the farm credit administration will

The Farm Credit Administration willpromote a safe and sound, competitiveFarm Credit System to finance agricul-ture and rural America as authorized byCongress.

FCA’s Mission

FARM CREDIT ADMINISTRATION

Report on theFinancial Conditionand Performance ofthe Farm Credit System

1998

CHAIRMAN OF THE FARM CREDIT ADMINISTRATION1501 Farm Credit Drive

McLean, Virginia 22102-5090

June 25, 1999

The President of the United States SenateThe Speaker of the United States House of Representatives

Gentlemen:

We are pleased to submit the annual Report on the Financial Condition and Performance ofthe Farm Credit System for the calendar year 1998. The report is provided in accordance withsection 5.17(a)(3) of the Farm Credit Act of 1971, as amended (Act).

We are reporting on the manner and extent to which the purposes and objectives of the Actare being carried out. Our report on the condition of the Farm Credit System is based on ourexaminations, required by section 5.19 of the Act, and on reports submitted to us by theinstitutions of the Farm Credit System. It also includes a summary and analysis of the reportssubmitted to us by the Farm Credit Banks and the Agricultural Credit Bank, relating to pro-grams for serving young, beginning, and small farmers and ranchers, required by section4.19(b) of the Act.

We hope you find this report informative and useful in your oversight of the Farm CreditSystem and agricultural policy affecting farmers and ranchers and rural America.

Sincerely,

Marsha Pyle MartinChairmanFarm Credit Administration Board

vii Preface

1 Overview of Organizations

Farm Credit Administration

Farm Credit Administration Board

Farm Credit System Insurance Corporation

Farm Credit System

5 Agricultural Finance Environment of 1998

8 Farm Credit System Performance

Farm Credit Leasing Services Corporation

Federal Agricultural Mortgage Corporation

14 Young, Beginning, and Small Farmers and Ranchers

18 Funding the Farm Credit System

20 Potential Risks for the Farm Credit System

23 Farm Credit System Financial Tables

33 Glossary

35 Additional Information

Contents

FCA 1998 Reporton the Financial Condition and Performance

of the Farm Credit System

FCA 1998 Reporton the Financial Condition and Performanceof the Farm Credit System

This report is published in accordance with section 5.17(a)(3) of the Farm Credit Actof 1971, as amended, which requires the Farm Credit Administration (FCA) to makeannual reports directly to Congress on the condition of the Farm Credit System (FCSor System) and its institutions. These annual reports also must include a summaryand analysis of reports submitted to FCA by Farm Credit banks on programs forserving young, beginning, and small farmers and ranchers.

We made some significant changes to the report this year. This is the first reportissued showing the results of the System’s reporting under a new policy statement onFarm Credit System Service to Young, Beginning, and Small Farmers and Ranchers andupdated definitions and reporting requirements, which were adopted in 1998. We alsoreorganized the sequence of the information presented and substantially reduced thetext and tables.

This report has been produced each year by the Farm Credit Administration since1933. It is based on a calendar year to coincide with the Farm Credit System’s financialreporting cycle. Previously it had been published under the titles: “Farm CreditAdministration Annual Report” (1933 to 1956–1957); “Annual Report of the FarmCredit Administration on the Work of the Cooperative Farm Credit System” (1957–1958 to 1965–1966); “Annual Report of the Farm Credit Administration and theCooperative Farm Credit System” (1966–1967 to 1983); and “Farm Credit Administra-tion Annual Report” (1984 to 1994). Since 1995 it has been published under the title“Report on the Financial Condition and Performance of the Farm Credit System.”

This publication is available on FCA’s Web site located at www.fca.gov. Depending onavailability, it may be obtained without charge from:

Office of Congressional and Public AffairsFarm Credit Administration1501 Farm Credit DriveMcLean, VA 22102-5090Telephone (703) 883-4056Fax (703) 790-3260E-mail: [email protected]

Preface

vii


Overview of Organizations

Farm Credit Administration

The Farm Credit Administration (FCAor Agency), an independent agency inthe executive branch of the U.S. Govern-ment, regulates and examines the entitiesof the Farm Credit System (FCS orSystem), including the Federal Agricul-tural Mortgage Corporation (FarmerMac). Created by an Executive order ofPresident Franklin D. Roosevelt in 1933,the Agency derives its powers andauthorities from the Farm Credit Act of1971, as amended. The FCA issuesregulations to implement the Act andexamines FCS institutions for compliancewith applicable statutes, regulations, andsafe and sound banking practices. If aninstitution violates statutes or regulationsor operates in an unsafe or unsoundmanner, the Agency has several optionsto bring about corrective action. TheFCA also annually examines the NationalConsumer Cooperative Bank (NCB) andits affiliate, the NCB DevelopmentCorporation. Reports of examination ofthe NCB are presented to the U.S. SenateCommittee on Banking, Housing, andUrban Affairs and the U.S. House ofRepresentatives Committee on Bankingand Financial Services.

The Agency is headquartered in McLean,Virginia. It has field offices at itsheadquarters and in Bloomington,Minnesota; Dallas, Texas; Denver,Colorado; and Sacramento, California.

Farm Credit AdministrationBoard

FCA policymaking is vested in a full-time, three-person Board appointed bythe President with the advice andconsent of the U.S. Senate. FCA Boardmembers serve a six-year term and maynot be reappointed after serving a fullterm or more than three years of aprevious member’s term. The President

designates one of the members asChairman of the Board. The Chairmanalso serves as the Agency’s ChiefExecutive Officer. Marsha Pyle Martinserves as the FCA Board Chairman andChief Executive Officer. Board membersare Ann Jorgensen and Michael M.Reyna.

Farm Credit System InsuranceCorporation

The Farm Credit System InsuranceCorporation (FCSIC) was established bythe Agricultural Credit Act of 1987 toensure the timely payment of principaland interest on insured notes, bonds, andother obligations issued on behalf ofFCS banks and to act as conservator orreceiver of FCS institutions. By ensuringthe repayment of FCS securities toinvestors, FCSIC helps to maintain adependable source of funds for farmers,ranchers, and other FCS borrowers.FCA Board members serve ex officio asthe Board of Directors for FCSIC. TheFCA Board Chairman may not serve asthe FCSIC Board Chairman. Michael M.Reyna serves as Chairman.

Farm Credit System

The Farm Credit System is a network ofborrower-owned, cooperative financialinstitutions and related service organiza-tions that serve all 50 states and theCommonwealth of Puerto Rico. Con-gress created the System in 1916 toprovide American agriculture with adependable source of credit. Theseinstitutions specialize in providing creditand related services to farmers, ranchers,producers or harvesters of aquaticproducts, and farmer-owned coopera-tives. They make loans for agriculturalprocessing and marketing activities;rural housing; certain farm-relatedbusinesses; agricultural, aquatic, andpublic utility cooperatives; and foreign

1



and domestic entities in connection withinternational trade.

All Farm Credit banks and associationsare governed as cooperatives by boardsof directors elected by member-borrower/stockholders. The directorselected by the member-borrower/stockholders elect or appoint at least oneadditional director from outside theSystem.

Over the past 16 years the number ofbanks and associations has declined from932 to 197 as System boards have soughtto enhance operating efficiencies, reducecommodity and geographic concentra-tion, and expand the services they canoffer their borrowers (Figure 1). As of

January 1, 1999, the System was com-posed of the following banks andassociations (Figure 2).

Farm Credit Bank (FCB) — Six FarmCredit Banks provide loan funds to 63Production Credit Associations (PCAs),50 Agricultural Credit Associations(ACAs), and 33 Federal Land CreditAssociations (FLCAs). These banks alsomake direct long-term real estate loansthrough 39 Federal Land Bank Associa-tions (FLBAs). PCAs make short- andintermediate-term loans; ACAs makeshort-, intermediate-, and long-termloans; FLCAs make long-term loans; andFLBAs act as lending agents for thebanks.

2

Figure 1Trend in Numbers of Farm Credit Banks and Associations,1983–1999(As of January 1)

Number of FCS Institutions

Source: FCA, Office of Policy and Analysis, Risk Analysis Division.

FCS institutions down by 79 percent,from 932 in 1983 to 197 in 1999.


3Figure 2Farm Credit System Banks Chartered Territories(As of January 1, 1999)

Source: FCA, Office of Policy and Analysis, Risk Analysis Division.



1. Farmer Mac is established in law as a part of theFarm Credit System. However, Farmer Mac has noliability for the debt of any other System institution,and the other System institutions have no liabilityfor Farmer Mac debt. Farmer Mac is organized asan investor-owned corporation, not a member-owned cooperative. Investors in voting stock mayinclude commercial banks, insurance companies,other financial organizations making farm mortgageloans, and other FCS institutions. Non-voting stockmay be owned by any class of investor. FarmerMac is regulated by the Farm Credit Administrationthrough the director of a separate Office of Second-ary Market Oversight, who reports directly to the FCABoard.

2. Section 4.25 of the Farm Credit Act provides thatone or more FCS banks and/or associations mayorganize a service corporation to perform functionsand services on their behalf. These federally char-tered service corporations are prohibited from ex-tending credit or providing insurance services.

Bank for Cooperatives (BC) — OneBank for Cooperatives makes loans toagricultural, aquatic, and public utilitycooperatives and other persons ororganizations owned by or havingtransactions with such cooperatives.

Agricultural Credit Bank (ACB) —One Agricultural Credit Bank has thecombined authorities of a BC and anFCB. In addition to making loans tocooperatives, the ACB provides loanfunds to four ACAs. Both the BC andthe ACB are authorized to finance U.S.agricultural exports and provide interna-tional banking services for farmer-ownedcooperatives.

FCA also examines and regulates thefollowing FCS entities:

The Federal Farm Credit BanksFunding Corporation (FundingCorporation) markets debt securitiesthat the banks sell to raise loan funds.The Funding Corporation is owned bythe System banks.

The Farm Credit System FinancialAssistance Corporation (FAC), char-tered in 1988, provided needed capital tothe System through the purchase ofpreferred stock. This stock was issued bycertain System institutions that receivedneeded financial assistance as authorizedby the Farm Credit System AssistanceBoard.

The Federal Agricultural MortgageCorporation (Farmer Mac)1 was createdto provide a secondary market foragricultural and rural housing mortgages.Farmer Mac guarantees the timelypayment of principal and interest onsecurities representing interests in, orobligations backed by, mortgage loanssecured by first liens on agricultural realestate or rural housing, and on securities

backed by the “guaranteed portions” offarm ownership and operating loans,rural business and community develop-ment loans, and certain other loansguaranteed by the U.S. Department ofAgriculture (USDA).

Service corporations organized undersection 4.25 of the Act,2 which FCA alsoexamines and regulates, include thefollowing:

The Farm Credit Finance Corporationof Puerto Rico uses tax incentivesoffered to investors to provide low-interest funding (other than that fromthe Funding Corporation) to the PuertoRico Farm Credit, ACA.

The Farm Credit Leasing ServicesCorporation (Leasing Corporation)provides equipment leasing services toeligible borrowers, including agriculturalproducers, cooperatives, and ruralutilities. The Leasing Corporation isowned by the System banks.

Farm Credit Financial Partners, Inc.,provides support services to the fourassociations affiliated with CoBank, ACB,and 23 of the 26 associations affiliatedwith the Western FCB.

The FCS Building Association (FCSBA)acquires, manages, and maintainsfacilities to house the FCA’s headquartersand field office staff. The FCSBA wasformed in 1981 and is owned by the FCSbanks. The FCA Board oversees theFCSBA’s activities on behalf of itsowners.

4


General Economic Setting RemainedStrong

In 1998, the U.S. economy established arecord for the longest period of sustainedeconomic growth in its peacetimehistory. Capping off this remarkableeight-year period, real gross domesticproduct rose about 4.25 percent last year,marking the third year in a row it hasbeen in the 4 percent range. Thecollapse of the Russian ruble and itsripple effect disrupted the financialmarkets in the late summer and fall.However, the Federal Reserve Boardresponded with a three-step, 75-basis-point reduction in the Federal funds rateand a 50-basis-point drop in the dis-count rate, which calmed the markets,restored investor confidence, andproduced a strong spurt in economicactivity by yearend.

U.S. Farm Economy Weakens

The bubble of prosperity that expandedin 1996 and 1997 essentially burst in1998 as prices for many commoditiesplummeted from the very high levelsrecorded in the previous few years. Lowcommodity prices and weak incomesexperienced in some sectors of agricul-ture today are due to large supplies ofcrops worldwide combined with flaggingdemand caused by economic recession inmany countries around the globe.

Net farm income is estimated to havedeclined to $46 billion in 1998, down 7.6percent from the previous year, in spiteof a 2 percent reduction in productionexpenses.1 The drop in farm incomeoccurred largely because of a $13 billiondecline in cash receipts, most of whichwas in the crop sector. Livestock receiptsdropped just $3.6 billion. Net cashincome also fell in 1998, from a recordhigh $60 billion in 1997 to an estimated$57.4 billion — a 5.6 percent decline.2

Agricultural FinanceEnvironment of 1998

Net cash income measures the cashavailable to service debt or substitute fordebt (Figure 3).

The Federal Government played a keyrole in stabilizing financial conditions inagriculture by boosting direct Govern-ment payments to farmers and ranchersin 1998. The U.S. Department ofAgriculture estimates that direct Govern-ment payments jumped from $7.5 billionin 1997 to $12.8 billion in 1998.

Exports Decline

Exports of farm commodities declinedto $53.7 billion in 1998 from $57.4billion in 1997, a 6 percent drop. Largeworldwide production and weak demandwere responsible for the decline. Thefinancial crisis in Asia played a pivotalrole in the decline in U.S. farm exports,since more than 45 percent of all U.S.farm exports are bound for Asianmarkets. Farm exports to Asia dropped17 percent in 1998.

Farm Finances Stressed

The abrupt change in the export outlookfor American agriculture, combined witha demonstrated ability of U.S. farmersand that of our competitors to boostproduction in response to the highercommodity prices of 1996 and 1997, hasadversely affected the nation’s farmeconomy. The value of U.S. farm assetsgrew only an estimated 3.3 percent in1998, compared with 5.3 percent duringeach of the previous two years. Farmers’demand for credit also has moderated, asevidenced by a marked slowing in thegrowth of outstanding debt. USDAestimates that farm-sector debt grew 3percent in 1998, compared with 3.5percent in 1996 and 5.9 percent in 1997.

1. Net farm income is an accounting of farm incomeand expenses on an accrual basis. Thus, net farmincome has adjustments for inventory changes (toreflect only the current year’s output), depreciationas an expense, and recognition of other noncashincome and expense items. Overall, income tendsto be more stable when expressed on a cash basisbecause it partly measures how farmers manage toaverage their sales and expenses from more thanone production year.

2. Net cash income is a cash accounting of commoditysales, Government payments, farm-related income,and operating expenses associated with producingthat revenue. Neither depreciation nor capital ex-penditures are deducted.

5

Figure 3Net Cash Income from Farming,1960–1999(Dollars in Billions)

Note: Data for 1998 are preliminary and data for1999 are forecast.

Source: USDA, Economic Research Service:National Financial Summary-1993, ECIFS 13-1,December 1994, and Agricultural Outlook, AGO-260, April 1999.



3. Market share data provided here do not include loansto farmers made through credit affiliates of coopera-tives that are funded by System institutions. Dataon market share to agricultural cooperatives are notavailable.

4. USDA’s farm business debt for all lenders is a pre-liminary yearend estimate (based on September 30,1998, financial results) and is adjusted to removedebt associated with farm households. The data arederived from USDA, Economic Research Service,Agricultural Income and Finance Situation and Out-look Report, AIS-71, February 1999. The yearendactual change in System loans by category is pre-sented in Table 1, in the section entitled “Farm CreditSystem Performance Report.”

5. Both System and commercial bank share in the farmnon-real-estate market are probably slightly higherthan USDA data show because of “point-of-sale”credit provided by farm input or equipment suppliers.Often this credit is funded through line-of-creditarrangements with System institutions or commer-cial banks.

Farmers’ use of credit capacity, which isbased on current outstanding debtcompared with the debt level that couldbe serviced with current net cash incomebefore interest, rose to an estimated 54.9percent in 1998 from 52.4 percent in1997. This increase is the result of lowerincome and higher debt servicingobligations. However, farmers are inmuch stronger financial shape than theywere in the 1980s. Today, farmers tendto employ more conservative financialmanagement strategies, they have lowerleverage, and have access to more timelyinformation than in the 1980s.

Farm Credit System Market ShareContinues to Lag Commercial Banks3, 4

USDA estimates that the System’syearend 1998 share of total farm businessdebt outstanding increased slightly to25.8 percent, from 25.6 at yearend 1997.This figure compares with a high of 34.0percent at yearend 1982 and a low of24.4 percent at yearend 1994 (Figure 4).The upward trend of the past four years

comes after more than a decade (1982-1994) of declining market share. Theshare held by commercial banks grew bya slightly larger amount in 1998, bringingtheir percentage to 41.0 (from 40.5 atyearend 1997). Commercial banks havegained market share steadily since 1981,when they held 21.3 percent. Since theend of 1987, commercial banks have heldthe largest share of any lender, a positionformerly held by the System.

Total farm debt consists of two compo-nents: farm real estate debt (debtcollateralized by real estate) and non-realestate debt (short- and intermediate-termdebt). About 51 percent of the totaloutstanding farm debt is farm real estatedebt and 49 percent is farm non-realestate debt. The FCS has been thedominant lender for farm real estate debt(32.1 percent market share as of Decem-ber 31, 1998), while commercial bankshave been dominant in the farm non-realestate debt market (52.2 percent marketshare) (Figures 5 and 6).5 Market sharesvary considerably by state. For example,

6

Figure 4Total Farm Business Debt,Market Shares, 1980–1998(As of December 31)

Percentage of Market

Note: “All Others” includes trade credit, sellerfinancing of real estate, life insurance compa-nies, USDA’s Farm Service Agency, and FarmerMac. Data for 1998 are preliminary estimates.

Source: USDA, Economic Research Service:Agricultural Income and Finance Situation andOutlook Report, AIS-71, February 1999.


in some states where commercial banksare heavily concentrated (e.g., Midwest-ern states), the System’s non-real estatemarket share is less than 10 percent.

Other institutional lenders to farmersinclude insurance companies and USDA’sFarm Service Agency (FSA). While onlysix insurance companies are now activein farm lending, they were very active inthe farm real estate market in 1998.Insurance companies emphasize largerloans (more than $500,000) and haveheld about 11 to 12 percent of the farmreal estate-secured debt since the early1980s, or about 6 to 7 percent of overallfarm debt.

FSA lending declined to an overall shareof 4.8 percent as of yearend 1998. Thedecline reflects an intentional shift by theFSA from direct-lending programs toguarantees of loans made by otherlenders. These guaranteed loans are onthe books of either FCS lenders orcommercial banks, and they are countedin the shares held by these lenders. More

7

Figure 5Real Estate Farm Business Debt,Market Shares, 1980–1998(As of December 31)


Note: “Individuals and Others” is mainly sellerfinancing of real estate, but also includesFarmer Mac loans. USDA-FSA is USDA’s FarmAgency Service. Data for 1998 are preliminaryestimates.


Figure 6Non-real Estate Farm BusinessDebt, Market Shares, 1980–1998(As of December 31)


Note: “Individuals and Others” is mainly tradecredit. USDA-FSA is USDA’s Farm ServiceAgency. Data for 1998 are preliminaryestimates.


than 90 percent of the System’s associa-tions participated in FSA’s guaranteedlending programs, but only about 2percent of the System’s farm loans wereguaranteed by FSA as of December 31,1998.

The competition in farm lendingmarkets for creditworthy borrowers isexpected to continue in 1999 in spite ofthe poor conditions in some parts ofthe agricultural economy. Commercialbanks, despite rising loan-to-depositratios, generally have the liquidity to bestrong competitors in the farm lendingarena. Insurance companies are alsocompeting actively for the larger credits.In addition, trade (or point-of-sale)credit appears to be experiencing stronggrowth. The System, with its renewedfinancial strength, its status as aGovernment-sponsored enterprise(GSE), and access to the nation’s moneymarkets, is well positioned to be a long-term reliable supplier of the futurecredit needs of the agricultural sector.



Although financial stress has increased inagriculture because of reduced commod-ity prices and a more uncertain exportoutlook, Farm Credit System institutionsduring 1998 continued to reflect strongfinancial performance, particularly inearnings and capital growth. TheSystem’s financial statements will likelybegin to show more of the effects of theeconomic downturn in 1999. With thebuild-up in risk-bearing capacity andimproved management systems duringthe 1990s, the FCS is in a strong positionto manage the anticipated economicproblems.

In 1998, the System banks and associa-tions continued an 11-year trend ofimproving financial condition andperformance. Earnings were downslightly from 1997 but continued athistorically high levels — more than $1billion for the sixth straight year. In thepast five years, System capital hasincreased more than 51 percent, to $12.5billion, and capital growth continued in1998. Nonperforming loan volumeincreased 69 percent in 1998, to $1.4billion, but most of the increase was dueto a few large cooperative borrowers.The overall level of nonperforming loansremained near historical lows.

FCA Rating System

The long-term improving trend in thefinancial performance and condition ofthe FCS continued to be evident in theFinancial Institutions Rating System(FIRS) ratings given as a result of FCA’sexaminations.2 At yearend 1997 and1998, there were no 5-rated institutionsand only one 4-rated institution (Figure7). The percentage of 3-rated Systeminstitutions dropped from 15.4 percent atyearend 1994 to 1.5 percent at yearend

Farm Credit SystemPerformance1

1998. Ten years earlier, at yearend 1988,23 percent of FCS institutions were 5-rated, 23 percent were 4-rated, and 20percent were 3-rated.

Enforcement Activity

FCA uses its various enforcementauthorities to ensure that FCS institu-tions operate on a safe and sound basisand in compliance with applicablestatutes and regulations. These authori-ties include the use of agreements ororders to cease and desist, civil moneypenalties, and the removal or suspensionof officers and directors of FCS institu-tions.

During 1998, FCA did not enter into anyenforcement actions with Systeminstitutions. FCA terminated twoagreements and one supervisory letterthat imposed conditions on a corporaterestructuring. At yearend 1998, oneorder to cease and desist issued uponconsent in the prior year remained ineffect. The total assets under enforce-ment action at the end of 1998 were lessthan 3 percent of the System’s assets.

Earnings

Net earnings for 1998 were $1.3 billion,down only slightly (1.3 percent) from1997. Higher loan and investmentvolume generated higher net interestincome, which was offset by increasedprovisions for loan losses and lower netinterest margins. Net interest incomewas up 2.4 percent over 1997 to $2.2billion because of higher loan volumes,partially funded by an increase inloanable funds.3 The net interestmargin fell slightly, from 2.95 percent ofaverage earning assets in 1997 to 2.87percent in 1998 (Figure 8), because of

1. The information in this section includes all FarmCredit Banks, the Agricultural Credit Bank and theiraffiliated associations, and the Bank for Coopera-tives. References to individual districts include com-bined financial data for the district bank and its affili-ated associations, adjusted to eliminate transactionsbetween institutions in the district. The data used inthe overall FCS analysis were provided by the FCSinstitutions to the Farm Credit Administration, or tothe Federal Farm Credit Banks Funding Corpora-tion. The analysis in this report is based on publiclyavailable information and is based on calendar year1998.

2. In early 1998 the Agency modified the FCA RatingSystem (commonly referred to as CAMEL) by adopt-ing the Financial Institutions Rating System. FIRSmodifies CAMEL by adding a separate “S” ratingfactor for sensitivity to market risk. This componentreflects the degree to which changes in interest ratesmay affect earnings or market value of an institution’sequity. FIRS uses key ratios and statistics as part ofits process of assigning institutions to risk catego-ries. Ratings for all System institutions are reviewedand adjusted as needed to reflect conditions exist-ing at the end of each quarter. FIRS ratings rangefrom 1 to 5. A 1-rated institution is sound in everyrespect. A 2-rated institution is fundamentally soundwith minor weaknesses that are correctable in thenormal course of business. A 3-rated institution hasmoderately severe to unsatisfactory weaknesses, butit is strong enough that the likelihood of failure issmall. A 4-rated institution has serious problems thatcould impair its viability and that are not being ad-dressed satisfactorily. A 5-rated institution is at im-minent risk of failure.

3. Loanable funds are the excess of interest-earningassets after subtracting interest-bearing liabilities.

8

Figure 7FIRS Ratings for Farm CreditBanks and Associations,1994–1998

Percent

* At yearend 1994, 1997, and 1998 one institutionwas 4-rated.

**At yearend 1995 and 1996, no institutions were4-rated.

Note: FIRS ratings are based on capital, assetquality, management, earnings, liquidity, andsensitivity to market risk. Ratings range from 1(a sound institution) to 5 (an institution that islikely to fail).

Source: FCA Examination Reports.


lower spreads on loans and decreasedinterest income recognized on nonaccrualloans. The net interest spread4 decreasednine basis points to 1.96 percent.

Four banks and their affiliated associa-tions reported modest increases indistrict income in 1998, and fourreported decreases. The St. Paul Bank forCooperatives reported net income thatwas 90 percent below 1997, due primarilyto increased loss provisions, lower loanvolume, and narrower spreads. System-wide, the return on average assets for the12 months ended December 31, 1998,was 1.54 percent, compared with 1.65percent for the 12 months ended Decem-ber 31, 1997.

Operating expenses for 1998 totaled $954million, a 7.0 percent increase from 1997.Salaries and employee benefits, the largestportion of expenses, increased 6.6percent, to $567 million. Occupancy andequipment expenses rose 5.0 percent, to$84 million, and other operatingexpenses rose 8.2 percent, to $303million. All districts reported increasesin operating expenses. The System’soperating expense rate (operatingexpense as a percentage of gross loans5 )decreased to 1.40 percent from 1.41percent in 1997, because loans grew fasterthan operating expenses. The operatingexpense rate has been close to 1.4 percentfor the past four years (Figure 9).

Other noninterest expenses were affectedby two offsetting events in 1998: areduction in assessments by the FarmCredit System Insurance Corporation andan increase in financial assistanceexpenses resulting from early retirementof debt. The Farm Credit InsuranceFund neared the secure base amount in1998, causing FCSIC to reduce itspremium assessments, which are paid by

System institutions. Systemwide premi-ums paid to FCSIC fell from $71.5million in 1997 to $19.8 million in 1998.The FCS Financial Assistance Corpora-tion called one of the bonds that it hadissued during the 1988–1989 period toprovide funds for financial assistance tocertain banks. Because interest rateswere so much lower in 1998, the FACand the System banks agreed to call the$240 million issue, which had beenissued originally for 15 years with a 9.45percent coupon. The difference betweenthe amount needed to call the bond andthe amount in a trust previously fundedby the System banks to repay the debtwas $39.5 million. Each bank recorded aproportional share of this amount as afinancial assistance expense in 1998.

In 1998, the System made a $150 millionprovision for loan losses, $58 millionmore than in 1997. Six of the eightbanks increased their provision for loanlosses and two reduced their provision.

The provision for income taxes was $180million, an effective tax rate of 12.6percent. The provision was $6 millionless than last year because of a one-time$15 million tax reduction caused by anassociation that settled an InternalRevenue Service dispute. Excluding thissettlement, the effective tax rate was 13.6percent for 1998. Because Systeminstitutions are cooperatives, they canoffset some of their tax liability bydeclaring patronage distributions, thusreturning a portion of their income tothe borrowers/owners who then paytaxes, as applicable. In 1998, the Systemdeclared $334 million in patronagedistributions, of which $137 million wasto be paid in cash. Of the remaining$197 million, $138 million was trans-ferred to allocated surplus and $59million was declared as capital stock.

4. Net interest spread is the difference between the in-terest rate charged to borrowers and the interest ratepaid by the institution.

5. Gross loans are accrual loans, nonaccrual loans,sales contracts, and notes receivable.

9

Figure 9Operating Expenses as aPercentage of Gross Loans,1994–1998

Percentage of Gross Loans

Source: Federal Farm Credit Banks FundingCorporation Annual Information Statements.

Figure 8Net Interest Margins, 1994–1998

Percentage of Average Earning Assets

*Loanable funds are owned (interest-free) fundsthat support interest-earning assets.




Capital

Total capital grew 7.1 percent, to $12.5billion in 1998.6 Total capital declinedslightly from 15.0 percent of total assetsat yearend 1997 to 14.9 percent atyearend 1998 (Figure 10). Surplusincreased $900 million (10.8 percent)and represented 74 percent of totalcapital, compared with 71 percent at theend of 1997.

Nonperforming loans were 11.1 percentof total capital, compared with 7.1percent at yearend 1997. Risk funds(allowances for losses, at-risk capital, andsurplus) totaled $14.4 billion at yearend1998 and covered 21 percent of Systemloans. At yearend 1988, risk fundscovered only 8 percent of System loans.

FCA requires each institution to main-tain a minimum 7 percent permanentcapital to risk-adjusted assets ratio, 7percent total surplus to risk-adjustedassets ratio, and 3.5 percent core surplusto risk-adjusted assets ratio. As ofyearend 1998, all institutions were in

compliance with regulatory requirementsfor their permanent capital ratio andtheir total surplus ratio. Two institutionsdid not comply with the requirement fortheir minimum core surplus ratio.However, these two institutions areoperating under FCA-approved capitalrestoration plans, which puts them incompliance.

Asset Growth

Total assets increased 7.7 percent overyearend 1997 to $84.1 billion. Grossloans of $67.9 billion, which constitute80.7 percent of assets, increased 7.0percent (Table 1). Long-term farmmortgage loans were up $1.8 billion, a6.2 percent increase over 1997. TheSystem also reported a $1.6 billionincrease (9.7 percent) in production andintermediate-term loans and a $574million increase (13.3 percent) in ruralutilities lending.

Long-term real estate loans made up 45.5percent of gross loans at yearend 1998,down from 45.8 percent in 1997.

6. Total capital includes protected capital and restrictedcapital. Protected capital ($76 million at yearend1998) consists of borrower stock, participation cer-tificates, and allocated equities that were outstand-ing as of January 6, 1988, or were issued or allo-cated before October 8, 1988. Protection of certainborrower capital is provided under the Farm CreditAct of 1971, as amended, which requires FCS insti-tutions, when retiring protected borrower capital, toretire such capital at par or stated value regardlessof its book value. Restricted capital ($1.41 billion atyearend 1998) represents the total assets under thecontrol of FCSIC, including those that have beenidentified for estimated insurance obligations ($0.15billion) and the Insurance Fund balance ($1.26 bil-lion).

10

Table 1Farm Credit System Gross Loans Outstanding, 1994–1998(Dollars in Millions)

PercentageChange

Loan Category 1994 1995 1996 1997 1998 from 1994

Long-Term Farm Mortgage $26,440 $26,635 $27,556 $29,085 $30,895 16.8Production and Intermediate-Term 11,648 13,255 14,659 16,040 17,594 51.0Domestic Cooperatives 7,700 10,390 9,954 9,764 9,917 28.8International 3,202 2,759 2,623 2,077 2,291 (28.5)Rural Utilities 2,927 3,208 3,890 4,301 4,875 66.6Rural Home 1,680 1,628 1,584 1,554 1,437 (14.5)Other 1,079 714 912 618 895 (17.1)

Total $54,676 $58,589 $61,178 $63,439 $67,904 24.2

Source: Federal Farm Credit Banks Funding Corporation Annual Information Statements.

Figure 10Farm Credit System Capital as aPercentage of Total Assets,1994–1998

Percentage of Total Assets

Note: Protected stock is not included since itrepresents a small (0.6 percent) percentage oftotal capital at yearend 1998.



Production and intermediate-term loansincreased their share of the FCS portfoliofrom 25.3 percent in 1997 to 25.9 percentin 1998.

All Farm Credit districts contributed tothe rise in 1998 loan volume. The largestpercentage increases were in theAgAmerica District (14 percent) and theTexas District (12 percent). The St. PaulBC reported a 4 percent decrease in loanvolume in 1998, an improvement fromthe 13 percent decrease in 1997.

The System’s investment portfolio, up11.3 percent from 1997 to $14.0 billion,also contributed to the asset growth.Total investment portfolios of Systembanks amounted to 20.3 percent of totalloans,7 which was under the 30 percentregulatory maximum that FCA imposes.Systemwide, 50 percent of the investmentportfolio consisted of mortgage-backedsecurities; 21 percent bankers’acceptances, certificates of deposit, andother commercial securities; 9 percentFederal funds and repurchase agreements;and 19 percent, various other types ofinvestments, primarily other asset-backedsecurities.

Asset Quality

Loan quality deteriorated but remained athistorically high levels. Nonperformingloans8 increased $568 million (69percent) from 1997 to $1.4 billion atyearend 1998. Nonperforming loansrepresented 2.0 percent of total loans,compared with 1.3 percent at yearend1997 and 2.7 percent at yearend 1994(Figure 11). Nonaccrual loans (thelargest component of nonperformingloans) doubled over the year to $1.2billion, primarily because of problemsexperienced by a few marketing andprocessing cooperatives. Of nonaccrualloans, 67.1 percent were current as toprincipal and interest payments.9

Nonperforming loans increased in 1998in all districts except Western andAgAmerica, where they declined by 44and 16 percent, respectively. Non-performing loans as a percentage of totalloans varied from highs of 8.7 percentfor the St. Paul BC and 2.7 percent in theWichita and AgriBank districts to a lowof 0.6 percent in the Western district.The largest increases in nonaccrual loanvolume occurred in the AgriBankdistrict ($205 million), the CoBankdistrict ($200 million), and the St. PaulBC ($149 million). Loan delinquencies(accruing loans 30 or more days pastdue) as a percentage of accrual loansincreased slightly in 1998 but remainedrelatively low (less than 1 percent ofaccrual loans).

The System’s allowance for loan losses,expressed as a percentage of gross loanvolume, declined slightly to 2.82 percentat yearend 1998 from 2.89 percent atyearend 1997. The allowance averaged160 percent of the amount of nonaccrualloans, compared with 310 percent in1997 and only 56 percent in 1988. Theallowance as a percentage of nonaccrualloans varied from lows of 35 percent atthe St. Paul BC and 110 percent atCoBank to highs of 377 percent in theAgAmerica district and 461 percent inthe Western district.

Farm Credit Leasing ServicesCorporation

The Farm Credit Leasing ServicesCorporation, chartered in 1983, is aservice corporation owned and fundedby the FCS banks. The LeasingCorporation’s headquarters is in Minne-apolis, Minnesota, with sales officesthroughout the United States. It special-izes in equipment leasing to agriculturalproducers and their cooperatives, ruralelectric and telephone organizations, andFCS entities. At September 1998 fiscal

7. Total loans are gross loans plus interest receivable.8. Nonperforming loans consist of nonaccrual loans,

accruing restructured loans, and accruing loans 90days or more past due.

9. FCA regulation 621.6(a) states, “A loan shall be con-sidered nonaccrual if it meets any of the followingconditions: (1) Collection of any amount of outstand-ing principal and all past and future interest accru-als, considered over the full term of the asset, is notexpected; (2) Any portion of the loan has beencharged off, except in cases where the prior chargeoffwas taken as part of a formal restructuring of theloan; or (3) The loan is 90 days past due and is notboth adequately secured and in process of collec-tion.” Nonaccrual loans pose the greatest risk ofloss.

11

Figure 11Nonperforming Loans in the FarmCredit System, 1994–1998

Percentage of Total Loans




yearend, the Leasing Corporation hadapproximately 37,000 lease contractsoutstanding to more than 9,200 custom-ers.

Since 1984, Leasing Corporation profit-ability has increased steadily. Netearnings increased to $9.4 million duringfiscal year 1998 from $8.9 million infiscal year 1997. The Leasing Cor-poration’s total assets increased 12.7percent to $776.5 million during fiscalyear 1998, while capital increased 16.1percent to $74.6 million. Its capital-to-asset ratio was 9.6 percent at the end offiscal year 1998, compared with 9.3percent a year earlier. Its return onequity was 13.9 percent for 1998 and hasexceeded 10 percent annually since 1989.The return on assets declined slightly to1.26 percent at fiscal yearend 1998 from1.38 percent at fiscal yearend 1997.

Federal Agricultural MortgageCorporation

Farmer Mac’s profitability increased forthe third straight year after passage ofthe Farm Credit System Reform Act of1996 (1996 Act).10 Farmer Mac reported$5.7 million of net income for 1998, anincrease from $4.6 million reported for1997. Income growth is attributable toFarmer Mac’s efforts to build a secondarymarket for the agricultural sectorthrough a variety of products and to theperformance of its investment portfolio.

Revenues on program-related productsincreased 21 percent during 1998,compared with 14 percent for 1997.Nonprogram revenues, primarily frominvestments, increased 33 percentbecause of growth in nonprogram assetsto $1.2 billion at December 31, 1998,compared with $834 million at Decem-ber 31, 1997. The increase in

nonprogram assets is attributable toFarmer Mac’s debt issuance strategy,which was expanded in early 1997. Theobjective of the debt issuance strategy isto increase Farmer Mac’s market pres-ence, resulting in an increased investorbase, greater liquidity in its securities,and lower issuance costs and spreads.Operating expenses increased by 13percent to support growth in program-related assets. In addition, the provisionfor losses increased to $1.6 million in1998, compared with $1.0 million in1997, because of increases in program-related assets.

Capital increased in 1998 by $5.9 millionto $80.9 million, compared with anincrease of $27.9 million to $75.1 millionin 1997. The increase in 1998 was due tonet income earned during 1998, whilethe increase in 1997 was due to netproceeds from the sale of 400,000 sharesof nonvoting Class C stock and netincome earned. Increases in FarmerMac’s retained program-related assetsand nonprogram investment portfoliocaused the capital-to-assets ratio todecline to 4.2 percent at yearend 1998,compared with 5.6 percent at yearend1997 and 7.8 percent at yearend 1996.Throughout 1998, Farmer Mac’s capitallevel exceeded the minimum require-ments set by statute. The statutoryminimum of $50.2 million was exceededby $30.5 million at yearend 1998.

Farmer Mac operates two principalprograms for providing a secondarymarket for agricultural mortgages. InFarmer Mac I, either Farmer Mac orprivate institutions form pools ofagricultural real estate loans. Securitiesbacked by those loans are called agricul-tural mortgage-backed securities(AMBS), with Farmer Mac guaranteeingthe timely payment of principal and

10. The 1996 Act provided new authorities for FarmerMac to purchase and pool loans and required FarmerMac to raise additional capital, but deferred imple-mentation of a risk-based capital regulation until af-ter January 1999.

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interest to security holders. In additionto AMBS issuance, the Farmer Mac Iprogram includes three other compo-nents: Mortgaged-Backed Bonds(“AgVantage”),11 which was introduced in1998; Swap Transactions;12 and Long-term Standby Commitments to Pur-chase,13 which was developed in 1998.

In Farmer Mac II, lenders sell theguaranteed portions of certain kinds ofU.S. Department of Agriculture loans toFarmer Mac. Farmer Mac pools theguaranteed portions of those loans andcreates securities backed by guarantees oftimely payment of principal and interest.

At yearend 1998, $796 million in FarmerMac I securities were outstanding, ofwhich Farmer Mac held $228.5 million,compared with $570 million outstandingand $184 million held at yearend 1997.At yearend 1998, $337 million in FarmerMac II securities were outstanding, ofwhich Farmer Mac held $307 million,compared with $273 million outstandingand $250 million held at yearend 1997.These retained securities provided asubstantial portion of Farmer Mac’sinterest income.

Of the loans underlying Farmer Mac Isecurities, 1.3 percent of the aggregateprincipal amount was delinquent (pastdue 90 days or more, in foreclosure, or inbankruptcy). This figure was up from0.3 percent at yearend 1997 and 0.7percent at yearend 1996. The majority ofdelinquent loans were in pools backed bya 10 percent subordinated interest. Theoverall delinquency trend has beenincreasing because of adverse conditionsin the agricultural economy and the ageof mortgages supporting the Farmer MacI program.

13

11. Farmer Mac purchases bonds from certified facili-ties that are secured by mortgages.

12. Swap transactions are an exchange between alender and Farmer Mac of qualified loans for guar-anteed securities backed by such loans.

13.Purchase commitments allow lenders to retain agri-cultural mortgages. Credit risk is reduced through acommitment by Farmer Mac to purchase loans inthe event of default or by request by the lender.



1. Policy Statement PS-75 is located on FCA’s Website, www.fca.gov, under the “Publications and AudioTapes” section.

Section 4.19(b) of the Farm Credit Actrequires each Farm Credit System bankto report annually on the operations andachievements under programs in itsdistrict that benefit young, beginning,and small (YBS) farmers and ranchers.This report represents the first year of athree-year transition to obtain improveddata from the System that most appropri-ately reflect its service to this targetedsegment of its portfolio.

FCA Board Acts to Improve Serviceand Data

On December 10, 1998, the Farm CreditAdministration Board adopted a policystatement entitled “Farm Credit SystemService to Young, Beginning, and SmallFarmers and Ranchers.”1 The FCABoard’s objective was that each board ofdirectors within the System should renewits commitment to be a reliable, consis-tent, and constructive lender to YBSborrowers. The FCA’s Office of Examina-tion has included YBS lending activity asa focus area in its examination of eachFCS institution. FCA also revised thereporting requirements to obtain datathat better represent System service to theYBS borrower in the current farming andranching environment. This annualreport is based on new definitions forreporting on YBS activities that aresignificantly different from those usedpreviously. As a result, data in this reportare not comparable to data in reportsfrom previous years.

A YBS borrower is defined differently.Going forward, the System will use newdefinitions for YBS borrowers.

• A young farmer, rancher, or produceror harvester of aquatic products(farmer) is defined as 35 years old orless at the time the loan is made. This

Young, Beginning, and SmallFarmers and Ranchers

is a slight revision to clarify that theage requirement applies at the time theloan is made.

• A beginning farmer is defined ashaving 10 years or less of farming orranching experience (previously sixyears or less). The new definition isconsistent with the definition used forthe Farm Service Agency’s BeginningFarmer Downpayment Loan Program.

• A small farmer is defined as normallygenerating less than $250,000 in annualgross sales of agricultural or aquaticproducts (previously a “small” farmerwas defined as having less than $40,000in annual agricultural sales and lessthan $100,000 in agricultural assets).The new definition considers inflation-ary factors and other significantchanges in the structure of farming. Inaddition, it is consistent with a recom-mendation made by the NationalCommission on Small Farms in its finalreport to the Secretary of Agriculture,January 1998.

Loans that benefit young and begin-ning borrowers are now reported. Thisyear for the first time, loans that benefita young or beginning borrower areincluded. This category includesindividuals who farm or ranch inpartnership with another person if theyoung or beginning farmer is obligated(on the note) to repay the debt. Theprevious definitions included only theprimary operator.

The definition of a “loan” is broadened.The definition includes leases and loan/lease participation interests to reflect alltypes of financing options that benefitYBS farmers. Loans to ruralhomeowners, processing and/or market-ing operators, farm-related service

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businesses, farmer cooperatives, ruralutilities, and other eligible borrowersunder title III of the Act are not includedfor purposes of YBS reporting.

New business with YBS borrowers isemphasized. Historically, YBS reportsincluded the volume of loans outstandingas of a particular yearend. This practicedid not take into account the seasonalityof production loans and represented astatic measurement of loans as ofyearend. The definition of gross newmoney loaned has been revised to reflectall new business conducted with YBSborrowers during the reporting year.This category includes loan and leaseoriginations, refinancings, and purchasedparticipation interests.

A loan is reported in each YBS cat-egory that applies. Reporting on YBSloan activity will no longer be in mutu-ally exclusive categories. All borrowerswho qualify as young farmers will bereported as such, even if they are alsobeginning farmers and/or small farmers.The same reporting criteria will apply toboth beginning and small farmers.Therefore, reports will reflect lending toyoung farmers, beginning farmers, andsmall farmers. Reports will not producea grand total because of the overlappingthat would result.

More information on YBS programs isreported. The new reporting require-ments provide more specific informationon how YBS programs are managed.Reports also provide information on theSystem’s activities in supporting YBSborrowers that do not involve theextension of credit, such as education orservice-related programs. Informationreported on System YBS programs willbe modified as changes occur and asadditional or different data are needed.

Reporting Transition

Many institutions will need to modifytheir computer systems to fully accountfor the revised definitions. To avoidinterfering with any System institution’sefforts to be year 2000 (Y2K) compliant,January 1, 2001, was established as thedate when each System institution isrequired to collect revised data on YBSborrowers. However, System institutionsare encouraged to report using the newYBS definitions as soon as practicable.

Two of the seven districts were able toreport using all aspects of the new YBSdefinitions. Only one district reportedentirely using the previous definitionsand format. The four remaining districtsreport on some, but not all, aspects ofthe new definitions. As a result, thisyear’s reports are conservative and likelydo not include the System’s full lendingvolume to YBS borrowers. This isbecause some districts continued toreport numbers based on the characteris-tics of the primary operator and on themore limited previous definition of asmall farmer.

Loans Outstanding to YBS Borrowers

The System had 603,322 outstandingloans to farmers and ranchers at yearend1998. Of this total, 15.7 percent wereloans to young farmers, 18.2 percent tobeginning farmers, and 56.0 percent tosmall farmers (Table 2). Respectively,this amounted to 11.6 percent, 16.6percent, and 36.8 percent of the System’sloan volume as reported in the 1998 YBSCall Report. For outstanding loans thatwere $50,000 or less, 60 percent bynumber and 52.5 percent by volumebenefited small farmers. Of all loansover $250,000, 26.4 percent by numberand 19.8 percent by volume benefitedsmall farmers.

15



Loans Made to YBS Borrowers

Of the total number of loans madeduring 1998, 13.8 percent were to youngfarmers, for a total of $1.1 billion (Table3). In effect, $7.87 of every $100 in loantransactions during 1998 benefited ayoung farmer. The average size loanduring 1998 to a young borrower was$59,235.

As one would expect, more credit wasextended to beginning farmers than toyoung farmers: 57 percent more loansby number (29,514 compared with18,857) and 162 percent more by volume($2.930 billion compared with $1.117billion). Beginning farmers likely includemany borrowers who also qualify asyoung farmers. The $2.9 billion inbeginning farmer business volumeduring the year represented just under 21percent of the System’s new business for1998. The average loan transaction size

for beginning and seasoned farmers wasnot significantly different in 1998. Theaverage loan to a beginning farmer was$99,275, and the average loan to a moreseasoned farmer was $104,691.

Slightly more than half the number of allloans made during 1998 benefited smallfarmers. This $4.64 billion in loansaccounted for 32.6 percent of the dollarvolume of all loan transactions. Most ofthe loans to small farmers during 1998were $50,000 or less (56.6 percent) andaveraged $19,307 per loan transaction.The average size of all loans to smallfarmers was $66,253. The average size ofa loan to farmers who are not consideredsmall was $128,883.

Programs that Benefit YBS Borrowers

This year, a questionnaire was used toobtain program information as well asinformation on lending activity. As a

16

Table 2Loans Outstanding at December 31, 1998, Benefiting Young,Beginning, and Small Farmers and Ranchers 1

Number Percentage Volume Percentage Averageof of Total of Loans of Total Loan

Loan Type Loans 2 Number (millions) Volume Size

Young Farmers and Ranchers 94,551 15.67 $ 6,271 11.58 $66,324Beginning Farmers and Ranchers 110,049 18.24 $ 9,007 16.63 $81,845All Small Farmers and Ranchers 338,032 56.03 $20,087 36.80 $59,434

Loans to Small Borrowers by Loan Size

Loans $50,000 or less 212,089 60.00 $ 4,080 52.48 $ 19,237Loans $50,001 – $100,000 72,386 58.80 $ 4,936 58.77 $ 68,190Loans $100,001 – $250,000 42,610 47.20 $ 6,071 45.93 $142,478Loans Over $250,000 10,947 26.40 $ 4,999 19.83 $456,655

1. A young farmer is 35 years or less when the loan was made; a beginning farmer has 10years or less of farming or ranching experience; and a small borrower normally generatesless than $250,000 annual gross sales of agricultural or aquatic products.

2. Full reporting under the new definitions is not required until 2001. The values in the tablelikely underrepresent System YBS activity.

Source: Annual Young, Beginning, and Small Farmer Reports submitted by each Systemlender through the Farm Credit banks.


Table 3Loans Made During 1998 Benefiting Young, Beginning, andSmall Farmers and Ranchers 1

Number Percentage Volume Percentage Average of of Total of Loans of Total Loan

Loan Type Loans 2 Number (millions) Volume Size

Young Farmers and Ranchers 18,857 13.76 $1,117 7.87 $ 59,235Beginning Farmers and Ranchers 29,514 21.53 $2,930 20.65 $ 99,275All Small Farmers and Ranchers 70,548 52.03 $4,640 32.59 $ 66,253

Loans to Small Borrowers by Loan Size

Loans $50,000 or less 45,268 56.61 $ 874 40.15 $ 19,307Loans $50,001 – $100,000 13,981 51.41 $ 995 50.42 $ 71,168Loans $100,001 – $250,000 8,628 42.77 $1,263 41.18 $146,384Loans Over $250,000 2,671 32.31 $1,508 21.48 $564,583

1. A young farmer is 35 years or less when the loan was made; a beginning farmer has 10years or less of farming or ranching experience; and a small borrower normally generatesless than $250,000 annual gross sales of agricultural or aquatic products.

2. Full reporting under the new definitions is not required until 2001. The values in the tablelikely underrepresent System YBS activity.

Source: Annual Young, Beginning, and Small Farmer Reports submitted by each Systemlender through the Farm Credit banks.

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result, more definitive information aboutthe System’s YBS programs is nowavailable. Highlights of the new datainclude the following:

• 88 percent of FCS institutions coordi-nate their YBS program with the U.S.Department of Agriculture’s FarmService Agency. For 1998, FCS institu-tions report 6,178 guaranteed YBS loanstotaling $736.9 million.

• 45.5 percent of FCS institutionscoordinate with a state program.

• Other coordination partners in declin-ing order of use are: input dealers/merchants; Farm Credit banks; otherFCS associations; farm groups; theSmall Business Administration; andcommercial/community banks.

• Two-thirds of FCS institutions offerinsurance services that their YBSborrowers use.

• 50 percent of FCS institutions providefee appraisal services.

• 42 percent of FCS institutions allowsome flexibility in their loan under-writing standards, as long as theborrower exhibits compensatingstrengths in other standards or thecredit risk can be otherwise managed.

• About half of the FCS institutions offerspecific training to YBS borrowers.Forty-nine percent offer business andfinancial skills training. One-thirdoffer leadership training. This traininghelps YBS borrowers to be betterfinancial managers and helps preparethem for the roles they will play intheir communities and agriculture’sfuture.



The Farm Credit System is able tomaintain an effective funding programand obtain funds at levels equal to orslightly better than other Government-sponsored enterprise issuers, even thoughit is the smallest issuer of the GSEs. In1998 Farm Credit System issuance wasup slightly, to 5 percent of the total GSEissuance. As shown in Figure 12, theFederal Home Loan Bank System (FHLB)was the largest issuer in 1998, followedclosely by the Federal Home LoanMortgage Corporation (FHLMC orFreddie Mac).

FCS banks obtain practically all loanfunds through the sale of debt securities.Systemwide debt securities can be issuedas discount notes, bonds, medium-termnotes, or global debt. Under the FarmCredit Act of 1971, as amended, all issuesof Systemwide debt securities are subjectto approval of the Farm Credit Adminis-tration.

The debt securities are not obligations of,nor are they guaranteed by, the UnitedStates or any agency or instrumentalitythereof, other than the FCS banks.Systemwide debt securities are the jointand several obligations of the Agricul-tural Credit Bank, the six Farm CreditBanks, and the Bank for Cooperatives,and are backed by their combinedresources and insured by the Farm CreditSystem Insurance Corporation. Anyuninsured bonds issued directly byindividual banks would be the soleobligations of the issuing bank. Becausethe System is a GSE issuer, its debtcarries certain favorable attributes, suchas interest exemption from state and localtaxes, eligibility for Federal ReserveBoard open market operations, andeligibility for unlimited purchase bynational banks, state bank FederalReserve members, and thrifts.

Funding the Farm Credit System

Each FCS bank is required to maintainspecified eligible assets at least equal invalue to the total amount of debtsecurities outstanding for which it isprimarily liable. As of December 31,1998, the combined FCS banks reportedeligible assets of approximately $75.9billion and debt securities and accruedinterest payable of $70.0 billion. For thecomparable period a year ago, the banksreported a combined $70.4 billion ineligible assets and $64.6 billion in debtsecurities and accrued interest payable.

Funding activities are handled by theFederal Farm Credit Banks FundingCorporation, which offers securities tothe public through a selling group ofinvestment dealers and dealer banks.The chief investors in Systemwidesecurities are municipalities, moneymarket funds, investment advisors,insurance companies, and commercialbanks.

Average Spreads

Interest rate spreads of GSEs overcomparable maturity U.S. Treasury rateswidened considerably during 1998, evenwhile interest rates declined. Thisunusual occurrence reflected the FederalReserve Board’s expansionary monetarypolicy to “stabilize” the capital marketsafter the turmoil experienced in late1998. However, System debt continuedto trade at spreads similar to those ofother GSEs in this unusual environment.

The average spread for all Systemwidedebt issued during 1998 was 42 basispoints above comparable U.S. Treasurysecurities, an increase from the 26-basis-point average spread experienced during1997 (Figure 13). The widening in theaverage spread is largely attributable toturmoil in the international capitalmarkets, especially during fall 1998,which caused strong demand for U.S.

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Figure 121998 GSE Debt Issuance*

*Farmer Mac was excluded from this figurebecause its total debt issuance was less than0.5 percent of the total GSE debt issuance.

FCS=Farm Credit SystemFHLB=Federal Home Loan Bank SystemFHLMC=Federal Home Loan Mortgage Corpora-

tion or Freddie MacFNMA=Federal National Mortgage Association or

Fannie MaeSLMA=Student Loan Marketing Association or

Sallie Mae

Source: The Bond Market Association 1stQuarter Report 1999.


Treasury securities by internationalinvestors. In addition, the Federalbudget surplus has reduced the volumeof U.S. Treasury issues.

Interest rates on Systemwide debtsecurities issued during 1998 wererelatively stable, although they diddecline at the long end of the yieldcurve. The average rate on Systemwidedebt securities issued during 1998 was5.32 percent, a decrease of 12 basispoints from 1997 (Figure 13). Theremaining maturity of Systemwide debtsecurities at yearend 1998 was 21.6months (1.8 years), compared with 19.2months (1.6 years) at yearend 1997.

Debt Securities Outstanding

Debt securities outstanding at yearend1998 totaled $68.6 billion, compared with$63.2 billion at yearend 1997, an increaseof 8.5 percent. The $5.4 billion debtincrease was used mainly to fund loangrowth and investments. Total issuanceof Systemwide debt securities was arecord $300.9 billion in 1998, up $56.1billion from the issuance of $244.8billion in 1997 (Figure 14). The increaseis attributable, in part, to growth inassets and increased discount note usageduring fall 1998 in response to greatermarket volatility.

In 1998, the System did not issue anyglobal debt because of the instability offinancial conditions overseas and ageneral lack of funding opportunities forthe types of structures and maturitiespreferred by System banks. However, theSystem still maintains a global marketpresence, and foreign investors purchaselarge portions of the calendar bondissues.

19

Figure 14Trend in Total Debt Issued, 1992–1998(Dollars in Billions)

Source: Federal Farm Credit Banks FundingCorporation Annual Reports.

Figure 13Farm Credit System Debt,1992–1998Average Rates and Spreads onTotal Debt

Basis Point Spread Interest Rate

Source: Federal Farm Credit Banks FundingCorporation Annual Reports.



1. The formal name of the 1996 Farm Bill is the Fed-eral Agricultural Improvement and Reform Act of1996.

In carrying out its responsibilities, theFarm Credit Administration activelymonitors systemic risks associated withFarm Credit System operations and theagricultural, financial, and economicenvironment within which Systeminstitutions operate. These analyticalrisk-monitoring responsibilities havebecome more important as Federalagricultural programs have given farmproducers more managerial flexibility andmore risk management responsibility.Because of this increased risk manage-ment responsibility, agricultural lendersare now more exposed to the variousrisks faced by their borrowers. Moreover,the U.S. Department of Agriculture’sforecast suggests that U.S. farmers will bemore vulnerable to risks in the 1999 and2000 crop years. Several risks will bearclose scrutiny over the next six monthsto two years.

World Agricultural Trade Risks

Supply/demand imbalances for agricul-tural commodities are not expected tomoderate in the near term, leaving U.S.agricultural producers to face continuedlow prices caused by weak marketdemand and increased foreign produc-tion.

Prolonged Asian Economic Crisis —While the Asian economic crisis has nowbottomed out, a return to the purchasingpatterns of the past will be slow. Softglobal markets generally translate intolower commodity prices, which can affectthe debt-servicing capacity of Systemfarmers and their cooperatives. Mostlikely to be affected by the Asian tradeslump are the Western and Midwesternstates, where exports to Asian countriesare relatively more important than inother parts of the country.

Global Oversupply — Over the pastseveral years, producing countriescompounded the problem of slow growthin market demand by increasing crop

output in response to the high prices ofthe mid-1990s. According to the WorldBank, world food production hasincreased by more than 25 percentduring the 1990s, with most of thisgrowth occurring during the past severalyears.

Foreign Exchange Rates — Last year’sworldwide recession also affected foreignexchange rates in the Asian countries, inRussia and Brazil, and in several energy-producing countries. As their economiesfaltered, so did their currency valuationsrelative to the U.S. dollar. The twofoldeffect was that (1) competing exporterswith devalued currencies caused worldprices to drop even more as they soldcommodities on the international marketand (2) purchasing countries withdevalued currencies had less purchasingpower to buy U.S. commodities. Theseconditions will continue to be a drag onforeign demand for U.S. farm productsfor several years.

Agricultural Trade Policies — Agricul-tural producers are increasingly exposedto programs and policies that affect theirability to compete in domestic andforeign markets. The World TradeOrganization negotiations that begin thisfall in Seattle, Washington, will be ofsignificant interest to U.S. farmers. U.S.farmers have a lot at stake in thesenegotiations since there continue to besubstantial barriers to export trade,whose removal would have a positiveimpact on the demand for U.S. farmproducts.

Effective Utilization of AgriculturalRisk Management Tools

Since passage of the 1996 Farm Bill,1 thecombined effect of Federal agriculturalpolicies has been to reduce plannedGovernment outlays to agriculture,transfer responsibility for risk manage-ment to individual producers, andminimize the Federal farm safety net.

Potential Risks for theFarm Credit System

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These policies, combined with anunanticipated world economic crisis anda series of natural disasters for certainU.S. producers, exposed weaknesses inthe farm safety net last year. Despite the1998 emergency relief to farmers, theFederal farm safety net now covers fewerfarm-sector risks than prior farmprograms did. Even with 1998’s ad hocrelief package, the Government safety netthrough crop loans, direct payments, andinsurance provides coverage for less thanhalf the farm sector as measured by farmcash receipts.

The insurance component of the farmsafety net is likely to change considerablyin the next two years as means are foundto expand traditional crop insurance tocover revenue and price risks, morecrops and livestock, and multiple-yearlosses. Insurance, as well as other riskmanagement tools such as hedging andcontracting, will become even moreimportant as ways for individual produc-ers to manage risk. These tools are likelyto become more varied and morecomplex. Farmers will need to under-stand how to customize an assortment ofthese tools to suit their individual riskexposure. Any failure on their part touse the appropriate risk managementtools will transfer additional risk to farmlenders.

Environmental Risk

U.S. agricultural producers are increas-ingly being subjected to environmentalstandards, which are placing morerestrictions on farming activities. Theseenvironmental constraints can increaseproduction costs and decrease productiv-ity. Environmental issues are beingaddressed increasingly at the state level,where producers’ interests were expectedto prevail; however, public tolerance forair, water, and sensory pollution hasdeclined. Federal guidelines make stategovernments responsible for achievingminimum standards for water quality,

and agriculture is increasingly beingcalled upon to participate in improvingwater quality. Failure by states such asNorth Carolina to meet minimum waterquality levels has led to rules againstadditional pollutants, which affect anyfurther economic development andactivities, including agriculture. Waterquality issues are also a significantconcern for California agriculturalproducers and a growing concern inseveral other states.

Competitive Pressures in the FinancialServices Sector

Three relatively new developments —taxation, Federal Home Loan Banksfunding, and expanded services offeredby commercial lending institutions —are changing the competitive landscapefor agricultural lenders. In addition,ongoing competitive pressures in thefinancial services sector require financialinstitutions to improve service andreduce rates to retain and attract custom-ers. Institutions unable to meet thesechallenges are merging to form largerinstitutions that can. System lenders arerecognizing these pressures and the needto make changes of their own to ensuretheir continued competitiveness.

About half of the taxable Farm Creditinstitutions currently take advantage oftheir cooperative status to file taxesunder Subchapter T of the InternalRevenue Code, thereby avoiding doubletaxation at both the corporate andpatron levels. Small commercial banksnow have a similar tax advantage. Underthe Small Business Jobs Protection Act of1996, commercial banks and thrifts thatmeet qualifying criteria can file their taxreturns under Subchapter S of theInternal Revenue Code, thereby receivingtax benefits comparable to cooperativesfiling under Subchapter T. In the pasttwo years, more than a thousandcommercial banks (60 percent of whichare located in six Midwestern farm

21



states) have taken advantage of this taxbenefit. These conversions will reducebank costs, increase competition, andultimately, through competition, shouldbenefit agricultural producers.

Federal Home Loan Banks are making iteasier for community banks to borrowfor small business and agriculturallending. As a result, the cost of fundswill decline. The FHLBs essentiallyprovide a convenient Government-sponsored enterprise source of fundingto community banks. Tightening loan-to-deposit ratios no longer need be aconstraint in the funding of agriculturalloans. Much of the interest in thisfunding seems to come from rural banksin the Midwest. While the fundingadvantage of System institutions islessened, the competition providesbenefits for agricultural producers.

Financial modernization proposals beforeCongress provide that commercial banksand thrifts will be able to engage insecurities and insurance businessactivities currently restricted by law. Thisexpansion of financially related servicesthrough banks will include some riskmanagement tools, such as crop, casualty,life, and health insurance and hedgingactivities that farmers need. While theirsmall size makes it unlikely that commu-nity banks will be able to fully developthese lines of business, larger banksprobably will be able to develop thesespecialized products and services. Thiscompetitive risk is expected to be mostprevalent in areas served by major banksthat specialize in agricultural lending,such as California. This will represent aunique new competitive situation forFarm Credit institutions, because thefinancial modernization proposals underconsideration do not include modifica-tions to the Farm Credit Act.

Recognizing a need for strategic changeif the System is to remain viable, theFCA Board adopted a philosophystatement on competition on July 14,1998. The statement affirms the Board’sbelief that competition is beneficial forthe customer and the System. Underthis philosophy statement, the FCABoard intends to provide Systeminstitutions greater flexibility to adjusttheir structure, address inefficiencies,exercise authorities permitted under theAct, and give customers a choice of FCSservice providers in order to better serveagricultural borrowers.

Technology Risk

The most immediate technology risk toFCS institutions is how the millennialdate change will affect computerizedoperations. The so-called year 2000problem affects not only FCS institutionsbut their borrowers as well. Systeminstitutions continue to make satisfactoryprogress in identifying, correcting, andtesting affected components of mission-critical systems. More than 90 percentof System institutions were ratedsatisfactory by FCA examiners as ofDecember 31, 1998, and 80 percent ofthe System’s “high-profile” institutions,including the Funding Corporation, wererated satisfactory. No System institutionwas rated unsatisfactory as of yearend1998.

Farmers are also vulnerable to the Y2Kproblem. A recent United Nations reportnoted that “almost all of the supplies andservices essential for agricultural produc-tion” are vulnerable. It concludes thatthe entire agricultural process could beaffected. The shipping industry isconsidered to be especially vulnerableand largely unprepared for the millennialdate change. This risk could affect theimportant U.S. export trade.

22


The financial tables that follow provide afinancial overview of the Farm CreditSystem’s major components: Farm Creditbanks, direct lender associations, FederalLand Bank Associations, and the FCS ona combined basis. The tables all providea five-year data series that shows thetrends in financial performance from1994 through 1998. As the Systemcontinues to consolidate and restructure,we will consider alternate approaches fordisplaying financial data in the mostuseful format. In addition, we alwayswelcome input from the public regardingthe most useful approach for displayingthis data.

The financial tables were developed fromCall Report data submitted by each FCSinstitution to the Farm Credit Adminis-tration. The Call Report information is

Farm Credit SystemFinancial Tables

routinely reviewed for accuracy and isused by FCA in the oversight of FCSinstitutions. Because of significantintercorporate relationships between FCSinstitutions, financial data presented inthis report for each group of likeinstitutions cannot be added to obtaindata for the combined FCS. Instead, weprovide some combined data on theSystem in Financial Table 1. We refer thereader to quarterly and annual informa-tion statements issued by the FederalFarm Credit Banks Funding Corporation(see page 35) for additional informationon the System’s combined financialstatements. These statements containcombined Systemwide quarterly andaudited annual financial statements anddisclosure to investors as required byregulation.

23



Financial Table 1Major Financial Indicators for the Farm Credit System, Annual Comparison 1

(Dollars in Thousands)

As of December 31 1998 1997 1996 1995 1994

Gross Loan Volume 67,904,000 63,439,000 61,178,000 58,589,000 54,675,911Formally Restructured Loans2 150,000 200,000 246,000 320,000 409,146Accrual Loans 90 or More Days Past Due 46,000 36,000 28,000 29,000 30,543Nonaccrual Loans 1,200,000 592,000 645,000 801,000 1,036,236Nonperforming Loans3 2.06% 1.31% 1.50% 1.96% 2.70%Total Bonds and Notes 69,664,000 64,479,000 62,343,000 59,778,000 55,793,199Total Capital/Total Assets4 14.88% 14.96% 14.32% 13.81% 13.53%Total Surplus/Total Assets 10.95% 10.64% 9.91% 9.20% 8.68%Total Net Income 1,251,000 1,267,000 1,201,000 1,165,000 1,005,000Return on Assets 1.54% 1.65% 1.62% 1.69% 1.54%Return on Equity 10.20% 11.19% 11.50% 12.14% 11.49%Net Interest Margin 2.87% 2.95% 2.99% 3.03% 3.07%

1. Some of the previously published data have been restated to include subsequent adjustments.2. Excludes loans past due 90 days or more.3. Nonperforming Loans are defined as Nonaccural Loans, Formally Restructured Loans, and Accrual Loans 90 or More Days Past Due.4. Total capital includes protected borrower stock and restricted capital (amount in the Farm Credit Insurance Fund).

Source: Federal Farm Credit Banks Reports to Investors of the Farm Credit System.

24


Financial Table 2Farm Credit System Banks Combined Statement of Financial Condition 1

(Dollars in Millions)

As of December 31 1998 1997 2 19962 19952 19942

AssetsLoans $63,289.3 $59,237.9 $57,300.7 $55,231.9 $51,563.9Allowance for Losses 737.5 736.1 729.7 707.0 801.0

Net Loans 62,551.8 58,503.8 56,571.0 54,524.9 50,762.9Cash and Investments in Securities 13,306.4 11,969.0 11,234.2 10,509.1 9,710.3Other Property Owned 5.7 7.4 21.1 33.3 52.9Other Assets–Net 718.3 643.9 723.3 686.6 778.6

Total Assets 76,582.1 71,124.1 68,549.7 65,753.9 61,304.8Liabilities

Systemwide Notes andBonds Outstanding 67,708.3 62,335.3 60,156.8 57,992.8 53,609.4

Other Liabilities 2,751.9 2,720.3 2,594.8 2,131.9 2,318.7Total Liabilities 70,460.2 65,055.6 62,751.6 60,124.6 55,928.1Net WorthCapital

Capital Stock and ParticipationCertificates–Protected 0.5 0.5 0.5 0.5 2.7

Capital Stock and Participation `Certificates–Unprotected 2,762.3 2,781.8 2,748.3 2,715.1 2,329.1

Preferred Stock–FinancialAssistance Corporation 0.0 0.0 0.0 0.0 388.2

Other Capital 400.0 401.6 383.0 429.8 227.4Total Capital 3,162.8 3,183.9 3,131.8 3,145.4 2,947.2Earned Net Worth 2,962.1 2,863.8 2,660.6 2,477.5 2,531.2Total Net Worth 6,121.9 6,068.5 5,798.1 5,629.3 5,376.7Total Liabilities and Net Worth $76,582.1 $71,124.1 $68,549.7 $65,753.9 $61,304.8

1. Includes six Farm Credit Banks, one Agricultural Credit Bank, and one Bank for Cooperatives. Figures for 1994 through 1998are not comparable to previous years because of mergers of Federal Land Bank Associations and Production CreditAssociations into Agricultural Credit Associations, and creation of Federal Land Credit Associations and downloading of farmreal estate loans from Farm Credit Banks.

2. Some of the previously published annual data have been restated to include subsequent adjustments.

Note: Totals may not add because of rounding.

25



Financial Table 3Farm Credit System Banks Combined Statement of Income and Expense 1


For the Year Ended December 31 1998 1997 1996 1995 1994Interest Income

Loans $4,093.2 $4,048.2 $3,981.7 $3,904.4 $3,283.5Investments and Other 712.0 670.4 641.8 595.9 404.9

Total Interest Income 4,805.2 4,718.6 4,623.5 4,500.3 3,688.5Interest Expense

Systemwide Notes and Bonds 3,708.1 3,544.9 2,669.2 2,442.8 1,882.5Other 61.4 92.3 834.1 1,012.2 721.2

Total Interest Expense 3,769.4 3,637.2 3,503.2 3,455.0 2,603.7Net Interest Income 1,035.7 1,081.4 1,120.3 1,045.3 1,084.7Less: Provision for Loan Losses 74.0 39.0 83.0 (7.8) 17.4Net Interest Income after

Provision for Loan Losses 961.7 1,042.4 1,037.4 1,053.1 1,067.3Other Income 107.5 113.5 87.4 82.7 74.3Operating Expenses

Salaries and Employee Benefits 123.1 117.5 124.6 120.3 147.0Occupancy and Equipment Expenses 22.7 24.0 25.3 27.9 32.8Other Operating Expenses 148.5 168.8 207.2 250.7 311.0

Total Operating Expenses 294.3 310.3 357.1 398.9 490.7Other Expenses 186.9 154.2 146.6 138.2 180.7Extraordinary Items (10.3) 0.5 1.2 (43.3) (2.7)Net Income $ 577.7 $ 691.9 $ 622.2 $ 555.3 $ 467.6


Note: Totals may not add because of rounding.

26


Financial Table 4Farm Credit System Banks Combined Trends in Selected Financial Measures 1


As of December 31 1998 1997 2 1996 1995 1994Loan Performance

Performing3 $62,207.3 $58,730.8 $56,733.0 $54,547.6 $50,607.0Formally Restructured3 237.4 278.0 307.5 337.1 397.4Nonaccrual 824.9 224.8 253.9 338.4 524.8Loans Past Due 90 Days or More 19.6 6.3 6.3 8.8 34.7

Net Chargeoffs on Loans $54.7 $11.2 $30.7 ($7.9) ($0.8)Selected Ratios

Return on Assets (%) 0.80 1.00 0.92 0.89 0.78Return on Equity (%) 9.30 11.57 10.77 10.04 8.70Net Interest Margin (%) 1.45 1.59 1.68 1.71 1.84Capital as a Percentage of Assets 7.99 8.53 8.46 8.56 8.77Debt-to-Capital Ratio 11.51 10.72 10.82 10.68 10.40


2. Some of the previously published annual data have been restated to include subsequent adjustments.3. Excludes loans past due 90 days or more.

27



Financial Table 5Direct Lender Associations Combined Statement of Financial Condition 1


As of December 31 1998 1997 2 1996 1995 1994Assets

Loans $41,029.9 $37,594.3 $34,771.2 $31,627.2 $29,365.6Allowance for Losses 1,099.7 1,017.3 955.3 886.3 748.5

Net Loans 39,930.2 36,577.0 33,815.8 30,740.9 28,617.1Cash and Investments in Securities 260.9 175.2 170.1 166.0 115.8Other Property Owned 26.6 24.0 33.5 30.6 47.3Other Assets–Net 2,586.8 2,495.1 2,437.2 2,418.5 2,302.1

Total Assets 42,804.5 39,271.2 36,456.6 33,355.9 31,082.3Liabilities

Systemwide Notes andBonds Outstanding N/A N/A N/A N/A N/A

Other Liabilities 35,802.1 32,792.3 30,372.0 27,646.7 25,710.4Total Liabilities 35,802.1 32,792.3 30,372.0 27,646.7 25,710.4Net WorthCapital


Capital Stock and ParticipationCertificates–Unprotected 826.9 919.0 1,034.1 1,138.6 1,267.8

Preferred Stock–FinancialAssistance Corporation 0.1 0.0 0.0 0.0 0.0

Other Capital 13.5 14.4 15.5 15.2 14.9Total Capital 911.2 1,034.8 1,171.9 1,304.1 1,472.8Earned Net Worth 6,091.1 5,444.1 4,912.6 4,405.1 3,899.2Total Net Worth 7,002.4 6,478.9 6,084.5 5,709.2 5,371.9Total Liabilities and Net Worth $42,804.5 $39,271.2 $36,456.6 $33,355.9 $31,082.3

1. Includes Production Credit Associations, Agricultural Credit Associations, and Federal Land Credit Associations. Figures for1994 through 1998 are not comparable to previous years because of mergers of Federal Land Bank Associations and PCAsinto ACAs, and creation of FLCAs and downloading of farm real estate loans from Farm Credit Banks.


Notes: Totals may not add because of rounding. N/A = Not applicable.

28


Financial Table 6Direct Lender Associations Combined Statement of Income and Expense 1



Loans $3,329.7 $3,100.3 $2,878.2 $2,745.7 $2,258.9Investments and Other 5.0 2.4 3.7 5.5 0.9

Total Interest Income 3,334.6 3,102.8 2,882.4 2,751.2 2,259.7Interest Expense

Systemwide Notes and Bonds N/A N/A N/A N/A N/AOther 2,085.8 1,927.8 1,769.9 1,690.2 1,301.2

Total Interest Expense 2,085.8 1,927.8 1,769.9 1,690.2 1,301.2Net Interest Income 1,248.9 1,174.9 1,112.0 1,061.0 958.6Less: Provision for Loan Losses 96.7 56.2 57.7 51.6 46.7Net Interest Income after

Provision for Loan Losses 1,152.1 1,118.7 1,054.3 1,009.3 911.9Other Income 399.7 356.2 361.9 345.1 326.4Operating Expenses


Total Operating Expenses 668.3 652.2 623.9 609.9 584.0Other Expenses 179.6 175.0 169.3 148.4 132.6Extraordinary Items 0.1 0.0 0.2 0.2 0.0Net Income $ 704.0 $ 647.7 $ 623.7 $ 596.4 $ 521.7

1. Includes Production Credit Associations, Agricultural Credit Associations, and Federal Land Credit Associations. Figures for 1994through 1998 are not comparable to previous years because of mergers of Federal Land Bank Associations and PCAs intoACAs, and creation of FLCAs and downloading of farm real estate loans from Farm Credit Banks.



29



Financial Table 7Direct Lender Associations Combined Trends in Selected Financial Measures 1


As of December 31 1998 1997 1996 1995 1994Loan Performance

Performing2 $40,556.6 $37,115.0 $34,270.5 $31,035.1 $28,704.1Formally Restructured2 71.4 89.1 88.0 108.1 129.6Nonaccrual 375.8 367.1 390.9 462.4 513.4Loans Past Due 90 Days or More 26.1 23.1 21.8 21.6 18.5

Net Chargeoffs on Loans $14.4 $15.8 $17.4 $3.2 $4.5Selected Ratios

Return on Assets (%) 1.72 1.73 1.79 1.86 1.74Return on Equity (%) 10.40 10.25 10.51 10.68 9.95Net Interest Margin (%) 3.27 3.38 3.46 3.63 3.51Capital as a Percentage of Assets 16.36 16.50 16.69 17.12 17.28Debt-to-Capital Ratio 5.11 5.06 4.99 4.84 4.79

1. Includes Production Credit Associations, Agricultural Credit Associations, and Federal Land Credit Associations. Figures for1994 through 1998 are not comparable to previous years because of mergers of Federal Land Bank Associations and PCAsinto ACAs, and creation of FLCAs and downloading of farm real estate loans from Farm Credit Banks.

2. Excludes loans past due 90 days or more.

30


Financial Table 8Federal Land Bank Associations Combined Statement of Financial Condition 1


As of December 31 1998 1997 1996 1995 1994Assets

Loans2 N/A N/A N/A N/A N/AAllowance for Losses3 N/A N/A N/A N/A N/A

Net Loans N/A N/A N/A N/A N/ACash and Investments in Securities $731.3 $658.8 $528.3 $447.7 $318.0Other Property Owned N/A N/A N/A N/A N/AOther Assets–Net 320.8 377.1 415.3 400.1 219.4

Total Assets 1,052.0 1,035.9 943.6 847.8 537.4Liabilities

Systemwide Notesand Bonds Outstanding N/A N/A N/A N/A N/A

Other Liabilities 62.2 61.6 61.2 46.6 35.5Total Liabilities 62.2 61.6 61.2 46.6 35.5Net WorthCapital


Capital Stock and ParticipationCertificates–Unprotected 106.8 116.1 133.2 164.9 189.0

Other Capital 0.0 0.0 0.0 0.0 0.0Total Capital 111.5 124.5 141.4 174.7 200.6Earned Net Worth 878.3 849.8 741.0 626.4 301.4Total Net Worth 989.8 974.4 882.4 801.2 502.0Total Liabilities and Net Worth $1,052.0 $1,035.9 $943.6 $847.8 $537.4

1. Figures for 1994 through 1998 are not comparable to previous years because of mergers of FLBAs and Production CreditAssociations into Agricultural Credit Associations, and creation of Federal Land Credit Associations and downloading of farmreal estate loans from Farm Credit Banks.

2. The FLBAs act as agents for the FCBs (formerly Federal Land Banks) in the lending process but do not hold loansthemselves.

3. FLBAs in some districts have liability for losses on FCB (formerly Federal Land Bank) loans. Because FLBAs do not makeloans, the FLBA allowance for loan losses is included in FLBA liabilities.


31



Financial Table 9Federal Land Bank Associations Combined Statement of Income and Expense 1



Loans N/A N/A N/A N/A N/AInvestments and Other $ 29.5 $ 26.8 $ 22.0 $ 24.3 $ 15.7

Total Interest Income 29.5 26.8 22.0 24.3 15.7Interest Expense

Systemwide Notes and Bonds N/A N/A N/A N/A N/AOther N/A N/A N/A N/A N/A

Total Interest Expense N/A N/A N/A N/A N/ANet Interest Income 29.5 26.8 22.0 24.3 15.7Less: Provision for Loan Losses 3.0 2.6 4.0 0.0 (2.7)Net Interest Income after

Provision for Loan Losses 26.6 24.2 17.9 24.3 18.4Other Income 200.9 175.2 161.8 335.1 79.4Operating Expenses


Total Operating Expenses 73.8 76.4 58.1 55.8 56.1Other Expenses 0.1 0.1 0.1 0.1 0.1Extraordinary Items 0.0 0.0 0.0 0.0 0.0Net Income $153.7 $123.0 $121.7 $303.7 $41.8

1. Figures for 1994 through 1998 are not comparable to previous years because of mergers of FLBAs and Production CreditAssociations into Agricultural Credit Associations, and creation of Federal Land Credit Associations and downloading of farmreal estate loans from Farm Credit Banks.



32


A

Agricultural Credit Association(ACA) — An ACA results from themerger of a Federal Land Bank Associa-tion or a Federal Land Credit Associationand a Production Credit Association andhas the combined authority of the twoinstitutions. An ACA borrows fundsfrom a Farm Credit Bank or AgriculturalCredit Bank to provide short-,intermediate-, and long-term credit tofarmers, ranchers, and producers orharvesters of aquatic products. It alsomakes loans to these borrowers forcertain processing and marketingactivities, to rural homeowners forhousing, and to certain farm-relatedbusinesses.

Agricultural Credit Bank (ACB) — AnACB results from the merger of a FarmCredit Bank and a Bank for Cooperativesand has the combined authorities ofthose two institutions. An ACB is alsoauthorized to finance U.S. agriculturalexports and provide internationalbanking services for farmer-ownedcooperatives. CoBank is the only ACB inthe Farm Credit System.

B

Bank for Cooperatives (BC) — A BCprovides lending and other financialservices to farmer-owned cooperatives,rural utilities (electric and telephone),and rural sewer and water systems. Italso is authorized to finance U.S. agricul-tural exports and provide internationalbanking services for farmer-ownedcooperatives. As of December 31, 1998,the St. Paul (Minnesota) BC is the onlyBC in the Farm Credit System.

Glossary

F

Farm Credit Act (the Act) — The FarmCredit Act of 1971, as amended, is thestatute under which the Farm CreditSystem operates. The Act recodified allprevious acts governing the Farm CreditSystem.

Farm Credit Bank (FCB) — On July 6,1988, the Federal Land Bank and theFederal Intermediate Credit Bank in 11of the 12 Farm Credit districts mergedto become FCBs. The mergers wererequired by the Agricultural Credit Actof 1987. FCBs generally provide servicesand funds to local associations that, inturn, lend those funds to farmers,ranchers, producers or harvesters ofaquatic products, rural residents forhousing, and some agriculture-relatedbusinesses. As of January 1, 1999, therewere six FCBs: AgAmerica, FCB; AgFirstFarm Credit Bank; AgriBank, FCB; FarmCredit Bank of Texas; Farm Credit Bankof Wichita; and Western Farm CreditBank.

Farm Credit Leasing Services Corpora-tion (Leasing Corporation) — TheLeasing Corporation is a service entityowned by Farm Credit System banks toprovide equipment leasing and relatedservices to eligible borrowers, includingagricultural producers, cooperatives, andrural utilities.

Farm Credit System Assistance Board(Assistance Board) — The AssistanceBoard was created by the AgriculturalCredit Act of 1987 to provide assistanceto financially troubled Farm CreditBanks, protect the stock of Systemborrowers, restore FCS banks to eco-nomic viability, and preserve their abilityto provide credit at reasonable andcompetitive rates. The Assistance Boardterminated on December 31, 1992.

33



Farm Credit System Insurance Corpo-ration (FCSIC) — The FCSIC wasestablished by the Agricultural Credit Actof 1987 as an independent U.S.Government-controlled corporation. Itspurpose is to ensure the timely paymentof principal and interest on insurednotes, bonds, and other obligationsissued on behalf of Farm Credit Systembanks. The FCA Board serves ex officioas the Board of Directors for FCSIC;however, the chairman of the FCA Boardis not permitted to serve as the chairmanof the FCSIC Board of Directors.

Federal Agricultural Mortgage Corpo-ration (Farmer Mac) — Farmer Mac,created by the Agricultural Credit Act of1987, provides guarantees for the timelyrepayment of principal and interest onsecurities backed by agricultural realestate or rural housing loans and onsecurities backed by the “guaranteedportions” of U.S. Department of Agricul-ture-guaranteed loans. Farmer Mac isregulated and examined by the FarmCredit Administration and is defined bystatute as a Farm Credit System institu-tion.

Federal Farm Credit Banks FundingCorporation (Funding Corporation) —The Funding Corporation, based inJersey City, New Jersey, manages the saleof Systemwide debt securities to financethe loans made by Farm Credit Systeminstitutions. The Funding Corporationuses a network of bond dealers to marketits securities.

Federal Land Bank Association(FLBA) — FLBAs are lending agents forFarm Credit Banks. FLBAs make andservice long-term mortgage loans tofarmers and ranchers and to ruralresidents for housing. FLBAs do notown loan assets but make loans only on

behalf of the Farm Credit Bank withwhich they are affiliated.

Federal Land Credit Association(FLCA) — An FLCA is a Federal LandBank Association that owns its loanassets. An FLCA borrows funds from aFarm Credit Bank to make and servicelong-term loans to farmers, ranchers, andrural residents for housing.

G

Government-sponsored enterprise(GSE) — A GSE is a federally charteredcorporation that is privately owned,designed to provide a source of creditnationwide, and limited to servicing oneeconomic sector. Each GSE has a publicor social purpose — to improve credit toagriculture, education, or housing. GSEsare usually created because the privatemarkets did not satisfy a purpose thatthe Congress deems worthy — either tofill a credit gap or to enhance competi-tive behavior in the loan market. Each isgiven certain features or benefits, referredto as GSE attributes, to allow it toovercome the barriers that preventedpurely private markets from developing.Sometimes the public assistance is onlyto get started, at other times it isongoing.

P

Production Credit Association(PCA) — The Farm Credit Act of 1933authorized farmers to organize PCAs thatcould discount notes with FederalIntermediate Credit Banks. PCAs areFarm Credit System entities that deliveronly short- and intermediate-term loansto farmers and ranchers. A PCAborrows money from its Farm CreditBank to lend to farmers. PCAs also owntheir loan assets.

34


A discussion of the performance and financial condition of the Farm Credit Adminis-tration may be found in the Farm Credit Administration Annual Report. This publica-tion is available on FCA’s Web site located at www.fca.gov. Depending on availability, itmay be obtained without charge from:

Office of Congressional and Public AffairsFarm Credit Administration1501 Farm Credit DriveMcLean, VA 22102-5090Telephone (703) 883-4056Fax (703) 790-3260E-mail: [email protected]

The Federal Farm Credit Banks Funding Corporation prepares the financial pressreleases, the Farm Credit System Annual Report to Investors, the System’s Annual andQuarterly Information Statements, and the System’s combined financial statementscontained therein, with the support of the System banks. The Funding Corporation’sWeb site is located at www.farmcredit-ffcb.com. Copies of the publications areavailable for inspection at, or will be furnished, without charge, upon request to theFunding Corporation.

Federal Farm Credit Banks Funding Corporation10 Exchange PlaceSuite 1401Jersey City, NJ 07302Telephone (201) 200-8000

The Farm Credit System Insurance Corporation, which ensures the timely payment ofprincipal and interest on insured securities issued by FCS banks, publishes an annualreport. Copies are available from:

Farm Credit System Insurance Corporation1501 Farm Credit DriveMcLean, VA 22102Telephone (703) 883-4380

In addition, FCS banks and associations are required by regulation to prepare annualand quarterly financial disclosure reports. Copies of these documents are available forpublic inspection at FCA headquarters in McLean, Virginia.

Additional Information 35

the farm credit administration will

Documents