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Farm Credit System Reports Net Income of $4.640 Billion for 2013

NEW YORK - The Farm Credit System today reported combined net income of $4.640 billion for the year ended December 31, 2013, as compared with $4.118 billion for the prior year. The System also reported combined net income of $1.141 billion for the fourth quarter of 2013, as compared with $960 million for the fourth quarter of 2012.

“Strong global and domestic demand for U.S. agricultural products continued throughout 2013, enhancing the earnings of agricultural producers and contributing to solid earnings recognized by the System,” remarked Tracey McCabe, President and CEO of the Federal Farm Credit Banks Funding Corporation. “Credit quality indicators continued to improve and reflect a sound System loan portfolio. Capitalization remains strong and the System is well positioned to withstand adverse changes that may arise in future agricultural economic conditions.”

2013 Results of Operations

Combined net income increased $522 million or 12.7% for the year ended December 31, 2013, as compared with the prior year. The increase resulted primarily from a loan loss reversal of $31 million, as compared with a provision for loan losses of $313 million for 2012, and from increases in net interest income of $197 million and noninterest income of $119 million, partially offset by an increase in noninterest expense of $139 million.

Net interest income increased $197 million or 3.0% to $6.674 billion for 2013, as compared with $6.477 billion for the prior year. The increase in net interest income resulted primarily from a higher level of average earning assets, driven largely by increased loan volume, which grew $14.193 billion or 6.3% to $240.235 billion for 2013.

Net interest margin decreased nine basis points to 2.78% for 2013, as compared with 2.87% for 2012. The decline in the net interest margin was due to a decrease in the net interest spread of seven basis points to 2.64% for 2013, as compared with 2.71% for 2012. The net interest margin was also negatively impacted by a two basis point decline in income earned on earning assets funded by noninterest-bearing sources (principally capital), as yields on average earning assets declined.

During 2013, the Banks called debt totaling $24.3 billion, as compared with $62.7 billion for 2012, and were able to lower their cost of funds relative to the interest rates 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 2013 reflected the lesser amount of debt being called, as compared to the prior year. As interest rates change and assets prepay or reprice in a manner more consistent with historical experience, the positive impact from calling debt on the net interest spread experienced over the past several years will continue to decline.

The decline in the net interest spread for 2013, as compared with 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 $31 million for the year ended December 31, 2013, as compared with a provision for loan losses of $313 million for the year ended December 31, 2012. The loan loss reversal for 2013 consisted of $113 million of loan loss reversals recorded by certain System institutions, partially offset by $82 million of provisions for loan losses recorded by other System institutions. The loan loss reversals were reflective of the improvement in overall credit quality of the loan portfolio. The provisions for loan losses recognized in 2013 were primarily due to credit challenges experienced by certain borrowers in our agricultural portfolio due to continued volatility of commodity prices and the slow recovery of the general U.S. economy during most of the year. The provision for loan losses recorded during 2012 reflected credit deterioration primarily in agricultural sectors affected by the overall weakness in the general U.S. economy at that time and volatility in commodity prices, in part as a result of the 2012 drought. The provision for loans losses for 2012 was also impacted by specific credit challenges for a small number of communication and rural energy customers.

Noninterest income increased $119 million or 23.7% to $621 million for 2013, as compared with $502 million for 2012. The increase was primarily due to decreases in losses on extinguishment of debt of $83 million and net other-than-temporary impairment losses on investments of $36 million. The decrease in losses on extinguishment of debt resulted from a lesser amount of debt being called and repurchased, including subordinated debt, in 2013, as compared with 2012.

Noninterest expense increased $139 million or 6.0% to $2.465 billion for 2013, as compared with $2.326 billion for 2012 primarily due to increases in salaries and employee benefits and all other operating expenses. Salaries and employee benefits increased $144 million to $1.602 billion for 2013 primarily due to annual merit and performance-based compensation increases, higher employee benefit costs and, to a lesser extent, higher staffing levels at certain System institutions. All other operating expenses increased $45 million for 2013, as compared with 2012, primarily due to increases in occupancy and equipment expense, purchased services and various administrative expenses. Partially offsetting the increase in noninterest expense was a decrease in net losses on other property owned of $51 million.

The System recorded a provision for income taxes of $221 million for 2013, as compared with $222 million for 2012. The effective tax rate decreased to 4.5% for 2013 from 5.1% for 2012. The decrease in the effective tax rate was primarily attributable to decreased taxable earnings at certain taxable System institutions and from a greater amount of patronage declared during 2013.

Fourth Quarter 2013 Results of Operations

Combined net income increased $181 million to $1.141 billion for the fourth quarter of 2013, as compared with $960 million for the fourth quarter of 2012. The increase in net income between the fourth-quarter periods primarily resulted from a loan loss reversal of $40 million in 2013, as compared with a provision for loan losses of $125 million in 2012, and from increases in noninterest income of $68 million and net interest income of $35 million, partially offset by increases in noninterest expense of $55 million and the provision for income taxes of $32 million.

Net interest income was $1.693 billion for the fourth quarter of 2013, as compared with $1.658 billion for the fourth quarter of 2012. The increase in net interest income resulted primarily from a higher level of average earning assets. Average earning assets grew $14.125 billion or 6.1% to $246.022 billion for the fourth quarter of 2013, as compared with the same period of the prior year, primarily as a result of increases in loan volume.

The net interest margin for the fourth quarter of 2013 declined to 2.75%, as compared with 2.86% for the same period in the prior year and resulted from a decrease in the net interest spread of 11 basis points to 2.61%, as compared with the fourth quarter of 2012. The decline in the net interest spread was primarily due to a lesser amount of debt being called, as compared to the same period of the prior year, and competitive pressures.

The System reported a loan loss reversal of $40 million for the fourth quarter of 2013, as compared with a provision for loan losses of $125 million for the fourth quarter of 2012. The loan loss reversal for the fourth quarter of 2013 was primarily due to improved credit quality in the System’s loan portfolio. The provision for loan losses recorded in the fourth quarter of 2012 reflected credit deterioration primarily in those agricultural sectors that had been impacted by the volatility in commodity prices, in part as a result of the 2012 drought, as well as those sectors affected by the overall weakness of the U.S. economy. The provision for loan losses for the fourth quarter of 2012 also reflected specific credit challenges for a small number of communication and rural energy customers.

Noninterest income increased $68 million to $177 million for the fourth quarter of 2013, as compared with $109 million for the fourth quarter of 2012. The increase was primarily due to decreases in losses on the extinguishment of debt of $53 million and net other-than-temporary impairment losses on investments of $20 million. Noninterest expense totaled $716 million for the fourth quarter of 2013, as compared with $661 million for the fourth quarter of 2012. The increase was primarily a result of an increase in salaries and employee benefits due to annual merit and performance-based compensation increases and, to a lesser extent, higher staffing levels at certain System institutions.

The provision for income taxes was $53 million and $21 million for the fourth quarter of 2013 and 2012. The effective tax rate increased to 4.4% for the fourth quarter of 2013 from 2.1% for the fourth quarter of 2012 primarily due to higher net earnings at taxable System institutions largely resulting from loan loss reversals during the fourth quarter of 2013, as compared with provisions for loan losses during the same period of 2012, and to decreased losses on extinguishment of debt.

Fourth Quarter 2013 Compared to Third Quarter 2013

Combined net income decreased $112 million to $1.141 billion for the fourth quarter of 2013, as compared with net income of $1.253 billion for the third quarter of 2013. The decrease was primarily due to an increase in noninterest expense of $139 million, offset in part, by an increase in net interest income of $24 million. The increase in noninterest expense was primarily due to an increase in salaries and employee benefits and net losses on other property owned recorded during the fourth quarter of 2013. Salaries and employee benefits increased primarily as a result of increases in performance-based compensation.

Loan Portfolio Activity

Gross loans increased $9.156 billion or 4.8% to $201.060 billion at December 31, 2013, as compared with $191.904 billion at December 31, 2012. This increase was primarily attributable to increases in real estate mortgage, production and intermediate-term, and processing and marketing loans. Real estate mortgage loans increased primarily due to continued strong demand for cropland in the Midwest. Production and intermediate-term loans increased primarily due to increases in equipment financing. The increase in process and marketing loans was primarily due to increased marketing efforts and increased loan participations with non-System entities.

Credit Quality

The System’s accruing loan volume was $199.324 billion at December 31, 2013, as compared with $189.604 billion at December 31, 2012. Nonaccrual loans were $1.736 billion at December 31, 2013, as compared with $2.300 billion at December 31, 2012. The decrease of $564 million in nonaccrual loans during 2013 was primarily due to loan repayments in excess of loans being transferred into nonaccrual status, charge-offs and an improvement in the credit quality of certain loans. At December 31, 2013, 58.5% 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) were $2.040 billion at December 31, 2013, down from $2.608 billion at December 31, 2012.

Nonperforming assets (which consist of nonperforming loans and other property owned) were $2.238 billion at December 31, 2013, as compared with $2.932 billion at December 31, 2012. Other property owned was $198 million at December 31, 2013 and $324 million at December 31, 2012. Nonperforming assets represented 1.11% of the System’s loans and other property owned at December 31, 2013, a decrease from 1.53% at December 31, 2012. Nonperforming assets represented 5.3% of total capital at December 31, 2013, as compared with 7.6% at December 31, 2012. 

The System’s other credit quality indicators also reflected improvement at December 31, 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 97.7% at December 31, 2013, as compared with 96.8% at December 31, 2012. Loan delinquencies, which are defined as accruing loans 30 days or more past due, as a percentage of accruing loans were 0.23% at December 31, 2013, as compared with 0.28% at December 31, 2012.

The allowance for loan losses was $1.238 billion at December 31, 2013, as compared with $1.343 billion at December 31, 2012. Net loan charge-offs of $62 million were recorded during 2013, as compared with net loan charge-offs of $236 million for 2012. The net loan charge-offs recognized in both 2013 and 2012 were due, in part, to loans in specific industries such as horticulture, ethanol, forestry and livestock. Net loan charge-offs in 2012 were also related to the dairy sector. The allowance for loan losses decreased an additional $12 million due to transfers to the reserve for unfunded commitments during the year ended December 31, 2013.

The allowance for loan losses as a percentage of total loans was 0.62% at December 31, 2013 and 0.70% at December 31, 2012. The allowance for loan losses was 61% of the System’s total nonperforming loans and 71% of its nonaccrual loans at December 31, 2013, as compared with 51% and 58% at December 31, 2012. Capital and the allowance for loan losses, which is a measure of risk-bearing capacity, totaled $43.839 billion at December 31, 2013 and $39.952 billion at December 31, 2012, and represented 21.8% of System loans at December 31, 2013, as compared with 20.8% at December 31, 2012.

Agricultural Outlook

Overall, agricultural borrowers’ financial conditions remained very favorable due to the high levels of farmers’ net cash income over the past several years. The February 2014 United States Department of Agriculture (USDA) forecast estimates 2013 farmers’ net cash income (a measure of the cash income after payment of business expenses) at $130.1 billion, down $4.3 billion from 2012 but up $39.2 billion from its 10-year average of $90.9 billion. The USDA’s February 2014 outlook for the farm economy, as a whole, forecasts 2014 farmers’ net cash income to decrease to $101.9 billion, a $28.2 billion decrease from 2013, but $11.0 billion above the 10-year average. The projected decrease in farmers’ net cash income from 2013 to 2014 is primarily due to an expected decrease in crop receipts of $26.7 billion.

Liquidity and Capital Resources

Cash and investments (principally all of which were held for liquidity purposes) increased $4.965 billion to $51.893 billion at December 31, 2013, as compared with $46.928 billion at year-end 2012. The System’s liquidity position was 194 days and 185 days at December 31, 2013 and 2012. The Banks’ liquidity management objectives are designed to meet maturing debt obligations, to provide a reliable source of funding to borrowers and to fund operations on a cost-effective basis.

Total capital increased $3.992 billion to $42.601 billion at December 31, 2013, as compared with $38.609 billion at December 31, 2012. The System’s surplus increased $3.141 billion to $35.060 billion at December 31, 2013, as compared with $31.919 billion at December 31, 2012. The increase was due to net income earned and retained. The increase was offset, in part, by patronage distributions of $1.100 billion. During 2013, four System institutions issued preferred stock totaling $850 million, while three System institutions redeemed $532 million of 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 was 16.3% at December 31, 2013, as compared with 15.7% at December 31, 2012.

Accumulated other comprehensive loss decreased $217 million during 2013 to $807 million at December 31, 2013. This decrease principally resulted from a decrease in accumulated other comprehensive loss on pension and other benefit plans of $490 million and a decrease in unrealized losses on cash flow hedges of $109 million. These were offset, in part, by a decrease in unrealized gains on investments available-for-sale of $342 million and an unrealized loss on other-than-temporary impairment on investments of $23 million at year end December 31, 2013 as compared to an unrealized gain on other-than-temporary impairment on investments of $17 million at year end December 31, 2012. The decrease in unrealized losses on pension and other benefits was primarily due to an increase in the discount rate used to calculate pension obligations and strong pension asset returns in 2013. The decrease in unrealized gains on investments available-for-sale during 2013 was primarily due to an increase in long-term interest rates lowering the value of existing fixed-rate investment securities.

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 System Banks and 78 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

The results discussed herein are preliminary and unaudited. The System’s financial statements for the year ended December 31, 2013 are expected to be available on or about February 28, 2014. 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.farmcreditfunding.com. For further information and copies of annual and quarterly information statements, contact:

Karen R. Brenner, Managing Director
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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