The November FCW reported on an accounting scandal that had just erupted at Farm Credit Services Southwest (FCS Southwest), the FCS association serving most of Arizona plus California’s Imperial Valley. This scandal stems from the discovery during the third quarter of 2014 of “a sudden significant increase in the level of delinquent loans affecting an identifiable portion of the Association’s loan portfolio.” Consequently, the FCS Southwest directors reported in an October 10, 2014, letter to the association’s borrower/stockholders that the association’s financial statements issued since 2009 “can no longer be relied upon. Accordingly, the Association expects to restate such financial statements.” So far, restated financial statements have not yet been issued. On a parallel track, the FCA removed the links on its website to all the call reports FCS Southwest filed after 2009. Those links have not been restored. Today, FCS Southwest is an accounting black hole.
On February 2, FCS Southwest announced that it had “entered into a letter of intent to merge with Farm Credit West,” the fifth-largest FCS association. Farm Credit West serves portions of California and Nevada. According to the FCS Southwest letter, “over the next couple of months, both Associations will be undertaking due diligence to more closely assess the potential benefits of a merger to their respective shareholders and to finalize the terms of a merger agreement,” with an anticipated “effective date for the merger of August 1, 2015.” Eleven days later, on February 13, FCS Southwest informed its borrower/stockholders that Farm Credit West’s CEO was also now serving as FCS Southwest’s CEO. Clearly, there are severe management and financial problems at FCS Southwest. One wonders how the borrower/stockholders of either association can intelligently vote on the proposed merger given all the financial unknowns. Once again a troubled FCS association will be buried through an FCA-sanctioned merger with another association. This shotgun merger must be seen as a supervisory failure of both the FCA and Cobank, FCS Southwest’s funding bank.
FCS delays publishing year-end financial results
Perhaps because of the financial-reporting problems at FCS Southwest or possibly due to accounting issues elsewhere within the FCS, the FCS will be publishing its 2014 financial results almost three weeks later than it normally does. According to the website for the Federal Farm Credit Banks Funding Corporation (the FCS’s funding arm), the news release reporting the FCS’s 2014 results will be published during the “week of March 9.” The FCS’s annual earnings news releases for the prior two years were dated February 19, 2014, and February 20, 2013. This delayed announcement almost certainly means that the FCS’s audited financial results will be published much later than usual. It will be interesting to read that report’s discussion of FCS accounting issues and perhaps other problems.