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Farm Credit System Reports 2013 Third Quarter and Nine-Month Net Income

NEW YORK, Nov. 1, 2013 - The Farm Credit System today reported combined net income of $1.253 billion and $3.499 billion for the three and nine months ended September 30, 2013, as compared with combined net income of $1.039 billion and $3.158 billion for the same periods last year.

“The System continued to report solid earnings due to the overall strength in the agricultural sector that has been sustained over the past few years,” remarked Tracey McCabe, President and CEO of the Federal Farm Credit Banks Funding Corporation. “Credit quality indicators continued to improve and reflect a healthy System loan portfolio. Capitalization remains strong and the System is well positioned to meet credit stress that may arise from future adverse agricultural economic events.”

Results of Operations
Third Quarter and Nine-Month 2013 Results Compared to Third Quarter and Nine-Month 2012 Results
Combined net income increased $214 million or 20.6% and $341 million or 10.8% for the three and nine months ended September 30, 2013, as compared with the same periods in 2012. The increase for the three-month period resulted primarily from a loan loss reversal of $32 million, as compared with a provision for loan losses of $121 million for the third quarter of 2012 and to a decrease in net noninterest expense of $34 million and an increase in net interest income of $31 million, partially offset by an increase in the provision for income taxes of $4 million. The increase for the nine-month period was primarily due to decreases in the provision for loan losses of $179 million and in the provision for income taxes of $33 million and an increase in net interest income of $162 million, partially offset by an increase in net noninterest expense of $33 million.

Net interest income increased to $1.669 billion and $4.981 billion for the three and nine months ended September 30, 2013, as compared with $1.638 billion and $4.819 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 $11.717 billion and $14.206 billion to $239.971 billion and $238.292 billion for the three and nine months ended September 30, 2013, as compared with the prior year periods.

The net interest margin was 2.78% and 2.79% for the three and nine months ended September 30, 2013, as compared with 2.87% for the three and nine months ended September 30, 2012. The decline in the net interest margin for both periods of 2013 resulted from a decrease in the net interest spread of eight and seven basis points to 2.64% and 2.65%, as compared with 2.72% for the same periods of the prior year. The net interest margin for both the three- and nine-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.

During the first nine months of 2013, the Banks called debt totaling $21.1 billion, as compared with $47.8 billion for the first nine 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. Although the net interest spread was positively impacted by the Banks’ ability to refinance debt, the decrease in the net interest spread for both periods of 2013 reflected the lesser amount of debt being called, as compared to the same periods of last year. 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 continue to decline.

The decline in the net interest spread for the three and nine months ended September 30, 2013, as compared with the same periods of the prior year was also attributable to competitive pressures and to an increase in the average loan volume in lower spread lines of business.

The System recognized a loan loss reversal of $32 million and a provision for loan losses of $9 million for the three and nine months ended September 30, 2013, as compared with provisions for loan losses of $121 million and $188 million for the three and nine months ended September 30, 2012. The provision for loan losses for the nine months ended September 30, 2013 consisted of $68 million of provisions for loan losses recorded by certain System institutions, partially offset by $59 million of loan loss reversals recorded by other System institutions. Despite the low level of provision for loan losses for 2013, certain borrowers in our agricultural portfolio experienced credit challenges due to continued volatility of commodity prices and the slow recovery of the general U.S. economy. In addition, the provision for loan losses recorded during the first nine months of 2013 also reflected modest credit quality deterioration among communication customers. The provision for loan losses recorded during the first nine 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 $44 million to $180 million and $51 million to $444 million for the three and nine months ended September 30, 2013, as compared with the same periods of the prior year. The increases for the three- and nine-month periods of 2013 were primarily due to decreases in losses on extinguishment of debt of $18 million and $30 million and net other-than-temporary impairment losses on investments of $9 million and $16 million. Partially offsetting these improvements in noninterest income were decreases in net gains on derivative and other transactions of $4 million and $5 million. Additionally, the increase for the three-month period ended September 30, 2013 was due to increases in mineral income of $9 million and loan-related fee income of $7 million. The increase in noninterest income for the nine-month period of 2013 was also impacted by an increase in gains on sales of investments and other assets, net of $7 million offset, in part, by lower income earned on Insurance Fund assets, which decreased $13 million due to low interest rates earned on these assets.

Noninterest expense increased $10 million and $84 million to $577 million and $1.749 billion for the three and nine months ended September 30, 2013, as compared with the same periods of the prior year. The increases for the three- and nine-month periods were primarily due to increases in salaries and employee benefits and other operating expense. Salaries and employee benefits increased $38 million and $95 million as a result of annual merit increases and higher staffing levels at certain System institutions. Other operating expense increased $5 million and $18 million due to increases in various administrative expenses. Partially offsetting these increases in noninterest expense were gains on other property owned, net of $10 million and losses on other property owned, net of $11 million for the three and nine months ended September 30, 2013, as compared to losses on other property owned, net of $27 million and $59 million for the same periods of the prior year.

The provisions for income taxes were $51 million and $168 million for the three and nine months ended September 30, 2013, as compared with $47 million and $201 million for the three and nine months ended September 30, 2012. The effective tax rate declined from 6.0% for the nine months ended September 30, 2012 to 4.6% for the nine months ended September 30, 2013 due to decreased earnings at certain taxable System institutions.

Third Quarter 2013 Compared to Second Quarter 2013

Net income was $1.253 billion for the third quarter of 2013, as compared with net income of $1.104 billion for the second quarter of 2013. The increase in net income was due to a loan loss reversal of $32 million, as compared with a provision for loan losses of $19 million for the prior quarter. Also contributing to the increase in net income were decreases in net noninterest expense of $57 million and the provision for income taxes of $7 million and an increase in net interest income of $34 million. The decrease in net noninterest expense was primarily due to a greater amount of fees for financially related services in the third quarter of 2013, as compared to the second quarter of 2013.

Loan Portfolio Activity

Gross loans increased $2.307 billion or 1.2% to $194.211 billion at September 30, 2013, as compared with $191.904 billion at December 31, 2012, primarily due to an increase in real estate mortgage loans, offset in part by a decrease in agribusiness loans. Real estate mortgage loans increased primarily due to strong demand for cropland in the Midwest. The decrease in agribusiness loans was due to lower levels of seasonal financing from farm supply and grain marketing cooperatives resulting from lower grain inventory levels, lower agricultural commodity prices and farmers’ and cooperatives’ strong cash positions.

Credit Quality

The System’s accruing loan volume was $192.283 billion at September 30, 2013, as compared with $189.604 billion at December 31, 2012. Nonaccrual loans decreased $372 million to $1.928 billion at September 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 September 30, 2013, 53.2% 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 $370 million to $2.238 billion at September 30, 2013, as compared with $2.608 billion at December 31, 2012. These nonperforming loans represented 1.15% of the System’s loans at September 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 first nine months 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 improved to 97.5% at September 30, 2013 from 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 0.25% at September 30, 2013, as compared with 0.35% at September 30, 2012.

The allowance for loan losses was $1.237 billion at September 30, 2013, as compared with $1.343 billion at December 31, 2012. Net loan charge-offs of $99 million were recorded during the first nine months of 2013, as compared with net loan charge-offs of $169 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 horticulture, forestry, ethanol and livestock. Net loan charge-offs in 2012 were also related to the dairy sector.

The allowance for loan losses as a percentage of total loans was 0.64% at September 30, 2013 and 0.70% at December 31, 2012. The allowance for loan losses was 55.3% of the System’s total nonperforming loans and 64.2% of its nonaccrual loans at September 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 $42.986 billion at September 30, 2013 and $39.952 billion at December 31, 2012, and represented 22.1% of System loans at September 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 $50.459 billion at September 30, 2013 and $46.928 billion at December 31, 2012. The System’s liquidity position represented 202 days coverage of maturing debt obligations at September 30, 2013, as compared with 185 days at December 31, 2012.

Total capital increased $3.140 billion during the first nine months of 2013 to $41.749 billion. The System’s surplus increased $2.801 billion to $34.720 billion during the first nine months of 2013 due to net income earned and retained. During the first nine months of 2013, three System institutions issued non-cumulative perpetual preferred stock totaling $600 million, while two System institutions redeemed $350 million of non-cumulative perpetual preferred stock. The proceeds from the issuance were used to increase regulatory capital and for general corporate purposes. Capital as a percentage of total assets increased to 16.5% at September 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.

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