Bankers seek re-evaluation of Farm Credit System

The American Bankers Association is banking on legislators to re-evaluate a federally funded competitor to traditional agricultural lenders.

Specifically, the Washington, D.C., trade association takes issue with the Farm Credit System, a nationwide network of borrower-owned institutions established in 1916 by the congressional Federal Farm Loan Act to make short- and long-term loans to new farmers.

Late last month, the U.S. House Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Subcommittee held an oversight administration hearing on the FCS. Reportedly the first such hearing by the subcommittee in 19 years, it gave the ABA the chance to air its grievances regarding the program.

A statement submitted by the ABA on Feb. 28 to the House subcommittee points to the fact the FCS has grown to a $304 billion system.

According to the ABA, if the FCS was a bank, it would be the ninth largest in the United States and bigger than 99.9 percent of the nation’s banking institutions. The ABA statement said the FCS benefited from some $1.3 billion in 2015 tax breaks, giving it an unfair advantage over traditional lenders.

Bankers say the FCS has grown beyond its means.

“We want more of a level playing field,” said Brett Magers, executive vice president and chief lending officer for Legacy Bank and Trust. “They operate with a little bit of a leg up on the competition as far as not having to pay taxes.

“Thirty-seven percent of everything we make goes back to taxpayers.”  

Magers, a member of the Missouri Bankers Association’s legislative affairs council, said the FCS can offer agricultural loan terms banks can’t touch. For instance, the FCS can offer fixed interest rates for up to 30 years. Magers said Legacy – and most commercial banks – only offer in house loans fixed for up to five years because of undue interest rate risk.  

“FCS just comes and cherry-picks your best customers from you,” he said.

Of Legacy Bank and Trust’s $70 million in total loans last year, Magers said roughly $25 million to $30 million came from farm-related business. The four-branch, $165 million company loses out on several million dollars of loans per year from the FCS, he said.

Calling the FCS’ growth “mission creep,” Magers compared the FCS with another item bankers have taken issue with in recent years: credit unions. He said what started as a way to help an underserved group of people has increased to directly compete with banks.

Officials with the FCS see the program as a value to farmers that keeps the valuable American industry humming.

Scott Gardner is vice president of marketing and sales for FCS Financial, one of 76 financial cooperatives connected to the federal system around the country. Gardner’s territory covers 104 counties out of 114 in Missouri, including Greene County.

Gardner said a key benefit to FCS Financial customers is they’re also stockholders. Government bonds are sold to pay for the FCS system, and the organization is able to return money to customers.

In 2016, FCS Financial returned $12.5 million to customers based on board members’ evaluation of its financial position and the overall farming industry.

Gardner noted, unlike traditional banks, FCS institutions focus solely on one niche.

“We’re agriculture 24/7,” Gardner said. “We’re not a depository. We don’t have checking accounts or savings accounts.”

As of Dec. 31, 2016, FCS Financial had over 14,000 customers. Of those, 3,370 were under the age of 35 and 4,920 had been farming less than 10 years, according to data Gardner provided. The institution’s average daily loan balance rose to $3.7 billion last year from $3.4 billion in 2015.

Gardner said if a change occurs to the nationwide FCS system, it should be a re-evaluation of the needs of farmers, rather than a reworking of the program.

“There’s no doubt that the agriculture that was in Missouri when I started – I started in 1984 – is different today,” he said. “The needs of stockholders are different today than they were in 1984-1985.”

Gardner said the organization’s ability to offer fixed rates is key to the industry, and he’d like legislators to remember that in any decision making.

Declining to quote potential rates, Gardner pointed to FCS loans covering real estate, livestock and equipment, leases and recreational property.

“We don’t approach our loans in a cookie-cutter style,” he said. “We custom fit the finance package that meets the individual’s needs.”

Legacy Bank’s Magers said while major changes are needed, common-sense reforms are more practical.

“It’s like any regulation,” he said. “You’re never going to have a major repeal or complete elimination of the program.”

What could happen, he said, is increasing taxes the FCS is required to pay.

However, not all bankers are concerned.

Travis Bybee, community bank president for OakStar Bank’s Urbana branch, said the FCS has little impact on its business even though a quarter of his branch’s loans are in the agriculture industry.

He said the FCS’ closest office in Springfield is nearly an hour away.

“They’re not a competitor at all, other than rare cases,” Bybee said. “We have the advantage of being (customers’) full-service bank. We have a relationship with them.

“I have an ag background, so I can relate to their needs.”

Despite little competition, Bybee said a level playing field for banks and the FCS is ideal.

To combat the FCS, Legacy Bank works with the U.S. Department of Agriculture’s Farm Service Agency. Similar to the U.S. Small Business Administration, the agency guarantees loans issued by banks.

“We utilize it because they work through private banks,” Magers said. “This is just a need that I feel is already being met.”