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The GSE believes it can offer community banks another source of revenue by originating and selling agricultural loans.
April 12 -
Volatile industries such as energy and agriculture are fueling strong results in states such as North Dakota and Iowa.
March 22 -
The Federal Agricultural Mortgage Corp. has raised the $65 million in capital it needed by a Tuesday deadline, but some bank trade groups are concerned that nearly all of the money came from Farm Credit institutions.
October 2
A growing number of community banks are seeking help as they compete against one of their biggest lending rivals.
Bankers have long complained that the Farm Credit System, a national network of borrower-owned lenders, has unfair advantages. The government-sponsored enterprise has cheap funding, allowing it to offer better rates, bankers say.
To combat this, small banks are turning to the Federal Agricultural Mortgage Corp. — better known as Farmer Mac — for lending to agricultural borrowers at interest rates that match those offered by Farm Credit lenders.
"We have been able to get more aggressive," says Lance Spruiell, senior vice president at Pioneer Bank in Dripping Springs, Texas, which began making Farmer Mac loans in 2009. "Farm Credit is the 800-pound gorilla. Now we've gotten ahead of them."
Farmer Mac, another GSE, was formed to create a secondary market for agricultural mortgage and rural utilities loans. The goal was to improve the availability of long-term credit in rural America. Community banks and Farm Credit lenders work with Farmer Mac, at times creating conflict, says John Blanchfield, senior vice president at the American Bankers Association.
For instance, Farmer Mac
Farmer Mac strives to balance the needs of banks and Farm Credit institutions, says Timothy Buzby, the GSE's president and chief executive. Its board includes representatives from banks and Farm Credit lenders, along with presidential appointees.
"We view competition as a good" thing, Buzby says. "It doesn't matter to us who gets the loan. It just matters to us that the farmer gets the best rate."
Smaller banks and Farm Credit institutions generally use different Farmer Mac services, Blanchfield says. Banks sell Farmer Mac qualifying loans that they originate, such as mortgages for agricultural real estate. Farm Credit lenders tend to hold onto their loans but pay a monthly fee for a guarantee.
Efforts to reach Farm Credit and its trade group, Farm Credit Council, were unsuccessful.
Interest in agricultural loans has increased in recent years, industry experts say. Many farmers are eager to borrow at low fixed interest rates for longer durations, something banks are wary of doing because of concerns about
"Farmer Mac is a tool that banks can use to accommodate" clients and overcome these challenges, Blanchfield says.
Pioneer began working with Farmer Mac on a loan that exceeded its legal limits to a high-net-worth client, says Jeff Wilkinson, the $215 million-asset bank's president and CEO. Pioneer was able to make the loan; the customer eventually steered the rest of his business to the bank, he says. Pioneer now makes five and 10 Farmer Mac loans a year, Spruiell adds.
Like Farm Credit, Farmer Mac has access to cheap funding and can set lower interest rates that it releases in a daily rates sheet. Banks then adjust the rate to cover servicing costs.
"We have been hearing for years from banks complaining that Farm Credit was taking away" farm real estate loans, says Peter Haddeland, president of First National Bank in Mahnomen, a unit of Mahnomen Bancshares in Minnesota. "This is one way to . . . beat them at their own game."
The $75 million-asset First National offers rates that are at times lower than those from Farm Credit lenders, Haddeland says.
Spruiell at Pioneer says he has fielded calls from lenders at Farm Credit institutions asking if he actually quoted a particularly low rate to a potential customer. "They're usually in disbelief," he adds.
In addition to customer retention, working with Farmer Mac lets smaller banks record fee income from origination and servicing, industry observers say.
Adjusting to this business model has been tough for some smaller banks, which are used to holding the loans and making money off of their yields, Blanchfield says.
Persistently low interest rates have hammered net interest margins, making it harder to make money from holding loans and forcing banks to
Fee income was part of the appeal for Farmers State Bank in Elmwood, Ill. Farmers State has yet to sell any loans, but it has some in the works, says Jennifer Beard, the $58 million-asset bank's president. She says management is excited about competing on long-term fixed-rate loans.
"It's definitely a good opportunity to make some good income off of the loans," Beard says. "This gives us a tool to allow us to come to the table when talking to a farmer."
