Farm Credit System Reports 2013 Second Quarter and Six-Month Net Income

Farm Credit System Reports 2013 Second Quarter and Six-Month Net Income

NEW YORK--(BUSINESS WIRE)-- The Farm Credit System today reported combined net income of $1.104 billion and $2.246 billion for the three and six months ended June 30, 2013, as compared with combined net income of $1.067 billion and $2.119 billion for the same periods last year.

"The System continues to record solid earnings through the first half of 2013," remarked Tracey McCabe, President and CEO of the Federal Farm Credit Banks Funding Corporation. "The year-over-year increases in average earning assets continue to drive the increases in net interest income. In addition, the System continues to build its capital as is reflected in the measure of capital as a percentage of total assets which increased to 16.3% at June 30, 2013, as compared with 15.7% at December 31, 2012."

Results of Operations

Second Quarter and Six-Month 2013 Results Compared to Second Quarter and Six-Month 2012 Results

Combined net income increased $37 million or 3.5% and $127 million or 6.0% for the three and six months ended June 30, 2013, as compared with the same periods in 2012. The increase for the three-month period resulted primarily from an increase in net interest income of $35 million and to decreases in the provision for loan losses of $16 million and the provision for income taxes of $28 million, partially offset by an increase in net noninterest expense of $42 million. The increase for the six-month period was primarily due to an increase in net interest income of $131 million and decreases in the provision for loan losses of $26 million and the provision for income taxes of $37 million, partially offset by an increase in net noninterest expense of $67 million.

Net interest income increased to $1.635 billion and $3.312 billion for the three and six months ended June 30, 2013, as compared with $1.600 billion and $3.181 billion for the same periods of the prior year. The increases in net interest income for both periods of 2013 resulted primarily from a higher level of average earning assets. Average earning assets increased $14.355 billion and $15.671 billion to $237.866 billion and $237.454 billion for the three and six months ended June 30, 2013, as compared with the prior year periods.

The net interest margin was 2.75% and 2.79% for the three and six months ended June 30, 2013, as compared with 2.86% and 2.87% for the three and six months ended June 30, 2012. The decline in the net interest margin for both periods resulted from a decrease in the net interest spread of ten and seven basis points to 2.61% and 2.65%, as compared with 2.71% and 2.72% for the same periods of the prior year. The net interest margin for both the three- and six-month periods of 2013 was also negatively impacted by a one basis point decline in income earned on earning assets funded by noninterest-bearing sources (principally capital), as yields on average earning assets declined.

The net interest spread was positively impacted by the Banks' ability to refinance outstanding debt at favorable interest rates in the low interest rate environment. During the first six months of 2013, the Banks called debt totaling $19.9 billion, as compared with $30.5 billion for the first six months of 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. However, the decrease in the net interest spread reflects the impact of the lesser amount of debt being called between the periods. As 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 decline in the net interest spread for the three and six months ended June 30, 2013, as compared with the same periods of the prior year was also partially attributable to competitive pressures and to an increase in the average loan volume in lower spread lines of business.

The System recognized provisions for loan losses of $19 million and $41 million for the three and six months ended June 30, 2013, as compared with provisions for loan losses of $35 million and $67 million for the three and six months ended June 30, 2012. The decreases in the provisions for loan losses reflect a lower level of probable and estimable losses recognized during the 2013 periods. 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 recorded during the first six months of 2013 also reflected specific credit challenges for a limited number of communication customers. The provision for loan losses recorded during the first six months of 2012 reflected credit deterioration primarily in those agricultural sectors affected by the overall weakness in the general U.S. economy at that time, particularly in housing-related industries such as forestry and horticulture. Additionally, the provision for loan losses during 2012 reflected credit deterioration primarily in those agricultural sectors impacted by the volatility in commodity prices.

Noninterest income increased $7 million to $142 million and $7 million to $264 million for the three and six months ended June 30, 2013, as compared with the same periods of the prior year. The increase for the three- and six-month periods of 2013 was primarily due to decreases in losses on extinguishment of debt of $16 million and $12 million and net other-than-temporary impairment losses on investments of $3 million and $7 million. Partially offsetting these improvements in noninterest income were decreases in income earned on Insurance Fund assets of $7 million and $15 million and mineral income of $9 million and $5 million. Also contributing to the increase in noninterest income for the six-month period of 2013 was an increase in gains on sales of investments and other assets, net of $8 million.

Noninterest expense increased $49 million and $74 million to $596 million and $1.172 billion for the three and six months ended June 30, 2013, as compared with the same periods of the prior year. The increases for the three- and six-month periods were primarily due to increases in salaries and employee benefits. Salaries and employee benefits increased as a result of annual merit increases and higher staffing levels at certain System institutions.

The provisions for income taxes were $58 million and $117 million for the three and six months ended June 30, 2013, as compared with $86 million and $154 million for the three and six months ended June 30, 2012. The effective tax rate declined from 6.8% for the six months ended June 30, 2012 to 5.0% for the six months ended June 30, 2013 due to decreased earnings at certain taxable System institutions.

Second Quarter 2013 Compared to First Quarter 2013

Net income was $1.104 billion for the second quarter of 2013, as compared with net income of $1.142 billion for the first quarter of 2013. The decrease in net income was due to a decrease in net interest income of $42 million offset, in part, by decreases in the provision for loan losses of $3 million and the provision for income taxes of $1 million. The decrease in net interest income was primarily due to a lesser amount of loan prepayment fee income recognized in the second quarter.

Loan Portfolio Activity

Gross loans increased $880 million or 0.5% to $192.784 billion at June 30, 2013, as compared with $191.904 billion at December 31, 2012, primarily due to increases in real estate mortgage and energy loans, offset in part by decreases in production and intermediate-term and agribusiness loans. Real estate mortgage loans increased primarily due to strong demand for cropland in the Midwest. The increase in energy loans resulted from continued market penetration in the electric distribution industry and increased lending activity in the power supply sector. The decrease in production and intermediate-term loans was primarily due to seasonal paydowns on operating lines of credit which occurred in January and is expected to be reversed in the third quarter of 2013 following normal seasonal patterns, albeit somewhat delayed because of the cold temperatures and excessive moisture experienced during the spring planting season in certain areas of the country. The decrease in agribusiness loans was due to lower levels of seasonal financing from farm supply and grain marketing cooperatives.

Credit Quality

The System's accruing loan volume was $190.601 billion at June 30, 2013, as compared with $189.604 billion at December 31, 2012. Nonaccrual loans decreased $117 million to $2.183 billion at June 30, 2013, as compared with $2.300 billion at December 31, 2012. This decrease in nonaccrual loans was attributed to charge-offs, repayments and the improvement in the credit quality of certain loans. At June 30, 2013, 53.0% 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) decreased $86 million to $2.522 billion at June 30, 2013, as compared with $2.608 billion at December 31, 2012. These nonperforming loans represented 1.31% of the System's loans at June 30, 2013 and 1.36% at December 31, 2012.

The System's other credit quality indicators also improved or remained at generally favorable levels during the second 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 were 97.0% at June 30, 2013 and 96.8% at 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 0.29% at June 30, 2013, as compared with 0.28% at June 30, 2012.

The allowance for loan losses was $1.323 billion at June 30, 2013, as compared with $1.343 billion at December 31, 2012. Net loan charge-offs of $61 million were recorded during the first six months of 2013, as compared with net loan charge-offs of $93 million for the same period of the prior year. The net loan charge-offs recognized in both 2013 and 2012 were due, in part, to loans in specific industries such as ethanol, forestry, horticulture, dairy and livestock.

The allowance for loan losses as a percentage of total loans was 0.69% at June 30, 2013 and 0.70% at December 31, 2012. The allowance for loan losses was 52.5% of the System's total nonperforming loans and 60.6% of its nonaccrual loans at June 30, 2013, as compared with 51.5% and 58.4% at December 31, 2012. Total capital and the allowance for loan losses, which is a measure of risk-bearing capacity, totaled $41.904 billion at June 30, 2013 and $39.952 billion at December 31, 2012, and represented 21.7% of System loans at June 30, 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) was $47.755 billion at June 30, 2013 and $46.928 billion at December 31, 2012. The System's liquidity position represented 200 days coverage of maturing debt obligations at June 30, 2013, as compared with 185 days at December 31, 2012.

Total capital increased $1.972 billion during the first six months of 2013 to $40.581 billion. The System's surplus increased $1.828 billion to $33.747 billion during the first six months of 2013 due to net income earned and retained. During the second quarter of 2013, two System institutions issued non-cumulative perpetual preferred stock totaling $300 million, while another System institution redeemed $150 million of its non-cumulative perpetual preferred stock. The proceeds from the issuances were used to increase regulatory capital and for general corporate purposes. Capital as a percentage of total assets increased to 16.3% at June 30, 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.