By Bert Ely
As FCW reported last month, Kansas banker Leonard Wolfe testified on ABA’s behalf at the May 19 oversight hearing the Senate Agriculture Committee held on the FCS and its regulator, the Farm Credit Administration. After he testified, Leonard wrote an opinion article for Agri-Pulse, titled: “It’s time to reform the Farm Credit System,” summarizing his testimony. Todd Van Hoose, president of the Farm Credit Council, the FCS’s trade association, then fired back with a response, titled: “Make no mistake: The bank lobby wants to kill farm credit.” I encourage bankers to read both articles, and especially Van Hoose’s, as his article is an excellent example of the way in which the FCS tries to defend its lending practices and the competitive advantages it has over its taxpaying bank competitors. Speaking of articles, Ralph Nader has weighed in with this criticism of the FCS, “The Funny Business of Farm Credit.” Even those not traditionally involved in agriculture see that the FCS is not fulfilling its mission.
Three large FCS associations plan merger; more are on the way
Last month, three large midwestern FCS associations announced that they had “begun exploring a merger,” stating that their “organizations are in the process of evaluating this potential collaboration with the guidance and assistance of staff and industry experts.” They are AgStar Financial Services, which serves eastern and southern Minnesota and northwest Wisconsin; 1st FCS, which serves northern and western Illinois; and Badgerland Financial, which serves southern Wisconsin. As of March 31, 2016, they were, respectfully, the fifth, tenth, and twelfth largest FCS associations. If they merge, which is more likely than not, the merged association, with $18 billion of assets, would become the third-largest FCS association, trailing only FCS of America ($24.9 billion of assets at March 31, 2016) and Farm Credit Mid-America ($22.2 billion). Perhaps coincidentally, this prospective merger was announced just days before the FCA posted on its website an informational memorandum on revised merger guidance for FCS institutions, based on new merger rules the FCA adopted last year.
If this merger takes place, it will reduce the FCS to 72 direct-lending retail associations, down from 84 at the beginning of 2011 and 96 at the beginning of 2006. More significantly, this consolidation has led to the growth of some very large, multi-state associations. Assuming the three associations had merged as of March 31, 2016, the six largest FCS associations would have held about 52% of all assets owned by FCS associations while the bottom half of the associations, by size, hold just 9.8% of all association assets; the largest of the associations in the bottom half had $945 million of assets. The twenty smallest associations – those with less than $500 million of assets – held just 3.6% of all FCS assets. Four of the larger associations serve all or portions of 19 states while Kansas is served by six associations and Oklahoma by four. Clearly, the FCS increasingly is dominated by large, multi-state associations, hardly consistent with the FCS of several decades ago, when it was dominated by local associations. The FCS merger wave almost certainly will continue, leading to ever larger associations.
CoBank: New CEO; investors sue over sub-debt redemption
On June 2, CoBank announced that its CEO, Bob Engel, would retire on June 30, 2017, after eleven years as CEO. During Engel’s tenure, CoBank more than tripled its size, reaching $118 billion in total assets on March 31, 2016, making it the largest of the four FCS banks. Over the same period, the FCS overall more than doubled its size, to $305 billion in total assets on March 31, 2016. Engel achieved that growth in part through CoBank’s aggressive lending to investor-owned utilities and by buying participations in loans to “similar entities” – investor-owned businesses who can borrow from the FCS only because similar businesses – agricultural and utility cooperatives – can borrow from the FCS. Although CoBank dominates the FCS, some executives elsewhere in the FCS will welcome a tamer CoBank, as will some members of the House and Senate Agriculture Committees who have questioned CoBank’s aggressiveness. Tom Halverson, CoBank’s chief banking officer, will succeed Engel. According to a CoBank news release, Halverson joined CoBank in 2013 after spending more than 16 years at Goldman Sachs in a variety of executive positions. He holds a doctorate in “war studies.”
As the April 2016 FCW reported, CoBank angered institutional investors when it announced in March that it would redeem $405 million of 7.875% subordinated notes, asserting that new capital rules promulgated by the FCA opened the door to this redemption. On April 15, CoBank carried out that redemption, wiping out the approximately $50 million premium at which those notes were selling above their par value. Not surprisingly, on June 13, 28 investors in those notes, who in total owned approximately 44% of the notes, sued in federal court (Southern District of New York) for damages. It will be interesting to see how this litigation turns out as three other FCS institutions have issued high-yielding subordinated debt; they probably are tempted to redeem that debt, too.
FCA issues annual report on the FCS’s YBS lending
The FCS loves to brag about how much it lends to young, beginning, and small farmers yet as the FCW has reported on numerous occasions, the facts belie that assertion. Young (Y) farmers are borrowers 35 or younger, beginning (B) farmers are those who have been farming or ranching for ten years or less, and small (S) farmers are those whose gross receipts from agriculture are normally less than $250,000. On June 9, the FCA released its annual report on the FCS’s YBS lending. As the FCA has always readily acknowledged, the FCS double- and triple-counts its YBS lending. For example, if a loan is made to a 33-year-old who began farming eight years ago and normally has gross farm receipts of $200,000 annually, that loan gets counted three times – as a Y, a B, and an S loan. Further, if that farmer has four loans, say a real estate loan, an operating loan, and two equipment loans, those loans will get counted twelve times in the FCS’s YBS data even though there is just one borrowing relationship. Given that the FCS, in the interest of sound credit management, monitors its total credit exposure to each of its borrowers, it could report its YBS data by borrower, but it does not.
As the March 2016 FCW reported, FCS demonstrated its long-standing ability to aggregate loan data by borrower when, for the first time, in its 2015 Annual Information Statement, it reported outstanding loans to borrowers, in ranges of the amount borrowed at year-end 2015; previously the FCS reported loan data based on the size of individual loans outstanding. Aggregating FCS loan data by borrower would, of course, significantly shrink the FCS’s YBS numbers, which should raise even more questions about how extensively the FCS serves YBS farmers. Even with its double- and triple-counting, FCS loans and commitments outstanding to beginning farmers and ranchers dropped from 17.3% of all FCS loans and commitments at the end of 2013 to 17.1% at the end of 2014 and to 16.9% at the end of 2015. Similar declines were seen in FCS lending to small and young farmers.