ABA Banking Journal
By Bert Ely
So far, the 2018 House and Senate Farm Bills now pending in Congress would have a minor impact on the FCS, which is good news for bankers. On June 21, the House passed its version of the next Farm Bill (H.R. 2) while on June 13, the Senate Agriculture Committee sent to the Senate floor its version of the Farm Bill (S. 3042). The full Senate will take up the Farm Bill before the end of June, with passage of the bill likely, after numerous floor amendments are considered. Differences between the two bills will then have to be resolved in a conference committee, which is expected to begin work in July. While there is a reasonable chance that Congress will enact a new Farm Bill this year, if it does not, then Congress almost certainly will extend the current Farm Bill, passed in 2014, for another year.
FCA posts misleading video on its website
In connection with a redesign of its website, the FCA has posted a short (1 minute, 35 second) video, which presents a misleading picture of the role the FCS plays in providing credit to agriculture and rural America. The video clearly conveys the idea that the FCS is the dominant, if not exclusive, provider of credit to agriculture and rural America, yet that definitely is not the case. According to unbiased data from the USDA, in 2016 commercial banks actually provided slightly more credit to farmers and ranchers than did the FCS, despite the significant tax and funding cost advantages the FCS has over banks, especially with regard to financing agricultural real estate. In the non-real estate component of farm borrowings, where the FCS has less of a tax and funding cost advantage, banks provided three dollars of credit to farmers and ranchers for every two dollars provided by the FCS. When the FCA updates its video, as surely it should, it needs to present a much more balanced perspective on the significant role that banks and other private-sector lenders play in providing credit to agriculture and rural America.
FCS blocks banks from Rebuild America Coalition
In a rather petty move, the Farm Credit Council, the trade association for FCS banks and associations, has blocked banks and bank trade associations from joining and participating in the activities of the Rebuild Rural Coalition, which was organized last year. This action parallel’s the FCA ignoring the role that commercial banks and other rural lenders play in financing American agriculture, as noted in the previous article. According to the Coalition’s website, the “Coalition is comprised of more than 200 organizations from across the country focused on rural communities, U.S. agricultural producers, rural businesses, and rural families.” The website states that the coalition “is dedicated to advocating for investment in rural America’s infrastructure and understands that rural America’s infrastructure needs are fundamentally different.”
Bankers living and working in rural America know as well as any rural resident or business owner how important sound, modern infrastructure is to the economic and social health of rural America. Not surprisingly, then, America’s commercial banks are a major source of credit for financing rural infrastructure, including loans to private owners of infrastructure, such as investor-owned utilities, as well as purchasing state and local government bonds that finance public infrastructure. The Coalition’s laudable objectives would be advanced more effectively if a principal source of infrastructure financing for rural America — America’s banking industry — had been invited to join with the Coalition’s other partners in advocating for rural America’s infrastructure needs.
CoBank extends credit to two investor-owned utilities
Perhaps because of sharp questioning from members of the House and Senate Ag Committees, CoBank appears to have scaled back its lending to large investor-owned utilities, such as AT&T and Verizon. That said, there have been two instances in recent months where CoBank did extend credit to investor-owned utilities. Last Nov. 2, CoBank led a “consortium of banks” which provided “a new $92 million, five-year credit facility” for Otelco, Inc., “a publicly traded telecommunications holding company based in Oneonta, Alabama” that owns small, independent telephone companies in several states. At Dec. 31, 2017, Otelco had total assets of $115 million and a miniscule net worth of $1.5 million. Interestingly, CoBank effectively acted as Otelco’s investment banker in this transaction.
On May 7 of this year, Artesian Wastewater Management, a subsidiary of Artesian Resources Corporation, entered into “an interest rate lock agreement” with CoBank for a $12 million first mortgage bond. At March 31, 2018, Artesian, which is NASDAQ-listed, had total assets of $497 million and stockholders’ equity of $148 million. Neither of these financings are huge deals, compared to some other private-sector financings CoBank has participated in, but these two companies are not utility cooperatives that CoBank supposedly lends to. Possibly CoBank would try to justify these credit extensions under the “similar entity” lending authority it has under the Farm Credit Act, but these two companies could readily have obtained credit from private-sector lenders. As noted in the previous article, commercial banks of all sizes play a key role in financing rural infrastructure, including providing credit to investor-owned utilities of all sizes.
Regulators ease appraisal requirement for commercial loans
On April 2, the three bank regulatory agencies issued a joint press release announcing an increase, from $250,000 to $500,000, in the size of commercial real estate loans which do not require an appraisal by a licensed appraiser. The older limit had been in place since 1994. The new limit “will materially reduce regulatory burden and the number of transactions that require an appraisal.”
Raising this ceiling will be especially beneficial for ag lenders given the shortage of appraisers in rural areas. For a commercial transaction under $500,000, banks can use “an evaluation rather than an appraisal [to] provide a market value estimate of the real estate pledged as collateral” for a loan. Such an evaluation will “not have to comply with the Uniform Standards of Professional Appraiser Practices.” Raising the loan size exempt from an appraisal will help to level the playing field between banks and the FCS, where FCS institutions have had greater flexibility in utilizing “collateral evaluation policies” that do not require the use of a licensed appraiser. Agriculture and all of rural America will benefit from the higher appraisal limit for commercial banks.
