UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-Q
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x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 28,August 31, 2015
OR
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¨ 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)
__________________________
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District of Columbia | | 52-0891669 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification no.) |
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20701 Cooperative Way, Dulles, Virginia, | | 20166 |
(Address of principal executive offices) | | (Zip (Zip Code) |
Registrant’s telephone number, including area code:(703) 467-1800
__________________________
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). YesxNo ¨
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.
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(Check one): Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨
| Accelerated filer ¨ Non-accelerated filerx Smaller reporting company ¨ |
(Do not check if a 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 ¨ Nox
The Registrant does not issue capital stock because it is a tax-exempt cooperative.
INDEX OF MD&A TABLES
| | Table | | Description | | Page | | Description | | Page |
— | | MD&A Tables: | | | | MD&A Tables: | | |
1 | | Summary of Selected Financial Data | | 3 |
| | Summary of Selected Financial Data | | 3 |
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2 | | Average Balances, Interest Income/Expense and Average Yield/Cost | | 8 |
| | Average Balances, Interest Income/Interest Expense and Average Yield/Cost | | 8 |
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3 | | Rate/Volume Analysis of Changes in Interest Income/Expense | | 11 |
| | Rate/Volume Analysis of Changes in Interest Income/Interest Expense | | 9 |
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4 | | Derivative Gains (Losses), Net | | 13 |
| | Derivative Gains (Losses) | | 11 |
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5 | | Derivative Average Notional Balances and Average Interest Rates | | 14 |
| | Derivative Average Notional Balances and Average Interest Rates | | 12 |
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6 | | Loans Outstanding by Type and Member Class | | 16 |
| | Loans Outstanding by Type and Member Class | | 14 |
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7 | | Total Debt Outstanding | | 17 |
| | Historical Retention Rate and Repricing Selection | | 14 |
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8 | | Guarantees Outstanding | | 20 |
| | Total Debt Outstanding | | 15 |
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9 | | Maturities of Guarantee Obligations | | 21 |
| | Guarantees Outstanding | | 17 |
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10 | | Unadvanced Loan Commitments | | 21 |
| | Maturities of Guarantee Obligations | | 18 |
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11 | | Notional Maturities of Unconditional Committed Lines of Credit | | 21 |
| | Unadvanced Loan Commitments | | 18 |
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12 | | Credit Exposure to 10 Largest Borrowers | | 22 |
| | Notional Maturities of Unconditional Committed Lines of Credit | | 19 |
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13 | | Unencumbered Loans | | 23 |
| | Notional Maturities of Unadvanced Loan Commitments | | 19 |
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14 | | Nonperforming and Restructured Loans | | 24 |
| | Loan Portfolio Security Profile | | 20 |
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15 | | Allowance for Loan Losses | | 25 |
| | Credit Exposure to 20 Largest Borrowers | | 21 |
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16 | | Rating Triggers for Derivatives | | 26 |
| | Impaired Loans | | 23 |
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17 | | Projected Sources and Uses of Liquidity | | 28 |
| | Allowance for Loan Losses | | 24 |
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18 | | Revolving Credit Agreements | | 29 |
| | Rating Triggers for Derivatives | | 25 |
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19 | | Member Investments | | 30 |
| | Projected Sources and Uses of Liquidity | | 27 |
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20 | | Financial Ratios under Revolving Credit Agreements | | 31 |
| | Revolving Credit Agreements | | 29 |
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21 | | Financial Ratios under Indentures | | 31 |
| | Member Investments | | 29 |
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22 | | Collateral Pledged or on Deposit | | 32 |
| | Financial Ratios under Revolving Credit Agreements | | 30 |
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23 | | Principal Maturity of Long-term Debt | | 33 |
| | Financial Ratios under Indentures | | 31 |
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24 | | Interest Rate Gap Analysis | | 34 |
| | Unencumbered Loans | | 31 |
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25 | | Adjusted Financial Measures — Income Statement | | 35 |
| | Collateral Pledged or on Deposit | | 31 |
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26 | | TIER and Adjusted TIER | | 36 |
| | Principal Maturity of Long-term Debt | | 33 |
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27 | | Adjusted Financial Measures — Balance Sheet | | 36 |
| | Interest Rate Gap Analysis | | 34 |
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28 | | Leverage and Debt-to-Equity and Adjusted Leverage and Adjusted Debt-to-Equity Ratios | | 37 |
| | Adjusted Financial Measures — Income Statement | | 35 |
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29 | | | TIER and Adjusted TIER | | 36 |
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30 | | | Adjusted Financial Measures — Balance Sheet | | 36 |
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31 | | | Leverage and Debt-to-Equity Ratios | | 37 |
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PART I—FINANCIAL INFORMATION
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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FORWARD-LOOKING STATEMENTS |
This Quarterly Report on Form 10-Q contains forward-lookingcertain statements defined bythat are considered “forward-looking statements” within the Securities Act of 1933, as amended, and the Exchange Act of 1934, as amended. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identified by our use of words such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity” and similar expressions, whether in the negative or affirmative. All statements about future expectations or projections, including statements about loan volume, the adequacyappropriateness of the allowance for loan loss allowance,losses, operating income and expenses, leverage and debt-to-equity ratios, borrower financial performance, impaired loans, and sources and uses of liquidity, 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 couldmay differ materially differ.from our forward-looking statements due to several factors. Factors that could cause future results to vary from current expectationsour forward-looking statements include, but are not limited to, general economic conditions, legislative changes including those that could affect our tax status, governmental monetary and fiscal policies, demand for our loan products, lending competition, changes in the quality or composition of our loan portfolio, changes in our ability to access external financing, changes in the credit ratings on our debt, valuation of collateral supporting impaired loans, charges associated with our operation or disposition of foreclosed assets, regulatory and economic conditions in the rural electric industry, nonperformancenon-performance of counterparties to our derivative agreements, and the costs and effects of legal or governmental proceedings involving National Rural Utilities Cooperative Finance Corporation (“CFC”) or its members. Somemembers and the factors listed and described under “Item 1A. Risk Factors” of these and other factors are discussed in our annual and quarterly reports previously filed withAnnual Report on Form 10-K for the U.S. Securities and Exchange Commissionfiscal year ended May 31, 2015 (“SEC”)2015 Form 10-K). 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.
CFCNational Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can 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. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes. As a member-owned cooperative, CFC has no publicly held equity securities outstanding. CFC funds its activities primarily through a combination of publicly and privately held debt securities and member investments. As a member-owned cooperative, CFC’s objective is not to maximize profit, but rather to offer its members cost-based financial products and services consistent with sound financial management. CFC annually allocates its net earnings, which consist of net income excluding the effect of certain non-cash accounting entries, to (i) a cooperative educational fund, (ii) a members’ capital reserve, (iii) a general reserve, if necessary, and (iv) members based on each member’s patronage of CFC’s loan programs during the year.
Our financial statements include the consolidated accounts of 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.assets. RTFC was established to provide private financing for the rural telecommunications industry. NCSC was established to provide financing to members of CFC and the for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to Class A, B and Ccertain members of CFC. The entitiesCFC controlled by CFC that holdand held foreclosed assets includein two entities, Caribbean Asset Holdings, LLC (“CAH”) and Denton Realty Partners, LP (“DRP”)., during fiscal year 2015. DRP was dissolved during the fourth quarter of fiscal year 2015, subsequent to the sale of the remainder of its assets. CAH, which is the only entity in which we currently hold foreclosed assets, is a holding company for various U.S. Virgin Islands, British Virgin Islands and St. Maarten-based telecommunications operating entities that were transferred to CAH as a result of a loan default by a borrower and subsequent bankruptcy proceedings. These operating entities provide local, long-distance and wireless telephone, cable television and internetInternet services to residential and commercial customers. DRP holds a land development loan and limited partnership interests in certain receivables related to a real estate development.See “Item 1. Business—Overview” of our 2015 Form 10-K for additional information on the business activities of each of these entities. Unless stated otherwise, references to “we,”
“our” “our” or “us” relate to CFC and its consolidated entities. All references to members within this document include members, associates and affiliates of CFC and its consolidated entities.
Management monitors a variety of key indicators to evaluate our business performance. The following MD&A is intended to provide the reader with an understanding of our results of operations, financial condition and liquidity by focusing ondiscussing the drivers of changes from period to period in certainand the key measures used by management to evaluate performance, such as leverage ratios, growth and credit quality metrics. MD&A is provided as a supplement to, and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes in this Report, the more detailed information contained in our Annual Report on2015 Form 10-K, for the fiscal year ended May 31, 2014 (“2014 Form 10-K” ), including the risk factors discussed under “Part I—Item 1A. Risk Factors” in our 20142015 Form 10-K, and the risk factors under “Part II—Item 1A. Risk Factors” in this Report.
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SUMMARY OF SELECTED FINANCIAL DATA |
Table 1 provides a summary of selected financial data for the three and nine months ended February 28,August 31, 2015 and 2014, and as of February 28,August 31, 2015 and May 31, 2014.2015. In addition to financial measures determined in accordance with generally accepted accounting principles in the United States (“GAAP”), management also evaluates performance based on certain non-GAAP measures, which we refer to as “adjusted” measures. Our key non-GAAP metrics consist of adjusted times interest earned ratio (“TIER”) and adjusted debt-to-equity ratio. The most comparable GAAP measures are TIER and debt-to-equity ratio, respectively. The primary adjustments we make to calculate these non-GAAP measures consist of (i) adjusting interest expense and net interest income to include the impact of net periodic derivative cash settlements; (ii) adjusting net income, senior debt and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting senior debt to exclude the amount that funds CFC member loans guaranteed by the RUS, subordinated deferrable debt and members’ subordinated certificates; and (iv) adjusting total equity to include subordinated deferrable debt and members’ subordinated certificates. See “Non-GAAP Financial Measures” for a detailed reconciliation of these adjusted measures to the most comparable GAAP measures. We believe our adjusted non-GAAP metrics, which are not a substitute for GAAP and may not be consistent with similarly titled non-GAAP measures used by other companies, provide meaningful information and are useful to investors because the financial covenants in our revolving credit agreements and debt indentures are based on these adjusted metrics.
Table 1: Summary of Selected Financial Data(1) | | | | Three Months Ended February 28, | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | Change | | 2015 | | 2014 | | Change | | 2015 | | 2014 | | Change |
Statement of operations | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 238,740 |
| | $ | 238,732 |
| | — |
| | $ | 711,266 |
| | $ | 719,057 |
| | (1) % |
| | $ | 246,116 |
| | $ | 237,291 |
| | 4 % |
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Interest expense | | (156,850 | ) | | (163,534 | ) | | (4) | | (471,677 | ) | | (496,464 | ) | | (5) | | (165,700 | ) | | (156,552 | ) | | 6 |
Net interest income | | 81,890 |
| | 75,198 |
| | 9 | | 239,589 |
| | 222,593 |
| | 8 | | 80,416 |
| | 80,739 |
| | — |
Provision for loan losses | | (2,304 | ) | | (787 | ) | | 193 | | 3,475 |
| | (3,161 | ) | | (210) | | (4,562 | ) | | 6,771 |
| | (167) |
Fee and other income | | 5,020 |
| | 5,702 |
| | (12) | | 19,249 |
| | 14,983 |
| | 28 | | 4,701 |
| | 4,357 |
| | 8 |
Derivative gains (losses), net (1) | | (98,770 | ) | | (31,623 | ) | | 212 | | (223,209 | ) | | 43,981 |
| | (608) | |
Derivative losses(2) | | | (12,017 | ) | | (49,878 | ) | | (76) |
Results of operations of foreclosed assets(2)(3) | | (1,369 | ) | | (1,164 | ) | | 18 | | (33,059 | ) | | (8,482 | ) | | 290 | | (1,921 | ) | | (2,699 | ) | | (29) |
Operating expenses(3) | | (18,008 | ) | | (17,183 | ) | | 5 | | (54,788 | ) | | (54,371 | ) | | 1 | |
Operating expenses(4) | | | (22,835 | ) | | (18,543 | ) | | 23 |
Other non-interest expense | | (710 | ) | | (1,359 | ) | | (48) | | (653 | ) | | (1,699 | ) | | (62) | | (357 | ) | | 61 |
| | (685) |
Income (loss) before income taxes | | (34,251 | ) | | 28,784 |
| | (219) | | (49,396 | ) | | 213,844 |
| | (123) | |
Income tax (expense) benefit | | 55 |
| | (243 | ) | | (123) | | (100 | ) | | (2,045 | ) | | (95) | |
Net income (loss) | | $ | (34,196 | ) | | $ | 28,541 |
| | (220) % |
| | $ | (49,496 | ) | | $ | 211,799 |
| | (123) % |
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Income before income taxes | | | 43,425 |
| | 20,808 |
| | 109 |
Income tax expense | | | (330 | ) | | (196 | ) | | 68 |
Net income | | | $ | 43,095 |
| | $ | 20,612 |
| | 109 % |
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Adjusted statement of operations | | | | | | | | | | | | | | | | | | |
Adjusted interest expense(4)(5) | | $ | (178,362 | ) | | $ | (182,322 | ) | | (2) % |
| | $ | (535,054 | ) | | $ | (551,408 | ) | | (3) % |
| | $ | (185,856 | ) | | $ | (176,653 | ) | | 5 % |
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Adjusted net interest income(4)(5) | | 60,378 |
| | 56,410 |
| | 7 | | 176,212 |
| | 167,649 |
| | 5 | | 60,260 |
| | 60,638 |
| | (1) |
Adjusted net income(4)(5) | | 43,062 |
| | 41,376 |
| | 4 | | 110,336 |
| | 112,874 |
| | (2) | | 34,956 |
| | 50,389 |
| | (31) |
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Ratios | | | | | | | | | | | | | | | | | | |
Fixed-charge coverage ratio/TIER (5)(6) | | — |
| | 1.17 |
| | NA | | — |
| | 1.43 |
| | NA | | 1.26 |
| | 1.13 |
| | 13 | bps |
Adjusted TIER(4)(5) | | 1.24 |
| | 1.23 |
| | 1 bps | | 1.21 |
| | 1.20 |
| | 1 bps | | 1.19 |
| | 1.29 |
| | (10) |
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| | | | | | | | As of | | | | | | |
| | | | | | | | February 28, 2015 | | May 31, 2014 | | Change | | August 31, 2015 | | May 31, 2015 | | Change |
Balance sheet | | | | | | | | | | | | | | | | | | |
Cash, investments and time deposits | | | | | | | | $ | 769,229 |
| | $ | 944,412 |
| | (19)% | | $ | 835,115 |
| | $ | 818,308 |
| | 2% |
Loans to members(6)(7) | | | | | | | | 21,212,092 |
| | 20,476,642 |
| | 4 | | 22,094,387 |
| | 21,469,017 |
| | 3 |
Allowance for loan losses | | | | | | | | (53,114 | ) | | (56,429 | ) | | (6) | | (38,307 | ) | | (33,690 | ) | | 14 |
Loans to members, net | | | | | | | | 21,158,978 |
| | 20,420,213 |
| | 4 | | 22,056,080 |
| | 21,435,327 |
| | 3 |
Total assets | | | | | | | | 22,648,921 |
| | 22,232,743 |
| | 2 | | 23,459,800 |
| | 22,846,059 |
| | 3 |
Short-term borrowings | | | | | | | | 3,213,860 |
| | 4,099,331 |
| | (22) | | 3,208,704 |
| | 3,127,754 |
| | 3 |
Long-term debt | | | | | | | | 15,861,011 |
| | 14,513,284 |
| | 9 | | 16,710,748 |
| | 16,244,794 |
| | 3 |
Subordinated deferrable debt | | | | | | | | 400,000 |
| | 400,000 |
| | — | | 395,717 |
| | 395,699 |
| | — |
Members’ subordinated certificates | | | | | | | | 1,526,452 |
| | 1,612,227 |
| | (5) | | 1,485,933 |
| | 1,505,420 |
| | (1) |
Total debt outstanding(8) | | | | | | | | 21,001,323 |
| | 20,624,842 |
| | 2 | | 21,801,102 |
| | 21,273,667 |
| | 2 |
Total liabilities | | | | | | | | 21,764,417 |
| | 21,262,369 |
| | 2 | | 22,544,635 |
| | 21,934,273 |
| | 3 |
Total equity | | | | | | | | 884,504 |
| | 970,374 |
| | (9) | | 915,165 |
| | 911,786 |
| | — |
Guarantees(9) | | | | | | | | 987,833 |
| | 1,064,822 |
| | (7) | | 972,486 |
| | 986,500 |
| | (1) |
| | | | | | | | | | | | | | | | | | |
Ratios | | | | | | | | | | | |
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Leverage ratio(7) | | | | | | | | 25.72 |
| | 23.01 |
| | 271 | bps | |
Leverage ratio(10) | | | 25.70 |
| | 25.14 |
| | 56 | bps |
Adjusted leverage ratio(4)(5) | | | | | | | | 6.41 |
| | 6.24 |
| | 17 | | 6.83 |
| | 6.58 |
| | 25 |
Debt-to-equity ratio(8) | | | | | | | | 24.61 |
| | 21.91 |
| | 270 | |
Debt-to-equity ratio(11) | | | 24.63 |
| | 24.06 |
| | 57 |
Adjusted debt-to-equity ratio(4)(5) | | | | | | | | 6.10 |
| | 5.90 |
| | 20 | | 6.52 |
| | 6.26 |
| | 26 |
____________________________
— Change is less than one percent or not meaningful.
(1)In the first quarter of fiscal year 2016, we early-adopted the Financial Accounting Standards Board (“FASB”) guidance that amends the presentation of debt issuance costs in the financial statements by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet
as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, rather than as an asset. We applied its provisions retrospectively, which resulted in the reclassification of unamortized debt issuance costs of $47 million as of May 31, 2015, from total assets on our condensed consolidated balance sheet to total debt outstanding. Other than this reclassification, the adoption of the guidance did not impact our consolidated financial statements. See “Note 1—Summary of Significant Accounting Policies—Accounting Standards Adopted in Fiscal Year 2016” for additional information.
(1)(2)Consists of derivative cash settlements and derivative forward value amounts. Derivative cash settlement amounts represent net periodic contractual interest accruals related to derivatives not designated for hedge accounting. Derivative forward value amounts represent changes in fair value during the period, excluding net periodic contractual accruals, related to derivatives not designated for hedge accounting and expense amounts reclassified into income related to the cumulative transition loss recorded in accumulated other comprehensive income (“AOCI”) atas of June 1, 2001, as a result of the adoption of the derivative accounting guidance that required derivatives to be reported at fair value on the balance sheet.
(2) (3)Includes non-cash impairment chargeCAH fair value loss of $27$2 million for the ninethree months ended February 28, 2015 related to certain identifiable intangible assets and goodwill of CAH.August 31, 2015.
(3)(4)Consists of salaries and employee benefits and other general and administrative expenses.
(4) (5)See “Non-GAAP Financial Measures” for details on the calculation of these adjusted non-GAAP ratios and the reconciliation to the most comparable GAAP measures.
(5)(6)Calculated based on net income plus interest expense for the period divided by interest expense for the period. The fixed-charge coverage ratios and TIER were the same for the three and nine months ended February 28,August 31, 2015 and 2014 because we did not have any capitalized interest during these periods. We reported a net loss of $34 million and $49 million for the three and nine months ended February 28, 2015, respectively; therefore, the TIER for these periods is below 1.00.
(6)(7)Consists of outstanding principal balance of member loans and deferred loan origination costs of $10 million as of both February 28,August 31, 2015 and May 31, 2014.2015.
(7)(8)Includes debt issuance costs, which were previously classified as an asset on our consolidated balance sheets, of $46 million and $47 million as of August 31, 2015 and May 31, 2015, respectively.
(9)Represents the total outstanding guarantee amount as of the end of the each period; however, the amount recorded on our condensed consolidated balance sheets for our guarantee obligations is significantly less than the outstanding guarantee total. See “Note 10—Guarantees” for additional information.
(10)Calculated based on total liabilities and guarantees at period end divided by total equity at period end.
(8)(11)Calculated based on total liabilities at period end divided by total equity at period end.
Our primary objective as a member-owned cooperative lender is to provide cost-based financial products to our rural electric members while maintaining sound financial results required for investment-grade credit ratings on our debt instruments. Our objective is not to maximize net income; therefore, the rates we charge our member-borrowers reflect our adjusted interest expense plus a spread to cover our operating expenses, a provision for loan losses and earnings sufficient to achieve interest coverage to meet our financial objectives. Our goal is to earn an annual minimum adjusted TIER of 1.10 and to achieve and maintain an adjusted debt-to-equity ratio below 6.00-to-1.
Financial Performance
Reported Results
We reported a net lossincome of $34$43 million and TIER below 1.00 for the quarter ended February 28,August 31, 2015 (“current quarter”), and TIER of 1.26, compared with net income of $29$21 million and TIER of 1.17 for the quarter ended February 28, 2014 (“prior year quarter”). We reported a net loss of $49 million and TIER below 1.00 for the nine months ended February 28, 2015, compared with net income of $212 million and TIER of 1.431.13 for the same prior year period.quarter. Our debt-to-equity ratio increased to 24.61-to-124.63-to-1 as of February 28,August 31, 2015, from 21.91-to-124.06-to-1 as of May 31, 2014.2015. Our reported results for the current quarter and nine months ended February 28, 2015 reflect the impact of significantly higherrelatively flat net interest income and a significant reduction in net derivative losses of $38 million, which more thanwas partially offset an increase in net interest income. In addition, our results for the nine months ended February 28, 2015 includeby a non-cash impairment charge of $27 million related to certain identifiable intangible assets and goodwill of CAH, which resultedshift in the write downprovision for loan losses of the carrying value$12 million, as we recorded a provision expense of CAH$5 million in the secondcurrent quarter versus a negative provision of fiscal$7 million in the same prior year 2015. We provide additional information on the CAH impairment charge below under “Consolidated Results of Operations” and in “Note 4—Foreclosed Assets.”quarter.
We expect volatility from period to period in our reported GAAP results due to changes in market conditions that result in periodic fluctuations in the estimated fair value of our derivative instruments, which we mark to market through earnings. As previously noted, we therefore use adjusted non-GAAP measures to evaluate our performance and for compliance with our debt covenants.
Adjusted Non-GAAP Results
Our adjusted net income totaled $43$35 million and $41 million for the three months ended February 28, 2015 and 2014, respectively, and our adjusted TIER was 1.24 and 1.23, respectively. Our1.19 for the current quarter, compared with adjusted net income totaled $110of $50 million and $113 millionadjusted TIER of 1.29 for the nine months ended February 28, 2015 and 2014, respectively, and our adjusted TIER was 1.21 and 1.20, respectively.same prior year quarter. Our adjusted debt-to-equity ratio increased to 6.10-to-16.52-to-1 as of February 28,August 31, 2015, from 5.90-to-16.26-to-1 as of May 31, 2014.2015. Our adjusted net income for the current quarter reflected a slight decline in net interest income and the unfavorable impact of the $12 million shift in our provision for loan losses.
Our adjusted net income for the current quarter and nine months ended February 28, 2015 reflected improvements in our core operations resulting from strategic actions taken to reduce our funding costs, which generated higher adjusted net interest income as the reduction in our average debt cost more than offset a decrease in the average yield on our interest-earning assets. Our adjusted results for the nine months ended February 28, 2015 also include the favorable impact of higher fee and other non-interest income and a reduction in the allowance for loan losses, which resulted in a negative provision for loan losses for the nine months ended February 28, 2015. The decrease in adjusted net income during the nine months ended February 28, 2015 from the same prior year period was driven by the CAH impairment charge of $27 million recorded in the second quarter of 2015, which more than offset the favorable impact from the improvement in our core operations.
Lending Activity
Total loans outstanding, which consists of the unpaid principal balance and excludes deferred loan origination costs, was $21,202$22,085 million as of February 28,August 31, 2015, an increase of $735$625 million, or 4%3%, from May 31, 2014.2015. The increase was primarily due to an increase in CFC distribution and power supply loans of $740$480 million and $162$163 million, respectively, which was attributable to members refinancing with us loans issuedmade by other lenders and member advances for capital investments. This increase was partially offset by a decrease in NCSC loans of $112$6 million and a decrease in RTFC loans of $48$7 million.
CFC had long-term fixed-rate loans totaling $1,026$206 million that repriced during the ninethree months ended February 28,August 31, 2015. Of this total, $862$199 million repriced to a new long-term fixed rate; $100$6 million repriced to a long-term variable rate; and $64$1 million were repaid in full.
Funding Activity
Our outstanding debt volume generally increases and decreases in response to member loan demand. As outstanding loan balances increased during the ninethree months ended February 28,August 31, 2015, our debt volume also increased. Total debt outstanding was $21,001$21,801 million as of February 28,August 31, 2015, an increase of $376$527 million, or 2%, from May 31, 2014.2015. The increase reflectedwas primarily attributable to the issuance of $300notes payable of $250 million aggregate principal amountunder the Guaranteed Underwriter Program of collateral trust bonds in November 2014the United States Department of Agriculture and $900$180 million in January 2015, which was partially offset by a $789 million reduction in our dealer commercial paper as part of our strategy to reduce our short-term wholesale funding risk. Significant funding-related developments duringunder the current quarter are discussed below.
note purchase agreement with the Federal Agricultural Mortgage Corporation (“Farmer Mac”). On January 27,July 31, 2015, we issued $400 million aggregate principal amount of 2.00% collateral trust bonds due 2020 and $500 million of aggregate principal amount of 2.85% collateral trust bonds due 2025. We used these funds to reduce our outstanding dealer commercial paper, which totaled $1,974 million as of May 31, 2014, to $1,185 million as of February 28, 2015.
On January 8, 2015, the commitment amount under theentered into a new revolving note purchase agreement with Farmer Mac was increased by $600 million to $4,500 million, and the draw period was extended by four years to January 11, 2020.
During fiscal year 2014, the CFC Board of Directors authorized management to execute the call of the outstanding $387 million of 7.5% member capital securities and offer members the option to invest in a new series of member capital securities that currently have a 5% interest rate. As of February 28, 2015, all $387 million of the 7.5% member capital securities had been redeemed. Members invested $219 million in the new series of member capital securities as of February 28, 2015.
On January 20, 2015, subsequent to our significant reduction in outstanding dealer commercial paper to manage our short-term wholesale funding risk, S&P restored CFC’s outlook to “stable” from “negative.” CFC’s rating outlook by both S&P and Moody’s was stable as of April 10, 2015 and February 28, 2015. Below we discuss our expectations for the next 12 months and actions we believe will help maintain our stable ratings outlook.$300 million.
Outlook for the Next 12 Months
We expect the amount of new long-term loan advances to exceed scheduled loan repayments over the next 12 months. We anticipate a continued increase in earnings from our core lending operations over the next 12 months based on our expectation of an increase in long-term loans outstanding.
As of February 28, 2015, weWe had $1,703$1,932 million of long-term debt as of August 31, 2015, scheduled to mature over the next 12 months. We believe that we have sufficient liquidity from the combination of existing cash and time deposits, member loan repayments, committed loan facilities and our ability to issue debt in the capital markets, to our members and in private placements, to meet the demand for member loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months. As of February 28, 2015, weWe had $684$751 million in cash and time deposits, up to $750$500 million available under committed loan facilities from the Federal Financing Bank, $3,418$3,419 million available under committed revolving lines of credit with a syndicate of banks, up to $300 million available under a new note purchase agreement with Farmer Mac and, subject to market conditions, up to $2,580$2,419 million available under athe existing revolving note purchase agreement with Farmer Mac.Mac as of August 31, 2015. On September 28, 2015, we received a commitment from RUS to guarantee a loan of $250 million from the Federal Financing Bank of the USDA pursuant to the Guaranteed Underwriter Program. Upon closing of the commitment, we will have an additional $250 million available under the Guaranteed Underwriter Program with a 20-year maturity repayment period during the three-year period following the date of closing. We also have the ability to issue collateral trust bonds and medium-term notes in the capital markets and medium-term notes to members.
We believe we can continue to roll over the member outstanding short-term debt of $2,029$2,294 million as of February 28,August 31, 2015, based on our expectation that our members will continue to reinvest their excess cash in our commercial paper, daily liquidity fund and select notes. We believe we can also continue to roll over our outstanding dealer commercial paper of $1,185$915 million as of February 28,August 31, 2015. We intend to manage our short-term wholesale funding risk by maintaining our dealer commercial paper within an approximate range between $1,000 million and $1,250 million for the foreseeable future. We expect to continue to be in compliance with the covenants under our revolving credit agreements, which will allow us to mitigate our roll-over risk as we can draw on these facilities to repay dealer or member commercial paper that cannot be rolled over due to potential adverse changes in market conditions.
Our goal is to maintain the adjusted debt-to-equity ratio at or below 6.00-to-1. However, because of the increase in outstanding loan balances during the thirdfirst quarter of fiscal 20152016 and the expected further increase during the remainder of the fiscal year, we anticipate additional borrowings to support our loan growth. As a result, our adjusted debt-to-equity ratio will likely continue to be higher than 6.00-to-1 in the near term.
As part of our strategy to manage our credit risk exposure, we entered into a long-term standby purchase commitment agreement with Farmer Mac on August 31, 2015. Under this agreement, we may designate certain loans, as approved by Farmer Mac, and in the event any such loan later goes into material default for at least 90 days, upon request by us, Farmer Mac must purchase such loan at par value. We have designated and Farmer Mac has approved an initial tranche of loans of $520 million as of August 31, 2015. We expect to designate an additional tranche of loans in the second quarter of fiscal year 2016.
On September 30, 2015, CFC entered into a Purchase Agreement (the “Purchase Agreement”) with CAH, ATN VI Holdings, LLC (“Atlantic”) and Atlantic Tele-Network, Inc., the parent corporation of Atlantic, to sell all of the issued and outstanding membership interests of CAH to Atlantic for a purchase price of $145 million, subject to certain adjustments. We expect to complete the transaction during the second half of calendar year 2016, subject to the satisfaction or waiver of various closing conditions under the Purchase Agreement, including, among other things, the receipt of required communications regulatory approvals in the United States, United States Virgin Islands, British Virgin Islands and St. Maarten, the expiration or termination of applicable waiting periods under applicable competition laws, and the absence of a material adverse effect or material adverse regulatory event. See “Consolidated Results of Operations—Results of Foreclosed Assets” below and “Note 4—Foreclosed Assets” for additional information related to CAH.
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|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
The preparation of financial statements in accordance with U.S. GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use managementmanagement's judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a discussion of our significant accounting policies under “Note 1—General Information andSummary of Significant Accounting Policies” in our 20142015 Form 10-K.
We have identified the allowance for loan losses and fair value as our most criticalcertain accounting policies as critical because they requireinvolve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. Our most critical accounting policies and estimates involve the determination of the allowance for loan losses and fair value. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussedThere were no material changes in the assumptions used in our critical accounting policies and estimates during the current quarter. Management has discussed significant judgments and assumptions in applying our critical accounting policies with the Audit Committee of theour Board of Directors. We provide information on the methodologies and key assumptions used in our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 20142015 Form 10-K. See “Item 1A. Risk Factors” for a discussion of the risks associated with management’s judgments and estimates in applying our accounting policies and methods in our 2015 Form 10-K.
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|
ACCOUNTING CHANGES AND DEVELOPMENTS |
See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted during the ninethree months ended February 28,August 31, 2015, as well as recently issued accounting standards not yet required to be adopted and the expected impact of these accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our results of operations, financial condition or liquidity, we discuss the impacts in the applicable section(s) of MD&A.
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|
CONSOLIDATED RESULTS OF OPERATIONS |
The section below provides a comparative discussion of our condensed consolidated results of operations forbetween the three and nine months ended February 28,August 31, 2015 and the three months ended August 31, 2014. Following this section, we provide a comparative analysis of our condensed consolidated balance sheets as of February 28,August 31, 2015 and May 31, 2014.2015. You should read these sections together with our
“Executive “Executive Summary—Outlook for the Next 12 Months” where we discuss trends and other factors that we expect will affect our future results of operations.
Net Interest Income
Net interest income represents the difference between the interest income and applicable fees earned on our interest-earning assets, which include loans and investment securities, and the interest expense on our interest-bearing liabilities. Our net interest yield represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities plus the impact from non-interest bearing funding. We expect net interest income and our net interest yield to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities. We do not fund each individual loan with specific debt. Rather, we attempt to minimize costs and maximize efficiency by funding large aggregated amounts of loans.
Table 2 presents our average balance sheets for the three and nine months ended February 28,August 31, 2015 and 2014, and for each major category of our interest-earning assets and interest-bearing liabilities, the interest income earned or interest expense incurred, and the average yield or cost. Table 2 also presents non-GAAP adjusted interest expense, adjusted net interest income and adjusted net interest yield, which reflect the inclusion of net periodic derivative cash settlements in interest expense. We provide reconciliations of our non-GAAP adjusted measures to the most comparable GAAP measures under “Non-GAAP Financial Measures.”
Table 2: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, |
(Dollars in thousands) | | 2015 | | 2014 |
Assets: | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost |
Long-term fixed-rate loans | | $ | 19,134,746 |
| | $ | 221,856 |
| | 4.70 | % | | $ | 18,376,969 |
| | $ | 220,227 |
| | 4.86 | % |
Long-term variable-rate loans | | 667,788 |
| | 4,836 |
| | 2.94 |
| | 763,410 |
| | 5,217 |
| | 2.77 |
|
Line of credit loans | | 1,159,097 |
| | 6,707 |
| | 2.35 |
| | 1,365,352 |
| | 8,302 |
| | 2.47 |
|
Restructured loans | | 7,534 |
| | — |
| | — |
| | 7,584 |
| | — |
| | — |
|
Nonperforming loans | | 1,690 |
| | — |
| | — |
| | 11,017 |
| | — |
| | — |
|
Interest-based fee income(1) | | — |
| | 2,946 |
| | — |
| | — |
| | 3,054 |
| | — |
|
Total loans | | 20,970,855 |
| | 236,345 |
| | 4.57 |
| | 20,524,332 |
| | 236,800 |
| | 4.68 |
|
Cash, investments and time deposits | | 761,963 |
| | 2,395 |
| | 1.27 |
| | 1,007,430 |
| | 1,932 |
| | 0.78 |
|
Total interest-earning assets | | $ | 21,732,818 |
| | $ | 238,740 |
| | 4.46 | % | | $ | 21,531,762 |
| | $ | 238,732 |
| | 4.50 | % |
Other assets, less allowance for loan losses | | 597,952 |
| | | | | | 1,007,744 |
| | | | |
Total assets | | $ | 22,330,770 |
| | | | | | $ | 22,539,506 |
| | | | |
| | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | |
Short-term debt | | $ | 3,844,060 |
| | $ | 1,669 |
| | 0.18 | % | | $ | 4,302,019 |
| | $ | 1,406 |
| | 0.13 | % |
Medium-term notes | | 2,909,343 |
| | 17,196 |
| | 2.40 |
| | 2,860,761 |
| | 20,369 |
| | 2.89 |
|
Collateral trust bonds | | 6,240,729 |
| | 77,360 |
| | 5.03 |
| | 5,961,449 |
| | 76,090 |
| | 5.18 |
|
Subordinated deferrable debt | | 400,000 |
| | 4,750 |
| | 4.82 |
| | 395,605 |
| | 4,750 |
| | 4.87 |
|
Subordinated certificates | | 1,493,438 |
| | 15,281 |
| | 4.15 |
| | 1,597,612 |
| | 19,777 |
| | 5.02 |
|
Long-term notes payable | | 5,998,620 |
| | 36,933 |
| | 2.50 |
| | 5,523,806 |
| | 37,130 |
| | 2.73 |
|
Debt issuance costs(2) | | — |
| | 1,871 |
| | — |
| | — |
| | 1,806 |
| | — |
|
Interest-based fee expense(3) | | — |
| | 1,790 |
| | — |
| | — |
| | 2,206 |
| | — |
|
Total interest-bearing liabilities | | $ | 20,886,190 |
| | $ | 156,850 |
| | 3.05 | % | | $ | 20,641,252 |
| | $ | 163,534 |
| | 3.21 | % |
Other liabilities | | 483,087 |
| | | | | | 1,000,595 |
| | | | |
Total liabilities | | 21,369,277 |
| | | | | | 21,641,847 |
| | | | |
Total equity | | 961,493 |
| | | | | | 897,659 |
| | | | |
Total liabilities and equity | | $ | 22,330,770 |
| | | | | | $ | 22,539,506 |
| | | | |
| | | | | | | | | | | | |
Net interest spread(4) | | | | | | 1.41 | % | | | | | | 1.29 | % |
Impact of non-interest bearing funding | | | | | | 0.10 |
| | | | | | 0.11 |
|
Net interest income/net interest yield(5) | | | | $ | 81,890 |
| | 1.51 | % | | | | $ | 75,198 |
| | 1.40 | % |
| | | | | | | | | | | | |
Adjusted net interest income/adjusted net interest yield: | | | | | | | | | | | | |
Interest income | | | | $ | 238,740 |
| | 4.46 | % | | | | $ | 238,732 |
| | 4.50 | % |
Interest expense | | | | 156,850 |
| | 3.05 |
| | | | 163,534 |
| | 3.21 |
|
Add: Net derivative cash settlement cost(6) | | | | 21,512 |
| | 0.99 |
| | | | 18,788 |
| | 0.91 |
|
Adjusted interest expense/adjusted average cost(7) | | | | $ | 178,362 |
| | 3.45 | % | | | | $ | 182,322 |
| | 3.58 | % |
| | | | | | | | | | | | |
Adjusted net interest spread(4) | | | | | | 1.01 | % | | | | | | 0.92 | % |
Impact of non-interest bearing funding | | | | | | 0.12 |
| | | | | | 0.14 |
|
Adjusted net interest income/adjusted net interest yield(8) | | | | $ | 60,378 |
| | 1.13 | % | | | | $ | 56,410 |
| | 1.06 | % |
| | | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | 2015 | | 2014 |
Assets: | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost | | Average Balance | | Interest Income/Expense | | Average Yield/Cost |
Long-term fixed-rate loans(1) | | $ | 18,758,101 |
| | $ | 660,391 |
| | 4.71 | % | | $ | 18,368,742 |
| | $ | 666,762 |
| | 4.85 | % | | $ | 19,914,082 |
| | $ | 232,202 |
| | 4.64 | % | | $ | 18,458,181 |
| | $ | 222,328 |
| | 4.78 | % |
Long-term variable-rate loans | | 705,736 |
| | 15,099 |
| | 2.86 |
| | 720,419 |
| | 14,871 |
| | 2.76 |
| | 685,897 |
| | 5,020 |
| | 2.91 |
| | 754,707 |
| | 5,360 |
| | 2.82 |
|
Line of credit loans | | 1,152,417 |
| | 20,335 |
| | 2.36 |
| | 1,266,853 |
| | 23,379 |
| | 2.47 |
| | 1,040,028 |
| | 6,198 |
| | 2.37 |
| | 1,156,811 |
| | 6,942 |
| | 2.38 |
|
Restructured loans | | 7,558 |
| | 10 |
| | 0.18 |
| | 11,909 |
| | 136 |
| | 1.53 |
| | 11,407 |
| | — |
| | — |
| | 7,585 |
| | — |
| | — |
|
Nonperforming loans | | 1,820 |
| | — |
| | — |
| | 13,073 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,071 |
| | — |
| | — |
|
Interest-based fee income(1)(2) | | — |
| | 8,915 |
| | — |
| | — |
| | 8,224 |
| | — |
| | — |
| | 71 |
| | — |
| | — |
| | 89 |
| | — |
|
Total loans | | 20,625,632 |
| | 704,750 |
| | 4.57 |
| | 20,380,996 |
| | 713,372 |
| | 4.68 |
| | 21,651,414 |
| | 243,491 |
| | 4.47 |
| | 20,379,355 |
| | 234,719 |
| | 4.57 |
|
Cash, investments and time deposits | | 826,981 |
| | 6,516 |
| | 1.05 |
| | 985,655 |
| | 5,685 |
| | 0.77 |
| | 722,391 |
| | 2,625 |
| | 1.45 |
| | 995,975 |
| | 2,572 |
| | 1.02 |
|
Total interest-earning assets | | $ | 21,452,613 |
| | $ | 711,266 |
| | 4.43 | % | | $ | 21,366,651 |
| | $ | 719,057 |
| | 4.50 | % | | $ | 22,373,805 |
| | $ | 246,116 |
| | 4.38 | % | | $ | 21,375,330 |
| | $ | 237,291 |
| | 4.40 | % |
Other assets, less allowance for loan losses | | 878,157 |
| | | | | | 1,172,855 |
| | | | | | 873,048 |
| | | | | | 900,480 |
| | | | |
Total assets | | $ | 22,330,770 |
| |
|
| | | | $ | 22,539,506 |
| |
|
| |
|
| | $ | 23,246,853 |
| |
|
| | | | $ | 22,275,810 |
| |
|
| |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | |
|
| |
|
| |
|
| |
|
| |
|
| | | |
|
| |
|
| |
|
| |
|
| |
|
|
Short-term debt | | $ | 3,823,206 |
| | $ | 4,375 |
| | 0.15 | % | | $ | 4,231,172 |
| | $ | 4,445 |
| | 0.14 | % | | $ | 2,799,166 |
| | $ | 2,542 |
| | 0.36 | % | | $ | 3,799,388 |
| | $ | 3,141 |
| | 0.33 | % |
Medium-term notes | | 2,844,148 |
| | 50,937 |
| | 2.39 |
| | 2,860,405 |
| | 62,920 |
| | 2.94 |
| | 3,361,129 |
| | 20,153 |
| | 2.39 |
| | 2,760,202 |
| | 17,159 |
| | 2.47 |
|
Collateral trust bonds | | 6,111,864 |
| | 227,346 |
| | 4.97 |
| | 5,903,818 |
| | 227,746 |
| | 5.16 |
| | 6,782,214 |
| | 82,831 |
| | 4.86 |
| | 6,017,423 |
| | 76,182 |
| | 5.02 |
|
Subordinated deferrable debt | | 400,000 |
| | 14,250 |
| | 4.76 |
| | 395,676 |
| | 14,250 |
| | 4.82 |
| | 400,000 |
| | 4,783 |
| | 4.76 |
| | 400,000 |
| | 4,767 |
| | 4.73 |
|
Subordinated certificates | | 1,520,276 |
| | 48,177 |
| | 4.24 |
| | 1,686,475 |
| | 60,897 |
| | 4.83 |
| | 1,497,706 |
| | 15,306 |
| | 4.07 |
| | 1,542,924 |
| | 16,746 |
| | 4.31 |
|
Long-term notes payable | | 5,876,077 |
| | 112,190 |
| | 2.55 |
| | 5,474,278 |
| | 113,828 |
| | 2.78 |
| | 6,550,307 |
| | 40,085 |
| | 2.43 |
| | 5,859,435 |
| | 38,557 |
| | 2.61 |
|
Debt issuance costs(2) | | — |
| | 5,596 |
| | — |
| | — |
| | 5,453 |
| | — |
| |
Interest-based fee expense(3) | | — |
| | 8,806 |
| | — |
| | — |
| | 6,925 |
| | — |
| |
Total interest-bearing liabilities | | $ | 20,575,571 |
| | $ | 471,677 |
| | 3.06 | % | | $ | 20,551,824 |
| | $ | 496,464 |
| | 3.23 | % | | $ | 21,390,522 |
| | $ | 165,700 |
| | 3.08 | % | | $ | 20,379,372 |
| | $ | 156,552 |
| | 3.05 | % |
Other liabilities | | 793,706 |
| | | | | | 1,090,023 |
| | | | | | 941,094 |
| | | |
| | 929,881 |
| |
| | |
Total liabilities | | 21,369,277 |
| | | | | | 21,641,847 |
| | | | | | 22,331,616 |
| | | |
| | 21,309,253 |
| |
| | |
Total equity | | 961,493 |
| | | | | | 897,659 |
| | | | | | 915,237 |
| | | | | | 966,557 |
| |
| | |
Total liabilities and equity | | $ | 22,330,770 |
| |
|
| | | | $ | 22,539,506 |
| |
|
| | | | $ | 23,246,853 |
| |
|
| | | | $ | 22,275,810 |
| |
|
| | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net interest spread(4) | | | |
|
| | 1.37 | % | |
|
| |
|
| | 1.27 | % | |
Impact of non-interest bearing funding | | | | | | 0.12 |
| | | | | | 0.12 |
| |
Net interest spread(3) | | | | |
|
| | 1.30 | % | |
|
| |
|
| | 1.35 | % |
Impact of non-interest bearing funding(4) | | | | | | | 0.14 |
| | | | | | 0.16 |
|
Net interest income/net interest yield(5) | | | | $ | 239,589 |
| | 1.49 | % | | | | $ | 222,593 |
| | 1.39 | % | | | | $ | 80,416 |
| | 1.44 | % | | | | $ | 80,739 |
| | 1.51 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted net interest income/adjusted net interest yield: | | | | | |
|
| | | | | | | | | | | |
|
| | | | | | |
Interest income | | | | $ | 711,266 |
| | 4.43 | % | | | | $ | 719,057 |
| | 4.50 | % | | | | $ | 246,116 |
| | 4.38 | % | | | | $ | 237,291 |
| | 4.40 | % |
Interest expense | | | | 471,677 |
| | 3.06 |
| | | | 496,464 |
| | 3.23 |
| | | | 165,700 |
| | 3.08 |
| | | | 156,552 |
| | 3.05 |
|
Add: Net derivative cash settlement cost(6) | | | | 63,377 |
| | 0.99 |
| | | | 54,944 |
| | 0.88 |
| | | | 20,156 |
| | 0.82 |
| | | | 20,101 |
| | 0.94 |
|
Adjusted interest expense/adjusted average cost(7) | | | | $ | 535,054 |
| | 3.48 | % | |
|
| | $ | 551,408 |
| | 3.59 | % | | | | $ | 185,856 |
| | 3.46 | % | |
|
| | $ | 176,653 |
| | 3.43 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Adjusted net interest spread(4) | | | | | | 0.95 | % | |
| | | | 0.91 | % | | | | | | 0.92 | % | |
| | | | 0.97 | % |
Impact of non-interest bearing funding | | | | | | 0.15 |
| | | | | | 0.14 |
| | | | | | 0.15 |
| | | | | | 0.16 |
|
Adjusted net interest income/adjusted net interest yield(8) | | | | $ | 176,212 |
| | 1.10 | % | |
| | $ | 167,649 |
|
| 1.05 | % | | | | $ | 60,260 |
| | 1.07 | % | |
| | $ | 60,638 |
|
| 1.13 | % |
____________________________
(1)Primarily related to Includes loan conversion fees, which are deferred and recognized in interest income over the interest rate pricing term of the original loan using the effective interest method. Also includes a small portion of conversion fees, which are intended to cover the administrative costs related to the conversion and are recognized into income immediately at conversion.
(2) Primarily related to loan origination and late loan payment fees.
(2)Primarily consists of underwriter’s fees, legal fees, printing costs and certain accounting fees, which are deferred and recognized in interest expense using the effective interest method. Also includes issuance costs related to dealer commercial paper, which are recognized immediately as incurred.
(3)Reflects various fees related to funding activities, including fees paid to banks participating in our revolving credit agreements. Amounts are recognized as incurred or amortized on a straight-line basis over the life of the agreement.
(4)Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing funding. Adjusted net interest spread represents the difference between the average yield on interest-earning assets and the adjusted average cost of interest-bearing funding.
(4)Includes other liabilities and equity.
(5)Net interest yield is calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.
(6)Represents the impact of net periodic derivative cash settlements during the period, which is added to interest expense to derive non-GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on the annualized net periodic cash settlements during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of derivatives was $8,791$9,788 million and $8,371$8,484 million for the three months ended February 28, 2015 and 2014, respectively. The average outstanding notional amount of derivatives was $8,588 million and $8,385 million for the nine months ended February 28,August 31, 2015 and 2014, respectively.
(7)Adjusted average cost is calculated based on annualized adjusted interest expense for the period divided by average interest-bearing funding during the period.
(8)Adjusted net interest yield is calculated based on annualized adjusted net interest income for the period divided by average interest-earning assets for the period.
Table 3 displays the change in our net interest income between periods and the extent to which the variance is attributable to:
(i) changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates of these assets and liabilities. The table also presents the change in adjusted net interest income between periods.
Table 3: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
| | | | Three Months Ended February 28, 2015 versus 2014 | | Nine Months Ended February 28, 2015 versus 2014 | | | Three Months Ended August 31, 2015 versus 2014 |
| | | | Variance due to:(1) | | | | Variance due to:(1) | | | | | Variance due to:(1) |
(Dollars in thousands) | | Total Variance | | Volume | | Rate | | Total Variance | | Volume | | Rate | | | Total Variance | | Volume | | Rate |
Interest income: | | | | | | | | | | | | | | | | | | | |
Long-term fixed-rate loans | | $ | 1,629 |
| | $ | 9,081 |
| | $ | (7,452 | ) | | $ | (6,371 | ) | | $ | 14,133 |
| | $ | (20,504 | ) | | | $ | 9,874 |
| | $ | 16,881 |
| | $ | (7,007 | ) |
Long-term variable-rate loans | | (381 | ) | | (653 | ) | | 272 |
| | 228 |
| | (303 | ) | | 531 |
| | | (340 | ) | | (502 | ) | | 162 |
|
Line of credit loans | | (1,595 | ) | | (1,254 | ) | | (341 | ) | | (3,044 | ) | | (2,112 | ) | | (932 | ) | | | (744 | ) | | (718 | ) | | (26 | ) |
Restructured loans | | — |
| | — |
| | — |
| | (126 | ) | | (50 | ) | | (76 | ) | | |
Nonperforming loans | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | |
Fee income | | (108 | ) | | — |
| | (108 | ) | | 691 |
| | — |
| | 691 |
| | | (18 | ) | | — |
| | (18 | ) |
Total loans | | (455 | ) | | 7,174 |
| | (7,629 | ) | | (8,622 | ) | | 11,668 |
| | (20,290 | ) | | | 8,772 |
| | 15,661 |
| | (6,889 | ) |
Cash, investments and time deposits | | 463 |
| | (471 | ) | | 934 |
| | 831 |
| | (915 | ) | | 1,746 |
| | | 53 |
| | (712 | ) | | 765 |
|
Interest income | | 8 |
| | 6,703 |
| | (6,695 | ) | | (7,791 | ) | | 10,753 |
| | (18,544 | ) | | | 8,825 |
| | 14,949 |
| | (6,124 | ) |
| | | | | | | | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | | | | | | | |
Short-term debt | | 263 |
| | (150 | ) | | 413 |
| | (70 | ) | | (429 | ) | | 359 |
| | | (599 | ) | | (833 | ) | | 234 |
|
Medium-term notes | | (3,173 | ) | | 346 |
| | (3,519 | ) | | (11,983 | ) | | (358 | ) | | (11,625 | ) | | | 2,994 |
| | 3,679 |
| | (685 | ) |
Collateral trust bonds | | 1,270 |
| | 3,567 |
| | (2,297 | ) | | (400 | ) | | 8,026 |
| | (8,426 | ) | | | 6,649 |
| | 9,448 |
| | (2,799 | ) |
Subordinated deferrable debt | | — |
| | 53 |
| | (53 | ) | | — |
| | 156 |
| | (156 | ) | | | 16 |
| | (13 | ) | | 29 |
|
Subordinated certificates | | (4,496 | ) | | (1,290 | ) | | (3,206 | ) | | (12,720 | ) | | (6,001 | ) | | (6,719 | ) | | | (1,440 | ) | | (535 | ) | | (905 | ) |
Long-term notes payable | | (197 | ) | | 3,192 |
| | (3,389 | ) | | (1,638 | ) | | 8,355 |
| | (9,993 | ) | | | 1,528 |
| | 4,428 |
| | (2,900 | ) |
Debt issuance costs | | 65 |
| | — |
| | 65 |
| | 143 |
| | — |
| | 143 |
| | |
Fee expense | | (416 | ) | | — |
| | (416 | ) | | 1,881 |
| | — |
| | 1,881 |
| | |
Interest expense | | (6,684 | ) | | 5,718 |
| | (12,402 | ) | | (24,787 | ) | | 9,749 |
| | (34,536 | ) | | | 9,148 |
| | 16,174 |
| | (7,026 | ) |
Net interest income | | $ | 6,692 |
| | $ | 985 |
| | $ | 5,707 |
| | $ | 16,996 |
| | $ | 1,004 |
| | $ | 15,992 |
| | | $ | (323 | ) | | $ | (1,225 | ) | | $ | 902 |
|
| | | | | | | | | | | | | | | | | | | |
Adjusted net interest income: | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 8 |
| | $ | 6,703 |
| | $ | (6,695 | ) | | $ | (7,791 | ) | | $ | 10,753 |
| | $ | (18,544 | ) | | | $ | 8,825 |
| | $ | 14,949 |
| | $ | (6,124 | ) |
Interest expense | | (6,684 | ) | | 5,718 |
| | (12,402 | ) | | (24,787 | ) | | 9,749 |
| | (34,536 | ) | | | 9,148 |
| | 16,174 |
| | (7,026 | ) |
Derivative cash settlements(2) | | 2,724 |
| | 942 |
| | 1,782 |
| | 8,433 |
| | 1,330 |
| | 7,103 |
| | | 55 |
| | 3,026 |
| | (2,971 | ) |
Adjusted interest expense(3) | | (3,960 | ) | | 6,660 |
| | (10,620 | ) | | (16,354 | ) | | 11,079 |
| | (27,433 | ) | | | 9,203 |
| | 19,200 |
| | (9,997 | ) |
Adjusted net interest income | | $ | 3,968 |
| | $ | 43 |
| | $ | 3,925 |
| | $ | 8,563 |
| | $ | (326 | ) | | $ | 8,889 |
| | | $ | (378 | ) | | $ | (4,251 | ) | | $ | 3,873 |
|
____________________________
(1)The changes for each category of interest income and interest expense are divided between the portion of change attributable to the variance in volume and the portion of change attributable to the variance in rate for that category. The amount attributable to the combined impact of volume and rate has been allocated to each category based on the proportionate absolute dollar amount of change for that category.
(2)For derivative cash settlements, variance due to average volume represents the change in derivative cash settlements that resulted from the change in the average notional amount of derivative contracts outstanding. Variance due to average rate represents the change in derivative cash settlements that resulted from the net difference between the average rate paid and the average rate received for interest rate swaps during the period.
(3) See “Non-GAAP Financial Measures” for additional information on the our adjusted non-GAAP measures.
Net interest income of $82$80 million for the current quarter increased by $7 million, or 9%,decreased slightly from the same prior year quarter, driven by an increasea decrease in the net interest yield of 8% (115% (7 basis points) to 1.51%1.44%, coupled with a 1%which was largely offset by an increase in average interest-earning assets.assets of 5%.
Net interest income of $240 million for the nine months ended February 28, 2015 increased by $17 million, or 8%, from the same prior-year period, driven by an increase in the net interest yield of 7% (10 basis points) to 1.49% and a modestAverage Interest-Earning Assets: The increase in average interest-earning assets.assets reflected loan advances that exceeded loan payments as members refinanced with us loans made by other lenders and obtained advances to fund capital investments.
Net Interest Yield: The increasedecrease in the net interest yield in the three and nine months ended February 28, 2015 was largely attributable to a reductionthe combined impact of an increase in our average cost of funds which more than offsetand a decreasedecline in the average yield on interest-earning assets. The reduction in our average cost of funds of 16 basis points and 17 basis points in the three and nine months ended February 28, 2015, respectively, to 3.05% and 3.06%, respectively, was primarily attributable to the call and redemption of $387 million of 7.5% member capital securities during the past 12 months, a portion of which we replaced with lower rate member capital securities and the remainder of which we replaced with lower cost debt. Our average cost of funds also reflectedincreased by 3 basis points to 3.08% during the benefit fromthree months ended August 31, 2015, largely due to our decision in the replacementthird quarter of higher-cost debt that matured during 2014, primarily medium-term notes, collateral trust bonds, and long-term notes payable, withfiscal year 2015 to significantly reduce our outstanding dealer commercial paper balance, which has a much lower cost debt as a result of the continued low interest rate environment.cost. The decrease in the average yield on interest-earning assets of 42 basis points and 7 basis points into 4.38% during the three and nine months ended February 28,August 31, 2015 respectively, to 4.46% and 4.43%, respectively, was largely attributable to reduced rates on fixed-rate loans, reflecting the repricing of higher rate loans to lower interest rates and lower interest rates on new loan originations as a result of the overall low interest rate environment. As a cost-based lender, our fixed interest rates for loans are intended to reflect our cost of borrowing plus a spread to cover our cost of operations and provision for loan losses and to provide earnings sufficient to achieve interest coverage to meet financial objectives. As benchmark treasury rates remained low and our credit spread tightened over the past few years, there was a continued reduction in the rates we had to pay to obtain funding in the capital markets. We therefore lowered the long-term fixed rates on our new loans.
Average Interest-Earning Assets: Average interest-earning assets increased modestly during the three and nine months ended February 28, 2015, reflecting loan advances that exceeded loan payments.
Adjusted net interest income of $60 million for the current quarter increased by $4 million, or 7%,also decreased slightly from the same prior year quarter, driven by an increase in the adjusted net interest yield of 7% (7 basis points) to 1.13%, coupled with the 1% increase in average interest-earning assets. Adjusted net interest income of $176 million for the nine months ended February 28, 2015 increased by $9 million, or 5%, from the same prior-year period, driven by an increasea decrease in the adjusted net interest yield of 5% (5(6 basis points) to 1.10% and1.07%, offset by the modest5% increase in average interest-earning assets.
Our adjusted net interest income and adjusted net interest yield include the impact of net periodic derivative cash settlements during the period. We recorded net periodic derivative cash settlement expense of $22 million and $19$20 million for the three months ended February 28,August 31, 2015 and 2014, respectively, and $63 million and $55 million for the nine months ended February 28, 2015 and 2014, respectively. The increase in the adjusted net interest yield in the three and nine months ended February 28, 2015 reflected the benefit from strategic actions taken to reduce our funding costs, resulting in higher adjusted net interest income as the reduction in our average cost of debt more than offset a decrease in the average yield on our interest-earning assets.2014. See “Non-GAAP Financial Measures” for additional information on our adjusted measures.
Provision for Loan Losses
Our provision for loan losses in each period is primarily driven by the level of allowance that we determine is necessary for probable incurred loan losses inherent in our loan portfolio as of each balance sheet date.
We recorded a provision for loan losses of $2 million and a negative provision of $3$5 million for the three and nine months ended February 28,August 31, 2015, respectively, compared with a provision ofbenefit for loan losses of $1 million and $3$7 million for the three and nine months ended February 28, 2014. Despitesame prior year period. The shift in the overallprovision was attributable to the increase in loans outstanding, our provision for loan losses reflects the modest improvementbalances and a slight deterioration in the credit quality and overall credit risk profile of our loan portfolio. Specifically, certain loans experienced favorablenegative migration through our internal risk rating process. As a result, our allowance for loan losses decreasedincreased to $53$38 million as of February 28,August 31, 2015, from $56$34 million as of May 31, 2014.2015. The benefit for loan losses recorded in the prior year period was due to modest improvement in the credit quality and overall credit risk profile of our loan portfolio and relatively flat loan balances. We provide additional information on our allowance for loan losses under “Credit Risk—Allowance for Loan Losses” and “Note 3—Loans and Commitments” of this Report. For information on our allowance methodology, see “MD&A—Critical Accounting Policies and Estimates” and “Note 1—General Information and Accounting Policies”Summary ” in our 20142015 Form 10-K.
Non-Interest Income
Non-interest income consists of fee and other income, gains and losses on derivatives not accounted for in hedge accounting relationships and results of operations of foreclosed assets.
We recorded losses from non-interest income of $95$9 million and $27$48 million for the three months ended February 28,August 31, 2015 and 2014, respectively. We recorded a loss from non-interest incomeThe decrease in losses of $237$39 million for the nine months ended February 28, 2015, compared with income of $50 million for the same prior year period. The variance in non-interest income for the three and nine months ended February 28, 2015 from the same prior year periods was primarily attributable to changesa reduction in net derivative gains (losses) recognized in our consolidated statementslosses of operations and$38 million during the non-cash impairment charge of $27 million related to certain identifiable intangible assets and goodwill of CAH recorded in the second quarter of fiscal yearthree months ended August 31, 2015.
Derivative Gains (Losses), Net
Our derivative instruments are an integral part of our interest rate risk management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments we use primarily include interest rate swaps, which we typically hold to maturity. The primary factors affecting the fair value of our derivatives and net derivative gains (losses) recorded in our results of operations include changes in interest rates, yield curves and implied interest rate volatility and the composition and balance of instrument types in our derivative portfolio. We generally do not designate interest rate swaps, which represent the substantial majority of our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our consolidated statements of operations under derivative gains (losses), net.. We did not have any derivatives designated as accounting hedges as of February 28,August 31, 2015 or May 31, 2014.2015.
We recorded net derivative losses of $99$12 million and $32$50 million for the three months ended February 28,August 31, 2015 and 2014, respectively. We recorded net derivative losses of $223 million for the nine months ended February 28, 2015, compared with net derivative gains of $44 million for the same prior-year period. Table 4 presents the components of net derivative gains (losses) recorded in our condensed consolidated results of operations for the three and nine months ended February 28,August 31, 2015 and 2014. The net derivative gains (losses) relate to interest rate swap agreements. Derivative cash settlements represent net contractual interest expense accruals on interest rate swaps during the period. The derivative forward value represents the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts.
Table 4: Derivative Gains (Losses), Net
| | | | Three Months Ended February 28, | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Derivative gains (losses) attributable to: | | | | | | | | | | | | |
Derivative cash settlements | | $ | (21,512 | ) | | $ | (18,788 | ) | | $ | (63,377 | ) | | $ | (54,944 | ) | | $ | (20,156 | ) | | $ | (20,101 | ) |
Derivative forward value | | (77,258 | ) | | (12,835 | ) | | (159,832 | ) | | 98,925 |
| | 8,139 |
| | (29,777 | ) |
Derivative gains (losses), net | | $ | (98,770 | ) | | $ | (31,623 | ) | | $ | (223,209 | ) | | $ | 43,981 |
| |
Derivative losses | | | $ | (12,017 | ) | | $ | (49,878 | ) |
We currently use two types of interest rate swap agreements: (i) we pay a fixed rate and receive a variable rate (“pay-fixed swaps”) and (ii) we pay a variable rate and receive a fixed rate (“receive-fixed swaps”). Pay-fixed swaps generally decrease in value as interest rates decline and increase in value as interest rates rise. In contrast, receive-fixed swaps generally increase in value as interest rates decline and decrease in value as interest rates rise. The composition of our pay-fixed and receive-fixed swaps varies across the swap yield curve. As a result, the overall fair value gains and losses of our derivatives also are also sensitive to flattening and steepening of the swap yield curve. See “Note 12—Fair Value of Financial Instruments” for information on how we estimate the fair value of our derivative instruments.
Table 5 displays the average notional amount outstanding, by swap agreement type, and the weighted-average interest rate paid and received for derivative cash settlements during the three and nine months ended February 28,August 31, 2015 and 2014. As indicated in Table 5, our derivative portfolio is currently comprisedconsists of a higher proportion of pay-fixed swaps than receive-
fixedreceive-fixed swaps, which is subject to change based on changes in market conditions and actions taken to manage our interest rate risk.
Table 5: Derivative Average Notional Balances and Average Interest Rates
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, |
| | 2015 | | 2014 |
(Dollars in thousands) | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received |
Pay-fixed swaps | | $ | 5,579,367 |
| | 3.24 | % | | 0.26 | % | | $ | 5,250,939 |
| | 3.34 | % | | 0.24 | % |
Receive-fixed swaps | | 3,211,222 |
| | 0.84 |
| | 3.47 |
| | 3,119,825 |
| | 0.91 |
| | 3.85 |
|
Total | | $ | 8,790,589 |
| | 2.38 | % | | 1.41 | % | | $ | 8,370,764 |
| | 2.43 | % | | 1.60 | % |
| | | | Nine Months Ended February 28, | | Three Months Ended August 31, |
| | 2015 | | 2014 | | 2015 | | 2014 |
(Dollars in thousands) | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Average Notional Balance | | Weighted- Average Rate Paid | | Weighted- Average Rate Received |
Pay-fixed swaps | | $ | 5,513,549 |
| | 3.29 | % | | 0.25 | % | | $ | 5,332,403 |
| | 3.36 | % | | 0.25 | % | | $ | 5,939,394 |
| | 3.13 | % | | 0.29 | % | | $ | 5,419,383 |
| | 3.32 | % | | 0.24 | % |
Receive-fixed swaps | | 3,074,549 |
| | 0.84 |
| | 3.56 |
| | 3,052,709 |
| | 0.97 |
| | 4.06 |
| | 3,849,000 |
| | 0.80 |
| | 3.09 |
| | 3,065,033 |
| | 0.86 |
| | 3.62 |
|
Total | | $ | 8,588,098 |
| | 2.41 | % | | 1.43 | % | | $ | 8,385,112 |
| | 2.49 | % | | 1.64 | % | | $ | 9,788,394 |
| | 2.21 | % | | 1.39 | % | | $ | 8,484,416 |
| | 2.42 | % | | 1.48 | % |
The net derivative losses of $99$12 million and $223recognized during the three months ended August 31, 2015 reflected the combined impact of net derivative forward value gains of $8 million, which was offset by a net loss related to the periodic cash settlements as we were a net payer on our interest-rate swaps based on the terms of the instruments. The net derivative forward value gains of $8 million were primarily attributable to a net increase in the fair value of our pay-fixed swaps during the period due to a steepening of the swap yield curve resulting from a gradual increase in interest rates across the curve.
Of the total derivative losses of $50 million recorded infor the three and nine months ended February 28, 2015August 31, 2014, $30 million related to derivative forward value losses and the remainder related to the net periodic contractual interest settlements. The derivative forward value losses were primarily attributable to a flattening of the swap yield curve during the period, and its effectwith rates on the compositionshorter end of our derivative portfolio, as the overall level of interestyield curve increasing and rates on the longer end of the yield curve declined while short-term interest rates rose. Thedeclining. Due to the overall composition of our derivative portfolio, we experienced an overall decline in longer term rates resulted in a net decrease in the fair value of both our pay-fixed swaps and the increase in shorter-term rates resulted in an overall decrease in the fair value of our receive-fixed swaps.
The net derivative losses of $32 million recorded in the three months ended February 28, 2014 were largely attributable to a decrease in swap interest rates on the longer end of the yield curve. The net derivative gains of $44 million for the nine months ended February 28, 2014 were primarily attributable to a significant steepening of the swap yield curve as longer-term swap rates increasedswaps during the period while short-term interest rates remained relatively flat, which resulted in an overall increase in the fair value of our pay-fixed swaps that more than offset an overall decrease in the fair value of our receive-fixed swaps.quarter.
See “Note 8—Derivative Financial Instruments” for additional information on our derivative instruments.
Results of Operations of Foreclosed Assets
The financial operating results of CAH and DRP, entities controlled by CFC that hold foreclosed assets are reported in our consolidated statements of operations under results of operations of foreclosed assets. We previously had two entities, CAH and DRP, that held foreclosed assets. We dissolved DRP during the fourth quarter of fiscal 2015, following the sale of DRP’s remaining assets.
We recorded total losses from the results of operations of foreclosed assets of $1$2 million for the three months ended February 28,August 31, 2015, and 2014, andcompared with losses of $33 million and $8$3 million for the ninesame prior year period. The losses recorded during the three months ended February 28,August 31, 2015 and 2014, respectively. The significant increase inwere primarily attributable to valuation adjustments related to CAH, while the losses in the nine months ended February 28, 2015, as compared torecorded during the same prior year period was duerelated to the non-cash impairment chargeCAH’s results of $27 million to write down the carrying value of CAH to estimated fair value during the second quarter of fiscal year 2015.
CAHoperations.
CAH had losses fromAs discussed above under “Executive Summary,” on September 30, 2015, CFC entered into a Purchase Agreement with Atlantic and Atlantic Tele-Network, Inc., the resultsparent corporation of operations of $1 million for the three months ended February 28, 2015 and 2014, and losses of $33 million and $8 million for the nine months ended February 28, 2015 and 2014, respectively.
Over the past few years, CAH has made substantial technology and infrastructure upgrades to enhance services and increase the customer base. During the quarter ending November, 30, 2014, CAH encountered issues with certain elements of the construction of the new network and service delivery technology, which required remediation and delayed the acceptance testing of network upgrades and product enhancements. CAH has experienced less than expected subscriber growth, revenue growth and lower than anticipated customer migration rates to the new network and internet services. In addition, the economic recovery in the area has lagged improvements in the overall U.S. recovery and is slower than previously expected. After taking these multiple factors into consideration, we concluded that a triggering event had occurred requiring us to conduct an interim impairment test to evaluate certain CAH tangible and intangible assets for impairment and assess whether the estimated fair value of CAH was less than our carrying value. As a result of the aforementioned events, CAH cash flow forecasts utilized in the interim impairment test were lowered to reflect reduced revenues. To assess goodwill impairment, we estimated the fair value of CAH based on a market approach and an income approach (discounted cash flow method), both of which require significant judgment. In applying these approaches, we relied on a number of factors, including actual operating results, an updated cash flow forecast based on the developments during the quarter and future business plans, revised economic projections and market data. We also considered recent transaction activity and market multiples for the telecommunications industry. Based on our assessment, we recognized impairment on certain identifiable intangible assets and goodwill of $27 million during the second quarter of fiscal year 2015, which, together with CAH’s operating losses, resulted in a reduction in CAH’s carrying value to $207 million as of February 28, 2015, from $239 million as of May 31, 2014.
The program to update CAH’s network infrastructure is substantially complete, and customers are being actively transitioned to the new infrastructure enabling the company to market enhanced services. Our intent is to market and sell CAH, and an outside consultant has been retained to assist in the sales process. It is difficult to determine the level of interest from potential buyers and there is uncertainty as to whether, or when, a disposition transaction will be completed, or the amount of any sales proceeds that may be realized from such a transaction. It is also uncertain as to whether we will be ableAtlantic, to sell all of the issued and outstanding membership interests of CAH operating businesses into Atlantic for a single transaction, or if the businesses will be soldpurchase price of $145 million, subject to multiple buyers.
DRP
Our carrying valuecertain adjustments. The amount recorded on our condensed consolidated balance sheet for CAH of DRP decreased to $272 thousand as of February 28, 2015, from $7$114 million as of MayAugust 31, 2014. The decrease was due2015 reflects the expected net proceeds, including estimated adjustments to the saleselling price and selling costs, from the completion of DRP’s interest in bond reimbursement receivables and real estate properties for which we received proceeds of approximately $6 million. Subsequent to February 28, 2015, DRP’s remaining assets were sold.the CAH sales transaction.
We expect to complete the transaction during the second half of calendar year 2016, subject to the satisfaction or waiver of various closing conditions under the Purchase Agreement, including, among other things, the receipt of required communications regulatory approvals in the United States, United States Virgin Islands, British Virgin Islands and St. Maarten, the expiration or termination of applicable waiting periods under applicable competition laws, and the absence of a material adverse effect or material adverse regulatory event.
Non-Interest Expense
Non-interest expense consists of salaries and employee benefit expense, general and administrative expenses, provision for guarantee liability, losses on early extinguishment of debt and other miscellaneous expenses.
Non-interestWe recorded non-interest expense of $19$23 million for the three months ended February 28,August 31, 2015, increased by 1%an increase of $5 million, or, 25% from the same prior year period was primarily due to an increase in salaries and employee benefits, which was partially offset by a decline in other general and administrative expenses related to system infrastructure enhancements and a decline in losses on early extinguishment of debt. Non-interest expense of $55 million for the nine months ended February 28, 2015 decreased by 1% from the same prior-year period due to a modest decline in other general and administrative expenses, which was partially offset by a slight increase in salaries and employee benefits.legal fees.
Net Income (Loss) Attributable to the Noncontrolling Interests
The netNet income (loss) attributable to the noncontrolling interests represents 100% of the results of operations of RTFC and NCSC, as the members of RTFC and NCSC own or control 100% of the interest in their respective companies.
We recorded a net loss attributable to noncontrolling interests of less than $1 million for the three months ended August 31, 2015, and net income of less than $1 million during the three months ended August 31, 2014. The fluctuations in net income (loss) attributable to noncontrolling interests are primarily due to fluctuations in the fair value of NCSC’s derivative instruments.
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CONSOLIDATED BALANCE SHEET ANALYSIS |
Total assets of $22,649$23,460 million as of February 28, 2015 increased slightly by $416 million, or 2% from MayAugust 31, 2014. Total liabilities of $21,764 million as of February 28, 2015 increased by $502$614 million, or 2%3%, from May 31, 2014,2015, primarily due to the increasegrowth in our funding needs forloan portfolio. Total liabilities of $22,545 million as of August 31, 2015 increased by $610 million, or 3%, from May 31, 2015, primarily due to debt issuances to fund the $735 million growth in theour loan portfolio. Total equity decreasedincreased by $86$3 million to $885$915 million as of February 28,August 31, 2015. The decreaseincrease in total equity was primarily attributable to our net lossincome of $49$43 million for the ninethree months ended February 28,August 31, 2015, and to CFC’s Board of Directors July 2014 authorization ofwhich was partially offset by the patronage capital retirement of $40 million.$39 million authorized by our Board of Directors in July 2015.
Following is a discussion of changes in the major components of our assets and liabilities during the ninethree months ended February 28,August 31, 2015. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to manage liquidity requirements for the company and our customers and our market risk exposure in accordance with our risk appetite.
Loan Portfolio
We are a cost-based lender that offersoffer long-term fixed- and variable-rate loans and line of credit variable-rate loans. Borrowers may choose between a variable interest rate or a fixed or variable interest rate for periods of one to 35 years. When a selected fixed interest ratefixed-rate term expires, the borrower may select either another fixed-rate term or a variable rate.rate or elect to repay the loan in full.
Table 6 summarizes loans outstanding by type and by member class as of February 28,August 31, 2015 and May 31, 2014.2015.
Table 6: Loans Outstanding by Type and Member Class(1)
| | | | February 28, 2015 | | May 31, 2014 | | Increase/ | | August 31, 2015 | | May 31, 2015 | | Increase/ |
(Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | | (Decrease) | | Amount | | % of Total | | Amount | | % of Total | | (Decrease) |
Loan type: | | | | | | | | | | | |
Loans by type: | | | | | | | | | | | |
Long-term loans: | | | | | | | | | | | | | | | | | | | | |
Long-term fixed-rate loans | | $ | 19,134,858 |
| | 90 | % | | $ | 18,175,656 |
| | 88 | % | | $ | 959,202 |
| | $ | 20,017,697 |
| | 91 | % | | $ | 19,543,274 |
| | 91 | % | | $ | 474,423 |
|
Long-term variable-rate loans | | 732,721 |
| | 4 |
| | 753,918 |
| | 4 |
| | (21,197 | ) | | 711,437 |
| | 3 |
| | 698,495 |
| | 3 |
| | 12,942 |
|
Loans guaranteed by RUS | | 180,622 |
| | 1 |
| | 201,863 |
| | 1 |
| | (21,241 | ) | | 177,840 |
| | 1 |
| | 179,241 |
| | 1 |
| | (1,401 | ) |
Total long-term loans | | 20,048,201 |
| | 95 |
| | 19,131,437 |
| | 93 |
| | 916,764 |
| | 20,906,974 |
| | 95 |
| | 20,421,010 |
| | 95 |
| | 485,964 |
|
Line of credit loans | | 1,154,198 |
| | 5 |
| | 1,335,488 |
| | 7 |
| | (181,290 | ) | | 1,177,577 |
| | 5 |
| | 1,038,210 |
| | 5 |
| | 139,367 |
|
Total loans | | $ | 21,202,399 |
| | 100 | % | | $ | 20,466,925 |
| | 100 | % | | $ | 735,474 |
| |
Total loans outstanding(1) | | | $ | 22,084,551 |
| | 100 | % | | $ | 21,459,220 |
| | 100 | % | | $ | 625,331 |
|
| | | | | | | | | | | | | | | | | | | | |
Member class: | | | | | | | | | | | |
Loans by member class: | | | | | | | | | | | |
CFC: | | | | | | | | | | | | | | | | | | | | |
Distribution | | $ | 15,774,955 |
| | 75 | % | | $ | 15,035,365 |
| | 74 | % | | $ | 739,590 |
| | $ | 16,575,202 |
| | 75 | % | | $ | 16,095,043 |
| | 75 | % | | $ | 480,159 |
|
Power supply | | 4,248,402 |
| | 20 |
| | 4,086,163 |
| | 20 |
| | 162,239 |
| | 4,344,867 |
| | 20 |
| | 4,181,481 |
| | 20 |
| | 163,386 |
|
Statewide and associate | | 61,790 |
| | — |
| | 67,902 |
| | — |
| | (6,112 | ) | | 60,377 |
| | — |
| | 65,466 |
| | — |
| | (5,089 | ) |
CFC total | | 20,085,147 |
| | 95 |
| | 19,189,430 |
| | 94 |
| | 895,717 |
| | 20,980,446 |
| | 95 |
| | 20,341,990 |
| | 95 |
| | 638,456 |
|
RTFC | | 401,763 |
| | 2 |
| | 449,546 |
| | 2 |
| | (47,783 | ) | | 379,033 |
| | 2 |
| | 385,709 |
| | 2 |
| | (6,676 | ) |
NCSC | | 715,489 |
| | 3 |
| | 827,949 |
| | 4 |
| | (112,460 | ) | | 725,072 |
| | 3 |
| | 731,521 |
| | 3 |
| | (6,449 | ) |
Total | | $ | 21,202,399 |
| | 100 | % | | $ | 20,466,925 |
| | 100 | % | | $ | 735,474 |
| |
Total loans outstanding(1) | | | $ | 22,084,551 |
| | 100 | % | | $ | 21,459,220 |
| | 100 | % | | $ | 625,331 |
|
____________________________
(1)Includes loans classified as restructured and nonperforming. Excludes deferred loan origination costs of $10 million as of February 28,August 31, 2015 and May 31, 2014.2015.
The balance of loans outstanding of $21,202$22,085 million as of February 28,August 31, 2015 increased by $735$625 million from May 31, 2014.2015. The increase was primarily due to the increase in CFC distribution and power supply loans of $740$480 million and $162$163 million, respectively, which was partially offset by a decrease in NCSC loans of $112$6 million and a decrease in RTFC loans of
$487 million. The increase in CFC distribution and power supply loans was attributable to members refinancing with us loans issuedmade by other lenders and member advances for capital investments.
CFC had long-term fixed-rate loans totaling $1,026 million that repriced during the nine months ended February 28, 2015. Of this total, $862 million repriced to a new long-term fixed rate; $100 million repriced to a long-term variable rate; and $64 million were repaid in full.
We provide additional information on loans in “Note 3—Loans and Commitments.” See also “Liquidity Risk” for information on unencumbered loans.
Table 7 displays our historical retention rate for long-term fixed-rate loans that repriced during the quarterly period ended August 31, 2015 and the year ended May 31, 2015. Table 7 also displays the percentage of borrowers that select another fixed-rate term or a variable rate. The retention rate is calculated based on the election made by the borrower at the repricing date.
Table 7: Historical Retention Rate and Repricing Selection
|
| | | | | | | | | | | | | | |
| | August 31, 2015 | | May 31, 2015 |
(Dollars in thousands) | | Amount | | % | | Amount | | % |
Loans retained: | | | | | | | | |
Long-term fixed rate selected | | $ | 198,576 |
| | 97 | % | | $ | 991,279 |
| | 81 | % |
Long-term variable rate selected | | 6,133 |
| | 3 |
| | 154,946 |
| | 13 |
|
Loans repriced and sold by CFC | | — |
| | — |
| | 3,904 |
| | — |
|
Total loans retained | | 204,709 |
| | 100 |
| | 1,150,129 |
| | 94 |
|
Total loans repaid | | 849 |
| | — |
| | 76,380 |
| | 6 |
|
Total loans repriced | | $ | 205,558 |
| | 100 | % | | $ | 1,226,509 |
| | 100 | % |
Debt
Table 78 displays the composition of our debt outstanding, by debt product type, by interest rate type and by original contractual maturity, as of February 28,August 31, 2015 and May 31, 2014.2015.
Table 7:8: Total Debt Outstanding
| | (Dollars in thousands) | | February 28, 2015 | | May 31, 2014 | | Increase/ (Decrease) | | August 31, 2015 | | May 31, 2015 | | Increase/ (Decrease) |
Debt product type: | | | | | | | |
Commercial paper sold through dealers, net of discounts | | $ | 1,184,951 |
| | $ | 1,973,557 |
| | $ | (788,606 | ) | | $ | 914,954 |
| | $ | 984,954 |
| | $ | (70,000 | ) |
Commercial paper sold directly to members, at par | | 778,909 |
| | 858,389 |
| | (79,480 | ) | | 838,180 |
| | 736,162 |
| | 102,018 |
|
Select notes | | 569,405 |
| | 548,610 |
| | 20,795 |
| | 667,669 |
| | 671,635 |
| | (3,966 | ) |
Daily liquidity fund notes | | 451,435 |
| | 486,501 |
| | (35,066 | ) | | 592,654 |
| | 509,131 |
| | 83,523 |
|
Bank bid notes | | — |
| | 20,000 |
| | (20,000 | ) | |
Collateral trust bonds | | 6,779,520 |
| | 5,980,214 |
| | 799,306 |
| | 6,758,598 |
| | 6,755,067 |
| | 3,531 |
|
Guaranteed Underwriter Program notes payable | | 4,412,036 |
| | 4,299,000 |
| | 113,036 |
| | 4,651,481 |
| | 4,406,465 |
| | 245,016 |
|
Farmer Mac notes payable | | 1,919,912 |
| | 1,667,505 |
| | 252,407 |
| | 2,081,398 |
| | 1,910,688 |
| | 170,710 |
|
Other notes payable | | 49,036 |
| | 52,535 |
| | (3,499 | ) | |
Medium-term notes | | 2,929,667 |
| | 2,726,303 |
| | 203,364 |
| | 3,368,028 |
| | 3,352,023 |
| | 16,005 |
|
Other notes payable(3) | | | 46,490 |
| | 46,423 |
| | 67 |
|
Subordinated deferrable debt | | 400,000 |
| | 400,000 |
| | — |
| | 395,717 |
| | 395,699 |
| | 18 |
|
Membership certificates | | 644,881 |
| | 644,944 |
| | (63 | ) | | 629,821 |
| | 645,035 |
| | (15,214 | ) |
Loan and guarantee certificates | | 662,151 |
| | 699,724 |
| | (37,573 | ) | | 636,116 |
| | 640,889 |
| | (4,773 | ) |
Member capital securities | | 219,420 |
| | 267,560 |
| | (48,140 | ) | | 219,996 |
| | 219,496 |
| | 500 |
|
Total debt outstanding | | $ | 21,001,323 |
| | $ | 20,624,842 |
| | $ | 376,481 |
| | $ | 21,801,102 |
| | $ | 21,273,667 |
| | $ | 527,435 |
|
| | | | | | | | | | | | |
Interest rate type: | | | | | | | | | | | | |
Fixed-rate debt(1) | | 81 | % | | 79 | % | |
|
| | 82 | % | | 81 | % | |
|
|
Variable-rate debt(2) | | 19 |
| | 21 |
| | | | 18 |
| | 19 |
| | |
Total | | 100 | % | | 100 | % | | | | 100 | % | | 100 | % | | |
| | | | | | | | | | | | |
Maturity classification: | | | | | | | |
Original contractual maturity: | | | | | | | |
Long-term debt | | 85 | % | | 80 | % | | | | 85 | % | | 85 | % | | |
Short-term debt | | 15 |
| | 20 |
| | | | 15 |
| | 15 |
| | |
Total | | 100 | % | | 100 | % | | | | 100 | % | | 100 | % | | |
____________________________
(1)Includes variable-rate debt that has been swapped to a fixed rate net of any fixed-rate debt that has been swapped to a variable rate.
(2) 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 includesIncludes fixed-rate debt that has been swapped to a variable rate net of any variable-rate debt that has been swapped to a fixed rate. Also includes commercial paper notes, which generally have maturities of less than 90 days. The interest rate on commercial paper notes does not change once the note has been issued; however, the rates on new commercial paper notes change daily.
(3) Other notes payable included unsecured and secured Clean Renewable Energy Bonds. We are required to pledge eligible mortgage notes from distribution and power supply system borrowers in an amount at least equal to the outstanding principal amount under the Clean Renewable Energy Bonds Series 2009A note purchase agreement. The remaining other notes payable relate to unsecured notes payable issued by NCSC.
Total debt outstanding was $21,001$21,801 million as of February 28,August 31, 2015, an increase of $376$527 million, or 2%, from May 31, 2014.2015. The increase primarily reflected the issuance of $300 million aggregate principal amount of collateral trust bonds in November 2014 and $900 million in January 2015. This increase was partially offset by a $789 million reduction in our dealer commercial paper as part of our strategy to reduce our short-term wholesale funding risk. Other significant funding-related developments are discussed below.
During fiscal year 2014,notes payable during the CFC Board of Directors authorized management to execute the call of the outstanding $387 million of 7.5% member capital securities and offer members the option to invest in a new series of member capital securities that currently have a 5% interest rate. As of February 28,three months ended August 31, 2015 all $387 million of the 7.5% member capital securities had been redeemed. Members invested $219 million in the new series of member capital securities as of February 28, 2015.
On October 28, 2014, we amended the $1,123 million four-year and $1,068 million five-year revolving credit agreements to (i) increase the total aggregate amount of commitments under the four-year and five-year agreements to $1,720 million and $1,700 million, respectively, and (ii) extend the commitment termination date for the five-year agreement to October 28, 2019. Also, on October 28, 2014, we terminated the existing $1,036 million three-year revolving credit agreement, which was scheduled to mature on October 28, 2016.
On November 18, 2014, we closed thetotaling $250 million Series H facility from the FFB guaranteed by RUS as part of the Guaranteed Underwriter Program. Under the Series H facility, we are able to borrow any time before October 15, 2017, with each advance having a final maturity not longer than 20 years from the advance date. During the quarter ended February 28, 2015, we borrowed $124 million under the Guaranteed Underwriter Program. As of February 28,Program and $180 million under a note purchase agreement with Farmer Mac. On July 31, 2015, we had up to $750 million available under committed loan facilities from the Federal Financing Bank as part of this program.
On December 1, 2014, we redeemed $400 million of 1.00% collateral trust bonds due February 2, 2015. The premium and unamortized issuance costs totaling $1 million were recorded asentered into a loss on early extinguishment of debt during the third quarter of fiscal year 2015.
On January 8, 2015, the commitment amount under ournew revolving note purchase agreement with Farmer Mac was increased by $600 million to $4,500 million, and the draw period was extended to January 11, 2020 from January 11, 2016. During the nine months ended February 28, 2015, we borrowed a total of $480 million under the note purchase agreement with the Farmer Mac. As of February 28, 2015, we had $2,580 million available under the revolving note purchase agreement with Farmer Mac.for an additional $300 million.
On January 27, 2015, we issued $400 million aggregate principal amount of 2.00% collateral trust bonds due 2020 and $500 million of aggregate principal amount of 2.85% collateral trust bonds due 2025.15
Equity
Total equity decreasedincreased by $86$3 million to $885$915 million as of February 28,August 31, 2015 from May 31, 2014.2015. The decreaseincrease in total equity was primarily attributable to our net lossincome of $49$43 million for the ninethree months ended February 28,August 31, 2015, and to CFC’s Board of Directors' July 2014 authorization ofpartially offset by the board authorized patronage capital retirement of $40$39 million.
In May 2014, the CFC Board of Directors authorized the allocation of $1 million of fiscal year 2014 net earnings to the Cooperative Educational Fund. In July 2014,2015, the CFC Board of Directors authorized additional allocations of fiscal year 20142015 net earnings that included $75$1 million to the Cooperative Educational Fund, $16 million to the members’ capital reserve and $79$78 million to members in the form of patronage capital. In July 2014,2015, the CFC Board of Directors also authorized the retirement of allocated net earnings totaling $40$39 million, which represented 50% of the fiscal year 20142015 allocation. This amount was returned to members in cash in September 2014.2015.
Future allocations and retirements of net earnings may be made annually as determined by CFC’sthe CFC Board of Directors taking into consideration CFC’s financial condition. The CFC 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. The NCSC Board of Directors has the authority to determine if and when net earnings will be allocated and retired. Likewise, the RTFC Board of Directors has the authority to determine if and when net earnings will be allocated and retired.
18The amount of patronage capital allocated each year by CFC’s Board of Directors is based on non-GAAP adjusted net income, which excludes the impact of derivative forward value gains (losses). See “Non-GAAP Financial Measures” for information on adjusted net income.
Debt Ratio Analysis
Leverage Ratio
The leverage ratio is calculated by dividing the sum of total liabilities and guarantees outstanding by total equity. TheBased on this formula, the leverage ratio was 25.72-to-125.70-to-1 as of February 28,August 31, 2015, an increase from 23.01-to-125.14-to-1 as of May 31, 2014.2015. The increase in the leverage ratio was due to the increase of $502$610 million in total liabilities, andpartially offset by the decreaseincrease of $86$3 million in total equity partly offsetand by the decrease of $77$14 million in total guarantees.
For covenant compliance under our revolving credit agreements and for internal management purposes, the leverage ratio calculation is adjusted to exclude derivative liabilities, debt used to fund loans guaranteed by RUS, subordinated deferrable debt and subordinated certificates from liabilities; uses members’ equity rather than total equity; and adds subordinated deferrable debt and subordinated certificates to calculate adjusted equity.
The adjusted leverage ratio was 6.41-to-16.83-to-1 and 6.24-to-16.58-to-1 as of February 28,August 31, 2015 and May 31, 2014,2015, respectively. The increase in the adjusted leverage ratio was due to the increase of $545$647 million in adjusted liabilities and the decrease of $11$24 million in adjusted equity, partially offset by the decrease of $77$14 million in guarantees as discussed under “Off-Balance Sheet Arrangements.” See “Non-GAAP Financial Measures” for further explanation and a reconciliation of the adjustments we make to our leverage ratio calculation to derive the adjusted leverage ratio.
Debt-to-Equity Ratio
The debt-to-equity ratio is calculated by dividing the sum of total liabilities outstanding by total equity. The debt-to-equity ratio was 24.61-to-124.63-to-1 as of February 28,August 31, 2015, an increase from 21.91-to-124.06-to-1 as of May 31, 2014.2015. The increase in the debt-to-equity ratio is due to the increase of $502$610 million in total liabilities, andpartially offset by the decreaseincrease of $86$3 million in total equity.
We adjust the components of the debt-to-equity ratio to calculate an adjusted debt-to-equity ratio that is used for internal management analysis purposes. The adjusted debt-to-equity ratio was 6.10-to-16.52-to-1 and 5.90-to-16.26-to-1 as of February 28,August 31, 2015 and May 31, 2014,2015, respectively. The increase in the adjusted debt-to-equity ratio was due to the increase of $545$647 million in adjusted liabilities and the decrease of $11$24 million in adjusted equity. See “Non-GAAP Financial Measures” for further explanation and a reconciliation of the adjustments made to the debt-to-equity ratio calculation to derive the adjusted debt-to-equity ratio.
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OFF-BALANCE SHEET ARRANGEMENTS |
In the ordinary course of business, we engage in financial transactions that are not recordedpresented on our condensed consolidated balance sheets, or may be recorded on our condensed consolidated balance sheets in amounts that are different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements consist primarily consist of guarantees of member obligations and commitments. These transactions are designedunadvanced loan commitments intended to meet the financial needs of our members, manage our credit, market or liquidity risks, and/or diversify our funding sources.members.
Guarantees
GuaranteesWe provide guarantees for certain contractual obligations of our members to assist them in obtaining various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member defaults on its obligation, we are contracts that contingently requireobligated to pay required amounts pursuant to our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member. In general, the member is required to repay any amount advanced by us with interest, pursuant to make payments to a guaranteed party based on an event or a change in an underlying asset, liability, rate or index. Guarantees are generally in the form of letters of credit, recourse obligations and other types of financial guarantee arrangements.documents evidencing the member's reimbursement obligation.
Table 89 shows our guarantees outstanding, by guarantee type and by company, as of February 28,August 31, 2015 and May 31, 2014.2015.
Table 8:9: Guarantees Outstanding
| | (Dollars in thousands) | | February 28, 2015 | | May 31, 2014 | | Increase/ (Decrease) | | August 31, 2015 | | May 31, 2015 | | Increase/ (Decrease) |
Guarantee type: | | | | | | | | | | | | |
Long-term tax-exempt bonds | | $ | 490,380 |
| | $ | 518,360 |
| | $ | (27,980 | ) | | $ | 489,020 |
| | $ | 489,520 |
| | $ | (500 | ) |
Letters of credit | | 383,396 |
| | 431,064 |
| | (47,668 | ) | | 369,391 |
| | 382,233 |
| | (12,842 | ) |
Other guarantees | | 114,057 |
| | 115,398 |
| | (1,341 | ) | | 114,075 |
| | 114,747 |
| | (672 | ) |
Total | | $ | 987,833 |
| | $ | 1,064,822 |
| | $ | (76,989 | ) | | $ | 972,486 |
| | $ | 986,500 |
| | $ | (14,014 | ) |
Company: | | |
| | | | | | |
| | | | |
CFC | | $ | 922,884 |
| | $ | 997,187 |
| | $ | (74,303 | ) | | $ | 937,343 |
| | $ | 952,875 |
| | $ | (15,532 | ) |
RTFC | | 2,465 |
| | 2,304 |
| | 161 |
| | 1,574 |
| | 1,574 |
| | — |
|
NCSC | | 62,484 |
| | 65,331 |
| | (2,847 | ) | | 33,569 |
| | 32,051 |
| | 1,518 |
|
Total | | $ | 987,833 |
| | $ | 1,064,822 |
| | $ | (76,989 | ) | | $ | 972,486 |
| | $ | 986,500 |
| | $ | (14,014 | ) |
In addition to the letters of credit displayedlisted in the above table, we had master letter of credit facilities in place as of February 28,August 31, 2015, under which we may be required to issue up to an additional $106$84 million in letters of credit to third parties for the benefit of our members. All of our master letter of credit facilities as of February 28,August 31, 2015 were subject to material adverse change clauses at the time of issuance. Also, we had hybrid letter of credit facilities, which represent commitments that may be used, at a borrower's option, for the issuance of letters of credit or line of credit loan advances totaling $1,768 million as of February 28, 2015. This amount is included in the unadvanced loan commitments for line of credit loans total reported in "Note 3—Loans and Commitments." Hybrid letter of credit facilities subject to material adverse change clauses at the time of issuance totaled $359 million as of February 28, 2015. Prior to issuing a letter of credit under these facilities, we would confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with the letter of credit terms and conditions. The remaining commitment under hybrid letter of credit facilities of $1,409 million as of February 28, 2015 may be used for the issuance of letters of credit as long as the borrower is in compliance with the terms and conditions of the facility.
WeIn addition to the guarantees described above, we were the liquidity provider for variable-rate, tax-exempt bonds, issued for our member cooperatives, totaling $495$493 million as of February 28,August 31, 2015. As liquidity provider on these tax-exempt bonds, we aremay be required to purchase bonds that are tendered or put by investors. Investors provide notice to the remarketing agent that they will tender or put a certain amount of bonds at the next interest rate reset date. If the remarketing agent is unable to sell such bonds to other investors by the next interest rate reset date, we have unconditionally agreed to purchase such bonds. Our obligation as liquidity provider is in the form of a letter of credit on $76 million of the tax-exempt bonds, which is included in the letters of credit amount in Table 8.9. We were not required to perform as liquidity provider pursuant to these obligations during the ninethree months ended February 28,August 31, 2015. In addition to being a liquidity provider, we also provided a guarantee for payment of all principal and interest amounts on $419$417 million of these bonds as of February 28,August 31, 2015, which is included in long-term tax-exempt bond guarantees in Table 89.
Of our total guarantee amounts, 58% and 61%56% as of February 28,August 31, 2015 and May 31, 2014, respectively,2015 were secured by a mortgage lien on substantially all of the system’s assets and future revenue of the borrowers.
The decrease in total guarantees during the ninethree months ended February 28,August 31, 2015 was primarily due to a decrease in the total amount of letters of credit outstanding. We recorded a guarantee liability of $22$19 million and $20 million respectively, as of February 28,August 31, 2015 and May 31, 2014,2015, related to the contingent and non-contingent exposures for guarantee and liquidity obligations associated with our members’ debt.
Table 910 summarizes our off-balance sheet obligations as of February 28,August 31, 2015, and maturity of amounts during each of the next five fiscal years and thereafter.
Table 9:10: Maturities of Guarantee Obligations
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding Balance | | Maturities of Guaranteed Obligations |
(Dollars in thousands) | | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter |
Guarantees(1) | | $ | 987,833 |
| | $ | 48,068 |
| | $ | 184,403 |
| | $ | 21,504 |
| | $ | 230,856 |
| | $ | 19,440 |
| | $ | 483,562 |
|
____________________________
(1) We were the guarantor and liquidity provider for $419 million of tax-exempt bonds, which were issued for our member cooperatives, as of February 28, 2015. In addition, we had issued letters of credit to provide standby liquidity for an additional $76 million of tax-exempt bonds as of February 28, 2015. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Outstanding Balance | | Maturities of Guaranteed Obligations |
(Dollars in thousands) | | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter |
Guarantees | | $ | 972,486 |
| | $ | 164,078 |
| | $ | 60,507 |
| | $ | 212,846 |
| | $ | 18,787 |
| | $ | 62,939 |
| | $ | 453,329 |
|
See “Note 10—Guarantees” for additional information.
Unadvanced Loan Commitments
Unadvanced commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. The table below displays the amount of unadvanced loan commitments, which consist of line of credit and long-term loan commitments, as of February 28,August 31, 2015 and May 31, 2014.2015. Our line of credit commitments include both contracts that are not subject to material adverse change clauses and contracts that are subject to material adverse change clauses.
Table 10:11: Unadvanced Loan Commitments
| | (Dollars in thousands) | | February 28, 2015 | | % of Total | | May 31, 2014 | | % of Total | | August 31, 2015 | | % of Total | | May 31, 2015 | | % of Total |
Line of credit commitments: | | | | | | | | | | | | | | | | |
Not conditional(1) | | $ | 2,785,832 |
| | 20 | % | | $ | 2,274,388 |
| | 16 | % | | $ | 2,686,842 |
| | 19 | % | | $ | 2,764,968 |
| | 20 | % |
Conditional(2) | | 6,560,103 |
| | 47 |
| | 6,927,417 |
| | 50 |
| | 6,706,480 |
| | 47 |
| | 6,529,159 |
| | 46 |
|
Total line of credit unadvanced commitments | | 9,345,935 |
|
| 67 |
| | 9,201,805 |
| | 66 |
| | 9,393,322 |
|
| 66 |
| | 9,294,127 |
| | 66 |
|
Total long-term loan unadvanced commitments | | 4,557,074 |
|
| 33 |
| | 4,710,273 |
| | 34 |
| | 4,903,121 |
|
| 34 |
| | 4,835,623 |
| | 34 |
|
Total | | $ | 13,903,009 |
|
| 100 | % | | $ | 13,912,078 |
| | 100 | % | | $ | 14,296,443 |
|
| 100 | % | | $ | 14,129,750 |
| | 100 | % |
____________________________
(1)Represents amount related to facilities that are not subject to material adverse change clauses.
(2)Represents amount related to facilities that are subject to material adverse change clauses.
For contracts not subject to a material adverse change clause, we are generally required to advance amounts on the committed facilities as long as the borrower is in compliance with the terms and conditions of the facility. As displayed in Table 10,11, unadvanced line of credit commitments not subject to material adverse change clauses at the time of each advance totaled $2,786$2,687 million and $2,274$2,765 million as of February 28,August 31, 2015 and May 31, 2014,2015, respectively. We record a liability for credit losses on our condensed consolidated balance sheets for unadvanced commitments related to facilities that are not subject to a material adverse change clause because we do not consider these commitments to be conditional. Table 1112 summarizes the available balance under committed lines of credit that are not subject to a material adverse change clause as of February 28,August 31, 2015, and the maturity of amounts during each of the next five fiscal years and thereafter.years.
Table 11:12: Notional Maturities of Unconditional Committed Lines of Credit
| | | | Available Balance | | Notional Maturities of Unconditional Committed Lines of Credit | | Available Balance | | Notional Maturities of Unconditional Committed Lines of Credit |
(Dollars in thousands) | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
Committed lines of credit | | $ | 2,785,832 |
| | $ | — |
| | $ | 74,654 |
| | $ | 416,930 |
| | $ | 796,526 |
| | $ | 1,141,719 |
| | $ | 356,003 |
| | $ | 2,686,842 |
| | $ | 79,077 |
| | $ | 297,416 |
| | $ | 717,942 |
| | $ | 950,728 |
| | $ | 641,679 |
|
For contracts subject to a material adverse change clause, the advance of additional amounts is conditional. Prior to making an advance on these facilities, we confirm that there have been no material adverse changes in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with the loan terms and conditions. The substantial majority of our line of credit commitments relate to contracts that include material adverse change clauses. Unadvanced commitments that are subject to a material adverse change clause are classified as contingent liabilities. We do not record a reserve for credit losses on our condensed consolidated balance
sheets for these commitments, nor do we include them in our off-balance sheet guarantee amounts in Table 89 above because we consider them to be conditional.
Table 13 summarizes the available balance under unadvanced commitments as of August 31, 2015 and the related maturities by fiscal year and thereafter by loan type:
Table 13: Notional Maturities of Unadvanced Loan Commitments
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available Balance | | Notional Maturities of Unadvanced Commitments |
(Dollars in thousands) | | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter |
Line of credit loans | | $ | 9,393,322 |
| | $ | 595,623 |
| | $ | 5,337,933 |
| | $ | 1,135,540 |
| | $ | 1,108,910 |
| | $ | 856,000 |
| | $ | 359,316 |
|
Long-term loans | | 4,903,121 |
| | 559,969 |
| | 1,124,419 |
| | 807,421 |
| | 1,114,284 |
| | 1,044,739 |
| | 252,289 |
|
Total | | $ | 14,296,443 |
| | $ | 1,155,592 |
| | $ | 6,462,352 |
| | $ | 1,942,961 |
| | $ | 2,223,194 |
| | $ | 1,900,739 |
| | $ | 611,605 |
|
Line of credit commitments are generally revolving facilities for periods that do not exceed five years. Historically, borrowers have not fully drawn the commitment amounts for line of credit loans, and the utilization rates have been low regardless of whether a material adverse change clause provision exists at the time of advance. Also, borrowers historically have not fully drawn the commitments related to long-term loans, and borrowings have generally been advanced in multiple transactions over an extended period of time. We believe these conditions are likely to continue because of the nature of the business of our electric cooperative borrowers and the terms of our loan commitments. See “MD&A—Contingent Off-Balance Sheet Obligations”Arrangements” in our 20142015 Form 10-K for additional information.
The CFC Board of Directors is responsible for the oversight and direction of risk management, while CFC’s management has primary responsibility for day-to-day management of the risks associated with CFC’s business. In fulfilling its risk management oversight duties, the CFC Board of Directors receives periodic reports on business activities from executive management and from various operating groups and committees across the organization, including the Credit Risk Management group, Internal Audit group and the Corporate Compliance group, as well as the Asset Liability Committee, the Corporate Credit Committee and the Disclosure Committee. The CFC Board of Directors also reviews CFC’s risk profile and management’s response to those risks throughout the year at its meetings. The board of directors establishes CFC’s loan policies and has established a Loan Committee of the board comprising no fewer than 10 directors that reviews the performance of the loan portfolio in accordance with those policies.
For additional information about the role of the CFC Board of Directors in risk oversight, see “Item 10. Directors, Executive Officers and Corporate Governance” in our 2015 Form 10-K for additional information.
Credit risk is the risk of loss associated with a borrower or counterparty’s failure to meet its obligations in accordance with agreed upon terms. Our loan portfolio, which represents the largest component of assets on our balance sheet, accountsand guarantees account for the substantial majority of our credit risk exposure. We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including the purchase of investment securities and entering into derivative transactions to manage our interest rate risk.
Credit Risk Profile—Loan and Guarantee Portfolio Credit Risk
Below we provide information on the credit risk profile of our loan portfolio and guarantee portfolio,guarantees, including security provisions, loan concentration, security provisions, pledged loanscredit performance and loans on deposit, nonperforming and restructured loans, andour allowance for loan losses.
Loan Concentration
The service territories of our electric and telecommunications members are located throughout the United States and its territories, including 49 states, the District of Columbia, American Samoa and Guam. The largest concentration of loans to borrowers in any one state was approximately 15% of total loans outstanding as of February 28, 2015 and May 31, 2014.
The total outstanding exposure to a single borrower or controlled group represented approximately 2% of total loans and guarantees outstanding as of February 28, 2015 and May 31, 2014. The 10 largest borrowers as of February 28, 2015 consisted of three distribution systems and seven power supply systems. The 10 largest borrowers as of May 31, 2014 consisted of four distribution systems and six power supply systems. Table 12 displays the outstanding exposure of the 10 largest borrowers, by exposure type and by company, as of February 28, 2015 and May 31, 2014.
Table 12: Credit Exposure to 10 Largest Borrowers
|
| | | | | | | | | | | | | | | | | | |
| | February 28, 2015 | | May 31, 2014 | | Increase/ (Decrease) |
(Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | |
By exposure type: | | | | | | | | | | |
Loans | | $ | 3,295,038 |
| | 15 | % | | $ | 3,155,857 |
| | 14 | % | | $ | 139,181 |
|
Guarantees | | 360,887 |
| | 2 |
| | 363,325 |
| | 2 |
| | (2,438 | ) |
Total credit exposure to 10 largest borrowers | | $ | 3,655,925 |
| | 17 | % | | $ | 3,519,182 |
| | 16 | % | | $ | 136,743 |
|
| | | | | | | | | | |
By company: | | | | | | | | | | |
CFC | | $ | 3,444,078 |
| | 16 | % | | $ | 3,378,698 |
| | 15 | % | | $ | 65,380 |
|
NCSC | | 211,847 |
| | 1 |
| | 140,484 |
| | 1 |
| | 71,363 |
|
Total credit exposure to 10 largest borrowers | | $ | 3,655,925 |
| | 17 | % | | $ | 3,519,182 |
| | 16 | % | | $ | 136,743 |
|
Security Provisions
Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans are generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. Guarantee reimbursement obligations are generally secured on parity with other secured creditors by substantially all assets and revenue of the borrower or by the underlying financed asset. In addition to the collateral pledged to secure our loans, borrowers also are also required to set rates charged to customers to achieve certain financial ratios. Unsecured loans represented $2,159 million, or 10%, and $2,118 million, or 10%, ofOf our total loans outstanding, 91% were secured and 9% were unsecured as of February 28,both August 31, 2015 and May 31, 2014, respectively.
Pledged Loans2015. Table 14 presents, by loan type and Loans on Depositby company, the amount and percentage of secured and unsecured loans in our loan portfolio.
Table 13 summarizes our secured debt or debt requiring collateral on deposit, the excess collateral pledged and our unencumbered loans as of February 28, 2015 and May 31, 2014.
Table 13: Unencumbered Loans14 : Loan Portfolio Security Profile
|
| | | | | | | | |
(Dollars in thousands) | | February 28, 2015 | | May 31, 2014 |
Total loans to members | | $ | 21,202,399 |
| | $ | 20,466,925 |
|
Less: Total secured debt or debt requiring collateral on deposit | | (13,401,188 | ) | | (12,242,446 | ) |
Excess collateral pledged or on deposit (1) | | (2,065,056 | ) | | (1,917,184 | ) |
Unencumbered loans | | $ | 5,736,155 |
| | $ | 6,307,295 |
|
Unencumbered loans as a percentage of total loans | | 27 | % | | 31 | % |
|
| | | | | | | | | | | | | | | | | | |
| | August 31, 2015 |
(Dollars in thousands) | | Secured | | % | | Unsecured | | % | | Total |
Loan type: | | | | | | | | | | |
Long-term fixed-rate loans | | $ | 19,074,885 |
| | 95 | % | | $ | 942,812 |
| | 5 | % | | $ | 20,017,697 |
|
Long-term variable-rate loans | | 645,333 |
| | 91 |
| | 66,104 |
| | 9 |
| | 711,437 |
|
Loans guaranteed by RUS | | 177,840 |
| | 100 |
| | — |
| | — |
| | 177,840 |
|
Line of credit loans | | 235,359 |
| | 20 |
| | 942,218 |
| | 80 |
| | 1,177,577 |
|
Total loans outstanding(1) | | $ | 20,133,417 |
| | 91 |
| | $ | 1,951,134 |
| | 9 |
| | $ | 22,084,551 |
|
| | | | | | | | | | |
Company: | | | | | | | | | | |
CFC | | $ | 19,332,978 |
| | 92 | % | | $ | 1,647,468 |
| | 8 | % | | $ | 20,980,446 |
|
RTFC | | 359,107 |
| | 95 |
| | 19,926 |
| | 5 |
| | 379,033 |
|
NCSC | | 441,332 |
| | 61 |
| | 283,740 |
| | 39 |
| | 725,072 |
|
Total loans outstanding(1) | | $ | 20,133,417 |
| | 91 |
| | $ | 1,951,134 |
| | 9 |
| | $ | 22,084,551 |
|
|
| | | | | | | | | | | | | | | | | | |
| | May 31, 2015 |
(Dollars in thousands) | | Secured | | % | | Unsecured | | % | | Total |
Loan type: | | | | | | | | | | |
Long-term fixed-rate loans | | $ | 18,526,068 |
| | 95 | % | | $ | 1,017,206 |
| | 5 | % | | $ | 19,543,274 |
|
Long-term variable-rate loans | | 628,115 |
| | 90 |
| | 70,380 |
| | 10 |
| | 698,495 |
|
Loans guaranteed by RUS | | 179,241 |
| | 100 |
| | — |
| | — |
| | 179,241 |
|
Line of credit loans | | 107,781 |
| | 10 |
| | 930,429 |
| | 90 |
| | 1,038,210 |
|
Total loans outstanding(1) | | $ | 19,441,205 |
| | 91 |
| | $ | 2,018,015 |
| | 9 |
| | $ | 21,459,220 |
|
| | | | | | | | | | |
Company: | | | | | | | | | | |
CFC | | $ | 18,635,818 |
| | 92 | % | | $ | 1,706,172 |
| | 8 | % | | $ | 20,341,990 |
|
RTFC | | 370,924 |
| | 96 |
| | 14,785 |
| | 4 |
| | 385,709 |
|
NCSC | | 434,463 |
| | 59 |
| | 297,058 |
| | 41 |
| | 731,521 |
|
Total loans outstanding(1) | | $ | 19,441,205 |
| | 91 |
| | $ | 2,018,015 |
| | 9 |
| | $ | 21,459,220 |
|
____________________________
(1) Excludes cash collateral pledged to secure debt. Unlessdeferred loan origination costs of $10 million as of August 31, 2015 and until there is an event of default, we can withdraw excess collateral as long as there is 100% coverage of the secured debt. If there is an event of default under most of our indentures, we can only withdraw this excess collateral if we substitute cash of equal value.May 31, 2015.
NonperformingAs part of our strategy to manage our credit risk exposure, we entered into a long-term standby purchase commitment agreement with Farmer Mac on August 31, 2015. Under this agreement, we may designate certain loans, as approved by Farmer Mac, and Restructured Loansin the event any such loan later goes into material default for at least 90 days, upon request by us, Farmer Mac must purchase such loan at par value. We have designated and Farmer Mac has approved an initial tranche of loans of $520 million as of August 31, 2015, and we expect to designate additional tranches of loans.
Table 14 summarizes nonperformingLoan Concentration
We serve electric and restructuredtelecommunications members throughout the United States and its territories, including 49 states, the District of Columbia, American Samoa and Guam. The largest concentration of loans as a percentageto borrowers in any one state represented approximately 14% and 15%, respectively, of total loans outstanding as of August 31, 2015 and May 31, 2015.
The largest total outstanding exposure to a single borrower or controlled group represented approximately 2% of total loans and guarantees outstanding as of February 28,August 31, 2015 and May 31, 2014.2015. The 20 largest borrowers consisted of 12 distribution systems and 8 power supply systems as of August 31, 2015 and May 31, 2015. Table 15 displays the outstanding exposure of the 20 largest borrowers, by exposure type and by company, as of August 31, 2015 and May 31, 2015.
Table 15: Credit Exposure to 20 Largest Borrowers
|
| | | | | | | | | | | | | | | | | | |
| | August 31, 2015 | | May 31, 2015 | | Increase/ (Decrease) |
(Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | |
By exposure type: | | | | | | | | | | |
Loans | | $ | 5,434,547 |
| | 23 | % | | $ | 5,478,977 |
| | 24 | % | | $ | (44,430 | ) |
Guarantees | | 363,522 |
| | 2 |
| | 374,189 |
| | 2 |
| | (10,667 | ) |
Total exposure to 20 largest borrowers | | $ | 5,798,069 |
| | 25 | % | | $ | 5,853,166 |
| | 26 | % | | $ | (55,097 | ) |
| | | | | | | | | | |
By company: | | | | | | | | | | |
CFC | | $ | 5,782,366 |
| | 25 | % | | $ | 5,837,463 |
| | 26 | % | | $ | (55,097 | ) |
NCSC | | 15,703 |
| | — |
| | 15,703 |
| | — |
| | — |
|
Total exposure to 20 largest borrowers | | $ | 5,798,069 |
| | 25 | % | | $ | 5,853,166 |
| | 26 | % | | $ | (55,097 | ) |
Credit Performance
As part of our credit risk management process, we monitor and evaluate each borrower and loan in our loan portfolio and assign numeric internal risk ratings based on quantitative and qualitative assessments. Our ratings are aligned to regulatory definitions of pass and criticized categories with criticized divided between special mention, substandard and doubtful. Internal risk rating and payment status trends are indicators, among others, of the level of credit risk in our loan portfolio. As displayed in “Note 3—Loans and Commitments,” less than 1% of the loans in our portfolio were classified as criticized as of August 31, 2015 and May 31, 2015. Below we provide information on certain additional credit quality indicators, including nonperforming, restructured and individually impaired loans.
Nonperforming Loans
We classify loans as nonperforming at the earlier of the date when we determine: (i) interest or principal payments on the loan is past due 90 days or more; (ii) as a result of court proceedings, the collection of interest or principal payments based on the original contractual terms is not expected; or (iii) the full and timely collection of interest or principal is otherwise uncertain. Once a loan is classified as nonperforming, we generally place the loan on nonaccrual status. Interest accrued but not collected at the date a loan is classified as nonperforming is reversed against earnings.
Restructured Loans
We actively monitor underperforming loans and, from time to time, attempt to work with borrowers to manage such exposures through loan workouts or modifications that better align with the borrower's current ability to pay. Modified loans in which we grant one or more concessions to a borrower experiencing financial difficulty are accounted for and reported as troubled debt restructurings (“TDRs”). Loans modified in a TDR are generally placed on nonaccrual status, although in many cases such loans were already on nonaccrual status prior to modification. These loans may be returned to performing status and the accrual of interest resumed if the borrower performs under the modified terms for an extended period of time and we expect the borrower to continue to perform in accordance with the modified terms. In certain limited circumstances in which a modified loan is current at the modification date, the loan is not placed on nonaccrual status at the time of modification. We had modified loans, all of which met the definition of a TDR, totaling $11 million and $12 million as of August 31, 2015 and May 31, 2015, respectively.
Impaired Loans
We consider a loan to be individually impaired when, based on an assessment of the borrower’s financial condition and the adequacy of collateral, if any, it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan. Individually impaired loans are subject to the specific allowance methodology. A loan that has been modified in a TDR is generally considered to be individually impaired until it matures, is repaid, or is otherwise liquidated, regardless of whether the borrower performs under the modified terms.
Table 16 presents nonperforming and performing TDR loans as of August 31, 2015 and May 31, 2015. These loans represent the population of loans identified as individually impaired as of the end of each period presented.
Table 14: Nonperforming and Restructured16: Impaired Loans
|
| | | | | | | | |
(Dollars in thousands) | | February 28, 2015 | | May 31, 2014 |
Nonperforming loans (1) | | $ | 1,349 |
| | $ | 2,095 |
|
Percent of loans outstanding | | 0.01 | % | | 0.01 | % |
Percent of loans and guarantees outstanding | | 0.01 |
| | 0.01 |
|
| | | | |
Restructured loans | | $ | 7,529 |
| | $ | 7,584 |
|
Percent of loans outstanding | | 0.04 | % | | 0.04 | % |
Percent of loans and guarantees outstanding | | 0.03 |
| | 0.04 |
|
| | | | |
Total nonperforming and restructured loans | | $ | 8,878 |
| | $ | 9,679 |
|
Percent of loans outstanding | | 0.05 | % | | 0.05 | % |
Percent of loans and guarantees outstanding | | 0.04 |
| | 0.05 |
|
| | | | |
Total nonaccrual loans | | $ | 8,878 |
| | $ | 9,679 |
|
Percent of loans outstanding | | 0.05 | % | | 0.05 | % |
Percent of loans and guarantees outstanding | | 0.04 |
| | 0.05 |
|
|
| | | | | | | | |
(Dollars in thousands) | | August 31, 2015 | | May 31, 2015 |
Modified TDR loans: | | | | |
CFC/Distribution | | $ | 7,221 |
| | $ | 7,221 |
|
NCSC | | — |
| | 294 |
|
RTFC | | 4,156 |
| | 4,221 |
|
Total TDR loans | | $ | 11,377 |
| | $ | 11,736 |
|
| | | | |
TDR loan ratio: | | | | |
Percent of total loans outstanding | | 0.05 | % | | 0.05 | % |
Percent of total loans and guarantees outstanding | | 0.05 |
| | 0.05 |
|
| | | | |
Performance status: | | | | |
Performing TDR loans(1) | | $ | 7,221 |
| | $ | 11,736 |
|
Nonperforming TDR loans(1) | | 4,156 |
| | — |
|
Total TDR loans | | $ | 11,377 |
| | $ | 11,736 |
|
| | | | |
Nonperforming loan ratio: | | | | |
Percent of total loans outstanding | | 0.02 | % | | — | % |
Percent of total loans and guarantees outstanding | | 0.02 |
| | — |
|
____________________________
(1)All loans classified as nonperformingTDR loans were on nonaccrual status.status as of August 31, 2015. Foregone interest on these loans totaled $0.2 million for the three months ended August 31, 2015 and 2014.
A borrower is classified as nonperforming whenWe did not accrue any one of the following criteria is met:
principal or interest payments on any loan to the borrower are past due 90 days or more;
as a result of court proceedings, repayment on the original terms is not anticipated; or
for some other reason, management does not expect the timely repayment of principal and interest.
Once a borrower is classified as nonperforming, we generally place the loan on nonaccrual status and reverse all accrued and unpaid interest back to the date of the last payment. Foregone interest on nonperforming and restructuredperforming TDR loans totaled $470 thousand for the nine months ended February 28, 2015.
As of February 28, 2015 and May 31, 2014, nonperforming loans totaled $1 million, or 0.01%, of loans outstanding and $2 million, or 0.01%, of loans outstanding, respectively. One borrower with a nonperforming loan is currently seeking a buyer for its system, as it is not anticipated that the borrower will generate sufficient cash flows to repay its loans without the proceeds from the sale of the business. We currently anticipate that even with the sale of the business, there will not be sufficient funds to repay the full amount owed to us. We have approval rights with respect to the sale of this company.
Restructured loans totaled $8 million, or 0.04%, of loans outstanding as of both February 28, 2015 and May 31, 2014. Each of our restructured loans was performing in accordance with the restructured terms as of February 28, 2015. Interest income recognized on restructured loans was less than $1 million during the three and nine months ended February 28,August 31, 2015 and also less than $12014. We classified $7 million during the same prior-year periods. We believe our allowance for loan losses related to nonperforming and restructured loans was adequate to cover our estimated loss exposureas performing as of February 28,August 31, 2015 because the borrower has demonstrated a sustained period of performance under the modified terms of the restructured loan.
We provide additional information on the credit quality of our loan portfolio in “Note 3—Loans and May 31, 2014.Commitments.”
Allowance for Loan Losses
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 that, 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. All loans are written off in the period that it becomes evident that collectability is highly unlikely; however, our efforts to recover all charged-off amounts may continue. Management believes the allowance for loan losses is appropriate to cover estimated probable portfolio losses.
Table 1517 summarizes activity in the allowance for loan losses for the three and nine months ended February 28,August 31, 2015 and 2014 and a comparison of the allowance by company as of February 28,August 31, 2015 and May 31, 2014.2015.
Table 15:17: Allowance for Loan Losses
| | | | | | | | | | Three Months Ended August 31, |
(Dollars in thousands) | | Three Months Ended February 28, 2015 | | Nine Months Ended February 28, 2015 | | 2015 | | 2014 |
Beginning balance | | $ | 50,757 |
| | $ | 56,429 |
| | $ | 33,690 |
| | $ | 56,429 |
|
Provision for loan losses | | 2,304 |
| | (3,475 | ) | | 4,562 |
| | (6,771 | ) |
Net recoveries | | 53 |
| | 160 |
| | 55 |
| | 53 |
|
Ending balance | | $ | 53,114 |
| | $ | 53,114 |
| | $ | 38,307 |
| | $ | 49,711 |
|
` | | | | | | | | |
| | February 28, 2015 | | May 31, 2014 | | August 31, 2015 | | May 31, 2015 |
Allowance for loan losses by company: | | | | | | | | |
CFC | | $ | 43,604 |
| | $ | 45,600 |
| | $ | 27,151 |
| | $ | 23,716 |
|
RTFC | | 4,834 |
| | 4,282 |
| | 5,552 |
| | 4,533 |
|
NCSC | | 4,676 |
| | 6,547 |
| | 5,604 |
| | 5,441 |
|
Total | | $ | 53,114 |
| | $ | 56,429 |
| | $ | 38,307 |
| | $ | 33,690 |
|
| | | | | | | | |
Allowance coverage ratios: | | | | | | | | |
As a percentage of total loans outstanding | | 0.25 | % | | 0.28 | % | |
As a percentage of total nonperforming loans outstanding | | 3,937.29 |
| | 2,693.51 |
| |
As a percentage of total restructured loans outstanding | | 705.46 |
| | 744.05 |
| |
As a percentage of total loans on non-accrual | | 598.27 |
| | 583.00 |
| |
Percentage of total loans outstanding | | | 0.17 | % | | 0.16 | % |
Percentage of total nonperforming TDR loans outstanding | | | 921.73 |
| | — |
|
Percentage of total performing TDR loans outstanding | | | 530.49 |
| | 287.07 |
|
Percentage of loans on nonaccrual status | | | 336.71 |
| | 287.07 |
|
Our allowance for loan losses decreasedincreased by $3$5 million during the ninethree months ended February 28,August 31, 2015 to $53$38 million as of February 28,August 31, 2015. The decreaseincrease reflected modest improvementan overall increase in loan balances and a slight deterioration in the credit quality and overall credit risk profile of our loan portfolio. Specifically, certain loans experienced favorablenegative migration through our internal risk rating process.
On a quarterly basis, we review all nonperforming and restructured loans, as well as certain additional loans selected based on known facts and circumstances, to determine if the loans are impaired and/or to determine if there have been changes to a previously impaired loan. We calculate impairment for loans identified as individually impaired based on the fair value of the underlying collateral securing the loan for collateral-dependent loans or based on the expected future cash flows for loans that are not collateral dependent. As events related to the borrower take place and economic conditions and our assumptions change, the impairment calculations may change. Our specific allowance for loan losses totaled $1 million and $0.4 million as of August 31, 2015 and May 31, 2015, respectively, which related to individually impaired loans of $11 million and $12 million, respectively.
See “Results of Operations—Provision for Loan Losses” and “Note 3—Loans and Commitments” for additional information. We provide information on our allowance for loan loss, including the specific allowance attributable to nonperforming and restructured loans individually evaluated for impairment and the general allowance attributable to loans collectively evaluated for impairment.methodology in “Note 1—Summary of Significant Accounting Policies” in our fiscal year 2015 Form 10-K.
Counterparty Credit Risk
We are exposed to counterparty risk related to the performance of the parties with which we entered into financial transactions, primarily for derivative instruments and cash and time deposits that we have with various financial institutions. To mitigate this risk, we only enter into these transactions with financial institutions with investment-grade ratings. Our cash and time deposits with financial institutions have an original maturity of less than one year.
Our derivative counterparties must be participants in one of our revolving credit agreements. We manage our derivate credit exposure through master netting arrangements and by diversifying our derivative transactions with multiple counterparties.
Our largest single counterparty exposure, based on the outstanding notional amount, represented approximately 20%18% and 21%19% of our total outstanding notional amount of derivatives as of February 28,August 31, 2015 and May 31, 2014,2015, respectively. Our derivative counterparties had credit ratings ranging from Aa2 to Baa3Baa1 by Moody’s and from AA- to BBB+ by S&P.
Rating Triggers for Derivatives
The majority of our interest rate swap agreements have credit risk-related contingent features referred to as rating triggers. 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.
We regularly evaluate the overall credit worthiness of our counterparties. Table 1618 displays the notional amounts of our derivative contracts with rating triggers as of February 28,August 31, 2015 and the payments that would be required if the contracts were terminated as of that date because of a downgrade of our unsecured credit ratings or the counterparty's unsecured credit ratings to or below Baa1/BBB+, Baa3/BBB- or Ba3/BB by Moody’s or
S&P, respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assumed that the amounts for each counterparty would be netted in accordance with the provisions of the master netting agreements for each counterparty. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.
Table 16:18: Rating Triggers for Derivatives
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Notional Amount | | Payment Required by CFC | | Payment Due to CFC | | Net (Payable)/Due |
Mutual rating trigger if ratings: | | | | | | | | |
falls below Baa1/BBB+ | | $ | 4,428,784 |
| | $ | (213,122 | ) | | $ | — |
| | $ | (213,122 | ) |
falls to Baa3/BBB- | | 1,796,722 |
| | (18,108 | ) | | — |
| | (18,108 | ) |
falls below Baa3/BBB- | | 594,131 |
| | (22,509 | ) | | — |
| | (22,509 | ) |
falls to or below Ba3/BB(1)
| | 50,000 |
| | (425 | ) | | — |
| | (425 | ) |
Total | | $ | 6,869,637 |
| | $ | (254,164 | ) | | $ | — |
| | $ | (254,164 | ) |
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Notional Amount | | Payment Required by CFC | | Payment Due to CFC | | Net (Payable)/Due |
Mutual rating trigger if ratings: | | | | | | | | |
Falls below Baa1/BBB+ | | $ | 5,420,527 |
| | $ | (176,319 | ) | | $ | 3,013 |
| | $ | (173,306 | ) |
Falls to Baa3/BBB- | | 1,781,207 |
| | (15,798 | ) | | — |
| | (15,798 | ) |
Falls below Baa3/BBB- | | 579,362 |
| | (23,217 | ) | | — |
| | (23,217 | ) |
Falls to or below Ba3/BB(1) | | 102,581 |
| | — |
| | 97 |
| | 97 |
|
Total | | $ | 7,883,677 |
| | $ | (215,334 | ) | | $ | 3,110 |
| | $ | (212,224 | ) |
____________________________
(1) Rating trigger for counterparty falls to or below Ba3/BB, while rating trigger for CFC falls to or below Baa2/BBB by Moody’s or S&P, respectively.
The aggregate amount, including the credit risk valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position was $251$217 million as of February 28,August 31, 2015. There were noThe aggregate amount, including the credit risk valuation adjustment, of all interest rate swaps with rating triggers that were in a net asset position was $2 million as of February 28,August 31, 2015. The credit ratings for twoThere were no counterparties werethat fell below the rating trigger levels in our interest swap contracts as of August 31, 2015. If a counterparty has a rating that falls below the rating trigger level specified in the interest swap contracts with these counterparties as of February 28, 2015. As a result,contract, we have the option to terminate all interest rate swaps with these counterparties. The interest rate swap contracts with these counterparties had a notional outstanding amount of $260 million as of February 28, 2015. If we elected to terminate the interest rate swaps with these counterparties, the contracts would be settled based on the fair value at the date of termination. We estimate that we would have to make a payment of approximately $10 million as of February 28, 2015 to settle the interest rate swaps with these counterparties. Because we use our interest rate swaps as part of our matched funding strategy,counterparty. However, we generally do not terminate such agreements early. We have not provided notice to either counterparty that we intend to terminate theearly because our interest rate swaps. We will continueswaps are critical to evaluate the overall credit worthiness of these counterparties and monitor our overall matched funding position.strategy.
For additional information about the risks related to our business, see “Item 1A. Risk Factors” in our 20142015 Form 10-K.
We face liquidity risk in funding our loan portfolio and refinancing our maturing obligations. Our Asset Liability Committee monitors liquidity risk by establishing and monitoring liquidity targets, as well as strategies and tactics to meet those targets, and ensuring that sufficient liquidity is available for unanticipated contingencies. We manage our rollover risk by maintaining liquidity reserves. We had liquidity reserve access totaling $7,432$7,389 million as of February 28,August 31, 2015. Our liquidity reserve access consisted of cash and time deposits of $684$751 million, committed revolving credit agreements of $3,418$3,419 million, committed loan facilities from the FFBFederal Financing Bank (“FFB”) of $750$500 million, a note purchase agreement
with Farmer Mac of $300 million and, subject to market conditions, a revolving note purchase agreement with Farmer Mac oftotaling up to $2,580$2,419 million.
As of February 28,August 31, 2015, we had commercial paper, select notes and daily liquidity fund notes, including member investments, of $2,985$3,013 million scheduled to mature during the next 12 months. We expect to continue to maintain member investments in commercial paper, select notes and daily liquidity fund notes at recent levels of approximately $1,800$2,099 million. Dealer commercial paper and bank bid notes decreased to $1,185$915 million as of February 28,August 31, 2015, from $1,994$985 million as of May 31, 2014.2015. In order to manage our short-term wholesale funding risk, we reduced our non-member outstanding short-term debt, which consists of dealer commercial paper, to an approximate range between $1,000 million and $1,250 million in the third quarter of fiscal year 2015. We intend to maintain our dealer commercial paper within that range for the foreseeable future. In order to access the commercial paper markets at attractive rates, we believe we need to maintain our current commercial paper credit ratings of F1 by Fitch, P-1 by Moody’s and A-1 by S&P.
We use our bank lines of credit primarily as backup liquidity for dealer and member commercial paper. We had $3,418$3,419 million in available lines of credit with various financial institutions as of February 28,August 31, 2015. We have been and expect to continue to be in compliance with the covenants under our revolving credit agreements; therefore, we could draw on these facilities to repay dealer or member commercial paper that cannot be rolled over in the event of market disruptions.
Long-term debt maturing in the next 12 months and medium-term notes with an original maturity of one year or less totaled $1,703$1,932 million as of February 28,August 31, 2015. In addition to our access to the dealer and member commercial paper markets as discussed above, we believe we will be able to refinance these maturing obligations through the capital markets and private debt issuances as discussed in further detail under “Sources of Liquidity.”
As discussed in further detail under “Off-Balance Sheet Arrangements,” as of February 28,August 31, 2015, we were the liquidity provider for a total of $495$493 million of variable-rate tax-exempt bonds issued for our member cooperatives. During the ninethree months ended February 28,August 31, 2015, we were not required to perform as liquidity provider pursuant to these obligations.
As of February 28,August 31, 2015, we had a total of $383$369 million of letters of credit outstanding for the benefit of our members. That total includes $76 million for the purpose of providing liquidity for pollution control bonds. The remaining $307$293 million represents obligations for which we may be required to advance funds based on various trigger events included in the letters of credit. If we are required to advance funds, the member is obligated to pay such amounts to CFC.
We expect that our current sources of liquidity, coupled with our cash on hand of $299$266 million and time deposits of $385$485 million as of February 28,August 31, 2015, will allow us to meet our obligations and to fund our operations over the next 12 to 18 months.
Liquidity and Capital Resources Profile
The following section discusses our expected sources and uses of liquidity.
Projected Near-Term Sources and Uses of Liquidity
Table 1719 shows the projected sources and uses of cash by quarter through the quarter ending August 31, 2016.February 28, 2017. In analyzing our projected liquidity position, we track key items identified in the table below. Our estimates assume that the balance of our time deposit investments will remain consistent with current levels over the next six quarters. 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 repayments represent the scheduled long-term loan amortization for the outstanding loans as of February 28,August 31, 2015, as well as our current estimate for the repayment of long-term loans. The estimate of the amount and timing of long-term loan repayments is subject to change. The other loan repayments and advances in the table primarily include line of credit advances and repayments. Such amounts represent the current best estimate of activity communicated to us by our members and, as such, the amount and timing of these amounts are subject to change. We only include such estimates for the near term. We assumed the issuance of commercial paper, medium-term notes and other long-term debt, including collateral trust bonds and private placement of term debt, to maintain matched funding within our loan portfolio and to allow our revolving lines of credit to provide backup liquidity for our outstanding commercial paper. As displayed in Table 17,19, we expect that estimated long-term loan advances over the next six quarters of $2,544$2,769 million will exceed expected long-term loan repayments of $1,547$1,586 million by $997$1,183 million.
Table 17:19: Projected Sources and Uses of Liquidity(1)
| | | | Projected Sources of Liquidity | | Projected Uses of Liquidity | | | | Projected Sources of Liquidity | | Projected Uses of Liquidity | | |
(Dollars in millions) | | Long-term Loan Amortization and Repayments | | Other Loan Repayments | | Debt Issuance-Long-term Debt | | Total Sources of Liquidity | | Long-term Debt Maturities | | Other Loan Advances | | Long-term Loan Advances | | Total Uses of Liquidity | | Cumulative Excess Sources over Uses of Liquidity(2) | | Long-term Loan Amortization and Repayments | | Other Loan Repayments | | Debt Issuance-Long-term Debt | | Total Sources of Liquidity | | Long-term Debt Maturities(3) | | Other Loan Advances | | Long-term Loan Advances | | Total Uses of Liquidity | | Cumulative Excess Sources over Uses of Liquidity(2) |
Feb15 | | | | | | | | | | | | | | | | | | $ | 684 |
| |
May15 | | $ | 267 |
| | $ | 111 |
| | $ | 880 |
| | $ | 1,258 |
| | $ | 460 |
| | $ | — |
| | $ | 947 |
| | $ | 1,407 |
| | 535 |
| |
Aug15 | | 282 |
| | — |
| | 300 |
| | 582 |
| | 164 |
| | — |
| | 401 |
| | 565 |
| | 552 |
| | | | | | | | | | | | | | | | | | $ | 751 |
|
Nov15 | | 253 |
| | — |
| | 1,000 |
| | 1,253 |
| | 845 |
| | — |
| | 425 |
| | 1,270 |
| | 535 |
| | $ | 261 |
| | $ | 40 |
| | $ | 1,420 |
| | $ | 1,721 |
| | $ | 845 |
| | $ | 15 |
| | $ | 976 |
| | $ | 1,821 |
| | 651 |
|
Feb16 | | 267 |
| | — |
| | 280 |
| | 547 |
| | 253 |
| | — |
| | 288 |
| | 541 |
| | 541 |
| | 297 |
| | — |
| | 480 |
| | 777 |
| | 290 |
| | 10 |
| | 481 |
| | 771 |
| | 657 |
|
May16 | | 229 |
| | — |
| | 550 |
| | 779 |
| | 576 |
| | — |
| | 199 |
| | 775 |
| | 545 |
| | 237 |
| | — |
| | 610 |
| | 847 |
| | 668 |
| | — |
| | 179 |
| | 847 |
| | 657 |
|
Aug16 | | 249 |
| | — |
| | 100 |
| | 349 |
| | 63 |
| | — |
| | 284 |
| | 347 |
| | 547 |
| | 274 |
| | — |
| | 50 |
| | 324 |
| | 129 |
| | — |
| | 207 |
| | 336 |
| | 645 |
|
Nov16 | | | 263 |
| | — |
| | 500 |
| | 763 |
| | 302 |
| | — |
| | 469 |
| | 771 |
| | 637 |
|
Feb17 | | | 254 |
| | — |
| | 550 |
| | 804 |
| | 338 |
| | — |
| | 457 |
| | 795 |
| | 646 |
|
Totals | | $ | 1,547 |
| | $ | 111 |
| | $ | 3,110 |
| | $ | 4,768 |
| | $ | 2,361 |
| | $ | — |
| | $ | 2,544 |
| | $ | 4,905 |
| | | | $ | 1,586 |
| | $ | 40 |
| | $ | 3,610 |
| | $ | 5,236 |
| | $ | 2,572 |
| | $ | 25 |
| | $ | 2,769 |
| | $ | 5,341 |
| | |
____________________________
(1)The dates presented are intended to reflect the end of each quarterly period through the quarter ending August 31, 2016.February 28, 2017.
(2)Cumulative excess sources over uses of liquidity includes cash and time deposits.
(3)Long-term debt maturities includes medium-term notes with an original maturity of less than one year.
The information presented above in Table 1719 represents our best estimate of our funding requirements and how we expect to manage those requirements through August 31, 2016. Our estimates assume that the balance of our time deposit investments will remain consistent with current levels over the next six quarters.February 28, 2017. We expect that these estimates will change quarterly based on the factors described above.
Sources of Liquidity
Capital Market Debt Issuance
As a well-known seasoned issuer, we have the following effective shelf registration statements on file with the SEC for the issuance of debt:
unlimited amount of collateral trust bonds until September 2016;
unlimited amount of senior and subordinated debt securities, including medium-term notes, member capital securities and subordinated deferrable debt, until November 2017; and
daily liquidity fund notes for a total of $20,000 million with a $3,000 million limitation on the aggregate principal amount outstanding at any time until April 2016.
While we register member capital securities and the daily liquidity fund with the SEC, these securities are not available for sale to the general public. Medium-term notes are available for sale to both the general public and members.
Our bank lines of credit may be used for general corporate purposes; however, we use them primarily as backup liquidity for dealer and member commercial paper. Commercial paper issued through dealers totaled $1,185$915 million and represented 6%4% of total debt outstanding as of February 28,August 31, 2015.
Private Debt Issuance
We have access to liquidity from private debt issuances through a note purchase agreementagreements with Farmer Mac. Under the terms of our March 2011 note purchase agreement as amended, we can borrow up to $4,500 million at any time from the date of the agreement through January 11, 2020 and such date shall automatically extend on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, Farmer Mac provides CFC with a notice that the draw period will not be extended beyond the remaining term. During the three months ended August 31, 2015, we borrowed a total of $180 million under the note purchase agreement with Farmer Mac. The agreement with Farmer Mac is a revolving credit facility that allows us to borrow, repay and re-borrow funds at any time through maturity or from time to time as market conditions permit. Each borrowing under athe note purchase agreement is evidenced by a secured note setting forth the interest rate, maturity date and other related terms as we may negotiate with Farmer Mac at the time of each such borrowing. We may select a fixed rate or variable rate at the time of each advance with a maturity as determined in the applicable pricing agreement. During the nineWe had up to $2,419 million available under this revolving note purchase agreement with Farmer Mac as of August 31, 2015.
months ended February 28,On July 31, 2015, we borrowedentered into a totalnew revolving note purchase agreement with Farmer Mac totaling $300 million. Under the terms of $480the new agreement, we can borrow up to $300 million at any time through July 31, 2018. This agreement with Farmer Mac is a revolving credit facility that allows us to borrow, repay and re-borrow funds at any time through maturity or from time to time. Each borrowing under the note purchase agreement with Farmer Mac. As of February 28, 2015, we had $1,920 million in debt outstanding underis evidenced by a secured note setting forth the Farmer Mac note purchase agreementmaturity date and weother related terms. We had up to $2,580$300 million available under this revolving note purchase agreement subject to market conditions for debt issued bywith Farmer Mac.Mac as of August 31, 2015.
We also have access to unsecured notes payable under bond purchase agreements with the FFB and a bond guarantee agreement with RUS issued under the Guaranteed Underwriter Program which supports the Rural Economic Development Loan and Grant program and provides guarantees to the FFB. On November 18, 2014, we closed on a commitment from RUS to guarantee a loan from the FFB for additional funding of $250 million as part of the Guaranteed Underwriter Program with a 20-year maturity repayment period for advances made through October 15, 2017. During the quarter ended February 28,August 31, 2015, we borrowed $124$250 million under the Guaranteed Underwriter Program. As of February 28,August 31, 2015, we had up to $750$500 million available under committed loan facilities from the FFB as part of this program, of which a total of $500$250 million is available for advance through October 15, 2016 and a total of $250 million is available for advance through October 15, 2017. On September 28, 2015, we received a commitment from RUS to guarantee a loan from the Federal Financing Bank for additional funding of $250 million as part of the Guaranteed Underwriter Program. As a result, we will have an additional $250 million available under the Guaranteed Underwriter Program with a 20-year maturity repayment period during the three-year period following the date of closing.
Member Loan Repayments
We expect long-term loan repayments from scheduled loan amortization and prepayments to be $1,069 million over the next 12 months.
Member Loan Interest Payments
During the ninethree months ended February 28,August 31, 2015, interest income on the loan portfolio was $705$243 million, representing an average rate of 4.57%4.47% compared with 4.68%4.57% for the ninethree months ended February 28,August 31, 2014. For the past three fiscal years, interest income on the loan portfolio has averaged $944$948 million. As of February 28,August 31, 2015, 91% of the total loans outstanding had a fixed rate of interest, and 9% of loans outstanding had a variable rate of interest.
Bank Revolving Credit Agreements
As of February 28,August 31, 2015 and May 31, 2014,2015, we had $3,420 million and $3,226 million, respectively, of commitments under revolving credit agreements. We had the ability to request up to $150 million of letters of credit under each agreement in place as of February 28,August 31, 2015, which would then reduce the amount available under the facility. Our bank lines of credit may be used for general corporate purposes; however, we use them primarily as backup liquidity for dealer and member commercial paper.
Table 1820 presents the total available and the outstanding letters of credit under our revolving credit agreements as of February 28,August 31, 2015 and May 31, 2014.2015.
Table 18:20: Revolving Credit Agreements
| | | | Total Available | | Letters of Credit Outstanding | | | | | | Total Available | | Letters of Credit Outstanding | | | | |
(Dollars in thousands) | | February 28, 2015 | | May 31, 2014 | | February 28, 2015 | | May 31, 2014 | | Maturity | | Annual Facility Fee (1) | | August 31, 2015 | | May 31, 2015 | | August 31, 2015 | | May 31, 2015 | | Maturity | | Annual Facility Fee (1) |
Three-year agreement | | $ | 1,719,855 |
| | $ | — |
| | $ | 145 |
| | $ | — |
| | October 28, 2017 | | 7.5 basis points | | $ | 1,719,855 |
| | $ | 1,719,855 |
| | $ | 145 |
| | $ | 145 |
| | October 28, 2017 | | 7.5 basis points |
Five-year agreement | | 1,698,109 |
| | — |
| | 1,891 |
| | — |
| | October 28, 2019 | | 10 basis points | | 1,699,000 |
| | 1,699,000 |
| | 1,000 |
| | 1,000 |
| | October 28, 2019 | | 10 basis points |
Three-year agreement | | — |
| | 1,036,000 |
| | — |
| | — |
| | October 28, 2016 | | 10 basis points | |
Four-year agreement | | — |
| | 1,122,500 |
| | — |
| | — |
| | October 28, 2017 | | 10 basis points | |
Five-year agreement | | — |
| | 1,065,609 |
| | — |
| | 1,891 |
| | October 28, 2018 | | 10 basis points | |
Total | | $ | 3,417,964 |
| | $ | 3,224,109 |
| | $ | 2,036 |
| | $ | 1,891 |
| | | | | | $ | 3,418,855 |
| | $ | 3,418,855 |
| | $ | 1,145 |
| | $ | 1,145 |
| | | | |
____________________________
(1) Facility fee determined by CFC’s senior unsecured credit ratings based on the pricing schedules put in place at the inception of the related agreement.
OnIn October 28, 2014, we amended2015, NCSC assumed a total of $155 million of commitments from one of the $1,123 million four-year and $1,068 million five-yearbanks under the revolving credit agreements. As a result, the total amount available from external third parties under our committed revolving credit agreements decreased to increase the total aggregate amount of commitments under the four-year and five-year agreements to $1,720 million and
$1,700 million, respectively, and to extend the commitment termination date for the five-year agreement to October 28, 2019. Also, on October 28, 2014, we terminated the existing $1,036 million three-year revolving credit agreement which was scheduled to mature on October 28, 2016.$3,264 million.
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 requirements to draw down on the facilities, including financial ratios. As shown below in Table 2022, we were in compliance with all covenants and conditions under our revolving credit agreements and senior debt indentures as of February 28,August 31, 2015.
Member Investments
Table 1921 shows the components of our member investments included in total debt outstanding as of February 28,August 31, 2015 and May 31, 2014.2015.
Table 19:21: Member Investments
| | | | February 28, 2015 | | May 31, 2014 | | Increase/ (Decrease) | | August 31, 2015 | | May 31, 2015 | | Increase/ (Decrease) |
(Dollars in thousands) | | Amount | | % of Total (1) | | Amount | | % of Total (1) | | | Amount | | % of Total (1) | | Amount | | % of Total (1) | |
Commercial paper | | $ | 778,909 |
| | 40 | % | | $ | 858,389 |
| | 30 | % | | $ | (79,480 | ) | | $ | 838,180 |
| | 48 | % | | $ | 736,162 |
| | 43 | % | | $ | 102,018 |
|
Select notes | | 569,405 |
| | 100 |
| | 548,610 |
| | 100 |
| | 20,795 |
| | 667,669 |
| | 100 |
| | 671,635 |
| | 100 |
| | (3,966 | ) |
Daily liquidity fund notes | | 451,435 |
| | 100 |
| | 486,501 |
| | 100 |
| | (35,066 | ) | | 592,654 |
| | 100 |
| | 509,131 |
| | 100 |
| | 83,523 |
|
Medium-term notes | | 619,116 |
| | 21 |
| | 498,262 |
| | 18 |
| | 120,854 |
| | 586,074 |
| | 17 |
| | 618,170 |
| | 18 |
| | (32,096 | ) |
Members’ subordinated certificates | | 1,526,452 |
| | 100 |
| | 1,612,227 |
| | 100 |
| | (85,775 | ) | | 1,485,933 |
| | 100 |
| | 1,505,420 |
| | 100 |
| | (19,487 | ) |
Total | | $ | 3,945,317 |
| | | | $ | 4,003,989 |
| | | | $ | (58,672 | ) | | $ | 4,170,510 |
| | | | $ | 4,040,518 |
| | | | $ | 129,992 |
|
| | | | | | | | | | | | | | | | | | | | |
Percentage of total debt outstanding | | 19 | % | | | | 19 | % | | | | |
| | 19 | % | | | | 19 | % | | | | |
|
____________________________
(1) Represents the percentage of each line item outstanding to our members.
Member investments averaged $4,191$4,214 million outstanding over the last three years. We view member investments as a more stable source of funding than capital market issuances.
Cash, Investments and Time Deposits
As of February 28,August 31, 2015, cash and time deposits totaled $684$751 million. The interest rate earned on the time deposits provides an overall benefit to our net interest yield. The total represents an additional source of liquidity that is available to support our operations.
Cash Flows from Operations
For the ninethree months ended February 28,August 31, 2015, cash flows provided by operating activities were $223$111 million compared with $281$124 million for the prior-year period. Our cash flows from operating activities are driven primarily by a combination of cash flows from operations and the timing and amount of loan interest payments we received compared with interest payments we made on our debt.
Compliance with Debt Covenants
As of February 28,August 31, 2015, we were in compliance with all covenants and conditions under our revolving credit agreements and senior debt indentures. Table 2022 represents our required and actual financial ratios under the revolving credit agreements at or for the periods ended February 28,August 31, 2015 and May 31, 2014.2015.
Table 20:22: Financial Ratios under Revolving Credit Agreements
| | | | | | Actual | | | | Actual |
| | Requirement | | February 28, 2015 | | May 31, 2014 | | Requirement | | August 31, 2015 | | May 31, 2015 |
| | | | | | |
Minimum average adjusted TIER over six most recent fiscal quarters (1) | | 1.025 |
| | 1.25 | | 1.28 | |
Minimum average adjusted TIER over the six most recent fiscal quarters (1) | | | 1.025 |
| | 1.27 | | 1.28 |
| | | | | | |
Minimum adjusted TIER for the most recent fiscal year (1) (2) | | 1.05 |
| | 1.23 | | 1.23 | | 1.05 |
| | 1.30 | | 1.30 |
| | | | | | |
Maximum ratio of adjusted senior debt-to-total equity (1) | | 10.00 |
| | 5.92 | | 5.79 | | 10.00 |
| | 6.16 | | 5.93 |
____________________________
(1) In addition to the adjustments made to the leverage ratio set forth under “Non-GAAP Financial Measures,” senior debt excludes guarantees to member systems that have certain investment-grade ratings from Moody’s and S&P. The TIER and debt-to-equity calculations include the adjustments set forth under “Non-GAAP Financial Measures” and exclude the results of operations and other comprehensive income for CAH.
(2) We must meet this requirement to retire patronage capital.
The revolving credit agreements prohibit liens on loans to members except liens:
under our indentures,
related to taxes that are not delinquent or contested,
stemming from certain legal proceedings that are being contested in good faith,
created by CFC to secure guarantees by CFC of indebtedness, the interest on which is excludable from the gross income of the recipient for federal income tax purposes,
granted by any subsidiary to CFC, and
to secure other indebtedness of CFC of up to $7,500 million plus an amount equal to the incremental increase in CFC’s allocated Guaranteed Underwriter Program obligations, provided that the aggregate amount of such indebtedness may not exceed $10,000 million. As of February 28,August 31, 2015, the amount of our secured indebtedness for purposes of this provision of all three revolving credit agreements was $6,348$6,750 million.
The revolving credit agreements limit total investments in foreclosed assets held by Caribbean Asset Holdings ("CAH")CAH to $275 million without consent by the required banks. These investments did not exceed this limit as of February 28,August 31, 2015.
Table 2123 summarizes our required and actual financial ratios as defined under our 1994 collateral trust bonds indenture and our medium-term notes indentures in the U.S. markets as of February 28,August 31, 2015 and May 31, 2014.2015.
Table 21:23: Financial Ratios under Indentures |
| | | | | | |
| | | | Actual |
| | Requirement | | February 28, 2015 |
| May 31, 2014 |
Maximum ratio of adjusted senior debt to total equity (1) | | 20.00 | | 7.34 | | 6.74 |
|
| | | | | | |
| | | | Actual |
| | Requirement | | August 31, 2015 |
| May 31, 2015 |
Maximum ratio of adjusted senior debt to total equity (1) | | 20.00 | | 7.67 | | 7.41 |
____________________________
(1) The ratio calculation includes the adjustments made to the leverage ratio under “Non-GAAP Financial Measures,” with the exception of the adjustments to exclude the non-cash impact of derivative financial instruments and adjustments from total liabilities and total equity.
We are required to pledge collateral equal to at least 100% of the outstanding balance of debt issued under our collateral trust bond indentures and note purchase agreements with Farmer Mac. In addition, we are required to maintain collateral on deposit equal to at least 100% of the outstanding balance of debt to the Federal Financing BankFFB under the Guaranteed Underwriter Program of the USDA, which supports the Rural Economic Development Loan and Grant program, for which distribution and power supply loans may be deposited. See "Note 3—Loans and Commitments—Pledging of Loans and Loans on Deposit" for additional information related to collateral.
Table 2224 summarizes our secured debt or debt requiring collateral on deposit, the excess collateral pledged and our unencumbered loans as of August 31, 2015 and May 31, 2015.
Table 24: Unencumbered Loans
|
| | | | | | | | |
(Dollars in thousands) | | August 31, 2015 | | May 31, 2015 |
Total loans outstanding(1) | | $ | 22,084,551 |
| | $ | 21,459,220 |
|
Less: Total secured debt or debt requiring collateral on deposit | | (13,802,432 | ) | | (13,386,713 | ) |
Excess collateral pledged or on deposit (2) | | (1,012,560 | ) | | (1,351,255 | ) |
Unencumbered loans | | $ | 7,269,559 |
| | $ | 6,721,252 |
|
Unencumbered loans as a percentage of total loans | | 33 | % | | 31 | % |
____________________________
(1)Excludes deferred loan origination costs of $10 million as of August 31, 2015 and May 31, 2015.
(2) Excludes cash collateral pledged to secure debt. Unless and until there is an event of default, we can withdraw excess collateral as long as there is 100% coverage of the secured debt. If there is an event of default under most of our indentures, we can only withdraw this excess collateral if we substitute cash of equal value.
Table 25 summarizes the amount of notes pledged or on deposit as collateral as a percentage of the related debt outstanding under the debt agreements noted above as of February 28,August 31, 2015 and May 31, 2014.2015.
Table 22:25: Collateral Pledged or on Deposit
| | | | Requirement | | Actual | | Requirement | | Actual |
Debt Agreement | | Debt Indenture Minimum | | Revolving Credit Agreements Maximum | | February 28, 2015 | | May 31, 2014 | | Debt Indenture Minimum | | Revolving Credit Agreements Maximum | | August 31, 2015 | | May 31, 2015 |
Collateral trust bonds 1994 indenture | | 100 | % | | 150 | % | | 108 | % | | 117 | % | | 100 | % | | 150 | % | | 104 | % | | 106 | % |
Collateral trust bonds 2007 indenture | | 100 |
| | 150 |
| | 117 |
| | 114 |
| | 100 |
| | 150 |
| | 107 |
| | 108 |
|
Farmer Mac | | 100 |
| | 150 |
| | 115 |
| | 114 |
| | 100 |
| | 150 |
| | 114 |
| | 113 |
|
Clean Renewable Energy Bonds Series 2009A | | 100 |
| | 150 |
| | 120 |
| | 117 |
| | 100 |
| | 150 |
| | 113 |
| | 117 |
|
Federal Financing Bank Series (1) (2) | | 100 |
| | 150 |
| | 114 |
| | 118 |
| |
FFB Series (1) (2) | | | 100 |
| | 150 |
| | 105 |
| | 112 |
|
____________________________
(1)Represents collateral on deposit as a percentage of the related debt outstanding.
(2)All pledge agreements previously entered into with RUS and U.S. Bank National Association were consolidated into one amended, restated and consolidated pledge agreement in December 2012.
Uses of Liquidity
Loan Advances
Loan advances are either from new loans approved to a borrower or from the unadvanced portion of loans previously approved. As of February 28,August 31, 2015, unadvanced loan commitments totaled $13,903$14,296 million. Of that total, $2,786$2,687 million represented unadvanced commitments related to line of credit loans that are not subject to a material adverse change clause at the time of each loan advance. As such, we would be required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the loan. New advances under 28%20% of these $2,687 million committed line of credit loans would be advanced at rates determined by CFC based on our cost and, therefore, any increase in CFC’s costs to obtain funding required to make the advance could be passed on to the borrower. The other 72%80% of committed line of credit loans represent loan syndications where the pricing is set at a spread over a market index as agreed upon by all of the participating banks and market conditions at the time of syndication. The remaining $11,117$11,609 million of unadvanced loan commitments as of February 28,August 31, 2015 were generally subject to material adverse change clauses. Prior to making an advance on these facilities, we would confirm that there has been no material adverse change in the borrower's business or condition, financial or otherwise, since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by use of proceeds restrictions, imposition of borrower-specific restrictions or by additional conditions that must be met prior to advancing funds.
Since we generally do not charge a fee for the borrower to have an unadvanced amount on a loan facility that is subject to a material adverse change clause, our borrowers tend to request amounts in excess of their immediate estimated loan requirements. Historically.Historically, we have not experienced significant loan advances from the large amount of long-term unadvanced loan amounts that are subject to material adverse change clauses at the time of the loan advance. We have a very low historical average utilization rate on all our line of credit facilities, including committed line of credit facilities. Unadvanced commitments related to line of credit loans are typically revolving facilities for periods not to exceed five years. Long-term unadvanced commitments generally expire five years from the date of the loan agreement. These reasons, together with the other limitations on advances as described above, all contribute to our expectation that the majority of the unadvanced commitments reported will expire without being fully drawn upon and that the total commitment amount does not necessarily represent future cash funding requirements as of February 28,August 31, 2015.
We currently expect to make long-term loan advances totaling approximately $2,061$1,843 million to our members over the next 12 months.
Interest Expense on Debt
For the ninethree months ended February 28,August 31, 2015, interest expense on debt was $472$166 million, representing an average cost of
3.06% 3.08% compared with 3.23%3.05% for the ninethree months ended February 28,August 31, 2014. For the past three fiscal years, interest expense on debt has averaged $685$661 million. As of February 28,August 31, 2015, 81%82% of outstanding debt had a fixed interest rate and 19%18% had a variable interest rate.
Principal Repayments on Long-Term Debt
Table 2326 summarizes the principal amount of long-term debt, subordinated deferrable debt and members' subordinated certificates maturing by fiscal year and thereafter as of February 28,August 31, 2015.
Table 23:26: Principal Maturity of Long-termLong-Term Debt
| | (Dollars in thousands) | | Amount Maturing (1) | | Percentage of Total | | Amount Maturing (1) | | Percentage of Total |
May 31, 2015 | | $ | 381,329 |
| | 2 | % | |
May 31, 2016 | | 1,686,270 |
| | 10 |
| | $ | 1,628,535 |
| | 9 | % |
May 31, 2017 | | 1,553,503 |
| | 9 |
| | 2,116,984 |
| | 11 |
|
May 31, 2018 | | 787,846 |
| | 4 |
| | 1,021,445 |
| | 6 |
|
May 31, 2019 | | 1,823,889 |
| | 10 |
| | 1,837,490 |
| | 10 |
|
May 31, 2020 | | | 954,347 |
| | 5 |
|
Thereafter | | 11,426,574 |
| | 65 |
| | 10,918,767 |
| | 59 |
|
Total | | $ | 17,659,411 |
| | 100 | % | | $ | 18,477,568 |
| | 100 | % |
____________________________
(1)Excludes loan subordinated certificates totaling $128$115 million that amortize annually based on the outstanding balance of the related loan and $0.2 million in subscribed and unissued certificates for which a payment has been received. 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 fiscal year, annual amortization on these certificates was $13$11 million. In fiscal year 2014,2015, amortization represented 10% of amortizing loan subordinated certificates outstanding.
Patronage Capital Retirements
CFC has made annual retirements of allocated net earnings in 3435 of the last 3536 fiscal years. In July 2014,2015, the CFC Board of Directors approved the allocation of $79$78 million from fiscal year 20142015 net earnings to CFC’s members. CFC made a cash payment of $40$39 million to its members in September 20142015 as retirement of 50% of allocated net earnings from the prior year as approved by the CFC Board of Directors. The remaining portion of allocated net earnings will be retained by CFC for 25 years under guidelines adopted by the CFC Board of Directors in June 2009. The board of directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable laws and regulation.
Market risk is the potential for adverse changes in the value of our assets and liabilities resulting from changes in market variables such as interest rates, volatilities or credit spreads. Interest rate risk represents our primary market risk.
Interest Rate Risk
Our interest rate risk exposure is related to the funding of the fixed-rate loan portfolio. The Asset Liability Committee reviews a complete interest rate risk analysis, reviews proposed modifications, if any, to our interest rate risk management strategy and considers adopting strategy changes. Our Asset Liability Committee monitors interest rate risk and generally meets monthly to review and discuss information such as national economic forecasts, federal funds and interest rate forecasts, interest rate gap analysis, our liquidity position, loan and debt maturities, short-term and long-term funding needs, anticipated loan demands, credit concentration risk, derivative counterparty exposure and financial forecasts. The Asset Liability Committee also discusses the composition of fixed-rate versus variable-rate lending, new funding opportunities, changes to the nature and mix of assets and liabilities for structural mismatches, and interest rate swap transactions.
Matched Funding Practice
We provide our members with many options on loans with regard to interest rates, the term for which the selected interest rate is in effect and the ability to convert or prepay the loan. Long-term loans have maturities of up to 35 years. Borrowers may select fixed interest rates for periods of one year through the life of the loan. We do not match fund the majority of our fixed-rate loans with a specific debt issuance at the time the loans are advanced. To monitor and mitigate interest rate risk in the funding of fixed-rate loans, we perform a monthly interest rate gap analysis that provides a comparison between fixed-rate assets repricing or maturing by year and fixed-rate liabilities and members’ equity maturing by year, which is presented in Table 2427 below. Fixed-rate liabilities include debt issued at a fixed rate as well as variable-rate debt swapped to a fixed rate using interest rate swaps. Fixed-rate debt swapped to a variable rate using interest rate swaps is excluded from the analysis since it is used to match fund the variable-rate loan pool. With the exception of members’ subordinated certificates, which are generally issued at rates below our long-term cost of funding and with extended maturities, and commercial paper, our liabilities have average maturities that closely match the repricing terms (but not the maturities) of our fixed-interest-rate loans.
We fund the amount of fixed-rate assets that exceed fixed-rate debt and members’ equity with short-term debt, primarily commercial paper. We also have the option to enter pay fixed-receive variable interest rate swaps. Our funding objective is to manage the matched funding of asset and liability repricing terms within a range of total assets (excluding derivative assets) deemed appropriate by the Asset Liability Committee based on the current environment and extended outlook for interest rates. Due to the flexibility we offer our borrowers, there is a possibility of significant changes in the composition of the fixed-rate loan portfolio, and the management of the interest rate gap is very fluid. We may use interest rate swaps to manage the interest rate gap based on our needs for fixed-rate or variable-rate funding as changes arise. We consider the interest rate risk on variable-rate loans to be minimal as the loans are eligible to be repriced at least monthly, which minimizes the variance to the cost of variable-rate debt used to fund the loans. Loans with variable interest rates accounted for 9% and 10%8% of our total loan portfolio as of February 28,August 31, 2015 and May 31, 2014,2015, respectively.
Interest Rate Gap Analysis
Our interest rate gap analysis allows us to consider various scenarios in order to evaluate the impact on adjusted TIER of issuing certain amounts of debt with various maturities at a fixed rate. See “Non-GAAP Financial Measures” for further explanation and a reconciliation of the adjustments to TIER to derive adjusted TIER.
Table 2427 shows the scheduled amortization and repricing of fixed-rate assets and liabilities outstanding as of February 28,August 31, 2015.
Table 24:27: Interest Rate Gap Analysis | | (Dollars in millions) | | Prior to 5/31/15 | | Two Years 6/1/15 to 5/31/17 | | Two Years 6/1/17 to 5/31/19 | | Five Years 6/1/19 to 5/31/24 | | Ten Years 6/1/24 to 5/31/34 | | 6/1/34 and Thereafter | | Total | | Prior to 5/31/16 | | Two Years 6/1/16 to 5/31/18 | | Two Years 6/1/18 to 5/31/20 | | Five Years 6/1/20 to 5/31/25 | | Ten Years 6/1/25 to 5/31/35 | | 6/1/35 and Thereafter | | Total |
Assets amortization and repricing | | $ | 469 |
| | $ | 4,015 |
| | $ | 3,156 |
| | $ | 4,775 |
| | $ | 4,896 |
| | $ | 2,004 |
| | $ | 19,315 |
| |
Asset amortization and repricing | | | $ | 1,602 |
| | $ | 3,799 |
| | $ | 2,745 |
| | $ | 4,690 |
| | $ | 5,075 |
| | $ | 2,284 |
| | $ | 20,195 |
|
Liabilities and members’ equity: | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | |
Long-term debt | | $ | 190 |
| | $ | 3,282 |
| | $ | 3,805 |
| | $ | 3,733 |
| | $ | 3,418 |
| | $ | 655 |
| | $ | 15,083 |
| | $ | 1,640 |
| | $ | 3,565 |
| | $ | 2,908 |
| | $ | 3,702 |
| | $ | 3,111 |
| | $ | 1,124 |
| | $ | 16,050 |
|
Subordinated certificates | | 7 |
| | 91 |
| | 69 |
| | 714 |
| | 264 |
| | 747 |
| | 1,892 |
| | 20 |
| | 74 |
| | 61 |
| | 703 |
| | 259 |
| | 733 |
| | 1,850 |
|
Members’ equity (1) | | — |
| | — |
| | — |
| | — |
| | 573 |
| | 603 |
| | 1,176 |
| | — |
| | — |
| | — |
| | — |
| | 739 |
| | 427 |
| | 1,166 |
|
Total liabilities and members’ equity | | $ | 197 |
| | $ | 3,373 |
| | $ | 3,874 |
| | $ | 4,447 |
| | $ | 4,255 |
| | $ | 2,005 |
| | $ | 18,151 |
| | $ | 1,660 |
| | $ | 3,639 |
| | $ | 2,969 |
| | $ | 4,405 |
| | $ | 4,109 |
| | $ | 2,284 |
| | $ | 19,066 |
|
Gap (2) | | $ | 272 |
| | $ | 642 |
| | $ | (718 | ) | | $ | 328 |
| | $ | 641 |
| | $ | (1 | ) | | $ | 1,164 |
| | $ | (58 | ) | | $ | 160 |
| | $ | (224 | ) | | $ | 285 |
| | $ | 966 |
| | $ | — |
| | $ | 1,129 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative gap | | 272 |
| | 914 |
| | 196 |
| | 524 |
| | 1,165 |
| | 1,164 |
| | | | (58 | ) | | 102 |
| | (122 | ) | | 163 |
| | 1,129 |
| | 1,129 |
| | |
Cumulative gap as a % of total assets | | 1.20 | % | | 4.04 | % | | 0.87 | % | | 2.31 | % | | 5.14 | % | | 5.14 | % | | | | (0.25 | )% | | 0.43 | % | | (0.52 | )% | | 0.69 | % | | 4.81 | % | | 4.81 | % | | |
Cumulative gap as a % of adjusted total assets(3) | | 1.21 |
| | 4.06 |
| | 0.87 |
| | 2.33 |
| | 5.17 |
| | 5.17 |
| | | | (0.25 | ) | | 0.44 |
| | (0.52 | ) | | 0.70 |
| | 4.83 |
| | 4.83 |
| | |
____________________________
(1)Includes the portion of the allowance for loan losses and subordinated deferrable debt allocated to fund fixed-rate assets and excludes non-cash adjustments from the accounting for derivative financial instruments.
(2)Calculated based on the amount of assets amortizing and repricing less total liabilities and members’ equity displayed in Table 24.27.
(3)Adjusted total assets represents total assets reported in our condensed consolidated balance sheets less derivative assets.
We had $19,315$20,195 million of fixed-rate assets amortizing or repricing as of February 28,August 31, 2015. These assets were funded by $15,083$16,050 million of fixed-rate liabilities maturing during the next 30 years and $3,068$3,016 million of members’ equity and members’ subordinated certificates. A portion of members' equity does not have a scheduled maturity. The difference, or gap, of $1,164$1,129 million reflects the amount of fixed-rate assets that are funded with short-term debt as of February 28,August 31, 2015. The gap of $1,164$1,129 million represented 5.14%4.81% of total assets and 5.17%4.83% of total assets excluding derivative assets, or adjusted total assets, as of February 28,August 31, 2015.
Our Asset Liability Committee believes it is necessary to maintain an unmatched position on our fixed-rate assets within a limited percentage of adjusted total assets. Our limited unmatched position is intended to provide the flexibility to ensure that we are able to match the current maturing portion of long-term fixed rate loans based on maturity date and the opportunity in the current low interest rate environment to maximize the gross yield on our fixed rate assets without taking what we would consider to be excessive risk. Funding fixed-rate loans with short-term debt increases interest rate and liquidity risk, as the maturing debt would need to be replaced to fund the fixed-rate loans through their repricing or maturity date. We manage interest rate risk through the use of derivatives and by limiting the amount of fixed-rate assets that can be funded by short-term debt to a specified percentage of adjusted total assets based on market conditions. We discuss how we manage our liquidity risk above under “Liquidity Risk.”
|
|
NON-GAAP FINANCIAL MEASURES |
In addition to financial measures determined in accordance with GAAP, management also evaluates performance based on certain non-GAAP measures, which we refer to as “adjusted” measures. We provide a reconciliation of our adjusted measures to the most comparable GAAP measures in this section. We believe these adjusted non-GAAP metrics provide meaningful information and are useful to investors because the financial covenants in our revolving credit agreements and debt indentures are based on these adjusted measures.
Statements of Operations Non-GAAP Adjustments and Calculation of TIER
Table 2528 provides a reconciliation of adjusted interest expense, adjusted net interest income and adjusted net income to the comparable GAAP measures. The adjusted amounts are used in the calculation of our adjusted net interest yield and adjusted TIER.
Table 25:28: Adjusted Financial Measures — Income Statement | | | | Three Months Ended February 28, | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | 2015 |
| 2014 | | 2015 |
| 2014 |
Interest expense | | $ | (156,850 | ) | | $ | (163,534 | ) | | $ | (471,677 | ) | | $ | (496,464 | ) | | $ | (165,700 | ) | | $ | (156,552 | ) |
Plus: Derivative cash settlements | | (21,512 | ) | | (18,788 | ) | | (63,377 | ) | | (54,944 | ) | | (20,156 | ) | | (20,101 | ) |
Adjusted interest expense | | $ | (178,362 | ) | | $ | (182,322 | ) | | $ | (535,054 | ) | | $ | (551,408 | ) | | $ | (185,856 | ) | | $ | (176,653 | ) |
| | | | | | | | | | | | |
Net interest income | | $ | 81,890 |
| | $ | 75,198 |
| | $ | 239,589 |
| | $ | 222,593 |
| | $ | 80,416 |
| | $ | 80,739 |
|
Less: Derivative cash settlements | | (21,512 | ) | | (18,788 | ) | | (63,377 | ) | | (54,944 | ) | | (20,156 | ) | | (20,101 | ) |
Adjusted net interest income | | $ | 60,378 |
| | $ | 56,410 |
| | $ | 176,212 |
| | $ | 167,649 |
| | $ | 60,260 |
| | $ | 60,638 |
|
| | | | | | | | | | | | |
Net income | | $ | (34,196 | ) | | $ | 28,541 |
| | $ | (49,496 | ) | | $ | 211,799 |
| | $ | 43,095 |
| | $ | 20,612 |
|
Less: Derivative forward value | | 77,258 |
| | 12,835 |
| | 159,832 |
| | (98,925 | ) | | (8,139 | ) | | 29,777 |
|
Adjusted net income | | $ | 43,062 |
| | $ | 41,376 |
| | $ | 110,336 |
| | $ | 112,874 |
| | $ | 34,956 |
| | $ | 50,389 |
|
TIER Calculation
Table 2629 presents our TIER and adjusted TIER for the three and nine months ended February 28,August 31, 2015 and 2014.
Table 26:29: TIER and Adjusted TIER
| | | | Three Months Ended February 28, | | Nine Months Ended February 28, | | Three Months Ended August 31, |
| | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
TIER (1) (2) | | — |
| | 1.17 |
| | — |
| | 1.43 |
| |
TIER (1) | | | 1.26 |
| | 1.13 |
|
| | | | | | | | | | | | |
Adjusted TIER (3)(2) | | 1.24 |
| | 1.23 |
| | 1.21 |
| | 1.20 |
| | 1.19 |
| | 1.29 |
|
____________________________
(1) TIER is calculated based on net income plus interest expense for the period divided by interest expense for the period.
(2) For the three and nine months ended February 28, 2015, we reported a net loss of $34 million and $49 million, respectively, therefore the TIER for these periods results in a value below 1.00.
(3) Adjusted TIER is calculated based on adjusted net income plus adjusted interest expense for the period divided by adjusted interest expense for the period.
Adjustments to the Calculation of Leverage and Debt-to-Equity Ratios
Table 2730 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, and to subtract from total liabilities, and add to total equity, debt with equity characteristics.
Table 27:30: Adjusted Financial Measures — Balance Sheet | | (Dollars in thousands) | | February 28, 2015 |
| May 31, 2014 | | August 31, 2015 |
| May 31, 2015 |
Total liabilities | | $ | 21,764,417 |
| | $ | 21,262,369 |
| | $ | 22,544,635 |
| | $ | 21,934,273 |
|
Less: | | | | | | | | |
Derivative liabilities | | (451,938 | ) | | (388,208 | ) | | (392,461 | ) | | (408,382 | ) |
Debt used to fund loans guaranteed by RUS | | (180,622 | ) | | (201,863 | ) | | (177,840 | ) | | (179,241 | ) |
Subordinated deferrable debt | | (400,000 | ) | | (400,000 | ) | | (395,717 | ) | | (395,699 | ) |
Subordinated certificates | | (1,526,452 | ) | | (1,612,228 | ) | | (1,485,933 | ) | | (1,505,420 | ) |
Adjusted liabilities | | $ | 19,205,405 |
| | $ | 18,660,070 |
| | $ | 20,092,684 |
| | $ | 19,445,531 |
|
| | | | | | | | |
Total equity | | $ | 884,504 |
| | $ | 970,374 |
| | $ | 915,165 |
| | $ | 911,786 |
|
Less: | | | | | | | | |
Prior year cumulative derivative forward | | | | | | | | |
value and foreign currency adjustments | | 185,181 |
| | 224,722 |
| | 299,274 |
| | 185,181 |
|
Current year-to-date derivative forward value (gains) losses, net | | 159,832 |
| | (39,541 | ) | | (8,139 | ) | | 114,093 |
|
Accumulated other comprehensive income (1) | | (5,606 | ) | | (6,320 | ) | | (5,138 | ) | | (5,371 | ) |
Plus: | |
| | | |
| | |
Subordinated certificates | | 1,526,452 |
| | 1,612,228 |
| | 1,485,933 |
| | 1,505,420 |
|
Subordinated deferrable debt | | 400,000 |
| | 400,000 |
| | 395,717 |
| | 395,699 |
|
Adjusted total equity | | $ | 3,150,363 |
| | $ | 3,161,463 |
| | $ | 3,082,812 |
| | $ | 3,106,808 |
|
Guarantees (2) | | $ | 987,833 |
| | $ | 1,064,822 |
| | $ | 972,486 |
| | $ | 986,500 |
|
____________________________
(1) Represents the accumulated other comprehensive income related to derivatives. Excludes $5$3 million and $4 million of accumulated other comprehensive income and $0.4 million of accumulated other comprehensive loss at February 28,August 31, 2015 and May 31, 2014,2015, respectively, related to the unrecognized gains on our investments. It also excludes $2$4 million of accumulated other comprehensive loss related to foreclosed assets at February 28,August 31, 2015 and May 31, 20142015 and $1 million of accumulated other comprehensive loss related to a defined benefit pension plan.
(2) Guarantees are used in the calculation of leverage and adjusted leverage ratios below.
Table 2831 presents the calculations of our leverage and debt-to-equity ratios and our adjusted leverage and debt-to-equity ratios as of February 28,August 31, 2015 and May 31, 2014.2015.
Table 28:31: Leverage and Debt-to-Equity and Adjusted Leverage and Adjusted Debt-to-Equity Ratios
| | | | February 28, 2015 | | May 31, 2014 | | August 31, 2015 | | May 31, 2015 |
Leverage ratio (1) | | 25.72 |
| | 23.01 |
| | 25.70 |
| | 25.14 |
|
Adjusted leverage ratio (2) | | 6.41 |
| | 6.24 |
| | 6.83 |
| | 6.58 |
|
Debt-to-equity ratio (3) | | 24.61 |
| | 21.91 |
| | 24.63 |
| | 24.06 |
|
Adjusted debt-to-equity ratio (4) | | 6.10 |
| | 5.90 |
| | 6.52 |
| | 6.26 |
|
____________________________
(1) Calculated based on total liabilities and guarantees at period end divided by total equity at period end.
(2) Calculated based on adjusted total liabilities and guarantees at period end divided by adjusted total equity at period end, such calculation is presented in Table 2730 above.
(3) Calculated based on total liabilities at period end divided by total equity at period end.
(4) Calculated based on adjusted total liabilities at period end divided by adjusted total equity at period end, such calculation is presented in Table 2730 above.
| |
Item 1. | Financial Statements |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | Three Months Ended February 28, | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | 2015 |
| 2014 | | 2015 |
| 2014 |
Interest income | | $ | 238,740 |
| | $ | 238,732 |
| | $ | 711,266 |
| | $ | 719,057 |
| | $ | 246,116 |
| | $ | 237,291 |
|
Interest expense | | (156,850 | ) | | (163,534 | ) | | (471,677 | ) | | (496,464 | ) | | (165,700 | ) | | (156,552 | ) |
Net interest income | | 81,890 |
| | 75,198 |
| | 239,589 |
| | 222,593 |
| | 80,416 |
| | 80,739 |
|
Provision for loan losses | | (2,304 | ) | | (787 | ) | | 3,475 |
| | (3,161 | ) | | (4,562 | ) | | 6,771 |
|
Net interest income after provision for loan losses | | 79,586 |
| | 74,411 |
| | 243,064 |
| | 219,432 |
| | 75,854 |
| | 87,510 |
|
Non-interest income: | | |
| | |
| | |
| | |
| | |
| | |
|
Fee and other income | | 5,020 |
| | 5,702 |
| | 19,249 |
| | 14,983 |
| | 4,701 |
| | 4,357 |
|
Derivative gains (losses), net | | (98,770 | ) | | (31,623 | ) | | (223,209 | ) | | 43,981 |
| |
Derivative losses | | | (12,017 | ) | | (49,878 | ) |
Results of operations of foreclosed assets | | (1,369 | ) | | (1,164 | ) | | (33,059 | ) | | (8,482 | ) | | (1,921 | ) | | (2,699 | ) |
Total non-interest income | | (95,119 | ) | | (27,085 | ) | | (237,019 | ) | | 50,482 |
| | (9,237 | ) | | (48,220 | ) |
Non-interest expense: | | |
| | |
| | |
| | |
| | |
| | |
|
Salaries and employee benefits | | (10,949 | ) | | (8,013 | ) | | (32,274 | ) | | (27,359 | ) | | (11,490 | ) | | (10,797 | ) |
Other general and administrative expenses | | (7,059 | ) | | (9,170 | ) | | (22,514 | ) | | (27,012 | ) | | (11,345 | ) | | (7,746 | ) |
Provision for guarantee liability | | — |
| | (117 | ) | | 80 |
| | (159 | ) | |
Losses on early extinguishment of debt | | (703 | ) | | (1,452 | ) | | (703 | ) | | (1,452 | ) | |
Other | | (7 | ) | | 210 |
| | (30 | ) | | (88 | ) | | (357 | ) | | 61 |
|
Total non-interest expense | | (18,718 | ) | | (18,542 | ) | | (55,441 | ) | | (56,070 | ) | | (23,192 | ) | | (18,482 | ) |
Income (loss) before income taxes | | (34,251 | ) | | 28,784 |
| | (49,396 | ) | | 213,844 |
| |
Income tax (expense) benefit | | 55 |
| | (243 | ) | | (100 | ) | | (2,045 | ) | |
Net income (loss) | | (34,196 | ) | | 28,541 |
| | (49,496 | ) | | 211,799 |
| |
Income before income taxes | | | 43,425 |
| | 20,808 |
|
Income tax expense | | | (330 | ) | | (196 | ) |
Net income | | | 43,095 |
| | 20,612 |
|
Less: Net (income) loss attributable to noncontrolling interests | | 217 |
| | (239 | ) | | 213 |
| | (3,024 | ) | | 230 |
| | (211 | ) |
Net income (loss) attributable to CFC | | $ | (33,979 | ) | | $ | 28,302 |
| | $ | (49,283 | ) | | $ | 208,775 |
| |
Net income attributable to CFC | | | $ | 43,325 |
| | $ | 20,401 |
|
| | | | | | | | | | | | |
| | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements. |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
| | | | Three Months Ended February 28, | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | 2015 |
| 2014 | | 2015 |
| 2014 |
Net income (loss) | | $ | (34,196 | ) | | $ | 28,541 |
| | $ | (49,496 | ) | | $ | 211,799 |
| |
Net income | | | $ | 43,095 |
| | $ | 20,612 |
|
Other comprehensive income (loss): | | |
| | |
| | |
| | |
| | |
| | |
|
Unrealized gains (losses) on available-for-sale investment securities | | 1,644 |
| | 2,313 |
| | 5,246 |
| | (2,931 | ) | | (664 | ) | | 2,700 |
|
Reclassification of derivative losses to net income | | (239 | ) | | (245 | ) | | (722 | ) | | (740 | ) | |
Reclassification of derivative gains to net income | | | (235 | ) | | (241 | ) |
Defined benefit plan adjustments | | (1,062 | ) | | — |
| | (1,062 | ) | | — |
| | 44 |
| | — |
|
Other comprehensive income (loss) | | 343 |
| | 2,068 |
| | 3,462 |
| | (3,671 | ) | | (855 | ) | | 2,459 |
|
Total comprehensive income (loss) | | (33,853 | ) | | 30,609 |
| | (46,034 | ) | | 208,128 |
| |
Total comprehensive income | | | 42,240 |
| | 23,071 |
|
Less: Total comprehensive (income) loss attributable to noncontrolling interest | | 220 |
| | (235 | ) | | 221 |
| | (3,011 | ) | | 232 |
| | (208 | ) |
Total comprehensive income (loss) attributable to CFC | | $ | (33,633 | ) | | $ | 30,374 |
| | $ | (45,813 | ) | | $ | 205,117 |
| |
Total comprehensive income attributable to CFC | | | $ | 42,472 |
| | $ | 22,863 |
|
| | | | | | | | | | | | |
| | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements. |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | (Dollars in thousands) | | February 28, 2015 |
| May 31, 2014 | | August 31, 2015 |
| May 31, 2015 |
Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 298,771 |
| | $ | 338,715 |
| | $ | 266,307 |
| | $ | 248,836 |
|
Restricted cash | | 35 |
| | 520 |
| | 5,195 |
| | 485 |
|
Investments | | 85,423 |
| | 55,177 |
| |
Time deposits | | 385,000 |
| | 550,000 |
| | 485,000 |
| | 485,000 |
|
Investment securities | | | 83,808 |
| | 84,472 |
|
Loans to members | | 21,212,092 |
| | 20,476,642 |
| | 22,094,387 |
| | 21,469,017 |
|
Less: Allowance for loan losses | | (53,114 | ) | | (56,429 | ) | | (38,307 | ) | | (33,690 | ) |
Loans to members, net | | 21,158,978 |
| | 20,420,213 |
| | 22,056,080 |
| | 21,435,327 |
|
Accrued interest and other receivables | | 192,924 |
| | 200,656 |
| | 178,703 |
| | 197,828 |
|
Fixed assets, net | | 109,642 |
| | 107,070 |
| | 110,619 |
| | 110,540 |
|
Debt service reserve funds | | 25,602 |
| | 39,353 |
| | 25,602 |
| | 25,602 |
|
Debt issuance costs, net | | 46,513 |
| | 42,058 |
| |
Foreclosed assets, net | | 207,154 |
| | 245,651 |
| | 114,253 |
| | 116,507 |
|
Derivative assets | | 113,231 |
| | 209,759 |
| | 107,358 |
| | 115,276 |
|
Other assets | | 25,648 |
| | 23,571 |
| | 26,875 |
| | 26,186 |
|
Total assets | | $ | 22,648,921 |
| | $ | 22,232,743 |
| | $ | 23,459,800 |
| | $ | 22,846,059 |
|
| | | | | | | | |
Liabilities: | |
|
| | | |
|
| | |
Accrued interest payable | | $ | 184,966 |
| | $ | 118,381 |
| | $ | 190,643 |
| | $ | 123,697 |
|
Debt outstanding: | | | | | | | | |
Short-term debt | | 3,213,860 |
| | 4,099,331 |
| | 3,208,704 |
| | 3,127,754 |
|
Long-term debt | | 15,861,011 |
| | 14,513,284 |
| | 16,710,748 |
| | 16,244,794 |
|
Subordinated deferrable debt | | 400,000 |
| | 400,000 |
| | 395,717 |
| | 395,699 |
|
Members’ subordinated certificates: | | |
| | |
| | |
| | |
|
Membership subordinated certificates | | 644,881 |
| | 644,944 |
| | 629,821 |
| | 645,035 |
|
Loan and guarantee subordinated certificates | | 662,151 |
| | 699,723 |
| | 636,116 |
| | 640,889 |
|
Member capital securities | | 219,420 |
| | 267,560 |
| | 219,996 |
| | 219,496 |
|
Total members’ subordinated certificates | | 1,526,452 |
| | 1,612,227 |
| | 1,485,933 |
| | 1,505,420 |
|
Total debt outstanding | | 21,001,323 |
| | 20,624,842 |
| | 21,801,102 |
| | 21,273,667 |
|
Patronage capital retirement payable | | | 38,500 |
| | — |
|
Deferred income | | 76,401 |
| | 78,040 |
| | 72,497 |
| | 75,579 |
|
Derivative liabilities | | 451,938 |
| | 388,208 |
| | 392,461 |
| | 408,382 |
|
Other liabilities | | 49,789 |
| | 52,898 |
| | 49,432 |
| | 52,948 |
|
Total liabilities | | 21,764,417 |
| | 21,262,369 |
| | 22,544,635 |
| | 21,934,273 |
|
| | | | | | | | |
Commitments and contingencies | |
|
| |
|
| |
|
| |
|
|
| | | | | | | | |
Equity: | | | | | | | | |
CFC equity: | | |
| | |
| | |
| | |
|
Retained equity | | 850,305 |
| | 939,888 |
| | 883,996 |
| | 880,242 |
|
Accumulated other comprehensive income | | 7,119 |
| | 3,649 |
| | 3,227 |
| | 4,080 |
|
Total CFC equity | | 857,424 |
| | 943,537 |
| | 887,223 |
| | 884,322 |
|
Noncontrolling interest | | 27,080 |
| | 26,837 |
| | 27,942 |
| | 27,464 |
|
Total equity | | 884,504 |
| | 970,374 |
| | 915,165 |
| | 911,786 |
|
Total liabilities and equity | | $ | 22,648,921 |
| | $ | 22,232,743 |
| | $ | 23,459,800 |
| | $ | 22,846,059 |
|
| | | | | |
| | | | | |
See accompanying notes to condensed consolidated financial statements. |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
| | (Dollars in thousands) | | Membership Fees and Education Fund | | Patronage Capital Allocated | | Members’ Capital Reserve | | Unallocated Net Income (Loss) | | CFC Retained Equity | | CFC Accumulated Other Comprehensive Income | | Total CFC Equity | | Non-controlling Interests | | Total Equity | | Membership Fees and Educational Fund | | Patronage Capital Allocated | | Members’ Capital Reserve | | Unallocated Net Income (Loss) | | CFC Retained Equity | | Accumulated Other Comprehensive Income | | Total CFC Equity | | Non-controlling Interests | | Total Equity |
Balance as of May 31, 2015 | | | $ | 2,743 |
| | $ | 668,980 |
| | $ | 501,731 |
| | $ | (293,212 | ) | | $ | 880,242 |
| | $ | 4,080 |
| | $ | 884,322 |
| | $ | 27,464 |
| | $ | 911,786 |
|
Net income | | | — |
| | — |
| | — |
| | 43,325 |
| | 43,325 |
| | — |
| | 43,325 |
| | (230 | ) | | 43,095 |
|
Other comprehensive loss | | | — |
| | — |
| | — |
| | — |
| | — |
| | (853 | ) | | (853 | ) | | (2 | ) | | (855 | ) |
Patronage capital retirement | | | — |
| | (39,210 | ) | | — |
| | — |
| | (39,210 | ) | | — |
| | (39,210 | ) | | — |
| | (39,210 | ) |
Other | | | (361 | ) | | — |
| | — |
| | — |
| | (361 | ) | | — |
| | (361 | ) | | 710 |
| | 349 |
|
Balance as of August 31, 2015 | | | $ | 2,382 |
| | $ | 629,770 |
| | $ | 501,731 |
| | $ | (249,887 | ) | | $ | 883,996 |
| | $ | 3,227 |
| | $ | 887,223 |
| | $ | 27,942 |
| | $ | 915,165 |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Balance as of May 31, 2014 | | $ | 2,751 |
| | $ | 630,340 |
| | $ | 485,447 |
| | $ | (178,650 | ) | | $ | 939,888 |
| | $ | 3,649 |
| | $ | 943,537 |
| | $ | 26,837 |
| | $ | 970,374 |
| | $ | 2,751 |
| | $ | 630,340 |
| | $ | 485,447 |
| | $ | (178,650 | ) | | $ | 939,888 |
| | $ | 3,649 |
| | $ | 943,537 |
| | $ | 26,837 |
| | $ | 970,374 |
|
Net income | | — |
| | — |
| | — |
| | (49,283 | ) | | (49,283 | ) | | — |
| | (49,283 | ) | | (213 | ) | | (49,496 | ) | | — |
| | — |
| | — |
| | 20,401 |
| | 20,401 |
| | — |
| | 20,401 |
| | 211 |
| | 20,612 |
|
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | 3,470 |
| | 3,470 |
| | (8 | ) | | 3,462 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,462 |
| | 2,462 |
| | (3 | ) | | 2,459 |
|
Patronage capital retirement | | — |
| | (39,662 | ) | | — |
| | — |
| | (39,662 | ) | | — |
| | (39,662 | ) | | — |
| | (39,662 | ) | | — |
| | (39,662 | ) | | — |
| | — |
| | (39,662 | ) | | — |
| | (39,662 | ) | | — |
| | (39,662 | ) |
Other | | (638 | ) | | (1 | ) | | 1 |
| | — |
| | (638 | ) | | — |
| | (638 | ) | | 464 |
| | (174 | ) | | (303 | ) | | (1 | ) | | 1 |
| | — |
| | (303 | ) | | — |
| | (303 | ) | | — |
| | (303 | ) |
Balance as of February 28, 2015 | | $ | 2,113 |
| | $ | 590,677 |
| | $ | 485,448 |
| | $ | (227,933 | ) | | $ | 850,305 |
| | $ | 7,119 |
| | $ | 857,424 |
| | $ | 27,080 |
| | $ | 884,504 |
| |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Balance as of May 31, 2013 | | $ | 2,505 |
| | $ | 591,581 |
| | $ | 410,259 |
| | $ | (213,255 | ) | | $ | 791,090 |
| | $ | 8,381 |
| | $ | 799,471 |
| | $ | 11,790 |
| | $ | 811,261 |
| |
Net income | | — |
| | — |
| | — |
| | 208,775 |
| | 208,775 |
| | — |
| | 208,775 |
| | 3,024 |
| | 211,799 |
| |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (3,658 | ) | | (3,658 | ) | | (13 | ) | | (3,671 | ) | |
Patronage capital retirement | | — |
| | (40,724 | ) | | — |
| | — |
| | (40,724 | ) | | — |
| | (40,724 | ) | | — |
| | (40,724 | ) | |
Other | | (521 | ) | | — |
| | — |
| | — |
| | (521 | ) | | — |
| | (521 | ) | | 12,146 |
| | 11,625 |
| |
Balance as of February 28, 2014 | | $ | 1,984 |
| | $ | 550,857 |
| | $ | 410,259 |
| | $ | (4,480 | ) | | $ | 958,620 |
| | $ | 4,723 |
| | $ | 963,343 |
| | $ | 26,947 |
| | $ | 990,290 |
| |
Balance as of August 31, 2014 | | | $ | 2,448 |
| | $ | 590,677 |
| | $ | 485,448 |
| | $ | (158,249 | ) | | $ | 920,324 |
| | $ | 6,111 |
| | $ | 926,435 |
| | $ | 27,045 |
| | $ | 953,480 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements. |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | 2015 | | 2014 |
Cash flows from operating activities: | | | | | | | | |
Net income (loss) | | $ | (49,496 | ) | | $ | 211,799 |
| |
Net income | | | $ | 43,095 |
| | $ | 20,612 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Amortization of deferred income | | (8,730 | ) | | (7,156 | ) | | (2,683 | ) | | (2,895 | ) |
Amortization of debt issuance costs and deferred charges | | 5,440 |
| | 5,393 |
| | 2,052 |
| | 1,759 |
|
Amortization of discount on long-term debt | | 4,424 |
| | 4,046 |
| | 2,110 |
| | 1,948 |
|
Amortization of issuance costs for revolving bank lines of credit | | 4,725 |
| | 2,098 |
| | 2,087 |
| | 709 |
|
Depreciation | | 4,693 |
| | 4,254 |
| | 1,899 |
| | 1,461 |
|
Provision for loan losses | | (3,475 | ) | | 3,161 |
| | 4,562 |
| | (6,771 | ) |
Provision for guarantee liability | | (80 | ) | | 159 |
| |
Results of operations of foreclosed assets | | 33,059 |
| | 8,482 |
| | 1,921 |
| | 2,699 |
|
Derivative forward value | | 159,832 |
| | (98,925 | ) | | (8,139 | ) | | 29,777 |
|
Changes in operating assets and liabilities: | | | | | | | | |
Accrued interest and other receivables | | 3,137 |
| | (37,792 | ) | | 806 |
| | (2,476 | ) |
Accounts payable | | (1,439 | ) | | 67,489 |
| | 484 |
| | 8,874 |
|
Accrued interest payable | | 66,585 |
| | 58,140 |
| | 66,946 |
| | 65,099 |
|
Deferred income | | 7,091 |
| | 61,109 |
| | (399 | ) | | 4,389 |
|
Other | | (3,005 | ) | | (1,116 | ) | | (4,045 | ) | | (1,127 | ) |
Net cash provided by operating activities | | 222,761 |
| | 281,141 |
| | 110,696 |
| | 124,058 |
|
Cash flows from investing activities: | | | | | | | | |
Advances on loans | | (6,409,934 | ) | | (6,165,888 | ) | | (2,279,165 | ) | | (1,987,198 | ) |
Principal collections on loans | | 5,673,899 |
| | 5,825,426 |
| | 1,653,889 |
| | 1,979,315 |
|
Net investment in fixed assets | | (7,181 | ) | | (6,004 | ) | | (2,058 | ) | | (2,485 | ) |
Proceeds from foreclosed assets | | 13,088 |
| | — |
| | 1,333 |
| | 2,187 |
|
Investments in foreclosed assets | | (7,650 | ) | | (2,160 | ) | | (1,000 | ) | | (2,400 | ) |
Investments in time deposits | | — |
| | — |
| | — |
| | (20,000 | ) |
Proceeds from sale of time deposits | | 165,000 |
| | — |
| |
Investments in equity securities | | (25,000 | ) | | — |
| | — |
| | (25,000 | ) |
Change in restricted cash | | 485 |
| | 440 |
| | (4,710 | ) | | (505 | ) |
Net cash used in investing activities | | (597,293 | ) | | (348,186 | ) | | (631,711 | ) | | (56,086 | ) |
Cash flows from financing activities: | | | | | | | | |
Proceeds from issuances of short-term debt, net | | (879,998 | ) | | 762,205 |
| | 146,190 |
| | 86,389 |
|
Proceeds from issuances of short-term debt with original maturity greater than 90 days | | 391,974 |
| | 593,401 |
| | 131,496 |
| | 132,739 |
|
Repayments of short term-debt with original maturity greater than 90 days | | (397,447 | ) | | (620,404 | ) | | (196,736 | ) | | (145,069 | ) |
Issuance costs for revolving bank lines of credit | | (3,249 | ) | | — |
| |
Proceeds from issuance of long-term debt | | 2,245,478 |
| | 2,449,067 |
| | 551,808 |
| | 216,456 |
|
Payments for retirement of long-term debt | | (912,614 | ) | | (2,368,220 | ) | | (89,998 | ) | | (349,577 | ) |
Issuance costs for subordinated debt | | — |
| | — |
| |
Proceeds from issuance of members’ subordinated certificates | | 74,657 |
| | 56,386 |
| | 746 |
| | 39,238 |
|
Payments for retirement of members’ subordinated certificates | | (145,015 | ) | | (99,507 | ) | | (5,020 | ) | | (66,293 | ) |
Payments for retirement of patronage capital | | (39,198 | ) | | (40,030 | ) | |
Net cash provided by financing activities | | 334,588 |
| | 732,898 |
| |
Net increase in cash and cash equivalents | | (39,944 | ) | | 665,853 |
| |
Net cash provided by (used in) financing activities | | | 538,486 |
| | (86,117 | ) |
Net increase (decrease) in cash and cash equivalents | | | 17,471 |
| | (18,145 | ) |
Beginning cash and cash equivalents | | 338,715 |
| | 177,062 |
| | 248,836 |
| | 338,715 |
|
Ending cash and cash equivalents | | $ | 298,771 |
| | $ | 842,915 |
| | $ | 266,307 |
| | $ | 320,570 |
|
| | | | | | | | |
See accompanying notes to condensed consolidated financial statements. |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | 2015 | | 2014 |
Supplemental disclosure of cash flow information: | | | | | | | | |
Cash paid for interest | | $ | 390,503 |
| | $ | 426,755 |
| | $ | 92,505 |
| | $ | 87,037 |
|
Cash paid for income taxes | | 130 |
| | 157 |
| | 4 |
| | 8 |
|
Non-cash financing and investing activities: | | | | | | | | |
Subordinated certificates applied against loan balances | | 228 |
| | — |
| |
Increase to patronage capital retirement payable | | | $ | 38,500 |
| | $ | 39,662 |
|
Net decrease in debt service reserve funds/debt service reserve certificates | | (13,751 | ) | | (450 | ) | | — |
| | (1,034 | ) |
| | | | | | | | |
| | | | | | | | |
See accompanying notes to condensed consolidated financial statements. |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | |
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The Company
National Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can 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. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes.
Principles of Consolidation and Basis of Presentation
The accompanying financial statements include the consolidated accounts and Use of CFC, Rural Telephone Finance Cooperative (“RTFC”) and National Cooperative Services Corporation (“NCSC”) and certain entities created and controlled by CFC to hold foreclosed assets and accommodate loan securitization transactions. The entities controlled by CFC that hold foreclosed assets include Caribbean Asset Holdings, LLC (“CAH”) and Denton Realty Partners, LP (“DRP”). CAH is a holding company for various U.S. Virgin Islands, British Virgin Islands and St. Maarten-based telecommunications operating entities that provide local, long-distance and wireless telephone, cable television and internet services to residential and commercial customers. DRP holds a land development loan and limited partnership interests in certain receivables related to a real estate development. Intercompany accounts and transactions have been eliminated in consolidation. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities.Estimates
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted accounting principles in the U.S.United States (“GAAP”). for interim financial information. Certain prior period amounts have been reclassified to conform to the current period presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from these estimates. In the opinion of management, all normal, recurring adjustments have been included for a fair presentation of this interim financial information. The results of operations in the interim financial statements are not necessarily indicative of the results that may be expected for the full year.
These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in CFC'sCFC’s Annual Report on Form 10-K for the fiscal year ended May 31, 2014 (the “20142015 (“2015 Form 10-K”).
ReclassificationsPrinciples of Consolidation
Certain prior period amountsThe accompanying consolidated financial statements include the accounts of CFC, Rural Telephone Finance Cooperative (“RTFC”), National Cooperative Services Corporation (“NCSC”) and entities created and controlled by CFC to hold foreclosed assets. All intercompany balances and transactions have been reclassifiedeliminated. RTFC was established to conformprovide private financing for the rural telecommunications industry. NCSC was established to provide financing to members of CFC and the current period presentation. The mostfor-profit and nonprofit entities that are owned, operated or controlled by, or provide significant reclassification relatesbenefits to the presentationcertain members of short-termCFC. CFC currently has one entity, Caribbean Asset Holdings, LLC (“CAH”), that holds foreclosed assets. CAH, which is classified as held for sale, is a holding company for various U.S. Virgin Islands, British Virgin Islands and long-term debt. Effective August 31, 2014, we began classifying debtSt. Maarten-based telecommunications operating entities that were transferred to CAH as either short-terma result of a loan default by a borrower and subsequent bankruptcy proceedings. Unless stated otherwise, references to “we,” “our” or long-term based on the original contractual maturity at issuance. For reporting periods prior“us” relate to August 31, 2014, we reported long-term debt maturing within one year as part of our short-term debt. The debt reclassification had no impact on our debt ratios or financial covenants.CFC and its consolidated entities.
Variable Interest Entities
Based on the accounting standards governing consolidations, equity controlled by RTFC and NCSC is classified as noncontrolling interest on the condensed consolidated balance sheet, and the subsidiary earnings controlled by RTFC and NCSC are reported as net income or net loss attributable to the noncontrolling interest on the consolidated statement of operations.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CFC manages the lending activities of RTFC and NCSC. We are required to consolidate the financial results of RTFC and NCSC because CFC is the primary beneficiary of variable interests in RTFC and NCSC due to its exposure to absorbing the majority of their expected losses.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Under separate guarantee agreements, RTFC and NCSC pay CFC a fee to indemnify them against loan losses. CFC is the sole lender to and manages the business operations of RTFC through a management agreement in effect until December 1, 2016, which is automatically renewed for one-year terms thereafter unless terminated by either party. CFC is the primary source of funding to, and manages the lending activities of, NCSC through a management agreement that is automatically renewable on an annual basis unless terminated by either party. NCSC funds its lending programs through loans from CFC or debt guaranteed by CFC. In connection with these guarantees, NCSC must pay a guarantee fee.
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. As of February 28,August 31, 2015, CFC had guaranteed $94$62 million of NCSC debt, derivative instruments and guarantees with third parties, and CFC’s maximum potential exposure for these instruments totaled $100$66 million. The maturities for NCSC obligations guaranteed by CFC extend through 2031. Guarantees of NCSC debt and derivative instruments are not included in Note 10, Guarantees, as the debt and derivatives are reported on the condensed consolidated balance sheets. As of February 28,August 31, 2015, CFC guaranteed $2 million of RTFC guarantees with third parties. The maturities for RTFC obligations guaranteed by CFC extend through 20152016 and are renewed on an annual basis. All CFC loans to RTFC and NCSC are secured by all assets and revenue of RTFC and NCSC, respectively. As of February 28,August 31, 2015, RTFC had total assets of $517$488 million including loans outstanding to members of $402$379 million, and NCSC had total assets of $757$739 million including loans outstanding of $715$725 million. As of February 28,August 31, 2015, CFC had committed to lend RTFC up to $4,000 million, of which $385$360 million was outstanding. As of February 28,August 31, 2015, CFC had committed to provide up to $3,000 million of credit to NCSC, of which $812$766 million was outstanding, representing $718$704 million of outstanding loans and $94$62 million of credit enhancements.
Interest Income
Interest income on loans is recognized using the effective interest method. The following table presents the components of interest income for the three and nine months ended February 28,August 31, 2015 and 2014.
| | | | Three Months Ended February 28, | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Interest on long-term fixed-rate loans | | $ | 221,856 |
| | $ | 220,227 |
| | $ | 660,391 |
| | $ | 666,762 |
| |
Interest on long-term fixed-rate loans(1) | | | $ | 232,202 |
| | $ | 222,328 |
|
Interest on long-term variable-rate loans | | 4,836 |
| | 5,217 |
| | 15,099 |
| | 14,871 |
| | 5,020 |
| | 5,360 |
|
Interest on line of credit loans | | 6,707 |
| | 8,302 |
| | 20,335 |
| | 23,379 |
| | 6,198 |
| | 6,942 |
|
Interest on restructured loans | | — |
| | — |
| | 10 |
| | 136 |
| |
Interest on investments | | 2,395 |
| | 1,932 |
| | 6,516 |
| | 5,685 |
| | 2,625 |
| | 2,572 |
|
Fee income(1) | | 2,946 |
| | 3,054 |
| | 8,915 |
| | 8,224 |
| |
Fee income(2) | | | 71 |
| | 89 |
|
Total interest income | | $ | 238,740 |
| | $ | 238,732 |
| | $ | 711,266 |
| | $ | 719,057 |
| | $ | 246,116 |
| | $ | 237,291 |
|
____________________________
(1) Primarily related toIncludes loan conversion fees, which are deferred and recognized in interest income over the original loan interest rate pricing term using the effective interest method. Also includes a small portion of conversion fees, thatwhich are intended to cover the administrative costs related to the conversion whichand are recognized immediately.into income immediately at conversion..
(2) Primarily related to loan origination and late payment fees.
Deferred income on the condensed consolidated balance sheets primarily includes deferred conversion fees totaling $72$68 million and $73$70 million as of February 28,August 31, 2015 and May 31, 2014,2015, respectively.
Interest Expense
The following table presents the components of interest expense for the three and nine months ended February 28, 2015 and 2014.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Interest Expense
The following table presents the components of interest expense for the three months ended August 31, 2015 and 2014.
| | | | Three Months Ended February 28, | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Interest expense on debt:(1)(3) | | | | | | | | | | | | |
Short-term debt | | $ | 1,669 |
| | $ | 1,406 |
| | $ | 4,375 |
| | $ | 4,445 |
| | $ | 2,542 |
| | $ | 3,141 |
|
Medium-term notes | | 17,196 |
| | 20,369 |
| | 50,937 |
| | 62,920 |
| | 20,153 |
| | 17,159 |
|
Collateral trust bonds | | 77,360 |
| | 76,090 |
| | 227,346 |
| | 227,746 |
| | 82,831 |
| | 76,182 |
|
Subordinated deferrable debt | | 4,750 |
| | 4,750 |
| | 14,250 |
| | 14,250 |
| | 4,783 |
| | 4,767 |
|
Subordinated certificates | | 15,281 |
| | 19,777 |
| | 48,177 |
| | 60,897 |
| | 15,306 |
| | 16,746 |
|
Long-term notes payable | | 36,933 |
| | 37,130 |
| | 112,190 |
| | 113,828 |
| | 40,085 |
| | 38,557 |
|
Debt issuance costs(2) | | 1,871 |
| | 1,806 |
| | 5,596 |
| | 5,453 |
| |
Fee expense(3) | | 1,790 |
| | 2,206 |
| | 8,806 |
| | 6,925 |
| |
Total interest expense | | $ | 156,850 |
| | $ | 163,534 |
| | $ | 471,677 |
| | $ | 496,464 |
| | $ | 165,700 |
| | $ | 156,552 |
|
____________________________
(1) Represents interest expense and the amortization of discounts on debt.
(2) Primarily consists ofIncludes underwriter’s fees, legal fees, printing costs and certain accounting fees, which are deferred and recognized in interest expense using the effective interest method. Also includes issuance costs related to dealer commercial paper, which are recognized immediately as incurred.
(3) Reflects variousIncludes fees related to funding activities, including fees paid to banks participating in our revolving credit agreements. Amounts are recognized as incurred or amortized on a straight-line basis over the life of the agreement.
We exclude indirectAccounting Standards Adopted in Fiscal Year 2016
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amends the current presentation of debt issuance costs if any,in the financial statements by requiring that debt issuance costs related to funding activities from interest expense.
Employee Benefits
We are a participantrecognized debt liability be presented in the National Rural Electric Cooperative Association (“NRECA”) Retirement Security Plan, which is a qualified defined benefit multiemployer master pension plan. As a supplemental component of the NRECA Retirement Security Plan, we previously adopted a Pension Restoration Plan, the purpose of which is to restore retirement benefits for certain selected key management and highly compensated employees because their benefits under the NRECA Retirement Security Plan are limited in order to comply with plan compensation limits under the Economic Growth and Tax Relief Act of 2001. NRECA has restricted additional participation in the Pension Restoration Plan. We therefore adopted a top-hat Executive Benefit Restoration Plan, effective January 1, 2015. The Executive Benefit Restoration Plan is a nonqualified, unfunded plan maintained by CFC to provide retirement benefits to a select group of senior management employees whose compensation exceed IRS limits for qualified defined benefit plans. There is a risk of forfeiture if participants leave the company prior to becoming fully vested in the Executive Benefit Restoration Plan. At adoption of this plan on January 1, 2015, we recorded an unfunded pension obligation of $1 million and an offsetting adjustment to accumulated other comprehensive income (“AOCI”). The pension obligation is included on our consolidated balance sheet as a componentdirect deduction from the carrying amount of other liabilities.that debt liability, consistent with debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as an asset in the balance sheet. The guidance, which does not affect the recognition and measurement requirements for debt issuance costs, is effective for us in the first quarter of fiscal year 2017. However, we early-adopted this guidance in the first quarter of fiscal year 2016, and applied its provisions retrospectively, which resulted in the reclassification of unamortized debt issuance costs of $47 million as of May 31, 2015, from total assets on our condensed consolidated balance sheet to total debt outstanding. We previously presented debt issuance costs as a separate line item under total assets on our condensed consolidated balance sheets. Other than this reclassification, the adoption of the guidance did not impact our consolidated financial statements.
Recently Issued but Not Yet Adopted Accounting Standards
In May 2014,Amendments to the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, which clarifies the principles for recognizing revenue from contracts with customers. The new accounting guidance, which does not apply to financial instruments, is effective for us beginning in the first quarter of fiscal year 2018. On April 1, 2015, the Financial Accounting Standards Board voted to propose to defer the effective date of the new revenue recognition standard by one year. We do not expect the new guidance to have a material impact on our financial condition, results of operations or liquidity, as CFC’s primary business and source of revenue is from lending.Consolidation Analysis
In February 2015, the Financial Accounting Standards BoardFASB issued Accounting Standards UpdateASU 2015-02, Amendments to the Consolidation Analysis, which is intended to improve upon and simplify the consolidation assessment required to evaluate whether organizations should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures. The new accounting guidance is effective for us beginning in the first quarter of fiscal year 2017. We do not expect the new guidance to have a material impact on our financial condition, results of operations or liquidity.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue from Contracts with Customers
In April 2015,May 2014, the Financial Accounting Standards BoardFASB issued Accounting Standards Update 2015-03, ASU 2014-09,Simplifying the Presentation of Debt Issuance Costs Revenue from Contracts with Customers, which changesclarifies the presentation of debt issuance costs in the financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deductionprinciples for recognizing revenue from the related debt liability rather than as an asset.contracts with customers. The new accounting guidance, which does not apply to financial instruments, is effective for us beginning in the first quarter of fiscal year 2017.2018. On April 1, 2015, the FASB voted to propose to defer the effective date of the new revenue recognition standard by one year. We are currently evaluatingdo not expect the new guidance to determine thehave a material impact on our balance sheet presentation.financial condition, results of operations or liquidity, as CFC’s primary business and source of revenue is from lending.
|
| | | | |
NOTE 2—INVESTMENT SECURITIES |
Our investment portfolio consistssecurities consist of preferred stock and common stockholdings of Federal Agricultural Mortgage Corporation (“Farmer Mac”). These investments were classified as available for sale as of February 28, 2015 preferred and May 31, 2014, and therefore recorded on our condensed consolidated balance sheets at fair value with any unrealized gains and losses recorded as a component of AOCI.
common stock. The following tables present the amortized cost, gross unrealized gains and losses and fair value of our available-for-sale investment securities, all of which are classified as available for sale, as of February 28,August 31, 2015 and May 31, 2014.2015.
| | | | February 28, 2015 | | August 31, 2015 |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Farmer Mac—Series A Non-Cumulative Preferred Stock | | $ | 30,000 |
| | $ | 564 |
| | $ | — |
| | $ | 30,564 |
| | $ | 30,000 |
| | $ | — |
| | $ | (600 | ) | | $ | 29,400 |
|
Farmer Mac—Series B Non-Cumulative Preferred Stock | | 25,000 |
| | 1,450 |
| | — |
| | 26,450 |
| | 25,000 |
| | 1,430 |
| | — |
| | 26,430 |
|
Farmer Mac—Series C Non-Cumulative Preferred Stock | | 25,000 |
| | 1,290 |
| | — |
| | 26,290 |
| | 25,000 |
| | 900 |
| | — |
| | 25,900 |
|
Farmer Mac—Class A Common Stock | | 538 |
| | 1,581 |
| | — |
| | 2,119 |
| | 538 |
| | 1,540 |
| | — |
| | 2,078 |
|
Total available-for-sale investment securities | | $ | 80,538 |
| | $ | 4,885 |
| | $ | — |
| | $ | 85,423 |
| | $ | 80,538 |
| | $ | 3,870 |
| | $ | (600 | ) | | $ | 83,808 |
|
| | | | May 31, 2014 | | May 31, 2015 |
(Dollars in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Farmer Mac—Series A Non-Cumulative Preferred Stock | | $ | 30,000 |
| | $ | — |
| | $ | (2,220 | ) | | $ | 27,780 |
| | $ | 30,000 |
| | $ | 264 |
| | $ | — |
| | $ | 30,264 |
|
Farmer Mac—Series B Non-Cumulative Preferred Stock | | 25,000 |
| | 500 |
| | — |
| | 25,500 |
| | 25,000 |
| | 1,250 |
| | — |
| | 26,250 |
|
Farmer Mac—Series C Non-Cumulative Preferred Stock | | | 25,000 |
| | 900 |
| | — |
| | 25,900 |
|
Farmer Mac—Class A Common Stock | | 538 |
| | 1,359 |
| | — |
| | 1,897 |
| | 538 |
| | 1,520 |
| | — |
| | 2,058 |
|
Total available-for-sale securities | | $ | 55,538 |
| | $ | 1,859 |
| | $ | (2,220 | ) | | $ | 55,177 |
| |
Total available-for-sale investment securities | | | $ | 80,538 |
| | $ | 3,934 |
| | $ | — |
| | $ | 84,472 |
|
The gross unrealized loss on our Farmer Mac—Series A Non-Cumulative Preferred Stock of $1 million as of August 31, 2015 was largely attributable to changes in interest rates. We did not have any investment securities in an unrealized loss position as of February 28,May 31, 2015. The grossFor the three months ended August 31, 2015, we recorded an unrealized loss on our Farmer Mac—Series A Non-Cumulative Preferred Stock of $2$1 million asin accumulated other comprehensive income, compared with an unrealized gain of May 31, 2014 was largely attributable to changes in interest rates. We do not intend to sell our investment securities in$3 million for the foreseeable future and therefore expect to recover any declines in fair value resulting from changes in interest rates.
|
| | | | |
NOTE 3—LOANS AND COMMITMENTS |
The outstanding principal balance of loans to members, unadvanced commitments and deferred loan origination costs, by loan type and member class, as of February 28, 2015 and May 31, 2014 are presented below.
same prior-year period.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | February 28, 2015 | | May 31, 2014 |
(Dollars in thousands) | | Loans Outstanding | | Unadvanced Commitments (1) | | Loans Outstanding | | Unadvanced Commitments (1) |
Loan type: (2) | | | | | | | | |
Long-term fixed-rate loans | | $ | 19,134,858 |
| | $ | — |
| | $ | 18,175,656 |
| | $ | — |
|
Long-term variable-rate loans | | 732,721 |
| | 4,557,074 |
| | 753,918 |
| | 4,710,273 |
|
Loans guaranteed by RUS | | 180,622 |
| | — |
| | 201,863 |
| | — |
|
Line of credit loans | | 1,154,198 |
| | 9,345,935 |
| | 1,335,488 |
| | 9,201,805 |
|
Total loans outstanding (3) | | 21,202,399 |
| | 13,903,009 |
| | 20,466,925 |
| | 13,912,078 |
|
Deferred loan origination costs | | 9,693 |
| | — |
| | 9,717 |
| | — |
|
Loans to members | | $ | 21,212,092 |
| | $ | 13,903,009 |
| | $ | 20,476,642 |
| | $ | 13,912,078 |
|
| | | | | | | | |
Member class:(2) | | | | | | | | |
CFC: | | | | | | | | |
Distribution | | $ | 15,774,955 |
| | $ | 9,317,103 |
| | $ | 15,035,365 |
| | $ | 9,531,315 |
|
Power supply | | 4,248,402 |
| | 3,149,507 |
| | 4,086,163 |
| | 3,025,423 |
|
Statewide and associate | | 61,790 |
| | 129,550 |
| | 67,902 |
| | 105,961 |
|
CFC total | | 20,085,147 |
| | 12,596,160 |
| | 19,189,430 |
| | 12,662,699 |
|
RTFC | | 401,763 |
| | 291,600 |
| | 449,546 |
| | 304,500 |
|
NCSC | | 715,489 |
| | 1,015,249 |
| | 827,949 |
| | 944,879 |
|
Total loans outstanding | | $ | 21,202,399 |
| | $ | 13,903,009 |
| | $ | 20,466,925 |
| | $ | 13,912,078 |
|
|
|
NOTE 3—LOANS AND COMMITMENTS |
The table below presents the outstanding principal balance of loans to members, including deferred loan origination costs, and unadvanced loan commitments, by loan type and member class, as of August 31, 2015 and May 31, 2015.
|
| | | | | | | | | | | | | | | | |
| | August 31, 2015 | | May 31, 2015 |
(Dollars in thousands) | | Loans Outstanding | | Unadvanced Commitments (1) | | Loans Outstanding | | Unadvanced Commitments (1) |
Loan type: (2) | | | | | | | | |
Long-term fixed-rate loans | | $ | 20,017,697 |
| | $ | — |
| | $ | 19,543,274 |
| | $ | — |
|
Long-term variable-rate loans | | 711,437 |
| | 4,903,121 |
| | 698,495 |
| | 4,835,623 |
|
Loans guaranteed by RUS | | 177,840 |
| | — |
| | 179,241 |
| | — |
|
Line of credit loans | | 1,177,577 |
| | 9,393,322 |
| | 1,038,210 |
| | 9,294,127 |
|
Total loans outstanding (3) | | 22,084,551 |
| | 14,296,443 |
| | 21,459,220 |
| | 14,129,750 |
|
Deferred loan origination costs | | 9,836 |
| | — |
| | 9,797 |
| | — |
|
Loans to members | | $ | 22,094,387 |
| | $ | 14,296,443 |
| | $ | 21,469,017 |
| | $ | 14,129,750 |
|
| | | | | | | | |
Member class:(2) | | | | | | | | |
CFC: | | | | | | | | |
Distribution | | $ | 16,575,202 |
| | $ | 9,657,965 |
| | $ | 16,095,043 |
| | $ | 9,474,568 |
|
Power supply | | 4,344,867 |
| | 3,332,602 |
| | 4,181,481 |
| | 3,273,501 |
|
Statewide and associate | | 60,377 |
| | 129,032 |
| | 65,466 |
| | 127,473 |
|
CFC total | | 20,980,446 |
| | 13,119,599 |
| | 20,341,990 |
| | 12,875,542 |
|
RTFC | | 379,033 |
| | 283,112 |
| | 385,709 |
| | 288,810 |
|
NCSC | | 725,072 |
| | 893,732 |
| | 731,521 |
| | 965,398 |
|
Total loans outstanding(3) | | $ | 22,084,551 |
| | $ | 14,296,443 |
| | $ | 21,459,220 |
| | $ | 14,129,750 |
|
____________________________
(1) The interest rate on unadvanced commitments is not set until drawn; therefore, the long-term unadvanced loan commitments have been classified in this table as variable-rate unadvanced commitments. However, at the time of the advance, the borrower may select a fixed or a variable rate on the new loan.
(2) Includes nonperforming and restructured loans.
(3) Represents the unpaid principal balance excluding deferred loan origination costs.
Unadvanced Loan Commitments
A total of $2,786$2,687 million and $2,274$2,765 million of unadvanced commitments as of February 28,August 31, 2015 and May 31, 2014,2015, respectively, represented unadvanced commitments related to committed lines of credit loans that are not subject to a material adverse change clause at the time of each loan advance. As such, we will be required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the facility.
The following table summarizes the available balance under unconditional committed lines of credit, as of February 28, 2015 and the related maturities by fiscal year, and thereafter as follows:of August 31, 2015.
| | | | Available Balance | | Notional Maturities of Unconditional Committed Lines of Credit | | Available Balance | | Notional Maturities of Unconditional Committed Lines of Credit |
(Dollars in thousands) | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
Committed lines of credit | | $2,785,832 |
| $ | — |
|
| $74,654 |
| $416,930 |
| $796,526 |
| $1,141,719 | | $356,003 | | $2,686,842 |
| $ | 79,077 |
|
| $297,416 |
| $717,942 |
| $950,728 |
| $641,679 |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The remaining unadvanced commitments totaling $11,117$11,609 million and $11,638$11,365 million as of February 28,August 31, 2015 and May 31, 2014,2015, respectively, were generally subject to material adverse change clauses. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by the designated purpose, imposition of borrower-specific restrictions or by additional conditions that must be met prior to advancing funds.
The following table summarizes the available balance under unadvanced commitments as of August 31, 2015 and the related maturities by fiscal year and thereafter by loan type:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Available Balance | | Notional Maturities of Unadvanced Commitments |
(Dollars in thousands) | | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter |
Line of credit loans | | $ | 9,393,322 |
|
| $ | 595,623 |
|
| $ | 5,337,933 |
|
| $ | 1,135,540 |
|
| $ | 1,108,910 |
|
| $ | 856,000 |
|
| $ | 359,316 |
|
Long-term loans | | 4,903,121 |
|
| 559,969 |
|
| 1,124,419 |
|
| 807,421 |
|
| 1,114,284 |
|
| 1,044,739 |
|
| 252,289 |
|
Total | | $ | 14,296,443 |
|
| $ | 1,155,592 |
|
| $ | 6,462,352 |
|
| $ | 1,942,961 |
|
| $ | 2,223,194 |
|
| $ | 1,900,739 |
|
| $ | 611,605 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unadvanced commitments related to line of credit loans are typically for periods not to exceed five years and are generally revolving facilities used for working capital and backup liquidity purposes. Historically, we have experienced a very low utilization rate on line of credit loan facilities, whether or not there is a material adverse change clause. Since we generally do not charge a fee on the unadvanced portion of the majority of our loan facilities, our borrowers will typically request long-term facilities to cover maintenancefund construction work plans and other capital expenditure work plansexpenditures for periods of up to five years and draw down on the facility over that time. In addition, borrowers will typically request an amount in excess of their immediate estimated loan requirements to avoid the expense related to seeking additional loan funding for unexpected items. These factors contribute to our expectation that the majority of the unadvanced commitments will expire without being fully drawn upon and that the total unadvanced amount does not necessarily represent future cash funding requirements.
Loan Sales
We account for the transfer of loans resulting from direct loan sales to third parties and securitization transactions by removing the loans from our condensed consolidated balance sheets when control has been surrendered. We retain the servicing performance obligations on these loans and recognize related servicing fees on an accrual basis over the period for which servicing activity is provided. Deferred transaction costs andprovided, as we believe the servicing fee represents adequate compensation. Because the loans are sold at par, we record immaterial losses on the sale of these loans for unamortized deferred loan origination costs related to the loans sold are included in determining the gain or loss on the sale.costs. We do not hold any continuing interest in the loans sold to date other than servicing performance obligations. We have no obligation to repurchase loans from the purchaser, except in the case of breaches of representations and warranties.
During the nine months ended February 28, 2015 and 2014, weWe sold CFC loans with outstanding balances totaling $25$52 million and $106$2 million, respectively, at par for cash.cash, during the three months ended August 31, 2015 and 2014, respectively.
Payment Status of LoansCredit Quality
The tables below show an analysisWe closely monitor loan performance trends to manage and evaluate our credit risk exposure. Our goal is to provide a balance between the credit needs of our members while also ensuring sound credit quality of our loan portfolio. Payment status and internal risk rating trends are indicators, among others, of the agelevel of credit risk within our loan portfolios. As part of our strategy to reduce our credit risk exposure, we entered into a long-term standby purchase commitment agreement with Farmer Mac on August 31, 2015. Under this agreement, we may designate certain loans, as approved by Farmer Mac, and in the event any such loan later goes into material default for at least 90 days, upon request by us, Farmer Mac must purchase such loan at par value. We have designated and Farmer Mac has approved an initial tranche of loans of $520 million as of August 31, 2015, and we can designate additional tranches of loans. We are paying Farmer Mac a monthly fee based on the unpaid principal balance of the recorded investmentloans in the tranche(s) for the commitment to purchase loans outstanding by member class as of February 28, 2015 and May 31, 2014.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | February 28, 2015 |
(Dollars in thousands) | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due (1) | | Total Past Due | | Total Financing Receivables | | Nonaccrual Loans |
CFC: | | | | | | | | | | | | |
Distribution | | $ | 15,774,955 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15,774,955 |
| | $ | 7,221 |
|
Power supply | | 4,248,402 |
| | — |
| | — |
| | — |
| | 4,248,402 |
| | — |
|
Statewide and associate | | 61,790 |
| | — |
| | — |
| | — |
| | 61,790 |
| | — |
|
CFC total | | 20,085,147 |
| | — |
| | — |
| | — |
| | 20,085,147 |
| | 7,221 |
|
RTFC | | 401,471 |
| | 99 |
| | 193 |
| | 292 |
| | 401,763 |
| | 1,349 |
|
NCSC | | 715,489 |
| | — |
| | — |
| | — |
| | 715,489 |
| | 308 |
|
Total loans outstanding | | $ | 21,202,107 |
| | $ | 99 |
| | $ | 193 |
| | $ | 292 |
| | $ | 21,202,399 |
| | $ | 8,878 |
|
| | | | | | | | | | | | |
As a % of total loans | | 100.00 | % | | — | % | | — | % | | — | % | | 100.00 | % | | 0.05 | % |
under the agreement.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Payment Status of Loans
The tables below present the payment status of loans outstanding by member class as of August 31, 2015 and May 31, 2015.
| | | | May 31, 2014 | | August 31, 2015 |
(Dollars in thousands) | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due (1) | | Total Past Due | | Total Financing Receivables | | Nonaccrual Loans | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due (1) | | Total Past Due | | Total Financing Receivables | | Nonaccrual Loans |
CFC: | | | | | | | | | | | | | | | | | | | | | | | | |
Distribution | | $ | 15,035,365 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 15,035,365 |
| | $ | 7,584 |
| | $ | 16,575,202 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 16,575,202 |
| | $ | 7,221 |
|
Power supply | | 4,086,163 |
| | — |
| | — |
| | — |
| | 4,086,163 |
| | — |
| | 4,344,852 |
| | 15 |
| | — |
| | 15 |
| | 4,344,867 |
| | — |
|
Statewide and associate | | 67,902 |
| | — |
| | — |
| | — |
| | 67,902 |
| | — |
| | 60,377 |
| | — |
| | — |
| | — |
| | 60,377 |
| | — |
|
CFC total | | 19,189,430 |
| | — |
| | — |
| | — |
| | 19,189,430 |
| | 7,584 |
| | 20,980,431 |
| | 15 |
| | — |
| | 15 |
| | 20,980,446 |
| | 7,221 |
|
RTFC | | 449,546 |
| | — |
| | — |
| | — |
| | 449,546 |
| | 1,695 |
| | 379,033 |
| | — |
| | — |
| | — |
| | 379,033 |
| | 4,156 |
|
NCSC | | 827,949 |
| | — |
| | — |
| | — |
| | 827,949 |
| | 400 |
| | 724,929 |
| | 143 |
| | — |
| | 143 |
| | 725,072 |
| | — |
|
Total loans outstanding | | $ | 20,466,925 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 20,466,925 |
| | $ | 9,679 |
| | $ | 22,084,393 |
| | $ | 158 |
| | $ | — |
| | $ | 158 |
| | $ | 22,084,551 |
| | $ | 11,377 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
As a % of total loans | | 100.00 | % | | — | % | | — | % | | — | % | | 100.00 | % | | 0.05 | % | | 100.00 | % | | — | % | | — | % | | — | % | | 100.00 | % | | 0.05 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | May 31, 2015 |
(Dollars in thousands) | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due (1) | | Total Past Due | | Total Financing Receivables | | Nonaccrual Loans |
CFC: | | | | | | | | | | | | |
Distribution | | $ | 16,095,043 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 16,095,043 |
| | $ | 7,221 |
|
Power supply | | 4,181,481 |
| | — |
| | — |
| | — |
| | 4,181,481 |
| | — |
|
Statewide and associate | | 65,466 |
| | — |
| | — |
| | — |
| | 65,466 |
| | — |
|
CFC total | | 20,341,990 |
| | — |
| | — |
| | — |
| | 20,341,990 |
| | 7,221 |
|
RTFC | | 385,709 |
| | — |
| | — |
| | — |
| | 385,709 |
| | 4,221 |
|
NCSC | | 731,521 |
| | — |
| | — |
| | — |
| | 731,521 |
| | 294 |
|
Total loans outstanding | | $ | 21,459,220 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 21,459,220 |
| | $ | 11,736 |
|
| | | | | | | | | | | | |
As a % of total loans | | 100.00 | % | | — | % | | — | % | | — | % | | 100.00 | % | | 0.05 | % |
____________________________
(1) All loans 90 days or more past due are on nonaccrual status.
Credit QualityInternal Risk Ratings of Loans
We monitor the credit quality and performance statistics of our financing receivables in an ongoing manner to provide a balance between the credit needs of our members and the requirements for sound credit quality of the loan portfolio. We evaluate the credit quality of our loans using an internal risk rating system that employs similar criteria for all member classes.
Our internal risk rating system is based on a determination of a borrower’s risk of default utilizing both quantitative and qualitative measurements.
We have grouped our risk ratings into the categories of pass and criticized based on the criteria below.
(i) Pass: Borrowers that are not experiencing difficulty and/or not showing a potential or well-defined credit weakness.
(ii) Criticized: Includes borrowers categorized as special mention, substandard and doubtful as described below:
Special mention: Borrowers that may be characterized by a potential credit weakness or deteriorating financial condition that is not sufficiently serious to warrant a classification of substandard or doubtful.
Substandard: Borrowers that display a well-defined credit weakness that may jeopardize the full collection of principal and interest.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Doubtful: Borrowers that have a well-defined weakness and the full collection of principal and interest is questionable or improbable.
Borrowers included in the pass, special mention, and substandard categories are generally reflected in the general portfolio of loans. Borrowers included in the doubtful category are reflected in the impaired portfolio of loans. Each risk rating is reassessed annually based on the receipt of the borrower’s audited financial statements; however, interim downgrades and upgrades may take place at any time as significant events or trends occur.
The following table presents our loan portfolio by risk rating category and member class based on available data as of February 28,August 31, 2015 and May 31, 2014.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | February 28, 2015 | | May 31, 2014 |
(Dollars in thousands) | | Pass | | Criticized | | Total | | Pass | | Criticized | | Total |
CFC: | | | | | | | | | | | | |
Distribution | | $ | 15,743,532 |
| | $ | 31,423 |
| | $ | 15,774,955 |
| | $ | 15,018,642 |
| | $ | 16,723 |
| | $ | 15,035,365 |
|
Power supply | | 4,248,402 |
| | — |
| | 4,248,402 |
| | 4,086,163 |
| | — |
| | 4,086,163 |
|
Statewide and associate | | 61,521 |
| | 269 |
| | 61,790 |
| | 67,625 |
| | 277 |
| | 67,902 |
|
CFC total | | 20,053,455 |
| | 31,692 |
| | 20,085,147 |
| | 19,172,430 |
| | 17,000 |
| | 19,189,430 |
|
RTFC | | 400,414 |
| | 1,349 |
| | 401,763 |
| | 447,851 |
| | 1,695 |
| | 449,546 |
|
NCSC | | 713,509 |
| | 1,980 |
| | 715,489 |
| | 825,736 |
| | 2,213 |
| | 827,949 |
|
Total loans outstanding | | $ | 21,167,378 |
| | $ | 35,021 |
| | $ | 21,202,399 |
| | $ | 20,446,017 |
| | $ | 20,908 |
| | $ | 20,466,925 |
|
Loan Security
Except when providing line of credit 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 revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. In addition to the lien and security interest we receive under the mortgage, our member borrowers are also required to achieve certain financial ratios as required by loan covenants.
The following tables summarize our secured and unsecured loans outstanding by loan type and by company as of February 28, 2015 and May 31, 2014.
2015.
|
| | | | | | | | | | | | | | | | | | |
| | February 28, 2015 |
(Dollars in thousands) | | Secured | | % | | Unsecured | | % | | Total |
Loan type: | | | | | | | | | | |
Long-term fixed-rate loans | | $ | 18,080,960 |
| | 94 | % | | $ | 1,053,898 |
| | 6 | % | | $ | 19,134,858 |
|
Long-term variable-rate loans | | 663,655 |
| | 91 |
| | 69,066 |
| | 9 |
| | 732,721 |
|
Loans guaranteed by RUS | | 180,622 |
| | 100 |
| | — |
| | — |
| | 180,622 |
|
Line of credit loans | | 118,249 |
| | 10 |
| | 1,035,949 |
| | 90 |
| | 1,154,198 |
|
Total loans outstanding | | $ | 19,043,486 |
| | 90 |
| | $ | 2,158,913 |
| | 10 |
| | $ | 21,202,399 |
|
| | | | | | | | | | |
Company: | | | | | | | | | | |
CFC | | $ | 18,243,074 |
| | 91 | % | | $ | 1,842,073 |
| | 9 | % | | $ | 20,085,147 |
|
RTFC | | 386,759 |
| | 96 |
| | 15,004 |
| | 4 |
| | 401,763 |
|
NCSC | | 413,653 |
| | 58 |
| | 301,836 |
| | 42 |
| | 715,489 |
|
Total loans outstanding | | $ | 19,043,486 |
| | 90 |
| | $ | 2,158,913 |
| | 10 |
| | $ | 21,202,399 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | |
| | May 31, 2014 |
(Dollars in thousands) | | Secured | | % | | Unsecured | | % | | Total |
Loan type: | | | | | | | | | | |
Long-term fixed-rate loans | | $ | 17,185,456 |
| | 95 | % | | $ | 990,200 |
| | 5 | % | | $ | 18,175,656 |
|
Long-term variable-rate loans | | 650,211 |
| | 86 |
| | 103,707 |
| | 14 |
| | 753,918 |
|
Loans guaranteed by RUS | | 201,863 |
| | 100 |
| | — |
| | — |
| | 201,863 |
|
Line of credit loans | | 311,103 |
| | 23 |
| | 1,024,385 |
| | 77 |
| | 1,335,488 |
|
Total loans outstanding | | $ | 18,348,633 |
| | 90 |
| | $ | 2,118,292 |
| | 10 |
| | $ | 20,466,925 |
|
| | | | | | | | | | |
Company: | | | | | | | | | | |
CFC | | $ | 17,313,990 |
| | 90 | % | | $ | 1,875,440 |
| | 10 | % | | $ | 19,189,430 |
|
RTFC | | 429,626 |
| | 96 |
| | 19,920 |
| | 4 |
| | 449,546 |
|
NCSC | | 605,017 |
| | 73 |
| | 222,932 |
| | 27 |
| | 827,949 |
|
Total loans outstanding | | $ | 18,348,633 |
| | 90 |
| | $ | 2,118,292 |
| | 10 |
| | $ | 20,466,925 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2015 | | May 31, 2015 |
(Dollars in thousands) | | Pass | | Criticized | | Total | | Pass | | Criticized | | Total |
CFC: | | | | | | | | | | | | |
Distribution | | $ | 16,541,027 |
| | $ | 34,175 |
| | $ | 16,575,202 |
| | $ | 16,062,516 |
| | $ | 32,527 |
| | $ | 16,095,043 |
|
Power supply | | 4,344,867 |
| | — |
| | 4,344,867 |
| | 4,181,481 |
| | — |
| | 4,181,481 |
|
Statewide and associate | | 60,114 |
| | 263 |
| | 60,377 |
| | 65,200 |
| | 266 |
| | 65,466 |
|
CFC total | | 20,946,008 |
| | 34,438 |
| | 20,980,446 |
| | 20,309,197 |
| | 32,793 |
| | 20,341,990 |
|
RTFC | | 364,137 |
| | 14,896 |
| | 379,033 |
| | 373,087 |
| | 12,622 |
| | 385,709 |
|
NCSC | | 721,187 |
| | 3,885 |
| | 725,072 |
| | 727,159 |
| | 4,362 |
| | 731,521 |
|
Total loans outstanding | | $ | 22,031,332 |
| | $ | 53,219 |
| | $ | 22,084,551 |
| | $ | 21,409,443 |
| | $ | 49,777 |
| | $ | 21,459,220 |
|
Allowance for Loan Losses
We maintain an allowance for loan losses at a level estimated by management to provide for probable losses inherent in the loan portfolio as of each balance sheet date. The tables below summarize changes, by company, in the allowance for loan losses as of and for the three and nine months ended February 28,August 31, 2015 and 2014.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, 2015 |
(Dollars in thousands) | | CFC | | RTFC | | NCSC | | Total |
Balance as of November 30, 2014 | | $ | 41,185 |
| | $ | 5,027 |
| | $ | 4,545 |
| | $ | 50,757 |
|
Provision for loan losses | | 2,366 |
| | (193 | ) | | 131 |
| | 2,304 |
|
Recoveries | | 53 |
| | — |
| | — |
| | 53 |
|
Balance as of February 28, 2015 | | $ | 43,604 |
| | $ | 4,834 |
| | $ | 4,676 |
| | $ | 53,114 |
|
| | | | Three Months Ended February 28, 2014 | | Three Months Ended August 31, 2015 |
(Dollars in thousands) | | CFC | | RTFC | | NCSC | | Total | | CFC | | RTFC | | NCSC | | Total |
Balance as of November 30, 2013 | | $ | 42,762 |
| | $ | 7,859 |
| | $ | 4,578 |
| | $ | 55,199 |
| |
Balance as of May 31, 2015 | | | $ | 23,716 |
| | $ | 4,533 |
| | $ | 5,441 |
| | $ | 33,690 |
|
Provision for loan losses | | 1,543 |
| | (2,450 | ) | | 1,694 |
| | 787 |
| | 3,380 |
| | 1,019 |
| | 163 |
| | 4,562 |
|
Recoveries | | 54 |
| | — |
| | — |
| | 54 |
| | 55 |
| | — |
| | — |
| | 55 |
|
Balance as of February 28, 2014 | | $ | 44,359 |
| | $ | 5,409 |
| | $ | 6,272 |
| | $ | 56,040 |
| |
Balance as of August 31, 2015 | | | $ | 27,151 |
| | $ | 5,552 |
| | $ | 5,604 |
| | $ | 38,307 |
|
| | | | Nine Months Ended February 28, 2015 | | Three Months Ended August 31, 2014 |
(Dollars in thousands) | | CFC | | RTFC | | NCSC | | Total | | CFC | | RTFC | | NCSC | | Total |
Balance as of May 31, 2014 | | $ | 45,600 |
| | $ | 4,282 |
| | $ | 6,547 |
| | $ | 56,429 |
| | $ | 45,600 |
| | $ | 4,282 |
| | $ | 6,547 |
| | $ | 56,429 |
|
Provision for loan losses | | (2,156 | ) | | 552 |
| | (1,871 | ) | | (3,475 | ) | | (5,192 | ) | | 6 |
| | (1,585 | ) | | (6,771 | ) |
Recoveries | | 160 |
| | — |
| | — |
| | 160 |
| | 53 |
| | — |
| | — |
| | 53 |
|
Balance as of February 28, 2015 | | $ | 43,604 |
| | $ | 4,834 |
| | $ | 4,676 |
| | $ | 53,114 |
| |
Balance as of August 31, 2014 | | | $ | 40,461 |
| | $ | 4,288 |
| | $ | 4,962 |
| | $ | 49,711 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended February 28, 2014 |
(Dollars in thousands) | | CFC | | RTFC | | NCSC | | Total |
Balance as of May 31, 2013 | | $ | 41,246 |
| | $ | 9,158 |
| | $ | 3,921 |
| | $ | 54,325 |
|
Provision for loan losses | | 2,953 |
| | (2,143 | ) | | 2,351 |
| | 3,161 |
|
Charge-offs | | — |
| | (1,606 | ) | | — |
| | (1,606 | ) |
Recoveries | | 160 |
| | — |
| | — |
| | 160 |
|
Balance as of February 28, 2014 | | $ | 44,359 |
| | $ | 5,409 |
| | $ | 6,272 |
| | $ | 56,040 |
|
Our allowance for loan losses consists of a specific allowance for loans individually evaluated for impairment and a generalcollective allowance for loans collectively evaluated for impairment. The tables below present, by company, the components of our allowance for loan losses and the recorded investment of the related loans as of February 28,August 31, 2015 and May 31, 2014.2015.
| | | | February 28, 2015 | | August 31, 2015 |
(Dollars in thousands) | | CFC | | RTFC | | NCSC | | Total | | CFC | | RTFC | | NCSC | | Total |
Ending balance of the allowance: | | | | | | | | | | | | | | | | |
Collectively evaluated | | $ | 43,604 |
| | $ | 3,485 |
| | $ | 4,676 |
| | $ | 51,765 |
| | $ | 27,151 |
| | $ | 4,401 |
| | $ | 5,604 |
| | $ | 37,156 |
|
Individually evaluated | | — |
| | 1,349 |
| | — |
| | 1,349 |
| | — |
| | 1,151 |
| | — |
| | 1,151 |
|
Total ending balance of the allowance | | $ | 43,604 |
| | $ | 4,834 |
| | $ | 4,676 |
| | $ | 53,114 |
| | $ | 27,151 |
| | $ | 5,552 |
| | $ | 5,604 |
| | $ | 38,307 |
|
| | | | | | | | | | | | | | | | |
Recorded investment in loans: | | | | | | | | | | | | | | | | |
Collectively evaluated | | $ | 20,077,926 |
| | $ | 400,414 |
| | $ | 715,181 |
| | $ | 21,193,521 |
| | $ | 20,973,225 |
| | $ | 374,877 |
| | $ | 725,072 |
| | $ | 22,073,174 |
|
Individually evaluated | | 7,221 |
| | 1,349 |
| | 308 |
| | 8,878 |
| | 7,221 |
| | 4,156 |
| | — |
| | 11,377 |
|
Total recorded investment in loans | | $ | 20,085,147 |
| | $ | 401,763 |
| | $ | 715,489 |
| | $ | 21,202,399 |
| | $ | 20,980,446 |
| | $ | 379,033 |
| | $ | 725,072 |
| | $ | 22,084,551 |
|
| | | | | | | | | | | | | | | | |
Loans to members, net (1) | | $ | 20,041,543 |
| | $ | 396,929 |
| | $ | 710,813 |
| | $ | 21,149,285 |
| | $ | 20,953,295 |
| | $ | 373,481 |
| | $ | 719,468 |
| | $ | 22,046,244 |
|
| | | | May 31, 2014 | | May 31, 2015 |
(Dollars in thousands) | | CFC | | RTFC | | NCSC | | Total | | CFC | | RTFC | | NCSC | | Total |
Ending balance of the allowance: | | | | | | | | | | | | | | | | |
Collectively evaluated | | $ | 45,600 |
| | $ | 3,876 |
| | $ | 6,527 |
| | $ | 56,003 |
| | $ | 23,716 |
| | $ | 4,138 |
| | $ | 5,441 |
| | $ | 33,295 |
|
Individually evaluated | | — |
| | 406 |
| | 20 |
| | 426 |
| | — |
| | 395 |
| | — |
| | 395 |
|
Total ending balance of the allowance | | $ | 45,600 |
| | $ | 4,282 |
| | $ | 6,547 |
| | $ | 56,429 |
| | $ | 23,716 |
| | $ | 4,533 |
| | $ | 5,441 |
| | $ | 33,690 |
|
| | | | | | | | | | | | | | | | |
Recorded investment in loans: | | | | | | | | | | | | | | | | |
Collectively evaluated | | $ | 19,181,846 |
| | $ | 447,851 |
| | $ | 827,549 |
| | $ | 20,457,246 |
| | $ | 20,334,769 |
| | $ | 381,488 |
| | $ | 731,227 |
| | $ | 21,447,484 |
|
Individually evaluated | | 7,584 |
| | 1,695 |
| | 400 |
| | 9,679 |
| | 7,221 |
| | 4,221 |
| | 294 |
| | 11,736 |
|
Total recorded investment in loans | | $ | 19,189,430 |
| | $ | 449,546 |
| | $ | 827,949 |
| | $ | 20,466,925 |
| | $ | 20,341,990 |
| | $ | 385,709 |
| | $ | 731,521 |
| | $ | 21,459,220 |
|
| | | | | | | | | | | | | | | | |
Loans to members, net(1) | | $ | 19,143,830 |
| | $ | 445,264 |
| | $ | 821,402 |
| | $ | 20,410,496 |
| | $ | 20,318,274 |
| | $ | 381,176 |
| | $ | 726,080 |
| | $ | 21,425,530 |
|
____________________________
(1) Excludes deferred origination costs of $10 million as of February 28,August 31, 2015 and May 31, 2014.2015.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Impaired Loans
Our recorded investment in individually-impaired loans, which consists of the unpaid principal balance, and the related specific valuation allowance, by member class, as of February 28,August 31, 2015 and May 31, 20142015 are summarized below.
| | | | February 28, 2015 | | May 31, 2014 | | August 31, 2015 | | May 31, 2015 |
(Dollars in thousands) | | Recorded Investment | | Related Allowance | | Recorded Investment | | Related Allowance | | Recorded Investment | | Related Allowance | | Recorded Investment | | Related Allowance |
With no specific allowance recorded: | | | | | | | | | | | | | | | | |
CFC/Distribution | | $ | 7,221 |
| | $ | — |
| | $ | 7,584 |
| | $ | — |
| | $ | 7,221 |
| | $ | — |
| | $ | 7,221 |
| | $ | — |
|
NCSC | | 308 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 294 |
| | — |
|
Total | | 7,529 |
| | — |
| | 7,584 |
| | — |
| | 7,221 |
| | — |
| | 7,515 |
| | — |
|
| | | | | | | | | | | | | | | | |
With a specific allowance recorded: | | | | | | | | | | | | | | | | |
NCSC | | — |
| | — |
| | 400 |
| | 20 |
| |
RTFC | | 1,349 |
| | 1,349 |
| | 1,695 |
| | 406 |
| | 4,156 |
| | 1,151 |
| | 4,221 |
| | 395 |
|
Total | | 1,349 |
| | 1,349 |
| | 2,095 |
| | 426 |
| | 4,156 |
| | 1,151 |
| | 4,221 |
| | 395 |
|
Total impaired loans | | $ | 8,878 |
| | $ | 1,349 |
| | $ | 9,679 |
| | $ | 426 |
| | $ | 11,377 |
| | $ | 1,151 |
| | $ | 11,736 |
| | $ | 395 |
|
The table below represents the average recorded investment in impaired loans and the interest income recognized, by member class, for the three and nine months ended February 28,August 31, 2015 and 2014.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, |
| | 2015 | | 2014 | | 2015 | | 2014 |
(Dollars in thousands) | | Average Recorded Investment | | Interest Income Recognized |
CFC/Distribution | | $ | 7,221 |
| | $ | 7,584 |
| | $ | — |
| | $ | — |
|
CFC/Power Supply | | — |
| | 5,000 |
| | — |
| | — |
|
NCSC | | 312 |
| | 454 |
| | — |
| | — |
|
RTFC | | 1,580 |
| | 5,527 |
| | — |
| | — |
|
Total impaired loans | | $ | 9,113 |
| | $ | 18,565 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended February 28, |
| | 2015 | | 2014 | | 2015 | | 2014 |
(Dollars in thousands) | | Average Recorded Investment | | Interest Income Recognized |
CFC/Distribution | | $ | 7,342 |
| | $ | 11,939 |
| | $ | — |
| | $ | 136 |
|
CFC/Power Supply | | — |
| | 5,000 |
| | — |
| | — |
|
NCSC | | 334 |
| | 151 |
| | 10 |
| | — |
|
RTFC | | 1,656 |
| | 7,735 |
| | — |
| | — |
|
Total impaired loans | | $ | 9,332 |
| | $ | 24,825 |
| | $ | 10 |
| | $ | 136 |
|
Nonperforming and Restructured Loans
Nonperforming and restructured loans outstanding and unadvanced commitments to members are summarized as follows by loan type and by company as of February 28, 2015 and May 31, 2014. |
| | | | | | | | | | | | | | | | |
| | Three Months Ended August 31, |
| | 2015 | | 2014 | | 2015 | | 2014 |
(Dollars in thousands) | | Average Recorded Investment | | Interest Income Recognized |
CFC/Distribution | | $ | 7,221 |
| | $ | 7,584 |
| | $ | — |
| | $ | — |
|
NCSC | | — |
| | 364 |
| | — |
| | — |
|
RTFC | | 4,166 |
| | 1,695 |
| | — |
| | — |
|
Total impaired loans | | $ | 11,387 |
| | $ | 9,643 |
| | $ | — |
| | $ | — |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Troubled Debt Restructured (“TDR”) Loans
The table below summarizes modified loans accounted for and reported as TDRs, the performance status of the loan, and the related unadvanced commitments, by loan type and by company, as of August 31, 2015 and May 31, 2015.
| | | | February 28, 2015 | | May 31, 2014 | | August 31, 2015 | | May 31, 2015 |
(Dollars in thousands) | | Loans Outstanding | | Unadvanced Commitments(1) | | Loans Outstanding | | Unadvanced Commitments(1) | | Loans Outstanding | | Unadvanced Commitments(1) | | Loans Outstanding | | Unadvanced Commitments(1) |
Nonperforming and restructured loans: | | | | | | | | | |
Nonperforming loans: | | | | | | | | | |
TDR loans: | | | | | | | | | |
Nonperforming TDR loans: | | | | | | | | | |
RTFC: | | | | | | | | | | | | | | | | |
Long-term variable-rate loans | | $ | 1,349 |
| | $ | — |
| | $ | 1,695 |
| | $ | — |
| | $ | 4,156 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total nonperforming TDR loans | | | 4,156 |
| | — |
| | — |
| | — |
|
| | | | | | | | | |
Performing TDR loans: | | | | | | | | | |
CFC: | | | | | | | | | |
Long-term fixed-rate loans(2) | | | $ | 7,221 |
| | $ | — |
| | $ | 7,221 |
| | $ | — |
|
NCSC: | | | | | | | | | | | | | | | | |
Line of credit loans | | — |
| | — |
| | 400 |
| | — |
| | — |
| | — |
| | 294 |
| | — |
|
Total nonperforming loans | | $ | 1,349 |
| | $ | — |
| | $ | 2,095 |
| | $ | — |
| |
| | | | | | | | | |
Restructured loans: | | | | | | | | | |
CFC: | | | | | | | | | |
Long-term fixed-rate loans | | $ | 7,221 |
| | $ | — |
| | $ | 7,584 |
| | $ | — |
| |
NCSC: | | | | | | | | | |
Line of credit loans | | 308 |
| | — |
| | — |
| | — |
| |
Total restructured loans | | $ | 7,529 |
| | $ | — |
| | $ | 7,584 |
| | $ | — |
| |
RTFC: | | | | | | | | | |
Long-term variable-rate loans | | | — |
| | — |
| | 4,221 |
| | — |
|
Total performing TDR loans | | | $ | 7,221 |
| | $ | — |
| | $ | 11,736 |
| | $ | — |
|
____________________________
(1) The interest rate on unadvanced commitments is not set until drawn; therefore, the long-term unadvanced loan commitments have been classified in this table as variable-rate unadvanced commitments. However, at the time of the advance, the borrower may select a fixed or a variable rate on the new loan.
(2) A borrower in this category also had a line of credit loan outstanding that was classified as performing as of August 31, 2015 and May 31, 2015. Unadvanced commitments related to this line of credit loan totaled $2 million as of August 31, 2015 and May 31, 2015.
The following table shows foregone interest income as a result of holding loans on nonaccrual status for the three and nine months ended February 28,August 31, 2015 and 2014.
| | | | Three Months Ended February 28, | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Nonperforming loans | | $ | 23 |
| | $ | 120 |
| | $ | 74 |
| | $ | 440 |
| | $ | 13 |
| | $ | 26 |
|
Restructured loans | | 132 |
| | 122 |
| | 396 |
| | 367 |
| | 166 |
| | 137 |
|
Total | | $ | 155 |
| | $ | 242 |
| | $ | 470 |
| | $ | 807 |
| | $ | 179 |
| | $ | 163 |
|
As of February 28,August 31, 2015, nonperforming TDR loans totaled $4 million, or 0.02%, of loans outstanding. We did not have any nonperforming TDR loans as of May 31, 2015.
As of August 31, 2015 and May 31, 2014, nonperforming2015, we had performing TDR loans totaled $1totaling $7 million, or 0.01%, of loans outstanding0.03% and $2$12 million, or 0.01%0.05%, of loans outstanding, respectively. One borrower in this group is currently seeking a buyer for its system, as it is not anticipated that it will have sufficient cash flow to repay its loans without the proceeds from the sale of the business. We currently anticipate that even with the sale of the business, there will not be sufficient funds to repay the full amount owed to us. We have approval rights with respect to the sale of this company.
As of February 28, 2015 and May 31, 2014, we had restructured loans totaling $8 million, or 0.04%,respectively, of loans outstanding, all of which were performing according to their restructured terms. Interest income recognizedWe did not accrue any interest on restructuredperforming TDR loans was less than $1 million during the three and nine months ended February 28,August 31, 2015 and also less than $1 million during the same prior-year periods.
2014. We believe our allowance for loan losses was appropriate to cover the losses inherent in our loan portfolio as of February 28,August 31, 2015.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pledging of Loans and Loans on Deposit
We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes our loans outstanding as collateral pledged to secure our collateral trust bonds, Clean Renewable Energy Bonds and notes payable to Farmer Mac and the amount of the corresponding debt outstanding (seeas of August 31, 2015 and May 31, 2015, See “Note 5—Short-Term Debt and Credit Arrangements” and “Note 6—Long-Term Debt”) as of February 28, 2015 and May 31, 2014.for information on our borrowings.
| | (Dollars in thousands) | | February 28, 2015 | | May 31, 2014 | | August 31, 2015 | | May 31, 2015 |
Collateral trust bonds: | | | | | | | | |
2007 indenture: | | | | | | | | |
Distribution system mortgage notes | | $ | 7,119,277 |
| | $ | 5,987,767 |
| | $ | 6,498,781 |
| | $ | 6,551,836 |
|
RUS guaranteed loans qualifying as permitted investments | | 157,866 |
| | 161,372 |
| | 155,446 |
| | 156,665 |
|
Total pledged collateral | | $ | 7,277,143 |
| | $ | 6,149,139 |
| | $ | 6,654,227 |
| | $ | 6,708,501 |
|
Collateral trust bonds outstanding | | 6,197,711 |
| | 5,397,711 |
| | 6,197,711 |
| | 6,197,711 |
|
| | | | | | | | |
1994 indenture: | | | | | | | | |
Distribution system mortgage notes | | $ | 926,734 |
| | $ | 1,005,058 |
| | $ | 891,957 |
| | $ | 905,656 |
|
Collateral trust bonds outstanding | | 855,000 |
| | 860,000 |
| | 855,000 |
| | 855,000 |
|
| | | | | | | | |
Farmer Mac: | | | | | | | | |
Distribution and power supply system mortgage notes | | $ | 2,214,073 |
| | $ | 1,907,607 |
| | $ | 2,379,464 |
| | $ | 2,160,805 |
|
Notes payable outstanding | | 1,919,912 |
| | 1,667,505 |
| | 2,081,398 |
| | 1,910,688 |
|
| | | | | | | | |
Clean Renewable Energy Bonds Series 2009A: | | | | | | | | |
Distribution and power supply system mortgage notes | | $ | 19,794 |
| | $ | 21,398 |
| | $ | 18,685 |
| | $ | 19,260 |
|
Cash | | 35 |
| | 520 |
| | 981 |
| | 485 |
|
Total pledged collateral | | $ | 19,829 |
| | $ | 21,918 |
| | $ | 19,666 |
| | $ | 19,745 |
|
Notes payable outstanding | | 16,529 |
| | 18,230 |
| | 16,529 |
| | 16,529 |
|
We are required to maintain collateral on deposit in an amount at least equal to the balance of debt outstanding to the Federal Financing Bank (“FFB”) of the United States Treasury issued under the Guaranteed Underwriter Program of the USDA (the “Guaranteed Underwriter Program”). See “Note 5—Short-Term Debt and Credit Arrangements” and “Note 6—Long-Term Debt.”
The following table shows the collateral on deposit and the amount of the corresponding debt outstanding as of February 28,August 31, 2015 and May 31, 2014.2015.
|
| | | | | | | | |
(Dollars in thousands) | | February 28, 2015 | | May 31, 2014 |
Federal Financing Bank: | | | | |
Distribution and power supply system mortgage notes on deposit | | $ | 5,028,500 |
| | $ | 5,076,428 |
|
Notes payable outstanding | | 4,412,036 |
| | 4,299,000 |
|
Assets received in satisfaction of loan receivables are initially recorded at fair value less estimated costs to sell when received and are subsequently periodically evaluated for impairment. These assets are reported on our condensed consolidated balance sheets as foreclosed assets. Our foreclosed assets are held through CAH and DRP, which are wholly-owned subsidiaries of CFC.
|
| | | | | | | | |
(Dollars in thousands) | | August 31, 2015 | | May 31, 2015 |
FFB: | | | | |
Distribution and power supply system mortgage notes on deposit | | $ | 4,870,659 |
| | $ | 4,943,746 |
|
Notes payable outstanding | | 4,651,794 |
| | 4,406,785 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Foreclosed Asset Activity
Foreclosed asset activity as of and for the nine months ended February 28, 2015 is summarized below.
|
| | | | | | | | | | | | |
| | Nine Months Ended February 28, 2015 |
(Dollars in thousands) | | CAH | | DRP | | Total |
Balance as of beginning of period | | $ | 239,119 |
| | $ | 6,532 |
| | $ | 245,651 |
|
Results of operations | | (6,296 | ) | | 240 |
| | (6,056 | ) |
Impairment | | (27,003 | ) | | — |
| | (27,003 | ) |
Results of operations of foreclosed assets | | (33,299 | ) | | 240 |
| | (33,059 | ) |
Net cash investments | | 1,062 |
| | (6,500 | ) | | (5,438 | ) |
Balance as of end of period | | $ | 206,882 |
| | $ | 272 |
| | $ | 207,154 |
|
CAH
We recorded an initial investment is the only entity in CAH of $254 million upon the completion of transfer of control of the U.S. Virgin Islands, British Virgin Islands and St. Maarten-based operating businesses of Innovative Communication Corporation (“ICC”) to CAH in October 2010 and March 2011.
Our strategic plan since the transfer of thewhich we held foreclosed assets of ICC to CAH has been to upgrade and sell the operating businesses of CAH. Since acquisition, we have made additional investments in CAH for capital expenditures to upgrade and modernize the hardware, software and network infrastructure of the existing operations in order to retain existing subscribers and attract new subscribers. Our carrying value of CAH was $239 million as of MayAugust 31, 2014, consisting of the initial recorded investment of $254 million, our subsequent net investments of $75 million, cumulative operating losses of $44 million and cumulative non-cash impairment charges of $46 million, including $1 million in fiscal year 2014 and $45 million in fiscal year 2012.
Over the past few years,2015. CAH has made substantial technology and infrastructure upgrades to enhance services and increase the customer base. During the quarter ending November 30, 2014, CAH encountered issues with certain elements of the construction of the new network and service delivery technology, which required remediation and delayed the acceptance testing of network upgrades and product enhancements. CAH has experienced less than expected subscriber growth, revenue growth and lower than anticipated customer migration rates to the new network and internet services. In addition, the economic recovery in the area has lagged improvements in the overall U.S. recovery and is slower than previously expected. After taking these multiple factors into consideration, we concluded that a triggering event had occurred requiring us to conduct an interim impairment test to evaluate certain CAH tangible and intangible assets for impairment and assess whether the estimated fair value of CAH was less than our carrying value. As a result of the aforementioned events, CAH cash flow forecasts utilized in the interim impairment test were lowered to reflect reduced revenues. To assess goodwill impairment, we estimated the fair value of CAH based on a market approach and an income approach (discounted cash flow method), both of which require significant judgment. In applying these approaches, we relied on a number of factors, including actual operating results, an updated cash flow forecast based on the developments during the quarter and future business plans, revised economic projections and market data. We also considered recent transaction activity and market multiples for the telecommunications industry.
Based on the above analysis, we recognized impairment on certain identifiable intangible assets and goodwill of $27 million during the quarter ended November 30, 2014. The impairment charge is included in our condensed consolidated statements of operations as a component of results of operations of foreclosed assets. The decrease in CAH’s carrying value to $207 million as of February 28, 2015, from $239 million as of May 31, 2014 was attributable to the impairment charge recorded in the second quarter and the operating losses of $6 million recorded during the nine months ended February 28, 2015. The impairment charge contributed to a decrease in CAH’s total assets, which consisted primarily of property, plant and equipment and goodwill and other intangible assets to $262of $168 million as of February 28, 2015, from $295 million as of MayAugust 31, 2014.2015. CAH had total liabilities of $241 million and $236$240 million as of February 28,August 31, 2015 and May 31, 2014, respectively, and net
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
an equity deficit of $21 million and $59 million, respectively. CAH's$72 million. CAH’s total liabilities included loans and interest payable to CFC, which arehave been eliminated in consolidation, of $185 million and $180$186 million as of February 28, 2015 and MayAugust 31, 2014, respectively.2015.
The program to update CAH’s network infrastructure is substantially complete,Sale of CAH
On September 30, 2015, CFC entered into a Purchase Agreement with CAH, ATN VI Holdings, LLC (“Atlantic”) and customers are being actively transitioned toAtlantic Tele-Network, Inc., the new infrastructure enabling the company to market enhanced services. Our intent is to market and sell CAH, and an outside consultant has been retained to assist in the sales process. It is difficult to determine the levelparent corporation of interest from potential buyers and there is uncertainty as to whether, or when, a disposition transaction will be completed, or the amount of any sales proceeds that may be realized from such a transaction. It is also uncertain as to whether we will be ableAtlantic, to sell all of the issued and outstanding membership interests of CAH operating businessesto Atlantic for a purchase price of $145 million, subject to certain adjustments. We expect to complete the transaction during the second half of calendar year 2016, subject to the satisfaction or waiver of various closing conditions under the Purchase Agreement, including, among other things, the receipt of required communications regulatory approvals in the United States, United States Virgin Islands, British Virgin Islands and St. Maarten, the expiration or termination of applicable waiting periods under applicable competition laws, and the absence of a single transaction,material adverse effect or if the businesses will be sold to multiple buyers.material adverse regulatory event.
DRPForeclosed Asset Activity
Our carrying value of DRP decreased to $272 thousandThe table below summarizes amounts recorded in our consolidated financial statements for CAH as of February 28, 2015, from $7and for the three months ended August 31, 2015. The balance of $114 million as of MayAugust 31, 2014. The decrease was due2015 reflects the expected net proceeds, including estimated adjustments to the saleselling price and selling costs, from the completion of DRP’s interest in bond reimbursement receivables and real estate properties for which we received proceedsthe CAH sales transaction.
|
| | | | |
| | Three Months Ended August 31, 2015 |
(Dollars in thousands) | |
Balance as of May 31, 2015 | | $ | 116,507 |
|
Fair value valuation adjustment loss(1) | | (2,254 | ) |
Balance as of August 31, 2015 | | $ | 114,253 |
|
____________________________
(1)Included as a component of approximately $6 million. Subsequent to February 28, 2015, DRP’s remainingresults of foreclosed assets were sold.
on our consolidated statements of operations.
|
| | | | |
NOTE 5—SHORT-TERM DEBT AND CREDIT ARRANGEMENTS |
The following is a summary of short-term debt outstanding as of February 28,August 31, 2015 and May 31, 2014.2015.
| | (Dollars in thousands) | | February 28, 2015 |
| May 31, 2014 | | August 31, 2015 |
| May 31, 2015 |
Short-term debt: | | | | | | | | |
Commercial paper sold through dealers, net of discounts (1) | | $ | 1,184,951 |
| | $ | 1,973,557 |
| | $ | 914,954 |
| | $ | 984,954 |
|
Commercial paper sold directly to members, at par (1)(2) | | 778,909 |
| | 858,389 |
| | 838,180 |
| | 736,162 |
|
Select notes | | 569,405 |
| | 548,610 |
| | 667,669 |
| | 671,635 |
|
Daily liquidity fund notes | | 451,435 |
| | 486,501 |
| | 592,654 |
| | 509,131 |
|
Bank bid notes | | — |
| | 20,000 |
| |
Medium-term notes sold to members | | 229,160 |
| | 212,274 |
| | 195,247 |
| | 225,872 |
|
Total short-term debt | | $ | 3,213,860 |
| | $ | 4,099,331 |
| | $ | 3,208,704 |
| | $ | 3,127,754 |
|
____________________________
(1)Backup liquidity is provided by our revolving credit agreements.
(2) Includes commercial paper sold directly to associates and affiliates.
As indicated in “Note 1—Summary of Significant Accounting Policies,” effective August 31, 2014, we began classifying debt as either short-term or long-term based on the original contractual maturity at issuance. For reporting periods prior to August 31, 2014, we reported long-term debt maturing within one year as part of our short-term debt. The amount reclassified from short-term debt to long-term debt as of May 31, 2014 was $1,300 million.57
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revolving Credit Agreements
As of February 28,August 31, 2015 and May 31, 2014,2015, we had $3,420 million and $3,226 million, respectively, of commitments under revolving credit agreements. We had the ability to request up to $150 million of letters of credit under each agreement in place as of February 28,August 31, 2015, which would then reduce the amount available under the facility. The following table presents the total available and the outstanding letters of credit under our revolving credit agreements as of February 28,August 31, 2015 and May 31, 2014.2015.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | Total Available | | Letters of Credit Outstanding | | | | | | Total Available | | Letters of Credit Outstanding | | | | |
(Dollars in thousands) | | February 28, 2015 |
| May 31, 2014 |
| February 28, 2015 |
| May 31, 2014 | | Maturity | | Annual Facility Fee (1) | | August 31, 2015 |
| May 31, 2015 |
| August 31, 2015 |
| May 31, 2015 | | Maturity | | Annual Facility Fee (1) |
Three-year agreement | | $ | 1,719,855 |
|
| $ | — |
|
| $ | 145 |
|
| $ | — |
|
| October 28, 2017 |
| 7.5 basis points | | $ | 1,719,855 |
|
| $ | 1,719,855 |
|
| $ | 145 |
|
| $ | 145 |
|
| October 28, 2017 |
| 7.5 basis points |
Five-year agreement | | 1,698,109 |
|
| — |
|
| 1,891 |
|
| — |
|
| October 28, 2019 |
| 10 basis points | | 1,699,000 |
|
| 1,699,000 |
|
| 1,000 |
|
| 1,000 |
|
| October 28, 2019 |
| 10 basis points |
Three-year agreement | | — |
|
| 1,036,000 |
|
| — |
|
| — |
|
| October 28, 2016 |
| 10 basis points | |
Four-year agreement | | — |
|
| 1,122,500 |
|
| — |
|
| — |
|
| October 28, 2017 |
| 10 basis points | |
Five-year agreement | | — |
|
| 1,065,609 |
|
| — |
|
| 1,891 |
|
| October 28, 2018 |
| 10 basis points | |
Total | | $ | 3,417,964 |
|
| $ | 3,224,109 |
|
| $ | 2,036 |
|
| $ | 1,891 |
|
| |
| | | $ | 3,418,855 |
|
| $ | 3,418,855 |
|
| $ | 1,145 |
|
| $ | 1,145 |
|
| |
| |
____________________________
(1) Facility fee determined by CFC’s senior unsecured credit ratings based on the pricing schedules put in place at the inception of the related agreement.
OnIn October 28, 2014, we amended2015, NCSC assumed a total of $155 million of commitments from one of the $1,123 million four-year and $1,068 million five-yearbanks under the revolving credit agreements. As a result, the total amount available from external third parties under our committed revolving credit agreements decreased to increase the total aggregate amount of commitments under the four-year and five-year agreements to $1,720 million and $1,700 million, respectively, and to extend the commitment termination date for the five-year agreement to October 28, 2019. Also, on October 28, 2014, we terminated the existing $1,036 million three-year revolving credit agreement which was scheduled to mature on October 28, 2016.$3,264 million.
The following represents our required and actual financial ratios under the revolving credit agreements as of February 28,August 31, 2015 and May 31, 2014.2015.
| | | | | | Actual | | | | Actual |
| | Requirement | | February 28, 2015 |
| May 31, 2014 | | Requirement | | August 31, 2015 |
| May 31, 2015 |
Minimum average adjusted TIER over the six most recent fiscal quarters(1) | | 1.025 |
| | 1.25 | | 1.28 | | 1.025 |
| | 1.27 | | 1.28 |
Minimum adjusted TIER for the most recent fiscal year (1) (2) | | 1.05 |
| | 1.23 | | 1.23 | | 1.05 |
| | 1.30 | | 1.30 |
Maximum ratio of adjusted senior debt to total equity (1) | | 10.00 |
| | 5.92 | | 5.79 | | 10.00 |
| | 6.16 | | 5.93 |
____________________________
(1) In addition to the adjustments made to the leverage ratio set forth in “Item 7. MD&A—Non-GAAP Financial Measures,” senior debt excludes guarantees to member systems that have certain investment-grade ratings by Moody’s Investors Service (“Moody's”) and Standard & Poor’s Corporation (“S&P”).&P. The TIER and debt-to-equity calculations include the adjustments set forth in “Item 7. MD&A—Non-GAAP Financial Measures” and exclude the results of operations and other comprehensive income for CAH.
(2) We must meet this requirementor exceed the required ratios in order to retire patronage capital.
As of February 28,August 31, 2015 and May 31, 2014,2015, we were in compliance with all covenants and conditions under our revolving credit agreements and there were no borrowings outstanding under these agreements.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following is a summary of long-term debt outstanding as of February 28,August 31, 2015 and May 31, 2014.2015.
|
| | | | | | | | |
(Dollars in thousands) | | August 31, 2015 | | May 31, 2015 |
Unsecured long-term debt: | | | | |
Medium-term notes sold through dealers | | $ | 2,798,350 |
| | $ | 2,749,894 |
|
Medium-term notes sold to members | | 390,827 |
| | 392,298 |
|
Subtotal medium-term notes | | 3,189,177 |
| | 3,142,192 |
|
Unamortized discount | | (664 | ) | | (706 | ) |
Debt issuance costs | | (15,732 | ) | | (15,335 | ) |
Total unsecured medium-term notes | | 3,172,781 |
| | 3,126,151 |
|
Guaranteed Underwriter Program notes payable | | 4,651,794 |
| | 4,406,785 |
|
Debt issuance costs | | (313 | ) | | (320 | ) |
Total Guaranteed Underwriter Program notes payable | | 4,651,481 |
| | 4,406,465 |
|
Other unsecured notes payable | | 31,167 |
| | 31,168 |
|
Unamortized discount | | (592 | ) | | (626 | ) |
Debt issuance costs | | (146 | ) | | (155 | ) |
Total other unsecured notes payable | | 30,429 |
| | 30,387 |
|
Total unsecured notes payable | | 4,681,910 |
| | 4,436,852 |
|
Total unsecured long-term debt | | 7,854,691 |
| | 7,563,003 |
|
Secured long-term debt: | | |
| | |
|
Collateral trust bonds | | 7,052,711 |
| | 7,052,711 |
|
Unamortized discount | | (269,167 | ) | | (271,201 | ) |
Debt issuance costs | | (24,946 | ) | | (26,443 | ) |
Total collateral trust bonds | | 6,758,598 |
| | 6,755,067 |
|
Farmer Mac notes payable | | 2,081,398 |
| | 1,910,688 |
|
Other secured notes payable | | 16,529 |
| | 16,529 |
|
Debt issuance costs | | (468 | ) | | (493 | ) |
Total other secured notes payable | | 16,061 |
| | 16,036 |
|
Total secured notes payable | | 2,097,459 |
| | 1,926,724 |
|
Total secured long-term debt | | 8,856,057 |
| | 8,681,791 |
|
Total long-term debt | | $ | 16,710,748 |
| | $ | 16,244,794 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | |
(Dollars in thousands) | | February 28, 2015 |
| | May 31, 2014 |
Unsecured long-term debt: | | | | |
Medium-term notes sold through dealers | | $ | 2,310,961 |
| | $ | 2,228,459 |
|
Medium-term notes sold to members | | 389,956 |
| | 285,988 |
|
Subtotal medium-term notes | | 2,700,917 |
| | 2,514,447 |
|
Unamortized discount | | (410 | ) | | (418 | ) |
Total unsecured medium-term notes | | 2,700,507 |
| | 2,514,029 |
|
Guaranteed Underwriter Program notes payable | | 4,412,036 |
| | 4,299,000 |
|
Other unsecured notes payable | | 33,167 |
| | 35,075 |
|
Subtotal unsecured notes payable | | 4,445,203 |
| | 4,334,075 |
|
Unamortized discount | | (660 | ) | | (770 | ) |
Total unsecured notes payable | | 4,444,543 |
| | 4,333,305 |
|
Total unsecured long-term debt | | 7,145,050 |
| | 6,847,334 |
|
Secured long-term debt: | | |
| | |
|
Collateral trust bonds | | 7,052,711 |
| | 6,257,711 |
|
Unamortized discount | | (273,191 | ) | | (277,496 | ) |
Total collateral trust bonds | | 6,779,520 |
| | 5,980,215 |
|
Farmer Mac notes payable | | 1,919,912 |
| | 1,667,505 |
|
Other secured notes payable | | 16,529 |
| | 18,230 |
|
Total secured notes payable | | 1,936,441 |
| | 1,685,735 |
|
Total secured long-term debt | | 8,715,961 |
| | 7,665,950 |
|
Total long-term debt | | $ | 15,861,011 |
| | $ | 14,513,284 |
|
During the nine months ended February 28, 2015, we issued a total of $1,200 million collateral trust bonds with an average coupon of 2.43% and maturities ranging between 2019 and 2025. On December 1, 2014, we redeemed $400 million of 1.00% collateral trust bonds due February 2, 2015. The premium and unamortized issuance costs totaling $1 million were recorded as a loss on early extinguishment of debt during the third quarter of fiscal year 2015. Unsecured Notes Payable
As of February 28,August 31, 2015 and May 31, 2014,2015, we had unsecured notes payable totaling $4,412$4,652 million and $4,299$4,407 million, respectively, outstanding under bond purchase agreements with the Federal Financing Bank (“FFB”)FFB and a bond guarantee agreement with RUS issued under the Guaranteed Underwriter Program, which provides guarantees to the FFB. We pay RUS a fee of 30 basis points per year on the total amount borrowed. As of February 28,August 31, 2015, $4,412$4,652 million of unsecured notes payable outstanding under the Guaranteed Underwriter 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. On November 18, 2014, we closed on a commitment from RUS to guarantee a loan from the FFB for additional funding of $250 million as part of the Guaranteed Underwriter Program. As a result, we will have an additional $250 million available under FFB loan facilities with a 20-year maturity repayment period for advances made through October 15, 2017. During the quarterthree months ended February 28,August 31, 2015, we borrowed $124$250 million under the Guaranteed Underwriter Program. As of February 28,August 31, 2015, we had up to $750$500 million available under committed loan facilities from the Federal Financing Bank as part of this program. We are required to maintain collateral on deposit in an amount at least equal to the balance of debt outstanding to the FFB under this program. On September 28, 2015, we received a commitment from RUS to guarantee a loan from the Federal Financing Bank for additional funding of $250 million as part of the Guaranteed Underwriter Program. As a result,
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
we will have an additional $250 million available under the Guaranteed Underwriter Program with a 20-year maturity repayment period during the three-year period following the date of closing.
Secured Notes Payable
As of February 28,August 31, 2015 and May 31, 2014,2015, secured notes payable include $1,920$2,081 million and $1,668$1,911 million, respectively, in debt outstanding to Federal Agricultural Mortgage Corporation (“Farmer Mac”) under a note purchase agreement totaling $4,500 million and $3,900 million, respectively. On January 8, 2015, the commitment amount under the Farmer Mac note purchase agreement was increased by $600 million to $4,500 million, and the draw period was extended by four years to January 11, 2020.million. Under the terms of the note purchase agreement, in place as of February 28, 2015, we couldcan borrow up to $4,500 million at any time through January 11, 2020, and thereafter automatically extend the agreement on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, Farmer Mac provided CFC with a notice
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
that the draw period would not be extended beyond the remaining term. During the ninethree months ended February 28,August 31, 2015, we borrowed a total of $480$180 million under the note purchase agreement with the Farmer Mac.
The agreement with Farmer Mac is a revolving credit facility that allows us to borrow, repay and re-borrow funds at any time through maturity or from time to time as market conditions permit, provided that the principal amount at any time outstanding under the note purchase agreement is not more than the total available under the agreement.
On July 31, 2015, we entered into a new revolving note purchase agreement with Farmer Mac totaling $300 million. Under the terms of the new agreement, we can borrow up to $300 million at any time through July 31, 2018. This agreement with Farmer Mac is a revolving credit facility that allows us to borrow, repay and re-borrow funds at any time through maturity or from time to time, provided that the principal amount at any time outstanding is not more than the total available under the agreement.
We are required 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.Farmer Mac agreements. See “Note 3—Loans and Commitments” for additional information on the collateral pledged to secure notes payable under these programs.
As of August 31, 2015 and May 31, 2015, we were in compliance with all covenants and conditions under our senior debt indentures.
|
| | | | |
NOTE 7—SUBORDINATED DEFERRABLE DEBT |
We had $400 million of 4.75% outstanding subordinated deferrable debt, due in 2043, asAs of both February 28,August 31, 2015 and May 31, 2014. Our outstanding2015, we had $396 million of 4.75% subordinated deferrable debt outstanding due in 2043. The outstanding balance is presented net of $4 million in unamortized debt issuance costs for both periods. Subordinated deferrable debt currently outstanding is callable at par on or after April 30, 2023.
|
| | | | |
NOTE 8—DERIVATIVE FINANCIAL INSTRUMENTS |
Use of Derivatives
We are an end user of derivative financial instruments and do not engage in derivative trading. We use derivatives, primarily interest rate swaps and treasury rate locks, to manage interest rate risk. Derivatives may be privately negotiated contracts, which are often referred to as over-the-counter (“OTC”) derivatives, or they may be listed and traded on an exchange. We generally engage in OTC derivative transactions.
Accounting for Derivatives
In accordance with the accounting standards for derivatives and hedging activities, we record derivative instruments at fair value as either a derivative asset or derivative liability on our condensed consolidated balance sheets. We report derivative asset and liability amounts on a gross basis based on individual contracts, which does not take into consideration the effects of master netting agreements or collateral netting. Derivatives in a gain position are reported as derivative assets on our condensed consolidated balance sheets, while derivatives in a loss position are reported as derivative liabilities. Accrued
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
interest related to derivatives is reported on our condensed consolidated balance sheets as a component of either accrued interest and other receivables or accrued interest payable.
If we do not elect hedge accounting treatment, changes in the fair value of derivative instruments, which consist of periodic derivative cash settlements and derivative forward value amounts, are recognized in our consolidated statements of operations under derivative gains (losses), net.. If we elect hedge accounting treatment for derivatives, we formally document, designate and assess the effectiveness of the hedge relationship. Changes in the fair value of derivatives designated as qualifying fair value hedges are recorded in earnings together with offsetting changes in the fair value of the hedged item and any related ineffectiveness. Changes in the fair value of derivatives designated as qualifying cash flow hedges are recorded as a component of other comprehensive income (“OCI”), to the extent that the hedge relationships are effective, and reclassified AOCI to earnings using the effective interest method over the term of the forecasted transaction. Any ineffectiveness in the hedging relationship is recognized as a component of derivative gains (losses), net in our consolidated statement of operations.
We generally do not designate interest rate swaps, which represent the substantial majority of our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our consolidated statements of operations under derivative gains (losses), net.. Cash settlements related to interest rate swaps are classified as an operating activity in our consolidated statements of cash flows.
We typically designate treasury rate locks as cash flow hedges of forecasted debt issuances. Accordingly, changes in the fair value of the derivative instruments are recorded as a component of OCI and reclassified to interest expense when the forecasted transaction occurs using the effective interest method. Any ineffectiveness in the hedging relationship is recognized
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
as a component of derivative gains (losses), net in our consolidated statements of operations. We did not have any derivatives designated as accounting hedges as of February 28,August 31, 2015 orand May 31, 2014.2015.
Outstanding Notional Amount of Derivatives
The notional amount provides an indication of the volume of our derivatives activity, but this amount is not recorded on our condensed consolidated balance sheets. The notional amount is used only as the basis on which interest payments are determined and is not the amount exchanged. The following table shows the outstanding notional amounts and the weighted-average rate paid and received for our interest rate swaps, by type, as of February 28,August 31, 2015 and May 31, 2014.2015. The substantial majority of our interest rate exchange agreements use an index based on the London Interbank Offered Rate (“LIBOR”) for either the pay or receive leg of the swap agreement.
| | | | February 28, 2015 | | May 31, 2014 | | August 31, 2015 | | May 31, 2015 |
(Dollars in thousands) | | Notional Amount | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Notional Amount | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Notional Amount | | Weighted- Average Rate Paid | | Weighted- Average Rate Received | | Notional Amount | | Weighted- Average Rate Paid | | Weighted- Average Rate Received |
Pay-fixed swaps | | $ | 5,511,439 |
| | 3.21 | % | | 0.25 | % | | $ | 5,322,809 |
| | 3.33 | % | | 0.21 | % | | $ | 6,158,280 |
| | 3.11 | % | | 0.29 | % | | $ | 5,776,533 |
| | 3.15 | % | | 0.28 | % |
Receive-fixed swaps | | 3,349,000 |
| | 0.85 |
| | 3.41 |
| | 3,124,000 |
| | 0.85 |
| | 3.62 |
| | 3,849,000 |
| | 0.81 |
| | 3.09 |
| | 3,849,000 |
| | 0.79 |
| | 3.09 |
|
Total interest rate swaps | | $ | 8,860,439 |
| | 2.32 |
| | 1.44 |
| | $ | 8,446,809 |
| | 2.41 |
| | 1.48 |
| | $ | 10,007,280 |
| | 2.22 |
| | 1.37 |
| | $ | 9,625,533 |
| | 2.21 |
| | 1.40 |
|
In addition to the notional amount of swaps shown in the chart above, we have $115 million notional amount of forward starting swaps with an effective date of September 1, 2015. As of August 31, 2015, the $115 million notional amount of forward starting swaps had a related fair value recorded on our condensed consolidated balance sheet. Because these swaps were not effective as of August 31, 2015, there have been no accrued cash settlement amounts as of this date.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Impact of Derivatives on Condensed Consolidated Balance Sheets
The following table displays the fair value of the derivative assets and derivative liabilities recorded on our condensed consolidated balance sheets and the related outstanding notional amount of our interest rate swaps as of February 28,August 31, 2015 and May 31, 2014.2015.
| | | | February 28, 2015 | | May 31, 2014 | | August 31, 2015 | | May 31, 2015 |
(Dollars in thousands) | | Fair Value | | Notional Balance | | Fair Value | | Notional Balance | | Fair Value | | Notional Balance | | Fair Value | | Fair Value |
Derivative assets | | $ | 113,231 |
| | $ | 3,108,030 |
| | $ | 209,759 |
| | $ | 3,817,593 |
| | $ | 107,358 |
| | $ | 3,796,629 |
| | $ | 115,276 |
| | $ | 3,448,615 |
|
Derivative liabilities | | (451,938 | ) | | 5,752,409 |
| | (388,208 | ) | | 4,629,216 |
| | (392,461 | ) | | 6,210,651 |
| | (408,382 | ) | | 6,176,918 |
|
Total | | $ | (338,707 | ) | | $ | 8,860,439 |
| | $ | (178,449 | ) | | $ | 8,446,809 |
| | $ | (285,103 | ) | | $ | 10,007,280 |
| | $ | (293,106 | ) | | $ | 9,625,533 |
|
All of our master swap agreements include legally enforceable netting provisions that allow for offsetting of all contracts with a given counterparty in the event of default by one of the two parties. However, as indicated above, we report derivative asset and liability amounts on a gross basis based on individual contracts. The following table presents the gross fair value of derivative assets and liabilities reported on our condensed consolidated balance sheets as of February 28,August 31, 2015 and May 31, 2014,2015, and provides information on the impact of netting provisions and collateral pledged.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | February 28, 2015 |
| | Gross Amounts of Recognized Assets/ Liabilities | | Gross Amounts Offset in the Balance Sheet | | Net Amounts of Assets/ Liabilities Presented in the Balance Sheet | | Gross Amounts Not Offset in the Balance Sheet | | |
(Dollars in thousands) | | | | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
Derivative assets: | | | | | | | | | | | | |
Interest rate swaps | | $ | 113,231 |
| | $ | — |
| | $ | 113,231 |
| | $ | 113,231 |
| | $ | — |
| | $ | — |
|
Derivative liabilities: | | | | | | | | | | | | |
Interest rate swaps | | 451,938 |
| | — |
| | 451,938 |
| | 113,231 |
| | — |
| | 338,707 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2015 |
| | Gross Amount of Recognized Assets/ Liabilities | | Gross Amount Offset in the Balance Sheet | | Net Amount of Assets/ Liabilities Presented in the Balance Sheet | | Gross Amount Not Offset in the Balance Sheet | | |
(Dollars in thousands) | | | | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
Derivative assets: | | | | | | | | | | | | |
Interest rate swaps | | $ | 107,358 |
| | $ | — |
| | $ | 107,358 |
| | $ | 106,580 |
| | $ | — |
| | $ | 778 |
|
Derivative liabilities: | | | | | | | | | | | | |
Interest rate swaps | | 392,461 |
| | — |
| | 392,461 |
| | 106,580 |
| | — |
| | 285,881 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | May 31, 2014 | | May 31, 2015 |
| | Gross Amounts of Recognized Assets/ Liabilities | | Gross Amounts Offset in the Balance Sheet | | Net Amounts of Assets/ Liabilities Presented in the Balance Sheet | | Gross Amounts Not Offset in the Balance Sheet | | | | Gross Amount of Recognized Assets/ Liabilities | | Gross Amount Offset in the Balance Sheet | | Net Amount of Assets/ Liabilities Presented in the Balance Sheet | | Gross Amount Not Offset in the Balance Sheet | | |
(Dollars in thousands) | | Financial Instruments | | Cash Collateral Pledged | | Net Amount | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
Derivative assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps | | $ | 209,759 |
| | $ | — |
| | $ | 209,759 |
| | $ | 169,700 |
| | $ | — |
| | $ | 40,059 |
| | $ | 115,276 |
| | $ | — |
| | $ | 115,276 |
| | $ | 115,276 |
| | $ | — |
| | $ | — |
|
Derivative liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps | | 388,208 |
| | — |
| | 388,208 |
| | 169,700 |
| | — |
| | 218,508 |
| | 408,382 |
| | — |
| | 408,382 |
| | 115,276 |
| | — |
| | 293,106 |
|
Impact of Derivatives on Condensed Consolidated Statements of Operations
Derivative gains (losses), net reported in our condensed consolidated statements of operations consist of derivative cash settlements and derivative forward value. Derivative cash settlements represent net contractual interest expense accruals on interest rate swaps during the period. The derivative forward value represents the change in fair value of our interest rate swaps during the reporting period due to changes in the estimate of future interest rates over the remaining life of our derivative contracts.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the components of the derivative gains (losses), net reported in our condensed consolidated statements of operations for our interest rate swaps for the three and nine months ended February 28,August 31, 2015 and 2014.
| | | | Three Months Ended February 28, | | Nine Months Ended February 28, | | Three Months Ended August 31, |
(Dollars in thousands) | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Derivative cash settlements | | $ | (21,512 | ) | | $ | (18,788 | ) | | $ | (63,377 | ) | | $ | (54,944 | ) | | $ | (20,156 | ) | | $ | (20,101 | ) |
Derivative forward value | | (77,258 | ) | | (12,835 | ) | | (159,832 | ) | | 98,925 |
| | 8,139 |
| | (29,777 | ) |
Derivative gains (losses), net | | $ | (98,770 | ) | | $ | (31,623 | ) | | $ | (223,209 | ) | | $ | 43,981 |
| |
Derivative losses | | | $ | (12,017 | ) | | $ | (49,878 | ) |
Impact of Derivative Rating TriggersCredit-Risk-Related Contingent Features in Derivatives
The majority of our interest rate swap agreements have credit risk-related contingent features referred to as rating triggers. 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.
On December 12, 2014,agreement. Our senior unsecured credit ratings from Moody’s and S&P announced a downgradewere A2 and A, respectively, as of August 31, 2015. Moody’s had our ratings on the senior secured debtstable outlook as of CFC from A+ to A based on the ratings criteria titled “Issue Credit Rating Methodology for Nonbank Financial Institutions and Nonbank Financial Service Companies,” published on December 9, 2014. Specifically, S&P applied the revised ratings criteria to rate CFC’s senior secured debt at the same level as CFC’s issuer credit rating. S&P also announced that it had changed CFC’s issuer credit rating outlook from “stable” to “negative” based on its revised ratings criteria titled “Nonbank Financial Institutions Rating Methodology,” published on December 9, 2014. This change only affected our senior secured debt credit rating; our corporate and short-term credit ratings remained unchanged. The change did not result in a rating trigger event under the provisions of our derivative transaction agreements. On November 24, 2014, Moody’s reaffirmed CFC’s existing senior secured debt, senior unsecured debt, subordinated debt and short-term credit ratings with a stable outlook. There have been no changes of CFC’s ratings by Moody’s since November 24, 2014. On January 20,August 31, 2015, S&P revised its outlook of CFC to “stable” from “negative.” Both Moody’s andwhile S&P had our ratings on a stablenegative outlook as of February 28,August 31, 2015.
The table below displays the notional amounts of our derivative contracts with rating triggers as of February 28,August 31, 2015 and the payments that would be required if the contracts were terminated as of that date because of a downgrade of our unsecured credit ratings or the counterparty's unsecured credit ratings to or below Baa1/BBB+, Baa3/BBB- or Ba3/BB by Moody’s or S&P, respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
assumed that the amounts for each counterparty would be netted in accordance with the provisions of the master netting agreements for each counterparty. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts. |
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Notional Amount | | Payment Required by CFC | | Payment Due to CFC | | Net (Payable) Due |
Impact of mutual rating downgrade trigger: | | | | | | | | |
falls below Baa1/BBB+ |
| $ | 4,428,784 |
|
| $ | (213,122 | ) |
| $ | — |
|
| $ | (213,122 | ) |
falls to Baa3/BBB- | | 1,796,722 |
|
| (18,108 | ) |
| — |
|
| (18,108 | ) |
falls below Baa3/BBB- | | 594,131 |
|
| (22,509 | ) |
| — |
|
| (22,509 | ) |
falls to or below Ba3/BB(1) | | 50,000 |
| | (425 | ) | | — |
| | (425 | ) |
Total | | $ | 6,869,637 |
|
| $ | (254,164 | ) |
| $ | — |
|
| $ | (254,164 | ) |
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Notional Amount | | Payment Required by CFC | | Payment Due to CFC | | Net (Payable) Due |
Impact of mutual rating downgrade trigger: | | | | | | | | |
Falls below Baa1/BBB+ |
| $ | 5,420,527 |
|
| $ | (176,319 | ) |
| $ | 3,013 |
|
| $ | (173,306 | ) |
Falls to Baa3/BBB- | | 1,781,207 |
|
| (15,798 | ) |
| — |
|
| (15,798 | ) |
Falls below Baa3/BBB- | | 579,362 |
|
| (23,217 | ) |
| — |
|
| (23,217 | ) |
Falls to or below Ba3/BB(1) | | 102,581 |
| | — |
| | 97 |
| | 97 |
|
Total | | $ | 7,883,677 |
|
| $ | (215,334 | ) |
| $ | 3,110 |
|
| $ | (212,224 | ) |
____________________________
(1) Rating trigger for counterparty falls to or below Ba3/BB, while rating trigger for CFC falls to or below Baa2/BBB by Moody’s or S&P, respectively.
The aggregate amount, including the credit risk valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position was $251$217 million as of February 28,August 31, 2015. There were noThe aggregate amount, including the credit risk valuation adjustment, of all interest rate swaps with rating triggers that were in a net asset position was $2 million as of February 28,August 31, 2015.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In May 2014,Total equity increased by $3 million during the CFC Boardthree months ended August 31, 2015 to $915 million as of Directors authorizedAugust 31, 2015. The increase in total equity was primarily attributable to our net income of $43 million for the allocationperiod, which was partially offset by patronage capital retirement of $1 million of fiscal year 2014 net earnings to the Cooperative Educational Fund. $39 million.
In July 2014,2015, the CFC Board of Directors authorized the allocation of the fiscal year 20142015 net earnings as follows: $75$1 million to the Cooperative Educational Fund, $16 million to the members’ capital reserve and $79$78 million to members in the form of patronage.
In July 2014,2015, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $40$39 million, representing 50% of the fiscal year 20142015 allocation. This amount was returned to members in cash in September 2014.2015. Future allocations and retirements of net earnings may be made annually as determined by the CFC Board of Directors with due regard for its financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable laws and regulations.
The following table summarizes total guarantees by type of guarantee and member class as of February 28,August 31, 2015 and May 31, 2014.2015.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | (Dollars in thousands) | | February 28, 2015 | | May 31, 2014 | | August 31, 2015 | | May 31, 2015 |
Total by type: | | | | | | | | |
Long-term tax-exempt bonds | | $ | 490,380 |
| | $ | 518,360 |
| | $ | 489,020 |
| | $ | 489,520 |
|
Letters of credit | | 383,396 |
| | 431,064 |
| | 369,391 |
| | 382,233 |
|
Other guarantees | | 114,057 |
| | 115,398 |
| | 114,075 |
| | 114,747 |
|
Total | | $ | 987,833 |
| | $ | 1,064,822 |
| | $ | 972,486 |
| | $ | 986,500 |
|
| | | | | | | | |
Total by member class: | | | | | | | | |
CFC: | | | | | | | | |
Distribution | | $ | 175,012 |
| | $ | 165,559 |
| | $ | 159,927 |
| | $ | 172,104 |
|
Power supply | | 730,851 |
| | 826,231 |
| | 760,341 |
| | 763,746 |
|
Statewide and associate | | 17,021 |
| | 5,397 |
| | 17,075 |
| | 17,025 |
|
CFC total | | 922,884 |
| | 997,187 |
| | 937,343 |
| | 952,875 |
|
RTFC | | 2,465 |
| | 2,304 |
| | 1,574 |
| | 1,574 |
|
NCSC | | 62,484 |
| | 65,331 |
| | 33,569 |
| | 32,051 |
|
Total | | $ | 987,833 |
| | $ | 1,064,822 |
| | $ | 972,486 |
| | $ | 986,500 |
|
The maturities for the long-term tax-exempt bonds and the related guarantees run through calendar year 2042. Amounts in the table represent the outstanding principal amount of the guaranteed bonds. As of February 28,August 31, 2015, our maximum potential exposure for the $72$71 million of fixed-rate tax-exempt bonds is $102$101 million, representing principal and interest. Of the amounts shown in the table above for long-term tax-exempt bonds, $419$417 million and $445$418 million as of February 28,August 31, 2015 and May 31, 2014,2015, respectively, are adjustable or floating-rate bonds that may be converted to a fixed rate as specified in the applicable indenture for each bond offering. We are unable to determine the maximum amount of interest that we could be required to pay related to the remaining adjustable and floating-rate bonds. Many of these bonds have a call provision that in the event of a default 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 revenue.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
The maturities for letters of credit run through calendar year 2024. The amounts shown in the table above represent our maximum potential exposure, of which $79$52 million is secured as of February 28,August 31, 2015. As of February 28,August 31, 2015 and May 31, 2014,2015, the letters of credit include $76 million and $125 million, respectively, to provide the standby liquidity for adjustable and floating-rate tax-exempt bonds issued for the benefit of our members, respectively. Security provisions include a mortgage lien on substantially all of the system’s assets, future revenue and the system’s investment in our commercial paper.
In addition to the letters of credit listed in the table above, under master letter of credit facilities in place as of February 28,August 31, 2015, we may be required to issue up to an additional $106$84 million in letters of credit to third parties for the benefit of our members. As of February 28,August 31, 2015, all of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance. Also, as of February 28, 2015 we had hybrid letter of credit facilities totaling $1,768 million that represent commitments that may be used for the issuance of letters of credit or line of credit loan advances, at the option of a borrower, and are included in unadvanced loan commitments for line of credit loans reported in “Note 3— Loans and Commitments.” Hybrid letter of credit facilities subject to material adverse change clauses at the time of issuance totaled $359 million as of February 28, 2015. Prior to issuing a letter of credit, we would confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with the letter of credit terms and conditions. The remaining commitment under hybrid letter of credit facilities of $1,409 million may be used for the issuance of letters of credit as long as the borrower is in compliance with the terms and conditions of the facility.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The maturities for other guarantees listed in the table run through calendar year 2025. The maximum potential exposure for these other guarantees is $115 million, all of which is unsecured.
As of February 28,August 31, 2015 and May 31, 2014,2015, we had $419$431 million and $418$434 million of guarantees, respectively, representing 42% and 39%, respectively,44% of total guarantees, under which our right of recovery from our members was not secured.
In addition to the guarantees described above, as of February 28,August 31, 2015, we were the liquidity provider for a total of $495$493 million of variable-rate tax-exempt bonds issued for our member cooperatives. While the bonds are in variable-rate mode, in return for a fee, we have unconditionally agreed to purchase bonds tendered or put for redemption if the remarketing agents are unable to sell such bonds to other investors. During the ninethree months ended February 28,August 31, 2015, we were not required to perform as liquidity provider pursuant to these obligations.
Guarantee Liability
As of February 28,August 31, 2015 and May 31, 2014,2015, we recorded a guarantee liability of $22$19 million and $20 million respectively, which represents the contingent and non-contingent exposures related to guarantees and liquidity obligations associated with our members’ debt. The contingent guarantee liability as of February 28,August 31, 2015 and May 31, 20142015 was $3$1 million and $2 million, respectively, based on management’s estimate of exposure to losses within the guarantee portfolio. The remaining balance of the total guarantee liability of $19$18 million and $20$19 million as of February 28,August 31, 2015 and May 31, 2014,2015, 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.
Activity in the guarantee liability account is summarized below as of and for the nine months ended February 28, 2015.
|
| | | | |
(Dollars in thousands) | | Nine Months Ended February 28, 2015 |
Beginning balance | | $ | 22,091 |
|
Net change in non-contingent liability | | (36 | ) |
Provision for contingent guarantee liability | | (80 | ) |
Ending balance | | $ | 21,975 |
|
| | |
Liability as a percentage of total guarantees | | 2.22 | % |
|
| | | | |
NOTE 11—FAIR VALUE MEASUREMENTS |
We use fair value measurements to record fair value adjustments for certain assets and liabilities and to determine fair value disclosures. Fair Value
value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (also referred to as an exit price). Assets and liabilities accounted for and reported at fair value in our consolidated financial statements on a recurring basis each reporting period include our available-for-sale investment securities and derivative instruments. Assets that are not measured at fair value on either a recurring or non-recurring basis on the condensed consolidated balance sheets as of February 28, 2015 and May 31, 2014 consisted of investments in common and preferred stock, derivative instruments and nonperforming collateral-dependent loans.
Assets and Liabilities Measured at Fair Valueeach reporting period but are subject to fair value measurements on a Recurring Basis
Assetsnonrecurring basis in certain circumstances include impaired loans and liabilitieslong-lived assets classified as held for sale. The adjustments related to assets measured at fair value on a recurringnonrecurring basis asusually result from the application of November 30, 2014 and May 31, 2014 consistedlower-of-cost-market accounting or impairment of our derivative instruments, investments in common and preferred stock and deferred compensation investments. The following table presents our assets and liabilities that are measured at fair value on a recurring basis as of February 28, 2015 and May 31, 2014.individual assets.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | February 28, 2015 | | May 31, 2014 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Level 1 | | Level 2 |
Derivative assets | | $ | — |
| | $ | 113,231 |
| | $ | — |
| | $ | 209,759 |
|
Derivative liabilities | | — |
| | 451,938 |
| | — |
| | 388,208 |
|
Investments in common and preferred stock | | 85,423 |
| | — |
| | 55,177 |
| | — |
|
Deferred compensation investments | | 4,247 |
| | — |
| | 4,156 |
| | — |
|
Fair Value Hierarchy
Derivative Instruments
We accountThe fair value accounting guidance provides a three-level fair value hierarchy for derivative instrumentsclassifying financial instruments. This hierarchy is based on the markets in which the condensed consolidated balance sheets as either anassets or liabilities trade and whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. Fair value measurement of a financial asset or liability measured at fair value. There is not an active secondary market forassigned a level based on the typeslowest level of interest rate swaps we use. Our processany input that is significant to estimate the fair value measurement in its entirety. The three levels of the fair value hierarchy are summarized below:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: Observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities
Level 3: Unobservable inputs
For additional information regarding the fair value hierarchy and a description of the methodologies we use to measure fair value, see “Note 13—Fair Value Measurements” and “Note 14—Fair Value of Financial Instruments” to the Consolidated Financial Statements in our derivative2015 Form 10-K.
Recurring Fair Value Measurements
The table below presents the carrying value and fair value of financial instruments involves multiple steps including consideration of indicative quotes from counterparties and use of a discounted cash flow model. We obtain indicative quotes from the interest rate swap counterparties to estimatereported in our condensed consolidated financial statements at fair value on a quarterly basis. The indicative quotes are based on the expected future cash flowrecurring basis as of August 31, 2015 and May 31, 2015, and the estimated yield curve.
We perform an analysis to validate the indicative quotes obtained from our swap counterparties and investigate any significant differences. We adjust the market values received from the counterparties using credit default swap levels for us and the counterparties. The credit default swap levels represent the credit risk premium required by a market participant based on the available information related to us and the counterparty. We only enter into swap agreements with counterparties that are participating in our revolving lines of credit at the time the exchange agreements are executed. All of our swap agreements are subject to master netting agreements.
Our valuation technique for interest rate swaps is based on discounted cash flows and we utilize observable inputs, which reflect market data. To calculate fair value, we determine the forward curve. The forward curve allows us to determine the projected floating rate cash flows and the discount factors needed to calculate the net present value of each interest payment. The significant observable inputs for our derivatives include spot LIBOR rates, Eurodollar futures contracts, and market swap rates.
Fair values for our interest rate swaps are classified as a Level 2 valuation. We record the change in the fair value of our derivatives for each reporting period in the derivative gains (losses) line, included in non-interest income in the consolidated statements of operations, as currently none of our derivatives qualify for hedge accounting.
Investments in Preferred and Common Stock
Our investments in equity securities consist of investments in Farmer Mac Series A, Series B and Series C preferred stock and Class A common stock, which are recorded in the condensed consolidated balance sheets at fair value. We determine the fair value of these investments 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. For the three and nine months ended February 28, 2015, we recorded an unrealized gain of $2 million and $5 million, respectively, in accumulated other comprehensive income, compared to an unrealized gain of $2 million and an unrealized loss of $3 million, respectively, for the same prior-year periods.
Deferred Compensation Investments
Deferred compensation investments are recorded in the condensed consolidated balance sheets in the other assets category at fair value. We calculate fair value based on the quoted price on the stock exchange where the funds are traded. That stock exchange is an active market based on the volume of shares transacted. The amounts are invested in highly liquid indices and mutual funds and are classified within Level 1classification level of the fair value methodology within the fair value measurement hierarchy.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | August 31, 2015 | | May 31, 2015 |
(Dollars in thousands) | | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
Investment securities, available for sale | | $ | 83,808 |
| | $ | — |
| | $ | 83,808 |
| | $ | 84,472 |
| | $ | — |
| | $ | 84,472 |
|
Deferred compensation investments | | 4,173 |
| | — |
| | 4,173 |
| | 4,294 |
| | — |
| | 4,294 |
|
Derivative assets | | — |
| | 107,358 |
| | 107,358 |
| | — |
| | 115,276 |
| | 115,276 |
|
Derivative liabilities | | — |
| | 392,461 |
| | 392,461 |
| | — |
| | 408,382 |
| | 408,382 |
|
Transfers Between Levels
We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy and transfer between Level 1, Level 2, and Level 3 accordingly. Observable market data includes but is not limited to quoted prices and market transactions. Changes in economic conditions or market liquidity generally will drive changes in availability of observable market data. Changes in availability of observable market data, which also may result in changing the valuation technique used, are generally the cause of transfers between levels. We did not have any transfers between levels for financial instruments measured at fair value on a recurring basis for the three months ended August 31, 2015 and 2014.
Nonrecurring Fair Value
The table below presents the carrying value and fair value of assets reported in our condensed consolidated financial statements at fair value on a nonrecurring basis as of August 31, 2015 and May 31, 2015, and unrealized losses for the three months ended August 31, 2015 and 2014.
|
| | | | | | | | | | | | | | | | |
| | Level 3 Fair Value | | Unrealized Losses Three Months Ended August 31 |
(Dollars in thousands) | | August 31, 2015 | | May 31, 2015 | | 2015 | | 2014 |
Impaired loans, net of specific reserves | | $ | 3,005 |
| | $ | — |
| | $ | (1,151 | ) | | $ | (226 | ) |
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Assets and Liabilities Measured at Fair Value on a Non-recurring BasisSignificant Unobservable Level 3 Inputs
We may be required, from time to time, to measure certain assets at fair value on a non-recurring 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. Assets measured at fair value on a non-recurring basis as of February 28, 2015 and May 31, 2014 consisted of certain nonperforming collateral-dependent loans. The fair value of these assets is determined based on the use of significant unobservable inputs, which are considered Level 3 in the fair value hierarchy.
Nonperforming Collateral-DependentImpaired Loans
As of February 28, 2015 and May 31, 2014, we measured certain collateral-dependent nonperforming loans at fair value. We utilize the fair value of the collateral underlying the loan to determine the fair value and specific allowance for loan loss.impaired
loans. In estimating the fair value of the collateral, we may use third-party valuation specialists, internal estimates or a
combination of both. The valuation technique used to determine fair value of the nonperforming loans provided by both our
internal staff and third-party specialists includes market multiples (i.e., comparable companies). The significant
unobservable inputinputs used in the determination of fair value for the specific nonperformingimpaired loans is a multiple of earnings before
interest, taxes, depreciation and amortization of 3.5x as of May 31, 2014. The material inputs used in estimating fair value by both internal staff and third-party specialists are Level 3 within the fair value hierarchy. In these instances, the valuation is considered to be a non-recurring item.4.0x. The significant unobservable inputs for estimating the fair value of nonperforming collateral-dependent loans are obtained from third-party specialists and reviewed by our Credit Risk Management group to assess the reasonableness of the assumptions used and the accuracy of the work performed. In cases where we rely on third-party inputs, we use the final unadjusted third-party valuation analysis as support for any adjustments to our consolidated financial statement adjustmentsstatements and disclosures to the financial statements.disclosures.
Because of the balancelimited amount of nonperforming collateral-dependentimpaired loans as of August 31, 2015 and May 31, 2015, we do not believe that potential changes in the significant unobservable inputs used in the determination of the fair value will have a material impact on the fair value measurement of these assets or our results of operations. The following table displays the carrying value and fair value of these loans as of February 28, 2015 and May 31, 2014 and the total losses for the three and nine months ended February 28, 2015 and 2014.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Level 3 Fair Value | | Total Losses For The Three Months Ended February 28, | | Total Losses For The Nine Months Ended February 28, |
(Dollars in thousands) | | February 28, 2015 | | May 31, 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Nonperforming loans, net of specific reserves | | $ | — |
| | $ | 1,669 |
| | $ | — |
| | $ | — |
| | $ | (943 | ) | | $ | — |
|
|
| | | | |
NOTE 12—FAIR VALUE OF FINANCIAL INSTRUMENTS |
The following table presents the carrying value and fair valuesvalue, and the classification level within the fair value measurement hierarchy, of our financial instruments as of February 28,August 31, 2015 and May 31, 2014 are presented below.2015.
|
| | | | | | | | | | | | | | | | | | | | |
| | August 31, 2015 | | Fair Value Measurements Using |
(Dollars in thousands) | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 266,307 |
| | $ | 266,307 |
| | $ | 266,307 |
| | $ | — |
| | $ | — |
|
Restricted cash | | 5,195 |
| | 5,195 |
| | 5,195 |
| | — |
| | — |
|
Time deposits | | 485,000 |
| | 485,000 |
| | — |
| | 485,000 |
| | — |
|
Investment securities | | 83,808 |
| | 83,808 |
| | 83,808 |
| | — |
| | — |
|
Deferred compensation investments | | 4,173 |
| | 4,173 |
| | 4,173 |
| | — |
| | — |
|
Loans to members, net | | 22,056,080 |
| | 22,444,320 |
| | — |
| | — |
| | 22,444,320 |
|
Debt service reserve funds | | 25,602 |
| | 25,602 |
| | 25,602 |
| | — |
| | — |
|
Derivative assets | | 107,358 |
| | 107,358 |
| | — |
| | 107,358 |
| | — |
|
| | | | | | | | | | |
Liabilities: | | | | | | | | | | |
Short-term debt | | 3,208,704 |
| | 3,208,518 |
| | 1,507,654 |
| | 1,700,864 |
| | — |
|
Long-term debt | | 16,710,748 |
| | 17,638,836 |
| | — |
| | 10,768,602 |
| | 6,870,234 |
|
Guarantee liability | | 19,125 |
| | 21,704 |
| | — |
| | — |
| | 21,704 |
|
Derivative liabilities | | 392,461 |
| | 392,461 |
| | — |
| | 392,461 |
| | — |
|
Subordinated deferrable debt | | 395,717 |
|
| 396,916 |
| | — |
| | 396,916 |
| | — |
|
Members’ subordinated certificates | | 1,485,933 |
|
| 1,485,957 |
| | — |
| | — |
| | 1,485,957 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | |
| | February 28, 2015 | | Fair Value Measurements Using |
(Dollars in thousands) | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 298,771 |
| | $ | 298,771 |
| | $ | 298,771 |
| | $ | — |
| | $ | — |
|
Restricted cash | | 35 |
| | 35 |
| | 35 |
| | — |
| | — |
|
Investments | | 85,423 |
| | 85,423 |
| | 85,423 |
| | — |
| | — |
|
Time deposits | | 385,000 |
| | 385,000 |
| | — |
| | 385,000 |
| | — |
|
Deferred compensation investments | | 4,247 |
| | 4,247 |
| | 4,247 |
| | — |
| | — |
|
Loans to members, net | | 21,158,978 |
| | 21,892,159 |
| | — |
| | — |
| | 21,892,159 |
|
Debt service reserve funds | | 25,602 |
| | 25,602 |
| | 25,602 |
| | — |
| | — |
|
Derivative instruments | | 113,231 |
| | 113,231 |
| | — |
| | 113,231 |
| | — |
|
| | | | | | | | | | |
Liabilities: | | | | | | | | | | |
Short-term debt | | 3,213,860 |
| | 3,213,605 |
| | 1,636,435 |
| | 1,577,170 |
| | — |
|
Long-term debt | | 15,861,011 |
| | 17,076,310 |
| | — |
| | 10,550,286 |
| | 6,526,024 |
|
Guarantee liability | | 21,975 |
| | 24,654 |
| | — |
| | — |
| | 24,654 |
|
Derivative instruments | | 451,938 |
| | 451,938 |
| | — |
| | 451,938 |
| | — |
|
Subordinated deferrable debt | | 400,000 |
|
| 401,004 |
| | — |
| | 401,004 |
| | — |
|
Members’ subordinated certificates | | 1,526,452 |
|
| 1,526,452 |
| | — |
| | — |
| | 1,526,452 |
|
| | | | May 31, 2014 | | Fair Value Measurements Using | | May 31, 2015 | | Fair Value Measurements Using |
(Dollars in thousands) | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 338,715 |
| | $ | 338,715 |
| | $ | 338,715 |
| | $ | — |
| | $ | — |
| | $ | 248,836 |
| | $ | 248,836 |
| | $ | 248,836 |
| | $ | — |
| | $ | — |
|
Restricted cash | | 520 |
| | 520 |
| | 520 |
| | — |
| | — |
| | 485 |
| | 485 |
| | 485 |
| | — |
| | — |
|
Investments | | 55,177 |
| | 55,177 |
| | 55,177 |
| | — |
| | — |
| |
Time deposits | | 550,000 |
| | 550,000 |
| | — |
| | 550,000 |
| | — |
| | 485,000 |
| | 485,000 |
| | — |
| | 485,000 |
| | — |
|
Investment securities | | | 84,472 |
| | 84,472 |
| | 84,472 |
| | — |
| | — |
|
Deferred compensation investments | | 4,156 |
| | 4,156 |
| | 4,156 |
| | — |
| | — |
| | 4,294 |
| | 4,294 |
| | 4,294 |
| | — |
| | — |
|
Loans to members, net | | 20,420,213 |
| | 21,000,687 |
| | — |
| | — |
| | 21,000,687 |
| | 21,435,327 |
| | 21,961,048 |
| | — |
| | — |
| | 21,961,048 |
|
Debt service reserve funds | | 39,353 |
| | 39,353 |
| | 39,353 |
| | — |
| | — |
| | 25,602 |
| | 25,602 |
| | 25,602 |
| | — |
| | — |
|
Derivative instruments | | 209,759 |
| | 209,759 |
| | — |
| | 209,759 |
| | — |
| | 115,276 |
| | 115,276 |
| | — |
| | 115,276 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Short-term debt | | 4,099,331 |
| | 4,099,534 |
| | 2,480,166 |
| | 1,619,368 |
| | — |
| | 3,127,754 |
| | 3,127,541 |
| | 1,494,131 |
| | 1,633,410 |
| | — |
|
Long-term debt | | 14,513,284 |
| | 15,738,970 |
| | — |
| | 9,618,645 |
| | 6,120,325 |
| | 16,244,794 |
| | 17,356,223 |
| | — |
| | 10,878,302 |
| | 6,477,921 |
|
Guarantee liability | | 22,091 |
| | 24,946 |
| | — |
| | — |
| | 24,946 |
| | 19,917 |
| | 22,545 |
| | — |
| | — |
| | 22,545 |
|
Derivative instruments | | 388,208 |
| | 388,208 |
| | — |
| | 388,208 |
| | — |
| | 408,382 |
| | 408,382 |
| | — |
| | 408,382 |
| | — |
|
Subordinated deferrable debt | | 400,000 |
| | 385,744 |
| | — |
| | 385,744 |
| | — |
| | 395,699 |
| | 406,000 |
| | — |
| | 406,000 |
| | — |
|
Members’ subordinated certificates | | 1,612,227 |
| | 1,612,227 |
| | — |
| | — |
| | 1,612,227 |
| | 1,505,420 |
| | 1,505,444 |
| | — |
| | — |
| | 1,505,444 |
|
We consider observable prices in the principal market in our valuations where possible. Fair value estimates were developed at the reporting date and may not necessarily be indicative of amounts that could ultimately be realized in a market transaction at a future date. There were no transfers between levels ofFor additional information regarding the fair value hierarchy duringand a description of the nine months ended February 28, 2015.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
With the exception of redeeming debt under early redemption provisions, terminating derivative instruments under early termination provisions and allowing borrowersmethodologies we use to prepay their loans, we held and intend to hold all financial instruments to maturity excluding common stock and preferred stock investments that have no stated maturity. Below is a summary of significant methodologies used in estimatingmeasure fair value, amounts assee “Note 13—Fair Value Measurements” and “Note 14—Fair Value of February 28, 2015 and May 31, 2014.
Cash and Cash Equivalents
Cash and cash equivalents include cash and certificates of deposit with original maturities of less than 90 days. Cash and cash equivalents are valued atFinancial Instruments” to the carrying value, which approximates fair value.
Restricted Cash
Restricted cash consists of cash and cash equivalents for which use is contractually restricted. The carrying value of restricted cash approximates fair value.
Investments
Our investments consist of Farmer Mac Series A, Series B and Series C preferred stock and Class A common stock. These securities are classified as available-for-sale and reported at fair valueConsolidated Financial Statements in our condensed consolidated balance sheets. We determine the fair value based on quoted prices on the stock exchange where the stock is traded. That stock exchange is an active market based on the volume of shares transacted.
Time Deposits
Time deposits with financial institutions in interest-bearing accounts have maturities of less than one year as of the reporting date and are valued at the carrying value, which approximates fair value.
Deferred Compensation Investments
CFC offers a nonqualified 457(b) deferred compensation plan to highly compensated employees. Such amounts deferred by employees are invested by the company. The deferred compensation investments are presented as other assets in the condensed consolidated balance sheets at fair value. We calculate fair value based on the quoted price on the stock exchange where the funds are traded. That stock exchange is an active market based on the volume of shares transacted. The amounts are invested in highly liquid indices and mutual funds.
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 ability 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 obtain market data for similar loans. Therefore, we must use other methods to estimate the fair value.
Fair values for fixed-rate loans are estimated using a discounted cash flow technique by discounting the expected future cash flows using the current rates at which we would make similar loans to new borrowers for the same remaining maturities. The maturity date used in the fair value calculation of loans with a fixed rate for a selected rate term is the next repricing date since these borrowers must reprice their loans at various times throughout the life of the loan at the current market rate.
Loans with different risk characteristics, specifically nonperforming 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 nonperforming loans.
The carrying value of our variable-rate loans adjusted for credit risk approximates fair value since variable-rate loans are eligible to be reset at least monthly.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Debt Service Reserve Funds
Debt service reserve funds represent cash and/or investments on deposit with the bond trustee for tax-exempt bonds that we guarantee. Debt service reserve fund investments are comprised of actively traded tax exempt municipal bonds and commercial paper. Carrying value is considered to be equal to fair value.
Short-Term Debt
Short-term debt consists of commercial paper, select notes, bank bid notes, daily liquidity fund notes and medium-term notes. 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. The fair value of short-term debt with maturities greater than 90 days is estimated based on discounted cash flows and quoted market rates for debt with similar maturities. Short-term debt classified within Level 1 of the fair value hierarchy is comprised of dealer commercial paper, bank bid notes and daily liquidity fund notes. Short-term debt classified within Level 2 of the fair value hierarchy is comprised of member commercial paper and select notes, and is determined based on discounted cash flows using discount rates consistent with current market rates for similar products with similar remaining terms.
Short-term debt classified within Level 2 also includes our medium-term notes with an original maturity equal to or less than one year. The fair value of short-term medium-term notes classified within Level 2 of the fair value hierarchy was determined based on discounted cash flows using a pricing model that incorporates available market information such as indicative benchmark yields and credit spread assumptions that are provided by third-party pricing services such as our banks that underwrite our other debt transactions.
Long-Term Debt
Long-term debt consists of collateral trust bonds, medium-term notes and long-term notes payable. We issue substantially all collateral trust bonds and some medium-term notes in underwritten public transactions. Collateral trust bonds and medium-term notes are classified within Level 2 of the fair value hierarchy. The fair value of long-term debt classified within Level 2 of the fair value hierarchy was determined based on discounted cash flows. There is no active secondary trading for the 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. Long-term notes payable are classified within Level 3 of the fair value hierarchy. The fair value was determined based on discounted cash flows using benchmark yields and spreads for similar instruments supplied by underwriter quotes for similar instruments, if available. Secondary trading quotes for our debt instruments used in the determination of fair value incorporate our credit risk.
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 using a discounted cash flow method. 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.
Subordinated Deferrable Debt
Subordinated deferrable debt outstanding was issued in an underwritten public transaction. There is no active secondary trading for this subordinated deferrable debt; therefore, dealer quotes and recent market prices are both used in estimating fair value based on a discounted cash flow method.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Members’ Subordinated Certificates
Members’ subordinated certificates include (i) membership subordinated certificates issued to our members, (ii) loan and guarantee subordinated certificates issued as a condition of obtaining loan funds or guarantees and (iii) member capital securities issued as voluntary investments by our members. All members' subordinated certificates are non-transferable other than among members with CFC’s consent and there is no ready market from which to obtain fair value quotes. These certificates are valued at par.
Derivative Instruments
We report derivative instruments at fair value as either an asset or liability in our condensed consolidated balance sheets. Because there is not an active secondary market for the types of interest rate swaps we use, we obtain indicative quotes from the interest rate swap counterparties to estimate fair value on a quarterly basis. The indicative quotes are based on the expected future cash flow and estimated yield curves. We adjust the market values received from the counterparties using credit default swap levels for us and the counterparties. The credit default swap levels represent the credit risk premium required by a market participant based on the available information related to us and the counterparty.
Commitments
The fair value of our commitments is estimated based on the carrying value, or zero. Extensions of credit under these commitments, if exercised, would result in loans priced at market rates.
2015 Form 10-K. See “Note 11—Fair Value Measurement” for additional information on assets and liabilities reported at fair value on a recurring and non-recurringnonrecurring basis on our condensed consolidated balance sheets.
|
| | | | |
NOTE 13—SEGMENT INFORMATION |
The following tables display segment results for the three and nine months ended February 28, 2015 and 2014, and assets attributable to each segment as of February 28, 2015 and 2014.
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, 2015 |
(Dollars in thousands) | | CFC | | Other | | Elimination | | Consolidated Total |
Statement of operations: | | | | | | | | |
Interest income | | $ | 235,616 |
| | $ | 11,791 |
| | $ | (8,667 | ) | | $ | 238,740 |
|
Interest expense | | (156,489 | ) | | (9,028 | ) | | 8,667 |
| | (156,850 | ) |
Net interest income | | 79,127 |
| | 2,763 |
| | — |
| | 81,890 |
|
Provision for loan losses | | (2,304 | ) | | — |
| | — |
| | (2,304 | ) |
Net interest income after provision for loan losses | | 76,823 |
| | 2,763 |
| | — |
| | 79,586 |
|
Non-interest income: | | | | | | | | |
Fee and other income | | 4,928 |
| | 922 |
| | (830 | ) | | 5,020 |
|
Derivative losses, net | | (97,424 | ) | | (1,346 | ) | | — |
| | (98,770 | ) |
Results of operations of foreclosed assets | | (1,369 | ) | | — |
| | — |
| | (1,369 | ) |
Total non-interest income | | (93,865 | ) | | (424 | ) | | (830 | ) | | (95,119 | ) |
Non-interest expense: | | | | | | | | |
General and administrative expenses | | (16,227 | ) | | (2,024 | ) | | 243 |
| | (18,008 | ) |
Provision for guarantee liability | | — |
| | — |
| | — |
| | — |
|
Losses on early extinguishment of debt | | (703 | ) | | — |
| | — |
| | (703 | ) |
Other | | (7 | ) | | (587 | ) | | 587 |
| | (7 | ) |
Total non-interest expense | | (16,937 | ) | | (2,611 | ) | | 830 |
| | (18,718 | ) |
Loss before income taxes | | (33,979 | ) | | (272 | ) | | — |
| | (34,251 | ) |
Income tax benefit | | — |
| | 55 |
| | — |
| | 55 |
|
Net loss | | $ | (33,979 | ) | | $ | (217 | ) | | $ | — |
| | $ | (34,196 | ) |
| | | | | | | | |
|
|
NOTE 13—SEGMENT INFORMATION |
The following tables display segment results for the three months ended August 31, 2015 and 2014, and assets attributable to each segment as of August 31, 2015 and 2014. |
| | | | | | | | | | | | | | | | |
| | Three Months Ended August 31, 2015 |
(Dollars in thousands) | | CFC | | Other | | Elimination | | Consolidated Total |
Statement of operations: | | | | | | | | |
Interest income | | $ | 243,051 |
| | $ | 11,850 |
| | $ | (8,785 | ) | | $ | 246,116 |
|
Interest expense | | (165,382 | ) | | (9,103 | ) | | 8,785 |
| | (165,700 | ) |
Net interest income | | 77,669 |
| | 2,747 |
| | — |
| | 80,416 |
|
Provision for loan losses | | (4,562 | ) | | — |
| | — |
| | (4,562 | ) |
Net interest income after provision for loan losses | | 73,107 |
| | 2,747 |
| | — |
| | 75,854 |
|
Non-interest income: | | | | | | | | |
Fee and other income | | 4,599 |
| | 818 |
| | (716 | ) | | 4,701 |
|
Derivative losses | | (11,827 | ) | | (190 | ) | | — |
| | (12,017 | ) |
Results of operations of foreclosed assets | | (1,921 | ) | | — |
| | — |
| | (1,921 | ) |
Total non-interest income | | (9,149 | ) | | 628 |
| | (716 | ) | | (9,237 | ) |
Non-interest expense: | | | | | | | | |
General and administrative expenses | | (20,276 | ) | | (2,812 | ) | | 253 |
| | (22,835 | ) |
Other | | (357 | ) | | (463 | ) | | 463 |
| | (357 | ) |
Total non-interest expense | | (20,633 | ) | | (3,275 | ) | | 716 |
| | (23,192 | ) |
Income before income taxes | | 43,325 |
| | 100 |
| | — |
| | 43,425 |
|
Income tax expense | | — |
| | (330 | ) | | — |
| | (330 | ) |
Net income (loss) | | $ | 43,325 |
| | $ | (230 | ) | | $ | — |
| | $ | 43,095 |
|
| | | | | | | | |
Assets: | | | | | | | | |
Total loans outstanding | | $ | 22,045,237 |
| | $ | 1,104,105 |
| | $ | (1,064,791 | ) | | $ | 22,084,551 |
|
Deferred loan origination costs | | 9,836 |
| | — |
| | — |
| | 9,836 |
|
Less: Allowance for loan losses | | (38,307 | ) | | — |
| | — |
| | (38,307 | ) |
Loans to members, net | | 22,016,766 |
| | 1,104,105 |
| | (1,064,791 | ) | | 22,056,080 |
|
Other assets | | 1,203,978 |
| | 119,366 |
| | 80,376 |
| | 1,403,720 |
|
Total assets | | $ | 23,220,744 |
| | $ | 1,223,471 |
| | $ | (984,415 | ) | | $ | 23,459,800 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | Three Months Ended February 28, 2014 | | Three Months Ended August 31, 2014 |
(Dollars in thousands) | | CFC | | Other | | Elimination | | Consolidated Total | | CFC | | Other | | Elimination | | Consolidated Total |
Statement of operations: | | | | | | | | | | | | | | | | |
Interest income | | $ | 234,927 |
| | $ | 12,613 |
| | $ | (8,808 | ) | | $ | 238,732 |
| | $ | 234,140 |
| | $ | 11,807 |
| | $ | (8,656 | ) | | $ | 237,291 |
|
Interest expense | | (163,157 | ) | | (9,185 | ) | | 8,808 |
| | (163,534 | ) | | (156,228 | ) | | (8,980 | ) | | 8,656 |
| | (156,552 | ) |
Net interest income | | 71,770 |
| | 3,428 |
| | — |
| | 75,198 |
| | 77,912 |
| | 2,827 |
| | — |
| | 80,739 |
|
Provision for loan losses | | (787 | ) | | — |
| | — |
| | (787 | ) | | 6,771 |
| | — |
| | — |
| | 6,771 |
|
Net interest income after provision for loan losses | | 70,983 |
| | 3,428 |
| | — |
| | 74,411 |
| | 84,683 |
| | 2,827 |
| | — |
| | 87,510 |
|
Non-interest income: | | | | | | | |
| | | | | | | | |
Fee and other income | | 5,127 |
| | 374 |
| | 201 |
| | 5,702 |
| | 4,226 |
| | 362 |
| | (231 | ) | | 4,357 |
|
Derivative losses, net | | (30,808 | ) | | (815 | ) | | — |
| | (31,623 | ) | |
Results of operations of foreclosed assets | | (1,164 | ) | | — |
| | — |
| | (1,164 | ) | |
Derivative losses | | | (49,171 | ) | | (707 | ) | | — |
| | (49,878 | ) |
Results of operations from foreclosed assets | | | (2,699 | ) | | — |
| | — |
| | (2,699 | ) |
Total non-interest income | | (26,845 | ) | | (441 | ) | | 201 |
| | (27,085 | ) | | (47,644 | ) | | (345 | ) | | (231 | ) | | (48,220 | ) |
Non-interest expense: | | | | | | | |
| | | | | | | | |
General and administrative expenses | | (14,477 | ) | | (2,505 | ) | | (201 | ) | | (17,183 | ) | | (16,699 | ) | | (2,075 | ) | | 231 |
| | (18,543 | ) |
Provision for guarantee liability | | (117 | ) | | — |
| | — |
| | (117 | ) | |
Losses on early extinguishment of debt | | (1,452 | ) | | — |
| | — |
| | (1,452 | ) | |
Other | | 210 |
| | — |
| | — |
| | 210 |
| | 61 |
| | — |
| | — |
| | 61 |
|
Total non-interest expense | | (15,836 | ) | | (2,505 | ) | | (201 | ) | | (18,542 | ) | | (16,638 | ) | | (2,075 | ) | | 231 |
| | (18,482 | ) |
Income before income taxes | | 28,302 |
| | 482 |
| | — |
| | 28,784 |
| | 20,401 |
| | 407 |
| | — |
| | 20,808 |
|
Income tax expense | | — |
| | (243 | ) | | — |
| | (243 | ) | | — |
| | (196 | ) | | — |
| | (196 | ) |
Net income | | $ | 28,302 |
| | $ | 239 |
| | $ | — |
| | $ | 28,541 |
| | $ | 20,401 |
| | $ | 211 |
| | $ | — |
| | $ | 20,612 |
|
| | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | |
Total loans outstanding | | | $ | 20,449,352 |
| | $ | 1,075,354 |
| | $ | (1,049,835 | ) | | $ | 20,474,871 |
|
Deferred loan origination costs | | | 9,707 |
| | — |
| | — |
| | 9,707 |
|
Less: Allowance for loan losses | | | (49,711 | ) | | — |
| | — |
| | (49,711 | ) |
Loans to members, net | | | 20,409,348 |
| | 1,075,354 |
| | (1,049,835 | ) | | 20,434,867 |
|
Other assets | | | 1,726,624 |
| | 145,696 |
| | (117,682 | ) | | 1,754,638 |
|
Total assets | | | $ | 22,135,972 |
| | $ | 1,221,050 |
| | $ | (1,167,517 | ) | | $ | 22,189,505 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended February 28, 2015 |
(Dollars in thousands) | | CFC | | Other | | Elimination | | Consolidated Total |
Statement of operations: | | | | | | | | |
Interest income | | $ | 701,924 |
| | $ | 34,926 |
| | $ | (25,584 | ) | | $ | 711,266 |
|
Interest expense | | (470,635 | ) | | (26,626 | ) | | 25,584 |
| | (471,677 | ) |
Net interest income | | 231,289 |
| | 8,300 |
| | — |
| | 239,589 |
|
Provision for loan losses | | 3,475 |
| | — |
| | — |
| | 3,475 |
|
Net interest income after provision for loan losses | | 234,764 |
| | 8,300 |
| | — |
| | 243,064 |
|
Non-interest income: | | | | | | | | |
Fee and other income | | 18,800 |
| | 2,653 |
| | (2,204 | ) | | 19,249 |
|
Derivative losses, net | | (219,656 | ) | | (3,553 | ) | | — |
| | (223,209 | ) |
Results of operations of foreclosed assets | | (33,059 | ) | | — |
| | — |
| | (33,059 | ) |
Total non-interest income | | (233,915 | ) | | (900 | ) | | (2,204 | ) | | (237,019 | ) |
Non-interest expense: | | | | | | | | |
General and administrative expenses | | (49,479 | ) | | (6,039 | ) | | 730 |
| | (54,788 | ) |
Provision for guarantee liability | | 80 |
| | — |
| | — |
| | 80 |
|
Losses on early extinguishment of debt | | (703 | ) | | — |
| | — |
| | (703 | ) |
Other | | (30 | ) | | (1,474 | ) | | 1,474 |
| | (30 | ) |
Total non-interest expense | | (50,132 | ) | | (7,513 | ) | | 2,204 |
| | (55,441 | ) |
Income before income taxes | | (49,283 | ) | | (113 | ) | | — |
| | (49,396 | ) |
Income tax expense | | — |
| | (100 | ) | | — |
| | (100 | ) |
Net income | | $ | (49,283 | ) | | $ | (213 | ) | | $ | — |
| | $ | (49,496 | ) |
| | | | | | | | |
Assets: | | | | | | | | |
Total loans outstanding | | $ | 21,187,603 |
| | $ | 1,117,252 |
| | $ | (1,102,456 | ) | | $ | 21,202,399 |
|
Deferred origination costs | | 9,693 |
| | — |
| | — |
| | 9,693 |
|
Less: Allowance for loan losses | | (53,114 | ) | | — |
| | — |
| | (53,114 | ) |
Loans to members, net | | 21,144,182 |
| | 1,117,252 |
| | (1,102,456 | ) | | 21,158,978 |
|
Other assets | | 1,448,655 |
| | 157,122 |
| | (115,834 | ) | | 1,489,943 |
|
Total assets | | $ | 22,592,837 |
| | $ | 1,274,374 |
| | $ | (1,218,290 | ) | | $ | 22,648,921 |
|
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended February 28, 2014 |
(Dollars in thousands) | | CFC | | Other | | Elimination | | Consolidated Total |
Statement of operations: | | | | | | | | |
Interest income | | $ | 707,758 |
| | $ | 37,958 |
| | $ | (26,659 | ) | | $ | 719,057 |
|
Interest expense | | (495,357 | ) | | (27,766 | ) | | 26,659 |
| | (496,464 | ) |
Net interest income | | 212,401 |
| | 10,192 |
| | — |
| | 222,593 |
|
Provision for loan losses | | (3,161 | ) | | — |
| | — |
| | (3,161 | ) |
Net interest income after provision for loan losses | | 209,240 |
| | 10,192 |
| | — |
| | 219,432 |
|
Non-interest income: | | | | | | | | |
Fee and other income | | 13,314 |
| | 1,068 |
| | 601 |
| | 14,983 |
|
Derivative gains, net | | 43,543 |
| | 438 |
| | — |
| | 43,981 |
|
Results of operations of foreclosed assets | | (8,482 | ) | | — |
| | — |
| | (8,482 | ) |
Total non-interest income | | 48,375 |
| | 1,506 |
| | 601 |
| | 50,482 |
|
Non-interest expense: | | | | | | | | |
General and administrative expenses | | (47,140 | ) | | (6,630 | ) | | (601 | ) | | (54,371 | ) |
Provision for guarantee liability | | (159 | ) | | — |
| | — |
| | (159 | ) |
Losses on early extinguishment of debt | | (1,452 | ) | | — |
| | — |
| | (1,452 | ) |
Other | | (89 | ) | | 1 |
| | — |
| | (88 | ) |
Total non-interest expense | | (48,840 | ) | | (6,629 | ) | | (601 | ) | | (56,070 | ) |
Income before income taxes | | 208,775 |
| | 5,069 |
| | — |
| | 213,844 |
|
Income tax expense | | — |
| | (2,045 | ) | | — |
| | (2,045 | ) |
Net income | | $ | 208,775 |
| | $ | 3,024 |
| | $ | — |
| | $ | 211,799 |
|
| | | | | | | | |
Assets: | | | | | | | | |
Total loans outstanding | | $ | 20,605,354 |
| | $ | 1,234,787 |
| | $ | (1,204,808 | ) | | $ | 20,635,333 |
|
Deferred origination costs | | 9,731 |
| | — |
| | — |
| | 9,731 |
|
Less: Allowance for loan losses | | (56,040 | ) | | — |
| | — |
| | (56,040 | ) |
Loans to members, net | | 20,559,045 |
| | 1,234,787 |
| | (1,204,808 | ) | | 20,589,024 |
|
Other assets | | 2,492,657 |
| | 145,847 |
| | (120,199 | ) | | 2,518,305 |
|
Total assets | | $ | 23,051,702 |
| | $ | 1,380,634 |
| | $ | (1,325,007 | ) | | $ | 23,107,329 |
|
| |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
For quantitative and qualitative disclosures about market risk, see “Part I—Item 2. MD&A—Market Risk” and “Note 8—Derivatives.”
Item 4. Controls and Procedures
| |
Item 4. | Controls and Procedures |
As of the end of the period covered by this report, 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. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting that occurred during the three months ended February 28,August 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, CFC is subject to certain legal proceedings and claims in the ordinary course of business, including litigation with borrowers related to enforcement or collection actions. In such cases, the borrower or others may assert counterclaims or initiate actions against us. Management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, liquidity, or results of operations. CFC establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Accordingly, no reserve has been recorded with respect to any legal proceedings at this time. RelatedIn June 2015, RTFC received a notice of deficiency from the Virgin Islands Bureau of Internal Revenue (“BIR”) alleging that RTFC owes tax or other amounts, plus interest, in connection with tax years 1996 and 1997, and 1999 through 2005. On September 4, 2015, RTFC filed a petition with the District Court of the Virgin Islands in response to the Innovative Communication Corporation (“ICC”) bankruptcy proceedings, ICC’s former indirect majority shareholderBIR's notice of deficiency. RTFC believes that these allegations are without merit and former chairman, and related parties, have asserted claims against CFC and certain of its officers and directors and other parties in various proceedings and forums. CFC has successfully defended these claims, certain of which are now on appeal.
will continue to contest this determination.
Item 1A. Risk Factors
Refer to “Part I— Item 1A. Risk Factors” in our 20142015 Form 10-K for information regarding factors that could affect our results of operations, financial condition and liquidity. We are not aware of any material changes in the risk factors set forth under “Part I— Item 1A. Risk Factors” in our 20142015 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
Item 3. Defaults Upon Senior Securities
| |
Item 3. | Defaults Upon Senior Securities |
Not applicable.
Item 4. Mine Safety Disclosures
| |
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are incorporated by reference or filed as part of this Report.
EXHIBIT INDEX
|
| | | |
EXHIBIT INDEX |
Exhibit No. | | Description |
10.1*^ | — | Plan Document for CFC's Executive Benefit Restoration PlanLong Term Standby Commitment to Purchase dated December 9, 2014. |
10.2 | — | Amended and Restated First Supplemental Note Purchase Agreement dated January 8,August 31, 2015, between the Registrant and Federal Agricultural Mortgage Corporation. Incorporated by reference to Exhibit 10.6 to our Form 10-Q filed on January 14, 2015. |
10.3^10.2* | — | EmploymentPurchase Agreement dated September 30, 2015, between the CompanyRegistrant, Caribbean Asset Holdings, LLC, ATN VI Holdings, LLC and Sheldon C. Petersen, effective January 1, 2015. Incorporated by reference to Exhibit 10.1 to our Form 8-K filed on December 23, 2014. |
10.4^ | — | Supplemental Executive Retirement Plan of the Company, effective January 1, 2015. Incorporated by reference to Exhibit 10.2 to our Form 8-K filed on December 23, 2014.Atlantic Tele-Network, Inc. |
12* | — | Computations of Ratio of Earnings to Fixed Charges |
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 |
101.INS* | — | XBRL Instance Document |
101.SCH* | — | XBRL Taxonomy Extension Schema Document |
101.CAL* | — | XBRL Taxonomy Calculation Linkbase Document |
101.LAB* | — | XBRL Taxonomy Label Linkbase Document |
101.PRE* | — | XBRL Taxonomy Presentation Linkbase Document |
101.DEF* | — | XBRL Taxonomy Definition Linkbase Document |
____________________________
*Indicates a document being filed with this Report.
^ Identifies a management contract or compensatory plan or arrangement.
†Indicates a document that is furnished with this Report, which shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.
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 |
Date: April 13,October 14, 2015
|
| |
By: | /s/ J. ANDREW DON |
| J. Andrew Don |
| Senior Vice President and Chief Financial Officer |
|
| |
By: | /s/ ROBERT E. GEIER |
| Robert E. Geier |
| Controller (Principal Accounting Officer) |