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Independent Midwestern bankers discuss lending woes with Obama

BY LINDA McGURK
Indiana Correspondent

SCHOOLCRAFT, Mich. — Small community banks didn’t create the financial meltdown that’s caused several banking giants to go belly-up in the past year-and-a-half. But despite largely staying out of the sub-prime mortgage market, they’re now paying the price for others’ risky lending practices, according to Independent Community Bankers of America (ICBA).

On Dec. 22, seven representatives of the advocacy group met with the Obama Administration at the White House to voice their concerns about community banks’ ability to lend money to small businesses.

“The President clearly wanted to hear about the challenges we’re facing in terms of making small business loans,” said Mark Schroeder, president and CEO of German American Bancorp in Jasper, Ind., who attended the meeting with President Obama and several of his senior staff members. “(During the meeting) we heard that some banks are strained from a capital perspective.”

Many community banks, whose customers include many rural and ag-related businesses, ended up with large inventories of unpaid residential and commercial loans when the economy tanked and people started defaulting on their mortgages. The growing load of foreclosures and write-downs of property values are now eating away from the banks’ capital, making it more difficult for them to make loans, explained Jim MacPhee, CEO of Kalamazoo County State Bank in Schoolcraft, Mich., and ICBA chairman-elect.

To help strained banks make loans, MacPhee and the other bankers suggested they get access to some of the money from the government’s Troubled Assets Relief Program that has now been returned by the bigger banks. They also advocated government guarantees for small business loans.

“Some of our recommendations were establishing a private/public program to encourage investors to purchase stocks in community banks. There would probably have to be a government guarantee for a portion of it,” said MacPhee.

Adding to the hardship of some community banks are the government regulations that were tightened in response to some of the bigger banks’ risky involvement in sub-prime mortgages and credit derivatives. “We really haven’t created some of these issues … and as legislators pass new regulations we ask that they don’t add to the burden of community banks,” Schroeder said.

Community banks’ ability to lend is vital for small businesses, as tight credit can make it hard for them to stay afloat in tough economic times.

“Many small businesses have spent the past 12-18 months just trying to stay alive, and they’ve used all their capital to keep their doors open. They won’t qualify for an SBA loan (Small Business Administration guaranteed loan program) because they’re not profitable,” said MacPhee.

Ag-related businesses, though, have fared relatively well during the recession, according to Schroeder. “The ag component of our small business lending is stronger than the non-ag related components.
“Obviously, the last several years have been good for our grain producers and good for businesses that sell to agriculture,” he said and added, “I don’t see that the ag sector will be affected (by tight credit).”

MacPhee also believes the financing situation for the ag sector will stay stable. “We expect to continue to make loans to ag businesses. Pricing-wise the rates are still very good,” he said. Schroeder said he expects interest rates for small business loans to remain stable until the fourth quarter, when he believes the economy will start to come back with full force.

After finishing a tough 2009, Schroeder believes the banking sector could still face some bumps in the road in the coming year. “I wish I could say we’ve turned the corner and that 2010 is going to be better for banking in general and community banks in particular, but we’re still tied to the unemployment situation. We hear people talk about a recovery, but we’re not seeing it from our customers yet. I think 2010 is going to be pretty similar to 2009.”

MacPhee said community banks are crucial to the economy and will play a central role in helping the country recover from the recession. “There’s no question our 8,000 community banks are an economic engine for small business development,” he said. “A lot of small businesses that start-up with significantly less than $1 million end up being multimillion-dollar businesses.”

Both MacPhee and Schroeder felt positive after the meeting with the President and Schroeder believes the Administra-tion will take “a hard look” at creating a credit program that offer government-guaranteed loans to small businesses.

“I think we definitely had the President’s ear,” MacPhee added. “We felt that he was being very sincere.”

1/13/2010