Because First State Bank of Eldorado, Ill., doesn't have a lot of farm loans on its books, you might assume it doesn't do much agricultural finance.

You'd be wrong.

The bank has developed a niche business: originating farm real estate loans for the secondary market through its two farm mortgage subsidiaries.

The strategy has been to offer long-term, fixed-rate loans and use the secondary market to build a stream of servicing and fee income, said chairman Burt H. Rowe Jr.

The $70 million-asset bank's loan-to-deposit ratio is a slim 25%, he said. The bank's loans and leases total more than $17 million, but only about $2.6 million of that is in agricultural operating loans.

However, volume from the long-term farm mortgage loans, not in the portfolio, is more substantial.

The bank's ratio of noninterest income to total assets was 1.9% in 1995, putting it in the 97th percentile among its peers, according to Sheshunoff Information Services. First State Bank's two subsidiaries serviced more than $150 million in total farm mortgages at yearend 1995, Mr. Rowe said.

Many banks and nonbank mortgage companies originate loans for the secondary farm mortgage market. But a small rural bank operating two farm mortgage subsidiaries is unusual, observers said. The two subsidiaries even compete with each other on occasion.

"I don't know of any other bank that has two subsidiaries doing the same thing," said John Nitz, vice president in Prudential Insurance Co.'s agricultural investments department in Lisle, Ill. First State Bank's subsidiaries are part of Prudential's nationwide network of about 25 farm mortgage loan originators from which it buys loans.

Together, the bank's subsidiaries are Prudential's top originator, said James Etienne, vice president of First State's first mortgage subsidiary, Capital First Corp.

Capital First, also of Eldorado, began as an originator of fixed-rate residential loans in 1987.

A year later the government established the Federal Agricultural Mortgage Corp., a secondary market for mortgages secured by agricultural real estate and rural housing, commonly known as Farmer Mac.

In 1990 Capital First decided to originate farm mortgage loans as well, which it does primarily in Illinois, Indiana, Missouri, and Wisconsin. It also joined the Prudential network.

Under Farmer Mac, lenders such as banks, mortgage companies, insurance companies, and other farm real estate lenders originate the loans that meet certain standards. Poolers like Prudential buy the loans and combine them to be sold as securities in the secondary market. The originators often continue to service the loans, earning fee income.

Also in 1990, First State Bank acquired American Farm Mortgage, a similar business in Louisville, Ky., that was seeking a bank partner.

"What's unique about American Farm is the territory we cover," said Don G. Mattern, vice president. The subsidiary has a network of originators in 39 states, a much wider area than its sister company.

Although both subsidiaries also originate other types of loans, farm mortgages are their mainstay - and they periodically compete for the same ones.

"There have only been rare occasions where we actually came across the same loan at the same time," said Mr. Etienne of Capital First. "Typically, whoever contacted the people first goes ahead and works on the loans."

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