Pub. 11 2016-2017 Issue 3

FCS Effective Tax Rate Dropped Lower The FCS’ tax bill dropped even as it continued to grow during the first half of 2016, with its total assets reaching $315 billion, 3.9 percent higher than at Dec. 31, 2015. Loans outstanding grew almost as much over that period, rising 3.4 percent. Despite a 5.9 percent increase in net interest income, for the first half of 2016 compared to the first half of 2015, pre-tax profits rose at a much lower pace—just 1.67 percent. The slower growth in pre-tax profits was due in part to a 4.1 percent increase in operating expenses and a tripling of the FCS’ loan-loss provision, from $50 million to $160 million, reflecting “industry-specific reserves due to continued low grain commodity prices, increased loan volume, and modest deterioration of credit quality in certain sectors of the loan portfolio.” Despite the FCS’ sharp increase in its loan-loss pro- vision, loan quality remains quite high, reflecting the ability of the FCS to cream-skim stronger ag credits. Consequently, the FCS is well-reserved relative to its total non-performing assets. Even though the FCS’ pre-tax profits increased $40million in the first half of 2016 over the first half of 2015, rising to $2.435 billion from $2.395 billion, its provision for income taxes declined $24 million, to $98million from$122 million, as its effective tax rate dropped to 4.0 percent from5.1 percent. Even that low tax rate overstates the amount of taxes paid by the core of the FCS—the FCS associations that banks compete against—for most of the FCS’ tax bill is paid by CoBank; in turn, the taxes CoBank pays are attributable to business seg- ments not directly involved in production agriculture, e.g., loans to agribusinesses and rural utilities. For the first half of 2016, CoBank accounted for $81.4 million of the FCS’ tax provision (for an effective tax rate of 14.3 percent), while the rest of the FCS accounted for just $17 million of the FCS’ tax provision, for an effective tax rate of just .9 percent. The same story was true for the first half of 2015. CoBank accounted for $93.8 million of the FCS’ tax provision, for an effective tax rate of 16.8 percent. The rest of the FCS recorded a tax provision of just $28 million, for an effective tax rate of 1.5 percent. As a practical matter, FCS associations essentially pay no income taxes even though the profits they earn on their non-real-estate lending are subject to federal income tax. FCA Approves CoBank, AgStar Health Care Investment On June 24, the FCA approved requests fromCoBank, the largest of the four FCS banks, and AgStar Financial Services to each invest up to $17.6 million in bonds issued by a rural medical center located somewhere in California. According  Bert Ely — continued on page 20