By Bert ElyOn August 11, several Iowa congressional candidates expressed concerns about the Farm Credit System at a candidates’ forum, as reported by several Iowa media outlets. Their concerns reflect the issues raised at the House and Senate Agriculture committee hearings held over the last year examining the FCS’ activities and the effectiveness of the Farm Credit Administration, the FCS’ regulator.
Veteran GOP Senator Charles Grassley, a long-time member of the Senate Agriculture Committee, said “he supports the [FCS], but it has operated outside its charter.” He added that “they came to my office to talk to me and I brought up some of the loans that were very questionable loans. I got the feeling that they were very embarrassed by the issues that I brought up with them.” Iowa is served by FCS of America, the largest FCS association and one of the most aggressive in its lending and banking activities.
Former Iowa Ag Secretary Patty Judge, the Democrat who is challenging Grassley this year, stated that “there are probably reforms that need to be made and I would suggest to you that we are going to have a real opportunity to do that next year as we write the new farm bill.”
Republican Congressman Steve King, a member of the House Agriculture Committee, said the FCS needs to refocus on helping farmers and agribusinesses to ‘stay afloat.’” King went on to say that “they write their own mission statement. I asked the chair of the [FCA] board [about] that before an Ag Committee hearing some time back and, you know, my message to that was: ‘We may have to help you write that mission statement.’”
Democrat Kim Weaver, who is challenging King, said she’s “troubled by the [FCS’] loan to Cracker Barrel. Even though it has a rather rustic appeal, it isn’t exactly a farm-related business. I would look at actually having a little bit more monitoring of that because I really don’t think it’s fair.”
GOP congressman David Young, who is on the Agriculture Appropriations Subcommittee, said the FCS must be held to its original mission. “Choice is good out there, but one of the choices out there is backed by the taxpayer, in a sense . . . have they been operating outside of their purview?” Jim Mowrer, Young’s Democratic opponent, stated that “when you look at some of the [FCS’] recent activities, like the Verizon loan that they made, this is way outside of its intended scope of purpose.”
GOP congressman Rod Blum, who is not on the House Ag Committee, but is a member of the House Oversight and Government Reform Committee, said “there’s probably still a role for the [FCS], but we need to make sure that they’re not competing in the areas that they’re not supposed to be in . . . they’ve made some very big loans to some very large and profitable customers that whether they’re ag related is very, very questionable.” Taken together, these comments reflect the value of the Senate and House Agriculture Committees holding periodic oversight hearings where FCA officials and representatives of the FCS face tough questioning about FCS activities. These hearings will become even more important as Congress begins work on the next farm bill.
FCS’ effective tax rate dropped even lower in first half of 2016
The FCS’ tax bill dropped even as it continued to grow during the first half of 2016, with its total assets reaching $315 billion, 3.9 percent higher than at December 31, 2015. Loans outstanding grew almost as much over that period, rising 3.4 percent. Despite a 5.9 percent increase in net interest income, for the first half of 2016 compared to the first half of 2015, pre-tax profits rose at a much lower pace – just 1.67 percent. The slower growth in pre-tax profits was due in part to a 4.1 percent increase in operating expenses and a tripling of the FCS’s loan-loss provision, from $50 million to $160 million, reflecting “industry-specific reserves due to continued low grain commodity prices, increased loan volume and modest deterioration of credit quality in certain sectors of the loan portfolio.”
Despite the FCS’ sharp increase in its loan-loss provision, loan quality remains quite high, reflecting the ability of the FCS to cream-skim stronger ag credits. Consequently, the FCS is well-reserved relative to its total non-performing assets.
Even though the FCS’ pre-tax profits increased $40 million in the first half of 2016 over the first half of 2015, rising to $2.435 billion from $2.395 billion, its provision for income taxes declined $24 million, to $98 million from $122 million, as its effective tax rate dropped to 4.0 percent from 5.1 percent. Even that low tax rate overstates the amount of taxes paid by the core of the FCS – the FCS associations that banks compete against, for most of the FCS’ tax bill is paid by CoBank; in turn, the taxes CoBank pays are attributable to business segments not directly involved in production agriculture – loans to agribusinesses and rural utilities.
For the first half of 2016, CoBank accounted for $81.4 million of the FCS’ tax provision (for an effective tax rate of 14.3 percent), while the rest of the FCS accounted for just $17 million of the FCS’ tax provision, for an effective tax rate of just 0.9 percent. The same story was true for the first half of 2015 – CoBank accounted for $93.8 million of the FCS’ tax provision, for an effective tax rate of 16.8 percent; the rest of the FCS recorded a tax provision of just $28 million, for an effective tax rate of 1.5 percent. As a practical matter, FCS associations essentially pay no income taxes even though the profits they earn on their non-real-estate lending are subject to federal income tax.
FCA approves CoBank, AgStar health care investment
On June 24, the FCA approved requests from CoBank, the largest of the four FCS banks, and AgStar Financial Services to each invest up to $17.6 million in bonds issued by a rural medical center located somewhere in California. According to an FCA news release, “The bonds will provide financing to relocate and replace existing facilities.” AgStar is the fifth-largest FCS association; it is chartered to serve portions of Minnesota and Wisconsin.
This FCS “investment” is highly questionable from several perspectives. First, the FCS is not authorized to lend to finance health-care facilities, regardless of how meritorious the investment might be. Second, characterizing what essentially is a loan as a bond is a subterfuge to sidestep an important lending constraint Congress imposed on the FCS. If Congress wanted the FCS to finance rural medical facilities, it would have explicitly authorized the FCS to do so. Third, while CoBank funds the seven FCS associations that serve portions of California, for whatever reason none of those associations are investing in these bonds. The FCA should cease authorizing “investments” that violate the intent of the Farm Credit Act.
AgriBank reports sudden “departure” of its CEO
On July 29, AgriBank, the second-largest FCS bank, announced the sudden “departure” four days earlier of its CEO, Bill York. York’s departure follows by just a few months the announced retirement of long-time CoBank CEO Bill Engel, effective at the end of this year. No reason, such as early retirement, was given for York’s departure; he is 62 and had served for ten years as AgriBank’s CEO. He was one of the FCS’ highest paid CEOs, earning $1.82 million in 2015. Retired AgriBank vice president and general counsel William Throne was named interim CEO, effective August 1. Current AgriBank senior vice president and general counsel Barbara Stille served as interim CEO for the six days between York’s departure and Throne coming back on board.