Testimony of Harley Bergmeyer
On Behalf of the American Bankers Association
Subcommittee on Commercial and Administrative Law
of the Judiciary Committee
Unites States House of Representatives
March 18, 1999
Chairman Gekas and members of the Subcommittee, I am pleased to be here on behalf of the American Bankers Association (ABA) to participate in this important hearing about bankruptcy in general, and Chapter 12 in particular. I am Harley Bergmeyer, Chairman, President and CEO of Saline State Bank in Wilber, Nebraska. In addition, I am the Treasurer of the American Bankers Association.
Saline State Bank is a $52 million bank located in southeastern Nebraska. Our bank plays a vital role in the financial success of the farmers, ranchers and agricultural support businesses in my part of Nebraska. We presently have a $34 million loan portfolio. Of that portfolio, 45% ($15.5 million) is loaned directly to our farm customers. Another 15% of our loan portfolio is loaned to businesses that are directly related to supporting and supplying farmers and ranchers in our service territory.
The ABA brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership-- which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks -- makes ABA the largest banking trade association in the country.
I have been an agricultural banker since 1968, and during my career I have seen many changes come to agriculture. Perhaps the most trying time for me and my customers was the late 1980's when agriculture experienced the worst financial crisis since the great depression. Many farmers in our service territory went out of business. Our community lost population since it seemed like there were no opportunities left in agriculture. We lost a generation of people that loved the land and loved agriculture.
Today, we face new challenges in agriculture. The last 18 months have been very difficult for me and my customers, and the outlook for the future is uncertain. While the challenges we face today are great, I think it is important and relevant to the discussion to point out that we are not facing a situation that is as dire as we faced in the 1980's.
The Banking Industry and Agriculture
For the last ten years, banks have been the primary source of credit for American agriculture. At the end of 1998 banks had over $72 billion loaned to farmers and ranchers, which amounted to 41% of all farm debt. American farmers and ranchers receive more credit from banks than from any other source.
The bank portfolio of credit to farmers and ranchers is extremely diverse. USDA studies indicate that banks provide credit to a wider range of farm operations than any other lender. Banks have credit extended to part-time farmers, beginning farmers, moderate-sized family farms and large farming and ranching operations.
Lending to agriculture is a major line of business for my bank and for many banks in the US. Nearly 3,100 US banks have more than 16% of their total loans in direct farm and ranch loans. Banks with this percentage or higher of agricultural loans to total loans are considered to be "agricultural banks" by the federal regulators. With 45% of our total loans to farmers and ranchers, my bank clearly meets the definition. Agricultural banks tend to be smaller institutions located in rural areas. For my bank, and for many agricultural banks throughout rural America, many of the remaining loans in our portfolios are to farm and ranch dependent businesses.
The Current Situation In US Agriculture Differs in Many Ways From the 1980s
While we have a difficult economic situation in agriculture today, there are many factors that make the current situation different than the 1980s. Farmers, ranchers and their bankers are better positioned to deal with a temporary downturn in the economy.
Farmers and Ranchers Prospered During the 1990s
· The 1990s have been very profitable years for farmers and ranchers. During much of the decade, US agriculture experienced record profits- net cash income in 1997 was a record $60.7 billion. Alternatively, in the 1970s and 1980s, many of the asset gains that farmers experienced were the result of inflation, not real profitability. The situation in the 1990s is clearly different. Farm and ranch businesses have increased their wealth through profits and retained earnings, not asset inflation.
· Debt levels are significantly lower today. Farmers and ranchers used their profits from the 1990s to reduce debt and to build liquidity. Total farm debt at the end of 1998 was approximately $172. During the peak of the farm debt crisis in the 1980s, total farm debt reached nearly $200 billion (1984).
· Farmers and ranchers have the strongest asset cushion they have ever had. The average debt to asset ratio for US farmers and ranchers is 15%. The average US farm or ranch has 85% owner equity in the business, the highest equity percentage in history. This sizable equity cushion will allow farmers and ranchers to more easily restructure debt as necessary to help compensate for temporarily reduced cash flows.
· Interest rates have been relatively stable and low and are projected to continue this way. One of the key elements that drove the farm credit crisis of the 1980s was historically high interest rates. During the early 1980s, farmers experienced rates that exceeded 20%. Today, average interest rates are less than half that amount.
· Farmers and ranchers have become more astute borrowers and business managers as they have invested in computers, farm management software and marketing software.
The Banking Industry is Well Positioned to Meet the Challenges In Agriculture
· A healthy agricultural economy in the 1990s has allowed agricultural banks to build capital. Total capital at farm banks rose 9.1% to $18.1 billion in 1997 alone. Farm banks continue to maintain a higher equity capital to assets ratio than other banks. That ratio, at the end of 1997 was 10.3%. At the end of 1997, 98.6% of all farm banks met the regulatory definition of "well-capitalized".
· The banking industry has abandoned lending practices that depended upon asset inflation as the primary source of repayment. One of the key lessons learned by farmers, ranchers and their lenders was that profit enables a business to successfully retire debt, not asset inflation.
· Bankers have invested billions in technology that enables them to be better lenders. In the 1980s the banker's most powerful tool for credit analysis was a calculator. Today, bankers employ sophisticated credit analysis software, credit scoring systems and a host of other tools that allow them to manage credit risk, and to help them provide their customers with better service and more options.
· Banks have more financial tools available to help them work with farmers and ranchers than they did in the 1980s. Since 1986, banks have greatly expanded their use of the USDA's guaranteed loan program, which allows banks to work with agricultural borrowers who have some type of credit deficiency. Banks write nearly all of the loans under this program, and the portfolio has grown from zero in the early 1980s to about $6.8 billion at the end of 1998. Through Farmer Mac, which Congress created in 1987, banks are able to structure long term fixed-rate farm real estate mortgages for their customers. Recent rule changes by the Federal Housing Finance Board allows banks under $500 million in assets to pledge farm and small business loans to the Federal Home Loan Bank system as collateral if there is a full time occupied dwelling on the property.
· During the farm crisis of the 1980s bankers and their customers learned the importance of open communication and the need for cooperation when there are credit problems. In the aftermath of the credit crisis of the 1980s, banks increased their loans to farmers and ranchers while other lenders retreated. Bankers worked through the problems with their customers while other lenders adopted inflexible and unworkable postures. These hard learned lessons have stayed with the agricultural community.
I wanted to review this information with you because what I am here to discuss today is an outgrowth of the agriculture crisis of the 1980s.
On October 27, 1986 the Bankruptcy Judges, United States Trustees, and Family Farmer
Bankruptcy Act of 1986 was signed into law. Chapter 12 was in response to the greatest agricultural crisis since the 1920s. Because it was an emergency response to a temporary crisis, the original act was set to sunset in October, 1993. While it was clear that the crisis had passed by 1993, Chapter 12 was extended, with little modification, to October 1998. In October 1998, Chapter 12 was extended until April 1, 1999 and legislation is pending to extend it for another 6 months.
After an initial surge of filings (6,122 in 1987), Chapter 12 filings have declined greatly (807 in 1998). In fact, by 1993, when Chapter 12 was supposed to have sunset, the number of filings had fallen to 1,200 nationwide.
Proponents of Chapter 12 contend that it is intended to be for "family farmers" since only those farmers who receive more than 50% of their gross income from farming, have total debts of less than $1.5 million and have 80% of their debts as a result of their farming operations are eligible for the protections under the statute.
Banker concerns about Chapter 12
We have two major concerns about Chapter 12:
· Chapter 12 was supposed to be a way for a family farmer to quickly reorganize his business through the courts. The primary justification for creating Chapter 12 was that the existing bankruptcy chapters were too expensive and too time consuming for a family farmer to be able to effectively use them to reorganize. Chapter 12 was supposed to make sure that any family farmer that could quickly reorganize would be able to do so. Under current law, a farmer that files for Chapter 12 protection is supposed to file a reorganization plan within 90 days after the order for relief has been filed. The debtor is to be allowed extensions by the court only in cases where the debtor should not be "justly" held accountable. In practice, however, the courts have been very willing to grant extensions to the debtor at the expense of the lender's claim.
The ABA fully supported the provision in HR 3150 last year that extended the time a debtor is allowed to file a claim from 90 days to 150 days, but would have required the debtor to convert to liquidation if he failed to produce a workable plan at the end of the 150 days.
We believe that any farmer that is seeking to reorganize their business should be able to produce a workable reorganization plan within 150 days. It is important to understand that during the period that the applicant is receiving the benefit of the automatic stay, but has not filed a reorganization plan, none of the farmer's creditors are being paid. This hurts my bank since the loan goes into default and non-accrual. It also hurts all of the other local businesses that may have extended terms to the farmer for things like feed, fertilizer, supplies and other necessary inputs.
There is a very fundamental fairness issue here. I recognize the fact that reorganization plans can be difficult to structure, but I also strongly believe that if a farmer can not put together a plan that works for him within 150 days, then liquidation should be required.
In my town, many businesses get hurt when farmers that have taken Chapter 12 abuse the system by failing to produce a plan that requires them to begin repayment of their obligations.
· Second, excessive cram downs of secured claims are often granted on the basis of unduly low appraisals provided by the debtor. In Chapter 12, lenders that have their claims crammed down to the value of the collateral lose any opportunity to attempt to recover the value of their claim in the future if the debtor defaults on the plan, or if the debtor chooses to go out of business. In Chapter 11 (business bankruptcy), a lender may make an election that will allow them the opportunity to try to recover their unsecured claim if the debtor defaults on their plan or sells their business. A similar allowance in Chapter 12 would create a powerful incentive for the debtor to successfully complete the plan, and would provide for equitable treatment of creditors in case of a default or voluntary liquidation by the debtor.
A provision in HR 3150 last year would have given creditors the opportunity to attempt to collect the full value of their claim in case of a default or voluntary debtor liquidation. The ABA fully supported this provision in HR 3150 last year and we again ask you to include such a provision again.
Chapter 12 was created during a period of unprecedented deflation in agricultural assets. In the mid-west land values, by the mid 1980s, had declined by over 50% from where they were at the beginning of the decade. Chapter 12 was supposed to have been a way that the "true" market value of the farm property was recognized and the farmer's debt was then adjusted by the cram down to that "true" value. Unfortunately, the reality is that under the current law, the debtor and the primary lender both hire appraisers that try to establish to present market value of the property in question. The current law leaves it up to the Bankruptcy Court Judge to decide which appraisal most accurately reflects the market value of the real estate. I know that if the property is appraised at a present market value below the balance of the debt, I will lose that portion of my bank's loan. Because of this, I am forced to spend a great deal of time and money on appraisers. The farmer and his attorney also know it is to their advantage to have an appraisal that indicates the lowest possible present market value. Today, we have a situation where all parties are arguing about the validity of their respective appraisal. The current statute creates this unnecessarily adversarial situation.
It is important to note that bankers are not the only ones to recognize this inequity. Judge Richard Bohanon, then Chief Judge of the US Bankruptcy Court for the Western District of Oklahoma, testifying before the U.S. House Judiciary Subcommittee on Economic and Commercial Law on June 24, 1992 noted:
"The obvious pain to the banks in this procedure is that they must realize their deficiency and absorb that loss now rather than at some later time. Additionally, they normally are not in a position to benefit from some future increase in the value of the farm, should that ever occur….Given time for thoughtful study, I believe that a solution could be found to the predicament of the banks and allow for an effective farm reorganization."
HR 3150 would have given banks and other lenders the opportunity to attempt to recover the full value of their claim only if a debtor voluntarily liquidated, or if the debtor defaulted on their plan. Debtors that successfully completed their plan as agreed would still be able to enjoy the full benefit of the cram down.
We believe that the provision in last years legislation would have gone a long way to address what is presently unfair, and what results in costly litigation and delay. If lenders knew that they at least had the opportunity to eventually recover the value of their crammed down debt, I believe that the process for the farmer, the lenders and the courts would function much more efficiently. We urge you to include this provision in legislation this year.
Recent efforts to expand Chapter 12 to include new classes of debtors are without merit. H.R. 763 would expand the protections of Chapter 12 to large mega-farms, allow people that have not farmed for many years to file, removes the provision that requires 50% of a debtor's gross income come from farming and waters down the requirement that the overwhelming majority of the debt be directly related to the applicant's farming operation.
We strongly oppose this expansive legislation. It is bad public policy and unconscionable that Congress would seek to extend special family farmer bankruptcy to mega-farms and to non farmers that have invested in farming operations as a way to shelter their income. We urge you to reject the proposal.
Family farmers and ranchers are a national treasure; we must do everything we can to ensure their success. Many of our family farm and ranch customers are facing an uncertain and difficult future. Their success is our success, and I and the thousands of agricultural bankers that I am here representing, want to assure you that bankers are doing everything we can to help our customers through this difficult and uncertain time.
At the same time, I have a responsibility to my institution. Each and every day I must assure my regulators, our stockholders and our depositors that the farm loans my bank makes have at least a reasonable chance of success. Congress can help us with this task by addressing the concerns we have regarding Chapter 12, and by not expanding it to those that are not family farmers or ranchers. As the industry that provides American agriculture with so much of the needed credit to enable our national agricultural miracle to function, we believe it is appropriate for you to examine and correct some of the deficiencies in the original legislation.
I will be happy to address any questions you have at this time.