* Two of five Farm Credit System banks to merge 2011
* Merger seen tied to consolidation not bank problems
By Christine Stebbins
CHICAGO, Dec 16 U.S. AgBank and CoBank, major lenders to U.S. agriculture and part of the government-sponsored Farm Credit System, said on Thursday they plan to merge in 2011 to boost diversification and efficiency.
CoBank, with $60 billion in assets, is based in Denver, Colorado, while U.S. AgBank, headquartered in Wichita, Kansas, has $25 billion in assets. Both banks are members of the Farm Credit System, a cooperative created by Congress in 1916 to provide credit to U.S. farmers and rural areas.
"This deal has been percolating for a long time now. It is not because of problems in U.S. AgBank but more of a matter of CoBank trying to spread its wings further," said Bert Ely, a scholar at The Cato Institute and a well-known critic of the Farm Credit System, which competes with commercial banks.
The combined bank will do business under the CoBank name and provide financing to more than 70,000 farmers, ranchers and other rural borrowers through Farm Credit association banks in 23 states.
CoBank's president and CEO Robert Engel will become chief executive of the combined bank while Darryl Rhodes, U.S. AgBank CEO, will retire after the merger completes on Oct. 1, 2011.
"The merged bank will enjoy substantial diversification benefits through the combination of two highly complementary loan portfolios, enhancing its ability to withstand risk," Engel said in a statement.
The board of directors for both banks approved a letter of intent to merge on Wednesday, FCS said. The merger requires both regulatory and stockholder approvals.
CoBank headquarters will remain in Denver. U.S. AgBank offices in Wichita and Sacramento, California, will stay open.
"CoBank had already been doing business with some of the California associations that belong to U.S. AgBank. I think we are going to see further consolidation among the banks," said Ely.
There has been massive consolidation of FCS banks over the years, now down to four banks with the CoBank-US AgBank merger. Once there were some 37 regional banks lending to the system's association banks. FCS obtains its basic capital by selling securities on domestic and international capital markets.
"The whole bank association structure within the Farm Credit System is kind of archaic," Ely said.
Farm Credit banks held about 37 percent of total U.S. farm debt, with commercial banks holding about 46 percent, insurance companies 5 percent, the USDA's Farm Service Agency about 2 percent, and individuals and other creditors about 10 percent, according to the USDA's Economic Research Service.
(Reporting by Christine Stebbins; Editing by David Gregorio)