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Farm Credit System Reports Net Income of $2.850 Billion for 2009

NEW YORK, Feb. 19, 2010 –The Farm Credit System today reported combined net income of $2.850 billion for the year ended December 31, 2009, as compared with combined net income of $2.916 billion for the prior year. Combined net income increased $286 million to $832 million for the fourth quarter of 2009, as compared with $546 million for the fourth quarter of 2008.

“We are extremely pleased with the fourth quarter and year-to-date financial results,” remarked Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. “The System’s ability to deliver a solid performance and maintain a strong financial position in this challenging environment reflects the System’s efforts to actively manage the credit quality of its loan portfolio and to follow conservative asset/liability management practices, while continuing to strengthen its capital position. The System’s capital as a percentage of assets grew from 12.7% at December 31, 2008 to 13.9% at December 31, 2009.”

2009 Results of Operations

Combined net income decreased $66 million or 2.3% for the year ended December 31, 2009, as compared with 2008. This decrease resulted from an increase in the provision for loan losses of $517 million, an increase in noninterest expense of $142 million and an increase in the provision for income taxes of $42 million, largely offset by an increase in net interest income of $690 million.

Net interest income was $5.392 billion for 2009, an increase of $690 million or 14.7%, as compared with $4.702 billion for the prior year. The increase in net interest income resulted from an increase in net interest spread and, to a lesser extent, a higher level of average earning assets. Average earning assets grew $8.623 billion or 4.4% to $203.455 billion for 2009, as compared with 2008.

The net interest margin increased 24 basis points to 2.65% for 2009, as compared with 2.41% for 2008. Positively impacting the net interest margin was an increase in the net interest spread of 44 basis points to 2.43% for 2009, as compared with a net interest spread of 1.99% for 2008. The increase in the net interest spread was primarily attributable to System Banks’ ability to more quickly re-price their outstanding debt in the lower interest rate environment and to adjustments in loan pricing to better reflect credit risk and market conditions in a more difficult agricultural economic environment. During 2009, the Banks called debt totaling $63.6 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. Over time, as the low interest rate environment changes and as assets prepay or re-price in a more normal manner, 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 net interest margin was negatively impacted by the decline in income earned on interest-free funds (primarily capital) of 20 basis points during 2009, as yields on average earning assets declined due to lower interest rates.

The System recognized provisions for loan losses of $925 million and $408 million for the years ended December 31, 2009 and 2008, reflecting the adverse impact on certain System borrowers from the continuing stress in the general economy and certain agricultural sectors. The 2009 provisions for loan losses were primarily due to credit deterioration in those agricultural sectors where corn is a significant input, such as dairy, hogs and ethanol. In 2008, corn prices increased sharply and, although prices have since declined, these increased prices have had a continuing negative impact on borrowers, particularly those borrowers who purchased corn at elevated prices in 2008 for future production. In addition, credit stress continues in those sectors impacted by the overall downturn in the general U.S. economy, including the forestry industry and, to a lesser extent, the communications industry. The provisions for loan losses recorded for 2008 primarily resulted from credit deterioration due to exceptional volatility in commodity prices, which adversely impacted the livestock/poultry and ethanol sectors, and, to a lesser extent, to a decline in the condition of the overall economy.

Noninterest income decreased $55 million to $447 million for 2009, as compared with $502 million for 2008. The decrease resulted primarily from an increase in losses on impairment of certain available-for-sale investments of $53 million and from decreases in fees for financially related services of $36 million, in income earned on Insurance Fund assets of $19 million and in mineral income of $16 million. The losses on impairment of investments totaling $135 million for 2009 resulted from credit losses on certain securities that have been negatively impacted by underlying credit issues with respect to the housing-related mortgages that support these securities. Due to a change in accounting rules, the 2009 losses reflect only the credit-related portion of the impairment in income while the remaining non-credit component of the impairment totaling $226 million is reflected in other comprehensive loss. The 2008 losses represented both the credit- and non-credit-related portions of the impairment. The 2008 non-credit component was $37 million. The decrease in noninterest income was partially offset by an increase in loan-related fee income of $65 million. The increase in loan-related fee income was primarily due to greater fees on unfunded credit commitments and on loan prepayment fees.

Noninterest expense increased $142 million to $1.869 billion for 2009, primarily due to increases in employee benefits of $80 million, losses on other property owned of $34 million and salaries of $32 million. Employee benefit costs increased 32.5% in 2009 primarily as a result of increased pension expense reflecting the decline in the fair value of the pension assets during 2008, resulting in increased amortization of past actuarial plan losses and, to a lesser extent, a lower expected return on plan assets. The 3.9% increase in salary expense was primarily due to annual merit and performance-based incentive compensation increases and, to a lesser extent, higher staffing levels at certain System institutions.

The System recorded a provision for income taxes of $195 million for 2009, as compared with $153 million for 2008. The effective tax rate increased from 5.0% for 2008 to 6.4% for 2009. The increase in the effective tax rate was primarily attributable to a lower level of tax-deductible expected patronage distributions due to lower patronage-based loan volume.

Fourth Quarter 2009 Results of Operations

Combined net income increased $286 million or 52.4% to $832 million for the fourth quarter of 2009, as compared with $546 million for the fourth quarter of 2008. This increase primarily resulted from an increase in net interest income of $253 million, an increase in noninterest income of $18 million and a decrease in the provision for loan losses of $92 million, partially offset by a $34 million increase in noninterest expense and a $43 million increase in the provision for income taxes.

Net interest income was $1.450 billion for the fourth quarter of 2009, as compared with $1.197 billion for the prior-year period. The increase in net interest income resulted from an increase in the net interest spread and, to a lesser extent, a higher level of average earning assets. Average earning assets grew $4.895 billion to $204.017 billion for the fourth quarter of 2009, as compared with the fourth quarter of 2008.

The net interest margin was 2.84% for the fourth quarter of 2009, as compared with 2.40% for the fourth quarter of 2008. Positively impacting the net interest margin was an increase in the net interest spread of 59 basis points to 2.63% for the quarter ended December 31, 2009, as compared with 2.04% for the same period of 2008. The increase in the net interest spread was primarily attributable to the Banks’ ability to more quickly re-price outstanding debt in the lower interest rate environment and to adjustments in loan pricing to better reflect credit risk and market conditions in a more difficult agricultural economic environment. The increase in the net interest spread was also impacted by the recognition of interest income on a large nonaccrual loan that was reinstated to accrual status during the fourth quarter of 2009 due to an improvement in borrower’s repayment capacity.

The System reported provisions for loan losses of $192 million and $284 million for the fourth quarter of 2009 and 2008. The provision for loan losses for the fourth quarter of 2009 was primarily due to the continued financial stress in certain sectors of the agricultural economy, as well as weaknesses in the general economy.

Noninterest income increased $18 million to $148 million for the fourth quarter of 2009, as compared with the same period in 2008. This increase was due primarily to increases in loan-related fee income and income earned on Insurance Fund investments and to a reduction in the losses recognized on other-than-temporarily impaired investments, offset, in part, by decreases in fees for financially related services and other noninterest income. Losses on other-than-temporarily impaired investments of $32 million were recognized in income during the fourth quarter of 2009, as compared with a $67 million impairment loss for the same period of the prior year. As previously discussed, the 2008 losses represented both the credit- and non-credit-related portions of the impairment. The fourth quarter 2009 and 2008 non-credit-related components were $92 million and $35 million.

Noninterest expense increased $34 million to $519 million for the fourth quarter of 2009, as compared with the fourth quarter of 2008. This increase was due to increases in salaries and employee benefits of $22 million and other property owned expense of $17 million, offset, in part, by a $5 million decrease in other operating expense.

The provision for income taxes increased $43 million to $55 million for the fourth quarter of 2009, as compared with $12 million for the fourth quarter of 2008. The effective tax rate increased from 2.2% for the fourth quarter of 2008 to 6.2% for the fourth quarter of 2009. The increase in the effective tax rate was primarily attributable to a lower level of tax-deductible expected patronage distributions due to lower patronage-based loan volume.

Loan Portfolio Activity

Gross loans increased $3.407 billion or 2.1% to $164.830 billion at December 31, 2009, as compared with $161.423 billion at December 31, 2008. The modest growth in loans experienced by the System during 2009 was primarily the result of softened loan demand as compared to the levels of the past few years due to the decline in commodity prices and the overall downturn in the U.S. and global economies. Further, in light of current economic conditions, System managements have carefully managed their loan growth and adhered to prudent underwriting standards to appropriately manage credit risk in order to maintain conservative capital ratios, while continuing to fulfill their mission.

Credit Quality

The System’s accruing loan volume was $161.461 billion at December 31, 2009, as compared with $159.141 billion at December 31, 2008. As noted above, System borrowers were negatively impacted by the overall stress in the general economy and certain sectors of the agricultural economy. Nonaccrual loans increased $1.087 billion to $3.369 billion at December 31, 2009, as compared with $2.282 billion at December 31, 2008. This increase was due primarily to deterioration in the credit quality of loans to borrowers in certain agricultural sectors, particularly dairy and hogs, as a result of decreased revenue from reduced demand for these products and increases in input costs, particularly for borrowers who purchased crops at elevated prices in 2008 for future production. In addition, the forestry sector experienced financial stress resulting primarily from the overall downturn in the general U.S. economy and the housing market. During 2009, nonaccrual loans peaked at $4.132 billion at September 30, 2009 before declining $763 million to the December 31, 2009 level. This decline primarily resulted from the transfer of certain loans in the poultry and ethanol industries from nonaccrual status to accrual status due to improvements in borrowers’ repayment capacities.

Nonaccrual loans that were current as to principal and interest as a percentage of total nonaccrual loans was 52% at December 31, 2009, as compared with 75% at December 31, 2008. Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans, and accruing loans 90 days or more past due) increased $1.119 billion to $3.535 billion at December 31, 2009, as compared with $2.416 billion at December 31, 2008. These nonperforming loans represented 2.14% of the System’s loans at December 31, 2009, an increase from 1.50% at December 31, 2008.

While other credit quality indicators declined, they remained at generally favorable levels. Loans classified under the regulatory uniform classification system as acceptable and other assets especially mentioned as a percentage of total loans decreased to 94.8% at December 31, 2009 from 97.1% at December 31, 2008. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans was unchanged from the year-end 2008 level, remaining at a relatively low level of 0.53% at December 31, 2009.

The allowance for loan losses was $1.359 billion at December 31, 2009, as compared with $936 million at December 31, 2008. Net loan charge-offs of $518 million were recorded during 2009, as compared with $99 million for 2008, and were primarily related to the sectors experiencing deterioration in credit quality, including the ethanol, dairy, hogs, poultry and forestry sectors. The allowance for loan losses increased an additional $16 million due to the transfer of $25 million from the reserve for unfunded commitments, offset by a $9 million reduction related to the merger of two Associations in the fourth quarter of 2009, which was accounted for as an acquisition. The allowance for loan losses as a percentage of loans outstanding and nonaccrual loans was 0.82% and 40% at December 31, 2009, as compared with 0.58% and 41% at December 31, 2008. Risk funds (total capital and the allowance for loan losses), which are a measure of risk-bearing capacity, totaled $31.318 billion at December 31, 2009, representing 19.0% of System loans, as compared with $28.060 billion and 17.4% at December 31, 2008.

Agricultural Outlook

Overall, agricultural borrowers’ financial conditions remained favorable due to the high levels of farmers’ net cash income over the past several years. The February 2010 United States Department of Agriculture (USDA) forecast estimates 2009 farmers’ net cash income (a measure of the cash income after payment of business expenses) at $70.8 billion, down $26.7 billion from 2008 but only down $2.1 billion from its 10-year average of $72.9 billion. The USDA’s February 2010 outlook for the farm economy, as a whole, forecasts 2010 farmers’ net cash income to increase to $76.3 billion, a $5.5 billion increase from 2009, and $3.4 billion above the 10-year average. Contributing to this increase in farmers’ net cash income are increases in livestock receipts of $11.5 billion and in farm-related income of $900 million, offset by a decrease in crop receipts of $6.0 billion, an increase in cash expenses of $400 million and a decline in direct government payments of $500 million.

Liquidity and Capital Resources

Cash and investments decreased $1.586 billion to $42.221 billion at December 31, 2009, as compared with $43.807 billion at year-end 2008. The System’s liquidity position was 178 days at December 31, 2009, as compared with 177 days at December 31, 2008. 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 $2.835 billion during 2009 to $29.959 billion. Surplus increased $1.584 billion to $24.732 billion during 2009 due to net income earned and retained that was partially offset by patronage distributions of $539 million to System borrowers, by the transfer of $374 million to restricted capital, and by the re-characterization of $206 million as additional paid-in-capital in connection with the merger of two Associations.

Accumulated other comprehensive loss decreased $575 million during 2009 to $1.558 billion at December 31, 2009. This decrease principally resulted from a decrease of $677 million in unrealized losses on investments available-for-sale, offset, in part, by an increase in other-than-temporary impairment of investments of $265 million. The lower amount of unrealized losses on investments was due to the favorable change in interest rates and to an improvement in liquidity in the financial markets during 2009. Capital as a percentage of total assets increased to 13.9% at December 31, 2009, as compared with 12.7% at December 31, 2008, due to the increase in capital and the slow-down in loan growth.

During the third quarter of 2009, one Bank issued $500 million of 9.125% unsecured subordinated debt due July 15, 2019, generating net proceeds of $496.8 million. The net proceeds were used to increase certain of the Bank’s regulatory capital ratios and for general corporate purposes. The debt is subordinate to all other categories of creditors, including any claims of the holders of Systemwide Debt Securities and general creditors, and is senior to all capital stock and surplus. This debt is not a Systemwide Debt Security, and thus is not the joint and several liability of the other Banks, and is not insured by the Farm Credit System Insurance Corporation.

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 Banks and 88 affiliated Associations. Unlike commercial banks, the Banks are not legally 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 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.farmcredit-ffcb.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:

Daniel M. Bienz, Vice President Financial Analysis and Disclosure
(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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