<PAGE> 1 FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
Commission File Number 1-7102
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DISTRICT OF COLUMBIA 52-0891669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
Woodland Park, 2201 Cooperative Way, Herndon, VA 22071-3025
(Address of principal executive offices)
Registrant's telephone number, including the area code (703) 709-6700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.YES X NO
Page 1 of 26
<PAGE> 2
<TABLE>
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
A S S E T S
(Unaudited)
August 31, 1995 May 31, 1995
<S> <C> <C>
Cash $ 21,317 $ 26,309
Marketable Securities 32,000 30,000
Debt Service Investments 38,928 32,740
Loans To Members, net 7,132,342 6,747,124
Receivables 89,201 87,638
Fixed Assets, net 36,840 36,807
Debt Service Reserve Funds 115,651 114,094
Other Assets 5,726 6,077
Total Assets $ 7,472,005 $ 7,080,789
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
- 2 -
<PAGE> 3
<TABLE>
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
L I A B I L I T I E S A N D M E M B E R S' E Q U I T Y
(Unaudited)
August 31, 1995 May 31, 1995
<S> <C> <C>
Notes Payable, due within one year $ 2,113,555 $ 1,812,570
Accounts Payable 54,984 16,705
Accrued Interest Payable 45,510 39,343
Long-Term Debt 3,748,948 3,685,682
Other Liabilities 23,560 21,553
Commitments, Guarantees and
Contingencies
Members' Subordinated Certificates:
Membership subscription
certificates 637,130 637,129
Loan & guarantee certificates 610,391 597,586
Total Members' Subordinated
Certificates 1,247,521 1,234,715
Members' Equity 237,927 270,221
Total Members' Subordinated Certi-
ficates & Members' Equity 1,485,448 1,504,936
Total Liabilities and Members'
Equity $ 7,472,005 $ 7,080,789
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
- 3 -
<PAGE> 4
<TABLE>
<CAPTION>
UNAUDITED
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF INCOME, EXPENSES AND NET MARGINS
(Dollar Amounts in Thousands)
For the Quarters Ended August 31, 1995 and 1994
Quarters Ended
August 31,
1995 1994
<S> <C> <C>
Operating Income-Interest on
loans to members $122,048 $ 97,985
Less-cost of funds allocated 103,169 78,487
Gross operating margin 18,879 19,498
Expenses:
General, administrative and
loan processing 3,695 3,683
Provision for loan and
guarantee losses 3,615 1,875
Total expenses 7,310 5,558
Operating margin 11,569 13,940
Nonoperating Income 819 511
Net Margins $ 12,388 $ 14,451
The accompanying notes are an integral part of these combined financial
statements.
</TABLE>
- 4 -
<PAGE> 5
<TABLE> (UNAUDITED)
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts in Thousands)
For the Quarters Ended August 31, 1995 and 1994
Patronage Capital Allocated
Educa- Unal- General
Member- tional located Reserve
Total ships Fund Margins Fund Other
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended August 31, 1995
Balance at May 31, 1995 $270,221 $ 1,383 $ 375 $ 2,289 $ 498 $265,676
Retirement of patronage capital (45,911) - - - (152) (45,759)
Net Margins 12,388 - - 12,388 - -
Other 1,229 14 54 - - 1,161
Balance at August 31, 1995 $237,927 $ 1,397 $ 429 $ 14,677 $ 346 $221,078
Quarter Ended August 31, 1994
Balance at May 31, 1994 $260,968 $ 1,339 $ 325 $ 2,289 $ 495 $256,520
Retirement of patronage capital (33,701) - - - (177) (33,524)
Net Margins 14,451 - - 14,451 - -
Other 41 13 28 - - -
Balance at August 31, 1994 $241,759 $ 1,352 $ 353 $ 16,740 $ 318 $222,996
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
- 5 -
<PAGE> 6
<TABLE> (UNAUDITED)
<CAPTION>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Quarters Ended August 31, 1995 and 1994
1995 1994
<S> <C> <C>
Cash Flows From Operating Activities:
Accrual basis net margins $ 12,388 $ 14,451
Add (deduct):
Provision for loan and guarantee losses 3,615 1,875
Depreciation 308 385
Amortization of deferred income (2,406) (4,701)
Amortization of bond issuance costs 318 299
Add (deduct) changes in accrual accounts:
Receivables 3,915 (251)
Accounts payable 38,278 26,939
Accrued interest payable 6,167 8,486
Other 3,974 5,958
Net cash flows provided by operating
activities 66,557 53,441
Cash Flows From Investing Activities:
Advances made on loans (1,131,664) (1,046,142)
Principal collected on loans 742,831 714,555
Investments in fixed assets (341) (156)
Net cash flows used in investing activities (389,174) (331,743)
Cash Flows From Financing Activities:
Notes payable, net 330,985 269,715
Marketable Securities, Net (2,000) -
Debt service (6,188) (26,771)
Proceeds from issuance of Long-Term Debt 81,079 79,993
Payments for retirement of Long-Term Debt (48,360) (19,892)
Proceeds from issuance of Members' Subordinated
Certificates 6,074 10,714
Payments for retirement of Members' Subordinated
Certificates (216) (1,214)
Payments for retirement of patronage capital (43,750) (34,804)
Net cash flows provided by financing activities 317,624 277,741
Net Cash Flows (4,993) (561)
Beginning Cash and Cash Equivalents 26,310 22,168
Ending Cash and Cash Equivalents $ 21,317 $ 21,607
Supplemental Disclosure of Cash Flow Information:
Cash paid during nine months for Interest Expense $ 97,756 $ 70,524
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
- 6 -
<PAGE> 7
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements
1. General Information
National Rural Utilities Cooperative Finance Corporation ("CFC")
is a private, not-for-profit cooperative association which provides
supplemental financing and related financial service programs for
the benefit of its members. Membership is limited to certain
cooperatives, not-for-profit corporations, public bodies and related
service organizations, as defined in CFC's Bylaws. CFC is exempt
from the payment of Federal income taxes under Section 501(c)(4) of
the Internal Revenue Code.
CFC's 1,049 members as of August 31, 1995, included 902 rural
electric utility system members ("Utility Members"), virtually
all of which are consumer-owned cooperatives, 73 service members
and 74 associate members. The Utility Members included 837
distribution systems and 65 generation and transmission systems
operating in 46 states and U.S. territories. At December 31,
1993, CFC's member systems served approximately 12.4 million
consumers, representing service to an estimated 32.5 million
ultimate users of electricity and owned approximately $62.6
billion (before depreciation of $17.9 billion) in total utility plant.
Rural Telephone Finance Cooperative ("RTFC") was incorporated as
a private cooperative association in the State of South Dakota in
September, 1987. RTFC is a controlled affiliate of CFC and was
created for the purpose of providing, securing and arranging
financing for its rural telecommunication members and affiliates.
RTFC's results of operations and financial condition have been
combined with those of CFC in the accompanying financial statements.
As of August 31, 1995, RTFC had 400 members. RTFC is a taxable
entity under Subchapter T of the Internal Revenue Code and
accordingly takes tax deductions for allocations of net margins
to its patrons.
Guaranty Funding Cooperative ("GFC") was incorporated as a
private cooperative association in the state of South Dakota
in December 1991. GFC is a controlled affiliate of CFC and
was created for the purpose of providing and servicing loans
to its members to fund the financing of loans guaranteed by
the Rural Utilities Service ("RUS").GFC's results of operations
and statements of financial condition have been combined with
those of CFC and RTFC in the accompanying financial statements.
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<PAGE> 8
Loans held by GFC were transferred to GFC by CFC and are guaranteed
by the RUS. GFC had four members other than CFC at August 31, 1995.
GFC is a taxable entity under Subchapter T of the Internal Revenue
Code and accordingly takes deductions for allocations of net margins
to its patrons.
In the opinion of management, the accompanying unaudited combined
financial statements contain all adjustments (which consist only of
normal recurring accruals) necessary to present fairly the combined
financial position of CFC, RTFC and GFC as of August 31, 1995 and
May 31, 1995, and the combined results of operations, cash flows and
changes in members' equity for the quarters ended August 31, 1995 and
1994.
The Notes to Combined Financial Statements for the years ended May
31, 1995 and 1994 should be read in conjunction with the accompanying
financial statements. (See CFC's Form 10-K for the year ended May 31,
1995, filed on August 29, 1995). Certain items on the May 31, 1995
Combined Balance Sheets have been reclassified to conform with the
August 31, 1995 presentation.
In May 1993, the Financial Accounting Standards Board (the "FASB")
released Statement No. 114 "Accounting by Creditors for Impairment
of a Loan." The statement requires that impaired loans be measured
based on the present value of expected future cash flows discounted
at the loan's effective interest rate, observable market value or,
in the case of collateral dependent loans, the fair value of the
collateral. In October 1994, the FASB released Statement No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures". The statement amends FASB Statement No. 114 by
eliminating the interest income recognition provisions and changing
the disclosure requirements. Both statements are required to be
implemented in fiscal years beginning after December 15, 1994 and
will apply to loans that are, or become impaired, based on the
provisions of FASB Statement No. 114, or that have certain restructur-
ing agreements executed on, or after the implementation date. CFC has
implemented these statements.
Principles of Combination
The accompanying financial statements include the combined accounts of
CFC, RTFC and GFC, after elimination of all material intercompany
accounts and transactions. CFC has a $1,000 membership interest in
RTFC and GFC. CFC exercises control over RTFC and GFC through majority
representation on their Boards of Directors. CFC manages the affairs
- 8 -
<PAGE> 9
of RTFC through a long-term management agreement. CFC services the
loans for GFC for which it collects a servicing fee. As of August
31, 1995, CFC had committed to lend RTFC up to $2,400.0 million to
fund loans to its members and their affiliates.
RTFC had outstanding loans and unadvanced loan commitments totaling
$1,294.7 million and $1,215.1 million as of August 31, 1995 and May
31, 1995, respectively. RTFC's net margins are allocated to RTFC's
borrowers. Summary financial information relating to RTFC is presented
below:
<TABLE>
<CAPTION>
At August 31, At May 31,
(Dollar Amounts In Thousands) 1995 1995
<S> <C> <C>
Outstanding loans to members
and their affiliates $ 929,041 $883,463
Total assets 1,045,140 985,381
Notes payable to CFC 929,041 883,463
Total liabilities 947,565 892,717
Members' Equity and
Subordinated Certificates 97,575 92,664
</TABLE>
<TABLE>
<CAPTION>
For the Quarters Ended August 31,
(Dollar Amounts In Thousands) 1995 1994
<S> <C> <C>
Operating income $ 15,611 $ 10,678
Net margins 682 479
</TABLE>
Summary financial information relating to GFC is presented below:
<TABLE>
<CAPTION>
At August 31, At May 31,
(Dollar Amounts In Thousands) 1995 1995
<S> <C> <C>
Outstanding loans to members $421,665 $421,665
Total assets 440,043 442,878
Notes payable to CFC 425,706 427,875
Total liabilities 437,329 440,410
Members' Equity 2,714 2,468
</TABLE>
<TABLE>
<CAPTION>
For the Quarters Ended August 31,
(Dollar Amounts In Thousands) 1995 1994
<S> <C> <C>
Operating income $ 7,518 $ 6,843
Net margins 246 710
</TABLE>
- 9 -
<PAGE> 10
Unless stated otherwise, references to CFC relate to CFC, RTFC and
GFC on a combined basis.
2. Debt Service Account
A provision of the 1972 Indenture between CFC and Chemical Bank
as trustee ("1972 Indenture") requires monthly deposits into a
debt service account held by the trustee, generally in amounts
equal to one-twelfth of the total annual interest payments, annual
sinking fund payments and the principal amount of bonds maturing
within one year. These deposits may be invested in permitted
investments, as defined in the indenture (generally bank certificates
of deposit and prime rated commercial paper).
On February 15, 1994, CFC completed a new Collateral Trust Bond
Indenture ("1994 Indenture") with First Bank National Association
as trustee. This indenture does not require the maintenance of a
debt service account. All future Collateral Trust Bonds will be
issued under the 1994 Indenture.
3. Loans Pledged as Collateral to Secure Collateral Trust Bonds
As of August 31, 1995 and May 31, 1995, mortgage notes representing
approximately $779.6 million and $789.9 million, respectively,
related to outstanding long-term loans to members, were pledged as
collateral to secure Collateral Trust Bonds. Both the 1972 Indenture
and the 1994 Indenture require that CFC pledge eligible mortgage notes
(or other permitted assets) as collateral that at least equal the
outstanding balance of Collateral Trust Bonds. Under CFC's revolving
credit agreement (See Note 6), CFC cannot pledge mortgage notes in
excess of 150% of Collateral Trust Bonds outstanding.
Collateral Trust Bonds outstanding at August 31, 1995 and May 31,
1995 were $682.1 million and $682.0 million, respectively.
4. Allowance for Loan and Guarantee Losses
CFC maintains an allowance for loan and guarantee losses at a level
considered to be adequate in relation to the quality and size of its
loan and guarantee portfolio. It is CFC's policy to periodically
review its loans and guarantees and to make adjustments to the
allowance as necessary.
The allowance is based on estimates, and accordingly, actual loan and
guarantee losses may differ from the allowance amount. As of August 31,
1995 and May 31, 1995, such allowance was $209.2 million and $205.6
million, respectively.
- 10 -
<PAGE> 11
Activity in the allowance account is summarized as follows for the
quarter ended August 31, 1995 and the year ended May 31, 1995.
<TABLE>
<CAPTION>
August 31, May 31,
(Dollar Amounts in Thousands) 1995 1995
<S> <C> <C>
Beginning Balance $205,596 $188,196
Provision for loan and 3,615 17,400
guarantee losses
Ending Balance $209,211 $205,596
</TABLE>
5. Members' Subordinated Certificates
Members' Subordinated Certificates are subordinated obligations
purchased by members as a condition of membership and in connection
with CFC's extension of long-term loans and guarantees to them.
Those issued as a condition of membership (Subscription Capital
Term Certificates) generally mature 100 years from issuance date
and bear interest at 5% per annum. The other certificates either
mature 46 to 50 years from issuance or amortize proportionately
based on the principal balance of the credit extended, and either
are non-interest-bearing or bear interest at varying rates.
The proceeds from certain non-interest-bearing subordinated
certificates issued in connection with CFC's guarantees of tax-
exempt bonds are pledged by CFC to the debt service reserve fund
established in connection with the bond issue, and any earnings
from the investment of the fund inure solely to the benefit of the
member.
6. Credit Arrangements
As of August 31, 1995, CFC had two revolving credit agreements
totaling $4,100.0 million with 56 banks, including Morgan Guaranty
Trust Company of New York as Arranger, Administrative Agent, and
Co-Syndication Agent and The Bank of Nova Scotia as Co-Syndication
Agent. These credit facilities were arranged principally to provide
liquidity support for CFC's outstanding commercial paper, CFC's
guaranteed commercial paper issued by the National Cooperative
Services Corporation ("NCSC") and the adjustable or floating/fixed
rate bonds which CFC has guaranteed and agreed to purchase for the
benefit of its members.
Under the respective revolving credit agreements, CFC can borrow
up to $2,460.0 million until February 28, 2000 (the "five-year
facility"), and $1,640.0 million until February 27, 1996 (the
"364-day facility"). Any amounts outstanding will be due on those
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<PAGE> 12
dates. In connection with the five-year facility, CFC pays a per
annum facility/commitment fee of .125 of 1%. The per annum
facility fee for the 364-day is .10 of 1%. If CFC's short-term
ratings decline, these fees may be increased by no more than .1125
of 1%. Borrowings under both agreements will be at one or more
rates as defined in the agreements, as selected by CFC.
The revolving credit agreements require CFC, among other things
to maintain Members' Equity and Members' Subordinated Certificates
of at least $1,345.0 million (increased each fiscal year by 90% of
net margins not distributed to members), an average fixed charge
coverage ratio over the six most recent fiscal quarters of at least
1.025 and prohibits the retirements of patronage capital unless CFC
has achieved a fixed charge coverage ratio of at least 1.05 for the
preceding fiscal year. The credit agreements prohibit CFC from
incurring senior debt (including guarantees but excluding indebted-
ness incurred to fund RUS guaranteed loans) in an amount in excess
of ten times the sum of Members' Equity and subordinated certificates
and restricts, with certain exceptions, the creation by CFC of liens
on its assets and certain other conditions to borrowing.
The agreement also prohibits CFC from pledging collateral in excess
of 150% of the principal amount of Collateral Trust Bonds outstanding.
Provided that CFC is in compliance with these financial covenants
(including that CFC has no material contingent or other liability
or material litigation that were not disclosed by or reserved against
in its most recent annual financial statements) and is not in default,
CFC may borrow under the agreements until the termination dates. As
of August 31, 1995 and May 31, 1995, CFC was in compliance with all
covenants and conditions under its revolving credit agreements and
there were no borrowings outstanding under the revolving credit
agreements.
At August 31, 1995 and May 31, 1995, CFC classified $2,460.0 million
and $2,430.0 million, respectively, of its notes payable outstanding
as long-term debt. CFC expects to maintain more than $2,460.0 million
of notes payable during the next twelve months. If necessary, CFC
can refinance such notes payable on a long-term basis by borrowing
under the five-year facility subject to the conditions herein.
7. Unadvanced Loan Commitments
As of August 31, 1995 and May 31, 1995, CFC had unadvanced loan
commitments, summarized by type of loan, as follows:
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<PAGE> 13
<TABLE>
<CAPTION>
(Dollar Amounts In Thousands) August 31, 1995 May 31, 1995
<S> <C> <C>
Long-term $1,583,443 $1,325,141
Intermediate-term 211,617 186,313
Short-term 3,211,274 3,121,212
Telecommunications 365,646 331,633
Associate Member 55,492 53,483
Restructured (See Note 11(c)) 20,000 20,000
Total unadvanced loan
commitments $5,447,472 $5,037,782
</TABLE>
Unadvanced commitments include loans approved by CFC for which loan
contracts have not yet been executed and for which loan contracts
have been executed but funds have not been advanced.CFC may require
additional information to assure itself that all conditions for
advance of funds have been fully met and that there has been no
material change in the member's condition as represented in the
documents supplied to CFC. Since commitments may expire without
being fully drawn upon, the total amounts reported as commitments
do not necessarily represent future cash requirements. Collateral
and security requirements for loan commitments are identical to
those for advanced loans.
8. Retirement of Patronage Capital
CFC Patronage capital in the amount of $47.6 million was retired on
August 31, 1995, representing one-sixth of the total allocations for
fiscal years 1988, 1989 and 1990 and 70% of the allocation for fiscal
year 1995. RTFC and GFC will retire a portion of their FY 1995
allocation by January 31, 1996. Future retirements of patronage
capital allocated to patrons may be made annually as determined by
CFC's Board of Directors with due regard for CFC's financial
condition.
9. Guarantees
As of August 31, 1995 and May 31, 1995, CFC had guaranteed the
following contractual obligations of its members:
<TABLE>
<CAPTION>
(Dollar Amounts In Thousands)
August 31, 1995 May 31, 1995
<S> <C> <C>
Long-term tax-exempt bonds (A) $1,491,585 $1,496,930
Debt portions of leveraged lease
transactions (B) 559,739 568,662
Indemnifications of tax benefit
transfers (C) 381,841 389,755
Other guarantees (D) 137,397 119,575
Total guarantees $2,570,562 $2,574,922
</TABLE>
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<PAGE> 14
(A) CFC has unconditionally guaranteed to the holders or to trustees for
the benefit of holders of these bonds the full principal, premium
(if any) and interest payments on each bond when due. In the event
of default, the bonds cannot be accelerated as long as CFC makes the
scheduled debt service payments. In addition, CFC has agreed to make
up, at certain times, deficiencies in the debt service reserve funds
for some of these issues of bonds. Of the amounts shown, $1,196.1
million and $1,200.1 million as of August 31, 1995 and May 31, 1995,
respectively, are adjustable or floating/fixed rate bonds. The
interest rate on such bonds may be converted to a fixed rate as
specified in the indenture for each bond offering. During the
variable rate period (including at the time of conversion to a fixed
rate), CFC has unconditionally agreed to purchase bonds tendered or
called for redemption if such bonds are not sold to other purchasers
by the remarketing agents.
(B) CFC has unconditionally guaranteed the repayment of debt raised by
National Cooperative Services Corporation ("NCSC") for leveraged
lease transactions.
(C) CFC has unconditionally guaranteed to lessors certain indemnity
payments which may be required to be made by the lessees in
connection with tax benefit transfers. The amounts of such
guarantees reach a maximum and then decrease over the life of
the lease.
(D) At August 31, 1995 and May 31, 1995, CFC had unconditionally
guaranteed commercial paper, along with the related interest rate
exchange agreement, issued by NCSC of $34.7 million and $34.9
million, respectively.
10. Interest Rate Exchange Agreements
The following table lists the notional principal amounts of CFC's
interest rate exchange agreements at August 31, 1995 and May 31, 1995:
<TABLE>
<CAPTION>
(Dollar Amounts in Thousands)
Maturity Notional Principal Amount
Date August 31, 1995 May 31, 1995
<S> <C> <C>
August 1996 (1) $ 30,000 $ 30,000
September 1996 (2) 150,000 150,000
February 1997 (1) 35,000 35,000
February 1997 (1) 40,000 40,000
February 1997 (1) 25,000 25,000
February 1998 (2) 50,000 50,000
Total $330,000 $330,000
- 14 -
<PAGE> 15
(1) Under these agreements, CFC pays a fixed rate of interest and
receives interest based on a variable rate.
(2) Under these agreements, CFC pays a variable rate of interest
and receives a variable rate of interest.
</TABLE>
CFC's objective in using interest rate exchange agreements in which
it pays a fixed rate of interest and receives a variable rate of
interest is to fix the interest rate on a portion of its commercial
paper. CFC then uses commercial paper, in an amount equal to the
notional principal value of the interest rate exchange agreements,
to fund a portion of its long-term fixed rate loan portfolio. The
net difference between the rate paid by CFC and the rate received
is included in the cost of funds.
CFC's objective in using interest rate exchange agreements in which
it pays and receives a variable rate of interest is to change the
variable rate on a notional amount of debt from a LIBOR rate index
to a commercial paper rate index. The variable rate Collateral
Trust Bonds and Medium-Term Notes are issued based on a LIBOR rate
index, while CFC sets its variable rate loan interest rates based
on a commercial paper rate. The net difference between the rate
paid by CFC and the rate received is included in the cost of funds.
CFC is exposed on these interest rate swap agreements to interest
rate risk if the counterparty to the interest rate swap agreement
does not perform to the agreement's terms. CFC does have a policy
intended to limit counterparty credit risk by maintaining long-term
swap agreements only with financial institutions with at least a AA
long-term credit rating, and short-term swap agreements only with
financial institutions with at least a A long-term credit rating.
11. Contingencies
(A) At August 31, 1995 and May 31, 1995, nonperforming loans in the
amount of $27.0 million and $27.6 million, respectively, were
on a nonaccrual basis with respect to interest income. At
August 31, 1995 and May 31, 1995, the total amount of re-
structured debt was $203.7 million and $185.0 million, respect-
ively. CFC elected to apply all principal and interest payments
received against principal outstanding on restructured debt of
$149.9 million and $131.1 million, respectively. At August 31,
1995 and May 31, 1995, CFC had committed to lend $0.0 million to
non-performing borrowers, and $20.0 million to restructured
borrowers, all on a senior secured lien basis.
(B) Out of the $230.7 million and $212.6 million of loans described
in footnote 11(A) at August 31, 1995 and May 31, 1995, respect-
ively, CFC has classified $177.0 million and $158.8 million as
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<PAGE> 16
as impaired with respect to the provisions of FASB Statements
No. 114 and 118. At those dates CFC had allocated $50.5 million
and $40.1 million of the loan and guarantee loss allowance to
such impaired loans. At August 31, 1995 and May 31, 1995, 97%
of the loans classified as impaired were collateral dependent.
Loans are collateral dependent when there are no reliable future
payment schedules and the amount expected to be collected is
directly related to the value of the assets and future revenues
that represent the underlying security for the loan. The amount
of loan and guarantee loss allowance allocated to such loans was
based on a comparison of the recorded investment in the loan to
the estimated value of the collateral. CFC does not recognize
interest income on any of the loans classified as impaired.
Instead, all payments received are applied as a reduction of
principal. The average recorded investment in impaired loans for
the three months ended August 31, 1995 was $170.3 million.
(C) On May 23, 1985, Wabash Valley Power Association, Inc. ("WVPA")
filed a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code in connection with the canceled
Marble Hill plant construction.
On August 7, 1991, the Bankruptcy Court confirmed WVPA's
reorganization plan pending approval of rates as contemplated
in the plan.
On June 22, 1994, the U.S. District Court affirmed (over RUS's
objection) the Wabash plan in reorganization. RUS appealed to
the U.S. Court of Appeals. Under the Wabash plan, CFC would
realize an estimated total loss of approximately $12 million
($8.6 million of which has been written off to date), after the
offset of subordinated capital term certificates (without taking
into account interest since the petition date). CFC and RUS have
agreed to distribute all settlement proceeds from Wabash in
compliance with provisions under the shared mortgage. Upon re-
solution of the bankruptcy there will be a final accounting of
the cash flow subsequent to the petition date. At this time it
is anticipated that this final accounting will result in CFC
making a net payment to RUS to true-up the cash distribution
between RUS and CFC.
In May 1993, CFC advanced $24.4 million in variable interest
rate secured loans to WVPA, which was used to effect an early
redemption of the tax-exempt bonds guaranteed by CFC. As WVPA
is operating in Bankruptcy, CFC has classified these loans as
nonperforming, therefore, does not accrue interest income on
these loans. As of August 31, 1995, CFC had $20.3 million in
loans outstanding to Wabash.
Based on WVPA's preliminary reorganization plan, management
believes that CFC has adequately reserved for any potential loss.
(D) Deseret Generation & Transmission Co-operative ("Deseret") and
its major creditors entered into an Agreement Restructuring
Obligations ("ARO") document that restructured Deseret's debt
obligations to RUS, CFC and certain other creditors, including
- 16 -
<PAGE>17
certain lease payments due on the Bonanza Power Plant. The ARO,
which closed in January 1991 with an effective date of January 1,
1989, provides for the reduction of Deseret's debt service and
rental obligations on the Bonanza Power Plant until 1996 when
large sales of power are intended to commence.
Under the ARO, CFC expected to fund Deseret's cashflow shortfalls
totaling $117 million and expected a maximum exposure of $439
million in 1996. At August 31, 1995, CFC had funded $132.3
million of the shortfall. CFC's current exposure of $464.7
million is greater than the expected maximum from the ARO
because it loaned Deseret funds to permit the early redemption,
at a premium, of two high interest rate bond issues.
Under the ARO assumptions, CFC expects to fund Deseret's cash
flow shortfalls until at least 1996 under its various guarantees
of debt obligations. Deseret's ability to generate enough cash
flow to service its current debt and rental payments as well as
to begin repayment of the shortfall funded by CFC thereafter
depends on whether it is able to make the large power sales on
which the ARO is premised. Due to changes in power demands of
Deseret's distribution system members and the resulting reduction
in power available for sale at higher prices to non-members as
well as an inability, so far, to complete the intended power
sales, Deseret's cashflow projections have undergone revision
since the closing of the ARO. As a result of these changes,
Deseret is expected to be unable to satisfy its payment obli-
gations under the ARO and the ARO is expected to be amended
sometime in the future. If the parties cannot agree on an
amendment, the ARO could be terminated and Deseret's creditors
would be free to pursue remedies on their defaulted obligations.
Deseret sought proposals from other parties regarding asset
and/or power purchases from Deseret. CFC continues to evaluate
these proposals and Deseret's plan to address the anticipated
payment default under the ARO.
CFC has placed all loans to Deseret on a nonaccrual basis with
respect to interest income recognition. CFC does not anticipate
interest income recognition on the outstanding loans until such
time that Deseret's power sales produce cash flows sufficient
to service all debt.
As part of a separate agreement, in conjunction with the ARO,
CFC will be obligated to repay out of payments by Deseret
$25.9 million (plus interest) received from a party to the
Bonanza Lease transaction to cover shortfalls in the July 1989,
January 1990 and July 1990 lease payments which were funded
- 17 -
<PAGE> 18
by that party. This amount will be repaid if the available
annual cash flow were to exceed the debt repayment requirements
as defined in the ARO (i.e., CFC is no longer required to fund
a shortfall).
As of August 31, 1995, CFC had approximately $464.7 million
in current credit exposure on behalf of Deseret consisting of
$149.9 million in secured loans, and $314.8 million for
guarantees by CFC of various direct and indirect obligations
of Deseret. CFC's guarantees include $8.5 million in tax-benefit
indemnifications and $27.3 million relating to mining equipment
for a coal supplier of Deseret. The remainder of CFC's guarantee
is for semiannual debt service payments on $279.0 million of
bonds issued in a $655 million leveraged lease financing of a
generating station in 1985. Under the ARO, CFC has also provided
Deseret a $20.0 million five-year senior secured line of credit.
At August 31, 1995, there was no balance outstanding under this
line of credit which expires in January 1996. CFC has no plans
to renew this facility.
CFC believes that given the underlying collateral value and the
terms of the ARO, it has adequately reserved for any potential
loss on its loans and guarantees to Deseret.
(E) As a consequence of high costs associated with the Clinton
Nuclear Station, Soyland Power Cooperative ("Soyland") charged
costs for wholesale power which resulted in its member's retail
rates being uncompetitive. This situation resulted in revenues
which were inadequate to service its debt. Soyland, RUS and
CFC entered into a debt restructuring agreement, dated as of
December 15, 1993, which restructured Soyland's indebtedness to
RUS. As part of this agreement, CFC agreed to extend additional
credit to Soyland in the form of a $30 million revolving credit
facility and a $30 million loan for capital additions. The
revolving credit loan and the capital additions loan have
priority in payment over the existing RUS loans and the prior
CFC loan.
At August 31, 1995, CFC had $49.4 million in outstanding long-
term loans to Soyland which were secured equally and ratably
with the RUS on all assets and future revenues of Soyland.
In addition, CFC had $1.2 million outstanding to Soyland under
the super-secured revolving credit agreement and $15.0 million
outstanding on the super-secured capital additions loan, both
of which are mentioned above. CFC also had $282.9 million in
loans to Soyland which are guaranteed by the U.S. Government.
Soyland has presented the details of a third party offer to
purchase most of Soyland's assets for an amount substantially
- 18 -
<PAGE> 19
less than the combined RUS and CFC debt. The proceeds from
any sale of Soyland's assets will be first applied against the
CFC super-secured loans, with any remaining proceeds split
pro-rata between CFC and RUS based on total debt outstanding
to Soyland. The proposal is being reviewed by RUS and CFC.
CFC believes that, given the underlying collateral value of
its secured loans to Soyland, it has adequately reserved for
any potential loss on its loans.
12. Loans Guaranteed by RUS
At August 31, 1995, CFC held $429.1 million in Trust Certificates
related to the refinancings of Federal Financing Bank loans. These
Trust Certificates are supported by payments from certain CFC Power
Supply members whose payments are guaranteed by RUS.
- 19 -
<PAGE> 20
Part I. Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(all dollar amounts in millions)
Changes in Financial Condition
During the quarter ended August 31, 1995, CFC's total assets increased by
$391.2 or 5.5% to $7,472.0 from $7,080.8 at May 31, 1995, primarily due to
an increase of $385.2 in net loans outstanding. Changes to the loan
portfolio included increases of $409.5 in long-term loans and $18.7 in
restructured loans offset by decreases of $36.3 in short-term loans and
$2.4 in intermediate-term loans.
Long-term loan activity consisted primarily of $532.1 in advances and $104.4
in principal repayments. Included in Long-term loan advances was $236.4
advanced to 8 members for the prepayment of their RUS loans, and $1.5
advanced to 1 member for telephone exchange acquisitions.
Net loans to members represented 95% of total assets at August 31, 1995 and
May 31, 1995. Long-term loans represented 86% and 85% of gross loans at
August 31, 1995 and May 31, 1995. Fixed rate loans represented 34% of gross
loans at August 31, 1995 and 32% at May 31 and the remaining loans carry a
variable rate that may be adjusted monthly or semi-monthly. At August 31,
1995, $622.2 or 8.5% of gross loans were unsecured, compared to $627.2
million or 9.0% at May 31. All other loans were secured pro-rata with other
lenders (primarily RUS), by all assets and future revenues of the borrower.
At August 31, CFC had provided $2,570.6 in guarantees, a decrease of $4.3
from the $2,574.9 at May 31. These guarantees relate primarily to tax-
exempt financed pollution control equipment and to leveraged lease trans-
actions for plant and equipment. All guarantees are secured on a pro-rata
basis with other creditors on all assets and future revenues of the borrower
or by the underlying financed assets.
Also at August 31, CFC had committed to lend $5,447.5, an increase of $409.7
from the $5,037.8 committed at May 31. Most unadvanced loan commitments
contain a material adverse change clause. As many of these commitments are
provided for operational back-up liquidity, CFC does not anticipate funding
the majority of the commitments outstanding.
During the quarter ended August 31, CFC's total liabilities and members'
equity increased by $391.2 or 5.5% to $7,472.0 from $7,080.8 at May 31. The
increase was primarily due to increases of $301.0 in notes payable, $44.6
in accounts and interest payable, $63.3 in long-term debt, $12.8 in loan
and guarantee subordinated certificates, offset by a decrease of $32.3 in
members' equity.
-20-
<PAGE> 21
The notes payable increase of $301.0 is due to increases of $211.2 in Dealer
Commercial Paper, $90.0 in Bank Bid Notes and $29.8 in Member Commercial
Paper offset by an increase of $30.0 in the amount of short-term debt
supported by the five year revolving credit agreement and reclassified as
long-term debt. The $63.3 increase in long-term debt is due to a $32.3
increase in the balance of Medium-Term Notes outstanding and an increase
of $30.0 to the amount of short-term debt reclassified as long-term debt.
The decrease of $32.3 in members' equity was due to the retirement of $47.6
in patronage capital offset by the $12.4 net margins for the quarter. The
increases to notes payable and long-term debt were required to fund the
increase in loans outstanding. The increase in subordinated certificates
was due to the issuance of new certificates related to loans and guarantees.
The allowance for loan and guarantee losses increased by $3.6 to $209.2 at
August 31, from $205.6 at May 31. At August 31, the loan and guarantee
loss allowance represented 2.85% of gross loans, 2.11% of gross loans and
guarantees, 90.68% of nonperforming and restructured loans, and 774.8% of
nonperforming loans. The allowance is periodically reviewed by management
for adequacy. In performing this assessment, management considers various
factors including an analysis of the financial strength of CFC's borrowers,
delinquencies, loan charge-off history, underlying collateral and economic
and industry conditions. As of August 31, management believes that the
allowance for loan and guarantee losses is adequate to cover any portfolio
losses which have occurred or may occur.
To date, CFC has advanced $605.4 to 29 members for the prepayment of RUS
loans. CFC estimates that this total represents 96% of the total lent for
the purpose of prepaying RUS notes. As of August 31, 1995 CFC had loan
applications for an additional $254.9 from 20 members for the purpose of
prepaying their RUS notes. RTFC had loan applications for $177.7 from 17
members for telephone exchange acquisitions.
Changes in the Results of Operations
CFC's net margins are subject to change as interest rates change. Therefore,
CFC uses an interest coverage ratio, instead of the dollar amount of gross
or net margins, as a primary performance indicator. During the quarter
ended August 31, 1995, CFC achieved a Times Interest Earned Ratio (TIER)
of 1.12. This was a decrease from the 1.18 TIER for the quarter ended August
31, 1994. Management has established a 1.10 TIER as its minimum operating
level.
Operating income for the quarter ended August 31, 1995, was $122.1, an
increase of $24.1 from the prior year period. The increase in operating
income was due to a positive rate variance of $11.6 and a positive volume
variance of $12.5. Average loans outstanding increased by $834.9 and the
average yield increased by 63 basis points. For the quarter ended August,
- 21 -
<PAGE> 22
31, 1995 average loans outstanding were $7,042.7 and the average yield was
6.89%, compared to average loans outstanding of $6,207.8 and an average
yield of 6.26% for the quarter ended August 31, 1994.
CFC's cost of funds for the quarter ended August 31, 1995, totaled $103.2,
an increase of $24.7 from the prior year. The increase was due to a positive
rate variance of $16.0 and a positive volume variance of $8.7. The average
interest rate on funds used by CFC at August 31, 1995, was 5.81%, an increase
of 79 basis points compared to the average rate of 5.02% at August 31, 1994.
Included in the cost of funds is interest expense on CFC's Subordinated
Certificates and other instruments offset by income from the overnight
investments of excess cash and the interest earnings on debt service
investments.
For the quarters ended August 31, 1995 and August 31, 1994, general and
administrative expenses totaled $3.7. General and administrative expenses
represented 19 basis points of average loan volume for the quarter ended
August 31, 1995, which is a decrease of 5 basis points from 24 basis points
for the prior year period.
The provision for loan and guarantee losses for the quarter ended August 31,
1995, totaled $3.6 or 22 basis points, compared to the prior year total of
$1.9 or 12 basis points. CFC has maintained the provision for loan and
guarantee losses in line with management's assessment of the size and quality
of the loan portfolio. During the quarter ended August 31, 1995, CFC made
planned additional provisions to the loan and guarantee loss allowance
totaling $1.7.
Overall, CFC's net margins for the quarter ended August 31, 1995, totaled
$12.4, a decrease of $2.1 from the prior year period total of $14.5.
Liquidity and Capital Resources
CFC is subject to liquidity risk to the extent cash repayments on its assets
or other sources of funds are insufficient to cover the cash requirements on
maturing liabilities. For the most part, CFC funds its long-term loans with
much shorter term maturity debt instruments, however, CFC's long-term loans
typically are repriced monthly or on a multiple number of years basis, and
as such, CFC will match the loan repricing periods with similarly repriced
sources of funding, thus minimizing interest rate risk.
With regard to liquidity risk, CFC manages its liquidity risk by ensuring
that other sources of funding are available to make debt maturity payments.
CFC accomplishes this in five ways. First, CFC maintains revolving credit
agreements which (subject to certain conditions) allows CFC to borrow funds
on terms of up to five years.
- 22 -
<PAGE> 23
Second, CFC has maintained investment grade ratings, facilitating access
to the capital markets. Third, CFC maintains SEC shelf registrations for
both its Collateral Trust Bonds and its Medium-Term Notes, either of which
(absent market disruptions and assuming CFC maintains investment grade
ratings) could be issued at fixed or variable rates in sufficient amounts
to fund the next 18 to 24 months funding requirements. Fourth, CFC maintains
SEC registrations for the Grantor Trust Certificates which permits public
issuance. Fifth, CFC obtains much of its funding directly from its members
and believes this funding is more stable than funding obtained from outside
sources.
At August 31, 1995, CFC had $4,100.0 in available credit, $2,460.0 of which
is available through February 28, 2000 and $1,640.0 is available through
February 27, 1996. As of August 31, CFC was in compliance with all covenants
and conditions to borrowing.
As of August 31, 1995, CFC had shelf registrations for Collateral Trust
Bonds and Medium-Term Notes of $650.0 and $353.5, respectively. Subsequent
to the end of the quarter, CFC completed three bond issues, the $100.0 6.5%
Collateral Trust Bonds, due 2002, the $50.0 6.65% Collateral Trust Bonds,
due 2005 and the $50.0 7.2% Collateral Trust Bonds, due 2015. As of August
31, 1995, CFC had SEC shelf registrations for Grantor Trust Certificates of
$139.4.
Member invested funds, including the loan and guarantee loss allowance, at
August 31, 1995 and May 31, 1994, were $3,153.9 and $3,126.7 or 41.7% and
43.4% of CFC's total capitalization, respectively (long- and short-term debt
outstanding, members' certificates and equity and the loan and guarantee
loss allowance).
CFC's leverage ratio was 5.47 at August 31, 1995, a slight increase over
the 5.13 reported at May 31, 1995. The increase was primarily due to
additional debt required to fund new loans and a decrease in the members
' equity due to the retirement of patronage capital on August 31, 1995.
<TABLE>
<CAPTION>
Interest-Rate Gap Analysis
(Fixed Assets/Liabilities)
As of August 31, 1995
(Dollar Amounts In Millions)
FY 96 FY 97-98 FY 99-00 FY 01-05 FY 06-15 FY 16+ Total
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loan Amortization
and repricing $ 184.9 $ 416.8 $ 512.9 $ 635.6 $ 435.1 $ 125.8 $2,311.1
Total Assets $ 184.9 $ 416.8 $ 512.9 $ 635.6 $ 435.1 $ 125.8 $2,311.1
Liabilities and Equity:
Long-Term Debt $ 59.2 $ 643.3 $ 35.5 $ 170.1 $ 33.7 $ 150.0 $1,091.8
Subordinated Certificates 7.0 13.2 196.5 447.9 261.7 63.5 989.8
Equity - - 144.4 17.7 52.0 - 214.1
Total Liabilities and Equity $ 66.2 $ 656.5 $ 376.4 $ 635.7 $ 347.4 $ 213.5 $2,295.7
Gap * $ 118.7 $(239.7) $ 136.5 $ (0.1) $ 87.7 $ (87.7) $ 15.4
Cumulative Gap $ 118.7 $(121.0) $ 15.5 $ 15.4 $ 103.1 $ 15.4
Cumulative Gap as a %
of Total Assets 1.59% 1.62% 0.21% 0.21% 1.38% 0.21%
</TABLE>
* Loan amortization/repricing over/(under) debt maturities
- 23 -
<PAGE> 24
CFC is subject to interest rate risk to the extent CFC's loans are subject
to interest rate adjustment at different times than the liabilities which
fund those assets. Therefore, CFC's interest rate risk management policy
involves the close matching of asset and liability repricing terms within
a range of 5% of gross assets (total assets plus the loan and guarantee
loss allowance which is netted against gross loans on the balance sheet).
CFC measures the matching of funds to assets by comparing the amount of
fixed rate assets repricing or amortizing to the total fixed rate debt
maturing over the periods listed in the above table. At August 31, 1995,
CFC had $184.9 in fixed rate assets amortizing or repricing and $66.2 in
fixed rate liabilities maturing during fiscal year 1996. The difference,
$118.7, represents the amount of CFC's assets that are not considered
match-funded as to interest rate. CFC's difference of $118.7 at August 31,
1995 represents 1.6% of total assets.
- 24 -
<PAGE> 25
Part II
Item 1, Legal Proceedings.
None.
Item 2, Changes in Securities.
None.
Item 3, Defaults upon Senior Securities.
None.
Item 4, Submission of Matters to a Vote of Security Holders.
None.
Item 5, Other Information.
None.
Item 6,
A. Exhibits
27 - Financial Data Schedules
B. Reports on Form 8-K.
None.
- 25 -
<PAGE> 26
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
/s/ Steven L. Lilly, Chief Financial Officer
October 16, 1995
/s/ Angelo M. Salera, Controller (Principal Accounting
Officer)
October 16, 1995
- 26 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the August
31, 1995 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> AUG-31-1995
<CASH> 21,317
<SECURITIES> 32,000
<RECEIVABLES> 89,201
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 181,446
<PP&E> 44,809
<DEPRECIATION> 7,969
<TOTAL-ASSETS> 7,472,005
<CURRENT-LIABILITIES> 2,237,609
<BONDS> 3,748,948
<COMMON> 0
0
0
<OTHER-SE> 1,485,448
<TOTAL-LIABILITY-AND-EQUITY> 7,472,005
<SALES> 122,048
<TOTAL-REVENUES> 122,867
<CGS> 103,169
<TOTAL-COSTS> 103,169
<OTHER-EXPENSES> 3,695
<LOSS-PROVISION> 3,615
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,388
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,388
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,388
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
