<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 February 28, 1998
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 24
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED BALANCE SHEETS
(Dollar Amounts In Thousands)
A S S E T S
(Unaudited)
February 28, 1998 May 31, 1997
Cash and Cash Equivalents $ 51,632 $ 50,011
Debt Service Investments 26,384 77,219
Loans To Members, net 9,859,985 8,678,196
Receivables 107,422 101,613
Fixed Assets, net 24,542 33,208
Debt Service Reserve Funds 103,489 103,489
Other Assets 21,118 13,758
Total Assets $ 10,194,572 $ 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)
February 28, 1998 May 31, 1997
Notes Payable, due within one year $ 3,519,469 $ 3,507,074
Accounts Payable 24,639 23,200
Accrued Interest Payable 67,775 46,924
Long-Term Debt 4,885,406 3,864,887
Other Liabilities 2,776 6,329
Quarterly Income Capital Securities 200,000 125,000
Commitments, Guarantees and Contingencies
Members' Subordinated Certificates:
Membership subscription certificates 644,817 645,449
Loan & guarantee certificates 584,164 567,037
Total Members' Subordinated Certificates 1,228,981 1,212,486
Members' Equity 265,526 271,594
Total Members' Subordinated Certificates
& Members' Equity 1,494,507 1,484,080
Total Liabilities and Members' Equity $ 10,194,572 $ 9,057,494
The accompanying notes are an integral part of these combined
financial statements.
3
<PAGE>
(UNAUDITED)
<TABLE>
<CAPTION>
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, 1998 and 1997
Quarters Ended Nine Months Ended
February 28, February 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating Income-Interest on loans to members $161,656 $142,562 $466,128 $417,062
Less-cost of funds allocated 138,040 122,319 396,446 352,068
Gross operating margin 23,616 20,243 69,682 64,994
Expenses:
General, administrative and loan processing 5,174 5,401 15,649 15,062
Provision for loan and guarantee losses 3,289 - 15,104 10,000
Total expenses 8,463 5,401 30,753 25,062
Operating margin 15,153 14,842 38,929 39,932
Nonoperating Income 750 700 1,777 2,033
Gain on Sale of Land - - 4,925 -
Net Margins $ 15,903 $ 15,542 $ 45,631 $ 41,965
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
4
<PAGE>
<TABLE>
<CAPTION> (UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(Dollar Amounts in Thousands)
For the Quarters Ended February 28, 1998 and 1997
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 February 28, 1998
Balance at November 30, 1997 $249,920 $ 1,491 $ 651 $ 32,031 $ 381 $215,366
Net Margins 15,903 - - 15,903 - -
Other (297) 3 (286) (14) - -
Balance at February 28, 1998 $265,526 $ 1,494 $ 365 $ 47,920 $ 381 $215,366
Quarter Ended February 28, 1997
Balance at November 30, 1996 $246,941 $ 1,448 $ 534 $ 28,712 $ 366 $215,881
Net Margins 15,542 - - 15,542 - -
Other 13 13 - - - -
Balance at February 28, 1997 $262,496 $ 1,461 $ 534 $ 44,254 $ 366 $215,881
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
5
<PAGE>
<TABLE>
<CAPTION> (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, 1998 and February 28, 1997
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, 1998
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 45,631 - - 45,631 - -
Other 1,016 24 (231) - - 1,223
Balance at February 28, 1998 $265,526 $ 1,494 $ 365 $ 47,920 $ 381 $215,366
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
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
(UNAUDITED)
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(Dollar Amounts In Thousands)
For the Nine Months Ended February 28, 1998 and 1997
<S> <C> <C>
1998 1997
Cash Flows From Operating Activities:
Net margins $ 45,631 $ 41,965
Add (deduct):
Provision for loan and guarantee losses 15,104 10,000
Depreciation 935 904
Amortization of deferred income (1,186) (7,969)
Amortization of issuance costs and deferred charges 1,553 1,375
Gain on sale of land (4,925) -
Add (deduct) changes in:
Receivables (8,106) (4,440)
Accounts payable 1,017 16,406
Accrued interest payable 20,851 19,795
Other (9,504) (13,221)
Net cash flows provided by operating activities 61,370 64,815
Cash Flows From Investing Activities:
Advances made on loans (4,364,038) (2,832,150)
Principal collected on loans 3,167,145 2,017,570
Proceeds from sale of land 13,220 -
Investments in fixed assets (564) (809)
Net cash flows used in investing activities (1,184,237) (815,389)
Cash Flows From Financing Activities:
Notes payable, net 257,095 364,677
Certificates of Deposit, net - 25,000
Debt service Investments, net 50,835 (116,290)
Proceeds from issuance of long-term debt 1,270,728 833,796
Payments for retirement of long-term debt (493,598) (449,925)
Proceeds from issuance of Quarterly Income Capital Securities 75,000 125,000
Proceeds from issuance of Members' Subordinated Certificates 22,569 22,228
Payments for retirement of Members' Subordinated Certificates (3,929) (12,936)
Payments for retirement of Patronage Capital (54,212) (45,349)
Net cash flows provided by financing activities 1,124,488 746,201
Net Cash Flows 1,621 (4,373)
Beginning Cash and Cash Equivalents 50,011 31,368
Ending Cash and Cash Equivalents $ 51,632 $ 26,995
Supplemental Disclosure of Cash Flow Information:
Cash paid during nine months for Interest Expense $ 381,801 $ 337,074
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
7
<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 February 28, 1998, included 908 rural electric
utility system members ("Utility Members"), virtually all of which are
consumer-owned cooperatives, 75 service members and 73 associate
members. The Utility Members included 840 distribution systems and 68
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 February 28, 1998, RTFC had
487 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, 1998. 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, 1998 and May 31, 1997,
and the combined results of operations, cash flows and changes in members'
equity for the quarters and nine months ended February 28, 1998 and 1997.
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).
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.
8
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
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, 1998, 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
$2,111.4 million and $1,825.0 million as of February 28, 1998 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 February 28, At May 31,
(Dollar Amounts In Thousands) 1998 1997
Outstanding loans to members and their affiliates $1,431,220 $1,099,163
Total assets 1,551,608 1,197,753
Notes payable to CFC 1,420,641 1,089,336
Total liabilities 1,434,415 1,100,497
Members' Equity and Subordinated Certificates 117,193 97,256
(Unaudited)
For the Nine Months Ended February 28,
(Dollar Amounts In Thousands) 1998 1997
Operating income $63,810 $52,945
Net margins 2,333 2,054
Summary financial information relating to GFC is presented below:
(Unaudited)
At February 28, At May 31,
(Dollar Amounts In Thousands) 1998 1997
Outstanding loans to members $133,195 $135,220
Total assets 137,447 141,353
Notes payable to CFC 133,195 136,960
Total liabilities 136,761 139,934
Members' Equity 686 1,419
(Unaudited)
For the Nine Months Ended February 28,
(Dollar Amounts In Thousands) 1998 1997
Operating income $6,358 $18,515
Net margins 600 1,610
Unless stated otherwise, references to CFC relate to CFC, RTFC and GFC on
a combined basis.
9
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
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, 1998 and May 31, 1997, mortgage notes representing
approximately $1,740.3 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 February 28, 1998 and May 31, 1997
were $1,698.1 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.
Activity in the allowance account is summarized as follows for the nine
months ended February 28, 1998 and the year ended May 31, 1997.
February 28, May 31,
(Dollar Amounts in Thousands) 1998 1997
Beginning Balance $233,208 $218,047
Provision for loan and guarantee losses 15,104 15,161
Charge-offs (2,104) -
Ending Balance $246,208 $233,208
Total Loan and Guarantee Loss Allowance
As a Percentage of:
Total Loans 2.44% 2.62%
Total Loans and Guarantees 2.03% 2.12%
Total Nonperforming and Restructured Loans 71.95% 62.79%
10
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
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, 1998, CFC had three revolving credit agreements totaling
$5,197.5 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 agreements are with 51 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 the
five-year agreement, executed in November 1996, CFC can borrow up to
$2,345.0 million until November 24, 2001. Under the 364-day agreement,
renewed on November 25, 1997, CFC can borrow up to $2,302.5 million
until November 24, 1998. Any amounts outstanding under these facilities
will be due on the respective maturity dates.
A third revolving credit agreement for $550.0 million was executed on
November 26, 1997 with 11 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 25, 1998
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 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
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.
11
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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
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, 1998
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 February 28,
1998 and May 31, 1997, CFC classified $2,345.0 million and $2,250.0
million, respectively, of its notes payable outstanding as long-term debt.
CFC expects to maintain more than $2,345.0 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 February 28, 1998 and May 31, 1997, CFC had unadvanced loan commitments,
summarized by type of loan, as follows:
(Dollar Amounts In Thousands) February 28, 1998 May 31, 1997
Long-term $2,758,130 $2,121,557
Intermediate-term 384,878 363,970
Short-term 3,744,563 3,443,502
Telecommunications 680,211 725,364
Associate Member 40,141 32,974
Total unadvanced loan commitments $7,607,923 $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.
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
retired $6.4 million in February 1998, representing 70% of their fiscal year
1997 allocation. 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.
12
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
9. Guarantees
As of February 28, 1998 and May 31, 1997, CFC had guaranteed the
following contractual obligations of its members:
(Dollar Amounts In Thousands) February 28, 1998 May 31, 1997
Long-term tax-exempt bonds (A) $1,153,485 $1,190,925
Debt portions of leveraged lease transactions (B) 438,553 418,916
Indemnifications of tax benefit transfers (C) 317,495 338,264
Other guarantees (D) 135,425 132,566
Total guarantees $2,044,958 $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, $1,022.1 million and
$1,043.2 million as of February 28, 1998 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 February 28, 1998 and May 31, 1997, CFC had unconditionally
guaranteed commercial paper, along with the related interest rate
exchange agreement, issued by NCSC of $32.9 million and $33.7
million, respectively.
10. Derivative Financial Instruments
At February 28, 1998 and May 31, 1997, CFC was a party to interest rate
exchange agreements with notional amounts totaling $753.7 million and
$438.8 million, respectively. 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 February 28, 1998
and May 31, 1997, CFC was using interest rate exchange agreements to fix
the interest rate on $603.7 million and $238.8 million, respectively, 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 $150.0 million of Collateral Trust Bonds 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.
13
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
The following table lists the notional principal amounts of CFC's interest
rate exchange agreements at February 28, 1998 and May 31, 1997:
(Dollar Amounts in Thousands) Notional Principal Amount
Maturity Date February 28, 1998 May 31, 1997
February 1998 (2) $ - $ 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
February 2001 (1) 75,000 -
February 2001 (1) 75,000 -
February 2001 (1) 75,000 -
February 2001 (1) 75,000 -
January 2003 (1) 12,375 -
January 2003 (1) 10,000 -
October 2004 (1) 40,700 43,200
January 2005 (1) 8,000 -
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
January 2008 (1) 14,000 -
January 2012 (1) 13,000 -
February 2012 (1) 10,000 -
Total $753,675 $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. In all interest rate
exchange agreements 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 February 28, 1998 and May 31, 1997, nonperforming loans in the amount
of $4.9 million and $9.4 million, respectively, were on a nonaccrual basis
with respect to interest income. At February 28, 1998 and May 31,
14
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
1997, the total amount of restructured loans was $337.3 million and $362.0
million, respectively. CFC elected to apply all payments received against
principal outstanding on all restructured loans at both dates.
(B) CFC has classified $342.2 million and $371.4 million, of the amounts
described in footnote 11(A), as impaired with respect to the provisions of
FASB Statements No. 114 and 118 at February 28, 1998 and May 31, 1997,
respectively. At both 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 nine months
ended February 28, 1998. All payments received were applied as a reduction
of principal. The average recorded investment in impaired loans for
the nine months ended February 28, 1998 was $349.1 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 February 28, 1998. 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 February 28, 1998,
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.
All of the parties to the lawsuit participated in a nonbinding mediation
session, but no settlement was reached. CFC is proceeding with litigation.
A new judge has been assigned to the case effective March 14, 1998. Trial
has been set for October 1998 in Vernal, Utah.
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
15
<PAGE>
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.
On March 20, 1998, the City of Riverside, CA ("Riverside") commenced an
action against Deseret in the United States District Court for the Central
District of California. Riverside is seeking (i) a declaratory judgment from
the court that the Power Sales Agreement dated October 6, 1992 (the
"Power Sales Agreement") between Deseret and Riverside terminated on
March 31, 1998 and (ii) unspecified damages against Deseret. On March
31, 1998, Deseret sought injunctive relief from a Utah State Court. The
Utah State Court has granted a temporary restraining order that enjoins
Riverside from terminating the Power Sales Agreement. The Utah
proceeding has been removed to the United States District Court for the
District of Utah. The temporary restraining order remains in effect until the
earlier of April 17, 1998 or the date on which a preliminary injunction
hearing is held before the Utah federal court.
The Power Sales Agreement requires Deseret to supply up to 52 MW to
Riverside through December 31, 2009. This contract represents
approximately 10% of Deseret's revenues. The impact of this action on
Deseret's ability to make the payments required under the ORA has not yet
been determined. A factor mitigating any impact is Deseret's contract with
PacifiCorp, under which PacifiCorp has agreed to purchase all excess
capacity.
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.
At February 28, 1998 and May 31, 1997, CFC had the following exposure to
Deseret:
(Dollar Amounts In Millions) February 28, 1998 May 31, 1997
Loans outstanding (1)(2) $337.3 $362.0
Guarantees outstanding:
Tax-exempt bonds 4.1 5.0
Mine equipment leases 54.6 23.1
Bonanza plant lease 258.1 263.7
Total Guarantees 316.8 291.8
Total Exposure $654.1 $653.8
1) From January 1, 1989 through February 28, 1998, CFC has funded a total
of $185.2 million in cashflow shortfalls related to Deseret's debt
service and rental obligations guaranteed by CFC. All cashflow
16
<PAGE>
NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
Notes to Combined Financial Statements - (Continued)
shortfalls funded by CFC represent an increase to loans outstanding and also
represent a decrease to the principal amount of the obligations guaranteed by
CFC.
2) In addition to the loans listed in the table, CFC was the servicer for
$172.1 million of RUS guaranteed Grantor Trust Certificates held by the
public at May 31, 1997.
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 February 28, 1998 and May 31, 1997, CFC held $133.2 million and $138.0
million, respectively, 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.
17
<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 nine months ended February 28, 1998, CFC's total assets increased
by $1,137.1 or 12.6% to $10,194.6 from $9,057.5 at May 31, 1997, primarily
due to an increase of $1,181.8 in net loans outstanding, partially offset by
a decrease of $50.8 in the debt service account. Changes to the loan
portfolio included increases of $920.7 in long-term loans and $323.4 in
short-term loans, partially offset by decreases of $29.2 in nonperforming
and restructured loans, $15.3 in intermediate-term loans and $4.8 in RUS
guaranteed loans. The debt service account decrease was due to the sinking
fund related to the redemption of the $150.0, 8.5% Series U bonds on
February 15, 1998.
Net loans to members represented 97% and 96% of total assets at February 28,
1998 and May 31, 1997, respectively. Long-term loans represented 86% of
gross loans at February 28, 1998 and 88% at May 31, 1997. Fixed rate loans
represented 45% of gross loans at February 28, 1998 and 37% at May 31, 1997,
while the remaining loans carry a variable rate that may be adjusted monthly
or semi-monthly. At February 28, 1998, $1,196.8 or 11.8% of gross loans were
unsecured, compared to $767.8 or 8.6% at May 31, 1997. The $1,196.8 of
unsecured loans at February 28, 1998 included $135.9 of temporarily unsecured
loans for RUS note buyouts. Once CFC has advanced the full amount required to
buyout RUS, the loan will be secured by all assets and future revenues of the
borrower. At February 28, 1998, the unsecured loans, excluding the
temporarily unsecured loans, were 10.5% of gross loans. All other loans were
secured pro-rata with other lenders (primarily RUS), by all assets and future
revenues of the borrower.
During the nine months ended February 28, 1998, CFC advanced $251.9 for the
prepayment of RUS loans. To date, CFC has financed approximately 92% of the
total RUS prepayments. Other lenders have lent 6% of the total and the
remaining 2% was prepaid out of the members' internally generated funds. In
addition, there were $43.8 in loan prepayment applications pending at RUS.
At February 28, 1998, CFC had provided $2,045.0 in guarantees, a decrease of
$35.7 from the $2,080.7 at May 31, 1997. The decrease to guarantees was due
to regularly scheduled principal payments and the retirement of a guarantee,
partially offset by the addition of a guarantee to a subsidiary of Deseret
for $34.3. 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, 1998, CFC had unadvanced loan commitments of $7,607.9,
an increase of $920.5 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.
18
<PAGE>
During the nine months ended February 28, 1998, CFC's total liabilities and
Members' Equity increased by $1,137.1 or 12.6% to $10,194.6 from $9,057.5 at
May 31, 1997. The increase was primarily due to increases of $1,020.5 in
long-term debt, $75.0 in Quarterly Income Capital Securities, $20.9 in
interest payable, $12.4 in notes payable, and $10.4 in Members' Equity and
Certificates.
The long-term debt increase was due to an increase of $698.6 in Collateral
Trust Bonds, an increase of $226.9 in Medium-Term Notes and the increase of
$95.0 in the Commercial Paper supported by revolving credit agreement. The
notes payable increase was due to increases of $463.9 in Dealer Commercial
Paper and $95.0 in the revolving credit agreement, offset by decreases of
$149.7 in Collateral Trust Bonds due within one year, $145.6 in Euro
Commercial Paper, $41.2 in direct sales of Commercial Paper and $20.0 in Bid
Notes. The decrease in Members' Equity and Members' Certificates was due to
the retirement of patronage capital partially offset by year-to-date net
margins 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.
At February 28, 1998, CFC had loans outstanding in the amount of $4.9
classified as nonperforming and $337.3 classified as restructured. All
nonperforming loans and restructured loans were on a non-accrual basis with
respect to interest income. As of February 28, 1998, CFC has classified
$342.2 of loans outstanding as impaired with respect to the provisions of
FASB Statement No. 114. At February 28, 1998, CFC has allocated $126.0 of
the loan and guarantee loss allowance for such impaired loans. During the
nine months ended February 28, 1998, the amount of loans classified as
impaired decreased by $29.2. This decrease was due to payments received on
loans classified as impaired. The amount of the loan and guarantee loss
reserve allocated for these loans was $126.0 at February 28, 1998. The
amount of loan and guarantee loss allowance allocated to impaired loans did
not change in-line with the balance of impaired loans, as the payments
received during the nine months ended February 28, 1998, had been
included in the expected future cashflows used to calculate the impairment
at May 31, 1997. CFC has applied all payments received on impaired loans as
a reduction to principal outstanding.
As of February 28, 1998, CFC's total exposure to nonperforming and
restructured borrowers was $659.0, $342.2 in loans and $316.8 in guarantees,
a decrease of $4.2 from the total of $663.2 at May 31, 1997. The total
exposure decreased due to reductions to the amount of loans and guarantees
outstanding to non-performing and restructured borrowers offset by CFC's
guarantee of an obligation to an affiliate of Deseret. 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 February 28, 1998, CFC had no amounts
outstanding to these two borrowers and does not anticipate lending to either
in the future.
The allowance for loan and guarantee losses increased by $13.0 to $246.2 at
February 28, 1998 from $233.2 at May 31, 1997. The increase was due to an
additional provision of $15.1, 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 February 28, 1998, the loan and guarantee loss allowance represented 2.44%
of gross loans, 2.03% of gross loans and guarantees, and 71.95% 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 February 28, 1998, management believes that the allowance for loan and
guarantee losses is adequate to cover any portfolio losses which have occurred
or may occur.
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, 1998, 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 28, 1997. Management has established a 1.10 TIER as its operating
target.
19
<PAGE>
Operating income for the nine months ended February 28, 1998, was $466.1, an
increase of $49.0 from the prior year period. The increase in operating
income was due to a positive volume variance of $47.6 and a positive rate
variance of $1.4. Average loans outstanding increased by $924.2 and the
average yield increased by 5 basis points from the prior year period. For
the nine months ended February 28, 1998, average loans outstanding were
$9,443.7 and the average yield was 6.60%, compared to average loans
outstanding of $8,519.5 and an average yield of 6.55% for the nine
months ended February 28, 1997. 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, 1998, totaled
$396.4, an increase of $44.3 from the prior year. The increase was due to
a positive volume variance of $40.8 and a positive rate variance of $3.5.
The average interest rate on funds used by CFC at February 28, 1998, was
5.61%, an increase of 8 basis points compared to the average rate of 5.53%
at February 28, 1997. 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 nine months ended February 28, 1998 and 1997, general and
administrative expenses totaled $15.6 and $15.1, respectively. General and
administrative expenses for the nine months ended February 28, 1998 and 1997
represented 22 basis points of average loan volume, which is a decrease of 2
basis points from 24 basis points for the prior year period.
The provision for loan and guarantee losses for the nine months ended
February 28, 1998, totaled $15.1 or 21 basis points, compared to the prior
year total of $10.0 or 16 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 nine months ended February 28, 1998,
totaled $45.6, an increase of $3.6 from the prior year period total of $42.0.
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 four 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,
Quarterly Income Capital Securities and Board authorization for securities
not requiring SEC registration, 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 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, 1998, CFC had $5,197.5 in available bank credit, $2,345.0 of
which is available through November 24, 2001, $2,302.5 is available through
November 24, 1998 and $550.0 is available through November 25, 1998. As of
February 28, 1998, CFC was in compliance with all covenants and conditions to
borrowing and there were no amounts outstanding under such agreements.
20
<PAGE>
As of February 28, 1998, CFC had a shelf registration for Medium-Term Notes
of $109.0. As of February 28, 1998, CFC also had shelf registrations for
Grantor Trust Certificates of $121.8 and $50.0 for Quarterly Income Capital
Securities. Subsequent to the end of the quarter, CFC filed and had
declared effective new shelf registrations for $500.0 of Collateral Trust
Bonds and $500.0 of Medium-Term Notes.
Member invested funds, including the loan and guarantee loss allowance, at
February 28, 1998 and May 31, 1997, were $3,133.1 and $3,197.4 or 30.3% 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 6.14 and 5.84 at February 28, 1998 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 debt to equity ratio was 4.31 and 3.97 at February 28, 1998 and May 31,
1997, respectively. CFC calculates the debt to equity ratio 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, divided by the sum of Members' Equity, Members' Subordinated
Certificates, Quarterly Income Capital Securities and the loan loss reserve.
The following chart schedules the maturities of CFC's fixed rate loans and
fixed rate funding, including variable rate funding in which the rate has
been fixed through interest rate exchange agreements. 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, 1998
<S> <C> <C> <C> <C> <C> <C> <C>
FY 98 FY 99-00 FY 01-02 FY 03-07 FY 08-17 FY 18+ Total
Assets:
Loan Amortization
and repricing $ 63.7 $ 867.1 $ 828.5 $1,393.9 $ 973.3 $ 403.4 $4,529.9
Total Assets $ 63.7 $ 867.1 $ 828.5 $1,393.9 $ 973.3 $ 403.4 $4,529.9
Liabilities and Equity:
Long-Term Debt $ - $ 342.4 $ 849.4 $ 956.8 $ 379.1 $ 450.0 $2,977.7
Subordinated Certificates 2.3 7.1 89.0 272.9 523.0 78.8 973.1
Equity - - 125.5 - 110.0 - 235.5
Total Liabilities and Equity $ 2.3 $ 349.5 $1,063.9 $1,229.7 $1,012.1 $ 528.8 $4,186.3
Gap * $ 61.4 $ 517.6 $ (235.4) $ 164.2 $ (38.8) $(125.4) $ 343.6
Cumulative Gap $ 61.4 $ 579.0 $ 343.6 $ 507.8 $ 469.0 $ 343.6
Cumulative Gap as a %
of Total Assets .60% 5.68% 3.37% 4.98% 4.60% 3.37%
* Loan amortization/repricing over/(under) debt maturities
</TABLE>
CFC is subject to interest rate risk to the extent CFC's loans are subject to
interest rate adjustment at different times than the liabilities which fund
those assets. Therefore, CFC's interest rate risk management policy involves
the close matching of asset and liability repricing terms within a range of
5% of total assets. CFC measures the matching of funds to assets by
comparing the amount of fixed rate assets repricing or amortizing to the
total fixed rate debt maturing over the periods listed in the above
21
<PAGE>
table. At February 28, 1998, CFC had $63.7 in fixed rate assets amortizing
or repricing and $2.3 in fixed rate liabilities maturing during the remainder
of fiscal year 1998. The difference, $61.4, represents the amount of CFC's
assets that are not considered match-funded as to interest rate. CFC's
difference of $61.4 at February 28, 1998 represents 0.60% 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.
At February 28, 1998 and May 31, 1997, CFC was a party to interest rate
exchange agreements totaling $753.7 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 $603.7 million as of February 28, 1998 and $238.8 as of May
31, 1997 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 $150.0 million of Collateral Trust Bonds 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.
22
<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 December 4, 1997 - Filing of an amendment to the
Agency Agreement dated June 1996 between the Company and the
agents named therein, relating to the distribution of the
Company's Medium-Term Notes, Series C, within the United States.
Item 7 on January 15, 1998 - Filing of Underwriting Agreement
for 6% Collateral Trust Bonds, due 2004.
Item 7 on February 9, 1998 - Filing of Underwriting Agreement
for 6.20% Collateral Trust Bonds, due 2008.
23
<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
April 14, 1998
/s/ Angelo M. Salera
Controller (Principal Accounting Officer)
April 14, 1998
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the February
28, 1998, 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-31-1998
<PERIOD-END> FEB-28-1998
<CASH> 51,632
<SECURITIES> 0
<RECEIVABLES> 107,422
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,045,423
<PP&E> 34,503
<DEPRECIATION> 9,961
<TOTAL-ASSETS> 10,194,572
<CURRENT-LIABILITIES> 3,614,659
<BONDS> 5,085,406
0
0
<COMMON> 0
<OTHER-SE> 1,494,507
<TOTAL-LIABILITY-AND-EQUITY> 10,194,572
<SALES> 466,128
<TOTAL-REVENUES> 472,830
<CGS> 396,446
<TOTAL-COSTS> 396,446
<OTHER-EXPENSES> 15,649
<LOSS-PROVISION> 15,104
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 45,631
<INCOME-TAX> 0
<INCOME-CONTINUING> 45,631
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,631
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
