Stable profitability and strong credit quality.
ST. PAUL, Minn., November 8, 2019 – Today St. Paul-based AgriBank announced financial results for the third quarter of 2019, with stable profitability, strong credit quality, and robust liquidity and capital.
- Stable profitability: Net income increased $18.6 million to $452.9 million for the nine months ended September 30, 2019, compared to $434.3 million for the same period of the prior year.
- Strong credit quality: Total loan portfolio credit quality remained strong, with 97.9 percent of loans classified as acceptable.
- Robust liquidity and capital: End-of-the-quarter liquidity was 149 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 $496.4 million for the nine months ended September 30, 2019, an increase of $52.7 million, or 11.9 percent, compared to $443.7 million for the same period of the prior year, primarily due to growth in loan volume and higher interest rates earned on loans and investment securities. This increase was substantially offset by higher interest rates paid on debt and growth in debt volume.
Non-interest income decreased to $67.2 million for the nine months ended September 30, 2019, compared to $86.2 million for the prior year. This decrease was primarily attributable to lower mineral income and mark-to-market losses on certain economic hedges. 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.
Third Quarter 2019 Results of Operations
Third quarter 2019 net income was $165.8 million, an increase of $22.5 million, or 15.7 percent compared to the same period of the prior year. This increase was primarily due to higher net interest income resulting from growth in loan volume and higher interest rates earned on loans and investment securities. This increase was substantially offset by higher interest rates paid on debt and growth in debt volume. Provision for loan losses and non-interest expense further offset the overall increase in net interest income.
Total loans were $95.7 billion at September 30, 2019, an increase of $3.0 billion or 3.3 percent compared to December 31, 2018. Within total loans, increased wholesale loans were driven by draws by District Associations, primarily to fund agribusiness and real estate mortgage volume.
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 97.9 percent loans classified as acceptable as of September 30, 2019, compared to 98.0 percent acceptable as of December 31, 2018. Loans classified as acceptable represent the highest-quality assets. The credit quality of AgriBank's retail loan portfolio (accounting for approximately 10 percent of the total loan portfolio) decreased slightly to 90.4 percent classified as acceptable at September 30, 2019, compared to 90.7 percent at December 31, 2018.
On August 30, 2019, the U.S. Department of Agriculture's Economic Research Service (USDA-ERS) revised its 2018 and 2019 net farm income forecasts significantly higher from the previous March 6, 2019 forecast. Net farm income for 2018 is estimated at $84.0 billion - up $6.3 billion, or 8.1 percent, from 2017, while 2019 is forecast to narrowly surpass the $88.0 billion level, a $4.0 billion, or 4.8 percent, increase from 2018. Both 2018 and 2019 cash expense levels were revised down roughly $19 billion from the March 6, 2019 USDA-ERS farm financial release, putting them near the $312 billion level for the third consecutive year. The overall year-over-year increase in net farm income is primarily driven by direct government payments (including the addition of the 2019 Market Facilitation Program (MFP)) and farm-related income, notably commodity insurance indemnities. These increases are projected to more than offset the $2.4 billion decline in cash receipts from crops and livestock, a downward adjustment to the value of inventory and a modest increase in expenses for 2019. Despite increased projected 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), U.S. farm sector working capital has declined in recent years, and further declines are projected to continue for the remainder of 2019, perpetuated by diminished crop and livestock values and growing short-term debt. USDA-ERS forecasts a 2019 U.S. farm sector working capital level of $56.9 billion, down $13.1 billion, or 18.7 percent, from 2018 and well below recent years; however, that is a notable improvement from the initial $38.0 billion March 6, 2019 forecast.
The solid U.S. economy does provide demand support for agricultural commodities; however, trade disputes and the associated impacts remain the primary risk factor for U.S. agricultural commodities. Pork and soybeans have been hit particularly hard by trade disputes, but another iteration of the MFP in 2019 has eased some of the pain caused. The historically wet 2019 spring has also presented challenges for crop production. Prevented plant acreage (land that could not be planted due to the effects of poor weather) reached a record high in 2019, and did so by a large margin. That impact will be partially mitigated by crop insurance as well as additional marginal payments on land under the MFP and the disaster aid package. The continual proliferation of African Swine Fever (ASF) in Asia, remains a key concern for U.S. agriculture. Chinese domestic pork prices have surged higher in recent months and U.S. pork exports to China have increased despite facing stiff import tariffs. However, U.S. pork shipments to China have fallen short of many participants expectations which has failed to support the high cash hog prices that the futures market was pricing in earlier in the year. Longer-term, ASF still provides tremendous upside price potential for U.S. pork as Chinese (and global) stocks tighten further.
Conversely, the Chinese ASF outbreak is bearish for global soybean demand which will spill over to other crops over time as production adjustments are made. Spot dairy margins have improved notably from the depressed levels in 2018 and early 2019. Retroactive Dairy Margin Coverage payments, MFP payments on milk, and MFP crop payments are also providing some relief for dairies; however, the dairy market remains very challenged. Milk futures generally look breakeven or better, and all animal agricultural sectors continue to benefit from the lower feed cost environment experienced over the past five years.
Producers who are able to realize cost and marketing efficiencies are most likely to weather the current low price environment. 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.
Capital Resources and Liquidity
Total capital remained very strong, increasing $220.9 million during 2019 to $6.1 billion, driven primarily by net income, which was substantially offset by patronage distributions declared, consistent with AgriBank's capital plan. AgriBank exceeded all regulatory capital minimum requirements, including additional regulatory buffers.
Cash and investments totaled $16.5 billion at September 30, 2019 and $16.2 billion at December 31, 2018. AgriBank's end-of-the-period liquidity position represented 149 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.