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2008 Annual Report

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2008 Annual Report 2008 Annual Report YANKEE FARM CREDIT, ACA 2008 ANNUAL REPORT Contents Chairperson and CEO’s Message.....................................................................................................2 Five Year Summary of Selected Financial Data...............................................................................3 Management’s Discussion and Analysis ..........................................................................................4 Directors and Senior Officers.........................................................................................................10 Report of Independent Auditors .....................................................................................................16 Consolidated Financial Statements.................................................................................................17 Notes to Consolidated Financial Statements ..................................................................................21 Shareholder Disclosure Information...............................................................................................33 Certification Statement...................................................................................................................34 Borrower Privacy Statement...........................................................................................................35 Office Locations .............................................................................................................................35 Young, Beginning and Small Farmers ...........................................................................................36 Relationship with CoBank, ACB ...................................................................................................37 Information about the Farm Credit System ....................................................................................38 Employees ......................................................................................................................................39 Directors .........................................................................................................................................40 1 Message from the Chairperson and CEO We are in challenging times. Last year stock markets crashed and credit markets seized up. Major financial institutions around the world failed or were rescued by their governments. The economy was declared in recession. In spite of these challenges, the Farm Credit System needed no government assistance and it continued to meet the needs of its borrowers. Highlights of your Association's financial results in 2008: • Net income was $4.5 million, down $1.9 million (29%) from 2007. The two most significant reasons for the decrease in net income were: an increase in the provision for loan losses, and lower net interest income due to falling interest rates. (Interest rates are presently at their lowest levels in over 50 years.) • Loans held by the Association increased by $24 million (8%) to $326 million. • Loan quality remained strong. Acceptable loan volume improved slightly from 96.8% to 97.8%, while high risk assets deteriorated slightly from 0.2% to 0.5% of total loan volume. • Permanent capital decreased slightly from 19.4% to 19.2%, still strong. While loan quality remained high in 2008, it is almost certain to deteriorate in 2009. Conditions in the dairy industry, our primary industry concentration, weakened in the last half of 2008 and especially at the end of the year and into early 2009. Conditions in the timber industry, our second most important industry concentration, remain weak due to the overall recession, with no recovery in sight. Because of these circumstances, we increased our allowance for loan losses by nearly $800,000 (83%) in 2008 even though we have not identified any specific losses. Many Association borrowers are facing financial stress in 2009. Your Association has excellent resources to work with you during these challenging times. Our credit staff is experienced and our balance sheet is strong. One way that we are pleased to help is by returning a portion of the Association's net income to members in the form of a patronage refund. The 2008 patronage refund is nearly $2.8 million and represents 1.00% (100 basis points) of member average loan volume. The 2008 patronage refund is 61 % of net income. Thank you once again for your continuing patronage and support. We look forward to visiting with you at our upcoming regional annual meetings. ?~'i_.~ Paul E. Doton George S. Putnam Chairperson President and CEO 2 YANKEE FARM CREDIT, ACA FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (in thousands) 2008 2007 2006 2005 2004 CONSOLIDATED BALANCE SHEET Loans $ 325,761 $ 302,019 $ 296,207 $ 275,354 $ 282,364 Less allowance for loan losses 1,758 960 801 646 1,118 Net loans 324,003 301,059 295,406 274,708 281,246 Cash 1,770 2,075 1,420 1,352 1,341 Investment in CoBank, ACB 11,779 11,504 11,224 11,018 10,796 Other property owned - - - - - Other assets 5,952 6,159 6,239 5,443 5,348 Total assets $ 343,504 $ 320,797 $ 314,289 $ 292,521 $ 298,731 Note payable to CoBank, ACB $ 271,461 $ 248,997 $ 245,629 $ 225,246 $ 232,913 Other liabilities 4,561 5,417 5,161 5,738 5,183 Total liabilities 276,022 254,414 250,790 230,984 238,096 Stock and participation certificates 939 906 935 951 976 Allocated surplus - - - 2,220 4,399 Unallocated surplus 67,613 65,852 62,792 59,027 55,584 Accum. other comprehensive (loss) (1,070) (375) (228) (661) (324) Total members' equity 67,482 66,383 63,499 61,537 60,635 Total liabilities and members' equity $ 343,504 $ 320,797 $ 314,289 $ 292,521 $ 298,731 CONSOLIDATED STATEMENT OF INCOME Net interest income $ 9,031 $ 9,663 $ 8,593 $ 8,278 $ 8,658 Provision (reversal of provision) for loan losses 781 131 155 (511) (6,106) Non-interest income 2,193 2,560 3,014 2,212 2,090 Non-interest expense 5,900 5,698 5,323 4,706 4,614 Provision for (benefit from) income taxes 2 2 (666) 227 17 Net income $ 4,541 $ 6,392 $ 6,795 $ 6,068 $ 12,223 KEY FINANCIAL RATIOS Return on average assets 1.5% 2.1% 2.3% 2.1% 4.4% Return on average members' equity 6.6% 9.6% 10.7% 9.7% 23.7% Net interest margin 3.1% 3.3% 3.1% 3.1% 3.2% Members' equity to assets 19.6% 20.7% 20.2% 21.0% 20.3% Debt to members' equity 4.1:1 3.8:1 4.0:1 3.8:1 3.9:1 Net charge-offs (recoveries) to avg. loans (0.01%) (0.01%) 0.00% (0.01%) 0.21% Allowance for loan losses to loans and accrued interest receivable 0.5% 0.3% 0.3% 0.2% 0.4% Permanent capital ratio 19.2% 19.4% 18.4% 19.8% 17.4% Total surplus ratio 18.9% 19.1% 18.1% 19.5% 17.1% Core surplus ratio 18.7% 18.7% 17.6% 18.1% 14.7% Net income distributed as patronage in the following year: Cash $ 2,790 $ 3,332 $ 3,031 $ 2,624 $ 2,600 3 YANKEE FARM CREDIT, ACA Management’s Discussion and Analysis of Financial Condition and Results of Operations For the Years Ended December 31, 2008, 2007 and 2006 (Dollars in thousands, except as noted) FORWARD LOOKING STATEMENTS • Patronage refunds from CoBank were $1.411 million in 2008, as compared to $1.663 million in 2007, a This annual report contains forward-looking statements. decrease of $252 thousand. This is primarily due to a These statements are not guarantees of future performance lower patronage refund related to participation loans and involve certain risks, uncertainties and assumptions that sold to CoBank. More detail on this item is given are difficult to predict. Words such as “anticipates,” below. “believes,” “could,” “estimates,” “may,” “should,” “will,” or other variations of these terms are intended to identify The return on average assets (ROA) was 1.5% in 2008 as the forward-looking statements. These statements are compared to 2.1% in 2007 and 2.3% in 2006. Return on based on assumptions and analyses made in light of average members’ equity (ROE) was 6.6% in 2008 as experience and other historical trends, current conditions, compared to 9.6% in 2007 and 10.7% in 2006. and expected future developments. However, actual results and developments may differ materially from our The Association declared a patronage distribution of $2.790 expectations and predictions due to a number of risks and million based on 2008 earnings, to be distributed 100% in uncertainties, many of which are beyond our control. cash in March 2009. The patronage distribution for 2007 These risks and uncertainties include, but are not limited to: (distributed in 2008) was $3.332 million, 100% cash, and weather-related, disease, and other adverse climatic or the patronage distribution for 2006 (distributed in 2007) biological conditions that periodically occur that impact was $3.031 million, 100% cash. agricultural productivity and income; economic fluctuations in the agricultural, rural utility, international, and farm- The major changes in the components of net income are related business sectors; changes in United States shown in the following table: government support of the agricultural industry; political, legal, regulatory and economic conditions and Effect on net income developments in the United States and abroad; and actions Increase (decrease) 2008 vs. 2007 2007 vs. 2006 taken by the Federal Reserve System in implementing Net interest income $ (632) $ 1,070 monetary policy. Provision for loan losses (650) 24 Patronage refunds from CoBank (252) 99 Other income, exclusive of RESULTS OF OPERATIONS patronage refunds from CoBank (115) (553) Other expense (202) (375) Net income in 2008 was $4.541 million, a decrease of Provision for income
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