CoBank, a cooperative bank serving agribusinesses, rural infrastructure providers and Farm Credit associations throughout the U.S., experienced loan volume growth in all three of its operating segments, and credit quality and earnings remained strong for the second quarter and first six months of 2017.
Net income for the second quarter increased 7% to $259.8 million, compared to $243.3 million in the second quarter of 2016. For the first six months of 2017, net income was $522.6 million, a 7% increase from $486.6 million in the same period of 2016. The bank benefited during the quarter and year-to-date periods from a lower provision for loan losses. No provision was taken during the second quarter of 2017, compared to a $20 million provision taken in the same period last year. Provisions for loan losses in the first six months of 2017 totaled $15 million, compared to $28 million in the prior-year period.
Net interest income for the second quarter was $347.2 million, up 0.4% from $345.9 million in the same period last year. For the first six months of the year, net interest income increased 3% to $703.3 million, compared to $682.8 million for the first six months of 2016. Higher average loan volume was a key driver of the increase for both the quarter and year-to-date periods, partially offset by decreases in fair value accretion income related to CoBank's merger with U.S. AgBank in 2012.
Average loan volume rose 3% in the second quarter to $95.4 billion versus $92.4 billion in the same period last year. For the first six months of 2017, average loan volume rose 6% to $96.7 billion, compared with $91.1 billion in the same period last year. The increases resulted primarily from higher levels of wholesale lending to the bank's affiliated Farm Credit associations, driven by greater demand for credit from farmers, ranchers and other rural borrowers. The bank also saw increased demand for loans from farmer-owned cooperatives, agricultural export finance customers, rural electric cooperatives and project finance borrowers.
"Through midyear, CoBank has delivered solid financial performance on behalf of its customer-owners," CoBank president and chief executive officer Tom Halverson said. "In particular, we have benefited from increased demand for credit in agriculture and agribusiness as well as continuing good credit quality in our loan portfolio."
Net interest margin for the quarter declined to 1.11% from 1.16% in the second quarter of 2016. For the first six months of the year, net interest margin was 1.12%, compared to 1.17% in the prior-year period. The reduction in net interest margin reflected the impact of slightly lower overall loan spreads as well as lower fair value accretion income, somewhat offset by increased earnings on balance sheet positioning.
At quarter-end, 1.01% of CoBank's loans were classified as adverse assets, compared to 0.81% as of Dec. 31, 2016. Non-accrual loans increased to $229.2 million as of June 30, 2017, from $207.2 million at Dec. 31, 2016, primarily due to a small number of agribusiness loans and a communications loan. The bank's allowance for credit losses totaled $676.9 million at quarter-end, or 1.41% of non-guaranteed loans when loans to Farm Credit associations were excluded.
As of June 30, 2017, shareholder equity totaled $8.8 billion, and the bank's total capital ratio was 15.6%, compared with the minimum of 8.0% (10.5% inclusive of the fully phased-in capital conservation buffer) established by the Farm Credit Administration (FCA), the bank's independent regulator. At quarter-end, CoBank held approximately $30.1 billion in cash, investments and overnight funds and had 179 days of liquidity, which exceeded FCA liquidity requirements.
Halverson noted that the bank continues to face a number of marketplace challenges, including intense competition in the banking industry, declining margins and a prolonged low interest rate environment that has lowered returns on invested capital. In addition, the bank is making significant investments in people, processes and systems that will enable it to operate more efficiently and meet the evolving needs and expectations of customers and partners.
"Despite strong net income so far this year, we continue to see ongoing pressure in our other profitability measures," Halverson said. "Our board and executive team are squarely focused on that issue and on improving the efficiency and scalability of our operating platform. We are committed to serving as a dependable financial partner for our customers and on building the capacity of the bank to fulfill its mission in rural America over the long term."