Pub. 7 2018 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 20 BERT ELY’S FARM CREDITWATCH® The FCS Southwest Saga Continues to Drag on and on Beginning with the Nov. 2014 issue of the FCW, I have reported on what effectively was the failure of Farm Credit Services Southwest (Southwest), the FCS association that serves most of Arizona as well as California’s Imperial Valley. The previous month, Southwest dropped from its website links to all financial statements that it had issued since 2009 while the Farm Credit Administration (FCA) removed links on its website to all the call reports Southwest had filed after 2009. These actions were triggered by an accounting scandal so severe that Southwest stated that its financial statements since 2009 “can no longer be relied upon.” As I reported at the time, in the 17 years that I had been writing the FCW, I had never seen such a statement by an FCS institution. Southwest explained that “during the third quarter of 2014, association management noted a sudden significant increase in the level of delinquent loans affecting an identifiable portion of the association’s lending portfolio.” On July 29, 2015, Southwest issued restated financial statements for the years 2010 to 2014. Amazingly, it reported a profit for each of those five years, although profitability was quite low in 2010 and 2014. Despite Southwest becoming current on its financial reporting, on Nov. 1, 2015, Southwest was “kind of” merged into Farm Credit West, the fourth largest FCS association, which serves much of California. I say “kind of” because there has yet to be a full merger of the two associations and their subsidiaries. Instead, Southwest continues to exist as a wholly owned subsidiary of Farm Credit West. Although Southwest has its own website (fcssw.com) it is managed by Farm Credit West personnel. For financial reporting purposes, Southwest’s financial results have been consolidated with those of Farm Credit West since 2015. However, there is an ongoing accounting for the Southwest’s finances since there is, according to Farm Credit West’s annual report, a patronage pool for Southwest “patrons” that is separate from the patronage pool for Farm Credit West patrons. Farm Credit West, though, has not filed any call reports on behalf of Southwest nor provided any financial reporting to Southwest’s former member/borrowers. Consequently, Southwest’s member/borrowers at the time it was taken over by Farm Credit West have been kept completely in the dark since 2015 as to how Southwest has performed under Farm Credit West’s management. The financial compartmentalization, created when Farm Credit West gained control over Southwest, pending a full merger of the two associations, protects Farm Credit West’s members from losses due to litigation arising from when Southwest was an independent association. In a sense, then, Farm Credit West is acting as if it were the receiver or operating trustee of Southwest in a Chapter 11 bankruptcy reorganization. This resolution of the Southwest mess was supposed to end on Nov. 1 of this year, but without providing any explanation, the FCA board, in a “notational vote” it took on Aug. 21 “approved a request [presumably from Farm Credit West] to extend the effective date” of the full financial merger of Southwest and Farm Credit West by up to three years, as reported in this press release. At a minimum, the FCA should explain why it granted this three-year extension and why it was needed. The FCA should go further, though, and direct Farm Credit West to publish a full accounting of Southwest financial results since 2015 so that Southwest’s former member/borrowers can assess whether the patronage payments they have received have been fairly calculated. Southwest clearly suffered a severe management failure in 2014 that justified its take-over even if it was not insolvent, but instead of placing Southwest in a receivership, as the FDIC does with a failed bank, the FCA engineered what essentially was a receivership for Southwest run by Farm Credit West. While the financial results of an FDIC receivership are published on the FDIC website so that creditors of and stockholders in a failed bank can monitor the FDIC’s management of the receivership, that vital transparency is absent in the Southwest situation. As I reported in the July FCW the Senate version of the pending Farm Bill includes extensive language that would