Pub. 4 2015 Issue 8

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 22 BERT ELY’S FARM CREDIT WATCH ® TAKING A FRESH LOOK AT CEO PAY IN THE FCS ©2015 Bert Ely A s FCW readers know, the FCS enjoys a substantial taxpayer subsidy, principally in the form of income-tax exemptions as well as its low-cost financing by virtue of being a government-sponsored enterprise. While FCS institutions use much of that subsidy to undercut banks and other private-sector lenders on lending rates, some of that subsidy gets passed through to the CEOs and other senior executives of FCS institutions. As it has been a few years since I last provided FCW readers with FCS CEO pay data, now is a good time to do so, and to ask this question: Should they be paid this much? The highest paid FCS CEO in 2014 was CoBank’s Robert Engle, whose total compensation was $5.07 million, compared to $4.53 million he was paid in 2013 and $4.96 million in 2012. Among the other three FCS bank presidents, AgFirst’s Leon Amerson clocked in at $2.87 million for 2014 ($1.63 million in 2013 and $1.94 million in 2013), Farm Credit Bank of Texas’s Larry Doyle was a close third at $2.80 million ($2.24 million in 2013 and $2.45 million in 2012), and AgriBank’s William York came in last at $1.88 million ($1.83 million in 2013 and $1.64 million in 2012). Tracey McCabe, CEO of the Federal Farm Credit Banks Funding Corporation, the FCS’s funding arm, was paid $2.17 million, up from $2.02 million in 2013 and $1.88 million in 2012. Five of the ten largest FCS associations published CEO compensation information in their 2014 annual reports while five did not. CEO compensation for the five which did publish that information is as follows (with asset size ranking in parentheses): Douglas Stark, FCS of America (#1) – $1.44 million; William Johnson, Mid-America Farm Credit (#2) – $977,000; Phil DePofi, Northwest FCS (#3) – $2.03 million; Ben Novasad, Capital Farm Credit (#8) – $1.16 million; and William Lipinski, Farm Credit East (#9) – $2.11 million. Farm Credit Administration (FCA) regulations provide in great detail how compensation data for an FCS institution’s CEO and top executives are to be disclosed in the institution’s annual report, similar to what the SEC requires for publicly traded corporations. However, the FCA regulations provide an escape hatch for FCS associations who do not want to disclose compensation data in annual reports available on-line for anyone to read by giving associations the option to “disclose the information required by [the disclosure regulation] in the Annual Meeting Information Statement (AMIS)” sent to the association’s member/borrowers. “Associations exercising this option must include a reference in the annual report stating that the senior officer compensation is included in the AMIS and that the AMIS is available for public inspection at the reporting association offices.” This reporting loophole means, for example, that a member of the public seeking to find out how much Rodney Hebrink, CEO of AgStar Financial Services, the fourth-largest FCS association, made in 2014 must visit AgStar’s headquarters in Mankato, Minnesota, to obtain that data. Similar trips would be required to find CEO compensation data for many other large FCS associations. So much for FCS transparency. FCS hikes its lending limit to $1.5 billion from $1.0 billion As FCW readers know, the FCS is heavily oriented to providing credit to very large agribusinesses, investor-owned utilities, and other corporate borrowers. To better meet the credit needs of its largest borrowers, during the second quarter of 2015, the FCS’s “System risk management committee determined in certain limited circumstances [to increase the FCS’s risk] exposure level to $1.5 billion.” That limit is double the $750 million lending limit the FCS had as recently as the second quarter of 2013; the $750 million limit had been in place since 2005. At June 30, 2015, no FCS risk exposures exceeded $1 billion but six exposures exceeded $750 million on that date compared to five such risk exposures at December 31, 2014. Translation: While a $1 billion credit limit is adequate today, the FCS needs to gear up to take on even bigger credit risks. The growth in FCS lending to very large borrowers has been quite evident in recent years. From the end of 2012 to the end of 2014, the number of FCS borrowers with loans exceeding $100 million increased from 87 to 109; the amount they had borrowed rose from $17.15 billion (8.9% of total FCS lending) at the end of 2012 to $24.93 billion (11.5% of total FCS lending) at year- end 2014. These increases are powerful evidence of the FCS’s increased emphasis on providing taxpayer-subsidized credit to large corporate borrowers.