I appreciate the opportunity to present my views at this important forum. ABA is uniquely qualified to comment on agricultural credit issues as banks have provided credit to agriculture since the founding of our country. Over 5,700 banks--nearly 75% of all banks--reported agricultural loans on their books at yearend 2010. with a total outstanding portfolio of over $127 billion. More farmers and ranchers receive credit from the banking industry than from any other source. In addition to our commitment to farmers and ranchers, thousands of farm-dependent businesses--food processors, retailers, transportation companies, storage facilities, manufacturers, etc.--receive financing from the banking industry as well.
There has been so much discussion about farmland values today and over the last couple of years that I feel like Joan Collinâ€™s last husband on their wedding night--I know what is expected of me, I just donâ€™t know how to make it interesting. That being saidâ€¦
The topic of todayâ€™s meeting is extremely important and timely. Our nation is facing difficult economic conditions which are affecting all businesses, including banks. The core business of banking is lending. That is what banks do. Banks will continue to be the source of financial strength in their communities by meeting the financial needs of farms, businesses, and individuals. Banks in every state in the country are actively looking for good farm and ranch loans. Since the financial crisis, the banking industry stepped up and increased their share of farm and ranch lending from year end 2007 to year end 2010 by over $13 billion. During the same period farmers and ranchers have reduced their total indebtedness by nearly $6 billion.
The increased regulatory burden brought about by the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 will impact agricultural credit. Dodd-Frank will require that we supply regulators with additional data about our lending activities to farmers and ranchers. Dodd-Frank may require us to justify the â€śsuitabilityâ€ť of the credit products we make available to our farm and ranch customers.
In the pages of ABA Banking Journal:
All banks--large and small--will be required to comply with rules and regulations set by the CFPB, including rules that identify what the CFPB considers to be â€śunfair, deceptive, or abusive.â€ť Moreover, the CFPB can require community banks to submit whatever information it decides it â€śneeds.â€ť There are also many other new regulatory burdens flowing from the Dodd-Frank Act empowerment of the CFPB which will add considerable compliance costs to every bankâ€™s bottom line. Increased compliance costs increase the cost of borrowing money for our customers; this will not help us revive our local and national economy.
In response to what we know lies ahead, ABA and our members have been telling farmers and ranchers that they have to improve their business practices, including their marketing plans, their capital expenditure planning, and their risk management practices, to name a few. Overall, many producers have responded positively to these messages, and they have stepped up their game to meet the challenges of this period. Proven cash flow, and being able to demonstrate the ability to repay a loan, continue to be a bedrock principle of agricultural lending by banks. If a producer cannot show adequate repayment ability, it will be hard to obtain credit. Again, the regulators have made it very clear to the bankers that they expect bankers to stick to the basics and that demand is being followed by the bankers I know.
In the past 12 months we have all heard and read a great deal about the increase in farmland prices. The question most asked by the press, and increasingly the banking regulators is, â€śAre we looking at another bubble?â€ť In March the FDIC held a symposium on this issue. In early December 2010 the FDIC issued guidance (the Office of the Comptroller of the Currency issued similar guidance to all western banks) to all FDIC insured banks warning them about the dangers of asset bubbles and also warning agricultural banks--those banks with a concentration in agricultural lending--to consider the dangers of credit concentration. We appreciate the guidance of the regulatory community.
Only one banker was invited to share his views at the FDIC Symposium. While it is clear in many areas of the country--including most of Iowa and the corn belt--farmland prices have escalated, there is no evidence that this is being fueled by credit. Farmers are responding to market signals, and those signals are extremely positive. Farmers and ranchers have accumulated cash, thanks to a healthy agricultural economy, and they have a positive outlook. As a result of these factors, what land that has gone on the market (in my area, very few parcels have come up for sale) has generated intense interest, and as a result, prices have risen. At the same time, demand for credit to finance these new land acquisitions has been relatively flat. Recent surveys of bankers conducted by Federal Reserve District banks support my point. In these surveys, the overwhelming majority of bankers reported that farm and ranch loan demand has been essentially flat. In addition, bank farm real estate loans outstanding according to the June 30, 2011, Call Reports filed with the FDIC indicate that there has been no increase in real estate lending. All of this data strengthens my belief that the increase in farmland sales values that we have seen over the past few years has largely been the result of farmer prosperity, not excessive lending.
Managing agricultural loan risk is what we do as agricultural bankers at Great Western Bank. To give you a sense of our posture towards farm real estate lending, please consider some of the standards at our bank:
â€˘ We have very conservative underwriting standards for real estate lending and these have not changed for a decade or more.
â€˘ Repayment-ability is the primary driver of our underwriting--if the request does not cash flow, we do not do it--regardless of the collateral position of the customer.
â€˘ We only lend a maximum of 60% of the appraised value of the land (loan-to-value).
â€˘ In our current farmland loan portfolio, our average loan-to-value is about 40%.
â€˘ Even though land values have increased to an average of $2600 per acre in our service area, we use earned net worth change for credit analysis purposes when calculating net worth position, debt to assets, and other key ratios.
I believe the concerns about what is happening in farmland values are overstated at this time. Our farm and ranch customers, and the farm and ranch customers of many other banks, have enormous skin in the game in their operations. Many are paying cash for real estate. Prosperity is driving the demand for farmland and farmer-retained earnings are providing the cash to purchase it.
â€˘ Technology is available that allows us to stress test our farm loan portfolio to see what would happen if real estate values dropped by as much as 40%.
â€˘ I cannot overstate the value of the technology that my bank and that most banks have invested in that allows us to do credit analysis and run â€śwhat ifâ€ť scenarios almost instantaneously.
For the past decade, U.S. agriculture has enjoyed one of the longest periods of financial prosperity in history. Financially, American agriculture has never been stronger. In 2010, many American farmers and ranchers enjoyed their most profitable year ever, and USDA projects that 2011 will greatly exceed 2010. The balance sheet for U.S. agriculture at the end of 2010 (according to USDA) is the strongest it has ever been with a debt to asset ratio of less than ten percent. USDA projected that at year end 2010 farm and ranch net worth was in excess of $2 trillion. This unprecedented high net worth is due in part to a robust increase in farm asset values (mainly farm real estate), but is equally due to solid earned net worth as farmers used their excess cash profits to retire debt and to acquire additional equipment and additional land. As a result, farmers and ranchers today have the capacity to tap their equity should there be a significant decline in farm profitability resulting in diminished cash flows. While no farmer or rancher wants to take on additional debt, the strength of the US farm and ranch balance sheet gives producers options to do so if the need arises.
When the agricultural economy collapsed in the middle 1980s, the banking industry worked with farmers and ranchers to restructure their businesses and to rebuild the agricultural economy. Since that time banks have provided the majority of agricultural credit to farmers and ranchers. While other lenders shrank their portfolios of agricultural loans or exited the business altogether, banks expanded agricultural lending, just as they did following the economic crisis of 2008/2009. Bankers saw opportunity where others did not.