Farm Credit System Reports 2009 Third Quarter and Nine-Month Net Income

“Once again the Farm Credit System had solid performance despite the challenging economic environment,” remarked Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. “While credit quality in certain sectors of the loan portfolio remains under pressure, the System’s profitability has allowed us to build our capital levels. Capital as a percentage of assets has grown from 12.7% at December 31, 2008 to 13.6% at September 30, 2009, supporting the System’s mission to provide for the financing needs of creditworthy farmers and ranchers throughout the United States.”

Results of Operations

Net interest income increased $144 million and $437 million to $1.342 billion and $3.942 billion for the three and nine months ended September 30, 2009, as compared with the same periods of 2008. These increases in net interest income resulted from increased net interest spreads driven by overall market conditions and, to a lesser extent, higher levels of average earning assets. Average earning assets grew $5.187 billion or 2.6% to $203.819 billion for the three months ended September 30, 2009 and $10.285 billion or 5.3% to $203.272 billion for the nine months ended September 30, 2009, as compared with the same periods of the prior year.

Net interest margin increased 22 and 17 basis points to 2.63% and 2.59% for the quarter and nine months ended September 30, 2009, as compared with 2.41% and 2.42% for the same periods of the prior year. Positively impacting the net interest margin was an increase in the net interest spread of 40 and 37 basis points to 2.41% and 2.36% for the three and nine months ended September 30, 2009, as compared with the net interest spread of 2.01% and 1.99% for the same periods of 2008. The increases in the net interest spread were primarily attributable to the System Banks’ ability to more quickly reprice their outstanding debt in this lower interest rate environment and to System institutions’ ability to increase pricing on loans as a result of a less competitive market, as many of the System’s competitors have reduced lending to the agricultural sector. During the first nine months of 2009, the Banks called debt totaling $47.4 billion and were able to lower their cost of funds relative to the interest rate earned on their assets, which did not change as quickly.

Negatively impacting the net interest margin for the three and nine months ended September 30, 2009 was a decline in income earned on earning assets funded by noninterest-bearing sources (principally capital), as yields on average earning assets declined in this low interest rate environment.

The System recognized higher provisions for loan losses of $259 million for the third quarter of 2009 and $733 million for the nine-month period ended September 30, 2009, as compared with provisions for loan losses of $61 million and $124 million for the three- and nine-month periods ended September 30, 2008. 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 nine months of 2009. The provisions for loan losses were primarily due to credit deterioration in those agricultural sectors that continue to be impacted by volatility in commodity and other input prices, and reduced demand for products, such as ethanol, dairy and hogs. In addition, credit deterioration occurred in those sectors impacted by the overall downturn in the general economy, including the communications and forestry industries.

Noninterest income decreased $28 million and $73 million to $134 million and $299 million for the three- and nine-month periods ended September 30, 2009, as compared with the same periods of the prior year. The decreases for both the three- and nine-month periods ended September 30, 2009 were primarily due to losses of $42 million and $103 million on the other-than-temporary impairment of certain available-for-sale securities, as compared with impairment losses of $9 million and $15 million recognized during the comparable periods of 2008. Also contributing to the decline for the three- and nine-month periods of 2009 were decreases in fees for financially related services, primarily multi-peril crop insurance, and mineral income. Partially offsetting these decreases were increases in loan-related fee income and gains recognized on the sale of certain investments.

Noninterest expense increased $8 million and $108 million to $450 million and $1.350 billion for the three- and nine-month periods ended September 30, 2009, as compared with the same periods of the prior year. The increase for the nine months ended September 30, 2009 was principally due to an increase in salary expense of $26 million and an increase in employee benefit costs of $64 million. The increase in salary expense was primarily due to higher staffing levels at certain System institutions and to annual merit increases. Employee benefit costs increased primarily due to increases in defined benefit pension expenses resulting from a decrease in the expected return on pension plan assets and to increased amortization of past actuarial plan losses.

The provisions for income taxes were $46 million and $140 million for the three and nine months ended September 30, 2009, as compared with $40 million and $141 million for the three and nine months ended September 30, 2008. The effective tax rate increased from 5.6% for the nine months ended September 30, 2008 to 6.5% for the nine months ended September 30, 2009.

Loan Portfolio Activity

Gross loans increased $763 million or 0.5% to $162.186 billion at September 30, 2009, as compared with $161.423 billion at December 31, 2008. The slight growth in loans experienced by the System during the first nine months of 2009 is reflective of the softening in loan demand due to the decline in commodity prices, adherence to prudent credit underwriting standards and the overall downturn in the U.S. and global economies. Further, in light of the current economic conditions, System managements have carefully managed their loan growth in order to maintain conservative capital ratios, while continuing to fulfill their mission.

Credit Quality

The System’s accruing loan volume was $158.054 billion at September 30, 2009, as compared with $159.141 billion at December 31, 2008. Nonaccrual loans increased $1.055 billion and $1.850 billion to $4.132 billion at September 30, 2009, as compared with $3.077 billion at June 30, 2009 and $2.282 billion at December 31, 2008. These increases in nonaccrual loans were primarily due to deterioration in the credit quality of loans to borrowers in certain agricultural sectors, primarily ethanol, dairy, hogs and forestry. The deterioration in the ethanol, dairy and hog sectors was the result of decreases in revenue from lower prices and increases in input costs, particularly for borrowers who purchased crops/feed at elevated prices in 2008 for future production/breeding. The forestry sector was impacted by the downturn in the U.S. general economy. At September 30, 2009, 58% of nonaccrual loans were current as to principal and interest, as compared with 75% at December 31, 2008. Nonaccrual loans as a percentage of total loans increased from 1.41% at year-end 2008 and from 1.89% at June 30, 2009 to the current level of nonaccrual loans to total loans of 2.55%.

Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans and accruing loans 90 days or more past due) increased $1.047 billion and $1.883 billion to $4.299 billion at September 30, 2009, as compared with June 30, 2009 and December 31, 2008. Also, nonperforming assets (which consist of nonperforming loans and other property owned) increased $907 million and $2.046 billion to $4.508 billion at September 30, 2009, as compared with June 30, 2009 and December 31, 2008. Nonperforming assets represented 2.78% of the System’s loans and other property owned at September 30, 2009, an increase from 2.20% at June 30, 2009 and 1.52% at December 31, 2008.

Other credit quality indicators generally declined during the first nine months of 2009, but continued to reflect generally favorable levels. 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 to 94.8% at September 30, 2009, as compared with 97.1% at December 31, 2008. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans were 0.63% at September 30, 2009, as compared with 0.36% at September 30, 2008.

The allowance for loan losses was $1.323 billion at September 30, 2009, as compared with $936 million at December 31, 2008. Net loan charge-offs of $358 million were recorded during the first nine months of 2009, as compared with net loan charge-offs of $34 million for the same period of the prior year. Approximately one-third of the net loan charge-offs were related to loans to ethanol producers, while the remaining charge-offs were primarily related to the other sectors experiencing deterioration in credit quality. Also impacting the allowance for loan losses for the nine months ended September 30, 2009 was the transfer of $12 million from the reserve for unfunded commitments to the allowance for loan losses because the commitments were funded during this period.

The allowance for loan losses as a percentage of total loans was 0.82% at September 30, 2009 and 0.58% at December 31, 2008. The allowance for loan losses was 29% of the System’s total nonperforming assets and 32% of its nonaccrual loans at September 30, 2009, as compared with 38% and 41% at December 31, 2008. Risk funds (total capital and the allowance for loan losses), which is a measure of risk-bearing capacity, totaled $30.633 billion at September 30, 2009 and $28.060 billion at December 31, 2008, and increased to 18.9% of System loans at September 30, 2009, as compared with 17.4% at December 31, 2008.

Liquidity and Capital Resources

Cash and investments increased $243 million to $44.050 billion at September 30, 2009, as compared with $43.807 billion at December 31, 2008. The System’s liquidity position increased to 182 days at September 30, 2009, as compared with 177 days at December 31, 2008.

Total capital increased $2.186 billion during the first nine months of 2009 to $29.310 billion. The increase was principally due to net income earned and retained and to a decrease in accumulated other comprehensive loss. The System’s surplus increased $1.401 billion to $24.549 billion during the first nine months of 2009. Capital as a percentage of total assets increased to 13.6% at September 30, 2009, as compared with 12.7% at December 31, 2008, due to the increase in capital and the slowdown in loan growth.

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 90 affiliated Associations. Unlike commercial banks, the Banks are not authorized to take 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. 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.

Federal Farm Credit Banks Funding Corporation
Daniel M. Bienz, 201-200-8070
Vice President
Financial Analysis and Disclosure
DBienz@farmcredit-ffcb.com