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Farm Credit System Reports Net Income of $3.940 Billion for 2011

NEW YORK, Feb. 17, 2012 - The Farm Credit System today reported an increase in combined net income of $445 million to $3.940 billion for the year ended December 31, 2011, as compared with combined net income of $3.495 billion for the prior year. Combined net income increased $84 million to $946 million for the fourth quarter of 2011, as compared with $862 million for the fourth quarter of 2010.

“The System achieved a high level of earnings in 2011, reflecting, in part, the continued robust agricultural environment,” remarked Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. “Strong global and domestic demand for crops and livestock, an extended period of low interest rates and the healthy credit quality of the System’s loan portfolio contributed significantly to the 2011 results.” Mr. Stewart stated, “The System’s capital to assets ratio increased to 15.6% at December 31, 2011 from 14.5% at December 31, 2010. The 2011 income earned and retained strengthened the System’s capital position, further ensuring the long-term capacity to fulfill our mission of providing funding to agriculture and rural America.”

2011 Results of Operations

The $445 million increase in combined net income for the year ended December 31, 2011, as compared with 2010 resulted from increases in net interest income of $369 million and noninterest income of $33 million and from a decrease in the provision for loan losses of $237 million, partially offset by increases in noninterest expense of $143 million and provision for income taxes of $51 million.

Net interest income was $6.259 billion for 2011, an increase of $369 million or 6.3%, as compared with $5.890 billion for the prior year. The increase in net interest income resulted primarily from a higher level of average earning assets and lower funding costs. Average earning assets grew $9.938 billion or 4.8% to $218.573 billion for 2011, as compared with 2010, largely as a carryover result of increases in loan volume during the latter half of 2010, even though loan volume leveled off during 2011.

“The growth in net interest income has benefitted significantly from an extended period of increasing loan volume over the last several years,” Mr. Stewart commented. “However, loan growth flattened during 2011 due, in part, to the strong financial positions generally enjoyed by agricultural producers, which decreased the demand for agricultural credit. A continuation of this trend could place pressure on net interest income levels in future periods.”

Net interest margin increased four basis points to 2.86% for 2011, as compared with 2.82% for 2010. Positively impacting the net interest margin was an increase in the net interest spread of seven basis points to 2.68% for 2011, as compared with a net interest spread of 2.61% for 2010. The increase in the net interest spread was primarily attributable to the System Banks’ ability to refinance outstanding debt at favorable interest rates in the current low interest rate environment. During 2011, the Banks called debt totaling $57.7 billion and were able to lower their cost of funds relative to their assets, which did not repay or 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 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 $430 million and $667 million for the years ended December 31, 2011 and 2010. While the overall agricultural economy has performed well during the year, credit stress in certain agricultural sectors continued to adversely impact certain System borrowers. The provisions for loan losses for both 2011 and 2010 were primarily due to credit deterioration in agricultural sectors that continue to be impacted by volatility in commodity and other input prices, such as livestock, ethanol and dairy, as well as those borrowers impacted by the overall downturn in the general U.S. economy and housing industry, such as forestry and nurseries. In addition, the provision for loan losses for 2011 reflected more recent credit stress in the poultry sector due to high feed costs and sustained low overall product pricing resulting from supply and demand dynamics in the industry.

Noninterest income increased $33 million or 6.2% to $568 million for 2011, as compared with $535 million for 2010. The increase resulted primarily from a higher level of loan-related fee income of $22 million and a decrease in net other-than-temporary impairment losses on investment securities of $21 million to $69 million, partially offset by a decrease in fees for financially related services of $15 million.

Noninterest expense increased $143 million or 7.0% to $2.188 billion for 2011, as compared with $2.045 billion for 2010 primarily due to increases in salaries and employee benefits of $71 million, other operating expenses of $17 million and merger/restructuring costs of $14 million. Also contributing to the increase in noninterest expense was an increase of $35 million to $83 million in losses on other property owned due primarily to declines in the value of acquired properties. Salaries and employee benefit expense increased $71 million or 5.6% to $1.349 billion for 2011 primarily due to annual merit and performance-based incentive compensation increases as a result of higher financial performance and, to a lesser extent, higher staffing levels at certain System institutions. Total merger/restructuring costs during 2011 were $22 million resulting primarily from the merger of two System Banks that was consummated on January 1, 2012.

The System recorded a provision for income taxes of $269 million for 2011, as compared with $218 million for 2010. The effective tax rate increased to 6.4% for 2011 from 5.9% for 2010. The increase in the effective tax rate was primarily attributable to increased earnings at taxable System institutions.

Fourth Quarter 2011 Results of Operations

Combined net income increased $84 million to $946 million for the fourth quarter of 2011, as compared with $862 million for the fourth quarter of 2010. The increase in net income between the fourth-quarter periods primarily resulted from decreases in the provision for loan losses of $115 million and noninterest expense of $17 million, offset by a $4 million decrease in net interest income, a $39 million decrease in noninterest income and a $5 million increase in the provision for income taxes.

Net interest income was $1.563 billion for the fourth quarter of 2011, as compared with $1.567 billion for the fourth quarter of 2010. The net interest margin for the fourth quarter of 2011 declined to 2.91%, as compared with 2.93% for the same period in the prior year. The decline in the net interest margin for the period resulted from a decrease in the net interest spread of two basis points to 2.73%, as compared with the fourth quarter of 2010. The decrease in net interest spread was due, in part, to a change in the asset mix as a result of a decline in average agribusiness loan volume, which offset the positive impact derived from the Banks’ calling debt.

The System reported provisions for loan losses of $78 million for the fourth quarter of 2011, as compared with $193 million for the fourth quarter of 2010. The provision for loan losses for each period reflected the financial stress in certain sectors of the agricultural economy, as well as weaknesses in the general U.S. economy. The decrease in the provision for loan losses between the periods was a result of the improvement in the credit quality of certain loans.

Noninterest income decreased to $142 million for the fourth quarter of 2011, as compared with $181 million for the fourth quarter of 2010. The decrease was due, in part, to increases in losses on the extinguishment of debt of $ 13 million and net other-than-temporary impairment losses on investment securities of $7 million. Noninterest expense totaled $609 million for the fourth quarter of 2011, as compared with $626 million for the fourth quarter of 2010. The decrease was primarily as a result of a decrease in salaries and employee benefits due to a greater amount of expenses deferred due, in part, to increases in loan originations and to an increased allocation of costs related to loan originations.

The provision for income taxes was $72 million for the fourth quarter of 2011 and $67 million for the fourth quarter of 2010. The effective tax rate decreased slightly to 7.1% for the fourth quarter of 2011 from 7.2% for the fourth quarter of 2010.

Fourth Quarter 2011 Compared to Third Quarter 2011

Combined net income decreased $62 million to $946 million for the fourth quarter of 2011, as compared with net income of $1.008 billion for the third quarter of 2011. The decrease was due to increases in noninterest expense of $77 million and the provision for income taxes of $11 million, and to decreases in noninterest income of $13 million and net interest income of $1 million, offset, in part, by a decrease in the provision for loan losses of $40 million. The increase in noninterest expense was primarily due to increases in salaries and employee benefits, occupancy and equipment expenses and purchased services. Salaries and employee benefits increased primarily as a result of increases in performance-based incentive compensation.

Loan Portfolio Activity

Gross loans decreased $687 million or 0.4% to $174.664 billion at December 31, 2011, as compared with $175.351 billion at December 31, 2010. This decrease was primarily attributable to the decline in agribusiness loans due to lower demand for seasonal financing in late 2011 as prices for certain agricultural commodities declined and to grain producers delaying delivery to the cooperative, which reduces financing requirements from our cooperative customers. In addition, contributing to the decline in loan volume was the strong financial positions of certain agricultural producers, particularly grain farmers, who have benefitted from the favorable agricultural conditions experienced over the past several years and the overall elevated prices for agricultural commodities, particularly over the last year or so.

Credit Quality

The System’s accruing loan volume was $171.926 billion at December 31, 2011, as compared with $172.122 billion at December 31, 2010. Nonaccrual loans were $2.738 billion at December 31, 2011, as compared with $3.229 billion at December 31, 2010. The decrease in nonaccrual loans during 2011 was primarily due to charge-offs, loan repayments and an improvement in the credit quality of certain loans. At December 31, 2011, 52.8% 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) were $2.997 billion at December 31, 2011, down from $3.386 billion at December 31, 2010.

Nonperforming assets (which consist of nonperforming loans and other property owned) were $3.455 billion at December 31, 2011, as compared with $3.840 billion at December 31, 2010. Other property owned was $458 million at December 31, 2011 and $454 million at December 31, 2010. Nonperforming assets represented 1.97% of the System’s loans and other property owned at December 31, 2011, a decrease from 2.18% at December 31, 2010. Nonperforming assets represented 9.6% of total capital at December 31, 2011, as compared with 11.5% at December 31, 2010.

The System’s other credit quality indicators also generally reflected improvement at December 31, 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 96.2% at December 31, 2011, as compared with 95.4% at December 31, 2010. Loan delinquencies, which are defined as accruing loans 30 days or more past due, as a percentage of accruing loans were 0.38% at December 31, 2011, as compared with 0.33% at December 31, 2010.

The allowance for loan losses was $1.290 billion at December 31, 2011, as compared with $1.447 billion at December 31, 2010. Net loan charge-offs of $500 million were recorded during 2011, as compared with net loan charge-offs of $596 million for 2010. Contributing to the decrease in the allowance for loan losses was a $71 million reduction based on net repayments of seasonal lines of credit and a $16 million elimination of the acquirees’ allowance for loan losses related to the merger of Associations, which was accounted for under the acquisition method of accounting.

The allowance for loan losses as a percentage of total loans was 0.74% at December 31, 2011 and 0.83% at December 31, 2010. The allowance for loan losses was 43% of the System’s total nonperforming loans and 47% of its nonaccrual loans at December 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 $37.230 billion at December 31, 2011 and $34.698 billion at December 31, 2010, and represented 21.3% of System loans at December 31, 2011, as compared with 19.8% at December 31, 2010.

Agricultural Outlook

Overall, agricultural borrowers’ financial conditions remained very favorable due to the high levels of farmers’ net cash income over the past several years. The February 2012 United States Department of Agriculture (USDA) forecast estimates 2011 farmers’ net cash income (a measure of the cash income after payment of business expenses) at $108.7 billion, up $16.4 billion from 2010 and up $28.4 billion from its 10-year average of $80.3 billion. The USDA’s February 2012 outlook for the farm economy, as a whole, forecasts 2012 farmers’ net cash income to decrease to $96.3 billion, a $12.4 billion decrease from 2011, but $16.0 billion above the 10-year average. The projected decrease in farmers’ net cash income from 2011 to 2012 is primarily due to an expected increase in cash expenses of $11.3 billion.

Liquidity and Capital Resources

Cash and investments increased $999 million to $47.281 billion at December 31, 2011, as compared with $46.282 billion at year-end 2010. The System’s liquidity position was 197 days and 173 days at December 31, 2011 and 2010. The Banks’ liquidity management objectives are designed to meet maturing debt obligations, to provide a reliable source of funding to borrowers and to fund operations on a cost-effective basis.

Total capital increased to $35.940 billion at December 31, 2011, as compared with $33.251 billion at December 31, 2010. The System’s surplus increased $2.597 billion to $29.733 billion at December 31, 2011, as compared with $27.136 billion at December 31, 2010, due to net income earned and retained that was partially offset by patronage distributions of $903 million to System borrowers. Total capital as a percentage of total assets was 15.6% at December 31, 2011, as compared with 14.5% at December 31, 2010.

Accumulated other comprehensive loss increased $159 million during 2011 to $1.330 billion at December 31, 2011. This increase principally resulted from increases in accumulated other comprehensive loss on pension and other benefit plans of $264 million, unrealized losses on cash flow hedges of $98 million, and other-than-temporary impairment losses on investments of $55 million, offset, in part, by an increase in unrealized gains on investments available-for-sale of $258 million. The increase in unrealized losses on pension and other benefits was primarily due to a lower than expected return on plan assets. The increase in the amount of unrealized gains on investments during 2011 was due to the favorable change in interest rates and an improvement in liquidity in the financial markets.

Recent Development

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. CoBank, ACB and CoBank, FCB (collectively, CoBank, ACB), are required to comply, on a combined or 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 has effectively four System Banks (CoBank, ACB; AgFirst Farm Credit Bank; AgriBank, FCB; and Farm Credit Bank of Texas). The merger was accounted for under the acquisition method of accounting.

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 System Banks and 83 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.farmcreditfunding.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@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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