A newly created farm lending institution is hoping to slash operating and personnel costs in the wake of major merger completed last month.

Agribank, a $10.2 billion-asset institution, one of the largest in the farm credit system, was formed May 1 by the merger of the Farm Credit banks of St. Paul and St. Louis.

Agribank officials expect to reap more than $10 million in annual savings from the merger, by streamlining computer operations and cutting more than 100 staff jobs. They added that the consolidation would lead the bank to stop buying outsourcing services from EDS Corp., Plano, Tex., a General Motors Corp. subsidiary.

Executives have high hopes that the merger will make Agribank a sounder, more competitive institution.

Substantial Losses in Early '80s

A spokesman said that in the early 1980s the combines banks probably lost an average of $100 million a year due to high loan defaults at the time, arising from a massive midwestern farm slump.

Farmers in the Midwest were hit hard by the Soviet grain embargo and falling exports, he said.

The merged banks, however, expect to reduce such risks by spreading their asset base over a larger area.

"The main thrust was not to save money," said John O'Day, Agribank's head of government relations. "Instead, it was other factors, such as spreading risk over a larger area and providing more innovative products."

But cost savings are important. Bank officials expect to charge $27.6 million in merger-related expenses against this year's earnings, which, after the hit, are expect to total about $30 million. But savings should pay for that hit in about three years, a spokesman said.

Job Reductions

About 40% of the cost reductions will come from streamlining computer systems. The rest will come mostly from eliminating more than 100 staff jobs, bringing combined staff down to 420 to 450.

Richard A. Spradling, Agribank's vice president for systems and technology said the computer department will probably lose fewer than a dozen jobs. That's because Agribank is reversing a five-year-old outsourcing arrangement that the St. Louis Farm Credit Bank had with EDS. This means that more computing will be done by bank employees.

Mr. Spradling said the EDS ran software on its mainframes in Plano that the St. Louis Farm Credit Bank used to manage its loan origination and processing operations.

Saving 20% on Outsourcing to EDS

Now, with EDS' help, Agribank is moving that software onto Agribank's mainframe in St. Paul. The transition should be completed in September and should let Agribank cut its payments to EDS by more than 20%, Mr. Spradling said.

Agribank expects to reap additional savings from pruning duplicate computer systems. Before the merger, the two banks ran 50 systems, but they expect to cut the total to 20 by yearend 1993.

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