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 cooperatives.

Reporting Period: Quarterly period ended November 30, 1996 (Six months ended November 30, 1996).

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

Key Financial Metrics

Key Ratios & Metrics:

• Times Interest Earned Ratio (TIER): 1.12 (Target: 1.10).
• Allowance for Loan Losses: $228,047 (2.58% of total loans).
• Leverage Ratio: 5.69.
• Unadvanced Loan Commitments: $5,941,625.

Material Changes vs. Prior Period

• Asset Growth: Total assets increased 12.0% ($966.0 million) driven primarily by an $870.5 million increase in net loans outstanding.
• Profitability: Net margins increased 6.2% to $26.4 million. Operating income rose $27.6 million due to a $40.5 million volume increase, partially offset by a $12.9 million negative rate variance.
• Cost of Funds: Increased $20.1 million to $229.7 million. The average cost of funds decreased 32 basis points to 5.49%.
• Provision for Losses: Increased significantly to $10.0 million (from $5.7 million prior year) to maintain adequate reserves against loan growth and specific impaired loans.
• Debt Structure: Notes payable increased $808.7 million and long-term debt increased $22.0 million to fund loan growth. Quarterly Income Capital Securities of $125.0 million were issued.

Outlook, Risks, and Contingencies

Management Commentary & Outlook:

• Management maintains a target TIER of 1.10 and achieved 1.12 for the period.
• Interest rate risk is managed by matching asset and liability repricing terms; a fixed-rate gap of $134.5 million (1.49% of assets) exists for the remainder of fiscal 1997.
• Liquidity is supported by $4.835 billion in available revolving credit facilities, with no amounts currently outstanding.

Significant Contingencies & Risks:

• Deseret Power: CFC acquired $740 million of Deseret's RUS debt for $238.5 million and entered an Obligations Restructuring Agreement (ORA). Total credit exposure is $653.8 million ($360.1 million loans, $293.7 million guarantees). Loans are on nonaccrual status. Management believes reserves are adequate.
• Wabash Power: $17.7 million in loans outstanding, classified as nonperforming. A reorganization plan is being implemented; CFC received $14.8 million in cash and notes in December 1996.
• Soyland: $297.8 million in loans outstanding, all classified as performing. A $47.1 million loan was reclassified from restructured to performing in November 1996.
• Guarantees: Total guarantees decreased to $2.108 billion, primarily due to the replacement of a pollution control guarantee for Tri-State.

Investor Verification Checklist

• Impaired Loan Reserves: Verify the adequacy of the $155.4 million allowance allocated to $384.3 million of impaired loans, specifically regarding Deseret and Wabash.
• Deseret Restructuring: Monitor the performance of Deseret under the new ORA and the status of the pending foreclosure action.
• Interest Rate Gap: Assess the impact of the $134.5 million fixed-rate funding gap on future earnings if rates rise.
• Provision Volatility: Review the policy of making special provisions to the loan loss allowance based on excess net margins (TIER > 1.12).
• Liquidity Covenants: Confirm continued compliance with the fixed charge coverage ratio (1.025) and equity maintenance covenants required by credit agreements.