Market Overview

Farm Credit System Reports 2012 Third Quarter and Nine-Month Net Income

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NEW YORK--(BUSINESS WIRE)--

The Farm Credit System today reported combined net income of $1.039 billion and $3.158 billion for the three and nine months ended September 30, 2012, as compared with combined net income of $1.008 billion and $2.994 billion for the same periods last year.

“The System continues to deliver solid results, building capital and improving credit quality as we move forward in a challenging environment,” stated Tracey McCabe, President and CEO of the Federal Farm Credit Banks Funding Corporation. “While our borrowers, by and large, have strengthened their own balance sheets over the past several years and have utilized risk management tools such as crop insurance and hedges for input costs, the full impact of the continuing U.S. drought is likely to unfold in 2013 and potentially be compounded by an uncertain global economic environment. As a result, we continue to monitor our borrowers closely during these uncertain and volatile times and remain committed to providing access to funding for U.S. agriculture and our rural communities.”

Results of Operations

Third Quarter and Nine-Month 2012 Results Compared to Third Quarter and Nine-Month 2011 Results

Combined net income increased $31 million and $164 million for the three and nine months ended September 30, 2012, as compared with the same periods in 2011. The increase for the three-month period resulted from an increase in net interest income of $74 million and a decrease in the provision for income taxes of $14 million, partially offset by increases in net noninterest expense of $54 million and the provision for loan losses of $3 million. The increase in net income for the nine-month period resulted from a decrease in the provision for loan losses of $164 million and an increase in net interest income of $123 million, partially offset by increases in net noninterest expense of $119 million and the provision for income taxes of $4 million.

Net interest income increased to $1.638 billion and $4.819 billion for the three and nine months ended September 30, 2012, as compared with $1.564 billion and $4.696 billion for the same periods of the prior year. The increase in net interest income for the three-month and nine-month periods of 2012, as compared to the same periods of the prior year, resulted primarily from a higher level of average earning assets. Average earning assets increased $12.314 billion and $4.275 billion to $228.254 billion and $224.086 billion for the three and nine months ended September 30, 2012, as compared with the prior year periods.

The net interest margin was 2.87% for the three and nine months ended September 30, 2012, as compared with 2.90% and 2.85% for the same periods of the prior year. The net interest spread for the third quarter of 2012 was unchanged from the third quarter of 2011 at 2.72% and increased five basis points to 2.72% for the nine-month period of 2012, as compared with 2.67% for the same period of 2011. The net interest spreads for the three- and nine-month periods were positively impacted as a result of the Banks' ability to refinance their outstanding debt at favorable interest rates in the current low interest rate environment. Since September 30, 2011, the Banks called debt totaling $63.2 billion, of which $47.8 billion was called during the first nine months of 2012, and were able to lower their cost of funds relative to their assets, which did not reprice as quickly. Over time, as interest rates increase or assets prepay or reprice in a manner consistent with historical experience, the positive impact on the net interest spread that the System has experienced over the last several years from calling Systemwide Debt Securities will likely diminish.

The net interest spreads were also favorably impacted by the net accretion of the fair value adjustments related to the merger of two System Banks (see the section entitled “Mergers” below) of $22 million and $68 million for the three and nine months ended September 30, 2012. Offsetting these positive impacts on the net interest spreads for the three and nine months ended September 30, 2012, as compared with the same periods of the prior year, was increased competition for particular types of loans in certain areas of the U.S., placing downward pressure on the net interest spreads.

The System recognized provisions for loan losses of $121 million and $188 million for the three- and nine-month periods ended September 30, 2012, as compared with provisions for loan losses of $118 million and $352 million for the three- and nine-month periods ended September 30, 2011. The decrease for the first nine months of 2012 reflects a lower level of probable and estimable losses recognized during that period, as compared with the same period of the prior year. The provisions for loan losses recorded during the three and nine months ended September 30, 2012 and 2011 reflected credit deterioration primarily in those agricultural sectors that continue to be impacted by the volatility in commodity prices, such as the livestock, ethanol and dairy sectors, as well as those sectors affected by the overall downturn in the general U.S. economy, such as forestry and nurseries. These factors, including the U.S. drought's impact on crop prices and yields, are expected to continue to weigh on the livestock, ethanol, dairy and poultry industries and other agricultural sectors that are exposed to grains as an input cost.

Noninterest income decreased $19 million and $33 million for the three and nine months ended September 30, 2012, as compared to the corresponding periods of 2011 primarily due to decreases in loan-related fee income of $12 million and $11 million, and income earned on Insurance Fund assets of $10 million and $24 million, partially offset by an increase in mineral income of $1 million and $21 million and to a decrease in net other-than-temporary impairment losses of $5 million and $27 million. Also contributing to the decrease in noninterest income for the nine-month period was an increase in losses on extinguishment of debt of $34 million.

Noninterest expense increased $35 million and $86 million for the three- and nine-month periods ended September 30, 2012, as compared with the same periods of the prior year. The increases were primarily due to increases in salaries and employee benefits of $21 million and $63 million and other operating expense of $11 million and $35 million for the three and nine months ended September 30, 2012, as compared with the same periods of the prior year. The increase in noninterest expense for the nine-month period of 2012 was partially offset by a decrease in merger-related expenses of $16 million related to the CoBank and U.S. AgBank merger discussed below.

The provisions for income taxes were $47 million and $201 million for the three and nine months ended September 30, 2012, as compared with $61 million and $197 million for the three and nine months ended September 30, 2011. The effective tax rate decreased slightly to 6.0% for the nine months ended September 30, 2012, as compared with 6.2% for the nine months ended September 30, 2011.

Third Quarter 2012 Compared to Second Quarter 2012

Net income decreased $28 million to $1.039 billion for the third quarter of 2012, as compared with net income of $1.067 million for the second quarter of 2012. The decrease in net income was principally due to increases in the provision for loan losses of $86 million and noninterest expense of $20 million, offset, in part by an increase in net interest income of $38 million and a decrease in the provision for income taxes of $39 million. As previously noted, the increase in the provision for loan losses was primarily due to credit deterioration primarily in those agricultural sectors that continue to be impacted by the volatility in commodity prices, such as dairy, livestock and ethanol sectors, as well as those sectors affected by the overall downturn in the general U.S. economy, such as forestry and nurseries. Noninterest expense increased primarily as a result of an increase in salaries and employee benefits and from an increase in losses on other property owned. The increase in net interest income resulted from an increase in average earning assets. The decrease in the provision for income taxes was due primarily to a decrease in taxable income during the third quarter.

Loan Portfolio Activity

Gross loans increased $10.745 billion or 6.2% to $185.409 billion at September 30, 2012, as compared with $174.664 billion at December 31, 2011, primarily due to increases in real estate mortgage, agribusiness and energy loans. Real estate mortgage loans increased primarily due to continued strong demand for cropland in the Midwest, despite extensive drought conditions. Agribusiness loans increased due to increases in seasonal loans to agribusiness cooperatives largely in the farm supply and grain marketing sectors, primarily resulting from an increase in commodity prices. The increase in energy loans was primarily due to increased lending in the power supply and electric distribution sectors.

Credit Quality

Overall, the System's credit quality improved during the first nine months of 2012. Accruing loan volume was $182.887 billion at September 30, 2012, as compared with $171.926 billion at December 31, 2011. Nonaccrual loans decreased $216 million to $2.522 billion at September 30, 2012, as compared with $2.738 billion at December 31, 2011. The decrease in nonaccrual loans was attributed to charge-offs, loan repayments and the improvement in the credit quality of certain loans. At September 30, 2012, 55.0% of nonaccrual loans were current as to principal and interest, as compared with 52.8% at December 31, 2011.

Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans, and accruing loans 90 days or more past due) decreased $165 million to $2.832 billion at September 30, 2012, as compared with $2.997 billion at December 31, 2011. Nonperforming loans represented 1.53% of the System's loans at September 30, 2012 and 1.72% at December 31, 2011.

The System's other credit quality indicators also reflected the improvement in credit quality of the System's loan portfolio during the first nine months of 2012. Loans classified under the Farm Credit Administration's Uniform Loan Classification System as “acceptable” or “other assets especially mentioned” as a percentage of loans and accrued interest receivable were 96.7% at September 30, 2012 and 96.2% at December 31, 2011. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans declined to 0.35% at September 30, 2012, as compared with 0.37% at September 30, 2011.

Notwithstanding these generally favorable credit quality indicators, certain parts of the U.S., particularly the Midwest, have been experiencing extensive drought. The majority of crop producers have crop insurance and generally have experienced several years of favorable economic conditions, which should help to mitigate the impact of the drought on these borrowers. System borrowers' who depend on crops as an input, including customers in the poultry, dairy, ethanol, beef and hog sectors, may be negatively impacted by higher commodity prices that result from these drought conditions.

The allowance for loan losses was $1.274 billion at September 30, 2012 and $1.290 billion at December 31, 2011. Net loan charge-offs of $169 million were recorded during the first nine months of 2012, as compared with net loan charge-offs of $332 million for the first nine months of 2011. The charge-offs recognized for these periods primarily related to the dairy, ethanol and livestock industries and to those sectors impacted by the overall downturn in the general U.S. economy, such as forestry and nurseries. The allowance for loan losses decreased an additional $35 million, primarily due to the transfer of $27 million to the reserve for unfunded commitments during the nine months ended September 30, 2012.

The allowance for loan losses as a percentage of total loans was 0.69% and 0.74% at September 30, 2012 and December 31, 2011. The allowance for loan losses was 45% of the System's total nonperforming loans and 51% of its nonaccrual loans at September 30, 2012, as compared with 43% and 47% at December 31, 2011. Total capital and the allowance for loan losses, which is a measure of risk-bearing capacity, totaled $39.791 billion at September 30, 2012 and $37.230 billion at December 31, 2011, and increased to 21.5% of System loans at September 30, 2012, as compared with 21.3% at December 31, 2011.

Liquidity and Capital Resources

Cash and investments (substantially all of which were held for liquidity purposes) were $45.896 billion at September 30, 2012 and $47.281 billion at December 31, 2011. The System's liquidity position represented 183 days coverage of maturing debt obligations at September 30, 2012, as compared with 194 days at December 31, 2011.

Total capital increased $2.577 billion during the first nine months of 2012 to $38.517 billion. The System's surplus increased $1.919 billion to $31.652 billion during the first nine months of 2012 due to net income earned and retained and from a $222 million transfer of restricted capital to surplus as a result of the declaration of premium refunds by the Farm Credit System Insurance Corporation (a U.S. government-controlled independent entity) offset, in part, by patronage distributions payable of $446 million and the re-characterization of $299 million of surplus as additional paid-in-capital in connection with Association mergers and the net reduction of $469 million in surplus due to the fair value adjustments in connection with the merger of two System Banks effective January 1, 2012. This surplus reduction includes a recharacterization of $259 million of accumulated other comprehensive loss that resulted from the Bank merger. For additional information on the mergers, see the following section entitled “Mergers.” Capital as a percentage of total assets increased to 16.1% at September 30, 2012, as compared with 15.6% at December 31, 2011.

Mergers

On January 1, 2012, U.S. AgBank, FCB, one of the System Banks, merged with and into CoBank, FCB, a wholly-owned subsidiary of CoBank, ACB, another one of the System Banks. CoBank, ACB and CoBank, FCB (collectively, CoBank, ACB) are required to comply, on a consolidated basis, with applicable System regulatory requirements and are jointly and severally liable on each other's debts and obligations, including Systemwide Debt Securities. As a result, the System now effectively has four System Banks (CoBank, ACB; AgFirst FCB; AgriBank, FCB; and Farm Credit Bank of Texas). In addition, on January 1, 2012, two Associations affiliated with the former U.S. AgBank merged and on July 1, 2012, two Associations affiliated with AgFirst FCB merged. The mergers were accounted for under the acquisition method of accounting.

About the Farm Credit System

The Farm Credit System is a federally chartered network of borrower-owned lending institutions and related service organizations. The System specializes in providing financing and related services to borrowers in the agricultural and rural sectors through four Banks and 82 affiliated Associations. Unlike commercial banks, the Banks are not legally authorized to accept deposits and they principally obtain their funds through the issuance of Systemwide Debt Securities.

Additional Information

Copies of this press release, as well as other financial information regarding the System, including its annual and quarterly information statements, are available on the Federal Farm Credit Banks Funding Corporation's website at www.farmcreditfunding.com. Additional information regarding the Farm Credit System is available on the System's website at www.farmcredit.com.

Forward-Looking Statements

Any forward-looking statements in this press release are based on current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from expectations due to a number of risks and uncertainties. More information about these risks and uncertainties is contained in the System's annual and quarterly information statements. The System undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

FARM CREDIT SYSTEM

COMBINED FINANCIAL STATEMENT DATA

(in millions)

 

STATEMENT OF CONDITION DATA

September 30,

2012

December 31,

2011

(unaudited)
 
Cash and investments $ 45,896 $ 47,281
Loans 185,409 174,664
Less: allowance for loan losses   (1,274 )   (1,290 )
Net loans   184,135     173,374  
Accrued interest receivable 2,161 1,750
Other assets 4,281 4,614
Restricted assets   3,268     3,392  
Total assets $ 239,741   $ 230,411  
 
Systemwide Debt Securities:
Due within one year $ 66,194 $ 64,716
Due after one year   126,291     120,064  
Total Systemwide Debt Securities 192,485 184,780
Subordinated debt 1,650 1,650
Other bonds 1,636 2,109
Other liabilities   5,453     5,932  
Total liabilities   201,224     194,471  
 
Preferred stock 2,019 2,125
Capital stock 1,637 1,618
Additional paid-in-capital 738 402
Restricted capital 3,268 3,392
Accumulated other comprehensive loss (797 ) (1,330 )
Surplus   31,652     29,733  
Total capital   38,517     35,940  
Total liabilities and capital $ 239,741   $ 230,411  

STATEMENT OF INCOME DATA

     

 

For the

Quarter Ended

September 30,

For the

Nine Months Ended

September 30,

(unaudited)

2012

 

2011

2012

 

2011

 
Interest income $ 2,154 $ 2,205 $6,418 $ 6,696
Interest expense   (516 )   (641 ) (1,599 )   (2,000 )
Net interest income 1,638 1,564 4,819 4,696
Provision for loan losses (121 ) (118 ) (188 ) (352 )
Net noninterest expense   (431 )   (377 ) (1,272 )   (1,153 )
Income before income taxes 1,086 1,069 3,359 3,191
Provision for income taxes   (47 )   (61 ) (201 )   (197 )
Net income $ 1,039   $ 1,008   $3,158   $ 2,994  

FARM CREDIT SYSTEM

COMBINED FINANCIAL STATEMENT DATA

(in millions)

         

Statement of Condition Data - Five Quarter Trend

September 30, June 30, March 31, December 31, September 30,

2012

2012

2012

2011

2011

(unaudited) (unaudited) (unaudited) (audited) (unaudited)
Cash and investments $ 45,896 $ 46,625 $ 44,736 $ 47,281 $ 48,420
Loans 185,409 181,519 178,595 174,664 170,615
Less: allowance for loan losses   (1,274 )   (1,241 )   (1,298 )   (1,290 )   (1,392 )
Net loans   184,135     180,278     177,297     173,374     169,223  
Accrued interest receivable 2,161 1,732 1,618 1,750 2,182
Other assets 4,281 4,383 4,381 4,614 4,513
Restricted assets   3,268     3,241     3,425     3,392     3,356  
Total assets $ 239,741   $ 236,259   $ 231,457   $ 230,411   $ 227,694  
 
Systemwide Debt Securities:
Due within one year $ 66,194 $ 67,210 $ 67,734 $ 64,716 $ 66,460
Due after one year   126,291     123,468     118,916     120,064     116,901  
Total Systemwide Debt Securities

192,485

190,678

186,650

184,780

183,361

Subordinated debt 1,650 1,650 1,650 1,650 1,650
Other bonds 1,636 1,313 1,273 2,109 1,195
Other liabilities   5,453     5,140     5,268     5,932     5,549  
Total liabilities   201,224     198,781     194,841     194,471     191,755  
 
Preferred stock 2,019 1,992 1,991 2,125 2,146
Capital stock 1,637 1,605 1,591 1,618 1,585
Additional paid-in-capital 738 719 717 402 401
Restricted capital 3,268 3,241 3,425 3,392 3,356
Accumulated other comprehensive loss

(797

)

(970

)

(955

)

(1,330

)

(991

)

Surplus   31,652     30,891     29,847     29,733     29,442  
Total capital   38,517     37,478     36,616     35,940     35,939  
Total liabilities and capital $ 239,741   $ 236,259   $ 231,457   $ 230,411   $ 227,694  

Statement of Income Data – Five Quarter Trend (unaudited)

               
 
For the quarter ended: September 30, June 30, March 31, December 31, September 30,

2012

2012

2012

2011

2011

 
Interest income $2,154 $2,128 $2,136 $2,188 $2,205
Interest expense (516)   (528)   (555)   (625)   (641)
Net interest income 1,638 1,600 1,581 1,563 1,564
Provision for loan losses (121) (35) (32) (78) (118)
Noninterest income 136 135 122 142 155
Noninterest expense (567)   (547)   (551)   (609)   (532)
Income before income taxes 1,086 1,153 1,120 1,018 1,069
Provision for income taxes (47)   (86)   (68)   (72)   (61)
Net income $1,039   $1,067   $1,052   $ 946   $1,008

For further information and copies of annual and quarterly information statements:
Federal Farm Credit Banks Funding Corporation
H. John Marsh, Jr., Managing Director
Financial Management Division
201-200-8071
jmarsh@farmcreditfunding.com

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