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Farm Credit System Reports First Quarter 2011 Combined Results

NEW YORK - The Farm Credit System today reported that combined net income increased by $202 million or 25.2% to $1.004 billion for the quarter ended March 31, 2011, as compared with combined net income of $802 million for the same period of the prior year.

We are extremely pleased with first quarter 2011 results, noted Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. The high level of earnings reflects the lower-rate funding environment over the past year and the generally favorable agricultural economic conditions in the United States. We are also pleased that the System’s capital levels were further enhanced as capital-to-assets increased to 14.7% at March 31, 2011 from 14.5% at December 31, 2010.

Results of Operations

First Quarter 2011 Compared to First Quarter 2010

The increase in combined net income between the first-quarter periods resulted from an increase in net interest income of $155 million and a decrease in the provision for loan losses of $63 million, partially offset by an increase in net noninterest expense of $10 million and an increase in the provision for income taxes of $6 million.

Net interest income was $1.569 billion for the first quarter of 2011, as compared with $1.414 billion for the first quarter of the prior year. The increase in net interest income between the periods primarily resulted from a higher level of average earning assets and lower debt costs. Average earning assets grew $18.499 billion or 9.0% to $222.914 billion for the first quarter of 2011, as compared with the first quarter of 2010.

The net interest margin was 2.82% for the quarter ended March 31, 2011, as compared with 2.77% for the quarter ended March 31, 2010. Positively impacting the net interest margin was an increase in the net interest spread to 2.64% for the quarter ended March 31, 2011, as compared with 2.56% for the first quarter of 2010. The increase in the net interest spread was primarily attributable to the Banks’ ability to more quickly reprice their outstanding debt in the lower interest rate environment and to adjustments in loan pricing to better reflect credit risk and market conditions in the current agricultural economic environment. Since March 31, 2010, the banks called debt totaling $60.2 billion, of which $7.1 billion was called during the first quarter of 2011, and were able to lower their cost of funds relative to their assets, which did not reprice as quickly. Over time, as interest rates change and as assets prepay or reprice in a manner more consistent with historical experience, the positive impact on the net interest spread will likely diminish.

The System recognized provisions for loan losses of $108 million for the first quarter of 2011, as compared with $171 million recognized during the first quarter of 2010. The decrease in the provision for loan losses reflects a lower level of probable and estimable losses in the System’s loan portfolio. However, the loan portfolio continues to be impacted by volatility in certain agricultural sectors. The provisions for loan losses recorded during the first quarters of 2011 and 2010 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 U.S. economy, such as forestry and nurseries.

Net noninterest expense increased $10 million or 2.7% to $387 million for the first quarter of 2011, as compared with the first quarter of 2010. The provision for income taxes was $70 million for the first quarter of 2011, as compared with $64 million for the first quarter of the prior year. The effective tax rate was 6.5% for the first quarter of 2011, as compared with 7.4% for the first quarter of 2010.

First Quarter 2011 Compared to Fourth Quarter 2010

Net income increased $142 million between the first quarter of 2011 and fourth quarter 2010 primarily due to decreases in the provision for loan losses of $85 million and in net noninterest expense of $58 million. The decrease in the provision for loan losses in the first quarter of 2011 from the fourth quarter of 2010 reflects a lower level of probable and estimable losses in the System’s loan portfolio. The decrease in net noninterest expense in the first quarter of 2011 from the fourth quarter of 2010 was primarily due to a decrease in salaries and employee benefits.

Loan Portfolio Activity

Gross loans increased $2.248 billion or 1.3% to $177.599 billion at March 31, 2011, as compared with $175.351 billion at December 31, 2010, principally due to an increase in demand for loans to cooperatives due to higher prices for grains and certain agricultural commodities that increased seasonal borrowing by agribusiness customers. This increase was offset, in part by decreases in production and intermediate-term loans, which decreased primarily due to normal seasonal repayments on these loans.

Credit Quality

The System’s accruing loan volume was $174.251 billion at March 31, 2011, as compared with $172.122 billion at December 31, 2010. Nonaccrual loans increased $119 million to $3.348 billion at March 31, 2011, as compared with $3.229 billion at December 31, 2010. This increase in nonaccrual loans was primarily due to a decline in the credit quality of loans to borrowers in certain agricultural sectors, such as livestock and poultry, as well as those sectors affected by the overall downturn in the general U.S. economy. At March 31, 2011, 49.2% of nonaccrual loans were current as to principal and interest, as compared with 49.7% at December 31, 2010.

Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans, and accruing loans 90 days or more past due) increased $154 million to $3.540 billion at March 31, 2011, as compared with December 31, 2010. These nonperforming loans represented 1.99% of the System’s loans at March 31, 2011 and 1.93% at December 31, 2010.

Certain credit quality indicators improved or remained at generally favorable levels during the first quarter of 2011. 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 95.4% at both March 31, 2011 and December 31, 2010. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans remained at a low level of 0.42% at March 31, 2011, as compared with 0.66% at March 31, 2010.

The allowance for loan losses was $1.456 billion at March 31, 2011, as compared with $1.447 billion at December 31, 2010. Net loan charge-offs of $71 million were recorded during the first quarter of 2011, as compared with net loan charge-offs of $68 million for the first quarter of 2010. The charge-offs recognized in these quarters primarily related to loans made in the ethanol and livestock sectors, as well as those sectors impacted by the overall downturn in the general U.S. economy such as forestry, nurseries and wineries.

The allowance for loan losses as a percentage of total loans was 0.82% at March 31, 2011 and 0.83% at December 31, 2010. The allowance for loan losses was 41% of the System’s total nonperforming loans and 43% of its nonaccrual loans at March 31, 2011, as compared with 43% and 45% at December 31, 2010. Risk funds (total capital and the allowance for loan losses), which is a measure of risk-bearing capacity, totaled $35.572 billion at March 31, 2011 and $34.698 billion at December 31, 2010, and increased to 20.0% of System loans at March 31, 2011, as compared with 19.8% at December 31, 2010.

Liquidity and Capital Resources

Cash and investments (principally all of which were held for liquidity purposes) were $46.010 billion at March 31, 2011 and $46.282 billion at December 31, 2010. The System’s liquidity position was 175 days of coverage of maturing debt at March 31, 2011, as compared with 173 days at December 31, 2010.

Total capital increased $865 million during the first quarter of 2011 to $34.116 billion. The System’s surplus increased $793 million to $27.929 billion during the first quarter of 2011 due to net income earned and retained, offset, in part, by the re-characterization of $20 million as additional paid-in-capital in connection with the merger of three Associations effective January 1, 2011. Capital as a percentage of total assets increased to 14.7% at March 31, 2011, as compared with 14.5% at December 31, 2010.

Credit Rating Outlook

As widely reported, on April 18, 2011, Standard & Poor’s Ratings Services affirmed its triple-A long-term and short-term sovereign credit ratings on the U.S. and revised its outlook on the long-term sovereign credit rating to negative from stable. On April 20, 2011, Standard & Poor's Ratings Services revised its outlook on the senior unsecured debt ratings of several U.S. government-sponsored enterprises, including the System, in conjunction with its recent move on the long-term sovereign credit rating outlook of the U.S.

In connection with such action, Standard & Poor’s Ratings Services affirmed its triple-A longterm rating of the System. Moreover, Moody’s Investors Service and Fitch Ratings have both assigned their highest credit ratings to the Systemwide Debt Securities.

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 84 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
Financial Analysis and Disclosure
Federal Farm Credit Banks Funding Corporation
10 Exchange Place, Suite 1401
Jersey City, NJ 07302
(201) 200-8070
E-mail - 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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