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Farm Credit System Reports 2010 Third Quarter and Nine-Month Net Income

NEW YORK - The Farm Credit System today reported combined net income of $949 million and $2.633 billion for the three and nine months ended September 30, 2010, as compared with combined net income of $721 million and $2.018 billion for the same periods last year.

“The Farm Credit System achieved very favorable earnings during the third quarter and first nine months of 2010,” remarked Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. “As the agricultural economy continues to improve, the System has benefitted considerably from its consistent efforts to build and maintain a strong financial position to ensure credit is readily available to rural America. Capital as a percentage of assets grew to 15.0% at September 30, 2010 from 13.9% at December 31, 2009.”

Results of Operations

Combined net income increased $228 million and $615 million for the third quarter and nine months ended September 30, 2010, as compared with the same periods in 2009. The increase for the three-month period resulted from an increase in net interest income of $138 million and decreases in the provision for loan losses of $101 million and the provision for income taxes of $11 million, partially offset by an increase in net noninterest expense of $22 million. The increase in net income for the nine-month period resulted from an increase in net interest income of $381 million and a decrease in the provision for loan losses of $259 million offset, in part, by increases in net noninterest expense of $14 million and the provision for income taxes of $11 million.

Net interest income increased to $1.480 billion and $4.323 billion for the three and nine months ended September 30, 2010, as compared with $1.342 billion and $3.942 billion for the same periods of the prior year. The increase in net interest income for both the three- and nine-month periods resulted from increases in the System’s net interest spread driven by overall market conditions.

Net interest margin increased 23 and 22 basis points to 2.86% and 2.81% for the quarter and nine months ended September 30, 2010, as compared with 2.63% and 2.59% for the same periods of the prior year. Positively impacting the net interest margin was an increase in the net interest spread of 25 and 24 basis points to 2.66% and 2.60% for the three and nine months ended September 30, 2010, as compared with the net interest spread of 2.41% and 2.36% for the same periods of 2009. The increases in the net interest spread were primarily attributable to the System Banks’ ability to more quickly reprice their outstanding debt in this lower interest rate environment and to adjustments in loan pricing to better reflect credit risk and market conditions.

During the first nine months of 2010, the Banks called debt totaling $55.1 billion and were able to lower their cost of funds relative to their assets, which did not reprice as quickly. Over time, as interest rates increase and as assets prepay or reprice in a manner more consistent with historical experience, the positive impact on net interest spread that the System has experienced over the last several years from calling Systemwide Debt Securities will likely diminish.

The System recognized provisions for loan losses of $158 million for the third quarter of 2010 and $474 million for the nine-month period ended September 30, 2010, as compared with provisions for loan losses of $259 million and $733 million for the three- and nine-month periods ended September 30, 2009. Even though the agricultural economy has generally improved over the last several months, credit stress in certain agricultural sectors continued to adversely impact certain System borrowers during the first nine months of 2010. The provisions for loan losses for both 2010 and 2009 were primarily due to credit deterioration in those agricultural sectors that continue to be impacted by volatility in commodity and other input prices, such as dairy and livestock, as well as those borrowers impacted by the overall downturn in the general U.S. economy, such as forestry. In addition, the provision for loan losses recognized in 2010 reflected the challenges facing a limited number of rural energy customers. However, the overall loan quality of the rural energy portfolio remains strong. The provision for loan losses recognized in 2009 also reflected credit stress in the ethanol sector.

Net noninterest expense increased $22 million to $338 million for the three-month period and increased $14 million to $1.065 billion for the nine-month period ended September 30, 2010, as compared with the same periods of the prior year. The increases for the three and nine months ended September 30, 2010 were primarily attributable to increases in salary and employee benefit costs.

The provisions for income taxes were $35 million and $151 million for the three and nine months ended September 30, 2010, as compared with $46 million and $140 million for the three and nine months ended September 30, 2009. The effective tax rate decreased from 6.5% for the nine months ended September 30, 2009 to 5.4% for the nine months ended September 30, 2010, primarily due to increased patronage distributions at taxable System institutions.

Loan Portfolio Activity

Gross loans increased moderately by $3.654 billion or 2.2% to $168.484 billion at September 30, 2010, as compared with $164.830 billion at December 31, 2009. The loan growth experienced by the System during the first nine months of 2010 was primarily due to growth in the agribusiness portfolio during the third quarter as prices for certain agricultural commodities increased, which led to increased borrowings by agribusiness customers. In addition, real estate mortgage loans increased due to successful marketing efforts and competitive interest rates on loan products.

Credit Quality

The System’s accruing loan volume was $164.923 billion at September 30, 2010, as compared with $161.461 billion at December 31, 2009. Nonaccrual loans increased $192 million during the first nine months of 2010 to $3.561 billion at September 30, 2010, as compared with $3.369 billion at December 31, 2009. At September 30, 2010, 50.6% of nonaccrual loans were current as to principal and interest, as compared with 51.6% at December 31, 2009. Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans and accruing loans 90 days or more past due) decreased $9 million during the third quarter of 2010 and increased $206 million for the first nine months of 2010 to $3.741 billion at September 30, 2010. The increase in nonaccrual loans during 2010 was due to deterioration of credit quality of loans to borrowers in certain agricultural sectors, such as dairy, forestry and livestock.

Nonperforming assets (which consist of nonperforming loans and other property owned) increased $375 million to $4.151 billion at September 30, 2010, as compared with December 31, 2009. Other property owned increased $169 million during the first nine months of 2010 to $410 million at September 30, 2010, as managements of System institutions actively worked through nonaccrual loans that primarily became stressed in 2008 and 2009. Nonperforming assets represented 2.46% of the System’s loans and other property owned at September 30, 2010, an increase from 2.29% at December 31, 2009. Nonperforming assets represented 12.6% of total capital at September 30, 2010 and December 31, 2009.

While nonperforming loans and assets increased during the first nine months of 2010, other credit quality indicators remained relatively stable. Loans classified under the Farm Credit Administration’s Uniform Loan Classification System as “acceptable” or “other assets especially mentioned” as a percentage of loans and accrued interest receivable were unchanged at 94.8% at September 30, 2010 and December 31, 2009. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans were 0.49% at September 30, 2010, as compared with 0.63% at September 30, 2009.

The allowance for loan losses was $1.403 billion at September 30, 2010, as compared with $1.359 billion at December 31, 2009. Net loan charge-offs of $406 million were recorded during the first nine months of 2010, as compared with net loan charge-offs of $358 million for the same period of the prior year.

The allowance for loan losses as a percentage of total loans was 0.83% at September 30, 2010 and 0.82% at December 31, 2009. The allowance for loan losses was 38% of the System’s total nonperforming loans and 39% of its nonaccrual loans at September 30, 2010, as compared with 38% and 40% at December 31, 2009. Risk funds (total capital and the allowance for loan losses), which is a measure of risk-bearing capacity, totaled $34.450 billion at September 30, 2010 and $31.318 billion at December 31, 2009, and increased to 20.4% of System loans at September 30, 2010, as compared with 19.0% at December 31, 2009.

Liquidity and Capital Resources

Cash and investments increased $679 million to $42.900 billion at September 30, 2010, as compared with $42.221 billion at December 31, 2009. The System’s liquidity position was 172 days at September 30, 2010, as compared with 178 days at December 31, 2009.

Total capital increased $3.088 billion during the first nine months of 2010 to $33.047 billion. The System’s surplus increased $2.138 billion to $26.870 billion during the first nine months of 2010 due to net income earned and retained, and from a $205 million transfer of restricted capital to surplus as a result of the declaration of premium refunds by the Farm Credit System Insurance Corporation, offset, in part, by the re-characterization of $175 million as additional paid-in-capital in connection with Association mergers. Capital also increased during the third quarter of 2010 as one Bank issued $300 million of 10% non-cumulative subordinated perpetual preferred stock.

Total capital as a percentage of total assets increased to 15.0% at September 30, 2010, as compared with 13.9% at December 31, 2009.

About the Farm Credit System

The Farm Credit System is a federally chartered network of borrower-owned lending institutions and related service organizations. The System specializes in providing financing and related services to borrowers in the agricultural and rural sectors through the five System Banks and 87 affiliated Associations. Unlike commercial banks, the Banks and Associations are not authorized to accept deposits and they principally obtain their funds through the issuance of Systemwide Debt Securities.

Additional Information

Copies of this press release, as well as other information regarding the System, including its annual and quarterly information statements, are available on the Federal Farm Credit Banks Funding Corporation’s website at www.farmcredit-ffcb.com.

CONTACT:
Daniel M. Bienz, Vice President
(201) 200-8070
DBienz@farmcredit-ffcb.com

Forward-Looking Statements

Any forward-looking statements in this press release are based on current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from expectations due to a number of risks and uncertainties. More information about these risks and uncertainties is contained in the System’s annual and quarterly information statements. The System undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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