Pub 7 2018 Issue 5

July2018 17 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 Trusted Member FDIC f n b h u t c h . b a n k | 8 0 0 . 2 9 3 . 0 6 8 3 | Our dedicated sta members are here to help you with a broad array of nancial expertise for you and your customers. Pictured (left to right) Mike Pritchett, Curtis Overton, Rod Jones, Dustin Stull, Mike Fahrbach and Shane McCall C M Y CM MY CY CMY K 17_FNB6987_ks_banker_mag_ad_trusted_02.pdf 1 11/21/17 11:23 AM by a particular borrower when reporting on its YBS lending. Lone Star Ag Credit issues 2017 annual report As I first reported in last August’s FCW, on Aug. 9, 2017, Lone Star Ag Credit, headquartered in Fort Worth and serving portions of central and north Texas, issued a “Notification of Non-Reliance on Previously Issued Financial Statements” for 2016 and the first quarter of 2017 due to just- discovered “appraisal and accounting irregularities.” At the same time, the Farm Credit Administration (FCA) pulled from its website all call reports Lone Star had filed after the fourth quarter of 2015. On May 3, Lone Star issued its 2017 annual report. It does not make for pretty reading. According to the report, a financial restatement reduced Lone Star’s 2016’s net income by $8.12 million. Losses causing that reduction “were the result of the activities of a former loan officer who breached [Lone Star’s] policies and procedures and engaged in improper conduct that included improperly advancing funds without appropriate approvals, offering unauthorized loan terms to borrowers, originating loans to fictitious borrowers, and originating loans and advancing funds on fabricated documentation.” These activities seem criminal to me, but I could find no indication in the annual report that Lone Star had filed a criminal complaint nor did a Google search turn up anything. In addition to the decrease in 2016’s net income, the accounting adjustments and additional expenses triggered by the restatement cost Lone Star another $19.83 million in 2017 and $1.43 million so far this year. But the hit was even worse — its combined net income for 2016 and 2017 was $30.30 million, not that much more than 2015’s net income of $27.57 million. Additionally, Lone Star paid no patronage dividend for 2017 after paying $26.75 million out of the prior two years’ earnings. Its member/borrowers must not be too happy about that! Fortunately, Lone Star remains well capitalized. The most interesting question that arises, and is barely touched on in the report, is how did an accounting mess of this magnitude occur, why did it mushroom to the size that it did, why did it persist as long as it did, and who was slow to discover these obvious lending and financial control issues given that Lone Star has a chief financial officer, has an annual audit, and is subject to periodic examination by FCA examiners working out of an FCA regional office just a 29-mile drive away? Additionally, Lone Star’s funding bank, the Farm Credit Bank of Texas, which had lent Lone Star $1.23 billion as of the end of 2015, and presumably provides some oversight of Lone Star by virtue of being its primary creditor, appears not to have provided sufficient oversight. Lone Star’s accounting and control issues seem similar to the problems that erupted at Arizona’s FCS Southwest in 2014 that in turn led to its acquisition by Farm Credit West in 2015. Perhaps Congress should direct the General Accounting Office to examine what happened at the two associations, and why.