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Farm Credit System Reports First Quarter 2012 Combined Results

NEW YORK - The Farm Credit System today reported that combined net income increased by $48 million or 4.8% to $1.052 billion for the quarter ended March 31, 2012, as compared with combined net income of $1.004 billion for the same period of the prior year.

“The System continued to achieve positive results in the first quarter of 2012,” noted Tracey McCabe, President and CEO of the Federal Farm Credit Banks Funding Corporation. “During the first quarter of 2012, we saw our capital position continue to grow and the credit quality of our loan portfolio generally remain strong. The System’s positive results and the healthy credit quality of its loan portfolio are reflective of System managements’ continued emphasis on sound underwriting standards and of the current favorable U.S. agricultural economy. We continue to watch the general U.S. economy and developments in the global economy as our business is fundamentally tied to both.”

Results of Operations

First Quarter 2012 Compared to First Quarter 2011

The increase in combined net income between the first-quarter periods resulted from an increase in net interest income of $12 million, a decrease in the provision for loan losses of $76 million and a decrease in the provision for income taxes of $2 million, partially offset by an increase in net noninterest expense of $42 million.

Net interest income was $1.581 billion for the first quarter of 2012, as compared with $1.569 billion for the first quarter of the prior year. The modest increase in net interest income between the periods resulted from a higher net interest margin.

The net interest margin was 2.87% for the quarter ended March 31, 2012, as compared with 2.82% for the quarter ended March 31, 2011. Positively impacting the net interest margin was an increase in the net interest spread to 2.71% for the quarter ended March 31, 2012, as compared with 2.64% for the first quarter of 2011. The increase in the net interest spread was due, in part, to the Banks’ ability to more quickly reprice their outstanding debt in the lower interest rate environment. The Banks called debt totaling $17.9 billion during the first quarter of 2012 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 or assets prepay or reprice in a manner more consistent with historical experience, the positive impact on the net interest spread experienced over the past several years from calling Systemwide Debt Securities will likely diminish. To a lesser extent, the net interest spread for the quarter ended March 31, 2012 was favorably impacted by the $21 million net accretion of the fair value adjustments related to the merger of two Banks (see the section entitled “Mergers” below).

During the past few years, net interest income has benefitted from an increase in average earning assets. However, average earning assets declined $2.832 billion or 1.3% to $220.082 billion for the first quarter of 2012, as compared with the first quarter of 2011, partially offsetting the higher net interest margin.

The System’s provision for loan losses declined $76 million to $32 million for the first quarter of 2012, as compared with $108 million recognized during the first quarter of 2011. 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 and weakness in the general U.S. economy, although to a lesser extent than in the prior year. The provisions for loan losses recorded during the first quarter of 2012 and 2011 reflected credit deterioration primarily in those agricultural sectors affected by the continuing weakness in the U.S. economy, particularly in specific industries such as forestry and nurseries. Additionally, the provision for loan losses recorded during the first quarter of 2011 reflected credit deterioration primarily in those agricultural sectors impacted by the volatility in commodity prices, such as the livestock and dairy sectors.

Noninterest income decreased $12 million or 9.0% to $122 million for the first quarter of 2012, as compared with the first quarter of the prior year. The decrease was primarily due to an increase in losses on extinguishment of debt of $16 million to $22 million, partially offset by a decrease in net other-than-temporary impairment losses on investments of $7 million to $6 million.

Noninterest expense increased $30 million or 5.8% to $551 million for the first quarter of 2012, as compared with the first quarter of 2011, primarily due to an increase in salaries and employee benefits.

The provision for income taxes was $68 million for the first quarter of 2012, as compared with $70 million for the first quarter of the prior year. The effective tax rate declined from 6.5% for the first quarter of 2011, to 6.1% for the first quarter of 2012.

First Quarter 2012 Compared to Fourth Quarter 2011

Net income increased $106 million between the first quarter of 2012 and fourth quarter 2011 primarily due to an increase in net interest income of $18 million and to decreases in the provision for loan losses of $46 million and net noninterest expense of $38 million. The decrease in the provision for loan losses in the first quarter of 2012 from the fourth quarter of 2011 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 2012 from the fourth quarter of 2011 was primarily due to a decrease in salaries and employee benefits and a lesser amount of losses on other property owned.

Loan Portfolio Activity

Gross loans increased $3.931 billion or 2.3% to $178.595 billion at March 31, 2012, as compared with $174.664 billion at December 31, 2011. The increase resulted from an increase in demand for loans to cooperatives resulting from normal seasonal borrowings by agribusiness customers, primarily in the farm supply and grain marketing sectors, offset, in part, by a decrease in production and intermediate-term loans due to seasonal repayments on these loans.

Credit Quality

The System’s accruing loan volume was $175.888 billion at March 31, 2012, as compared with $171.926 billion at December 31, 2011. Nonaccrual loans decreased $31 million to $2.707 billion at March 31, 2012, as compared with $2.738 billion at December 31, 2011. This decrease in nonaccrual loans was attributed to charge-offs, repayments and the improvement in the credit quality of certain loans. At March 31, 2012, 54.6% of nonaccrual loans were current as to principal and interest, as compared with 52.8% at December 31, 2011.

Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans, and accruing loans 90 days or more past due) decreased $27 million to $2.970 billion at March 31, 2012, as compared with December 31, 2011. These nonperforming loans represented 1.66% of the System’s loans at March 31, 2012 and 1.72% at December 31, 2011.

The System’s other credit quality indicators also improved or remained at generally favorable levels during the first quarter of 2012. 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 96.3% at March 31, 2012 and 96.2% at December 31, 2011. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans remained at a low level of 0.36% at March 31, 2012, as compared with 0.42% at March 31, 2011.

The allowance for loan losses was $1.298 billion at March 31, 2012, as compared with $1.290 billion at December 31, 2011. Net loan charge-offs of $42 million were recorded during the first quarter of 2012, as compared with net loan charge-offs of $71 million for the first quarter of 2011. The charge-offs recognized in these quarters primarily related to loans made in the livestock and ethanol sectors, as well as those sectors impacted by the continuing weakness in the general U.S. economy, particularly in specific industries such as forestry and nurseries.

The allowance for loan losses as a percentage of total loans was 0.73% at March 31, 2012 and 0.74% at December 31, 2011. The allowance for loan losses was 44% of the System’s total nonperforming loans and 48% of its nonaccrual loans at March 31, 2012, as compared with 43% and 47% at December 31, 2011. Total capital and the allowance for loan losses, which is a measure of risk-bearing capacity, totaled $37.914 billion at March 31, 2012 and $37.230 billion at December 31, 2011, and represented 21.2% of System loans at March 31, 2012, as compared with 21.3% at December 31, 2011.

Liquidity and Capital Resources

Cash and investments (principally all of which were held for liquidity purposes) were $44.736 billion at March 31, 2012 and $47.281 billion at December 31, 2011. The System’s liquidity position was 183 days of coverage of maturing debt at March 31, 2012, as compared with 194 days at December 31, 2011.

Total capital increased $676 million during the first quarter of 2012 to $36.616 billion. The System’s surplus increased $114 million to $29.847 billion during the first quarter of 2012 due to net income earned and retained offset, in part, by the re-characterization of $283 million of surplus as additional paid-in-capital in connection with the merger of Associations and the net reduction of $469 million in surplus due to the fair value adjustments in connection with the merger of two System Banks effective January 1, 2012. This surplus reduction includes a recharacterization of $259 million of accumulated other comprehensive loss that resulted from the Bank merger. For additional information on the mergers, see the section entitled “Mergers” below. Capital as a percentage of total assets increased to 15.8% at March 31, 2012, as compared with 15.6% at December 31, 2011.

Mergers

On January 1, 2012, U.S. AgBank, FCB, one of the System Banks, merged with and into CoBank, FCB, a wholly-owned subsidiary of CoBank, ACB, another one of the System Banks. CoBank, ACB and CoBank, FCB (collectively, CoBank, ACB), are required to comply, on a consolidated basis, with applicable System regulatory requirements and are jointly and severally liable on each other’s debts and obligations, including Systemwide Debt Securities. As a result, the System now effectively has four System Banks (CoBank, ACB; AgFirst Farm Credit Bank; AgriBank, FCB; and Farm Credit Bank of Texas). In addition, on January 1, 2012, two Associations affiliated with the former U.S. AgBank merged. The mergers were accounted for under the acquisition method of accounting. The resulting fair value adjustments and the net accretion for the period of the adjustments required under the accounting guidance for these mergers were not material to the System’s combined financial position or results of operations.

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 four Banks and 83 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.farmcreditfunding.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:

H. John Marsh, Jr., Managing Director
Financial Management Division
Federal Farm Credit Banks Funding Corporation
10 Exchange Place, Suite 1401
Jersey City, NJ 07302
(201) 200-8071
E-mail – jmarsh@farmcreditfunding.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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