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Feb. 22, 2011 Source: Farm Credit System news release The Farm Credit System reported an increase in combined net income of $645 million or 22.6% to $3.495 billion for the year ended December 31, 2010, as compared with combined net income of $2.850 billion for the prior year. Combined net income increased $30 million or 3.6% to $862 million for the fourth quarter of 2010, as compared with $832 million for the fourth quarter of 2009. "The System recognized strong earnings in 2010 as the credit quality of the loan portfolio stabilized and credit losses trended downward," remarked Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. "The System's earnings continued to benefit from the low interest rate environment that enabled the Banks to call outstanding debt and issue new debt at lower interest rates, outpacing the rate at which assets repriced. In the generally favorable agricultural environment, System management was able to further strengthen our financial position and enhance our financial capacity to ensure we fulfill our mission of being a reliable source of credit for eligible borrowers." 2010 Results of Operations Combined net income grew $645 million or 22.6% for the year ended December 31, 2010, as compared with 2009. This growth resulted from increases in net interest income of $498 million and noninterest income of $88 million and from a decrease in the provision for loan losses of $258 million, partially offset by increases in noninterest expense of $176 million and provision for income taxes of $23 million. Net interest income was $5.890 billionfor 2010, an increase of $498 million or 9.2%, as compared with $5.392 billion for the prior year. The increase in net interest income resulted from an increase in the net interest margin and, to a lesser extent, a higher level of average earning assets. Average earning assets grew $5.180 billion or 2.5% to $208.635 billion for 2010, as compared with 2009. Net interest margin increased 17 basis points to 2.82% for 2010, as compared with 2.65% for 2009. Positively impacting the net interest margin was an increase in the net interest spread of 18 basis points to 2.61% for 2010, as compared with a net interest spread of 2.43% for 2009. The increase in the net interest spread was primarily attributable to the System Banks' ability to more quickly reprice their outstanding debt in this low interest rate environment and to adjustments in loan pricing to better reflect credit risk and market conditions. During 2010, the Banks called debt totaling $65.6 billion and were able to lower their cost of funds relative to their assets, which did not reprice as quickly. Over time, as interest rates increase 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 $667 million and $925 million for the years ended December 31, 2010 and 2009. Even though the agricultural economy has generally improved during the year, credit stress in certain agricultural sectors continued to adversely impact certain System borrowers during 2010. The provisions for loan losses for both 2010 and 2009 were primarily due to credit deterioration in agricultural sectors, such as dairy and livestock, that continue to be impacted by volatility in commodity and other input prices, as well as those borrowers impacted by the overall downturn in the general U.S. economy, such as forestry. In addition, the provision for loan losses recognized in 2010 reflected the challenges facing a limited number of rural energy and communication customers. The provision for loan losses recognized in 2009 also reflected credit stress in the ethanol sector. Noninterest income increased $88 million or 19.7% to $535 million for 2010, as compared with $447 million for 2009. The increase resulted primarily from increases in loan-related fee income of $25 million and mineral income of $33 million, as well as a decrease in net other-thantemporary impairment losses on investment securities of $45 million to $90 million, partially offset by an increase in losses on extinguishment of debt of $14 million. The net other-thantemporary impairment losses resulted from credit losses on certain securities that have been negatively impacted by underlying credit issues with respect to housing-related mortgages that support these securities. Noninterest expense increased $176 million or 9.4% to $2.045 billion for 2010, as compared with $1.869 billion at December 31, 2009 primarily due to increases in salaries and employee benefits and other operating expenses. The increase in salaries and employee benefit expense was primarily due to annual merit and performance-based incentive compensation increases as a result of higher financial performance and, to a lesser extent, higher staffing levels at certain System institutions. The System recorded a provision for income taxes of $218 million for 2010, as compared with $195 million for 2009. The effective tax rate decreased to 5.9% for 2010 from 6.4% for 2009. The decrease in the effective tax rate was primarily attributable to a higher level of taxdeductible patronage distributions due to increased earnings at taxable System institutions. Fourth Quarter 2010 Results of Operations Combined net income was $862 million for the fourth quarter of 2010, as compared with $949 million for the third quarter of 2010 and $832 million for the fourth quarter of 2009. The decrease in combined net income for the fourth quarter of 2010 from the third quarter of 2010 was primarily due to increases in the provision for loan losses of $35 million, noninterest expense of $158 million and the provision for income taxes of $32 million offset, in part, by an increase in net interest income of $87 million and an increase in noninterest income of $51 million. The increase in net income between the fourth quarter of 2010 and fourth quarter of 2009 primarily resulted from an increase in net interest income of $117 million and an increase in noninterest income of $33 million, partially offset by a $107 million increase in noninterest expense and a $12 million increase in the provision for income taxes. Net interest income was $1.567 billion for the fourth quarter of 2010, as compared with $1.480 billion for the third quarter of 2010 and $1.450 billion for the fourth quarter of 2009. The periodover- period increases in net interest income resulted from increases in the net interest spread and, to a lesser extent, higher levels of average earning assets. Average earning assets grew to $213.900 billion for the fourth quarter of 2010, as compared with $206.723 billion for the third quarter of 2010 and $204.017 billion for the fourth quarter of 2009. The net interest margin was 2.93% for the fourth quarter of 2010, as compared with 2.86% for the third quarter of 2010 and 2.84% for the fourth quarter of 2009. Positively impacting the net interest margin was an increase in the net interest spread to 2.75% for the quarter ended December 31, 2010, as compared with 2.66% for the third quarter of 2010 and 2.63% for the fourth quarter of 2009. The period-over-period increases in the net interest spread were primarily attributable to the Banks' ability to more quickly reprice outstanding debt in the low interest rate environment and to adjustments in loan pricing to better reflect credit risk and market conditions. The System reported provisions for loan losses of $193 million for the fourth quarter of 2010, $158 million for the third quarter of 2010 and $192 million for the fourth quarter of 2009. The provision for loan losses for each period resulted from financial stress in certain sectors of the agricultural economy, as well as weaknesses in the general economy. Noninterest income increased to $181 million for the fourth quarter of 2010, as compared with $130 million for the third quarter of 2010 and $148 million for the fourth quarter of 2009. The increase for the fourth quarter of 2010, as compared to the other two periods was primarily due to a reduction in the amount of losses recognized on impairment of investments, and to an increase in mineral income. Noninterest expense totaled $626 million for the fourth quarter of 2010, as compared with $468 million for the third quarter of 2010 and $519 million for the fourth quarter of 2009. The increase for the fourth quarter of 2010, as compared to the other two periods was primarily due to increases in salaries and employee benefits and, to a lesser extent, losses on other property owned and increases in other operating expense. Salaries and employee benefits increased primarily as a result of increases in annual merit and performance-based incentive compensation due to higher financial performance. The provision for income taxes was $67 million for the fourth quarter of 2010, $35 million for the third quarter of 2010 and $55 million for the fourth quarter of 2009. The effective tax rate increased to 7.2% for the fourth quarter of 2010 from 6.2% for the fourth quarter of 2009. This increase in the effective tax rate was primarily attributable to increased earnings at taxable System institutions. Loan Portfolio Activity Gross loans increased $10.521 billion or 6.4% to $175.351 billion at December 31, 2010, as compared with $164.830 billion at December 31, 2009 and increased $6.867 billion or 4.1%, as compared with $168.484 billion at September 30, 2010. The loan growth experienced by the System in 2010 was primarily due to growth in the agribusiness portfolio during the second half of the year as prices for certain agricultural commodities increased, which led to increased borrowings, particularly financings of grain inventories by agribusiness customers. In addition, real estate mortgage loans increased due to successful marketing efforts and competitive interest rates on loan products. Credit Quality The System's accruing loan volume was $172.122 billion at December 31, 2010, as compared with $164.923 billion at September 30, 2010 and $161.461 billion at December 31, 2009. Nonaccrual loans were $3.229 billion at December 31, 2010, as compared with $3.561 billion at September 30, 2010 and $3.369 billion at December 31, 2009. At December 31, 2010, 49.7% of nonaccrual loans were current as to principal and interest, as compared with 50.6% at September 30, 2010 and 51.6% at December 31, 2009. Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans and accruing loans 90 days or more past due) were $3.386 billion at December 31, 2010, down from $3.741 billion at September 30, 2010 and $3.535 billion at December 31, 2009. The decrease in nonaccrual loans during 2010 was primarily due to the return to accruing status of certain large loans to borrowers whose financial performance improved during 2010. Nonperforming assets (which consist of nonperforming loans and other property owned) were $3.840 billion at December 31, 2010, as compared with $4.151 billion at September 30, 2010 and $3.776 billion at December 31, 2009. Other property owned increased $44 million during the fourth quarter of 2010 to $454 million at December 31, 2010 and increased $213 million from December 31, 2009. The increase resulted from managements of System institutions actively working through nonaccrual loans that primarily became stressed in 2008 and 2009. Nonperforming assets represented 2.18% of the System's loans and other property owned at December 31, 2010, a decrease from 2.46% and 2.29% at September 30, 2010 and December 31, 2009. Nonperforming assets represented 11.5% of total capital at December 31, 2010, as compared with 12.6% at both September 30, 2010 and December 31, 2009. Aside from the increase in nonperforming assets outstanding during 2010, other credit quality indicators generally reflected improvement. 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 95.4% at December 31, 2010, as compared with 94.8% at both September 30, 2010 and December 31, 2009. Loan delinquencies, which are defined as accruing loans 30 days or more past due, as a percentage of accruing loans improved to 0.33% at December 31, 2010, as compared with 0.49% at September 30, 2010 and 0.53% at December 31, 2009. The allowance for loan losses was $1.447 billion at December 31, 2010, as compared with $1.403 billion at September 30, 2010 and $1.359 billion at December 31, 2009. Net loan charge-offs of $596 million were recorded during 2010, as compared with net loan charge-offs of $518 million for the same period of the prior year. The allowance for loan losses as a percentage of total loans was 0.83% at both December 31, 2010 and September 30, 2010 and 0.82% at December 31, 2009. The allowance for loan losses was 43% of the System's total nonperforming loans and 45% of its nonaccrual loans at December 31, 2010, as compared with 38% and 40% at December 31, 2009. Risk funds (total capital and the allowance for loan losses), which is a measure of risk-bearing capacity, totaled $34.698 billion at December 31, 2010, $34.450 billion at September 30, 2010 and $31.318 billion at December 31, 2009, and represented 19.8% of System loans at December 31, 2010, as compared with 20.4% at September 30, 2010 and 19.0% at December 31, 2009. Agricultural Outlook Overall, agricultural borrowers' financial conditions remained favorable due to the high levels of farmers' net cash income over the past several years. The February 2011 United States Department of Agriculture (USDA) forecast estimates 2010 farmers' net cash income (a measure of the cash income after payment of business expenses) at $91.3 billion, up $22.2 billion from 2009 and up $19.5 billion from its 10-year average of $71.8 billion. The USDA's February 2011 outlook for the farm economy, as a whole, forecasts 2011 farmers' net cash income to increase to $98.6 billion, a $7.3 billion increase from 2010, and $26.8 billion above the 10-year average. Contributing to the increase in farmers' net cash income from 2010 to 2011 are increases in crop receipts of $24.0 billion and livestock receipts of $4.3 billion, offset by an increase in cash expenses of $19.7 billion and a decline in direct government payments of $1.6 billion. Liquidity and Capital Resources Cash and investments increased $4.061 billion to $46.282 billion at December 31, 2010, as compared with $42.221 billion at year-end 2009. The System's liquidity position was 173 days and 178 days at December 31, 2010 and 2009. 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 during 2010 to $33.251 billion at December 31, 2010, as compared with $29.959 billion at December 31, 2009. The System's surplus increased $2.404 billion to $27.136 billion at December 31, 2010, as compared with $24.732 billion at December 31, 2009, due to net income earned and retained, and from a $205 million transfer of restricted capital to surplus as a result of the declaration of premium refunds by the Farm Credit System Insurance Corporation, offset, in part, by the re-characterization of $187 million as additional paid-in-capital in connection with Association mergers. Capital also increased during 2010 as one Bank issued $300 million of non-cumulative subordinated perpetual preferred stock. Total capital as a percentage of total assets was 14.5% at December 31, 2010, as compared with 13.9% at December 31, 2009. Accumulated other comprehensive loss decreased $387 million during 2010 to $1.171 billion at December 31, 2010. This decrease principally resulted from decreases in unrealized losses on investments available-for-sale of $416 million and other-than-temporary impairment losses on investments of $45 million offset, in part, by increases in unrealized losses on cash flow hedges of $62 million and accumulated other comprehensive loss on pension and other benefit plans of $12 million. The lower amount of unrealized losses on investments during 2010 was due to the favorable change in interest rates and to an improvement in liquidity in the financial markets. 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. Tweet |
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