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Farm Credit System Reports First Quarter 2008 Combined Results

Business Wire, April 30, 2008

NEW YORK -- The Farm Credit System today reported combined net income of $770 million for the quarter ended March 31, 2008, as compared with combined net income of $654 million for the same period of the prior year.

"The System continued to generate strong earnings during the first quarter of 2008, despite the current unstable conditions in the U.S. financial industry," remarked Jamie B. Stewart, Jr., President and CEO of the Federal Farm Credit Banks Funding Corporation. "The overall agricultural economic conditions remained favorable during the first quarter due to strong global demand for agricultural commodities and a weak U.S. dollar resulting in significantly higher crop prices. However, the volatility in crop prices and increased cost of farm inputs resulted in higher risk profiles for livestock producers, marketers of grains and oilseeds, and borrowers that use corn or other grains in their products. In this environment, managements of System institutions continue to be vigilant in applying prudent loan underwriting standards and monitoring the credit quality of their loan portfolios."

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Results of Operations

Net interest income increased $164 million to $1.137 billion during the first quarter of 2008, as compared with $973 million for the first quarter of the prior year. This increase resulted from higher levels of average earning assets, primarily from our loan portfolio. Average earning assets grew $26.055 billion or 16.3% to $186.330 billion for the first quarter of 2008, as compared with the first quarter of 2007.

The net interest margin remained relatively unchanged at 2.44% for the quarter ended March 31, 2008, as compared with 2.43% for the quarter ended March 31, 2007. Positively impacting the net interest margin was an increase in the net interest spread of 21 basis points to 1.93% for the quarter ended March 31, 2008, as compared with 1.72% for the same period of 2007. The increase was attributable to continued favorable agricultural lending conditions and the recent lower interest rate environment. During the first quarter of 2008, the Banks called debt totaling $23.1 billion and were able to lower their cost of funds relative to their assets, which did not reprice as quickly. In addition, the net interest spread was positively impacted by the change in the asset mix, which resulted from an increased percentage of higher spread loans and from a decreased percentage of lower spread investments. However, this increase in the net interest spread was virtually offset by a 20 basis point decline due to a decrease in income earned on interest-free funds (primarily capital), as yields on average earning assets declined in this lower interest rate environment, and to a reduction in the net interest margin resulting from a decline in capital as a percentage of average earning assets.

The System recognized a provision for loan losses of $23 million for the first quarter of 2008, as compared with a loan loss reversal of $1 million during the first quarter of 2007. The first quarter of 2008 provision for loan losses consisted of $29 million of provisions for loan losses at certain System institutions, partially offset by loan loss reversals of $6 million recorded by other System institutions. The provisions for loan losses recorded during the first quarter of 2008 were primarily due to credit deterioration in a limited number of loans.

Noninterest income was $109 million and $98 million for the three months ended March 31, 2008 and 2007. The increase was primarily due to increases in loan-related fee income and fees for financially related services offset, in part, by an increase in losses on extinguishment of debt.

Noninterest expense increased $18 million to $396 million for the three months ended March 31, 2008, as compared with $378 million for the same period of the prior year, principally due to increases in salaries and employee benefit costs and other operating expenses.

The provision for income taxes was $57 million and $40 million for the first quarter of 2008 and 2007. The effective tax rate increased to 6.9% for the first quarter of 2008 from 5.8% for the first quarter of 2007, primarily due to increased income earned by taxable System institutions.

Loan Portfolio Activity

Gross loans increased $10.026 billion or 7.0% to $152.932 billion at March 31, 2008, as compared with $142.906 billion at December 31, 2007. More than half of the increase was attributable to growth in loans to agricultural cooperatives. These loans increased primarily as a result of increased financing demand due to higher commodity prices and continued increases in the cost of farm inputs. Processing and marketing loans and real estate mortgage loans also increased substantially during the quarter ended March 31, 2008. Both types of loans increased due to continued marketing efforts by System institutions, competitive rates and products and continued loan participations.

Credit Quality

The System's accruing loan volume was $152.265 billion at March 31, 2008, as compared with $142.394 billion at December 31, 2007. Nonaccrual loans increased $155 million to $667 million at March 31, 2008, as compared with $512 million at December 31, 2007. This increase in nonaccrual loans was primarily due to deterioration in the credit quality of a limited number of loans in the current agricultural environment of commodity price volatility and higher farm input costs. At March 31, 2008, 54% of nonaccrual loans were current as to principal and interest, as compared with 52% at December 31, 2007. Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans, and accruing loans 90 days or more past due) increased $192 million to $813 million at March 31, 2008, as compared with December 31, 2007. These nonperforming loans represented 0.53% of the System's loans at March 31, 2008, an increase from 0.43% at December 31, 2007. While nonperforming loans increased during the first quarter of 2008, these loans remained at a relatively low level.

Business Services Industry

Farm Credit System Reports First Quarter 2008 Combined Results

Business Wire, April 30, 2008

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