Farm bank thrives amid crisis


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 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.

Farm Credit's balance sheet is the envy of the banking industry. 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.

Another way of measuring a lender's success, and one that has had more than its fair share of headlines in recent months, is 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 completely eliminating dividend payments of 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. "They are fiscal conservatives and prone not to repeat mistakes of the past."

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 faring better than most of its competitors. "We don't make subprime loans."

Subprime loans are at the heart of the nation's current 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 got 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 difficult situation, Farm Credit changed the way it makes loans. Its lending officers now look at a farmer's ability to repay a loan from the farm's operations, not the value of the farm property.

"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 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 current 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 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 its 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."

He added: "MidAtlantic did not participate in the subprime market; we have not had losses from mortgage backed investments. We are in a strong position to handle the crisis in the long term."

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

MidAtlantic Farm Credit and Valley Farm Credit have recently received approval from their stockholders to merge the two associations effective at the end of the year.

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 cooperative will keep its headquarters in Westminster.

"This merger increases the commodity and geographic diversity of our loan portfolio," Frazee said in a release. "In addition, we have more capacity to serve even a broader territory."

MidAtlantic's new territory will include 46 counties in Delaware, Maryland, Pennsylvania, Virginia and West Virginia.

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