Bank Failures and Ag Credit Access

OMAHA (DTN) -- With regional banks facing stock-price declines, U.S. senators on Thursday asked community bankers, Farm Credit lenders and representatives from the crop insurance industry about lending stability in agriculture and rural America.

Less than a day after Federal Reserve Chairman Jerome Powell expressed support for the banking system with the Fed declaring "the U.S. banking system is sound and resilient," at least two publicly traded regional banks were under pressure from investors.

PacWest Bancorp, a California-based bank, saw its share price collapse, and the bank announced it was trying to sell a $2.7 billion loan portfolio. PacWest is now the fourth bank in recent months that is under significant financial pressure.

Senators asked bankers about systemic risks within the banking industry and the broader implications for farmers and rural America in a hearing Thursday on agricultural credit and crop insurance held by the Senate Agriculture Subcommittee on Commodities, Risk Management and Trade.

Sen. Kirsten Gillibrand, D-N.Y., pointed out the country has seen "three of the four largest bank failures in American history" just since early March. Gillibrand said regulators and the private sector have stabilized the situation "to a point," but she said Congress will need to step in to prevent a further collapse.

"It's clear Congress must act with some banking reform to guarantee long-term economic stability in the banking sector or risk similar future events," Gillibrand said.

Gillibrand asked if the banking disruptions pose a risk to rural lenders and rural creditors.

Jase Wagner, president and CEO of Compeer Financial, a member of the Farm Credit System in Wisconsin, said the impact on credit is real "when you have contagion like you have." The increased spreads in interest rates require more collateral for the risks being taken. That is costing farmers and others in rural money.

"The impact is not real acute right now," Wagner said. "It is around the edges, new producers coming in, new loans that are being funded, but it is something we are actively watching."

The backstop stemming from bank failures is that everyone else also becomes more conservative with their lending practices, Wagner added.

"What you are seeing more broadly is everyone talking about risk, and when everyone is talking about risk, you tend to get more conservative," Wagner said. "So, it's immediately impactful to your young, beginning farmers."

Gus Barker, president and CEO of First Community Bank in Newell, Iowa, stressed to senators that the problems affecting the stability of "megabanks" are not systemic to community banks.

"We have not seen an impact," he said. "Those megabanks were not typical bank management. We just feel there needs to be a distinguished line drawn in the sand between the risk of those megabanks who are investing in far-out ways of doing business compared to what the community bank model has always been," Barker said. "It's been stable. It's survived everything from world wars to the ag crisis and survived that bank model. We just feel we are stable. We have not seen withdrawals of major deposits or anything like that."

Barker added that small lenders and customers also shouldn't have to pay higher risk-based fees because of the financial problems facing those larger banks. "We shouldn't be tagged on to paying for those failures of those people."

Gillibrand said she was concerned about regional and smaller banks. She asked if other institutions are seeing "capital flight" to larger banks and "misalignment of interest rates."

"We have data and information that they have not reached stability," Gillibrand said, pointing to regional banks seeing declines in their stock prices.

Phillip Morgan, CEO of Southern AgCredit, a Mississippi-based Farm Credit lender, said all lenders are concerned any time there is discussion of a credit crunch, "whether it is ag or non-ag, that bothers all of us." Morgan added, "I can tell you Farm Credit is well positioned, well capitalized, and does not have the same concerns, and we're well positioned to continue to support local agriculture."

Morgan also said the rapid rise of interest rates over the past 12 months affects every farm operator. A number of long-term real-estate loans will "reprice" this year as the original price expires, he said.

"They will be facing much higher interest rate costs," Morgan said, adding some producers will be facing both higher operating costs and real-estate loans.

William Cole, a Mississippi crop insurance agent and a farmer representing the Crop Insurance Professionals Association (CIPA) at the hearing, said his customers, "for the most part" were able to secure operating loans this year, but that will become more difficult going forward.

"It's just apparent the high rates are going to have a severe impact, especially with the cost of production just dramatically rising," Cole said.

James Korin, president of NAU Country Insurance in Minnesota and testifying for the American Association of Crop Insurers, said reinsurance costs for the industry overall are up 40% this year, though that is a bigger issue for property and casualty lines of insurance instead of crop insurance.

"There's no doubt the change in the banking industry has impacted capital," Korin said. He added, "We're seeing our cost of capital really go up."

Sen. Debbie Stabenow, D-Mich., chairwoman of the Senate Agriculture Committee, also weighed in about the possible impacts on interest rates and credit if the U.S. were to default on its debt obligations.

"My bigger worry right now is the economic environment we are in with all of the discussion about default and so on," Stabenow said.

Sen. John Boozman, R-Ark., ranking member of the overall Senate Agriculture Committee, asked if any of the bankers or Farm Credit members were now facing more scrutiny.

Barker said community banks "have always been scrutinized pretty heavily," but said "our files are up to date," and "our customers are well-positioned. They've had some very good years, and we hope to keep that sustained."

Barker added that the farm safety net, such as crop insurance, is critical because bank regulators often ask about it. "That is a question we get asked about every customer from the examiners. Do they have federal crop insurance? As long as we tell them yes, they have much more comfort."

FSA LOAN GUARANTEES

As part of the farm bill, multiple senators also asked if the borrowing limit on FSA-guaranteed loans should be raised. Sen. Tommy Tuberville, R-Ala., said a new producer trying to start a four-building poultry operation can cost roughly $2.5 million.

Both Farm Credit and the Independent Community Bankers of America would like to see FSA-guaranteed loan limits raised from the current $2.03 million to $3.5 million for construction loans and $3 million in operating loans.

Barker also suggested those FSA-guaranteed loan limits should be indexed to inflation.

"They need to be adjusted upward. The price of land and inputs has just skyrocketed upward for us," Barker said.

TAX-EXEMPT BANK LOANS

Barker also said Farm Credit has a better funding system because of the bond market, but community bankers are looking for a way to be more competitive with Farm Credit on interest rates.

The Independent Community Bankers of America is pitching a bill, the "Access to Credit for our Rural Economy" or ACRE Act, which would provide banks with tax exemptions on interest earned in rural lending -- agricultural real-estate or rural home sales in towns under 2,500 in population.

"We've calculated that could be the difference of 1.5% to 2.5% lower rates for our folks, and that is another tool we would love to use for our beginning farmers and our low-income families in our towns," Barker said.

Also see "Fed Rate Hike Will Tighten Credit, But Other News Rallies Grain Prices,"

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Chris Clayton can be reached at Chris.Clayton@dtn.com

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