Strong profitability and stable credit quality
ST. PAUL, Minn., August 7, 2020 – Today, St. Paul-based AgriBank announced financial results for the second quarter of 2020, with strong profitability, credit quality, and liquidity and capital.
- Profitability: Net income increased $138.5 million, or 48.2 percent, to $425.6 million for the six months ended June 30, 2020, compared to $287.1 million for the same period of the prior year.
- Credit quality: Total loan portfolio credit quality remained strong, with 99.2 percent of loans classified as acceptable compared to 97.9 percent at December 31, 2019.
- Liquidity and capital: End-of-the-quarter liquidity was 180 days, well above the regulatory requirement. Capital also remained well above the regulatory minimums and company targets.
COVID-19 PandemicThe spread of COVID-19 has created a global public-health crisis that has stifled the worldwide economy, temporarily decreased liquidity in fixed income and equity markets in March and April, significantly increased unemployment levels, and disrupted global supply and demand chains. Governments, businesses and individuals have taken unprecedented actions to slow or contain the spread of COVID-19, including quarantines, "stay-at-home" orders, school closings, and travel bans that substantially restricted daily activities and caused many businesses to curtail or cease operations beginning in March 2020. In the U.S., states and municipalities that implemented closings have started reopening to various degrees. The impact of COVID-19 on companies is evolving rapidly, and its future effects remain uncertain. When the significance of the COVID-19 situation became apparent, AgriBank and District Associations implemented our respective Business Continuity Plans. In March and April, operations transitioned to alternative work environments. Beginning in June, operations at certain Associations began transitioning back to in-office on a location-by-location basis in accordance with each entity's Business Continuity Plan. To date, the transition to alternative work environments has occurred without significant issues. Collectively, our business continuity responses have allowed us to continue to serve our mission. The remote work environment has maintained the health of our employees and allowed uninterrupted business functions. We are supporting District Associations as they continue to work with farmer-borrowers to offer appropriate solutions to meet their liquidity needs, which may include loan modifications for those borrowers impacted by the COVID-19 pandemic. We have not had any significant changes to our internal controls over financial reporting due to working remotely. Future transition back to the AgriBank offices will be done in a manner designed to minimize risk to employees and the operations of our business functions. This outbreak puts the economy and agriculture sector in uncharted territory. The overall impact of the COVID-19 pandemic on U.S. agriculture will depend on the severity and duration of the outbreak and the continued response by federal and local governments. To date, the COVID-19 pandemic has not resulted in a material adverse financial impact to the AgriBank or District Combined Financial Statements. The extent to which the COVID-19 pandemic ultimately impacts our business, results of operations and financial condition, including regulatory capital and liquidity ratios and other regulatory requirements, will depend on future developments that are highly uncertain and cannot be predicted. Overall, agriculture will adjust, providing an "essential service" to the U.S. and global consumer.
Year-to-date 2020 Results of OperationsNet interest income was $389.4 million for the six months ended June 30, 2020, an increase of $66.8 million, or 20.7 percent, compared to same period of the prior year. Net interest income increased due to changes in interest rates as well as increased loan volume compared to the prior year. Non-interest income was $112.6 million for the six months ended June 30, 2020, an increase of $75.6 million, or 204.2 percent, compared to the same period of the prior year. This significant increase was primarily due to increased fees resulting from refinancing activity at AgriBank District Associations.
Second Quarter 2020 Results of OperationsNet interest income was $198.3 million for the quarter ended June 30, 2020, an increase of $34.7 million, or 21.2 percent, compared to $163.6 million for the same period of the prior year. These changes were consistent with the factors described above affecting year-to-date activity. Non-interest income was $43.6 million for the quarter ended June 30, 2020, an increase of $20.7 million, or 90.3 percent, compared to $22.9 million for the prior year. These changes were consistent with the factors described above affecting year-to-date activity.
Loan PortfolioTotal loans were $104.5 billion at June 30, 2020, an increase of $6.2 billion, or 6.3 percent, compared to December 31, 2019. This increase was primarily due to draws by District Associations (wholesale loans), primarily to fund real estate mortgage lending activity and, to a lesser extent, agribusiness and production and intermediate-term loan volume in capital markets portfolios. These increases in wholesale loans were partially offset by seasonal repayments on operating lines in the production and intermediate-term sector at District Associations, although overall production and intermediate-term loans increased. Retail loans increased during the the six months ended June 30, 2020, primarily driven by purchases of participation interests of approximately $2.1 billion in primarily real estate mortgage loans from certain District Associations as part of AgriBank's asset pool programs. Production and intermediate-term loan growth outpaced seasonal repayment activity and contributed further to overall retail portfolio growth. 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 99.2 percent loans classified as acceptable as of June 30, 2020, compared to 97.9 percent acceptable as of December 31, 2019. Loans classified as acceptable represent the highest-quality assets. The improvement in acceptable percentage is primarily the result of the purchase of approximately $2.1 billion of loans from certain District Associations, primarily categorized in the real estate sector. The credit quality of AgriBank's retail loan portfolio (accounting for approximately 10 percent of the total loan portfolio) increased to 92.9 percent classified as acceptable at June 30, 2020, compared to 90.1 percent acceptable at December 31, 2019. While currently strong, negative economic trends will impact borrowers and may result in changes to credit quality in AgriBank's loan portfolio.
Agricultural ConditionsThe U.S. agricultural condition outlook remains highly uncertain due to the COVID-19 pandemic, including recent escalations in cases throughout the U.S., and due to trade tensions between the U.S. and China. It appears unlikely that China will reach the reported pledged phase one U.S. agriculture purchase commitments for 2020, and it is unclear what fallout would result from China's failure to meet those commitments given the pandemic. Due to dramatic changes in the economic environment resulting from the global spread of COVID-19, the University of Missouri's Food and Agricultural Policy Research Institute (FAPRI) released an updated forecast to its March 2020 baseline outlook on June 9, 2020. The updated forecast showed downward revisions to farm cash receipts and expenses, while expected direct government payments were revised up from the initial FAPRI 2020 forecast to include $16 billion provided in the Coronavirus Food Assistance Program. The net result of the updated forecast revised down the FAPRI U.S net farm income forecast by $8.4 billion to $90.6 billion compared to the March 2020 FAPRI baseline of $98.1 billion. If realized, the June FAPRI net farm income forecast would mark a $4.6 billion decline from 2019 in inflation adjusted terms. The U.S. Department of Agriculture's Economic Research Service has not updated forecasts since February 2020, prior to the onset of the COVID-19 pandemic. Beef and pork processing plants were impacted particularly hard as worker physical distancing limitations and housing concentration fostered elevated infection rates at many plants, forcing some plants to close temporarily while many reduced throughput. The decline in processing drove wholesale meat prices to record highs, while fed animal prices decreased as the supply of market-ready animals increased. As of early July, cattle and hog processing rates have recovered to near last year's levels. The recovering processing rates have pressured wholesale meat prices lower, while supporting modest increases in livestock prices from early 2020 lows. However, livestock prices remain lower than pre-pandemic levels as the increase in market-ready animals works through the supply chain. Changing consumer patterns due to infection concerns and sheltering orders, paired with supply chain issues due to logistics and processing plant infection outbreaks, caused agricultural commodity prices to fall in March and April for many markets. Most markets have recovered from the lows as supply chains adjust, infections within processing plants have stabilized, and as consumers have become more comfortable with curbside pickup orders and dining out in some areas. While producer prices have recovered from the early 2020 COVID-19 pandemic impacted lows, most prices remain below the pre-pandemic level. In recent years, producers have been adjusting to the normalization of crop prices near the long-term price trends. Optimal input usage, adoption of cost-saving technologies, and effective utilization of hedging and other price risk management strategies are all critical in yielding positive net income for producers. In addition to those measures, Market Facilitation Program payments helped to mitigate the low prices in 2018 and 2019 due to trade conflicts. In 2020, some producers will receive relief via the Coronavirus Food Assistance Program (CFAP) and via the Paycheck Protection Program (PPP), while increased unemployment benefits may offer support for some producers who are dependent on off-farm income. Those who have been most effectively able to realize cost and marketing efficiencies are most likely to weather the current economic environment, but many may still require flexibility from lenders through payment deferrals and other measures to preserve working capital.
Capital Resources and LiquidityTotal capital remained very strong at $6.5 billion as of June 30, 2020, an increase of $356.6 million compared to December 31, 2019. This increase was driven primarily by net income and net stock issuances reduced by cash patronage distributions declared, consistent with AgriBank's capital plan. AgriBank exceeded all regulatory capital minimum requirements, including additional regulatory buffers.In March, AgriBank enacted its Contingency Funding Plan in response to unstable markets. As a result, AgriBank intentionally increased investments and cash holdings, resulting in higher days of liquidity through the end of the second quarter. Cash and investments totaled $19.0 billion at June 30, 2020 and $16.1 billion at December 31, 2019. AgriBank's end-of-the-period liquidity position represented 180 days coverage of maturing debt obligations, which supports operational demands, and was well above the 90-day minimum established by AgriBank's regulator.
About AgriBankAgriBank 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.
Forward-Looking StatementsAny 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, which is available no later than 75 days following the end of the year. AgriBank undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.