Farm Credit System Reports 1997 Second Quarter and Six-Month Net Income.

NEW YORK--(BUSINESS WIRE)--August 12, 1997--The Farm Credit System today reported combined net income of $304 million and $607 million for the three and six months ended June 30, 1997, respectively, as compared with combined net income of $308 million and $662 million for the same periods last year.

"While net income decreased for the three and six months ended June 30, 1997, as compared with the same periods of the prior year, the System continued to maintain solid profitability," remarked James A. Brickley, president and CEO of the Federal Farm Credit Banks Funding Corp. "System institutions managements' focus on building capital over the past several years has allowed the system to sustain a favorable level of earnings in an increasingly competitive agricultural environment."

Net interest income decreased $6 million and $29 million to $537 million and $1.070 billion for the second quarter and first six months of 1997, respectively, as compared with net interest income of $543 million and $1.099 billion for the corresponding periods of the prior year. The decreases in net interest income resulted from declines in the net interest margin (net interest income as a percentage of average earning assets) to 2.90% for the second quarter of 1997 from 3.00% for the second quarter of 1996 and to 2.91% for the six months ended June 30, 1997 from 3.07% for the same period last year. These declines resulted primarily from decreases of 18 and 22 basis points in the spread between the yield on earning assets and the cost of interest-bearing debt to 2.01% and 2.02% for the second quarter and first six months of 1997, respectively, from 2.19% and 2.24% for the corresponding periods of the prior year. The declines in net interest spreads were due primarily to competitive loan pricing pressures and decreases in income recognized on nonaccrual loans. Higher loan volumes during the three and six months ended June 30, 1997 served to partially offset the negative impact of the decline in net interest spread.

The provision for loan losses decreased $12 million and increased $10 million for the three and six months ended June 30, 1997, respectively, to $27 million and $67 million, as compared with the provision for loan losses of $39 million and $57 million for the same periods of the prior year. The decrease in the second quarter of 1997 provision for loan losses, as compared with the same period in 1996, resulted primarily from the absence of significant additional allowances for loan losses that were required during the second quarter of 1996 due to credit risks associated with loans to certain grain and farm supply cooperatives that incurred losses from grain marketing and related hedging contracts. The provision for loan losses recorded for the three months ended June 30, 1997 reflected the determination that allowances for loan losses were needed to provide for credit risks related to additional loan volume and credit deterioration related to a few borrowers.

The increase in the provision for loan losses during the first six months of 1997 was primarily attributable to the System's additional loan volume and to operating weaknesses faced by a limited number of processing and marketing cooperatives. The operations of these cooperatives were adversely affected by higher input prices in 1996.

Also contributing to the decrease in System earnings during the second quarter and first six months of 1997 were increases in net noninterest expenses of $11 million and $16 million, respectively, reflecting an increase in salaries and employee benefits and other operating costs. These increases reflect, in part, certain System institutions' expenditures for strategic alliances and for customer and market research and development efforts.

The provision for income taxes remained relatively stable during the three and six months ended June 30, 1997. While income before income taxes decrease $55 million for the six months ended June 30, 1997, the effective tax rate (the provision for income taxes as a percentage of income before income taxes) increased to 12.7% as compared with 11.7% for the same period of the prior year. This increase in the effective tax rate resulted primarily from the effect of transactions between tax-exempt and taxable System institutions, including taxable dividends paid to certain Associations by their related tax-exempt Banks, offset in part by decreased earnings at certain taxable entities.

Gross loan volume rose $1.461 billion, or 2.4% to $62.639 billion at June 30, 1997, as compared with year-end 1996 volume of $61.178 billion. The increase in loan volume resulted primarily from seasonal growth in domestic loans to cooperatives and short- and intermediate-term loans, offset in part by a decline in loans made in connection with international transactions. Long-term real estate loans also increased slightly between Dec. 31, 1996 and June 30, 1997.

The System's accruing loan volume was $61.674 billion at June 30, 1997, as compared with $60.533 billion at Dec. 31, 1996. Nonaccrual loans remained relatively stable, as compared with the first quarter of 1997 levels, and increased $320 million during the first six months of 1997 to $965 million at June 30, 1997, as compared with $645 million at Dec. 31, 1996. This increase in nonaccrual loans was principally attributable to the deterioration in the credit quality of loans to a limited number of processing and marketing cooperatives during the first quarter of 1997.

As a result of the increase in nonaccrual loans, nonperforming loans (which consist of nonaccrual loans, accruing restructured loans, and accruing loans 90 days or more past due) increased by $307 million to $1.226 billion at June 30, 1997, an increase of 33% from Dec. 31, 1996. Nonperforming assets (which consists of nonperforming loans and other property owned) were $1.278 billion at June 30, 1997, as compared with $974 million at Dec. 31, 1996. Such assets represented 2.0% of the System's loans and other property owned at June 30, 1997, an increase from 1.6% at Dec. 31, 1996.

The allowance for loan losses was $1.825 billion at June 30, 1997, as compared with $1.770 billion at Dec. 31, 1996. The allowance for loan losses as a percentage of loans outstanding was 2.9% at June 30, 1997 and Dec. 1, 1996. The allowance for loan losses was 149% of the system's total nonperforming loans and 189% of its nonaccrual loans at June 30, 1997, as compared with 193% and 274%, respectively, at Dec. 31, 1996. The decreases in the allowance for loan losses as a percentage of nonperforming and nonaccrual loans resulted primarily from the increase in nonaccrual loans discussed above.

Capital increased during the first six months of 1997 by $493 million to $11.091 billion. The June 30, 1997 balance included restricted capital, reflecting assets in the Farm Credit Insurance Fund, in the amount of $1.236 billion. The increase in capital resulted primarily from net income earned and retained. Capital as a percentage of total assets was 14.5% at June 30, 1997, as compared with 14.1% at Dec. 31, 1996.

The Farm Credit System is a nationwide system of Federally chartered agricultural and rural lending institutions cooperatively owned by their borrowers. -0-

                        Farm Credit System
                 Combined Financial Statement Data
                          (in millions)

                                    June 30,        December 31,
                                      1997              1996
                                   (unaudited)
Statement of Condition Data

Cash and investments                $11,942           $12,142
Loans                                62,639            61,178
Less allowance for loan losses       (1,825)           (1,770)
Net loans                            60,814            59,408

Accrued interest receivable           1,258             1,166
Other property owned                     52                55
Other assets                            979               977
Restricted assets                     1,236             1,169
                                    -------           -------
Total assets                        $76,281           $74,917

Systemwide bonds and notes,
 and Bank and other bonds           $63,362           $62,343
Other liabilities                     1,711             1,845
  Total liabilities                  65,073            64,188
Protected borrower capital              117               131
Capital (including restricted
 capital of $1,236 and $1,169,
 respectively)                       11,091            10,598
                                    -------           -------
Total liabilities and capital       $76,281           $74,917
-0-

                                      For the           For the
                                   Quarter Ended    Six Months Ended
                                      June 30,          June 30,
                                             (Unaudited)
                                  1997      1996      1997      1996
Statement of Income Data

Interest income                $1,472     $1,444     $2,904   $2,894
Interest expense                 (935)      (901)    (1,834)  (1,795)

Net interest income               537        543      1,070    1,099
Provision for loan losses         (27)       (39)       (67)     (57)

Net noninterest expenses         (163)      (152)      (308)    (292)
Income before income taxes        347        352        695      750
Provision for income taxes        (43)       (44)       (88)     (88)

Net income                     $  304     $  308     $  607   $  662

CONTACT: Federal Farm Credit Banks Funding Corp., Jersey City, N.J.

Daniel M. Bienz, 201/200-8070