<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 1997
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
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
A S S E T S
(Unaudited)
August 31, 1997 May 31, 1997
Cash $ 31,580 $ 50,011
Debt Service Investments 114,947 77,219
Loans To Members, net 8,991,002 8,678,196
Receivables 102,621 101,613
Fixed Assets, net 24,508 33,208
Debt Service Reserve Funds 103,489 103,489
Other Assets 14,002 13,758
Total Assets $ 9,382,149 $ 9,057,494
The accompanying notes are an integral part of
these combined financial statements.
2
<PAGE>
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, 1997 May 31, 1997
Notes Payable, due within one year $ 3,647,765 $ 3,507,074
Accounts Payable 25,034 23,200
Accrued Interest Payable 59,765 46,924
Long-Term Debt 4,067,273 3,864,887
Other Liabilities 8,488 6,329
Quarterly Income Capital Securities 125,000 125,000
Commitments, Guarantees and Contingencies
Members' Subordinated Certificates:
Membership subscription certificates 644,817 645,449
Loan & guarantee certificates 569,181 567,037
Total Members' Subordinated Certificates 1,213,998 1,212,486
Members' Equity 234,826 271,594
Total Members' Subordinated
Certificates & Members' Equity 1,448,824 1,484,080
Total Liabilities and Members' Equity $ 9,382,149 $ 9,057,494
The accompanying notes are an integral part of
these combined financial statements.
3
<PAGE>
(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, 1997 and 1996
Quarters Ended
August 31, 1997 August 31, 1996
Operating Income-Interest on loans to members $150,477 $134,267
Less-cost of funds allocated 127,779 110,927
Gross operating margin 22,698 23,340
Expenses:
General, administrative and loan processing 5,329 4,420
Provision for loan and guarantee losses 8,250 6,815
Total expenses 13,579 11,235
Operating margin 9,119 12,105
Nonoperating Income 592 661
Gain on Sale of Land 4,939 -
Net Margins $ 14,650 $ 12,766
The accompanying notes are an integral part of
these combined financial statements.
4
<PAGE>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts in Thousands)
For the Quarters Ended August 31, 1997 and 1996
<TABLE>
<CAPTION> 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, 1997
Balance at May 31, 1997 $271,594 $ 1,470 $ 596 $ 2,289 $ 504 $266,735
Retirement of patronage capital (52,715) - - - (123) (52,592)
Net Margins 14,650 - - 14,650 - -
Other 1,297 9 65 - - 1,223
Balance at August 31, 1997 $234,826 $ 1,479 $ 661 $ 16,939 $ 381 $215,366
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
</TABLE>
The accompanying notes are an integral part of
these combined financial statements.
5
<PAGE>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Three Months Ended August 31, 1997 and 1996
1997 1996
Cash Flows From Operating Activities:
Accrual basis net margins $ 14,650 $ 12,766
Add (deduct):
Provision for loan and guarantee losses 8,250 6,815
Depreciation 347 282
Amortization of deferred income (382) (2,645)
Amortization of issuance costs and deferred charges 456 365
Gain on sale of land (4,939) -
Add (deduct) changes in accrual accounts:
Receivables (3,016) (5,744)
Accounts payable 1,479 91
Accrued interest payable 12,841 10,257
Other (1,531) (197)
Net cash flows provided by operating activities 28,155 21,990
Cash Flows From Investing Activities:
Advances made on loans (1,195,441) (782,594)
Principal collected on loans 874,386 552,105
Proceeds from sale of land 13,235 -
Investments in fixed assets 58 (17)
Net cash flows used in investing activities (307,762) (230,506)
Cash Flows From Financing Activities:
Notes payable, Net 165,651 237,132
Certificates of Deposit, net - 7,000
Debt service Investments, net (37,728) (41,290)
Proceeds from issuance of long-term debt 323,993 90,662
Payments for retirement of long-term debt (146,473) (75,475)
Proceeds from issuance of Members'
Subordinated Certificates 4,401 9,879
Payments for retirement of Members'
Subordinated Certificates (897) (387)
Payments for retirement of Patronage Capital (47,771) (45,349)
Net cash flows provided by financing activities 261,176 182,172
Net Cash Flows (18,431) (26,344)
Beginning Cash and Cash Equivalents 50,011 31,368
Ending Cash and Cash Equivalents $ 31,580 $ 5,024
Supplemental Disclosure of Cash Flow Information:
Cash paid during three months for Interest Expense $ 116,550 $101,705
The accompanying notes are an integral part of
these combined financial statements.
6
<PAGE>
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 1,056 members as of August 31, 1997, included 910 rural electric utility
system members ("Utility Members"), virtually all of which are consumer-owned
cooperatives, 74 service members and 72 associate members. The Utility
Members included 845 distribution systems and 65 generation and transmission
systems operating in 46 states and U.S. territories.
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, 1997, RTFC had 474 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 refinancing
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.
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, 1997. 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, 1997 and May 31, 1997, and the combined
results of operations, cash flows and changes in members' equity for the three
months ended August 31, 1997 and 1996.
The Notes to Combined Financial Statements for the years ended May 31, 1997
and 1996 should be read in conjunction with the accompanying financial
statements. (See CFC's Form 10-K for the year ended May 31, 1997, filed on
August 29, 1997).
CFC has implemented Financial Accounting Standards Board (the
"FASB") Statement No. 114, "Accounting by Creditors for Impairment of a
Loan" and Statement No. 118, "Accounting by Creditors for Impairment of
a Loan-Income Recognition and Disclosures". These statements require
CFC to calculate impairment on loans receivable by comparing the present
value of the future cash flows associated with the loan against CFC's
investment in the loan. The statements also require that CFC provide loss
reserves for loans based on the calculated impairment. The implementation
of these statements did not have a material impact on CFC's financial
statements.
7
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
CFC has implemented FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The CFC investments covered by
this statement, at August 31, 1997, 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.
CFC has implemented FASB 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. CFC is neither a dealer nor a trader in
derivative financial instruments. CFC uses interest rate exchange
agreements to help manage its interest rate risk. The implementation of this
statement did not have a material impact on CFC's 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, 1997, CFC had committed to lend RTFC up to
$3.4 billion to fund loans to its members and their affiliates.
RTFC had outstanding loans and unadvanced loan commitments totaling
$1,851.0 million and $1,825.0 million as of August 31, 1997 and May 31, 1997,
respectively. RTFC's net margins are allocated to RTFC's borrowers. Summary
financial information relating to RTFC is presented below:
(Unaudited)
At August 31, At May 31,
(Dollar Amounts In Thousands) 1997 1997
Outstanding loans to members and their affiliates $1,122,653 $1,099,163
Total assets 1,225,710 1,197,753
Notes payable to CFC 1,106,862 1,089,336
Total liabilities 1,123,579 1,100,497
Members' Equity and Subordinated Certificates 102,131 97,256
(Unaudited)
For the Three Months Ended August 31,
(Dollar Amounts In Thousands) 1997 1996
Operating income $19,839 $17,219
Net margins 748 674
8
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
Summary financial information relating to GFC is presented below:
(Unaudited)
At August 31, At May 31,
(Dollar Amounts In Thousands) 1997 1997
Outstanding loans to members $135,220 $135,220
Total assets 139,252 141,353
Notes payable to CFC 135,220 136,960
Total liabilities 138,922 139,934
Members' Equity 330 1,419
(Unaudited)
For the Three Months Ended August 31,
(Dollar Amounts In Thousands) 1997 1996
Operating income $2,174 $6,698
Net margins 219 290
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 Chase Manhattan
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, 1997 and May 31, 1997, mortgage notes representing
approximately $1,288.1 million and $1,294.5 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, 1997 and May 31, 1997 were
$1,249.1 million and $1,149.2 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 regular 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.
9
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
Activity in the allowance account is summarized as follows for the three months
ended August 31, 1997 and the year ended May 31, 1997.
August 31, May 31,
(Dollar Amounts in Thousands) 1997 1997
Beginning Balance $233,208 $218,047
Provision for loan and guarantee losses 8,250 15,161
Charge-offs (2,104) -
Ending Balance $239,354 $233,208
Total Loan and Guarantee Loss Allowance
As a Percentage of:
Total Loans 2.59% 2.62%
Total Loans and Guarantees 2.11% 2.12%
Total Nonperforming and Restructured Loans 68.50% 62.79%
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. Those issued as a
condition of receiving a loan or guarantee generally 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, 1997, 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 $4,550.0 million were executed with 52
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 $2,275.0
million until November 26, 2001 (the "five-year facility"), and $2,275.0
million until November 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 November 27, 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
November 26, 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
.090 of 1%. The per annum facility fee for both agreements with a 364-day
maturity is .065 of 1%. There is no commitment fee for any
10
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
of the revolving credit facilities. If CFC's long-term ratings decline, the
facility fees may be increased by no more than .035 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 $1,349.9
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 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 prohibit 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, Members' Subordinated Certificates and Quarterly
Income Capital Securities 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, 1997 and
May 31, 1997, 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, 1997
and May 31, 1997, CFC classified $2,275.0 million and $2,250.0 million,
respectively, of its notes payable outstanding as long-term debt. CFC expects
to maintain more than $2,275.0 million of notes payable outstanding 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, 1997 and May 31, 1997, CFC had unadvanced loan commitments,
summarized by type of loan, as follows:
(Dollar Amounts In Thousands) August 31, 1997 May 31, 1997
Long-term $2,199,233 $2,121,557
Intermediate-term 387,178 363,970
Short-term 3,487,480 3,443,502
Telecommunications 728,365 725,364
Associate Member 33,345 32,974
Total unadvanced loan commitments $6,835,601 $6,687,367
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.
11
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
8. Retirement of Patronage Capital
CFC patronage capital in the amount of $54.6 million was retired in August
1997, representing 70% of the allocation for fiscal year 1997 and one-sixth
of the total allocations for fiscal years 1988, 1989 and 1990. The $54.6
million includes $5.2 million retired to RTFC and $2.7 million retired to GFC.
GFC retired patronage capital in August 1997 in the amount of $1.7 million
representing 100% of the allocation for fiscal year 1997. RTFC will retire 70%
of their fiscal year 1997 allocation later this fiscal year. 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, 1997 and May 31, 1997, CFC had guaranteed the following
contractual obligations of its members:
(Dollar Amounts In Thousands) August 31, 1997 May 31, 1997
Long-term tax-exempt bonds (A) $1,185,945 $1,190,925
Debt portions of leveraged lease transactions (B) 448,909 418,916
Indemnifications of tax benefit transfers (C) 330,220 338,264
Other guarantees (D) 134,250 132,566
Total guarantees $2,099,324 $2,080,671
(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, $1,038.7 million and $1,043.2
million as of August 31, 1997 and May 31, 1997, 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, 1997 and May 31, 1997, CFC had unconditionally
guaranteed commercial paper, along with the related interest rate exchange
agreement, issued by NCSC of $33.1 million and $33.7 million,
respectively.
10. Derivative Financial Instruments
At August 31, 1997 and May 31, 1997, CFC was a party to interest rate
exchange agreements totaling $438.8 million. CFC uses interest rate
exchange agreements as part of its overall interest rate matching strategy.
Interest rate exchange agreements are used when they provide CFC a lower
cost of funding option or minimize interest rate risk. CFC will only enter
interest rate exchange agreements with highly rated financial institutions. At
both of the above dates, CFC was using interest rate exchange agreements to
fix the interest rate on $238.8 million of its variable rate commercial paper.
CFC was also using interest rate exchange agreements at both dates to
minimize the variance between the three month LIBOR rate at
12
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
which $200.0 million of Collateral Trust Bonds and Medium-Term Notes were
issued and CFC's variable commercial paper rate. All of CFC's derivative
financial instruments were held for purposes other than trading. CFC has not
invested in derivative financial instruments for trading purposes in the past
and does not anticipate doing so in the future.
The following table lists the notional principal amounts of CFC's interest
rate exchange agreements at August 31, 1997 and May 31, 1997:
(Dollar Amounts in Thousands)
Notional Principal Amount
Maturity Date August 31, 1997 May 31, 1997
February 1998 (2) 50,000 50,000
November 1999 (2) 50,000 50,000
November 1999 (2) 50,000 50,000
November 1999 (2) 50,000 50,000
January 2000 (1) 52,851 52,851
January 2001 (1) 42,749 42,749
October 2004 (1) 43,200 43,200
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 $438,800 $438,800
(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.
CFC does not value the interest rate exchange agreements on its balance
sheet, but rather values the underlying hedged debt instruments at historical
cost. All amounts that CFC pays and receives related to the interest rate
exchange agreements and the underlying hedged debt instruments are
included in CFC's cost of funding for the period. On the $238.8 million of
interest rate exchange agreements in which CFC pays a fixed rate and
receives a variable rate, the fixed rate on the contract is CFC's cost of
funds. On the $200.0 million of interest rate exchange agreements in which CFC
pays a commercial paper rate and receives a three month LIBOR rate, CFC's
cost of funds is the commercial paper rate. In both cases, CFC receives the
amount required to service the debt outstanding to its investors from the
counter party to the agreement. The estimated fair value of CFC's interest
rate exchange agreements is presented in the footnotes to the financial
statements of CFC's Form 10-K for the year ended May 31, 1997.
CFC closely matches the terms of its interest rate exchange agreements
with the terms of the underlying debt instruments. Therefore, it is unlikely
that CFC would prepay debt that is hedged or have hedged debt mature prior to
the maturity of the interest rate exchange agreement. However,
circumstances may arise that cause either CFC or the counter party to the
agreement to exit such agreement. In the event of such actions, CFC would
record any gain or loss from the termination of the interest rate exchange
agreement as an extraordinary item on its income statement for that period.
11. Contingencies
(A) At August 31, 1997 and May 31, 1997, nonperforming loans in the amount
of $5.1 million and $9.4 million, respectively, were on a nonaccrual basis
with respect to interest income. At August 31, 1997 and May 31, 1997, the
total amount of restructured loans was $344.3 million and $362.0 million,
respectively. CFC elected to apply all payments received against principal
outstanding on all restructured loans at both dates.
13
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
(B) Out of the $349.4 million and $371.4 million of loans described in
footnote 11(A) at August 31, 1997 and May 31, 1997, respectively, CFC has
classified $349.4 million and $371.4 million as impaired with respect to the
provisions of FASB Statements No. 114 and 118. At those dates CFC had
allocated $126.0 million of the loan and guarantee loss allowance for such
impaired loans. The amount of loan and guarantee loss allowance allocated for
such loans was based on a comparison of the present value of the expected
future cashflow associated with the loan and/or the estimated fair value of the
collateral securing the loan to the recorded investment in the loan. CFC
recognized no interest income on loans classified as impaired during the three
months ended August 31, 1997. All payments received were applied as a
reduction of principal. The average recorded investment in impaired loans
for the three months ended August 31, 1997 was $363.4 million compared to
$332.7 for the year ended May 31, 1997.
(C) On December 31, 1996 the Wabash Valley Power Association ("WVPA")
plan of reorganization became effective. Under the plan, CFC received a
$4.9 million cash payment and offset $9.9 million of WVPA's investments in
CFC commercial paper and Subordinated Certificates, for a total of $14.8
million. CFC also received a combination of secured and unsecured
promissory notes bearing interest at market rates totaling $13.4 million,
bringing the total received by CFC to $28.2 million. CFC applied the cash
and offsets against the $17.7 million nonperforming loan to Wabash,
reducing the balance to $2.9 million at August 31, 1997. The notes
receivable have been classified as performing and are accruing interest at
CFC's intermediate-term interest rate. WVPA is current with respect to
amounts due on the notes. The $2.9 million has been classified as
nonperforming and is on a nonaccrual status with respect to the recognition
of interest income.
CFC and RUS are negotiating a settlement on the amount of true up
payments under a separate agreement entered into in May 1988. This
agreement provides for CFC and RUS to allocate between them all post-
petition, pre-confirmation payments made by WVPA to CFC on debt secured
by a mortgage under which CFC and RUS were co-mortgagees in proportion
to the respective amounts of debt secured. CFC anticipates making a
payment to RUS under this agreement. At August 31, 1997, CFC has a
deferred gain of $10.5 million (total received $28.2 million less outstanding
loans of $17.7 million). This gain will be used to offset a portion of any
true-up payment that is made to RUS.
(D) Deseret Generation & Transmission Co-operative ("Deseret") failed to
make the payments required under a prior workout agreement, the Agreement
Restructuring Obligations (the "ARO"), during 1995. The creditors were unable
to agree on the terms of a negotiated settlement and the ARO was terminated as
of February 29, 1996. CFC filed a foreclosure action against the owner of the
Bonanza Power 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 foreclosure action has filed amended
counterclaims against CFC. These amended counterclaims allege breaches of
contract and fiduciary duties, fraudulent concealment, tortious interference
with contract and conspiracy. These amended counterclaims also seek rescission
or equitable subordination of CFC's interest in the Bonanza Plant. A trial
has been scheduled for June 1998.
On October 16, 1996, Deseret and CFC entered into an Obligations
Restructuring Agreement (the "ORA") for the purpose of restructuring
Deseret's debt with CFC. Pursuant to the terms of the ORA, CFC agreed to
(i) forbear from exercising any remedy to collect the CFC Debt (as defined in
the ORA) and (ii) pay and perform all of the CFC Guarantees (as defined in
the ORA) in consideration for Deseret agreeing to make quarterly minimum
payments to CFC through December 31, 2025. In addition to the quarterly
minimum payments, Deseret is required to pay to CFC certain percentages of
its excess cash flow and proceeds from the disposition of assets, as detailed
in the ORA. If Deseret performs all of its obligations under the ORA, CFC has
agreed to forgive any remaining CFC Debt on December 31, 2025. To date,
Deseret has made all required payments under the ORA.
In connection with the ORA, on October, 16, 1996, CFC acquired all of
Deseret's indebtedness in the outstanding principal amount of $740 million
from RUS for the sum of $238.5 million (the "RUS Debt"). As a result of the
purchase, CFC holds a majority of Deseret's outstanding secured debt.
Pursuant to a participation agreement dated October 16, 1996, the member
systems of Deseret purchased from CFC, for
14
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
$55 million, a participation interest in the RUS Debt. CFC provided long term
financing to the members of Deseret as follows: (i) $32.5 million in the
aggregate to finance the buyout by the members of their respective RUS debt
(the "Note Buyout Loans"),
and (ii) $55.0 million in the aggregate to finance the members' purchase of
participation interests in the RUS Debt acquired by CFC (the "Participation
Loans"). The Note Buyout Loans and the Participation Loans are secured by
the assets and revenues of the member systems. Under the participation
agreement the Deseret members will receive a share of the minimum
quarterly payments that Deseret makes to CFC which the members will use
to service their Participation Loans. Each member of Deseret has the option
to put its Participation Loan back to CFC at any time after twelve years,
provided that no event of default exists under the ORA and under such
member's Participation Loan.
From January 1, 1989 through August 31, 1997, CFC has funded $176.2 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, 1997, CFC had approximately
$667.7 million in current credit exposure to Deseret consisting of $344.3
million in secured loans and $323.4 million in guarantees by CFC of various
direct and indirect obligations of Deseret. The secured loans to Deseret are
on nonaccrual status with respect to interest income. All payments received
from Deseret are applied against principal outstanding. CFC's guarantees
include $5.1 million in tax-benefit indemnifications and $56.4 million
relating to mining equipment. The remainder of CFC's guarantee is for
semi-annual debt service payments on $261.9 million of bonds issued in a
$655 million leveraged lease financing of the Bonanza Plant in
1985. RUS is responsible for the repayment of $174.9 million of Deseret loans
held by grantor trusts and serviced by CFC. CFC holds $2.8 million of the
grantor trust certificates which are currently in the variable rate mode.
Based on its analysis, CFC believes that it has adequately reserved for any
potential loss on its loans and guarantees to Deseret.
12. Loans Guaranteed by RUS
At August 31, 1997 and May 31, 1997, CFC held $138.0 million in Trust
Certificates related to the refinancing of Federal Financing Bank loans.
These Trust Certificates are supported by payments from certain CFC power
supply members whose payments are guaranteed by RUS.
13. Gain on Sale of Land
During the quarter ended August 31, 1997, CFC sold land with a cost basis of
$8.3 million for $13.2 million, resulting in a gain of $4.9 million.
15
<PAGE>
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, 1997, CFC's total assets increased by
$324.6 or 3.6% to $9,382.1 from $9,057.5 at May 31, 1997, primarily due to
an increase of $312.8 in net loans outstanding and an increase of $37.7
in the debt service account. Changes to the loan portfolio included
increases of $312.9 in long-term loans and $68.8 in short-term
loans, partially offset by a decrease of $22.0 in nonperforming and
restructured loans and $40.8 in intermediate-term loans. Long-term loan
activity consisted primarily of $486.9 in advances and $194.3 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 fiscal year.
Net loans to members represented 96% of total assets at August 31, 1997 and
May 31, 1997. Long-term loans represented 88% of gross loans at August 31,
1997 and May 31, 1997. Fixed rate loans represented 38% of gross loans
at August 31, 1997 and 37% at May 31, 1997, while the remaining loans
carry a variable rate that may be adjusted monthly or semi-monthly.
At August 31, 1997, $911.6 or 9.9 % of gross loans were unsecured,
compared to $767.8 or 8.6% at May 31, 1997. The $911.6 of unsecured
loans at August 31, 1997 included $125.3 of temporarily unsecured
loans for RUS note buyouts. At August 31, 1997, the unsecured loans,
excluding the temporarily unsecured loans, were 8.5% of gross
loans. This amount represents the first portion of the buyout from RUS.
Once the full amount has been advanced by CFC, the loan 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, 1997, CFC had provided $2,099.3 in guarantees, an increase of
$18.6 from the $2,080.7 at May 31, 1997. The increase to guarantees was
due to the addition of a guarantee to a subsidiary of Deseret for $34.3
offset by regularly scheduled principal payments. 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, 1997, CFC had unadvanced loan commitments of $6,835.6, an
increase of $148.2 from the $6,687.4 committed at May 31, 1997. 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, 1997, CFC's total liabilities
and Members' Equity increased by $324.6 or 3.6% to $9,382.1 from $9,057.5
at May 31, 1997. The increase was primarily due to increases of $202.4 in
long-term debt, $140.7 in notes payable, and $12.8 in interest payable,
offset by a decrease of $35.3 in Members' Equity and Certificates.
The notes payable increase was due to the increase of $142.2 in Dealer
Commercial Paper. The Member Commercial Paper balance of $1,060.3
at August 31, 1997 represents an 11.4% decrease from $1,196.6 at May 31, 1997.
The long-term debt increase was due to an increase of $99.9 in long-term
Collateral Trust Bonds, an increase of $77.5 in Medium-Term Notes and the
increase of $25.0 in the Commercial Paper supported by revolving credit
agreements. The decrease in Members' Equity and Members' Certificates
was due to the retirement of patronage capital partially offset by the year to
16
<PAGE>
date net margin and by the issuance of Subordinated Certificates on new
loans. The increase to notes payable was required to fund the increase
in loans outstanding. The increase in interest payable was due to the
increase in funds outstanding. Subsequent to the end of the quarter,
on September 18, 1997, CFC issued $75.0, 7.65% Quarterly Income Capital
Securities, due 2046. On October 8, 1997, CFC issued $100.0, 6.375%,
Collateral Trust Bonds, due 2004.
At August 31, 1997, CFC had loans outstanding in the amount of $5.1 classified
as nonperforming and $344.3 classified as restructured. All nonperforming
loans and restructured loans were on a non-accrual basis with respect to
interest income. As of August 31, 1997, CFC has classified $349.4 of
loans outstanding as impaired with respect to the provisions of FASB
Statement No. 114. At August 31, 1997, CFC has allocated
$126.0 of the loan and guarantee loss allowance for such impaired loans.
During the three months ended August 31, 1997, the amount of loans classified
as impaired decreased by $22.0. This decrease was due to payments received
on loans classified as impaired. Although the balance of loans classified
as impaired decreased, the amount of the loan and guarantee loss reserve
allocated for these loans remained at $126.0 at May 31, 1997 and
August 31, 1997. CFC has applied all payments received on impaired
loans as a reduction to principal outstanding.
The allowance for loan and guarantee losses increased by $6.2 to $239.4 at
August 31, 1997 from $233.2 at May 31, 1997. The increase was due to an
additional provision of $8.3, offset by a charge-off of $2.1. The $2.1
charge-off was a result of the Vermont EC and Vermont G & T settlements.
At August 31, 1997, the loan and guarantee loss allowance represented 2.59%
of gross loans, 2.11% of gross loans and guarantees, and 68.50% of
nonperforming and restructured loans, compared to 2.62%, 2.12%, and 62.79%
at May 31, 1997, respectively. CFC makes regular 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, 1997, management believes that
the allowance for loan and guarantee losses is adequate to cover
any portfolio losses which have occurred or may occur.
During the three months ended August 31, 1997, CFC advanced $42.4 for the
prepayment of RUS loans. To date, CFC has financed approximately 88% of
the total RUS prepayments. Other lenders have lent 8% of the total and
the remaining 4% was prepaid out of the members' internally generated funds.
In addition, there were $43.8 in loan prepayment applications pending at RUS.
During the quarter ended August 31, 1997, CFC's total exposure to nonperforming
and restructured borrowers was $672.8, $349.4 in loans and $323.4 in
guarantees, an increase of $9.6 from the total of $663.2 at May 31, 1997.
The total exposure increased due to CFC's agreement to guarantee an additional
obligation for Deseret, offset by reductions to the amount of nonperforming
and restructured loans outstanding. During the quarter ended August 31, 1997,
CFC charged off $2.1 related to the settlement of loans to two nonperforming
borrowers that had a total of $6.5 in loans outstanding at May 31, 1997.
At August 31, 1997, CFC had no amounts outstanding to these two borrowers.
In addition, $2.2 of loans to another borrower were moved to the
nonperforming classification due to a missed debt service payment.
CFC is currently meeting with this borrower to discuss the resolution
of this situation. CFC agreed to guarantee the lease payments related to
a sale and leaseback of mine equipment by Blue Mountain Energy, a subsidiary
of Deseret. The guarantee totals $34.3 and amortizes monthly through 2007.
During the quarter, CFC received a total of $33.4 from Deseret, $25.1 from
the sale of the mine equipment and $8.3 from the quarterly payment due under
the ORA on June 30. CFC paid out a total of $15.7 related to obligations
guaranteed for Deseret during the quarter. The total amount guaranteed by
CFC at August 31, 1997, $323.4 represents and increase of $31.6 over
the balance of 291.8 at May 31, 1997. The increase was due to the guarantee
of $34.3 in mine equipment lease payments for Blue Mountain Energy offset
by a reduction of $2.7 of principal repayments on the obligations during
the quarter. To date, Deseret has made all required payments under the ORA.
17
<PAGE>
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, 1997, CFC achieved a Times Interest Earned Ratio (TIER)
of 1.12. This is the same as the 1.12 TIER for the three months ended
August 31, 1996. Management has established a 1.10 TIER as its
operating target.
Operating income for the three months ended August 31, 1997, was $150.5, an
increase of $16.2 from the prior year period. The increase in operating
income was due to a positive volume variance of $17.5 and a negative rate
variance of $1.3. Average loans outstanding increased by $1,056.0 while the
average yield decreased by 6 basis points from the prior year period. For
the three months ended August 31, 1997, average loans outstanding were
$9,125.5 and the average yield was 6.54%, compared to average loans
outstanding of $8,069.5 and an average yield of 6.60% for the three months
ended August 31, 1996. 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, 1997, totaled
$127.8, an increase of $16.9 from the prior year. The increase was due
to a positive volume variance of $14.5 and a positive rate variance of
$2.4. The average interest rate on funds used by CFC at August 31, 1997,
was 5.56%, an increase of 11 basis points compared to the average rate of
5.45% at August 31, 1996. 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, 1997 and 1996, general and
administrative expenses totaled $5.3 and $4.4, respectively. General
and administrative expenses for the three months ended August 31, 1997
and 1996 represented 23 basis points and 22 basis points, respectively,
of average loan volume. The provision for loan and guarantee losses for
the three months ended August 31, 1997, totaled $8.3 or 36 basis points,
compared to the prior year total of $6.8 or 33 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.
On August 12, 1997, CFC sold 23.5 acres of land adjacent to its headquarters
building realizing a gain of $4.9 on the sale.
Overall, CFC's net margins for the three months ended August 31, 1997,
totaled $14.6, an increase of $1.8 from the prior year period total of $12.8.
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 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.
18
<PAGE>
At August 31, 1997, CFC had $5,050.0 in available bank credit, $2,275.0 of
which is available through November 27, 2001, $2,275.0 is available through
November 25, 1997 and $500.0 is available through November 26, 1997. As of
August 31, 1997, CFC was in compliance with all covenants and conditions
to borrowing and there were no amounts outstanding under such agreements.
As of August 31, 1997, CFC had shelf registrations for Collateral Trust Bonds
and Medium-Term Notes of $600.0 and $183.3 respectively. As of August 31,
1997, CFC also had shelf registrations for Grantor Trust Certificates of
$121.8 and $50.0 for Quarterly Income Capital Securities. CFC anticipates
increasing the amount of the MTN shelf registration during October 1997.
Member invested funds, including the loan and guarantee loss allowance, at
August 31, 1997 and May 31, 1997, were $3,017.6 and $3,197.4 or 31.7% and
34.7% 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 6.21 and 5.84 at August 31, 1997 and May 31, 1997,
respectively. CFC calculates leverage as the ratio of total assets, less
Members' Equity, less Members' Subordinated Certificates, less Quarterly
Income Capital Securities, less funding for loans guaranteed by RUS, plus
guarantees divided by the sum of Members' Equity, Members' Subordinated
Certificates and Quarterly Income Capital Securities. CFC's current leverage
ratio is well below the limit authorized by its Board of Directors and
revolving credit agreements.
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.
Interest-Rate Gap Analysis
(Fixed Assets/Liabilities)
As of August 31, 1997
<TABLE>
<CAPTION>
FY 98 FY 99-00 FY 01-02 FY 03-07 FY 08-17 FY 18+ Total
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loan Amortization
and repricing $285.3 $ 723.3 $ 666.6 $ 817.1 $ 754.9 $ 289.4 $3,536.6
Total Assets $285.3 $ 723.3 $ 666.6 $ 817.1 $ 754.9 $ 289.4 $3,536.6
Liabilities and Equity:
Long-Term Debt $194.5 $ 319.0 $ 358.3 $ 624.8 $ 52.1 $ 450.0 $1,998.7
Subordinated
Certificates 3.6 7.1 219.1 247.3 418.2 74.0 969.3
Equity - 125.2 19.2 15.0 50.0 - 209.4
Total Liabilities
and Equity $198.1 $ 451.3 $ 596.6 $ 887.1 $ 520.3 $ 524.0 $3,177.4
Gap * $ 87.2 $ 272.0 $ 70.0 $ (70.0) $ 234.6 $(234.6) $ 359.2
Cumulative Gap $ 87.2 $ 359.2 $ 429.2 $ 359.2 $ 593.8 $ 359.2
Cumulative Gap as a %
of Total Assets .93% 3.83% 4.57% 3.83% 6.33% 3.83%
</TABLE>
* Loan amortization/repricing over/(under) debt maturities
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
19
<PAGE>
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, 1997, CFC had $285.3 in fixed rate assets amortizing or
repricing and $198.1 in fixed rate liabilities maturing during the remainder
of fiscal year 1998. The difference, $87.2, represents the amount of CFC's
assets that are not considered match-funded as to interest rate. CFC's
difference of $87.2 at August 31, 1997 represents .93% 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.
At August 31, 1997 and May 31, 1997, CFC was a party to interest rate exchange
agreements totaling $438.8 million. CFC uses interest rate exchange
agreements as part of its overall interest rate matching strategy.
Interest rate exchange agreements are used when they provide CFC a lower
cost of funding option or minimize interest rate risk. CFC
will only enter interest rate exchange agreements with highly rated
financial institutions. At both of the above dates, CFC was using interest
rate exchange agreements to fix the interest rate on $238.8 million of its
variable rate commercial paper. CFC was also using interest rate exchange
agreements at both dates to minimize the variance between the three
month LIBOR rate at which $200.0 million of Collateral Trust Bonds and
Medium-Term Notes were issued and CFC's variable commercial paper rate.
All of CFC's derivative financial instruments were held for purposes other
than trading. CFC has not invested in derivative financial instruments
for trading purposes in the past and does not anticipate doing so in the
future.
20
<PAGE>
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 7 on June 11, 1997 - Filing of Underwriting Agreement for
6.70%, Collateral Trust Bonds, due 2002.
21
<PAGE>
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 10, 1997
/s/ Angelo M. Salera
Controller (Principal Accounting Officer)
October 10, 1997
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the August
31, 1997, Form 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-31-1998
<PERIOD-END> AUG-31-1997
<CASH> 31,580
<SECURITIES> 0
<RECEIVABLES> 102,621
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,240,150
<PP&E> 33,905
<DEPRECIATION> 9,397
<TOTAL-ASSETS> 9,382,149
<CURRENT-LIABILITIES> 3,741,052
<BONDS> 4,067,273
0
0
<COMMON> 0
<OTHER-SE> 1,448,824
<TOTAL-LIABILITY-AND-EQUITY> 9,382,149
<SALES> 150,477
<TOTAL-REVENUES> 156,008
<CGS> 127,779
<TOTAL-COSTS> 127,779
<OTHER-EXPENSES> 5,329
<LOSS-PROVISION> 8,250
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,650
<INCOME-TAX> 0
<INCOME-CONTINUING> 14,650
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,650
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
