Farm Credit System Reports Lower Net Income

The Farm Credit System reported combined net income of $882 million and $1.684 billion for the three and six months ended June 30, as compared with combined net income of $682 million and $1.297 billion for the same periods last year. Combined net income increased $200 million and $387 million for the second quarter and six months ended June 30, as compared with the same periods in 2009. The increases resulted from increases in net interest income of $102 million and $243 million and decreases in the provision for loan losses of $83 million and $158 million and net non-interest expenses of $19 million and $8 million, partially offset by increases in the provision for income taxes of $4 million and $22 million.

Net interest income increased to $1.429 billion and $2.843 billion for the three and six months ended June 30, as compared with $1.327 billion and $2.600 billion for the same periods of the prior year. The increase in net interest income for both the three- and six-month periods resulted from increases in the System’s net interest spread driven by overall market conditions.

The net interest margin increased 19 and 22 basis points to 2.80% and 2.78% for the quarter and six months ended June 30, as compared with 2.61% and 2.56% for the same periods of the prior year. Positively impacting the net interest margin, was an increase in the net interest spread of 19 and 24 basis points to 2.58% and 2.57% for the three and six months ended June 30, as compared with 2.39% and 2.33% for the same periods of 2009.

The increases in the net interest spread were primarily attributable to System Banks’ ability to more quickly reprice their outstanding debt in this lower interest rate environment and to adjustments in loan pricing to better reflect credit risk and market conditions in the current ag economic environment. During the first six months of 2010, the Banks called debt totaling $32.8 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 change and as assets prepay or reprice in a manner consistent with historical experience, the positive impact on net interest spread that the System has experienced over the last several years from calling Systemwide Debt Securities will likely diminish.