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YANKEE FARM CREDIT, ACA. Management s Discussion & Analysis of Results of Operations and Financial Condition

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YANKEE FARM CREDIT, ACA Management s Discussion & Analysis of Results of Operations and Financial Condition Second Quarter Ended June 30, 2015 (Dollars in thousands, except as noted) (Unaudited) Results
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YANKEE FARM CREDIT, ACA Management s Discussion & Analysis of Results of Operations and Financial Condition Second Quarter Ended June 30, 2015 (Dollars in thousands, except as noted) (Unaudited) Results of Operations: Second Quarter Net income for the second quarter of 2015 was $3.096 million, up $1.088 million (54%) from net income of $2.008 million in the second quarter of Net interest income before the provision for loan losses was up $74 thousand (2%) in 2015 as compared to The following table shows the components of this increase: Changes in net interest income due to: Changes in volumes of accrual loans & debt $ 124 Changes in interest rates on accrual loans & debt (20) Changes in interest income on nonaccrual loans (31) Other adjustments 1 Total change in net interest income $ 74 Changes in accrual volumes and rates are shown in the following table: Three Months Ended June 30, Average accrual loan volume $ 417,770 $ 403,959 Average interest rate on loans 4.17% 4.20% Average interest rate spread 3.47% 3.48% Average loan volume was higher in 2015, and this contributed an increase of $124 thousand in the total change in net interest income as shown in the first table above. This increase was offset by a decrease in interest recognized upon payouts of nonaccruals loans of $31 thousand and a decrease of $20 thousand due to changes in interest rates on accrual loans, as shown in the first table above. There was a negative provision for credit losses of $468 thousand in the second quarter of 2015, as compared to a provision for credit losses of $569 thousand in the second quarter of Improved credit quality is the primary reason for this change in the provision for credit losses. Other income increased by $109 thousand (11%) in 2015 as compared to This increase resulted primarily from an increase of $84 thousand in fees for financial services and an increase of $19 thousand in patronage refunds from CoBank. Other expense increased by $132 thousand (6%) in 2015 as compared to Salaries and employee benefits increased by $65 thousand (5%) and fees paid to Farm Credit Financial Partners, Inc. (the Association s service provider) increased $48 thousand (17%). Results of Operations: Year-to-Date Net income through the second quarter of 2015 was $5.741 million, up $1.339 million from net income of $4.402 million through the second quarter of There was a negative provision for credit losses of $604 thousand through the second quarter of 2015, as compared to a provision for credit losses of $732 thousand for the same period in Improved credit quality is the primary reason for this change in the provision for credit losses.. Management s Discussion & Analysis (cont.) Net interest income before the provision for loan losses was up $166 thousand (2%) in 2015 as compared to The following table shows the components of this increase: Changes in net interest income due to: Changes in volumes of accrual loans & debt $ 227 Changes in interest rates on accrual loans & debt (32) Changes in interest income on nonaccrual loans (28) Other adjustments (1) Total change in net interest income $ 166 Changes in accrual volumes and rates are shown in the following table: Six Months Ended June 30, Average accrual loan volume $ 419,251 $ 406,818 Average interest rate on loans 4.18% 4.21% Average interest rate spread 3.48% 3.49% Average loan volume was higher in 2015 and this contributed to an increase of $227 thousand to the total change in net interest income, as shown in the first table above. This increase was offset by a decrease of $32 thousand due to changes in interest rates on accrual loans and a decrease in interest recognized upon payouts of nonaccruals loans of $28 thousand, as shown in the first table above. Other income increased by $197 thousand (10%) in 2015 as compared to This increase resulted primarily from an increase of $149 thousand in fees for financial services and an increase of $36 thousand in patronage refunds from CoBank. Other expense increased by $360 thousand (9%) in 2015 as compared to Salaries and employee benefits increased $151 thousand (6%), occupancy and equipment expense increased $82 thousand (47%) and fees paid to Farm Credit Financial Partners, Inc. (the Association s service provider) increased $96 thousand (17%). Loan Portfolio and Financial Condition Loans originated by the Association decreased by $22.2 million (4%) from year-end. Loans purchased increased by $1.3 million (7%) from year-end, and participations sold decreased by $11.0 million (8%). Loans held by the Association decreased by $10.0 million (2%) from year-end. The loan portfolio continues to be concentrated in the dairy industry. Farm prices for dairy products decreased in the second quarter of Federal Order 1 prices for the second quarter of 2015 averaged $16.58/cwt, down $1.84/cwt (10%) from the first quarter of 2015, and down $8.64/cwt (34%) from the second quarter of The change in prices received for dairy products has been accompanied by a slight decrease in the cost of farm inputs, particularly purchased feed. The composite Feed Index published by the USDA was 105 for the first two months (April and May) of the second quarter of 2015, down 4% from the first quarter of 2015, and down 14% from the second quarter of (Feed Index = 100 for 2011) Enrollment for the new Margin Protection Program for Dairy Producers (MPP-Dairy) took place in the fourth quarter of MPP-Dairy is designed to provide a compensating benefit payment to producers when a national trigger indicates that margins between milk prices and feed costs fall below a designated level. The program is designed to give producers a cash benefit during periods of low margins (milk income over feed costs). Producers are allowed to pick a margin level and the percentage of their historic milk production to be covered. Producers pay a premium based on the level of coverage they have selected. Loan quality improved slightly and remained strong through the second quarter of Loans graded Substandard or lower were 3.4% of total loans at June 30, 2015, 0.7% improved from year-end. High risk assets comprised 0.6% of loans and related assets at June 30, 2015, unchanged from year-end. (High risk assets include nonaccrual loans, accrual troubled debt restructured loans, loans delinquent 90 days or more but not yet classified as nonaccrual, and other property owned.) Repayment performance remained satisfactory. Loans (both accrual and nonaccrual) delinquent 30 days or more were 0.5% at June 30, 2015, unchanged from year-end. The 12-month rolling average for Management s Discussion & Analysis (cont.) this statistic was 0.6% at June 30, 2015, 0.4% improved from year-end. There were no charge-offs, but recoveries of $4 thousand in the first two quarters of There were charge-offs of $19 thousand and recoveries of $6 thousand in the first two quarters of As discussed in the 2014 Annual Report to Shareholders, the Association declared a patronage distribution of $4.641 million based on 2014 earnings, 100% in cash. This was paid on March 24, Members equity as a percentage of assets was 21.0% at June 30, 2015, as compared to 19.8% at year-end. The Association s permanent capital ratio was 19.7% at June 30, 2015, up 0.3% from year-end. These financial statements were prepared under the oversight of the Audit Committee of the Board of Directors. YANKEE FARM CREDIT, ACA CONSOLIDATED BALANCE SHEET (Unaudited) June 30, December 31, (in thousands) ASSETS Loans originated by the Association $ 539,287 $ 561,530 Plus loans purchased 18,760 17,482 Less participations sold 134, ,673 Loans held by the Association 423, ,339 Less allowance for loan losses 4,691 5,283 Net loans 418, ,056 Cash 961 1,182 Accrued interest receivable 1,353 1,308 Patronage refunds due from CoBank, ACB 1,430 2,718 Investment in CoBank, ACB 16,028 15,721 Mission related investment Premises and equipment, less accumulated depreciation 3,513 3,184 Other assets 1,410 1,371 Total assets $ 443,881 $ 454,031 LIABILITIES Note payable to CoBank, ACB $ 346,329 $ 356,885 Patronage distribution payable 2,389 4,641 Reserve for unfunded commitments Other liabilities 2,047 2,742 Total liabilities 350, ,358 MEMBERS' EQUITY Capital stock and participation certificates 1,091 1,082 Unallocated surplus 93,699 90,347 Accumulated other comprehensive (loss) (1,756) (1,756) Total members' equity 93,034 89,673 Total liabilities and members' equity $ 443,881 $ 454,031 The accompanying notes are an integral part of these financial statements. YANKEE FARM CREDIT, ACA CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, (in thousands) INTEREST INCOME Loans $ 4,341 $ 4,264 $ 8,683 $ 8,518 Total interest income 4,341 4,264 8,683 8,518 INTEREST EXPENSE Note payable to CoBank, ACB ,197 1,198 Total interest expense ,197 1,198 Net interest income 3,741 3,667 7,486 7,320 Provision for credit losses (468) 569 (604) 732 Net interest income after provision for credit losses 4,209 3,098 8,090 6,588 OTHER INCOME Patronage refunds from CoBank, ACB ,244 1,208 Fees for financial services Loan fees and other income Total other income 1,119 1,010 2,139 1,942 OTHER EXPENSE Salaries and employee benefits 1,313 1,248 2,594 2,443 Occupancy and equipment Farm Credit Insurance Fund premium Fees paid to Farm Credit Financial Partners, Inc Other expenses Total other expense 2,228 2,096 4,480 4,120 Income before income taxes 3,100 2,012 5,749 4,410 Provision for income taxes Net income $ 3,096 $ 2,008 $ 5,741 $ 4,402 OTHER COMPREHENSIVE INCOME OCI related to pension liabilities Comprehensive income $ 3,096 $ 2,008 $ 5,741 $ 4,402 The accompanying notes are an integral part of these financial statements. YANKEE FARM CREDIT, ACA CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY (Unaudited) Accumulated Capital Stock Other Total and Participation Unallocated Comprehensive Members' Certificates Surplus Income (Loss) Equity (in thousands) Balance at December 31, 2013 $ 1,068 $ 84,928 $ (1,366) $ 84,630 Comprehensive income Net income - 4,402-4,402 Other comprehensive income Change in pension liabilities Total comprehensive income - 4,402-4,402 Capital stock/pcs issued Capital stock/pcs retired (65) - - (65) Patronage distribution accrued Cash - (2,326) - (2,326) Adjustment for rounding Balance at June 30, 2014 $ 1,071 $ 87,004 $ (1,366) $ 86,709 Balance at December 31, 2014 $ 1,082 $ 90,347 $ (1,756) $ 89,673 Comprehensive income Net income - 5,741-5,741 Other comprehensive income Change in pension liabilities Total comprehensive income - 5,741-5,741 Capital stock/pcs issued Capital stock/pcs retired (77) - - (77) Patronage distribution accrued Cash - (2,389) - (2,389) Adjustment for rounding (1) - - (1) Balance at June 30, 2015 $ 1,091 $ 93,699 $ (1,756) $ 93,034 The accompanying notes are an integral part of these financial statements. YANKEE FARM CREDIT, ACA Notes To Consolidated Financial Statements Second Quarter Ended June 30, 2015 (Dollars in thousands, except as noted) (Unaudited) NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Yankee Farm Credit, ACA (the Association) is a member-owned cooperative within the Farm Credit System. A description of the organization and operations of the Association, the significant accounting policies followed, and the financial condition and results of operations as of and for the year ended December 31, 2014 are contained in the 2014 Annual Report to Shareholders. These unaudited second quarter 2015 financial statements should be read in conjunction with the 2014 Annual Report to Shareholders. In August 2014, the Financial Accounting Standards Board (FASB) issued guidance entitled Presentation of Financial Statements - Going Concern. The guidance governs management s responsibility to evaluate whether there is substantial doubt about an entity s ability to continue as a going concern and to provide related footnote disclosures. This guidance requires management to perform interim and annual assessments of an entity s ability to continue as a going concern within one year after the date the financial statements are issued or within one year after the financial statements are available to be issued, when applicable. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations for the assessed period. This guidance becomes effective for interim and annual periods ending after December 15, 2016, and early application is permitted. Management will be required to make its initial assessment as of December 31, In May 2014, the FASB issued guidance entitled, Revenue from Contracts with Customers. The guidance governs revenue recognition from contracts with customers and requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Financial instruments and other contractual rights within the scope of other guidance issued by the FASB are excluded from the scope of this new revenue recognition guidance. In this regard, a majority of our contracts would be excluded from the scope of this new guidance. In April 2015, this guidance was deferred by one year and results in the new revenue standard becoming effective for interim and annual reporting periods ending after December 15, The Association is in the process of reviewing contracts to determine the effect, if any, on their financial condition or results of operations. The accompanying financial statements contain all adjustments necessary for a fair presentation of the interim financial condition and results of operations and conform to generally accepted accounting principles and prevailing practices within the banking industry. The results of operations for the six month period ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year. NOTE 2 - LOANS AND ALLOWANCE FOR LOAN LOSSES A summary of loans follows: Value at June 30, 2015 December 31, 2014 Long-term farm mortgage $ 182,573 $ 180,548 Country home 2,127 2,267 Farm related business 24,729 24,051 Production and intermediate term 329, ,664 Total loan originated by the Association 539, ,530 Plus participations purchased 18,760 17,482 Less participations sold 134, ,673 Loans held by the Association $ 423,381 $ 433,339 The Association purchases and sells participation interests with other parties in order to diversify risk, manage loan volume and comply with FCA regulations. All of the Association s loan purchases and sales are with other Farm Credit institutions. The following table presents information regarding the balances of participations purchased and sold: Value at June 30, 2015 December 31, 2014 Participations Purchased Participations Sold Participations Purchased Participations Sold Long-term farm mortgage $ 12,209 $ 8,844 $ 11,001 $ 9,159 Farm related business 5, ,449 1,265 Production and intermediate term ,161 1, ,249 Total $ 18,760 $ 134,666 $ 17,482 $ 145,673 Impaired assets (including related accrued interest) and related credit quality statistics are as follows: June 30, 2015 Value at December 31, 2014 Nonaccrual Loans: Long-term farm mortgage $ 1,046 $ 1,116 Farm related business Production and intermediate term Total nonaccrual loans $ 2,010 $ 2,235 Accrual Troubled Debt Restructured Loans: Long-term farm mortgage $ 530 $ 539 Total troubled debt restructured loans $ 530 $ 539 Accrual Loans 90 Days Past Due: Production and intermediate term $ - $ - Total accrual loans 90 days past due $ - $ - Total impaired assets $ 2,540 $ 2,774 A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Association, for economic or legal reasons related to the member s financial difficulties, grants a concession to the member that it would not have otherwise considered. The Association had no new TDR loans through the period ending June 30, The following table provides information on outstanding loans restructured in troubled debt restructurings (including accrued interest) as of June 30, 2015: Loans Modified as TDRs June 30, 2015 December 31, 2014 TDRs in Nonaccrual Status* June 30, 2015 December 31, 2014 Long-term farm mortgage $ 530 $ 539 $ - $ - Farm related business Production and intermediate term Total $ 679 $ 681 $ 149 $ 142 *represents the portion of loans modified as TDRs (first two columns) that are in nonaccrual status There were no additional commitments to lend additional funds to members whose loans were classified as troubled debts restructured at June 30, 2015. The following table provides an age analysis of past due loans (including accrued interest) as of June 30, 2015: Past Due Days 90 Days Total Long-term farm mortgage $ 563 $ 116 $ 679 Country home Farm related business Production and intermediate term ,090 Total loans past due $ 1,463 $ 783 $ 2,246 There were no loans 90 days or more past due but still classified as accrual at June 30, The following table shows loans and related accrued interest classified under the FCA Uniform Loan Classification System as a percentage of total loans and related accrued interest receivable by loan type as of: June 30, 2015 December 31, 2014 Long-term farm mortgage Acceptable 36.9% 35.6% OAEM* 1.9% 1.3% Substandard/doubtful 1.5% 2.0% 40.3% 38.9% Country home Acceptable 0.5% 0.5% OAEM* 0.1% 0.1% Substandard/doubtful 0.0% 0.0% 0.6% 0.6% Farm related business Acceptable 12.9% 12.5% OAEM* 0.0% 0.0% Substandard/doubtful 0.4% 0.4% 13.3% 12.9% Production and intermediate term Acceptable 42.8% 44.2% OAEM* 1.5% 1.7% Substandard/doubtful 1.5% 1.7% 45.8% 47.6% Total Loans Acceptable 93.1% 92.8% OAEM* 3.5% 3.1% Substandard/doubtful 3.4% 4.1% 100.0% 100.0% *Other Assets Especially Mentioned The following tables present information on impaired loans and related amounts in the Allowance for Loan Losses: Recorded Investment At June 30, 2015 Unpaid Principal Balance* Related Allowance Impaired Loans with a related allowance for loan losses: Long-term farm mortgage $ 1,574 $ 2,184 $ 75 Farm related business Production and intermediate term Total $ 2,538 $ 3,964 $ 329 Impaired Loans with no related allowance for loan losses: Farm related business $ - $ 9 $ - Production and intermediate term $ - $ 19 $ - Total $ - $ 28 $ - Total Impaired Loans: Long-term farm mortgage $ 1,574 $ 2,193 $ 75 Farm related business Production and intermediate term Total $ 2,538 $ 4,011 $ 329 Recorded Investment At December 31, 2014 Unpaid Principal Balance* Related Allowance Impaired Loans with a related allowance for loan losses: Long-term farm mortgage $ 1,646 $ 2,191 $ 173 Farm related business 672 1, Production and intermediate term Total $ 2,757 $ 4,056 $ 425 Impaired Loans with no related allowance for loan losses: Long-term farm mortgage $ 8 $ 25 $ - Farm related business Production and intermediate term Total $ 17 $ 68 $ - Total Impaired Loans: Long-term farm mortgage $ 1,654 $ 2,216 $ 173 Farm related business 672 1, Production and intermediate term Total $ 2,774 $ 4,124 $ 425 *Unpaid principal balance represents the borrower s contractual balance of the loan. The following table presents additional information on impaired loans: Average Impaired Loans Three Months Ended June 30, 2015 June 30, 2014 Interest Average Income Impaired Recognized Loans Interest Income Recognized Impaired Loans with a related allowance for loan losses: Long-term farm mortgage $ 1,562 $ 7 $ 1,958 $ 38 Farm related business Production and intermediate term Total $ 2,583 $ 7 $ 3,377 $ 38 Impaired Loans with no related allowance for loan losses: Long-term farm mortgage $ - $ - $ 10 $ - Production and intermediate term Total $ - $ - $ 20 $ - Total Impaired Loans: Long-term farm mortgage $ 1,562 $ 7 $ 1968 $ 38 Farm related business Production and intermediate term Total $ 2,583 $ 7 $ 3,387 $ 38 Average Impaired Loans Six Months
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