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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 First Quarter Ended March 31, 2016 (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 First Quarter Ended March 31, 2016 (Dollars in thousands, except as noted) (Unaudited) Results of Operations: First Quarter Net income for the first quarter of 2016 was $2.650 million, up slightly from net income of $2.645 million in the first quarter of Net interest income before the provision for loan losses was up $408 thousand (11%) in 2016 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 $ 246 Changes in interest rates on accrual loans & debt 17 Changes in interest income on nonaccrual loans 145 Total change in net interest income $ 408 Changes in accrual volumes and rates are shown in the following table: Three Months Ended March 31, Average accrual loan volume $ 446,291 $ 420,749 Average interest rate on loans 4.35% 4.18% Average interest rate spread 3.44% 3.48% Average loan volume was higher in 2016, contributing to an increase of $246 thousand and interest recognized upon payouts on nonaccrual loans contributed to $145 thousand to the total change in net interest income as shown in the first table above. There was a provision for credit losses of $239 thousand in the first quarter of 2016, as compared to a negative provision for credit losses of $136 thousand in the first quarter of Other income increased by $120 thousand (12%) in 2016 as compared to This increase resulted primarily from an increase of $101 thousand in fees for financial services and an increase of $26 thousand in patronage refunds from CoBank. Other expense increased by $148 thousand (7%) in 2016 as compared to Salaries and employee benefits increased by $83 thousand (6%), and the premium paid to the Farm Credit Insurance Fund increased $57 thousand (65%). These increases were partially offset by occupancy and equipment expense decreasing $39 thousand (25%). Loan Portfolio and Financial Condition Loans originated by the Association decreased by $9.5 million (1%) from year-end. Loans purchased decreased by $0.8 million (3%) from year-end, and participations sold decreased by $9.5 million (4%). Loans held by the Association decreased by $0.7 million from year-end. The loan portfolio continues to be concentrated in the dairy industry. Farm prices for dairy products decreased in the first quarter of Federal Order 1 prices for the first quarter of 2016 averaged $16.03/cwt, down $1.84/cwt (10%) from the fourth quarter of 2015, and down $2.39/cwt (13%) from the first 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 97 for the first two months of 2016, down 4% from the fourth quarter of 2015, and down 11% from the first quarter of (Feed Index = 100 for 2011) 2 Management s Discussion & Analysis (cont.) Enrollment for the 2016 Margin Protection Program for Dairy Producers (MPP-Dairy) took place in the second half 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 first quarter of Loans graded Substandard or lower were 3.0% of total loans at March 31, 2016, 0.1% improved from year-end. High risk assets comprised 0.4% of loans and related assets at March 31, 2016, 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 March 31, 2016, 0.1% improved from year-end. The 12-month rolling average for this statistic was 0.7% at March 31, 2016, unchanged from year-end. There were no charge-offs or recoveries in the first quarter of There were no charge-offs, but recoveries of $3 thousand in the first quarter of As discussed in the 2015 Annual Report to Shareholders, the Association declared a patronage distribution of $4.862 million based on 2015 earnings, 100% in cash. This was paid on March 23, Members equity as a percentage of assets was 20.5% at March 31, 2016, as compared to 20.0% at year-end. The Association s permanent capital ratio was 19.1% at March 31, 2016, down 0.5% from year-end. These financial statements were prepared under the oversight of the Audit Committee of the Board of Directors. 3 YANKEE FARM CREDIT, ACA CONSOLIDATED BALANCE SHEET (Unaudited) March 31, December 31, (in thousands) ASSETS Loans originated by the Association $ 679,157 $ 688,636 Plus participations purchased 21,744 22,495 Less participations sold 252, ,131 Loans held by the Association 448, ,000 Less allowance for loan losses 5,345 5,123 Net loans 442, ,877 Cash 1,472 4,210 Accrued interest receivable 1,798 1,484 Patronage refunds due from CoBank, ACB 1,016 3,302 Investment in CoBank, ACB 17,072 16,637 Mission related investment Premises and equipment, less accumulated depreciation 3,456 3,498 Other assets 1,263 1,138 Total assets $ 469,361 $ 474,453 LIABILITIES Note payable to CoBank, ACB $ 368,439 $ 372,830 Patronage distribution payable 1,262 4,862 Reserve for unfunded commitments Other liabilities 3,168 1,680 Total liabilities 372, ,464 MEMBERS' EQUITY Capital stock and participation certificates 1,099 1,093 Unallocated surplus 97,097 95,709 Accumulated other comprehensive (loss) (1,813) (1,813) Total members' equity 96,383 94,989 Total liabilities and members' equity $ 469,361 $ 474,453 The accompanying notes are an integral part of these financial statements. 4 YANKEE FARM CREDIT, ACA CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended March 31, (in thousands) INTEREST INCOME Loans $ 4,975 $ 4,342 Total interest income 4,975 4,342 INTEREST EXPENSE Note payable to CoBank, ACB Total interest expense Net interest income 4,153 3,745 Provision for credit losses 239 (136) Net interest income after provision for credit losses 3,914 3,881 OTHER INCOME Patronage refunds from CoBank, ACB Fees for financial services Loan fees and other income Total other income 1,140 1,020 OTHER EXPENSE Salaries and employee benefits 1,364 1,281 Occupancy and equipment Farm Credit Insurance Fund premium Fees paid to Farm Credit Financial Partners, Inc Other expenses Total other expense 2,400 2,252 Income before income taxes 2,654 2,649 Provision for income taxes 4 4 Net income $ 2,650 $ 2,645 OTHER COMPREHENSIVE INCOME OCI related to pension liabilities - - Comprehensive income $ 2,650 $ 2,645 The accompanying notes are an integral part of these financial statements. 5 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, 2014 $ 1,082 $ 90,347 $ (1,756) $ 89,673 Comprehensive income Net income - 2,645-2,645 Other comprehensive income Change in pension liabilities Total comprehensive income - 2,645-2,645 Capital stock/pcs issued Capital stock/pcs retired (37) - - (37) Patronage distribution accrued Cash - (1,208) - (1,208) Adjustment for rounding (1) - - (1) Balance at March 31, 2015 $ 1,083 $ 91,784 $ (1,756) $ 91,111 Balance at December 31, 2015 $ 1,093 $ 95,709 $ (1,813) $ 94,989 Comprehensive income Net income - 2,650-2,650 Other comprehensive income Change in pension liabilities Total comprehensive income - 2,650-2,650 Capital stock/pcs issued Capital stock/pcs retired (29) - - (29) Patronage distribution accrued Cash - (1,262) - (1,262) Adjustment for rounding Balance at March 31, 2016 $ 1,099 $ 97,097 $ (1,813) $ 96,383 The accompanying notes are an integral part of these financial statements. 6 YANKEE FARM CREDIT, ACA Notes To Consolidated Financial Statements First Quarter Ended March 31, 2016 (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, 2015 are contained in the 2015 Annual Report to Shareholders. These unaudited first quarter 2016 financial statements should be read in conjunction with the 2015 Annual Report to Shareholders. In February 2016, the Financial Accounting Standards Board (FASB) issued guidance entitled Leases. The guidance requires the recognition by lessees of lease assets and lease liabilities on the balance sheet for the rights and obligations created by those leases. Leases with lease terms of more than 12 months are impacted by this guidance. This guidance becomes effective for interim and annual periods beginning after December 15, 2018, with early application permitted. The Association is currently evaluating the impact of adoption on its financial condition and results of operations. In January 2016, the FASB issued guidance entitled Recognition and Measurement of Financial Assets and Liabilities. This guidance becomes effective for interim and annual periods beginning after December 15, The adoption of this guidance is not expected to impact the Association s financial condition or its results of operations. In August 2014, the 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 August 2015, the FASB issued an update that defers this guidance by one year, which results in the new revenue standard becoming effective for interim and annual reporting periods beginning 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 three month period ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year. 7 NOTE 2 - LOANS AND ALLOWANCE FOR LOAN LOSSES A summary of loans follows: Value at March 31, 2016 December 31, 2015 Long-term farm mortgage $ 190,163 $ 187,050 Country home 2,013 2,045 Farm related business 24,449 26,417 Production and intermediate term 462, ,124 Total loan originated by the Association 679, ,636 Plus participations purchased 21,744 22,495 Less participations sold 252, ,131 Loans held by the Association $ 448,316 $ 449,000 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 March 31, 2016 December 31, 2015 Participations Purchased Participations Sold Participations Purchased Participations Sold Long-term farm mortgage $ 13,837 $ 11,537 $ 13,603 $ 11,671 Farm related business 7,265 1,395 8,233 1,964 Production and intermediate term , ,496 Total $ 21,744 $ 252,585 $ 22,495 $ 262,131 Impaired assets (including related accrued interest) and related credit quality statistics are as follows: March 31, 2016 Value at December 31, 2015 Nonaccrual Loans: Long-term farm mortgage $ 736 $ 765 Farm related business Production and intermediate term Total nonaccrual loans $ 1,321 $ 1,485 Accrual Troubled Debt Restructured Loans: Long-term farm mortgage $ 513 $ 517 Total troubled debt restructured loans $ 513 $ 517 Total impaired assets $ 1,834 $ 2,002 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 March 31, There were no additional commitments to lend additional funds to members whose loans were classified as troubled debts restructured at March 31, The following table provides information on outstanding loans restructured in troubled debt restructurings (including accrued interest) as of March 31, 2016: Loans Modified as TDRs March 31, 2016 December 31, 2015 TDRs in Nonaccrual Status* March 31, 2016 December 31, 2015 Long-term farm mortgage $ 513 $ 517 $ - $ - Farm related business Production and intermediate term Total $ 524 $ 552 $ 11 $ 35 *represents the portion of loans modified as TDRs (first two columns) that are in nonaccrual status The following table provides an age analysis of past due loans (including accrued interest) as of March 31, 2016: Past Due Days 90 Days Total Long-term farm mortgage $ 361 $ 21 $ 382 Farm related business Production and intermediate term 1, ,362 Total loans past due $ 1,643 $ 576 $ 2,219 There were no loans 90 days or more past due but still classified as accrual at March 31, 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: March 31, 2016 December 31, 2015 Long-term farm mortgage Acceptable 36.2% 35.8% OAEM* 1.9% 1.5% Substandard/doubtful 1.4% 1.3% 39.5% 38.6% Country home Acceptable 0.4% 0.4% OAEM* 0.1% 0.1% Substandard/doubtful 0.0% 0.0% 0.5% 0.5% Farm related business Acceptable 11.8% 12.1% OAEM* 0.4% 0.4% Substandard/doubtful 0.3% 0.3% 12.5% 12.8% Production and intermediate term Acceptable 44.9% 45.4% OAEM* 1.3% 1.2% Substandard/doubtful 1.3% 1.5% 47.5% 48.1% Total Loans Acceptable 93.3% 93.7% OAEM* 3.7% 3.2% Substandard/doubtful 3.0% 3.1% 100.0% 100.0% *Other Assets Especially Mentioned 9 The following tables present information on impaired loans and related amounts in the Allowance for Loan Losses: Recorded Investment At March 31, 2016 Unpaid Principal Balance* Related Allowance Impaired Loans with a related allowance for loan losses: Long-term farm mortgage $ 1,249 $ 1,843 $ 58 Farm related business Production and intermediate term Total $ 1,834 $ 3,189 $ 172 Impaired Loans with no related allowance for loan losses: Production and intermediate term $ - $ 29 $ - Total $ - $ 29 $ - Total Impaired Loans: Long-term farm mortgage $ 1,249 $ 1,843 $ 58 Farm related business Production and intermediate term Total $ 1,834 $ 3,218 $ 172 Recorded Investment At December 31, 2015 Unpaid Principal Balance* Related Allowance Impaired Loans with a related allowance for loan losses: Long-term farm mortgage $ 1,282 $ 1,857 $ 59 Farm related business Production and intermediate term Total $ 2,002 $ 3,473 $ 206 Impaired Loans with no related allowance for loan losses: Production and intermediate term Total $ - $ 19 $ - Total Impaired Loans: Long-term farm mortgage $ 1,282 $ 1,857 $ 59 Farm related business Production and intermediate term Total $ 2,002 $ 3,492 $ 206 *Unpaid principal balance represents the borrower s contractual balance of the loan. 10 The following table presents additional information on impaired loans: Three Months Ended March 31, 2016 March 31, 2015 Interest Average Income Impaired Recognized Loans Average Impaired Loans Interest Income Recognized Impaired Loans with a related allowance for loan losses: Long-term farm mortgage $ 1,266 $ 8 $ 1,637 $ 7 Farm related business Production and intermediate term Total $ 1,888 $ 141 $ 2,736 $ 7 Impaired Loans with no related allowance for loan losses: Long-term farm mortgage $ - $ - $ 184 $ 2 Farm related business Production and intermediate term Total $ 7 $ 13 $ 185 $ 5 Total Impaired Loans: Long-term farm mortgage $ 1,266 $ 8 $ 1,821 $ 9 Farm related business Production and intermediate term Total $ 1,895 $ 154 $ 2,921 $ 12 A summary of changes in the allowance for loan losses and period end recorded investment in loans is as follows: Long-term Farm Mortgage Country Home Farm Related Business Production & Intermediate Term Total Allowance for Loan Losses: Balance at December 31, 2015 $ 2,380 $ 10 $ 324 $ 2,409 $ 5,123 Charge-offs Recoveries Provision for (reversal of provision for) loan losses 80 - (34) Balance at March 31, 2016 $ 2,460 $ 10 $ 290 $ 2,585 $ 5,345 Ending Balance: individually evaluated for impairment $ 58 $ - $ 36 $ 78 $ 172 Ending Balance: collectively evaluated for impairment 2, ,407 5,173 Balance at March 31, 2016 $ 2,460 $ 10 $ 290 $ 2,585 $ 5,345 Balance at December 31, 2014 $ 2,570 $ 10 $ 344 $ 2,359 $ 5,283 Charge-offs Recoveries Provision for (reversal of provision for) loan losses (92) (1) 160 (203) (136) Balance at March 31, 2015 $ 2,478 $ 9 $ 507 $ 2,156 $ 5,150 Ending Balance: individually evaluated for impairment $ 77 $ - $ 178 $ 54 $ 309 Ending Balance: collectively evaluated for impairment 2, ,102 4,841 Balance at March 31, 2015 $ 2,478 $ 9 $ 507 $ 2,156 $ 5,150 11 Long-term Farm Mortgage Country Home Farm Related Business Production & Intermediate Term Total Recorded Investment in Loans Outstanding: At March 31, 2016 Ending Balance for loans collectively evaluated for impairment $ 191,214 $ 2,013 $ 30,028 $ 223,227 $ 446,482 Ending Balance for loans Individually evaluated for impairment 1, ,834 Ending Balance at March 31, 2016 $ 192,463 $ 2,013 $ 30,319 $ 223,521 $ 448,316 At December 31, 2015 Ending Balance for loans collectively evaluated for impairment $ 187,700 $ 2,045 $ 32,295 $ 224,958 $ 446,998 Ending Balance for loans individually evaluated for impairment 1, ,002 Ending Balance at December 31, 2015 $ 188,982 $ 2,045 $ 32,686 $ 225,287 $ 449,000 The methodology for determining the Allowance for Credit Losses takes into consideration pot
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