US AgBank and CoBank, two of the five banks in the Farm Credit System, have said that they intend to pursue a merger in 2011.

The banks’ boards of directors executed a letter of intent that sets forth key terms and conditions of the proposed transaction, which also requires regulatory and stockholder approval.

CoBank, with $60bn in assets, is based in Denver, Colorado, while US AgBank, headquartered in Wichita, Kansas, has $25bn in assets. Both banks are members of the Farm Credit System, a cooperative created by Congress in 1916 to provide credit to US farmers and rural areas.

According to Farm Credit System, the merged bank would serve as a wholesale provider of financing to Farm Credit associations that provide credit and financial services to more than 70,000 farmers, ranchers and other rural borrowers in 23 US states.

The merged bank would continue to do business under the CoBank name and be headquartered outside Denver, Colorado, but it would maintain US AgBank’s existing presence and operations in Wichita, Kansas, and Sacramento, California.

Robert Engel, CoBank’s president and CEO, would be the chief executive of the combined entity, while Darryl Rhodes, US AgBank CEO, will retire after the merger completes on 1 October 2011.

Engel said the merged bank will enjoy substantial diversification benefits through the combination of two highly complementary loan portfolios, enhancing its ability to withstand risk.