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April 20, 2001

Merger in the works for
10th Farm Credit District?

By Mike Barnett
Editor

The 10th Farm Credit District is negotiating with three other Farm Credit District banks about joint business opportunities and a possible merger, says Farm Credit Bank of Texas Chairman of the Board Ralph W. Cortese.

Speaking at the annual meeting of the 10th District recently in San Antonio, Cortese said changes on the national level have brought about the merger possibility.

"With national charters on the horizon, we may soon be in direct competition with associations inside and outside of the district," he said. "This intensifies the need to be lean and mean with our dealing with ag credit."

Cortese said the 10th District has gone about as far as possible in reducing costs in its present configuration.

"We've worked hard to bring down the cost of money so associations will be competitive and have some leeway in products and rates they can charge their fellow farmers and ranchers," the board chairman said. "The next possibility to bring down costs is to spread those costs over a larger loan volume."

Potential merger partners include the AgAmerica, Western and Wichita Farm Credit Districts. AgAmerica and Western are currently under joint management. A merger between the four districts would cover all of the western and much of the central part of the United States. Cortese said a merger of the four districts would "move us into a $25 billion-plus operation organization with not a lot of attending added cost. What I'm saying," he explained, "is that we can expect that we can manage a five time increase in volume with a much less than five times increase in operating cost."

That funding level would result in "true savings," innovative products and good risk management, Cortese said.

The four districts are looking at joint management with a possible merger within two years. Cortese said all four banks are currently considering adoption of a business statement that reads as follows: "The overarching objective is to form an alliance among AgAmerica, Western, Wichita and Texas Farm Credit Banks that best serve customers—both associations and farmers and ranchers. The alliance must work for all associations, large and small, equitably. The objective is to create an atmosphere that provides choice to shareholders. The alliance will operate as a wholesale bank. There will be freedom to choose services by association customers, and ultimately, the goal is to merge."

"This says we come together for the good of the associations, still protecting their right to choose their future while protecting our core values," Cortese explained. "What will happen for us is a unique opportunity to study the best practices of three other districts...and more importantly, the funding function, be on a level playing field."

A good year

Meanwhile, the 10th District ended the year with record loan volume and strong earnings, said CEO Arnold Henson.

Gross loan volume exceeded $5.2 billion—a new record in the district's 84-year history. That represented more than a 9 percent increase over the $4.8 billion in loan volume reported at the end of 1999.

"This growth in loan volume can be attributed to several factors such as competitive interest rates, strong demand for real estate, a growth in the cattle industry, and generally good non-farm economic conditions throughout our district," Henson said.

The short- and intermediate-term loan portfolio increased by 22.8 percent over the previous year to total a little over $1 billion at Dec. 31, 2000. Henson said financial improvements in the livestock sector contributed substantially to the strong demand for agricultural operating and equipment loans.

Other contributing factors included the expansion in the integrated processing and marketing sector and increases in point-of-sale equipment financing and loan participation volume.

The long-term portfolio totaled $4.2 billion at the end of the year, a 6.3 percent increase from December 1999. The growth in mortgage loan volume is attributed primarily to competitive interest rates offered by the bank and its lending institutions, strong demand for real estate and generally strong non-farm economic conditions throughout the district.

"We are extremely pleased with this remarkable growth in loan volume and the high quality of our loan portfolio, especially considering the adverse weather conditions and low commodity prices experienced by many producers in 2000," Henson said. "Disaster payments and other federal payments helped to cushion the blow for many producers caused by the extreme adversities of last year. And this morning, I think there is little doubt that the high quality of our loan portfolio at year-end can be attributed in part to these payments."

The percentage of the district loan volume classified as acceptable increased to 97.6 percent at the end of 2000 from 96.6 percent a year earlier.

The bank and district associations reported net income of $80.2 million for the year ending Dec. 31, 2000, down 2 percent from the $81.8 million reported for 1999.

Net interest income of $192 million in 2000 represented a 2.7 percent increase over the previous year and is attributed primarily to growth in district loan volume.

District associations declared $25.7 million in patronage distributions consisting of cash and allocated retained earnings to their stockholders in 2000.