Farm Credit's CoBank earnings hit by low rates, insurance fund

Reuters

CHICAGO, Nov 4 (Reuters) - CoBank, the largest of theU.S.-government sponsored Farm Credit System cooperative banks,said on Monday its earnings remained under pressure in the thirdquarter and for the year due to low interest rates and higherinsurance fund premiums.

Net income for the quarter ended Sept. 30 fell 4 percent to$208.1 million, from $217.7 million in the third quarter of2012. For the first nine months of 2013, net income decreased 10percent to $628.9 million.

Denver-based CoBank said its earnings for the first ninemonths of 2012 included $44.6 million in refunds from the FarmCredit System Insurance Corporation. As a result, 2013year-to-date net income declined 6 percent when the impact ofthe refunds was excluded.

Net interest income fell in the third quarter by 9 percentto $276.4 million, from $305.1 million a year earlier. For thefirst nine months of 2013, net interest income fell 5 percent to$875.5 million.

The bank said the drop was driven primarily by the continuedlow interest rate environment, which has reduced the bank'sreturns on invested capital, its balance sheet positioning andits portfolio of liquidity investments.

"In the broader financial services industry, marketconditions remain challenging. Weak loan demand and increasedcompetition have pressured earnings for many banks, as has thelow interest rate environment engineered by the FederalReserve," Bob Engel, CoBank's chief executive officer, said in astatement. "Though CoBank's business results will generallybenefit if rates increase, we continue to generate strongearnings despite the current monetary policy environment."

Total loan and lease volume as of Sept. 30 was $70.4billion. For the first nine months of 2013, average loan volumerose 3 percent. The increase was driven by higher levels ofborrowing by affiliated Farm Credit associations and ruralelectric customers, which more than offset a decline in lendingto agribusiness cooperatives.

CoBank said the decrease in agribusiness lending resultedprimarily from lower grain inventories at many agribusinesscooperatives around the country, which reduced demand forseasonal financing.

Credit quality in the bank's loan portfolio remainedfavorable. At quarter's end, 0.76 percent of the bank's loanswere classified as adverse assets, compared with 1.01 percent asof Dec. 31, 2012. Nonaccrual loans were $151.7 million as ofSept. 30, compared with $170.2 million on Dec. 31, 2012. Thebank recorded no provision for loan losses during the quarter.

"CoBank's credit quality continues to benefit from thegeneral strength of the U.S. agricultural sector and the otherrural industries we finance," said David P. Burlage, CoBank'schief financial officer.

Capital levels at the bank remain well in excess ofregulatory minimums. As of Sept. 30, shareholders' equitytotaled $6.6 billion and the bank's permanent capital ratio was17.3 percent, compared with the 7.0 percent minimum establishedby the Farm Credit Administration, the bank's independentregulator. At quarter end, the bank held approximately $22.7billion in cash and investments.

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