Pub. 6 2017 Issue 7

October/November 2017 25 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 up to three years. Presumably that arrangement will enable future losses in Southwest’s loan book at the time of the merger to be borne by Southwest’s member/borrowers rather than Farm Credit West’s member/borrowers. The FCA and the Farm Credit Bank of Texas, which funds and supposedly oversees Loan Star, may have to cook up a similar resolution for Lone Star. That resolution may be complicated, though, by the fact that Lone Star’s territory overlaps several other FCS associations. Tonsager stresses the importance of internal controls On July 10, just a month before the Lone Star accounting mess surfaced, FCA chairman Dallas Tonsager spoke at the annual meeting of the AgFirst Farm Credit Bank about the importance of strong internal controls, stating that “having strong internal controls is central to building public confidence in the [FCS].” He went on in his speech to discuss the basics of providing a robust set of internal controls, such as “a loan officer should never have the authority to override controls designed to provide checks and balances in the loan-making process.” One can reasonably wonder if Tonsager had the Lone Star situation in mind when he wrote his AgFirst speech. Let FCS institutions leave the FCS, along with their capital In 2004, the Omaha-based Farm Credit Services of America (FCSA), the largest FCS association ($27 billion in assets), serving Nebraska, Iowa, South Dakota and Wyoming, tried to sell itself to Rabobank, the large, globally active Dutch- based agricultural lender. To put it mildly, the FCS, led by its trade association, the Farm Credit Council, went ballistic, for if FCSA left the FCS, perhaps other well-capitalized FCS institutions might then leave, too, taking their capital with them. The FCS could quickly become a shell of its former self. A November 2004 article published by the Federal Reserve Bank of Kansas City observed that “the Rabobank acquisition could have paved the way for further purchases of FCS associations by private institutions, possibly leading to the end of the FCS.” AgStar (now Compeer Financial), another large FCS association, offered to merge with FCSA, but by then opposition to the Rabobank proposal was so intense that FCSA decided to remain independent. Had the Rabobank deal gone forward, FCSA would have had to pay an $800 million “exit fee” to the Farm Credit System Insurance Corporation (FCSIC), which guarantees the timely payment of principal and interest on the FCS’s Systemwide Debt Securities which provide most of the FCS’s funding. Although the Rabobank-FCSA deal was not consummated, it did raise a critical public-policy question as relevant today as it was in 2004: Why shouldn’t an FCS institution be permitted to leave the FCS, taking all of its capital with it, if its members/ borrowers thought the institution would fare better, and better serve its members, outside the FCS? There is a precedent for such a departure: In 1991 the California Livestock Production Credit Association, with just $14 million in loans, became MO S S A DA M S .C OM / F I Assurance, tax, and consulting offered through Moss Adams LLP. Wealth management provided by Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC. PRO SP ER I T Y R I S E S I N THE WE ST Discover how Moss Adams is helping community banks thrive. We’re committed to working with you to manage risk and grow operations with our accounting, consulting, and wealth management services. RISE WITH THE WEST. Stockmans Bank. Congress approved that exit from the FCS in the 1990 farm bill and even waived the exit fee. Today, many smaller FCS associations face extinction as larger associations gobble up smaller ones, creating large, multi-state associations increasingly focused on financing very large farming operations and agribusinesses. Almost without exception the smaller associations are extremely well- capitalized by commercial bank standards so capital would not be a barrier to seeking a commercial bank charter. All of that capital would be available to the former association if the exit fee payable to the FCSIC was waived, as occurred in the Stockmans Bank case. Arguably, a former association should be entitled to a return of the funds it paid into the FCSIC as its FCS borrowings were paid down. As banks, these former associations could then accept FDIC-insured deposits to replace the funding they formerly obtained from the FCS bank funding the association. These former associations also would be freed from the lending constraints now imposed on them by the Farm Credit Act. While smaller FCS associations, which are similar in many ways to community banks since they serve relatively small geographic areas, are the most likely candidates to leave the FCS, some larger associations might decide to depart, too. Perhaps FCSA might again consider merging with Rabobank. CoBank could even consider exiting the FCS as it could then escape the lending constraints it must now operate under.