Liquidity crisis

Northwestern Financial Review, Aug 5, 2000 by Olmsted, Monte

The scarcity of deposits is forcing ag bankers to use unconventional funding tools to meet loan demand

The term "liquidity crisis" used to refer to drought conditions on the farm. Now the term has a different meaning that every banker understands: the challenge of funding strong loan demand in an environment of diminishing deposits. For the rural banker, the liquidity question is particularly stressing. Deposits are tough to come by in areas where population is dying off, and many of the farmers who still need credit are having trouble making ends meet. Government officials are keenly aware of the situation. On June 20, President Clinton signed a $15 billion farm aid package, marking the third straight year such legislation has been approved. A month later, the Senate passed legislation calling for $2 billion in ag disaster relief.

Government payments make it possible for farmers to repay loans, but such aid won't do any good if the local bank doesn't have the funds to lend in the first place. Ag bankers are increasingly turning to unconventional sources of funding. The experts say guarantee programs, aggie bonds and the secondary markets are fast becoming standard tools for many agricultural lenders.

"We're involved in a realm of different programs to try to aid farmers as best we can, especially in these economic times," said William Manhart, an agriculture loan officer for Vermilion Valley Bank in Piper City, Ill. "We need to be out there with something that's cost beneficial."

By turning to alternative lending sources, rural banks get the help they need as well as maintain relationships with their customers. Here, Northwestern Financial Review looks at three popular alternative funding sources.

Guaranteed Loans

A weak farm economy has meant an explosion of guaranteed loans through the U.S. Department of Agriculture's Farm Service Agency Already, fiscal year 2000 's 10-month total through July 21 has reached nearly $2.4 billion. That nearly matches last year's total of $2.47 billion, and about doubles the amounts from 1998 ($1.43 billion), and 1997 ($1.5 billion).

The guaranteed loan program is the most popular tool for bankers looking to fund marginal farmers, according to John Blanchfield of the American Bankers Association. And Blanchfield said the FSA is gradually shifting more of its efforts into loan guarantees, away from direct lending. Blanchfield, the ABA's manager of agricultural banking and rural development, credited the change to a bright FSA deputy administrator, Carolyn Cooksie. "She has dragged the FSA kicking and screaming into reality that if it offers credit assistance programs, they're guaranteed and through the private sector,' Blanchfield said.

The guaranteed loan program has proven so popular that, in the past, federal funding has dried up. Ag bankers working through the Independent Community Bankers of America have recommended the government maintain reserve pool funds to address future shortfalls. Unprecedented demand for the loans last spring had bankers scratching their heads in bewilderment over the FSA's inability to help out, explained ICBA's Mark Scanlan, the group's director of agriculture finance.

Last year, the program ran out of money, and U.S. Secretary of Agriculture Dan Glickman was forced to make available $30 million to fund loans while bankers and farmers waited for Congress to act on emergency supplemental appropriations. Congress finally acted in March 1999.

Two months later, Congress passed legislation that provided $110 million to FSA s guaranteed loan program, and the action resulted in the addition of $1.2 billion in loans for farmers. And in June of last year, Glickman announced the USDA would reallocate farm credit funds to provide $300 million in additional guaranteed farm operating loans.

Finally, in October of last year, an $8.7 billion farm aid bill signed by President Clinton included $3 billion in loan guarantees for the FSA program. For fiscal 2001, which starts on Oct. 1, the matter of funding remains in question.

Tom Olson, president of the Lisco State Bank in Lisco, Neb., said all banks should become familiar with the FSA's guaranteed loan program. A number of small banks nix the program because the process can be trying for institutions that don't have expertise in filling out the paperwork, he said. "A lot of these banks don't want to take the time to do it. Yes, it is time-consuming, but the FSA guaranteed loan program has been helpful," said Olson, whose $13 million bank has obtained 30 such loans.

To overcome this obstacle, banks sometimes can turn to other banks for help. Two of those helping-hand banks include the $316 million First Dakota National Bank in Yankton, S.D., and the $28 million Nebraska State Bank in Oshkosh. For more than two years, Nebraska State Bank has been a packager of guaranteed loans for other banks, said Randy Stanczyk, the bank's vice president.

According to Blanchfield, the Nebraska bank is one of the largest originators of guaranteed loans in the country. In all, Nebraska State Bank has helped 44 banks in Nebraska and South Dakota secure guaranteed loans, Stanczyk said.