Farmer Mac Wants Small Banks to Give It a Second Look

Farmer Mac wants more community banks to consider using its services as a way of bringing in more revenue.

After enduring a rough patch following the financial crisis, Farmer Mac implemented changes to improve its risk management. Back on track, the entity officially known as the Federal Agricultural Mortgage Corp. (AGM) is optimistic that more banks will look at the secondary market for agricultural loans.

"I expect to see bankers looking to do business differently as competition increases and the marketplace changes," says Timothy Buzby, who became Farmer Mac's president and chief executive last fall. "We will look to partner with bankers to grow our business through the evolution of theirs."

Farmer Mac was created during the farm credit crisis in the 1980s so community banks and other lenders could offer farmers long-term fixed-rate loans, notes Mark Scanlan, vice president of agriculture and rural policy at the Independent Community Bankers of America.

Banks originate loans, such as mortgages for agricultural real estate, and then sell them to Farmer Mac. Banks generate income through the origination and often by servicing the loan, Buzby says. Banks can also borrow money from Farmer Mac, using mortgages as collateral, or buy guarantees for loans they opt to keep on their balance sheet.

Community banks were initially slow to embrace Farmer Mac. Part of the problem was a lack of awareness of the entity's services and limited flexibility in some of the programs, Scanlan says. Requirements have since changed and educational efforts have made more bankers aware of what Farmer Mac does, he says.

The enterprise has also picked up steam in the last few years as interest rates have stayed low, making it "a great time for farmers to lock in rates for a variety of types of loans," Scanlan says.

The agricultural industry has been strong in general, despite the broader economic downturn, Buzby says. High commodities prices have put farmers in a "position where they have increased incomes and the ability to expand their operations and the ability to withstand any disruption in that economy" like the recent drought that has plagued some areas, he says.

As a result, Farmer Mac has reported record business volume and core earnings. Net income attributable to common stockholders tripled last year from a year earlier, to nearly $44 million.

The results benefited from an effort to reduce losses on financial derivatives and hedging activities to nearly a fifth of what they were a year earlier, to $20 million. Farmer Mac uses financial derivatives, mostly interest rate swaps, to reduce interest rate exposure and to lower the overall cost of borrowing.

Still, Farmer Mac added $2.9 billion of new business volume from a broad range of sources. Outstanding business volume rose roughly 9% from a year earlier, to $13 billion. Last year, Farmer Mac bought $1.1 billion of farm and ranch loans and Department of Agriculture-guaranteed securities, an amount that more than doubled its activity in 2008.

Despite improvements, Farmer Mac is taking steps in case an agriculture land bubble develops. Farmer Mac, which underwrites all of the loans it buys, has reduced its maximum loan-to-value ratio to 60% from 70% in some cases, Buzby says.

It is also looking to increase the number of lenders it works with, along with the volume of business conducted with each lender, Buzby says. New regulation and consolidation in the banking industry could open some doors.

"I always encourage bankers that we don't do business with to think about the last customer that that they lost, why that customer went elsewhere and what could Farmer Mac have done to help," Buzby says.

Farmer Mac can act as a "source of risk management tools" for bankers, Buzby says. Banks looking to diversify by geography or commodities can lower some of the risk by selling loans to Farmer Mac. As regulators require banks to hold more capital, Farmer Mac's guarantees on assets can help, he says.

Farmer Mac has faced questions about its similarities to Fannie Mae and Freddie Mac, which were taken over by the government during the financial crisis.

In that regard, Farmer Mac certainly knows about perseverance after sustaining losses in 2008 from investments in Fannie Mae and Lehman Brothers. The enterprise had been using its investment portfolio to generate revenue, straying away from its charge of maintaining liquid assets for possible sale, Buzby says. Eventually, Farmer Mac had to raise $65 million, bringing in most of the funds from five Farm Credit institutions and Zions Bancorp (ZION).

Still, it avoided government conservatorship. Since Farmer Mac is smaller than Fannie or Freddie, it is "not so instrumental" or viewed as "one of the primary drivers" in the financial system, Buzby says.

Farmer Mac has since revamped its policies for its investment portfolio, which now includes higher-quality assets such as U.S. Treasuries rather than riskier investments in corporate debt.

"We were created by Congress to provide financing to financial institutions in good times and bad times," Buzby says. "In bad times we want to make sure we have the financial wherewithal for that service."