Pub. 9 2014-2015 Issue 4

www.nebankers.org 20 Extraordinary Service for Extraordinary Members. O N OCT. 16, THE BORROWERS/ stockholders of Frontier Farm Credit approved a “strategic alliance” with Farm Credit Services of America (FCSA), the largest Farm Credit System (FCS) association. The June edition of Farm Credit Watch provided an initial report about this most unusual alliance, a first within the FCS. FCSA, with $21.4 billion of assets, is headquartered in Omaha, Neb., and serves all of Nebraska, Wyoming, South Dakota, and Iowa. Frontier, with $1.77 billion of assets, is headquartered in Manhattan, Kan., and serves the eastern third of Kansas. This “alliance” would be FCSA’s first organizational change in decades, but it is not an outright acquisition. According to materials issued by the two associations, they “will continue Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2014 Bert Ely FCSA Evades FCA Approval to Gain Control of Frontier FC to exist as separate associations while integrating their day-to-day business operations, technology systems, and management teams. Each association will continue to have its own board, with representatives participating in a coordinating committee to facilitate board governance between the two or- ganizations.”However, the coordinating committee will have an FCSA tilt since 15 of its directors will serve on the com- mittee while Frontier will have just two directors on it. According to a Sept. 2 letter FCSA sent to its stockholders, the two associa- tions “will be jointly managed under a single teamof [FCSA] leaders withDoug Stark serving as the president and CEO of both associations. All employees will be joint employees of both associations” except “certain Frontier employees who participate in certain defined benefit and other plans will remain as [Fron- tier] employees, but will be leased to [FCSA].” [emphasis supplied] This explanation suggests that Frontier’s management team will be sacked, as they probably would be if there was an outright merger. Frontier will likely bear most of the cost of implementing the alliance, including $4 million this year, before the alliance becomes effective on Jan. 1, 2015. Much of that amount probably will be severance paid to departing managers. A source in Kansas re- ported that there already have been numerous terminations of Frontier personnel. Once the alliance becomes effective, “expense and income items will [generally] be shared in order to yield pre-tax incomes in proportion to the associations’ relative prior- year asset sizes as determined on a quarterly basis.” Although the two associations will be run as if they were one, they have different FCS funding banks that also provide supervisory oversight: CoBank is the funding/ supervising bank for Frontier while AgriBank fills that role for FCSA. Themost interesting question raised by this “strategic alliance:”Why is Fron- tier not being merged into FCSA, given that FCSAwill be running Frontier? Ac- cording to a document sent to Frontier’s borrowers/stockholders, “a merger would entail a more time-consuming and costly process, requiring the ap- proval of each association’s stockhold- ers, and separate approvals from the two funding banks and potentially their stockholders, as well as regula- tory approval from FCA.” This alliance does not require formal approval by the Farm Credit Administration (FCA) because 1996 amendments to the Farm Credit Act eliminated the requirement for FCA approval of FCS management agreements. While “projected savings of the alliance after full implementation is expected to be $6.5 million per year,” an outright merger would save even more money. Perhaps hidden problems