<PAGE> 1
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 February 28, 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 23
<PAGE> 2
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
A S S E T S
(Unaudited)
February 28, 1997 May 31, 1996
Cash $ 26,995 $ 31,368
Certificates of Deposit - 25,000
Debt Service Investments 157,197 40,907
Loans To Members, net 8,532,851 7,728,271
Receivables 96,485 84,600
Fixed Assets, net 33,481 33,576
Debt Service Reserve Funds 103,490 102,512
Other Assets 13,939 7,855
Total Assets $ 8,964,438 $ 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)
February 28, 1997 May 31, 1996
Notes Payable, due within one year $3,398,405 $2,471,552
Accounts Payable 32,997 16,591
Accrued Interest Payable 60,614 40,819
Long-Term Debt 3,855,805 4,033,881
Other Liabilities 3,510 13,921
Quarterly Income Capital Securities 125,000 -
Commitments, Guarantees and Contingencies
Members' Subordinated Certificates:
Membership subscription certificates 645,449 638,440
Loan & guarantee certificates 580,162 569,244
Total Members' Subordinated
Certificates 1,225,611 1,207,684
Members' Equity 262,496 269,641
Total Members' Subordinated
Certificates & Members' Equity 1,488,107 1,477,325
Total Liabilities and Members' Equity $ 8,964,438 $ 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 and Nine Months Ended February 28, 1997 and February 29, 1996
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
February 28, 1997 February 29, 1996 February 28, 1997 February 29, 1996
<S> <C> <C> <C> <C>
Operating Income-Interest on loans to members $142,562 $126,269 $417,062 $373,197
Less-cost of funds allocated 122,319 108,121 352,068 317,698
Gross operating margin 20,243 18,148 64,994 55,499
Expenses:
General, administrative and loan processing 5,401 4,803 15,062 13,342
Provision for loan and guarantee losses - 1,875 10,000 7,555
Total expenses 5,401 6,678 25,062 20,897
Operating margin 14,842 11,470 39,932 34,602
Nonoperating Income 700 1,311 2,033 3,058
Net Margins $ 15,542 $ 12,781 $ 41,965 $ 37,660
</TABLE>
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 February 28, 1997 and February 29, 1996
<TABLE>
<CAPTION>
Patronage Capital
Allocated
Educa- Unal- General
Member- tional located Reserve
Total ships Fund Margins Fund Other
Quarter Ended February 28, 1997 <C> <C> <C> <C> <C> <C>
Balance at November 30, 1996 $246,941 $ 1,448 $ 534 $ 28,712 $ 366 $215,881
Retirement of patronage capital - - - - - -
Net Margins 15,542 - - 15,542 - -
Other 13 13 - - - -
Balance at February 28, 1997 $262,496 $ 1,461 $ 534 $ 44,254 $ 366 $215,881
Quarter Ended February 29, 1996
Balance at November 30, 1995 $248,021 $ 1,402 $ 429 $ 27,168 $ 346 $218,676
Retirement of patronage capital - - - - - -
Net Margins 12,781 - - 12,781 - -
Other 12 12 - - - -
Balance at February 29, 1996 $260,814 $ 1,414 $ 429 $ 39,949 $ 346 $218,676
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
<PAGE> 6
<TABLE> (UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts in Thousands)
For the Nine Months Ended February 28, 1997 and February 29, 1996
<CAPTION>
Patronage Capital
Allocated
Educa- Unal- General
Member- tional located Reserve
Total ships Fund Margins Fund Other
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended February 28, 1997
Balance at May 31, 1996 $269,641 $ 1,424 $ 476 $ 2,289 $ 501 $264,951
Retirement of patronage capital (50,963) - - - (135) (50,828)
Net Margins 41,965 - - 41,965 - -
Other 1,853 37 58 - - 1,758
Balance at February 28, 1997 $262,496 $ 1,461 $ 534 $ 44,254 $ 366 $215,881
Nine Months Ended February 29, 1996
Balance at May 31, 1995 $270,221 $ 1,383 $ 375 $ 2,289 $ 498 $265,676
Retirement of patronage capital (48,313) - - - (152) (48,161)
Net Margins 37,660 - - 37,660 - -
Other 1,246 31 54 - - 1,161
Balance at February 29, 1996 $260,814 $ 1,414 $ 429 $ 39,949 $ 346 $218,676
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
<PAGE> 7
<TABLE>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Nine Months Ended February 28, 1997 and February 29, 1996
<C> <C> <C>
1997 1996
Cash Flows From Operating Activities:
Accrual basis net margins $ 41,965 $ 37,660
Add (deduct):
Provision for loan and guarantee losses 10,000 7,555
Depreciation 904 953
Amortization of deferred income (7,969) (7,232)
Amortization of bond issuance costs 1,375 1,543
Add (deduct) changes in accrual accounts:
Receivables (4,440) 10,012
Accounts payable 16,406 (1,271)
Accrued interest payable 19,795 12,660
Other (13,221) (5,816)
Net cash flows provided by operating activities 64,815 56,064
Cash Flows From Investing Activities:
Advances made on loans (2,832,150) (2,799,225)
Principal collected on loans 2,017,570 2,047,751
Investments in fixed assets (809) 2,110
Net cash flows used in investing activities (815,389) (749,364)
Cash Flows From Financing Activities:
Notes payable, Net 364,677 456,863
Certificates of Deposit, Net 25,000 (38,000)
Debt service Investments, Net (116,290) (7,320)
Proceeds from issuance of Long-Term Debt 833,796 543,070
Payments for retirement of Long-Term Debt (449,925) (180,875)
Proceeds from issuance of Quarterly Income Capital Securities 125,000 -
Proceeds from issuance of Members' Subordinated Certificates 22,228 14,113
Payments for retirement of Members' Subordinated Certificates (12,936) (15,335)
Payments for retirement of patronage capital (45,349) (46,152)
Net cash flows provided by financing activities 746,201 726,364
Net Cash Flows (4,373) 33,064
Beginning Cash and Cash Equivalents 31,368 26,309
Ending Cash and Cash Equivalents $ 26,995 $ 59,373
Supplemental Disclosure of Cash Flow Information:
Cash paid during nine months for Interest Expense $ 337,074 $ 307,603
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 8
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 1,054 members as of February 28, 1997, included 907 rural electric
utility system members ("Utility Members"), virtually all of which are
consumer-owned cooperatives, 74 service members and 73 associate members.
The Utility Members included 842 distribution systems and 65 generation
and transmission systems operating in 46 states and U.S. territories.
At December 31, 1995, CFC's member systems served approximately 11.5
million consumers, representing service to an estimated 27.7 million
ultimate users of electricity.
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 February 28, 1997, RTFC
had 455 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 February 28, 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 February 28, 1997 and
May 31, 1996, and the combined results of operations, cash flows and
changes in members' equity for the nine months ended February 28, 1997
and February 29, 1996.
The Notes to Combined Financial Statements for the years ended May 31, 1996
and 1995 should be read in conjunction with the accompanying financial
statements. (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
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. CFC has implemented
these statements. The implementation of these statements did not have
a material impact on CFC's financial statements.
<PAGE> 9
CFC has implemented FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The CFC investments covered
by this statement, at February 28, 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.
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. 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 February 28,
1997, 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
$1,865.7 million and $1,465.5 million as of February 28, 1997 and
May 31, 1996, respectively. RTFC's net margins are allocated to RTFC's
borrowers. Summary financial information relating to RTFC is presented
below:
<TABLE>
<CAPTION>
(Unaudited)
At February 28, At May 31,
(Dollar Amounts In Thousands) 1997 1996
<S> <C> <C>
Outstanding loans to members and their affiliates $1,077,297 $ 975,269
Total assets 1,184,834 1,079,920
Notes payable to CFC 1,068,118 966,690
Total liabilities 1,077,175 981,790
Members' Equity and Subordinated Certificates 107,659 98,130
(Unaudited)
For the Nine Months Ended
(Dollar Amounts In Thousands) February 28, 1997 February 29, 1996
Operating income $ 52,945 $ 48,384
Net margins 2,054 2,074
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
Summary financial information relating to GFC is presented below: (Unaudited)
At February 28, At May 31,
(Dollar Amounts In Thousands) 1997 1996
<S> <C> <C>
Outstanding loans to members $ 135,220 $ 411,373
Total assets 143,128 429,177
Notes payable to CFC 136,960 415,414
Total liabilities 141,425 427,079
Members' Equity 1,703 2,098
(Unaudited)
For the Nine Months Ended
(Dollar Amounts In Thousands) February 28, 1997 February 29, 1996
Operating income $ 18,515 $ 21,511
Net margins 1,610 1,913
</TABLE>
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 February 28, 1997 and May 31, 1996, mortgage notes
representing approximately $1,454.8 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 February 28, 1997 and May 31,
1996 were $1,299.2 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 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.
<PAGE> 11
Activity in the allowance account is summarized as follows for the
nine months ended February 28, 1997 and the year ended May 31, 1996.
February 28, May 31,
(Dollar Amounts in Thousands) 1997 1996
Beginning Balance $218,047 $205,596
Provision for loan and guarantee losses 10,000 12,451
Ending Balance $228,047 $218,047
Total Loan and Guarantee Loss Allowance
As a Percentage of:
Total Loans 2.60% 2.74%
Total Loans and Guarantees 2.10% 2.14%
Total Nonperforming and Restructured Loan 59.89% 92.88%
The decline in nonperforming and restructured loan percentage is
due to the purchase of certain RUS notes related to troubled
borrowers as discussed in Note 11.
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 February 28, 1997, CFC had three revolving credit agreements
totaling $4,835.0 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 $4,335.0 million
were executed with 49 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 $2,167.5 million until November 26,
2001 (the "five-year facility"), and $2,167.5 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 .09 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 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.
<PAGE> 12
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 nine 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 February 28, 1997 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
February 28, 1997 and May 31, 1996, CFC classified $2,167.5 million
and $2,730.0 million, respectively, of its notes payable outstanding
as long-term debt. CFC expects to maintain more than $2,167.5 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 February 28, 1997 and May 31, 1996, CFC had unadvanced loan
commitments, summarized by type of loan, as follows:
(Dollar Amounts In Thousands) February 28, 1997 May 31, 1996
Long-term $1,881,738 $1,578,658
Intermediate-term 347,327 288,570
Short-term 3,273,736 3,199,364
Telecommunications 788,359 490,283
Associate Member 30,387 54,664
Non-performing 20,000 -
Total unadvanced loan commitments $6,341,547 $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 allocation for fiscal
year 1996. RTFC retired $5.9 million in February 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> 13
9. Guarantees
As of February 28, 1997 and May 31, 1996, CFC had guaranteed the
following contractual obligations of its members:
(Dollar Amounts In Thousands) February 28, 1997 May 31, 1996
Long-term tax-exempt bonds (A) $1,196,715 $1,317,655
Debt portions of leveraged
lease transactions (B) 418,939 432,516
Indemnifications of tax
benefit transfers (C) 342,807 363,702
Other guarantees (D) 134,307 135,567
Total guarantees $2,092,768 $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, $1,047.1 million and $1,168.9 million as of
February 28, 1997 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 February 28, 1997 and May 31, 1996, CFC had unconditionally
guaranteed commercial paper, along with the related interest
rate exchange agreement, issued by NCSC of $34.0 million and
$34.7 million, respectively.
<PAGE> 14
10. Interest Rate Exchange Agreements
The following table lists the notional principal amounts of CFC's
interest rate exchange agreements at February 28, 1997 and May 31,
1996:
(Dollar Amounts in Thousands)
Notional Principal Amount
Maturity Date February 28, 1997 May 31, 1996
August 1996 (1) $ 0 $ 30,000
September 1996 (2) 0 150,000
February 1997 (1) 0 35,000
February 1997 (1) 0 40,000
February 1997 (1) 0 25,000
February 1998 (2) 50,000 50,000
November 1999 (2) 50,000 0
November 1999 (2) 50,000 0
November 1999 (2) 50,000 0
January 2000 (1) 52,851 0
January 2001 (1) 42,749 0
October 2004 (1) 43,200 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 $438,800 $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.
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 agreement does not perform to
the agreement's terms. CFC does have a policy intended to limit
counterparty credit risk by maintaining long-term interest rate swap
agreements only with financial institutions with at least an AA
long-term credit rating, and short-term interest rate swap agreements
only with financial institutions with at least an A long-term credit
rating.
11. Contingencies
(A) At February 28, 1997 and May 31, 1996, nonperforming loans
in the amount of $6.5 million and $25.3 million, respectively,
were on a nonaccrual basis with respect to interest income.
At February 28, 1997 and May 31, 1996, the total amount of
restructured debt was $374.3 million and $209.4 million,
respectively. CFC elected to apply all principal and
interest payments received against principal outstanding on
restructured debt of $370.2 million and $157.1 million,
respectively.
<PAGE> 15
(B) Out of the $380.8 million and $234.7 million of loans
described in footnote 11(A) at February 28, 1997 and May 31,
1996, respectively, CFC has classified $376.7 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 $121.0 million and $160.9 million of the loan and
guarantee loss allowance to such impaired loans. 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
no interest income on loans classified as impaired during the
nine months ended February 28, 1997. All payments received
were applied as a reduction of principal. The average
recorded investment in impaired loans for the nine months
ended February 28, 1997 was $319.5 million.
(C) The Plan in Reorganization for Wabash Valley Power Association
(WVPA) was effective on December 31, 1996. Under the Plan,
CFC received $4.9 million of cash payments under the various
components of the Wabash Plan. CFC also offset $9.9 million
of maturing commercial paper investments held in escrow,
Subordinated Certificates and patronage capital, for a cash
total of $14.8 million. CFC also received a combination of
secured and unsecured promissory notes at market rates
totaling $13.4 million for a total of $28.2 million. These
notes have been classified as performing and will accrue
interest at CFC's intermediate-term interest rate.
CFC and RUS entered into a separate agreement in May 1988,
under which they have agreed to allocate among themselves all
post-petition, pre-confirmation payments by Wabash on debt
secured by the joint RUS/CFC mortgage. CFC and RUS are
currently in the process of determining the amount of payment
due from CFC to RUS.
CFC believes that it has adequately reserved for any potential
losses related to Wabash.
(D) Deseret failed to make the payments required under the
Agreement Restructuring Obligations, (the "ARO") during 1995.
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 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 recission
or equitable subordination of CFC's interest in the Bonanza
Plant. No trial date has been set.
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 and no event of default occurs thereunder, then on
December 31, 2025, CFC has agreed to forgive any amounts
owed by Deseret to CFC, comprising CFC Debt.
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 $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.
<PAGE> 16
From January 1, 1989 through February 28, 1997, CFC has funded
$170.4 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 February 28, 1997, CFC had
approximately $662.1 million in current credit exposure to
Deseret consisting of $370.2 million in secured loans and
$291.9 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 $23.1 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
$263.7 million of bonds issued in a $655 million leveraged
lease financing of the Bonanza Plant in 1985. RUS is now
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.
CFC believes that given its analysis of Deseret's cashflow
projections, it has adequately reserved for any potential
loss on its loans and guarantees to Deseret.
E) On September 13, 1996, CFC advanced $235.0 million to Soyland
for the purpose of repaying its RUS obligations at a
significant discount. This loan will amortize over a five
year term. As a condition to this advance, the distribution
members of Soyland agreed to guarantee repayment to CFC of
$117.5 million. RUS is also responsible for the repayment
of $350.7 million of Soyland loans held by grantor trusts and
serviced by CFC.
As of February 28, 1997, CFC had $267.3 million of loans
outstanding to Soyland. All of these loans have been
classified as performing and are on full accrual status with
respect to interest income. On November 1, 1996, the $47.1
million loan to Soyland that had previously been classified
as restructured was reclassified as performing and placed on
accrual status with respect to the recognition of interest
income.
CFC believes that it is adequately reserved for any potential
loss on its loans to Soyland.
12. Loans Guaranteed by RUS
At February 28, 1997, CFC held $138.0 million in Trust Certificates
related to the refinancing of Federal Financing Bank loans, a
decrease of $278.6 million from $416.6 million at May 31, 1996.
The decrease is primarily due to the prepayment of $263.2 million
of the loans on February 13, 1997 by RUS. These Trust Certificates
are supported by payments from certain CFC power supply members whose
payments are guaranteed by RUS.
<PAGE> 17
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 nine months ended February 28, 1997, CFC's total assets increased
by $910.3 or 11.3% to $8,964.4 from $8,054.1 at May 31, 1996, primarily due
to an increase of $804.6 in net loans outstanding and an increase of $116.3
in the debt service account. Changes to the loan portfolio included
increases of $572.7 in long-term loans, $162.3 in short-term loans, $146.2
in restructured loans and $212.1 in intermediate-term loans partially offset
by a decrease of $278.7 to loans guaranteed by RUS,[SV1] due to the prepayment
of $263.2 by RUS. Long-term loan activity consisted primarily of $862.4 in
advances and $324.0 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.
Net loans to members represented 95% of total assets at February 28, 1997 and
96% at May 31, 1996. Long-term loans represented 86% of gross loans at
February 28, 1997 and 86% at May 31, 1996. Fixed rate loans represented 38%
of gross loans at February 28, 1997 and 38% at May 31, while the remaining
loans carry a variable rate that may be adjusted monthly or semi-monthly.
At February 28, 1997, $797.7 or 9.1 % of gross loans were unsecured,
compared to $767.1 or 9.7% at May 31, 1996. The $797.7 of unsecured loans
at February 28, 1997 included $119.2 of temporarily unsecured loans for RUS
note buyouts. 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 February 28, 1997, CFC had provided $2,092.8 in guarantees, a decrease of
$156.6 from the $2,249.4 at May 31, 1996. The decrease to guarantees was
primarily due to replacement of CFC as guarantor of the $102.0 pollution
control guarantee for Tri-State and 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 February 28, 1997, CFC had unadvanced loan commitments of $6,341.5,
an increase of $703.8 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 nine months ended February 28, 1997, CFC's total liabilities and
Members' Equity increased by $910.3 or 11.3% to $8,964.4 from $8,054.1 at May
31, 1996. The increase was primarily due to increases of $926.8 in notes
payable, $16.5 of accounts payable, $19.8 in interest payable, $10.8 in
Members' Equity and Certificates and the issuance of $125.0 of Quarterly
Income Capital Securities offset by a decrease of $178.1 of long-term debt.
The notes payable increase was due to the increase of $401.8 in Dealer
Commercial Paper and the reclassification of $150.0 in Collateral Trust Bonds
maturing February 15, 1998. The Member Commercial Paper balance at February
28, 1997 represents a 6.2% decrease over the May 31, 1996 balance. The
long-term debt decrease was due to the decrease of $562.5 in the Commercial
Paper supported by revolving credit agreements, offset by an increase of
$299.8 in long-term Collateral Trust Bonds and an increase of $84.6 in
Medium-Term Notes. This fiscal year, CFC has averaged about $18.8 in
Medium-Term Note sales to members each month. The increase in Members'
Equity and certificates was due to the issuance of Subordinated
<PAGE> 18
Certificates on new loans and the year to date net margin offset by the
retirement of patronage capital. 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.
At February 28, 1997, CFC had loans outstanding in the amount of $6.5
classified as nonperforming and $374.3 classified as restructured. All
nonperforming loans and $370.2 of restructured loans were on a non-accrual
basis with respect to interest income. As of February 28, 1997, CFC has
classified $376.7 of loans outstanding as impaired with respect to the
provisions of FASB Statement No. 114. At February 28, 1997, CFC has
allocated $121.0 of the loan and guarantee loss allowance to such impaired
loans. During the nine months ended February 28, 1997, the amount of loans
classified as impaired increased by $146.3. This increase was due to the
purchase of the RUS claims against Deseret for $183.5 (total purchase amount
of $238.5 less participations sold to members of $55.0), the resolution of
the uncertainty related to the $47.1 loan to Soyland which was reclassified
as performing, advances of $14.1 related to CFC's guarantee of Deseret's
obligations and $4.2 of payments received on loans classified as impaired.
While the balance of loans classified as impaired increased, the amount of
the loan and guarantee loss reserve allocated to these loans decreased from
$160.9 at May 31, 1996 to $121.0 at February 28, 1997. This decrease was due
to the reduction to the amounts reserved for Wabash and Soyland, which was
larger than the required additions for other impaired loans based on the
provisions of FASB Statement No. 114. CFC has applied all payments received
on impaired loans as a reduction to principal outstanding.
The allowance for loan and guarantee losses increased by $10.0 to $228.0 at
February 28, 1997 from $218.0 at May 31, 1996. At February 28, 1997, the
loan and guarantee loss allowance represented 2.60% of gross loans, 2.10%
of gross loans and guarantees, and 59.89% of nonperforming and restructured
loans, compared to 2.74%, 2.14%, and 92.88% at May 31, 1996, 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
February 28, 1997, 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 February 28, 1997, CFC had advanced $1,220.2 to 81 members for the
prepayment of RUS loans. CFC estimates that this amount represented 89% of
the total RUS prepayments. Other lenders have lent 8% of the total and the
remaining 3% was prepaid out of the members' internally generated funds. As
of February 28, 1997, CFC had approved loan applications for an additional
$45.2 from 8 members for the purpose of prepaying their RUS notes. In
addition, there were $43.8 in loan prepayment applications pending at RUS.
As of February 28, 1997, RTFC had approved approximately $200 of loans for
the purpose of financing Personal Communication Services ("PCS") systems.
These loans will carry guarantees of an amount no less than 66% of principal
from the equipment vendors and sponsoring telcos. It is anticipated that
these loans will begin closing during the fourth quarter of fiscal year 1997.
On October 16, 1996, Deseret and CFC entered into an 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 and no event of default occurs thereunder, then on December 31,
2025, CFC has agreed to forgive any amounts owed by Deseret to CFC,
comprising the CFC Debt.
In connection with the ORA, on October, 16, 1996, CFC acquired all of
Deseret's indebtedness in the outstanding principal amount of $740 from the
RUS for the sum of $238.5. As a result of the purchase, CFC holds a majority
of Deseret's outstanding debt. Pursuant to a participation agreement dated
October 16, 1996, the member systems of Deseret purchased from CFC, for $55,
a participation interest in the RUS Debt. CFC provided a total of $87.5 long
term financing to the members of Deseret to finance the purchase of the
participation interest in the RUS Debt and the buyout by the members of
their respective debt to RUS. These loans are secured by the assets and
revenues of the member systems. Each member of Deseret has the option to
put its participation loan back to CFC after twelve years, provided that no
event of default exists under the ORA and under such member's participation
loan.
<PAGE> 19
As of February 28, 1997, CFC had $662.1 in current credit exposure to
Deseret, consisting of $370.2 in secured loans and $291.9 for guarantees of
various direct and indirect obligations of Deseret. All loans to Deseret are
on a nonaccrual status with respect to the recognition of interest income.
All payments received from Deseret have been and will continue to be applied
as a reduction to principal outstanding, at least until the uncertainty of
the foreclosure trial has been resolved.
On December 31, 1996, CFC received $4.9 in cash payments under the various
components of the Wabash Plan. CFC also offset $9.9 in maturing commercial
paper investments held in escrow, subordinated certificates and patronage
capital, for a cash total of $14.8. Under the Wabash Plan, CFC also
received a combination of secured and unsecured promissory notes at market
rates totaling $13.4. The cash and notes received were applied as repayment
of the $17.7 loan.
CFC and RUS entered into a separate agreement in May 1988, under which they
have agreed to allocate among themselves all post-petition, pre-confirmation
payments by Wabash on debt secured by the joint RUS/CFC mortgage. CFC and
RUS are currently in the process of determining the amount of payment, if
any, due to either party.
On September 13, 1996, CFC advanced $235.0 to Soyland for the purpose of
repaying its RUS obligations at a significant discount. This loan will
amortize over a 5 year term. As a condition to this advance, the
distribution members of Soyland agreed to guarantee repayment to CFC of
$117.5. RUS was responsible for the repayment of $617.8 of Soyland loans
held by grantor trust and serviced by CFC. On December 20, 1996, RUS made a
scheduled principal payment of $3.9 on one of the trusts held in the variable
rate mode and held by CFC. On February 13, 1997, RUS prepaid $263.2 of the
loans which were in the variable rate mode and held by CFC. Subsequent to
the end of the quarter, on March 20, 1997, RUS repaid $257.0 of the fixed
rate loans held by the trust. As of the end of March 1997, RUS had an
obligation to make principal and interest payments on a total of $93.7.
As of February 28, 1997, CFC had $267.3 of loans outstanding to Soyland. All
of these loans have been classified as performing and are on full accrual
status with respect to interest income. The balance outstanding on the loans
guaranteed by the Soyland distribution members at February 28, 1997 was
$106.0 million. On November 1, 1996, the $47.1 loan that had previously
been classified as restructured was reclassified as performing.
CFC believes that, given the value of the collateral and cashflow projections
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 nine months
ended February 28, 1997, CFC achieved a Times Interest Earned Ratio (TIER) of
1.12. This is the same as the 1.12 TIER for the nine months ended February
29, 1996. Management has established a 1.10 TIER as its operating target.
Operating income for the nine months ended February 28, 1997, was $417.1, an
increase of $43.9 from the prior year period. The increase in operating
income was due to a positive volume variance of $59.0 offset by a negative
rate variance of $15.1. Average loans outstanding increased by $1,181.2 while
the average yield decreased by 22 basis points from the prior year period.
For the nine months ended February 28, 1997, average loans outstanding were
$8,519.5 and the average yield was 6.55%, compared to average loans
outstanding of $7,338.3 and an average yield of 6.77% for the nine months
ended February 29, 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 nine months ended February 28, 1997, totaled
$352.1, an increase of $34.4 from the prior year. The increase was due to a
positive volume variance of $54.0 offset by a negative rate variance of $19.6.
The average interest rate on funds used by CFC at February 28, 1997, was
5.53%, a decrease of 24 basis points compared to the average rate of 5.77% at
February 29, 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. CFC's average cost of funding is expected to increase
due to the large volume of fixed rate debt issued towards the end of the
second quarter.
<PAGE> 20
For the nine months ended February 28, 1997 and February 29, 1996, general
and administrative expenses totaled $15.1 and $13.3, respectively. General
and administrative expenses represented 24 basis points of average loan
volume for the nine months ended February 28, 1997, and February 29, 1996.
The provision for loan and guarantee losses for the nine months ended
February 28, 1997, totaled $10.0 or 16 basis points, compared to the prior
year total of $7.6 or 14 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.
Overall, CFC's net margins for the nine months ended February 28, 1997,
totaled $42.0, an increase of $4.3 from the prior year period total of $37.7.
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.
At February 28, 1997, CFC had $4,835.0 in available bank credit, $2,167.5 of
which is available through November 27, 2001, $2,167.5 is available through
November 25, 1997 and $500.0 is available through November 26, 1997. As of
February 28, 1997, CFC was in compliance with all covenants and conditions to
borrowing and there were no amounts outstanding under such agreements.
As of February 28, 1997, CFC had shelf registrations for Collateral Trust
Bonds and Medium-Term Notes of $700.0 and $330.8 respectively. As of
February 28, 1997, CFC also had shelf registrations for Grantor Trust
Certificates of $121.8 and $125.0 for Quarterly Income Capital Securities.
Member invested funds, including the loan and guarantee loss allowance, at
February 28, 1997 and May 31, 1996, were $3,117.8 and $3,204.3 or 34.28% 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 5.77 and 5.69 at February 28, 1997 and May 31, 1996,
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.
<PAGE> 21
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 February 28, 1997
FY 97 FY 98-99 FY 00-01 FY 02-06 FY 07-16 FY 17+ Total
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loan Amortization
and repricing $ 47.5 $ 702.7 $ 597.0 $ 980.2 $ 636.6 $ 142.1 $3,106.1
Total Assets $ 47.5 $ 702.7 $ 597.0 $ 980.2 $ 636.6 $ 142.1 $3,106.1
Liabilities and Equity:
Long-Term Debt $190.0 $ 434.9 $ 300.6 $ 526.7 $ 152.2 $ 375.0 $1,979.4
Subordinated Certificates 4.2 41.3 296.4 415.7 140.5 76.2 974.3
Equity - 139.7 - 32.6 40.0 - 212.3
Total Liabilities and Equity $ 194.2 $ 615.9 $ 597.0 $ 975.0 $ 332.7 $ 451.2 $3,166.0
Gap * $(146.7) $ 86.8 $ 0.0 $ 5.2 $ 303.9 $(309.1) $ (59.9)
Cumulative Gap $(146.7) $ (59.9) $ (59.9) $ (54.7) $ 249.2 $ (59.9)
Cumulative Gap as a %
of Total Assets 1.64% .67% .67% .61% 2.78% .67%
</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 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 February 28, 1997, CFC had $47.5 in fixed rate assets amortizing or
repricing and $194.2 in fixed rate liabilities maturing during the remainder
of fiscal year 1997. The difference, $146.7, represents the amount of CFC's
assets that are not considered match-funded as to interest rate. CFC's
difference of $146.7 at February 28, 1997 represents 1.64% 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> 22
Part II
Item 1, Legal Proceedings.
None.
Item 2, Changes in Securities.
None.
Item 3, Defaults upon Senior Securities.
None.
Item 4, Submission of Matters to a Vote of Security Holders.
None.
Item 5, Other Information.
None.
Item 6,
A. Exhibits
27 - Financial Data Schedules.
B. Reports on Form 8-K.
None.
<PAGE> 23
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/ Angelo M. Salera
Acting Chief Financial Officer
April 14, 1997
/s/ Robert E. Geier
Acting Controller (Principal Accounting Officer)
April 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the February
28, 1997 Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> FEB-28-1997
<CASH> 26,995
<SECURITIES> 0
<RECEIVABLES> 96,485
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 280,677
<PP&E> 42,235
<DEPRECIATION> 8,754
<TOTAL-ASSETS> 8,964,438
<CURRENT-LIABILITIES> 3,492,016
<BONDS> 3,855,805
0
0
<COMMON> 0
<OTHER-SE> 1,488,107
<TOTAL-LIABILITY-AND-EQUITY> 8,964,438
<SALES> 417,062
<TOTAL-REVENUES> 419,095
<CGS> 352,068
<TOTAL-COSTS> 352,068
<OTHER-EXPENSES> 15,062
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 41,965
<INCOME-TAX> 0
<INCOME-CONTINUING> 41,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,965
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
