FARM CREDIT EAST | 2017 ANNUAL REPORT
expenses for new software, digital and cyber security initiatives. Insurance fund premiums were $7.2 million in 2017, a decrease of $0.7 million from December 31, 2016. Insurance fund premium rates are set by the Farm Credit System Insurance Corporation and were 15 basis points of adjusted insured debt obligations during 2017. The rates were 17 basis points in 2016. Noninterest expenses also include occupancy and equipment expense, other operating expenses and other property owned expenses.
distributions are sent to eligible customers shortly after the end of the year. For the year ended December 31, 2017, the Association declared a $60.0 million qualified patronage dividend which will be distributed 100 percent in cash in 2018. For the years ended December 31, 2016 and 2015, the Association declared a $56.0 million and $53.0 million in qualified patronage dividends respectively which were distributed 100 percent in cash in February of the following year.
Provision for Income Taxes The provision for income taxes decreased $0.1 million to $1.3 million for the twelve months ending December 31, 2017. The decrease is a result of lower income attributable to our taxable entity non patronage business. The effective tax rate was 0.8 percent for the year ended December 31, 2017, as compared to 0.9 percent for 2016. The Association’s effective tax rate is significantly less than the applicable federal and state statutory income tax rates due to tax deductible patronage distributions and our tax exempt business activities. For the twelve months ending December 31, 2015 the provision for income taxes was $2.6 million.
Liquidity and Funding Sources The Association’s primary source of funding is CoBank. Funds are obtained through borrowing on a revolving line of credit governed by a General Financing Agreement. At December 31, 2017, the Association’s notes payable to CoBank totaled $5.4 billion which is a $0.2 billion increase from $5.2 billion at December 31, 2016. The Association’s note payable was $5.0 billion at December 31, 2015. The line of credit available to the Association is formuladriven based on Association loan volume and credit quality. Because of the funding relationship with CoBank, the Association does not maintain large balances in cash or other liquid investments. Substantially all of the Association’s assets are pledged as security to CoBank. The Association is in full compliance with its financing agreement with CoBank and has capacity under the agreement to borrow funds needed to meet anticipated loan demand.
The TCJA was enacted in late 2017 which among other things lowered the federal corporate tax rate from 35 percent to 21 percent beginning in 2018. In accordance with accounting principles generally accepted in the United States (GAAP), the change to the lower corporate tax rate led to a revaluation of our deferred tax liabilities and deferred tax assets in the period of enactment (2017). Management’s position is that none of the deferred tax benefits will be realized in future periods and accordingly a valuation allowance is provided against net deferred tax assets. Accordingly, no net tax benefit was recognized.
The Association minimizes its interest rate risk by funding loans with debt from CoBank that has similar pricing characteristics as the assets being funded. As a result, the Association is not subject to substantial interest rate risk. The Association’s loan portfolio consisted of the following breakdown by pricing type:
For additional information, see Note 9 “Income Taxes” to the consolidated financial statements. Patronage Distributions The Association has a patronage program that allows it to distribute its available net earnings to its stockholders. The patronage program consists of a qualified cash distribution and a non-qualified distribution. This program provides for the application of net earnings in the manner described in our Bylaws. When determining the amount and method of patronage to be distributed, the Board considers the setting aside of funds to increase retained earnings to meet capital adequacy standards established by Farm Credit regulations, to meet our internal capital adequacy standards to support competitive pricing at targeted earnings levels, and for reasonable reserves. Patronage is distributed in accordance with cooperative principles, as determined by the Board and in accordance with Association by-laws. The
December 31
2017
2016
Pricing Type: Variable rate loans Indexed loans (Prime, ARM, LIBOR) Fixed rate loans
51.6% 16.1% 32.3%
55.5% 17.0% 27.5%
2015 57.1% 16.0% 26.9%
The interest rates charged to the Association on debt, by and large, have the same pricing characteristics as the loans funded. For example, fixed rate loans are funded with fixed rate debt with the same term. The Association’s goal is to fund fixed and indexed rate loans with 100 percent matching debt to the extent possible. The Association’s equity is invested in variable rate loans. The yield on equity funded loans is the average variable portfolio rate. As rates rise or fall, earnings on equity funded loans go up and down. The Association also uses 10