GOVERNMENT
QUALIFYING
LIQUIDITY
FUND
SEMI-ANNUAL REPORT
TO SHAREHOLDERS
SEPTEMBER 30, 1994
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS
FEDERATED INVESTORS TOWER
Pittsburgh, PA 15222-3779
89833C307
G00656-01 (11/94)
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
Dear Investor:
I am pleased to present the Semi-Annual Report to Shareholders for Government
Qualifying Liquidity Fund (the "Fund"), a portfolio of Trust for Financial
Institutions, for the six-month period ended September 30, 1994. The report
begins with our Investment Review, which provides a brief overview of the
economy and its impact on the agency balloon market. Following the Investment
Review are the Financial Statements, which include the Portfolio of Investments.
With an average duration of 2.5 to 3 years, the Fund gives financial
institutions a liquid, diversified approach to the U.S. government market. At
the close of the reporting period, 75.9% of the Fund's net assets were invested
in Federal Home Loan Mortgage Corporation securities. Approximately 23.8% of the
Fund's net assets were invested in U.S. Treasury notes. The remainder of the
portfolio was invested in a repurchase agreement fully collateralized by U.S.
government securities.
Dividends paid to shareholders during the six-month reporting period totaled
$154.9 million, or $0.29 per share. At the end of the period, net assets stood
at $7.7 million.
Thank you for your confidence in the Fund. As always, we welcome your questions
or comments.
Sincerely,
Richard B. Fisher
President
November 15, 1994
INVESTMENT REVIEW
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The Fund, which is rated Aaa by Moody's Investors Service, Inc. ("Moody's"),
invests primarily in U.S. government securities and exclusively in securities
which qualify as liquid assets for federal savings associations.* The Fund may
only invest in securities with final maturities of five years or less. While the
Fund may invest in U.S. Treasury securities, the majority of the Fund is
invested in mortgage-backed securities to meet Qualified Thrift Lender ("QTL")
standards.
In keeping with the final maturity limit of 5 years or less, the Fund is
invested in 5-year government mortgage balloons and short U.S. Treasuries with a
small position in repurchase agreements collateralized by U.S. government
obligations. The Fund, with its emphasis on 5-year balloons, has consistently
outperformed 5-year Treasury securities since its inception.** Following its
mid-October 1993 low of 4.6%, the 5-year Treasury note yield increased by 2.7%
to 7.3% on September 30, 1994. Investor fears of rising inflation have continued
to disrupt the markets throughout much of 1994, as the economy has shown strong
signs of expansion. In a concerted effort to head off inflation, the Federal
Reserve Board (the "Fed") has tightened monetary policy five times, increasing
the Fed Funds target rate from 3% to 4 3/4% by the Fund's year end. With further
expectations of Fed tightening, there is significant potential for further
increases in interest rates before year end.
Given the upward pressure on interest rates, the Fund will remain defensively
positioned in mortgage spread product and short U.S. Treasuries. With 5-year
balloons having benefited from significant tightening, we have taken the
opportunity to enhance total return and liquidity by investing in 3-year U.S.
Treasury securities. Much of the favorable performance was due to solid market
technicals in the 5-year balloon sector. After peaking in January of 1994,
5-year balloon outstanding balances have declined significantly (down 66%) while
the demand for balloon remains strong. Given the bearish tone in the market, we
expect demand for mortgage product to remain strongest within the short-duration
sectors.
* This rating is obtained after Moody's evaluates a number of factors,
including credit quality, market price exposure, and management. They monitor
the portfolio weekly for developments that could cause changes in ratings.
** Past performance may not be indicative of future results.
GOVERNMENT QUALIFYING LIQUIDITY FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1994
(UNAUDITED)
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<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ---------- --------------------------------------------------------------------- ----------
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS--99.7%
- -----------------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP.--75.9%
---------------------------------------------------------------------
$1,490,271 7.00%, 7/1/99 $1,483,751
---------------------------------------------------------------------
3,524,900 6.00%, 3/1/99 3,394,902
---------------------------------------------------------------------
997,962 5.50%, 9/1/98 949,311
--------------------------------------------------------------------- ----------
Total 5,827,964
--------------------------------------------------------------------- ----------
U.S. TREASURY NOTES--23.8%
---------------------------------------------------------------------
1,850,000 6.50%, 8/15/97 1,831,426
--------------------------------------------------------------------- ----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST $7,877,901) 7,659,390
--------------------------------------------------------------------- ----------
*REPURCHASE AGREEMENT--0.7%
- -----------------------------------------------------------------------------------
50,000 J.P. Morgan Securities, Inc., dated 9/30/94, due 10/3/94
(at amortized cost) 50,000
--------------------------------------------------------------------- ----------
TOTAL INVESTMENTS (IDENTIFIED COST $7,927,901) $7,709,390+
--------------------------------------------------------------------- ----------
</TABLE>
* The Repurchase Agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement was through participation in joint
accounts with other Federated funds.
+ The cost of investments for federal tax purposes amounts to $7,927,901. The
unrealized depreciation of investments on a federal tax basis amounts to
$218,511, at September 30, 1994.
Note: The categories of investments are shown as a percentage of net assets
($7,682,329) at September 30, 1994.
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT QUALIFYING LIQUIDITY FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1994
(UNAUDITED)
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<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------
Investments in securities, at value (identified and tax cost; $7,927,901) $7,709,390
- ---------------------------------------------------------------------------------
Cash 3,859
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Interest receivable 46,257
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Deferred expenses 5,699
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Total assets 7,765,205
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LIABILITIES:
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Dividends payable $23,948
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Accrued expenses 58,928
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Total liabilities 82,876
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NET ASSETS for 831,043 shares of beneficial interest outstanding $7,682,329
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NET ASSETS CONSIST OF:
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Paid-in capital $8,102,599
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Unrealized appreciation (depreciation) of investments (218,511)
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Accumulated net realized gain (loss) on investments (201,759)
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Total Net Assets $7,682,329
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NET ASSET VALUE, Offering Price, and Redemption Price Per Share:
($7,682,329 / 831,043 shares of beneficial interest outstanding) $9.24
- --------------------------------------------------------------------------------- ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT QUALIFYING LIQUIDITY FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1994
(UNAUDITED)
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<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest income (net of interest expense of $987) $ 154,958
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EXPENSES:
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Investment advisory fee $12,525
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Director's Fees 300
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Administrative personnel and services fees 39,198
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Custodian and portfolio accounting fees 20,252
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Transfer and dividend disbursing agent fees and expenses 7,600
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Fund share registration costs 4,150
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Auditing fees 8,000
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Legal fees 1,500
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Printing and postage 2,200
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Insurance premiums 1,450
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Taxes 50
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Miscellaneous 1,300
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Total expenses 98,525
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Deduct--
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Waiver of investment advisory fees $12,525
- ---------------------------------------------------------------
Reimbursement of other operating expenses 86,000 98,525
- --------------------------------------------------------------- ------- -------
Net expenses 0
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Net investment income 154,958
- ------------------------------------------------------------------------------------ ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (60,339)
- ------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (115,991)
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Net realized and unrealized gain (loss) on investments (176,330)
- ------------------------------------------------------------------------------------ ---------
Change in net assets resulting from operations $ (21,372)
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</TABLE>
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT QUALIFYING LIQUIDITY FUND
STATEMENT OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1995* 1994**
---------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------
OPERATIONS--
- ------------------------------------------------------------------
Net investment income $ 154,958 $ 171,049
- ------------------------------------------------------------------
Net realized gain (loss) on investment transactions
($60,339 net loss and $141,420 net loss, respectively, as
computed for federal tax purposes) (60,339) (141,420)
- ------------------------------------------------------------------
Change in unrealized appreciation (depreciation) of investments (115,991) (102,520)
- ------------------------------------------------------------------ ---------- -----------
Change in net assets resulting from operations (21,372) (72,891)
- ------------------------------------------------------------------ ---------- -----------
DISTRIBUTIONS TO SHAREHOLDERS--
- ------------------------------------------------------------------
Dividends to shareholders from net investment income (154,958) (171,049)
- ------------------------------------------------------------------ ---------- -----------
FUND SHARE (PRINCIPAL) TRANSACTIONS--
- ------------------------------------------------------------------
Net proceeds from sale of shares 3,000,000 10,250,500
- ------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of dividends declared 4,276 846
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Cost of shares redeemed (952,810) (4,200,213)
- ------------------------------------------------------------------ ---------- -----------
Change in net assets from Fund share transactions 2,051,466 6,051,133
- ------------------------------------------------------------------ ---------- -----------
Change in net assets 1,875,136 5,807,193
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NET ASSETS:
- ------------------------------------------------------------------
Beginning of period 5,807,193 --
- ------------------------------------------------------------------ ---------- -----------
End of period $7,682,329 $ 5,807,193
- ------------------------------------------------------------------ ---------- -----------
</TABLE>
* Six months ended September 30, 1994 (unaudited).
** For the period from October 18, 1993 (date of initial public investment) to
March 31, 1994.
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT QUALIFYING LIQUIDITY FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED MARCH
31,
------------------
1995* 1994**
----- ------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.55 $10.00
- ---------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------
Net investment income 0.29 0.23
- ---------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.31) (0.45 )
- --------------------------------------------------------------------- ---- ------
Total from investment operations (0.02) (0.22 )
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------
Dividends to shareholders from net investment income (0.29) (0.23 )
- --------------------------------------------------------------------- ---- ------
NET ASSET VALUE, END OF PERIOD $9.24 $9.55
- --------------------------------------------------------------------- ---- ------
TOTAL RETURN*** (0.23%) (1.80 %)
- ---------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
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Expenses 0.00 %(b) 0.00 %(b)
- ---------------------------------------------------------------------
Net investment income 6.19 %(b) 5.30 %(b)
- ---------------------------------------------------------------------
Expense waiver/reimbursement (a) 3.93 %(b) 1.56 %(b)
- ---------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------
Net assets, end of period (000 omitted) $7,682 $5,807
- ---------------------------------------------------------------------
Portfolio turnover rate 21 % 120 %
- ---------------------------------------------------------------------
</TABLE>
* Six months ended September 30, 1994 (unaudited).
** Reflects operations for the period from October 18, 1993 (date of initial
public investment) to March 31, 1994.
*** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
(See Notes which are an integral part of the Financial Statements)
GOVERNMENT QUALIFYING LIQUIDITY FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
Trust for Financial Institutions (the "Trust") is registered under the
Investment Company Act of 1940, as amended (the "Act"), as an open-end
management investment company. The Trust consists of one diversified portfolio,
Government Qualifying Liquidity Fund (the "Fund"). The Fund provides two classes
of shares: Institutional Shares and Institutional Service Shares. As of
September 30, 1994, Institutional Service Shares were effective but did not have
public investment.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--U.S. government obligations are generally valued at
the mean between the over-the-counter bid and asked prices as furnished by an
independent pricing service. Short-term securities with remaining maturities
of sixty days or less may be stated at amortized cost, which approximates
value.
B. REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund to
monitor, on a daily basis, the market value of each repurchase agreement's
underlying collateral to ensure that the value of the collateral at least
equals the principal amount of the repurchase agreement, including accrued
interest.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as brokers/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines
established by the Board of Trustees (the "Trustees"). Risks may arise from
the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Fund could receive less than the
repurchase price on the sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount, if applicable, are amortized as
required by the Internal Revenue Code, as amended (the "Code"). Distributions
to shareholders are recorded on the ex-dividend date.
GOVERNMENT QUALIFYING LIQUIDITY FUND
- --------------------------------------------------------------------------------
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income. Accordingly,
no provisions for federal tax are necessary.
E. DOLLAR ROLL TRANSACTIONS--The Fund enters into dollar roll transactions with
respect to mortgage securities issued by GNMA, FNMA, and FHLMC, in which the
Fund loans mortgage securities to financial institutions and simultaneously
agrees to repurchase substantially similar (same type, coupon, and maturity)
securities at a later date at an agreed upon price. Dollar roll transactions
are short-term financing arrangements which will not exceed twelve months.
The Fund will use the proceeds generated from these transactions to invest in
short-term investments which may enhance the Fund's current yield and total
return.
F. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis
are marked to market daily and begin earning interest on the settlement date.
G. DEFERRED EXPENSES--The costs incurred by the Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering the share, have been deferred and are being amortized
using the straight-line method over a period of five years from the Fund's
commencement date.
H. OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1995* 1994**
- -------------------------------------------------------------------- -------- ---------
<S> <C> <C>
Shares sold 323,974 1,035,786
- --------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 463 86
- --------------------------------------------------------------------
Shares redeemed (101,760) (427,506)
- -------------------------------------------------------------------- -------- ---------
Net change resulting from Fund transactions 222,677 608,366
- -------------------------------------------------------------------- -------- ---------
</TABLE>
* Six months ended September 30, 1994.
** For the period from October 18, 1993 (date of initial public investment) to
March 31, 1994.
GOVERNMENT QUALIFYING LIQUIDITY FUND
- --------------------------------------------------------------------------------
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment adviser
(the "Adviser"), receives for its services an annual investment advisory fee
equal to .50 of 1% of the Fund's average daily net assets. The Adviser may
voluntarily choose to waive all or a portion of its fee. The Adviser can modify
or terminate this voluntary waiver at any time at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS") provides the Fund
administrative personnel and services. The FAS fee is based on the level of
average daily net assets of all funds advised by subsidiaries of Federated
Investors for the period. The administrative fee received during the period of
the Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.
SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Service Agreement
with Federated Shareholder Services ("FSS"), the Fund will pay FSS up to .25 of
1% of average net assets of the Fund for the period. This fee is to obtain
certain personal services for shareholders and to maintain the shareholder
accounts.
TRANSFER AND DIVIDEND DISBURSING AGENT--Federated Services Company ("FServ")
serves as transfer agent and dividend disbursing agent for the Fund. The FServ
fee is based on the size, type and number of accounts and transactions made by
shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses ($39,516) and start-up
administrative service expenses ($38,751) were borne initially by Adviser. The
Fund has agreed to reimburse the Adviser for the organizational expenses and
start-up administrative expenses during the five-year period following October
14, 1993 (date the Fund first became effective). For the six months ended
September 30, 1994, the Fund paid $1,976 and $1,938, respectively, pursuant to
this agreement.
Certain of the Officers and Trustees of the Trust are Officers and Directors or
Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the six
months ended September 30, 1994, were as follows:
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
PURCHASES $ 3,320,599
- ------------------------------------------------------------------------------- -----------
SALES $ 1,112,601
- ------------------------------------------------------------------------------- -----------
</TABLE>
<TABLE>
<S> <C>
TRUSTEES OFFICERS
- ---------------------------------------------------------------------------------------------
John F. Donahue John F. Donahue
John T. Conroy, Jr. Chairman
William J. Copeland Richard B. Fisher
James E. Dowd President
Lawrence D. Ellis, M.D. J. Christopher Donahue
Richard B. Fisher Vice President
Edward L. Flaherty, Jr. Edward C. Gonzales
Peter E. Madden Vice President and Treasurer
Gregor F. Meyer Glen R. Johnson
Wesley W. Posvar Vice President
Marjorie P. Smuts John W. McGonigle
Vice President and Secretary
David M. Taylor
Assistant Treasurer
Robert C. Rosselot
Assistant Secretary
</TABLE>
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses and other information.
