A Healthy Harvest

The ICBA-Farmer Mac program is growing agricultural loan volumes—and new financing options

By Katie Kuehner-Hebert

Thanks to the introduction of two new long-term, fixed-rate agricultural financing products, a streamlined online application process and greater awareness among community bankers, ICBA member participation in the ICBA-Farmer Mac agricultural secondary market loan program continues to grow quickly.

Long-term, fixed-rate financing is Farmer Mac’s most popular product among community bankers, as it helps their institutions compete for the best borrowers, says Tim Buzby, CEO of Farmer Mac in Washington, D.C. “Typically, community bankers are not going to want to make long-term fixed-rate loans and keep them on their balance sheets because their source of funds comes from deposits,” Buzby says.

“Our program gives banks a secondary market so they don’t have to hold those loans on their books.”

In 2009, the initial year of the partnership program with ICBA, Farmer Mac bought 66 loans for $36 million from 33 ICBA-member banks. But as banks became more aware of the program, both the number of banks using the program and the number of loans sold to Farmer Mac increased sharply. In 2012, the company bought more than 300 loans for $200 million from about 100 banks. In a 12-month period running through April of this year, more than 125 community banks sold approximately 400 loans to Farmer Mac.

Last year the Farmer Mac program added two new 15-year Farmer Mac agricultural loan products—with special pricing exclusive to ICBA member banks. One product allows loans to amortize over 20 years; the other is amortized over 25 or 30 years.

The ability to lock in rates for 15 years has been popular with ICBA-member banks, Buzby adds.

Expanding options

The new products available through the ICBA-Farmer Mac program help community banks better compete for farm real estate mortgages against large national banks, insurance companies and farm credit associations, says Patrick Kerrigan, Farmer Mac’s director of business development. “This is where the ICBA-Farmer Mac program brings great value to community banks,” he says.

To streamline the loan application and underwriting process, Farmer Mac has invested heavily in Web-based technology, particularly with its AgPower loan submission platform, he says.

Mark Scanlan, ICBA senior vice president, agriculture and rural policy, says the trade association has been supportive of the Farmer Mac program since its start in the 1980s, but he adds that not many banks took advantage of the program in the early years because of the way it was structured initially.

At first, community banks couldn’t sell the entire loan to Farmer Mac; instead, they had to keep 10 percent of the loan on their books, and as such they had to set aside higher capital levels. That requirement was omitted in the late 1990s. “Now they have an online application that simplifies the application process, speeds up the turnaround time for approval and makes the program more user-friendly,” Scanlan says.

In 2008, ICBA formed a partnership with Farmer Mac to offer the company’s members certain loan products at a discounted price. The products were created in large part based on input from ICBA’s Agriculture-Rural America Committee, comprised of bankers from across the country. And Farmer Mac is able to offer discounted rates on these products to ICBA members because it receives a higher volume of loans, Scanlan says.

Now the program’s new 15-year, fixed-rate loans, which can be amortized over 20, 25 or 30 years, also can reduce the regular loan payments made by customers, Scanlan says. Moreover, the program offers a one-month LIBOR-based ARM product and a five-year product that can be amortized up to 25 years.

Taking advantage

More and more community banks of late are using the program to win deals over competitors, particularly Farm Credit System institutions, which often underprice loans due to their tax exemptions and funding advantages.

First National Bank in Mahnomen, Minn., recently originated a Farmer Mac loan in northwestern Minnesota for about $540,000, and the net yield on the loan was 3.67 percent, fixed for 15 years, says Peter Haddeland, the bank’s president. Even after the bank added its servicing fee onto that price it still beat Farm Credit’s rate on that particular deal, Haddeland says. The annual servicing fee is paid out over the life of the loan, thereby generating ongoing fee income.

First National has completed six Farmer Mac fixed-rate loan deals in the last seven months, each for around $300,000 to $500,000.

“ICBA member banks can get a reduction on Farmer Mac’s normal rate sheet, so rather than complain about the Farm Credit, do the program and beat them at their own game,” Haddeland offers.

Steve Handke, president and CEO of The Union State Bank of Everest, Kan., says that his community bank has been able to double its loan volume in the ICBA-Farmer Mac program every year since it started participating in 2008. “About 40 percent of our loan portfolio is in agriculture, but we’re able to sell the Farmer Mac loans and take them off our books, enabling us to make more ag loans without increasing our concentration,” he says.

Some community banks wonder if they would diminish their current agricultural loan portfolio if they participated in the ICBA-Farmer Mac program, but The Union State Bank has been able to attract many more new customers with the program, which has greatly outweighed the extra work of transitioning some existing customers into the program, Handke says. As such, the bank’s overall portfolio is growing.

“Farmer Mac also pays us a service fee that is nearly three-quarters of a percent of the loans every year, so we’ve built a nice stream of income from servicing Farmer Mac’s portfolio,” he adds.

Katie Kuehner-Hebert is a financial writer in Running Springs, Calif.