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Drought to hurt farm loan quality, bank says

11/09/2012 @ 2:18pm

CoBank on Friday cautioned that it expects the quality of its agricultural loan portfolio to decline over the next few months as the impact of the prolonged drought spreads through the U.S. farming community.

The level of loans classed as adverse assets rose only slightly over the quarter ended Sept. 30 because of concerns over a "limited number" of communications and energy clients, but CoBank said it expects to feel some pressure from farm loans.

"We do expect moderate declines in credit quality over the next few quarters as the effects of this year's drought on crop yields and commodity prices impacts various customer segments," said Chief Financial Officer David Burlage in a statement as the bank reported a 28% rise in third-quarter profit.

CoBank's outlook is closely watched as it became the largest agricultural lender after acquiring Agbank in a deal that closed in January.

The bank said 1.03% of its loans were deemed adverse assets at the end of the quarter compared with 1.02% at June 30 and 1.25% on Dec. 31.

Net profit in the quarter rose to $217.7 million from $169.9 million a year earlier.

CoBank is one of four banks in the government-sponsored Farm Credit System. The system, first founded by Congress in 1916, ensures a reliable source of credit for U.S. farmers and ranchers. Loans made in the Farm Credit System are often purchased and repackaged as securities by Farmer Mac (AGMA), a federal underwriting guarantor that resembles Freddie Mac in the residential mortgage sector.

Average agribusiness loan volume has dropped 9% in the quarter due to low prices on grain and commodities earlier in the year, the bank said in a release.

Write to Ben Kesling at benjamin.kesling@dowjones.com

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(END) Dow Jones Newswires

November 09, 2012 13:51 ET (18:51 GMT)

DJ CoBank: Droughts Effects on Agricultural Loans Will Linger->copyright

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