<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, 1996
OR
( TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From To
Commission File Number 1-7102
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DISTRICT OF COLUMBIA 52-0891669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Woodland Park, 2201 Cooperative Way, Herndon, VA 20171-3025
(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 22
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
A S S E T S
(Unaudited)
August 31, 1996 May 31, 1996
Cash $ 5,024 $ 31,368
Certificates of Deposit 18,000 25,000
Debt Service Investments 82,197 40,907
Loans To Members, net 7,951,945 7,728,271
Receivables 89,442 84,600
Fixed Assets, net 33,311 33,576
Debt Service Reserve Funds 102,512 102,512
Other Assets 8,004 7,855
Total Assets $ 8,290,435 $ 8,054,089
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 3
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, 1996 May 31, 1996
Notes Payable, due within one year $ 2,708,684 $ 2,471,552
Accounts Payable 16,683 16,591
Accrued Interest Payable 51,076 40,819
Long-Term Debt 4,049,122 4,033,881
Other Liabilities 15,063 13,921
Commitments, Guarantees and Contingencies
Members' Subordinated Certificates:
Membership subscription certificates 638,440 638,440
Loan & guarantee certificates 578,107 569,244
Total Members' Subordinated Certificates 1,216,547 1,207,684
Members' Equity 233,260 269,641
Total Members' Subordinated
Certificates & Members' Equity 1,449,807 1,477,325
Total Liabilities and Members' Equity $ 8,290,435 $ 8,054,089
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 4
(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, 1996 and 1995
Quarters Ended
August 31,
1996 1995
Operating Income-Interest on loans to members $134,267 $122,048
Less-cost of funds allocated 110,927 103,169
Gross operating margin 23,340 18,879
Expenses:
General, administrative and loan processing 4,420 3,695
Provision for loan and guarantee losses 6,815 3,615
Total expenses 11,235 7,310
Operating margin 12,105 11,569
Nonoperating Income 661 819
Net Margins $ 12,766 $ 12,388
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 5
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts in Thousands)
For the Quarters Ended August 31, 1996 and 1995
Patronage Capital
<TABLE> Allocated
<CAPTION> Educa- Unal- General
Member- tional located Reserve
Total ships Fund Margins Fund Other
<C> <C> <C> <C> <C> <C> <C>
Quarter Ended August 31, 1996
Balance at May 31, 1996 $269,641 $ 1,424 $ 476 $ 2,289 $ 501 $264,951
Retirement of patronage capital (50,973) - - - (135) (50,838)
Net Margins 12,766 - - 12,766 - -
Other 1,826 9 58 - - 1,759
Balance at August 31, 1996 $233,260 $ 1,433 $ 534 $ 15,055 $ 366 $215,872
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
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 6
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Quarters Ended August 31, 1996 and 1995
1996 1995
Cash Flows From Operating Activities:
Accrual basis net margins $ 12,766 $ 12,388
Add (deduct):
Provision for loan and guarantee losses 6,815 3,615
Depreciation 282 308
Amortization of deferred income (2,645) (2,406)
Amortization of bond issuance costs 365 318
Add (deduct) changes in accrual accounts:
Receivables (5,744) 3,915
Accounts payable 91 38,278
Accrued interest payable 10,257 6,167
Other (197) 3,974
Net cash flows provided by operating activities 21,990 66,557
Cash Flows From Investing Activities:
Advances made on loans (782,594) (1,131,664)
Principal collected on loans 552,105 742,831
Investments in fixed assets (17) (341)
Net cash flows used in investing activities (230,506) (389,174)
Cash Flows From Financing Activities:
Notes payable, Net 237,132 330,985
Certificates of Deposit, Net 7,000 (2,000)
Debt service Investments, Net (41,290) (6,188)
Proceeds from issuance of Long-Term Debt 90,662 81,079
Payments for retirement of Long-Term Debt (75,475) (48,360)
Proceeds from issuance of Members'
Subordinated Certificates 9,879 6,074
Payments for retirement of Members'
Subordinated Certificates (387) (216)
Payments for retirement of patronage capital (45,349) (43,750)
Net cash flows provided by financing activities 182,172 317,624
Net Cash Flows (26,344) (4,993)
Beginning Cash and Cash Equivalents 31,368 26,310
Ending Cash and Cash Equivalents $ 5,024 $ 21,317
Supplemental Disclosure of Cash Flow Information:
Cash paid during quarters for Interest Expense $ 101,705 $ 97,756
The accompanying notes are an integral part of these combined financial
statements.
<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 1,051 members as of August 31, 1996, included 903 rural electric utility
system members ("Utility Members"), virtually all of which are consumer-owned
cooperatives, 74 service members and 74 associate members. The Utility
Members included 839 distribution systems and 64 generation and transmission
systems operating in 46 states and U.S. territories. At December 31, 1994,
CFC's member systems served approximately 12.2 million consumers, representing
service to an estimated 32.0 million ultimate users of electricity and owned
approximately $66.5 billion (before depreciation of $19.4 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, 1996, RTFC had 433 members. RTFC is a taxable entity under Sub-
chapter 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 state-
ments of financial condition have been combined with those of CFC and RTFC
in the accompanying financial statements. 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, 1996. 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, 1996 and May 31, 1996, and the combined results
of operations, cash flows and changes in members' equity for the quarters
ended August 31, 1996 and 1995.
The Notes to Combined Financial Statements for the years ended May 31, 1996
and 1995 should be read in conjunction with the accompanying financial state-
ments. (See CFC's Form 10-K for the year ended May 31, 1996, filed on
August 27, 1996).
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 restructuring agreements executed on, or after the implementation
date.
<PAGE> 8
CFC has implemented these statements. The implementation of these statements
did not have a material impact on CFC's financial statements.
CFC has implemented FASB Statement No. 115, "Accounting for Certain Invest-
ments in Debt and Equity Securities." The CFC investments covered by this
statement, at August 31, 1996, include the certificates of deposit and the
debt service investments. These items have been recorded at amortized cost,
due to the Company's intent and ability to hold all investments to maturity.
The implementation of this statement did not have a material impact on CFC's
financial statements.
In October 1994, the FASB released Statement No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments."
This statement requires disclosure about the amounts, nature and terms of
derivative financial instruments. The statement must be implemented for
fiscal years ending after December 15, 1994. CFC uses interest rate exchange
agreements to help manage its interest rate risk and is neither a dealer nor
a trader in derivative financial instruments. The implementation of this
statement did not have a material impact on these financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the assets, liabilities, revenues and expenses reported in the
financial statements, as well as amounts included in the notes thereto,
including discussion and disclosure of contingent liabilities. While the
Company uses its best estimates and judgments based on the known facts at
the date of the financial statements, actual results could differ from these
estimates as future events occur.
CFC does not believe it is vulnerable to the risk of a near term severe impact
as a result of any concentrations of its activities.
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 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, 1996, CFC had committed to lend RTFC up
to $2,600.0 million to fund loans to its members and their affiliates.
RTFC had outstanding loans and unadvanced loan commitments totaling $1,570.1
million and $1,465.5 million as of August 31, 1996 and May 31, 1996,
respectively. RTFC's net margins are allocated to RTFC's borrowers.
Summary financial information relating to RTFC is presented below:
At August 31, At May 31,
(Dollar Amounts In Thousands) 1996 1996
Outstanding loans to members and
their affiliates $1,045,104 $ 975,269
Total assets 1,149,213 1,079,920
Notes payable to CFC 1,031,188 966,690
Total liabilities 1,045,889 981,790
Members' Equity and Subordinated Certificates 103,324 98,130
For the Three Months Ended August 31,
(Dollar Amounts In Thousands) 1996 1995
Operating income $ 17,219 $ 15,611
Net margins 674 682
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Summary financial information relating to GFC is presented below:
At August 31, At May 31,
(Dollar Amounts In Thousands) 1996 1996
Outstanding loans to members $ 411,373 $ 411,373
Total assets 422,434 429,177
Notes payable to CFC 413,113 415,414
Total liabilities 422,052 427,079
Members' Equity 382 2,098
For the Three Months Ended August 31,
(Dollar Amounts In Thousands) 1996 1995
Operating income $ 6,698 $ 7,518
Net margins 290 246
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, 1996 and May 31, 1996, mortgage notes representing
approximately $1,246.9 million and $1,094.2 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, 1996 and May 31, 1996
were $999.7 million and $999.6 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. CFC makes monthly additions to the
allowance for loan and guarantee losses. These additions are required
to maintain the allowance at an adequate level based on the current year
to date increase to loans outstanding and the estimated loan growth for
the next twelve months. On a quarterly basis, CFC reviews the adequacy
of the loan and guarantee loss allowance and estimates the amount of
future provisions that will be required to maintain the allowance at an
adequate level based on estimated loan growth.
The allowance is based on estimates, and accordingly, actual loan and
guarantee losses may differ from the allowance amount. As of August 31,
1996 and May 31, 1996, such allowance was $224.9 million and $218.0
<PAGE> 10
million, respectively. At August 31, 1996 and May 31, 1996, the allowance
represented 2.75% and 2.74% of loans outstanding, 2.16% and 2.13% of loans
and guarantees outstanding and 88.3% and 92.9% of the total of non-
performing and restructured loans outstanding.
Activity in the allowance account is summarized as follows for the three
months ended August 31, 1996 and the year ended May 31, 1996.
August 31, May 31,
(Dollar Amounts in Thousands) 1996 1996
Beginning Balance $218,047 $205,596
Provision for loan and guarantee losses 6,815 12,451
Ending Balance $224,862 $218,047
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, 1996, CFC had three revolving credit agreements totaling
$5,050.0 million which are used 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 is
standby purchaser for the benefit of its members.
Two of these credit agreements, totaling a combined $4,550.0 million were
executed with 60 banks, with J.P. Morgan Securities, Inc. and The Bank of
Nova Scotia as Co-Syndication Agents and Morgan Guaranty Trust Company of
New York as Administrative Agent. Under these agreements, CFC can borrow
up to $2,730.0 million until February 28, 2000 (the "five-year facility"),
and $1,820.0 million until February 25, 1997 (the "364-day facility").
Any amounts outstanding under these facilities will be due on the
respective maturity dates. A third revolving credit agreement for $500.0
million was executed on April 30, 1996 with ten banks, including the Bank
of Nova Scotia as Administrative and Syndication Agent (the "BNS
facility"). This agreement has a 364-day revolving credit period which
terminates April 29, 1997 during which CFC can borrow and such borrowings
may be converted to a 1-year term loan at the end of the revolving credit
period.
In connection with the five-year facility, CFC pays a per annum facility
fee of .10 of 1% and per annum commitment fee of .025 of 1%. The per
annum facility fee for both agreements with a 364-day maturity is .08 of
1% and there is no commitment fee as long as CFC maintains its current
credit rating level. If CFC's long-term ratings decline, these fees may
be increased by no more than .1250 of 1%. Generally, pricing options are
the same under all three agreements and 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 $1,346.3 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
<PAGE> 11
least 1.025 and prohibits the retirement 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 prohibits CFC from incurring
senior debt (including guarantees but excluding indebtedness 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 agreements also prohibit 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 was 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, 1996 and May 31, 1996, CFC was in compliance with
all covenants and conditions under its revolving credit agreements and
there were no borrowings outstanding under such agreements.
Based on the ability to borrow under the five year facility, at
August 31, 1996 and May 31, 1996, CFC classified $2,730.0 million of
its notes payable outstanding as long-term debt. CFC expects to maintain
more than $2,730.0 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, 1996 and May 31, 1996, CFC had unadvanced loan
commitments, summarized by type of loan, as follows:
(Dollar Amounts In Thousands) August 31, 1996 May 31, 1996
Long-term $1,625,580 $1,578,658
Intermediate-term 520,061 288,570
Short-term 3,148,690 3,199,364
Telecommunications 524,948 490,283
Associate Member 34,524 54,664
Total unadvanced loan commitments $5,853,803 $5,611,539
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 $50.7 million was retired in August
1996, representing one-sixth of the total allocations for fiscal years
1988, 1989 and 1990 and 70% of the allocation for fiscal year 1996. GFC
retired patronage capital in August 1996 in the amount of $2.0 million
representing 100% of the allocations for fiscal year 1996. RTFC will
retire 70% of their FY 1996 allocations by January 31, 1997. 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.
<PAGE> 12
9. Guarantees
As of August 31, 1996 and May 31, 1996, CFC had guaranteed the following
contractual obligations of its members:
(Dollar Amounts In Thousands) August 31, 1996 May 31, 1996
Long-term tax-exempt bonds (A) $1,311,970 $1,317,655
Debt portions of leveraged lease
transactions (B) 420,599 432,516
Indemnifications of tax benefit
transfers (C) 355,298 363,702
Other guarantees (D) 135,296 135,567
Total guarantees $2,223,163 $2,249,440
(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, $1,164.7 million and $1,168.9
million as of August 31, 1996 and May 31, 1996, 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 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, 1996 and May 31, 1996, CFC had unconditionally guaranteed
commercial paper, along with the related interest rate exchange agreement,
issued by NCSC of $34.4 million and $34.7 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, 1996 and May 31, 1996:
(Dollar Amounts in Thousands) Notional Principal Amount
Maturity Date August 31, 1996 May 31, 1996
August 1996 (1) $ 0 $ 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
October 2004 (1) 45,600 45,600
April 2006 (1) 25,000 25,000
April 2006 (1) 25,000 25,000
April 2006 (1) 25,000 25,000
April 2006 (1) 25,000 25,000
Total $445,600 $475,600
(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.
<PAGE> 13
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 an AA long-term credit rating, and short-term
swap agreements only with financial institutions with at least an A long-term
credit rating.
11. Contingencies
(A) At August 31, 1996 and May 31, 1996, nonperforming loans in the
amount of $24.8 million and $25.3 million, respectively, were on a
nonaccrual basis with respect to interest income. At August 31,
1996 and May 31, 1996, the total amount of restructured debt was
$229.8 million and $209.4 million, respectively. CFC elected to
apply all principal and interest payments received against principal
outstanding on restructured debt of $178.5 million and $157.1
million, respectively. At August 31, 1996 and May 31, 1995, CFC had
no additional amounts committed to borrowers with loans classified
as nonperforming or restructured.
(B) Out of the $254.6 million and $234.7 million of loans described in
footnote 11(A) at August 31, 1996 and May 31, 1996, respectively,
CFC has classified $250.4 million and $230.4 million as impaired
with respect to the provisions of FASB Statements No. 114 and 118.
At those dates CFC had allocated $159.7 million and $160.9 million
of the loan and guarantee loss allowance to such impaired loans. At
August 31, 1996 and May 31, 1996, 29% and 32% respectively, 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 recognized a total of $0.7 million of
interest income on loans classified as impaired during the quarter
ended August 31, 1996. All other payments received were applied as
a reduction of principal. The average recorded investment in
impaired loans for the three months ended August 31, 1996 was
$244.4 million.
Subsequent to the end of the quarter, CFC has removed the impairment
classification from $47.1 million of loans to one borrower. This
borrower has made all payments as due and CFC has returned all loans
to full accrual status. As of September 30, 1996, CFC had classified
a total of $203.3 million of loans as impaired and had allocated
$129.7 million of the loan and guarantee loss reserve to such
impaired loans.
(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. On December 28, 1995, the U.S. Court of
Appeals reaffirmed the Wabash plan of reorganization. RUS requested
that the U.S. Court of Appeals rehear the case. The judges of the
Court of Appeals denied the RUS request. On August 30, 1996, the
United States petitioned the U.S. Supreme Court seeking to overturn
the WVPA Plan in reorganization.
<PAGE> 14
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 settle-
ment proceeds from Wabash in compliance with provisions under the
shared mortgage. Upon resolution 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, there-
fore, does not accrue interest income on these loans. As of August
31, 1996, CFC had $18.2 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 certain lease pay-
ments 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.
Deseret failed to make the payments required under the ARO during
1995. Deseret's creditors agreed to extend the provisions of the
ARO first through January 31, 1996 and then until February 29, 1996.
The extensions were intended to allow the creditors to develop final
terms for a long-term restructuring of the ARO. The creditors were
unable to agree on the terms of a negotiated settlement and thus the
ARO was terminated as of February 29, 1996. CFC filed a foreclosure
action against the owner of the Bonanza Plant in State Court in Utah
on March 21, 1996. In this action, CFC has not terminated the lease
or sought removal of Deseret as the plant operator. One of the
defendants in the action has asserted counterclaims against CFC
alleging that the remedies which CFC seeks are not available to it
and that CFC seeks such remedies in an improper manner. At this
time, the counterclaims are very general in nature making it hard
to determine any potential impact on CFC. Another party, not named
in the action, has successfully intervened and joined the action.
The foreclosure trial is expected to begin in early 1997.
CFC, RUS, Deseret and the members of Deseret continue to work toward
the terms of an agreement in which CFC would purchase the RUS claims
against Deseret for approximately $237 million, with Deseret's
members purchasing separate participations in these claims from CFC
for $55 million. CFC would fund the Deseret members' portion of the
purchase through secured loans to the members. RUS would require
the Deseret members to prepay their RUS loans totaling approximately
$50 million. In addition, CFC would provide Deseret with a $20
million secured line of credit. All parties have tentatively agreed
on a mid-October closing for this transaction.
CFC would fund the prepayment of the RUS loans by the Deseret
members through long-term secured loans to the members. The total
amount lent to the Deseret members, approximately $105 million ($55
million for RUS buyouts and $50 million to purchase loan
participations), would be secured against the assets and future
revenues of the respective members and not by the assets of Deseret.
From January 1, 1989 through August 31, 1996, CFC has funded $160.8
million in cashflow shortfalls related to Deseret's debt service and
rental obligations. All cashflow shortfalls funded by CFC represent
an increase to the restructured loan to Deseret. They also serve to
reduce CFC's guarantee exposure to Deseret As of August 31, 1996,
CFC had approximately $472.2 million in current credit exposure to
Deseret consisting of $178.5 million in secured loans and $293.7
million in guarantees by CFC of various direct and indirect
obligations of Deseret. The secured loan to Deseret is on non-
accrual status with respect to interest income. All payments
received from Deseret are applied against principal outstanding.
CFC's guarantees include $5.9 million in tax-benefit indemnifi-
cations and $23.9 million relating to mining equipment for a coal
supplier of Deseret. The remainder of CFC's guarantee is for semi-
annual debt service payments on $263.9 million of bonds issued in a
$655 million
<PAGE> 15
leveraged lease financing of the Bonanza Plant in 1985. In addition,
CFC had a $5.3 million loan to Deseret which is fully guaranteed
by the U.S. Government.
CFC believes that given the underlying collateral value, 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, 1996, CFC had $47.1 million in outstanding long-term
loans to Soyland which were secured equally and ratably with RUS on
all assets and future revenues of Soyland. In addition, CFC had
$14.8 million outstanding to Soyland under a long-term revolving
credit agreement and $12.6 million outstanding on a capital
additions loan, both of which have priority in payment over the
existing RUS loans and the prior CFC loan. CFC also had $274.0
million in loans to Soyland which are guaranteed by the U.S.
Government.
On September 13, 1996, CFC advanced $235.0 million to Soyland for
the purpose of repaying its RUS debt at a significant discount.
CFC advanced the amount to Soyland through two senior secured
amortizing five-year term notes for $117.5 million, both maturing
on July 1, 2001. One of the notes is fully guaranteed by the
distribution members of Soyland. Due to the amount of the RUS
discount, CFC expects Soyland to be able to make all payments
related to this debt and has classified these notes as performing
loans. Interest income on these notes will be recognized on an
accrual basis. As part of the buyout from RUS, Soyland will no
longer be responsible for the semi-annual debt service on the
grantor trust certificates, the notes of which are guaranteed by
RUS. RUS will now be responsible for all debt service payments
related to the $274.0 million, in addition to the outstanding fixed
rate grantor trust certificates held by public investors.
As of September 30, 1996, CFC has classified all new loans to
Soyland as performing, with interest recognition on an accrual
basis. The revolving credit loan and capital additions loan remain
classified as performing, with interest recognized on an accrual
basis. The restructured loan will remain classified as
restructured, due to changes made in a prior agreement, and it will
be returned to accrual status with respect to the recognition of
interest income.
12. Loans Guaranteed by RUS
At August 31, 1996 and May 31, 1996, CFC held $416.6 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.
<PAGE> 16
Part I. Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(all dollar amounts in millions)
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the assets, liabilities, revenues and expenses reported in the
financial statements, as well as amounts included in the notes thereto,
including discussion and disclosure of contingent liabilities. While the
Company uses its best estimates and judgments based on the known facts at
the date of the financial statements, actual results could differ from these
estimates as future events occur.
CFC does not believe it is vulnerable to the risk of a near term severe impact
as a result of any concentrations of its activities.
Changes in Financial Condition
During the three months ended August 31, 1996, CFC's total assets increased
by $236.3 or 2.9% to $8,290.4 from $8,054.1 at May 31, 1996, primarily due to
an increase of $223.7 in net loans outstanding, an increase of $41.3 in the
debt service account and a decrease of $33.3 in cash and certificates of
deposit. Changes to the loan portfolio included increases of $191.6 in long-
term loans, $23.5 in short-term loans and $20.4 in restructured loans,
partially offset by a decrease of $4.6 in intermediate-term loans. Long-term
loan activity consisted primarily of $292.3 in advances and $77.1 in principal
repayments. The debt service account increase was due to the mandatory
sinking fund requirements for bonds that are scheduled to mature during the
year. The cash balance decreased due to the increase in the debt service
account.
Net loans to members represented 96% of total assets at August 31, 1996 and
May 31, 1996. Long-term loans represented 86% of gross loans at August 31,
1996 and May 31, 1996. Fixed rate loans represented 37% of gross loans at
August 31, 1996 and 38% at May 31, while the remaining loans carry a variable
rate that may be adjusted monthly or semi-monthly. At August 31, 1996, $832.4
or 10.2% of gross loans were unsecured, compared to $767.1 million or 9.7% at
May 31, 1996. The $832.4 of unsecured loans at August 31, 1996 includes $317.6
in temporarily unsecured loans for RUS note buyouts. This amount represents
the first portion of the buyout from RUS. CFC will be advancing the remaining
portion prior to the end of fiscal year 1997, at which time the full amount
advanced by CFC will be secured by all assets and future revenues of the
borrower. All other loans were secured pro-rata with other lenders (primarily
RUS), by all assets and future revenues of the borrower.
At August 31, 1996 CFC had provided $2,223.2 in guarantees, a decrease of
$26.2 from the $2,249.4 at May 31, 1996. These guarantees relate primarily
to tax-exempt financed pollution control equipment and to leveraged lease
transactions 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 unadvanced loan commitments of $5,853.8, an
increase of $242.3 from the $5,611.5 committed at May 31, 1996. Most
unadvanced loan commitments contain a material adverse change clause that
would relieve CFC from its obligation to lend if the borrower's financial
condition had changed materially from the time the loan was approved. Many
of these commitments are provided for operational back-up liquidity. CFC does
not anticipate funding the majority of the commitments outstanding during the
next twelve to eighteen months.
During the three months ended August 31, 1996, CFC's total liabilities and
Members' Equity increased by $236.3 or 2.9% to $8,290.4 from $8,054.1 at May
31, 1996. The increase was primarily due to increases of $237.1 in notes
payable, $15.2 to long-term debt and $10.3 in interest payable offset by a
decrease in Members' Equity and certificates of $27.5.
The notes payable increase was due to increases of $171.6 in Dealer Commercial
Paper and $66.0 in Member Commercial Paper. The Member Commercial paper
balance outstanding at August 31, 1996 represents a 5.3% increase over the
May 31, 1996 balance. The increase to long-term debt was due to a net
increase in medium-term notes outstanding. CFC has averaged about $20.6 in
Medium-Term Note sales to members each month. The decrease in Members' Equity
and certificates was due to the retirement of patronage capital partially
offset by the year to date net margins and the issuance of Subordinated
Certificates on new loans. The increases to notes payable and long-term
debt were required to fund the increase in loans outstanding and the decrease
to Members' Equity and certificates. The increase in interest payable was
<PAGE> 17
due to the increase in funds outstanding and to the increase in the rates on
those funds. Subsequent to the end of the quarter on September 5, 1996, CFC
issued $100.0 in Collateral Trust Bonds, due 2001 at a rate of 6.75% and on
September 26, 1996, CFC issued $100.0 in Collateral Trust Bonds, due 2006 at
a rate of 7.30%.
The allowance for loan and guarantee losses increased by $6.9 to $224.9 at
August 31, 1996 from $218.0 at May 31, 1996. At August 31, 1996, the loan
and guarantee loss allowance represented 2.75% of gross loans, 2.16% of gross
loans and guarantees, 88.33% of nonperforming and restructured loans, and
906.86% of nonperforming loans compared to 2.74%, 2.14%, 92.88% and 862.05%
at May 31, 1996, respectively. CFC makes monthly additions to the allowance
for loan and guarantee losses. These additions are required to maintain the
allowance at an adequate level based on the current year to date increase to
loans outstanding and the estimated loan growth for the next twelve months.
On a quarterly basis, CFC reviews the adequacy of the loan and guarantee
loss allowance and estimates the amount of future provision that will be
required to maintain the allowance at an adequate level based on estimated
loan growth. 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, 1996, management believes that the
allowance for loan and guarantee losses is adequate to cover any portfolio
losses which have occurred or may occur.
As of August 31, 1996, CFC had advanced $1,034.9 to 61 members for the pre-
payment of RUS loans. CFC estimates that this amount represented 86% of the
total RUS prepayments. Other lenders have lent 10% of the total and the
remaining 4% was prepaid out of the members' internally generated funds. As
of August 31, 1996 CFC had approved loan applications for an additional $72.0
from 12 members for the purpose of prepaying their RUS notes. In addition,
there were $59.8 in loan prepayment applications pending at RUS. RTFC had
loan applications for $48.9 from 7 applicants for telephone exchange
acquisitions.
CFC has implemented FASB Statements No. 114, "Accounting by Creditors for
Impairment of a Loan" and No. 118, "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosure." As of August 31, 1996, CFC has
classified $250.4 of loans outstanding as impaired with respect to the
provisions of these statements. At August 31, 1996, CFC has allocated $159.7
of the loan and guarantee loss allowance to such impaired loans. CFC has
recognized $0.7 of interest income on its impaired loans during the three
months ended August 31, 1996. CFC has applied all other payments received
as a reduction to principal outstanding.
At August 31, 1996, CFC had loans outstanding in the amount of $24.8
classified as nonperforming and $229.8 classified as restructured. All
nonperforming loans and $225.5 of restructured loans were on a non-accrual
basis with respect to interest income.
As of August 31, 1996, CFC had $472.2 in current credit exposure to Deseret,
consisting of $178.5 in secured loans and $293.7 for guarantees of various
direct and indirect obligations of Deseret. During the quarter ended August
31, 1996, the $178.5 of loans to Deseret were on non-accrual status with
respect to recognition of interest income. All payments received were applied
against principal outstanding. CFC also had $5.3 loans to Deseret which are
guaranteed by the U.S. Government. CFC recognizes interest income on an
accrual basis on the loans guaranteed by the U.S. Government.
CFC, RUS, Deseret and the distribution members of Deseret continue to work
toward the terms of an agreement in which CFC would purchase the RUS claims
against Deseret for approximately $237, with Deseret's members purchasing
separate participations in these claims from CFC for $55. In addition, CFC
would provide Deseret with a $20 secured line of credit. The purchase of
the RUS claims by CFC has been tentatively scheduled for mid-October 1996.
CFC would fund the Deseret members' portion of the purchase through secured
loans to the members. In addition, RUS would require the Deseret members to
prepay their RUS loans totaling approximately $50. CFC would fund the
prepayment of the RUS loans by the Deseret members through long-term secured
loans to the members. The total amount lent to the Deseret members,
approximately $105, would be secured against the assets and future revenues
of the respective members and not by the assets of Deseret.
On December 28, 1995, the U.S. Court of Appeals reaffirmed the lower courts
approval of the Wabash plan of reorganization. On August 30, 1996, the
United States petitioned the U.S. Supreme Court seeking to overturn the WVPA
plan in reorganization. As of August 31, 1996, CFC had $18.2 in loans out-
standing to Wabash. Upon resolution of the bankruptcy, CFC and RUS have
agreed to split all proceeds from Wabash in compliance with the provisions
of the shared
<PAGE> 18
mortgage. 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 CFC and RUS. During the quarter ended August 31, 1996, all loans to
Wabash were on a non-accrual status with respect to the recognition of
interest income. All payments received from Wabash were applied against the
principal balance outstanding.
As of August 31, 1996, CFC had $47.1 in long-term secured loans, $14.8 out-
standing under a revolving credit agreement and $12.6 outstanding on a capital
additions loan to Soyland. The revolving credit agreement and capital
additions loans both have priority in payment over the existing RUS loans
and prior CFC loan. The amounts outstanding under the revolving credit
agreement and the capital additions loan would be repaid first from the
proceeds of asset sales or liquidation. The revolving credit and capital
additions loans were on full accrual status with respect to the recognition
of interest income. The $47.1 restructured loan was on non-accrual status,
with interest income recognized on a cash basis as received. Soyland has
negotiated a settlement of its outstanding debt with RUS. Under the settle-
ment, Soyland will pay the government $235.0 and will be released from all of
its obligations to the government pursuant to the RUS loan or guarantee
programs. On September 13, 1996, CFC advanced $235.0 to Soyland for the
purpose of repaying its RUS debt. The $235.0 was advanced in two notes of
$117.5, both maturing on July 1, 2001. Both notes are fully secured by the
assets and future revenues of Soyland and one of the notes is also guaranteed
by the distribution members of Soyland. As of September 30, 1996, all new
loans to Soyland were classified as performing, with interest recognition on
an accrual basis and the $47.1 restructured loan was returned to accrual
status with respect to the recognition of interest income.
CFC believes that, given the value of the collateral underlying the loans to
Deseret, Wabash and Soyland, it is adequately reserved for any potential
losses.
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 three months
ended August 31, 1996, CFC achieved a Times Interest Earned Ratio (TIER) of
1.12. This was the same as the 1.12 TIER for the quarter ended August 31,
1995. Management has established a 1.10 TIER as its minimum operating level.
Operating income for the three months ended August 31, 1996, was $134.3, an
increase of $12.2 from the prior year period. The increase in operating income
was due to a positive volume variance of $19.5 and a negative rate variance of
$7.3. Average loans outstanding increased by $1,026.8 and the average yield
decreased by 29 basis points from the prior year period. For the three months
ended August 31, 1996, average loans outstanding were $8,069.5 and the average
yield was 6.60%, compared to average loans outstanding of $7,042.7 and an
average yield of 6.89% for the three months ended August 31, 1995. CFC sets
the interest rates on its loans to cover the cost of funds, general and
administrative expenses, a provision for loan and guarantee losses and a
reasonable TIER. As a result, the yield earned on the loan portfolio will
move in conjunction with the rates in the capital markets.
CFC's cost of funds for the three months ended August 31, 1996, totaled
$110.9, an increase of $7.8 from the prior year. The increase was due to a
negative rate variance of $8.2 and a positive volume variance of $16.0. The
average interest rate on funds used by CFC at August 31, 1996, was 5.45%, a
decrease of 36 basis points compared to the average rate of 5.81% at August
31, 1995. 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 three months ended August 31, 1996 and August 31, 1995, general and
administrative expenses totaled $4.4 and $3.7, respectively. General and
administrative expenses represented 22 basis points of average loan volume
for the three months ended August 31, 1996, which is an increase of 3 basis
points from 19 basis points for the prior year period.
The provision for loan and guarantee losses for the three months ended August
31, 1996, totaled $6.8 or 33 basis points, compared to the prior year total
of $3.6 or 22 basis points. During fiscal year 1997, CFC may continue its
practice of making a special provision to the loan and guarantee loss
allowance equal to the net margins earned in excess of the amount required
to achieve a 1.12 TIER on a monthly basis. During the quarter ended August
31, 1996, this resulted in additional provisions totaling $4.3, an increase
of $2.6 over the $1.7 of additional provision for the first quarter of the
prior year. These additions are intended to maintain the allowance at an
adequate level based on current and expected future loan
<PAGE> 19
growth. 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.
Overall, CFC's net margins for the three months ended August 31, 1996,
totaled $12.8, a increase of $0.4 from the prior year period total of $12.4.
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) allow CFC to borrow funds
on terms of up to five years. Second, CFC has maintained investment grade
ratings, facilitating access to the capital markets. Third, CFC maintains
SEC shelf registrations for its Collateral Trust Bonds, Medium-Term Notes and
other debt securities, 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 permit public issuance of certificates to private investors to replace
the of variable rate certificates currently held by CFC. 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, 1996, CFC had $5,050.0 in available bank credit, $2,730.0 of
which is available through February 28, 2000, $1,820.0 is available through
February 25, 1997 and $500.0 is available through April 29, 1997. As of
August 31, 1996 CFC was in compliance with all covenants and conditions to
borrowing.
As of August 31, 1996, CFC had shelf registrations for Collateral Trust Bonds
and Medium-Term Notes of $650.0 and $551.0, respectively. As of August 31,
1996, CFC had shelf registrations for Grantor Trust Certificates of $121.8.
CFC also developed and registered $250.0 of a new debt security, Quarterly
Income Capital Securities. CFC plans on selling these securities in the retail
markets with maturities of 30 to 50 years. The interest due on these
securities will be deferrable by CFC for up to five years. As of August 31,
1996, CFC had not issued any of these new securities.
Member invested funds, including the loan and guarantee loss allowance, at
August 31, 1996 and May 31, 1996, were $3,251.5 and $3,204.3 or 38.6% and
39.1% 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 5.96 at August 31, 1996, an increase over the 5.69
reported at May 31, 1996. 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 15, 1996.
<PAGE> 20
The following chart schedules the maturities of CFC's fixed rate loans and
fixed rate funding. The chart is a useful tool to identify gaps in the
matching of fixed rate loans with fixed rate funds.
<TABLE>
<CAPTION> Interest-Rate Gap Analysis
(Fixed Assets/Liabilities)
As of August 31, 1996
FY 97 FY 98-99 FY 00-01 FY 02-06 FY 07-16 FY 17+ Total
<C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loan Amortization
and repricing $ 190.6 $ 621.4 $ 468.8 $ 863.3 $ 584.9 $ 129.1 $2,858.1
Total Assets $ 190.6 $ 621.4 $ 468.8 $ 863.3 $ 584.9 $ 129.1 $2,858.1
Liabilities and Equity:
Long-Term Debt $ 309.1 $ 365.1 $ 170.0 $ 519.3 $ 52.2 $ 150.0 $1,565.7
Subordinated Certificates 3.9 11.5 113.3 344.0 426.3 68.0 967.0
Equity - - 165.6 - 17.5 - 183.1
Total Liabilities and Equity $ 313.0 $ 376.6 $ 448.9 $ 863.3 $ 496.0 $ 218.0 $2,715.8
Gap * $(122.4) $ 244.8 $ 19.9 $ 0.0 $ 88.9 $ (88.9) $ 142.3
Cumulative Gap $(122.4) $ 122.4 $ 142.3 $ 142.3 $ 231.2 $ 142.3
Cumulative Gap as a %
of Total Assets 1.48% 1.48% 1.72% 1.72% 2.79% 1.72%
* Loan amortization/repricing over/(under) debt maturities
</TABLE>
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 total assets. 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,
1996, CFC had $190.6 in fixed rate assets amortizing or repricing and $313.0
in fixed rate liabilities maturing during the remainder of fiscal year 1997.
The difference, $122.4, represents the amount of CFC's assets that are not
considered match-funded as to interest rate. CFC's difference of $122.4 at
August 31, 1996 represents 1.48% of total assets.
Variable rate loans are repriced monthly and are funded with variable rate
liabilities that are also priced monthly and as such are considered to be
match-funded with respect to interest rate repricings.
<PAGE> 21
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.
Item 5 on August 28, 1996 - Filing of Underwriting Agreement for 6.75%
Collateral Trust Bonds, due 2001.
Item 5 on June 19, 1996 - Filing of exhibits for MTN shelf
registration.
<PAGE> 22
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 15, 1996
/s/ Angelo M. Salera
Controller (Principal Accounting Officer)
October 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the August
31, 1996 Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> AUG-31-1996
<CASH> 23,024
<SECURITIES> 0
<RECEIVABLES> 89,442
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 194,663
<PP&E> 41,506
<DEPRECIATION> 8,195
<TOTAL-ASSETS> 8,290,435
<CURRENT-LIABILITIES> 2,791,506
<BONDS> 4,049,122
0
0
<COMMON> 0
<OTHER-SE> 1,449,807
<TOTAL-LIABILITY-AND-EQUITY> 8,290,435
<SALES> 134,267
<TOTAL-REVENUES> 134,928
<CGS> 110,927
<TOTAL-COSTS> 110,927
<OTHER-EXPENSES> 4,420
<LOSS-PROVISION> 6,815
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,766
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,766
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,766
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
