FCS Reports Income Increase for Quarter

May 10, 2001

The Farm Credit System reports combined net income of $390 million for the quarter ended March 31 compared with combined net income of $312 million for the same period last year. "The System achieved very favorable earnings of $390 million for the quarter ended March 31, highlighted by an increase in net interest income," said James A. Brickley, president and CEO of the Federal Farm Credit Banks Funding Corporation.

"A more favorable interest rate environment benefitted the system during the quarter. Also, the adverse impact of pricing pressures on certain crops continued to be tempered by significant direct federal government payments made to support U.S. agriculture. In this environment, system institutions have been successful in maintaining favorable credit quality levels and strong capital levels," he added.

Net interest income increased $54 million to $638 million for the quarter ended March 31 compared with $584 million for the quarter ended March 31, 2000. This increase was due to a higher level of average earning assets, funded, in part, by an increase in interest-free funds, and to an increase in the net interest rate spread. The net interest rate spread increased six basis points to 1.86% for the first quarter of 2001, as compared with 1.80% for the same period of the prior year, reflecting a more favorable lending environment. As a result of the improvement in the interest rate spread, the net interest margin increased to 2.78% for the first quarter of 2001, as compared with 2.73% for the same period of the prior year.

Provisions for loan losses were $36 million for the latest quarter and for the quarter ended last March 31. The provisions for loan losses recorded in the first quarter of 2001 and 2000 were due primarily to an increase in loan volume and to additional credit quality deterioration in a limited number of loans to cooperatives.

The provision for income taxes declined $18 million to $29 million for the first quarter of 2001 compared with the first quarter of 2000. The decline was due to certain Agricultural Credit Associations' (ACAs) recognition of $17 million of income tax benefits representing their portions of claimed refunds from the Internal Revenue Service (IRS) relating to taxes previously paid on earnings from mortgage lending activities. As the remaining ACAs finalize their individual settlement agreements with the IRS during the year, the provision for income taxes will continue to be favorably affected.

Provisions for income taxes for both the first quarter of 2001 and 2000 were affected by the write-offs of deferred tax assets of $13 million and $18 million, respectively, related to restructuring certain ACAs which have formed taxable Production Credit Association and non-taxable Federal Land Credit Association subsidiaries. Excluding the recognition of income related to claimed refunds and the write-offs of deferred tax assets, the effective tax rates for the first quarter of 2001 and 2000 would have been 7.9% and 8.1%, respectively. These effective tax rates reflected a lower level of income earned at taxable System institutions resulting from the ongoing restructuring of ACAs.

Gross loan volume increased $808 million to $76.031 billion at March 31 compared with year-end 2000 volume of $75.223 billion. The increase resulted primarily from growth in the long-term real estate loan volume and in domestic loans to cooperatives. The system's accruing loan volume was $75.298 billion at March 31 compared with $74.513 billion at Dec. 31. Nonaccrual loans increased $23 million to $733 million at March 31 compared with the balance of $710 million at Dec. 31.

Nonperforming loans (which consist of nonaccrual loans, accruing restructured loans, and accruing loans 90 days or more past due) increased $67 million to $946 million at March 31, 2001, as compared with $879 million at Dec. 31, 2000. These loans represented 1.24% and 1.17% of the system's loans at March 31 and Dec. 31 respectively. Accruing loans 90 days or more past due increased $54 million during the first quarter of 2001 to $103 million at March 31, 2001. These loans, which are well secured and in the process of collection, are normally at their highest level at the end of the first quarter.

The allowance for loan losses was $1.977 billion at March 31 compared with $1.957 billion Dec. 31at December 31, 2000. The allowance as a percentage of loans outstanding was 2.60% at March 31 and Dec. 31. The allowance for loan losses was 209% of the system's total nonperforming loans and 270% of its nonaccrual loans at March 31 compared with 223% and 276%, respectively, at Dec. 31. Net loan charge-offs of $16 million were recorded during the first quarter of 2001 compared with $31 million for the first quarter of 2000. Although the allowances for loan losses were considered by managements of system institutions to be adequate to absorb estimated losses inherent in their loan portfolios at March 31, 2001, a continuation or worsening of existing pressures on the agricultural economy could result in further deterioration in the credit quality of their loan portfolios.