Pub. 5 2010-2011 Issue 2

www.nebankers.org 14 Extraordinary Service for Extraordinary Members. excluded from the definition of “Major Swap Participant.” If $48 billion in outstanding swaps and other derivatives is not a major swap participant, then certainly almost all banks aren’t either. While the council’s arguments for exclusion parallel those offered by banks, the FCS seeks only to exempt itself. Although the letter does not say so, the FCS effectively is trying to gain yet another competitive advantage over its private-sector competitors, in addition to the substantial tax and interest-rate advantages the FCS already has. Hopefully, Congress will not cut a special deal for the FCS in the financial regulation legislation. AgStar Issues $100 Million of Costly Subordinated Debt In a most puzzling move, AgStar, one of the largest and most aggressive FCS associations, issued $100 million of subordinated debt during the first quarter of 2010. Until now, only three of the five FCS banks have issued subordi- nated debt. AgStar’s sub debt is due in 15 years, is not call- able for 10 years, and carries a 9 percent interest rate, which is in junk-bond territory. The big question is: Why does AgStar need or want such expensive debt capital? Clearly, AgStar has loan-quality problems, with its nonaccrual loans at March 31, 2010, equal to 4.61 percent of its total loans, more than double the nonaccrual rate of 2.09 percent for the rest of the FCS. As the February 2010 issue of Farm Credit Watch (FCW) reported, AgStar has been especially aggressive in making dairy loans well outside its assigned territory in Minnesota and Wisconsin, with a number of those loans later going bad. Possibly AgStar foresaw the need to boost its risk capital (which includes sub debt) in anticipation of future loan losses that would impair its ability to pay patronage dividends. As it was, AgStar cut its patronage payments to its members to $1.64 million in 2009 from $11.54 million in 2008 and $7.99 million in 2007, presumably to preserve capital. Possibly AgStar is gearing up to greatly expand its out-of-territory lending and is prepared to leverage its members’ capital in order to take on that additional credit risk. Time will tell. Report FCS Lending Abuses Bankers are continuing to send FCW reports of FCS lending abuses such as FCS loans for rural estates, week- end getaways, and hunting preserves. E-mail reports of similar lending abuses in your market to green-acres@ely- co.com . Please provide as much detail as possible about any loan that violates the spirit, if not the law, governing FCS lending. Farm Credit Watch Free to ABA Members If your bank belongs to the American Bankers Associa- tion, you can enjoy a free e-mail subscription to FCW, or you can read it monthly online at www.aba.com . To receive FCW by e-mail or to manage your subscription, visit ABA E-mail Bulletins at www.aba.com and check or uncheck the appropriate boxes. For other inquiries, please contact Barbara McCoy at the ABA at 800-BANKER. Z To contact Bert Ely, e-mail bert@ely-co.com; fax (703) 836-1403; phone (703) 836-4101, or mail PO Box 320700, Alexandria, Va. 22320. Q FCS Derivatives The FCS effectively is trying to gain yet another competitive advantage over its private-sector competitors, in addition to the substantial tax and interest-rate advantages the FCS already has. We take pride in our lending partnerships with more than 100 banks in our region. 3100 13th Ave. S., Fargo, N.D. | 800.450.8949 | STATEBANKS.COM MEMBER FDIC GENE UHER TOM ISHAUG HEIDI BYE Participation loans > Bank stock & ownership loans > Bank building financing > Business & personal loans > for bankers Call us for flexible underwriting, competitive rates and fast decisions! GARY KELLER