Pub. 7 2018 Issue 9

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 18 BERT ELY’S FARM CREDITWATCH® F CS TAX LIABILITY ALMOST ZERO IN THE third quarter of 2018 The FCS, apart from CoBank, has reached the point where it essentially is paying no income tax. For the third quarter of 2018, the FCS’s total tax liability was $18 million on pre- tax income of $1.381 billion. However, most of that tax liability was attributable to CoBank — $16.5 million on pre- tax income of $308 million, for an effective tax rate of 5.4 percent. That means the rest of the FCS had a tax liability for the third quarter of 2018 of just $1 million on $1.073 billion of pre-tax earnings, for an effective tax rate of just .09 percent! Some FCS associations reported a negative income- tax liability, which raises this question – are they getting tax refunds? The FCS does not discuss that possibility. Also contributing to the FCS’s increased earnings this year — after-tax income for first nine months of 2018 was up 8.0 percent from the same period in 2017 — was a continuing decline in the FCS’s provision for loan losses despite declining farm income. For the first nine months of 2018, the FCS reduced its loan-loss provision by 22 percent from the same period in 2017 despite a 19 percent increase in non-performing loans during the first nine months of 2018. The Farm Credit Administration (FCA), the FCS’s regulator, might argue that FCS institutions are adequately reserved at this time for future loan losses but a declining loan-loss provision in the face of an increase in non-performing loans suggests that the loss provision should be going up, not down. As I reported in the August FCW, it appears that some large FCS associations have not reserved adequately for future loan losses, at least relative to other, more conservative associations. That trend appears to have continued into the third quarter of 2018. The FCA should be very concerned about that trend. FCS Insurance Corporation renews its Treasury line of credit As I have written about in prior FCWs, in Sept. 2013 the Farm Credit System Insurance Corporation (FCSIC) obtained a $10 billion line-of-credit from the Federal Financing Bank, an arm of the U.S. Treasury. FCSIC guarantees the timely payment of principal and interest on the FCS’s outstanding Systemwide Debt Securities, which totaled $268.5 billion at Sept. 30 of this year. This line-of-credit, which Congress has never authorized and for which the FCSIC pays not a penny, was recently renewed for another twelve months, to Sept. 30, 2019. Although this line-of-credit has never been drawn upon, it provides additional assurance to investors in FCS debt that the FCS will have sufficient liquidity to pay off maturing debt, thereby helping to maintain a tight spread between FCS debt and the Treasury yield curve. That spread widened out in the aftermath of the 2008 financial crisis, which lessened the FCS’s competitiveness relative to bank financing for farmers. YBS regulations to be reviewed next year According to a letter from Dallas Tonsager, FCA chairman and CEO, published in the FCA’s just-issued 2017 Annual Report, “in early 2019, [the FCA plans] to review the agency’s YBS [young, beginning, and small farmer] regulation, which was last updated 20 years ago. Through the publication of an advance notice of proposed rulemaking [ANPR], we plan to explore ways to improve services to YBS farmers and ranchers and to update [FCS] reporting requirements.” This review is long overdue, but whether it will lead to a meaningful reform of the FCS’s reporting of its YBS statistics is questionable. As I have pointed out on numerous occasions, the FCS double-and triple-counts its loans to YBS farmers. Worse, it does not aggregate YBS loans by farmer to show the total amount of credit provided by the FCS to a YBS farmer. Additionally, many loans classified as YBS loans in fact are not going to genuine farmers; instead, they are loans to folks buying rural property or purchasing farming- related equipment for a second home or a hobby farm not intended to be a genuine farming operation. It will be interesting to see if the ANPR even touches on the many obvious shortcomings in the current reporting of the FCS’s purported YBS lending activities.