Pub. 7 2018 Issue 2

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 22 INSIDE THE OSBC WITH DEPUTY COMMISSIONER TIM KEMP 1. The history of Kansas agriculture is complicated due to cash flow fluctuations from year to year. Can you talk about this challenge for banks? (example for conversation- banks and ag producers have stronger balance sheets than they did in the 80’s – does this impact how you view ag loans today?) Ag producers are price takers not price setters. That causes some cash flow fluctuations that they don’t have any control over and when you compile that with weather, global stocks and trade policy, it can create challenges for cash flow. All of this creates challenges for bankers. Prior to this cycle with lower commodity prices we had a period with historically high ag prices which strengthened balance sheets and helped to sustain performance on loans where cash flow is now a challenge. Agriculture is cyclical and with that in mind what the examiners look for is risk mitigation and proper underwriting with a thorough analysis of the financial condition of the operation, requiring crop insurance, and knowledge of the producers marketing plan. Stronger balance sheets offer the opportunity for bankers to work with producers in this slower ag market but it doesn’t negate the responsibility of risk mitigation to maintain cash flow that provides sufficient cash flow. 2. As markets have come off the agriculture boom that supported $8 corn and pricing returns to traditional levels, excess cash flows have dried up in many cases. Some banks are looking at new cash flow levels that no longer support short-term accelerated loans and they are restructuring debt to more traditional loans with five, 10 or 20 year terms, when the assets support it. How does the OSBC view this trend and what can banks do to restructure carry-over debt rather than calling it a classified loan? There is an increase in the number of restructured loans. The restructure is not the sole reason for an adverse classification of the loan but it does signify that there was an issue with repayment. When a banker is restructuring a loan, they need to look at the borrower’s current financial condition through updated financials and look at their leveraged position, cash flow and balance sheet to make sure the restructure plan will work with current cash flow. Of course, the repayment terms should match the collateral. Equipment shouldn’t be on the same term that land would be, for example. While a restructure is not ideal, it is sometimes necessary and is a tool that bankers can use to help producers in a situation where they have no control. At the end of the day, you can restructure, but there is only one thing that pays the loan and that’s cash. Restructuring is not a routine option. You must consider where the cash is coming from whether it’s through traditional cash flow, sale of equipment, or off farm income. The cash flow must be present to have the loan viewed favorably. 3. How can government payments such as crop insurance be considered in cash flow analysis? Can the PLC and ARC payments be estimated based on the 2017 prices? The USDA published projections based on 2017 PLC and ARC payments. There is a chart posted on their website. The projections are something that the OSBC would accept as bankers develop cash flow analysis for repayment. Government payments can be considered for crop production cash flow. They can also look at securing collateral and filing UCC to secure government payments as collateral. 4. What is the comfort level of the OSBC in terms of loan concentration percentages? For example, a rural community bank may have 300% of capital in ag loans because of the local economy but a much smaller percentage in commercial loans and an urban bank may be the opposite. Where is the comfort level for examinations by the OSBC? Loan concentrations are reviewed at every exam and the market is a consideration for that analysis. The OSBC comfort level Tim Kemp is the Director of Examinations and Acting Deputy Bank Commissioner for the Office of the State Bank Commissioner (OSBC). He recently met for an interview for KBA’s The Kansas Banker Magazine. Kemp has a strong agricultural background from growing up and working on a large family farm in Reno County just outside Pretty Prairie. The working farm has been recognized with Century Farm status by Farm Bureau and four of his 6 children are still involved in running the farm today. Kemp earned a degree in business administration and began his exposure to banking with an internship at the bank in Pretty Prairie, which at the time was a state bank. He worked for Congressman Dan Glickman in Hutchinson for two years before going back to run the 8,000-acre family farm in Reno and Butler Counties. In 2001 Kemp went to work for the OSBC as a financial examiner out of the Wichita office and he moved to the main office in Topeka as a Review Examiner in 2013. In 2017 Kemp was named Director of Examinations. He is currently serving in a dual role with the additional title of Deputy Bank Commissioner since October 2017.