August 5, 2013 / 8:33 PM / 4 years ago

Big U.S. Farm Credit unit CoBank sees earnings slip in quarter

CHICAGO, Aug 5 (Reuters) - CoBank, a major lender to U.S. agriculture as part of the government-sponsored Farm Credit System, said on Monday its second quarter earnings fell 16 percent compared to a year ago as interest income declined and insurance fund payments rose.

CoBank, a cooperative bank with $93 billion in loans which lends in all 50 states, said net income in the three months ending on June 30 totaled $212.0 million compared to $252.4 million a year earlier. For the first six months of 2013, net income decreased 13 percent to $420.8 million.

"The 2012 results included significantly higher noninterest income due to $44.6 million in refunds from the Farm Credit System Insurance Corporation received in the second quarter of 2012," the bank said in a statement. "The continuing low interest rate environment and increased insurance fund premium expenses also reduced earnings in 2013."

The results point to continued stress on margins in key areas of agriculture that depend on grain prices, especially biofuels production and livestock feeding. Corn-dependent industries like ethanol and the feeding of hogs, poultry and dairy have been squeezed for a prolonged period by historically high prices, most recently after last summer's punishing drought in the U.S. grain belt.

"Overall, CoBank continues to perform well despite market conditions that remain challenging," Bob Engel, CoBank's chief executive officer, said. "Like most banks, we are feeling the impact of low interest rates on our earnings but we remain highly profitable and in a strong position to continue fulfilling our mission and meeting the needs of our customers."

Credit quality in the bank's loan portfolio remained favorable. But credit data continued to reflect rising stress in some areas of the bank's loans.

Nonaccrual loans at the end of June eased to $212.7 million, after jumping to $245.8 million in the first quarter from $170.2 million at end-2012 and $106.9 million a year earlier. The bank had said first-quarter non-accruals had jumped primarily to credit concerns involving a small number of communications customers.

The bank's allowance for credit losses rose to $624.6 million at end-June, compared to $619.2 million at end-March, $595 million at end-2012 and $547.7 million a year earlier. At mid-year, 1.11 percent of the bank's loans were classified as adverse assets, compared to 1.01 percent six months earlier, the bank said.

"Over the past few months, the Federal Reserve has begun talking publicly about tapering its quantitative easing program, and the reaction of the market has been volatile," Engel said, "Though CoBank's business results will generally benefit if rates increase, we have the financial strength and flexibility to continue delivering on our promises regardless of the monetary environment."

CoBank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. The bank also provides wholesale loans and other financial services to affiliated Farm Credit associations serving farmers, ranchers and other rural borrowers in 23 states around the country.

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