Strong profitability and stable credit quality
ST. PAUL, Minn., March 1, 2021 – Today, St. Paul-based AgriBank announced financial results for the fourth quarter and full year of 2020, with strong profitability, credit quality, and liquidity and capital.
- Profitability: Net income increased $81.6 million, or 13.0 percent, to $709.2 million for the year ended December 31, 2020, compared to $627.6 million for the prior year.
- Credit quality: Total loan portfolio credit quality was strong, with 99.3 percent of loans classified as acceptable compared to 97.9 percent at December 31, 2019.
- Liquidity and capital: End-of-the-quarter liquidity was 167 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 second half of 2020, in part due to government ad-hoc support programs, uncertainties about the pace of economic recovery remain as the impact and duration of the pandemic is unknown.
As the significance of the COVID-19 pandemic became apparent, AgriBank and District Associations implemented their respective Business Continuity Plans (BCPs). 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 BCP. However, due to the rise of COVID-19 cases in the later part of 2020, as well as state and local requirements, some Association locations reverted back to remote work environments and continue to operate in that capacity. Based on business needs and employee discretion, a very limited number of AgriBank employees returned to the office in October with permission from senior leaders and following agreed-upon safety protocols. The timing of the transition back to the AgriBank office for the remaining staff will depend on, among numerous factors, established metrics monitored and assessed by the BCP team and will occur in a way that minimizes risk to employees and to AgriBank's business operations. To date, the transition to alternative work environments has occurred without significant issues. Collectively, AgriBank's business continuity practices have allowed them to continue to serve their mission. The remote work environment was done without interruption to business functions. AgriBank is supporting District Associations as they continue to work with borrowers to offer appropriate solutions to meet their liquidity needs, which may include loan modifications for those borrowers impacted by the pandemic. AgriBank had not had any significant changes to their internal controls over financial reporting due to working remotely or related issues.
The overall impact of the pandemic on U.S. agriculture will depend on the severity and duration of the outbreak, the continued response by federal, state 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 impact the pandemic ultimately has on AgriBank's business, results of operations and financial condition, including regulatory requirements, will depend on future developments that are highly uncertain and unpredictable. Overall, agriculture will adjust, continuing to provide an essential service to the U.S. and global consumer.
Year-to-date 2020 Results of Operations
Net interest income was $714.4 million for the year ended December 31, 2020, an increase of $32.8 million, or 4.8 percent, compared to the same period of the prior year. Net interest income increased primarily due to higher loan volume and a variety of funding actions, including substantial bond call activity during 2020.
Non-interest income was $190.1 million for the year ended December 31, 2020, an increase of $92.9 million, or 95.6 percent, compared to the same period of the prior year. District borrowers were able to significantly lower their borrowing costs in the current rate environment, resulting in substantial AgriBank fee income from loan conversion activity, enabling AgriBank to lower the interest rate to Associations the second half of the year and pay high levels of patronage to Associations. Offsetting the increase in non-interest income was a non-recurring loss contingency recorded during the fourth quarter and debt extinguishment costs classified within other non-interest expense.
Fourth Quarter 2020 Results of Operations
Net interest income was $166.2 million for the quarter ended December 31, 2020, a decrease of $18.9 million, or 10.2 percent, compared to $185.1 million for the same period of the prior year. These decreases were a result of lower spreads on AgriBank's wholesale loans during the fourth quarter when compared to the same period of the prior year.
Non-interest income was $37.3 million for the quarter ended December 31, 2020, an increase of $7.7 million, or 26.2 percent, compared to $29.6 million for the prior year. These changes were consistent with the factors described above affecting year-to-date activity.
Total loans were $109.8 billion at December 31, 2020, an increase of $11.5 billion, or 11.7 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 loan volume. Retail loans increased during the year ended December 31, 2020, primarily driven by purchases of participation interests in primarily real estate mortgage loans.
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 99.3 percent loans classified as acceptable as of December 31, 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 was primarily the result of the purchase of loan participations from certain District Associations, largely categorized in the real estate sector, as well as strong forecasted net farm income and improvement in farm sector working capital in 2020. The credit quality of AgriBank's retail loan portfolio (accounting for approximately 10 percent of the total loan portfolio) increased to 94.0 percent classified as acceptable at December 31, 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. Department of Agriculture's Economic Research Service (USDA-ERS) released its initial forecast of the U.S. aggregate farm income and financial conditions for 2021 on February 5. The release also contained the revised estimates for 2020. Net farm income for 2021 is forecast to decline for the first time in five years to $111.4 billion, down $9.8 billion, or 8.1 percent, from the latest 2020 estimate of $121.1 billion. If realized, the 2021 forecast would still mark the second-highest net farm income level in past seven years in nominal terms, and would surpass the 20-year average-inflation-adjusted net farm income level of $94.6 billion by $16.8 billion, or 17.8 percent.
The outlook for agriculture has improved remarkably since the second quarter of 2020. However, COVID-19 infection rates (including potential outbreaks in animal processing plants and new more virulent strains) along with weather, trade, government policy and global agricultural production levels may keep agriculture market volatility elevated for the next 12 months. Adoption of cost-saving technologies, marketing methods and risk management strategies will continue to cause a wide range of results among the respective producers.
Capital Resources and Liquidity
Total capital remained very strong at $6.6 billion as of December 31, 2020, an increase of $397.1 million compared to December 31, 2019. This increase was driven primarily by net income and net stock issuances, which was substantially offset 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 $19.8 billion at December 31, 2020 and $16.1 billion at December 31, 2019. AgriBank's end-of-the-period liquidity position represented 167 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.