Increase (Decrease) in For the nine months ended September 30, Net Income

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2 Copies of quarterly and annual reports are available upon request by contacting AgriBank, FCB, 30 E. 7th Street, Suite 1600, St. Paul, MN or by calling (651) Reports are also available at MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion is a review of the combined financial position and results of operations of AgriBank, FCB and Affiliated Associations which are part of the Farm Credit System (the System). This information should be read in conjunction with the accompanying combined financial statements, the notes to the combined financial statements and the 2011 annual report. We serve customers in states across America s heartland. AgriBank, FCB (AgriBank) provides funding to and is owned by its affiliated Associations, certain related entities and other financial institutions (OFIs). AgriBank and its affiliated Associations are collectively referred to as the District. The Associations are chartered to serve customers in substantially all of Arkansas, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Tennessee, Wisconsin and Wyoming. The Associations provide credit and financial services to farmers, ranchers, rural residents and agribusinesses. RESULTS OF OPERATIONS District net income for the nine months ended September 30, 2012 totaled $1.3 billion, a 15.5% increase, compared to $1.1 billion for the same period in The return on average assets increased to 2.0% for the nine months ended September 30, 2012 from 1.8% for the comparable period in The following table illustrates changes in significant components of net income: (in millions) Increase (Decrease) in For the nine months ended September 30, Net Income Net interest income $1,705.6 $1,622.7 $82.9 Provision for credit losses (22.0) (55.3) 33.3 Non-interest income Salaries and employee benefits (390.1) (390.2) 0.1 Other operating expenses (203.0) (189.0) (14.0) Farm Credit System insurance expense (23.8) (27.6) 3.8 Net impairment losses recognized in earnings (14.2) (12.4) (1.8) Provision for income taxes (42.5) (39.9) (2.6) Net income $1,278.8 $1,107.4 $171.4 Net interest income for the nine months ended September 30, 2012 increased $82.9 million or 5.1% compared to the same period in The increase in net interest income was primarily due to the positive effects of changes in volume of $126.0 million, driven by increases in real estate mortgage volume due to strong demand for cropland, partially offset by negative effects of changes in rates of $41.9 million and changes in nonaccrual income of $1.2 million. Average earning assets increased to $83.3 billion, or 6.1%, for the nine months ended September 30, 2012 compared to $78.5 billion for the same period in Over time, if interest rates stabilize or increase, the positive impact on the net interest income we have experienced over the last several years from calling debt securities will likely diminish. 1

3 Information regarding the year-to-date average daily balances (ADBs) and annualized average rates earned and paid on our portfolio follows: (in millions) For the nine months ended September 30, ADB Rate NII ADB Rate NII Interest earning assets: Accrual loans $68, % $2,278.2 $64, % $2,282.6 Nonaccrual loans % % 30.5 Investment securities and federal funds 13, % , % Other earning assets % % 8.2 Total 83, % 2, , % 2,433.5 Interest bearing liabilities 70, % , % Interest rate spread $12, % $11, % Impact of equity financing 0.21% 0.24% Net interest margin 2.73% 2.75% Net interest income $1,705.6 $1,622.7 Net interest margin has decreased by two basis points over the same period last year due to a three basis point decline in the impact of equity financing offset by a one basis point increase in interest rate spread. Equity financing represents the benefit of non-interest bearing funding, which was lower because of continued falling interest rates. Our average interest rate spread improved slightly from 2.51% in 2011 to 2.52% for the nine months ended September 30, The increase in interest rate spread was primarily due to increased spreads on converted fixed rate loans, reflecting the Associations abilities to re-price borrowers loans at lower interest rates and increase spreads. Changes in loans are further discussed in the Loan Portfolio section of this report. The District recorded provision for credit losses for the nine months ended September 30, 2012 of $22.0 million compared to $55.3 million during The amounts reflect the change in the estimated losses in the loan portfolio during the periods. The amount of provision recorded during the three months ended September 30, 2012 was partially offset by reversals during the first half of the year reflecting strong collateralization of the portfolios and continued improvement in credit quality. The provision expense recorded during the third quarter of 2012 includes one association establishing a $10.0 million general reserve for the impact of the drought as well as an additional $5.3 million of specific reserves on a participated dairy credit. In addition, factors driving the increase during the quarter include high unemployment (impact of non-farm income) and general weakness in the U.S. economy. Included in the provision for credit losses was a reversal of $1.0 million and provision expense of $3.7 million for a reserve for unfunded commitments and unfunded letters of credit, respectively. The reserves for unfunded commitments and letters of credit are recorded as liabilities on the Combined Statements of Condition. The increase in non-interest income primarily resulted from the following: A non-recurring $79.1 million distribution of our share of the Allocated Insurance Reserve Accounts (AIRA) we received during These reserve accounts were established by the Farm Credit System Insurance Corporation. The funds were returned when the level of the insurance fund increased above the required 2% of insured debt. There was no distribution during A $24.8 million increase in mineral income, earned from mineral rights, as lease bonus and royalty income continues to remain strong, specifically in the Williston Basin in western North Dakota. These increases were partially offset by: A $25.9 million decrease in miscellaneous income and other (losses) gains, net, due in part to a $13.2 million increase in acquired property write-downs, primarily related to the write-down of one large timber relationship during the third quarter of $6.8 million at one Association. The decrease was also due to $10.6 million of derivative losses primarily related to receive-fixed swaps that were de-designated as hedging instruments. Refer to Note 7 for further discussion. An $8.0 million decrease in financially related services fees primarily due to a decrease in crop insurance fees. The volume of crop insurance coverage has increased throughout the District but, due to changes in the crop insurance program, commission rates have dropped and resulted in lower fee income. The decrease in salaries and benefits resulted from the following: A $13.3 million decrease in salary expense due to a greater amount of expense deferred due, in part, to increases in loan originations and the corresponding increased allocations of costs related to loan originations, partially offset by annual 2

4 merit increases as well as an increase in head count of 317 full-time equivalents (6.0%) from September 30, 2011 to September 30, A $13.2 million increase in benefits expense driven primarily by i) an increase in pension expense of $6.5 million reflecting the impact of the decline in the discount rate and the continued amortization of losses on plan assets in 2008, ii) an increase in defined contribution plan expense of $2.0 million reflecting the increase in staffing (all new employees are in the defined contribution plan) and iii) a $1.9 million increase in the medical and dental insurance expenses due to the rising cost of medical care. Other operating expenses increased $14.0 million. The increase was spread among various categories including travel, advertising, public and member relations, purchased services and other miscellaneous expenses. Farm Credit System insurance expense decreased by $3.8 million reflecting the Farm Credit System Insurance Corporation premium rate of five basis points for the nine months ended September 30, 2012 compared to six basis points in AgriBank evaluates all investments in an unrealized loss position quarterly and determined that certain securities were in an other-thantemporary loss position at September 30, As a result of its evaluations, AgriBank recognized $14.2 million in impairment losses during the nine months ended September 30, 2012 compared to $12.4 million in See additional discussion in the Investment Portfolio section of this report. The increase in the provision for income taxes for the nine months ended September 30, 2012 was related to increased income in the taxable entities, primarily due to reversals of credit losses in those entities. LOAN PORTFOLIO The following table presents the components of loans: (in millions) September 30, December 31, Accrual loans: Real estate mortgage $40,868.3 $37,783.6 Production and intermediate term 19, ,198.7 Agribusiness 6, ,597.1 Rural residential real estate 2, ,257.1 Other 3, ,628.2 Nonaccrual loans Total loans $73,113.5 $68,349.6 District loans totaled $73.1 billion at September 30, 2012, a $4.8 billion, or 7.0%, increase from December 31, The increase in total loans from December 31, 2011 was primarily driven by strong business activity in real estate mortgage as well as continued activity in large multiple lender credits, offset by seasonal repayments and a decrease in nonaccrual loans. Typical seasonal increases on operating lines have been primarily offset by paydowns as many borrowers sold crops and paid down operating lines in January following December increases as inputs were purchased as part of tax planning strategies. The components of risk assets follow (total loans include accrued interest receivable): (in millions) September 30, December 31, Nonaccrual loans $774.5 $884.9 Accruing restructured loans Accruing loans 90 days or more past due Total risk loans Other property owned Total risk assets $908.1 $1,033.6 Risk loans as a % of total loans 1.12% 1.33% Delinquencies as a % of total loans 0.72% 0.74% 3

5 Our risk assets have decreased from December 31, 2011, remaining at acceptable levels. Based on management s analysis, all accruing loans 90 days or more past due were adequately secured and in the process of collection and, as such, were eligible to remain in accruing status. These loans have increased compared to December 31, 2011 following seasonal trends; the comparable balance at September 30, 2011 was $20.6 million. Total risk loans as a percentage of total loans remains within our established risk management guidelines. Nonaccrual loans represented 1.1% of total loans at September 30, 2012 compared to 1.3% at December 31, At September 30, 2012, 61.5% of nonaccrual loans were current as to principal and interest compared to 63.5% at December 31, Credit quality on loans remained at acceptable levels with 97.3% of our portfolio in the acceptable and special mention categories at September 30, 2012 compared to 96.8% at December 31, Adversely classified volume was 2.7% at September 30, 2012 compared to 3.2% at December 31, Comparative allowance coverage of various loan categories follows: September 30, December 31, Allowance as a % of: Loans 0.37% 0.44% Nonaccrual loans 35.33% 33.96% Total risk loans 32.94% 32.65% Net charge-offs as a % of average loans 0.07% 0.18% Adverse loans as a % of risk funds 14.00% 16.89% The District s allowance for loan losses is an estimate of losses on loans in the AgriBank and Association portfolios as of the financial statement date. AgriBank and Associations management determine the appropriate allowance levels based on a periodic evaluation of factors such as loan loss history, probability of default, estimated loss severity, portfolio quality and current economic and environmental conditions. During the nine months ended September 30, 2012, we decreased our allowance for loan losses by $26.9 million from the comparable period in The decline in the allowance was primarily driven by net charge-offs of $46.2 million and provision expense of $19.3 million (not including a $1.0 million reversal for unfunded commitments and a $3.7 million provision for unfunded letters of credit). The amounts reflect the change in the estimated losses in the loan portfolio during the periods. AgriBank and Associations management consider the allowance for loan losses at September 30, 2012 to be reasonable in relation to the risk in the loan portfolios. INVESTMENT PORTFOLIO At September 30, 2012, investment securities and federal funds held for liquidity purposes by AgriBank totaled $11.7 billion, an increase of $1.7 billion from December 31, AgriBank evaluates all investments in an unrealized loss position quarterly. As a result of these evaluations, AgriBank recognized $14.2 million in impairment losses during the nine months ended September 30, 2012 representing $1.4 million on newly impaired securities and $12.8 million on previously impaired securities. No other securities were in an other-than-temporary loss position. The impairments reflect the deterioration of prepayment and severity assumptions based on specific history of those individual securities, as well as deteriorations in credit performance. 4

6 AgriBank continues to closely monitor its home equity asset-backed securities (ABS) and non-agency mortgage-backed securities (MBS), which are detailed in the table below: (in millions) As of September 30, 2012 As of December 31, 2011 Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value First liens $133.6 $ -- $34.0 $99.6 $163.9 $ -- $51.7 $112.2 Second liens Wrapped ABS Total home equity asset-backed securities $156.2 $4.5 $37.7 $123.0 $190.4 $3.7 $58.0 $136.1 Alt-A non-agency MBS - floating $13.0 $0.9 $2.0 $11.9 $16.9 $0.8 $4.2 $13.5 Alt-A non-agency MBS - fixed Alt-A non-agency MBS - ARM Jumbo non-agency MBS - floating Jumbo non-agency MBS - fixed Jumbo non-agency MBS - ARM Total non-agency mortgage-backed securities $256.5 $3.8 $15.2 $245.1 $300.9 $0.8 $47.9 $253.8 Total of above segments $412.7 $8.3 $52.9 $368.1 $491.3 $4.5 $105.9 $389.9 At September 30, 2012, AgriBank had securities that, because the ratings were downgraded below AAA, were no longer eligible under Farm Credit Administration (FCA) regulations. The fair value of all ineligible investments totaled $289.6 million including $178.0 million on which AgriBank has taken impairment charges. Of the securities ineligible under the FCA regulations, securities totaling $285.2 million have been approved by the FCA to hold beyond six months and are included in AgriBank s net collateral ratio. One security with a fair value of $1.6 million was submitted to the FCA and approved in October 2012 and three securities with a fair value of $2.8 million have not yet been submitted to the FCA for approval. Subsequent to September 30, 2012, 11 ABS and MBS related securities with a fair value of $28.9 million were downgraded below AAA and became ineligible. These securities will be submitted for FCA approval in the future. In addition, AgriBank held split-rated non-agency mortgage-backed securities and home equity asset-backed securities with a fair value of $69.9 million that were downgraded below AAA by at least one rating agency. There are no split-rated securities on which AgriBank has taken impairment. AgriBank also held $8.6 million of non-agency mortgage-backed securities and home equity assetbacked securities on credit watch negative. Mission-related and other investments held by Associations consisted of $2.0 billion of government guaranteed instruments, $315.1 million of securities issued by the Federal Agricultural Mortgage Corporation (Farmer Mac), $0.8 million of investment securities of Agricultural Rural Community (ARC) bonds and a $2.6 million venture capital equity investment. The mission-related and other investments portfolio is evaluated for other-than-temporary impairment. As a result of these evaluations, one Association recognized $14 thousand of impairment losses during the nine months ended September 30, 2012 on previously impaired securities. No securities were other-than-temporarily impaired during the same period in AGRICULTURAL CONDITIONS The United States Department of Agriculture (USDA) projects U.S. net farm income to exceed $122 billion in 2012 and net cash income to exceed $139 billion as of August 28, 2012, both record nominal values. The expected increase in income reflects large price-led gains in corn and soybean receipts as well as large increases in crop insurance indemnities. The report suggests that crop farm gains should be more than enough to offset livestock farmers' higher feed expenses and a decline in sales of wholesale milk. Drought Impact Extensive drought in the U.S., particularly in the Midwest, has reduced crop yields, resulting in increased crop prices. Multi-peril crop insurance (MPCI) will generally mitigate the impact of the drought for most crop producers. These insurance policies range in coverage levels from catastrophic and yield protection (at the lower end) to revenue protection (at the higher end). The MPCI policies are sold and serviced through private insurance companies designated by the USDA to provide insurance coverage. These companies share the risk of loss by reinsuring with large private reinsurance companies and the USDA and its Federal Crop Insurance Corporation. Based on USDA information for the 2012 crop year, 84% of corn and soybean acres planted are covered by multi-peril crop insurance. The majority of these policies provide for revenue protection. In addition, many crop producers strengthened their 5

7 financial positions over the past several years and are expected to withstand the financial impact of the drought. However, increased prices for corn and soybeans and other grains are placing pressure on livestock, poultry, ethanol and dairy producers who rely on these inputs. Some producers mitigated a portion of this risk by locking in prices for these inputs during However, many users of corn and soybeans may be unable to avoid some level of losses as we move into Land Values Monitoring of agricultural land values is extensive within the District. The AgriBank District conducts an annual Benchmark Survey, conducted by licensed real estate appraisers, of a sample of benchmark farms selected to represent the lending footprint of associations throughout the District. The District s most recent real estate market value survey indicated that District real estate values, on average, increased 15.7% over the twelve-month period ending June 30, Qualitative surveys of lending officers compiled by the Federal Reserve Banks of Chicago, Kansas City and Minneapolis as of the end of the second quarter 2012 indicated sharply increasing farmland values. The Federal Reserve Banks cited survey findings of a year-over-year increase in the average value of non-irrigated farmland of 15-26%. Declining land values following sustained periods of land value increases have historically created conditions of considerable risk for collateral-based lenders. Nominal and real (inflation-adjusted) agricultural land values have increased in proportions greater than other asset classes such as stocks and urban residential and commercial land during the last decade, but District agricultural land values have, for the most part, escaped the valuation declines that other assets suffered during the recession. This is largely because the agricultural sector, particularly crop farming, remained profitable throughout the economic crisis period, and major agricultural lenders such as the Farm Credit System retained the capacity to continue lending for land purchases, unlike lenders to other industrial or consumer sectors. Our credit risk policies emphasize loan repayment capacity in addition to conservative assessments of collateral values that secure loans. Although FCA regulations allow real estate mortgage loans of up to 85% of appraised value, our underwriting standards generally limit lending to no more than 65% at origination. Due to very strong land values in much of our territory, many Associations have implemented risk management practices that incorporate loan-to-appraised-value thresholds below 65%. Furthermore, many District lenders impose a lending limit of fixed dollar amounts per acre based on the land s production capacity. While underwriting exceptions on loan-to-appraised-value are sometimes granted, in such cases they are often structured with additional principal payments in the early years to reduce the risk of lending at higher levels of appraised value. FUNDING, LIQUIDITY AND MEMBERS EQUITY The System continues to have reliable access to the debt capital markets to support its mission of providing credit to farmers, ranchers and other eligible borrowers. During the nine months ended September 30, 2012, investor demand for Systemwide Debt Securities has remained favorable. Given the low interest rate environment, AgriBank continued to refinance callable bonds when advantageous in order to lower its cost of funds. AgriBank is responsible for meeting the District's funding, liquidity and asset/liability management needs. Access to funding remains the primary source of liquidity. AgriBank also maintains liquidity through its investment portfolio. AgriBank s liquidity policy and FCA regulations require maintaining a minimum of 90 days of liquidity on a continuous basis, assuming no access to the debt capital markets. The days of liquidity refers to the number of days of maturing debt covered by liquid investments. AgriBank currently operates with a liquidity target of 125 days. As of September 30, 2012, AgriBank had sufficient liquidity to fund all debt maturing within 143 days. AgriBank also has a contingency plan in the event that there is not ready access to traditional funding sources. This plan establishes other avenues for funding such as borrowing overnight via federal funds, using investment securities as collateral to borrow, allowing the investment portfolio to mature and selling investments. The composition of the liquidity investment portfolio is structured to provide at least 15 days of liquidity coverage in a combination of U.S. Treasury securities maturing within 3 years, debt to be settled and cash held in Federal Reserve Banks. As of September 30, 2012, AgriBank held U.S. Treasury securities with a book value of $3.2 billion. At September 30, 2012 AgriBank held qualifying assets in excess of that required to meet the 15 days of liquidity coverage. Total members equity at September 30, 2012 was $14.1 billion, a $1.3 billion increase from December 31, Members equity was positively impacted by net income for the period, changes in other comprehensive income and increased capital stock and participation certificates. These increases were partially offset by earnings reserved for patronage distributions. The noncontrolling interest represents the equity investment of Associations and Farm Credit System entities outside the AgriBank District who have ownership interests in AgDirect, LLC and Farm Credit Foundations (FCF). The AgDirect program was initiated in April 2011 and FCF was formed as a service corporation effective January 1, The noncontrolling interest for the AgDirect program and FCF at September 30, 2012 was $17.6 million and $0.4 million, respectively. Refer to Notes 1 and 2 in 2011 Annual Report for a more complete description. 6

8 At September 30, 2012, AgriBank and each Association exceeded the regulatory minimum capital ratios, which are further discussed in Note 4 to the financial statements. CERTIFICATION The undersigned have reviewed the September 30, 2012 quarterly report of AgriBank, FCB and Affiliated Associations which has been prepared under the oversight of the AgriBank audit committee and in accordance with all applicable statutory or regulatory requirements and that the information contained herein is true, accurate and complete to the best of our knowledge and belief. Richard Davidson Chairman of the Board AgriBank, FCB November 9, 2012 L. William York Chief Executive Officer AgriBank, FCB November 9, 2012 Brian J. O Keane Executive Vice President, Banking and Finance and Chief Financial Officer AgriBank, FCB November 9,

9 COMBINED STATEMENTS OF CONDITION AgriBank, FCB and Affiliated Associations (Dollars in thousands) (unaudited) September 30, December 31, Assets Loans $73,113,478 $68,349,565 Allowance for loan losses 273, ,508 Net loans 72,839,859 68,049,057 Investment securities - AgriBank, FCB 10,950,040 9,688,571 Investment securities - Affiliated Associations 2,342,614 2,262,747 Other earning assets 142, ,945 Cash 303, ,862 Federal funds 756, ,976 Accrued interest receivable 1,032, ,969 Premises and equipment, net 344, ,019 Deferred tax assets, net 13,301 7,806 Assets held for lease, net 476, ,467 Derivative assets 82, ,444 Other property owned 77, ,260 Debt issuance costs 51,369 53,700 Other assets 128, ,852 Total assets $89,541,779 $83,136,675 Liabilities Bonds and notes $73,606,010 $68,262,968 Subordinated notes 600, ,000 Accrued interest payable 243, ,457 Derivative liabilities 22,850 17,466 Deferred tax liabilities, net 131, ,798 Accounts payable 108, ,386 Patronage payable 78, ,760 Postretirement liability 426, ,395 Cash collateral pledged by counterparties 27, ,120 Other liabilities 193, ,425 Total liabilities 75,440,099 70,302,775 Commitments and contingencies Members' equity Protected borrower equities 697 2,056 Capital stock and participation certificates 258, ,382 Allocated surplus 284, ,516 Unallocated surplus 14,062,832 12,875,783 Accumulated other comprehensive loss (522,446) (594,096) Noncontrolling interest 17,984 6,259 Total members' equity 14,101,680 12,833,900 Total liabilities and members' equity $89,541,779 $83,136,675 The accompanying notes are an integral part of these combined financial statements. 8

10 COMBINED STATEMENTS OF COMPREHENSIVE INCOME AgriBank, FCB and Affiliated Associations (Dollars in thousands) (Unaudited) Three months Nine months For the period ended September 30, Interest income Loans $782,444 $774,363 $2,307,459 $2,313,121 Investment securities and other earning assets 37,294 39, , ,396 Total interest income 819, ,854 2,419,801 2,433,517 Interest expense 225, , , ,812 Net interest income 593, ,941 1,705,637 1,622,705 Provision for credit losses 40,737 17,118 22,044 55,276 Net interest income after provision for credit losses 553, ,823 1,683,593 1,567,429 Non-interest income Financially related services 50,765 52,486 95, ,087 Loan prepayment and fee income 11,240 14,951 33,604 33,852 Allocated insurance reserve account distribution , Mineral income 15,779 10,452 56,286 31,526 Miscellaneous income and other (losses) gains, net (7,940) 8,284 4,747 30,660 Total non-interest income 69,844 86, , ,125 Non-interest expense Salaries and employee benefits 134, , , ,279 Other operating expenses 69,133 65, , ,077 Farm Credit System insurance expense 8,222 9,249 23,773 27,554 Impairment losses recognized in earnings: Total other-than-temporary impairment losses 7,787 6,158 25,149 15,516 Portion of loss recognized in other comprehensive income (840) -- (10,914) (3,149) Net impairment losses recognized in earnings 6,947 6,158 14,235 12,367 Total non-interest expense 218, , , ,277 Income before income taxes 404, ,631 1,321,247 1,147,277 Provision for income taxes 7,040 14,548 42,478 39,906 Net income $397,223 $397,083 $1,278,769 $1,107,371 Other comprehensive income (loss) Unrealized gains (losses) on investment securities not-other-than-temporarily impaired 24,542 (168) 24,109 12,703 Reclassification adjustment for losses (gains) included in net income 415 (374) 1,393 1,484 Not-other-than-temporary-impaired investments 24,957 (542) 25,502 14,187 Unrealized gains (losses) on investment securities other-than-temporarily impaired 12,739 (6,633) 21,924 (2,460) Reclassification adjustment for losses included in net income 6,532 6,159 12,842 10,420 Other-than-temporary-impaired investments 19,271 (474) 34,766 7,960 Unrealized gains (losses) on derivatives 587 (85,420) (10,564) (90,679) Reclassification adjustment for (gains) losses included in net income (48) 49 (48) (871) Derivatives 539 (85,371) (10,612) (91,550) Employee benefits 7,331 6,337 21,994 18,867 Total other comprehensive income (loss) 52,098 (80,050) 71,650 (50,536) Comprehensive income $449,321 $317,033 $1,350,419 $1,056,835 The accompanying notes are an integral part of these combined financial statements. 9

11 COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY AgriBank, FCB and Affiliated Associations (Dollars in thousands) (Unaudited) Accumulated Other Comprehensive Income (Loss) Capital Not-other-than- Other-than- Protected Stock and temporarily- temporarily- Total Borrower Participation Allocated Unallocated impaired impaired Employee Noncontrolling Members' Equities Certificates Surplus Surplus Investments Investments Derivatives Benefits Interest Equity Balance at December 31, 2010 $2,716 $247,194 $265,010 $11,576,553 $(25,461) $(48,703) $(12,228) $(347,137) $ -- $11,657,944 Net income 1,107,371 1,107,371 Other comprehensive income (loss) 14,187 7,960 (91,550) 18,867 (50,536) Patronage (41,963) (41,963) Surplus allocated under nonqualified patronage program 30,004 (30,004) -- Redemption of allocated surplus under nonqualified patronage program (13,873) (13,873) Capital stock/participation certificates issued 21,675 21,675 Capital stock/participation certificates retired (540) (14,165) (14,705) Balance at September 30, 2011 $2,176 $254,704 $281,141 $12,611,957 $(11,274) $(40,743) $(103,778) $(328,270) $ -- $12,665,913 Balance at December 31, 2011 $2,056 $253,382 $290,516 $12,875,783 $(9,389) $(34,982) $(103,653) $(446,072) $6,259 $12,833,900 Noncontrolling interest equity investment 11,725 11,725 Net income 1,278,769 1,278,769 Other comprehensive income (loss) 25,502 34,766 (10,612) 21,994 71,650 Patronage (56,383) (56,383) Surplus allocated under nonqualified patronage program 35,337 (35,337) -- Redemption of allocated surplus under nonqualified patronage program (41,818) (41,818) Capital stock/participation certificates issued 20,434 20,434 Capital stock/participation certificates retired (1,359) (15,238) (16,597) Balance at September 30, 2012 $697 $258,578 $284,035 $14,062,832 $16,113 $(216) $(114,265) $(424,078) $17,984 $14,101,680 The accompanying notes are an integral part of these combined financial statements. 10

12 COMBINED STATEMENTS OF CASH FLOWS AgriBank, FCB and Affiliated Associations (Dollars in thousands) (Unaudited) For the nine months ended September 30, Cash flows from operating activities Net income $1,278,769 $1,107,371 Adjustments to reconcile net income to cash flows from operating activities: Depreciation on premises and equipment 25,996 24,763 Gain on sales of premises and equipment (2,462) (1,464) Depreciation on assets held for lease 59,662 50,323 Gain on disposal of assets held for lease (618) (286) Provision for credit losses 22,044 55,276 Loss (gain) on other property owned 17,410 (330) Loss on derivative activities 3,643 5,098 Impairment of investment securities 14,235 12,367 Gain on sale of investment securities -- (463) Amortization of premiums and discounts on loans and investments 32,530 29,266 Insurance refund related to FAC stock (5,546) -- Changes in operating assets and liabilities: Accrued interest receivable (213,260) (187,493) Other assets 248 (25,715) Accrued interest payable 2,085 2,138 Other liabilities (20,265) 36,827 Total adjustments (64,298) 307 Net cash provided by operating activities 1,214,471 1,107,678 Cash flows from investing activities Increase in loans, net (4,816,558) (1,265,129) Proceeds from sales of other property owned 23,535 30,889 Decrease in other earning assets, net 68,548 63,816 Increase in investment securities, net (1,326,509) (768,770) Proceeds from the sale of investment securities ,877 Purchases of assets held for lease, net (93,822) (54,052) Purchases of premises and equipment, net (37,389) (48,759) Proceeds from insurance refund related to FAC stock 5, Net cash used in investing activities (6,176,649) (1,497,128) Cash flows from financing activities Consolidated bonds and notes issued 198,263, ,826,682 Consolidated bonds and notes retired (192,871,961) (185,968,710) Decrease in cash collateral pledged by counterparties, net (75,350) (52,770) Patronage distribution paid (176,640) (175,679) Redemption of allocated surplus under nonqualified patronage program (19,260) (13,873) Capital stock/participation certificates issued, net 3,208 6,172 Increase in noncontrolling interest 11, Net cash provided by financing activities 5,135, ,822 Net increase in cash and federal funds 173, ,372 Cash and federal funds at beginning of year 886, ,708 Cash and federal funds at end of year $1,059,961 $1,025,080 Supplemental schedule of non-cash activities Decrease in derivative assets $57,447 $90,173 Increase in derivative liabilities 5,384 5,725 (Decrease) increase in bonds from derivative activity (48,576) 750 Decrease in members' equity from cash flow derivatives (10,612) (91,550) Increase in members' equity from investment securities 60,268 22,147 Increase in members' equity from employee benefits 21,994 18,867 Loans transferred to other property owned 23,912 46,689 Patronage distributions payable to members 78,874 41,443 Financed sales of other property owned (18,774) -- Patronage payable of allocated surplus under nonqualified patronage program 22, Stock patronage issued Supplemental Information Interest paid $712,079 $808,674 Taxes paid 26,499 60,590 The accompanying notes are an integral part of these combined financial statements. 11

13 NOTES TO COMBINED FINANCIAL STATEMENTS AgriBank, FCB and Affiliated Associations NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES AgriBank, FCB and Affiliated Associations comprise one of the Districts of the Farm Credit System (the System), a nationwide system of cooperatively owned banks and associations, established by Congress and subject to the provisions of the Farm Credit Act of 1971, as amended. The System specializes in providing financing and related services to qualified borrowers for agricultural and rural purposes. AgriBank and its Affiliated Associations are collectively referred to as the District. At September 30, 2012, the District had 17 Agricultural Credit Association parent associations, each of which has wholly owned Federal Land Credit Association and Production Credit Association subsidiaries and AgriBank, FCB. AgriBank, FCB (AgriBank) serves as the intermediary between the financial markets and the retail lending activities of the District Associations. A description of the organization and operation of the District, significant accounting policies followed, combined financial condition and results of operations as of and for the year ended December 31, 2011 are contained in the 2011 annual report. These unaudited third quarter 2012 combined financial statements should be read in conjunction with the annual report. The results of the nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the year ended December 31, The accompanying combined financial statements include the accounts of AgriBank combined with its 17 affiliated Associations and certain related entities. All significant transactions and balances between AgriBank and the Associations have been eliminated in combination. The accompanying financial statements contain all adjustments necessary for a fair presentation of the interim financial condition and results of operations and conform to accounting principles generally accepted in the United States of America and prevailing practices within the financial services industry. Recent Accounting Developments In December 2011, the Financial Accounting Standards Board (FASB) issued guidance entitled, Balance Sheet Disclosures about Offsetting Assets and Liabilities. The guidance requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. This includes the effect or potential effect of rights of setoff associated with an entity s recognized assets and recognized liabilities. The requirements apply to recognized financial instruments and derivative instruments that are offset in accordance with the rights of offset set forth in accounting guidance and for those recognized financial instruments and derivative instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset or not. This guidance is to be applied retrospectively for all comparative periods and is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this guidance will not impact financial condition or results of operations, but will result in additional disclosures. In June 2011, the FASB issued guidance entitled Presentation of Comprehensive Income. This standard eliminated the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement referred to as the Statement of Comprehensive Income or in two separate, but consecutive, statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts net income and other comprehensive income, would need to be displayed under either alternative. The statement(s) would need to be presented with equal prominence as the other primary financial statements. The guidance is intended to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This guidance is effective as of the beginning of the fiscal year that begins after December 15, The adoption of this guidance did not have an impact on our financial condition or results of operations, but did result in changes to our financial statement presentation. In May 2011, the FASB issued guidance entitled, Fair Value Measurement Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. The amendments clarify certain aspects of the fair value measurement and increases disclosure requirements. The amendments are applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, The adoption of this guidance did not have an impact on our financial condition or results of operations, but resulted in additional disclosures. In April 2011, the FASB issued guidance entitled A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This guidance provided additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. The new guidance requires creditors to evaluate modifications and restructurings of 12

14 receivables using a more principles-based approach, which may result in more modifications and restructurings being considered troubled debt restructurings. The guidance is effective for annual periods ending on or after December 15, 2012, including interim periods within those annual periods. The adoption of this guidance did not have a significant impact on our financial statements. NOTE 2 LOANS Loans consisted of the following: September 30, 2012 December 31, 2011 Amount % Amount % Real estate mortgage $41,336, % $38,276, % Production and intermediate term 19,999, % 19,448, % Agribusiness 6,258, % 5,668, % Rural residential real estate 2,460, % 2,316, % Other 3,058, % 2,639, % Total loans $73,113, % $68,349, % The other category is primarily comprised of communication and energy related loans and finance leases as well as loans to AgriBank s Other Financial Institutions and loans originated under our Mission Related Investment authority. Participations We may purchase or sell participation interests with other parties in order to diversify risk, manage loan volume and comply with Farm Credit Administration (FCA) regulations or Association General Financing Agreement limitations. The following table presents information regarding participations purchased and/or sold: Other Farm Credit Institutions Non-Farm Credit Institutions Total Participations Participations Participations Participations Participations Participations As of September 30, 2012 Purchased Sold Purchased Sold Purchased Sold Real estate mortgage $799,915 $147,241 $1,935,655 $40,127 $2,735,570 $187,368 Production and intermediate term 574, ,081 3,119,689 32,343 3,693, ,424 Agribusiness 2,493, , , ,168 3,214, ,760 Rural residential real estate , , Other 1,518,424 98, , ,726,723 98,267 Total loans $5,386,380 $843,181 $6,002,129 $353,689 $11,388,509 $1,196,870 Other Farm Credit Institutions Non-Farm Credit Institutions Total Participations Participations Participations Participations Participations Participations As of December 31, 2011 Purchased Sold Purchased Sold Purchased Sold Real estate mortgage $756,174 $114,972 $1,837,541 $54,063 $2,593,715 $169,035 Production and intermediate term 518, ,375 2,573,324 45,354 3,092, ,729 Agribusiness 2,195, ,317 1,254, ,226 3,450, ,543 Rural residential real estate , , Other 1,187,493 58, , ,409,664 58,777 Total loans $4,658,022 $852,441 $5,908,160 $392,701 $10,566,182 $1,245,142 Information in the preceding chart excludes loans entered into under our Mission Related Investment authority. 13

15 Portfolio Performance Risk loans are loans for which it is probable that all principal and interest will not be collected according to the contractual terms. (Risk loans include nonaccrual loans, accruing restructured loans and accruing loans 90 days or more past due.) September 30, December 31, Nonaccrual loans: Current as to principal and interest $476,192 $561,771 Past due 298, ,171 Total nonaccrual loans 774, ,942 Accruing restructured loans 31,453 31,230 Accruing loans 90 days or more past due 24,660 4,197 Total risk loans $830,590 $920,369 Volume with specific reserves $231,689 $321,671 Volume without specific reserves 598, ,698 Total risk loans $830,590 $920,369 Specific reserves $76,220 $95,541 For the nine months ended September 30, Income on accrual risk loans $1,839 $1,784 Income on nonaccrual loans 29,287 30,452 Total income on risk loans $31,126 $32,236 Average risk loans $883,192 $1,032,390 Risk assets by loan type (accruing volume includes accrued interest receivable) are as follows: September 30, December 31, Nonaccrual loans: Real estate mortgage $467,911 $492,938 Production and intermediate term 193, ,402 Agribusiness 40,899 71,370 Rural residential real estate 52,025 59,605 Other 20,044 11,627 Total nonaccrual loans $774,477 $884,942 Accruing restructured loans: Real estate mortgage $18,536 $18,683 Production and intermediate term 3,890 3,634 Agribusiness 4,417 4,514 Rural residential real estate Other 4,169 4,351 Total accruing restructured loans $31,453 $31,230 Accruing loans 90 days or more past due: Real estate mortgage $13,834 $2,109 Production and intermediate term 5,002 1,078 Agribusiness 4, Rural residential real estate Other 1,216 1,010 Total accruing loans 90 days or more past due $24,660 $4,197 Total risk loans $830,590 $920,369 Other property owned $77,453 $113,260 Total risk assets $908,043 $1,033,629 14

16 One credit quality indicator we utilize is the FCA Uniform Loan Classification System that categorizes loans into five categories. The categories are defined as follows: Acceptable assets are expected to be fully collectible and represent the highest quality, Other assets especially mentioned (special mention) assets are currently collectible but exhibit some potential weakness, Substandard assets exhibit some serious weakness in repayment capacity, equity and/or collateral pledged on the loan, Doubtful assets exhibit similar weaknesses to substandard assets; however, doubtful assets have additional weaknesses in existing factors, conditions and values that make collection in full highly questionable, and Loss assets are considered uncollectible. The following table shows loans and related accrued interest classified under the FCA Uniform Loan Classification System by loan type: As of September 30, 2012 Acceptable Special mention Substandard/Doubtful Total Real estate mortgage $40,131, % $680, % $1,124, % $41,937, % Production and intermediate term 19,420, % 368, % 520, % 20,308, % Agribusiness 5,705, % 395, % 187, % 6,287, % Rural residential real estate 2,348, % 23, % 104, % 2,476, % Other 2,970, % 20, % 75, % 3,066, % Total loans $70,574, % $1,488, % $2,012, % $74,075, % As of December 31, 2011 Acceptable Special mention Substandard/Doubtful Total Real estate mortgage $36,474, % $985, % $1,267, % $38,727, % Production and intermediate term 18,636, % 432, % 649, % 19,718, % Agribusiness 5,110, % 434, % 147, % 5,692, % Rural residential real estate 2,197, % 25, % 104, % 2,328, % Other 2,548, % 48, % 49, % 2,646, % Total loans $64,968, % $1,926, % $2,218, % $69,113, % The following table provides an age analysis of past due loans by loan type (accruing volume includes accrued interest receivable): Not Past Due Days or Less than Accruing loans Days or More Total 30 Days Total 90 days or As of September 30, 2012 Past Due Past Due Past Due Past Due Loans more past due Real estate mortgage $163,083 $148,751 $311,834 $41,625,213 $41,937,047 $13,834 Production and intermediate term 74,262 56, ,852 20,177,583 20,308,435 5,002 Agribusiness 4,793 19,499 24,292 6,263,190 6,287,482 4,475 Rural residential real estate 31,309 14,649 45,958 2,430,251 2,476, Other 5,314 15,160 20,474 3,046,254 3,066,728 1,216 Total loans $278,761 $254,649 $533,410 $73,542,491 $74,075,901 $24,660 Not Past Due Days or Less than Accruing loans Days or More Total 30 Days Total 90 days or As of December 31, 2011 Past Due Past Due Past Due Past Due Loans more past due Real estate mortgage $147,278 $139,106 $286,384 $38,441,500 $38,727,884 $2,109 Production and intermediate term 69,127 70, ,310 19,579,317 19,718,627 1,078 Agribusiness 828 5,634 6,462 5,685,952 5,692, Rural residential real estate 34,525 20,338 54,863 2,273,297 2,328, Other 17,696 5,981 23,677 2,622,909 2,646,586 1,010 Total loans $269,454 $241,242 $510,696 $68,602,975 $69,113,671 $4,197 15

17 All risk loans are considered to be impaired loans. The following table provides additional impaired loan information: As of September 30, 2012 For the nine months ended September 30, 2012 Recorded Investment 1 Unpaid Principal Balance 2 Related Allowance Average Impaired Loans Interest Income Recognized Impaired loans with a related allowance for loan losses: Real estate mortgage $110,657 $129,744 $27,683 $105,238 $ -- Production and intermediate term 88,192 99,709 33, , Agribusiness 14,926 14,864 9,002 21, Rural residential real estate 8,417 8,527 2,023 8, Other 9,497 9,715 3,952 5, Total $231,689 $262,559 $76,220 $247,981 $ -- Impaired loans with no related allowance for loan losses: Real estate mortgage $389,624 $498,435 $ -- $405,261 $11,882 Production and intermediate term 114, , ,996 8,877 Agribusiness 34,865 48, ,477 8,948 Rural residential real estate 44,182 57, ,888 1,192 Other 15,932 20, , Total $598,901 $884,351 $ -- $635,211 $31,126 Total impaired loans: Real estate mortgage $500,281 $628,179 $27,683 $510,499 $11,882 Production and intermediate term 202, ,051 33, ,073 8,877 Agribusiness 49,791 63,153 9,002 62,455 8,948 Rural residential real estate 52,599 66,315 2,023 56,788 1,192 Other 25,429 30,212 3,952 22, Total $830,590 $1,146,910 $76,220 $883,192 $31,126 1 The recorded investment in the receivable is the face amount increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges and acquisition costs and may also reflect a previous direct write-down of the investment. The recorded investment may be less than the unpaid principal balance as payments on non-cash basis nonaccrual loans reduce the recorded investment. 2 Unpaid principal balance represents the contractual principal balance of the loan. As of December 31, 2011 For the nine months ended September 30, 2011 Recorded Investment 1 Unpaid Principal Balance 2 Related Allowance Average Impaired Loans Interest Income Recognized Impaired loans with a related allowance for loan losses: Real estate mortgage $108,666 $132,607 $25,423 $92,650 $ -- Production and intermediate term 151, ,401 47, , Agribusiness 45,033 52,854 17, , Rural residential real estate 11,924 15,193 2,785 8, Other 4,716 9,218 1,955 2, Total $321,671 $419,273 $95,541 $401,220 $ -- Impaired loans with no related allowance for loan losses: Real estate mortgage $405,064 $499,468 $ -- $418,021 $11,802 Production and intermediate term 102, , ,573 9,553 Agribusiness 30,851 47, ,835 8,897 Rural residential real estate 47,729 58, ,793 1,126 Other 12,272 20, , Total $598,698 $806,341 $ -- $631,170 $32,236 Total impaired loans: Real estate mortgage $513,730 $632,075 $25,423 $510,671 $11,802 Production and intermediate term 254, ,400 47, ,758 9,553 Agribusiness 75, ,833 17, ,276 8,897 Rural residential real estate 59,653 73,865 2,785 53,601 1,126 Other 16,988 29,441 1,955 14, Total $920,369 $1,225,614 $95,541 $1,032,390 $32,236 16

18 Troubled Debt Restructurings The following table presents information regarding troubled debt restructurings that occurred during the nine months ended September 30, 2012: Pre-modification Outstanding Post-modification Outstanding As of September 30, 2012 Recorded Investment* Recorded Investment* Troubled debt restructurings: Real estate mortgage $16,611 $16,649 Production and intermediate term 11,994 11,923 Rural residential real estate 1,308 1,202 Total loans $29,913 $29,774 * Pre-modification represents the recorded investment just prior to restructuring and post-modification represents the recorded investment immediately following the restructuring. The recorded investment is the face amount of the receivable increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges and acquisition costs and may also reflect a previous direct write-down of the investment. A restructuring of a loan constitutes a troubled debt restructuring, also known as formally restructured, if the creditor for economic or legal reasons related to the debtor s financial difficulties grants a concession to the debtor that it would not otherwise consider. Concessions vary by program and are borrower-specific and may include interest rate reductions, term extensions, payment deferrals or the acceptance of additional collateral in lieu of payments. The post-modification outstanding recorded investment may be higher than the pre-modification outstanding recorded investment, in certain segments, primarily due to the acceptance of additional collateral as well as amounts capitalized upon restructuring. As this table illustrates and as discussed above, Associations generally provide concessions which do not reduce the principal or interest to be collected. In limited circumstances, principal may be forgiven. When a restructured loan constitutes a troubled debt restructuring, these loans are included within our risk loans. All risk loans are analyzed within our allowance for loan losses. We record a specific allowance to reduce the carrying amount of the formally restructured loan to the lower of book value or net realizable value of collateral, if required. The following table presents information regarding troubled debt restructurings that occurred within the previous 12 months and for which there was a subsequent payment default during the nine months ended September 30, 2012: Recorded As of September 30, 2012 Investment Troubled debt restructurings that subsequently defaulted: Real estate mortgage $2,452 Production and intermediate term 1,133 Rural residential real estate 409 Total $3,994 Troubled debt restructurings outstanding at September 30, 2012 totaled $156.3 million, of which $124.8 million were in nonaccrual status. Additional commitments to lend to borrowers whose loans have been modified in a troubled debt restructuring totaled $4.0 million at September 30, Allowance for Loan Losses A summary of the allowance for loan losses follows: For the nine months ended September 30, Balance at beginning of year $300,508 $406,346 Provision for loan losses 19,294 45,276 Charge-offs (59,449) (88,344) Recoveries 13,266 13,154 Balance at end of period $273,619 $376,432 We consider the allowance for loan losses at September 30, 2012 to be reasonable in relation to the risk in our loan portfolio. During the nine months ended September 30, 2012, we decreased our allowance for loan losses by $26.9 million from the comparable period in The decline in the allowance was primarily driven by net charge-offs of $46.2 million offset by provision expense of 17

19 $19.3 million (not including a $1.0 million reversal for unfunded commitments and a $3.7 million provision for unfunded letters of credit). The amounts reflect the change in the estimated losses in the loan portfolio during the periods. The amount of provision recorded during the three months ended September 30, 2012 was partially offset by reversals during the first half of the year reflecting strong collateralization of the portfolios and continued improvement in credit quality. The provision expense recorded during the third quarter of 2012 includes one association establishing a $10.0 million general reserve for the impact of the drought as well as an additional $5.3 million of specific reserves on a participated dairy credit. In addition, factors driving the increase during the quarter include high unemployment (impact of non-farm income) and general weakness in the economy. A summary of changes in the allowance for loan losses and period end recorded investments in loans by loan type is as follows: Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Other Total Allowance for loan losses: Balance at December 31, 2011 $107,075 $124,448 $47,933 $12,789 $8,263 $300,508 Provision for (reversal of) loan losses (675) (4,378) 9,849 4,323 10,175 19,294 Charge-offs (17,407) (31,982) (4,601) (5,450) (9) (59,449) Recoveries 6,583 5,364 1, ,266 Balance at September 30, 2012 $95,576 $93,452 $54,350 $11,801 $18,440 $273,619 At September 30, 2012: Ending balance: individually evaluated for impairment $27,683 $33,560 $9,002 $2,023 $3,952 $76,220 Ending balance: collectively evaluated for impairment $67,893 $59,892 $45,348 $9,778 $14,488 $197,399 Recorded investments in loans outstanding: Ending balance at September 30, 2012 $41,937,047 $20,308,435 $6,287,482 $2,476,209 $3,066,728 $74,075,901 Ending balance for loans individually evaluated for impairment $500,281 $202,490 $49,791 $52,599 $25,429 $830,590 Ending balance for loans collectively evaluated for impairment $41,436,766 $20,105,945 $6,237,691 $2,423,610 $3,041,299 $73,245,311 Real estate mortgage Production and intermediate term Agribusiness Rural residential real estate Other Total Allowance for loan losses: Balance at December 31, 2010 $170,547 $145,748 $68,915 $12,999 $8,137 $406,346 Provision for (reversal of) loan losses (8,340) (18,426) 58,779 9,883 3,380 45,276 Charge-offs (23,563) (25,983) (29,673) (4,778) (4,347) (88,344) Recoveries 4,817 7, ,154 Balance at September 30, 2011 $143,461 $109,198 $98,144 $18,401 $7,228 $376,432 At December 31, 2011: Ending balance: individually evaluated for impairment $25,423 $47,525 $17,853 $2,785 $1,955 $95,541 Ending balance: collectively evaluated for impairment $81,652 $76,923 $30,080 $10,004 $6,308 $204,967 Recorded investments in loans outstanding: Ending balance at December 31, 2011 $38,727,884 $19,718,627 $5,692,414 $2,328,160 $2,646,586 $69,113,671 Ending balance for loans individually evaluated for impairment $513,730 $254,114 $75,884 $59,653 $16,988 $920,369 Ending balance for loans collectively evaluated for impairment $38,214,154 $19,464,513 $5,616,530 $2,268,507 $2,629,598 $68,193,302 18

20 NOTE 3 INVESTMENT SECURITIES AND FEDERAL FUNDS AgriBank Investment Securities and Federal Funds A summary of the amortized cost, unrealized gains and losses and fair value of investment securities and federal funds follows: Weighted Amortized Unrealized Unrealized Fair Average As of September 30, 2012 Cost Gains Losses Value Yield Mortgage-backed securities $4,236,103 $47,221 $16,518 $4,266, % U.S. Treasury securities 3,158,494 5, ,163, % Commercial paper and other 2,908, ,908, % Federal funds 756, , % Asset-backed securities 417,219 4,573 38, , % U.S. Agencies 214,300 13, , % Total $11,690,471 $70,712 $54,815 $11,706, % Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2011 Cost Gains Losses Value Yield Mortgage-backed securities $4,156,732 $33,316 $49,301 $4,140, % U.S. Treasury securities 2,924,353 8, ,933, % Commercial paper and other 2,123, ,123, % Federal funds 299, , % Asset-backed securities 284,500 3,633 58, , % U.S. Agencies 243,634 17, , % Total $10,032,918 $63,659 $108,030 $9,988, % Commercial paper and other is primarily corporate and municipal obligations, certificates of deposit and term federal funds. All securities are classified as available-for-sale. A summary of the investments in an unrealized loss position presented by the length of time that the investments have been in a continuous unrealized loss position follows: Less than 12 months More than 12 months Fair Unrealized Fair Unrealized As of September 30, 2012 Value Losses Value Losses Mortgage-backed securities $382,523 $853 $360,923 $15,665 U.S. Treasury securities 152, Commercial paper and other 502, Asset-backed securities 157, ,966 37,767 Total $1,194,924 $1,383 $484,889 $53,432 Less than 12 months More than 12 months Fair Unrealized Fair Unrealized As of December 31, 2011 Value Losses Value Losses Mortgage-backed securities $269,359 $381 $642,583 $48,920 U.S. Treasury securities 50, Commercial paper and other 1,272, Asset-backed securities 83, ,620 58,036 Total $1,676,493 $1,074 $783,203 $106,956 AgriBank evaluates its investment securities for other-than-temporary impairment on a quarterly basis. Factors considered in determining whether an impairment is other-than-temporary include: 1) the length of time and the extent to which the fair value is less than cost, 2) the financial condition and near-term prospects of the issuer and, if applicable, the financial condition of any financial 19

21 guarantor, 3) the estimated cash flow projections compared to contractual cash flows and 4) AgriBank s intent to sell the impaired security and whether AgriBank is more likely than not to be required to sell the security before recovery. In addition, AgriBank qualitatively considers other available information when assessing whether impairment is other-than-temporary. Based on the results of these evaluations, if it is determined that the impairment is other-than-temporary, the loss is separated into credit-related and noncredit-related components. The credit-related component is recognized through earnings and the non-credit related component is recognized in other comprehensive income or loss. The credit-related components of the other-than-temporary impairment losses were determined by projecting cash flows using cash flow models which require certain market assumptions. The significant inputs into the models include assumptions with regard to interest rates, prepayment speeds, default rates and loss severities. The assumptions are applied at the individual security and associated collateral pool level. The unrealized losses primarily reflect concerns about the creditworthiness and liquidity of home equity related asset-backed and nonagency mortgage-backed securities. AgriBank determined that securities with a fair value of $178.0 million at September 30, 2012 were in an other-than-temporary loss position compared to securities with a fair value of $162.2 million at December 31, As a result of its evaluations, AgriBank has recognized $14.2 million in net impairment losses during the nine months ended September 30, 2012, reflecting a gross impairment charge of $25.1 million, net of $10.9 million related to the non-credit component which was recognized in other comprehensive income. AgriBank has determined no other securities were in an other-than-temporary loss position at September 30, The following represents the activity related to the credit-loss component for investments that have been written down for other-thantemporary impairment that is recognized in earnings: For the the nine months ended September 30, Credit-loss component, beginning of year $103,680 $80,537 Additions: Initial credit impairment 1,393 1,947 Subsequent credit impairments 12,842 10,420 Reductions: For increases in expected cash flows 1 -- Credit-loss component, end of year $117,914 $92,904 A summary of the contractual maturity at fair value and weighted average yield by maturity of investment securities and federal funds follows: Year of Maturity One Year One to Five to More Than As of September 30, 2012 or Less Five Years Ten Years Ten Years Total Mortgage-backed securities $ -- $3,074 $179,980 $4,083,752 $4,266,806 U.S. Treasury securities 1,814,662 1,348, ,163,645 Commercial paper and other 2,908, ,908,402 Federal funds 756, ,328 Asset-backed securities ,532 6, , ,629 U.S. Agencies 116, , ,558 Total $5,596,698 $1,716,645 $186,318 $4,206,707 $11,706,368 Weighted average yield 0.7% 1.4% 0.8% 1.1% 0.9% 20

22 Year of Maturity One Year One to Five to More Than As of December 31, 2011 or Less Five Years Ten Years Ten Years Total Mortgage-backed securities $ -- $676 $237,934 $3,902,137 $4,140,747 U.S. Treasury securities 1,820,833 1,112, ,933,150 Commercial paper and other 2,123, ,123,383 Federal funds 299, ,976 Asset-backed securities -- 83,771 10, , ,873 U.S. Agencies 29, , ,418 Total $4,273,593 $1,428,781 $247,961 $4,038,212 $9,988,547 Weighted average yield 0.9% 1.7% 0.8% 1.1% 1.1% The expected average life is 2.3 years for asset-backed securities and 3.0 years for mortgage-backed securities at September 30, Expected maturities differ from contractual maturities because borrowers may have the right to prepay obligations. Affiliated Association Investment Securities Mission-related and other investments held by Associations consisted of the following held-to-maturity investments: Weighted Amortized Unrealized Unrealized Fair Average As of September 30, 2012 Cost Gains Losses Value Yield Government guaranteed instruments $2,024,065 $21,598 $35,304 $2,010, % Farmer Mac mortgage-backed securities 315,099 6, , % ARC bonds % Venture capital equity investment 2,635 * * * * Total $2,342,614 $27,957 $35,420 $2,332, % Weighted Amortized Unrealized Unrealized Fair Average As of December 31, 2011 Cost Gains Losses Value Yield Government guaranteed instruments $1,915,583 $19,195 $36,578 $1,898, % Farmer Mac mortgage-backed securities 340,181 7, , % ARC bonds 1, , % Investment notes in a trust of equipment loans 3, , % Venture capital equity investment 1,885 * * * * Total $2,262,747 $26,591 $36,773 $2,250, % * Not applicable due to the nature of the investment The mission-related and other investments portfolio is evaluated for other-than-temporary impairment. As a result of these evaluations, one Association recognized $14 thousand of impairment losses during the nine months ended September 30, 2012 on previously impaired securities. No securities were other-than-temporarily impaired during the same period in

23 NOTE 4 CAPITAL FCA's capital adequacy regulations require AgriBank and the Associations to maintain permanent capital of at least 7.0% of risk-adjusted assets. In addition, each System institution is required to maintain a total surplus to risk-adjusted assets ratio of at least 7.0% and a core surplus to risk-adjusted assets ratio of at least 3.5%. At September 30, 2012, AgriBank exceeded these requirements with a 20.9% permanent capital ratio, 17.4% total surplus ratio and 10.3% core surplus ratio. All District Associations exceeded the regulatory minimums at September 30, FCA regulations also require AgriBank to maintain a net collateral ratio of at least 103.0%. However, AgriBank is required by the regulator to maintain a higher minimum of 104.0% during the period in which AgriBank has subordinated notes outstanding. At September 30, 2012, AgriBank s net collateral ratio was 106.2%. NOTE 5 EMPLOYEE BENEFIT PLANS Net periodic benefit costs included the following components: Pension Other Pension Other For the nine months ended September 30, Benefits Benefits Benefits Benefits Components of net periodic benefit cost Service cost $19,520 $419 $18,067 $488 Interest cost 34,528 1,099 33,131 1,191 Expected return on plan assets (35,383) -- (35,789) -- Amortization of prior service cost (848) (521) (792) (468) Amortization of loss (gain) 23,528 (164) 20,275 (148) Net periodic benefit cost $41,345 $833 $34,892 $1,063 The District previously disclosed in our financial statements for the year ended December 31, 2011, that the District expected to contribute $36.0 million for pension benefits and $1.7 million for other postretirement benefits in As of September 30, 2012, the District expects to contribute $52.5 million for pension benefits and $1.5 million for other postretirement benefits in As of September 30, 2012, District employers have contributed $16.6 million to the pension plans. District employers anticipate contributing an additional $35.9 million to fund pension benefits in As of September 30, 2012, District employers have contributed $1.1 million for other postretirement benefits. District employers anticipate contributing an additional $0.4 million for other postretirement benefits in

24 NOTE 6 FAIR VALUE MEASUREMENTS Valuation Techniques FASB guidance on Fair Value Measurements defines fair value, establishes a framework for measuring fair value and requires disclosures for certain assets and liabilities measured at fair value on a recurring and non-recurring basis. These assets and liabilities primarily consist of investments available-for-sale, federal funds, derivative assets and liabilities, impaired loans, other property owned, and collateral liabilities. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Refer to Notes 2 and 15 of the 2011 Annual Report for a more complete description. The following represents a summary of the valuation techniques used to measure fair value on a recurring basis: Federal Funds The fair value of federal funds is generally their face value, plus accrued interest, as these instruments are highly liquid, readily convertible to cash and short-term in nature. Investments Available-for-Sale The fair value of substantially all of our investment securities are determined from third-party valuation services that estimate current market prices. Level 2 inputs and assumptions related to third-party market valuation services are typically observable in the marketplace. Such services incorporate repayment assumptions and underlying mortgage-backed or asset-backed collateral information to generate cash flows that are discounted using appropriate benchmark interest rate curves and volatilities including LIBOR, Treasury and other Index benchmarks. Third-party valuations also incorporate information regarding broker/dealer quotes, available trade information, historical cash flows, credit ratings and other market information. Such valuations represent an estimated exit price, or price to be received by a seller in active markets to sell the investment securities to a willing participant. Level 3 inputs are based on the relatively illiquid marketplace for some investments and the lack of marketplace information available for significant inputs and assumptions to the valuation process. The fair value measurements of these assets are based on multiple factors including information obtained from third-party valuation services using both Level 2 and Level 3 inputs. These inputs include volatilities, market spreads, default probabilities, loss severities, prepayment speeds and dealer quotes. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates. FASB guidance requires us to provide quantitative information about significant unobservable inputs used in the fair value measurement for recurring and non-recurring assets and liabilities within Level 3. However, a reporting entity is not required to create quantitative information if the unobservable inputs are not developed by the reporting entity. As the fair value is determined by third-party valuation services without adjustment by management, we have not reported this disclosure as those inputs are not reasonably available to us. The valuation process is described above. Derivative Assets and Liabilities The fair value of our derivative financial instruments is the estimated amount to be received to sell a derivative asset or paid to transfer a derivative liability in active markets among willing participants at the reporting date. Estimated fair values are determined through internal market valuation models. These models incorporate LIBOR swap curves, market volatilities and other inputs which are observable directly or indirectly in the marketplace. We compare internally calculated derivative valuations to broker/dealer quotes to substantiate the results. Cash Collateral Pledged by Counterparties The majority of derivative contracts are supported by bilateral collateral agreements with counterparties requiring the posting of cash or investment securities as collateral in the event certain dollar thresholds of credit exposure are reached. The market value of cash collateral pledged by counterparties is its face value that approximates fair value. Standby Letters of Credit Estimating the fair value of letters of credit is determined by the inherent credit loss in such instruments. 23

25 Assets and liabilities measured at fair value on a recurring basis are summarized below: Fair Value Measurement Using Total Fair As of September 30, 2012 Level 1 Level 2 Level 3 Value Assets: Federal funds $ -- $756,328 $ -- $756,328 Investments available-for-sale: Mortgage-backed securities -- 4,021, ,093 4,266,806 U.S. Treasury securities -- 3,163, ,163,645 Commercial paper and other -- 2,908, ,908,402 U.S. Agency securities , ,558 Asset-backed securities , , ,629 Total investments available-for-sale -- 10,575, ,386 10,950,040 Derivative assets -- 82, ,997 Total assets $ -- $11,414,979 $374,386 $11,789,365 Liabilities: Cash collateral pledged by counterparties $27,770 $ -- $ -- $27,770 Derivative liabilities -- 22, ,850 Standby letters of credit ,750 3,750 Total liabilities $27,770 $22,850 $3,750 $54,370 Total Fair As of December 31, 2011 Level 1 Level 2 Level 3 Value Assets: Federal funds $ -- $299,976 $ -- $299,976 Investments available-for-sale: Fair Value Measurement Using Mortgage-backed securities -- 3,887, ,741 4,140,747 U.S. Treasury securities -- 2,933, ,933,150 Commercial paper and other -- 2,123, ,123,383 U.S. Agency securities , ,418 Asset-backed securities -- 83, , ,873 Total investments available-for-sale -- 9,288, ,843 9,688,571 Derivative assets , ,444 Total assets $ -- $9,729,148 $399,843 $10,128,991 Liabilities: Cash collateral pledged by counterparties $103,120 $ -- $ -- $103,120 Derivative liabilities -- 17, ,466 Total liabilities $103,120 $17,466 $ -- $120,586 We did not have any assets or liabilities transfer between levels during the nine months ended September 30,

26 The table below represents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3): Level 3 Instruments Only (In thousands) Asset-backed Securities Mortgage-backed Securities Standby Letters of Credit Balance at December 31, 2011 $146,102 $253,741 $ -- Total gains or (losses) realized/unrealized: Included in earnings (5,244) (8,991) 3,750 Included in other comprehensive income 21,037 35, Settlements (32,602) (35,391) -- Transfers in and/or out of Level Balance at September 30, 2012 $129,293 $245,093 $3,750 Level 3 Instruments Only (In thousands) Asset-backed Securities Mortgage-backed Securities Standby Letters of Credit Balance at December 31, 2010 $224,648 $314,357 $ -- Total gains or (losses) realized/unrealized: Total Fair Value Measurement Investments Available-for-Sale Total Fair Value Measurement Investments Available-for-Sale Included in earnings (7,113) (5,254) -- Included in other comprehensive income 5,241 14, Settlements (16,747) (52,698) -- Transfers in and/or out of Level Balance at September 30, 2011 $206,029 $270,731 $ -- The following represents a summary of the valuation techniques used to measure fair value on a non-recurring basis: Loans Certain collateral dependent loans are measured at fair value on a non-recurring basis when they are evaluated for impairment under FASB guidance in which fair values are based upon the underlying collateral. Costs to sell represent transaction costs and are not included as a component of the fair value. Since the value of the collateral, less estimated costs to sell, was less than the principal balance of the loan, specific reserves were established for these loans. If the process uses independent appraisals and other market-based information, they fall under Level 2. If the process requires significant input based on management s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters, they fall under Level 3. Other Property Owned Other property owned is measured at fair value on a non-recurring basis when the fair value for other property owned is based upon the collateral fair value. Costs to sell represent transaction costs and are not included as a component of the fair value. If the process uses independent appraisals and other market-based information, they fall under Level 2. If the process requires significant input based on management s knowledge of and judgment about current market conditions, specific issues relating to the collateral and other matters, they fall under Level 3. Assets measured at fair value on a non-recurring basis are summarized below: Fair Value Measurement Using Total Fair Total As of September 30, 2012 Level 1 Level 2 Level 3 Value Losses Assets: Loans $ -- $90,470 $78,440 $168,910 $(40,128) Other property owned ,551 80,551 (17,410) Fair Value Measurement Using Total Fair Total As of December 31, 2011 Level 1 Level 2 Level 3 Value Gain (Losses) Assets: Loans $ -- $99,755 $139,407 $239,162 $19,336 Other property owned , ,790 (6,201) 25

27 NOTE 7 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES Use of Derivatives AgriBank maintains an overall interest rate risk management strategy that incorporates the use of derivative products to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. AgriBank s goals are to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that movements in interest rates do not adversely affect the net interest margin. As a result of interest rate fluctuations, hedged fixed-rate liabilities will appreciate or depreciate in market value. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by AgriBank s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of interest rate fluctuations is that the interest income and interest expense of hedged floating-rate liabilities will increase or decrease. The effect of this variability in earnings is expected to be substantially offset by AgriBank s gains and losses on the derivative instruments that are linked to these hedged assets and liabilities. AgriBank considers the use of derivatives to be a prudent method of managing interest rate sensitivity, as it prevents earnings from being exposed to undue risk posed by changes in interest rates. AgriBank enters into derivative transactions, particularly interest rate swaps, to lower funding costs, diversify sources of funding, alter interest rate exposures arising from mismatches between assets and liabilities or better manage liquidity. AgriBank may also enter into derivatives with District Associations as a service to enable them to transfer, modify or reduce their exposure to retail interest rate risk. AgriBank substantially offsets this risk by concurrently entering into offsetting agreements with non-system institutional counterparties. Interest rate swaps allow AgriBank to raise long-term borrowings at fixed-rates and swap them into floating-rates that are lower than those available to AgriBank if floating-rate borrowings were made directly. Under interest rate swap arrangements, AgriBank agrees with other parties to exchange, at specified intervals, payment streams calculated on a specified notional principal amount, with at least one stream based on a specified floating-rate index. AgriBank may purchase interest rate options, such as caps, in order to offset the impact of rising interest rates on AgriBank s floating-rate debt, and floors, in order to offset the impact of falling interest rates on related floating-rate assets. The primary types of derivative instruments used and the amount of activity during the period (in notional amount) are summarized in the following table: (in millions) Receive- Fixed Swaps Pay-Fixed and Amortizing Pay-Fixed Swaps Floating-for- Floating and Amortizing Floating-for- Floating Other Derivatives Total Balance at December 31, 2011 $4,750 $972 $2,250 $200 $8,172 Additions Maturities/amortization (450) (45) (500) (100) (1,095) Balance at September 30, 2012 $4,550 $1,077 $1,750 $100 $7,477 Pay-Fixed Floating-forand Floating and Amortizing Amortizing Receive- Pay-Fixed Floating-for- Other (in millions) Fixed Swaps Swaps Floating Derivatives Total Balance at December 31, 2010 $6,290 $832 $1,950 $371 $9,443 Additions Maturities/amortization (1,140) (78) -- (3) (1,221) Balance at September 30, 2011 $5,550 $854 $2,250 $368 $9,022 Other derivatives consist primarily of forward starting swaps, interest rate caps and swaptions. By using derivative products, AgriBank exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, AgriBank s credit risk will equal the fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes AgriBank, thus creating credit risk for AgriBank. When the fair value of the derivative contract is negative, AgriBank owes the counterparty and, therefore, AgriBank does not have credit risk to that counterparty. 26

28 To minimize the risk of credit losses, AgriBank only deals with non-customer counterparties that have an investment grade or better credit rating from a rating agency and also monitors the credit standing and levels of exposure to individual counterparties. AgriBank does not anticipate nonperformance by any of these counterparties. AgriBank typically enters into master agreements that contain netting provisions. These provisions allow AgriBank to require the net settlement of covered contracts with the same counterparty in the event of default by the counterparty on one or more contracts. Substantially all derivative contracts are supported by bilateral collateral agreements with counterparties requiring the posting of collateral in the event certain dollar thresholds of exposure of one party to the other are reached. These thresholds vary depending on the counterparty s current credit rating. At September 30, 2012, AgriBank s exposure to counterparties, net of collateral, was $48.0 million. At September 30, 2012, AgriBank held cash collateral of $27.8 million and securities of $38.7 million from counterparties. AgriBank s derivative activities are monitored by its Asset-Liability Management Committee (ALCO) as part of the Committee s oversight of AgriBank s asset/liability and treasury functions. AgriBank s ALCO is responsible for approving hedging strategies that are developed within limits established by the Bank s board of directors through AgriBank s analysis of data derived from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into AgriBank s overall interest rate risk-management strategies. Accounting for Derivatives Fair-Value Hedges: For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. AgriBank includes the gain or loss on the hedged items in the same line item (interest expense) as the offsetting loss or gain on the related interest rate swaps. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recorded in current period earnings in Miscellaneous income and other (losses) gains, net in the Combined Statements of Comprehensive Income. Cash Flow Hedges: For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings (interest expense) in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recorded in current period earnings in Miscellaneous income and other (losses) gains, net in the Combined Statements of Comprehensive Income. Derivatives not Designated as Hedges: For derivatives not designated as a hedging instrument, the related change in fair value is recorded in current period earnings in Miscellaneous income and other (losses) gains, net in the Combined Statements of Comprehensive Income. Financial Statement Impact of Derivatives The following table presents the gross fair value of derivative assets and derivative liabilities. The fair value of our derivative contracts are presented as Derivative assets and Derivative liabilities in the Combined Statements of Condition, and are presented net on the Combined Statements of Condition for counterparties with master netting agreements. September 30, 2012 December 31, 2011 Fair Value Fair Value Fair Value Fair Value Assets: Liabilities: Assets: Liabilities: Derivatives designated as hedging instruments: Receive-fixed swaps $173,045 $ -- $227,736 $ -- Pay-fixed and amortizing pay-fixed swaps , ,428 Floating-for-floating and amortizing floating-for-floating swaps -- 12, ,829 Total derivatives designated as hedging instruments 173, , , ,257 Derivatives not designated as hedging instruments: Receive-fixed swaps 1, Total derivatives not designated as hedging instruments 1, Credit valuation adjustments (306) -- Total derivatives $175,637 $115,490 $227,536 $104,558 The fair value of derivatives includes credit valuation adjustments (CVA). The CVA reflects credit risk of each derivative counterparty to which AgriBank has exposure, net of any collateral posted by the counterparty, and an adjustment for AgriBank s credit worthiness where the counterparty has exposure to AgriBank. The favorable CVA in 2012 is due to AgriBank s counterparties 27

29 exposure to AgriBank. The change in the CVA for the period is included in Miscellaneous income and other (losses) gains, net on the Combined Statements of Comprehensive Income. Fair-Value Hedges: AgriBank recorded $7.7 million of gains for the nine months ended September 30, 2012 compared to $5.3 million of losses for the same period in 2011 related to receive-fixed swaps which are designated as hedging instruments on the Combined Statements of Comprehensive Income. The gains and losses on the derivative instruments are recognized in Interest expense on the Combined Statements of Comprehensive Income. Cash Flow Hedges: The following table presents the amount of Other Comprehensive Income (OCI) recognized on derivatives. The gain (loss) on derivatives designated as hedges reclassified from accumulated other comprehensive income (AOCI) into income is included in Interest expense on the Combined Statements of Comprehensive Income. For the nine months ended September 30, 2012: Derivatives - Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) and Amount Excluded from Effectiveness Testing Pay-fixed and amortizing pay-fixed swaps $(10,169) $367 $17 Floating-for-floating and amortizing floating-for-floating swaps (395) Other derivative products -- (319) -- Total $(10,564) $48 $17 For the nine months ended September 30, 2011: Derivatives - Cash Flow Hedging Relationships Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) and Amount Excluded from Effectiveness Testing Pay-fixed and amortizing pay-fixed swaps $(83,372) $512 $79 Floating-for-floating and amortizing floating-for-floating swaps (7,307) 1, Other derivative products -- (1,170) -- Total $(90,679) $871 $79 Derivatives not Designated as Hedges: AgriBank recorded $12.6 million of losses for the nine months ended September 30, 2012 compared to $44 thousand of losses for the same period in 2011 related to receive-fixed swaps which are not designated as hedging instruments on the Combined Statements of Comprehensive Income. The gains and losses on the derivative instruments are recognized in Miscellaneous income and other (losses) gains, net on the Combined Statements of Comprehensive Income. The losses during the nine months ended September 30, 2012 primarily represent swaps AgriBank purchased from another Farm Credit Bank in October 2008 that became ineffective in March 2012 requiring that the market value of the swaps ($1.1 million at September 30, 2012) be recognized on a mark-to-market basis. These losses are partially offset by gains of $8.2 million recognized in Interest expense on the Combined Statements of Comprehensive Income representing the amortization of the fair value adjustment recorded on hedged debt for the period the hedge was deemed effective. With the discontinuance of hedge accounting the fair value adjustment is amortized to income over the remaining life of the hedged item using the effective interest method. NOTE 8 COMMITMENTS AND CONTINGENCIES In the normal course of business, we have various contingent liabilities and commitments outstanding, primarily commitments to extend credit, which may not be reflected in the accompanying consolidated financial statements. We do not anticipate any material losses because of these contingencies or commitments. District entities may, from time to time, be named as defendants in certain lawsuits or legal actions in the normal course of business. At the date of these financial statements, management was not aware of any such actions that would have a material impact on the entities financial condition. However, AgriBank and Association management cannot ensure that such actions or other contingencies will not arise in the future. 28

30 While AgriBank is primarily liable for its portion of Systemwide bonds and notes, AgriBank is jointly and severally liable for the Systemwide bonds and notes of the other Farm Credit System Banks. The total bonds and notes of the System at September 30, 2012 were $192.5 billion. NOTE 9 SUBSEQUENT EVENTS We have evaluated subsequent events through November 9, 2012, which is the date the financial statements were available to be issued. There have been no material subsequent events that would require recognition in our Combined Financial Statements or disclosure in the Notes to those Combined Financial Statements. NOTE 10 AGRIBANK ONLY DATA Statements of Condition September 30, December 31, Loans, net $66,150,767 $62,033,794 Other assets 12,546,258 11,076,218 Total assets $78,697,025 $73,110,012 Liabilities $74,531,188 $69,303,825 Members' equity 4,165,837 3,806,187 Total liabilities and members' equity $78,697,025 $73,110,012 Statements of Income For the nine months ended September 30, Interest income $1,060,781 $1,145,726 Interest expense 707, ,714 Net interest income 353, ,012 Provision for loan losses 6,400 15,200 Other, net 37,739 11,556 Net income $384,815 $338,368 Patronage $202,572 $179,090 Substantially all patronage is paid to the Associations and is eliminated in combination. 29

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32 AgriBank, FCB and Affiliated Associations 30 E. 7 th Street, Suite 1600 St. Paul, Minnesota (651) Visit us at