Farm Credit System Reports First Quarter 2013 Combined Results

Farm Credit System Reports First Quarter 2013 Combined Results

NEW YORK--(BUSINESS WIRE)-- The Farm Credit System today reported that combined net income increased $90 million or 8.6% to $1.142 billion for the quarter ended March 31, 2013, as compared with combined net income of $1.052 billion for the same period of the prior year.

"The System's positive results in the first quarter of 2013 reflect the continued strength of the agricultural sector of the U.S. economy," noted Tracey McCabe, President and CEO of the Federal Farm Credit Banks Funding Corporation. "Despite the increasingly competitive environment, the System has increased its period-over-period average loans outstanding, primarily in our real estate mortgage, production and intermediate-term and energy loan portfolios, resulting in a higher level of net interest income."

Results of Operations

First Quarter 2013 Compared to First Quarter 2012

The increase in combined net income between the first-quarter periods resulted from an increase in net interest income of $96 million and decreases in the provision for loan losses of $10 million and the provision for income taxes of $9 million, partially offset by an increase in noninterest expense of $25 million.

Net interest income was $1.677 billion for the first quarter of 2013, as compared with $1.581 billion for the first quarter of the prior year. The increase in net interest income between the periods primarily resulted from a higher level of average earning assets. Average earning assets grew $16.982 billion or 7.7% to $237.064 billion for the first quarter of 2013, as compared with the first quarter of 2012.

The net interest margin was 2.83% for the quarter ended March 31, 2013, as compared with 2.87% for the quarter ended March 31, 2012. The decline in net interest margin for the period resulted from a three basis point decline in income earned on earning assets funded by noninterest bearing sources (principally capital), as yields on average earning assets declined due to lower interest rates and from a decrease in the net interest spread of one basis point to 2.70%, as compared with the first quarter of 2012. The decline in the net interest spread resulted primarily from competitive pressures. The net interest spread for both the quarters ended March 31, 2013 and 2012 were positively impacted by CoBank's $24 million and $21 million net accretion of asset and liability fair value adjustments related to its January 1, 2012 merger with U.S. AgBank and from the Banks' ability to refinance outstanding debt at favorable interest rates in the current low interest rate environment. The Banks called debt totaling $9.9 billion and $17.9 billion during the first quarters of 2013 and 2012 and were able to lower their cost of funds relative to the interest earned on their assets, which did not repay or reprice as quickly. As our loan product mix changes, interest rates change and assets prepay or reprice in a manner more consistent with historical experience, the positive impact on the net interest spread experienced over the past several years from calling Systemwide Debt Securities will decline.

The System's provision for loan losses declined $10 million to $22 million for the first quarter of 2013, as compared with $32 million recognized during the first quarter of 2012. The decrease in the provision for loan losses reflects a lower level of probable and estimable losses in the System's loan portfolio. However, the loan portfolio continues to be impacted by volatility in certain agricultural sectors and by the overall weakness in the general U.S. economy during the past few years. The provision for loan losses for the first quarter of 2013 also reflected specific credit challenges for a small number of communication customers. The provision for loan losses recorded during the first quarter of 2012 reflected credit deterioration primarily in those agricultural sectors affected by the weakness in the U.S. economy, particularly in specific industries such as forestry and horticulture.

Noninterest income was $122 million for both the first quarter of 2013 and 2012. Noninterest expense increased $25 million or 4.5% to $576 million for the first quarter of 2013, as compared with the first quarter of 2012, primarily due to an increase in salaries and employee benefits. Salaries and employee benefits increased as result of annual merit increases and higher staffing levels at certain System institutions.

The provision for income taxes was $59 million for the first quarter of 2013, as compared with $68 million for the first quarter of the prior year. The effective tax rate declined from 6.1% for the first quarter of 2012 to 4.9% for the first quarter of 2013 due to decreased earnings at certain taxable System institutions.

First Quarter 2013 Compared to Fourth Quarter 2012

Net income increased $182 million to $1.142 billion for the first quarter of 2013, as compared with $960 million for the fourth quarter 2012. The increase between the periods was due to decreases in the provision for loan losses of $103 million and net noninterest expense of $98 million and to an increase in net interest income of $19 million offset, in part, by an increase in the provision for income taxes of $38 million. The decrease in the provision for loan losses in the first quarter of 2013 from the fourth quarter of 2012 reflects a lower level of probable and estimable losses in the System's loan portfolio. The decrease in net noninterest expense in the first quarter of 2013 from the fourth quarter of 2012 was primarily due to decreases in salaries and employee benefits and losses on other property owned.

Loan Portfolio Activity

Gross loans decreased $107 million or 0.1% to $191.797 billion at March 31, 2013, as compared with $191.904 billion at December 31, 2012. The decrease resulted from a decrease in production and intermediate-term loans due to seasonal repayments, offset, in part, by an increase in demand for loans to cooperatives resulting from normal seasonal borrowings by agribusiness customers, primarily in the farm supply and grain marketing sectors.

Credit Quality

The System's accruing loan volume was $189.405 billion at March 31, 2013, as compared with $189.604 billion at December 31, 2012. Nonaccrual loans increased $92 million to $2.392 billion at March 31, 2013, as compared with $2.300 billion at December 31, 2012. This increase in nonaccrual loans was primarily due to a decline in the credit quality of a limited amount of loans to borrowers in the communication and hog sectors. At March 31, 2013, 54.3% of nonaccrual loans were current as to principal and interest, as compared with 53.8% at December 31, 2012.

Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans, and accruing loans 90 days or more past due) increased $103 million to $2.711 billion at March 31, 2013, as compared with $2.608 billion at December 31, 2012. These nonperforming loans represented 1.41% of the System's loans at March 31, 2013 and 1.36% at December 31, 2012.

The System's other credit quality indicators remained at generally favorable levels during the first quarter of 2013. 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 was 96.8% at both March 31, 2013 and December 31, 2012. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans remained at a low level of 0.31% at March 31, 2013, as compared with 0.36% at March 31, 2012.

The allowance for loan losses was $1.341 billion at March 31, 2013, as compared with $1.343 billion at December 31, 2012. Net loan charge-offs of $18 million were recorded during the first quarter of 2013, as compared with net loan charge-offs of $42 million for the first quarter of 2012. The net loan charge-offs recognized in the first quarters of 2013 and 2012 were due, in part, to loans in specific industries such as dairy, livestock, poultry, forestry and horticulture. The first quarter 2012 net loan charge-offs also related to the ethanol sector.

The allowance for loan losses as a percentage of total loans was 0.70% at both March 31, 2013 and December 31, 2012. The allowance for loan losses was 49% of the System's total nonperforming loans and 56% of its nonaccrual loans at March 31, 2013, as compared with 51% and 58% at December 31, 2012. Total capital and the allowance for loan losses, which is a measure of risk-bearing capacity, totaled $40.985 billion at March 31, 2013 and $39.952 billion at December 31, 2012, and represented 21.4% of System loans at March 31, 2013, as compared with 20.8% at December 31, 2012.

Liquidity and Capital Resources

Cash and investments (principally all of which were held for liquidity purposes) were $48.138 billion at March 31, 2013 and $46.928 billion at December 31, 2012. The System's liquidity position was 189 days of coverage of maturing debt at March 31, 2013, as compared with 185 days at December 31, 2012.

Total capital increased $1.035 billion during the first quarter of 2013 to $39.644 billion. The System's surplus increased $962 million to $32.881 billion during the first quarter of 2013 due to net income earned. Capital as a percentage of total assets increased to 16.0% at March 31, 2013, as compared with 15.7% at December 31, 2012.

About the Farm Credit System

The Farm Credit System is a federally chartered network of borrower-owned lending institutions and related service organizations. The System specializes in providing financing and related services to borrowers in the agricultural and rural sectors through the 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.

For further information and copies of annual and quarterly information statements, contact:

Karen R. Brenner, Managing Director
Financial Management Division
Federal Farm Credit Banks Funding Corporation
10 Exchange Place, Suite 1401
Jersey City, NJ 07302
(201) 200-8081
E-mail - kbrenner@farmcreditfunding.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.