge loans with RUS funding. Scheduled repayments include
loan amortization and anticipated resolutions of impaired loans based on current
expectations.
Member
Loan Interest Payments
During
the six months ended November 30, 2009, interest income on the loan portfolio
was $528 million, representing an average yield of 5.24 percent as compared with
5.39 percent for the six months ended November 30, 2008. For the past
three fiscal years, interest income on the loan portfolio has averaged $1,039
million. At November 30, 2009, 78 percent of the total loans
outstanding had a fixed rate of interest and 22 percent of loans outstanding had
a variable rate of interest. At November 30, 2009, 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)
|
|
November
30, 2009
|
|
|
May
31, 2009
|
|
Termination
Date
|
|
|
Facility
fee per
year
(1)
|
Five-year
agreement (2)
|
$
|
1,049,000
|
|
$
|
1,125,000
|
|
March
16, 2012
|
|
|
6
basis points
|
Five-year
agreement (2)
|
|
967,313
|
|
|
1,025,000
|
|
March
22, 2011
|
|
|
6
basis points
|
364-day
agreement
|
|
1,000,000
|
|
|
1,000,000
|
|
March
12, 2010
|
|
|
12.5
basis points
|
Total
|
|
$
|
3,016,313
|
|
$
|
3,150,000
|
|
|
|
|
|
(1)
Facility fee determined by CFC’s senior unsecured credit ratings based on the
pricing schedules put in place at the initiation of the related
agreement.
(2)
Amounts as of November 30, 2009 exclude 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. These amounts were assigned to NCSC in
September 2009 by Lehman Brothers Bank, FSB and are eliminated in
consolidation.
At
November 30, 2009 and May 31, 2009, we were in compliance with all covenants and
conditions under our revolving credit agreements and there were no borrowings
outstanding under these agreements.
The following represents our required and actual
financial ratios under the revolving credit agreements:
|
|
|
|
Actual
|
|
|
|
Requirement
|
|
November
30, 2009
|
|
May
31, 2009
|
|
|
|
|
|
|
|
|
|
Minimum
average adjusted TIER over the six most recent fiscal
quarters
|
|
1.025
|
|
1.15
|
|
1.18
|
|
|
|
|
|
|
|
|
|
Minimum
adjusted TIER at fiscal year end (1)
|
|
1.05
|
|
NA
|
|
1.10
|
|
|
|
|
|
|
|
|
|
Maximum
ratio of senior debt to total equity
|
|
|
10.00
|
|
6.52
|
|
6.90
|
|
(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
November 30, 2009 and May 31, 2009, members funded 22.4 percent and 20.5
percent, respectively, of total assets. Below is a table showing the
components of our member investments:
|
|
November
30, 2009
|
|
|
May
31, 2009
|
|
|
Increase/
|
|
(dollar
amounts in thousands)
|
|
Amount
|
|
%
of Total (1)
|
|
|
Amount
|
|
%
of Total (1)
|
|
|
(Decrease)
|
|
Commercial
paper (2)
|
$
|
1,554,378}
|
|
80
|
%
|
$
|
1,226,238
|
|
67
|
%
|
$
|
328,140}
|
|
Medium-term
notes
|
|
627,538}
|
|
14
|
|
|
723,009
|
|
12
|
|
|
(95,471)
|
|
Members'
subordinated certificates
|
|
1,790,206}
|
|
100
|
|
|
1,740,054
|
|
100
|
|
|
50,152}
|
|
Members'
equity (3)
|
|
603,484}
|
|
100
|
|
|
604,316
|
|
100
|
|
|
(832)
|
|
Noncontrolling
interest (4)
|
|
8,746}
|
|
100
|
|
|
10,162
|
|
100
|
|
|
(1,416)
|
|
Total
|
$
|
4,584,352}
|
|
|
|
$
|
4,303,779
|
|
|
|
$
|
280,573}
|
|
Percentage
of total assets
|
|
22.4}
|
%
|
|
|
|
20.5
|
%
|
|
|
|
|
|
Percentage of total assets less derivative
assets (3)
|
|
22.9}
|
|
|
|
|
20.9
|
|
|
|
|
|
|
(1)
Represents the percentage of each line item outstanding to our
members.
(2)
Includes $538 million and $291 million related to the daily liquidity fund at
November 30, 2009 and May 31, 2009, respectively.
(3) See
the Liabilities and
Equity section of Financial Condition for a
breakout of members' equity.
(4)
Represents RTFC and NCSC equity as RTFC and NCSC members are members of the
consolidated entity.
Members
held commercial paper (including the daily liquidity fund) totaling $1,554
million or approximately 80 percent of the total commercial paper and daily
liquidity fund outstanding at November 30, 2009. Member commercial
paper
investments
have averaged $1,244 million outstanding since January 1,
2007. Commercial paper issued through dealers and bank bid notes
totaled $438 million and represented 2 percent of total debt outstanding at
November 30, 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. We view member commercial paper
investments as a more stable source of funding than investor-purchased
commercial paper.
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 November 30, 2009,
we had unadvanced loan commitments totaling $13,914 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 $2 billion of long-term commitments are
scheduled to expire if not advanced over the next three
years. Approximately 60 percent of the outstanding commitments
at November 30, 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 $920 million during the remainder of fiscal
year 2010.
Interest
Expense on Debt
For the
six months ended November 30, 2009, interest expense on debt was $458 million,
representing 4.71 percent of the average debt volume. The interest
expense on debt represented 4.79 percent of the average debt volume for the six
months ended November 30, 2008. For the past three fiscal years,
interest expense on debt has averaged $935 million. At November 30,
2009, a total of 83 percent of outstanding debt had a fixed interest rate and 17
percent of outstanding debt had a variable interest rate.
Principal
Repayments on Long-term Debt
The
principal amount of medium-term notes, collateral trust bonds, long-term notes
payable, subordinated deferrable debt and membership subordinated certificates
maturing in each of the five fiscal years following November 30, 2009 and
thereafter is as follows:
|
|
Amount
|
|
(dollar
amounts in thousands)
|
|
Maturing
(1)
|
|
May
31, 2010
|
$
|
622,726
|
|
May
31, 2011
|
|
2,149,030
|
|
May
31, 2012
|
|
2,044,855
|
|
May
31, 2013
|
|
669,564
|
|
May
31, 2014
|
|
2,243,483
|
|
Thereafter
|
|
9,056,081
|
|
Total
|
|
$
|
16,785,739
|
|
(1)
Excludes loan subordinated certificates totaling $237 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 CFC board of directors approved the
allocation of a total of $83 million from fiscal year 2009 net earnings to the
National Rural members. CFC made cash payments 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 CFC for 25 years
under new guidelines that started 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 below). The interest rate risk is deemed
minimal on variable-rate loans, since the loans may be repriced either monthly
or semi-monthly to reflect the cost of the debt used to fund the
loans. At November 30, 2009 and May 31, 2009, 22 percent and 27
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 3 percent of total assets excluding derivative
assets. At November 30, 2009, we had $15,390 million of fixed-rate
assets amortizing or repricing, funded by $13,446 million of fixed-rate
liabilities maturing during the next 30 years and $2,021 million of members'
equity and members' subordinated certificates, a portion of which does not have
a scheduled maturity. The difference of $77 million, or less than 1
percent of total assets and total assets excluding derivative assets, represents
the fixed-rate debt and equity maturing during the next 30 years in excess of
the fixed-rate assets.
The
following table shows the scheduled amortization and repricing of fixed-rate
assets and liabilities outstanding at
November
30, 2009.
Interest
Rate Gap Analysis
|
(Fixed-rate
Assets/Liabilities)
|
As
of November 30, 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
|
$
|
1,264
|
|
|
$
|
4,508
|
|
|
$
|
2,629
|
|
|
$
|
3,467
|
|
|
$
|
2,474
|
|
|
$
|
1,048
|
|
|
$
|
15,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and members' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$
|
970
|
|
|
$
|
4,774
|
|
|
$
|
2,251
|
|
|
$
|
3,946
|
|
|
$
|
673
|
|
|
$
|
832
|
|
|
$
|
13,446
|
|
Subordinated
certificates
|
|
11
|
|
|
|
64
|
|
|
|
32
|
|
|
|
56
|
|
|
|
1,100
|
|
|
|
350
|
|
|
|
1,613
|
|
Members'
equity (1)
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
205
|
|
|
|
188
|
|
|
|
408
|
|
Total
liabilities and members' equity
|
$
|
981
|
|
|
$
|
4,838
|
|
|
$
|
2,283
|
|
|
$
|
4,017
|
|
|
$
|
1,978
|
|
|
$
|
1,370
|
|
|
$
|
15,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gap
(2)
|
$
|
283
|
|
|
$
|
(330
|
)
|
|
$
|
346
|
|
|
$
|
(550
|
)
|
|
$
|
496
|
|
|
$
|
(322
|
)
|
|
$
|
(77
|
)
|
Cumulative
gap
|
|
283
|
|
|
|
(47
|
)
|
|
|
299
|
|
|
|
(251
|
)
|
|
|
245
|
|
|
|
(77
|
)
|
|
|
|
|
Cumulative
gap as a % of total assets
|
|
1.38
|
%
|
|
|
(0.23
|
)%
|
|
|
1.46
|
%
|
|
|
(1.23
|
)%
|
|
|
1.20
|
%
|
|
|
(0.38
|
)%
|
|
|
|
|
Cumulative gap as a % of adjusted total
assets (3)
|
|
1.41
|
|
|
|
(0.23
|
)
|
|
|
1.49
|
|
|
|
(1.25
|
)
|
|
|
1.22
|
|
|
|
(0.38
|
)
|
|
|
|
|
(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 represent total assets in the consolidated balance sheet
less derivative assets.
Derivative
Financial Instruments
We are
neither a dealer nor a trader in derivative financial instruments. We
use interest rate, cross currency and cross currency interest rate swaps to
manage our interest rate and foreign currency risk. These interest
rate swaps are used when they provide a lower cost of funding or minimize
interest rate risk as part of our overall interest rate matching
strategy. 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 November 30, 2009
and May 31, 2009, there were no foreign currency derivative instruments
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 November 30, 2009 and May 31, 2009, we
were a party to derivative instruments with notional amounts totaling $11,421
million and $11,830 million, respectively. At November 30, 2009 and
May 31, 2009, the total notional exposure to any one counterparty did not exceed
13 percent and 12 percent, respectively, of total derivative
instruments. 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. In
addition, the derivative instruments executed per counterparty is based on key
characteristics such as the following: notional concentration, credit risk
exposure, tenor, bid success rate, total credit commitment, and credit
ratings. 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 and Aaa to Baa1 as assigned by Moody’s
Investor Service. Based on the fair
market value of our
derivative
instruments at November 30, 2009, there were eight counterparties that would be
required to make a payment to us totaling $51 million if all of our derivative
instruments were terminated on that day. The largest amount owed to
us by a single counterparty was $13 million at November 30, 2009.
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
November 30, 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 53 for
CFC's senior unsecured credit ratings as of November 30, 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)
|
$
|
6,904,235}
|
|
$
|
(111,256)
|
|
$
|
23,527}
|
|
$
|
(87,729)
|
|
Counterparty
may terminate if ratings fall below
|
|
|
|
|
|
|
|
|
|
|
|
|
Baa1/BBB+
(2)
|
|
1,319,280}
|
|
|
-}
|
|
|
8,754}
|
|
|
8,754}
|
|
Total
|
|
$
|
8,223,515}
|
|
$
|
(111,256)
|
|
$
|
32,281}
|
|
$
|
(78,975)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Stated senior unsecured credit 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 senior unsecured credit 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 November 30, 2009, we had a
total notional amount of $745 million of derivative instruments with one
counterparty that would require the pledging of collateral totaling $25 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 November 30, 2009 was $131 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
November 30, 2009, we had $2,050 million of commercial paper, daily liquidity
fund, and bank bid notes scheduled to mature during the next 12
months. Based on past history, we expect to continue to maintain
member investments in commercial paper at approximately the current level of
$1,017 million at November 30, 2009. Due to reductions in loans
outstanding, we currently have less dealer commercial paper and bank bid notes
outstanding than in prior periods, however, we expect that we have the market
access to maintain dealer commercial paper and bank bid notes at approximately
$1 billion to $1.5 billion, if required.
At
November 30, 2009, we had $3 billion in available lines of credit with financial
institutions. These revolving credit agreements provide backup
liquidity for 100% of our dealer and member commercial paper. We
expect to be in compliance with the covenants under our revolving credit
agreements, therefore we could draw on these facilities to repay any amount of
dealer or member commercial paper that cannot be rolled over in the event of
market disruptions.
We also
have access to the CPFF through February 2010 which provides capacity to issue a
maximum of $3 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 dealer and member commercial paper
markets.
At
November 30, 2009, we had long-term debt maturing in the next 12 months totaling
$2,137 million. This amount includes $406 million of medium-term
notes sold through dealers (including retail notes) and $425 million of
medium-term notes sold to members. Based on past history, we expect
to maintain the level of member and dealer investments in medium-term notes
within a range of the current outstanding balance. We have
experienced a significant increase in demand for our retail notes since January
2009 and expect that we should be able to access the retail note market at least
at the current level. The total balance of retail notes outstanding
has increased $821 million over the past 12 months to $1,093 million at November
30, 2009.
Additionally,
our long-term funding includes the following sources:
·
|
We
expect to maintain the ability to obtain funding through the capital
markets, as indicated by our $500 million issuance of collateral trust
bonds in September 2009.
|
·
|
We
had $575 million available under revolving note purchase agreements with
Farmer Mac at November 30, 2009, subject to market
conditions. In December 2009, CFC exercised the call
option on a $150 million 4.95 percent note with Farmer Mac, which
increased the amount available under revolving note purchase agreements
with Farmer Mac to $725 million.
|
·
|
Secured
notes payable scheduled to mature in the next twelve months were issued
under revolving credit facilities with Farmer Mac that allow us to borrow,
repay and re-borrow funds as market conditions
permit.
|
We face
liquidity risk in the funding of our loan portfolio based on member demand for
new loans, however we expect loans outstanding to decrease slightly during
fiscal year 2010. We also face liquidity risk in our ability to renew
our revolving credit agreements at current commitment levels. Our
$1.0 billion 364-day revolving credit agreement matures in March
2010. If we are not able to renew this agreement at the current
commitment level, it would reduce the amount commercial paper funding we could
obtain in the future.
At
November 30, 2009, we were the guarantor and liquidity provider for $608 million
of tax-exempt bonds issued for our member cooperatives. During the
six months ended November 30, 2009, we were not required to purchase any
tax-exempt bonds pursuant to our obligation as liquidity provider.
At
November 30, 2009, we expect that our $356 million of cash on hand and our
current sources of liquidity will allow us to issue the debt required to fund
our operations over the next 12 to 18 months.
For
additional information about the risks related to our business, see Item 1A.
Risk Factors in this
Form 10-Q.
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
The
following table provides a reconciliation between interest expense, net interest
income, income prior to income taxes and net income and these financial measures
adjusted to exclude the effect of derivatives for the three and six months ended
November 30, 2009 and November 30, 2008. Refer to Non-GAAP Financial
Measures in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, in our Form 10-K/A for
the year ended May 31, 2009 for an explanation of why these adjustments to net
income and the calculation of the TIER ratio reflect management's perspective on
our operations and why we believe these are useful financial measures for
investors.
Due to
the adoption of new accounting guidance regarding noncontrolling interests on
June 1, 2009, minority interest net income is included in total net income on
the consolidated statement of operations for the three and six months ended
November 30, 2009 and 2008. As a result, it is not necessary to
adjust net income to include minority interest net income as it
was in
prior periods. As required, we have reflected changes in presentation
and disclosure of noncontrolling interest in our consolidated financial
statements for all periods presented in this Form 10-Q, including the adjusted
net income and TIER calculations for the six months ended November 30,
2008.
|
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
|
November
30,
|
|
November
30,
|
|
|
(dollar
amounts in thousands)
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Interest
expense
|
|
$
|
(226,977)
|
|
|
$
|
(234,187
|
)
|
|
$
|
(469,606)
|
|
|
$
|
(454,336
|
)
|
|
|
Derivative
cash settlements
|
|
(10,706)
|
|
|
|
12,503
|
|
|
|
(14,200)
|
|
|
|
12,934
|
|
|
|
Adjusted interest expense
|
|
$
|
(237,683)
|
|
|
$
|
(221,684
|
)
|
|
$
|
(483,806)
|
|
|
$
|
(441,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
37,942}
|
|
|
$
|
32,559
|
|
|
$
|
64,770}
|
|
|
$
|
75,527
|
|
|
|
Derivative
cash settlements
|
|
(10,706)
|
|
|
|
12,503
|
|
|
|
(14,200)
|
|
|
|
12,934
|
|
|
|
Adjusted net interest income
|
$
|
27,236}
|
|
|
$
|
45,062
|
|
|
$
|
50,570}
|
|
|
$
|
88,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) prior to income taxes
|
$
|
21,578}
|
|
|
$
|
(237,755
|
)
|
|
$
|
38,043}
|
|
|
$
|
(225,285
|
)
|
|
|
Derivative
forward value
|
|
|
(7,562)
|
|
|
|
139,383
|
|
|
|
3,272}
|
|
|
|
150,411
|
|
|
|
Adjusted income (loss) prior to income taxes
|
$
|
14,016}
|
|
|
$
|
(98,372
|
)
|
|
$
|
41,315}
|
|
|
$
|
(74,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) prior to cumulative effect of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle
|
|
$
|
22,419}
|
|
|
$
|
(231,355
|
)
|
|
$
|
38,852}
|
|
|
$
|
(218,125
|
)
|
|
|
Derivative
forward value
|
|
|
(7,562)
|
|
|
|
139,383
|
|
|
|
3,272}
|
|
|
|
150,411
|
|
|
|
Adjusted net income (loss)
|
$
|
14,857}
|
|
|
$
|
(91,972
|
)
|
|
$
|
42,124}
|
|
|
$
|
(67,714
|
)
|
|
|
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 presents our TIER and adjusted TIER:
|
Three
months ended
|
|
Six
months ended
|
|
November
30,
|
|
November
30,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
TIER
(1)
|
|
1.10}
|
|
|
|
-
|
|
|
|
1.08}
|
|
|
|
-
|
|
Adjusted
TIER (1)
|
|
|
1.06}
|
|
|
|
-
|
|
|
|
1.09}
|
|
|
|
-
|
|
(1) For
the three and six months ended November 30, 2008, the Company reported a net
loss of $231 million and $218 million, respectively. For the three
and six months ended November 30, 2008, the Company reported an adjusted net
loss of $92 million and $68 million, respectively. Thus the TIER and
adjusted TIER calculations for those periods results in a value below
1.00.
Adjustments
to the Calculation of Leverage and Debt to Equity
The
following table provides a reconciliation between the liabilities and equity
used to calculate the leverage and debt to equity ratios and these financial
measures adjusted to exclude the non-cash effects of derivatives and foreign
currency adjustments, to subtract debt used to fund loans that are guaranteed by
RUS from total liabilities, to subtract from total liabilities, and add to total
equity, debt with equity characteristics and to include minority interest as
equity. Due to the adoption of new accounting guidance regarding noncontrolling
interests on June 1, 2009, minority interest is reported as equity on the
consolidated balance sheets as of November 30, 2009 and May 31,
2009. As a result, it is not necessary to adjust equity to include
minority interest in the leverage and debt to equity ratio as it was in prior
periods. As required, we have reflected the changes in
presentation and disclosure of noncontrolling interest in our consolidated
financial statements for all periods presented in this Form 10-Q including the
leverage and debt to equity ratios at May 31, 2009.
Refer to
Non-GAAP Financial
Measures in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, in our Form 10-K/A for
the year ended May 31, 2009 for an explanation of why these adjustments to the
calculation of leverage and debt to equity ratios reflect management's
perspective on our operations and why we believe these are useful financial
measures for investors.
(dollar
amounts in thousands)
|
|
|
November
30,
2009
|
|
|
|
May
31,
2009
|
|
|
Liabilities
|
|
$
|
19,922,325}
|
|
|
$
|
20,463,605
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
|
(544,655)
|
|
|
|
(493,002
|
)
|
|
Debt
used to fund loans guaranteed by RUS
|
|
|
(239,482)
|
|
|
|
(243,997
|
)
|
|
Subordinated
deferrable debt
|
|
|
(311,440)
|
|
|
|
(311,440
|
)
|
|
Subordinated
certificates
|
|
|
(1,790,206)
|
|
|
|
(1,740,054
|
)
|
|
Adjusted
liabilities
|
|
$
|
17,036,542}
|
|
|
$
|
17,675,112
|
|
|
Total
equity
|
|
$
|
515,601}
|
|
|
$
|
519,100
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
Prior
year cumulative derivative forward
|
|
|
|
|
|
|
|
|
|
value
and foreign currency adjustments
|
|
|
103,493}
|
|
|
|
(44,056
|
)
|
|
Year-to-date
derivative forward value loss (1)
|
925}
|
|
|
|
147,549
|
|
|
Accumulated
other comprehensive income
|
|
|
(7,789)
|
|
|
|
(8,115
|
)
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
Subordinated
certificates
|
|
|
1,790,206}
|
|
|
|
1,740,054
|
|
|
Subordinated
deferrable debt
|
|
|
311,440}
|
|
|
|
311,440
|
|
|
Adjusted
equity
|
|
$
|
2,713,876}
|
|
|
$
|
2,665,972
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
|
|
|
$
|
1,195,739}
|
|
|
$
|
1,275,455
|
|
|
(1)
Represents the derivative forward value loss recorded by CFC for the
year-to-date period.
The
leverage and debt to equity ratios using GAAP financial measures are
calculated as follows:
|
|
Leverage
ratio =
|
Liabilities
+ guarantees outstanding
|
|
|
|
Total
equity
|
|
|
|
|
|
|
Debt
to equity ratio =
|
Liabilities
|
|
|
|
Total
equity
|
|
The
adjusted leverage and debt to equity ratios are calculated as
follows:
|
Adjusted
leverage ratio =
|
Adjusted
liabilities + guarantees outstanding
|
|
|
|
|
Adjusted
equity
|
|
|
|
Adjusted
debt to equity ratio =
|
Adjusted
liabilities
|
|
|
|
|
Adjusted
equity
|
|
|
The
following table provides the calculated ratio for leverage and debt to equity,
as well as the adjusted ratio calculations.
|
|
|
November
30,
2009
|
|
May
31,
2009
|
|
Leverage
ratio
|
|
|
40.96}
|
|
41.88
|
|
Adjusted
leverage ratio
|
|
|
6.72}
|
|
7.11
|
|
|
|
|
|
|
|
|
Debt
to equity ratio
|
|
|
38.64}
|
|
39.42
|
|
Adjusted
debt to equity ratio
|
|
|
6.28}
|
|
6.63
|
|
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
See
Market Risk discussion beginning on page 56.
Item
4T. Controls
and Procedures
Senior
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 ("the
Exchange Act"). At the end of the period covered by this report,
based on this evaluation process, the Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
effective. 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.
PART
II.
|
OTHER
INFORMATION
|
Refer to Part I, Item 1A. Risk Factors
in our Form 10-K/A for the year ended May 31, 2009 for information regarding
factors that could affect our results of operations, financial condition and
liquidity. There have been no material changes to our risk factors
during the quarter ended November 30, 2009.
|
|
|
31.1
|
–
|
Certification
of the Chief Executive Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
–
|
Certification
of the Chief Financial Officer required by Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
–
|
Certification
of the Chief Executive Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
–
|
Certification
of the Chief Financial Officer required by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
NATIONAL RURAL UTILITIES
COOPERATIVE
FINANCE
CORPORATION
/s/ STEVEN L.
LILLY
Steven L. Lilly
Chief Financial Officer
/s/ ROBERT E.
GEIER
Robert E. Geier
Controller
(Principal Accounting
Officer)
January
13, 2010