llnit,ttd Stat,es General Accounting Office ‘GAO ’ Report to the Congress FINANCIAL AUDIT Rural Telephone Bank’s 1988 Financial Statements , United States GAO General Accounting Office Washington, D.C. 20648 Comptroller General of the United States B-159292 May 23,199O To the President of the Senate and the Speaker of the House of Representatives This report presents our opinion on the Rural Telephone Bank’s (RTJ3) financial statements for the fiscal year ended September 30, 1988. Reports on RTB'S internal accounting controls and on its compliance with laws and regulations are also provided. The Rural Telephone Bank was established in 1971 to provide supple- mental financing for the Rural Electrification Administration’s tele- phone program borrowers. The Rural Telephone Bank and the Rural Electrification Administration are agencies of the U.S. Department of Agriculture. We are required to conduct an audit of RTB at least once every 3 years under the provisions of the Government Corporation Control Act (31 U.S.C. 9106). To fulfill our responsibility, we contracted with an inde- pendent certified pyblic accounting firm to conduct a financial and com- pliance audit of RTB for the year ended September 30,1988. We determined the scope of the audit work; monitored its progress at all key points; reviewed the working papers of the certified public accountants, KPMG Peat Marwick; and performed other procedures as we deemed necessary. Our examinations were conducted in accordance with gener- ally accepted government auditing standards. In our opinion, and consistent with the opinion of KPMG Peat Marwick, RTB’sfinancial statements present fairly, in all material respects, its financial position as of September 30, 1988, and the results of its opera- tions, changes in stockholders’ equity, and cash flows for the year then ended, in conformity with generally accepted accounting principles. The September 30, 1987, financial statements, which are presented for com- parative purposes, were not audited and, thus, no opinion has been expressed on them. The report by KPMG Peat Marwick on internal accounting controls, with which we concur, discloses a reportable condition concerning RTB'S methodology for estimating its provision for losses on loans. RTB'S method did not consider prevailing economic conditions, the quality and quantity of loans, and other relevant factors which could adversely affect the accuracy of RTB'S financial information. RTB has responded Page1 GAO/AFMD-90-69RuralTelephoneBank El58202 that it will analyze its reserve balances and evaluate necessary changes to the methodology for estimating its provision for losses on loans. KPMG Peat Marwick’s report on compliance with laws and regulations, with which we also concur, disclosed nothing to indicate that RTB had not complied with applicable laws and regulations that could have mate- rially affected its financial statements, However, KPMG Peat Marwick did report a compliance item that should be highlighted. Specifically, RTB did not obligate at least $177,046,000, the minimum amount of direct loans authorized for fiscal year 1988, pursuant to Public Law 100-202. RTB committed to lend $80,139,000, which was the total amount of loans applied for during the year. During the course of its audit, KPMG Peat Marwick also identified sev- eral matters which, although not material to the financial statements, were communicated to RTB in a separate management letter. Distribution of Excess RTB As discussed in section d of note 6 and presented in RTB'B Statement of Reserve Changes in Stockholders’ Equity;Public Law 100-203, the Omnibus Budget Reconciliation Act of 1987, requires that RTB transfer the bal- ance in its reserve for contingencies to a reserve for losses due to inter- est rate fluctuations. At September 30, 1988, the balance in the reserve was $98,267,903. In our March 1989 report, Reserve Accounting: Rural Telephone Bank’s Reserve for Losses Due to Interest Rate Fluctuations (GAO/AFMD-89-E), we concluded that a $10 million reserve for losses due to interest rate fluctuations appeared to be more than reasonable. We recommended that remaining amounts in the reserve in excess of $10 million plus 1988 profits not yet designated for a specific use be distributed as stock dividends to RTB'S borrowers who hold RTB Class B stock. Subsequently, as disclosed in note 9, RTB'S Board of Directors amended the bylaws to provide for a stock distribution of the excess. To comply with the recommendation and the change in the bylaws, RTB dis- tributed approximately $126 million in patronage refunds on its Class B stock during fiscal year 1989. Page 2 GAO/APMD-90-69Rural TelephoneBank \ B-159292 We are sending copies of this report to the Director of the Office of Man- agement and Budget, the Secretary of the Treasury, the Secretary of Agriculture, the Administrator of the Rural Electrification Administra- tion, and the Board of Directors of the Rural Telephone Bank. Charles A. Bowsher Comptroller General of the United States Page 3 GAO/AFMD-904%Rural TelephoneBank Contents Letter Auditors’ Opinion Auditors’ Report on Internal Accounting Controls Auditors’ Report on 10 Compliance With Laws and Regulations Financial Statements Statement of Financial Position 12 Statement of Operations 13 Statement of Changes in Stockholders’ Equity 14 Statement of Cash Flows 16 Notes to Financial Statements 18 Abbreviation RTB Rural Telephone Bank Page4 GAO/AFMD-90-69Rural TelephoneBank Y Page 6 GAO/AFWD-90-69 Rural TelephoneBank Auditors’ Opinion 1111 Peat Mat-wick Certified Public Accountsnta 2001 M Street. NW. WashlnQton. DC 20036 The Comptroller General U.S. General Accounting Office The Board of Directors Rural Telephone Bank: We have audited the accompanying statement of financial position of the Rural Telephone Bank as of September 30, 1988, and the related statements of operations, changes in stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Rural Telephone Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards and Gcrvcrnmtnt issued by the Comptroller General of the United States. Those standards reduire that we plan and perform the audit to obtain reasonable essurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Rural Telephone Bank as of September 30, 1988, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The statement of financial position of the Rural Telephone Bank as of September 30. 1987. and the related rtatsments of operations, changes in stockholders’ equity, and cash flows for the year then ended were not audited and, accordingly, we do not express an opinion on them. In addition to this report on our audit of the Rural Telephone Bank’s September 30. 1988 financial statements, we are also reporting on our study and evaluation of internal accounting controls and compliance with laws and regulations. During our audit, we identified matters that do not affect the fair presentation of the financial statements, but nonetheless warrant management’s attention. We are reporting them separately to the General Accounting Office and the Rural Telephone Bank. June 30. 1989 Page 6 GAO/APMD-9069Rural TelephoneBank Auditors’ Report on Internd Accounting Controls -Peat Marwick 2001 M Street. N.W. Wash~naton,DC 20036 The Comptroller Goneral U.S. General Accounting Office The Board of Directors Rural Telaphono Bank: We have audited the financial etatemente of the Rural Telephone Bank (RTB) a8 of and for the year ended September 30. 1988, and have ierued our report thereon dated June 30. 1989. We conducted our audit in accordance with generally accepted auditing standards end p ieaued by the Comptroller General of the United Starer. Thoee etandarde req:ire that vo plan and perform the audit to obtain reasonable eeeurance about whether the finencial statements arc free of material mirrtatement. In planning and performing our audit of the financial etatements of RTB for the year ended September 30, 1988, we performed a study of the internal control atructura in order to determine our auditing procedureo for the purpor* of expreesins our opinion on the financial statements and not to provide aeeuranco on the internal control rtructura. The management of RTB ie reeponeible for ertabliahing and maintaining an internal control rtructuro. l[n fulfilling thir reeponribility, eetimatos and judpent# by menagement aro required to aeeeee the expected benefits and related eo8U of internal uontrol structure policiee end procedures. The objectivre of an internal oantrol rtructuro are to provide management with rearonable, but not abrolute, aaeurance that aeeota are eafeguardod against lore from unauthorized uee OF dirpoeition , and that traneactions are executed in accordance with managemenCts authorization and recorded properly to permit the preparation of finencial statements in accordance with generally accepted accounting principler. Because of inherent limitations in any internal control rtructure, errors or irregularities may novorthelosr ‘occur end not be detected. Alro, projection of any evaluation of the structure to future periods is subject to the rink that proceduree may become inadequate because of change in conditionr or that the effectivenear of the design and operation of policies end procedures may deteriorate. Page 7 GAO/~-9989 Rural TelephoneBank Auditors’ I&port on Internal , Accounting Controls For the purpose of this report, we have clsssified the significant internal control structure policies and procedures in the following categories: loan receipts, loan disbursements, treasury, and financial reporting. Our study included all of the control categories listed above and it was more limited than would be necessary to express an opinion on tho internal control structure taken aa a whole or on any of the control categories. We noted one matter involving the internal control structure and its operation that we consider to be a reportable condition under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve mattors coming to our attention relating to significant deficiencies in the deeign or operation of the internal control structure that, in our judgment, could adversely affect the organization’s ability to record, process, rtnmariso, and report financial data consistent with the assertions of management in the financial statements. Wo noted one reportable condition ae follows: l RTB has not updated its methodology for estimating the provision for loss on loam rince the early 1970’s. The method presently used does not consider prevailing economic conditions, the quality and quantity of loans in the portfolio, or other relevant factors. In addition, RTR relies on limited financial analyeia and unaudited financial information for annual evaluations of borrowers’ financial status. We underrtand that historically there have been few RTB borrowers who have experienced difficulty meeting debt ret-vice requirements, yet the current method incrementally increaser the provision for loss on loans each year. Based on the history of the telephone program, we recommend RTB consider revising its method to discontinue the incremental provision for loss increase8, establish procedures for reviewing the finencial condition of all borrowers on an annual basis and annually determine the adequacy of the provision for lose on loans. A matorial wealmesa is a reportable condition in which the design or operation of the specific internal control structure elements does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal coursa of performing their assigned functions. Our consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as dof ined above. However, we do not believe the reportable condition described above is a material weakness. Y GAO/AFMD4MM9 Rural Telephone Bauk Auditors’ Report on Internal Accounting controls 3 We also noted other matters involving the internal control structure and its operation that we have reported to the management of RTB in a separate letter dated June 30, 1989. Thie report is intended for the information of RTB and the General Accounting Office. This restriction in not intended to limit the distribution of this report, which is a matter of public record. June 30. 1989 Y Page 9 GAO/AFMD-90-69 Rural Telephone Bank Auditors’ Report on ComplianceWith Laws and Regulations -Peat Marwick Cartitied Publlc Accountants 2001 M. Street. N.W. Washlngfon. DC 20036 The Comptroller General U.S. General Accounting Office The Board of Directors Rural Telephone Bank: We have audited the financial statements of the Rural Telephone Bank (RTB) aa of and for the year ended September 30, 1988, and have issued our report thereon dated June 30, 1989. We conducted our audit in accordance with generally accepted auditing standards and Governmsnt issued by the Comptroller General of the United States. Those standards ra&re that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material q iaatatement. Compliance with law; and regulations applicable to RTB is the responsibility of RTB’s manageaurnt. Aa part of obtaining reasonable assurance about whether the financial statements are free of material misetatemant, we performed tests of RTB’s compliance with csrtein provisions of the Rural Electrification Act of 1936. ‘a8 mended (7 U.S.C. 901-95Ob): the Anti-Deficiency Act (31 U.5.C 1341. 1342. 1511 - 1517) and the Continuing Appropriation Act for fiscal year 1988 (Public Law 100-202). However, our objective was not to provide an opinion on overall compliance with such laws. The results of our teets indicate that, with respect to the itemo tested, RTB complied, in all material respects, with certain provirions of the laws referred to in the preceding paragraph of this report, and with respect to itemr not terted, nothing came to our attention that caused ua to believe that RTB had not complied, in all material respects, with those laws. Kowever. we noted the following item we believe should be highlighted. Page 10 GAO/AFMD80-69 Rural Telephone Bank Auditors’ Report on Compliance With Laws and Regulations 2 The continuing resolution for fiscal year 1988 (Public Law 100-202) provided that the principal amount of direct RTP loans shall not be less than $177,045,000 nor more than $210,540,000 during fiscal year 1988. Eowever, RTB coeraitted to lending only $80.139,000 during fiscal year 1988. Our audit test&l determined that of the amount of RTB telephone-insured loans applied for during fiscal year 1988, no smounte were denied. Thus, RTB was not able to obligate the minimum amount available to it for direct RTE loans because the demand for such loans fell short of the minimum requirement. This report is intended for the information of RTE and the General Accounting Office. The restriction is not intended to limit the distribution of this report, which is a matter of public record. June 30. 1989 Page 11 GAO/AFhID-90-69 Rural Telephone Bank Financid Statements Statement of Financial Pocrition September 30, 1988 (with comparative balances for 1987) m.8 (una%ed) Funds with U.S. Treasury $ 188,376,434 81,224,991 Investment sccurttier (note 3) 805,151 805,155 Loans, net of allowance for loan losses of $5,512,000 in 1988 and $5,295.000 in 1987 (note 4) 1,407,898,557 1,441,307,857 Accrued interest receivable 10.709.251 9,867,701 Other aeeete 402 450 $1.607.789.7951.533.206.154 Liabilities: Account8 payable 683,947 8,015 Loans payable to the U.S. Treasury (note 5) 758.762.000 758.762.000 Accrued interest payable -.-u&am- Total liabilities -777.895.606 Stockholders’ equity (note 6): Investment of U.S. government - Class A stock, $1 par value; 600,000.000 shares authorized 505.950,000 477,240,OOO Investment of others: Claes B stock, $1 par value 181.402,657 165,320,340 Clasr C stock, $1,000 par value 6,787,OOO 2,949,OOO Patronage capital: Designated for contingencies 76,781,352 Reserve for interest rate fluctuations (note 9) 98.267.903 Patronage capital earned 36.810.697 33.0;9.856 Total stockholders’ equity 829,218,257 755,310,548 Commitments (note 8) $1.607.789.7951.533.206.154 See accompanying notes to financial statements. Page 12 GAO/AFMD-9089 Rural Telephone Bank . Nnancial Statements Statement of Operation8 For the year ended September 30, 1988 (with comparative balances for 1987) 1988 l3.z (unaudited) Interest income: Interest on loans $ 114,363,003 112,199,642 Interest on U.S. Treasury securities 57.075 58.058 Interest on Eunds with U.S. Treasury 9.617.8645.722.9)4 Total interest income 124,037,942 117,980,634 Interest expense 76.502.36776.502.367 Net interest income 47,535,575 41,478,267 Provision for loan losseo (note 4) 217.ono391.ooo Net interest income after provieion for loan losees 47.318.525- Other operating income 2.5281.442.352 Other operating expenses: Directors’ fees 12,600 17,600 Directors’ travel 39,890 48,532 Other 8.17444.890 Total other operating expensea 60.664t11.022 Net income $47.260.43942.418.597 See accompanying notes to financial statements. Y Page 13 GAO/AFMD-90-69 Rural Telephone Rank Financial Statement8 Stetament of Chsnges in Stockholders’ Equity For the year ended September 30, 1988 (with comparative balances for 1987) Class A Class B xass c stock stock stock Fiscal year 1987 balances and transactions, (unaudited): Balance, September 30, 1986 $ 448,530,OOO 149,451,815 1,730,000 Net income for the year ended September 30, 1987 Issuance of Class A stock 28,710,OOO - Cash dividends on Class A stock ($.02 per share) Issuance of Class B stock (net of rescissions) 2,777,OlO Stock dividends on Class B stock 13,091,515 Cash dividends on Class C stock ($85 per share) Issuance of Class C stock 1,219,OOO Amount designated for contingencies --- Balance, September 30, 1987 477,240,OOO 165,320,340 2,949,000 Fiscal year 19S8 balances and transactions: Amount designated for contingencies Transfer to reserve for interest rate fluctuations, January 1, 1988 Net income for the year ended September 30, 198S issuance of Class A stock 28,710,OOO - Cash dividends on Class A stock CL.02 per share) Issuance of Class B stock (net of rescissions) 4,799,677 Stock dividends on Class B stock 11,295,117 Issuance of Class C stock Cash dividends on Class C stock ($85 per share) Class C stock cash dividends declared but not paid ($85 per share) Adjustment to Class B stock dividends (12,477) - Balance, September 30, 1988 t 181.402.657 LZ&C&& . See accompanying notes to financial statements. Y Page 14 GAO/AFMD-99-69 Rural Telephone Bank . ~. - I Flnanclal Statements Reserve for interest Designated for rate fluctuations Patronage contingencies (note 9) cepital -Total 64,706,937 25,312,980 689,731,732 42,418,597 42,418,597 28.710.000 (9,398,741) (9;398;741) 2,777,OlO (13,091,515) - (147,050) (147,050) 1.219,OOO 12,074,415 (12,074,415) - 76,781,352 33,019,856 755,310,548 21,474,074 G?1,474,074) - (98,255,426) 98,255,426 47,260,439 47,260,439 28,710,OOO (9,872,847) (9,872,847) 4,799,677 (11,295,117) - 3,838,OOO 1250,665) (250,665) C576.895) (576,895) 12,477 -- Page 1K GAO/APMD-9989 Rural Telephone Bank Financial Statementa Statement of Cash Flows For the year ended September 30, 1988 (with comparative balances for 1987) 1588 l!az (unaudited) Funds from operating activities: Intereet received $ 123.196.392 117,018,565 Interest paid (76,502,367) (76,502,367) Administrative expenses paid and other, net 40.953 1.&W Net funds provided from operating activities 46.734.978 Funds from investing activities: Collections on loans 152.680.668 39.307,039 Advances on loans - including Class B stock issued (119-488.368) -1 Net funds provided from investing activities (12.667..899) Funds from financing activities: Proceeds from issuance of stock 37,347,677 32,706,OlO Cash dividends paid (10.123.512) (9.545.791) Net funds provided from financing activities Net increase in funds with U.S. Treasury 107,151,443 S2,420,753 Funds with U.S. Treasury, beginning of year Funds with U.S. Treasury, end of year $ U.8.376.434 81.224.991 il L- ___ “I- _..._ -.-_- .-.- Page 16 GAO/AFMD-9049 Rural Telephone Bank 2 A!%! (unaudited) Reconciliation of net income to net funds provided from operating activities: Net income $ 47,260,439 42‘418,597 Adjustments to reconcile net income to net funds provided from operating activities: Provision for loeoee on insured loans 217,000 391,000 Changes in anocts and liabilities: Increaec (decrease) in accrued in&rent receivable (841,550) (962,069) Decreaee in other aeeete 52 127.980 Increaee (decrease) in account8 payable 675,932 (47,075) Dividends declared but not paid (576.895) Net funds provided from operating activities $&L?d!Bl &928.43J See accompanying notee to financial statements. Y Page 17 GAO/AFMD-9049 Rural Telephone Rank Flnaucial Statements Notes to Financial Statements September 30. 1988 The Rural Telephone Bank (the Bank) was established on May 7. 1971, to provide a supplemental source of financing for the Rural Electri- fication Administration’s (MA) telephone program. The RRA is a credit agency of the U.S. Department of Agriculture which assists organizations with financing of electric or telephone service in rural are*s. (b) Conversion According to authorizing legislation and amendments, the Bank will be converted to independent status when 51 percent of the Class A stock issued to the U.S. govenuncnt and outstanding at any time since September 30, 1985 has been fully redeemed and retired. When such conversion occurs 1 the Bank will no longer be an agency of the U.S. Department of Agriculture and the President will cease to appoint board members. However, Congress may continue its oversight responsibilities for the Bank’s operations. Section 403(b) of the Rural Electrification Act of 1936, as amended, (the Act), the Bank’s enabling legislation, authorizes the Bank to partially or jointly use the facilities and services of employees of REA, or of any other agency of the U.S. Department of Agriculture, without cost. The Bank’s operations are conducted by RRA employees who carry out similar responsibilities under RRA’s Rural Telephone program. REA and the U.S. Department of Agriculture’s Office of General Counsel provide administrative and facilities support to the Bank without reimbursement. (2) h5Atmlav of SfPnificant The following is a susssary of the significant accounting and reporting policies followed by the Bank. Investment securities are stated at cost , adjusted for amortization of premium and accretion of discount to maturity. Securities are written down to market only when there has been a permanent impairment of value. (Continued) Y --__-- Page 18 GAO/AFMD-9049 Rural Telephone Bank . Flnanclal Statements (b) Lpana Loene are stated at unpaid principal amount net of the allowance for loen loeeee. Interest on loans is accrued at a level rate of return over the term of the loan. Origination fees are not charged on loans issued. The allowance for loan losses is management’s current estimate of the anticipated loeeee in the present loan portfolio. The allowance is increased by provisions charged to operating expenses end decreased by loan charge-offs net of recoveriee. The Bank ir en instrumentality of the United States and is not subject to income texet3. (a) Donatad As previously stated, the R8A and the Department of Agriculture’s Office of General Counsel provide administrative end facilities support to the Bank without charge. Because there is no clearly q eaeurable and objective basis for determining the value of euch rervicer ‘I donated services are not reflected in the accompanying financial statements. However, amuagament estimates the value of there rervicee at approximately $L,OOO,OOOper year. (3) Invcrtmant The Bank’s investment eecuritiee at September 30, 1988 and 1987 are as followe: 19881987 (unaudited) Book Market Book Market yaluci!calwiyalve~ U.S. government bonds due in 1993 (rates ranging from 6.75% to 7.50%) $805.151760.388805.155727.573 (Continued) Y Page 19 GAO/AFMD9O89 Rural Telephone Rank E%uuwial Statements The composition of loans outstanding at September 30. 1988 and 1987 is as follows: I.288 J.sz (unaudited) Loans $ 1,322,423.814 1,360,403.314 Class B stock (note 6) 90,906,743 869199,543 L.-z-se - allowance for loan losses (5.51Looo) (5.295.ooo) Total $ - J-441.307a Interest rates, all of which are fixed, on loans range from 4 percent to 12 l/4 percent. Transactions in the allowance for loan losses for the years ended September 30. 1988 and 1987 are shown below: u..eR l.Bz (unaudited) Balance at beginning of year $ 5,295,OOO 4,904,OOO Provision charged to operations 217,000 391,000 Loam charged off/recoveries A A Balance at end of year J5.512.001)- (5) Loanr. to the U.S. Tremurx On July 26, 1973, the Bank executed an open end note payable to the Secretary of the Treasury to fund loans to be obtained under Section 406 of the Rural Electrification Act of 1936, as amended (7 U.S.C. 948). Each year’s advances are to be repaid in a lump sum on or before 50 years from the year-end following the date of advance at a rate of intereat entablfshed by the Secretary of the Treasury for the calendar month in which each advance is made. The first principal payment to the U.S. Treasury will be due in 2023. As of September 30, 1968 and 1987, the Bank’s cumulative debenture borrowings from the Treasury amounted to S758,762,000, at interest rates ranging from 7.25 to 14.625 percent. Total outstanding borrowings from the U.S. Treasury may not exceed twenty times the Bank’s equity. As of September 30, 1988 and 1987. the Bank’s cumulative borrowing authority totaled $16.6 billion and 115.1 billion. respectively. (Continued) Page 20 GAO/AFMD-9049 Rural Telephone Bank . Financial Statements (6) Stoclrholderr’ Claw A stock is owned by the REA on behalf of the United States and is nonvoting stock. The Bank is authoriaed to issue up to $30,000,000 par value of this stock annually, until such stock issued and outstandinS equals $600,000,000. Class A stock is to be redeemed and retirad by the Bank as soon as practicable after September 30, 1995, but not to the axtent that the Bank’s Board determines that such retiramant will impair the operations of the Bank. Class A stockholders receive cash dividends, payable from income, at a rate of 2 psrcant per annum. As of September 30, 1988 and 1987, 505.950,OOO and 677,240,OOO shares, respectively, of Class A stock were issued and outstanding. (b Claw B stock ie issued only to loan customers of the Bank and is voting stock. Each customer ia raqulrsd to purchase such stock in the amountof 5 percent of the approved loan for construction purpoeea. Tha Bank may not pay cash dividendr on Class B stock, but holders ace entitled to patronage refunds in the form of Claes B stock dividends calculated at e specified percentage of interest income on loans to Cla#e B rtockholdsra, approved each year by the Board (10 percent in 1988 and 12 percent in 1987). Claw B rtock i# nontransferable, except in connection with the anaumption by the tranrferae with tha approval of the Bank governor of all or part of the tranrferor’r loan from the Bank. A borrower, upon retiring debt with the Bank , may exchange Claw B stock for Class C stock. Otherwise, the borrower retains possession. Class B stock can be redeemed only after all shares of Class A stock have been redeemed or retired. Subrcriptionr receivable for Claw B stock are not reflected in the accaapenying financial statements. When the Bank makes the first advance under each loan, it issuee the stock applicable to the total loan and charges loan8 receivable for full amount of the Class B stock. In the event of rssciasion of part of the loan commitment subsequent to issuance of the stock, the Bank rescinds the applicable portion of Class B stock and reduces loans receivable. (Continued) Page 21 GAO/APMD-90-69 Rural Telephone Bank I Financial Statements Class B stock at September 30, 1988 and 1987 is as follows: lm u&7 (unaudited) Class B stock issued and committed for issuance $ 109,022,940 112,655,168 Less - subscriptions not recognized n-625 Stock issued based on loans originated 90.986.743 86,199,543 Cumulative patronage refunds (stock dividends) issued and outstanding -79.120297 Total Class B stock issued and outstanding $ lliULiZ ULJ20.34Q Cc) Clams Class C stock is issued only to borrowers, or to corporations and public entities eligible to borrow from the Bank under Section 408 of the Act, or by organizations controlled by such borrowers, corporations and public entities, and is voting stock. The Bank may pay dividends on Class C stock (8.5 percent in 1988 and 1987). The number of shares of Class C stock issued and outstanding at September 30. 1988 and 1987 was 6,787 and 2,949, respectively. (d )Patronane Patronage capital is distributed as follows: ad for ContingnnPiPs and -forInterest Rate s - Prior to the passage of the Cminibus Reconciliation Act of 1987. passed on December 22. 1987, an amount determined by the Board of Directors (not lees than 10 percent of patronage capital) for each fiscal year was designated for contingencies. The amount so designated at September 30, 1987 did not include the smount designated from 1987 operations. The new law required that the reserve for contingencies be transferred to the reserve for losses due to interest rate fluctuations (see note 9). (Continued) Page 22 GAO/AFMJMJ%9 Rural Telephone Bank . I, . Flnanchl Statements Patronanc- Net income after dividends on Claes A stock is reflected as patronage capital earned. This balance will be partially reeerved for interest rate fluctuationa with the remainder distributed to Class B and C shareholders. (7) hlaivd Penalrv on Loan Public Law 100-203, enacted December 22, 1987, allowed borrowers of the Bank to prepay loans (or any part thereof) until September 30, 1988, by paying the loen face amount without prepayment penaltiee. Total waived pcnaltiee approximated $9,700,000 during 1988. (8) Conmi A reconciliation of the Bank’s unadvenced loen commitmentr from September 30, 1987 to September 30, 1988 follows: Unadvanced loan commitmanta September 30, 1987 $ 792,257,249 Loan approval6 during fiecal year 1988 80,139,150 Loan advances including Class B stock during fiscal year 1988 (119,488,367) Reciseion of loan comitmento during fiscal year 1988 (64.734.190) Unadvenced loan commitments September 30, 1988 $ &&J&&& Interest rates on unadvanced loan commitments made prior to October 1, 1987 range from 6.5 percent to 11.5 percent. Interest ratee on unadvanced loan commitments made on or after October 31, 1987 will be the “coat of money rate” ae defined in Section 408 of the Act, determined at the end of the fiscal year in which the initial advance is made, but not less than 5 percent. Loan conssitmente are generally extended for 6 years. Unadvanced loan commitments at September 30, 1988 will expire through 1994. (9) Subsccluenr On March 30, 1989, the Board of Directors amended the Bylaws of the Bank regarding the allocation of patronage capital for fiscal years after 1987. Any amounts in the reeerve for interest rate fluctuations in excess of $10,000,000 shall be allocated as Class B rtock dividends to those borrowers holding Class B stock during the fiscal year the amounts were earned. Y (9leos8) Page 23 GAO/AFMD-8089 Rural Telephone Bank - - Kequesls for copies of GAO reports should be sent to: lJ.S. Getwral Accounting Office Post Office Box 6015 (;u.ithersbur~, Maryltiud 20877 ‘l’elt~phone 202-275-6241 The first five copies of each report are free. Additioual copies are $2.00 Wt<!h. Orders must be prepaid by cash or by check or n~oney order made out, to Lhe Superintendent of D0curnent.s.
Financial Audit: Rural Telephone Bank's 1988 Financial Statements
Published by the Government Accountability Office on 1990-05-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)