May 5, 2014 / 11:42 PM / in 3 years

CoBank earnings rise in 1st qtr on solid U.S. farm loans, firm rates

CHICAGO, May 5 (Reuters) - CoBank, the largest of the U.S. Farm Credit System’s cooperative banks, said on Monday its first quarter net income rose 11 percent, reflecting higher interest income as rates ticked higher and higher loan demand from food and agribusiness companies as well as rural power providers.

Denver-based CoBank said net income for the quarter ended March 31 was $231.3 million, up from $208.8 million the first quarter of 2013.

“Demand for credit strengthened in some areas of the rural economy, and we continued to benefit from strong credit quality in our loan portfolio,” Robert B. Engel, CoBank’s chief executive officer, said in a statement. “Some of the market conditions we experienced last year, including extremely low grain volumes at country elevators, have improved.”

As interest rates edged up, net interest income for the quarter grew by 2 percent to $309.0 million, from $302.4 million a year ago. Additionally, the average loan volume rose 4 percent to $76.4 billion.

“The increase resulted from higher levels of borrowing in a number of customer segments, including affiliated Farm Credit associations, rural power providers and food and agribusiness companies, partially offset by lower seasonal borrowing by grain and farm supply cooperatives,” CoBank said.

No provision for loan losses was taken in the first quarter of 2014, whereas the bank had recorded a $15 million provision in the same period last year.

Noninterest income increased to $38.3 million in the first quarter of 2014 compared to $25.8 million in the same period last year, due to a decrease in losses on early extinguishments of debt, net of prepayment income, and gains on the sale of investment securities.

At quarter’s end, 0.71 percent of the bank’s loans were classified as adverse assets, unchanged from Dec. 31, 2013.

The Farm Credit System, a government-sponsored entity that is the largest single lender to U.S. agriculture, last week reported system-wide first-quarter income at $1.145 billion, versus $1.142 billion for the same period a year ago. FCS, which competes with private banks and other lenders, is a bellwether for the U.S. agricultural economy.

In a report issued on Monday, Fitch Ratings said the FCS remains in good shape despite last year’s drop in grain prices and some softening over the winter in farmland values, which are the main collateral for most farmer loans.

“Credit quality measures have continued to improve for the Federal Farm Credit System and associated banks even as the U.S. farm economy slows down in 2014,” Fitch said. “System-wide non-accrual loans declined to 0.86 percent of gross loans as of Dec. 31, 2013, from their peak of 2.04 percent at Dec. 31, 2009.”

Fitch said there could be “some adverse impact” to credit quality should land values “start correcting.” But the agency praised FCS banks for “reasonable steps to mitigate a correction, namely lower loan to value limits and debt caps per acre.”

Fitch said it expects U.S. agriculture to have a solid year in 2014, with grain farmers buoyed by the strengthened balance sheets and reduced debt of recent boom years and livestock farmers welcoming lower feed costs. (Reporting by Christine Stebbins; Editing by Cynthia Osterman)

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