A RECENT MERGER AGREEMENT between two farm credit banks would form one of the nation's largest agricultural lenders -- and a formidable competitor for community banks in the Midwest and South.

Under the proposal announced on June 7, the farm credit bank of Louisville, Ky., will be folded into Agribank, the growing St. Paul-based farm credit bank, by the end of this year.

The merger will create the largest institution among the 13 banks in the government-sponsored Farm Credit System.

It will enable Agribank to compete more aggressively with bankers for farm loans, said Ronald K. Ence, director of agricultural finance at the Independent Bankers Association of America.

Agribank officials say eventual cost savings from the merger will allow the bank's associations, or branches, to knock off up to 25 basis points of interest on loans.

"Farmers will notice only one difference -- that their cost of funds will have gone down," said Dave Reinders, an agricultural economist at Agribank. Because the banks will not close any branches, he said, the merger will not cause any serve shortfalls.

Agricultural bankers frequently accuse farm credit banks of undercutting the market rate of certain loans in order to "cherry pick" well-qualified borrowers.

While evidence of such pricing is anecdotal at best, the Farm Credit System, because it is financed by government-guaranteed bonds, can dip into capital markets for low-cost funds.

The merger pact follows a trend of farm credit banks joining to cut operational costs and pass the savings on to farm borrowers and shareholders.

"The whole idea is to move our operating cost structure to a low enough level where we can compete with the lenders of the future, who may or may not be commercial banks," said Mr. Reinders.

Agribank was formed last year when the farm credit banks of St. Paul and St. Louis joined forces in the first merger within the agricultural credit system.

Since the, the Federal Intermediate Credit Bank of Jackson, Miss. has agreed to merge with the farm credit bank of Columbia, S.C., and the farm credit banks of Omaha and Spokane, Wash., are said to be in merger discussions.

The Farm Credit System required a congressional bailout in 1987, after a downturn in the agricultural industry and some faulty underwriting of loans. The 1987 bill advised farm credit banks to seek mergers as a way to improve expense ratios.

If the merger is approved by shareholders, Agribank will serve farmers in 11 states: Minnesota, Arkansas, Illinois, Michigan, Missouri, North Dakota, Wisconsin, Indiana, Ohio, Kentucky, and Tennessee.At a Glance:Agribank of St. PaulHow the merged institutionwould look:Chairman: Daniel T. KellyEmployees: 3,400Assets: $14.4 billionLoans: $12.4 billionAssociations(branches): 35

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.