and personal by wulinqing

VIEWS: 10 PAGES: 56

									                  2009 Annual Report




We’re keepin’ it rural
         and personal
    Table of Contents
    We’re Keepin’ It Rura
                              l and Personal - - - - -
                                                       ------------           ---------
    AgSouth’s Pledge to                                                                           4
                             Our Members - - - - -
                                                             -----------------
                                                                                    -----         5
   A Message from our
                             CEO - - - - - - - - - - - - -
                                                           ----   -----------------
   Board of Directors an                                                                         6
                              d Senior Managemen
                                                              t ---------------
                                                                                --        --   7
   Reasons to Borrow fro
                              m AgSouth - - - - - - - -
                                                              -----------------
   Members Only - - - - -                                                                ---   8
                             -----------------
                                                             -----------------
                                                                                    ----       9
  AgSouth’s Patronage
                             Program - - - - - - - - -
                                                       --      -----------------
  Consolidated Five-Yea                                                                  - - 10
                            r Summar y of Selected
                                                               Financial Data- - - - -
  Report of Managem                                                                      - - 11
                          ent - - - - - - - - - - - - - -
                                                            -----------------
                                                                                  - - - - - 12
 Report on Internal Co
                            ntrol Over Financial
                                                   Reporting - - - - - - - -
                                                                              - - - - - 13
 Management’s Discus
                         sion & Analysis of Fin
 & Results of Operation                              ancial Condition
                         s ---------------
                                                    -----------------
 Disclosure Required                                                              - - - 14
                      by Farm Credit Adm
                                                inistration Regulation
                                                                             s - - - 29
Report of the Audit Co
                        mmittee - - - - - - - - - -
                                                    -----------------
Report of Independe                                                              - - - 35
                      nt Auditors - - - - - - -
                                                -----------------
                                                                            - - - - - 36
Consolidated Financia
                       l Statements - - - - -
                                                 -----------------
                                                                              - - - - 37
Notes to the Consoli
                     dated Financial Stat
                                              ements - - - - - - - - - -
                                                                         - - - - - - 41




                    Congratulations
                      to all of the winners in our
                   “Keepin’ It Rural” photo contest.

        Your photos went up alongside photos from other Farm
         Credit associations to help us celebrate agriculture—
            the fun and the work—at the Sunbelt Ag Expo.
4



    We’re Keepin’ It Rural
                                                  and personal!
    Our association was created nearly a century ago as a means of providing farmers with financing options
    to coincide with the planting and harvesting of their crops. The Federal Land Bank and Production Credit
    Associations were formed as a result. Through mergers the names have changed, but farmers and rural
    America continue to turn to Farm Credit as a reliable source of credit for farms, homes and land.

    AgSouth Farm Credit is proud to be a lending institution that supports rural America, and we’re proud of our
    long heritage. We hope you’ll join us in our commitment to keep your cooperative strong and successful by
    sharing our story with your friends and neighbors, just like the members featured here. Thank you for your
    patronage during 2009.

    We look forward to serving you in the years to come.



           We tell anyone who is looking for a home with acreage to call Phil Long.
        He’s professional, knowledgeable and an easy guy to work with. When it
        comes to financing a home with land, you just can’t beat AgSouth.

        – Lisa Gosnell




                                                          AgSouth Mortgages customer Lisa Gosnell
                                                          and AgSouth Mortgages Originator Phil Long
                                                                                                                      5



AgSouth’s Pledge
to Our Members                                                            ... I can call Dan Good, tell him what
                                                                      I need, and because he knows our business,
                                                                      we don’t have to wait days or weeks for an
AgSouth pledges to continue to provide the
                                                                      answer. With Dan, I usually have my answer
personal service you have become accustomed to
                                                                      within a few hours. A business relationship
as a member of our association. Our loan officers
                                                                      just doesn’t get any better than that.
and staff know agriculture and the intricacies of
agricultural finance, and no one does it better!                                                     – Connie Horner


We also know that farming is not an 8-to-5 job.
That’s why our loan officers are often out on the
road, meeting with our customers at your farms
and in your offices. Sure, we have office hours,
but when you can’t come see us, we’ll go out of
our way to meet you at your convenience. We
are committed to preserving rural America and
helping the people who serve it, and superior
customer service is part of our pledge to you.




                                                           AgSouth Farm Credit Loan Officer Dan Good
                                                           with AgSouth member Connie Horner




                                                  We’ve been members since 1976 and started getting our
                                            crop insurance through AgSouth the year they began the crop
                                            insurance patronage program. The crop insurance agents give
                                            good service, are in tune with agriculture and its changing
                                            climate and know our needs. They’re good people.
AgSouth Farm Credit Crop Insurance Agent
Sam Perry with AgSouth members Bobby                                                         – Robert Riley
and Robert Riley
6



                                  A Message from our CEO
                                   Last year I referred to 2008 as the year of the “meltdown.” The spark that ignited all the
                                   trouble was securitization of residential home loans and the belief that residential real
                                   estate values would always increase. This idea proved to be false and ignited a wildfire
                                   that threatened to consume investment banking, commercial banking and the general
                                   economy. Government and the Federal Reserve put out the fire with trillions of dollars
                                   in investments, bailouts and stimulus. I believe we can say the wildfire is out, but I fear
                                   we may be dealing with the hot spots that are left over for years to come. Housing
    seems to have stabilized at low levels, but many foreclosures have just been delayed. The consumer has pulled back
    trying to repair household net worth by saving and reducing spending. Many of the nation’s largest banks remain
    weak, and some community and regional banks have been mortally wounded. The primary areas of weakness have
    moved from residential lending to the general economy to commercial transactions. As the government has spent
    trillions of dollars, they have essentially kicked the can of banking problems down the road hoping the economy
    will improve.

    I am pleased to report that AgSouth continued to earn significant profits in 2009. We, too, have not been fully
    immune from the downturn in the general economy as our earnings were impacted by the need to add to our
    allowances for loan losses and absorb losses on other property owned. So, while earnings are less than we would
    like them to be, they are sufficient to allow us to pay a significant patronage back to our customers and continue to
    revolve your allocated surplus on a five-year cycle.

    Three factors allowed us to escape many of the issues affecting other financial institutions. The first is you, our
    customers. The vast majority of our customers have continued to make their payments timely. Second, our
    employees have done proper analysis of credit requests allowing us to avoid some costly mistakes. Finally, your
    board provided direction to stay conservative in our practices and stay focused on our mission. Our long-term
    strategic mission is to serve agriculture and the rural areas of our chartered territory and return a large portion of
    our earnings back to you, our stockholders.

    While I would like to close the books on 2009 and say I am glad it is over, we need to stay vigilant and prepare for an
    uncertain future. We need to continue to look for ways to strengthen your cooperative so that AgSouth will be here
    well into the future to meet your lending needs. This year is sure to bring many new and continuing challenges as
    we continue to deal with the aftermath of 2008 and 2009. Your Board and management are committed to prepare
    your association to meet the challenges, prepare for our future, and to reward our customers financially for doing
    business with their cooperative.



    William P. Spigener Jr.
    Chief Executive Officer
                                                                                                                                              7



Rural America’s Lender of Choice for
Ag, Land and Home Loans
AgSouth’s board of directors and management are committed to operating your cooperative in a safe and sound manner in
order to remain strong and continue paying patronage. Our board and management have the knowledge and expertise to lead
your association as agriculture and the world continue to change. It is our leaders’ commitment to safely grow the association
that has made AgSouth rural America’s lender of choice for agriculture, real estate and home loans in our territory.


AgSouth’s Board of Directors




 Seated from the left: David H. Womack, Diane H. Edwins, Gary L. Alexander. Second Row–from the left: Loy D. Cowart, Harry S. Bell,
 Eugene W. Merritt Jr., Charles C. Rucks, Vice Chairman A. Harvey Lemmon, John R. Wells, Arthur Q. Black, Hugh E. Weathers, Jimmy B. Metts,
 Chairman Thomas H. Coward, Raymond L. Tumbleston, Jerome G. Parker, Jimmy C. Carter Jr., and Lee H. DeLoach




                                                                                      AgSouth’s Senior Management
                                                                                      From the left:
                                                                                      Van McCall, Alisa Gunter, Craig Peebles, William P.
                                                                                      Spigener Jr. (seated), Rick Moore, Ronald Summers,
                                                                                      Theron Anderson, and Owen Smith
8



    There are Many Reasons to Borrow
    from AgSouth
    Why Go Anywhere Else for Your Financing Needs?

    Dependability – We’ve been financing agriculture and              Flexible Terms – Our loan programs are tailored to
    rural America for nearly a century, and we plan to be here for   meet your individual needs, so payments are due when your
    generations to come.                                             income stream comes in, whether that’s monthly, quarterly
                                                                     or annually.
    Knowledge – Our loan officers know agriculture and
    they know agricultural finance. You won’t find another lender      Loans that Pay You – With an average patronage
    who knows more about your business than AgSouth.                 payout over the past five years of 20 percent of interest
                                                                     earned, it pays to do business with AgSouth!
    Superior Customer Service – If you can’t come
    to us, we’ll meet you at a time and place convenient to you,     Tools for Your Success – Programs like
    even if it means coming out to your farm or office.                AccountAccess, LoanLine and AutoDraft make it easy for you
                                                                     to get the funds you need when you need them. You can also
    Local Decisions – We make our loan decisions locally             check your account information and make payments any
    so you get the benefit of financial backing from a nationwide,     time, whether we’re open or not.
    long-standing system of agricultural banks with loan
    decisions made by people you know and trust.                     Additional Services – AgSouth also has other
                                                                     programs to help make your operation a success with life
    Competitive Rates – Farm Credit was created to be                insurance, crop insurance and leasing options.
    a dependable source for agriculture and rural financing, and
    our rates are some of the most competitive around.




                                                                                                      Sammy Fogle knows
                                                                                                  my business and his. It’s a
                                                                                                  pleasure doing business with
                                                                                                  someone who understands
                                                                                                  you and your needs.

                                                                                                             – Moss Perrow Jr.



                                                                                                 AgSouth member Moss Perrow Jr.
                                                                                                 with AgSouth Regional Vice President
                                                                                                 Sammy Fogle
                                                                                                                             9



AgSouth’s Special Products for
Members Only
LoanLine                                     AutoDraft                              FastCash
1-877-562-6546                               AutoDraft automatically deducts        Use FastCash to withdraw funds
AccountAccess                                payments from your checking or         from your line of credit with a simple
www.agsouthfc.com                            savings account whether they’re        phone call to your local office or
As an AgSouth member you can get             due monthly, quarterly or annually,    through www.agsouthfc.com under
current account information, check           helping protect your credit by         AccountAccess. We’ll electronically
your account history and even make           making sure your payments are          transfer funds from your line of
payments 24 hours a day, 7 days a            made on time. You can also make        credit to your checking or savings
week, through AccountAccess. New             special principal payments             account FREE!
changes allow you to download and            with AutoDraft.
print your loan activity statement
and tax information, 1098 and 1099.




           Leasing makes it easier
       to manage my cash flow, and
       Christian was so easy to work
       with. He was able to show me
       how leasing could help me better
       manage my operation.

                          – Lane Wade


      AgSouth Leasing Specialist Christian
      Taylor with AgSouth Members Lane
      and Sharon Wade




Loans for Agriculture:                       Loans for Real Estate:                Loans for Homes:
• Equipment                                  • Large Acreage                       • Home Purchases
• Farm Improvements                          • Residential Lots                    • Home Construction
• Operating Expenses                         • Timberland                          • Home Improvements
• Barns
                                                                                   • Refinances
• Fencing
• Vehicles
• Livestock
• Personal Expenses
10



     AgSouth’s Patronage Program
     As a cooperative, we return a portion of our profits to our members. Since 1991, AgSouth has distributed more than $343
     million to members through the patronage program, including more than $247 million in cash. In March of 2010, AgSouth
     estimates another significant return of interest earned to our members for patronage earned in 2009, and in April of 2010,
     an allocated surplus revolvement of nearly $15 million for the year ending December 31, 2004. This allocated surplus
     return is in keeping with the board’s current policy of returning allocated surplus on a five-year revolvement schedule.

     As an AgSouth Farm Credit member, you have averaged a 20 percent return on interest paid to the association in the past
     five years. That means that for every dollar you paid in interest, the association returned twenty cents back to you in the
     form of patronage! At AgSouth, we don’t send our profits to Wall Street. We send them to YOUR street!




                AgSouth really understands my business, so my payments are due when my money
            comes in. When you factor in patronage, they offer a loan package that just can’t be beat.
            When they say that it pays to do business with AgSouth, they really mean it.
             – Wayne, Dale and James Tatum




                                                                                                  AgSouth members Brad and Wayne Tatum,
                                                                                                  AgSouth Loan Officer Allen Daily
                                                        AgSouth Farm Credit, ACA                                                                 11

    Consolidated Five - Year Summary of Selected
                    AgSouth Farm Credit, ACA


                   Financial Summary of
    Consolidated Five - Year Data
Consolidated Five-YearSummary of Selected
                   Financial Data December 31,
Selected Financial Data
(dollars in thousands)                                         2009             2008           2007                 2006             2005
                                                                                            December 31,
(dollars Sheet Data
Balancein thousands)                                           2009             2008           2007                 2006             2005
Cash                                                       $     4,119     $       2,772    $     4,429        $       2,116    $       6,204
Investment securities
Balance Sheet Data                                               4,583                —              —                    —                —
Loans
Cash                                                       $ 1,503,794
                                                                 4,119     $   1,445,201
                                                                                   2,772    $ 1,323,840
                                                                                                  4,429        $   1,281,398
                                                                                                                       2,116    $   1,156,110
                                                                                                                                        6,204
 Less: allowance for
Investment securities loan losses                                9,497
                                                                 4,583             4,467
                                                                                      —           3,970
                                                                                                     —                 3,806
                                                                                                                          —             3,808
                                                                                                                                           —
 Net loans
Loans                                                        1,494,297
                                                             1,503,794         1,440,734
                                                                               1,445,201      1,319,870
                                                                                              1,323,840            1,277,592
                                                                                                                   1,281,398        1,152,302
                                                                                                                                    1,156,110
 Less: allowance for Farmlosses institutions
Investments in other loan Credit                                 9,497
                                                                24,658             4,467
                                                                                  23,316          3,970
                                                                                                 21,790                3,806
                                                                                                                      19,832            3,808
                                                                                                                                       15,538
 Net property owned
Otherloans                                                       3,489
                                                             1,494,297               216
                                                                               1,440,734             40
                                                                                              1,319,870                  536
                                                                                                                   1,277,592              874
                                                                                                                                    1,152,302
Other assets in other Farm Credit institutions
Investments                                                     63,002
                                                                24,658            59,752
                                                                                  23,316         57,360
                                                                                                 21,790               55,329
                                                                                                                      19,832           53,835
                                                                                                                                       15,538
       Total assets
Other property owned                                       $ 1,594,148
                                                                 3,489     $   1,526,790
                                                                                     216    $ 1,403,489
                                                                                                     40        $   1,355,405
                                                                                                                         536    $   1,228,753
                                                                                                                                          874
Other assets to AgFirst Farm Credit Bank*
Notes payable                                                   63,002
                                                           $ 1,323,237     $      59,752
                                                                               1,262,811         57,360
                                                                                            $ 1,149,999        $      55,329
                                                                                                                   1,114,330    $      53,835
                                                                                                                                      997,536
       Total assets
Accrued interest payable and other liabilities             $ 1,594,148     $   1,526,790    $ 1,403,489        $   1,355,405    $   1,228,753
  with payable to AgFirstthan one year Bank*
Notes maturities of less Farm Credit                            36,078
                                                           $ 1,323,237     $      35,590
                                                                               1,262,811         37,243
                                                                                            $ 1,149,999        $      34,762
                                                                                                                   1,114,330    $      32,853
                                                                                                                                      997,536
Accrued interest payable and other liabilities
       Total liabilities                                     1,359,315         1,298,401      1,187,242            1,149,092        1,030,389
  with maturities of stockthan one year
Protected borrower less                                         36,078
                                                                   208            35,590
                                                                                     335         37,243
                                                                                                    457               34,762
                                                                                                                         608           32,853
                                                                                                                                          910
        stock and participation certificates
CapitalTotal liabilities                                         6,277
                                                             1,359,315             6,270
                                                                               1,298,401          6,176
                                                                                              1,187,242                6,021
                                                                                                                   1,149,092            5,923
                                                                                                                                    1,030,389
Retained earnings stock
Protected borrower                                                 208               335            457                  608              910
  Allocated
Capital stock and participation certificates                   111,658
                                                                 6,277           109,795
                                                                                   6,270        102,123
                                                                                                  6,176               92,430
                                                                                                                       6,021           86,063
                                                                                                                                        5,923
  Unallocated
Retained earnings                                              116,982           112,202        107,688              107,254          105,468
Accumulated other comprehensive income (loss)
  Allocated                                                       (292)
                                                               111,658              (213)
                                                                                 109,795           (197)
                                                                                                102,123                   —
                                                                                                                      92,430               —
                                                                                                                                       86,063
       Total members' equity
  Unallocated                                                  234 833
                                                               234,833
                                                               116,982           228,389
                                                                                 228 389
                                                                                 112,202        216,247
                                                                                                216 247
                                                                                                107,688              206,313
                                                                                                                     206 313
                                                                                                                     107,254          198,364
                                                                                                                                      198 364
                                                                                                                                      105,468
       Total liabilities and members' equity
Accumulated other comprehensive income (loss)              $ 1,594,148
                                                                  (292)    $   1,526,790
                                                                                    (213)   $ 1,403,489
                                                                                                   (197)       $   1,355,405
                                                                                                                          —     $   1,228,753
                                                                                                                                           —
       Total Income equity
Statement ofmembers'Data                                       234 833
                                                               234,833           228,389
                                                                                 228 389        216 247
                                                                                                216,247              206 313
                                                                                                                     206,313          198,364
                                                                                                                                      198 364
       Total liabilities
Net interest income and members' equity                    $ 1,594,148
                                                                48,753     $   1,526,790
                                                                                  46,367    $ 1,403,489
                                                                                                 43,425        $   1,355,405
                                                                                                                      41,391    $   1,228,753
                                                                                                                                       40,454
Statement of Income of allowance for) loan losses
Provision for (reversal Data                                     5,654               750             —                    —               347
Noninterest income
Net interest income (expense), net                         $ (16,914)
                                                                48,753     $     (11,762)
                                                                                  46,367    $    (9,137)
                                                                                                 43,425        $     (10,211)
                                                                                                                      41,391    $      (9,445)
                                                                                                                                       40,454
Provision for (reversal of allowance for) loan losses
       Net income                                                5,654
                                                           $ 26,185        $         750
                                                                                  33,855    $        —
                                                                                                 34,288        $          —
                                                                                                                      31,180    $         347
                                                                                                                                       30,662
Noninterest income (expense), net
Key Financial Ratios                                           (16,914)          (11,762)        (9,137)             (10,211)          (9,445)
Rate ofNet income
        return on average:                                 $ 26,185        $      33,855    $    34,288        $      31,180    $      30,662
 Total assets
Key Financial Ratios                                             1.70%             2.29%          2.51%                2.45%            2.52%
 Total return on average:
Rate ofmembers' equity                                          11.16%            15.06%         16.20%               15.41%           15.98%
Net interest income as a percentage of
 Total assets                                                    1.70%             2.29%          2.51%                2.45%            2.52%
 average earning assets
 Total members' equity                                           3.36%
                                                                11.16%             3.30%
                                                                                  15.06%          3.35%
                                                                                                 16.20%                3.42%
                                                                                                                      15.41%            3.51%
                                                                                                                                       15.98%
Net (chargeoffs) recoveries to average loans
Net interest income as a percentage of                        (0.043)%          (0.018)%         0.013%                   —          (0.048)%
Total members' equity to total assets
 average earning assets                                         14.73%
                                                                 3.36%            14.96%
                                                                                   3.30%         15.41%
                                                                                                  3.35%               15.22%
                                                                                                                       3.42%           16.14%
                                                                                                                                        3.51%
Debt to members' equity (:1)
Net (chargeoffs) recoveries to average loans                      5.79
                                                              (0.043)%              5.69
                                                                                (0.018)%           5.49
                                                                                                 0.013%                 5.57
                                                                                                                          —              5.19
                                                                                                                                     (0.048)%
Total members' equity to to loans
Allowance for loan lossestotal assets                            0.63%
                                                                14.73%             0.31%
                                                                                  14.96%          0.30%
                                                                                                 15.41%                0.30%
                                                                                                                      15.22%            0.33%
                                                                                                                                       16.14%
Permanent capital ratio
Debt to members' equity (:1)                                    14.55%
                                                                  5.79            14.78%
                                                                                    5.69         15.52%
                                                                                                   5.49               15.94%
                                                                                                                        5.57           16.81%
                                                                                                                                         5.19
Total surplus ratio losses to loans
Allowance for loan                                              14.12%
                                                                 0.63%            14.33%
                                                                                   0.31%         15.03%
                                                                                                  0.30%               15.56%
                                                                                                                       0.30%           16.31%
                                                                                                                                        0.33%
Core surplus ratio ratio
Permanent capital                                               10.35%
                                                                14.55%            10.88%
                                                                                  14.78%         11.81%
                                                                                                 15.52%               12.15%
                                                                                                                      15.94%           12.71%
                                                                                                                                       16.81%
Total surplusDistribution
Net Income ratio                                                14.12%            14.33%         15.03%               15.56%           16.31%
Estimated patronage
Core surplus ratio refunds:                                     10.35%            10.88%         11.81%               12.15%           12.71%
 Cash
Net Income Distribution                                    $     7,247     $       9,697    $     9,751        $       8,284    $       7,560
 Qualified allocated refunds:
Estimated patronage retained earnings                              934               838          1,145                  455               —
 Nonqualified allocated retained earnings
 Cash                                                      $    13,851
                                                                 7,247     $      18,555
                                                                                   9,697    $    21,608
                                                                                                  9,751        $      18,874
                                                                                                                       8,284    $      17,640
                                                                                                                                        7,560
 Qualified allocated retained earnings                             934               838          1,145                  455               —
 Nonqualified allocated retained earnings                       13,851            18,555         21,608               18,874           17,640

* General financing agreement is renewable on three-year cycles. The next renewal date is December 31, 2011.

* General financing agreement is renewable on three-year cycles. The next renewal date is December 31, 2011.
12



     Report of Management
                                                  Report of Management
     The accompanying Consolidated Financial Statements and                  The Consolidated Financial Statements have been examined by
     related financial information appearing throughout this annual          independent public auditors, whose report appears elsewhere in
     report have been prepared by management of AgSouth Farm                 this annual report. The Association is also subject to
     Credit, ACA (Association) in accordance with generally accepted         examination by the Farm Credit Administration.
     accounting principles appropriate in the circumstances. Amounts
     which must be based on estimates represent the best estimates           The Consolidated Financial Statements, in the opinion of
     and judgments of management. Management is responsible for              management, fairly present the financial condition of the
     the integrity, objectivity, consistency, and fair presentation of the   Association. The undersigned certify that we have reviewed the
     Consolidated Financial Statements and financial information             2009 Annual Report of AgSouth Farm Credit, ACA, that the
     contained in this report.                                               report has been prepared under the oversight of the audit
                                                                             committee of the Board of Directors and in accordance with all
     Management maintains and depends upon an internal accounting            applicable statutory or regulatory requirements, and that the
     control system designed to provide reasonable assurance that            information contained herein is true, accurate, and complete to
     transactions are properly authorized and recorded, that the             the best of our knowledge and belief.
     financial records are reliable as the basis for the preparation of
     all financial statements, and that the assets of the Association are
     safeguarded. The design and implementation of all systems of
     internal control are based on judgments required to evaluate the
     costs of controls in relation to the expected benefits and to           Thomas H. Coward
     determine the appropriate balance between these costs and               Chairman of the Board
     benefits. The Association maintains an internal audit program to
     monitor compliance with the systems of internal accounting
     control. Audits of the accounting records, accounting systems
     and internal controls are performed and internal audit reports,         William P. Spigener, Jr.
     including appropriate recommendations for improvement, are              Chief Executive Officer
     submitted to the Board of Directors.


                                                                             Alisa D. Gunter
                                                                             Chief Financial Officer


                                                                             March 12, 2010
                                                                                                                                           13



Report on Internal Control Over
    Report Reporting
Financialon Internal Control Over Financial Reporting
 The Association’s principal executives and principal financial        The Association’s management has completed an assessment of
 officers, or persons performing similar functions, are responsible    the effectiveness of internal control over financial reporting as
 for establishing and maintaining adequate internal control over       of December 31, 2009. In making the assessment, management
 financial reporting for the Association’s Consolidated Financial      used the framework in Internal Control — Integrated
 Statements. For purposes of this report, “internal control over       Framework, promulgated by the Committee of Sponsoring
 financial reporting” is defined as a process designed by, or under    Organizations of the Treadway Commission, commonly referred
 the supervision of the Association’s principal executives and         to as the “COSO” criteria.
 principal financial officers, or persons performing similar
 functions, and effected by its Board of Directors, management         Based on the assessment performed, the Association concluded
 and other personnel, to provide reasonable assurance regarding        that as of December 31, 2009, the internal control over financial
 the reliability of financial reporting information and the            reporting was effective based upon the COSO criteria.
 preparation of the Consolidated Financial Statements for external     Additionally, based on this assessment, the Association
 purposes in accordance with accounting principles generally           determined that there were no material weaknesses in the
 accepted in the United States of America and includes those           internal control over financial reporting as of December 31,
 policies and procedures that: (1) pertain to the maintenance of       2009.
 records that in reasonable detail accurately and fairly reflect the
 transactions and dispositions of the assets of the Association,
 (2) provide reasonable assurance that transactions are recorded as
 necessary to permit preparation of financial information in
 accordance with accounting principles generally accepted in the
 United States of America, and that receipts and expenditures are      William P. Spigener, Jr.
 being made only in accordance with authorizations of                  Chief Executive Officer
 management and directors of the Association, and (3) provide
 reasonable assurance regarding prevention or timely detection of
 unauthorized acquisition, use or disposition of the Association’s
 assets that could have a material effect on its Consolidated          Alisa D. Gunter
 Financial Statements.                                                 Chief Financial Officer




                                                                       March 12, 2010
14



     Management’s Discussion & Analysis of
            Management’s & Results of Operations
     Financial ConditionDiscussion & Analysis
               of Financial Condition & Results of Operations
     dollars in thousands, except as noted

                                                       (dollars in thousands, except as noted)


      GENERAL OVERVIEW                                                        extension 237, or writing Alisa D. Gunter, CFO, P.O. BOX
                                                                              4966, Spartanburg, SC 29305. The Association prepares an
      The following commentary summarizes the financial condition             electronic version of the Annual Report, which is available on
      and results of operations of AgSouth Farm Credit, ACA,                  the website, within 75 days after the end of the fiscal year and
      (Association) for the year ended December 31, 2009 with                 distributes the Annual Reports to shareholders within 90 days
      comparisons to the years ended December 31, 2008 and                    after the end of the fiscal year. The Association prepares an
      December 31, 2007. This information should be read in                   electronic version of the Quarterly report, which is available on
      conjunction with the Consolidated Financial Statements, Notes to        the internet, within 40 days after the end of each fiscal quarter,
      the Consolidated Financial Statements and other sections in this        except that no report needs to be prepared for the fiscal quarter
      Annual Report. The accompanying Consolidated Financial                  that coincides with the end of the fiscal year of the Association.
      Statements were prepared under the oversight of the Audit
      Committee of the Board of Directors. For a list of the Audit
      Committee members, refer to the “Report of the Audit                    FORWARD LOOKING INFORMATION
      Committee” reflected in this Annual Report. Information in any
      part of this Annual Report may be incorporated by reference in          This annual information statement contains forward-looking
      answer or partial answer to any other item of the Annual Report.        statements. These statements are not guarantees of future
                                                                              performance and involve certain risks, uncertainties and
      The Association is an institution of the Farm Credit System             assumptions that are difficult to predict. Words such as
      (System), which was created by Congress in 1916 and has served          “anticipates,” “believes,” “could,” “estimates,” “may,” “should,”
      agricultural producers for over 90 years. The System’s mission          “will,” or other variations of these terms are intended to identify
      is to maintain and improve the income and well-being of                 the forward-looking statements. These statements are based on
      American farmers, ranchers, and producers or harvesters of              assumptions and analyses made in light of experience and other
      aquatic products and farm-related businesses. The System is the         historical trends, current conditions, and expected future
      largest agricultural lending organization in the United States.         developments. However, actual results and developments may
      The System is regulated by the Farm Credit Administration,              differ materially from our expectations and predictions due to a
      (FCA), which is an independent safety and soundness regulator.          number of risks and uncertainties, many of which are beyond
                                                                              our control. These risks and uncertainties include, but are not
      The Association is a cooperative, which is owned by the                 limited to:
      members (also referred to throughout this Annual Report as
      stockholders or shareholders) served. The territory of the                       •   political, legal, regulatory and economic conditions
      Association extends across a diverse agricultural region of                          and developments in the United States and abroad;
      Georgia and South Carolina. Refer to Note 1, “Organization and
      Operations,” of the Notes to the Consolidated Financial                          •   economic fluctuations in the agricultural, rural
      Statements for counties in the Association’s territory. The                          utility, international, and farm-related business
      Association provides credit to farmers, ranchers, rural residents,                   sectors;
      and agribusinesses. Our success begins with our extensive
      agricultural experience and knowledge of the market.                             •   weather-related, disease, and other adverse climatic
                                                                                           or biological conditions that periodically occur that
      The Association obtains funding from AgFirst Farm Credit Bank                        impact agricultural productivity and income;
      (AgFirst or Bank). The Association is materially affected and
      shareholder investment in the Association could be affected by                   •   changes in United States government support of the
      the financial condition and results of operations of the Bank.                       agricultural industry and the Farm Credit System, as
      Copies of the Bank’s Annual and Quarterly Reports are on the                         a government-sponsored enterprise, as well as
      AgFirst website, www.agfirst.com, or may be obtained at no                           investor and rating-agency reactions to events
      charge by calling 1-800-845-1745, extension 378, or writing                          involving other government-sponsored enterprises
      Stephen Gilbert, AgFirst Farm Credit Bank, P. O. Box 1499,                           and other financial institutions; and
      Columbia, SC 29202.
                                                                                       •   actions taken by the Federal Reserve System in
      Copies of the Association’s Annual and Quarterly reports are                         implementing monetary policy.
      also available upon request free of charge on the Association’s
      website, www.agsouthfc.com, or by calling 1-800-310-4805,
                                                                                                                                         15



AGRICULTURAL OUTLOOK                                                 remaining 60 percent of U.S. farms are classified as rural
                                                                     residential farms where the primary occupation is not farming
The following United States Department of Agriculture (USDA)         and the farms produce less than $10 thousand in products. Rural
analysis provides a general understanding of the U.S.                residential farms only account for 2 percent of total production.
agricultural economic outlook. However, this outlook does not
take into account all aspects of the Association’s business.         In addition to farmers’ net cash income, off-farm income is an
References to the USDA information in this section refer to the      important source of income for the repayment of farm debt
U.S. agricultural market and not the Association.                    obligations and is less subject to cycles in agriculture. The
                                                                     USDA measures farm household income, which is defined as
The February 2010 USDA forecast estimates that 2009 farmers’         earnings from farming activities plus off-farm income. Nearly
net cash income, which is a measure of the cash income after         100 percent of farm household income for operators of rural
payment of business expenses, will decrease to $70.8 billion,        residential farms and more than 90 percent of farm household
down $26.7 billion from 2008, but only down $2.1 billion from        income for intermediate farms is generated from off-farm
its 10-year average of $72.9 billion. The USDA’s February 2010       sources. Further, USDA data suggests that approximately 25
outlook for the farm economy, as a whole, forecasts 2010             percent of farm household income for commercial farms is
farmer’s net cash income to increase to $76.3 billion, a $5.5        generated from off-farm income. The USDA forecasts 2009
billion increase from 2009, and $3.4 billion above the 10-year       farm household income to decrease 15 percent for commercial
average. Contributing to this increase in farmers’ net cash          farms and 19 percent for intermediate farms.
income are increases in livestock receipts of $11.5 billion and in
farm-related income of $900 million, offset by a decrease in         According to the USDA February 2010 forecast, farm sector
crop receipts of $6.0 billion, an increase in cash expenses of       asset values are forecast to decline 3.5 percent from $1.944
$400 million, and a decline in direct government payments of         trillion in 2009 to $1.876 trillion for 2010, reflecting lower
$500 million.                                                        expected returns on farm investments. The values of land,
                                                                     machinery/equipment, and crop inventories are expected to
During 2009, crop prices and prices for livestock animals and        decline in 2010, while the values of financial assets and of
products declined from 2008 levels. Demand for exports was           purchased input inventories are expected to rise. Farmers’ equity
curtailed and farmers were forced to accept prices lower than        (farm business assets minus debt) is expected to decline 3
previously anticipated. The USDA’s 2010 forecast reflects            percent from $1.694 trillion in 2009 to $1.643 trillion in 2010,
expected improvement in economic conditions for livestock            largely due to the declines in asset values.
producers. During a recession, consumers limit their
consumption of higher cost items such as meat, milk, and eggs,       One measure of the financial health of the agricultural sector
or buy lower priced products. With the U.S. economy stabilizing      used by the USDA is the assessment of farmers’ utilization of
or showing signs of improvement, consumers are expected to           their capacity to repay debt (actual debt as a percentage of
increase consumption of animal products, thus improving              maximum debt that can be supported by farmers’ current
earnings of livestock producers.                                     income). Higher capacity utilization rates indicate tighter cash
                                                                     flow positions and, consequently, higher exposure to financial
The following table sets forth the commodity prices per bushel       risk. These estimates do not take into account, however, off-
for certain crops and by hundredweight for beef cattle from          farm income sources. Since 1970, debt repayment capacity
December 31, 2006 to December 31, 2009:                              utilization has ranged from a low of 35.8 percent in 1973 to a
                                                                     high of 104.1 percent in 1981, and has remained relatively stable
Commodity       12/31/09     12/31/08   12/31/07 12/31/06            since 1987, averaging about 50.0 percent. During 2009,
Corn              $3.59        $4.11      $3.76    $3.01             repayment capacity increased significantly above the 50.0
Soybeans          $9.80        $9.24     $10.00    $6.18             percent average due to the decline in farmers’ net cash income.
Wheat             $4.85        $5.95      $7.74    $4.52             The USDA suggests a decrease in the use of repayment capacity
Beef Cattle      $78.60       $79.70     $88.90   $83.10             from 70.0 percent in 2009 to 60.9 percent in 2010.

The USDA’s February 2010 income outlook shows a great deal           As estimated by the USDA, the Farm Credit System’s market
of variation depending on farm size, geographic location, and        share of farm business debt, defined as debt incurred by those
commodity specialties. The USDA classifies all farms into three      involved in on-farm agricultural production, grew to 39.0
primary categories: commercial farms, intermediate farms and         percent at December 31, 2008, as compared with 28.3 percent at
rural residential farms. Commercial farms represent about 10         December 31, 2000. Farm business debt is forecasted to fall in
percent of U.S. farms by number and represent 80 percent of          2010 from the 2009 level by approximately 6.8 percent. The
total U.S. farm production. Commercial farms are expected to         USDA’s forecast of declining debt is due to continued softening
have an 11 percent increase in average net cash income in 2010.      of farmland values due to lower expected earnings on farm
Intermediate farms, defined as ones in which the primary             investments, tighter credit, and greater overall market
occupation is farming and gross sales are between $10 thousand       uncertainty.
and $250 thousand, represent 30 percent of U.S. farms by
number and account for 18 percent of total production. The           In general, agriculture has experienced a sustained period of
                                                                     favorable economic conditions, due to stronger commodity
16

     Management’s Discussion & Analysis of Financial Condition & Results of Operations
     (continued) dollars in thousands, except as noted

      prices, higher land values, and, to a lesser extent, government        security that, by nature, contains elements of uncertainty
      support programs. To date, the Association’s financial results         and imprecision. Changes in the agricultural economy and
      have remained favorable as a result of these conditions.               their borrower repayment capacity will cause these various
      Production agriculture, however, remains a cyclical business that      judgments, evaluations and appraisals to change over time.
      is heavily influenced by commodity prices. In an environment of        Accordingly, actual circumstances could vary from the
      less favorable economic conditions in agriculture and without          Association’s expectations and predictions of those
      sufficient government support programs, the Association’s              circumstances.
      financial performance and credit quality measures would likely
      be negatively impacted. Conditions in the general and                  Management considers the following factors in determining
      agricultural economy have become more volatile with the recent         and supporting the levels of allowance for loan losses: the
      instability in the global financial markets and recent declines in     concentration of lending in agriculture, combined with
      commodity prices. Certain agriculture sectors, as described more       uncertainties in farmland values, commodity prices,
      fully in this Management Discussion and Analysis, experienced          exports, government assistance programs, regional
      significant financial stress during 2009 and could continue to         economic effects and weather-related influences. Changes
      experience financial stress in 2010. Any negative impact from          in the factors considered by management in the evaluation
      these less favorable conditions should be lessened by geographic       of losses in the loan portfolios could result in a change in
      and commodity diversification and the influence of off-farm            the allowance for loan losses and could have a direct
      income sources supporting agricultural-related debt. However,          impact on the provision for loan losses and the results of
      agricultural borrowers who are more reliant on off-farm income         operations.
      sources may be more adversely impacted by a weakened general
      economy.                                                             • Valuation methodologies — Management applies various
                                                                             valuation methodologies to assets and liabilities that often
                                                                             involve a significant degree of judgment, particularly when
      CRITICAL ACCOUNTING POLICIES                                           liquid markets do not exist for the particular items being
                                                                             valued. Quoted market prices are referred to when
      The financial statements are reported in conformity with               estimating fair values for certain assets for which an
      accounting principles generally accepted in the United States of       observable liquid market exists, such as most investment
      America. Our significant accounting policies are critical to the       securities. Management utilizes significant estimates and
      understanding of our results of operations and financial position      assumptions to value items for which an observable liquid
      because some accounting policies require us to make complex or         market does not exist. Examples of these items include
      subjective judgments and estimates that may affect the value of        impaired loans, pension and other postretirement benefit
      certain assets or liabilities. We consider these policies critical     obligations, and certain other financial instruments. These
      because management must make judgments about matters that              valuations require the use of various assumptions,
      are inherently uncertain. For a complete discussion of significant     including, among others, discount rates, rates of return on
      accounting policies, see Note 2, “Summary of Significant               assets, repayment rates, cash flows, default rates, costs of
      Accounting Policies,” of the Notes to the Consolidated Financial       servicing and liquidation values. The use of different
      Statements. The following is a summary of certain critical             assumptions could produce significantly different results,
      policies.                                                              which could have material positive or negative effects on
                                                                             the Association’s results of operations.
         • Allowance for loan losses — The allowance for loan losses
           is maintained at a level considered adequate by                 • Pensions — The Bank and its related Associations
           management to provide for probable and estimable losses           participate in defined benefit retirement plans. These plans
           inherent in the loan portfolio. The allowance for loan losses     are noncontributory and benefits are based on salary and
           is increased through provisions for loan losses and loan          years of service. In addition, the Bank and its related
           recoveries and is decreased through allowance reversals           Associations also participate in defined contribution
           and loan charge-offs. The allowance for loan losses is            retirement savings plans. Pension expense for all plans is
           determined based on a periodic evaluation of the loan             recorded as part of salaries and employee benefits. Pension
           portfolio by management in which numerous factors are             expense for the defined benefit retirement plans is
           considered, including economic and political conditions,          determined by actuarial valuations based on certain
           loan portfolio composition, credit quality and prior loan         assumptions, including expected long-term rate of return on
           loss experience.                                                  plan assets and discount rate. The expected return on plan
                                                                             assets for the year is calculated based on the composition of
           Significant individual loans are evaluated based on the           assets at the beginning of the year and the expected long-
           borrower’s overall financial condition, resources, payment        term rate of return on that portfolio of assets. The discount
           record, the prospects for support from any financially            rate is used to determine the present value of our future
           responsible guarantor, and, if appropriate, the estimated net     benefit obligations. The discount rate for 2009 was
           realizable value of any collateral. The allowance for loan        selected by reference to analysis and yield curves of the
           losses encompasses various judgments, evaluations and             plans’ actuary and industry norms.
           appraisals with respect to the loans and their underlying
                                                                                                                                             17



ECONOMIC CONDITIONS                                                    There are some positive signs in the state’s economy as
                                                                       expansion in Georgia’s military installations increases. Fort
As agricultural loan demand has increased, turmoil in the overall      Benning, Fort Stewart, Fort Gordon, and Robbins Air Force
financial markets, and the banking sector in particular, has           Base represent four of the top six employers in the state with
caused commercial banks to reduce the amount of available              Wal-Mart and Delta Airlines completing the top six. Expansion
credit to farmers and related businesses. This has contributed to      is underway at several of these bases that lie within AgSouth
increased loan demand in the Association and throughout the            territory. A new Kia auto plant is under construction near
Farm Credit System. A seasoned, knowledgeable lending staff            Columbus, Georgia and will employee 2,500 workers as well as
and the inherent value of patronage paid under the cooperative         create many affiliated supply businesses which are expected to
structure have positioned the Association to compete effectively       create additional jobs.
for this expanded business, while retaining current members and
their business relationships.                                          The agricultural sector of the economy in Georgia is the state’s
                                                                       largest industry. Input costs moderated somewhat in 2009 from
Despite the dismal economic conditions in 2009, the Association        the previous year and several of our major commodities saw
was able to produce significant earnings. This positions the           price improvement. Corn, peanuts, soybeans, and cotton
Association to once again return a sizable patronage distribution      generally produced fairly good yields across the region and
to our shareholders.                                                   prices for corn, soybeans and cotton were fairly strong at harvest.
                                                                       The tobacco crop experienced early excessive rains and disease
For the year ended December 31, 2009, the credit quality of the        and many growers lost a majority of their crop. Tobacco growers
loan portfolio continued to be good with some slight                   with crop insurance should recoup most of the actual loss but will
deterioration compared to prior reporting periods. The increased       not generate the needed profit in many cases. Specialty crops
volatility in the financial markets and the generally weaker           such as blueberries did not fare as well as early freeze damage
economy experienced over the past twelve months has affected           and later problems with excessive water hurt production yield
the overall farm sector and the Association’s customers in a           and quality. Blueberries have grown to almost two percent of the
negative way.                                                          Association’s portfolio with the rapid expansion in the industry
                                                                       that has taken place over the past three years. The 2009 sweet
To the extent there has been any recent credit quality                 onion crop was good with a fairly strong market throughout the
deterioration, that deterioration is largely driven by declining       season. Milk prices have improved from decreasing negative
land values and the lack of an active buying market. Industries        margins and allowing many producers to move back into a
tied to housing such as forestry, sawmills, sod, and landscape         profitable position, however, the extended period of low milk
nurseries saw demand plummet and profitability compromised.            prices has had an adverse impact on the liquidity and overall
                                                                       financial condition of many diary producers.
During 2009, the Association targeted certain areas of our
business with hopes of increasing market share. Continued              The timber industry continues to be depressed. Some price
efforts are being made to expand services, increase public             improvement has been realized in the pine composite lumber
knowledge of our services and streamline our current delivery of       price index since late summer. Recent wet weather has
products to enhance our existing portfolio.                            increased stumpage prices for standing timber, particularly in
                                                                       the pulpwood market. Chip-n-saw and lumber markets remain
Georgia Region                                                         weak and improvement in the housing sector will be needed to
                                                                       bring about significant improvement in those markets.
Georgia’s general economy in 2009 felt the impact of a fairly
deep recession. Unemployment reached a thirty three year high          The poultry industry has benefited from decreased feed cost and
peaking at 10.5 percent in July and showed some signs of               improved prices. Significant profitability has returned to most
modest improvement ending the year at 10.1 percent. The total          integrators located within the Georgia region. As of the date of
number of jobs in the state also showed some positive indicators       this report we still do not have a definite decision regarding the
in the last quarter as it stopped its decline and held steady in the   potential reopening of the Pilgrim’s Pride poultry processing
early fourth quarter at 3.87 million jobs. This is down from 4.11      plant located in Douglas, Georgia, which was closed in May
million jobs a year earlier. One of the more troubling areas of        2009.
the economy is the commercial banking sector in Georgia which
has experienced significant stress. There were twenty six              Land values in regions which had little urban influence have
commercial banking institutions closed in Georgia by the FDIC          remained fairly stable. Farm and timberland values have held
in 2009 and Georgia leads the nation in failed banks since             fairly steady but have experienced a significant decrease in the
August of 2008. Stress in many bank portfolios is shifting from        number of sale transactions.
residential loans to the commercial real estate sector and this is
expected to create additional bank failures in those banks with        South Carolina Region
weak capital positions. With a large percentage of the
commercial banks in the state experiencing a fairly high level of      The economic environment in South Carolina remained stressed
stress, competition is not nearly as keen as it has been in the past   during 2009 as the region’s unemployment rate remained near 12
which should create new lending opportunities for AgSouth.             percent at year end compared to a national rate of 10 percent.
18

     Management’s Discussion & Analysis of Financial Condition & Results of Operations
     (continued) dollars in thousands, except as noted

      Even with the labor issue facing the state, bankruptcy filings in       Most crops produced in the state experienced reasonable growing
      the state increased at one of the lowest rates in the nation, while     conditions and profitable returns. Crop prices varied as normal,
      the South Carolina foreclosure rate ranked 31 out of 50 states and      but for the most part, market prices remained at attractive levels,
      increased by only 7.4 percent compared to a national increase of        while most input costs were lower compared to 2008. Cotton
      17 percent.                                                             prices improved during late 2009, which could lead to more
                                                                              farmers considering this crop as 2010 approaches. Wet conditions
      An announcement during the fall of 2008 that Boeing would               during the fall and early winter did slow the cotton and soybean
      grow its aerospace presence in the lower part of the state bodes        harvest to some degree, but not to the point of adversely affecting
      well for the future as jobs will be created not only from the plant     the overall ability to profit in these commodities.
      itself but also through vendors which will supply the industry.
      Many of the companies currently supplying the needs of the auto         The previously noted issue of housing starts has negatively
      industry in the South Carolina upstate, where BMW is located,           impacted virtually all timber processors within the state. Forestry
      will be able to expand their services to include Boeing in the          within the state continues to struggle as hardwood and pine saw
      future. The significance of this is the stabilization of the labor      timber prices remain depressed. Pine pulpwood has rebounded
      force and potential enhancement of employment in both the               during the last two quarters of 2009 and remains the only timber
      upstate and lowcountry.                                                 product generating reasonable profits for the landowner and
                                                                              processors. Timberland owners are continuing to market wood,
      Housing starts in the state remain depressed. On a positive note,       but this appears to be on a very selective, carefully planned basis
      housing permits issued on a monthly basis did improve for               with an emphasis on pulpwood sale consisting of primarily
      November 2009 over the same month in 2008 by about 20                   plantation thinning.
      percent, which indicates the investment in new residential
      construction is showing some improvement. Most economists               Agricultural real estate values in South Carolina have decreased by
      think the state’s residential construction decline has bottomed         1.7 percent from 2008 to 2009, while the Southeastern average has
      out. In addition to the state’s recent improvement in home              decreased by 6.5 percent and the national average has decreased
      building, housing sales have consistently increased within recent       by 3.2 percent. With an average agricultural real estate value of
      months. Home prices have been declining within the state and            $2,900 per acre evident in South Carolina, the state’s average trails
      this trend is expected to continue into early 2010. With reduced        the Southeast as a whole but far exceeds the national average of
      housing prices, housing is becoming more affordable, and it is          $2,100 per acre. Agricultural land values within the state have
      anticipated that South Carolina will attract additional new             increased by approximately 22.4 percent since 2005 even when
      homeowners. The state’s draw as a retirement destination as well        factoring in the reduction experienced in 2009. AgSouth continues
      as the coastal areas and foothills are appealing to many who            to provide significant financing of agricultural and rural real
      want to relocate.                                                       property within the state, but admittedly, the number of real estate
                                                                              sales has dropped significantly in 2009 while values have
      The top industry in South Carolina continues to be agribusiness,        remained somewhat steady exclusive of adverse sales.
      which is the combination of traditional agriculture and forestry.
      Agribusiness impacts the state’s economy by about $34 billion
      annually. Recently, the agricultural leaders of the state started       LOAN PORTFOLIO
      work with the South Carolina Department of Agriculture to
      initiate the 50/20 program focused on increasing the state’s            The Association provides funds to farmers, rural homeowners, and
      agribusiness economic impact from $34 billion to $50 billion by         farm-related businesses for financing of short- and intermediate-
      2020. The effort appears quite feasible and agricultural                term loans and long-term real estate mortgage loans through
      leadership remains hopeful that further fiscal support from the         numerous product types.
      state’s governmental leaders will lead to an even stronger
      investment toward promoting the state’s agribusiness industry           The diversification of the Association loan volume by type for
      well into the future.                                                   each of the past three years is shown below.

      Within agriculture, the livestock sectors have faced the most                                                                    December 31,
                                                                              Loan Type                            2009                      2008                  2007
      adversity as feed costs have remained relatively high while prices                                                           (dollars in thousands)
      have regressed. The Association has a minimal concentration of          Real estate mortgage          $ 1,085,490    72.18% $ 1,066,878       73.82% $   954,169    72.08%
                                                                              Production and
      dairies financed within the state, but this industry was hit hard in     intermediate-term                342,172   22.75         302,869   20.96        296,018    22.36
      2009 and continues to struggle with low milk prices. South              Processing and marketing           25,211    1.68          28,895    2.00         22,835     1.72
                                                                              Farm-related business              14,075     .94          12,523    0.86         15,295     1.16
      Carolina’s Dairy Disaster legislation will help some, as funds are      Rural residential real estate      36,846    2.45          34,036    2.36         35,523     2.68
      returned to these farmers, but longer term more advanced measures       Total                      $ 1,503,794      100.00% $ 1,445,201     100.00% $ 1,323,840 100.00%
      on the federal level might be needed to ensure the viability of these
      livestock operations. The poultry industry has improved
      somewhat compared to 2008, but again, feed costs and return on          While we make loans and provide financially related services to
      sales are a concern. Poultry expansion has slowed dramatically,         qualified borrowers in the agricultural and rural sectors and to
      and only a small number of new broiler houses were noted within         certain related entities, our loan portfolio is diversified.
      the state during 2009.
                                                                                                                                                            19



The geographic distribution of the loan volume by branch for the   The major commodities in the Association loan portfolio are
past three years is as follows:                                    shown below. The predominant commodities are timber
                                                                   processing and related forest products, poultry including broilers,
Branch                        12/31/09   12/31/08   12/31/07       eggs, and turkeys, feed grains, soybeans and hay, and beef cattle
Aiken                            3.52%      3.75%     3.55%        and pasture. These commodities constitute approximately 72
Allendale                        3.64       3.77      3.79         percent of the entire portfolio.
Anderson                         7.38       8.34      8.52
Batesburg                        5.24       6.07      6.16                                                        December 31,
Baxley                           4.29       4.33      4.07         Commodity Group                2009                   2008                 2007
Blackshear                       4.84       4.51      3.66                                                     (dollars in thousands)
Camden                           3.63       3.51      3.80         Timber, Forest Products $   628,504   42%   $ 588,775        41%     $   529,195   40%
Carrollton                       1.62       1.66      1.74         Broilers                    184,360   12      192,972        13          184,444   14
                                                                   Beef Cattle, Pasture        109,078    7      100,260         7           91,334    7
Corporate Georgia                1.04       1.02       .68
                                                                   Feed Grains,
Corporate South Carolina          .46        .62       .53          Soybeans & Hay             102,205   7        104,605        7           90,476   7
Covington                        1.87       2.16      2.40         Horses                       74,977   5         76,485        5           63,092   5
Douglas                          3.33       3.40      3.69         Other                        53,788   3         46,032        3           47,236   4
Greenville                       3.51       3.65      3.59         Cotton                       49,592   3         44,017        3           48,867   4
                                                                   Sod, Nursery,
Greenwood                        1.32       1.72      2.00          & Horticulture              37,740   2         35,573        2           36,549   3
Griffin                          2.17       2.30      1.60         Timber Processing,
Jesup                             .98       1.04      1.26          & Harvesting                38,894   2         36,805        3           35,463   2
Laurens                          4.02       3.83      4.08         Rural Home                   30,872   2         31,435        2           32,825   2
                                                                   Landlords                    30,044   2         28,907        2           30,745   2
Madison                          6.37       6.79      7.59         Blueberries                  27,267   2         26,415        2           18,127   1
Orangeburg                       4.28       4.44      4.56         Dairy                        26,647   2         23,326        2           21,640   1
Rock Hill                        2.60       2.59      2.45         Fruit, Nuts                  22,911   2         21,406        1           16,781   1
Spartanburg                      4.11       3.82      3.78         Eggs                         11,212   1         11,195        1           13,629   1
                                                                   Peanuts                      18,239   1         15,608        1           13,321   1
St Matthews                      2.18       1.73      2.01
                                                                   Vegetables & Tomatoes        11,673   1         15,320        1           13,171   1
Statesboro                       7.70       6.80      6.25         Tobacco                      12,439   1         12,603        1           10,425   1
Summerville                      3.99       4.16      4.02         Hogs                          8,580   1          9,492        1            9,697   1
Sylvania                         1.53       1.52      1.58         Turkeys                       8,540   1          8,632        1            8,688   1
Thomaston                        4.03       4.06      4.71         Onions                       16,232   1         15,338        1            8,135   1
Vidalia                          3.64       3.43      2.77         Total                  $ 1,503,794 100%     $ 1,445,201    100%      $ 1,323,840 100%
Walterboro                       3.89       3.90      4.51
SAM                              2.82       1.08       .65
                              100.00%     100.00%   100.00%        Repayment ability is closely related to the commodities produced
                                                                   by our borrowers, and increasingly, the off-farm income of
                                                                   borrowers. The Association’s loan portfolio contains a
Commodity and industry categories are based upon the Standard      concentration of timber, poultry, including broilers, turkeys and
Industrial Classification system published by the federal          eggs, beef cattle, feed grains, soybeans and hay producers.
government. The system is used to assign commodity or industry     Although a large percentage of the loan portfolio is concentrated in
categories based upon the largest agricultural commodity of the    these enterprises, many of these operations are diversified within
customer.                                                          their enterprise and/or with crop production that reduces overall
                                                                   risk exposure. The concentration of large loans has increased over
                                                                   the past several years; however, the agricultural enterprise mix of
                                                                   these loans is diversified and similar to that of the overall
                                                                   portfolio. The risk in the portfolio associated with commodity
                                                                   concentration and large loans is reduced by the range of diverse
                                                                   enterprises in the Association’s territory.

                                                                   Loan volume increased from $1,445,201 to $1,503,794 between
                                                                   December 31, 2008 and December 31, 2009. The increase of
                                                                   $58,593, or 4.05 percent, for the twelve months ended
                                                                   December 31, 2009, is primarily attributed to increased demand
                                                                   for both real estate mortgage financing for larger tracts and
                                                                   production and intermediate term financing for production
                                                                   agriculture. Loan volume increased from $1,323,840 at
                                                                   December 31, 2007 to $1,445,201 at December 31, 2008.
20

     Management’s Discussion & Analysis of Financial Condition & Results of Operations
     (continued) dollars in thousands, except as noted

      The long-term volume trend has been upward, as has the short-                surplus short-term funds as allowable under FCA regulations.
      and intermediate-term loan volume trend. The short-term                      During the years ended December 31, 2009, 2008, and 2007 the
      portfolio, heavily influenced by operating-type loans, normally              balance of these loans, including the unamortized premium, was
      reaches a peak balance in August and rapidly declines in the fall            $0.
      months as commodities are marketed and proceeds are applied
      to repay operating loans.
                                                                                   MISSION-RELATED INVESTMENTS
      During 2009, the Association activity in the selling of loan
      participations within and outside of the System slowed                       During 2005, the FCA initiated an investment program to
      considerably. Loans sold decreased 32.98 percent from $351,595               stimulate economic growth and development in rural areas. The
      to $235,638 between the period ended December 31, 2008 and                   FCA outlined a program to allow System institutions to hold
      December 31, 2009. The decline in sold loans is linked to the                such investments, subject to approval by the FCA on a case-by-
      absence of large loan activity in the marketplace and the                    case basis. FCA approved the Rural America Bonds pilot and
      Association’s desire to take a more conservative approach to                 the Tobacco Buyout Program under the mission-related
      larger loans. Between the same periods in 2007 and 2008, loans               investments umbrella, as described below.
      sold increased 6.95 percent. Selling participations in larger
      credits provides a means for the Association to spread credit risk,          In October 2005, the FCA authorized AgFirst and the
      concentration risk and realize non-patronage sourced interest and            Associations to make investments in Rural America Bonds under
      fee income, which may strengthen the capital position. The                   a three-year pilot period. Rural America Bonds may include debt
      purchase of participation loans increased between the periods                obligations issued by public and private enterprises, corporations,
      ended December 31, 2008 and December 31, 2009 by 6.13                        cooperatives, other financing institutions, or rural lenders where
      percent. This includes purchases from both FCS Institutions and              the proceeds would be used to support agriculture, agribusiness,
      Non FCS Institutions.                                                        rural housing, or economic development, infrastructure, or
                                                                                   community development and revitalization projects in rural
                                                 December 31,                      areas. Examples include investments that fund value-added food
       Loan Participations:             2009          2008         2007            and fiber processors and marketers, agribusinesses, commercial
                                            (dollars in thousands)                 enterprises that create and maintain employment opportunities in
       Participations Purchased
                                                                                   rural areas, community services, such as schools, hospitals, and
         – FCS Institutions        $    16,031     $    14,656     $    17,548
       Participations Purchased
                                                                                   government facilities, and other activities that sustain or
         – Non-FCS Institutions           3,568           3,810           4,597    revitalize rural communities and their economies. The objective
       Participations Sold             (235,638)       (351,595)       (328,753)   of this pilot program is to help meet the growing and diverse
                                                                                   financing needs of agricultural enterprises, agribusinesses, and
             Total                 $ (216,039) $ (333,129) $ (306,608)
                                                                                   rural communities by providing a flexible flow of money to rural
                                                                                   areas through bond financing. These bonds may be classified as
                                                                                   Loans or Investments on the Consolidated Balance Sheets
      The Association did not have any loans sold with recourse,
                                                                                   depending on the nature of the investment. As of December 31,
      retained subordinated participation interests in loans sold, or
                                                                                   2009, December 31, 2008, and December 31, 2007 the
      interests in pools of subordinated participation interests for the
                                                                                   Association had $12,585, $8,316 and, $6,667, respectively, in
      period ended December 31, 2009.
                                                                                   Rural America Bonds. In 2009, the Association purchased
                                                                                   certain Rural America Bonds which are appropriately accounted
      The Association sells qualified long-term mortgage loans into
                                                                                   for as investments. Thus, at December 31, 2009 $4,583 of the
      the secondary market. For the period ended December 31, 2009,
                                                                                   $12,585 is presented on the Consolidated Balance Sheet as
      the Association originated loans for resale totaling $138,342,
                                                                                   Investment Securities. The remaining bonds in the amount of
      which were sold into the secondary market. For the years ended
                                                                                   $8,002 are classified as Loans on the Consolidated Balance
      December 31, 2008 and 2007, loans sold into the secondary
                                                                                   Sheets.
      market totaled $81,194 and $91,269, respectively. At
      December 31, 2009, there was $2,209 classified as loans held for
                                                                                   On October 22, 2004, Congress enacted the “Fair and Equitable
      sale on the Association’s balance sheet. The increase in loans
                                                                                   Tobacco Reform Act of 2004” (Tobacco Act) as part of the
      sold from 2008 to 2009 is the result of significant refinance
                                                                                   “American Jobs Creation Act of 2004.” The Tobacco Act
      transactions due to the lower interest rate environment.
                                                                                   repealed the Federal tobacco price support and quota programs,
                                                                                   provided for payments to tobacco “quota owners” and producers
      The Association also participates in the Farmer Mac Long Term
                                                                                   for the elimination of the quota and included an assessment
      Stand-By program. Farmer Mac was established by Congress to
                                                                                   mechanism for tobacco manufacturers and importers to pay for
      provide liquidity to agricultural lenders. At December 31, 2009,
                                                                                   the buyout. Tobacco quota holders and producers will receive
      the Association had loans totaling $10,380 which were 100
                                                                                   equal annual payments under a contract with the Secretary of
      percent guaranteed by Farmer Mac. The Association
                                                                                   Agriculture. The Tobacco Act also includes a provision that
      additionally purchased portions of loans that are guaranteed by
                                                                                   allows the quota holders and producers to assign to a “financial
      the United States Department of Agriculture. These loans are
                                                                                   institution” the right to receive the contract payments (Successor-
      held for the purposes of reducing interest rate risk and managing
                                                                                   in-Interest Contracts (SIIC)) so that they may obtain a lump sum
                                                                                                                                             21



or other payment. On April 4, 2005, the United States                    The Association reviews the credit quality of the loan portfolio
Department of Agriculture (USDA) issued a Final Rule                     on an ongoing basis as part of our risk management practices.
implementing the “Tobacco Transition Payment Program”                    Each loan is classified according to the Uniform Classification
(Tobacco Buyout). At December 31, 2009, 2008, and 2007, the              System, which is used by all Farm Credit System institutions.
Association had loan assignments of $0, $53, and $53,                    Below are the classification definitions.
respectively, outstanding and these are classified as Loans on the
Consolidated Balance Sheets. In previous years, the Association               Acceptable – Assets are expected to be fully collectible and
acquired SIIC and sold the contracts to another Farm Credit                   represent the highest quality.
Association who subsequently settled with the USDA. No                        Other Assets Especially Mentioned (OAEM) – Assets are
contracts were sold during 2009. During 2009 and 2008, the                    currently collectible but exhibit some potential weakness.
Association earned no commissions from the sales of these                     Substandard – Assets exhibit some serious weakness in
contracts compared to $1 in 2007.                                             repayment capacity, equity, and/or collateral pledged on the
                                                                              loan.
                                                                              Doubtful – Assets exhibit similar weaknesses to
CREDIT RISK MANAGEMENT                                                        substandard assets. However, doubtful assets have
                                                                              additional weaknesses in existing facts, conditions and
Credit risk arises from the potential inability of an obligor to              values that make collection in full highly questionable.
meet its repayment obligation. As part of the process to evaluate             Loss – Assets are considered uncollectible.
the success of a loan, the Association continues to review the
credit quality of the loan portfolio on an ongoing basis. With the       The following table presents selected statistics related to the
approval of the Association Board of Directors, the Association          credit quality of loans including accrued interest at
establishes underwriting standards and lending policies that             December 31.
provide direction to loan officers. Underwriting standards
include, among other things, an evaluation of:                            Credit Quality              2009         2008          2007
                                                                          Acceptable & OAEM           95.48%        98.92%        99.60%
     •    Character – borrower integrity and credit history               Substandard                  4.50%         1.08%         0.40%
                                                                          Doubtful                      .02%            –%            –%
     •    Capacity – repayment capacity of the borrower based             Loss                            –%            –%            –%
          on cash flows from operations or other sources of                    Total                 100.00%       100.00%       100.00%
          income
     •    Collateral – protection for the lender in the event of
          default and a potential secondary source of repayment          The decline in Acceptable and OAEM percentage of volume and
     •    Capital – ability of the operation to survive                  the increase in the Substandard percentage can be linked to the
          unanticipated risks                                            overall economy and borrowers’ inability to sell assets to repay
     •    Conditions – intended use of the loan funds                    debt when necessary. While the underlying collateral may not be
                                                                         the sole repayment source, in some cases, borrowers have been
The credit risk management process begins with an analysis of            attempting to sell collateral in order to pay down or liquidate
the borrower’s credit history, repayment capacity, and financial         their debt to the Association. Again, because of the current
position. Repayment capacity focuses on the borrower’s ability           economic market, sales are not occurring and therefore
to repay the loan based upon cash flows from operations or other         downgrades in asset quality were warranted. The Association
sources of income, including non-farm income. Real estate loans          also provides financing to poultry growers in the Coffee County,
must be collateralized by first liens on the real estate (collateral).   Georgia area that have been adversely affected by the shut-down
As required by FCA regulations, each institution that makes              of the Pilgrim’s Pride plant while that company worked through
loans on a collateralized basis must have collateral evaluation          its bankruptcy proceedings. The majority of this volume was
policies and procedures. Real estate mortgage loans may be               downgraded during late 2008 and remained so throughout 2009.
made only in amounts up to 85 percent of the original appraised
value of the property taken as collateral or up to 97 percent of the
appraised value if guaranteed by a state, federal, or other
governmental agency. The actual loan to appraised value when
loans are made is generally lower than the statutory maximum
percentage. Appraisals are required for loans of more than
$250,000. In addition, each loan is assigned a credit risk rating
based upon the underwriting standards. This credit risk rating
process incorporates objective and subjective criteria to identify
inherent strengths, weaknesses, and risks in a particular
relationship.
22

     Management’s Discussion & Analysis of Financial Condition & Results of Operations
     (continued) dollars in thousands, except as noted

      Nonperforming Assets                                                     Allowance for Loan Losses

      The Association’s loan portfolio is divided into performing and          The allowance for loan losses at each period end was considered
      high-risk categories. A Special Assets Management Department             by Association management to be adequate to absorb probable
      is responsible for servicing loans classified as high-risk. The          losses existing in and inherent to its loan portfolio. The allowance
      high-risk assets, including accrued interest, are detailed below:        for loan losses is prepared according to generally accepted
                                                                               accounting principles.
                                                      December 31,
       High-risk Assets                     2009            2008        2007   The following table presents the activity in the allowance for
                                                   (dollars in thousands)      loan losses for the most recent three years:
       Nonaccrual loans                   $ 35,606      $ 4,419     $ 2,251
       Restructured loans                        –            –           –                                                    Year Ended December 31,
       Accruing loans 90 days past due          54          160         134    Allowance for Loan Losses Activity:           2009          2008         2007
       Total high-risk loans                35,660        4,579       2,385                                                      (dollars in thousands)
       Other property owned                  3,489           216         40    Balance at beginning of year             $    4,467 $       3,970 $       3,806
       Total high-risk assets             $ 39,149      $ 4,795     $ 2,425    Charge-offs:
                                                                                  Real estate mortgage                        (478)       (149)             –
       Ratios
                                                                                  Production and intermediate-term            (171)       (136)           (72)
       Nonaccrual loans to total loans      2.37%         0.31%        0.17%
                                                                                   Agribusiness                                (72)          –              –
       High-risk assets to total assets      2.46%        0.31%        0.17%       Rural residential real estate              (106)          –              –
                                                                                   Other                                                                   (5)
                                                                                   Total charge-offs                          (827)       (285)           (77)
      Nonaccrual loans represent all loans where there is a reasonable         Recoveries:
      doubt as to the collection of principal and/or future interest              Real estate mortgage                          69          8               –
      accruals, under the contractual terms of the loan. In substance,            Production and intermediate-term              18         19             231
      nonaccrual loans reflect loans where the accrual of interest has            Agribusiness                                 110                          6
                                                                                  Rural residential real estate                  6          5               4
      been suspended. Nonaccrual loans increased $31,187 or 705.75
                                                                                  Total recoveries                             203         32             241
      percent in 2009. This increase is the result of economic
      conditions in the territory and some borrowers’ inability to pay.        Net (charge-offs) recoveries                   (624)       (253)           164
      Of the $35,606 in nonaccrual volume at December 31, 2009,                Provision for (reversal of allowance
      $15,361 or 43.14%, compared to 55.06% and 34.92% at                          for) loan losses                           5,654        750              –
      December 31, 2008 and 2007, respectively, was current as to
                                                                               Balance at end of year                   $     9,497 $    4,467 $        3,970
      scheduled principal and interest payments, but did not meet all
      regulatory requirements to be transferred into accrual status.
                                                                               Ratio of net (charge-offs) recoveries
      Other property owned increased $3,273 from $216 to $3,489                    during the period to average loans
                                                                                   outstanding during the period            (0.043)%    (0.018)%     0.013%
      between December 31, 2008 and December 31, 2009. The
      increase is the result of a significant number of acquisitions of
      real estate and other collateral during the collection process. In       The net loan charge-offs were primarily associated with real
      some cases the acquisitions have been through foreclosure and            estate mortgage and production and intermediate term loans.
      others through a deed in lieu process. Staff efforts to sell the         There was no specific trend in the charge-offs recognized.
      property have been somewhat hampered by the general economy
      and the lack of an active buying base. The Association is                The provision for loan losses increased the Allowance for Loan
      currently marketing all other property owned for sale.                   Loss account $5,654 during 2009. Analysis of the Allowance
                                                                               account is completed on a quarterly basis and reviewed by the
      Loan restructuring is available to financially distressed                Association’s Asset/Liability Committee which is comprised of
      borrowers. Restructuring of loans occurs when the Association            members of Senior Management and other selected staff
      grants a concession to a borrower based on either a court order or       members. The significant increase was necessary to offset
      good faith in a borrower’s ability to return to financial viability.     potential future losses based upon the deterioration of the loan
      The concessions can be in the form of a modification of terms or         portfolio and the increase in nonperforming assets.
      rates, a compromise of amounts owed, or deed in lieu of
      foreclosure. Other receipts of assets and/or equity to pay the loan
      in full or in part are also considered restructured loans. The type
      of alternative financing structure chosen is based on minimizing
      the loss incurred by both the Association and the borrower.
                                                                                                                                                                                  23



The allowance for loan losses by loan type for the most recent                               Noninterest Income
three years is as follows:
                                                                                             Noninterest income for each of the three years ended December 31
                                                      December 31,                           is shown in the following table:
Allowance for Loan Losses by Type            2009           2008               2007
                                                  (dollars in thousands)                                                                                       Percentage
Real estate mortgage                    $    6,563      $ 3,306       $        2,848
                                                                                                                                 For the Year Ended        Increase/(Decrease)
Production and intermediate-term             2,224             938               911
Agribusiness                                   510             134               106                                                December 31,            2009/      2008/
Rural residential real estate                  200              89               105         Noninterest Income               2009        2008      2007     2008       2007
                                                                                                                                (dollars in thousands)
    Total allowance                     $     9,497      $    4,467     $      3,970         Loan fees                     $ 3,379 $ 2,806 $ 2,725           20.42%      2.97%
                                                                                             Fees for financially
                                                                                               related services               793         778       574         1.93      35.54
                                                                                             Patronage refund from other
The allowance for loan losses as a percentage of loans                                         Farm Credit Institutions     13,641     11,789    13,028        15.71     (9.51)
outstanding and as a percentage of certain other credit quality                              Gains (losses) on other
                                                                                               property owned, net          (2,262)        34       (31)     6752.94    209.68
indicators is shown below:                                                                   Gains (losses) on sales
                                                                                               of rural home loans, ,net     1,159        824       893        40.66     (7.73)
Allowance for Loan Losses                             December 31,                           Gains (losses) on sales of
   as a Percentage of:                      2009         2008               2007               premises and equipment,         466         46       116       913.04    (60.34)
                                                                                             net
Total loans                              0.63%            0.31%            0.30%             Other noninterest income          315      (168)     1,236       287.50   (113.59)
Nonperforming loans                     26.63%           97.55%          166.45%
Nonaccrual loans                        26.67%          101.09%          176.37%             Total noninterest income      $ 17,491 $ 16,109 $ 18,541         8.58%    (13.12)%


Please refer to Note 4, “Loans and Allowance for Loan Losses,”
of the Notes to the Consolidated Financial Statements, for                                   Loan fees increased $573 or 20.42 percent when comparing the
further information concerning the allowance for loan losses.                                reporting periods 2008 to 2009. The increase is the result of the
                                                                                             ability of the staff to negotiate higher fees in a competitive
                                                                                             lending environment. Loan fees increased from $2,725 to
RESULTS OF OPERATIONS                                                                        $2,806 between the periods ending December 31, 2007 and
                                                                                             December 31, 2008.
Net Interest Income
                                                                                             Fees for financially related services increased $15 or 1.93
Net interest income was $48,753, $46,367, and $43,425 in 2009,                               percent from December 31, 2008 to December 31, 2009. The
2008 and 2007, respectively. Net interest income is the                                      increase is from the commissions earned on the sale of crop
difference between interest income and interest expense. Net                                 insurance by Association staff and commissions earned on lease
interest income is the principal source of earnings for the                                  transactions and fee appraisal services. Between the reporting
Association and is impacted by volume, yields on assets and                                  periods ended December 31, 2008 and December 31, 2007, fees
cost of debt. The effects of changes in average volume and                                   for financially related services increased from $574 to $778.
interest rates on net interest income over the past three years are                          This increase is primarily from the sale of crop insurance.
presented in the following table:
                                                                                             There was a 15.71 percent or $1,852 increase in patronage
Change in Net Interest Income:                                                               refund from other Farm Credit Institutions between the periods
                                                                 Nonaccrual
                                   Volume*           Rate          Income          Total
                                                                                             ended December 31, 2008 and December 31, 2009. In 2009, the
                                                   (dollars in thousands)                    Association earned $11,506 in patronage refund and $1,551 in a
12/31/09 - 12/31/08                                                                          special distribution from AgFirst. In 2008, the Association
Interest income                    $   3,316 $      (12,582) $        (275) $ (9,541)        earned $11,219 in a patronage refund and $0 in a special
Interest expense                       2,467 $      (14,394) $           – $ (11,927)
Change in net interest income      $     849 $        1,812 $         (275) $  2,386
                                                                                             distribution, compared to $10,623 and $1,546, for 2007. For the
                                                                                             period ended December 31, 2009, the Association earned $584
12/31/08 - 12/31/07                                                                          in patronage refund from other Farm Credit Associations. This
Interest income                    $   9,104 $      (12,571) $         113 $       (3,354)   compares to $570 and $859 for the periods ended December 31,
Interest expense                       5,629        (11,925)             – $       (6,296)   2008 and December 31, 2007. The increase in patronage from
Change in net interest income      $   3,475 $         (646) $         113 $        2,942
                                                                                             other Farm Credit Associations is partially attributable to an
                                                                                             increase in patronage from one Association over 2008 levels.
*   Volume variances can be the result of increased/decreased loan volume or
    from changes in the percentage composition of assets and liabilities between
    periods.                                                                                 The Association took in several significant pieces of other
                                                                                             property owned in 2009. Subsequently, the Association
                                                                                             recorded $2,262 in losses on the sale of other property owned.
                                                                                             The losses recorded were primarily from the need to write down
                                                                                             asset values to match new and more current appraisals. This
                                                                                             compares to gains of $34 for the period ended December 31,
24

     Management’s Discussion & Analysis of Financial Condition & Results of Operations
     (continued) dollars in thousands, except as noted

      2008. For the period ended December 31, 2007, the Association                 qualify for retirement within the next three years. The
      had recorded losses of $31.                                                   Association has hired new staff and started the training process in
                                                                                    anticipation of these retirements. This increase in staff directly
      Gains on the sales of rural home loans in the secondary market                results in the increase in salary and benefits expense.
      totaled $1,159 for the period ended December 31, 2009. This
      was an increase of $335 or 40.66 percent from the period ended                Occupancy and equipment expense increased $181 between the
      December 31, 2008. The increase is the result of the increased                reporting periods ended December 31, 2009 and December 31,
      activity in refinances of home loans and the Association’s                    2008. The increase of 7.82 percent is due to higher operating
      market penetration in the home loan market in some areas of the               costs for Association buildings. In 2009, the Association
      Association’s territory. For the period ended December 31,                    completed construction of two new facilities in Douglas,
      2008, gains totaled $824. This is a decrease of $69 between the               Georgia and Rock Hill, South Carolina. The Association also
      reporting periods ended December 31, 2007 and December 31,                    completed a major renovation of the Summerville, South
      2008.                                                                         Carolina office. The decrease of $95 between December 31,
                                                                                    2007 and December 31, 2008 is related to the lower operating
      Gains on the sales of premises and equipment increased 913.04                 costs for some of the Association’s offices.
      percent or $420 between December 31, 2008 and December 31,
      2009. Gains totaled $466 for the period ended December 31,                    Insurance Fund premiums increased $467 or 24.37 percent for
      2009. In 2009, the Association sold an office building in                     the twelve months ended December 31, 2009, compared to the
      Douglas, Georgia and generated a gain of $461. Sales in 2008                  same period of 2008. The Farm Credit System Insurance
      were limited to excess automobiles, furniture, and equipment.                 Corporation (FCSIC) changed the methodology in assessing the
                                                                                    insurance premiums as a result of the 2008 Farm Bill. Please
      Other noninterest income increased $483 from a loss of $168 to                refer to the “Regulatory Matters” section of this Management’s
      a gain of $315. A significant part of the increase is related to the          Discussion and Analysis for details concerning the 2008 Farm
      collection of sales volume premiums for secondary mortgage                    Bill. The FCSIC set premiums at 20 basis points on adjusted
      loan activity. Also included in the gain is savings from the Farm             insured debt outstanding for the year 2009. In addition, there
      Credit system captive insurance fund. Other noninterest income                was a 25 basis point premium on the average principal
      decreased from 2007 to 2008, $1,404 from a gain of $1,236 in                  outstanding of nonaccrual loans and any other-than-temporarily
      2007 to a loss of $168 in 2008. In 2007, the Association                      impaired investments. The FCSIC has provided guidance to
      collected life insurance proceeds that were assigned to the                   system institutions that the premium rates will be decreased to
      Association several years ago during a troubled debt restructure.             10 basis points for accruing volume in 2010.
      This collection occurred in 2007 and did not reoccur in 2008 or
      2009.                                                                         Other operating expenses decreased $657 or 11.99 percent
                                                                                    between the reporting periods ended December 31, 2009 to
      Noninterest Expense                                                           December 31, 2008. During 2009, Association management and
                                                                                    staff met and identified items to delay purchase or
      Noninterest expense for each of the three years ended                         implementation in 2009 in an effort to cut other operating
      December 31 is shown in the following table:                                  expenses. As a result of cut backs in travel, training, advertising
                                                                                    and public and member relations, the Association was able to
                                                                  Percentage        realize these savings. Comparing other operating expenses for
                                     For the Year Ended       Increase/(Decrease)   the period ended December 31, 2007 to December 31, 2008;
                                        December 31,            2009/     2008/
                                                                                    other operating expenses increased $384 or 7.53 percent. Other
       Noninterest Expense         2009       2008     2007     2008      2007
                                                                                    operating expense includes travel, training, advertising, public
                                    (dollars in thousands)
       Salaries and employee                                                        and member relations, communications, directors, supervisory
        benefits                $ 24,535 $ 18,129 $ 18,040     35.34%      0.49%    and examination, and all other expenses not detailed above
       Occupancy and equipment     2,496    2,315    2,410      7.82      (3.94)    necessary to operate the Association.
       Insurance Fund premiums     2,383    1,916    1,803     24.37       6.27
       Other operating expenses    4,824    5,481    5,097    (11.99)      7.53
                                                                                    Income Taxes
       Total noninterest expense $ 34,238 $ 27,841 $ 27,350    22.98%     1.80%
                                                                                    The Association recorded a provision for income taxes of
                                                                                    $167 for the year ended December 31, 2009, as compared to a
                                                                                    provision of $30 for 2008 and a provision of $328 for 2007.
      Salaries and employee benefits increased $6,406 or 35.34 percent              Refer to Note 2, “Summary of Significant Accounting
      in 2009, as compared with 2008, and $89 or 0.49 percent when                  Policies, Income Taxes,” of the Notes to the Consolidated
      comparing 2007 to 2008. These increases are primarily due to                  Financial Statements, for more information concerning
      increased costs associated with employee benefit plans, merit and             Association income taxes.
      incentive compensation, and employee staffing levels. Employee
      retirement expense increased significantly in 2009 as a result of
      financial market performance in 2008. The Association has a
      significant pool of employees who either currently qualify or will
                                                                                                                                             25



Key Results of Operations Comparisons                                   the amount of notes payable outstanding. This margin is
                                                                        commonly referred to as “Loanable Funds.”
Key results of operations comparisons for each of the twelve
months ended December 31 are shown in the following table:              Total notes payable to the Bank at December 31, 2009, was
                                                                        $1,323,237 as compared to $1,262,811 at December 31, 2008
Key Results of Operations                For the 12 Months Ended        and $1,149,999 at December 31, 2007. The increase of 4.79
Comparisons                         12/31/09      12/31/08   12/31/07   percent comparing December 31, 2209 to December 31, 2008
Return on average assets               1.70 %     2.29 %       2.51%    and the increase of 9.81 percent comparing December 31, 2008
Return on average members’ equity     11.16 %    15.06 %      16.20%    to December 31, 2007, was attributable to continued loan growth
Net interest income as a percentage                                     in the Association. The average volume of outstanding notes
 of average earning assets             3.36 %     3.30 %       3.35%
                                                                        payable to the Bank was $1,280,262 and $1,229,222 for the
Net (charge-offs) recoveries
 to average loans                   (0.043) %   (0.018) %     0.013%    years ended December 31, 2009 and 2008, respectively. Refer
                                                                        to Note 8, “Notes Payable to AgFirst Farm Credit Bank,” of the
                                                                        Notes to the Consolidated Financial Statements, for weighted
The return on average assets and return on members’ equity              average interest rates and maturities, and additional information
decreased slightly in the 2009 accounting period as compared to         concerning the Association’s notes payable.
2008. The decrease in earnings over an increased rate of asset
growth resulted in a lower return on average assets. The decline        Liquidity management is the process whereby funds are made
in the return on members’ equity ratio is the result of the decline     available to meet all financial commitments including the
in earnings as well. The increase in the percentage of net interest     extension of credit, payment of operating expenses, and payment
income to average earning assets is due to the growth in net            of debt obligations. The Association receives access to funds
interest income exceeding the growth in average earning assets          through its borrowing relationship with the Bank and from
between the two reporting periods. During 2009, the Association         income generated by operations. The liquidity policy of the
had a very focused effort at repricing loans to benefit both the        Association is to manage cash balances to maximize debt
borrower and the Association.                                           reduction and to increase loan volume. As borrower payments
                                                                        are received, they are applied to the Association’s note payable
A key factor in the growth of net income for future years will be       to the Bank. The Association's participation in the Farmer Mac,
continued improvement in net interest and noninterest income.           investments, and other secondary market programs provides
Our goal is to generate earnings sufficient to fund operations,         additional liquidity. Sufficient liquid funds have been available
adequately capitalize the Association, and achieve an adequate          to meet all financial obligations. There are no known trends
rate of return for our members. To meet this goal, the                  likely to result in a liquidity deficiency for the Association.
agricultural economy must continue the improvement shown in
recent years and the Association must meet certain objectives.          At December 31, 2009, the Association had invested $138,900
These objectives are to attract and maintain high quality loan          of its lendable equity (loanable funds) in fixed rate notes which
volume priced at competitive rates and to manage credit risk in         will mature in 2010, 2012 and 2013. These investments are
our entire portfolio, while efficiently meeting the credit needs of     made to generate additional income for the Association during
our members.                                                            the year. Income generated is included as a reduction to interest
                                                                        expense.

LIQUIDITY AND FUNDING SOURCES                                           The Association had no lines of credit from third party financial
                                                                        institutions as of December 31, 2009, 2008 and 2007.
Liquidity and Funding
                                                                        Funds Management
The principal source of funds for the Association is the
borrowing relationship established with the Bank through a              The Bank and the Association manage assets and liabilities to
General Financing Agreement (GFA). The GFA utilizes the                 provide a broad range of loan products and funding options,
Association’s credit and fiscal performance as criteria for             which are designed to allow the Association to be competitive in
establishing a line of credit on which the Association may draw         all interest rate environments. The primary objective of the
funds. The Bank advances the funds to the Association, creating         asset/liability management process is to provide stable and rising
notes payable (or direct loans) to the Bank. The Bank manages           earnings, while maintaining adequate capital levels by managing
interest rate risk through direct loan pricing and asset/liability      exposure to credit and interest rate risks.
management. The notes payable are segmented into variable rate
and fixed rate components. The variable rate note is utilized by        Demand for loan types is a driving force in establishing a funds
the Association to fund variable rate loan advances and                 management strategy. The Association offers fixed, adjustable
operating funds requirements. The fixed rate note is used               and variable rate loan products that are marginally priced
specifically to fund fixed rate loan advances made by the               according to financial market rates. Variable rate loans may be
Association. Association capital levels effectively create a            indexed to market indices such as the Prime Rate or the 90-day
borrowing margin between the amount of loans outstanding and            London Interbank Offered Rate (LIBOR). Adjustable rate
26

     Management’s Discussion & Analysis of Financial Condition & Results of Operations
     (continued) dollars in thousands, except as noted

      mortgages are indexed to U.S. Treasury Rates. Fixed rate loans         Total capital stock and participation certificates were $6,485 on
      are priced based on the current cost of System debt of similar         December 31, 2009, compared to $6,605 on December 31, 2008
      terms to maturity.                                                     and $6,633 on December 31, 2007. The decrease was attributed to
                                                                             the liquidations of stock in the normal course of business
      The majority of the interest rate risk in the Association’s            exceeding the purchases of stock associated with new borrowing
      Consolidated Balance Sheets is transferred to the Bank through         entities.
      the notes payable structure. The Bank, in turn, actively utilizes
      funds management techniques to identify, quantify and control          FCA sets minimum regulatory capital requirements for System
      risk associated with the loan portfolio.                               banks and associations. Capital adequacy is evaluated using a
                                                                             number of regulatory ratios. According to the FCA regulations,
      Relationship with the Bank                                             each institution’s permanent capital ratio is calculated by dividing
                                                                             permanent capital by a risk-adjusted asset base. Risk adjusted
      The Association’s statutory obligation to borrow only from the         assets mean the total dollar amount of the institution’s assets
      Bank is discussed in Note 8, “Notes Payable to AgFirst Farm            adjusted by an appropriate credit conversion factor as defined by
      Credit Bank” of the Notes to the Consolidated Financial                regulation. For all periods represented, the Association exceeded
      Statements in this Annual Report.                                      minimum regulatory standards for all the ratios.

      The Bank’s ability to access capital of the Association is             The Association’s capital ratios as of December 31 and the FCA
      discussed in Note 5 of the Notes to the Consolidated Financial         minimum requirements follow:
      Statements.
                                                                                                                                    Regulatory
      The Bank’s role in mitigating the Association’s exposure to                                     2009      2008      2007      Minimum
      interest rate risk is described in the “Liquidity and Funding
      Sources” section of this Management’s Discussion and Analysis          Permanent capital ratio 14.55%   14.78%    15.52%         7.00%
      and in Note 8, “Notes Payable to AgFirst Farm Credit Bank”             Total surplus ratio     14.12%   14.33%    15.03%         7.00%
      included in this Annual Report.                                        Core surplus ratio      10.35%   10.88%    11.81%         3.50%


      The Bank also provides key services related to payroll and human       The decrease in the Association’s permanent capital, total surplus,
      resource processing and accounting services. In the area of            and core surplus for December 31, 2009 and December 31, 2008
      technology, the Bank provides the backroom services including          was attributed to growth in the Association’s portfolio outpacing
      mainframe and network server applications including network            the additions to both allocated and unallocated surplus from annual
      communications, loan origination, loan accounting and disaster         earnings. There are no trends, commitments, contingencies, or
      recovery. Some services include a specific fee structure, while        events that are likely to affect the Association’s ability to meet
      others are incorporated into the Bank’s funding formula.               regulatory minimum capital standards and capital adequacy
                                                                             requirements.

      CAPITAL RESOURCES                                                      See Note 9, “Members’ Equity,” of the Consolidated Financial
                                                                             Statements, for further information concerning capital resources.
      Capital serves to support asset growth and provide protection
      against unexpected credit and interest rate risk and operating
      losses. Capital is also needed for future growth and investment in     PATRONAGE PROGRAM
      new products and services.
                                                                             Prior to the beginning of any fiscal year, the Association’s Board
      The Association Board of Directors establishes, adopts, and            of Directors, by adoption of a resolution, may establish a
      maintains a formal written capital adequacy plan to ensure that        Patronage Allocation Program to distribute its available
      adequate capital is maintained for continued financial viability, to   consolidated net earnings. This resolution provides for the
      provide for growth necessary to meet the needs of                      application of net earnings in the manner described in the
      members/borrowers, and to ensure that all stockholders are             Association’s Bylaws. This includes the setting aside of funds to
      treated equitably. There were no material changes to the capital       increase surplus to meet minimum capital adequacy standards
      plan for 2009 that would affect minimum stock purchases or             established by FCA Regulations, to increase surplus to meet
      would have an effect on the Association’s ability to retire stock      Association capital adequacy standards to a level necessary to
      and distribute earnings.                                               support competitive pricing at targeted earnings levels, and for
                                                                             reasonable reserves for necessary purposes of the Association.
      Total members’ equity at December 31, 2009, increased 2.82             After excluding net earnings attributable to (a) the portion of loans
      percent to $234,833 from the December 31, 2008 total of                participated to another institution, and (b) participation loans
      $228,389. At December 31, 2008, total members’ equity increased        purchased, remaining consolidated net earnings are eligible for
      5.61 percent from the December 31, 2007 total of $216,247. The         allocation to borrowers. Refer to Note 9, “Members’ Equity,” of
      increase was primarily attributed to earnings, both allocated and      the Notes to the Consolidated Financial Statements for more
      unallocated, in excess of revolvement of allocated earnings.           information concerning the patronage distributions. The
                                                                                                                                                          27



Association declared patronage distributions of $22,032 in 2009,                        •    Provide current and pertinent farm management and
$29,090 in 2008, and $32,504 in 2007. The decrease in patronage                              financial training to YBS customers and prospects in
distribution is related to the lower earnings in 2009 compared to                            group settings and one on one.
2008 and 2007. The Association typically pays 30 percent in cash                        •    Inform customers and prospects of available services
and the remainder in a combination of qualified and/or                                       through advertising and public relations.
nonqualified allocated surplus. Payment of patronage is usually                         •    Encourage young people to choose agriculture as a
made in the latter part of the first quarter of the following fiscal                         profession by supporting 4-H and FFA.
year. There were no significant changes to the Association’s                            •    Encourage use of Student Agricultural Project loan
patronage policies and practices during 2009.                                                program by visiting with 4-H representatives and FFA
                                                                                             chapters in the service area.
                                                                                        •    Support Young Farmer Groups in the service area and
YOUNG, BEGINNING AND SMALL (YBS) FARMERS                                                     at the state level.
AND RANCHERS PROGRAM                                                                    •    Make customers and prospects aware of farm related
                                                                                             services and encourage them to take advantage of
The Association’s mission is to provide financial services to                                beneficial programs.
agriculture and the rural community, which includes providing
                                                                                        •    Closely work with FSA personnel to meet the needs of
credit to Young*, Beginning**, and Small*** farmers. Because
                                                                                             YBS customers and prospects.
of the unique needs of these individuals, and their importance to
the future growth of the Association, the Association has
                                                                                   The Association is committed to the future success of young,
established annual marketing goals to increase our market share
                                                                                   beginning and small farmers.
of loans to YBS farmers. Specific marketing plans have been
developed to target these groups, and resources have been
                                                                                   *Young farmers are defined as those farmers, ranchers, producers,
designated to help ensure YBS borrowers have access to a stable
                                                                                   or harvesters of aquatic products who are age 35 or younger as of
source of credit. As a result, 2009 goals were established and
                                                                                   the date the loan is originally made.
met.
                                                                                   **Beginning farmers are defined as those farmers, ranchers,
The following table outlines the loan volume and number of
                                                                                   producers or harvesters of aquatic products who have 10 years
YBS loans in the loan portfolio for the Association.
                                                                                   or less farming or ranching experience as of the date the loan is
                                                                                   originally made.
                                    As of December 31, 2009
                                   Number of      Amount of
                                     Loans           Loans                         ***Small farmers are defined as those farmers, ranchers,
 Young                               1,794         $226,987
                                                                                   producers, or harvesters of aquatic products who normally
 Beginning                           3,680          524,277                        generate less than $250 in annual gross sales of agricultural or
 Small                               7,322          887,099                        aquatic products at the date the loan is originally made.

  Note: For purposes of the above table, a loan could be classified in more than
  one category, depending upon the characteristics of the underlying borrower.
                                                                                   REGULATORY MATTERS
The 2007 USDA Ag census data (latest data available) has been
                                                                                   For the twelve months ended December 31, 2009, the FCA took
used as a benchmark to measure penetration of the Association’s
                                                                                   no enforcement action against the Association.
marketing efforts. The census data indicated that within the
Association’s chartered territory (counties) there were 36,071
reported farmers of which by definition 1,501 or 4.16 percent
                                                                                   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
were Young, 10,069 or 27.91 percent were Beginning, and
34,192 or 94.79 percent were Small. Comparatively, as of
                                                                                   Effective January 1, 2009, the Association adopted accounting
December 31, 2009, the demographics of the Association’s
                                                                                   guidance for fair value measurements of nonfinancial assets and
agricultural portfolio contained 9,478 farmers, of which by
                                                                                   nonfinancial liabilities. The impact of adoption resulted in
definition 1,794 or 18.93percent were Young, 3,680 or 38.83
                                                                                   additional fair value disclosures (see Note 14), primarily regarding
percent were Beginning and 7,322 or 77.25 percent were Small.
                                                                                   other property owned, but does not have an impact on the
                                                                                   Association’s financial condition or results of operations.
The Director of Risk Management is charged with the
responsibility of monitoring the Young, Beginning, and Small
                                                                                   In April 2009, the Financial Accounting Standards Board (FASB)
farmer program. It is an integral part of the Association’s business
                                                                                   issued guidance, “Determining Fair Value When the Volume and
plan. The following strategies have helped the Association work
                                                                                   Level of Activity for the Asset or Liability Have Significantly
toward its goals and objectives relative to Young, Beginning, and
                                                                                   Decreased and Identifying Transactions That Are Not Orderly.”
Small farmer programs.
                                                                                   The guidance emphasizes that even if there has been a significant
                                                                                   decrease in the volume and level of activity for the asset or
                                                                                   liability and regardless of the valuation technique and inputs used,
28

     Management’s Discussion & Analysis of Financial Condition & Results of Operations
     (continued) dollars in thousands, except as noted

      the objective for the fair value measurement is unchanged from            with the remainder of the loss amount recognized in other
      what it would be if markets were operating at normal activity             comprehensive income. For held-to-maturity securities, the
      levels or transactions were orderly; that is, to determine the current    portion of the other-than-temporary impairment not related to a
      exit price. It sets forth additional factors that should be considered    credit loss will be recognized in a new category of other
      to determine whether there has been a significant decrease in             comprehensive income and amortized over the remaining life of
      volume and level of activity when compared with normal market             the debt security as an increase in the security’s carrying amount.
      activity. The reporting entity shall evaluate the significance and        Disclosure requirements for impaired debt and equity securities are
      relevance of the factors to determine whether, based on the weight        expanded and will now be required quarterly as well as annually
      of evidence, there has been a significant decrease in activity and        (see Note 3).
      volume. The guidance indicates that if an entity determines that
      either the volume or level of activity for an asset or liability has      The Association adopted this guidance effective for June 30, 2009.
      significantly decreased (from normal conditions for that asset or         For securities held at the beginning of the interim period of
      liability) or price quotations or observable inputs are not               adoption for which an other-than-temporary impairment was
      associated with orderly transactions, increased analysis and              previously recognized, if an entity does not intend to sell and it is
      management judgment will be required to estimate fair value. It is        not more likely than not that it will be required to sell before
      further noted that a fair value measurement should include a risk         recovery of its amortized cost basis, the entity shall recognize the
      adjustment to reflect the amount market participants would                cumulative effect of initially applying this guidance as an
      demand because of the risk (uncertainty) in the cash flows.               adjustment to the opening balance of retained earnings with a
                                                                                corresponding adjustment to accumulated other comprehensive
      This guidance also requires a reporting entity to make additional         income. There was no initial adjustment to apply this guidance for
      disclosures in interim and annual periods. Revisions resulting from       the Association since no other-than-temporary impairment was
      a change in valuation techniques or their application are accounted       previously recognized by the Association.
      for as a change in accounting estimate. The Association adopted
      this guidance effective June 30, 2009 (see Note 3).                       In April 2009, FASB issued guidance, “Interim Disclosures about
                                                                                Fair Value of Financial Instruments.” This guidance requires
      In April 2009, the FASB issued guidance, “Recognition and                 disclosures about fair value of financial instruments for interim
      Presentation of Other-Than-Temporary Impairments,” which                  reporting periods of publicly traded companies as well as in annual
      amends the other-than-temporary impairment guidance for debt              financial statements. The Association adopted this guidance
      securities to make the guidance more operational and to improve           effective June 30, 2009 (see Note 15).
      the presentation and disclosure of other-than-temporary
      impairments on debt securities in the financial statements. It does       In May 2009, the FASB issued guidance, "Subsequent Events,"
      not change existing recognition and measurement guidance related          which sets forth general standards of accounting for and disclosure
      to other-than-temporary impairments of equity securities.                 of events that occur after the balance sheet date but before
                                                                                financial statements are issued or are available to be issued. There
      This guidance changes existing impairment guidance related to             are two types of subsequent events: the first type consists of
      accounting for certain investments in debt and equity securities by       events or transactions that provide additional evidence about
      eliminating the “ability and intent to hold” provision. In addition,      conditions that existed at the balance sheet date (recognized
      impairment is now considered to be other than temporary if an             subsequent events) and the second type consists of events that
      entity 1) intends to sell the security, 2) more likely than not will be   provide evidence about conditions that did not exist at the balance
      required to sell the security before recovering its cost, or 3) does      sheet date but arose after that date (nonrecognized subsequent
      not expect to recover the security’s entire amortized cost basis          events). Recognized subsequent events should be included in the
      (even if the entity does not intend to sell). The “probability”           financial statements since the conditions existed at the date of the
      standard relating to the collectibility of cash flows is also             balance sheet. Nonrecognized subsequent events are not included
      eliminated, and impairment is now considered to be other-than-            in the financial statements since the conditions arose after the
      temporary if the present value of cash flows expected to be               balance sheet date but before the financial statements are issued or
      collected from the debt security is less than the amortized cost          are available to be issued. This guidance, which includes a
      basis of the security (any such shortfall is referred to as a “credit     required disclosure of the date through which an entity has
      loss”). If an entity intends to sell an impaired debt security or         evaluated subsequent events, was adopted by the Association
      more likely than not will be required to sell the security before         effective June 30, 2009 (see Note 17).
      recovery of its amortized cost basis less any current-period credit
      loss, the impairment is other-than-temporary and should be                In June 2009, the FASB issued guidance, “The FASB Accounting
      recognized currently in earnings in an amount equal to the entire         Standards Codification and the Hierarchy of Generally Accepted
      difference between fair value and amortized cost. If a credit loss        Accounting Principles.” This Codification became the source of
      exists, but an entity does not intend to sell the impaired debt           authoritative U.S. generally accepted accounting principles
      security and is not more likely than not to be required to sell           recognized by the FASB. This guidance was adopted by the
      before recovery, the impairment is other-than-temporary and               Association effective July 1, 2009 and had no impact on the
      should be separated into 1) the estimated amount relating to credit       Association’s financial condition or results of operations.
      loss, and 2) the amount relating to all other factors. Only the
      estimated credit loss amount is recognized currently in earnings,
                                                                                                                                                   29



Disclosure Required by Farm Credit
            Disclosure Required
Administration Regulations by
                       Farm Credit Administration Regulations
Description of Business                                                                                                             Form of
                                                                     Location                             Description               Ownership
Descriptions of the territory served, persons eligible to borrow,    809 South Park Street                Branch                    Owned
                                                                     Carrollton, GA
types of lending activities engaged in, financial services offered
                                                                     9164 Covington Bypass                Branch                    Owned
and related Farm Credit organizations are incorporated herein by
                                                                     Covington, GA
reference to Note 1 of the Consolidated Financial Statements,
                                                                     204 Bowen’s Mill Road                Branch                    Owned
“Organization and Operations,” included in this Annual Report        Douglas, GA
to shareholders.
                                                                     596 South Talbotton Street           Branch                    Owned
                                                                     Greenville, GA
The description of significant developments that had or could        690 Bypass 72 Suite A                Branch
have a material impact on earnings or interest rates to borrowers,                                                                  Leased(1)
                                                                     Greenwood, SC
acquisitions or dispositions of material assets, material changes    1298 Enterprise Way                  Branch                    Owned
in the manner of conducting the business, seasonal                   Griffin, GA
characteristics, and concentrations of assets, if any, is            311 East Cherry Street               Branch                    Owned
incorporated in “Management’s Discussion and Analysis of             Jesup, GA
Financial Condition and Results of Operations” included in this      306 Hillcrest Drive                  Branch                    Owned
Annual Report.                                                       Laurens, SC
                                                                     296 North Main Street                Secondary Mortgage        Owned
The Association distributes its earnings in a Patronage              Madison, GA
Allocation program as described in Management’s Discussion           2002 South Main Street               Branch                    Owned
and Analysis of Financial Condition and Results of Operations”       Madison, GA
included in this Annual Report. During 2009, there were no           1880 Joe S. Jeffords Highway         Branch                    Owned
significant changes to existing patronage policies and practices.    Orangeburg, SC
                                                                     1321 Springdale Road                 Branch                    Owned
Description of Property                                              Rock Hill, SC
                                                                     1192 Asheville Highway               Branch                    Owned
The following table sets forth certain information regarding the     Spartanburg, SC
properties of the reporting entity:                                  2630 Colonel Thomson Highway         Branch                    Owned
                                                                     St. Matthews, SC
                                                       Form of       40 South Main Street                 Branch                    Owned
Location                         Description           Ownership     Statesboro, GA
26 South Main Street             Administrative        Owned         702 Kate Lane                        Branch                    Owned
Statesboro, GA                   Headquarters                        Summerville, SC
1884 Joe S. Jeffords Highway     Administrative        Owned         302 Mims Avenue                      Branch                    Owned
Orangeburg, SC                                                       Sylvania, GA
101 Northtown Drive              Administrative        Owned         620 North Church Street              Branch                    Owned
Spartanburg, SC                                                      Thomaston, GA
951 East Pine Log Road           Branch                Owned         314 Commerce Way                     Branch                    Owned
Aiken, SC                                                            Vidalia, GA
                                                                     529 Bells Highway                    Branch                    Owned
413 Barnwell Highway             Branch                Owned
                                                                     Walterboro, SC
Allendale, SC
                                                                     887 South Calhoun Street             Special Assets            Owned
1325 Highway 28 Bypass           Branch                Owned
                                                                     Bamberg, SC
Anderson, SC
109 East Church Street           Branch                Owned              (1)   The term commenced on October 1, 1995 for a period of 24
Batesburg, SC                                                                   months. The lease was renewed with the latest renewal covering
64 Heritage Street               Branch                Owned                    the period October 5, 2009 through October 4, 2011. The lease
Baxley, GA                                                                      payment is payable monthly in advance in the sum of
111 Carter Avenue                Branch                Owned                    $2,054/month. The premises shall be used for office space. The
Blackshear, GA                                                                  lease holds an option to renew for an additional two year period
                                                                                at a mutually agreed upon lease rate.
951 Highway 1 South              Branch                Owned
Lugoff, SC
30

     Disclosure Required by Farm Credit Administration Regulations (continued)

      The Association owns property at 305 W. Oakland Avenue in                        W. Van McCall is the owner of McCall Ministries (evangelistic
      Rock Hill, SC which is currently on the market for sale.                         ministry) and managing partner in McCall Timber Farm, LLC
                                                                                       (pine timber and straw farming operation).
      Legal Proceedings
                                                                                       A. Owen Smith is the president of Sterling Estates Homeowners
      Information, if any, to be disclosed in this section is incorporated             Association. Mr. Smith is also partial owner of a family farm
      herein by reference to Note 13 of the Consolidated Financial                     that is currently being rented.
      Statements, “Commitments and Contingencies,” included in this
      Annual Report.                                                                   John Theron Anderson owns pecan and timber farms and holds
                                                                                       properties for rental and investment purposes.
      Description of Capital Structure
                                                                                       The total amount of compensation earned by all senior officers
      Information to be disclosed in this section is incorporated herein
                                                                                       as a group during the years ended December 31, 2009, 2008 and
      by reference to Note 9 of the Consolidated Financial Statements,
                                                                                       2007, is as follows:
      “Members’ Equity,” included in this Annual Report.
                                                                                           Name of
      Description of Liabilities                                                         Individual or                    Annual    Deferred Perq./
                                                                                       Number in Group Year           Salary  Bonus Comp. Other*                       Total
      The description of liabilities, contingent liabilities and obligations
      to be disclosed in this section is incorporated herein by reference              Wm. P. Spigener, Jr.   2009    $350,013 $113,050            –    $11,191        $474,254
                                                                                       Wm. P. Spigener, Jr.   2008    $325,012 $136,500            –    $11,277        $472,789
      to Notes 2, 8 and 13 of the Consolidated Financial Statements
                                                                                       Wm. P. Spigener, Jr.   2007    $305,011 $124,337            –    $10,534        $439,883
      included in this Annual Report.
                                                                                       7                      2009 $1,060,412 $325,300       –                –    $1,385,812
      Management’s Discussion and Analysis of Financial                                7                      2008 $1,007,102 $359,059 $11,765          $10,500    $1,388,426
      Condition and Results of Operations                                              7                      2007   $958,486 $343,257 $10,941                –    $1,312,684

      “Management’s Discussion and Analysis of Financial Condition                     *     The Perquisites/Other amount disclosed in the above chart includes club
                                                                                             memberships, automobile allowance, deferred compensation and life
      and Results of Operations,” which appears in this Annual Report                        insurance.
      and is to be disclosed in this section, is incorporated herein by
      reference.                                                                       In addition to a base salary, deferred compensation and
                                                                                       perquisites/other, senior officers earn additional compensation
      Senior Officers                                                                  under an annual incentive plan. The Association’s annual
                                                                                       incentive plan is designed to motivate employees to exceed the
      The following represents certain information regarding the
                                                                                       business plan goals during the fiscal year. These goals include
      senior officers of the Association:
                                                                                       Association income, credit quality, credit administration, loan
      Senior Officer             Position                              Date of Hire    volume, delinquencies, and other key success measurements.
                                                                                       Income to pay the incentive payments is derived from profits
      William P. Spigener, Jr.   Chief Executive Officer               August 1987
      Alisa D. Gunter            Chief Financial Officer               November 1981   over and above those budgeted in the board-approved budget for
      R. H. Moore                Director of Risk Management           January 1982    2009. All employees are covered by the annual incentive plan
      Phillip Craig Peebles      Regional President – Georgia          March 1981      which runs for the full calendar year. Employees can earn
      Ronald L. Summers          Regional President – South Carolina   May 1981
                                                                                       between 0 and 30 percent of base salary. Partial payment of the
      Walter Van McCall          Regional Lending Manager – Georgia    July 1980
      A. Owen Smith              Regional Lending Manager              May 1978        incentive was in the fourth quarter of 2009 with final payment in
                                  – South Carolina                                     the first quarter of 2010. A copy of the incentive plan is
      John Theron Anderson       Director of Secondary Market          May 1991        available to stockholders upon request. Certain additional
                                  & Insurance
                                                                                       bonuses have been approved by the board based on either the
                                                                                       overall performance of the Association, or particular ideas or
      The business experience for the past five years for senior                       performance leading to sustained increases in profits to the
      officers is with the Farm Credit System. Each senior officer has                 stockholders. Bonuses are shown in the year earned, which may
      held their current position with AgSouth Farm Credit since                       be different than the year of payment.
      merger, and held current or similar positions in pre-merger
      associations.                                                                    Selected staff members participate in a long-term incentive
                                                                                       program. The long-term incentive program was established by
      Ronald L. Summers serves on the boards of the Palmetto                           the board in fiscal year 2006 and measures performance at the
      Agribusiness Council (promotes agriculture in South Carolina),                   end of each three (3) year period. Payments under the long-term
      South Carolina Advocates for Agriculture (promotes agriculture                   incentive program can range from 0 to 15 percent. Goals include
      in South Carolina), South Carolina Poultry Federation (promotes                  reaching key financial ratios and building and maintaining the
      poultry industry in South Carolina), and South Carolina State                    Association’s patronage program. A partial payment of earned
      Business College (education). Mr. Summers also works a limited                   long-term incentive was paid in the fourth quarter of 2009. The
      amount on the family farm.                                                       final payment will be made in the first quarter of 2010. The
                                                                                                                                           31



purpose of the long-term incentive program is to retain key staff     The following chart details the year the director began serving on
and reward them for reaching established goals.                       the board and the current term expiration.

Selected staff members may also participate in a defined                                              Original Year of    Current
contribution benefit plan separate from the Association’s existing                                      Election or        Term
                                                                                    Director           Appointment       Expiration
401K plan. The defined contribution plan has requirements for
                                                                      Thomas H. Coward,                    1986            2012
vesting and is reflected in the Perquisites/Other column above.       Chairman
                                                                      A. Harvey Lemmon,                    1979             2011
All employees are eligible to receive awards based on years of        Vice-Chairman
service on five year, or multiple of five year anniversaries. A       Gary L. Alexander                    1997             2012
copy of this plan is available to stockholders upon request.          Harry S. Bell                        1967             2011
                                                                      Arthur Q. Black                      1995             2010
                                                                      James C. Carter, Jr.                 1979             2010
Disclosure of information on the total compensation paid during       Loy D. Cowart                        1968             2011
2009 to any senior officer, or to any other individual included in    Lee H. DeLoach                       2002             2011
the total, is available to stockholders upon request.                 Diane H. Edwins                      2002             2011
                                                                      Eugene W. Merritt, Jr.               1970             2012
Directors                                                             Jimmy B. Metts                       1978             2011
                                                                      Jerome G. Parker                     1987             2012
                                                                      Noel L. Riggins                      1994               *
Directors and senior officers are reimbursed on an actual cost        Charles C. Rucks                     1988             2010
basis for all expenses incurred in the performance of official        Raymond L. Tumbleston                1987             2012
duties. Such expenses may include transportation, lodging,            Hugh E. Weathers                     1998             2012
meals, tips, tolls, parking, laundry, registration fees, and other    John R. Wells,                       1990             2011
expenses associated with travel on official business. A copy of       Outside Director
                                                                      David H. Womack,                     1991             2012
the policy is available to stockholders upon request.                 Outside Director

The aggregate amount of reimbursement for travel, subsistence
and other related expenses for all directors as a group was           *Director Noel L. Riggins retired effective October 31, 2009.
$172,898 for 2009, $208,730 for 2008, and $178,665 for 2007.          Upon receipt of this intention to retire, the Board, at the
In 2006, the Association provided computers, printers, and            recommendation of the Governance Committee voted to reduce
internet access to the directors to provide for an electronic means   the number of stockholder elected directors to twelve (12),
of communication. Internet access charges are reimbursed based        through attrition.
upon submission. Depreciation expense for the Association
owned computers and printers is included in the furniture and         The following represents certain information regarding the
equipment expense of the Association.                                 directors of the Association. Unless specifically listed, the
                                                                      principal occupation of the board member for the past five years
Subject to approval by the board, the Association may allow           has been as a self-employed farmer.
directors honoraria of $400 for attendance at meetings, committee
meetings, or special assignments. Directors are also allowed          Thomas H. Coward, Chairman, is a horse farmer and real estate
travel honorarium of $200 depending upon meeting location             developer. Mr. Coward serves on the board of directors of the
relative to their headquarters. Directors are paid a monthly          South Carolina Foundation Seed Association (certified seed
retainer fee of $400 each. The retainer for the chairman, vice-       association) and is a commissioner of the Aiken Soil and Water
chairman, and chairman of the audit committee is $550 per             Conservation District (conservation). Mr. Coward serves on the
month.                                                                Executive, Compensation, Audit, Policy and Governance
                                                                      Committees.
There was no noncash compensation paid to directors in 2009.
                                                                      A. Harvey Lemmon, Vice-Chairman, is a commercial and
                                                                      purebred cattle producer. He serves on the Georgia Beef Board
                                                                      (promote beef and research) and the Georgia Angus Association
                                                                      (Angus cattle promotion). Mr. Lemmon serves on the Executive,
                                                                      Compensation, Audit, Policy and Governance Committees.

                                                                      Gary L. Alexander is a poultry farmer who owns and operates a
                                                                      residential property development business. Mr. Alexander is a
                                                                      board member of The Outdoor Dream Foundation (children’s
                                                                      organization) and is a member of the South Carolina Poultry
                                                                      Federation (poultry organization). Mr. Alexander also serves on
                                                                      the AgFirst Farm Credit Bank (agricultural lending) board of
                                                                      directors. Mr. Alexander services on the Executive, Compensation
                                                                      and Audit Committees.
32

     Disclosure Required by Farm Credit Administration Regulations (continued)

      Harry S. Bell is a row crop farmer and the former president of        Mr. Merritt serves on the Executive and Compensation
      the South Carolina Farm Bureau. He serves on the boards of the        Committees.
      Ridge Farmers Mutual (farm supply business) and the Saluda
      County Farm Bureau (agricultural organization). Mr. Bell also         Jimmy B. Metts is a cattle and row crop farmer. He owns a
      serves on an Advisory Committee for the First Citizens bank           timber business and a restaurant as well. His principal occupation
      serving the Johnston and Ridge Spring area of South Carolina          and employment for the past five years was farming, timber and
      (commercial banking). Mr. Bell serves on the Audit Committee.         the operation of his restaurant. Mr. Metts is on the Governance
                                                                            Committee.
      Arthur Q. Black is a peach, strawberry, hay, and produce farmer.
      He operates a retail roadside market and bakery with his wife and     Jerome G. Parker is a pecan farmer. He also owns a refrigeration
      daughter. He is president of York County Farm Bureau                  business. His principal occupation and employment for the past
      (agricultural organization) and serves on the board of the Fruit      five years was farming and operating his refrigeration business.
      Advisory Committee of the South Carolina Farm Bureau                  He serves on the board of the Tattnall County Farm Bureau
      (agriculture organization). He also serves as president on the        (agricultural organization). Mr. Parker serves on the Policy
      board of Farmers Mutual Insurance (insurance). Mr. Black              Committee.
      serves on the Governance Committee.
                                                                            Noel L. Riggins is a broiler producer, cattle farmer, and retired
      James C. Carter, Jr. is a beef cattle, hay, blueberry, blackberry     airline pilot. He serves on the board of Southern Rivers Energy
      and strawberry farmer. His farm has expanded into agritourism         Trust (nonprofit). He also serves on the board of the Barnesville
      with a corn maize and educational field trips. He also operates a     Lamar Community Foundation (nonprofit). Mr. Riggins retired
      feed business and provides artificial insemination services for       from the board effective October 31, 2009. Prior to retiring from
      cattle. Mr. Carter serves on the boards of the Henry County Farm      the Board, Mr. Riggins served on the Executive, Compensation
      Bureau (agricultural organization), the Henry County Water and        and Policy Committees.
      Sewage Authority (water supply and distribution organization),
      and the Henry County Cattlemen’s Association (beef cattle             Charles C. Rucks is a dairy farmer. He also produces hay and beef
      production). Mr. Carter serves on the Executive and                   cattle. He serves on the boards of American Dairy Association
      Compensation Committees and is chairman of the Audit                  (dairy industry), the Spalding County Farm Bureau (agricultural
      Committee.                                                            organization), the Georgia Beef Board (agricultural organization)
                                                                            and the Upper Flint Water Council (water conservation). Mr.
      Loy D. Cowart, Jr. is a timber farmer and landlord. He serves on      Rucks serves on the Executive and Compensation committees and
      the boards of Durden Banking Company (banking), Emanuel               is chairman of the Policy Committee.
      County Development Authority (county development), Emanuel
      County Board of Education (education), and serves as Vice             Raymond L. Tumbleston is a retired tomato farmer and real estate
      President of Emanuel County Farm Bureau (agricultural                 developer. He serves on the board of the Charleston County Farm
      organization). Mr. Cowart serves as the chairman of the               Bureau (agricultural organization), the Charleston Soil and Water
      Governance committee and is on the Executive and                      Conservation District (conservation), the South Carolina Tomato
      Compensation Committees.                                              Growers Association (tomato promotion) and St. Paul’s Academy
                                                                            (education). Mr. Tumbleston was recently awarded the South
      Lee H. DeLoach serves as Bulloch County, Georgia Probate              Carolina Outstanding Conservation District Commissioner of the
      Judge. He is also a timber farmer and landlord. His principal         Year. Mr. Tumbleston serves on the Policy Committee.
      occupation and employment for the past five years was his
      service as probate judge and managing his timber farm and rental      Hugh E. Weathers is a dairy farmer and is currently serving as
      property. Mr. DeLoach is active in community and civic affairs.       Commissioner of Agriculture for the state of South Carolina. He
      Mr. DeLoach serves on the Policy Committee.                           is currently employed by Weathers Farms, Inc. and the state of
                                                                            South Carolina. He serves on the board of the South Carolina
      Diane H. Edwins is a row crop and timber farmer and part-time         Poultry Federation (poultry industry), the Southern United States
      bookkeeper. Mrs. Edwins also serves on the board of the               Trade Association (agricultural exporting), and the South Carolina
      Berkeley Soil and Water Conservation District (conservation),         Department of Commerce Coordinating Council (commerce
      the Lord Berkeley Conservation Trust (conservation) and the           enhancement). Mr. Weathers serves on the Governance
      state conservation board (conservation). Mrs. Edwins serves on        Committee.
      the Audit Committee.
                                                                            John R. Wells is retired. His principal occupation for the past five
      Eugene W. Merritt, Jr. is an ornamental tree farmer and landscape     years was with the University of West Georgia (formerly West
      contractor. Mr. Merritt is co-owner and operates, Merritt Brothers,   Georgia College), where he served as Assistant Dean in the
      Inc. (tree farm and landscaping business). Mr. Merritt also serves    College of Business. Mr. Wells is serving as an outside director
      on the boards of AgFirst Farm Credit Bank (agricultural lending),     and is a member of the Audit Committee.
      Peoples National Bank (banking), Peoples BankCorp (bank
      holding company), Jackson Company (recreational), and serves as       David H. Womack is a Certified Public Accountant in the firm of
      an elder at Mount Morinth Baptist Church (religious organization).    David H. Womack, PC, CPAs. His principal occupation and
                                                                                                                                                    33



employment for the past five years has been as a CPA. He serves               Transactions with Senior Officers and Directors
on the boards of Evans Memorial Hospital Authority (non-profit
health care), Brewton Cemetery, Inc. (perpetual care, non-profit),            The reporting entity’s policies on loans to and transactions with
and Pinewood Christian Academy (education, non-profit). Mr.                   its officers and directors, to be disclosed in this section are
Womack is serving as an outside director and serves on the Audit              incorporated herein by reference to Note 12 of the Consolidated
Committee.                                                                    Financial Statements, “Related Party Transactions,” included in
                                                                              this Annual Report. There have been no transactions between the
The following chart details the committee assignments and the                 Association and senior officers or directors which require
honorarium paid for committee meetings and other activities:                  reporting per FCA regulations.

                                     Days in                                  Involvement in Certain Legal Proceedings
                                      Board          Comp. for Board
              Director               Meetings       Meetings & Retainer
Thomas H. Coward,                               9               $ 9,800       There were no matters which came to the attention of
Chairman                                                                      management or the board of directors regarding involvement of
A. Harvey Lemmon,                               9                 9,800       current directors or senior officers in specified legal proceedings
Vice-Chairman
Gary L. Alexander                               8                 7,600
                                                                              which should be disclosed in this section. No directors or senior
Harry S. Bell                                   9                 8,000       officers have been involved in any legal proceedings during the
Arthur Q. Black                                 9                 8,400       last five years which require reporting per FCA regulations.
James C. Carter, Jr.                            9                 9,800
Loy D. Cowart                                   8                 8,000
Lee H. DeLoach                                  9                 8,400
                                                                              Relationship with Independent Auditor
Diane H. Edwins                                 9                 8,000
Eugene W. Merritt, Jr.                          9                 8,400       There were no changes in or material disagreements with our
Jimmy B. Metts                                  9                 8,400       independent auditor on any matter of accounting principles or
Jerome G. Parker                                9                 8,000
Noel L. Riggins                                 6                 6,400
                                                                              financial statement disclosure during this period.
Charles C. Rucks                                9                 8,400
Raymond L. Tumbleston                           9                 8,400       Aggregate fees paid by the Association for services rendered by
Hugh E. Weathers                                6                 4,800       its independent auditor for the year ended December 31, 2009
John R. Wells,                                  8                 7,600
Outside Director
                                                                              were as follows:
David H. Womack,                                9                 8,000
Outside Director                                                                                                                  2009
                                                                                 Independent Auditor
     TOTAL                                                     $146,200           PricewaterhouseCoopers, LLP
                                                                                             Audit services                  $    61,541
                                                    Comp. for                               Total                            $    61,541
                          Days in      Days in      Committee
                         Committee     Other        and other    Total All
         Director         Meetings    Activities    Activities Compensation   Audit services were for the annual audit of the Consolidated
Thomas H. Coward,                                                             Financial Statements.
Chairman                     9           19         $ 11,925     $ 21,725
A. Harvey Lemmon,
Vice-Chairman                9           18          11,525       21,325
                                                                              The Association also contracts with Harper, Rains, Knight &
Gary L. Alexander            7           10           6,200       13,800      Company for tax services and some selected internal audit
Harry S. Bell                8           16          10,250       18,250      components. In 2009, the Association contracted with the firm of
Arthur Q. Black              2           19           8,700       17,100      Dabbs, Hickman, Hill & Cannon, LLP to tabulate the director
James C. Carter, Jr.         9           15          10,125       19,925
                                                                              election ballots at the annual meeting. The hiring of the
Loy D. Cowart                6            8           4,125       12,125
Lee H. DeLoach               4           16           7,650       16,050      independent auditor and CPA for tax services was authorized by
Diane H. Edwins              8           14           9,250       17,250      the Audit Committee.
Eugene W. Merritt, Jr.       7            5           4,600       13,000
Jimmy B. Metts               2           16           7,775       16,175      Consolidated Financial Statements
Jerome G. Parker             4            9           5,325       13,325
Noel L. Riggins              6            5           4,725       11,125
Charles C. Rucks             7           11           7,200       15,600      The Consolidated Financial Statements, together with the report
Raymond L. Tumbleston        4           15           7,450       15,850      thereon of PricewaterhouseCoopers, LLP dated March 12, 2010
Hugh E. Weathers             2           10           2,525        7,325      and the report of management, which appear in this Annual
John R. Wells,                                                                Report are incorporated herein by reference.
Outside Director             7            9           7,050       14,650
David H. Womack,
Outside Director             8           16          10,050       18,050      Copies of the Association’s quarterly reports are available upon
  TOTAL                                             $136,450    $282,650      request free of charge by calling 1-800-310-4805, ext. 237, or
                                                                              writing Alisa D. Gunter, AgSouth Farm Credit, ACA, P.O. Box
                                                                              4966 Spartanburg, SC 29305, or accessing the website,
                                                                              www.agsouthfc.com. The Association prepares an electronic
                                                                              version of the Annual Report which is available on the
34

     Disclosure Required by Farm Credit Administration Regulations (continued)

      Association’s web site within 75 days after the end of the fiscal
      year and distributes the Annual Reports to shareholders within 90
      days after the end of the fiscal year. The Association prepares an
      electronic version of the Quarterly Report within 40 days after
      the end of each fiscal quarter, except that no report need be
      prepared for the fiscal quarter that coincides with the end of the
      fiscal year of the institution.

      Borrower Information Regulations

      Since 1972, Farm Credit Administration (FCA) regulations have
      required that borrower information be held in strict confidence by
      Farm Credit System (FCS) institutions, their directors, officers and
      employees. These regulations provide Farm Credit institutions
      clear guidelines for protecting their borrowers’ nonpublic personal
      information.

      On November 10, 1999, the FCA Board adopted a policy that
      requires FCS institutions to formally inform new borrowers at
      loan closing of the FCA regulations on releasing borrower
      information and to address this information in the Annual Report.
      The implementation of these measures ensures that new and
      existing borrowers are aware of the privacy protections afforded
      them through FCA regulations and Farm Credit System
      institution efforts.

      Credit and Services to Young, Beginning, and Small Farmers
      and Ranchers and Producers or Harvesters of Aquatic
      Products

      Information to be disclosed in this section is incorporated herein
      by reference to the similarly named section in the Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations section included in this Annual Report to the
      shareholders.

      Shareholder Investment

      Shareholder investment in the Association could be affected by
      the financial condition and results of operations of AgFirst Farm
      Credit Bank (Bank or AgFirst). Copies of the Bank’s Annual and
      Quarterly reports are available upon request free of charge by
      calling 1-800-845-1745, ext. 378, or writing Stephen Gilbert,
      AgFirst Farm Credit Bank, P. O. Box 1499, Columbia, SC
      29202. Information concerning AgFirst Farm Credit Bank can
      also be obtained by going to AgFirst’s web site at
      www.agfirst.com. The Bank prepares an electronic version of
      the Annual Report, which is available on the website, within 75
      days after the end of the fiscal year and distributes the Annual
      Reports to shareholders within 90 days after the end of the fiscal
      year. The Bank prepares an electronic version of the Quarterly
      report within 40 days after the end of each fiscal quarter, except
      that no report needs to be prepared for the fiscal quarter that
      coincides with the end of the fiscal year of the Bank.
                                                                                                                                              35



Report of the Audit Committee
                               Report of the Audit Committee

The Audit Committee of the Board of Directors (Committee) is comprised of the directors named below. None of the directors who serve
on the Committee is an employee of AgSouth Farm Credit (Association), ACA, and in the opinion of the Board of Directors, each is free of
any relationship with the Association or management that would interfere with the director’s independent judgment on the Committee.

The Committee has adopted a written charter that has been approved by the Board of Directors. The Committee has reviewed and
discussed the Association’s audited financial statements with management, which has primary responsibility for the financial statements.

PricewaterhouseCoopers LLP (PwC), the Association’s independent auditor for 2009, is responsible for expressing an opinion on the
conformity of the Association’s audited financial statements with accounting principles generally accepted in the United States of America.
The Committee has discussed with PwC the matters that are required to be discussed by Statement on Auditing Standards No. 114 (The
Auditor's Communication With Those Charged With Governance). PwC has provided to the Committee the written disclosures and the
letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Committee
has discussed with PwC that firm’s independence.

The Committee has also concluded that PwC’s provision of non-audit services, if any, to the Association is compatible with PwC’s
independence.

Based on the considerations referred to above, the Committee recommended to the Board of Directors that the audited financial
statements be included in the Association’s Annual Report for 2009. The foregoing report is provided by the following independent
directors, who constitute the Committee:




                                                           James C. Carter, Jr.

                                                    Chairman of the Audit Committee

                                                      Members of Audit Committee

                                                           Thomas H. Coward
                                                           A. Harvey Lemmon
                                                           Gary L. Alexander
                                                              Harry S. Bell
                                                            Diane H. Edwins
                                                              John R. Wells
                                                           David H. Womack



March 12, 2010
36



     Report of Independent Auditors
                 Report of Independent Auditors



                                                                               PricewaterhouseCoopers LLP
                                                                               10 Tenth Street, Suite 1400
                                                                               Atlanta, GA 30309
                                                                               Telephone (678) 419 1000


            Report of Independent Auditors



            To the Board of Directors and Members
            of AgSouth Farm Credit, ACA


            In our opinion, the accompanying consolidated balance sheets and the related consolidated
            statements of income, of changes in members’ equity and of cash flows present fairly, in all
            material respects, the financial position of AgSouth Farm Credit, ACA (the Association) and its
            subsidiaries at December 31, 2009, 2008 and 2007, and the results of their operations and their cash
            flows for the years then ended in conformity with accounting principles generally accepted in the
            United States of America. These financial statements are the responsibility of the Association’s
            management. Our responsibility is to express an opinion on these financial statements based on our
            audits. We conducted our audits of these statements in accordance with auditing standards
            generally accepted in the United States of America. Those standards require that we plan and
            perform the audit to obtain reasonable assurance about whether the financial statements are free of
            material misstatement. An audit includes examining, on a test basis, evidence supporting the
            amounts and disclosures in the financial statements, assessing the accounting principles used and
            significant estimates made by management, and evaluating the overall financial statement
            presentation. We believe that our audits provide a reasonable basis for our opinion.




            March 12, 2010
                                                   AgSouth Farm Credit, ACA
                                                                                                              37
         Consolidated Balance Sheets
                                                   AgSouth Farm Credit, ACA



         Consolidated Balance Sheets
Consolidated Balance Sheets                                           31
                                                             December 31,              31
                                                                              December 31,             31
                                                                                              December 31,
(dollars in thousands)                                           2009             2008            2007
                                                                      31
                                                             December 31,              31
                                                                              December 31,             31
                                                                                              December 31,
(dollars in thousands)                                           2009             2008            2007
Assets
Cash                                                          $      4,119    $      2,772    $      4,429
Investment securities:
Assets
  Held
Cash to maturity (fair value of $4,768                        $      4,119    $      2,772    $      4,429
    $0 and securities:
Investment$0 respectively)                                           4,583              —               —
  Held investment securities
  Total to maturity (fair value of $4,768                             4,583              —               —
   $0 and $0 respectively)                                            4,583              —               —
Loans                                                             1,503,794       1,445,201       1,323,840
  Less: allowance securities
  Total investmentfor loan losses                                     4,583
                                                                      9,497              —
                                                                                      4,467              —
                                                                                                      3,970
  Net
Loans loans                                                       1,494,297
                                                                  1,503,794       1,440,734
                                                                                  1,445,201       1,319,870
                                                                                                  1,323,840
  Less: allowance for loan losses                                     9,497           4,467           3,970
L     held for l
Loans h ld f sale                                                     2,209
                                                                      2 209             977             222
  Net loans
Accrued interest receivable                                       1,494,297
                                                                     15,599       1,440,734
                                                                                     17,145       1,319,870
                                                                                                     17,905
Loans h ld for other
Investmentsf in sale Farm Credit institutions
L     held        l                                                  24,658
                                                                      2 209
                                                                      2,209          23,316
                                                                                        977          21,790
                                                                                                        222
Accrued and equipment, net
Premisesinterest receivable                                          15,108
                                                                     15,599          13,342
                                                                                     17,145          11,681
                                                                                                     17,905
Other property owned                                                  3,489
                                                                     24,658             216
                                                                                     23,316              40
                                                                                                     21,790
Investments in other Farm Credit institutions
Due from AgFirst Farm Credit
Premises and equipment, net Bank                                     13,062
                                                                     15,108          11,225
                                                                                     13,342          12,178
                                                                                                     11,681
Other assets owned
Other property                                                       17,024
                                                                      3,489          17,063
                                                                                        216          15,374
                                                                                                         40
Due from AgFirst Farm Credit Bank                                  13,062          11,225          12,178
           l
      Total assets                                            $ 1,594,148     $ 1,526,790     $ 1,403,489
Other assets                                                       17,024          17,063          15,374

            l
      Total assets                                            $ 1,594,148     $ 1,526,790     $ 1,403,489
Liabilities
Notes payable to AgFirst Farm Credit Bank                     $ 1,323,237     $ 1,262,811     $ 1,149,999
Accrued interest payable
Liabilities                                                         3,922           4,754           5,502
Notes payable to payable
Patronage refund AgFirst Farm Credit Bank                           7,505
                                                              $ 1,323,237           9,952
                                                                              $ 1,262,811           9,946
                                                                                              $ 1,149,999
Other liabilities payable
Accrued interest                                                   24,651
                                                                    3,922          20,884
                                                                                    4,754          21,795
                                                                                                    5,502
Patronage refund payable                                              7,505           9,952           9,946
Other Total liabilities
      liabilities                                                 1,359,315
                                                                     24,651       1,298,401
                                                                                     20,884       1,187,242
                                                                                                     21,795
Commitments and contingencies
    Total liabilities                                             1,359,315       1,298,401       1,187,242
Members' Equity contingencies
Commitments and
Protected borrower stock                                               208             335             457
Capital stock and participation certificates
Members' Equity                                                      6,277           6,270           6,176
Retained borrower
Protectedearnings stock                                                208             335             457
   Allocated
Capital stock and participation certificates                       111,658
                                                                     6,277         109,795
                                                                                     6,270         102,123
                                                                                                     6,176
   Unallocated
Retained earnings                                                  116,982         112,202         107,688
Accumulated other comprehensive income (loss)
   Allocated                                                          (292)
                                                                   111,658            (213)
                                                                                   109,795            (197)
                                                                                                   102,123
   Unallocated                                                     116,982         112,202         107,688
     Total members' equity
Accumulated other comprehensive income (loss)                      234,833
                                                                      (292)        228,389
                                                                                      (213)        216,247
                                                                                                      (197)
      Total liabilities and members' equity                     1,594,148
                                                              $ 1 594 148       1,526,790
                                                                              $ 1 526 790       1,403,489
                                                                                              $ 1 403 489
      Total members' equity                                       234,833         228,389         216,247

      Total liabilities and members' equity                     1,594,148
                                                              $ 1 594 148       1,526,790
                                                                              $ 1 526 790       1,403,489
                                                                                              $ 1 403 489


The accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these financial statements.
                                                        AgSouth Farm Credit, ACA
38
                                 Consolidated Balance Sheets
     Consolidated Statements of Income                  AgSouth Farm Credit, ACA
                                                                           31
                                                                  December 31,                    31
                                                                                         December 31,                   31
                                                                                                               December 31,

                         Consolidated Statements of Income
     (dollars in thousands)                                           2009                   2008                  2007



     Assets
     Cash                                                          $                      $      2,772
                                                                          4,119 For the year ended December 31, $
                                                                                                            31         4,429
     Investment securities:
     (dollars in thousands)                                            2009                   2008                  2007
       Held to maturity (fair value of $4,768
         $0 and $0 respectively)                                          4,583                    —                      —
     Interest Income
     Investment securities
       Total investment securities                                $           15
                                                                           4,583         $          ——         $           —
                                                                                                                           —
     Loans                                                                96,234               105,790                109,144
     Loans                                                             1,503,794             1,445,201              1,323,840
       Less: allowance for
      Total interest income loan losses                                    9,497
                                                                          96,249                 4,467
                                                                                               105,790                  3,970
                                                                                                                      109,144
       Net loans                                                       1,494,297             1,440,734              1,319,870
     Interest Expense
     L
     Loans payable to l
            held for AgFirst Farm Credit Bank
     Notes h ld f sale                                                    2 209
                                                                          2,209
                                                                         47,478                   977
                                                                                               59,305                    222
                                                                                                                      65,543
     Accrued interest receivable
     Other                                                               15,599
                                                                             18                17,145
                                                                                                  118                 17,905
                                                                                                                         176
     Investments in other Farm Credit institutions                       24,658                23,316                 21,790
     Premises and equipment, net
      Total interest expense                                             15,108
                                                                         47,496                13,342
                                                                                               59,423                 11,681
                                                                                                                      65,719
     Other property owned                                                 3,489                   216                     40
     Due from AgFirst Farm Credit Bank
     Net interest income                                                 13,062
                                                                         48 753
                                                                         48,753                11,225
                                                                                               46 367
                                                                                               46,367                 12,178
                                                                                                                      43 425
                                                                                                                      43,425
     Other assets (reversal of allowance for) loan losses
     Provision for                                                       17,024
                                                                          5,654                17,063
                                                                                                  750                 15,374
                                                                                                                          —
           Total income
     Net interest assets after provision for
                l                                                  $ 1,594,148           $ 1,526,790           $ 1,403,489
     (reversal of allowance for) loan losses                            43,099                45,617                43,425

     Noninterest
     Liabilities Income
     Loan payable to AgFirst Farm Credit Bank
     Notesfees                                                            3,379
                                                                   $ 1,323,237                 2,806
                                                                                         $ 1,262,811                 2,725
                                                                                                               $ 1,149,999
     Fees for financially related services
     Accrued interest payable                                               793
                                                                          3,922                  778
                                                                                               4,754                   574
                                                                                                                     5,502
     Patronage refund from other
     Patronage refund payable Farm Credit institutions                  13,641
                                                                          7,505               11,789
                                                                                               9,952                13,028
                                                                                                                     9,946
     Gains (losses) on
     Other liabilities other property owned, net                         (2,262)
                                                                        24,651                    34
                                                                                              20,884                   (31)
                                                                                                                    21,795
     Gains (losses) on sales of rural home loans, net                     1,159                  824                   893
            (losses) on sales
     Gains Total liabilities of premises and equipment, net                 466
                                                                     1,359,315                    46
                                                                                           1,298,401                   116
                                                                                                                 1,187,242
     Other noninterest income                                               315                 (168)                1,236
     Commitments and contingencies
      Total noninterest income                                            17,491               16,109                 18,541
     Members' Equity
     Noninterest Expense
     Protected borrower stock                                              208                   335                   457
     Salariesstockemployee benefits certificates
     Capital and and participation                                      24,535
                                                                         6,277                18,129
                                                                                               6,270                18,040
                                                                                                                     6,176
     Occupancy and equipment
     Retained earnings                                                   2,496                 2,315                 2,410
     Insurance Fund premiums
         Allocated                                                       2,383
                                                                       111,658                 1,916
                                                                                             109,795                 1,803
                                                                                                                   102,123
     Other operating expenses
         Unallocated                                                     4,824
                                                                       116,982                 5,481
                                                                                             112,202                 5,097
                                                                                                                   107,688
     Accumulated other comprehensive income (loss)                        (292)                 (213)                 (197)
      Total noninterest expense                                         34,238                27,841                27,350
            Total members' equity                                      234,833               228,389               216,247
     Income before income taxes                                         26,352                33,885                34,616
            Total liabilities income taxes
     Provision (benefit) forand members' equity                      1,594,148
                                                                   $ 1 594 148
                                                                           167             1,526,790
                                                                                         $ 1 526 790
                                                                                                  30           $ 1 403 489
                                                                                                                 1,403,489
                                                                                                                       328

     Net income                                                   $       26,185         $     33,855          $      34,288


     The accompanying notes are an integral part of these financial statements.
                                                             AgSouth Farm Credit, ACA
                                                                                                                                                     39
                                  Consolidated Balance Sheets
Consolidated Statements                                          AgSouth Farm Credit, ACA
                                                                                    31
                                                                           December 31,                          31
                                                                                                        December 31,                         31
                                                                                                                                    December 31,
      Consolidated Statements of Changes
of Changes in Members’ Equity in
(dollars in thousands)                                                         2009                         2008                        2007

                                                    Members' Equity
Assets
Cash                                                                       $ Capital
                                                                                  4,119             $      2,772 Accumulated$       4,429
Investment securities:                                             Protected Stock and      Retained Earnings        Oth
                                                                                                                     Other        Total
                                                                   Borrower Participation                        Comprehensive Members'
   Held to maturity (fair value of $4,768
(dollars in thousands)                                               Stock Certificates Allocated Unallocated       Income      Equity
    $0 and $0 respectively)                                                       4,583                       —                         —
Balance at December 31, 2006                                        $ 608     $ 6,021     $ 92,430    $ 107,254    $     —     $ 206,313
   Total investment securities
Net income                                                                        4,583                       —
                                                                                                         34,288                   34,288—
Protected borrower stock retired                                       (151)                                                        (151)
Loans
Capital stock/participation certificates issued/(retired), net               1,503,794
                                                                                   155                 1,445,201               1,323,840
                                                                                                                                     155
   Less: allowance for
Patronage distribution loan losses                                                 9,497                        4,467                       3,970
  Cash                                                                                                       (9,751)                       (9,751)
   Net loans                                                                    1,494,297                  1,440,734                    1,319,870
  Qualified allocated retained earnings                                                         1,145        (1,145)                           —
L Nonqualified allocated retained earnings
        held for l
Loans h ld f sale                                                                  2 209
                                                                                   2,209       21,608       (21,608)
                                                                                                                 977                           —
                                                                                                                                               222
Retained earnings retired
Accrued interest receivable                                                       15,599      (14,006)        17,145                      (14,006)
                                                                                                                                            17,905
Patronage distribution adjustment                                                                 946         (1,350)                        (404)
                                                                                  24,658                      23,316                       21,790
Investments initially Farm Credit institutions
Adjustment toin other apply accounting guidance for
Premises and equipment, net
 employee benefit plans (Note 11)                                                 15,108                      13,342        (197)          11,681
                                                                                                                                            (197)
Other property owned                                                               3,489                         216                           40
Balance at December 31, 2007                                            457       6,176      102,123        107,688         (197)        216,247
Due from AgFirst Farm Credit Bank                                                 13,062                      11,225                       12,178
Comprehensive income
Other assets                                                                      17,024                      17,063                       15,374
 Net income                                                                                                  33,855                       33,855
  Employee benefit plans adjustments (Note 11)                                                                  (30)         (16)            (46)
             l
       Total assets                                                        $ 1,594,148                   $ 1,526,790                $   1,403,489
    Total comprehensive income                                                                                                            33,809
Protected borrower stock retired                                        (122)                                                               (122)
Capital stock/participation certificates issued/(retired), net                       94                                                       94
Liabilities
Patronage distribution
Notes payable to AgFirst Farm Credit Bank
  Cash                                                                     $ 1,323,237                   $ 1,262,811
                                                                                                             (9,697)                $ 1,149,999
                                                                                                                                         (9,697)
Accrued interest payable earnings
  Qualified allocated retained                                                   3,922            838          4,754
                                                                                                               (838)                       5,502
                                                                                                                                             —
  Nonqualified allocated retained
  N        lifi d ll t d t
Patronage refund payable i d earnings    i                                       7,505         18 555
                                                                                               18,555       (18,555)
                                                                                                                555)
                                                                                                            (189,952                         —
                                                                                                                                           9,946
Retained earnings retired
Other liabilities                                                               24,651        (11,879)        20,884                    (11,879)
                                                                                                                                          21,795
Patronage distribution adjustment                                                                 158          (221)                         (63)
Balance at December 31, 2008
       Total liabilities                                                335        6,270
                                                                                1,359,315    109,795        112,202
                                                                                                           1,298,401        (213)        228,389
                                                                                                                                        1,187,242
Comprehensive income
 Net income
Commitments and contingencies                                                                                26,185                       26,185
  Employee benefit plans adjustments (Note 11)                                                                               (79)            (79)
    Total comprehensive income
Members' Equity                                                                                                                           26,106
Protected borrower stock retired
Protected borrower stock                                                (127)        208                          335                       (127)
                                                                                                                                              457
Capital stock/participation certificates issued/(retired), net
Capital stock and participation certificates                                          7
                                                                                   6,277                        6,270                          7
                                                                                                                                            6,176
Patronage distribution
Retained earnings
  Cash                                                                                                       (7,247)                      (7,247)
    Allocated                                                                    111,658                     109,795                     102,123
  Qualified allocated retained earnings                                                           934          (934)                          —
    Unallocated
  Nonqualified allocated retained earnings
                                                                                 116,982       13,851
                                                                                                             112,202
                                                                                                            (13,851)
                                                                                                                                         107,688
                                                                                                                                              —
Accumulated other comprehensive income (loss)
Retained earnings retired                                                           (292)     (13,456)          (213)                        (197)
                                                                                                                                         (13,456)
Patronage distribution adjustment                                                                 534           627                        1,161
       Total members' equity                                                     234,833                     228,389                     216,247
Balance at D
B l             b 31,
         t December 31 2009                                         $   208       6 277
                                                                                $ 6,277     $ 111 658
                                                                                              111,658        116,982
                                                                                                           $ 116 982    $   (292)         234,833
                                                                                                                                        $ 234 833
       Total liabilities and members' equity                                 1,594,148
                                                                           $ 1 594 148                     1,526,790
                                                                                                         $ 1 526 790                  1,403,489
                                                                                                                                    $ 1 403 489




The accompanying notes are an integral part of these financial statements.
                                                           AgSouth Farm Credit, ACA
40
                                   Consolidated Balance Sheets
                                                           AgSouth Farm Credit, ACA



         Consolidated Statements of Cash Flows
     Consolidated Statements of Cash Flows                                      31
                                                                       December 31,               31
                                                                                         December 31,                               31
                                                                                                                           December 31,
     (dollars in thousands)                                                2009              2008                              2007

                                                                                                     year ended December 31,
                                                                                             For the y                     ,
     (dollars in thousands)                                                                  2009          2008        2007
     Assets
     Cash
     Cash flows from operating activities:                               $       4,119   $        2,772                    $        4,429
     Investment securities:
      Net income                                                                         $ 26,185          $    33,855         $ 34,288
         Held to maturity (fair net income to net
       Adjustments to reconcilevalue of $4,768 cash
          $0 and $0 respectively)
        provided by (used in) operating activities:                              4,583                —                                —
         Depreciation on premises and equipment                                                1,030                999              966
         Total investment securities
        Amortization (accretion) of net deferred loan origination costs (fees)   4,583           198 —             (276)                —
                                                                                                                                    (629)
              ii f (           l f ll         for) loan l
        Provision for (reversal of allowance f ) l       losses                                5,654                750               —
     Loans                                                                   1,503,794        1,445,201                         1,323,840
        (Gains) losses on other property owned, net                                            2,262                (34)              31
                                    losses
         Less: allowance for loanpremises and equipment, net
        (Gains) losses on sales of
                                                                                 9,497             4,467
                                                                                                (466)               (46)
                                                                                                                                     3,970
                                                                                                                                    (116)
         Net loans
        Changes in operating assets and liabilities:                         1,494,297        1,440,734                         1,319,870
          (Increase) decrease in loans held for sale, net                                    (1,232)              (755)            (101)
     L (Increase) decrease in accrued interest receivable
             held for l
     Loans h ld f sale                                                           2 209
                                                                                 2,209        1,546 977            760               222
                                                                                                                                   (792)
     Accrued interest receivable from AgFirst Farm Credit Bank
          (Increase) decrease in due                                            15,599           17,145
                                                                                             (1,837)               953            17,905
                                                                                                                                 (1,745)
     Investments in other Farm Credit institutions
          (Increase) decrease in other assets                                   24,658           23,316
                                                                                                 39             (1,689)           21,790
                                                                                                                                  1,486
          Increase (decrease) in net
     Premises and equipment,accrued interest payable                            15,108           13,342
                                                                                               (832)              (748)           11,681
                                                                                                                                    203
          Increase (decrease)
     Other property owned in other liabilities                                   3,489        3,688 216           (952)             614
                                                                                                                                      40
     Due from AgFirst Farm Credit Bank
          Total adjustments                                                     13,062           11,225
                                                                                             10,050             (1,038)           12,178
                                                                                                                                    (83)
     Other assets provided by (used in) operating activities
            Net cash                                                            17,024           17,063
                                                                                             36,235             32,817            15,374
                                                                                                                                 34,205
     Cash flows from investing activities:
             Total investment securities, held to maturity
                  l
      Purchases ofassets                                                 $ 1,594,148       1,526,790
                                                                                         $ (4,583)                   — $ 1,403,489
                                                                                                                                —
      Net (increase) decrease in loans                                                    (69,020)             (121,559)   (41,348)
      (Increase) decrease in investment in other Farm Credit institutions                  (1,342)               (1,526)    (1,958)
      Purchases
     Liabilitiesof premises and equipment                                                  (2 886)
                                                                                           (2,886)               (2,666)
                                                                                                                 (2 666)    (1 900)
                                                                                                                            (1,900)
      Proceeds from sales of premises Credit Bank
     Notes payable to AgFirst Farm and equipment                         $ 1,323,237          556
                                                                                         $ 1,262,811                           171
                                                                                                                     52 $ 1,149,999
      Proceeds from sales of other property owned                                           4,070                    74        214
     Accrued interest payable                                                  3,922              4,754                             5,502
          Net cash provided by
     Patronage refund payable(used in) investing activities                    7,505         (73,205)
                                                                                                   9,952       (125,625)        (44,821)
                                                                                                                                    9,946
     Cash flows from financing activities:
     Other liabilities                                                        24,651             20,884                            21,795
     Advances on (repayment of) notes payable to AgFirst Farm Credit Bank, net             60,426       112,812                   35,669
     Protected borrower stock retired
           Total liabilities                                            1,359,315            (127)
                                                                                           1,298,401       (122)                    (151)
                                                                                                                                1,187,242
     Capital stock and participation certificates issued/(retired), net                         7            94                      155
     Patronage refunds and dividends paid                                                  (8,533)
                                                                                           (8 533)       (9,754)
                                                                                                         (9 754)                  (8 738)
                                                                                                                                  (8,738)
     Commitments and contingencies
     Retained earnings retired                                                            (13,456)      (11,879)                 (14,006)
          Net cash provided by (used in) financing activities                              38,317        91,151                   12,929
     Members' Equity
     Net increase (decrease) in cash                                                        1,347        (1,657)                   2,313
     Protected borrower stock                                                 208                 335                                  457
     Capital stock and period
     Cash, beginning of participation certificates                          6,277           2,772
                                                                                                6,270     4,429                    2,116
                                                                                                                                     6,176
     Retained of period
     Cash, end earnings                                                                  $ 4,119      $   2,772                $ 4,429
         Allocated
     Supplemental schedule of non-cash activities:                          111,658            109,795                           102,123
         Unallocated other property owned
     Financed sales of                                                      116,982      $     112,202 $
                                                                                                205               —            $ 107,688
                                                                                                                                   355
     Accumulated other comprehensive income (loss)
     Loans transferred to other property owned                                 (292)          9,810(213)            221             (197)
                                                                                                                                    54
     Cash dividends or patronage distributions declared or payable                            7,247               9,697           9,751
           Total members' equity
     Increase in liability resulting from adoption of accounting guidance   234,833             228,389                          216,247
      for employee benefit plans (Note 11)                                                       —                  —        197
     Employee benefit plans adjustments (Note 11)
           Total liabilities and members' equity                        $ 1 594 148
                                                                          1,594,148           79
                                                                                         $ 1 526 790
                                                                                           1,526,790                46 $ 1 403 —
                                                                                                                               489
                                                                                                                         1,403,489
     Supplemental information:
     Interest paid                                                                       $ 48,328          $    60,171         $ 65,516
     Taxes (          ) paid,
            (refunded) p , net                                                                 70                   —               151


     The accompanying notes are an integral part of these financial statements.


     The accompanying notes are an integral part of these financial statements.
                                                                                                                                              41



Notes to the Consolidated
  Notes to Statements
Financial the Consolidated Financial Statements  (dollars in thousands, except as noted)
dollars in thousands, except as noted


 Note 1 — Organization and Operations                                       makes collateralized long-term agricultural real estate and
                                                                            rural home mortgage loans. The PCA makes short- and
 A. Organization: AgSouth Farm Credit, ACA (Association) is                 intermediate-term loans for agricultural production or
    a member-owned cooperative which provides credit and                    operating purposes. The Association is operating its short-
    credit-related services to or for the benefit of eligible               and intermediate-term business through the ACA instead of
    borrowers/stockholders for qualified purposes in the states of          the PCA as allowed by charter.
    Georgia and South Carolina in the following counties:
                                                                            The Farm Credit Administration (FCA) is delegated
     Georgia: Counties of Appling, Atkinson, Bacon, Brantley,               authority by Congress to regulate the System banks and
     Bryan, Bulloch, Butts, Camden, Candler, Carroll, Charlton,             associations. The FCA examines the activities of the
     Chatham, Clayton, Clinch, Coffee, Coweta, DeKalb,                      associations and certain actions by the associations are
     Douglas, Effingham, Emanuel, Evans, Fayette, Fulton,                   subject to the prior approval of the FCA and the supervising
     Glynn, Greene, Gwinnett, Haralson, Harris, Heard, Henry,               bank.
     Jasper, Jeff Davis, Jenkins, Lamar, Liberty, Long, McIntosh,
     Meriwether, Monroe, Montgomery, Morgan, Muscogee,                      The Farm Credit Act established the Farm Credit System
     Newton, Oconee, Pierce, Pike, Putnam, Rockdale, Screven,               Insurance Corporation (Insurance Corporation) to administer
     Spalding, Talbot, Tattnall, Toombs, Troup, Upson, Walton,              the Farm Credit Insurance Fund (Insurance Fund). The
     Ware, Wayne and Wheeler.                                               Insurance Fund is required to be used (1) to ensure the
                                                                            timely payment of principal and interest on Systemwide debt
     South Carolina: Counties of Abbeville, Aiken, Allendale,               obligations (Insured debt), (2) to ensure the retirement of
     Anderson, Bamberg, Barnwell, Beaufort, Berkeley, Calhoun,              protected borrower capital at par or stated value, and (3) for
     Charleston, Cherokee, Chester, Colleton, Dorchester,                   other specified purposes. The Insurance Fund is also
     Edgefield, Fairfield, Greenville, Greenwood, Hampton,                  available for discretionary uses by the Insurance Corporation
     Jasper, Kershaw, Lancaster, Laurens, Lexington,                        to provide assistance to certain troubled System institutions
     McCormick, Newberry, Oconee, Orangeburg, Pickens,                      and to cover the operating expenses of the Insurance
     Richland, Saluda, Spartanburg, Union, and York.                        Corporation. Each System bank has been required to pay
                                                                            premiums, which may be passed on to the Association, into
     The Association is a lending institution of the Farm Credit            the Insurance Fund, based on its annual average adjusted
     System (System), a nationwide system of cooperatively                  outstanding insured debt until the assets in the Insurance
     owned banks and associations, which was established by                 Fund reach the “secure base amount.” The secure base
     Acts of Congress to meet the credit needs of American                  amount is defined in the Farm Credit Act as 2.0 percent of
     agriculture and is subject to the provisions of the Farm               the aggregate insured obligations (adjusted to reflect the
     Credit Act of 1971, as amended (Farm Credit Act). The                  reduced risk on loans or investments guaranteed by federal
     most recent significant amendment to the Farm Credit Act               or state governments) or such other percentage of the
     was the Agricultural Credit Act of 1987. At December 31,               aggregate obligations as the Insurance Corporation in its sole
     2009, the System was comprised of four Farm Credit Banks,              discretion determines to be actuarially sound. When the
     one Agricultural Credit Bank and eighty-nine associations.             amount in the Insurance Fund exceeds the secure base
                                                                            amount, the Insurance Corporation is required to reduce
     AgFirst Farm Credit Bank (Bank) and its related associations           premiums, but it still must ensure that reduced premiums are
     are collectively referred to as the “District.” The Bank               sufficient to maintain the level of the Insurance Fund at the
     provides funding to associations within the District and is            secure base amount.
     responsible for supervising certain activities of the
     Association, as well as the other associations operating            B. Operations: The Farm Credit Act sets forth the types of
     within the District. The District consists of the Bank and             authorized lending activity, persons eligible to borrow, and
     twenty-two Agricultural Credit Associations (ACAs), all of             financial services which can be offered by the Association.
     which are structured as ACA parent-companies, which have               The Association is authorized to provide, either directly or in
     two wholly owned subsidiaries, a Federal Land Credit                   participation with other lenders, credit, credit commitments
     Association (FLCA) and a Production Credit Association                 and related services to eligible borrowers. Eligible
     (PCA). FLCAs are tax-exempt while ACAs and PCAs are                    borrowers include farmers, ranchers, producers or harvesters
     taxable.                                                               of aquatic products, rural residents, and farm-related
                                                                            businesses.
     ACA parent-companies provide financing and related
     services through its FLCA and PCA subsidiaries. The FLCA
42

     Notes to the Consolidated Financial Statements (continued)
     dollars in thousands, except as noted

      The Association may sell to any System borrowing member, on           Loans are carried at their principal amount outstanding
      an optional basis, credit or term life insurance appropriate to       adjusted for charge-offs and deferred loan fees or costs.
      protect the loan commitment in the event of death of the
      debtor(s). The sale of other insurance necessary to protect a         Loans are generally placed in nonaccrual status when
      member’s farm or aquatic unit is permitted, but limited to hail       principal or interest is delinquent for 90 days (unless
      and multi-peril crop insurance, and insurance necessary to            adequately collateralized and in the process of collection) or
      protect the facilities and equipment of aquatic borrowers.            circumstances indicate that collection of principal and/or
                                                                            interest is in doubt. When a loan is placed in nonaccrual
                                                                            status, accrued interest deemed uncollectible is reversed (if
      Note 2 — Summary of Significant Accounting Policies                   accrued in the current year) or charged against the allowance
                                                                            for loan losses (if accrued in the prior year).
      The accounting and reporting policies of the Association conform
      with accounting principles generally accepted in the United           When loans are in nonaccrual status, the interest portion of
      States of America (GAAP) and prevailing practices within the          payments received in cash is recognized as interest income if
      banking industry. The preparation of financial statements in          collection of the recorded investment in the loan is fully
      conformity with GAAP requires management to make estimates            expected and the loan does not have a remaining
      and assumptions that affect the amounts reported in the               unrecovered prior charge-off associated with it. Otherwise,
      Consolidated Financial Statements and accompanying notes.             loan payments are applied against the recorded investment in
      Significant estimates are discussed in these footnotes, as            the loan. Nonaccrual loans may be returned to accrual status
      applicable. Actual results may differ from these estimates.           when principal and interest are current, prior charge-offs
                                                                            have been recovered, the ability of the borrower to fulfill the
      Certain amounts in prior years’ financial statements may have         contractual repayment terms is fully expected and the loan is
      been reclassified to conform to the current year’s presentation.      not classified “doubtful” or “loss.”
      Such reclassifications had no effect on net income or total
      members’ equity of prior years. The Consolidated Financial            Loans are charged-off, wholly or partially, as appropriate, at
      Statements include the accounts of the FLCA and the PCA. All          the time they are determined to be uncollectible.
      significant inter-company transactions have been eliminated in
      consolidation.                                                        In cases where a borrower experiences financial difficulties
                                                                            and the Association makes certain monetary concessions to
      A. Cash: Cash, as included in the statements of cash flows,           the borrower through modifications to the contractual terms
         represents cash on hand and on deposit at banks.                   of the loan, the loan is classified as a restructured loan. If
                                                                            the borrower’s ability to meet the revised payment schedule
      B. Investment Securities: The Association holds investments           is uncertain, the loan is classified as a nonaccrual loan.
         in accordance with mission-related investment and other
         investment programs approved by the Farm Credit                    Loan origination fees and direct loan origination costs are
         Administration. These programs allow the Association to            deferred as part of the carrying amount of the loan and the
         make investments that further the System’s mission to serve        net fee or cost is amortized over the life of the related loan as
         rural America. Mission-related investments, which the              an adjustment to interest income using the effective interest
         Association has the intent and ability to hold to maturity, are    method.
         classified as held-to-maturity and carried at cost, adjusted for
         the amortization of premiums and accretion of discounts.           The allowance for loan losses is a valuation account used to
                                                                            reasonably estimate loan and lease losses existing as of the
          The Association reviews all investments that are in a loss        financial statement date. Determining the appropriate
          position in order to determine whether the unrealized loss,       allowance for loan losses balance involves significant
          which is considered an impairment, is temporary or other-         judgment about when a loss has been incurred and the
          than-temporary. In the event of other-than-temporary              amount of that loss.
          impairment, the carrying value of the security would be
          written down to fair value, the credit-related loss would be      The allowance for loan losses is based on a periodic
          included in earnings in the period of impairment and the          evaluation of the loan portfolio by management in which
          non-credit related portion would be recognized in other           numerous factors are considered, including current
          comprehensive income. Credit related loss is defined as the       production and economic conditions, loan portfolio
          shortfall of the present value of the cash flows expected to      composition, collateral value, portfolio quality, and prior
          be collected in relation to the amortized cost basis.             loan loss experience. It is based on estimates, appraisals and
                                                                            evaluations of loans which, by their nature, contain elements
      C. Loans and Allowance for Loan Losses: Long-term real                of uncertainty and imprecision. The possibility exists that
         estate mortgage loans generally have original maturities           changes in the economy and its impact on borrower
         ranging from 5 to 40 years. Substantially all short- and           repayment capacity will cause these estimates, appraisals
         intermediate-term loans for agricultural production or             and evaluations to change.
         operating purposes have maturities of 10 years or less.
                                                                                                                                           43



   The level of allowance for loan losses is generally based on         loans are recognized based on the difference between the
   recent charge-off experience adjusted for relevant                   selling price and the carrying value of the related rural home
   environmental factors. The Association considers the                 mortgage loans sold.
   following factors when adjusting the historical charge-offs
   experience:                                                       E. Investment in AgFirst Farm Credit Bank and Other
                                                                        Farm Credit Institutions: The Association is required to
    •    Changes in credit risk classifications,                        maintain ownership in the Bank in the form of Class B and
    •    Changes in collateral values,                                  Class C stock. Accounting for this investment is on the cost
    •    Changes in risk concentrations,                                plus allocated equities basis. Patronage refunds from the
    •    Changes in weather related conditions, and                     Bank are accrued as earned. The receivable for such
    •    Changes in economic conditions.                                patronage refunds is classified as due from AgFirst Farm
                                                                        Credit Bank.
   Impaired loans are loans for which it is probable that not all
   principal and interest will be collected according to the         F. Other Property Owned: Other property owned, consisting
   contractual terms of the loan. Impaired loans include                of real and personal property acquired through a collection
   nonaccrual loans, restructured loans, and could include loans        action, is recorded upon acquisition at fair value less
   past due 90 days or more and still accruing interest. A loan is      estimated selling costs. Revised estimates to the fair value
   considered contractually past due when any principal                 less cost to sell are reported as adjustments to the carrying
   repayment or interest payment required by the loan                   amount of the asset, provided that such adjusted value is not
   instrument is not received on or before the due date. A loan         in excess of the carrying amount at acquisition. Income,
   shall remain contractually past due until it is formally             expenses, and carrying value adjustments related to other
   restructured or until the entire amount past due, including          property owned are included in gains (losses) on other
   principal, accrued interest, and penalty interest incurred as        property owned, net.
   the result of past due status, is collected or otherwise
   discharged in full.                                               G. Premises and Equipment: Premises and equipment are
                                                                        carried at cost less accumulated depreciation. Land is
   A specific allowance may be established for impaired loans           carried at cost. Depreciation is provided on the straight-line
   under Financial Accounting Standards Board (FASB)                    method over the estimated useful lives of the assets. Gains
   guidance on accounting by creditors for impairment of a              and losses on dispositions are reflected in current earnings.
   loan. Impairment of these loans is measured based on the             Maintenance and repairs are charged to expense and
   present value of expected future cash flows discounted at the        improvements are capitalized.
   loan’s effective interest rate or, as practically expedient, at
   the loan’s observable market price or fair value of the           H. Advanced Conditional Payments: The Association is
   collateral if the loan is collateral dependent.                      authorized under the Farm Credit Act to accept advance
                                                                        payments from borrowers. To the extent the borrower’s
   A general allowance may also be established under FASB               access to such advance payments is restricted, the advanced
   guidance on accounting for contingencies, to reflect                 conditional payments are netted against the borrower’s
   estimated probable credit losses inherent in the remainder of        related loan balance. Amounts in excess of the related loan
   the loan portfolio which excludes impaired loans considered          balance and amounts to which the borrower has unrestricted
   under the specific allowance discussed above. A general              access are presented as interest-bearing liabilities in the
   allowance can be evaluated on a pool basis for those loans           accompanying Consolidated Balance Sheets. Advanced
   with similar characteristics. The level of the general               conditional payments are not insured. Interest is generally
   allowance may be based on management’s best estimate of              paid by the Association on such accounts.
   the likelihood of default adjusted for other relevant factors
   reflecting the current environment.                               I. Employee Benefit Plans: Substantially all employees of
                                                                        the Association may participate in either the AgFirst Farm
   The allowance for loan losses is maintained at a level               Credit Final Average Pay Retirement Plan or the AgFirst
   considered adequate by management to provide for probable            Farm Credit Cash Balance Plan (collectively referred to as
   and estimable losses inherent in the loan portfolio. The             the “Plans”), which are defined benefit plans and considered
   allowance for loan losses is increased through provisions for        multi-employer plans. These two Plans are noncontributory
   loan losses and loan recoveries and is decreased through             and include eligible District employees. The “Projected Unit
   allowance for loan losses reversals and loan charge-offs.            Credit” actuarial method is used for financial reporting
                                                                        purposes. The actuarially-determined costs of these Plans
D. Gains/(Losses) on Rural Home Loans Held for Sale:                    are allocated to each participating entity, including the
   Certain rural home mortgage loans originated by the                  Association, by multiplying the Plans’ net pension expense
   Association are sold on a servicing released basis primarily         by each institution’s eligible service cost and accumulated
   to the Bank or into the secondary market to unrelated third          benefit obligation as a percentage of the total eligible service
   parties. Gains or losses on sales of rural home mortgage             cost and total accumulated benefit obligation for all Plans’
                                                                        participants.
44

     Notes to the Consolidated Financial Statements (continued)
     dollars in thousands, except as noted

          Substantially all employees of the Association may also be          including the effects of our expected patronage program,
          eligible to participate in a defined contribution Districtwide      which reduces taxable earnings.
          401(k) plan, which qualifies as a 401(k) plan as defined by
          the Internal Revenue Code. For employees hired on or prior       K. Patronage Refund from AgFirst and Other Financial
          to December 31, 2002, the Association contributes $.50 for          Institutions: The Association records patronage refunds
          each $1.00 of the maximum employee contribution of 6                from the Bank and certain District Associations on an
          percent of total compensation. For employees hired on or            accrual basis.
          after January 1, 2003, the Association contributes $1.00 for
          each $1.00 of the maximum employee contribution of 6             L. Fair Value Measurement: Effective January 1, 2008, the
          percent of total compensation. Employee deferrals are not to        Association adopted FASB guidance on fair value
          exceed the maximum deferral as adjusted by the Internal             measurements. This guidance defines fair value, establishes
          Revenue Service. 401(k) plan costs are expensed as funded.          a framework for measuring fair value and expands
                                                                              disclosures about fair value measurements. This guidance
          The Association may provide certain health care and life            defines fair value as the exchange price that would be
          insurance benefits to eligible retired employees.                   received for an asset or paid to transfer a liability in an
          Substantially all employees may become eligible for these           orderly transaction between market participants in the
          benefits if they reach early retirement age while working for       principal or most advantageous market for the asset or
          the Association. Authoritative accounting guidance requires         liability. This guidance also establishes a fair value
          the accrual of the expected cost of providing these benefits        hierarchy, which requires an entity to maximize the use of
          to an employee and an employee’s beneficiaries and covered          observable inputs and minimize the use of unobservable
          dependents during the years that the employee renders               inputs when measuring fair value. It describes three levels
          service necessary to become eligible for these benefits.            of inputs that may be used to measure fair value as discussed
                                                                              in Note 14.
      J. Income Taxes: The Association is generally subject to
         Federal and certain other income taxes. As previously             M. Recently Issued Accounting Pronouncements:
         described, the ACA holding company has two wholly-owned              Effective January 1, 2009, the Association adopted
         subsidiaries, a PCA and a FLCA. The FLCA subsidiary is               accounting guidance for fair value measurements of
         exempt from federal and state income taxes as provided in            nonfinancial assets and nonfinancial liabilities. The impact
         the Farm Credit Act. The ACA holding company and the                 of adoption resulted in additional fair value disclosures (see
         PCA subsidiary are subject to federal, state and certain other       Note 14), primarily regarding other property owned, but
         income taxes.                                                        does not have an impact on the Association’s financial
                                                                              condition or results of operations.
          The Association is eligible to operate as a cooperative that
          qualifies for tax treatment under Subchapter T of the Internal        In April 2009, the Financial Accounting Standards Board
          Revenue Code. Accordingly, under specified conditions, the            (FASB) issued guidance, “Determining Fair Value When
          Association can exclude from taxable income amounts                   the Volume and Level of Activity for the Asset or Liability
          distributed as qualified patronage refunds in the form of             Have Significantly Decreased and Identifying Transactions
          cash, stock or allocated surplus. Provisions for income taxes         That Are Not Orderly.” The guidance emphasizes that
          are made only on those taxable earnings that will not be              even if there has been a significant decrease in the volume
          distributed as qualified patronage refunds. The Association           and level of activity for the asset or liability and regardless
          distributes patronage on the basis of book income.                    of the valuation technique and inputs used, the objective for
                                                                                the fair value measurement is unchanged from what it
          The Association accounts for income taxes under the asset             would be if markets were operating at normal activity
          and liability method, recognizing deferred tax assets and             levels or transactions were orderly; that is, to determine the
          liabilities for the expected future tax consequences of the           current exit price. It sets forth additional factors that
          temporary differences between the carrying amounts and tax            should be considered to determine whether there has been a
          bases of assets and liabilities. Deferred tax assets and              significant decrease in volume and level of activity when
          liabilities are measured using enacted tax rates expected to          compared with normal market activity. The reporting
          apply to taxable income in the years in which those                   entity shall evaluate the significance and relevance of the
          temporary differences are expected to be realized or settled.         factors to determine whether, based on the weight of
                                                                                evidence, there has been a significant decrease in activity
          The Association records a valuation allowance at the balance          and volume. The guidance indicates that if an entity
          sheet dates against that portion of the Association’s deferred        determines that either the volume or level of activity for an
          tax assets that, based on management’s best estimates of              asset or liability has significantly decreased (from normal
          future events and circumstances, more likely than not (a              conditions for that asset or liability) or price quotations or
          likelihood of more than 50 percent) will not be realized. The         observable inputs are not associated with orderly
          consideration of valuation allowances involves various                transactions, increased analysis and management judgment
          estimates and assumptions as to future taxable earnings,              will be required to estimate fair value. It is further noted
                                                                                that a fair value measurement should include a risk
                                                                                                                                     45



adjustment to reflect the amount market participants would          The Association adopted this guidance effective for
demand because of the risk (uncertainty) in the cash flows.         June 30, 2009. For securities held at the beginning of the
                                                                    interim period of adoption for which an other-than-
This guidance also requires a reporting entity to make              temporary impairment was previously recognized, if an
additional disclosures in interim and annual periods.               entity does not intend to sell and it is not more likely than
Revisions resulting from a change in valuation techniques           not that it will be required to sell before recovery of its
or their application are accounted for as a change in               amortized cost basis, the entity shall recognize the
accounting estimate. The Association adopted this                   cumulative effect of initially applying this guidance as an
guidance effective June 30, 2009 (see Note 3).                      adjustment to the opening balance of retained earnings with
                                                                    a corresponding adjustment to accumulated other
In April 2009, the FASB issued guidance, “Recognition               comprehensive income. There was no initial adjustment to
and Presentation of Other-Than-Temporary Impairments,”              apply this guidance for the Association since no other-than-
which amends the other-than-temporary impairment                    temporary impairment was previously recognized by the
guidance for debt securities to make the guidance more              Association.
operational and to improve the presentation and disclosure
of other-than-temporary impairments on debt securities in           In April 2009, FASB issued guidance, “Interim Disclosures
the financial statements. It does not change existing               about Fair Value of Financial Instruments.” This guidance
recognition and measurement guidance related to other-              requires disclosures about fair value of financial
than-temporary impairments of equity securities.                    instruments for interim reporting periods of publicly traded
                                                                    companies as well as in annual financial statements. The
This guidance changes existing impairment guidance                  Association adopted this guidance effective June 30, 2009
related to accounting for certain investments in debt and           (see Note 15).
equity securities by eliminating the “ability and intent to
hold” provision. In addition, impairment is now considered          In May 2009, the FASB issued guidance, "Subsequent
to be other than temporary if an entity 1) intends to sell the      Events," which sets forth general standards of accounting
security, 2) more likely than not will be required to sell the      for and disclosure of events that occur after the balance
security before recovering its cost, or 3) does not expect to       sheet date but before financial statements are issued or are
recover the security’s entire amortized cost basis (even if         available to be issued. There are two types of subsequent
the entity does not intend to sell). The “probability”              events: the first type consists of events or transactions that
standard relating to the collectibility of cash flows is also       provide additional evidence about conditions that existed at
eliminated, and impairment is now considered to be other-           the balance sheet date (recognized subsequent events) and
than-temporary if the present value of cash flows expected          the second type consists of events that provide evidence
to be collected from the debt security is less than the             about conditions that did not exist at the balance sheet date
amortized cost basis of the security (any such shortfall is         but arose after that date (nonrecognized subsequent events).
referred to as a “credit loss”). If an entity intends to sell an    Recognized subsequent events should be included in the
impaired debt security or more likely than not will be              financial statements since the conditions existed at the date
required to sell the security before recovery of its amortized      of the balance sheet. Nonrecognized subsequent events are
cost basis less any current-period credit loss, the                 not included in the financial statements since the conditions
impairment is other-than-temporary and should be                    arose after the balance sheet date but before the financial
recognized currently in earnings in an amount equal to the          statements are issued or are available to be issued. This
entire difference between fair value and amortized cost. If         guidance, which includes a required disclosure of the date
a credit loss exists, but an entity does not intend to sell the     through which an entity has evaluated subsequent events,
impaired debt security and is not more likely than not to be        was adopted by the Association effective June 30, 2009
required to sell before recovery, the impairment is other-          (see Note 17).
than-temporary and should be separated into 1) the
estimated amount relating to credit loss, and 2) the amount        In June 2009, the FASB issued guidance, “The FASB
relating to all other factors. Only the estimated credit loss      Accounting Standards Codification and the Hierarchy of
amount is recognized currently in earnings, with the               Generally Accepted Accounting Principles.” This
remainder of the loss amount recognized in other                   Codification became the source of authoritative U.S.
comprehensive income. For held-to-maturity securities, the         generally accepted accounting principles recognized by the
portion of the other-than-temporary impairment not related         FASB. This guidance was adopted by the Association
to a credit loss will be recognized in a new category of           effective July 1, 2009 and had no impact on the Association’s
other comprehensive income and amortized over the                  financial condition or results of operations.
remaining life of the debt security as an increase in the
security’s carrying amount. Disclosure requirements for
impaired debt and equity securities are expanded and will
now be required quarterly as well as annually (see Note 3).
46

     Notes to the Consolidated Financial Statements (continued)
     dollars in thousands, except as noted

      Note 3 — Investment Securities                                                            to perform and are in an unrealized gain position at December
                                                                                                31, 2009.
      A summary of the amortized cost and fair value of investment
      securities held-to-maturity at December 31, 2009 follows. The
      Association had no investment securities at December 31, 2008                             Note 4 — Loans and Allowance for Loan Losses
      and December 31, 2007.
                                                                                                A summary of loans follows:
                                               December 31, 2009
                                             Gross      Gross                                                                                            December 31,
                             Amortized     Unrealized Unrealized            Fair                Loan Type                            2009                      2008                  2007
                               Cost          Gains     Losses               Value      Yield                                                         (dollars in thousands)
                                                                                                Real estate mortgage          $ 1,085,490    72.18% $ 1,066,878       73.82% $   954,169    72.08%
       Mission-related                                                                          Production and
         investments         $   4,583     $ 185        $               $   4,768      7.46 %    intermediate-term                342,172   22.75         302,869   20.96        296,018    22.36
                                                                –
                                                                                                Processing and marketing           25,211    1.68          28,895    2.00         22,835     1.72
                                                                                                Farm-related business              14,075     .94          12,523    0.86         15,295     1.16
                                                                                                Rural residential real estate      36,846    2.45          34,036    2.36         35,523     2.68
      A summary of the expected maturity, amortized cost and                                    Total                      $ 1,503,794      100.00% $ 1,445,201     100.00% $ 1,323,840 100.00%
      estimated fair value of investment securities held-to-maturity at
      December 31, 2009 follows:
                                                                                                A substantial portion of the Association’s lending activities is
                                                                              Weighted          collateralized and the Association’s exposure to credit loss
                                            Amortized               Fair      Average           associated with lending activities is reduced accordingly. An
                                              Cost                  Value      Yield            estimate of the Association’s credit risk exposure is considered in
      In one year or less                  $       –        $          –               –%       the determination of the allowance for loan losses.
      After one year through five years            –                   –               –
      After five years through ten years           –                   –               –        The amount of collateral obtained, if deemed necessary upon
      After ten years                          4,583                4,768           7.46
                                                                                                extension of credit, is based on management’s credit evaluation
          Total                            $   4,583        $       4,768           7.46 %      of the borrower. Collateral held varies, but typically includes
                                                                                                farmland and income-producing property, such as crops and
                                                                                                livestock, as well as receivables. Long-term real estate loans are
      The Association’s mission-related investments consist of private                          collateralized by the first liens on the underlying real property.
      placement securities purchased under the Rural America Bond                               Federal regulations state that long-term real estate loans are not to
      Program approved by the FCA.                                                              exceed 85 percent (97 percent if guaranteed by a government
                                                                                                agency) of the property’s appraised value. However, a decline in
      An investment is considered impaired if its fair value is less than                       a property’s market value subsequent to loan origination or
      its cost. A continuous unrealized loss position for an investment                         advances, or other actions necessary to protect the financial
      is based on the date the impairment was first identified. The                             interest of the Association in the collateral, may result in the loan
      Association had no investments that have been in a continuous                             to value ratios in excess of the regulatory maximum.
      unrealized loss position at December 31, 2009.
                                                                                                The following table presents information relating to impaired
      The Association performs periodic credit reviews, including                               loans as defined in Note 2.
      other-than-temporary impairment analyses, on its investment
      securities portfolio. The objective is to quantify any future                                                                                            December 31,
      possible loss of principal or interest due on each security                                                                                       2009       2008              2007
      identified for additional analysis. Factors considered in
      determining whether an impairment is other-than-temporary                                 Impaired nonaccrual loans:
                                                                                                  Current as to principal and interest $                 15,361 $ 2,433          $     786
      include among others as applicable: 1) the length of time and the
                                                                                                  Past due                                               20,245   1,986              1,465
      extent to which the fair value is less than cost, 2) adverse                              Total impaired nonaccrual loans                          35,606   4,419              2,251
      conditions specifically related to the industry, 3) geographic area
      and the condition of the underlying collateral, 4) payment                                Impaired accrual loans:
      structure of the security, 5) ratings by rating agencies, 6) the                            90 days or more past due                                    54        160            134
      credit worthiness of bond insurers, and 7) volatility of the fair                         Total impaired accrual loans                                  54        160            134
      value changes. Based on the results of all analyses, the
                                                                                                Total impaired loans                                $    35,660 $ 4,579          $   2,385
      Association has not recognized any other-than-temporary
      impairment in connection with its investment securities. The
      Association has the ability and intent to hold these investments                          There were no material commitments to lend additional funds to
      until maturity and at this time expects to collect the full principal                     debtors whose loans were classified as impaired at
      amount and interest due on these securities. The Association                              December 31, 2009.
      does not intend to sell these investments and it is not more likely
      than not that the Association would be required to sell these
      investments before recovering its costs. All securities continue
                                                                                                                                                                          47



The following table summarizes impaired loan information for                              The following table presents information concerning impaired
the year ended December 31,                                                               loans and related allowance for loan losses as of December 31,

                                                2009           2008            2007                                                         2009       2008       2007
Average impaired loans                       $16,187      $3,525           $2,241         Impaired loans with related allowance    $ 14,525 $             460 $   140
                                                                                          Impaired loans with no related allowance   21,135             4,299   2,245
                                                                                            Total impaired loans                   $ 35,660 $           4,759 $ 2,385
Interest income is recognized and cash payments are applied on
nonaccrual impaired loans as described in Note 2. The                                     Allowance on impaired loans                   $   1,270 $        74 $     51
following table presents interest income recognized on impaired
loans.
                                                                                          In addition, the following is a breakdown of the allowance for
                                                    Year Ended December 31,               loan losses for the end of the last three fiscal years:
                                                    2009     2008     2007
                                                                                                                             December 31, 2009        December 31, 2008
Interest income recognized on                                                                                                 Amount      %           Amount      %
   impaired nonaccrual loans              $            276 $     550       $     437
                                                                                          Real estate mortgage               $      6,563    69%      $ 3,306     74%
Interest income on impaired accrual loans               11        10               6
                                                                                          Production and intermediate term          2,224    24           938     21
Interest income recognized on                                                             Agribusiness                                510     5           134      3
   impaired loans                               $      287 $     560       $     443      Rural residential real estate               200     2            89      2
                                                                                                     Total                   $      9,497   100%      $ 4,467     100%

The following table summarizes interest income on nonaccrual                                                                     December 31, 2007
and accruing restructured loans that would have been recognized                                                                  Amount       %
under the original terms of the loans:                                                    Real estate mortgage               $      2,848     71%
                                                                                          Production and intermediate term            911     23
                                                    Year Ended December 31,               Agribusiness                                106      3
                                                    2009     2008     2007                Rural residential real estate               105      3
                                                                                                     Total                   $      3,970    100%
Interest income which would have been
recognized under the original loan terms        $ 1,285 $ 820              $ 775
Less: interest income recognized                    276   550                437
                                                                                          To mitigate the risk of loan losses, the Association has entered
    Foregone interest income                    $ 1,009 $ 270              $ 338          into Long-term Standby Commitment to Purchase agreements
                                                                                          with the Federal Agricultural Mortgage Corporation (Farmer
                                                                                          Mac). The agreements, which are effectively credit guarantees
A summary of changes in the allowance for loan losses follows:                            that will remain in place until the loans are paid in full, give the
                                                                                          Association the right to sell the loans identified in the agreements
                                               Year Ended December 31,
                                             2009        2008         2007
                                                                                          to Farmer Mac in the event of default (typically four months past
                                                                                          due), subject to certain conditions. The balance of loans under
Balance at beginning of year            $      4,467 $         3,970   $        3,806
                                                                                          Long-term Standby Commitments to Purchase was $10,380,
Charge-offs:                                                                              $13,947 and $20,695 at December 31, 2009, 2008 and 2007,
  Real estate mortgage                         (478)           (149)                –     respectively. Fees paid to Farmer Mac for such commitments
  Production and intermediate term             (171)           (136)             (72)
  Agribusiness                                  (72)              –                –      totaled $60, $87 and $115 for the years ended December 31,
  Rural residential real estate                (106)              –                –      2009, 2008 and 2007, respectively. These amounts are classified
  Other                                           –               –               (5)     as noninterest expense.
     Total charge-offs                         (827)           (285)             (77)
Recoveries:
  Real estate mortgage                           69               8                 –     Note 5 — Investment in AgFirst Farm Credit Bank
  Production and intermediate term               18              19               231
  Agribusiness                                  110               –                 6
  Rural residential real estate                   6               5                 4     The Association is required to maintain ownership in the Bank
     Total recoveries                           203              32               241     of Class B and Class C stock as determined by the Bank. The
Net (charge-offs) recoveries                   (624)           (253)              164     Bank may require additional capital contributions to maintain its
                                                                                          capital requirements.
Provision for (reversal of allowance
    for) loan losses                           5,654            750                   –
Balance at end of year                  $      9,497 $      4,467      $        3,970

Ratio of net (charge-offs) recoveries
  during the period to average loans
  outstanding during the period             (0.043)%      (0.018)%             0.013%
48

     Notes to the Consolidated Financial Statements (continued)
     dollars in thousands, except as noted

      Note 6 — Premises and Equipment                                                  Under the Farm Credit Act, the Association is obligated to
                                                                                       borrow only from the Bank, unless the Bank approves
      Premises and equipment consists of the following:                                borrowing from other funding sources. The Bank, consistent
                                                                                       with FCA regulations, has established limitations on the
                                                       December 31,                    Association’s ability to borrow funds based on specified factors
                                             2009          2008              2007      or formulas relating primarily to credit quality and financial
      Land                                 $ 3,533       $ 2,568         $    2,406    condition. At December 31, 2009, the Association’s notes
      Buildings and improvements            13,853        12,991             11,247    payable were within the specified limitations.
      Furniture and equipment                6,154         5,945              5,699
                                            23,540        21,504             19,352
                                                                                       Note 9 — Members’ Equity
      Less: accumulated depreciation        8,432          8,162              7,671
      Total                                $15,108       $13,342         $ 11,681      A description of the Association’s capitalization requirements,
                                                                                       protection mechanisms, regulatory capitalization requirements
                                                                                       and restrictions, and equities are provided below.
      Note 7 — Other Property Owned
                                                                                       A. Protected Borrower Equity
      Net gains (losses) on other property owned consist of the
      following:                                                                          Protection of certain borrower equity is provided under the
                                                                                          Farm Credit Act which requires the Association, when
                                                               December 31,               retiring protected borrower equity, to retire such equity at
                                                        2009       2008     2007          par or stated value regardless of its book value. Protected
      Gains (losses) on sale, net                    $ (229)       $   23     $ (10)      borrower equity includes capital stock, participation
      Carrying value unrealized gains (losses)        (1,915)          13       (11)      certificates and allocated equities which were outstanding as
      Operating income (expense), net                   (118)          (2)      (10)      of January 6, 1988, or were issued or allocated prior to
                                                                                          October 6, 1988. If an Association is unable to retire
        Gains (losses) on other property
                                                                                          protected borrower equity at par value or stated value,
         owned, net                                  $ (2,262)     $   34     $ (31)
                                                                                          amounts required to retire this equity would be obtained
                                                                                          from the Insurance Fund.
      Note 8 — Notes Payable to AgFirst Farm Credit Bank                               B. Capital Stock and Participation Certificates
      The Association’s indebtedness to the Bank represents                               In accordance with the Farm Credit Act and the
      borrowings by the Association to fund its loan portfolio. This                      Association’s capitalization bylaws, each borrower is
      indebtedness is collateralized by a pledge of substantially all of                  required to invest in Class C stock for agricultural loans, or
      the Association’s assets and the terms of the revolving lines of                    participation certificates in the case of rural home and farm
      credit are governed by a general financing agreement. Interest                      related business loans, as a condition of borrowing. The
      rates on both variable and fixed rate notes payable are generally                   initial borrower investment, through either purchase or
      established loan-by-loan based on the Bank’s marginal cost of                       transfer, must be in an amount equal to the lesser of $1,000
      funds, capital position, operating costs and return objectives.                     or 2 percent of the amount of the loan. The Board of
                                                                                          Directors may increase the amount of investment if
      The interest rate is periodically adjusted by the Bank based upon                   necessary to meet the Association’s capital needs. Loans
      agreement between the Bank and the Association. The weighted                        designated for sale or sold into the Secondary Market on or
      average interest rates on the variable rate notes were 1.45                         after April 16, 1996 will have no voting stock or
      percent for LIBOR-based loans, 1.72 percent for Prime-based                         participation certificate purchase requirement if sold within
      loans, and the weighted average remaining maturities were 2.4                       180 days following the date of designation.
      years and 1.5 years, respectively, at December 31, 2009. The
      weighted average interest rate on the fixed rate and adjustable                     The borrower acquires ownership of the capital stock or
      rate mortgage (ARM) notes payable which are match funded by                         participation certificates at the time the loan is made, but
      the Bank was 3.95 percent and the weighted average remaining                        usually does not make a cash investment. The aggregate par
      maturity was 9.2 years at December 31, 2009. The weighted                           value is generally added to the principal amount of the
      average interest rate on all interest-bearing notes payable was                     related loan obligation. The Association retains a first lien
      3.55 percent and the weighted average remaining maturity was                        on the stock or participation certificates owned by
      7.9 years at December 31, 2009.                                                     borrowers. Retirement of such equities will generally be at
                                                                                          the lower of par or book value, and repayment of a loan does
      Variable rate and fixed rate notes payable represent                                not automatically result in retirement of the corresponding
      approximately 16.25 percent and 83.75 percent, respectively, of                     stock or participation certificates.
      total notes payable at December 31, 2009.
                                                                                                                                                49



C. Regulatory Capitalization Requirements and Restrictions                face amounts, provided the minimum capital adequacy standards
                                                                          established by the Board are met.
   FCA’s capital adequacy regulations require the Association to
   achieve permanent capital of 7.00 percent of risk-adjusted             Retained Earnings
   assets and off-balance-sheet commitments. Failure to meet
   the 7.00 percent capital requirement can initiate certain              The Association maintains an unallocated retained earnings
   mandatory and possibly additional discretionary actions by             account and an allocated retained earnings account. The
   FCA that, if undertaken, could have a direct material effect on        minimum aggregate amount of these two accounts is determined
   the Association’s financial statements. The Association is             by the Board. At the end of any fiscal year, if the retained
   prohibited from reducing permanent capital by retiring stock           earnings accounts otherwise would be less than the minimum
   or making certain other distributions to shareholders unless           amount determined by the Board as necessary to maintain
   prescribed capital standards are met. FCA regulations also             adequate capital reserves to meet the commitments of the
   require that additional minimum standards for capital be               Association, the Association shall apply earnings for the year to
   achieved. These standards require all System institutions to           the unallocated retained earnings account in such amounts as
   achieve and maintain ratios as defined by FCA regulations.             may be determined necessary by the Board. Unallocated
   These required ratios are total surplus as a percentage of risk-       retained earnings are maintained for each borrower to permit
   adjusted assets of 7.00 percent and of core surplus as a               liquidation on a patronage basis.
   percentage of risk-adjusted assets of 3.50 percent. The
   Association’s permanent capital, total surplus and core                The Association maintains an allocated retained earnings
   surplus ratios at December 31, 2009 were 14.55 percent,                account consisting of earnings held and allocated to borrowers
   14.12 percent and 10.35 percent, respectively.                         on a patronage basis. In the event of a net loss for any fiscal
                                                                          year, such allocated retained earnings account will be subject to
   An FCA regulation empowers it to direct a transfer of funds            full impairment in the order specified in the bylaws beginning
   or equities by one or more System institutions to another              with the most recent allocation.
   System institution under specified circumstances. The
   Association has not been called upon to initiate any transfers         The Association has a first lien and security interest on all
   and is not aware of any proposed action under this regulation.         retained earnings account allocations owned by any borrowers,
                                                                          and all distributions thereof, as additional collateral for their
D. Description of Equities                                                indebtedness to the Association. When the debt of a borrower is
                                                                          in default or is in the process of final liquidation by payment or
   The Association is authorized to issue or have outstanding             otherwise, the Association, upon approval of the Board, may
   Classes A and D Preferred Stock, Classes A, B, and C                   order any and all retained earnings account allocations owned by
   Common Stock, Classes B and C Participation Certificates,              such borrower to be applied on the indebtedness.
   and such other classes of equity as may be provided for in
   amendments to the bylaws in such amounts as may be                     Allocated equities shall be retired solely at the discretion of the
   necessary to conduct the Association’s business. All stock             Board, provided that minimum capital standards established by
   and participation certificates have a par or face value of five        the FCA and the Board are met. Nonqualified retained surplus
   dollars ($5.00) per share.                                             is considered to be permanently invested in the Association and
                                                                          as such, there is no plan to revolve or retire this surplus. All
   The Association had the following shares outstanding at                nonqualified distributions are tax deductible only when
   December 31, 2009:                                                     redeemed.

                                               Shares Outstanding         At December 31, 2009, allocated members’ equity consisted of
                                                        Aggregate         $3,621 of qualified surplus, and $108,037 of nonqualified
   Class                             Protected Number Par Value           allocated surplus.
   B Common/Nonvoting                   Yes        37,161 $      186
   C Common/Voting                      No      1,130,110      5,650      Patronage Distributions
   B Participation
   Certificates/Nonvoting               Yes         4,424            22   Prior to the beginning of any fiscal year, the Board, by adoption
   C Participation                                                        of a resolution, may obligate the Association to distribute to
   Certificates/Nonvoting               No        125,326        627      borrowers on a patronage basis all or any portion of available
   Total Capital Stock                                                    net earnings for such fiscal year or for that and subsequent fiscal
   and Participation Certificates               1,297,021 $    6,485      years. Patronage distributions are based on the proportion of the
                                                                          borrower’s interest to the amount of interest earned by the
                                                                          Association on its total loans unless another proportionate
Protected common stock and participation certificates are retired         patronage basis is approved by the Board.
at par or face value in the normal course of business. At-risk
common stock and participation certificates are retired at the            If the Association meets its capital adequacy standards after
sole discretion of the Board at book value not to exceed par or           making the patronage distributions, the patronage distributions
50

     Notes to the Consolidated Financial Statements (continued)
     dollars in thousands, except as noted

      may be in cash, authorized stock of the Association, allocations     outstanding stock and participation certificates in the following
      of earnings retained in an allocated members’ equity account, or     order:
      any one or more of such forms of distribution. Patronage
      distributions of the Association’s earnings may be paid on either    1.    Classes A and D Preferred Stock
      a qualified or nonqualified basis, or a combination of both, as      2.    Classes A and B Common Stock and Class B Participation
      determined by the Board. A minimum of 20 percent of the total              Certificates
      qualified patronage distribution to any borrower for any fiscal      3.    Class C Common Stock and Class C Participation
      year shall always be paid in cash.                                         Certificates
                                                                           4.    Allocated Surplus
      Dividends                                                            5.    Unallocated Surplus issued after January 1, 1996 shall be
                                                                                 distributed to all holders of Class C Common Stock and
      The Association may declare noncumulative dividends on its                 Class C Participation Certificates from January 1, 1996
      capital stock and participation certificates provided the dividend   6.    Remaining Assets shall be distributed ratably to the holders
      rate does not exceed 20 percent of the par value of the respective         of all classes of Stock and Participation Certificates
      capital stock and participation certificates. Such dividends may
      be paid solely on Classes A and D Preferred Stock or on all          E.    Other Comprehensive Income (Loss)
      classes of stock and participation certificates.
                                                                           The Association reports other comprehensive income (loss) (OCI)
      The rate of dividends paid on Class A Preferred Stock for any        in its Consolidated Statements of Changes in Members' Equity.
      fiscal year may not be less than the rate of dividends paid on       The Association reported OCI of $(79), $(16) and $(197) in 2009,
      Classes A, B, or C Common Stock or participation certificates        2008 and 2007, respectively, due to FASB guidance on employers’
      for such year. The rate of dividends on Classes A, B, or C           accounting for defined benefit pension and other postretirement
      Common Stock and participation certificates shall be at the same     plans (see Note 11 for further information).
      rate per share.

      Dividends may not be declared if, after recording the liability,     Note 10 — Income Taxes
      the Association would not meet its capital adequacy standards.
      No dividends were declared by the Association for any of the         The provision (benefit) for income taxes follows:
      periods included in these Consolidated Financial Statements.
                                                                                                                        Year Ended December 31,
                                                                                                                      2009       2008        2007
      Transfer
                                                                           Current:
      Classes A and D Preferred, Classes A, B, and C Common Stock,                      Federal                   $    142     $   24        $   261
                                                                                        State                           25          6             47
      and Classes B and C Participation Certificates may be
                                                                                                                       167         30            308
      transferred to persons or entities eligible to purchase or hold
      such equities.                                                       Deferred:
                                                                                        Federal                         –           –            17
                                                                                        State                           –           –             3
      Impairment
                                                                                                                        –           –            20

      Any net losses recorded by the Association shall first be applied    Total provision (benefit) for
                                                                                        income taxes              $    167     $   30        $   328
      against unallocated members’ equity. To the extent that such
      losses would exceed unallocated members’ equity, such losses
      would be applied consistent with the Association’s bylaws and
      distributed pro rata to each share and/or unit outstanding in the    The provision (benefit) for income tax differs from the amount of
      class, in the following order:                                       income tax determined by applying the applicable U.S. statutory
                                                                           federal income tax rate to pretax income as follows:
      1.   Allocated Surplus
      2.   Class C Common Stock and Class C Participation                                                                     December 31,
           Certificates                                                                                               2009        2008           2007
      3.   Classes A and B Common Stock and Class B Participation          Federal tax at statutory rate          $ 8,960      $ 11,521      $ 11,769
           Certificates                                                    State tax, net                               25             6            4
                                                                           Patronage distributions                  (2,782)       (3,582)      (3,705)
      4.   Classes A and D Preferred Stock                                 Tax-exempt FLCA earnings                 (6,442)       (9,847)      (8,271)
                                                                           Change in valuation allowance               901          (529)         220
      Liquidation                                                          Other                                     (495)          2,461         311
                                                                           Provision (benefit) for income taxes   $    167     $        30   $    328
      In the event of liquidation or dissolution of the Association, any
      assets of the Association remaining after payment or retirement
      of all liabilities should be distributed to the holders of the
                                                                                                                                                       51



Deferred tax assets and liabilities are comprised of the following                participants hired prior to January 1, 2003, benefits are provided
at:                                                                               under the FAP Plan and are based on eligible compensation and
                                                                                  years of service. For participants hired on or after January 1,
                                                   December 31,                   2003, benefits are provided under the CB Plan and are
                                          2009         2008           2007
                                                                                  determined using a percent of eligible compensation formula.
Deferred income tax assets:                                                       The employer contribution under the CB Plan is based on a
  Allowance for loan losses          $     788     $    327       $    522        formula of 3.00-5.00 percent of eligible compensation
  Annual leave                             298          274            259
  Nonaccrual loan interest                 921          631            631        (depending on years of service) and interest credits as allocated
  Pensions and other                                                              to an employee’s theoretical account balance. As a participant
       postretirement benefits           1,948         1,881          1,849       in these District defined benefit plans, the Association funded
  Depreciation                             (29)           13              4
                                                                                  $5,562 for 2009, $3,040 for 2008, and $0 for 2007, through its
Gross deferred tax assets                3,926         3,126          3,265       note payable to the Bank. Plan expenses included in salaries and
Less: valuation allowance                 (977)          (76)          (605)      employee benefits were $5,892 for 2009, $952 for 2008, and
Gross deferred tax assets, net of                                                 $1,583 for 2007.
valuation allowance                      2,949         3,050          2,660
Deferred income tax liabilities:                                                  The District sponsors a plan providing certain benefits
  Loan fees                               (689)         (706)          (653)      (primarily health care) to its retirees. Certain Association
  Pensions and other
       postretirement benefits           (2,260)       (2,344)        (2,007)
                                                                                  charges related to this plan are an allocation of District charges
                                                                                  based on the Association’s proportional share of the plan
Gross deferred tax liability             (2,949)       (3,050)        (2,660)
                                                                                  liability. This plan is unfunded with expenses paid as incurred.
Net deferred tax asset (liability)   $       –     $          –   $           –   Postretirement benefits other than pensions (primarily health
                                                                                  care benefits) included in salaries and employee benefits were
                                                                                  $949 for 2009, $831 for 2008 and $942 for 2007.
At December 31, 2009, deferred income taxes have not been
provided by the Association on approximately $9.4 million of                      Under FASB guidance on employers’ accounting for defined
patronage refunds received from the Bank prior to January 1,                      benefit pension and other postretirement plans, accounting for
1993. Such refunds, distributed in the form of stock, are subject                 the guidance follows the plan sponsor, which is at the District
to tax only upon conversion to cash. The tax liability related to                 entity level for the District-wide benefit plans in which the
future conversions is not expected to be material.                                Association participates. Therefore, there is no impact to the
                                                                                  Association's financial statements due to this guidance for the
The Association recorded a valuation allowance of $(977),                         defined benefit plans discussed above. Additional financial
$(76), and $(605) during 2009, 2008 and 2007, respectively.                       information for the District sponsored plans, including the
The Association will continue to evaluate the realizability of                    impact of this guidance, may be found in Notes to the Combined
these deferred tax assets and adjust the valuation allowance                      Financial Statements of AgFirst Farm Credit Bank and District
accordingly.                                                                      Associations’ 2009 Annual Report.

There were no uncertain tax positions identified related to the                   In addition, supplemental retirement benefits and deferred
current year and the Association has no unrecognized tax                          compensation options are provided to certain key employees
benefits at December 31, 2009 for which liabilities have been                     under supplemental defined benefit executive plans and
established. The Association recognizes interest and penalties,                   supplemental deferred compensation plans. Assets have been
if any, related to unrecognized tax benefits as a component of                    allocated and separately invested for these plans, but are not
income tax expense. The tax years that remain open for federal                    isolated from the general creditors of the Association. In 2009
and major state income tax jurisdictions are 2005 and forward.                    the Association incurred expenses of $126 related to these plans.
                                                                                  This compares to $121 and $93 for the periods ending December
                                                                                  31, 2008 and December 31, 2007 respectively.
Note 11 — Employee Benefit Plans
                                                                                  The supplemental defined benefit executive plan is unfunded
The Association participates in district sponsored benefit plans.                 and had a projected benefit obligation of $1,522 and a net under-
These plans include a defined benefit final average pay                           funded status of $1,522 at December 31, 2009. Net periodic
retirement plan, a defined benefit cash balance retirement plan, a                pension cost for the period was $126. The assumptions used to
defined benefit other postretirement benefits plan, and a defined                 determine the projected benefit obligation included a discount
contribution 401(k) plan. Financial information regarding each                    rate of 6.00 percent.
of these plans follows.
                                                                                  FASB guidance requires the recognition of the overfunded or
Substantially all employees of the Association are eligible to                    underfunded status of pension and other postretirement benefit
participate in either the defined benefit final average pay                       plans on the balance sheet. The balance sheet recognition
retirement plan (the FAP Plan) or the defined benefit cash                        provisions of this guidance were adopted at December 31, 2007
balance retirement plan (the CB Plan.) These two plans are                        by the Association for the single employer supplemental
noncontributory and include eligible District employees. For
52

     Notes to the Consolidated Financial Statements (continued)
     dollars in thousands, except as noted

      nonqualified plan, resulting in an adjustment of $197 to            Note 13 — Commitments and Contingencies
      accumulated other comprehensive income (AOCI).
                                                                          The Association has various commitments outstanding and
      FASB guidance also requires that employers measure the benefit      contingent liabilities.
      obligation and plan assets as of the fiscal year end for fiscal
      years ending after December 15, 2008. In fiscal year 2007 and       The Association may participate in financial instruments with
      earlier, a September 30 measurement date was used for pension       off-balance-sheet risk to satisfy the financing needs of its
      and other postretirement benefit plans. This guidance provides      borrowers and to manage their exposure to interest-rate risk.
      two approaches for an employer to transition to a fiscal year end   These financial instruments include commitments to extend credit
      measurement date. The approach applied by the Association           and/or commercial letters of credit. The instruments involve, to
      allows for the use of the measurements determined for the prior     varying degrees, elements of credit risk in excess of the amount
      year end. Under this alternative, pension and other                 recognized in the financial statements. Commitments to extend
      postretirement benefit expense measured for the three-month         credit are agreements to lend to a borrower as long as there is not
      period October 1, 2007 to December 31, 2007 (determined using       a violation of any condition established in the contract.
      the September 30, 2007 measurement date) is reflected as an         Commercial letters of credit are agreements to pay a beneficiary
      adjustment to beginning 2008 unallocated retained earnings. As      under conditions specified in the letter of credit. Commitments
      a result, the Association decreased unallocated retained earnings   and letters of credit generally have fixed expiration dates or other
      by $30.                                                             termination clauses and may require payment of a fee. At
                                                                          December 31, 2009, $112,389 of commitments to extend credit
      FASB guidance further requires the determination of the fair        and $0 of commercial letters of credit were outstanding.
      value of plan assets and recognition of actuarial gains and
      losses, prior service costs or credits, and transition assets or    Since many of these commitments are expected to expire without
      obligations as a component of AOCI. These amounts are               being drawn upon, the total commitments do not necessarily
      subsequently recognized as components of net periodic benefit       represent future cash requirements. However, these credit-related
      costs over time. For 2009 and 2008, $79 and $16 has been            financial instruments have off-balance-sheet credit risk because
      recognized as a net debit, respectively to AOCI to reflect these    their amounts are not reflected on the Consolidated Balance
      elements.                                                           Sheets until funded or drawn upon. The credit risk associated
                                                                          with issuing commitments and letters of credit is substantially the
      The Association participates in a defined contribution              same as that involved in extending loans to borrowers and
      Districtwide 401(k) plan, which qualifies as a 401(k) plan as       management applies the same credit policies to these
      defined by the Internal Revenue Code. For employees hired on or     commitments. Upon fully funding a commitment, the credit risk
      prior to December 31, 2002, the Association will contribute $.50    amounts are equal to the contract amounts, assuming that
      for each $1.00 of the maximum employee contribution of 6            borrowers fail completely to meet their obligations and the
      percent of total compensation. For employees hired on or after      collateral or other security is of no value. The amount of
      January 1, 2003, the Association will contribute $1.00 for each     collateral obtained, if deemed necessary upon extension of credit,
      $1.00 of the maximum employee contribution of 6 percent of          is based on management’s credit evaluation of the borrower.
      total compensation. Employee deferrals are not to exceed the
      maximum deferral as adjusted by the Internal Revenue Service.       The Association also participates in standby letters of credit to
      Employer contributions to this plan were $508, $477, and $424       satisfy the financing needs of its borrowers. These letters of
      for the years ended December 31, 2009, 2008 and 2007,               credit are irrevocable agreements to guarantee payments of
      respectively.                                                       specified financial obligations. At December 31, 2009, the
                                                                          Association had outstanding $9,012 of standby letters of credit,
                                                                          with expiration dates ranging from February 22, 2010 to
      Note 12 — Related Party Transactions                                November 1, 2012. The maximum potential amount of future
                                                                          payments the Association may be required to make under these
      In the ordinary course of business, the Association enters into     existing guarantees is $9,012.
      loan transactions with officers and directors of the Association,
      their immediate families and other organizations with which such    A guarantor is required to recognize at the inception of a
      persons may be associated. Such loans are subject to special        guarantee, a liability for the fair value of the guarantee
      approval requirements contained in the FCA regulations and are      commitment. The Association has determined the fair value of
      made on the same terms, including interest rates, amortization      the guarantee commitment based upon the fees to be earned over
      schedule and collateral, as those prevailing at the time for        the life of the guarantee. The fair value is updated periodically to
      comparable transactions with unaffiliated borrowers.                reflect changes in individual guarantee amounts and the
                                                                          remaining life to maturity of the individual guarantees in the
      Total loans to such persons at December 31, 2009 amounted to        Association’s inventory. At December 31, 2009, the
      $11,418. During 2009, $5,682 of new loans were made and             Association’s inventory of standby letters of credit had a fair
      repayments totaled $7,560. In the opinion of management, none       value of $94 and was included in other liabilities.
      of these loans outstanding at December 31, 2009 involved more
      than a normal risk of collectibility.
                                                                                                                                                    53



Note 14 — Fair Value Measurement                                         significant management judgment or estimation. Level 3 assets
                                                                         and liabilities also could include instruments whose price has
As described in Note 2, effective January 1, 2008, the                   been adjusted based on dealer quoted pricing that is different
Association adopted FASB guidance on, fair value                         than the third-party valuation or internal model pricing.
measurements. This guidance defines fair value, establishes a
framework for measuring fair value and expands the                       Level 3 assets at December 31, 2009 include impaired loans which
Association’s fair value disclosures for certain assets and              represent the fair value of certain loans that were evaluated for
liabilities measured at fair value on a recurring and non-recurring      impairment under FASB guidance. The fair value was based upon
basis. These assets and liabilities consist primarily of assets held     the underlying collateral since these were collateral-dependent
in trust funds, standby letters of credit, impaired loans, and other     loans. The fair value measurement process uses independent
property owned.                                                          appraisals and other market-based information, but in many cases
                                                                         it also requires significant input based on management's
This guidance defines fair value as the exchange price that would        knowledge of and judgment about current market conditions,
be received for an asset or paid to transfer a liability in an orderly   specific issues relating to the collateral and other matters. As a
transaction between market participants in the principal or most         result, these fair value measurements fall within Level 3 of the
advantageous market for the asset or liability.                          hierarchy. When the value of the collateral, less estimated costs to
                                                                         sell, is less than the principal balance of the loan, a specific reserve
This guidance establishes a fair value hierarchy for disclosure of       is established. Other property owned is classified as a Level 3
fair value measurements to maximize the use of observable                asset at December 31, 2009. The fair value for other property
inputs, that is, inputs that reflect the assumptions market              owned is based upon the collateral value. Costs to sell represent
participants would use in pricing an asset or liability based on         transaction costs and are not included as a component of the fair
market data obtained from sources independent of the reporting           value of other property owned. Level 3 liabilities at December 31,
entity. The valuation hierarchy is based upon the transparency of        2009 include standby letters of credit whose market value is
inputs to the valuation of an asset or liability as of the               internally calculated based on information that is not observable
measurement date. A financial instrument’s categorization                either directly or indirectly in the marketplace.
within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement.                 Assets and Liabilities Measured at Fair Value on a
                                                                         Recurring Basis
The three levels of inputs and the classification of the
Association’s financial instruments within the fair value hierarchy      The following tables present the assets and liabilities that are
are as follows:                                                          measured at fair value on a recurring basis at December 31, 2009
                                                                         and 2008 for each of the fair value hierarchy levels:
Level 1
Level 1 inputs to the valuation methodology are unadjusted                                                      December 31, 2009
quoted prices for identical assets or liabilities in active markets.                                                                     Total
                                                                                                  Level        Level        Level        Fair
The Association’s Level 1 assets at December 31, 2009 consist of                                    1            2            3          Value
assets held in trust funds related to deferred compensation and           Assets:
supplemental retirement plans. The trust funds include                    Assets held in
investments in securities that are actively traded and have quoted         trust funds        $    735    $      –      $     –      $    735
                                                                             Total Assets     $    735    $      –      $     –      $    735
net asset value prices that are directly observable in the
marketplace.
                                                                          Liabilities:
                                                                          Standby letters
Level 2                                                                    of credit          $     –     $      –      $     94     $     94
Level 2 inputs to the valuation methodology include quoted                Total Liabilities   $     –     $      –      $     94     $     94
prices for similar assets and liabilities in active markets; quoted
prices in markets that are not active; and inputs that are                                                      December 31, 2008
observable, or can be corroborated, for substantially the full term                                                                      Total
                                                                                                  Level        Level        Level        Fair
of the asset or liability. The Association has no Level 2 assets                                    1            2            3          Value
and liabilities measured at fair value on a recurring basis at            Assets:
December 31, 2009.                                                        Assets held in
                                                                           trust funds        $    613    $      –      $     –      $    613
                                                                             Total Assets     $    613    $      –      $     –      $    613
Level 3
Level 3 inputs to the valuation methodology are unobservable              Liabilities:
and supported by little or no market activity. Valuation is               Standby letters
determined using pricing models, discounted cash flow                      of credit          $     –     $      –      $    122     $    122
methodologies, or similar techniques, and could include                   Total Liabilities   $     –     $      –      $    122     $    122
54

     Notes to the Consolidated Financial Statements (continued)
     dollars in thousands, except as noted

      The following tables present the changes in Level 3 assets and                            Note 15 — Disclosures About Fair Value of Financial
      liabilities measured at fair value on a recurring basis for 2009 and                      Instruments
      2008:
                                                                                                The following table presents the carrying amounts and fair values
                                                                Standby                         of the Association’s financial instruments at December 31, 2009.
                                                                 Letters
                                                                Of Credit
        Balance at January 1, 2009                          $        122                        Quoted market prices are generally not available for certain
        Total gains or (losses)                                                                 System financial instruments, as described below. Accordingly
        realized/unrealized:                                                                    fair values are based on judgments regarding anticipated cash
           Included in earnings                                        –
                                                                                                flows, future expected loss experience, current economic
           Included in other
            comprehensive loss                                         –                        conditions, risk characteristics of various financial instruments,
        Purchases, sales, issuances                                                             and other factors. These estimates involve uncertainties and
            and settlements, net                                     (28)                       matters of judgment, and therefore cannot be determined with
        Transfers in and/or out of level 3                             –
                                                                                                precision. Changes in assumptions could significantly affect the
        Balance at December 31, 2009                        $         94
                                                                                                estimates.
                                                                Standby
                                                                 Letters
                                                                                                The estimated fair values of the Association’s financial
                                                                Of Credit                       instruments are as follows:
        Balance at January 1, 2008                          $         76
        Total gains or (losses)                                                                                               December 31, 2009                 December 31, 2008
        realized/unrealized:                                                                                               Carrying    Estimated              Carrying   Estimated
           Included in earnings                                        –                                                   Amount      Fair Value             Amount     Fair Value
           Included in other                                                                    Financial assets:
            comprehensive loss                                         –                         Cash                      $        4,119   $    4,119    $       2,772   $    2,772
        Purchases, sales, issuances
            and settlements, net                                      46
        Transfers in and/or out of level 3                             –                         Investment securities     $        4,583   $    4,768    $          –    $        –
        Balance at December 31, 2008                        $        122
                                                                                                 Loans, net of allowance   $ 1,494,297      $ 1,537,827   $ 1,440,734     $ 1,491,097

                                                                                                 Assets held in trust funds $        735    $      735    $        613    $      613
      Assets and Liabilities Measured at Fair Value on a Non-
      recurring Basis                                                                           Financial liabilities:
                                                                                                 Notes payable to AgFirst
      Assets and liabilities measured at fair value on a non-recurring                             Farm Credit Bank       $ 1,323,237       $ 1,338,028   $ 1,262,811     $ 1,290,496
      basis at December 31, 2009 and 2008 for each of the fair value
      hierarchy values are summarized below. As discussed in note 2,                                                              December 31, 2007
      fair value disclosure of nonfinancial instruments, such as other                                                          Carrying   Estimated
      property owned, began in 2009.                                                                                            Amount     Fair Value
                                                                                                Financial assets:
                                                                                                 Cash                      $        4,429   $    4,429
                                               December 31, 2009
                                                                                      YTD
                                                                     Total            Total      Investment securities     $                $
                        Level          Level         Level            Fair            Gains
                          1              2             3             Value           (Losses)    Loans, net of allowance   $ 1,319,870      $ 1,351,010
      Assets:
      Impaired                                                                                   Assets held in trust funds $       1,027   $    1,027
       loans       $      –       $      –     $   13,255       $   13,255       $   (1,820)
      Other
      property                                                                                  Financial liabilities:
       owned       $      –       $      –     $    3,935       $    3,935       $   (2,144)     Notes payable to AgFirst
                                                                                                   Farm Credit Bank       $ 1,149,999       $ 1,155,604

                                               December 31, 2008
                                                                                       YTD
                                                                     Total            Total
                        Level          Level         Level            Fair            Gains
                          1              2             3             Value           (Losses)
      Assets:
      Impaired
       loans       $      –       $      –     $      386       $          386   $     (276)
                                                                                                                                                                         55



A description of the methods and assumptions used to estimate the            payments on the Association’s loan receivables plus accrued
fair value of each class of the Association’s financial instruments          interest on the notes payable. This assumption implies that
for which it is practicable to estimate that value follows:                  earnings on the Association’s interest margin are used to
                                                                             fund operating expenses and capital expenditures.
A.   Cash:
                                                                       E.    Commitments to Extend Credit:
     The carrying value is primarily a reasonable estimate of fair
     value.                                                                  The estimated market value of off-balance-sheet
                                                                             commitments is minimal since the committed rate
B.   Loans:                                                                  approximates current rates offered for commitments with
                                                                             similar rate and maturity characteristics and since the related
     Because no active market exists for the Association’s loans,            credit risk is not significant.
     fair value is estimated by discounting the expected future
     cash flows using the Association’s current interest rates at      F.    Assets Held in Trust Funds:
     which similar loans would be made to borrowers with
     similar credit risk. Discount rates are based on the Bank’s             See Note 14 for discussion of estimation of fair value for
     loan rates as well as management estimates.                             this instrument.

     For purposes of determining fair value of accruing loans, the     G. Investment Securities: Fair value is determined by
     loan portfolio is segregated into pools of loans with                discounting the expected future cash flows using appropriate
     homogeneous characteristics based upon repricing and credit          interest rates for similar assets.
     risk. Expected future cash flows and interest rates reflecting
     appropriate credit risk are separately determined for each
     individual pool.                                                  Note 16 — Quarterly Financial Information (Unaudited)

     Fair value of loans in a nonaccrual status is estimated to be     Quarterly results of operations for the years ended December 31,
     the carrying amount of the loan less specific reserves.           2009, 2008 and 2007 follow:

     The carrying value of accrued interest approximates its fair                                                                 2009
                                                                                                      First        Second          Third        Fourth         Total
     value.
                                                                       Net interest income         $ 11,544 $      12,178    $ 12,628       $ 12,403      $   48,753
                                                                       Provision for (reversal of
C.   Investment in AgFirst Farm Credit Bank and Other                   allowance for) loan losses       643        1,872          1,534        1,605          5,654
     Farm Credit Institutions:                                         Noninterest income
                                                                        (expense), net               (2,999)       (4,593)        (3,659)       (5,663)       (16,914)
                                                                       Net income (loss)           $ 7,902 $        5,713    $     7,435    $    5,135    $    26,185
     Estimating the fair value of the Association’s investment in
     the Bank and Other Farm Credit Institutions is not                                                                           2008
     practicable because the stock is not traded. As described in                                     First        Second          Third        Fourth         Total
     Note 5, the net investment is a requirement of borrowing          Net interest income         $ 11,271    $   11,482    $ 11,753       $ 11,861      $   46,367
     from the Bank and is carried at cost plus allocated equities in   Provision for (reversal of
                                                                        allowance for) loan losses        –             –           250           500            750
     the accompanying Consolidated Balance Sheets. The                 Noninterest income
     Association owns 5.77 percent of the issued stock of the           (expense), net               (1,370)       (3,464)        (2,291)       (4,637)       (11,762)
     Bank as of December 31, 2009 net of any reciprocal                Net income (loss)           $ 9,901     $    8,018    $     9,212    $    6,724    $    33,855
     investment. As of that date, the Bank’s assets totaled $30.9
                                                                                                                                 2007
     billion and shareholders’ equity totaled $1.6 billion. The
                                                                                                      First        Second          Third        Fourth         Total
     Bank’s earnings were $309 million during 2009.
                                                                       Net interest income         $ 10,824    $   10,609    $ 11,178       $ 10,814      $   43,425
                                                                       Provision for (reversal of
     In addition, the Association has an investment of $2,480           allowance for) loan losses        –             –              –             –             –
     related to other Farm Credit institutions.                        Noninterest income
                                                                        (expense), net               (2,491)       (3,305)        (1,491)       (1,850)       (9,137)
                                                                       Net income (loss)           $ 8,333     $    7,304    $     9,687    $    8,964    $   34,288
D.   Notes Payable to AgFirst Farm Credit Bank:

     The notes payable are segregated into pricing pools
     according to the types and terms of the loans (or other           Note 17 – Subsequent Events
     assets) which they fund. Fair value of the notes payable is
     estimated by discounting the anticipated cash flows of each       The Association has evaluated subsequent events and has
     pricing pool using the current rate that would be charged for     determined there are none requiring disclosure through March 12,
     additional borrowings. For purposes of this estimate it is        2010, which is the date the financial statements were issued.
     assumed the cash flow on the notes is equal to the principal
                                            PRSRT STD
                                           U.S. POSTAGE

                                           PAID
                                           COLUMBIA, SC
26 South Main Street                        PERMIT 1160
Statesboro, GA 30458




                       www.agsouthfc.com

								
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