Farm Credit System Reports 2011 Second Quarter and Six-Month Net Income

NEW YORK--(BUSINESS WIRE)--The Farm Credit System today reported combined net income of $982 million and $1.986 billion for the three and six months ended June 30, 2011, as compared with combined net income of $882 million and $1.684 billion for the same periods last year.

“The Farm Credit System’s results continue to be very positive due to relatively good credit quality and steady net interest margins”

“The Farm Credit System’s results continue to be very positive due to relatively good credit quality and steady net interest margins,” remarked Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. “To date, we are pleased we continue to have access to well-priced debt due to our strong income trend and our conservative balance sheet despite the current uncertainty in the domestic and European debt markets. At June 30, 2011, System capital as a percentage of total assets was 15.2% and the System’s liquidity position represented 195 days coverage of maturing debt obligations.”

Results of Operations

Second Quarter and Six-Month 2011 Results Compared to Second Quarter and Six-Month 2010 Results

Combined net income increased $100 million and $302 million for the second quarter and six months ended June 30, 2011, as compared with the same periods in 2010. The increases resulted from increases in net interest income of $134 million and $289 million and decreases in the provision for loan losses of $19 million and $82 million, partially offset by increases in net noninterest expense of $39 million and $49 million and increases in the provision for income taxes of $14 million and $20 million.

Net interest income was $1.563 billion and $3.132 billion for the three and six months ended June 30, 2011, as compared with $1.429 billion and $2.843 billion for the same periods of the prior year. The increase in net interest income between the three- and six-month periods primarily resulted from a higher level of average earning assets. Average earning assets increased $16.311 billion and $17.385 billion to $220.692 billion and $221.788 billion for the three and six months ended June 30, 2011.

The net interest margin increased three and four basis points to 2.83% and 2.82% for the quarter and six months ended June 30, 2011, as compared with 2.80% and 2.78% for the same periods of the prior year. Positively impacting the net interest margin were increases in the net interest spreads of eight basis points to 2.66% and 2.65% for both the three and six months ended June 30, 2011, as compared with 2.58% and 2.57% for the same periods of 2010. The increases in the net interest spreads were primarily attributable to the Banks’ ability to more quickly reprice their outstanding debt in the lower interest rate environment and to adjustments in loan pricing to better reflect credit risk and market conditions in the current agricultural economic environment. Since June 30, 2010, the Banks called debt totaling $52.8 billion, of which $20.0 billion was called during the first six months of 2011, and as a result, the Banks were able to lower their cost of funds relative to their assets, which did not reprice as quickly. Over time, as interest rates change and as assets prepay or reprice in a manner more 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 System recognized provisions for loan losses of $126 million and $234 million for the three- and six-month periods ended June 30, 2011, as compared with provisions for loan losses of $145 million and $316 million for the three- and six-month periods ended June 30, 2010. The decrease in the provision for loan losses reflects a lower level of probable and estimable losses recognized during the comparable periods. However, the loan portfolio continues to be impacted by volatility in certain agricultural sectors and weakness in the general U.S. economy. The provisions for loan losses recorded during the first six months of 2011 and 2010 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, nurseries and wineries. In addition, the provision for loan losses in 2011 reflected more recent credit stress in the poultry sector, as well as a higher average level of loan volume and commitments to agribusiness customers.

Net noninterest expense increased $39 million to $389 million and $49 million to $776 million for the three and six months ended June 30, 2011, as compared with $350 million and $727 million for the same periods of the prior year. The increases were due to increases in noninterest expense of $53 million and $96 million, partially offset by increases in noninterest income of $14 million and $47 million. Noninterest expense for the three- and six-month periods ended June 30, 2011 reflected increased salaries and employee benefits of $24 million and $57 million and increased losses on other property owned of $17 million and $34 million, as compared with the same periods of the prior year.

The provisions for income taxes were $66 million and $136 million for the three and six months ended June 30, 2011, as compared with $52 million and $116 million for the three and six months ended June 30, 2010. The effective tax rate was 6.4% for both the six months ended June 30, 2011 and 2010.

Second Quarter 2011 Compared to First Quarter 2011

Net income was $982 million for the second quarter of 2011, as compared with net income of $1.004 billion for the first quarter of 2011. The decrease in net income was due to a $6 million decrease in net interest income, an increase in the provision for loan losses of $18 million and an increase in net noninterest expense of $2 million, offset, in part by a decrease in the provision for income taxes of $4 million. The increase in the provision for loan losses in the second quarter of 2011, as compared with the first quarter of 2011, reflects continued volatility in certain sectors of the agricultural and general economy, including the ethanol, dairy, poultry, forestry and nursery sectors.

Loan Portfolio Activity

Gross loans decreased $1.553 billion or 0.9% to $173.798 billion at June 30, 2011, as compared with $175.351 billion at December 31, 2010, primarily due to decreases in production and intermediate-term loans and agribusiness loans, offset, in part by an increase in real estate mortgage loans. The decrease in production and intermediate-term loans was primarily due to lower than expected increases in operating lines of credit due to the strong financial position of agricultural producers, and to delayed plantings in many areas related to weather conditions. The decrease in agribusiness loans resulted from a decline in borrowings by agribusiness customers, which reach a seasonal low in late summer or early fall before harvest financing demands result in loan volume increases in the late fall of each year. In addition, real estate mortgage loans increased primarily due to strong demand for cropland and competitive interest rates on loan products.

Credit Quality

The System’s accruing loan volume was $170.487 billion at June 30, 2011, as compared with $172.122 billion at December 31, 2010. Nonaccrual loans increased $82 million to $3.311 billion at June 30, 2011, as compared with $3.229 billion at December 31, 2010. This increase in nonaccrual loans was primarily due to a decline in the credit quality of loans to borrowers in certain agricultural sectors, such as livestock and poultry, as well as those sectors affected by the overall downturn in the general U.S. economy. At June 30, 2011, 49.1% of nonaccrual loans were current as to principal and interest, as compared with 49.7% at December 31, 2010.

Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans, and accruing loans 90 days or more past due) were $3.552 billion at June 30, 2011, as compared with $3.386 billion at December 31, 2010. Accruing restructured loans increased $60 million during the first six months of 2011 to $174 million at June 30, 2011. The increase was due to the restructuring of a limited number of loans. Nonperforming loans represented 2.04% of the System’s loans at June 30, 2011 and 1.93% at December 31, 2010.

Certain credit quality indicators improved or remained at generally favorable levels during the first half of 2011. 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 95.5% at June 30, 2011 and 95.4% at December 31, 2010. Loan delinquencies (accruing loans 30 days or more past due) as a percentage of accruing loans declined to 0.39% at June 30, 2011, as compared with 0.58% at June 30, 2010.

The allowance for loan losses was $1.447 billion at both June 30, 2011 and December 31, 2010. Net loan charge-offs of $188 million were recorded during the first six months of 2011, as compared with net loan charge-offs of $225 million for the first six months of 2010. The charge-offs recognized for these periods primarily related to loans made in the ethanol and livestock sectors, as well as those sectors impacted by the overall downturn in the general U.S. economy such as forestry, nurseries and wineries.

The allowance for loan losses as a percentage of total loans was 0.83% at both June 30, 2011 and December 31, 2010. The allowance for loan losses was 41% of the System’s total nonperforming loans and 44% of its nonaccrual loans at June 30, 2011, as compared with 43% and 45% at December 31, 2010. Risk funds (total capital and the allowance for loan losses), which is a measure of risk-bearing capacity, totaled $36.510 billion at June 30, 2011 and $34.698 billion at December 31, 2010, and increased to 21.0% of System loans at June 30, 2011, as compared with 19.8% at December 31, 2010.

Liquidity and Capital Resources

Cash and investments (principally all of which were held for liquidity purposes) was $48.262 billion at June 30, 2011 and $46.282 billion at December 31, 2010. The System’s liquidity position represented 195 days coverage of maturing debt obligations at June 30, 2011, as compared with 173 days at December 31, 2010.

Total capital increased $1.812 billion during the first six months of 2011 to $35.063 billion. The System’s surplus increased $1.526 billion to $28.662 billion during the first half of 2011 due to net income earned and retained. Accumulated other comprehensive loss decreased $179 million primarily due to increases in unrealized gains on investments available-for-sale of $126 million due to favorable changes in interest rates. Capital as a percentage of total assets increased to 15.2% at June 30, 2011, as compared with 14.5% at December 31, 2010.

U.S. Fiscal Situation and Credit Rating Impact

The recent U.S. Congressional negotiations aimed at raising the government’s borrowing limit and addressing long-term budget imbalances have further highlighted the risks to the System relating to the U.S. fiscal situation. These risks include the implied link between the credit rating of the System and the U.S. government given the System’s status as a government-sponsored enterprise.

In July 2011, Moody’s Investors Service and Standard & Poor’s Ratings Services placed the debt securities of the U.S. government under review for possible downgrade. They indicated that depending upon the actions of Congress and the Administration with respect to the government debt ceiling and budget, it was possible that the long-term sovereign credit rating of the U.S. may be downgraded. In turn, if that should happen, Moody’s Investors Service and Standard & Poor’s Ratings Services have indicated that their long-term credit rating for the System may also be downgraded. The two rating agencies have affirmed their short-term credit rating for the System. A reduction in the System’s credit rating, if it were to occur, may increase our borrowing costs and may limit our access to the capital markets, reducing our flexibility to issue debt across the full spectrum of the yield curve.

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 five Banks and 84 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.farmcredit-ffcb.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:
Daniel M. Bienz, Vice President
Financial Analysis and Disclosure
Federal Farm Credit Banks Funding Corporation
10 Exchange Place, Suite 1401
Jersey City, NJ 07302
[phone]
E-mail - [e-mail]

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.

COMBINED FINANCIAL STATEMENT DATA
(in millions)
STATEMENT OF CONDITION DATA
	June 30,			December 31,
	2011			2010
	(unaudited)
Cash and investments	$	48,262		$	46,282
Loans		173,798			175,351
Less: allowance for loan losses		(1,447	)		(1,447	)
Net loans		172,351			173,904
Accrued interest receivable		1,831			1,881
Other assets		4,234			4,680
Restricted assets		3,316			3,226
Total assets	$	229,994		$	229,973
Systemwide Debt Securities:
Due within one year	$	67,302		$	68,067
Due after one year		119,994			120,706
Total Systemwide Debt Securities		187,296			188,773
Subordinated debt		1,650			1,650
Other bonds		961			802
Other liabilities		5,024			5,497
Total liabilities		194,931			196,722
Preferred stock		2,123			2,125
Capital stock		1,553			1,542
Additional paid-in-capital		401			393
Restricted capital		3,316			3,226
Accumulated other comprehensive loss		(992	)		(1,171	)
Surplus		28,662			27,136
Total capital		35,063			33,251
Total liabilities and capital	$	229,994		$	229,973

	For the						For the
	Quarter Ended						Six Months Ended
	June 30,						June 30,
	(unaudited)
	2011			2010			2011			2010
Interest income	$	2,233		$	2,192		$	4,491		$	4,384
Interest expense		(670	)		(763	)		(1,359	)		(1,541	)
Net interest income		1,563			1,429			3,132			2,843
Provision for loan losses		(126	)		(145	)		(234	)		(316	)
Net noninterest expense		(389	)		(350	)		(776	)		(727	)
Income before income taxes		1,048			934			2,122			1,800
Provision for income taxes		(66	)		(52	)		(136	)		(116	)
Net income	$	982		$	882		$	1,986		$	1,684

FARM CREDIT SYSTEM
COMBINED FINANCIAL STATEMENT DATA
(in millions)
Statement of Condition Data - Five Quarter Trend
	June 30,			March 31,			December 31,			September 30,			June 30,
	2011			2011			2010			2010			2010
	(unaudited)			(unaudited)			(audited)			(unaudited)			(unaudited)
Cash and investments	$	48,262		$	46,010		$	46,282		$	42,900		$	45,756
Loans		173,798			177,599			175,351			168,484			162,186
Less: allowance for loan losses		(1,447	)		(1,456	)		(1,447	)		(1,403	)		(1,440	)
Net loans		172,351			176,143			173,904			167,081			160,746
Accrued interest receivable		1,831			1,730			1,881			2,282			1,924
Other assets		4,234			4,155			4,680			5,089			4,677
Restricted assets		3,316			3,269			3,226			3,193			3,158
Total assets	$	229,994		$	231,307		$	229,973		$	220,545		$	216,261
Systemwide Debt Securities:
Due within one year	$	67,302		$	67,968		$	68,067		$	64,737		$	64,378
Due after one year		119,994			121,673			120,706			114,365			112,455
Total Systemwide Debt Securities		187,296			189,641			188,773			179,102			176,833
Subordinated debt		1,650			1,650			1,650			1,650			1,650
Other bonds		961			863			802			771			948
Other liabilities		5,024			5,037			5,497			5,975			5,080
Total liabilities		194,931			197,191			196,722			187,498			184,511
Preferred stock		2,123			2,129			2,125			2,143			1,838
Capital stock		1,553			1,522			1,542			1,525			1,496
Additional paid-in-capital		401			413			393			381			371
Restricted capital		3,316			3,269			3,226			3,193			3,158
Accumulated other comprehensive loss		(992	)		(1,146	)		(1,171	)		(1,065	)		(1,234	)
Surplus		28,662			27,929			27,136			26,870			26,121
Total capital		35,063			34,116			33,251			33,047			31,750
Total liabilities and capital	$	229,994		$	231,307		$	229,973		$	220,545		$	216,261

Statement of Income Data – Five Quarter Trend (unaudited)
For the three months ended:	June 30,			March 31,			December 31,			September 30,			June 30,
	2011			2011			2010			2010			2010
Interest income	$	2,233		$	2,258		$	2,251		$	2,215		$	2,192
Interest expense		(670	)		(689	)		(684	)		(735	)		(763	)
Net interest income		1,563			1,569			1,567			1,480			1,429
Provision for loan losses		(126	)		(108	)		(193	)		(158	)		(145	)
Net noninterest expense		(389	)		(387	)		(445	)		(338	)		(350	)
Income before income taxes		1,048			1,074			929			984			934
Provision for income taxes		(66	)		(70	)		(67	)		(35	)		(52	)
Net income	$	982		$	1,004		$	862		$	949		$	882