Farm Credit Watch: The Four FCS Banks Are Commercial Banks?

By Bert Ely

According to a recent press release issued by the on-line magazine Global Finance, the four FCS banks are among the world’s 50 safest commercial banks. AgriBank was ranked #19, CoBank #25, AgFirst #28, and Farm Credit Bank of Texas #30. The press release stated that the banks on its list of the safest commercial banks “were selected through an evaluation of long-term foreign currency ratings — from Moody’s, Standard & Poor’s, and Fitch.”

Apart from their equity capital, the FCS banks are almost entirely funded with debt issued by the Federal Farm Credit Banks Funding Corporation and are jointly and severally liable for that debt. Global Finance, though, did not acknowledge that fact nor the fact that the four FCS banks are GSEs implicitly backed by the federal government, they also are the beneficiaries of a $10 billion cost-free line-of-credit from the U.S. Treasury. Five U.S. bank holding companies also made the top-50 list — U.S. Bancorp (21), BNY Mellon (40), State Street (43), Northern Trust (44), and Wells Fargo (49).

It is absolutely appalling that Global Finance fails to understand that the FCS banks are not commercial banks, but worse, when I pointed out that rather obvious fact to the editors at Global Finance, they would not acknowledge it. More troubling, when CoBank touted its inclusion the list of Global Finance’s 50 safest banks in this news release, it failed to note that its outstanding debt is raised for it by the Funding Corporation and that it was erroneously included in Global Finance’s companion list of the world’s safest commercial banks. CoBank’s failure to publicly state it should not be characterized as a commercial bank is a tacit admission that it does not mind being viewed by Global Finance’s readers as a commercial bank.

Worse, for at least the last six years, CoBank news releases have cited it as being ranked by Global Finance as one of the world’s safest banks without pointing out the magazine’s error in characterizing it a commercial bank. If CoBank has no objection to repeatedly being called a commercial bank, then it should be regulated as if it were a commercial bank.

Trying to set the record straight, I emailed the editors at Global Finance to explain that the FCS banks are not commercial banks and that they are largely funded by the unranked Funding Corporation. On Sep. 29, Andrea Fiano, Global Finance’s editor, emailed a substantive reply, but he failed to address my central complaint — the magazine’s characterization of the FCS banks as commercial banks when they clearly are not.

Worse, on Oct. 6, Global Finance published a list of the “Safest 25 Commercial Banks In The World,” which is merely the top 25 banks from its earlier list of the 50 safest commercial banks. Accordingly, this list included AgriBank and CoBank. So far Fiano has failed to respond to a follow-up query as to why Global Finance continues to call the FCS banks commercial banks. Hopefully, Global Finance will soon drop the FCS banks from its list of the safest commercial banks.

The FCS’s regulator, the Farm Credit Administration (FCA), should object to any mischaracterization of any FCS institution, if for no other reason than to protect its regulatory turf, for if a widespread belief developed that FCS banks are commercial banks, then political pressure would build to subject them to oversight by the bank regulators, specifically the OCC and the Federal Reserve. The FCA has indicated that it will respond to my request for a comment on Global Finance’s mischaracterization of the FCS banks as commercial banks. I will share that response with FCW readers after I receive it.

Finally, I emailed CoBank to request that it inform the magazine that CoBank is not a commercial bank and to cease publicizing, even indirectly, that it, and the other three FCS banks, are among the world’s safest commercial banks. So far, CoBank has not responded to this request.

What is happening at Lone Star Ag Credit?
As I reported in the FCW two months ago, on Aug. 9 Lone Star Ag Credit, the FCS association headquartered in Fort Worth, Texas, issued a Notification of Non-Reliance on Previously Issued Financial Statements Applicable to the financial statements Lone Star issued for 2016 and the first quarter of 2017. In a parallel move, the Farm Credit Administration dropped from its website Lone Star’s quarterly call reports for 2016 and the first quarter of 2017.

Apart from the Notification of Non-Reliance, Lone Star has posted absolutely nothing on its website about the “appraisal and accounting irregularities affecting a segment of the Association’s lending portfolio” that triggered the withdrawal of its financial statements and call reports nor has it posted any other information about this accounting fiasco. While visitors to the site will learn about the 2017 Lone Star Ag Credit Dove Hunt Invitational and the Annual Appreciation Event for Corsicana Stockholders, there is no listing of the association’s current management or of recent management changes, if any, as well as corrective actions being taken to fix Lone Star’s accounting problems. As cooperatives, FCS associations should be fully transparent to its member/borrowers — that definitely is not the case today at Lone Star.

Will FCS of America and Frontier Farm Credit ever merge?
In the Oct. 2014 FCW, I wrote about a “strategic alliance” that Frontier Farm Credit, which serves the eastern third of Kansas, entered into with Farm Credit Services of America (FCSA), the largest FCS association, which serves Nebraska, Wyoming, South Dakota, and Iowa. At June 30, 2017, FCSA has assets of $26.9 billion while Frontier had assets of $2.0 billion. To the best of my knowledge, there are no other strategic alliances in the FCS universe. According to a letter FCSA sent to its member/borrowers when the “strategic alliance” was formed, the two associations “will be jointly managed under of a single team of [FCSA] leaders.”

The question then was why didn’t Frontier simply merge with FCSA; that question still resonates today as the FCSA management team runs Frontier even though Frontier has its own board of directors. Presumably the FCSA managers in Kansas take their marching orders from Frontier’s directors even if those directors have adopted policies that differ from policies adopted by FCSA’s directors. Although there is a coordinating committee comprised of directors from both associations, it is puzzling as to how one management team can be responsible to two independent boards of directors, especially given the degree of operational integration of the two associations.

The arbitrary manner in which income and expenses are divided between the two associations, as summarized in their respective annual reports, reinforces the key question: Why haven’t Frontier and FCSA merged? Reasons not to merge are not at all evident, which raises this question: What is the real reason they have not merged? As is the case in the Lone Star Ag Credit situation, the lack of transparency here is very troubling, and should be especially so for Frontier’s member/borrowers since Frontier is very much the junior partner in this alliance. Worse for Frontier’s member/borrowers, they are stuck in the alliance because Frontier no longer has its own management team.

About Bert Ely

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