Pub. 7 2010-2013 Issue 3

September/October 2012 23 Extraordinary Service for Extraordinary Members. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2012 Bert Ely Special Factors Boosted FCS’ Second-Quarter Income T HE FARM CREDIT SYSTEM (FCS) earned record net income of $1.067 billion during the sec- ond quarter of 2012, with net income up $85 million, or 8.7 percent, from the second quarter of 2011. That increase occurred despite a modest 1.8 percent increase in average outstand- ing loans during the second quarter of 2012 over the same quarter last year and a slight—five basis point—increase in the FCS’ net interest spread. Two factors account for much of the FCS’ year-over-year increase in its net income—a $91 million, or 72 percent, decrease in its provision for loan losses and a $16million increase, or near dou- bling, of mineral income, principally from oil and gas wells. Absent those two items, FCS’ pre-tax income for the second quarter of 2012 would have declined $2 million from the second quarter of 2011 despite a $37 million, or 2.4 percent, increase in net interest income for the second quarter of 2012 over the same quarter in 2011. On a slightly positive note (for bankers) the FCS’ income-tax rate was 7.5 percent for the second quarter of 2012, up from 6.3 percent in the same quarter the year before. By comparison, ac- cording to a recent American Banker article, the income-tax rate paid by banks in recent periods has varied from 30 percent to 32 percent—four to five times the rate the FCS has been paying in recent years. While the overall income-tax per- centage for the FCS rose from the same quarter in 2011, CoBank continues to account for most of the FCS’ income- tax liability—68.5 percent of that liability during the second quarter of 2012. Consequently, the effective income-tax rate for the rest of the FCS during the quarter was just 3.2 percent. Only three associations had effective tax rates above 10 percent: Ag New Mexico (13.27 percent), Ag- Star (12.67 percent), and United FCS (11.84 percent). The three largest associations had much lower effec- tive tax rates: FCS of Mid-America (7.17 percent), FCS of America (2.31 percent), and Northwest FCS (4.18 percent). Although every one of the 80 FCS ACAs (agricultural credit as- sociations) reported a pre-tax profit during the second quarter of 2012, and therefore should have had some income-tax liability, four ACAs re- ported tax credits (probably from tax- loss carryforwards), 28 ACAs reported a tax liability of zero, and another 21 ACAs reported a tax liability between 0 and 1 percent of their pre-tax income. Clearly, some ACAs are more adept than other ACAs at minimizing their income-tax liabilities. Mineral income is interesting be- cause it is not spread evenly across the FCS. During the second quarter of 2012, almost 81 percent of that income was earned by just one in- stitution: AgriBank, the FCS bank funding FCS associations headquar- tered in the Midwest. Most of the re- maining mineral income was earned by associations in the western part of the country funded by CoBank, with two associations, Northwest FCS and American AgCredit, capturing 4.3 percent and 3.8 percent, respec- tively, of the FCS’ mineral income. FCS mineral income is derived from mineral rights FCS banks and as- sociations retain when they sell ag land they have foreclosed on, as oc- curred extensively during the 1980s and early 1990s. What is surprising, though, is that apart from small amounts of mineral income earned by two Texas associations, neither the Texas Farm Credit Bank nor any of the other associations it funds earned any mineral income despite all the oil and natural gas production in that part of the country. AgDirect Lending Continues to Grow As past issues of Farm Credit Watch (FCW) have reported, Omaha-  FCW — continued on page 24