Stable profitability and strong credit quality.
ST. PAUL, Minn., August 9, 2019 – Today St. Paul-based AgriBank announced financial results for the second quarter of 2019, with stable profitability, strong credit quality, and robust liquidity and capital.
- Stable profitability: Net income was $287.1 million for the six months ended June 30, 2019, a slight decrease compared to $291.0 million for the same period of the prior year.
- Strong credit quality: Total loan portfolio credit quality remained strong, with 98.0 percent of loans classified as acceptable.
- Robust liquidity and capital: End-of-the-quarter liquidity was 147 days, well above the regulatory requirement. Capital also remained well above the regulatory minimum and company targets.
Year-to-date 2019 Results of Operations
Net interest income was $322.6 million for the six months ended June 30, 2019, an increase of $24.2 million, or 8.1 percent, compared to same period of the prior year. This increase was primarily due to both increased loan volume and increased interest rates earned on loans and investments. This increase was substantially offset by increased interest expense due to both higher interest expense paid on Systemwide debt and increased volume of Systemwide debt.
Non-interest income was $37.0 million for the six months ended June 30, 2019, a decrease of $18.9 million, or 33.7 percent, compared to the same period of the prior year. This decrease was primarily attributable to reversal of previously recorded mark-to-market gains on certain economic hedges as well as decreased mineral income. A decrease in the distribution from the Farm Credit System Insurance Corporation (FCSIC) in March 2019, compared to the distribution received in 2018, also contributed to the decrease in non-interest income compared to the prior year. The FCSIC can distribute funds when insurance funding exceeds the required secured base amount of 2 percent of insured debt.
Second Quarter 2019 Results of Operations
Second quarter 2019 net income was $149.8 million, an increase of $4.8 million, or 3.3 percent, compared to the same period of the prior year. This increase was primarily driven by increased net interest income compared to the prior year, primarily attributable to increased loan volume.
Total loans were $94.2 billion at June 30, 2019, an increase of $1.5 billion, or 1.6 percent compared to December 31, 2018. Within total loans, increased wholesale loans were driven by increased draws by District Associations, primarily to fund agribusiness volume and partially offset by paydowns on wholesale loans reflecting seasonal repayments on operating lines in the production and intermediate-term sector at District Associations.
AgriBank's strong credit quality reflects the overall financial strength of District Associations and their underlying portfolios of retail loans. AgriBank's portfolio was composed of 98.0 percent loans classified as acceptable as of June 30, 2019, unchanged compared to December 31, 2018. Loans classified as acceptable represent the highest-quality assets. The credit quality of AgriBank's retail loan portfolio (accounting for approximately 9 percent of the total loan portfolio) increased slightly to 91.0 percent classified as acceptable at June 30, 2019, compared to 90.7 percent at December 31, 2018.
The U.S. Department of Agriculture's Economic Research Service (USDA-ERS) has initially forecasted 2019 net farm income to increase $6.3 billion, or 10.0 percent, to $69.4 billion from the latest 2018 estimate of $63.1 billion. This increase is primarily driven by cash receipts, which more than offset decreased direct government payments and increased expenses. Although a notable improvement, this forecasted 2019 net farm income level measures $23.7 billion or 25.5 percent below the 10-year average when adjusting the value of the U.S. dollar for inflation over this time period.
Following this initial USDA-ERS forecast are some noteworthy events including: the proliferation of African Swine Fever (ASF) in China and Southeast Asia, another round of trade aid via the USDA, and the historically wet spring which has caused uncertainty around acreage planted and yield potential. These events could drive significant revisions to the U.S. farm sector financial outlook in updated forecasts.
Net cash farm income (net cash farm income excludes accrual based items like depreciation expense and inventory changes, which are included in net farm income calculations) is projected to increase by $4.3 billion in 2019 compared to 2018. This increase is based on projected higher cash crop, animal and animal products cash receipts, partially offset with only modestly higher projected cash expenses. Negatively impacting the net cash farm income projection is the expected decline in direct government payments. However, a 2019 Market Facilitation Program offers the potential for upside to cash farm income. Despite increased projected net cash farm income, U.S. farm sector working capital has declined in recent years, and further declines are projected in 2019, perpetuated by diminished levels of cash and other short-term assets, sustained low commodity prices and growing short-term debt.
While the farm sector's declining working capital remains a cause for concern in 2019, the solid U.S. economy does provide demand support for agricultural commodities. The primary area of risk will remain the export component of the demand for U.S. agricultural commodities, with a strong dollar and ongoing uncertainty surrounding the future of U.S. trade policy. The ASF outbreak has added a layer of complexity for both soybeans and hogs. The significant increase in hog futures early in the year provided an excellent opportunity for many pork producers to lock in profitable margins but those opportunities have nearly completely dissipated due to more recent futures price levels. Conversely, the ASF outbreak is bearish for soybeans as the substantial decline in Chinese hog numbers will reduce China's need for soybean imports overall. The revised Dairy Margin Protection Program in the Farm Bill and the new Dairy Revenue Protection Program may provide limited support for dairy farmers; however, the dairy market remains very challenged.
Producers who are able to realize cost of production efficiencies and market their farm products effectively are most likely to adapt to the current price environment. Optimal input usage, adoption of cost-saving technologies, negotiating adjustments to various business arrangements such as rental cost of agricultural real estate, and effective utilization of hedging and other price risk management strategies are all critical in yielding positive net income for producers.
Capital Resources and Liquidity
Total capital remained very strong, increasing $151.7 million during the first half of 2019 to $6.0 billion, driven primarily by net income, which was substantially offset by patronage accrued. AgriBank exceeded all regulatory capital minimum requirements, including additional regulatory buffers.
Cash and investments totaled $16.5 billion at June 30, 2019 and $16.2 billion at December 31, 2018. AgriBank's end-of-the-period liquidity position represented 147 days coverage of maturing debt obligations, which supports operational demands, and was well above the 90-day minimum established by AgriBank's regulator.
AgriBank is part of the customer-owned, nationwide Farm Credit System. Under Farm Credit's cooperative structure, AgriBank is primarily owned by 14 local Farm Credit Associations, which provide financial products and services to rural communities and agriculture. AgriBank obtains funds and provides funding and financial solutions to those Associations. The AgriBank District covers a 15-state area stretching from Wyoming to Ohio and Minnesota to Arkansas.
For more information, please visit www.AgriBank.com.
Any forward-looking statements in this press release are based on current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from expectations due to a number of risks and uncertainties. More information about these risks and uncertainties is contained in AgriBank's annual report. AgriBank undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.