Previous Page  23 / 32 Next Page
Information
Show Menu
Previous Page 23 / 32 Next Page
Page Background

April 2015

23

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

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

nonperforming loans.

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.

866.440.6515

www.boscinc.com/assetliability

Where’s the risk in your Risk Management process?

Your bank’s interest rate risk model is key to navigating a

changing interest rate environment. But how good is the

information you use to make decisions?

Let BOSC, Inc. conduct a thorough analysis of your internal

interest rate risk management process. We’ll not only

review compliance with federal regulations, we’ll also

make sure your model is a reliable tool for identifying risk

and evaluating strategic alternatives.

INTEREST

RATE RISK?

© 2015 BOSC, Inc. Securities offered by BOSC, Inc., member FINRA/SIPC. Asset liability modeling, CD

underwriting, portfolio accounting and safekeeping services are provided by BOKF, NA, an affiliate of

BOSC, Inc. Investments and insurance are not insured by the FDIC; are not deposits or other obligations

of, and are not guaranteed by, any bank or bank affiliate.