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Main Street banks teach Wall Street how to do businessIn the waning days of the Bush administration, as Wall Street came to Washington asking for bailouts of their banks that were "too big to fail," Main Street bankers, those in small town America, kept asking the facetious question, "Where's my bailout?" While the financial capital of the world reeled in the mess of its own making, the community bankers of America were keeping on keeping on. That is, they were doing what they've done best for years, in good times and bad. As fears spread about problems at large banks trickling down to the banks of small town America, Congress ordered the Congressional Oversight Panel monitoring the Troubled Asset Relief Program (TARP) to analyze the commercial farm credit markets and the use of loan restructuring as an alternative to farm foreclosures. In its analysis, the Panel found that, thus far, the farm sector has fared somewhat better than the broader economy throughout the financial crisis. "Buoyed by continued strength in farmland values, generally high commodity prices, record levels of farm income and farm operator household income, and historically low debt-to-asset ratios, the agriculture sector--on the whole--has entered the crisis on the heels of several notably robust years," the report said. "Trends in farm loan delinquencies mirrored the positive conditions in the sector, and data on farm loans made by the U.S. Department of Agriculture's Farm Service Agency, Farm Credit Services, and commercial banks all reveal historically low levels of troubled farm loans in the months and years leading up to the crisis. Further, the relative lack of exotic financial products in the farm credit market has insulated the sector from some of the major challenges seen in residential mortgages." Risk, really? Still, the report indicates what producers have long known: Production agriculture is a risky business. The report repeats data from the USDA's Economic Research Service that the overall impact of the financial crisis on agriculture cannot be assessed with certainty. "To date, while measures of the strength of the farm sector have fallen from the positive levels of the preceding years, they remain within historic averages. USDA projects that net farm income will decline by 20 percent in 2009, while remaining above a running 10-year average," the report said. "The average U.S. farm operator household income is also projected to decline, although by considerably less than net farm income--a result of the rising importance of non-farm sources of income for American farmers." The report continued to state that while USDA projections show net farm income recovering in 2010 and returning to record levels by the end of the projection period, the current crisis has defied the projections of all but the most pessimistic of forecasters. With such a weak forecasting capacity, the effect that continued economic troubles could have on agriculture simply can't be known. Ready to work Even with risk and lack of real knowledge of what lies ahead for production agriculture in the future, community banks stand ready to serve because they avoided the traps Wall Street banks fell into. This, along with the fact that community banks know their customers and have generally good relationships with them, is why the TARP Panel found by a majority vote that a mandate for a loan restructuring program likely won't be needed. "While it is an option, mandatory modifications through the TARP might not be the most effective policy choice because of the limited number of farm loans held by TARP-recipient banks. Commercial banks hold only about 45 percent of overall farm debt--with the FCS, FSA, and other farm lenders collectively extending the majority of farm credit," the report said. "When considering real estate debt, commercial banks hold an even smaller piece, only 38 percent." The report went on to indicate that TARP-recipient banks hold only 27 percent of the portion of farm real estate loans made by commercial banks, or only about 10 percent of total farm real estate debt. Thus, a restructuring mandate for TARP-recipient banks would have very limited reach. Moreover, the role of TARP banks in the farm credit arena can be expected to diminish over time as such banks return their TARP funding. Besides, the report stated, Congress and Treasury have other options within the TARP to protect farm homes. "In the same way that Congress has embraced the principle of using the TARP to protect non-farm homes, it could apply this principle in different ways. One possibility would be to devote some portion of the remaining TARP funding to a farm mortgage foreclosure mitigation program, patterned on the incentive-based program developed to protect homes, but focusing on bank participation that extends beyond current TARP recipients," the report said. "Unlike residential mortgage restructurings, farm loan restructurings must also consider business plans, cash flows, and market factors. Therefore, the model would need to be adapted to provide the necessary flexibility. Another option for utilizing TARP money is to create a loan guarantee program for restructured farm loans." For now, though, all of the statements in the Panel's report are mostly "what if" statements, examining scenarios for a further decline in the economy, specifically the economy in rural America. Praise for farm banks At a recent hearing on farm credit held at Greeley, Colo., Elizabeth Warren, a distinguished professor of law at Harvard Law School who chairs the TARP panel, implied Wall Street could take a cue from Main Street in how to conduct proper lending practices. "This hearing makes clear the importance of relationship banking from the beginning through troubled times to full performance," Warren said. "In other hearings we've had, we've heard a lot about mathematical models, the standards of working out a loan. I'm impressed to hear from both borrowers and lenders how deeply the lender must understand ag business and evaluate its long-term viability, how much the lender has to be able to withstand volatility." Another thing Warren learned during her trip to the heart of Colorado agriculture was that, some days, producers want to borrow less than more. "Of all the places I've been to, this is the first place I've heard that. I also learned about sudden loss in weather. I really learned how much of a role credit plays in the business of agriculture," Warren said. "I'm most impressed, though, with how much bankers in agriculture understand the role of risk in their business. It's a role that people in other sectors of banking could learn from." Understanding risk While the community bankers of America aren't ready to say the nation's financial woes are over, they are willing to say the report Warren and the TARP Panel issued proved something they already knew: We understand risk. We help producers understand risk, too. We are ready and willing to help customers meet their production agriculture objectives. "The report issued by the Congressional Oversight Panel on TARP (Troubled Asset Relief Program) on July 21 about farm loan restructuring confirms what bankers have always known and have been saying consistently--banks work with debt-stressed farm and ranch customers to help them resolve loan repayment problems," said John Blanchfield, senior vice president at the Center for Agricultural and Rural Banking of the American Bankers Association. "Foreclosure is not and has never been the first option chosen. Bankers want their farm and ranch customers to be successful and they have and will work with their customers to ensure their success." The report, Blanchfield said, also confirms the agricultural economy, despite the global financial crisis, continues to be strong and that farmers and ranchers have historically high equity levels which will serve as an important cushion should the agricultural economy decline further. "The strength of the U.S. farm balance sheet gives producers and their banker's options to restructure debt, if necessary," Blanchfield said. "The committee was unable to find any compelling reason for wide scale farm debt restructuring. "Further, the committee acknowledged that if a widespread problem should arise, 'Congress has other tools available that may provide indirect relief for distressed farm loans. Most troubled loan situations arise from insufficient repayment capacity. Therefore, other programs providing assistance to farmers have the potential to ease a distressed loan situation.'" Restructuring instead of foreclosures The Independent Community Bankers of America also applauded the findings of the TARP Panel's opinion that it's premature to conclude there is an immediate need for a mandate for banks receiving TARP assistance to restructure their farm loans. "Our nation's more than 8,000 community banks continue to work every day with the farmers and ranchers in their communities so they can continue to do business," said R. Michael Menzies, ICBA chairman and president and CEO of Easton Bank and Trust Co., Easton, Md. "Community bankers put their customers first and already work with those who may be struggling with their loans. We agree with the panel's suggestion that Congress look to existing programs instead of creating any new burdens on community banks." ICBA supported the following key findings from the report: --Several factors, such as generally low delinquency and charge-off rates, a historically low farmer debt-to-asset ratio and record U.S. farm operating income levels, suggest that an agricultural restructuring requirement may be premature. --Administrative costs associated with a mandatory restructuring program would "possibly be passed through to those borrowers." --If Congress determines that the farm sector in part, or in whole, needs assistance, then such assistance could be delivered through existing programs. --Mandatory modifications might not be the most effective policy choice. ICBA recently pointed out in testimony to the House Agriculture Committee and Senate Banking Committee that the community banking industry has ample credit available for agricultural lending, and community banks continue to provide credit to local farmers at historically low interest rates. In fact, community banks with less than $1 billion in assets provide more than 60 percent of the banking industry's agriculture-related loans. Community banks with less than $500 million in assets provide more than 50 percent of these loans. "ICBA looks forward to continuing the dialogue with Congress and regulators to ensure that community banks can continue to serve their local agricultural sector, which is key to the stability of local economies and the communities we proudly serve," Menzies said. Breathing the same air Closer to home, the leader of one state group of community banks also was happy with the TARP Board's findings and in hearing Warren's positive statement about community banks. Gary Kay, president of The Nekoma State Bank, LaCrosse, Kan., and chairman of the Community Bankers Association of Kansas, put it simply: "We're Main Street bankers and not Wall Street bankers." "Agribusiness has had a good last couple of years. One of the good things that's happened is that farmers and ranchers have paid down their loans in good years and now have them at a manageable level. They now are being very conservative in their spending given the current state of farm prices. "Farmers are managing their assets well. This is due to a combination of self-discipline and good fiduciary requirements set by community bankers. Overall, 2008 was an excellent year for farmers. We've stabilized our situation, for the most part." The Nekoma State Bank is a $30 million institution. It moved from the small town where it was chartered in 1916 some 12 miles to the county seat in 1987, following the foreclosure of every bank in town. Today, Rush County, Kan., still relies on agriculture for its livelihood and on several institutions, including Kay's bank, for financial services. "The majority of community bankers breathe the same air our customers breathe. We're Main Street USA and we see them every day. We're totally dependent on the ag sector," Kay said. "We've always stuck with the principles of having adequate capital and making safe loans that our customers have the capacity to repay. We have excellent customers and we're more than willing to help meet their needs." Doing their homework Since the days of the agricultural financial crisis of the 1980s, community bankers have developed better ways of understanding the risky business of production agriculture, Kay said, and are now better prepared to weather times today. "We need to be aware of our risk categories and I think most of us have been focused on this for the last 25 years. Our customers are aware of this and that means we have money to lend to take care of our customers' needs." As a community bank leader, Kay added: "Community bankers aren't the problem in this country. We were doing our homework. We weren't creating the problem loans or doing the commercial lending that larger banks, the ones that said 'we're too large to fail,' did." Larry Dreiling can be reached by phone at 785-628-1117, or by e-mail at ldreiling@aol.com.
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