Pub. 2 2013 Issue 5

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 16 Bert Ely’s farm credit watch ® Shedding Light on the Farm Credit System, America’s Least Known GSE ©2013 Bert Ely Learn which FCS associations are your direct competitors The lead article in last month’s FCW inadvertently omitted the link to the map of the territories of FCS associations. Go to http://www. fca.gov/info/directory.html and then click on Printer-Friendly Map of Institution Territories. When zooming in on your market area, color-coded cross-hatching and dots indicate that two associations serve the same area and therefore are competing against each other in that territory. The name of the association serving a particular area is shown next to a star, which marks the location of the city where the association is headquartered. Detailed information about each associ - ation can be obtained through links on an alphabetical listing of every FCS institution found on this webpage:  http://www.fca.gov/apps/instit. nsf/Active%20Institutions%20Page?OpenPage Tax rate for FCS institutions varied greatly in 2012 As FCW readers know so well, the FCS pays very little in corporate income tax due to the tax breaks it enjoys. Notably, FCS profits on real estate lending are exempt from federal and state income taxes while patronage dividends are tax-deductible. Key to the FCS’s low tax burden is the Agricultural Credit Association (ACA) corporate structure that all but three FCS associations have adopted. Each ACA has two subsidiaries – a tax-exempt Federal Land Credit Association (FLCA), which does the ACA’s real estate lending, and a Production Credit Association (PCA), which does non-real estate lending. PCA income is subject to federal income tax but generally not to state income taxes. This corporate structure gives ACAs an opportunity to shift income and expenses between the FLCA and the PCA so as to minimize the ACA’s total tax liability.   Consequently, the FCS as a whole enjoys a relatively low tax rate – 5.12% in 2012 compared with 6.39% in 2011 and 5.87% in 2010.  CoBank, the FCS’s exclu - sive lender to agricultural and rural utility cooperatives, pays tax on much of its earnings; consequently, it has a higher tax rate – 16.1% in 2012. Due to that higher rate, CoBank accounted for 73.7% of the FCS’s total tax liability in 2012 and a comparable portion of the FCS’s tax liability in other years. As a result, the effective tax rate on the pre-tax earnings of the rest of the FCS was just 1.75% in 2012, down from 2.21% in 2011. The other three FCS banks – Farm Credit Bank of Texas, AgFirst Farm Credit Bank, and AgriBank, FCB – are exempt from all taxes. Sixteen ACAs, with combined 2012 net income of $136 million, each reported a zero tax liability for 2012. At the other end of the tax spectrum, FCS of North Dakota reported a 2012 tax rate of 10.82%, the highest of any ACA, while eleven ACAs reported tax rates between 5% and 10%. The following table shows the variability in the 2012 tax rate for the ten most profitable ACAs. The variance among these effective tax rates partially reflects how aggressive an ACA is in minimizing its tax liability. Greenstone, for example, appears to have attributed over 90% of its 2012 profitabil - ity to tax-exempt real estate lending even though real estate loans accounted for only 61% of its total lending at the end of 2012. Green - stone also appears to have paid out as a patronage dividend more than 100% of the profits of its taxable PCA subsidiary. On the other hand, Farm Credit Mid-America pays no cash patronage and it appears to be more conservative than Greenstone in the profitability it attributes to its real-estate lending activities. Over the 2010-12 period Greenstone held its tax liability as close to zero as possible – for the three-year period Greenstone reported a tax credit of $108,000 on $336.1 million of pre-tax income. Over the same three years, Farm Credit Mid-America reported an average tax rate of 5.87%. FCS association Headquarters city 2012 pre- tax income (000) Income tax provision (000) 2012 tax rate FCS of America Omaha, NE $486,906 $4,820 0.99% Farm Credit Mid-America Louisville, KY 309,296 20,716 6.70% Northwest FCS Spokane, WA 196,698 9,443 4.80% Farm Credit West Roseville, CA 151,606 134 0.09% Capital Farm Credit Bryan, TX 139,739 72 0.05% Greenstone FCS East Lansing, MI 123,586 (2,571) (2.08%) American AgCredit Santa Rosa, CA 110,587 3,329 3.01% Farm Credit East Enfield, CT 110,177 639 .58% AgStar Financial Services Mankato, MN 104,010 (3,371) (3.24%) 1st Farm Credit Services Normal, IL 96,044 1,769 1.84%