CoBank's loan volume up 14%CoBank's loan volume up 14%
Second quarter financials show net income up 5% mostly from higher net interest income.
August 5, 2016
CoBank, a cooperative bank serving agribusinesses, rural infrastructure providers and Farm Credit associations throughout the United States, announced financial results for the second quarter and first six months of 2016.
Net income for the second quarter increased 5% to $243.3 million, compared to $232.3 million in the second quarter of 2015. For the first six months of 2016, net income was $486.6 million, a 5% increase from $464.6 million in the same period last year. The increases in earnings primarily resulted from higher net interest income, partially offset by higher provisions for loan losses, increases in operating expenses and lower overall noninterest income in the 2016 period.
Net interest income for the second quarter was $345.9 million, a 12% increase compared to $309.4 million in the same period last year. For the first six months of the year, net interest income increased 9% to $682.8 million, compared to $624.6 million for the first six months of 2015. The increases in net interest income were primarily driven by higher average loan volume and increased earnings on balance sheet positioning, somewhat offset by spread compression in the bank's loan portfolio due to continued strong competition and a higher cost of short-term debt.
Average loan volume rose 14% in the second quarter to $92.4 billion, from $81.1 billion in the same period last year. For the first six months of 2016, average loan volume rose 13% to $91.1 billion, from $80.9 billion in the same period last year. The increases resulted from higher levels of borrowing from affiliated Farm Credit associations, agricultural cooperatives, other food and agribusiness companies, rural electric cooperatives, and rural communications service providers.
"We're pleased with both the quarterly and year-to-date results of our business, including solid growth in our portfolio across all of our operating segments," said Robert B. Engel, CoBank's chief executive officer. "In addition to loan growth, CoBank's profitability, credit quality and liquidity all remain strong. Most importantly, the bank continues to fulfill its mission by providing dependable credit and financial services to rural industries."
At quarter-end, 0.63% of the bank's loans were classified as adverse assets compared to 0.71% at March 31, 2016. Nonaccrual loans decreased to $115.4 million at June 30, 2016 from $212.8 million at March 31, 2016. The bank's allowance for credit losses totaled $628.3 million at quarter-end or 1.32% of non-guaranteed loans when loans to Farm Credit associations are excluded.
Capital levels remain well in excess of regulatory minimums. As of June 30, 2016, shareholders' equity totaled $8.6 billion, and the bank's permanent capital ratio was 14.9%, compared with the 7.0% minimum established by the Farm Credit Administration (FCA), the bank's independent regulator.
During the quarter, the bank redeemed at par plus accrued interest all of its outstanding 7.875% subordinated notes due in 2018, totaling approximately $405 million. The bank also issued $375 million in preferred stock. The new Series I non-cumulative perpetual preferred stock has a fixed dividend rate of 6.25% until October 1, 2026, after which the dividends will accrue at a floating rate.
"We continue to monitor the capital markets and capital regulations in order to optimize the effectiveness, quality and cost of our third-party capital, which enhances our lending capacity and our ability to serve the borrowing needs of our customers," said David P. Burlage, CoBank's chief financial officer.
At quarter-end, the bank held approximately $30.5 billion in cash and investments and had 200 days of liquidity, which was in excess of FCA liquidity requirements.
Engel noted that, despite strong financial results in the first half of the year, the bank continues to face challenges that have the potential to negatively impact earnings and overall financial performance over the balance of the year.
"CoBank's margins remain under pressure due to historically low interest rates as well as intense competition in the banking and finance industries for the business of our customers," Engel said. "In addition, it is possible we will see deterioration in credit quality as a result of lower commodity prices, a stronger dollar and other economic and geopolitical events or trends that impact many of our
"Nonetheless, we remain highly confident in the overall financial condition of CoBank and in our ability to meet the needs of our customers. We continue to focus on building the long-term strength of the organization and on fulfilling our vital mission in rural America."
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