NRUC

Business Context and Reporting Period

Company: National Rural Utilities Cooperative Finance Corporation (CFC), a private, not-for-profit cooperative providing financing to rural electric and telecommunication utilities.

Reporting Period: Quarterly period ended November 30, 1995 (Six months ended November 30, 1995).

Scope: Combined financial statements include CFC and its controlled affiliates, Rural Telephone Finance Cooperative (RTFC) and Guaranty Funding Cooperative (GFC).

Key Financial Metrics

Material Changes vs. Prior Period

• Asset Growth: Total assets increased by $490.3 million (6.9%) primarily driven by a $493.3 million increase in net loans to members.
• Profitability Decline: Net margins decreased by $4.1 million (14%) to $24.9 million. This was primarily due to a reduction in recognized conversion fees ($4.8 million vs. $9.2 million in the prior year) and a higher cost of funds.
• Cost of Funds: Increased by $46.2 million to $209.6 million. The average interest rate on funds rose 65 basis points to 5.80%.
• Loan Portfolio: Average loans outstanding increased by $875.9 million. Average yield on loans increased 45 basis points to 6.83%.
• Provision for Losses: Increased to $5.7 million (15 basis points) from $3.8 million (12 basis points) in the prior year period.
• Equity Reduction: Members' equity decreased by $22.2 million, largely due to the retirement of $48.3 million in patronage capital.

Outlook, Risks, and Contingencies

Management Commentary and Guidance

• Performance Target: Management maintains a minimum operating level of a 1.10 Times Interest Earned Ratio (TIER). The current TIER of 1.12 exceeds this threshold.
• Future Conversions: Large-scale conversions from fixed to variable rate loans are not anticipated for fiscal years 1996 and 1997.
• Liquidity: CFC maintains $4.1 billion in available credit facilities and shelf registrations for bonds and notes to fund future requirements.

Material Risks and Contingencies

• Deseret Generation & Transmission: CFC has a current credit exposure of $457.0 million (loans and guarantees). A restructuring agreement (ARO) was extended to January 31, 1996, to negotiate a buyout of RUS claims. Implementation is not assured pending regulatory approvals.
• Wabash Valley Power Association: Bankruptcy reorganization plan reaffirmed by the Court of Appeals. CFC expects a total loss of approximately $12 million (with $8.6 million already written off). CFC anticipates a net payment to RUS upon final accounting.
• Soyland Power Cooperative: CFC holds $65.6 million in secured loans. A third-party offer to purchase assets expired on December 31, 1995. Management believes reserves are adequate based on collateral value.
• Impaired Loans: $168.7 million of loans are classified as impaired under FASB 114/118, with $50.8 million of the allowance specifically allocated to them.

Investor Verification Checklist

• Deseret Restructuring: Verify the status of the proposed $250 million RUS buyout and the likelihood of regulatory approval by January 31, 1996.
• Wabash Final Accounting: Confirm the final cash flow distribution between CFC and RUS following the bankruptcy resolution.
• Interest Rate Sensitivity: Assess the impact of rising interest rates on the cost of funds versus loan yields, given the 1.12 TIER is close to the 1.10 minimum target.
• Loan Commitments: Review the $5.59 billion in unadvanced loan commitments to understand potential future liquidity requirements.
• Patronage Capital Retirements: Monitor future retirements of patronage capital and their impact on Members' Equity and leverage ratios.