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System's 2nd Quarter Earnings Remain Strong Despite Continued Market Volatility and Weakness in the U.S. and Global Economies

NEW YORK, Aug. 03, 2009 - The Farm Credit System today reported combined net income of $682 million and $1.297 billion for the three and six months ended June 30, 2009, as compared with combined net income of $793 million and $1.553 billion for the same periods last year.

“We are pleased that the Farm Credit System continued to generate strong earnings during a time of market volatility and weakness in the U.S. and global economies, especially in the financial services industry,” remarked Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. “While the overall agricultural economic conditions were relatively stable during this period, as compared to the broader U.S. and global economies, certain agricultural sectors experienced significant financial stress due to increased farm input costs and the downturn in the general U.S. economy. In view of these adverse factors, System managements prudently grew their loan portfolios by only 1.1% during the first six months of 2009, while increasing capital levels by $1.4 billion to $28.5 billion primarily through earnings retained.”

Results of Operations

Combined net income decreased $111 million and $256 million for the second quarter and six months ended June 30, 2009, as compared with the same periods in 2008, as a result of increases in the provision for loan losses and noninterest expenses and a decrease in noninterest income, partially offset by an increase in net interest income.

Net interest income increased $157 million and $293 million to $1.327 billion and $2.600 billion for the three and six months ended June 30, 2009, as compared with the same periods of the prior year. These increases in net interest income resulted from increases in the System’s net interest margin and from higher levels of average earning assets.

Average earning assets grew $9.566 billion or 4.9% to $203.614 billion for the three months ended June 30, 2009 and $12.833 billion or 6.7% to $203.018 billion for the six months ended June 30, 2009, as compared with the same periods of the prior year.

The net interest margin increased 20 and 13 basis points to 2.61% and 2.56% for the quarter and six months ended June 30, 2009, as compared with 2.41% and 2.43% for the same periods of the prior year. Positively impacting the net interest margin was an increase in the net interest spread of 38 and 36 basis points to 2.39% and 2.33% for the three and six months ended June 30, 2009, as compared with 2.01% and 1.97% for the same periods of 2008. The increases in the net interest spread were primarily attributable to the Banks’ ability to more quickly reprice their outstanding debt in this lower interest rate environment and increase pricing as a result of the less competitive market and additional credit risk in light of the current economic and financial environment. During the first six months of 2009, the Banks called debt totaling $35 billion and were able to lower their cost of funds relative to their assets, which did not reprice as quickly. However, the increases in the net interest spread were partially offset by 18 and 23 basis point declines in income earned on interest-free funds (primarily capital) during the three- and six-month periods ended June 30, 2009, as yields on average earning assets declined in this lower interest rate environment.

The System recognized provisions for loan losses of $228 million and $474 million for the three- and six-month periods ended June 30, 2009, as compared with provisions for loan losses of $30 million and $63 million for the three- and six-month periods ended June 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 six 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 prices, such as ethanol and dairy, as well as those sectors impacted by the overall downturn in the general economy, including the forestry industry.

Noninterest income decreased $17 million and $45 million to $84 million and $165 million for the three and six months ended June 30, 2009, as compared with $101 million and $210 million for the same periods of the prior year. The decreases for both the three- and six-month periods ended June 30, 2009 were primarily due to losses of $37 million and $61 million on the other-than-temporary impairment of certain available-for-sale securities, as compared with impairment losses of $6 million recognized during the comparable periods of 2008. Also contributing to the decline for the six-month period was a $14 million decrease in the income earned on Insurance Fund assets. Partially offsetting the decrease for the six-month period were increases in loan-related fee income of $13 million and other noninterest income of $16 million.

Noninterest expense increased $49 million and $100 million to $453 million and $900 million for the three- and six-month periods ended June 30, 2009, as compared with the same periods of the prior year, principally due to increases in salaries of $22 million and $42 million and increases in employee benefit costs of $21 million and $45 million. The increase in salaries was primarily due to higher staffing levels at certain System institutions and to annual merit increases. Employee benefits 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 $48 million and $94 million for the three and six months ended June 30, 2009, as compared with $44 million and $101 million for the three and six months ended June 30, 2008. The effective tax rate increased from 6.1% for the six months ended June 30, 2008 to 6.8% for the six months ended June 30, 2009.

Loan Portfolio Activity

Gross loans increased $1.805 billion or 1.1% to $163.228 billion at June 30, 2009, as compared with $161.423 billion at December 31, 2008. Loan growth was relatively flat, reflecting a softening in loan demand due to the decline in commodity prices and to the overall downturn in the U.S. and global economies. Further, in light of the current economic conditions, System managements carefully managed their loan growth and maintained conservative capital ratios, while continuing to fulfill their mission.

Credit Quality

The System’s accruing loan volume was $160.151 billion at June 30, 2009, as compared with $159.141 billion at December 31, 2008. Nonaccrual loans increased $795 million to $3.077 billion at June 30, 2009, as compared with $2.282 billion at December 31, 2008. This increase in nonaccrual loans was primarily due to deterioration in the credit quality of loans to borrowers in certain agricultural sectors, primarily ethanol, dairy and forestry. The deterioration for the ethanol and dairy sectors was the result of decreases in revenue from  lower commodity prices and increases in input costs, particularly for borrowers who purchased crops at elevated prices in 2008 for future production. The forestry sector was impacted by the downturn in the U.S. general economy. At June 30, 2009, 59% of nonaccrual loans were current as to principal and interest, as compared with 75% at December 31, 2008. While nonaccrual loans increased from the year-end 2008 level of 1.41% of total loans, the current level of nonaccrual loans to total loans of 1.89% remains within long-term historical norms.

Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans and accruing loans 90 days or more past due) increased $836 million to $3.252 billion at June 30, 2009, as compared with December 31, 2008. Also, nonperforming assets (which consist of nonperforming loans and other property owned) increased $1.139 billion to $3.601 billion at June 30, 2009, as compared with December 31, 2008. In addition to the increase in nonaccrual loans, other property owned increased $303 million to $349 million at June 30, 2009. Substantially all of the increase resulted from the transfer of a portion of our nonaccrual loans related to ethanol to other property owned. Nonperforming assets represented 2.20% of the System’s loans and other property owned at June 30, 2009, an increase from 1.52% at December 31, 2008.

Other credit quality indicators generally declined during the first six 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 95.7% at June 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 0.61% at June 30, 2009, as compared with 0.43% at June 30, 2008.

The allowance for loan losses was $1.166 billion at June 30, 2009, as compared with $936 million at December 31, 2008. Net loan charge-offs of $272 million were recorded during the first six months of 2009, as compared with net loan charge-offs of $24 million for the same period of the prior year. Approximately half of the net loan charge-offs were related to loans to ethanol producers. Also impacting the allowance for loans losses for the six months ended June 30, 2009 was the transfer of $28 million from the reserve for unfunded commitments to the allowance for loan losses since the commitments were funded.

The allowance for loan losses as a percentage of total loans was 0.71% at June 30, 2009 and 0.58% at December 31, 2008. The allowance for loan losses was 32% of the System’s total nonperforming assets and 38% of its nonaccrual loans at June 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 $29.704 billion at June 30, 2009 and $28.060 billion at December 31, 2008, and increased to 18.2% of System loans at June 30, 2009, as compared with 17.4% at December 31, 2008.

Liquidity and Capital Resources

Cash and investments increased $461 million to $44.268 billion at June 30, 2009, as compared with $43.807 billion at December 31, 2008. The System’s liquidity position increased slightly to 180 days at June 30, 2009, as compared with 177 days at December 31, 2008.

Total capital increased $1.414 billion during the first six months of 2009 to $28.538 billion. The increase was primarily due to net income earned and retained and to a decrease in accumulated other comprehensive loss. The System’s surplus increased $881 million to $24.029 billion during the first six months of 2009. Capital as a percentage of total assets increased to 13.2% at June 30, 2009, as compared with 12.7% at December 31, 2008, due to the increase in capital and the slowdown in loan growth.

In April 2009, the Financial Accounting Standards Board (FASB) issued additional accounting guidance for determining fair value when the volume and level of market activity for the asset or liability has significantly decreased and for identifying transactions that are not orderly. In addition, the FASB issued additional guidance on the recognition and presentation of other-than-temporary impairments. The guidance specifies that for investments that are identified as other-than-temporarily impaired, the portion of the impairment related to credit losses is reported in current period earnings, while the remaining portion is recognized in accumulated other comprehensive income. During the first six months of 2009, the Banks adopted the guidance and reported a $39 million cumulative effect adjustment increasing beginning surplus that represents the portion of non-credit related impairments of previously impaired investment securities. There was a corresponding increase in accumulated other comprehensive loss.

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
(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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