Community bankers balk at potential FCS overreach

In the Ozarks, a nearly century-old financial institution is operating with a local base of more than 1,000 customers, though relatively few people outside the agriculture industry are aware of it. It shares structural characteristics of modern credit unions and the rural electric cooperatives that rose from President Franklin Roosevelt’s New Deal in the 1930s, yet it predates both. It is the Farm Credit System, and a recent $725 million loan to Verizon Communications Inc. (NYSE: VZ) has community bankers doubting its motivation.

Joe James, executive vice president of Mountain Grove-based First Home Savings Bank, questions not only the Verizon deal, but the fairness of competing with an entity that he calls a “quasi-government agency” for local loans.

“That’s what our industry is facing,” James said. “The federal government is putting more and more regulations on independent banks, while going after the same business. It’s not any one big thing that’s hurting us, but more like a thousand little nicks and cuts. On the surface it’s just a bunch of flesh wounds, but they eventually add up to a lot of blood loss.”

Storied history
With its roots in the Federal Land Bank, the FCS was established in 1916 by the congressional Federal Farm Loan Act to make short- and long-term loans to rural Americans for the purchase of property, facilities, equipment or operating resources that relate to farming and agriculture, including grains, beef, poultry, swine, dairy and wood products. Today, it is a $250 billion institution that, if it were a bank,  would rank ninth-largest in the U.S., according to the national organization’s website.

However, like its financial services siblings Fannie Mae, Freddie Mac and Sallie Mae, it is not a bank, but is classified as a government sponsored entity. Of that group, FCS is the only member-owned cooperative – a point local FCS Vice President Greg Brown is quick to point out.

“We’re an organization made up of farmers,” he said. “Our structure means that all our stockholders are equal – whether you’re a part-time farmer who takes out a $10,000 loan for each season’s crop supplies, or you’re a huge agribusiness with a $10 million note. Everybody gets the same vote.”  

That solidarity amounts to big business. As one of 86 nationwide FCS-affiliated banks and associations, Brown’s company, FCS Financial, covers 102 counties in all areas of Missouri except the Bootheel. Governed by stockholders via a Jefferson City-based board of directors, its 22 statewide branch locations service more than 27,000 loans with a volume of just more than $3 billion.  

FCS Financial operates as two legally separate subentities. Its Federal Land Credit Association handles the capital side of the ledger – traditional loans of up to 30 years, mainly for real estate and related improvements. Its Production Credit Association arm focuses on short-term, ag-specific operational needs, such as crop inputs, machinery, feed for livestock or harvesting equipment.

While the primary purpose of the system is to make loans to eligible farmers, ranchers and rural homeowners, Brown said the core purpose has been expanded during the years to include broader financial services such as life, disability and crop/livestock insurance and equipment leases.

Diversified and criticized
Like most financial services companies, the FCS operates with a wide focus on its mission to support agricultural industries. In the modern era, that support often extends to rural infrastructure entities, including power, water and communications providers.   

Member institution CoBank is one of the national cooperative banks that serve as wholesale lenders for FCS entities. Last month, along with 45 banks from around the world, CoBank contributed $725 million to a total $12 billion loan to help Verizon Communications reclaim majority domestic ownership of Verizon Wireless from British telecom company Vodafone.

Despite Verizon’s long-term initiative to upgrade nonurban telecommunications service coverage via its LTE in Rural America program, the move has drawn some criticism. The loudest so far comes from the Independent Community Bankers’ Associations, which last week questioned the loan during testimony to congressional leaders in support of the Community Lending Enhancement and Regulatory Relief Act.

According to a statement from CoBank, the bank’s “mission is to support infrastructure in rural communities. We provide credit to a wide variety of rural communications companies, including voice, Internet, cable, wireless and data service providers. Our borrowers include small, medium and large-sized businesses. The communications landscape continues to evolve rapidly, and there is a great deal of interdependence among companies to deliver modern communications services to rural communities. Everyone we loan to is eligible to borrow from CoBank under applicable law.”

James said First Home Savings Bank, which operates eight area bank branches in rural communities, has lost loans to FCS, though he isn’t sure exactly how many.

“Even if it’s two or three, that’s two or three too many,” he said. “We shouldn’t be banging up against the federal government.”

Greg Bailey, president of the Aurora branch of Monett-based Community National Bank, shares James’s concern for leveling the playing field, noting that a portion of FCS assets are tax-free. Still, facing a federally-backed competitor doesn’t keep him from aggressively pursuing farm and agriculture loans via print and radio advertising and word of mouth.

“We try to do as many of those as we can get,” Bailey said. “They are a big part of our business, and so we have to remain competitive however we can. The best way is to really know your customers.”

The need for seed
Despite the tightening market as commercial banks consolidate, the 100-year-old FCS formula is still working.

“Locally, in our Springfield market, applications have been up,” Brown said of his office’s $108 million principal and loan volume. Statewide, FCS has has 12 percent growth during the past three years.

He said with the exception of recession-marred 2009, FCS Financial’s five-year revenues have trended steadily upward, finishing 2012 a full 50 percent higher than 2008 levels.

Additionally, the FCS institutional model means those increased revenues translate into greater returns for stockholders.

FCS’s financials 2012 annual report shows it returned $9 million in patronage payouts to its owner-operators – a 76 percent increase from 2011, and more than double the 2008 figure.

Of the 22 areas of agricultural operations supported by FCS, the majority of local loan applications – 56 percent – went to just four types of producers: crops (corn and soybean), cattle, swine and poultry.  Additionally, Brown said, just more than half of his local FCS Financial loans went to part-time farmers, or those operators for whom agriculture is not the primary occupation for both household residents.

One such borrower is Lincoln Hough. In addition to his work as the state representative of Missouri’s 135th District, he and his wife Sarah raise beef cattle on their farm in Fair Grove – property that was purchased two years ago via a loan through FCS Financial. In addition to raising calves for market, the farm’s grazing land generates hay used to sustain their stock during winter months, with some surplus bales being sold to neighboring ranchers.

Hough said for rural communities, the most important aspect of a lender like FCS is its flexibility in financing and repayment options. FCS loans operate on a six- to 12-month loan cycle most farmers utilize for short-term, harvest-related borrowing.

“Some producers may only sell their commodities once or twice a year,” Hough said via email. “FCS can build a financing plan around your individual operation. Personally and professionally, they have been the best lenders my family has ever worked with.”[[In-content Ad]]