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
K A N S A S
Service Group (CWS). CWS is an investor-owned, New York
Stock Exchange-listed company providing “regulated and
non-regulated water service to approximately 2 million people
in more than 100 California, Washington, New Mexico, and
Hawaii communities.” Given its size and financial strength,
CWS certainly does not need to tap taxpayer-subsidized credit
provided by CoBank, which probably would argue that under
the Farm Credit Act it can lend to CWS because as a water
utility CWS has activities that are “functionally similar” to the
cooperatively owned water utilities that CoBank is authorized
to lend to. However, this loan to CWS, like the $1.5 billion of
CoBank loans to investor-owned telecom companies that Rep.
Mulvaney questions, clearly stretched congressional intent
with regard to the FCS’s lending authority. Questions that Sen.
Pat Roberts, chairman of the Senate Agriculture Committee,
raised at the confirmation hearings for Tonsager and Hall are an
additional indication that members of Congress are increasingly
concerned about FCS lending that goes beyond congressional
intent. The FCS, and CoBank in particular, should worry where
its lending overreach could lead.
FCS’s 2014 financial results
The FCS has finally published its 2014 financial statements,
almost two weeks later than usual. FCS’s after-tax profits in
2014 reached a record level – $4.72 billion – up1.8% over 2013
as average loans outstanding in 2014 rose 6.7% above 2013’s
average. Due to a 14 basis point decline in net interest spread,
to 2.50%, the FCS’s net interest income for 2014 was only
1.9% higher than in 2013; that modest increase carried through
to the FCS’s bottom line. The FCS attributed the decline in net
interest spread to “competitive pressures, greater average loan
volume in lower spread lines of business and a lesser amount
of debt being called;” i.e., debt that was refinanced at lower
interest rates. The FCS’s tax bill for 2014 was the same as
2013 – $221 million – which means its overall tax rate dropped
slightly, to 4.47% from 4.55% in 2013 and 5.12% in 2012.
CoBank, though, accounts for most of the FCS’s tax liability –
$162.9 million in 2014. For the rest of the FCS, its effective tax
rate has been declining, from 1.76% in 2012 to 1.61% in 2013
and to 1.50% in 2014.
The FCS remains strong financially, reflecting both the
continuing strength of the farm economy and the FCS’s
continuing ability to use its favorable tax and GSE status to
cream-skim the stronger agricultural and utility credit risks.
FCS capital remains at an elevated level – 16.2% of total assets
of $283 billion at the end of 2014 compared with 16.3% at the
previous year-end. Credit quality improved, with a decrease
of $303 million in nonperforming loans and a $66 million
decrease in other real estate owned. The FCS’s allowance
for loan losses at the end of 2014 equaled 71% of total
The FCS is not without its warts, though. A financial
restatement still has not been published for FCS Southwest, the
FCS association serving most of Arizona that is being forced
into a shotgun merger with Farm Credit West, as reported in
last month’s FCW. According to the FCS’s Annual Information
Statement for 2014, Southwest has had to add $47 million to its
allowance for loan losses and charge off $42 million of loans.
Whether Southwest was solvent at the end of 2014 will not be
known until its restated financial statements are published.
My Treasury FOIA request may
eventually bear fruit
FCW readers may remember that I filed a Freedom of
Information Act (FOIA) request with the Treasury Department
on May 8 of last year to obtain all documents related to the
creation of a $10 billion line-of-credit the Farm Credit System
Insurance Corporation (FCSIC) obtained from Treasury’s
Federal Financing Bank on September 24, 2013. That line
of credit expired on September 30, 2014; it has since been
renewed for another year. As I reported in the December 2014
FCW, I have persevered since last May in trying to obtain
these documents. As recently as March 11, I was advised by
a Treasury official that once she completed her review, “they
will be reviewed by the [Treasury] General Counsel . . . I am
going to try to get the documents out to you within the next
two weeks.” Of course, I was told the same thing months ago.
It will be interesting to see how informative these documents
are given that this line-of-credit apparently was created without
Congress’s knowledge or consent.
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