The Baltimore Farm Credit Banks, a group of three little-known financial institutions with $3.4 billion in assets, had a much different financial report for 1985 than did most lenders making farm and rural housing loans across the nation. They actually made money.

Nevertheless, the three banks -- which operate under a single management and have about 74,000 outstanding loans made through a network of local offices in Delaware, Maryland, Pennsylvania, Virginia, West Virginia and Puerto Rico -- are under growing pressure because of losses elsewhere in the farm credit system.

The Baltimore banks are among the 37 that comprise FCS, and last year FCS suffered what is probably the most massive loss of any business in history: $2.7 billion.

In contrast to that bleak national picture, the Baltimore Farm Credit Banks earned $12.7 million and, at the end of December, had fewer than 5 percent of their loans delinquent.

However, the need to find money to cover enormous losses by Farm Credit banks in Omaha, Spokane and elsewhere is raising new problems for the Baltimore banks and the farmer-borrowers who are their ultimate owners. During 1985, the traditionally independent Baltimore banks directly contributed $13.6 million to shore up other parts of FCS, an amount that cut the banks' earnings by more than half.

Negative Impact Felt

Thus, even though the farm credit system in this region is comparatively free of the financial problems facing the FCS elsewhere, the negative impact still is being felt -- causing higher than normal interest rates on farm loans and the loss of dividends normally paid to borrowers as members of the credit association.

The three banks are the Federal Land Bank of Baltimore, the Federal Intermediate Credit Bank of Baltimore and the Baltimore Bank for Cooperatives.

The farming activities for which the banks make loans range from commercial fishing in the Potomac River (called aquaculture), to rural homeowners raising hay, keeping a couple of steers or just maintaining a wooded tract, to mushroom growing, to raising llamas for sale as pets, to more traditional livestock and crop operations. Mortgage loans are available to almost anyone with at least 10 acres of rural land and even a minimal attachment to agriculture.

The Baltimore banks are in relatively good shape compared with the rest of the Farm Credit System because agriculture in this area is highly diversified and most borrowers do not rely on farming for the bulk of their income, said Gene L. Swackhamer, president of the three banks.

"Most of our borrowers have managed their credit well," Swackhamer said. Most farms are relatively smaller than in the Midwest and Great Plains areas, livestock operations are varied and the region is a "grain deficit area" -- that is, more grain is consumed than is grown -- and that has kept grain prices somewhat higher than in other parts of the country, he explained.

Meanwhile, the demand for land for recreational and housing purposes has helped prop up land values. That is in sharp contrast to some farming areas, where values are down to only one-half to one-third of what they were five or six years ago.

Swackhamer proudly noted that the Baltimore banks did not go overboard making collateral-based loans when land values rose sharply in the late 1970s. "When land values were rising, our loan-to-value ratio fell a bit. I took more heat in the past from not accommodating credit needs of farmers than I do now for foreclosures," he declared.

And while Swackhamer acknowledged his banks' obligation to the rest of the system -- an obligation he said likely will take a bite out of this year's earnings at least as large as in 1985 -- he argued that there ought not be steps taken that will "penalize good management" in places like Baltimore.

This "penalty" could be much larger in the future. Late last year Congress agreed to allow the Farm Credit System to borrow money from the U.S. Treasury if it needed to avoid a default on the securities FCS has issued to the public -- in other words, to ward off bankruptcy. But Congress set some very stringent conditions on that new line of credit, including that FCS first must fully utilize its own financial resources to aid its troubled institutions.

During a panel session at the Baltimore banks' annual meeting this month, Swackhamer suggested that the Baltimore contribution ought to be about 4 percent of whatever amount is needed -- in line with the fact that the Baltimore banks hold 4 percent of the Farm Credit System's roughly $80 billion in assets.

"You can expect to save 96 percent of the system with the 4 percent," he declared.

But another panel member, Bill O'Conner of the House Agriculture Committee staff, said that the Baltimore banks would have to provide much more than that. FCS "is going to have to make an overwhelming case that it is on the verge of collapse" before Congress would appropriate any money and the secretary of Treasury agree to loan it to FCS, he said.

And as for tying the Baltimore banks' contribution to their share of assets in the system, O'Conner added, "I am not at all certain that is going to be adequate" in the view of members of Congress. All of this is bad news for borrowers from the three banks and the local associations.

Normally, the interest rates paid by Farm Credit System borrowers have been tied to the system's average cost of funds. That policy made system loans a real bargain a few years ago when interest rates were rising rapidly. At one time, mortgages were available at rates 5 percentage points lower than those being charged by other lenders.

Now, with interest rates generally falling, FCS rates are not. The Farm Credit Administration, a federal government agency that was given new regulatory authority over the Farm Credit System by a law passed in December to allow access to federal assistance, has told all parts of FCS that rates cannot be lowered without prior approval from it.

In its "Capital Directive No. 1," a document that already has become infamous within the system, FCA ordered that the banks in Baltimore and elsewhere and the associations under them must not take any action "that has the effect of dissipating the institution's existing capital resources, decreasing its revenues or otherwise diminishing its capacity to provide financial assistance to other system institutions."

Among the actions that are specifically prohibited is paying any dividend. As associations with mutual ownership, the system has customarily paid such dividends to borrowers from the Federal Land Banks and the Land Bank Associations.

Last year the Baltimore Land Bank and associations paid $1.6 million in dividends on the stock held by borrowers. (Borrowers must buy stock in their local association as a condition of receiving a loan, with the stock purchase usually equal to 5 percent of the amount borrowed.)

No such dividends will be paid this year, however, because of Capital Directive No. 1, according to bank officials.

Rate Decisions a Blow to Borrowers

For many borrowers, the failure to lower rates is more of a blow. Once Congress agreed to have federal money used to backstop the system, FCS securities regained the highly favored status they traditionally have had in financial markets. Currently, the Federal Farm Credit Banks Funding Corp. in New York, which issues securities that have the joint backing of all the 37 banks in the system, is paying rates only about one-quarter point higher than is the U.S. Treasury to raise money.

Unlike most variable-rate loans, a typical agreement between the land bank and a borrower does not specify any standard by which rates will rise or fall. The agreements simply give the lender the right to raise or lower the rate without restriction.

Some borrowers who had assumed that the past policy of relating rates to the average cost of funds would continue are beginning to refinance their loans elsewhere. Twenty-five such loans at the Leesburg branch of the Warrenton Land Bank Association were paid off between mid-February and mid-March, according to Tim Tarr, the association manager.

However, other borrowers are planning to stick with the system even if they could readily get credit elsewhere. The reason, Tarr said, is that FCS loan officers know agriculture and the borrowers with whom they work far better than those at most institutions. "This sort of working relationship is unique to a cooperative," he adds.

The current rate for land bank loans is 11 3/4 percent, about 2 percentage points higher than long-term fixed-rate loans available from other lenders in this area. Variable-rate mortgage money, similar to the land bank loans, is available even more cheaply. While other rates have dropped sharply, the land bank rate has not changed in nearly a year, Tarr said.

Another concern is that the stock held by a borrower, which is normally redeemed when a loan is repaid, might be frozen, or that the capital represented by such stock might be siphoned off to aid the rest of the system -- though that is not supposed to happen.

The tenor of questions from the audience at the panel session indicated considerable unhappiness on the part of borrowers with having their money sent elsewhere.

Later, Wilson Greenlaw, a member of the board of the Warrenton Land Bank Association, sat in the living room of his home on Park Farm in Hartwood, not far from Fredericksburg, talking about the problems farmers and the Farm Credit System are facing.

"As a farmer, and a farmer who is having trouble, if I was in Omaha or Spokane bank districts, I am not sure how I would feel about getting help from other farmers," Greenlaw said. "But as a farmer not in Omaha or Spokane, I know that part of my equity is going to help them. Quite frankly, as a farmer, I can't afford it."

Greenlaw has little faith in the prospect of federal help for the Farm Credit System.

"By the time the federal government will step in and help, I think the situation will be too far down the tubes to help, and that assessment was shared by many of the people in Baltimore" at the annual meeting, he said.

Out in Leesburg, Henry Stowers, a former member of the Loudoun County Board of Supervisors, is a farmer in far better financial shape than Greenlaw, partly because almost all of the more than 450 acres of land he and his family own (he farms another 500 acres of rented land) is now inside the town limits of Leesburg and is soon to be sold to a developer.

Stowers has some ambiguous feelings about aiding other parts of FCS. "I don't particularly like it, but I think we are all in the boat together. We have got to have some compassion," he said.

Last year, there were only 264 foreclosures on collateral securing FCS loans in the Baltimore district.

There were an additional 175 bankruptcies of borrowers, including 69 that were triggered by FCS foreclosure actions.

Bank officials said that the largest losses were in southeastern Pennsylvania, where mushroom farmers are under great financial stress due to competition from imported mushrooms and from expansion of production by large operators such as Campbell Soup Co.

With the cost of acquiring funds falling and the interest rates being charged not falling, earnings ought to rise this year -- depending on how much assistance is given to the rest of FCS, and depending on how many present borrowers go elsewhere.

There is no indication, as in other parts of the country, of a significant increase in loan losses, according to the banks' annual report. At the end of December, 5.4 percent of the land bank loans and 3.9 percent of the production credit loans were delinquent. Those figures were up from 5.2 percent and 3.6 percent, respectively, at the end of 1984.

Swackhamer is not at all sure what lies ahead for the Farm Credit System, but he has no doubts that it is needed as a source of credit for farmers.

"The return on investment in agriculture has been so low that, except for country banks, commercial banks do not want much to do with agriculture," he said. "Farmers will need us more than even in the next decade. Borrowers will be coming in because the commercial banks will not want to talk to them."

After all, Swackhamer added, "farmers must have access to the credit markets. A farmer can't attract equity capital to his farm, so he has to use debt."

The question for the full-time farmers served by Swackhamer's banks is whether they will have enough income to pay off that debt. Those with full-time nonfarm jobs are the mainstay of the Baltimore banks right now, and they can go to other lenders. If the Farm Credit Administration forces all the FCS banks to keep their lending rates high in today's market, an increasing number seem likely to do so.