We recently closed a Farmer Mac loan financing crop land on a long term fixed rate. There were lots of benefits to the credit union member which included a long term fixed rate on the loan, a lower annual payment than what the couple previously had, a loan that does not balloon, and the ability to complete a contract for deed. The borrower was quite happy at the closing.
As credit union folks, we do enjoy finding ways to serve our members by meeting their financial needs. But have you considered the benefits to the credit union?
The correspondent credit union received a portion of the origination fee at the closing. All finance people are looking at ways to generate more income. The origination fee will provide extra earnings. But, the non-interest income is not the only source of income for the credit union. The credit union priced the loan so they would earn money with each payment. MWBS allows for each correspondent to add up to 75 basis points to the interest rate. This provides an annuity stream of income for the credit union through the life of the loan. In the first year, the CU will recognize over $4,200 of income on a loan that is under $500K which is not even carried on their books!
It is easy to see the non-interest income benefits to Farmer Mac once the checks come in. The benefits to the balance sheet of the credit union are often overlooked. The first benefit is the elimination of the duration risk associated with the long term fixed rate. No institution should feel comfortable with giving a 25 year fixed, knowing that at some time the margin will be compressed or may even be negative compared to the cost of funding. So off-loading longer term agricultural land and facility credits that want fixed rates will be a wise asset-liability management strategy.
Next, consider concentration risk. The credit union may want to provide as many services as it can for the good ag member. What do you do when the farmer’s borrowing needs exceed your capacity? Do you send him to the banking institution down the street? Well that is often the path that is chosen. An alternative is to allow MWBS to provide secondary market financing with Farmer Mac to off load the farm or ranch land and facilities financing and allow the credit union to continue financing the equipment and operating lines.
Another benefit is getting a loan off the books that the credit union should not have done in the first place. This does occur from time to time. There are cases of a credit union closing an ag loan for a member when they do not have the regulatory blessing to do business lending. In this case or in the case of a concentration limit, moving loans to Farmer Mac provides a way to clean up the balance sheet. In our recent closing, enough debt was moved off the credit union balance sheet to leave a small balance below the $50,000 limit. This can be managed easily by the CU.
The next time your farm or ranch customer has a land or facilities financing need that you either cannot or do not want to do because of balance sheet management goals, consider MWBS. We can help the client with good secondary market financing that will keep you in the customer relationship and also allow you to continue to make income through the life of the loan.--Phil Love