Pub. 13 2018-2019 Issue 4

NEBRASKA BANKERS ASSOCIATION 23 To contact Bert Ely, email bert@ely-co.com , phone (703) 836-4101, or send mail to P.O. Box 320700, Alexandria, Va. 22320. If your bank belongs to the American Bankers Association (ABA), you can enjoy a free email subscription to Farm Credit Watch or you can read it monthly online at www.aba.com . To receive Farm Credit Watch by email or to manage your subscription, visit ABA Member Email Bulletins at www.aba.com/Tools/Ebulletins/Pages/ default.aspx . For other inquiries, please contact Barbara McCoy at the ABA at (800) BANKERS or bmccoy@aba.com. to have a comparable concern. The FCA policy further states that should such a disclosure be made, it would have to exclude “information that would identify the institution and/or persons involved.” Not identifying the institution or individuals subject to an enforcement order smacks of protecting the guilty. Read FCA Policy Statement 34 at https://bit.ly/2SRtSz9. The annual and quarterly information statements published by the Federal Farm Credit Banks Funding Corporation, the FCS’s funding arm, hint at the existence of enforcement orders against FCS institutions by stating the number of outstanding enforcement orders as of the end of the most recent quarter and the approximate size of the offending institutions. As best I can determine, there have been no outstanding enforcement orders since the first quarter of 2016, yet Lone Star Ag Credit, which I have written about in previous FCWs disclosed on Aug. 9, 2017 that its financial statements for 2016 and the first quarter of 2017 “should no longer be relied upon” due to “appraisal and accounting irregularities.” Lone Star has since come current on its financial reporting, but it appears that its apparently severe accounting problems did not generate any kind of enforcement order or regulatory action against Lone Star or the Lone Star employees responsible for its accounting problems. That regula- tory inaction should raise serious concerns at the FCA and on the ag committees — see the next article. Is the FCA waking up fast enough to risks facing the FCS? On Oct. 2 the FCA issued an informational memorandum summarizing its National Oversight Plan for Fiscal Year 2019. Read the memorandum at https://bit.ly/2zvSch9. This plan signals that the FCA is aware of key risks facing the FCS as farmers and ranchers deal with a tough economic environment due to declining commodity prices, rising interest rates and declining real estate prices. The memorandum highlighted the importance of internal controls, noting an “increased incidence [within the FCS] of internal control weaknesses that led to credit losses, increased operating expenses and increased reputational risk.” That, of course, is what occurred at Lone Star Ag Credit and earlier at FCS Southwest in Arizona, leading to its shotgun merger with Farm Credit West. One can reasonably wonder, though, what accounting and internal control failures are lurking today inside other FCS institutions. While it is commendable that the FCA is concerned about those risks and the importance of strong internal controls, the key question today is how well do FCS institutions understand those risks as they continue to aggressively compete against commercial banks by offering generous collateral valuations, low interest rates and promises of patronage dividends? Another indication of the FCA’s concern about growing risks within the FCS was the recent appointment of Howard Rubin as the chief risk officer of the FCS Insurance Corporation (FC- SIC) — he “will act as director of the FCSIC’s Risk Management Division while continuing to provide guidance to [its] board and management on complex legal issues affecting risk to the Insur- ance Fund.” The three members of the FCA’s board of directors also serve as the directors of the FCSIC, which guarantees the timely payment of principal and interest on debt issued by the Amazingly, the FCA is not willing to provide this same reciprocal courtesy to the other financial regulators or to the institutions they regulate. Funding Corporation. The insolvency of an FCS institution, most likely through loan losses, could trigger a claim on the fund balance the FCSIC has built up through premiums paid by FCS institutions. Given the stresses agriculture and the FCS are facing today, Mr. Rubin faces a challenging task. What happens if a patronage dividend is not paid as promised? Bankers have complained to me with increased frequency about promises of a patronage dividend that FCS institutions make to prospective borrowers. Patronage dividends, of course, are nothing more than an interest rebate, but presumably they are payable only if the FCS institution has sufficient funds and earnings to justify the rebate. In the July 2018 FCW I criticized a video produced by ArborOne Farm Credit that a banker sent to me because of the implied promise in the video that the pa- tronage dividend is guaranteed to be paid every year. What the video did not make clear is that there could be years in which no dividend would be paid. How often the promise of a dividend is not honored is unknown, but there are at least two instances in recent years when an FCS association paid no patronage dividend or at best a reduced dividend. Lone Star Ag Credit paid no patronage dividend in 2017 following the eruption of the accounting problems mentioned above. The patronage situ- ation at FCS Southwest is murkier because of sketchy reporting of its finances after its financial problems erupted in 2014 but it appears that its patronage dividend dropped substantially after 2014. The FCA should be doing much more to effectively police the patronage-dividend commitments many FCS associations dangle in front of prospective borrowers. 