Farm Credit System Reports 2011 Third Quarter and Nine-Month Net Income

NEW YORK--(BUSINESS WIRE)--The Farm Credit System today reported combined net income of $1.008 billion and $2.994 billion for the three and nine months ended September 30, 2011, as compared with combined net income of $949 million and $2.633 billion for the same periods last year.

“The Farm Credit System continued to achieve positive results during 2011 due, in part, to a favorable funding environment and stable credit quality”

“The Farm Credit System continued to achieve positive results during 2011 due, in part, to a favorable funding environment and stable credit quality,” remarked Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. “We continue to have access to well-priced debt, reflecting our strong income trend and conservative balance sheet. The System’s profitability has allowed us to further strengthen our capital levels. Capital as a percentage of assets has grown from 14.5% at December 31, 2010 to 15.8% at September 30, 2011, supporting the System’s mission to provide for the financing needs of creditworthy farmers and ranchers throughout the United States.”

Results of Operations

Third Quarter and Nine-Month 2011 Results Compared to Third Quarter and Nine-Month 2010 Results

Combined net income increased $59 million and $361 million for the three and nine months ended September 30, 2011, as compared with the same periods in 2010. The increase for the three-month period resulted from an increase in net interest income of $84 million and a decrease in the provision for loan losses of $40 million, partially offset by increases in net noninterest expense of $39 million and the provision for income taxes of $26 million. The increase in net income for the nine-month period resulted from an increase in net interest income of $373 million and a decrease in the provision for loan losses of $122 million, offset, in part, by increases in net noninterest expense of $88 million and the provision for income taxes of $46 million.

Net interest income increased to $1.564 billion and $4.696 billion for the three and nine months ended September 30, 2011, as compared with $1.480 billion and $4.323 billion for the same periods of the prior year. The increase in net interest income for the three- and nine-month periods resulted primarily from a higher level of average earning assets. Average earning assets increased $9.217 billion and $14.655 billion to $215.940 billion and $219.811 billion for the three and nine months ended September 30, 2011, largely as a result of increases in loan volume during the latter half of 2010.

The net interest margin increased four basis points to 2.90% and 2.85% for the three and nine months ended September 30, 2011, as compared with 2.86% and 2.81% for the same periods of the prior year. Positively impacting the net interest margin was an increase in the net interest spread of six and seven basis points to 2.72% and 2.67% for the three and nine months ended September 30, 2011, as compared with the net interest spread of 2.66% and 2.60% for the same periods of 2010. The increases in the net interest spread were primarily attributable to the System 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 September 30, 2010, the Banks have called debt totaling $52.8 billion, of which $42.3 billion was called during the first nine 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 $118 million and $352 million for the three- and nine-month periods ended September 30, 2011, as compared with provisions for loan losses of $158 million and $474 million for the three- and nine-month periods ended September 30, 2010. The decreases reflect a lower level of probable and estimable losses recognized during the current 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 nine 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 and a higher level of average loan volume and commitments to agribusiness customers.

Net noninterest expense increased $39 million to $377 million for the three-month period and increased $88 million to $1.153 billion for the nine-month period ended September 30, 2011, as compared with the same periods of the prior year. The increases were due to increases in noninterest expense of $64 million and $160 million, partially offset by increases in noninterest income of $25 million and $72 million for the three- and nine-month periods ended September 30, 2011, as compared to the corresponding periods of 2010. Noninterest expense for the three- and nine-month periods ended September 30, 2011 reflected increased salaries and employee benefits of $26 million and $83 million and increased losses on other property owned of $16 million and $50 million, as compared with the same periods of the prior year. The increases in noninterest income for the three and nine months ended September 30, 2011 were primarily due to decreases in net other-than-temporary impairment losses of $21 million and $28 million. Also contributing to the increase in noninterest income for the nine month period were increases in loan-related fee income of $15 million, in net gains on derivative and other transactions of $16 million and in mineral income of $9 million.

The provisions for income taxes were $61 million and $197 million for the three and nine months ended September 30, 2011, as compared with $35 million and $151 million for the three and nine months ended September 30, 2010. The effective tax rate increased to 6.2% for the nine months ended September 30, 2011 from 5.4% for the nine months ended September 30, 2010. The increase in the effective tax rate was principally due to increased earnings at taxable System institutions.

Third Quarter 2011 Compared to Second Quarter 2011

Net income increased $26 million to $1.008 billion for the third quarter of 2011, as compared with net income of $982 million for the second quarter of 2011. The increase in net income was principally due to decreases in the provision for loan losses of $8 million, in net noninterest expense of $12 million and in the provision for income taxes of $5 million.

Loan Portfolio Activity

Gross loans decreased $4.736 billion or 2.7% to $170.615 billion at September 30, 2011, as compared with $175.351 billion at December 31, 2010, primarily due to a decrease in agribusiness loans offset, in part, by an increase in real estate mortgage loans. The decrease in agribusiness loans resulted from seasonal decreases in borrowings by agribusiness customers. The increase in real estate mortgage loans was primarily due to strong demand for cropland, particularly in the mid-western part of the United States.

Credit Quality

Overall, the System’s credit quality improved during the first nine months of 2011. Accruing loan volume was $167.544 billion at September 30, 2011, as compared with $172.122 billion at December 31, 2010. Nonaccrual loans decreased $158 million to $3.071 billion at September 30, 2011, as compared with $3.229 billion at December 31, 2010. The decrease in nonaccrual loans was primarily due to charge-offs and loan repayments. At September 30, 2011, 52.2% 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) decreased $71 million to $3.315 billion at September 30, 2011, as compared with $3.386 billion at December 31, 2010. Nonperforming loans represented 1.94% of the System’s loans at September 30, 2011 and 1.93% at December 31, 2010.

Other credit quality indicators further reflected the improvement in the credit quality of the System’s loan portfolio during the first nine months 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 95.8% at September 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 0.37% at September 30, 2011, as compared with 0.49% at September 30, 2010.

The allowance for loan losses was $1.392 billion at September 30, 2011 and $1.447 billion at December 31, 2010. Net loan charge-offs of $332 million were recorded during the first nine months of 2011, as compared with net loan charge-offs of $406 million for the first nine months of 2010. The charge-offs recognized for these periods primarily related to loans made in the ethanol, livestock, dairy and poultry sectors, as well as 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 $75 million, primarily due to the transfer of $59 million to the reserve for unfunded commitments during the nine months ended September 30, 2011.

The allowance for loan losses as a percentage of total loans was 0.82% and 0.83% at September 30, 2011 and December 31, 2010. The allowance for loan losses was 42% of the System’s total nonperforming loans and 45% of its nonaccrual loans at September 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 $37.331 billion at September 30, 2011 and $34.698 billion at December 31, 2010, and increased to 21.9% of System loans at September 30, 2011, as compared with 19.8% at December 31, 2010.

Liquidity and Capital Resources

Cash and investments increased $2.138 billion to $48.420 billion at September 30, 2011, as compared with $46.282 billion at December 31, 2010. The System’s liquidity position was 200 days at September 30, 2011, as compared with 173 days at December 31, 2010.

Total capital increased $2.688 billion during the first nine months of 2011 to $35.939 billion. The System’s surplus increased $2.306 billion to $29.442 billion during the first nine months of 2011 due to net income earned and retained. Total capital as a percentage of total assets increased to 15.8% at September 30, 2011, as compared with 14.5% at December 31, 2010.

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 System Banks and 84 affiliated Associations. Unlike commercial banks, the Banks and Associations are not 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 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. 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]

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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,			December 31,
	2011			2010
	(unaudited)
Cash and investments	$	48,420		$	46,282
Loans		170,615			175,351
Less: allowance for loan losses		(1,392	)		(1,447	)
Net loans		169,223			173,904
Accrued interest receivable		2,182			1,881
Other assets		4,513			4,680
Restricted assets		3,356			3,226
Total assets	$	227,694		$	229,973
Systemwide Debt Securities:
Due within one year	$	66,460		$	68,067
Due after one year		116,901			120,706
Total Systemwide Debt Securities		183,361			188,773
Subordinated debt		1,650			1,650
Other bonds		1,195			802
Other liabilities		5,549			5,497
Total liabilities		191,755			196,722
Preferred stock		2,146			2,125
Capital stock		1,585			1,542
Additional paid-in-capital		401			393
Restricted capital		3,356			3,226
Accumulated other comprehensive loss		(991	)		(1,171	)
Surplus		29,442			27,136
Total capital		35,939			33,251
Total liabilities and capital	$	227,694		$	229,973

STATEMENT OF INCOME DATA
	For the						For the
	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	(unaudited)
		2011			2010			2011			2010
Interest income	$	2,205		$	2,215		$	6,696		$	6,599
Interest expense		(641	)		(735	)		(2,000	)		(2,276	)
Net interest income		1,564			1,480			4,696			4,323
Provision for loan losses		(118	)		(158	)		(352	)		(474	)
Net noninterest expense		(377	)		(338	)		(1,153	)		(1,065	)
Income before income taxes		1,069			984			3,191			2,784
Provision for income taxes		(61	)		(35	)		(197	)		(151	)
Net income	$	1,008		$	949		$	2,994		$	2,633

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,
		2011			2011			2011			2010			2010
	(unaudited)			(unaudited)			(unaudited)			(audited)			(unaudited)
Cash and investments	$	48,420		$	48,262		$	46,010		$	46,282		$	42,900
Loans		170,615			173,798			177,599			175,351			168,484
Less: allowance for loan losses		(1,392	)		(1,447	)		(1,456	)		(1,447	)		(1,403	)
Net loans		169,223			172,351			176,143			173,904			167,081
Accrued interest receivable		2,182			1,831			1,730			1,881			2,282
Other assets		4,513			4,234			4,155			4,680			5,089
Restricted assets		3,356			3,316			3,269			3,226			3,193
Total assets	$	227,694		$	229,994		$	231,307		$	229,973		$	220,545
Systemwide Debt Securities:
Due within one year	$	66,460		$	67,302		$	67,968		$	68,067		$	64,737
Due after one year		116,901			119,994			121,673			120,706			114,365
Total Systemwide Debt
Securities		183,361			187,296			189,641			188,773			179,102
Subordinated debt		1,650			1,650			1,650			1,650			1,650
Other bonds		1,195			961			863			802			771
Other liabilities		5,549			5,024			5,037			5,497			5,975
Total liabilities		191,755			194,931			197,191			196,722			187,498
Preferred stock		2,146			2,123			2,129			2,125			2,143
Capital stock		1,585			1,553			1,522			1,542			1,525
Additional paid-in-capital		401			401			413			393			381
Restricted capital		3,356			3,316			3,269			3,226			3,193
Accumulated other
comprehensive loss		(991	)		(992	)		(1,146	)		(1,171	)		(1,065	)
Surplus		29,442			28,662			27,929			27,136			26,870
Total capital		35,939			35,063			34,116			33,251			33,047
Total liabilities and capital	$	227,694		$	229,994		$	231,307		$	229,973		$	220,545

Statement of Income Data – Five Quarter Trend (unaudited)
For the quarter ended:	September 30,			June 30,			March 31,			December 31,			September 30,
		2011			2011			2011			2010			2010
Interest income	$	2,205		$	2,233		$	2,258		$	2,251		$	2,215
Interest expense		(641	)		(670	)		(689	)		(684	)		(735	)
Net interest income		1,564			1,563			1,569			1,567			1,480
Provision for loan losses		(118	)		(126	)		(108	)		(193	)		(158	)
Net noninterest expense		(377	)		(389	)		(387	)		(445	)		(338	)
Income before income taxes		1,069			1,048			1,074			929			984
Provision for income taxes		(61	)		(66	)		(70	)		(67	)		(35	)
Net income	$	1,008		$	982		$	1,004		$	862		$	949