Realizing Opportunities

Transcription

Realizing
Opportunities
IN AMERICA’S EXPORT BUSINESS
FOR BOTH L ARGE & SMALL COMPANIES
ANNUAL REPORT 2014
PRIVATE EXPORT
FUNDING CORPORATION
ANNUAL REPORT 2014
TABLE OF CONTENTS
CHAIRMAN’S LETTER 2
BUSINESS YEAR IN REVIEW 4
SUMMARY OF PEFCO’S BUSINESS 8
PEFCO’S REL ATIONSHIP WITH EX-IM BANK 16
MANAGEMENT’S DISCUSSION & ANALYSIS 21
INDEPENDENT AUDITOR’S REPORT 26
CONSOLIDATED FINANCIAL STATEMENTS 28
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 53
FIVE YEAR FINANCIAL DATA 54
INDEPENDENT AUDIT FEES 55
BOARD OF DIRECTORS 56
ADVISORY BOARD, EXPORTERS’ COUNCIL, AND SMALL BUSINESS LENDER COUNCIL 57
OFFICERS 58
PEFCO SHAREOWNERS 59
ADDITIONAL INFORMATION 60
Heritage of Success
FOUNDED BY ASSURED FINANCING AND
SUPPORTING AMERICAN EXPORTS
CHAIRMAN’S LETTER
PEFCO ANNUAL REPORT 2014
TO OUR SHAREOWNERS:
This has been a successful, exciting and challenging year
deep and thorough understanding of PEFCO, its business
for PEFCO. We ended this year with net income at $6.6
and challenges. I will continue to serve as Chairman of the
million compared to $6.8 million in 2013. Throughout
Board until the March 2015 Board Meeting.
the year, we followed the proposed Congressional reauthorization of Ex-Im Bank, which will now be addressed
in 2015 and, depending on how things develop, could
have an impact on PEFCO. We also mark this year with the
election of a new chief executive officer.
Loan commitments for 2014 were almost $1.6 billion, down
from $1.9 billion in 2013. Compared to other years, more
transactions were funded on a floating rate basis and the
total volume of Ex-Im Bank authorizations decreased by
26 percent. Direct and Secondary Long-term Programs
totaled $1.4 billion compared to $1.7 billion in 2013 and
commitments under Short- and Medium-term Small
Business Programs in 2014 were $206 million compared
to $251 million in 2013.
Another change at PEFCO this year has been the
retirement of Richard Youtz. Richard was a Senior Vice
President in our lending area and was a valuable member
of PEFCO for 25 years.
We note with special thanks the service of two Board
members who are leaving the Board and we are happy to
welcome two new members. David A. Dohnalek, Treasurer
of The Boeing Company, has replaced Michael J. Cave,
who retired as President of Boeing Capital. Mike, a Board
Member since 2010, served on the Audit Committee and
the Nominating and Governance Committee. Robert J.
Bernabucci retired as President of UPS Capital Corporation.
Bob joined the Board in 2007 and has served on the
Executive Committee and as Chairman of the Nominating
Core revenue in 2014 remained at $23.7 million whereas
and Governance Committee as well as Chairman of the
non-core revenue generated from available for sale
Special Committee established for the purpose of choosing
securities was slightly lower than last year at $952 thousand.
the new CEO. Bob is being replaced by John A. McAdams,
Earnings per share were $371 compared to $388 and return
President of ExWorks Capital. John recently left Ex-Im Bank
on equity was 4.61% compared to 5.10% the prior year.
as its Chief Operating Officer and Vice Chairman.
Given our financial results and still mindful of preserving
capital, at the September meeting, the Board of Directors
approved an annual dividend of $29 per share which is the
same amount as was paid the previous two years.
I would like to close with a special thank you for the
privilege of serving as your Chairman, President and Chief
Executive Officer these past 10 years. In that period of
time, PEFCO financed $18 billion of U.S. exports; increased
Ex-Im Bank is now officially operating under a continuing
equity by $76 million and earned $40 million in net profit.
resolution that will allow it to remain open until June 30,
Our mission and purpose is to serve as a supplemental
2015. Accordingly, it will be up to the new Congress to
lender to the Export-Import Bank. As the world financial
decide the outcome of Ex-Im Bank and the potential
markets have been stressed over the past 10 years, I believe
reforms that could be put in place. We will be mindful of
PEFCO has more than proved its role in helping ensure that
any changes that could impact us and our business. Until
there is adequate financing of U.S. manufactured goods.
then, however, we remain able and committed to ensuring
It has been an honor for me to be part of this organization
U.S. exports for businesses are financed.
and work with the dedicated staff at PEFCO and with the
Late last year, I informed the Board of Directors of my
intention to resign as President and CEO in 2014. After
an extensive succession planning process and search, the
Board of Directors elected Timothy C. Dunne, who has
been our Treasurer for the past 9 years, to succeed me,
effective October 1, 2014, as President and Chief Executive
fine management and staff at Ex-Im Bank, as well as with
our clients and shareholders. I thank the Board of Directors
for its wonderful support and guidance and know well that
PEFCO’s future is entrusted to a focused and dedicated
new CEO and Board of Directors.
Sincerely yours,
Officer. Tim has a broad background from his years in
Treasury and Risk Management positions at various financial
institutions, including Chase and ING before coming to
PEFCO in 2005. Over the past few years at PEFCO, Tim
has been involved with all areas of our operations and has a
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Don B. Taggart
Chairman
CHAIRMAN’S LETTER
“We ended this year with net
income at $6.6 million compared
to $6.8 million in 2013.”
R IGHT:
Don B. Taggart
Chairman
LEFT:
Timothy C. Dunne
President and Chief Executive Officer
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BUSINESS YEAR IN REVIEW
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Committed to Growing
Opportunities for America’s
Export Businesses
W E A R E F O C U S E D O N T H E G R O W T H O F U. S . E X P O R T S . B Y H E L P I N G
O U R C O U N T R Y C O M P E T E , W E O P E N M O R E M A R K E T S A N D C R E AT E
M O R E O P P O R T U N I T I E S T O G R O W O U R E C O N O M Y.
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O U T S TA N D I N G L O A N S B Y P R O D U C T W E R E :
(DOLL ARS IN MILLIONS)
Telecommunication88
Infrastructure93
Equipment198
Small Business
386
Energy411
Aircraft6,166
TOTAL $7,342
OPIC
EX-IM
PEFCO’s programs have enabled the world-wide export of
various U.S. products. Outstanding Export Loans guaranteed
or insured by Ex-Im Bank and OPIC as of September 30, 2014.
O U T S TA N D I N G L O A N S B Y C O U N T R Y W E R E :
(DOLL ARS IN MILLIONS)
Cayman Islands
84
United Kingdom
96
Ireland
692
Russian Federation
192
Mongolia
71
Norway
508
China
254
Republic of Korea
222
Japan
80
Ukraine
146
Luxembourg
272
Croatia
60
Mexico
294
Turkey
186
Bangladesh
203
Israel
147
Aruba
201
Other
398
Philippines
109
Panama
177
United
Arab
Emirates
285
Brazil
831
Chile
272
Angola
379
Tajikistan
57
Indonesia
115
India
439
TOTAL $7,342
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Australia
572
OPIC
EX-IM
The average balance of financing assets increased in 2014
by $424 million and the average balance of financing
liabilities increased by $353 million in 2014.
LENDING
DIVIDEND
Private Export Funding Corporation’s (“PEFCO”) new loan
The Board of Directors voted to declare a dividend of
commitments were $1,562 million in 2014, compared to
$29 per share for the fiscal year ending September 30,
new loan commitments of $1,927 million in 2013. New
2014. The Board and management recognize that capital
commitments in the Short and Medium – term Loan
preservation and growth are extremely important. As we
Programs and under our Small Business Programs were
seek additional capital in the support of our business a
$206 million in 2014 and $251 million in 2013.
signal to investors of a moderate dividend is important.
EARNINGS
PEFCO’s net income in 2014 was $6.6 million compared
to net income of $6.8 million in 2013. Net financing
income decreased to $19.8 million in 2014 from $20.0
million in 2013. The average balance of financing assets
increased in 2014 by $424 million and the average balance
of financing liabilities increased by $353 million in 2014.
$29
per share
FOR THE FISCAL YEAR ENDING
SEPTEMBER 30, 2014.
Both the average financing revenue interest rate and
the average financing expense interest rate decreased
by 0.18%.
FUNDING
Series
During 2014, PEFCO issued a total of $1.0 billion of
KK
Amount (in millions) Lead Underwriter(s)
400
BAML / US Bancorp
KK reopen
100
HSBC / KeyBanc
Issuances included two original issue series, and two
CC reopen
100
HSBC / KeyBanc
re-openings of existing series as detailed in the
LL
400 Citigroup / JP Morgan
Secured Notes under a $2.0 billion issuance limit as
approved by Ex-Im Bank and the Board of Directors.
following table.
$
$ 1,000
No. of Loan Commitments
Products
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AIRCRAFT
1
ENERGY
109
118
SMALL BUSINESS
Amounts (in millions)
$ 1,316
40
206
$ 1,562
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SUMMARY OF PEFCO’S BUSINESS
Introduction:
PEFCO was incorporated on April 9, 1970 under Delaware law and is principally
engaged in making U.S. dollar loans to foreign importers to finance purchases of
goods and services of United States m
anufacture or origin. PEFCO’s shareowners include
most of the major commercial banks involved in financing U.S. exports, industrial companies involved
in exporting U.S. products and services, and financial services companies.
PEFCO was established with the support of the United States Department of the Treasury and the
Export-Import Bank of the United States (“Ex-Im Bank”) to assist in the financing of U.S. exports through
the mobilization of private capital as a supplement to the financing already available through Ex-Im
Bank, commercial banks and other lending institutions. Ex-Im Bank has cooperated in the operation of
PEFCO through various agreements described under “PEFCO’s Relationship
with Ex-Im Bank” and in the “Notes to the Consolidated
Financial Statements.”
Since all loans made by PEFCO are guaranteed or insured as to the due and punctual payment
of principal and interest by Ex-Im Bank or other U.S. government institutions, such as the
Overseas Private Investment Corporation (“OPIC”), whose obligations are backed
by the full faith and credit of the United States, PEFCO relies upon this U.S.
government support and does not make evaluations of credit risks, appraisals
of economic conditions in foreign countries, or reviews of other factors in
making its loans.
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PEFCO’S LENDING PROGRAMS
Short and Medium-term Programs
Short-term Program
PEFCO offers to purchase short-term loans under its
Working Capital Facility and Short-term Insured Loan Facility.
These programs are a d
ependable source of liquidity
for lenders using Ex-Im Bank Short-term Insurance and
Working Capital Facility: PEFCO purchases participations
Medium-term Guarantee Programs. The lender is always
our customer; PEFCO does not finance exporters directly.
The PEFCO Short and Medium-term Programs include our
Standard Programs, our Special Initiatives and our Small
in working capital loans guaranteed against non-payment
under an Ex-Im Bank Working Capital Guarantee. PEFCO
will purchase the 90% guaranteed portion of each loan.
The lender funds and retains the risk of the 10% non-
Business Initiative.
guaranteed portion. PEFCO will purchase transaction
specific or revolving loans, and can include participations
PEFCO will purchase loans from lenders who have
in standby letters of credit included under the Ex-Im
demonstrated an understanding of, and ability to work
Bank guarantee.
with, Ex-Im Bank insurance and guarantee programs.
Loan amount, exporter size, borrower’s country, and the
Short-term Insured Loan Facility: PEFCO purchases
underlying item financed are not factors in our decision
participations in short-term loans insured against non-
to purchase. All loans are purchased by PEFCO on a
payment under an Ex-Im Bank “documentary” or small
non-recourse basis. While defaulted loans must and will
business “enhanced” policy. The lender can (i) lend
be assigned to Ex-Im Bank upon its payment of a claim,
directly to the overseas buyer or foreign bank or (ii)
performing loans are held by PEFCO in its portfolio
purchase insured buyer obligations. PEFCO purchases
to maturity. By selling to PEFCO, a lender achieves its
the Ex-Im Bank insured portion of each loan (90%, 95%,
financial objectives – improved profitability, removal from
98% or 100%). The lender or exporter retains the risk of
the balance sheet of low-yielding assets, a freeing-up of
the non-insured portion.
capacity for borrowers, and reduced loan portfolio size
while maintaining its lending relationship with the borrower.
Other features of PEFCO’s Short-term Facilities:
• All purchases are governed by a master loan participation
Standard Programs
agreement between the lender and PEFCO.
Loans disbursed by a lender may be subsequently sold to
PEFCO under one of our Standard Facilities. The loans
must be insured or guaranteed against non-payment under
a documentary insurance policy or a guarantee by Ex-Im
Bank. PEFCO will only purchase the amount covered by
the Ex-Im Bank insurance or guarantee.
• There is no minimum amount per loan.
• PEFCO will purchase a participation in any short-term
loan or letter of credit structure acceptable to Ex-Im Bank.
• The lender retains responsibility for servicing the loan
and maintaining the Ex-Im Bank guarantee or policy.
2014 PEFCO Programs
Long-term:
$ 1,356 million
(9 transactions)
Short/Medium-term:
206 million
(109 transactions)
Total:
$ 1,562 million
(118 transactions)
For lenders not able to make a loan directly, PEFCO will
“stand-in” as direct lender on behalf of the originating party.
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Medium-term Program
• Except for the Discount Facility and the Stand-in Lender
PEFCO offers three medium-term secondary market
Facility, the lender retains responsibility for servicing
facilities and a medium-term direct loan facility.
the loan and maintaining the Ex-Im Bank guarantee or
Guaranteed Note Facility: PEFCO purchases medium-term
loans guaranteed against non-payment under an
policy. PEFCO holds the original note.
• For the Discount Facility and the Stand-in Lender Facility
Ex-Im Bank medium-term guarantee (“ECP-MGA”).
PEFCO always assumes responsibility for collecting
Interest rates can be floating or fixed. Fixed rates can be
payments and maintaining the Ex-Im Bank guarantee.
set in advance of the PEFCO purchase date.
PEFCO holds the original note.
Discount Facility: PEFCO offers a special program under
the Guaranteed Note Facility used for guaranteed loans
requiring a fixed interest rate to be set prior to shipment of
the items. Once set, the fixed interest is held constant until
the final disbursement, even when the note has multiple
disbursements over many months, without payment of an
up-front fee.
Guaranteed Lease Facility: PEFCO purchases medium-term
leases guaranteed against non-payment under an
Ex-Im Bank ECP-MGA. Interest rates can be floating or
fixed. Fixed rates can be set in advance of the PEFCO
purchase date.
Stand-In Lender Facility: For lenders not able to make a
loan directly, PEFCO will “stand-in” as direct lender
on behalf of the originating party. The originating lender
must participate in preparing the application to Ex-Im
Bank, acquiring related documentation and maintaining
the borrower relationship. Lenders ask PEFCO to be the
Stand-in Lender for a variety of reasons including loan size
or because a borrower may be located outside the lender’s
marketing area.
Other features of PEFCO Medium-term Facilities:
• All purchases are governed by a master note purchase
agreement.
• Note amounts range from $100,000 (and possibly smaller)
to $20,000,000.
• PEFCO will fund any note structure acceptable to
Ex-Im Bank.
• PEFCO will purchase single notes or portfolios, new notes
Special Initiatives
Short-term
Small Loan Program: For exporters of small value items
with a Small Business Policy. PEFCO will work with the
exporter’s lender, or a reliable lender introduced by PEFCO,
to facilitate obtaining access to financing.
Medium-term
Accessible Lender Program: A referral service for exporters.
PEFCO will introduce the exporter to a reliable lender
willing to p
rovide medium-term export financing on a
transactional basis.
Committed Purchase Program: For lenders needing
certainty of access to PEFCO funding over extended
periods. PEFCO provides a written commitment to
purchase an aggregate amount over a specified term
(typically one year) on defined terms and interest rates.
Actual loan commitments are made individually.
Emerging Markets Lender Program: For foreign lenders
with their own Master Guarantee Agreement (“MGA”) that
finance importers in their own and other countries, but
which lack access to competitively-priced U.S. dollars.
Small Lender Program: For small U.S. and foreign lenders
with their own MGA that specialize in financing small
exporters and small-value loans but which fail to meet
PEFCO’s minimum standards for financial strength.
Small Note Program: For exporters of small-value products
or services, PEFCO will work with the exporter’s lender, or
a reliable lender is introduced by PEFCO, to enable the
exporter to obtain financing.
or partially repaid notes, single-disbursement or multipledisbursement notes, buyer credits or supplier credits, and
financial leases.
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Small Business Initiative
supporting Ex-Im Bank’s outreach to small business
The PEFCO Small Business Initiative is a direct result of
exporters. Members of the Council include banks and
our strong commitment to assist small business exporters
trade finance companies. The Council has two principal
(as defined by the U.S. Small Business Administration)
functions: as a funding source for small business exporters,
in obtaining access to reliable lenders for financing
and as a forum where Ex-Im Bank can have frank
their exports.
discussions with lenders on subjects of common interest.
The cornerstone of the Small Business Initiative is the
The Council’s dedicated website is located at: http://www.
PEFCO Small Business Lender Council (the “Council”).
pefco-smallbusinesslenders.com
The Council is a network of lenders committed to
Small Business Commitments
Short & Medium-term
Long-term Commitments
2014 $ 206 million
2014 $ 1,356 million
2013 $ 251 million
2013 $ 1,676 million
2012 $ 236 million
2012 $ 1,918 million
PEFCO Direct Loans are available for transactions which
have an Ex-Im Bank guaranteed value of $20 million or
more and a repayment term of five years or more.
Long-term Loan Programs
Direct Loan Program The interest rates on Direct Loans (whether fixed or floating)
Under the Direct Loan Program, PEFCO acts as the
the rate is calculated, taking into account the disbursement
original lender making loans directly to borrowers (as
and repayment characteristics of the loan. PEFCO’s
opposed to buying loans made by other lenders) to
estimated cost of funds is a function of the then current
finance their purchases of U.S. goods and services. All
U.S. Treasury yield for a maturity similar to the average life
such loans benefit from Ex-Im Bank’s comprehensive
of the loan being funded, plus the estimated margin over
long-term guarantee to PEFCO, dated December 15,
the Treasury yield required to place PEFCO Secured Notes
1971, as amended (see “PEFCO’s Relationship with Ex-Im
with investors, warehousing and hedging costs, if any, and a
Bank”). PEFCO Direct Loans are available for transactions
modest margin for expenses, risk and return to shareholders.
which have an Ex-Im Bank guaranteed value of $20 million
or more and a repayment term of five years or more.
The PEFCO Direct Loan Program is typically limited to
borrowers seeking a fixed-rate of interest on the Ex-Im
Bank guaranteed loans. Ex-Im Bank also allows PEFCO
to make its Direct Loans available on a floating-rate basis
to borrowers located in sub-Saharan Africa and borrowers
engaged in the purchase of “environmental” exports from
the U.S. or exports from U.S. small business exporters.
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are based on PEFCO’s estimated cost of funds at the time
In the case of fixed-rate loans, PEFCO allows a great
deal of flexibility with respect to the timing of the rate
fixing. Borrowers are able to set forward rates in advance
of any disbursement under the loan facility or, if they
prefer, borrowers may elect to wait up to one year after
disbursement of the loan to set the fixed rate.
Floating interest rates are set by determining a fixed spread
of the originating lender for at least one year, determined
to LIBOR, based on PEFCO’s estimated cost of funds
from the date of the first disbursement under the facility
described above.
sold. In addition, the selling institution will sign a
PEFCO may also charge commitment fees calculated
on the undisbursed and uncancelled amount of the
loan commitment.
representation stating that they are active in the business of
originating Ex-Im Bank guaranteed loans, and will continue
to generate such loans for their own account. PEFCO has
agreed to set aside up to $250 million of lending capacity
Once the fixed rate has been established, a borrower
per quarter for an aggregate annual amount of up to $800
may only cancel or prepay a portion of a loan or loan
million. Pricing is subject to PEFCO pricing models for
commitment by paying PEFCO a “make-whole” fee equal
fixed-rate loans and current PEFCO spread quotations for
to the present value of the reinvestment loss, if any,
floating-rate loans.
that would be incurred by PEFCO as a result of such
prepayment or cancellation.
PEFCO’S FUNDING ACTIVITIES
PEFCO manages the liquidity and interest rate exposures
Secondary Loan Program The purpose of the Secondary Loan Program is to provide
liquidity to lenders participating in the Ex-Im Bank
guaranteed loan market. PEFCO will support lenders
making long-term Ex-Im Bank guaranteed loans by buying
such loans from the originating lender. As with the Direct
Loan Program, such loans typically have an original value
of $20 million or more and were originally scheduled to
be repaid in five years or more. As with the Direct Loan
Program, the rates (yields) at which PEFCO is willing to buy
such loans will be a function of PEFCO’s estimated cost of
funds at the time of such purchase.
arising from loan assets and unfunded loan commitments
through the combination of short term funding, secured
note issuances and interest rate derivatives. This approach
allows for targeting the proper liquidity profile, while
controlling exposure to market fluctuations. For fixed-rate
loan commitments, PEFCO hedges the loan pricing at the
time that a borrower accepts a fixed-rate loan offer, either
through specific hedging actions or within the context
of managing the interest rate risk in the overall book. In
cases where a derivative hedge is utilized, PEFCO hedges
the fixed-rate loan commitments using interest rate swaps
in advance of loan funding to immunize the interest rate
exposure. In cases where a cash hedge is utilized for fixed-
Lenders are also able to obtain commitments from PEFCO
rate loan commitments, PEFCO issues term funding and
to purchase loans in the future (in advance of disbursement
invests in U.S. Government Securities for the warehousing
of such loan by the originating lender). Moreover, by
period prior to loan funding.
agreement with Ex-Im Bank, as of September 29, 2009,
PEFCO is no longer limited to purchasing floating rate
loans in connection with “environmental” transactions,
small business exporters and sub-Saharan borrowers.
PEFCO is now free to purchase both floating and fixed
rate long-term loans for which Ex-Im Bank gave its
This approach allows for flexibility in accommodating
a range of disbursement schedules. The impact of
warehousing may reduce earnings during the warehousing
period prior to disbursement of funds, which is
incorporated into the loan pricing.
guarantee commitment on or after September 29, 2009
without restriction.
In fiscal year 2013, PEFCO developed with Ex-Im Bank
the Secondary Market Long-term Loan Purchase Program
(SMLTPP) to facilitate the development of an active
secondary market in long term Ex-Im Bank guaranteed
loans. To be eligible for the purchase under SMLTPP, the
loan must be fully disbursed and have been on the books
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Secured Note Issuances
May 2015 and entered into a new $280 million three-year
For longer term U.S. dollar funding requirements,
facility. In addition, PEFCO has an existing $260 million
PEFCO issues secured notes in public markets through
three-year facility maturing in May 2016. The combined
underwriters. The Secured Note Program is issued through
total of all three facilities is $1,660 million. Of the fifteen
a trust arrangement on the books of Private Export Funding
lenders across the three credit facilities, twelve are
Corporation under the Indenture, dated June 15, 1975,
shareholders of PEFCO. The credit agreements contain
as supplemented and amended (the “Indenture”). The
a number of covenants, including a covenant that PEFCO
principal repayments for the Secured Notes are backed
comply with its contractual commitments with Ex-Im Bank,
by foreign importer notes - export loans guaranteed by
with customary exceptions. As of September 30, 2014,
Ex-Im Bank - and investment securities explicitly backed
there were no amounts outstanding under any of the credit
by the full faith and credit of the U.S. For each Secured
agreements. In addition, there were no amounts drawn
Note issue, the principal cash flows backing the principal
under any of the credit agreements during fiscal year 2014.
must mature prior to the maturity date for redemption of
the Secured Note principal. Pledged assets are assigned
to and held by The Bank of New York Mellon (a shareowner
of PEFCO), as Trustee, as collateral for the benefit of
the holders of PEFCO Secured Notes. Foreign importer
notes pledged against the notes are backed by the 1971
Guarantee Agreement between Ex-Im Bank and PEFCO.
Interest paid on the Secured Note Program is explicitly
guaranteed by Ex-Im Bank, as specified in the 1971
Certain underwriters of PEFCO Secured Notes, certain
dealers of PEFCO short-term notes, and certain participants
in the 364 day and three year syndicated credit agreements
are shareowners (or their affiliates are shareowners) of
PEFCO. Certain officers of certain shareowners also
serve as Directors of PEFCO as described herein. Certain
shareowners have provided and presently provide a variety
of commercial banking services to PEFCO.
Guarantee & Credit Agreement.
PEFCO FINANCE CORPORATION
Since inception, PEFCO had issued $17.1 billion aggregate
PEFCO created PEFCO Finance Corporation (“PFC”), a
principal amount of Secured Notes, of which $6.9 billion
wholly owned subsidiary, to assist it in the financing of
aggregate principal amount were outstanding at
purchases of long-term debt obligations issued by foreign
September 30, 2014, currently rated, Aaa, by Moody’s and
importers of U.S. goods and services. These obligations
AA+, by Standard & Poor’s. In October 2014, Standard &
were guaranteed as to the timely payment of principal
Poor’s downgraded its issues ratings on PEFCO’s Secured
and interest by Ex-Im Bank. PFC had obtained funds
Notes to A+ in light of increased risk to PEFCO’s business
to purchase such long-term debt obligations by issuing
model as a result of the short-term extension and ongoing
Collateralized Notes pursuant to a separate indenture
debate in the U.S. Congress of Ex-Im Bank’s charter. In
dated as of June 24, 1998, as supplemented and amended,
November 2014, Fitch issued a rating of AAA on the
between PFC and The Bank of New York Mellon, as Trustee
long-term Issuer Default Rating for PEFCO, consistent with
(the “Trustee”). The operations of PFC have consisted
Fitch’s U.S. sovereign rating. See Note 16, Subsequent
solely of the issuance of such Collateralized Notes and the
Events, for more information.
purchase of Ex-Im Bank-guaranteed export loans and U.S.
Short-term Borrowings
PEFCO raises short-term liquidity to finance loan
commitments through the issuance of commercial paper.
As of September 30, 2014, PEFCO received short-term
ratings of P-1 by Moodys’ and A-1 by Standard & Poor’s
and subsequent to year end, in November 2014, received
a short-term rating of F-1+ by Fitch. In 2014, PEFCO
established a new $1.12 billion 364 day facility maturing in
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government obligations from PEFCO, which were then
assigned to and held by the Trustee to secure both the
principal and interest on the Collateralized Notes.
As of September 30, 2014, Management took the action of
dissolving PFC under the laws of Delaware. There were no
Collateralized Notes outstanding during fiscal year 2014,
and the last of the loan assets matured prior to the end of
fiscal year 2014.
PEFCO POLICIES REGARDING RISK
MANAGEMENT
For managing capital leverage, management operates
PEFCO manages risk exposures for interest rate risk,
shareowners’ equity to a level no greater than 75 to 1.
liquidity and counterparty risk using guidelines approved
by its Board of Directors. Management reports twice a year
to the Risk Policy Committee of the Board.
under a leverage ratio limit that caps guaranteed assets to
For management of counterparty risk on derivative
transactions, PEFCO utilizes an approach based upon the
“Standardized Method” detailed in the Basel II capital
For interest rate risk, management routinely measures the
accords (see page 18 of “The Application of Basel II to
net present value and duration of interest-sensitive assets
Trading Activities and the Treatment of Double Default
and liabilities and maintains current schedules which show
Effects” issued July, 2005). Two important changes are
asset/liability mismatches and simulation of future income.
included in this methodology. First, the required capital
Management will not place at risk a 100 basis point
against a risk weighted exposure is 20%, a limit level
movement in interest rates in more than 10% of the pre-tax
that is 2.5 times the 8% limit typical of bank regulatory
net present value of capital.
requirements. Second, the maximum use of risk capital
Management may use derivative contracts, such as interest
rate swaps, in fair value and cash flow hedge strategies as
part of the process to mitigate risk exposure to changes
for counterparty risk is limited to 16% of PEFCO’s equity.
Maximum market value per counterparty is $30 million and
the minimum credit rating per counterparty is A.
in market interest rates. However, management will not
This approach integrates both the current net market value
use swaps or other derivative financial instruments for
per counterparty and the price risk associated with the
speculative purposes. As a financial institution, PEFCO has
durations of the positions. Risk weights take into account
been required to clear all swap trades through a centralized
credit ratings, with AA rated counterparties weighted 20%
clearinghouse since June 2013, thereby mitigating
and A rated counterparties weighted 50%.
exposure to any single counterparty. Management
routinely measures the potential interest rate exposure
associated with outstanding fixed-rate loan offers.
As of September 30, 2014 the counterparty risk capital
usage was $5.1 million against a maximum of $23.3 million.
Exposure at Default (EAD) was $56.5 million distributed
As a position limit on investments, management will not
over 10 counterparties. The maximum counterparty market
allow non-core business investments (those investments
value exposure to any single counterparty was $11.9 million
that are not required to cover secured note installments
versus a maximum of $30 million.
in the trust estate and that are unrelated to the secured
note program) with a maturity of more than 90 days to
exceed $250 million and will mark these investments to
market daily.
To mitigate liquidity risk, the amount of short-term funding
PEFCO has had a long and significant relationship with the
Export-Import Bank of the United States since its inception,
providing liquidity support for certain of its guarantee
financing facilities. These arrangements are set forth in
various agreements that are described herein.
due to mature within a two-week period, including
commercial paper, will not exceed the unutilized portion of
the credit facility. In addition, a balance of unencumbered
assets will be maintained to equal the level of outstanding
unsecured borrowings less the unutilized portion of the
credit facility.
PEFCO has had a long and significant relationship with the
Export-Import Bank of the United States since its inception,
providing liquidity support for certain of its guarantee
financing facilities.
15
PEFCO’S REL ATIONSHIP WITH EX-IM BANK
Under the terms of a
Guarantee Agreement,
D AT E D D E C E M B E R 15 , 1971, A S A M E N D E D, B E T W E E N P E F C O A N D
E X-I M B A N K , D U E A N D P U N C T U A L PAY M E N T O F T H E P R I N C I PA L O F
A N D I N T E R E S T O N A L L F O R E I G N I M P O R T E R N O T E S (“ G U A R A N T E E D
I M P O R T E R N O T E S ”) E V I D E N C I N G L O A N S M A D E B Y P E F C O W I T H T H E
A P P R O VA L O F E X-I M B A N K W I L L B E F U L LY A N D U N C O N D I T I O N A L LY
G U A R A N T E E D B Y E X-I M B A N K .
16
17
GUARANTEE AGREEMENT Dated
12/15/1971
In September 2008, PEFCO entered into an agreement
Under the terms of a Guarantee Agreement, dated
by PEFCO that had been guaranteed by Ex-Im Bank under
December 15, 1971, as amended, between PEFCO and
the Ex-Im Bank Master Guarantee Agreement would be
Ex-Im Bank, due and punctual payment of principal
eligible to be approved by Ex-Im Bank for coverage under
and interest on all foreign importer notes (“Guaranteed
the 1971 Guarantee Agreement and, as a result, could then
Importer Notes”) evidencing loans made by PEFCO with
be eligible to be pledged as collateral in connection with
the approval of Ex-Im Bank will be fully and unconditionally
issuances of Secured Notes.
guaranteed by Ex-Im Bank. At its option, PEFCO (or a
with Ex-Im Bank pursuant to which certain loans purchased
PEFCO may pledge Guaranteed Importer Notes under
1971 GUARANTEE AND CREDIT
AGREEMENT
the Indenture, dated as of June 15, 1975, as supplemented
In 1971, in order to assist PEFCO in its objective of
and amended (the “Indenture”), among PEFCO, Ex-Im
mobilizing private capital to finance U.S. exports, Ex-Im
Bank and The Bank of New York Mellon, as Trustee (the
Bank entered into a Guarantee and Credit Agreement (the
“Trustee”) may, after an event of default under any loan
“Agreement”) with PEFCO. Pursuant to the Agreement,
agreement pursuant to which PEFCO shall have acquired
among other things, Ex-Im Bank agreed, when requested
any Guaranteed Importer Note, elect (i) to have Ex-Im Bank
by PEFCO, to guarantee the due and punctual payment
service such Guaranteed Importer Note by continuing
of interest on debt obligations of PEFCO approved for
the payment of interest and principal in accordance with
issuance by Ex-Im Bank, which currently are PEFCO’s
the terms thereof or (ii) to accelerate the maturity of such
Secured Notes. The Agreement also provides that Ex-Im
Guaranteed Importer Note and have Ex-Im Bank pay the
Bank will make any required payments under its interest
entire amount of such Guaranteed Importer Note plus
guarantees directly to any trustee acting for the benefit
accrued interest to the date of payment. If PEFCO or the
of the holders of debt obligations so guaranteed, that
Trustee should exercise the option described in clause
any claims Ex-Im Bank may have against PEFCO for any
(ii) of the preceding sentence, Ex-Im Bank has the right
payments made by Ex-Im Bank under such guarantees
to substitute another Guaranteed Importer Note with a
will not be collected from assets pledged to secure such
yield to PEFCO at least equal to the yield on, and with
obligations, unless and until the holders thereof have
approximately the same remaining stated maturities as,
been paid in full, and that Ex-Im Bank will enter into an
the Guaranteed Importer Note in default. The Indenture
agreement with any such trustee to evidence the foregoing
provides that any Guaranteed Importer Note substituted by
understandings. The Indenture contains provisions of the
Ex-Im Bank must have remaining stated maturities which,
nature described in the foregoing sentence. A semi-annual
together with the stated maturities of the other collateral
guarantee fee on the total interest accrued by PEFCO
then subject to the lien of the Indenture, will be sufficient to
during the preceding semi-annual period on securities on
ensure that, before the dates of any mandatory payments
which interest payments have been guaranteed by Ex-Im
of principal on all Secured Notes outstanding under the
Bank is payable to Ex-Im Bank under the Agreement.
Indenture, the Trustee will be provided with cash sufficient
Such fee is computed at the rate of 1/4 of 1% on the first
to make such payments. In consideration of Ex-Im Bank’s
$10,000,000 of such interest expense, 3/16 of 1% on the
guarantee of the Guaranteed Importer Notes, a one-time
next $10,000,000 of such interest expense and 1/8 of 1% on
front-end exposure fee is payable to Ex-Im Bank by PEFCO
the balance, if any, of such interest expense.
trustee acting for the benefit of noteholders with which
at a rate determined by Ex-Im Bank. Such fee is normally
paid directly to Ex-Im Bank by the borrower on behalf of
PEFCO. Under the terms of a Guarantee Fee Guarantee
Agreement dated as of September 15, 1988 between
PEFCO and Ex-Im Bank, Ex-Im Bank guarantees PEFCO’s
reimbursement by borrowers of all amounts of guarantee
fees paid by PEFCO to Ex-Im Bank. The Indenture provides
that no failure by PEFCO to pay the required guarantee fee
will affect Ex-Im Bank’s obligation under any Guaranteed
Importer Note subject to the lien of the Indenture.
18
If Ex-Im Bank makes any payments pursuant to its
guarantees of interest on PEFCO’s Secured Notes, the
Agreement requires PEFCO, if its net worth exceeds 25% of
its paid-in and callable capital, immediately to apply (i) cash
and securities held by PEFCO and not pledged to secure
any other obligations of PEFCO plus (ii) the aggregate
amount which PEFCO can call pursuant to subscription
agreements with its shareowners to reimburse Ex-Im Bank
for such payments. Moreover, if PEFCO has net income
In 1971,
IN ORDER TO ASSIST PEFCO IN ITS OBJECTIVE OF
M O B I L I Z I N G P R I VAT E C A P I TA L T O F I N A N C E U. S . E X P O R T S ,
E X-I M B A N K E N T E R E D I N T O A G U A R A N T E E A N D C R E D I T
A G R E E M E N T ( T H E “A G R E E M E N T ”) W I T H P E F C O.
19
in any subsequent semi-annual period, it must apply the
required guarantee fee will affect Ex-Im Bank’s obligations
amount of such net income to repay Ex-Im Bank for any
under any outstanding guarantees and that Ex-Im Bank will
unreimbursed payments made by Ex-Im Bank under its
not exercise any right to terminate, cancel or rescind the
guarantees of interest on PEFCO debt obligations. Finally,
Agreement so long as any debt obligations of PEFCO are
any amounts paid by Ex-Im Bank pursuant to its guarantees
held by persons other than Ex-Im Bank.
of interest must be repaid by PEFCO within one year after
payment in full of the last maturing PEFCO debt obligation
on which interest is g
uaranteed by Ex-Im Bank. Amounts
paid by Ex-Im Bank under its guarantee of interest will
bear interest at the prevailing rate of interest charged by
Ex-Im Bank on direct loans made in the ordinary course of
business on the date of such payment by Ex-Im Bank. Such
interest is to be payable semi-annually.
The Agreement gives Ex-Im Bank a broad measure of
supervision over PEFCO’s major financial management
decisions. In particular, the Agreement requires the
approval of Ex-Im Bank before PEFCO can issue certain
debt obligations, make direct loans guaranteed by Ex-Im
Bank, purchase its long-term debt obligations prior to
their originally stated maturity date, invest its surplus funds
The Agreement provides that Ex-Im Bank will, if necessary
to meet its obligation, make payments which may be
required under its guarantee of interest on all notes
outstanding under the Indenture, and to the extent that
funds are available in accordance with Section 6 of the
Export-Import Bank Act of 1945, as amended, apply to the
Secretary of the Treasury for a loan or loans in amounts
which, together with other funds available to Ex-Im Bank for
such purpose, shall be sufficient to make such payments.
Except for the Guarantee Agreement and the Guarantee
and Credit Agreement, PEFCO’s guarantees and insurance
policies with Ex-Im Bank have additional requirements that
must be observed in order to receive payment under the
relevant guarantee or policy.
in assets other than Ex-Im Bank approved investments,
Various other provisions governing the relationship
declare or pay dividends on its capital stock, transfer all or
between Ex-Im Bank and PEFCO are contained in the
substantially all of its assets or engage in any business other
Agreement, a copy of which is on file and available for
than the financing of exports of U.S. goods and services.
inspection during normal business hours at the offices
Additionally, the Agreement gives Ex-Im Bank the right to
of PEFCO.
have representatives present at all meetings of PEFCO’s
Board of Directors and the right to receive information as to
Over the years, Ex-Im Bank’s statutory authority to exercise
PEFCO’s budgets, financial condition and operating results.
its functions has been limited to specified periods, which
have been extended by Congressional action from time
The Agreement, which, as originally executed, was
to time. The Export-Import Bank Reauthorization Act of
scheduled to terminate on December 31, 1995, has been
2012 (H.R. 2072) extended Ex-Im Bank’s corporate existence
extended by agreement between Ex-Im Bank and PEFCO
through June 30, 2015. If the corporate existence of Ex-
to December 31, 2020. PEFCO may also terminate the
Im Bank shall terminate or have been terminated, under
Agreement as of December 31 in any year on 60 days prior
the provisions of the Export-Import Bank Act of 1945, as
written notice if it is not indebted to Ex-Im Bank at the time.
amended, such a termination of the corporate existence of
No termination will affect any then outstanding guarantees
Ex-Im Bank would have no effect on Ex-Im Bank’s guarantee
of Ex-Im Bank or PEFCO’s obligations to pay the guarantee
of principal and interest on the Guaranteed Importer
fee on, or to reimburse Ex-Im Bank for any payment by it
Notes, and no effect on Ex-Im Bank’s guarantee of interest
under, any such guarantee. Under the Agreement, Ex-Im
on the outstanding Secured Notes.
Bank has agreed that no failure by PEFCO to pay the
The Agreement gives Ex-Im Bank a broad measure
of supervision over PEFCO’s major financial
management decisions.
20
MANAGEMENT’S DISCUSSION & ANALYSIS
Operations
participating interests in such obligations. PEFCO finances
The following discussion should be read in conjunction with
these purchases through the sale of its own securities to
PEFCO’s Consolidated Financial Statements and the Notes
investors in private transactions. PEFCO also assists small
thereto found elsewhere in this report.
businesses in financing U.S. exports and provides support
PEFCO’s mission is to assist in the financing of U.S. exports
by mobilizing private capital as a supplement to the
for certain securitized, guaranteed financing facilities of
Ex-Im Bank.
financing already available through Ex-Im Bank, commercial
Since PEFCO’s creation, the volume of its export loan
banks and other lending institutions. PEFCO accomplishes
business has been subject to the initiation of financing
this objective primarily by purchasing medium– and long–
transactions involving PEFCO by commercial banks and
term debt obligations issued by f oreign importers of U.S.
other lending institutions (including the shareowners
goods and services which are g
uaranteed or insured as to
of PEFCO), the approval by Ex-Im Bank of PEFCO’s
the timely payment of principal and interest by Ex-Im Bank,
participation in each such transaction, the volume of U.S.
or by other U.S. government institutions whose obligations
exports, and the requirements and policies of Ex-Im Bank
are backed by the full faith and credit of the United
with respect to the financing of those exports.
States, or by purchasing from commercial bank lenders
The following table is an analysis of Financing Revenue (in thousands) for the years ended September 30,
2014
2013
2012
Average
Balance
Average
Rate
Interest
Revenue
Average
Balance
Average
Rate
Interest
Revenue
Average
Balance
Average
Rate
Interest
Revenue
$ 4,336,000
0.91%
$ 39,667
$ 4,187,000
1.11%
$ 46,388
$ 3,040,000
1.22%
$ 37,203
416,000
0.91%
3,782
155,000
1.06%
1,650
266,000
1.13%
3,000
1,020,000
1.48%
15,124
1,093,000
1.57%
17,146
1,053,000
2.04%
21,435
893,000
0.82%
7,361
897,000
0.88%
7,866
907,000
0.93%
8,416
221,000
1.81%
4,002
242,000
1.89%
4,584
279,000
1.93%
5,380
311,000
1.50%
4,665
405,000
1.59%
6,428
367,000
1.81%
6,640
66,000
0.82%
538
87,000
0.99%
863
116,000
1.11%
1,283
112,000
1.35%
1,508
126,000
1.39%
1,751
143,000
1.49%
2,125
Financing Revenue
Interest Revenue
Export loans guaranteed or
insured by Ex-Im Bank:
Primary Long-term
Loan Program
Fixed-rate(1)
Floating-rate
Secondary Long-term
Loan Program
Fixed-rate
Floating-rate
Short & Medium-term Programs
Medium-term Programs
Medium-term
Working Capital &
Short-term Insurance
Loans Insured by OPIC
Long-term
Medium-term
Loans
(1)
Investment securities
Total
(1)
Commitment and prepayment fees
Financing Revenue
1,085,000
7,375,000
0.41%
1.04%
76,647
7,192,000
1.21%
86,676
6,171,000
763,000
0.78%
1.39%
85,482
$ 8,460,000
0.96%
$ 81,084
$ 8,036,000
1.14%
$ 91,860
$ 6,934,000
1.32%
$ 91,458
4,437
844,000
0.61%
5,184
5,976
614
2,025
2,329
$ 81,698
$ 93,885
$ 93,787
(1) The pro-forma impact on the average rates earned on fixed-rate primary long-term loans, total loans and total interest-earning assets attributable to $2.3 million
in hedge ineffectiveness gains recognized in 2013 amounted to 0.06% in 2013 and 0.04% in 2012. See discussion in Total Financing Revenue below and Note
11, Derivative Financial Instruments.
21
The following table is an analysis of Financing Expense and Net Financing Income (in thousands) for the years ended September 30,
2014
Average
Balance
2013
Average
Rate
Interest
Expense
Average
Balance
2012
Average
Rate
Interest
Expense
Average
Balance
Average
Rate
Interest
Expense
Financing Expense
Interest Expense
Long-term Notes
$ 6,322,000
0.78%
$ 49,604
$ 5,969,000
1.00%
$ 59,531
$ 4,812,000
1.35%
$ 64,904
Short-term Notes
2,191,000
0.38%
8,409
2,191,000
0.48%
10,624
2,163,000
0.41%
8,883
$ 8,513,000
0.68%
$ 58,013
$ 8,160,000
0.86%
$ 70,155
$ 6,975,000
1.06%
$ 73,787
Total
Commitment and other fees
3,898
3,726
4,009
61,911
73,881
77,796
$ 19,787
$ 20,004
$ 15,991
Financing Expense
Net Financing Income
2014 compared to 2013
The average balances and yields in the primary Long-term
PEFCO’s net income for 2014 was $6.6 million compared
Loan Program were:
to net income in 2013 of $6.8 million. The decrease in net
income was primarily the result of a decrease in financing
revenue of $12.2 million, a decline in financing expense
of $12.0 million, and an increase of $0.1 million in general
and administration expenses. The total amount of loans
increased to $7.5 billion on September 30, 2014 compared
to $7.3 billion on September 30, 2013.
Total Financing Revenue
Total financing revenue is composed of interest income
on loans and investment securities available for sale, and
commitments and other fees earned. In addition, any gains
recognized on the prepayment of a loan are reported as
part of total financing revenue. Interest income on loans
is net of interest expense on fair value hedges, as well as
ineffectiveness gains or losses related to fair value hedge
hedge ineffectiveness losses, 0.92% without) compared
to $4,187 million and 1.11% in 2013 (inclusive of hedge
ineffectiveness gains, 1.05% without)
• Floating-rate - $416 million and 0.91% in 2014 compared
to $155 million and 1.06% in 2013.
The average balances and yields in the Secondary Longterm Loan Program were:
• Fixed-rate - $1,020 million and 1.48% in 2014 compared
with $1,093 million and 1.57% in 2013.
with $897 million and 0.88% in 2013.
The average balances and yields of the Short and Medium-
relationships on loans.
term Programs were:
For the year ended September 30, 2014, total financing
• Medium-term - $221 million and 1.81% in 2014 compared
revenue decreased by $12.2 million to $81.7 million
from $93.9 million in 2013, and includes $ 0.4 million in
ineffectiveness losses on a portion of the Company’s
fair value hedge relationships. Excluding the hedge
ineffectiveness losses, the primary reason for the decrease
in total financing revenue was a decrease in average
short-term interest rates over the course of the year. Other
contributing factors include the roll-off of higher yielding
loans and increased investment in lower yielding loans.
Short-term interest rates (LIBOR) are the basis for pricing
the floating rate portfolio while long-term interest rates
(Treasury Notes) provide the basis for pricing the fixed rate
portfolio. Although average interest earning assets grew
by $ 0.4 billion to $8.5 billion in 2014, the portfolio yield
22
• Fixed-rate - $4,336 million and 0.91% in 2014 (inclusive of
decreased by 18 basis points.
• Working Capital and Short-term Insurance - $311 million
and 1.50% in 2014 compared with $405 million and 1.59%
in 2013.
The average balances and yields of loans insured by
OPIC were:
• Long-term - $66 million and 0.82% in 2014 compared
The overall average balance and yield of the lending
portfolio was $7,375 million and 1.04% in 2014 (inclusive
of hedge ineffectiveness losses, 1.05% without) compared
with $7,192 million and 1.21% in 2013 (inclusive of hedge
ineffectiveness gains, 1.17% without). PEFCO utilizes
In 2014, amortization of debt issuance costs amounted to
interest rate swaps contracts to hedge certain fixed-rate
$3.5 million, an increase of $0.3 million from $3.2 million
loans and accounts for these as fair value hedges. The net
in 2013. The increase was attributable to the issuances of
interest expense on these fair value hedges reported as
series KK and LL and the re-openings of Series CC and KK.
an adjustment of interest income on fixed-rate loans was
$122.8 million in 2014 and $120.7 million in 2013.
The available for sale investment securities portfolio had an
average balance and yield of $1,085 million and 0.41% in
2014 compared with $844 million and 0.61% in 2013.
Commitment and other fees paid in 2014 amounted to $3.9
million compared to $3.7 million in 2013.
PEFCO’s net financing income was $19.8 million in 2014
compared with $20.0 million in 2013. Net margin amounted
Commitment and Prepayment Fees
to 28 basis points in 2014 (asset yield of 0.96% less cost of
It is PEFCO’s policy to permit borrowers to prepay loans
0.68%) compared to 28 basis points in 2013 (asset yield of
only if the borrower makes PEFCO whole for the economic
1.14% less cost of funds of 0.86%).
loss incurred as a result of such payment. In 2014, there
was no gain from prepayment of loans compared to
approximately $1.5 million from two borrowers in 2013.
Net Securities Gains
In 2014, net securities transactions, the result of sales on
investment securities available for sale, produced a net
Commitment and other fees in 2014 amounted to $614
gain of $952 thousand, comparable to a net gain of $957
thousand compared to $533 thousand in 2013.
thousand in 2013.
Total Financing Expense
General and Administrative Expenses
Total financing expense is comprised of interest on short-
General and administrative expenses were $10.7 million
term and long-term notes, amortization of debt issuance
in 2014 compared to $10.6 million in 2013. The overall
costs, and commitment and other fees incurred.
increase was attributable to increases in administration
expense decreased to $61.9 million from $73.9 million in
2013. The primary reason for the decrease in total financing
expenses ($357 thousand) and professional fees ($257
thousand) offset by a $511 thousand decrease in
compensation and benefits expenses.
expense was attributable to higher average borrowings in
Provision for Income Tax
2014 at lower cost of funds compared to 2013. Short-term
Provision for income tax amounted to $3.4 million
interest rates (Commercial Paper) are the basis for pricing
compared to $3.5 million in 2013 reflecting the decrease
the short-term notes issued by PEFCO while long-term
in income before income taxes of $0.3 million in 2014.
interest rates (Treasury Notes) are the basis for pricing the
PEFCO’s effective tax rate was 34.2% in 2014 and 34.1%
Long-term Notes issued by PEFCO. The average balance
in 2013.
and effective cost for Long- term Notes was $6,322 million
and 0.78% in 2014 compared to $5,969 million and 1.00% in
2013. The average balance and effective cost of the Shortterm Notes was $2,191 million and 0.38% in 2014 compared
to $2,191 million and 0.48% in 2013.
PEFCO utilizes interest rate swap contracts to hedge
Comprehensive income decreased to $7.5 million, net
of tax, in 2014 compared to $8.2 million in 2013, largely due
to a decrease in unrealized losses on investment securities
of $1.7 million, a decrease in pension and post-retirement
benefits adjustment of $1.4 million and a decrease in cash
flow hedges gain of $0.8 million.
certain long-term notes and accounts for these contracts
as fair value hedges. In addition, PEFCO uses interest
rate swaps designated as cash flow hedges on certain
short-term notes. The net interest income on the fair value
hedges of the long-term notes reported as an adjustment
to interest expense was $141.1 million in 2014 and $128.6
million in 2013. The net interest expense on interest
rate swaps designated as cash flow hedges was $2.9
million in 2014 compared to $4.6 million in 2013 and was
reported as an adjustment to the interest expense on the
short-term notes.
2013 compared to 2012
PEFCO’s net income for 2013 was $6.8 million compared
to net income in 2012 of $6.3 million. The increase in net
income was primarily the result of an increase in pre-tax
income of $0.8 million which resulted from an increase in
net financing revenue of $4.0 million, a reduction of $1.3
million in net securities gains and an increase in general
and administrative expenses of $1.9 million. The 2012
results included a non-recurring reversal of overaccrued
pension expense recorded in prior years resulting in a
23
cumulative adjustment of $1.3 million (pre-tax) (see Note
10 Employee Benefit Plans). As a result, general and
administrative expenses in 2013 were unfavorably impacted
in comparison to 2012.
Total financing revenue is composed of interest income
on loans and investment securities available for sale, and
commitments and other fees earned. In addition, any
gains or losses recognized on the prepayment of a loan are
reported as part of total financing revenue. Interest income
The average balances and yields of the Short and Mediumterm Programs were:
• Working Capital and Short-term Insurance - $405 million
and 1.59% in 2013 compared with $367 million and 1.81%
in 2012.
on loans is net of interest expense on fair value hedges, as
The average balances and yields of loans insured by
well as ineffectiveness gains and losses related to fair value
OPIC were:
hedge relationships on loans.
• Long-term - $87 million and 0.99% in 2013 compared
revenue increased by $0.1 million to $93.9 million
from $93.8 million in 2012, and includes $2.3 million in
ineffectiveness gains on a portion of the Company’s
fair value hedge relationships. As discussed further in
The overall average balance and yield of the lending
Note 11, Derivative Financial Instruments, $0.4 million of
portfolio was $7,192 million and 1.21% in 2013 (inclusive
ineffectiveness gains related to prior years is included in
of hedge ineffectiveness gains, 1.17% without) compared
2013. In addition, $1.9 million of the ineffectiveness gains
with $6,171 million and 1.39% in 2012. PEFCO utilizes
relates to the current year, more than half of which are
interest rate swap contracts to hedge certain fixed-rate
attributable to significant increases in the level of medium-
loans and accounts for these as fair value hedges. The net
term interest rates in the latter part of the year. Excluding
interest expense on these fair value hedges reported as
the hedge ineffectiveness gains, the primary reason for
an adjustment of interest income on fixed-rate loans was
the decrease in total financing revenue was a decrease in
$120.7 million in 2013 and $107.6 million in 2012.
average short-term interest rates over the course of the
year. Other contributing factors include the roll-off of
higher yielding loans and increased investment in lower
yielding loans. Short-term interest rates (LIBOR) are the
an average balance and yield of $844 million and 0.61% in
2013 compared with $763 million and 0.78% in 2012.
basis for pricing the floating-rate portfolio while long-
Commitment and Prepayment Fees
term interest rates (Treasury Notes) provide the basis for
It is PEFCO’s policy to permit borrowers to prepay
pricing the fixed-rate portfolio. Although average interest
loans only if the borrower makes PEFCO whole for the
earning assets grew by $1.1 billion to $8.0 billion in 2013,
economic loss incurred as a result of such payment. In
the portfolio yield decreased by 18 basis points (inclusive of
2013, PEFCO received approximately $1.5 million in make-
hedge ineffectiveness gains, 21 basis points without).
whole payments from two borrowers and in 2012 received
The average balances and yields in the Primary Long-term
Loan Program were:
• Fixed-rate - $4,187 million and 1.11% in 2013 (inclusive of
approximately $1.7 million from one borrower who prepaid.
Commitment and other fees in 2013 amounted to $533
thousand compared to $631 thousand in 2012.
hedge ineffectiveness gains, 1.05% without) compared to
$3,040 million and 1.22% in 2012.
Total financing expense is comprised of interest on short-
to $266 million and 1.13% in 2012.
term and long-term notes, amortization of debt issuance
costs, and commitment and other fees incurred.
The average balances and yields in the Secondary Long-
term Loan Program were:
expense decreased to $73.9 million from $77.8 million in
• Fixed-rate - $1,093 million and 1.57% in 2013 compared
with $1,053 million and 2.04% in 2012.
24
The available for sale investment securities portfolio had
2012. The primary reason for the decrease in total financing
expense was attributable to higher average borrowings in
2013 at lower cost of funds compared to 2012. Short-term
interest rates (Commercial Paper) are the basis for pricing
expenses increased by $647 thousand primarily due to an
the short-term notes issued by PEFCO while long-term
increase in compensation and benefits and professional
interest rates (Treasury Notes) are the basis for pricing the
fees, offset by modest decreases in administrative expenses.
Long-term Notes issued by PEFCO. The average balance
and effective cost for Long-term Notes was $5,969 million
and 1.00% in 2013, compared to $4,812 million and 1.35%
in 2012. The average balance and effective cost of the
Short-term Notes was $2,191 million and 0.48% in 2013 and
$2,163 million and 0.41% in 2012.
PEFCO utilizes interest rate swap contracts to hedge
certain long-term notes and accounts for these contracts
as fair value hedges. In addition, PEFCO uses interest
rate swaps designated as cash flow hedges on certain
short-term notes. The net interest income on the fair value
hedges of the long-term notes reported as an adjustment
Provision for Income Tax
Provision for income tax amounted to $3.5 million in 2013,
an increase from $3.3 million in 2012 reflecting the increase
in income before income taxes of $0.8 million in 2013.
PEFCO’s effective tax rate was 34.1% in 2013 and 34.2%
in 2012.
Comprehensive income decreased to $8.2 million,
net of tax, in 2013 compared to $9.0 million, net of tax
in 2012, largely due to an increased unrealized loss on
investment securities.
to interest expense was $128.6 million in 2013 and $111.9
Liquidity and Capital Resources
million in 2012. The net interest expense on interest rate
The principal source of capital during the year were funds
swaps designated as cash flow hedges was $4.6 million in
generated from the net issuance of PEFCO’s Short-term
both 2013 and 2012, and was reported as an adjustment to
notes and Long-term Secured Notes totaling $1.0 billion.
the interest expense on the short-term notes.
As of September 30, 2014, PEFCO has approximately $9.3
In 2013, amortization of debt issuance costs amounted to
billion of total obligations, of which approximately $2.2
$3.2 million, an increase of $0.3 million from $2.9 million
billion (24%) were short-term and $7.1 billion (76%) were
in 2012. The increase was attributable to the issuances of
long-term.
Series II and JJ and the re-opening of Series HH, offset
by the completed amortization on Series R and Y which
matured in 2013.
Commitments and other fees paid in 2013 amounted to
$3.7 million compared to $4.0 million in 2012.
The long-term debt, which includes portions due within one
year, has amounts maturing of $730 million in 2015,
$650 million in 2016, $850 million in 2017, $1,000 million in
2018, and $3,700 million in 2019 and thereafter.
During the fiscal year ended September 30, 2014, PEFCO
issued no additional common shares. Since the beginning
PEFCO’s net financing income was $20.0 million in 2013
of fiscal 2012, PEFCO has raised $22 million in new capital,
compared with $16.0 million in 2012. Net margin amounted
more than doubling the $17.4 million in common stock
to 28 basis points in 2013 (asset yield of 1.14% less cost of
outstanding at September 30, 2011. As of September
funds of 0.86%) compared to 26 basis points in 2012 (asset
30, 2014, PEFCO had Total Shareowners’ Equity of $145.6
yield of 1.32% less cost of funds of 1.06%).
million, total capitalization (calculated as the sum of total
Net Securities Gains
In 2013, net securities transactions, the result of sales on
debt and Total Shareowners’ Equity) of $9.5 billion and a
total debt to capitalization ratio of 98.5%.
investment securities available for sale, produced a net
On May 9, 2014, PEFCO entered into a new 364 day $1.12
gain of $1.0 million, compared to a net gain of $2.2 million
billion revolving credit facility and a new $280 million
in 2012.
3 year facility. Combined with an existing $260 million credit
General and Administrative Expenses
General and administrative expenses were $10.6 million
facility maturing in June 2016, PEFCO’s facilities total
$1.66 billion.
in 2013 compared to $8.7 million in 2012. The overall
The credit agreements contain a number of covenants,
increase was attributable to a reversal of $1.3 million in
including a negative pledge covenant and a covenant that
2012 of overaccrued pension expense which accumulated
PEFCO will comply with its contractual commitments with
over prior years. See Notes 10 and 14 to the consolidated
Ex-Im Bank. As of September 30, 2014, there were no
financial statements for more information. Without giving
amounts outstanding under these credit facilities.
effect to this 2012 reversal, general and administrative
25
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors and Shareowners of Private Export Funding Corporation:
We have audited the accompanying consolidated financial
An audit of financial statements involves performing
statements of Private Export Funding Corporation and
procedures to obtain audit evidence about the amounts
its subsidiary (the “Company”), which comprise the
and disclosures in the consolidated financial statements.
consolidated statements of financial condition as of
The procedures selected depend on our judgment,
September 30, 2014 and 2013, and the related consolidated
including assessment of the risks of material misstatement
statements of operations, comprehensive income, changes
of the consolidated financial statements, whether due
in shareholders’ equity, and cash flows, for each of the
to fraud or error. In making those risk assessments,
three years in the period ended September 30, 2014.
we consider internal control relevant to the company’s
We also have audited the Company’s internal control
preparation and fair presentation of the consolidated
over financial reporting as of September 30, 2014 based
financial statements in order to design audit procedures
on criteria established in Internal Control - Integrated
that are appropriate in the circumstances. An audit of
Framework (1992) issued by the Committee of Sponsoring
internal control over financial reporting involves obtaining
Organizations of the Treadway Commission (COSO).
an understanding of internal control over financial
Management’s Responsibility
The Company’s management is responsible for the
preparation and fair presentation of the consolidated
financial statements in accordance with accounting
principles generally accepted in the United States of
America, for maintaining internal control over financial
reporting including the design, implementation, and
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures
as we considered necessary in the circumstances. We
believe that the audit evidence we obtained is sufficient
and appropriate to provide a basis for our opinions.
fair presentation of the consolidated financial statements
Definition and Inherent Limitations of Internal
Control Over Financial Reporting
that are free from material misstatement, whether due to
A company’s internal control over financial reporting is
error or fraud, and for its assertion about the effectiveness
a process effected by those charged with governance,
of internal control over financial reporting, included in the
management, and other personnel, designed to provide
accompanying Management Report on Internal Control
reasonable assurance regarding the preparation of reliable
over Financial Reporting.
financial statements in accordance with accounting
maintenance of controls relevant to the preparation and
Auditor’s Responsibility
Our responsibility is to express an opinion on the
consolidated financial statements and an opinion on
the Company’s internal control over financial reporting
based on our audits. We conducted our audits of the
consolidated financial statements in accordance with
auditing standards generally accepted in the United
States of America and our audit of internal control over
financial reporting in accordance with attestation standards
established by the American Institute of Certified Public
Accountants. Those standards require that we plan and
perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free
from material misstatement and whether effective internal
control over financial reporting was maintained in all
material respects.
26
reporting, assessing the risk that a material weakness
America. A company’s internal control over financial
reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are
being made only in accordance with authorizations of
management and those charged with governance; and
(iii) provide reasonable assurance regarding prevention or
timely detection and correction of unauthorized acquisition,
use, or disposition of the company’s assets that could have
a material effect on the financial statements.
INDEPENDENT AUDITOR’S REPORT
Because of its inherent limitations, internal control over
financial reporting may not prevent, or detect and correct
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes
in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Opinion
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of the Company and its subsidiary
at September 30, 2014 and 2013 and the results of their
operations and their cash flows for the three years then
ended in conformity with accounting principles generally
accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
September 30, 2014 based on criteria established in
Internal Control - Integrated Framework (1992) issued
by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
November 25, 2014
New York, New York
27
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS (Amounts in thousands, except share amounts)
September 30, 2014
Cash and cash equivalents
Investment securities available for sale
Interest and fees receivable
Export loans guaranteed or insured by Ex-Im Bank
Loans insured by OPIC
Total lending
September 30, 2013
$ 957,146
$ 888,982
943,637
262,117
62,974
63,583
7,301,740
7,080,129
158,484
190,302
7,460,224
7,270,431
61,821
48,654
$ 9,485,802
$ 8,533,767
Short-term notes
$ 2,175,814
$ 2,191,479
Interest payable
50,220
45,434
Accrued expenses and other liabilities
39,502
52,297
Long-term Secured Notes
7,074,619
6,105,908
Total Liabilities
9,340,155
8,395,118
38,950
38,950
108,879
102,790
(2,182)
(3,091)
145,647
138,649
$ 9,485,802
$ 8,533,767
Other assets and deferred charges
Total Assets
LIABILITIES AND SHAREOWNERS’ EQUITY
Liabilities
Shareowners’ Equity
Common stock-no par value; authorized 40,000 shares; outstanding 17,786 shares
at September 30, 2014 and September 30, 2013
Retained earnings
Accumulated other comprehensive loss
Total Shareowners’ Equity
Total Liabilities and Shareowners’ Equity
See Notes to Consolidated Financial Statements
28
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30,
FINANCING REVENUE (Amounts in thousands, except per share amounts)
2014
2013
2012
$ 81,084
$ 91,860
$ 91,458
614
2,025
2,329
81,698
93,885
93,787
(58,013)
(70,155)
(73,787)
(3,898)
(3,726)
(4,009)
(61,911)
(73,881)
(77,796)
19,787
20,004
15,991
952
957
2,231
General and administrative expenses
(10,700)
(10,597)
(8,665)
Income before income tax
10,039
10,364
9,557
Provision for income tax
(3,434)
(3,536)
(3,271)
$ 6,605
$ 6,828
$ 6,286
$ 371.37
$ 388.29
$ 385.74
Interest
Commitment and prepayment fees
FINANCING EXPENSE
Interest
Commitment and other fees
Net securities gain
Net Income
NET INCOME PER SHARE
Net Income
29
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income (Amounts in thousands)
Unrealized losses on investment securities - AFS
2014
2013
2012
$ 6,605
$ 6,828
$ 6,286
(1,646)
(3,378)
(1,137)
2,229
3,013
2,814
628
674
1,628
(302)
1,063
(568)
909
1,372
2,737
$ 7,514
$ 8,200
$ 9,023
(net of benefit of ($848); ($1,740); and ($586))
Cashflow hedges gain
(net of tax of $1,148; $1,552; and $1,450)
Reclassification adjustment for net securities gains included in net income
(net of tax of $324; $347; and $839)
Pension and post retirement adjustment
(net of (benefit)/tax of ($156); $548; and ($293))
Other comprehensive income
Comprehensive income
See notes to Consolidated Financial Statements
30
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUIT Y
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY
(Amounts in thousands, except share and per share amounts)
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Balances at September 30, 2011
$ 17,401
$ 90,698
$ (7,200)
Total
Shareowners’
Equity
$ 100,899
Common stock:
2,645 shares issued
17,986
17,986
Comprehensive income:
Net income
6,286
2,737
Dividend declared ($29 per share)
6,286
(506)
$ 35,387
$ 96,478
2,737
(506)
$ (4,463)
$ 127,402
Common stock:
330 shares issued
3,563
3,563
Net income
6,828
1,372
6,828
(516)
$ 38,950
$ 102,790
1,372
(516)
$ (3,091)
$ 138,649
Net income
6,605
909
6,605
(516)
$ 38,950
$ 108,879
909
(516)
$ (2,182)
$ 145,647
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES (Amounts in thousands)
Net income
Adjustments to reconcile net income to net cash
2014
2013
2012
$ 6,605
$ 6,828
$ 6,286
6,495
6,434
4,698
(952)
(957)
(2,231)
—
(1,492)
(1,698)
(565)
1,654
(830)
provided by (used in) operating activities:
Depreciation and amortization
Net gain on investment securities
Net gain on prepayments of loans
(Increase) decrease in deferred taxes
Decrease (increase) in interest and fees receivable
610
8,173
(399)
Increase (decrease) in interest payable
4,786
(4,148)
1,677
Increase (decrease) in accrued expenses and other liabilities
1,390
(2,141)
740
344
(1,888)
4,622
18,713
12,463
12,865
Proceeds from maturities of investment securities
7,257,819
6,774,346
1,827,325
Purchases of investment securities
(8,012,061)
(6,589,846)
(1,970,396)
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Proceeds from sales of investment securities
76,506
72,497
238,231
Principal collected on loans
1,522,149
1,335,396
1,181,048
Principal disbursed on loans
(1,765,912)
(1,363,823)
(2,402,843)
Asset purchases
Net cash (used in) provided by investing activities
—
—
(104)
(921,499)
228,570
(1,126,739)
FINANCING ACTIVITIES
Proceeds from issuance of Short-term notes
Repayments of Short-term notes
4,113,696
5,265,017
11,131,254
(4,135,013)
(5,273,940)
(11,085,691)
992,772
994,555
1,491,395
Repayments and repurchases of Long-term Secured Notes
—
(696,405)
(387,671)
Issuance of common stock
—
734
17,986
Treasury shares repurchased
—
(1,171)
—
Treasury shares re-issued
—
4,000
—
(505)
(499)
—
970,950
292,291
1,167,273
68,164
533,324
355,658
302,259
$ 957,146
$ 888,982
$ 355,658
Proceeds from issuance of Long-term Secured Notes
less issuance costs
Dividends paid
Net cash provided by financing activities
Increase in cash
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
888,982
53,399
SUPPLEMENTAL DISCLOSURES
Interest paid
$ 192,409
$ 180,127
$ 3,200
$ 4,539
$ 2,859
Dividends declared
$ 516
$ 516
$ 506
32
$ 185,440
Income taxes paid
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
amended, such a termination of the corporate existence of
Private Export Funding Corporation (“PEFCO”) was
Ex-Im Bank would have no effect on Ex-Im Bank’s guarantee
incorporated on April 9, 1970 under Delaware law and is
of principal and interest on the Guaranteed Importer
principally engaged in making U.S. dollar loans to foreign
Notes, and no effect on Ex-Im Bank’s guarantee of interest
importers to finance p
urchases of goods and services of
on the outstanding Secured Notes.
United States manufacture or origin. PEFCO’s shareowners
include most of the major commercial banks involved in
financing U.S. exports, industrial companies involved in
exporting U.S. products and services, and financial
services companies.
3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts
PEFCO was established with the support of the United
of PEFCO and its wholly owned subsidiary, PEFCO Finance
States Department of the Treasury and the Export-Import
Corporation (“PFC”). These consolidated financial
Bank of the United States (“Ex-Im Bank”) to assist in the
statements are prepared in accordance with accounting
financing of U.S. exports through the mobilization of private
capital as a supplement to the financing already available
America (“U.S. GAAP”). Certain amounts reported in prior
through Ex-Im Bank, commercial banks and other lending
periods have been reclassified to conform with the current
institutions. Ex-Im Bank has cooperated in the operation of
presentation.
PEFCO through various agreements.
2. AGREEMENTS WITH EX-IM BANK
Use of Estimates
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
PEFCO has agreements with Ex-Im Bank which provide that
assumptions that affect the reported amount of assets and
Ex-Im Bank will:
liabilities and disclosure of contingent assets and liabilities
1. guarantee the due and punctual payment of principal
and interest on all export loans made by PEFCO; and
2. guarantee the due and punctual payment of interest
on PEFCO’s long-term Secured Notes in return for a
fee paid by PEFCO.
at the date of the financial statements and the reported
amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of deposits held at
banks and highly liquid money market account balances.
Under its agreements with PEFCO, Ex-Im Bank retains
Substantially all PEFCO’s cash and cash equivalents
a broad measure of supervision over PEFCO’s major
are held by four financial institutions that management
financial m
anagement decisions. The approval of Ex-Im
believes are of high credit quality. At September 30, 2014
Bank is required on the terms of PEFCO’s individual loan
and September 30, 2013, approximately 97% and 25%,
commitments and on the terms of PEFCO’s long-term
respectively, of the cash and cash equivalents were held
debt issues. Surplus funds may be invested only in Ex-Im
in money market funds invested in U.S. Treasuries and
Bank-approved types of assets. Ex-Im Bank is entitled
repurchase agreements in respect of such securities.
to representation at all meetings of PEFCO’s Board
of Directors, Advisory Board, and Exporters’ Council.
PEFCO furnishes Ex-Im Bank with full information as to
budgets, financial condition, and operating results.
Over the years, Ex-Im Bank’s statutory authority to exercise
its functions has been limited to specified periods, which
have been extended by Congressional action from time
to time. The Export-Import Bank Reauthorization Act of
2012 (H.R. 2072) extended Ex-Im Bank’s corporate existence
through June 30, 2015. If the corporate existence of ExIm Bank shall terminate or have been terminated, under
the provisions of the Export-Import Bank Act of 1945, as
Investment Securities
Investment securities that PEFCO has the positive intent
and ability to hold to maturity are classified as securities
held to maturity and recorded at amortized cost.
Investment securities that may be sold in response to
changes in market interest rates, needs for liquidity,
changes in funding sources and terms or other factors are
classified as securities available for sale. The securities are
carried at fair value with unrealized gains and losses, net
of income taxes, reported as a component of accumulated
other comprehensive income (loss).
33
The classification is determined at the time each security
one stream based on a specified floating-rate index.
is acquired. At each reporting date, the appropriateness
The credit risk inherent in interest rate swaps arises from
of the classification is reassessed and the securities are
the potential inability of counterparties to meet the terms
assessed for other than temporary impairment.
of their contracts.
Interest income on investment securities, including
Derivative financial instruments are recorded in the balance
amortization of premiums and accretion of discounts, is
sheet as either an asset or liability measured at fair value.
recognized when earned using methods that approximate
If the derivative is designated as a fair value hedge, the
the interest method. Security transactions are accounted
changes in fair value of the derivative and hedged item are
for as of the date these securities are purchased or sold
recognized in earnings. If the derivative is designated as a
(trade date). Realized gains and losses are reported on an
cash flow hedge, changes in the fair value of the derivative
identified cost basis (FIFO).
are recorded in other comprehensive income (loss) and are
Loans, Interest and Fees
Loans are reported at their principal amounts outstanding.
recognized in the income statement when the hedged item
affects earnings.
Interest income is recognized when earned using the
PEFCO formally documents all relationships between
interest method. Fees are received from securitization
hedging instruments and hedged items. Also, PEFCO
support transactions and from the undisbursed balances
formally assesses whether the derivatives used in hedging
of loan commitments. Fee income is recognized over the
transactions have been highly effective in offsetting
period the service is provided. A borrower may cancel all
changes in the fair value or cash flows of hedged items
or any portion of an unused fixed-rate loan commitment
and whether those derivatives may be expected to remain
or prepay a fixed-rate loan by paying PEFCO a fee equal
highly effective in future periods.
to the present value of the reinvestment loss, if any,
incurred by PEFCO. Cancellation and prepayment fees are
recorded as income by PEFCO upon receipt.
Allowance for Loan Losses
Since all loans made by PEFCO are guaranteed or
insured as to the due and punctual payment of principal
Other Assets and Deferred Charges
and interest by Ex-Im Bank or other U.S. government
Debt issuance costs incurred in connection with the issuance
institutions, such as the Overseas Private Investment
of long-term debt are deferred and amortized to interest
Corporation (“OPIC”), whose obligations are backed by
expense straight-line over the life of each issue.
the full faith and credit of the United States, PEFCO relies
Equipment and leasehold improvements are carried at
cost less accumulated depreciation and amortization.
Depreciation and amortization are computed using the
straight-line method over the estimated useful life of the
owned asset and, for leasehold improvements, over the
estimated useful life of the improvement or the lease term,
whichever is shorter.
Derivative Financial Instruments
In connection with PEFCO’s asset/liability management
process, the purpose of which is to manage and control
the sensitivity of PEFCO’s earnings to changes in market
interest rates, PEFCO may enter into derivative financial
instruments including interest rate swap contracts that are
designated as cash flow or fair value hedges of specific
assets or groups of similar assets or similar liabilities and
anticipated debt issuance transactions. Interest rate
swaps are transactions in which two parties agree to
exchange, at specified intervals, interest payment streams
calculated on an agreed-upon notional amount with at least
34
upon this U.S. government support and does not make
evaluation of credit risks, appraisals of economic conditions
in foreign countries, or reviews of other factors in making
its loans. In addition, insured loans are supported by
guarantees from the respective lenders. Accordingly,
PEFCO does not presently maintain an allowance for
loan losses.
Fair Value Measurement
PEFCO reports fair value measurements for specialized
classes of assets and liabilities. In measuring fair value,
PEFCO utilizes fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value into three
broad levels. The highest priority is given to quoted prices
in active markets and the lowest priority to unobservable
inputs. Additional disclosure requirements are required for
the lowest priority level. At PEFCO, fair value measurement
is calculated using prices from data providers and dealers.
Dividends and Distribution to Shareowners
as well as to apply a simplified impairment model to
Dividends and distribution to shareowners are recorded on
goodwill. This amendment will be effective commencing
the ex-dividend date.
with annual periods beginning after December 15, 2014
Income Taxes
Income taxes are recorded based on the provisions of
enacted tax laws, including the tax rates in effect for current
and for interim periods beginning after December 15,
2015. Adoption of this guidance is not expected to have a
material impact on PEFCO.
and future years. Net deferred tax assets are recognized
Also in January, 2014, FASB issued ASU No. 2014-03 –
to the extent that it is more likely than not that these future
Derivatives and Hedging (Topic 815): Accounting for
benefits will be realized.
Certain Receive-Variable, Pay-Fixed Interest Rate Swaps –
A tax position is recognized as a benefit only if it is “more
likely than not” that the tax position would be sustained in
a tax examination, with a tax examination being presumed
to occur. The amount recognized is the largest amount of
tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded.
Recently Issued Accounting Pronouncements
In May 2012, the Board of Trustees of the Financial
Accounting Foundation (FAF), the parent organization
of the Financial Accounting Standards Board (FASB),
approved the establishment of the Private Company
Council (PCC), a new body formed to improve the process
of setting accounting standards for private companies. The
PCC and the FASB will mutually agree on a set of criteria to
decide whether and when alternatives within U.S. GAAP are
warranted for private companies, and the PCC will review
and propose alternatives within U.S. GAAP to address the
needs of users of private company financial statements.
The PCC also serves as the primary advisory body to
the FASB on the appropriate treatment for items under
consideration on the FASB’s agenda.
In December 2013, the FASB and the PCC issued the final
guide, Private Company Decision-Making Framework: A
Guide for Evaluating Financial Accounting and Reporting
for Private Companies (“the framework”). Under the
framework, PEFCO does not meet the definition of a public
company and is therefore considered a nonpublic or private
company, subject to the accounting standards promulgated
by the PCC and FASB in relation to U.S. GAAP.
Simplified Hedge Accounting Approach, to provide private
companies, other than financial institutions, the option to
use a simplified hedge accounting approach to account for
interest rate swaps that are entered into for the purpose
of economically converting variable-rate interest payments
to fixed rate payments. As a financial institution, PEFCO is
precluded from adopting these simplified approaches to
hedge accounting and continues to adhere to the broader
provisions of hedge accounting in ASC 815.
In March 2014, the FASB issued ASU No. 2014-07 –
Applying Variable Interest Entities Guidance to Common
Control Leasing Arrangements (Topic 810) which allows
private companies to elect, when certain conditions
exist, not to apply variable interest entity guidance to a
lessor under common control. Alternatively, the private
company would make certain disclosures about the lessor
and the leasing arrangement. This amendment will be
effective commencing with annual periods beginning after
December 15, 2014 and for interim periods beginning
after December 15, 2015. Adoption of this guidance is not
expected to have a material impact on PEFCO.
In May 2014, the FASB, in convergence with the
International Accounting Standards Board, issued ASU
2014-09 – Revenue from Contracts with Customers
(Topic 606) to provide a comprehensive, industry-neutral
revenue recognition model intended to increase financial
statement comparability across companies and industries,
and significantly reduce the complexity inherent in
today’s revenue recognition guidance. This ASU affects
any entity that enters into contracts to transfer goods
or services, or enters into contracts for the transfer of
Since the inception of the PCC, FASB has issued three
nonfinancial assets unless those contracts are within the
updates to U.S. GAAP that provide alternatives to private
scope of other standards (e.g., leases, insurance contracts,
companies. In January 2014, FASB issued Accounting
financial instruments). ASU 2014-09 is effective for private
Standards Update (ASU) No. 2014-02, Intangibles –
companies for the first interim period within annual
Goodwill and Other (Topic 350), which permits a private
reporting periods beginning after December 15, 2017.
company to subsequently amortize goodwill on a straight-
Early adoption is prohibited. Management is in the process
line basis over a period of ten years, or less if the company
of assessing the effect of this ASU on PEFCO, but does not
demonstrates that another useful life is more appropriate,
believe the impact will be material.
35
In August 2014, the FASB issued ASU 2014-15 –
In February 2013, the FASB issued ASU No. 2013-03: –
Presentation of Financial Statements – Going Concern
Financial Instruments (Topic 825): Clarifying the Scope
(Subtopic 205-40): Disclosure of Uncertainties about
and Applicability of a Particular Disclosure to Nonpublic
an Entity’s Ability to Continue as a Going Concern.
Entities. The objective of this ASU is to clarify the scope
The amendments in this ASU provide guidance about
and applicability of a particular disclosure to nonpublic
management’s responsibility to evaluate whether there is
entities that resulted from the issuance of ASU No. 2011-
substantial doubt about an entity’s ability to continue as a
04, Fair Value Measurement (Topic 820): Amendments to
going concern and to provide related footnote disclosures.
Achieve Common Fair Value Measurement and Disclosure
This ASU applies to all entities and is effective for the
Requirements in U.S. GAAP and IFRS. Contrary to the
annual period ending after December 15, 2016 and all
stated intent of ASU 2011-04 to exempt all nonpublic
subsequent interim periods. Early adoption is permissible.
entities for a particular disclosure, that exemption is not
In July 2013, the FASB issued ASU No. 2013-10 Derivatives and Hedging (Topic 815): Inclusion of the
Fed Funds Effective Swap Rate (or Overnight Index
Swap Rate) as a Benchmark Interest Rate for Hedge
Accounting Purposes. This ASU permits the use of the
applicable to nonpublic entities that have total assets of
more than $100 million or more, or that have one or more
derivate instruments. The amendments were effective
immediately and did not have a material impact on
PEFCO’s consolidated financial statements.
Fed Funds Effective Swap Rate (OIS) as an acceptable
In February 2013, the FASB issued Accounting Standards
U.S. benchmark interest rate, in addition to UST (Treasury)
Update (ASU) No. 2013-02 – Other Comprehensive
and LIBOR (London Interbank Offer Rate) rates, for hedge
Income (Topic 220): Reporting of Amounts Reclassified
accounting purposes. The amendments in this ASU are
Out of Accumulated Other Comprehensive Income.
effective prospectively for qualifying new or re-designated
The amendments in this ASU do not change current
hedging relationships entered into or after July 17, 2013.
requirements for reporting net income or other
The guidance did not have a material impact on PEFCO’s
comprehensive income in financial statements; however,
consolidated financial statements.
the amendments require an entity to provide information
In February 2013, the FASB issued ASU 2013-04: Liabilities
(Topic 405): Obligations Resulting from Joint and Several
Liability Arrangements for Which the Total Amount of
the Obligation is Fixed at the Reporting Date. This ASU
provides guidance for the recognition, measurement, and
disclosure of obligations resulting from joint and several
liability arrangements for which the total amount of the
obligation within the scope of this guidance is fixed at
the reporting date, except for obligations within existing
guidance in U.S. GAAP. Examples of obligations covered
by this ASU include debt arrangements, other contractual
obligations, and settled litigation and judicial rulings. The
amendments in this ASU apply to public and nonpublic
entities, and require a reporting entity to disclose the
nature and amount of the obligation, as well as other
information. The amendments in this ASU should be
applied retrospectively to all periods presented in the
36
about the amounts reclassified out of accumulated other
comprehensive income by component. An entity is
required to present, either on the face of the statement
where net income is presented or in the notes thereto,
significant amounts reclassified out of accumulated other
comprehensive income by the respective line items of
net income, but only if the amount reclassified is required
under U.S. GAAP to be reclassified to net income in its
entirety in the same reporting period. For other amounts
that are not required under U.S. GAAP to be reclassified
in their entirety to net income, an entity is required to
cross-reference to other disclosures under U.S. GAAP
that provide additional detail about those amounts. The
effective date of the ASU is prospective for nonpublic
entities with fiscal years beginning on or after December
15, 2013. Adoption of this guidance did not have a material
impact on PEFCO’s consolidated financial statements.
financial statements. For nonpublic entities, the effective
In January 2013, the FASB issued ASU No. 2013-01
date is for fiscal years ending after December 14, 2014,
– Balance Sheet (Topic 210): Clarifying the Scope of
and interim and annual periods thereafter. Adoption of
Disclosures about Offsetting Assets and Liabilities, the
this guidance did not have a material impact on PEFCO’s
purpose of which is to address implementation issues about
the scope of ASU No. 2011-11: Disclosures about Offsetting
Assets and Liabilities. ASU No. 2013-01 clarifies that
In October 2012, the FASB issued ASU No. 2012-
ASU No. 2011-11 applies only to derivatives, repurchase
04 – Technical Corrections and Improvements. The
agreements and reverse repurchase agreements, and
amendments in this update are changes to clarify the FASB
securities borrowing and securities lending transactions
Accounting Standards Codification published in 2009,
that are either offset in accordance with specific criteria
correct unintended application of guidance, or make minor
contained in certain sections of Topic 210 or 815 of
improvements to the Codification that are not expected
the Accounting Standards Codification or subject to a
to have a significant effect on current accounting practice
master netting arrangement or similar agreement. ASU
upon issuance. For nonpublic entities, amendments
2013-01 is effective for fiscal years beginning on or after
that are subject to transition guidance will be effective
January 1, 2013, and interim periods within those annual
for fiscal periods after December 15, 2013. Adoption of
periods. An entity should provide the required disclosures
this guidance did not have a material impact on PEFCO’s
retrospectively for all comparative periods presented.
Adoption of ASU 2013-01 did not have a material impact on
PEFCO’s consolidated financial statements.
4. INVESTMENT SECURITIES
September 30, 2014 (000’s)
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$ 664,986
$ 5
$ —
Amortized
Cost
Available for Sale
Fair
Value (a)
Average
Yield (b)
$ 664,991
0.01%
1.50%
U.S. Treasury Securities
Maturity in one year or less
U.S. Guaranteed Securities
Maturity in one year or less(c)
89,979
981
14
90,946
Maturity after one year through five years(c)
119,907
290
956
119,241
1.56%
Maturity after five years through ten years(c)
56,276
—
604
55,672
1.94%
Maturity after ten years(c)
12,336
5
51
12,290
1.58%
152
345
—
497
—
$ 943,636
$ 1,626
$ 1,625
$ 943,637
0.48%
Equity Securities
Total Available for Sale Securities
September 30, 2013 (000’s)
Amortized
Cost
Available for Sale
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value (a)
Average
Yield (b)
$ 22,851
$ 16
$ 11
$ 22,856
1.15%
Maturity after one year through five years(c)
140,480
2,862
397
142,945
1.93%
Maturity after five years through ten years
71,552
593
1,686
70,459
1.97%
25,539
10
96
25,453
1.49%
152
253
1
404
—
$ 260,574
$ 3,734
$ 2,191
$ 262,117
1.83%
Maturity in one year or less(c)
Maturity after ten years(c)
Equity Securities
Total Available for Sale Securities
(c)
(a) The fair value of PEFCO’s portfolio of investment securities is based on independent dealer quotations.
(b) The average yield is based on effective rates on carrying values at the end of the year.
(c) The weighted average term has been used for U.S. Guaranteed Securities that have scheduled payments through final maturity.
37
Cash proceeds from the sales of available for sale
securities sold in 2013 amounted to $957 thousand (gross
securities during 2014, 2013, and 2012 were $76.5 million,
gains of $991 thousand and gross losses of $34 thousand).
$72.5 million, and $238.2 million respectively. Net gains
Net gains from available for sale securities sold in 2012
from available for sale securities sold in 2014 amounted
amounted to $2.2 million (gross gains of $2.2 million and
to $952 thousand (gross gains of $1.2 million and gross
gross losses of $5 thousand).
losses of $278 thousand). Net gains from available for sale
The following table provides the gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in
a continuous unrealized loss position.
Less than
12 months (000’s)
September 30, 2014
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$ —
$ —
$ —
$ —
119,761
403
58,772
1,222
$ 119,761
$ 403
$ 58,772
$ 1,222
Total temporarily
impaired securities
12 months
or more (000’s)
Less than
12 months (000’s)
September 30, 2013
Total temporarily
impaired securities
12 months
or more (000’s)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$ —
$ —
$ —
$—
99,463
2,183
739
8
$ 99,463
$ 2,183
$ 739
$8
These investment securities are U.S. Guaranteed Securities.
PEFCO has the ability and intent to hold these investments
The unrealized losses on these investments resulted from
for a period of time sufficient to collect all amounts due
the movement in the yield curve and are not credit related.
according to the contractual terms of the investments.
5. LENDING PROGRAMS
Loans outstanding at September 30, 2014, and related undisbursed commitments are classified as follows:
Outstanding Loans (000’s)
Amount
Average Rate
Undisbursed Commitments (000’s)
Amount
Direct & Secondary Long-term Loan Programs
Fixed-rate
Floating-rate
$ 5,630,043
1,265,866
3.26%
$ 491,885(b)
61,000(a)
(a)
Short-term & Medium-term Loan Programs
Fixed-rate
Floating-rate
58,341
228,963
2.93%
23,825(b)
116,797(a)
(a)
$ 7,183,213
$ 693,507
Long-term Floating-rate
60,000(a) (c)
Medium-term Fixed-rate
4,114(c)
Medium-term Floating-rate
Total
94,370(a) (c)
5.78%
33,892(a) (c)
$ 158,484
$ 33,892
$ 7,341,697
$ 727,399
(a) The base interest rate is the London Interbank Offered Rate (“LIBOR”).
(b) The interest rate will be determined upon pricing (Direct and Secondary) / disbursement (Short and Medium-term).
(c) These transactions are unconditionally guaranteed by the sovereign governments involved and are fully insured by OPIC against the non honoring
of such sovereign guarantees.
38
Loans outstanding at September 30, 2013, and related undisbursed commitments are classified as follows:
Outstanding Loans (000’s)
Amount
Undisbursed Commitments (000’s)
Average Rate
Amount
3.39%
$ 674,681(b)
Direct & Secondary Long-term Loan Programs
Fixed-rate
$ 5,138,929
Floating-rate
1,109,253
645,400(a)
(a)
Short-Term & Medium-term Loan Programs
Fixed-rate
65,102
Floating-rate
590,949
3.08%
48,094(b)
108,186(a)
(a)
$ 6,904,233
$ 1,476,361
Long-term Floating-rate
75,000(a) (c)
Medium-term Fixed-rate
4,981(c)
Medium-term Floating-rate
5.78%
110,321(a) (c)
Total
25,442(a) (c)
$ 190,302
$ 25,442
$ 7,094,535
$ 1,501,803
(a) The base interest rate is the London Interbank Offered Rate (“LIBOR”).
(b) The interest rate will be determined upon pricing (Direct and Secondary) / disbursement (Short and Medium-term).
(c) These transactions are unconditionally guaranteed by the sovereign governments involved and are fully insured by OPIC against the non honoring
of such sovereign guarantees.
Outstanding loans are scheduled for repayment at September 30, 2014
as follows: (in 000’s of USD)
Outstanding loans are scheduled for repayment at September 30, 2013
as follows: (in 000’s of USD)
2015
$ 1,082,791
2014
$ 1,326,778
2016
954,475
2015
848,880
2017
913,624
2016
809,928
2018
895,978
2017
769,556
2019
857,100
2018
749,494
2020 and thereafter
2,637,729
Total before Fair Value Hedge Adjustment
2019 and thereafter
2,589,899
Total before Fair Value Hedge Adjustment
and Unamortized Discount
$ 7,341,697
and Unamortized Discount
$ 7,094,535
Fair Value Hedge Adjustment
121,622
175,896
Unamortized Discount
Total Carrying Value
(3,095)
$ 7,460,224
—
$ 7,270,431
Under the liquidity support program, PEFCO supports both
held by a trustee. As of September 30, 2014, PEFCO
medium and long-term U.S. Agency-guaranteed financing
supported no transactions. As of September 30, 2013,
facilities by providing liquidity support during the waiting
PEFCO supported one transaction amounting to $3 million
period prior to payment by the agency under its guarantee
in Agency-guaranteed financing facilities.
and by funding interim notes until securitization of the
Agency-guaranteed debt is effected. PEFCO’s liquidity
support advance, if any, will be repaid and is secured by the
agency’s guarantee and, in certain instances, by deposits
39
6. SHORT-TERM NOTES
assets held in a trust arrangement residing on the books of
At September 30, 2014 and 2013, PEFCO’s Short-term
PEFCO. Collateral assets include U.S. Treasury Securities
notes consisted of commercial paper in the amount of $2.2
or other obligations unconditionally guaranteed or fully
billion. Commercial paper is generally issued in amounts
insured by the United States or agencies of the United
not less than $100 thousand and with maturities of 270 days
States, and foreign importer notes supported directly by
or less.
export loan guarantees by Ex-Im Bank under the 1971
Short-term notes averaged approximately $2.2 billion in
2014 and 2013. The average interest rate was 0.25% in
2014 and 0.27% in 2013. At September 30, 2014, the cost
of the commercial paper after adjusting for the impact
of the interest rate swaps (cash flow hedges) was 0.38%,
compared to 0.48% at September 30, 2013.
Guarantee Agreement. The securities and notes are
assigned to, and held by, The Bank of New York Mellon (a
shareowner of PEFCO), as Trustee. The collateral includes
scheduled maturities which ensure that, before the date on
which payment of principal of each Secured Note is due,
the Trustee will have cash from maturing collateral sufficient
to pay the principal of the Secured Notes. Payment of
PEFCO has three syndicated revolving credit facilities in
place with 15 banks, of which 12 are shareowners, totaling
$1.66 billion: a 364-day facility for $1.12 billion, a three-year
$260 million facility expiring in 2016, and a three-year $280
million facility expiring in 2017. At September 30, 2014, there
were no amounts outstanding under any facility.
interest on the Secured Notes is fully guaranteed by Ex-Im
Bank in return for a fee paid by PEFCO, which is expensed
as incurred.
PEFCO issued $1,000 million of Secured Notes in 2014 and
$1,000 million in 2013. The average principal balance of
Long-term Secured Notes was approximately $6,322 million
in 2014 and $5,969 million in 2013. The average interest
7. LONG-TERM SECURED NOTES
cost for the year ended September 30, 2014 was 3.01%
Secured Notes typically have original maturities of five
compared to 3.15% for the year ended September 30, 2013.
years or longer and are sold through underwriters. Lead
A summary of the Secured Note maturities as of September
underwriters are often also shareowners of PEFCO. The
30, 2014 and September 30, 2013 appears below.
principal of all Secured Notes is fully backed by collateral
Remaining Maturities of Long-term Secured Notes at September 30, 2014 are
as follows: (000’s of USD)
Remaining Maturities of Long-term Secured Notes at September 30, 2013 are
as follows: (000’s of USD)
2015
$ 730,000
2014
$ —
2016
650,000
2015
730,000
2017
850,000
2016
650,000
2018
1,000,000
2017
850,000
2019
1,000,000
2018
900,000
2020 and thereafter
2,700,000
2019 and thereafter
Total Outstanding Principal Amount
132,789
Total Outstanding Principal Amount
$ 5,930,000
165,188
Unamortized Premium
20,410
Unamortized Premium
18,537
(8,580)
(7,817)
40
$ 6,930,000
2,800,000
$ 7,074,619
$ 6,105,908
As noted above, the principal cash flows arising from the
The pledged collateral backing the Secured Notes at
collateral pool backing each Secured Note series must
September 30, 2014 consists of $6,598 million in foreign
mature before the due date when the Secured Note
importer notes backed by the 1971 Guarantee and $326
principal is due. The principal cash flows are segregated
million in U.S. Treasuries and other U.S. Government
between designated installments (pledged in the trust
guaranteed securities. Total pledged assets including cash
against existing Secured Note issuances) and free
are $7,140 million against the balance of Secured Notes
installments (pledged in the Trust arrangement but not
outstanding of $6,930 million. For designated installments
designated currently against any existing Secured Note
at September 30, 2014, the amount of principal installments
issuances). Designated installments in excess of a Secured
in excess of Secured Note principal redemption amounted
Note principal redemption are available to back the next
to $13 million. For free installments at September 30, 2014,
scheduled Secured Note redemption. Free installments
principal installments available after May 21, 2024 amount
are available collateral for pledging against future Secured
to $197 million.
Note issuance, or transferring out of the trust if held as
current cash.
Long-term Secured Notes outstanding as of September 30, 2014 (in 000’s):
As a % of
Principal
9/30/14
Principal
Due Within
One Year
$ 481,728
120%
$ 400,000
May-15
527,657
160%
330,000
Nov-15
674,839
193%
—
2.15%
Jul-16
850,922
284%
—
5.01%
Dec-16
913,785
914%
—
1.38%
1.24%
Feb-17
959,606
192%
—
250,000
5.45%
5.47%
Sep-17
926,920
371%
—
500,000
2.25%
2.10%
Dec-17
891,650
178%
—
500,000
500,000
1.88%
1.91%
Jul-18
861,027
172%
—
500,000
500,000
4.38%
4.25%
Mar-19
897,457
179%
—
Series HH
500,000
500,000
1.45%
1.47%
Aug-19
747,780
150%
—
Series LL
400,000
400,000
2.25%
2.29%
Mar-20
659,559
165%
—
Series BB
500,000
500,000
4.30%
4.23%
Dec-21
1,373,959
275%
—
Series EE
500,000
500,000
2.80%
2.71%
May-22
1,079,055
216%
—
Series II
400,000
400,000
2.05%
2.07%
Nov-22
801,217
200%
—
Series KK
500,000
500,000
3.55%
3.51%
Jan-24
801,864
160%
—
Series GG
400,000
400,000
2.45%
2.48%
Jul-24
413,456
103%
—
$ 6,930,000
$ 6,930,000
2.98%
2.93%
Original
Principal
Amount
Principal
Amount
9/30/14
$ 400,000
$ 400,000
3.05%
3.07%
Oct-14
Series T
330,000
330,000
4.55%
4.47%
Series U
350,000
350,000
4.95%
4.60%
Series DD
300,000
300,000
2.13%
Series W
100,000
100,000
5.00%
Series FF
500,000
500,000
Series X
250,000
Series CC
500,000
Series JJ
Series Z
Issue
Designation
Series AA
Coupon
Rate
Effective
Rate (a)(b)
Designated
Collateral
Installments
Maturity
Schedule
$ 13,862,481
$ 730,000
(a) Forward gains and losses and original issue discounts and premiums are reflected in the effective interest rate.
(b) Weighted average
41
Long-term Secured Notes outstanding as of September 30, 2013 (in 000’s):
As a % of
Principal
9/30/13
Principal
Due Within
One Year
$ 863,178
216%
—
May-15
875,859
265%
—
Nov-15
947,366
271%
—
2.15%
Jul-16
1,031,322
344%
—
5.01%
Dec-16
1,025,662
1026%
—
1.38%
1.24%
Feb-17
1,044,081
209%
—
250,000
5.45%
5.47%
Sep-17
926,302
371%
—
400,000
2.25%
2.29%
Dec-17
849,508
212%
—
500,000
500,000
1.88%
1.91%
Jul-18
833,285
167%
—
500,000
500,000
4.38%
4.25%
Mar-19
763,453
153%
—
Series HH
500,000
500,000
1.45%
1.47%
Aug-19
543,317
109%
—
Series BB
500,000
500,000
4.30%
4.23%
Dec-21
1,223,364
245%
—
Series EE
500,000
500,000
2.80%
2.71%
May-22
862,038
172%
—
Series II
400,000
400,000
2.05%
2.07%
Nov-22
508,970
127%
—
Series GG
400,000
400,000
2.45%
2.48%
Jul-24
412,528
103%
—
$ 5,930,000
$ 5,930,000
3.09%
3.04%
Original
Principal
Amount
Principal
Amount
9/30/13
$ 400,000
$ 400,000
3.05%
3.07%
Oct-14
Series T
330,000
330,000
4.55%
4.47%
Series U
350,000
350,000
4.95%
4.61%
Series DD
300,000
300,000
2.13%
Series W
100,000
100,000
5.00%
Series FF
500,000
500,000
Series X
250,000
Series CC
400,000
Series JJ
Series Z
Issue
Designation
Series AA
Coupon
Rate
Effective
Rate (a)(b)
Designated
Collateral
Installments
Maturity
Schedule
$ 12,710,233
—
(a) Forward gains and losses and original issue discounts and premiums are reflected in the effective interest rate.
(b) Weighted average
8. SHAREOWNERS’ EQUITY
(i) the shareowners’ equity of PEFCO, after giving effect to
Common stock outstanding amounted to $39.0 million at
such dividend, is maintained at a minimum of $60 million
September 30, 2014 and September 30, 2013, and shares
(excluding the impact on shareowners’ equity of market
issued and outstanding amounted to 17,786 at each
value accounting for investment securities and for cash
period end.
flow hedges); (ii) PEFCO maintains, after giving effect to
Net income per share was $371.37 in fiscal 2014, $388.29 in
fiscal 2013 and $385.74 in fiscal 2012. Weighted average
shares outstanding amounted to 17,786 for 2014, 17,584 for
2013 and 16,295 for 2012.
Under an agreement with Ex-Im Bank effective December
16, 2010, PEFCO has approval to declare or pay dividends
of up to 50% of annual net income, subject to the following:
42
such dividend, a leverage ratio of guaranteed assets to
shareowners’ equity not in excess of 75 to 1; and (iii) PEFCO
maintains an AAA rating from a major rating agency on all
secured debt issued.
The Board of Directors voted to declare a $29 dividend per
share for the fiscal years ended September 30, 2014, 2013
and 2012.
9. INCOME TAXES
The provision for income taxes is as follows for the years ended September 30, (in 000’s):
2014
2013
2012
$ 3,844
$ 2,430
$ 3,808
(410)
1,106
(537)
$ 3,434
$ 3,536
$ 3,271
2014
2013
2012
Tax at statutory rate
34.0%
34.0%
34.0%
Effective income tax rate
34.2%
34.1%
34.2%
Federal-current
Federal-deferred
A comparison of the U.S. Federal statutory tax rate to the effective income tax rate is as follows for the years ended September 30,
Included in other assets and deferred charges at September
would be realized in the future, no valuation allowance
30, 2014 is a net deferred tax asset of $2,633 thousand
was required as of September 30, 2014 and 2013. This
($2,691 thousand in 2013). PEFCO determined that, as
determination was made based upon the evidence of prior
it was more likely than not that such deferred tax asset
year earnings as well as expected future earnings.
The following table is an analysis of the deferred tax assets/liabilities (in 000’s) for the years ended September 30:
2014
2013
Deferred Asset (Liability)
Deferred Asset (Liability)
Total deferred assets
$ 3,418
$ 4,108
Total deferred liabilities
$ (785)
$ (1,417)
Net deferred assets
$ 2,633
$ 2,691
The Company has not recorded any uncertain tax positions
Currently, there are no examinations in progress and the
as of September 30, 2014 and 2013. The Company does
Company has not been notified of any future examination
not expect its uncertain tax position balance to change
by applicable taxing authorities.
significantly in the next 12 months. The company is no
longer subject to examinations by taxing authorities for all
fiscal years prior to the one ended September 30, 2011.
There are no significant matters affecting the comparability
of the income tax information presented above.
43
10. EMPLOYEE BENEFIT PLANS
plan which provides defined pension benefits to certain
PEFCO has a funded, noncontributory qualified defined
employees. Pension benefits are based primarily upon the
benefit pension plan covering all full-time employees
participants’ compensation and years of credited service.
and an unfunded, noncontributory, nonqualified pension
The following table sets forth changes in benefit obligation, plan assets, funded status and net periodic benefit cost of each plan:
Qualified Plan
(in 000’s)
Nonqualified Plan
2014
2013
2014
2013
Change in Benefit Obligation
$ 8,332
$ 8,342
$ 4,570
$ 4,277
Service cost
Benefit obligation at beginning of year
568
501
141
337
Interest cost
354
343
185
165
Actuarial (gain)/loss
794
(650)
250
(8)
Benefits paid
(49)
(204)
(226)
(201)
$ 9,999
$ 8,332
$ 4,920
$ 4,570
$ 8,105
$ 6,807
$ —
$ —
Actual return on plan assets
707
822
—
—
Employer contributions
575
680
226
201
Benefits paid
(49)
(204)
(226)
(201)
Fair value of plan assets at end of year
$ 9,338
$ 8,105
$ —
$ —
Funded status at end of year
$ 661
$ 227
$ 4,920
$ 4,570
Benefit obligation at end of year
Change in Plan Assets
Fair value of plan assets at beginning of year
(a)
(a) These amounts were recognized as liabilities in the Consolidated Statements of Financial Condition as of September 30, 2014 and 2013.
Amounts Recognized in Accumulated Other Comprehensive Income
Net loss/(gain)
Prior service cost
44
$ 1,569
$ 1,088
$ 1,243
$ 1,018
(7)
(11)
5
9
$ 1,562
$ 1,077
$ 1,248
$ 1,027
The net periodic pension cost for 2014, 2013 and 2012 in
Management had concluded that the adjustments were
the table below reflects the actuarial-determined expense.
not individually or in the aggregate material to the
PEFCO had overaccrued its pension expense in prior years
consolidated financial statements as of and for the year
in a cumulative amount of $1.3 million as of September
ended September 30, 2012 or to any preceding period
30, 2011 and corrected the overaccrual in 2012 net income
as reported.
as a reduction of compensation and benefits expense.
The net periodic benefit cost and other amounts recognized in Other Comprehensive Income (“OCI”) follow:
Qualified Plan
(in 000’s)
Nonqualified Plan
2014
2013
2012
2014
2013
2012
$ 568
$ 501
$ 495
$ 141
$ 337
$ 305
Components of net periodic pension cost
Service cost
Interest cost
354
343
309
185
164
165
Expected return on plan assets
(415)
(358)
(248)
—
—
—
—
—
15
—
—
—
Amortization of prior service cost
Amortization of unrecognized transition obligation
(4)
(4)
5
5
5
(4)
Amortization of net losses
22
194
134
24
32
20
$ 525
$ 676
$ 710
$ 355
$ 538
$ 486
$ 502
$ (1,115)
$ 262
$ 250
$ (8)
$ 399
(22)
(194)
(134)
(24)
(32)
(20)
Amortization of prior service cost
4
4
(5)
(5)
(5)
4
Amortization of transition (asset)/obligation
—
—
(15)
—
—
—
$ 484
$ (1,305)
$ 108
$ 221
$ (45)
$ 383
Net periodic pension cost
Other Changes in Amounts Recognized in OCI(1)
Net (gain)/loss
Amortization of (gain)/loss
Total Recognized in OCI
(1) Before taxes at PEFCO’s effective tax rate of approximately 34%. 2012 does not include the impact of the pension correction related to prior years.
Discount rate assumptions used for pension plan
30% in debt securities. At September 30, 2014 and 2013,
accounting reflect prevailing rates available on high-
all plan assets were invested in Level 2 asset classes. The
quality, fixed –income debt instruments with maturities that
funding objectives of the pension plan are to achieve and
match the benefit obligation. For each pension plan, the
maintain plan assets adequate to cover the accumulated
weighted average discount rates used in the measurement
benefit obligation and to provide competitive investment
of the benefit obligation were 3.55% in 2014, 4.25% in 2013
returns and reasonable risk levels when measured against
and 3.94% in 2012 and the weighted average rate of pay
appropriate benchmarks.
increase was 4.00% in 2014, 2013 and 2012. The weighted
average discount rates used to determine the net periodic
pension costs were 4.25% in 2014, 3.94% in 2013, and 4.69%
in 2012 for both plans. The expected long-term rate of
return on assets for the qualified plan was 5.00% in 2014,
PEFCO also provides healthcare and life insurance benefits
to eligible retired employees. Healthcare is contributory;
life insurance is noncontributory. All postretirement plans
are funded on a pay-as-you-go basis.
2013 and 2012.
The assets of the qualified plan are currently invested in a
balanced fund. The asset allocation of the balanced fund
consists of approximately 70% in equity securities and
45
The following table sets forth changes in benefit obligation, funded status and net periodic benefit cost of the postretirement plans:
(in 000’s)
2014
2013
Change in benefit obligation
$ 3,561
$ 3,355
Service cost
Benefit obligation at beginning of year
320
322
Interest cost
175
131
Plan participants’ contributions
25
20
(241)
(227)
(55)
(40)
$ 3,785
$ 3,561
$ —
$ —
Employer contribution
30
20
Plan participants’ contributions
25
20
Benefits paid
(55)
(40)
—
—
$ 3,785
$ 3,561
Actuarial (gain)/loss
Benefits paid
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Fair value of plan assets at end of year
Funded status at end of year
(a)
(a) These amounts were recognized as liabilities in the Consolidated Statements of Financial Condition at September 30, 2014 and 2013.
Amounts Recognized in Accumulated Other Comprehensive Income
Net loss/(gain)
$ 669
$ 965
(172)
(220)
$ 497
$ 745
2014
2013
2012
Service cost
$ 320
$ 322
$ 325
Prior service (credit)
The net periodic benefit cost and other amounts recognized in Other Comprehensive Income (“OCI”) follow:
(in 000’s)
Components of periodic postretirement benefit cost
Interest cost
175
131
147
Amortization of prior service (credit)
(47)
(47)
(47)
Amortization of net losses
54
82
122
$ 502
$ 488
$ 547
$ (241)
$ (227)
$ (243)
Amortization of prior service credit
47
47
47
Amortization of actuarial (gain)
(54)
(82)
(122)
$ (248)
$ (262)
$ (318)
Net periodic postretirement benefit cost
Other Changes in Amounts Recognized in OCI(1)
Net (gain)/loss
Total Recognized in OCI
(1) Before taxes at PEFCO’s effective tax rate of approximately 34%. 2012 does not include the impact of the pension correction related to prior years.
46
The weighted average discount rates used in the
provide an indication of the volume of the transactions.
measurement of benefit obligation were 4.34% in 2014 and
The credit risk inherent in interest rate swaps arises from
4.94% in 2013. The weighted average discount rates used
the potential inability of counterparties to meet the terms
in measuring net periodic benefit cost for the years ended
of their contracts. PEFCO performs credit reviews and
September 30, 2014, 2013 and 2012 were 4.94%, 3.94%
enters into netting agreements to minimize the credit risk
and 4.69%, respectively. For the year ended September
of interest rate swaps. There were no counterparty default
30, 2014, assumed health care cost trend rates for medical
losses in 2014, 2013, or 2012.
pre-65 and post-65 were at 8.50%, and prescription drugs at
6.25%. For the year ended September 30, 2013, those rates
were 8.50%, 8.50% and 6.25%, respectively. These rates
will gradually decrease to 4.50% by 2024. The impact of a
1% change in the health care cost trend assumption would
increase (decrease) the postretirement benefit obligation
by $659 thousand and ($788 thousand), respectively.
PEFCO has a defined contribution 401(k) plan in which all
full-time employees, after completing six months of service,
are eligible to participate. This plan allows employees
The following table summarizes the notional amount and credit exposure of
PEFCO’s derivative instruments at September 30, 2014 and 2013.
Derivatives Instruments designated as hedges
(in 000’s)
Interest Rate Swaps
Fair Value Hedge
Cash Flow Hedge
Total
to make pre-tax contributions to tax-deferred investment
Effect of master
portfolios. Employees may contribute up to 12% of their
netting agreements
compensation subject to certain limits based on federal
Total Credit Exposure
income tax laws. PEFCO matches employee contributions
up to 6% of an employee’s compensation. The contribution
expense was $185 thousand in 2014, $188 thousand in 2013
and $160 thousand in 2012.
11. DERIVATIVE FINANCIAL
INSTRUMENTS
Notional
2014
Credit Exposure
2013
2014
2013
$11,684,694 $10,375,159 $ 230,134 $ 282,941
—
90,000
—
$11,684,694 $10,465,159 $ 230,134 $ 282,941
(193,008) (256,305)
$ 37,126 $ 26,636
PEFCO has interest rate swap contracts designated as fair
value hedges, which hedge certain fixed-rate long-term
loans and certain fixed-rate Long-term Secured Notes (debt).
The objective of the fair value hedge is to protect the
fixed-rate long-term loans and the fixed-rate long-term
PEFCO uses derivative financial instruments, including
debt against changes in LIBOR which is the designated
interest rate swap contracts, as part of its asset/liability
benchmark interest rate used by PEFCO.
management activities. The objective of the asset/
liability management process is to manage and control the
sensitivity of PEFCO’s earnings to changes in the market
interest rates. The process seeks to preserve earnings
while not placing at risk of a 100 basis point movement
in interest rates more than 10% of the pre-tax net present
value of PEFCO’s capital, which is the acceptable specified
limit authorized by PEFCO’s Board of Directors. PEFCO
does not enter into interest rate swap contracts or other
—
Certain fair value hedges are considered to be 100%
effective as each meets shortcut method accounting
requirements and, accordingly the changes in fair values
of both the interest rate swap contracts and related debt
are recorded as equal and offsetting gains and losses
in the Consolidated Statements of Financial Condition.
Accordingly, there was no gain or loss recognized in current
period earnings related to these hedges.
derivatives not designated as hedging instruments.
Interest rate swap contracts are transactions in which two
parties agree to exchange, at specified intervals, interest
payment streams calculated on an agreed-upon notional
amount with at least one stream based on a specified
floating-rate index. The notional principal amount of
interest rate swap contracts do not represent the market
or credit risk associated with those contracts but rather
47
Certain fair value hedges do not meet shortcut accounting
periods, resulting in a cumulative understatement of
requirements and accordingly, the extent to which these
income. Included in net finance income for 2013 is a pre-
instruments are effective at achieving offsetting changes
tax adjustment of $0.4 million related to prior years, of
in fair value must be assessed at least quarterly. Any
which $0.6 million related to 2012 and $(0.2) million related
ineffectiveness must be recorded in current period earnings.
to years prior to 2012. Management also recorded a year
PEFCO has interest rate swap contracts designated as
cash flow hedges, which offset the variability in cash flows
arising from the rollover of short-term notes (liabilities).
The cash flow hedges are considered to be highly
effective and accordingly, the changes in the cash flows
of the interest rate swap contracts have been, and are
expected to continue to be, highly effective at offsetting
the changes in the cash flows of the short-term liabilities.
Any ineffectiveness must be recorded in the current period
earnings. The gains and losses deemed to be effective
are recorded in accumulated other comprehensive income
end net finance income pre-tax adjustment in 2013 of $0.7
million that related to the first two quarters of fiscal 2013.
Management evaluated these adjustments and concluded
that the adjustments were not material individually or in
the aggregate for the year-ended September 30, 2013 or
any preceding years’ consolidated financial statements
of PEFCO.
Ineffectiveness related to derivatives and hedging relationships was recorded
in net financing revenue as follows:
Ineffectiveness (in 000’s)
(loss), net of applicable income taxes. PEFCO had no
Interest Rate Swaps
interest rate swap contracts outstanding designated as cash
flow hedges at September 30, 2014.
In the financial close process for fiscal 2013, Management
Year ended September 30,
2014
2013
2012
Fair Value Hedge
$ (429)
$ 2,225
$ (5)
Cash Flow Hedge
123
—
—
$ (306)
$ 2,225
$ (5)
Total
discovered it had been incorrectly computing hedge
ineffectiveness under the long-haul method in prior
The following table presents the effect of PEFCO’s derivative instruments on the Consolidated Statements of Financial Condition (in 000’s):
Asset Derivatives Fair Value (a)
Derivatives designated as hedges
Liability Derivatives Fair Value (b)
2014
2013
2014
2013
Interest Rate Swaps (c)
$ 230,134
$ 282,941
$ 216,684
$ 294,177
Total
$ 230,134
$ 282,941
$ 216,684
$ 294,177
(193,008)
(256,305)
(193,008)
(256,305)
$ 37,126
$ 26,636
$ 23,676
$ 37,872
Effect of master netting agreements
Total reported on the Consolidated Statements
of Financial Condition
(a) Reported as “Other assets and deferred charges” on the Consolidated Statements of Financial Condition
(b) Reported as “Accrued expenses and other liabilities” on the Consolidated Statements of Financial Condition
(c) Fair Values are on a gross basis, before consideration of master netting agreements as required by ASC 815-10
(d) Commencing in June 2013, PEFCO, as a financial institution, was required to clear all swap trades through a clearinghouse, thereby mitigating exposure to any
single counterparty. As of September 30, 2014, PEFCO had deposited margin of approximately $23 million related to 24 cleared transactions with a portfolio
market value of $13 million, resulting in excess margin of approximately $25 million. The aggregate notional principal on the cleared swaps amounted to $2.6
billion at September 30, 2014. PEFCO received/paid no cash collateral in connection with uncleared derivative transactions in 2014 and 2013.
The following table presents the effect of PEFCO’s derivative instruments in cash flow hedging relationships on the Consolidated Statements of Operations
(in 000’s):
Loss (Gain) Recognized in
Other Comprehensive
Income (OCI) on Derivatives,
net of tax (Effective Portion)
Interest Rate Swaps
48
Loss Reclassified
from OCI into
2014
2013
2012
2014
2013
2012
$ (2,229)
$ (3,013)
$ (2,814)
$ —
$ 64
$ 237
12. FAIR VALUE MEASUREMENTS
2. Level 2 – Quoted prices for similar instruments in active
PEFCO is required to report fair value measurements for
markets; quoted and model-derived valuations in
specialized classes of assets and liabilities and utilizes a
which all significant inputs and significant value drivers
three-level valuation hierarchy established under U.S. GAAP
are observable in active markets. Level 2 inputs are
for disclosure of fair value measurements.
those in markets for which there are few transactions,
the prices are not current, little public information
The valuation hierarchy is based on the transparency of
exists or instances where prices vary substantially
inputs to the valuation of an asset or liability as of the
over time or among brokered market makers. Level 2
measurement date.
securities consist of U.S. Guaranteed Securities.
The three-level hierarchy for fair value measurement is
3. Level 3 – Model derived valuations in which one or
defined as follows:
more significant inputs or significant value drivers are
unobservable. Unobservable inputs are those inputs
1. Level 1 – Quoted unadjusted prices for identical
that reflect PEFCO’s own assumptions that market
instruments in active markets for identical assets or
participants would use to price the asset or liability
liabilities to which PEFCO has access at the date of
based on the best available information.
measurement. Level 1 securities include U.S. Treasury
and equity securities.
September 30, 2014 (000’s)
Assets Measured at Fair Value on a Recurring Basis
Available-for-sale securities
Quoted Prices
in Active
Market (Level 1)
Prices w/Other
Observable
Inputs (Level 2)
Prices w/Significant
Unobservable
Inputs (Levels 3)
Netting (a)
Total
$ 665,488
$ 278,149
$ —
$ —
$ 943,637
—
230,134
—
(193,008)
37,126
$ 665,488
$ 508,283
$ —
$ (193,008)
$ 980,763
Unrealized depreciation on interest rate swaps
$ —
$ 216,684
$ —
$ (193,008)
$ 23,676
Total Liabilities at Fair Value
$ —
$ 216,684
$ —
$ (193,008)
$ 23,676
Netting (a)
Total
Unrealized appreciation on interest rate swaps
Total Assets at Fair Value
Liabilities Measured at Fair Value on a Recurring Basis
September 30, 2013 (000’s)
Assets Measured at Fair Value on a Recurring Basis
Available-for-sale securities
Quoted Prices
in Active
Market (Level 1)
Prices w/Other
Observable
Inputs (Level 2)
Prices w/Significant
Unobservable
Inputs (Levels 3)
$ 404
$ 261,713
$ —
$ —
$ 262,117
—
282,941
—
(256,305)
26,636
$ 404
$ 544,654
$ —
$ (256,305)
$ 288,753
Unrealized depreciation on interest rate swaps
$ —
$ 294,177
$ —
$ (256,305)
$ 37,872
Total Liabilities at Fair Value
$ —
$ 294,177
$ —
$ (256,305)
$ 37,872
Unrealized appreciation on interest rate swaps
Total Assets at Fair Value
Liabilities Measured at Fair Value on a Recurring Basis
(a) PEFCO has elected to net unrealized gains (receivables) and unrealized losses (payables) when a legally enforceable master netting agreement exists.
49
PEFCO did not have any assets or liabilities that were
non-recurring basis during the years ended September 30,
measured at fair value on a recurring basis using significant
2014 and 2013.
unobservable inputs (Level 3) during the years ended
September 30, 2014 and 2013. PEFCO did not have any
assets or liabilities that were measured at fair value on a
There were no transfers between Level 1 and Level 2 during
the years ended September 30, 2014 and 2013.
The following table presents the carrying amounts and estimated fair values of financial instruments as of September 30, 2014 and 2013 (in 000’s)
2014
ASSETS
Cash and cash equivalents
Investment securities
Interest and fees receivable
Loans
Interest rate swaps
2013
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$ 957,146
$ 957,146
$ 888,982
$ 888,982
943,637
943,637
262,117
262,117
62,974
62,974
63,583
63,583
7,460,224
7,533,919
7,270,431
7,390,363
37,126
37,126
26,636
26,636
$ 2,175,814
$ 2,175,814
$ 2,191,479
$ 2,191,479
LIABILITIES
Short-term notes
Interest payable
Interest rate swaps
50,220
50,220
45,434
45,434
7,074,619
7,145,286
6,105,908
6,092,517
23,676
23,676
37,872
37,872
For the following financial instruments, which have relatively
13. RELATED PARTY TRANSACTIONS
short-term maturities or floating interest rates, the carrying
Certain shareowners (or their affiliates) have provided
amounts recognized in the Consolidated Statement of
and presently provide a variety of commercial banking
Financial Condition were determined to be a reasonable
services to PEFCO. In 2014, PEFCO paid $3,695 thousand
estimate of their fair value: cash, floating-rate loans, interest
in underwriting fees ($3,336 thousand in 2013) related to
and fees receivable, short-term notes and interest payable.
the issuance of Long-term Secured Notes. Fees paid
Investment securities - The fair value of investment
securities available for sale are recorded at fair value on the
balance sheet. The fair value is generally determined using
market prices provided by data providers (level 1) or dealer
quotations (level 2).
Fixed-rate loans - Because no quoted market prices are
for liquidity back-up lines in 2014 were $2,370 thousand
($2,322 thousand in 2013). In 2014, PEFCO also paid $702
thousand for other commercial banking services ($661
thousand in 2013).
PEFCO has derivative contracts with certain shareholders broken out as follows
(in 000’s):
available for the loan portfolio, contractual cash flows
are discounted using current rates appropriate for each
maturity to estimate the fair value of fixed-rate loans.
Long-term Secured Notes - The fair values were based
on dealer quotations taking into account current market
interest rates and the credit rating of PEFCO.
Interest rate swaps - The fair values were based on model
valuations (level 2) using market-based inputs. The fair
value generally reflects the estimated amounts that PEFCO
would receive or pay to replace the contracts at the
reporting date.
50
September 30, 2014
September 30, 2013
Receivable, net
$ 23,762
$ 22,710
Payable, net
$ (14,114)
$ (25,500)
14. GENERAL AND ADMINISTRATIVE
EXPENSES
The breakdown of the General and Administrative Expenses are as follows
(in 000’s):
2014
2013
2012
$ 6,680
$ 7,191
$ 5,398 (a)
Administration
2,905
2,548
2,602
Professional fees
1,115
858
665
$ 10,700
$ 10,597
$ 8,665
Compensation and benefits
Total
(a) PEFCO had over accrued its pension expense in prior years in a cumulative
amount of $1.3 million through September 30, 2011, and corrected the
overaccrual in 2012 pre-tax earnings as a reduction of compensation and
benefits expense. Management has concluded that the adjustments were
not individually or in the aggregate material to the consolidated financial
statements as of and for the year ended September 30, 2012 or to any
preceding period as reported.
15. OPERATING LEASE
PEFCO has executed as lessee an operating lease for the
rental of office space through fiscal 2020. Rent holidays
and rent escalation clauses are recognized on a straightline basis over the lease term. Leasehold improvements
incentives are recorded as leasehold improvements and
amortized over the shorter of their economic lives or the
term of the lease. For the years ended September 30,
2014, 2013 and 2012, PEFCO recorded lease expense
related to these agreements of $615 thousand, $614
thousand and $614 thousand, respectively, which is
included in the accompanying Consolidated Statements
of Operations.
Future minimum lease payments under the lease as of September 30, 2014
are as follows (in 000’s)
2015
$ 625
2016
634
2017
634
2018
634
2019
634
Thereafter
106
Total
$ 3,267
51
16. SUBSEQUENT EVENTS
which considers Ex-Im’s stand-alone credit profile (SACP)
In accordance with current accounting literature,
and the likelihood of extraordinary support from the U.S.
subsequent events were evaluated through the date the
government. Standard & Poor’s holds the view that there
financial statements were issued, November 25, 2014.
exists an extremely high likelihood of extraordinary support
On October 10, 2014, PEFCO was informed by one of its
lenders that a borrower filed for reorganization under the
bankruptcy laws of its home country. The customer has
outstanding six notes totaling $2.9 million under PEFCO’s
Short-term Insured Loan Program which are insured against
non-payment by Ex-Im Bank. The lender filed a claim
with Ex-Im Bank which was denied for technical reasons,
and subsequently filed an appeal which was also denied.
PEFCO placed theses notes on nonperforming status,
stopped accruing interest and reversed approximately $38
thousand of interest accrued on the notes. Negotiations
from the U.S. government to Ex-Im Bank, but that support
is no longer viewed as certain. Consequently, Standard &
Poor’s has opined that Ex-Im’s credit profile is slightly lower
than the sovereign credit rating on the U.S. On October
24, 2014, Standard & Poor’s affirmed its A+ long-term issue
credit rating (ICR) on PEFCO and also affirmed its A-1 shortterm ICR and A-1 commercial paper rating, but lowered its
issue ratings on PEFCO’s secured notes to A+ from AA+.
Standard & Poor’s also removed its long-term ICR from
CreditWatch with negative implications and changed its
outlook to negative.
to satisfy PEFCO’s claims are in the early stages, and due
On November 19, 2014, Fitch issued a rating of AAA on the
to guarantees issued by the lender and other cross default
long-term Issuer Default Rating (IDR) for PEFCO, consistent
covenants of the notes, PEFCO believes it will recover
with Fitch’s U.S. sovereign rating, and a rating of F-1+ on
its claims.
the short-term IDR. Fitch also issued a Support Rating of
Ex-Im Bank’s statutory authority to exercise its functions
has been limited to specified periods, which have been
extended by Congressional action from time to time, and
recently, the U.S. Congress extended Ex-Im Bank’s Charter
to June 2015, as part of a continuing resolution to fund
the U.S. Budget. As Ex-Im is an independent executive
agency and a wholly owned U.S. government corporation,
Standard & Poor’s assesses Ex-Im’s credit profile according
to its government-related enterprise (GRE) methodology,
52
‘1’ and Support Rating Floor of AAA, the highest possible,
with the view that PEFCO enjoys an extremely high degree
of sovereign support through Ex-Im Bank. Furthermore
Fitch’s ratings assume that Ex-Im Bank will be reauthorized
given its critical policy role. In the unlikely event Ex-Im’s
charter is not renewed, Fitch is of the belief that PEFCO’s
ratings may not change solely on that basis reflecting the
sovereign guarantees that remain in effect until maturity of
the obligations.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
TO THE BOARD OF DIRECTORS AND
SHAREOWNERS OF PRIVATE EXPORT
FUNDING CORPORATION
Private Export Funding Corporation (“PEFCO”) maintains
a system of internal control over financial reporting which
established in Internal Control-Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this assessment,
PEFCO believes that, as of September 30, 2014, its system
of internal control over financial reporting was effective.
is designed to provide reasonable assurance regarding the
preparation of reliable published financial statements. The
system contains self-monitoring mechanisms, and actions
are taken to correct deficiencies as they are identified.
Even an effective internal control system, no matter how
well designed, has inherent limitations – including the
possibility of the circumvention or overriding of controls
Timothy C. Dunne
PRESIDENT & CHIEF EXECUTIVE OFFICER
November 25, 2014
– and therefore can provide only reasonable assurance
with respect to financial statement preparation. Further,
because of changes in conditions, internal control system
effectiveness may vary over time.
PEFCO’s management assessed its internal control over
financial reporting as of September 30, 2014, in relation to
criteria for effective internal control based on criteria
Robert T. O’Neill
VICE PRESIDENT & CONTROLLER
November 25, 2014
53
F I V E-Y E A R F I N A N C I A L D ATA
In thousands, except per share amounts
Loan Commitments
Commitments for year
Commitments, cumulative from inception
Year ended September 30,
2014
2013
2012
2011
2010
$ 1,927,000
$ 2,154,000
$ 2,948,000
$ 1,643,000
$ 1,900,783
$ 1,151,099
$ 877,946
$ 913,642
$ 889,710
7,301,740
7,080,129
7,217,526
5,901,849
4,497,347
158,484
190,302
234,284
277,349
295,132
$ 2,175,814
$ 2,191,479
$ 2,194,408
$ 2,144,677
$ 1,814,941
7,074,619
6,105,908
6,067,586
4,897,357
3,777,945
—
—
—
—
42,000
$ 6,605
$ 6,828
$ 6,286
$ 3,351
$ 1,391
371.37
388.29
385.74
226.25
93.95
516
516
506
—
—
143,257
133,867
114,854
96,916
95,907
4.61%
5.10%
5.47%
3.46%
1.45%
$ 1,562,000
33,824,000
Selected Assets
Cash and investment securities
Selected Liabilities
Short-term notes
Long-term Collateralized Notes
Other Financial Data
Net income (loss)
Net income (loss) per share
Dividends
Average shareowners’ equity
Return on average shareowners’ equity
54
INDEPENDENT AUDIT FEES
INDEPENDENT AUDIT FEES
Service
PEFCO utilizes the services of PricewaterhouseCoopers LLP
Audit
for audit, other audit-related services and tax services.
Audit-related
PEFCO’s Audit Committee is responsible for the preapproval of all audit and permitted audit-related and tax
services performed by the independent auditors. The fees
incurred in 2014 and 2013 were as follows:
2014
2013
$ 447,000
$ 457,000
Secured Note issuances
32,134
78,250
Substitutions of collateral
42,000
28,150
Audit-related
74,134
106,400
Tax
66,000
64,000
$ 587,134
$ 627,400
Total
55
BOARD OF DIRECTORS
Directors
Don B. Taggart(7)
Timothy C. Dunne(1) (3) (5) (6)
Richard S. Aldrich, Jr.(1) (4)
Philip F. Bleser(2) (4)
Mary K. Bush (3) (5)
David A. Dohnalek
Benjamin M. Friedman (1) (5)
Robert D. Matthews, Jr. (2) (5)
John A. McAdams
Karen B. Peetz (3) (4)
William R. Rhodes (1) (4)
Rita M. Rodriguez (2) (5)
Chairman
PEFCO
Chairman
BUSH INTERNATIONAL, LLC
CEO
EXWORKS CAPITAL, LLC
Paul Simpson
56
(2) (5)
Global Head of Equity
Asset Services
BANK OF AMERICA
MERRILL LYNCH
President &
Chief Executive Officer
PEFCO
Partner
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM, LLP
Senior Vice President & Treasurer
THE BOEING COMPANY
William Joseph Maier Professor of
Political Economy
HARVARD UNIVERSITY
President
THE BANK OF NEW YORK
MELLON
Francesco Vanni d’Archirafi
CITI HOLDINGS
President
WILLIAM R. RHODES GLOBAL
ADVISORS
Head of Global Corporate
Banking in North America
J.P. MORGAN
Vice Chairman
CITIZENS FINANCIAL
GROUP, INC.
Former Ex-Im Bank Director
(1)
Member of the Executive Committee
(2)
Member of the Audit Committee
(3)
ember of the Nominating and Governance
M
Committee
(4)
ember of the Compensation and Management
M
Development Committee
(5)
Member of the Risk Policy Committee
(6)
r. Dunne is an ex-officio member of the Audit
M
Committee and Compensation and Management
Development Committee
(7)
r. Taggart is an ex-officio member of all
M
standing committees of PEFCO except the
Executive Committee
(3) (4)
PEFCO ANNUAL REPORT 2014 ADVISORY BOARD & EXPORTERS’ COUNCIL & SMALL BUSINESS LENDER COUNCIL
The Advisory Board and the Exporters’ Council advise the
matters as management may request. Their guidance and
management of PEFCO on loan policy, lending rate policy,
strong support contribute greatly to the success of PEFCO
scope of activities, relationships with borrowers, commercial
and are highly appreciated. We are also appreciative of the
banks, other co-lenders, Ex-Im Bank and on such other
active participation of Ex-Im Bank.
Advisory Board
Exporters’ Council
Norman Buchbinder
Terina A. Golfinos
Jeffrey S. Cain
Carla G. Campos
Lillian Labbat
Bruce Drossman
Senior Vice President
Wells Fargo Bank, N.A.
Director
HSBC Securities (USA), Inc.
Managing Director
ING Capital LLC
Managing Director
JPMorgan Chase Bank, N.A.
Phillips Lee
Ronald J. Glover
Michael K. Clare
Robert P. Mayer
Brian Pelan
Piers Constable
Christan McCormick
Raj Daryanani
John Neblo
Managing Director
J.P. Morgan Securities Inc.
Director
Deutsche Bank
Director
BNP Paribas
Managing Director
Société Générale
Vice President and Manager
PNC Bank, N.A.
International Export
Credit Manager
Caterpillar Inc.
Jeffrey Windland
General Electric
Ae Kyong Chung
Managing Director
Citigroup Global Markets, Inc.
Daniel A. Stewart
Managing Director
Siemens Financial Services
Vice President &
Assistant Treasurer
Orbital Services Corp.
Managing Director
Boeing Capital Corporation
Manager, Customer Finance
Sikorsky Aircraft Corporation
Global Head of Aircraft Finance
Natixis
Head of Structured Finance
Investec USA Holding Corp.
Marcia M. Davis
Bank of America, N.A.
The PEFCO Small Business Lender Council is a network
frank discussions with lenders on subjects of common
of lenders that work with PEFCO in support of Ex-Im
interest. The Council is a PEFCO endeavor and is open
Bank’s outreach to small U.S. exporters. The Council has
only to lenders that have an established relationship with
two principal functions: as a funding resource for small
the PEFCO Small Business Program. The Council began
exporters and as a forum where Ex-Im Bank can have
activities in 2006.
Small Business Lender Council
Joseph T. Barrett
President
Barrett Trade & Finance Group, LLC
Gregory J. Bernardi
President
London Forfaiting Americas
Federico de la Garza
Trade Finance Director
Hencorp Becstone Group, LLC
Ralph Clumeck
Steven M. Greene
Brett N. Silvers
Luis Fernando Mendoza
Gustavo Rosas
Miguel Angelo Burelo
President
CFS International Capital Corp.
Trade Finance and International
Business Head
InterBanco, S.A.
Jorge Garza Adame
CEO Mexico
BAC Florida Bank
COO International Trade
Atrafin, LLC.
President
WorldBusiness Capital, Inc.
Director
New Continent Finance, Inc
Managing Director
INTL FCStone
William M. Schoeningh
President
Centre Merchant Finance, Inc.
www.pefco-smallbusinesslenders.com
57
OFFICERS
Officers
Timothy C. Dunne
Amit Gaglani
Vincent J. Herman
Gordon L. Hough
Ann Marie Milano
Rajgopalan Nandkumar
Robert T. O’Neill
Francoise M. Renieris
Melinda A. Scott
Don B. Taggart
President &
Vice President & Secretary
Assistant Vice President
58
Assistant Vice President &
Deputy Controller
Vice President & Treasurer
Chairman
Vice President
Vice President & Controller
Assistant Vice President
PEFCO SHAREOWNERS
PEFCO’s stock is owned by 26 commercial banks, one
By-laws, a “Qualified Investor” is a financial institution or
financial services company, and six industrial companies.
a corporation engaged in producing or exporting United
In the case of the commercial banks, the shares are
States products or services. Under PEFCO’s By-laws, no
owned directly or through an affiliate. Ownership and
shareowner may own more that 18% of the outstanding
transferability of the common stock of PEFCO are
shares. The following is a list of shareowners as of
restricted to “Qualified Investors”. As defined in the
September 30, 2014:
Commercial Banks
Financial Services Companies
Bank of America
Number of Shares
1,924
The Bank of Miami, N.A.
280
The Bank of New York Mellon
702
Bank of the West
79
Brown Brothers Harriman & Co.
38
Citibank, N.A.
1,507
Citizens Financial Group, Inc.
1,549
Deutsche Bank
1,066
HSBC USA Inc.
441
ING Capital LLC
267
Investec Investments Ltd.
108
JPMorgan Chase & Co.
165
Natixis Transport Finance, S.A.
738
Paribas North America, Inc.
367
PNC Bank Corp.
503
Regions Bank
20
Silicon Valley Bancshares
42
Société Générale
100
Standard Chartered Bank
300
UBS AG
Union Bank N.A.
Industrial Companies
ABB, Inc.
The Boeing Company
212
Number of Shares
80
1,425
General Electric Company
567
KBR, Inc.
113
Textron Inc.
United Technologies Corporation
Total
40
200
17,786
2,937
Key Bank
Sterling National Bank & Trust Company
Radian Asset Assurance Inc.
Number of Shares
39
137
93
UPS Capital Business Credit
431
U.S. Bank N.A.
500
Wells Fargo & Company
816
59
ADDITIONAL INFORMATION
Private Export Funding Corporation
280 Park Avenue, New York, NY 10017
For Specific Inquiries Concerning
PEFCO’s Lending Programs, Contact:
Telephone: (212) 916-0300
Gordon L. Hough
Facsimile: (212) 286-0304
(212) 916-0332
Internet
www.pefco.com
www.pefco-smallbusinesslenders.com
Common Stock
PEFCO is its own transfer agent and registrar for
its common stock, and a
ccordingly, all transfers of stock
must be coordinated through PEFCO.
For inquiries, contact
Ann Marie Milano, Vice President & Secretary
(212) 916-0314
[email protected]
Financial Information About PEFCO, Contact:
Robert T. O’Neill
Vice President & Controller
(212) 916-0333
[email protected]
Long-term Secured Notes and
Collateralized Notes
The Bank of New York Mellon is trustee, registrar, transfer
agent and paying agent for all outstanding issues of
PEFCO’s Secured Notes and PFC’s Collateralized Notes.
Short-term Notes
As of September 30, 2014, JPMorgan Chase Bank was the
issuing and paying agent for PEFCO’s commercial paper.
In November 2014, Bank of America, National Association
assumed the role of our issuing and paying agent for
PEFCO’s commercial paper.
For inquiries regarding Long-term and
Short-term Notes, Contact:
Raj Nandkumar
Vice President & Treasurer
(212) 916-0334
[email protected]
60
[email protected]
Vincent J. Herman
Vice President
(212) 916-0327
[email protected]
Independent Auditors
PricewaterhouseCoopers LLP
300 Madison Avenue
New York, NY 10017
Legal Counsel
Shearman & Sterling LLP
599 Lexington Avenue
New York, NY 10022
Annual Meeting
4:30 p.m., Thursday December 4, 2014
280 Park Avenue, 4th Floor
New York, NY 10017
To Contact Any of the Board of Directors
Please Mail Correspondence to:
PEFCO
Attention (Board Member)
Office of the Secretary
280 Park Avenue, 4th Floor
New York, NY 10017
P RIVATE EX PO RT
FU N D I N G CO R PO R ATIO N
280 PA R K AV E N U E
NEW YORK, NY 10017
W W W. P E F C O.C O M

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