TARP Board learns ag credit lessons
A funny thing happened on the way to the end of a formal hearing organized by an authorized panel of Congress.
Hard truths and emotions emerged and perhaps a bit of learning (even for a Harvard law professor) came at a recent hearing on the state of agricultural credit at Greeley, Colo.
The hearing of the Congressional Oversight Panel, the group authorized by Congress to oversee the bailout of U.S. banks through the Troubled Assets Relief Program (TARP), was held in the community noted for one of the biggest farm bank failures in recent history.
While the April 10 failure of Greeley-based New Frontier Bank was not originally to be the focus of the hearing, it became the 800-pound gorilla in a room filled with bankers, community officials, area businesspersons and producers.
New Frontier's closing placed more than $750 million in both performing and non-performing agricultural loans into receivership with no other banks desiring to assume them.
These agricultural loans include various collateral types such as dairy, feedlot, farmland and livestock. These loans are predominantly based in Colorado (58 percent), Texas (19 percent) and Florida (9 percent). Approximately 50 percent of the former New Frontier Bank portfolio is currently performing.
Amidst this backdrop, three of the five members of the panel popularly known as the TARP Board heard prepared testimony. Announcements from local media preceding the hearing stated that public comments would not be accepted. Instead, seeing there was a little time remaining before a promised two-hour cutoff, chair Elizabeth Warren, a distinguished professor of law at Harvard Law School, decided to open the hearing to the public.
Joining Warren at the hearing were Damon Silvers, associate general counsel for the AFL-CIO, and Richard Neiman, superintendent of banks for the State of New York. Absent were former U.S. Sen. John Sununu, R-NH, and Rep. Jeb Hensarling, R-TX.
The panel heard formal testimony from Michael Scuse, deputy undersecretary of agriculture for farm and foreign agricultural services in the U.S. Department of Agriculture; Marc Arnusch, of Marc Arnusch Farms, Prospect Valley, Colo.; Mike Flesher, executive vice president of Farm Credit Services of the Mountain Plains; Les Hardesty, a Greeley dairyman who serves on the executive committee of Dairy Farmers of America; and Lonnie Ochsner, senior vice president of New West Bank of Greeley and Eaton, Colo.
Bankers and farmers
Among that group, Oschner and Arnusch's testimony likely gave off the most light, with Oschner attacking New Frontier Bank's operators for its lending practices.
"Perhaps another congressional hearing should be conducted to determine how New Frontier Bank management and the regulators failed to protect the borrowers, taxpayers and community at large," Ochsner said.
Ochsner told the crowd of about 200 in the Weld County Commission Chambers that he believed about only 10 percent of borrowers left standing after New Frontier collapsed were credit worthy, while most were insolvent.
"Many of these borrowers are good, honest, hard working people who have been loaned into positions they now cannot get out of," Oschner said. "Specifically, they have more debt than they can repay and their debt far exceeds the value of their assets.
"All the TARP money in the world will not change the credit quality of these loans and the worse sin of all would be to give TARP money to a bank that is already short of capital and ask them to lend to these very high-risk borrowers."
Ochsner also complained about how banks that fell into insolvency could have avoided their plight by being more like most good agricultural lenders, those who get to know their borrowers and their needs. And bankers should help them while maintaining proper banking standards.
"The biggest injustice of all is for a bank to lend people into insolvency, when good counsel may have helped them exit while they still had equity that could be salvaged," Oschner said.
As a producer, Arnusch offered the advice that farmers and ranchers need to take responsibility for their operations through development of a proper business plan emphasizing knowing the cost of production and the ability to identify the profit centers of their farm or ranch, recognizing risk factors and working to limit them, taking advantage of available market opportunities, diversification and being realistic with one's financials.
Arnusch told the panel of a hail storm that once devastated his operation and exposed him and practically all his neighbors to an inability to withstand risk. He told the panel that producers need to "get their house in order" to succeed.
"Any loan program offered via the government or commercial lending needs to emphasize the importance of business management. Without this vital component, availability of credit will not make a difference. In fact, it may become weight that sinks middle American agriculture, just as it did in my hometown," Arnusch said.
When Warren announced she would take public comments, a small stream of people approached the microphone.
One of those was another banker who disagreed with Oschner's comment about banks not needing TARP funds, saying some notes could be made whole if financial institutions could net new funding.
Darrell McAllister, chief executive officer of Greeley-based Bank of Choice, a holding company with about 20 branches across Colorado, told the panel that New Frontier Bank's failure "vaporized" $160 million in capital and now there's the need for "20 banks to replace the capital of New Frontier."
No northern Colorado bank, McAllister said, has received any TARP money.
"Without capital, it's hard to move forward," McAllister said. However, McAllister did admit that "TARP funding will not make a bad loan good."
Two other speakers were noteworthy. One was Deb Herston, a Loveland producer who operates a 120-acre alfalfa and grass hay operation. Instead of taking care of her crops this summer, she's had to take the time to build a new relationship with a different banker other than New Frontier.
"I'm a crop farmer and not a dairy operator. I should be out tending my crops but, instead, I've been involved with trying to find refinancing," Herston said. "The timing of the FDIC in closing down New Frontier Bank could not come at a worse time than it did."
Loyal Gallatin, owner of Greeley's JL & Sons Construction Co., said the closure of New Frontier Bank has put his business in jeopardy. Since the closure, Gallatin said he has been to 24 different banks trying to find financing and has been turned down 24 times.
"My loan was in good standing, but the FDIC said 'you have 30 to 60 days to find restructuring.' So it's not all about agriculture, and agriculture is important, but it's also about small businesses like mine," said Gallatin, who added the federal government should provide alternative financial options for restructuring loans like those available to agricultural borrowers.
Warren, who has been the face of the TARP panel since its inception, 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."
Larry Dreiling can be reached by phone at 785-628-1117, or by e-mail at firstname.lastname@example.org.