The NATIONAL Bank of Harvey HARVEY, NORTH DAKOTA 58341 Phone (701) 324-4611 GARY BERGSTROM Vice President & Cashier Honorable Members of the Senate Agriculture Committee: It is indeed an honor for this banker from Harvey, North Dakota to be able to share some of the thoughts from my prospective relative to functional improvements that may be feasible to make the FMHA programs more workable in the present agricultural environment. With the changes and shifts in agriculture policy in recent years in order to make our products more competative in world markets, it is only sensible that programs to meet the financial needs of those involved in agriculture must be changed, adapted, or made flexible enough to address the fallout from these policy changes. I personally believe that in most cases, the responsibility for some of the financial problems that we in agriculture are going through must be shouldered by everyone involved. I feel that that the farmer himself, in most cases, was at least 1/4 to 1/3 responsible for the problems. The financial agencies (Banks, PCA's, FLB's, and FMHA's) must also share 1/4 to 1/3 of the responsibility. The other 1/3 to 1/2 of the problems can be laid at the feet of the severe shifts in agricultural policy. While I may agree with the basic reasons necessary for many of these policy changes, we must equip the financial agencies with the tools to deal with the problems arising from these shifts. In I am president of the National Bank of Harvey which is located in a town of 2600 population. Harvey serves as a trade center for the agriculture community for about 40 miles in each direction. Our Bank is about $23,500,000 in total assets and has been heavily committed to serving farmers and our small town businesses which are almost totally dependent upon agriculture. April of 1986, I completed a 4 year term as mayor of Harvey and served 6 years previous on the city council. From the prospective of both a Banker and a previous city official, I cannot stress enough the necessity to find a way to provide an efficient source of funds for agriculture or the consequences to rural communities will be devestir eng. in I happen to believe that we ready have the instiutions and programs place that can deliver funds to auriculture on an efficient basis. These institutions are the local banks and the FMHA, and the program is the FMHA guaranteed loan program. By making 1 few modifications to this guarantee program, I feel that we can consistently deliver funds from investors in ull parts of the country to agricultu: in the most efficient manner possible. (2) Our Bank has utilized the SBA guaranteed loan program to finance the majority of our local businesses over the past ten years with great sucess. We have made approximately 30 to 40 loans under this program, and have had only one fail to date despite the secondary reprocussions of the agriculture economy that are definately showing up in the business sectors of our main streets. I credit the lower rate of business closures in our town to the extensive use of the SBA program. By use of the program, the bunk is uble to spread its risk through the guarantee and pass through to the customer a variety of terms and rates that would not be possible without the guarantec program. I feel that some functional changes in the FMHA guarantee program are necessary in order to have a program that works in practice and not just theory. Some of those changes are as follows: 1. The procedure for payout of the guarantee needs to be made upon default of the loan as in the SBA program, not after liquidation of the borrower. This change will in efect create confidence in the guaranteed paper by investors and financial agencies that they will receive funds under default in a timely manner. This will result in more agressive bidding for this paper and will result in lower rates to the borrower. 2. The second change that I see necessary to effectuate an effective guarantee program, is to eliminate the seemingly adversarial role between FMHA and the lending institution as it pertains to loan servicing. This is a partnership effort and cooperation is necessary between FMHA and the financial institution. Horror stories abound from banks that the only way you can collect on an FMHA guarantee is to take legal action. Furthermore, the stories indicate that often times FMHA attempts to avoid payment on a guarantee for minute and inconsequential variances from the servicing agreement. Loan servicing standards should be set and unless there is substantial negligence in the servicing, the financial institution and FMHA should work together to recover as much as possible from a defaulted loan situation rather than fighting each other. 3. The issue of family size farms for eligibility must be expanded under the guaranteed program. I believe that the direct FHA programs can still fulfill the "lender of last resort" role for borrowers that cannot obtain financing through the guarantee program due to extremely low equity if it is deemed to be in the best public interest to do so. I personally feel that new entrants into the field of agriculture should be required to have at least some specified minimium equity position as experience shown us that there is risk enough of business failure even at normal equit: evels. I would suggest that the FMHA guaranteed program have completely separate requirements for determining who is eligible. There could be limits set for the types of loans involved such as real estate $400,000, equipment $300,000, operating $200,000, with a total aggregate to one borrower of $500,000. There could also be a requirement for gross income to be less in in a set amount per year (Example $500,000). By setting the requirements in Lanner such as this, we can help present and future borrowers who may ... Lew acres larger than what is allowed under the direct programs without opening the doors to extremely lurge operations. (3) 4. Some provisions are also going to have to be made for dealing with the FMHA debt that exists in many cases which is far beyond the current collateral valuations. Basically there are relatively few choices that can be made as these loans are difficult to cash flow even at current market values and are nearly impossible to service at levels exceeding market value without some type of restructure. The options are either liquidation which will in many cases force a chapter 11 or 12 bankrupcy, or some type of restructure of the debt. I feel that the guarantee program could be utilized in some cases in such a way as to enable FMHA to recover more than it would in a liquidation (bankrupcy) and turn a long term non-performing loan into a restructured performing loan. For the past few years, banks have been forced to either liquidate or restructure loans that do not cash flow at current market value, and our bank is no exception. If the borrower is a good producer and has a mutual trusting relationship with the bank, and is willing to also make some personal sacrifices to make a restructure work, there is little doubt that both parties come out ahead in a restructure Vs. a bankrupcy. 1 I feel that if a troubled borrower presents FMHA with a restructure proposal that may or may not require a whitedown to present market value, FMHA must be required to analize their liquidation position and be authorized and encouraged to enter into a restructured agreement either on a continued direct basis or under the guarantee program. A unitedown of a present FMHA loan to current collateral values should not necessarily eliminate restructuring the loan through a guarantee or other methods, as the objective should be to ultimately recover more than through a bankrupcy or liquidation. At present, the authorization appears to be in place for FMHA to write down under collateralized loans and extinguish the resulting debt, however the process seems to be arbitrarily lengthy in most cases. A reasonable time table should be encouraged to accomplish this process in a timely manner. One county committee in our area recently voted to deny a writedown of an admittedly undersecured position with no possibility of being able to cash flow the debt without the adjustment which may force the borrowers to bankrupcy. Rather than look at how the most can be recovered, the committee members said they prefer liquidation so their names don't have to be linked to the whitedown of the debt. The decision is being appealed to a higher level at the present time. I appreciate the opportunity to share with you some of 1911 we can better meet the needs of agriculture and deal with the problems currently being experienced. Sincerely, Yay Bergation Gury Bergstrom roughts on how NATIONAL BANK BUYDOWN PROGRAM 1. BASE RATE WILL BE VARIABLE RATE il. 2. QUALIFIED BORROWERS CAN OBTAIN: A. 1 1/2% interest buydown from base for 3 years if annual requirements met. B. 1 1/21 deferred interest accrual. Interest to be deferred 3 years. At the end of the fourth year, the first installment of deffered interest will C. There will be a floor of 8 3/4% so if the Base falls below 11.75% the buydown interest will be less than 1 1/2%. If rates fall below.251 then deferred interest could be less than 1.5%. 3. THE PROGRAM IS DESIGNED FOR 3 YEARS, BUT ALL REQUIREMENTS MUST BE SATISFIED EACH YEAR BEFORE PROGRESSING TO THE NEXT YEAR. 4. THE PRIMARY GOAL OF THE PROGRAM IS TO PROMOTE A MAXIMIUM JOINT EFFORT 13. AN ANNUAL COLLATERAL INSPECTION WILL BE NECESSARY (EQUIP, LIVESTOCK, GRAIN). 14. BORROWER MUST CARRY FEDERAL CROP/HAIL INSURANCE AT LEVELS SATISFACTORY TO THE BANK. 15. PROJECTED BANK REDUCTIONS MUST BE MADE OR REDUCTIONS IN PERSONAL DRAWS WILL Senator CONRAD. Lonnie Parsons. Lonnie is from Western State Bank in Devils Lake, North Dakota. Proceed with your testimony. Again, all of your prepared statement will be entered into the record. If you can summarize in 7 minutes, then we will have some time for questions. STATEMENT OF LONNIE D. PARSONS, WESTERN STATE BANK, DEVILS LAKE, ND Mr. PARSONS. Well, the first thing I would like to say is that I have a better understanding of where my county supervisor is coming from after hearing Mr. Clark. I work for a community bank in a small town in north central North Dakota. I have about 175 active farm families whose combined credit needs will exceed $11 million. My role as an agricultural loan officer is to service the needs of these farm families. I must stay within the guidelines of safe, sound, prudent banking practices while serving those needs. However, with the well publicized problems in the rural economy, my role is increasingly more difficult. A bank's role in the community should be one of leadership. We have the responsibility of keeping as many of our friends and neighbors in business and on the farms. In other words, we want to keep the yard lights burning. I am a former Farmers Home Administration employee. During my tenure with FmHA, I worked on the Fort Berthold Indian Reservation. To paraphrase a popular television show, "Our mission was to boldly go where no commercial creditor had gone before." This outreach of credit allowed the people within our area the opportunity to go into and succeed in business. With the rural economy in dire need, many creditors including FmHA are turning their back. History has shown that you cannot borrow your way out of debt. Farmers as well as bankers are not looking for handouts. Rather, we need a solid source of capital, at a reasonable interest rate, to help our farmers stay in business. We must make every effort to help those farmers who can demonstrate economic viability the opportunity to get into or stay in business. Rural America can be rebuilt. Agriculture is the engine that pulls the rural economy train. This engine runs on a fuel called capital. Unfortunately, our sources of fuel are limited. As a commercial banker and an approved FmHA lender, I ask that you give us access to that capital substitute called credit. The guarantee program is an important tool we can use to help those farm families in need stay on the family farm. It serves no purpose for me to try and stick FmHA with poorly performing loans. I do not have the people resources to spend on farming operations that cannot succeed. I must put my funds and staff to work where they will do the most good. I can achieve this goal with the help of the FmHA guarantee program. FmHA requires that I follow a strict format in processing loans for their review and approval under the guarantee program. The complexity of these requirements discourage banks to not participate in this important source of credit. In fact, the sheer complexity of the FmHA procedure has created a new industry for former 80-151 0 - 88 - 7 |