Southern Agriculture’s Current Financial

Situation

Alton K. McRee, President & CEOFederal Land Bank Association

of South Mississippi, FLCA

Farm Commercial Banks

Agricultural banking industry remains strong.

Farm Commercial Banks

• Agricultural credit continued its upward trend in 2001, expanding 4.8 percent

• Marking the ninth consecutive increase, total outstanding farm credit reached $192.8 billion in 2001

Farm Commercial Banks

Farm assets reached $1.02

trillion at the end of 2001.

Farm Commercial Banks

Commercial banks continue to be the largest holder of

agricultural loans, with the Farm Credit

System being the second largest holder.

Farm Commercial Banks

The interest rate reductions by the Federal reserve created a more

favorable borrowing environment for

agricultural producers in 2001.

Farm Commercial BanksAsset Quality

• Asset quality remained

favorable for farm banks in 2001.

• Ratio of non-performing loans to total loans increased slightly to 1.13 percent at farm banks, up from 0.96 percent in 2000.

Farm Commercial BanksLoan Losses

• Banks across the country

have increased loan loss reserves.

• Loan loss provisions represent close to 0.4 percent of total loan volume for farm banks.

• Net charge-offs were 0.9 percent of total loans at all commercial banks, up from 0.66 in December 2000.

Farm Commercial BanksDeposits and Capital

• Farm bank deposit liabilities increased 7.6 percent in 2001 to $164.5 billion

• The median farm bank equity capital-to-asset ratio was 10.06, slightly lower than the 10.48 percent in 2000.

Farm Commercial BanksEarnings

• Farm banks reported a net income of little more than $2 billion in 2001, virtually unchanged from the previous year.

• The median ratio for return on assets decreased slightly from 1.11 to 1.05 percent.

Farm Credit SystemStrong Financials – Few Signs of Stress

(June 30, 2002)

Gross loan volume was $86.2 billion, up 9.3 percent from a

year ago.

Farm Credit SystemMajor Financial Indicators

Annual Comparison

Source: FCS Reports to Investors – Quarterly Information Statements & Call Reports Received from

System Institutions

Total Farm Credit SystemAt and for 12 months ended 30-Jun-02 30-Jun-01 30-Jun-00

Gross Loan Volume $86.2 B $78.8 B $71.7 B

Farm Credit SystemStrong Financials – Few Signs of Stress

(June 30, 2002)

Non-performing loans were 1.24 percent of

gross loans, down from 1.28 percent a

year ago.

Farm Credit SystemStrong Financials – Few Signs of Stress

(June 30, 2002)

Accruing loans 90 or more days past due

remain very low at $112 million, 15 percent less

than a year ago, but more than double the level two years ago.

Farm Credit SystemMajor Financial Indicators

Annual Comparison

Source: FCS Reports to Investors – Quarterly Information Statements & Call Reports Received from

System Institutions

Total Farm Credit SystemAt and for 12 months ended 30-Jun-02 30-Jun-01 30-Jun-00

Accruing Restructured Loans $96 M $107 M $124 M

Accrual Loans 90 or More Days Past Due $112 M $132 M $50 M

Nonaccural Loans $859 M $771 M $879 M

Nonperforming Loans/Gross Loans 1.24% 1.28% 1.47%

Farm Credit SystemStrong Financials – Few Signs of Stress

(June 30, 2002)

Capital to asset ratio at 15.9 percent, up

from 16.52 percent a year ago.

Farm Credit SystemMajor Financial Indicators

Annual Comparison

Source: FCS Reports to Investors – Quarterly Information Statements & Call Reports Received from

System Institutions

Total Farm Credit SystemAt and for 12 months ended 30-Jun-02 30-Jun-01 30-Jun-00

Capital/Assets 15.93% 15.62% 15.45%

Surplus/Assets 12.50% 12.03% 11.89%

Farm Credit SystemStrong Financials – Few Signs of Stress

(June 30, 2002)

Net income for first six months of 2002

was $934 million, up 8.1 percent from first

6 months of 2001.

Farm Credit SystemMajor Financial Indicators

Annual Comparison

Source: FCS Reports to Investors – Quarterly Information Statements & Call Reports Received from

System Institutions

Total Farm Credit SystemAt and for 12 months ended 30-Jun-02 30-Jun-01 30-Jun-00

Net Income $934 M $864 M $660 M

Return on Assets 1.81% 1.81% 1.51%

Return on Equity 11.44% 11.66% 9.79%

Net Interest Margin 2.75% 2.81% 2.74%

Interest Rates

Rates are low– Rates at lowest levels in over 40 years

• Overnight rate

• 10 Year Treasury

– Home Mortgage rates• 6.22% - August average

• 6.05% - week of September 19th

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Interest Rate Outlook – little change

• Comments by Fed Governors seem to indicate no change in policy

– The current policy is “very accommodative and it is intentionally that way to help the economy move forward and expand more rapidly” - Chicago Federal Reserve Bank President Michael Moskow (9/9/02)

– ”Given what we know now about economic conditions, an accommodative stance seems appropriate to me” - San Francisco Federal Reserve President Robert Parry (9/12/02)

– “Doesn't sound to us like a signal he's changed his mind on the appropriateness of the current level of interest rates” - comment on 9/12/02 Congressional Testimony by Alan Greenspan

Interest Rate Outlook – little change

• Federal Reserve OMC Meeting – 9/24/02– Next meetings 11/6 and 12/10

• Bloomberg survey of Bond Dealers (9/20/02)– 9 predict no change before March 2003– 4 predict increase in March 2003

Economic Outlook

“The road to recovery is turning out to be bumpy” Chicago Federal Reserve Bank President Michael Moskow

• 1.1% growth in 2nd quarter

• Blue Chip Economic Indicators survey– 2.7% in 3rd quarter– 2.9% in 4th quarter

• Treasury Secretary Paul O-Neill– 3% to 3.5% pace by yearend

Economic Outlook

• Economic news continues to be Good News/Bad News– 0.8% increase in retail sales in August– 2.2% decrease in new home construction in August

• Decrease in Midwest

• Growth in South

– Jobless rate dropped to 5.7% in August– Initial jobless claims remained above 400,000

• Indicating a slowing job market

– Decrease in trade deficit– Decrease in factory orders

Economic Outlook

• “Statistics on the economy have been generally pretty good.”

– Merrill Lynch senior economist

• “The economy broadly looks like it’s moving ahead.”

– JP Morgan Chase senior US economist

Conclusion

• Relatively low inflation and interest rates should help keep the farm sector strong.

• Government payments will again play an important part on the ability of farmers to pay down their existing debt and maintain a strong balance sheet.

• Rising farm-land prices and cautious borrowing helped keep farm balance sheets sound in 2001.

• Weak export demand and low commodity prices are likely to persist in 2002.