U.S. Markets closed

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

CHICAGO, Nov 4 (Reuters) - CoBank, the largest of the U.S.-government sponsored Farm Credit System cooperative banks, said on Monday its earnings remained under pressure in the third quarter and for the year due to low interest rates and higher insurance 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 of 2012. For the first nine months of 2013, net income decreased 10 percent to $628.9 million.

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

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

The bank said the drop was driven primarily by the continued low interest rate environment, which has reduced the bank's returns on invested capital, its balance sheet positioning and its portfolio of liquidity investments.

"In the broader financial services industry, market conditions remain challenging. Weak loan demand and increased competition have pressured earnings for many banks, as has the low interest rate environment engineered by the Federal Reserve," Bob Engel, CoBank's chief executive officer, said in a statement. "Though CoBank's business results will generally benefit if rates increase, we continue to generate strong earnings despite the current monetary policy environment."

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

CoBank said the decrease in agribusiness lending resulted primarily from lower grain inventories at many agribusiness cooperatives around the country, which reduced demand for seasonal financing.

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

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

Capital levels at the bank remain well in excess of regulatory minimums. As of Sept. 30, shareholders' equity totaled $6.6 billion and the bank's permanent capital ratio was 17.3 percent, compared with the 7.0 percent minimum established by the Farm Credit Administration, the bank's independent regulator. At quarter end, the bank held approximately $22.7 billion in cash and investments.