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Farm Credit System Reports First Quarter 2010 Combined Results

NEW YORK, May 3, 2010 – The Farm Credit System today reported that combined net income increased by $187 million or 30.4% to $802 million for the quarter ended March 31, 2010, as compared with combined net income of $615 million for the same period of the prior year.

“The System continued to generate strong earnings during the first quarter of the year,” remarked Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. “Largely as a result of retaining a significant portion of these earnings, the System’s capital grew past the $30 billion level to $30.826 billion at March 31, 2010. Capital as a percentage of total assets increased to 14.5% at March 31, 2010, as compared with 13.9% at December 31, 2009.”

Results of Operations

The increase in combined net income resulted from an increase in net interest income of $141 million and a decrease in the provision for loan losses of $75 million, partially offset by an increase in net noninterest expense of $11 million and an increase in the provision for income taxes of $18 million.

Net interest income was $1.414 billion for the first quarter of 2010, as compared with $1.273 billion for the first quarter of the prior year. The increase in net interest income between the two periods resulted from an increase in the net interest spread and, to a lesser extent, a higher level of average earning assets. Average earning assets grew $2.007 billion or 1.0% to $204.415 billion for the first quarter of 2010, as compared with the first quarter of 2009.

The net interest margin was 2.77% for the quarter ended March 31, 2010, as compared with 2.52% for the quarter ended March 31, 2009. Positively impacting the net interest margin was an increase in the net interest spread of 28 basis points to 2.56% for the quarter ended March 31, 2010, as compared with 2.28% for the same period of 2009. The increase in the net interest spread was primarily attributable to the Banks’ ability to more quickly re-price their outstanding debt in the lower interest rate environment and to adjustments in loan pricing to better reflect additional credit risk and market conditions in the current agricultural economic environment. During the first quarter of 2010, the Banks called debt totaling $12.5 billion and were able to lower their cost of funds relative to their assets, which did not re-price as quickly. Over time, as interest rates change and as assets prepay or re-price 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 $171 million for the first quarter of 2010, as compared with provisions for loan losses of $246 million recognized during the first quarter of 2009. The provisions for loan losses recorded during the first quarters of 2010 and 2009 reflected credit deterioration primarily in those agricultural sectors that continue to be impacted by the volatility in commodity prices, such as the livestock and dairy sectors, as well as those borrowers affected by the overall downturn in the general economy, such as forestry. In addition, the provision for loan losses for 2009 reflected credit stress in the ethanol sector.

Net noninterest expense increased $11 million or 3.0% to $377 million for the first quarter of 2010, as compared with the first quarter of 2009. The provision for income taxes was $64 million for the first quarter of 2010, as compared with $46 million for the first quarter of the prior year. The effective tax rate was 7.4% for the first quarter of 2010, as compared with 7.0% for the same period in 2009.

Loan Portfolio Activity

Gross loans decreased $2.328 billion or 1.4% to $162.502 billion at March 31, 2010, as compared with $164.830 billion at December 31, 2009, principally due to the decline in production and intermediate-term loans, which decrease primarily resulted from normal seasonal repayments on these loans.

Credit Quality

The System’s accruing loan volume was $158.985 billion at March 31, 2010, as compared with $161.461 billion at December 31, 2009. Nonaccrual loans increased $148 million to $3.517 billion at March 31, 2010, as compared with $3.369 billion at December 31, 2009. This increase in nonaccrual loans was primarily due to deterioration in the credit quality of loans to borrowers in certain agricultural sectors, such as dairy and forestry. At March 31, 2010, 47.7% 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) increased $181 million to $3.716 billion at March 31, 2010, as compared with December 31, 2009. These nonperforming loans represented 2.29% of the System’s loans at March 31, 2010, an increase from 2.14% at December 31, 2009.

While certain credit quality indicators declined during the first quarter of 2010, these indicators remained at generally favorable levels. 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 was 94.6% at March 31, 2010, as compared with 94.8% at December 31, 2009. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans remained at a low level of 0.66% at March 31, 2010, as compared with 0.68% at March 31, 2009.

The allowance for loan losses was $1.451 billion at March 31, 2010, as compared with $1.359 billion at December 31, 2009. Net loan charge-offs of $68 million were recorded during the first quarter of 2010, as compared with net loan charge-offs of $159 million for the first quarter of 2009.

The allowance for loan losses as a percentage of total loans was 0.89% at March 31, 2010 and 0.82% at December 31, 2009. The allowance for loan losses was 39% of the System’s total nonperforming loans and 41% of its nonaccrual loans at March 31, 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 $32.277 billion at March 31, 2010 and $31.318 billion at December 31, 2009, and increased to 19.9% of System loans at March 31, 2010, as compared with 19.0% at December 31, 2009.

Liquidity and Capital Resources

Cash and investments (principally all of which were held for liquidity purposes) were $42.647 billion at March 31, 2010 and $42.221 billion at December 31, 2009. The System’s liquidity position increased to 197 days of coverage of maturing debt at March 31, 2010, as compared with 178 days at December 31, 2009.

Total capital increased $867 million during the first quarter of 2010 to $30.826 billion. The System’s surplus increased $681 million to $25.413 billion during the first quarter 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 $165 million as additional paid-in-capital in connection with the merger of two Associations effective January 1, 2010. Capital as a percentage of total assets increased to 14.5% at March 31, 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 Banks and 88 affiliated Associations. Unlike commercial banks, the Banks are not legally 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 financial 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. Additional information regarding the Farm Credit System is available on the System’s website at www.farmcredit.com. For further information and copies of annual and quarterly information statements, 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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