Pub. 2 2013 Issue 3

20 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s T he FCS reported record after-tax earnings for 2012 of $4.12 billion, up 4.5% from 2011. Net interest income grew slightly less – 3.5% – in 2012 even though the FCS’s net interest spread increased three basis points in 2012, to 2.71%. However, that higher spread was offset by a continuing decline in the interest income the FCS earns on its substan- tial investment portfolio (17.3% of total assets at the end of 2012). The FCS stated that the increased spread “was primarily attributable to the [FCS] Banks’ ability to refinance [their] debt at favorable interest rates in the current low interest rate environment.” However, when rates eventually turn up, the refinancing kick to earnings will quickly disappear. A major driver of the FCS’s higher earnings in recent years has been a substantial reduction in its provision for loan losses. The reduced loss provision accounted for 56% of the increase in FCS’s pre-tax income from 2010 to 2012 and 47% of its pre- tax-income increase from 2009 to 2012. To be fair, the FCS has strengthened its allowance for loan losses in recent years – that allowance rose from 36% of total nonperforming assets at the end of 2009 to 46% at the end of 2012. FCS’s effective tax rate dropped to its lowest level in four years – just 5.12%. As has been the case in other years, CoBank, the FCS’s exclusive lender to agricultural and rural utility co-ops, accounted for the bulk of the FCS’s 2012 tax li- ability – 74% – for an effective CoBank tax rate of 16.1%. The rest of the FCS had an effective tax rate in 2012 of a miniscule 1.7%. Changes in the Mix and Size of FCS Loans Although average FCS loans outstanding grew 4.3% in 2012, compared to a growth rate of 4.8% for 2011, the FCS experienced strong loan growth during 2012, presaging a much higher rate of growth in average loans outstanding for 2013. From year-end 2011 to year-end 2012, total loans outstanding grew $17.24 billion, or 9.87%. Over the prior three-year period, 2009 to 2011, total loans outstanding grew $13.24 billion, or 8.24%, for a compound annual growth rate of 2.66%. Real estate loans, which account for 46.0% of the FCS’s loan book, grew $7.61 billion during 2012. Energy and water/waste water utility loans rose $2.76 billion during the year; these loans accounted for 7.6% of the FCS’s outstanding loans at the end of 2012. These two loan categories accounted for 60% of the FCS’s total loan growth during 2012. FCS’s rapid growth in real estate lending has been driven in part by a drop in the av- erage interest rate on these loans, from 5.63% in 2010 to 4.76% in 2012 – a decline of 87 basis points. On the other hand, the average rate on energy and water/waste water loans dropped only 10 basis points from 2010 to 2012. While production and intermediate-term loans are FCS’s second-largest loan category (22.8% of outstanding loans at the end of 2012), they have not grown as rapidly in recent years, perhaps because the average rate on these loans declined just 35 basis points in recent years, from  4.46% in 2010 to 4.11% in 2012. Large loans (individual loans over $25 million) accounted for 40% of the FCS’s 2012 loan growth.  Balances on those loans rose $6.9 billion, to $28.4 billion, or 14.8% of total loans outstanding at the end of 2012. The number of these loans grew from 271 at the end of 2011 to 358 a year later. These borrowers – hardly typical family farmers – certainly do not need the tax and interest-rate subsidies Congress has bestowed on the FCS. The FCS’s ten largest borrowers accounted for $4.16 billion, or 2.17% of outstanding loans at the end of 2012. A year earlier, the FCS’s ten largest borrowers accounted for $3.43 billion, or 1.96% of outstanding FCS loans. Bert Ely’s farm credit watch ® Shedding Light on the Farm Credit System, America’s Least Known GSE ©2013 Bert Ely FCS Reports Record Earnings for 2012