Farm Credit Watch: CoBank overreaches, again, in lending to investor-owned utility

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CoBank has overreached, again, when, on March 10, acting as a co-syndication agent, it participated in a $450 million unsecured revolving credit facilities for the California Water 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.