Farm Credit Watch: FCS’ Deposit-taking More Extensive Than Previously Reported

In the July Farm Credit Watch, I wrote that the Farm Credit System effectively accepts deposits, through the cash management services some FCS associations offer to their member/borrowers. As the article described, many associations in two of the four FCS districts — those funded by CoBank and AgriBank — accept deposits on behalf of the bank that funds them. That bank then invests the deposited funds in interest-bearing bonds it issues. These bonds can then be redeemed at any time by the FCS member/borrower, apparently without penalty. These bonds are not insured by any federal agency. In particular, unlike the debt the FCS issues through the Federal Farm Credit Banks Funding Corporation, these bonds are not insured by the Farm Credit System Insurance Corporation, which does insure the timely payment of principal and interest on debt issued by the Funding Corporation. On Sept. 30, 2017, $2.35 billion of these bonds were outstanding, down slightly from $2.43 billion on Dec. 31, 2016.

Additionally, based on Sept. 30, 2017, FCS call-report data, 37 of the 69 FCS associations had a total of $1.15 billion in liabilities called “Other Interest-Bearing Debt,” or OI-BD. As discussed below, all or a substantial portion of the OI-BD effectively are readily withdrawable deposits held by these associations. There also were another $241 million of deposit-like liabilities on the books of CoBank and AgriBank, for a total of $3.74 billion of deposits and deposit-like liabilities owed by FCS institutions on Sept. 30, 2017. Of course, Congress has not authorized FCS institutions to accept deposits. This spreadsheet lists all FCS institutions reporting OI-BD as of Sept. 30, 2017. This debt is usually identified on the quarterly financial reports the associations publish on their websites as “Funds Held,” “Advanced Conditional Payments,” “Future Payment Funds,” or similar terms suggesting that they are deposits.

The $1.15 billion of OI-BD held by the 37 associations on Sept. 30 are especially troubling as they fund a portion of the associations’ activities, yet they are uninsured liabilities of the association. As the linked spreadsheet shows in column I, some associations rely on OI-BD for a not-insignificant portion of their funding — as high as 11.59 percent at Colusa-Glenn. The fourth-largest association, Farm Credit West, held $421 million of OI-BD as of Sept. 30, 2017, accounting for 5.32 percent of its funding. The public disclosure of that uninsured status is sketchy, at best. AgTexas, which had $9.3 million of such deposits as of Sept. 30, 2017, states on its website that “Voluntary ACP Accounts are not federally insured but are backed by the financial strength of AgTexas Farm Credit Services.” An FDIC-insured bank could never say that. Numerous associations actually state that they accept deposits when describing on their websites the cash management services they offer; in other cases, the association’s eagerness to accept deposits can reasonably be inferred from the website. Column J in the linked spreadsheet flags the associations where deposit-taking can at least be inferred.

Another Texas FCS association, the financially troubled Lone Star Ag Credit (see next article), states on its webpage that it offers “an interest-bearing ‘Funds-Held Account’ for its borrowers.” The Farm Credit Administration (FCA) has removed from its website all Lone Star call reports since the end of 2015 so we have no idea how much it is holding in uninsured OI-BD at this time; in 2015, the amounts were quite small — just a few thousand dollars. However, it is amazing that the FCA permits Lone Star, much less any FCS association, to hold for their members any uninsured “Funds Held” or other euphemisms for deposits. The House Financial Services and Senate Banking Committees should investigate the deposit-taking as well as the other banking activities many FCS institutions engage in, none of which are subject to the Bank Secrecy Act, as I reported in the Sept. 2017 FCW.

Lone Star Ag Credit’s problems and lack of FCS transparency

As I first reported in the Aug. 2017 FCW, Lone Star Ag Credit was hit by an accounting scandal that caused the association to withdraw its financial statements back to the first quarter of 2016, stating that they “should no longer be relied upon.” As noted in the previous article, the FCA removed from its website Lone Star call reports since the end of 2015. Earlier this month, Lone Star published a short update on its website stating that it could not issue “Third Quarter 2017 financial statements on a timely basis.” It also reported that an investigation into the “appraisal and accounting irregularities” that triggered the withdrawal of its financial statements should be completed “during the fourth quarter of 2017,” after which it “will work diligently to prepare all prior reports once the investigation is complete.” Beyond that, Lone Star has disclosed nothing about its serious accounting problems, including management changes that may have been triggered by those problems. In fact, unlike other FCS associations, Lone Star does not even provide a list of its senior management on its website.

This lack of disclosure at Lone Star is just one more example of the lack of transparency within the FCS and at the FCA. For example, even though bank regulators routinely publish detailed enforcement orders against banks and thrifts, the FCA refuses to do so; all it will do is disclose quarterly how many enforcement orders, or “written agreements,” were outstanding at the end of the most recent calendar quarter. Amazingly, according to the Third Quarter 2017 Information Statement issued by the Federal Farm Credit Banks Funding Corporation, no FCA written agreements were outstanding at Sept. 30, 2017, or at the prior quarter-end either, which strongly implies that the FCA has not taken any enforcement actions against Lone Star despite its acknowledged appraisal and accounting irregularities. This is an astonishing example of a lack of transparency by the FCA as to what steps have been or are being taken to ensure there is not a repeat of such irregularities.

FCA not concerned FCS banks are called ‘commercial banks’

Last month I reported on a press release issued by the online magazine Global Finance in which the four FCS banks (CoBank, AgriBank, AgFirst, and Farm Credit Bank of Texas) were ranked among the world’s safest commercial banks. The FCS banks, of course, are not commercial banks, or even banks as that term is generally understood. Instead, they are merely funding intermediaries between the Funding Corporation, which issues FCS debt, and the FCS associations, which do the bulk of the FCS’s lending. As an aside, the four FCS banks could easily be folded into the Funding Corporation and agriculture and rural America would not notice the difference, but that is a topic for another day.

As I noted in the FCW, CoBank seems quite proud of being ranked among the world safest commercial banks, having issued a news release to that effect, even though it knows it is not a commercial bank. When I expressed my concern to the FCA about CoBank promoting its Global Finance ranking, the FCA replied that because the CoBank news release states that it is “a leading cooperative bank serving agribusinesses, rural infrastructure providers and Farm Credit associations throughout the United States,” that statement “is not misleading and does not warrant FCA concern.” Apparently the FCA is not concerned that CoBank does not mind being called a commercial bank.

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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