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FitchRatings
August 12, 2011
 

Fitch Affirms Farm Credit Bank Of TX's IDRS at
‘AA-/F1+’; Outlook Stable

Fitch Ratings-New York-12 August 2011: Fitch Ratings has affirmed the long- and short-term Issuer Default Ratings (IDRs) of Farm Credit Bank of Texas (FCBT) at ‘AA-’ and ‘F1+’ , respectively. The Rating Outlook is Stable. A complete list of ratings affected by this action can be found at the end of this release.

The affirmation of FCBT's ratings reflects its strong operating performance, good asset quality, sound capital base, and a healthy liquidity position. Moreover, the rating action recognizes that FCBT is managed in a very conservative manner. The bank has implemented risk management standards that minimize concentration risk in its portfolio and, owing to its reliance on funding through a government sponsored entity (GSE), FCBT, as have the other Farm Credit Banks, adopted prudent contingent liquidity and funding plans.

The Stable Outlook reflects Fitch's view of FCBT's ability to manage through the current and anticipated stress resulting from weather related issues, such as the severe drought in its region, or weakness in any specific agricultural sector. Further, the Stable Outlook considers FCBT's ability to meet its mission of providing for the funding and liquidity needs of its agricultural district given a short-term disruption in its access to funding via the Federal Farm Credit Banks Funding Corporation, the funding arm of the Farm Credit System (FCS).

FCBT's ratings could be negatively affected should there be a protracted disruption in access to its primary source of funding, as would significant negative developments in the agricultural sector. The ratings could also be negatively impacted should the FCS lose its GSE status or if there is a change in Fitch's view of support for the system.

FCBT, as well as the other four Farm Credit Banks, have reliable access to the capital markets through a GSE channel. The FCS is currently rated ‘AAA/F1+’ by Fitch. This access is a key factor considered in the rating, as this funding is the primary source of liquidity for FCBT. Access to this funding has been dependable through the period of concern regarding the U.S. Debt Ceiling and the issues surrounding the U.S. Sovereign rating.

While the FCS and FCBT are not guaranteed by the U.S. government, Fitch believes that if the FCS were in need of support, it is extremely likely that it would be provided. However, such support may not extend to obligations of any single district bank, a factor considered in FCBT's rating.

Recognizing its mission to meet the funding and liquidity needs of its district, FCBT maintains a minimum 120 days of liquidity on a continuous basis assuming no capital markets access. As of June 30, 2011, FCBT had 228 days of liquidity coverage. Further, FCBT has established alternative funding sources in the event its traditional funding sources are not available.

Credit quality in FCBT's district has held up well despite weather related stress that has affected much of its region, as well as continued weakness in certain agricultural sectors such as timber, which has been impacted by the slow housing market. Additionally, a potential reduction in farm subsidies or other forms of farm related aid, which may affect certain agricultural sectors, are not expected to have a near-term impact on credit quality due to the increased worldwide demand for agricultural products. Most agricultural sectors have benefited from this demand.

FCBT's good asset quality is illustrated by a manageable level of non-performing assets (NPAs) and minimal net charge-offs (NCOs). FCBT's ratio of NPAs to loans and OREO is 1.6% and NCOs, which peaked at 0.30% in 2010, was 0.13% for the first half of 2011 (1H'11).

The majority of the bank's loan portfolio is comprised of loans to its affiliated associations (70%).This reduces direct credit risk to FCBT as the associations' reserves for loan losses and capital would need to be exhausted before FCBT experienced a loss. FCBT's participation portfolio, which gives the bank more direct exposure to the farmers and ranchers, provides an opportunity to enhance portfolio diversity, as well as profitability. However, it does add an element of increased direct risk to FCBT.

FCBT, with about $#36;14 billion in assets, is one of the five Farm Credit banks in the FCS. FCBT's district spans five states across parts of the Southwest and Southeast. Fitch has affirmed the following ratings with a Stable Outlook: Farm Credit Bank of Texas.

–Long-term IDR at ‘AA-’;
–Short-term IDR at ‘F1+’;
–Subordinated debt at ‘A+’;
–Preferred stock at ‘A’;
–Support at ‘1’;
–Support floor at ‘A-’.

Contact:
Primary Analyst
Ken Ritz
Senior Director
+1-212-908-0368
Fitch, Inc.
One State Street Plaza
New York, NY 10004

Secondary Analyst
Brandon Bajema
Associate Director
+1-312-606-2332

Committee Chairperson
Thomas Abruzzo
Managing Director
+1-212-908-0793

Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
brian.bertsch@fitchratings.com.

Additional information is available at ‘www.fitchratings.com’.

Applicable Criteria and Related Research:

–‘Global Financial Institutions Rating Criteria’ (Aug. 16, 2010);
–‘Short-Term Ratings Criteria for Corporate Finance’ (Nov. 2, 2010);
–‘Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms’ (April 11, 2011);
–‘Rating Linkages to the U.S. Sovereign Rating’ (July 18, 2011).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685
Short-Term Ratings Criteria for Corporate Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726
Rating Criteria for Banking Structures Backed by Mutual Support Mechanisms
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=591785
Rating Linkages to the U.S. Sovereign


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