Strong profitability and stable credit quality
ST. PAUL, Minn., November 9, 2020 – Today, St. Paul-based AgriBank announced financial results for the third quarter of 2020, with strong profitability, credit quality, and liquidity and capital.
- Profitability: Net income increased $126.8 million, or 28.0 percent, to $579.7 million for the nine months ended September 30, 2020, compared to $452.9 million for the same period of the prior year.
- Credit quality: Total loan portfolio credit quality remained strong, with 99.1 percent of loans classified as acceptable compared to 97.9 percent at December 31, 2019.
- Liquidity and capital: End-of-the-quarter liquidity was 168 days, well above the regulatory requirement. Capital also remained well above the regulatory minimums and company targets.
The spread of COVID-19 has created a global public-health crisis that has adversely impacted the worldwide economy, temporarily decreased liquidity in fixed income markets in March and April, significantly increased unemployment levels, and disrupted global supply and demand chains. Although production agriculture has fared better than expected during the third quarter of 2020 in part due to government ad-hoc support programs, uncertainties about the pace of economic recovery remain as COVID-19 cases continue to rise.
When the significance of the COVID-19 situation became apparent, AgriBank and District Associations implemented our respective Business Continuity Plans (BCP). 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. At their discretion, a very limited number of AgriBank employees were able to return to the office in October with permission from senior leaders and agreed-upon safety protocols. The timing of the ultimate transition back to the AgriBank offices for the remaining staff is dependent on established metrics monitored by the BCP team and will be done in a manner designed to minimize risk to employees and the operations of our business functions. 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. AgriBank is 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. AgriBank has not had any significant changes to our internal controls over financial reporting due to working remotely.
The overall impact of the COVID-19 pandemic on U.S. agriculture will depend on the severity and duration of the outbreak, the continued response by federal and local governments, and levels of commodity prices, among many other factors. To date, the global pandemic has not resulted in a material adverse financial impact to the AgriBank or District Combined Financial Statements. The extent to which the 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 Operations
Net interest income was $548.2 million for the nine months ended September 30, 2020, an increase of $51.7 million, or 10.4 percent, compared to the same period of the prior year. Net interest income increased due to higher total loan volume, including an increase in the retail loan portfolio, which yields higher spreads, compared to the prior year.
Non-interest income was $152.7 million for the nine months ended September 30, 2020, an increase of $85.5 million, or 127.3 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.
Third Quarter 2020 Results of Operations
Net interest income was $158.7 million for the quarter ended September 30, 2020, a decrease of $15.1 million, or 8.7 percent, compared to $173.8 million for the same period of the prior year. These decreases were a result of lower spreads on our wholesale loans during the third quarter when compared to the same period of the prior year.
Non-interest income was $40.1 million for the quarter ended September 30, 2020, an increase of $9.9 million, or 32.9 percent, compared to $30.2 million for the prior year. These changes were consistent with the factors described above affecting year-to-date activity.
Total loans were $107.1 billion at September 30, 2020, an increase of $8.8 billion, or 9.0 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. Retail loans increased during the nine months ended September 30, 2020, primarily driven by purchases of participation interests of approximately $2.3 billion in primarily real estate mortgage loans from certain District Associations as part of AgriBank's asset pool programs.
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 99.1 percent loans classified as acceptable as of September 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 $2.3 billion of loans from certain District Associations, largely 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 92.7 percent classified as acceptable at September 30, 2020, compared to 90.1 percent acceptable at December 31, 2019. While currently strong, negative economic trends could impact borrowers and may result in changes to credit quality in AgriBank's loan portfolio.
The U.S. agricultural condition outlook remains uncertain due to the COVID-19 pandemic; however, the outlook has improved dramatically from earlier in the year. The September 2, 2020 U.S. Department of Agriculture's Economic Research Service (USDA-ERS) Farm Income and Wealth Statistics forecast update calls for net farm income to increase in 2020 for the fourth consecutive year to $102.7 billion, up $19.0 billion, or 22.7 percent, compared to 2019. If realized, the 2020 forecast would mark the highest net farm income level since 2013 in nominal terms, and would surpass the 20-year average inflation-adjusted net farm income level by $12.5 billion, or 13.8 percent. Most of the increase in the 2020 net farm income forecast is expected to come from a substantial rise in direct government payments, which are forecast to increase $14.7 billion, or 65.7 percent, to $37.2 billion, an inflation-adjusted record high. Increases in the value of crop production are forecast to offset the decline in the value of animals and animal product production. Production expenses are forecast to decline $1.5 billion, or 0.7 percent, in 2020. A rebound of planted acreage is expected to support an increase in fertilizer expenses, while fuel, livestock and poultry purchases are forecast to be lower due to price pressure from the pandemic.
The U.S. farm balance sheet forecast indicates a fractional increase in sector equity in nominal terms for 2020. Aggregate farm sector equity for year-end 2020 is forecast at $2.7 trillion, a modest $18.5 billion increase, 0.7 percent, from 2019. Most of the increase in 2020 asset values is expected to come from higher valuations on farm real estate and buildings along with a modest increase in farm financial assets. Farm sector debt is forecast to increase by $15.2 billion, driven by increases in real estate debt. On a real-dollar basis (inflation-adjusted), farm sector equity is forecast to decline in 2020 for the third-consecutive year and fall for the fifth time in the past six years. However, with the 2020 farm sector debt-to-asset ratio forecast near 14.0 percent, it would still be well below the 22.2 percent 1985 peak, as land values remain steady.
USDA is projecting an increase of corn and soybean production in 2020 following the abnormally wet 2019 planting and growing seasons, that reduced production. The COVID-19 pandemic sent crop prices lower early in 2020; however, some recovery in the economy, crop production issues in China, increasing export sales, the smaller than expected 2020/2021 beginning stocks, and a lower South American production prospect due to La Niña conditions have supported a rise in U.S. corn and soybean prices in late summer and early fall. These supportive factors have significantly raised USDA crop price forecasts since August. The higher price expectation along with strong government direct payments in 2020 should support favorable returns for many crop operations.
The animal agriculture sector continues to face many challenges; however, animal and animal product prices have largely recovered as processing rates improved, and with customers' embrace of drive-thru, curbside and food delivery services for restaurants. Government COVID-19 mitigation payments and the food box purchase program have also eased the pandemic's impact on producers. USDA expects mixed, but generally steady to higher, animal and animal protein prices in 2021; however, rising feed costs and declining direct government payments to the sector could challenge margins for many producers.
In addition to elevated direct government payments, producers have been adjusting to the normalization of crop prices near the long-term price trends in recent years. 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. Those who have been most effectively able to realize cost and marketing efficiencies and preserve working capital are most likely to weather the shifting economic environment.
Capital Resources and Liquidity
Total capital remained very strong at $6.6 billion as of September 30, 2020, an increase of $418.0 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.
Cash and investments totaled $19.3 billion at September 30, 2020 and $16.1 billion at December 31, 2019. AgriBank's end-of-the-period liquidity position represented 168 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, 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.