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Farm Credit System Reports Second Quarter 2010 and Six-Month Net Income

NEW YORK, Aug. 2, 2010 - The Farm Credit System today reported combined net income of $882 million and $1.684 billion for the three and six months ended June 30, 2010, as compared with combined net income of $682 million and $1.297 billion for the same periods last year.

“We are very pleased with the Farm Credit System’s results for the first half of 2010,” remarked Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. “Notwithstanding the volatility associated with the current uncertain economic conditions and the slow pace of the U.S. and global economic recovery, the System achieved strong earnings for the second quarter and the first six months of 2010. In addition, System capital as a percentage of total assets increased to 14.7%, as compared with 13.9% at December 31, 2009.”

Results of Operations

Combined net income increased $200 million and $387 million for the second quarter and six months ended June 30, 2010, as compared with the same periods in 2009. The increases resulted from increases in net interest income of $102 million and $243 million and decreases in the provision for loan losses of $83 million and $158 million and net noninterest expenses of $19 million and $8 million, partially offset by increases in the provision for income taxes of $4 million and $22 million.

Net interest income increased to $1.429 billion and $2.843 billion for the three and six months ended June 30, 2010, as compared with $1.327 billion and $2.600 billion for the same periods of the prior year. The increase in net interest income for both the three- and six-month periods resulted from increases in the System’s net interest spread driven by overall market conditions.

The net interest margin increased 19 and 22 basis points to 2.80% and 2.78% for the quarter and six months ended June 30, 2010, as compared with 2.61% and 2.56% for the same periods of the prior year. Positively impacting the net interest margin was an increase in the net interest spread of 19 and 24 basis points to 2.58% and 2.57% for the three and six months ended June 30, 2010, as compared with 2.39% and 2.33% for the same periods of 2009. The increases in the net interest spread were primarily attributable to 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 in the current agricultural economic environment. During the first six months of 2010, the Banks called debt totaling $32.8 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 change and as assets prepay or reprice in a manner 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 $145 million and $316 million for the three- and six-month periods ended June 30, 2010, as compared with provisions for loan losses of $228 million and $474 million for the three- and six-month periods ended June 30, 2009. The financial stress in certain sectors of the agricultural economy, as well as the weakness in the general economy, continued to adversely impact certain System borrowers during the first six months of 2010, although to a lesser extent than during the first six months of 2009. The provisions for loan losses for both 2010 and 2009 were primarily due to credit deterioration in those agricultural sectors that continued to be impacted by volatility in commodity prices, such as livestock and dairy, as well as those sectors impacted by the overall downturn in the general economy, including the forestry industry. In addition, the provision for loan losses recognized in 2009 reflected credit stress in the ethanol sector.

Net noninterest expense decreased $19 million to $350 million and $8 million to $727 million for the three and six months ended June 30, 2010, as compared with $369 million and $735 million for the same periods of the prior year. The decreases were due to increases in noninterest income of $39 million and $59 million, partially offset by increases in noninterest expenses of $20 million and $51 million.

The provisions for income taxes were $52 million and $116 million for the three and six months ended June 30, 2010, as compared with $48 million and $94 million for the three and six months ended June 30, 2009. The effective tax rate was 6.4% for the six months ended June 30, 2010, a decrease from 6.8% for the six months ended June 30, 2009.

Loan Portfolio Activity

Gross loans decreased $2.644 billion or 1.6% to $162.186 billion at June 30, 2010, as compared with $164.830 billion at December 31, 2009, due to a softening in loan demand as a result of the decline in commodity prices and the overall downturn in the U.S. and global economies. Further, in light of the current economic conditions, System institutions’ managements have carefully managed their loan growth through continued adherence to strong underwriting standards and have focused on further strengthening their capital positions, while continuing to fulfill their mission.

Credit Quality

The System’s accruing loan volume was $158.663 billion at June 30, 2010, as compared with $161.461 billion at December 31, 2009. While nonaccrual loans increased $154 million to $3.523 billion at June 30, 2010, as compared with $3.369 billion at December 31, 2009, nonaccrual loans increased only $6 million from $3.517 billion at March 31, 2010. The six-month increase in nonaccrual loans was primarily attributable to deterioration in the credit quality of loans to borrowers in certain agricultural sectors, such as dairy, livestock and forestry. At June 30, 2010, 50.0% 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 $215 million to $3.750 billion at June 30, 2010, as compared with December 31, 2009, and increased $34 million from $3.716 billion at March 31, 2010. Also, nonperforming assets (which consist of nonperforming loans and other property owned) increased $264 million to $4.040 billion at June 30, 2010, as compared with December 31, 2009. Nonperforming assets represented 2.49% of the System’s loans and other property owned at June 30, 2010, an increase from 2.29% at December 31, 2009.

While nonperforming loans and assets increased during the first six 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 declined slightly to 94.7% at June 30, 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 were 0.58% at June 30, 2010, as compared with 0.61% at June 30, 2009.

The allowance for loan losses was $1.440 billion at June 30, 2010, as compared with $1.359 billion at December 31, 2009. Net loan charge-offs of $225 million were recorded during the first six months of 2010, as compared with net loan charge-offs of $272 million for the same period of the prior year.

The allowance for loan losses as a percentage of total loans was 0.89% at June 30, 2010 and 0.82% at December 31, 2009. The allowance for loan losses was 38% of the System’s total nonperforming loans and 41% of its nonaccrual loans at June 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 $33.190 billion at June 30, 2010 and $31.318 billion at December 31, 2009, and increased to 20.5% of System loans at June 30, 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 $45.756 billion at June 30, 2010 and $42.221 billion at December 31, 2009. The System’s liquidity position was 197 days of coverage of maturing debt at June 30, 2010, as compared with 178 days at December 31, 2009.

Total capital increased $1.791 billion during the first six months of 2010 to $31.750 billion. The System’s surplus increased $1.389 billion to $26.121 billion during the six-month period ended June 30, 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 14.7% at June 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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