Farm Credit System lenders didn't have to withhold as much money for loan losses in the first quarter of 2010, but that wasn't the only reason for their 30 percent profit growth.

Interest rate fluctuations contributed to roughly two-thirds of the $187 million increase in net income recently reported by system lenders, according to the Federal Farm Credit Banks Funding Corporation.

The corporation raises funds for lenders in the network by selling bonds and other securities.

Lenders were able to repay those debts and reissue new securities as interest rates fell, said John Marsh, managing director for financial disclosure at FFCB.

For that reason, lenders were able to reap more net income from the loans they made to farmers, whose interest rates didn't fluctuate as much, he said. "They may be staying the same or not decreasing as quickly."

The difference between what the banks pay and what the farmers pay in interest rates -- known as the spread -- widened from 2.28 percentage points to 2.52 percentage points.

That was the primary reason interest income grew from about $1.27 billion to $1.4 billion, according to FFCB.

The interest rates paid by farmers aren't as prone to fluctuation because much of their debt remains fixed over a longer period of time, said Jay Penick, CEO of Northwest Farm Credit Services, a system lender.

Credit quality has also been a challenge for all commercial banks in recent years, driving up the rates for longer-term loans, he said. "There's more spread than there has been, but there's also more risk in those loans."

-- Mateusz Perkowski

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