Ely: FCA Chairman Tonsager Has Important Message for FCS

On February 1, Dallas Tonsager, the new chairman and CEO of the Farm Credit Administration (FCA), gave his maiden speech as FCA chairman at the Farm Credit Council’s annual meeting.

The Council is the trade association for the FCS’s banks and associations. Tonsager sent a powerful message to the FCS that can be characterized by one word – confidence – which appeared 23 times in his speech. According to Tonsager, the FCS must maintain the confidence of the various publics it deals with, including those it lends to, those “to whom it does not lend,” and investors in FCS debt. Most important of all, Tonsager counseled, “the [FCS] must also be mindful of the confidence that Congress has in it. It only takes one example to raise doubts and questions among members of Congress.”

Those doubts and questions were starkly evident during the most recent oversight hearings the House and Senate Agriculture Committees held on FCS activities and the FCA’s regulation of the FCS. Possibly the “one example” Tonsager had in mind was CoBank, which was widely criticized at the two hearings for its numerous loan to large, investor-owned utilities and to other borrowers hardly in need of taxpayer-subsidized financing.

Although members of the ag committees criticized the numerous instances when FCS institutions have lent outside the limits of the Farm Credit Act or otherwise provided services not authorized by the act, Tonsager seemed to encourage FCS institutions to lend and provide services beyond those authorized by the act, including partnering “with veterans’ groups, land grant universities, and urban communities,” noting that some of these partnerships “have resulted in new hospitals, schools, nursing homes, and other community facilities.” There is one problem – the Farm Credit Act does not authorize FCS institutions to finance such facilities even though they may be in rural America.

Most troubling, Tonsager stated that “as your regulator, we will continue to work to bring clarity to the approval process for these projects so that you can continue to participate in them.” Translation: The FCA will ignore the limits and restrictions of the Farm Credit Act when it is so inclined.

Perhaps the most interesting aspect of Tonsager talk was his focus on the FCS’s structure, stating that he “would like to propose a year of dialogue between the [FCS] and FCA on this issue.” He noted that in recent years “there’s been a lot of talk about the right number of banks and associations. I don’t know if there is a right number of associations. However, since the banks are jointly and severally liable for [FCS] debt, I believe there is a point where the [FCS] could be left with too few banks.” Today, there are just four FCS banks, with AgFirst and Farm Credit Bank of Texas, if combined, about one-half the size of AgriBank and less than half the size of CoBank.

Tonsager went on to say that “both the [FCS] and FCA will need to reflect more closely on the reasons and ramifications for mergers and other changes in [FCS] structure.” Interestingly, Tonsager ignored the very important role that Congress and the FCS’s taxpaying competitors should play in that discussion.

Farm Credit Mid-America almost certainly faces a loss on a loan to a bankrupt college it should never have made

Two years ago, in the January 2015 FCW, I wrote about a $27 million loan Farm Credit Mid-America (FCMA) made in May 2013 to St. Joseph’s College in Rensselaer, Indiana. FCMA, the second-largest FCS association, is headquartered in Louisville.

According to a news release St. Joseph’s issued at that time, the college refinanced “its long term debt obligations through partnerships with DeMotte State Bank [of DeMotte, Indiana] and [FCMA].” The loan “will be locked in at a fixed interest rate for a 20 year term.” Reportedly, the bank merely serviced the loan on behalf of FCMA. On February 3, 2017, St. Joseph’s announced that its board had “voted to suspend activities on [its] campus at the end of the current semester” due to “a ‘dire’ financial situation at the more than 125-year-old institution.” According to one school official, “the school’s financial issues had been ‘brewing’ for the past 10 to 15 years, or longer;” that is, long before it obtained the FCMA loan. The school’s president stated that “a total of $100 million would be needed to sustain [the school] in its current state for five or more years,” including paying off $27 million of debt, presumably the FCMA loan.

In my article about the FCMA loan, I raised two huge problems with the loan. First, I questioned if the college was an eligible FCS borrower. That is, was it a “bona fide” farmer, as that phrase is used in the Farm Credit Act. In November of 2014, I asked the FCA if St. Joseph’s could be considered to be a “bona fide” farmer and therefore eligible to borrow from the FCS. Michael Stokke, the FCA’s Director of Congressional and Public Affairs, responding to my email, stated that my inquiry “does not involve a loan for which you are obligated,” which is how the FCA often blows off complaints about improper FCS lending. Stokke, who is still with the FCA, then stated that “we assure you that, under our examination authority, we have reviewed [FCMA’s] relationship with the College and determined that, in its business dealings with the College, [FCMA] has complied with our regulations.”

According to a well-placed source, FCMA has a lien on all of St. Joseph’s real estate, which comprises campus buildings as well as 8,000 acres of farmland that had been gifted to the college. Assuming that St. Joseph’s does not reopen, as has been the case with many other small colleges that have closed in recent years, its campus, located in northwest Indiana, 80 miles south of Chicago, will net FCMA little, if anything, after taking into account substantial deferred maintenance costs and its location in a town with a population of 6,000.

The farmland might bring at least $6 million, so FCMA is likely facing a loss of at least $20 million on this loan. As I reported in 2015, in 2010 St. Joseph’s was gifted with 7,634 acres of farmland with an estimated value of $40 million, more than enough to pay off the FCMA loan. However, the donor of that land, a very savvy businesswoman most likely quite aware of the school’s financial difficulties, “stipulated in her will and written agreements with the college that neither the college nor the [Catholic] church could sell the farmland.” Reportedly, the new beneficiary of the income produced by this farmland will be an unrelated charitable institution. It will be interesting to see if FCMA tries to establish a claim on that land so as to reduce its loss on the loan.

Given the substantial loss FCMA is facing on its St. Joseph’s loan, FCMA should discuss in its 2016 annual report how it justified making a clearly undercollateralized loan to a clearly ineligible borrower. Perhaps FCMA sold participations in this loan to other FCS institutions, which should raise this question among those buyers: Why did we buy a piece of such a lousy loan? The FCA should reexamine and publicly explain whether it should have approved this loan after being questioned about it.

The ag committees should ask why the FCA stated that “in its business dealings with the College, [FCMA] has complied with [the FCA’s] regulations.” Does the Farm Credit Act actually permit partially collateralized loans to private colleges? This loan could be yet one more instance where an FCS loan raises “doubts and questions among members of Congress.” Hopefully that will be the case.

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About Bert Ely

Bert Ely
Bert Ely is a consultant specializing in banking issues. He writes ABA's monthly Farm Credit Watch email bulletin.