Farm banking thrives amid crisis

on the farm

December 21, 2008|By Ted Shelsby | Ted Shelsby,Special to the Baltimore Sun

Our nation would not be in the midst of the greatest financial crisis since the Great Depression if we had more grain farmers, dairymen and poultry growers running our lending institutions.

That's paraphrasing a recent comment from Bob Frazee, chief executive officer of MidAtlantic Farm Credit, a regional unit of the national Farm Credit System, a farmer-owned cooperative banking system established by Congress in 1916 to serve agriculture and rural America.

While conventional banks are counting on a $700 billion bailout by the federal government to stay in business, Farm Credit is thriving.

Net income for the six months ended June 30 is up nearly 20 percent to $1.55 billion from the same period last year. Its credit quality remains very favorable, with 98.4 percent of all loans ranked in the highest loan-quality classification.

As of June 30, the cooperative banking system had more than $27 billion in capital, up more than 25 percent since the end of 2007.

The system also looks good in light of foreclosures. Conventional lenders reported nearly 8,000 foreclosures in Maryland during the three-month period ended Sept. 30, and that is with state programs aimed at keeping people in their homes. By comparison, MidAtlantic Farm Credit, which serves most of Maryland and parts of Pennsylvania, West Virginia, Virginia and Delaware, has reported fewer than a dozen foreclosures over the past year.

While other banks have been cutting or eliminating dividend payments to shareholders, MidAtlantic paid out $28 million in patronage payments last year. This is a form of profit sharing with its borrowers who are also owners of the bank.

"Having farmers on our board of directors helps keep us focused on our mission," said Frazee. Sixteen of MidAtlantic's 18 directors are farmers.

Sandy Wieber, senior vice president of marketing at MidAtlantic, hit on another major reason that the cooperative bank is fairing better than most of its competitors. "We don't make subprime loans."

Subprime loans are at the heart of the nation's mortgage crisis. They are loans that were based on the premise that home values would continue to rise. When home values fell, many borrowers owed more than the value of their homes.

The Farm Credit System was caught in a similar situation in the 1980s, when it made loans based on the value of farm properties. When farm income fell, the cooperative banking system was involved in some foreclosures that made television network news.

As a result of that situation, Farm Credit changed its ways. Its officers now look at the farmer's ability to repay from farm operations, not property value.

"There is no doubt that the current credit crisis has shaken everyone's trust in our nation's financial institutions, as well as in our government," Ken Auer, president of the Farm Credit Council in Washington, said in a recent publication sent to farmer members of the cooperative.

"But it is important to remember that not all lenders are alike," he continued. "I'd like to suggest that Farm Credit is one of the few successes in lending, and we should look to our structure and safeguards as models for our industry."

He said the agriculture industry has been relatively strong and that has added to the cooperative's level of stability.

In the Farm Credit cooperative structure, the borrowers are also stockholders, or members. These borrowers elect the cooperative's board of directors, and they share in the cooperative's profits.

Many of the regulatory tools that are only now being implemented for Fannie Mae and Freddie Mac have been part of Farm Credit's regulatory framework for many years, including a strong central regulator - the Farm Credit Administration - which oversees Farm Credit's risk-management tools, capital levels, adherence to the mission and compliance with regulations and laws.

Freddie Mac and Fannie Mae are two huge housing lenders that were recently taken over by the federal government.

In a letter to borrowers last month, Frazee told them that MidAtlantic had prepared for the credit crisis the best that it could.

"We've watched our capital position," he said. "We've made sure we're efficient, we've paid attention to our net income and we've managed our credit quality."

MidAtlantic is the largest agriculture lender in the Mid-Atlantic region, accounting for about 60 percent of all regional agriculture loans. Its influence on the market will grow.

MidAtlantic Farm Credit and Valley Farm Credit have received approval from their stockholders to merge by year's end.

The resulting organization will still be MidAtlantic Farm Credit, and it will have combined assets of more than $2.3 billion, making it one of the largest rural lending organizations on the East Coast.

The co-op's headquarters will be in Westminster.

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