Thank you for the opportunity to present testimony in support of S. 1423, Senator Hagel's
important proposal concerning the Federal Home Loan Banks. I am Phil Burns, CEO of the
Farmers & Merchants National Bank in West Point, Nebraska. I am very pleased that Senator
Hagel has introduced this legislation and that Senator Bob Kerrey, Nebraska's other Senator,
has signed on as co-sponsor. This reflects the importance of this proposal for Nebraska and
hopefully indicates the bi-partisan support for expanded bank access to the Federal Home
Loan Bank System and this legislation.
Today I am here representing the American Bankers Association. The American Bankers
Association brings together all categories of banking institutions to best represent the interests of
the 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 also currently serve as
the President of the Nebraska Bankers Association.
The ABA supports Senator Hagel's legislation, particularly those provisions expanding access to
the Federal Home Loan Bank System for community banks like mine. While ABA believes that
some provisions of the bill, particularly the capital structure provisions, need further discussion,
and we look forward to working with Senator Hagel, the committee, and the Federal Home Loan
Bank Presidents as the legislation moves forward, I am here today to discuss three elements of
Senator Hagel's bill which ABA believes will significantly improve the FHLB System and help
the financial institutions and communities served by the System.
Senator Hagel's bill improves the FHLB System by:
Making it easier for community banks to join the System by eliminating the 10% mortgage
portfolio requirement for institutions with less than $500 million in assets.
Broadening the categories of eligible collateral which my be pledged for FHLB advances to
allow community banks to obtain advances to meet the borrowing needs of the farmers, ranchers,
small business owners and homebuyers in their communities; and
Equalizing the borrowing costs for all System members so as not to disadvantage one
community in relationship to another simply because the borrowing needs of their residents
I want to take a few moments and tell you about my community. West Point is a small rural town with a population of thirty two hundred. We are a county seat town. In the Midwest that means we are the largest town in Cuming County, which has a population of eleven thousand. Our bank is one of three commercial banks in West Point, and one of eight banks in the county. We also have a branch of a Lincoln-based thrift in West Point. These four lenders compete for the home loan business in our small community.
I want to explain our housing market further. In West Point not every borrower can afford a
new home, even a moderately priced new home. But it is important to consider the impact of
home construction on the economy of a community, and the impact on housing availability.
When a single new home is built in West Point it often causes a ripple effect. When the newly
constructed home is occupied, the owners have usually moved out of another home in our
community. Whomever acquires their vacated property has generally upgraded their housing
as well, and their previous house then is available to yet another potential homeowner. Not
everyone may be moving into a newly constructed home, but more and better housing is made
available to them due to the ripple effect. Some homebuyers may be one, or two or even three
transactions away from the new construction, but that simply magnifies the number of
homeowners who benefit from the construction of a single new home. Access to the FHLB
System helps my bank and others like it to be able to lend to all the homebuyers I have just
described. That is great news for homeowners.
Our local economy is very much agricultural in nature. Cuming county prides itself in being in the top ten counties nationally as ranked by the dollar volume of agricultural products sold. Because of the agricultural nature of our economy, most of the credit demand at my bank is for agriculture related loans--either loans directly to agricultural producers or loans to finance ag-related businesses. This situation is not unique to my bank. Nationwide, agricultural lending is very important to many small banks like mine. Banks with less than $500 million in assets held approximately $34.7 billion in loans to farmers and ranchers at the end of 1996. That is 22 percent of all the loans made to farmers and ranchers in America or 57 percent of total agricultural loans made by banks.
Although we have a concentration in agricultural lending, that is not to say that home
mortgage lending is not part of our business. My bank makes residential real estate loans, but
there is limited residential lending potential in a small market like ours. Because of the small,
stable population, there is limited opportunity for us to make enough of these loans to reach
the 10 percent qualifying asset threshold currently necessary to qualify for Federal Home
Loan Bank membership. That is why Section 6 of this bill is so important. It makes it easier
for banks like mine, those under $500 million in assets, to become members of the FHLB
System by recognizing the loans we hold in our portfolio whether they be home mortgage
loans, small business loans, farm loans or other loans that reflect the needs of our
communities. Further, this bill will help my community and others like it by broadening the
categories of eligible collateral which may be pledged for FHLB advances to allow community
banks to obtain funds to meet the borrowing needs of the farmers, ranchers, small business
owners and homebuyers.
This legislation would enhance the ability of the banks in our market area to make fixed rate
residential loans. Because my bank has limited access to long term, stable funding, the bank
currently makes home loans with interest rates which are fixed for only up to three years.
Many borrowers, especially in the interest rate environment we have today, would be better off
to secure a loan with a long term fixed rate. (Unless lenders have access to loan funds which
have a fixed rate, it is very difficult for a bank to match the loan with the funding.) The
Federal Home Loan Bank System gives lenders an opportunity to secure long term funds at a
fixed rate so they can in turn pass the advantage of long term fixed rate loans on to borrowers.
Being able to match funding to the loan is a significant risk management tool for the lender,
and creates an important hedge against interest rate increases for the borrower.
My bank has the same problem when lending to small business borrowers. By definition,
every business in West Point is a small business. Securing a long term, fixed rate loan is
important to the success of a small business. Again, this is very difficult if the lender only has
limited access to a funding source with a fixed rate.
In 1989 commercial banks were first allowed access to the FHLB, and since that time banks have become the leading lenders to this nation's housing industry. In rural America banks are an even more important source of home mortgage credit than in urban America. Banks originate over 46 percent of all rural housing loans.(1)
Section Five of S. 1423 will allow the
banking industry to provide even broader access to competitively priced loan funds to home
owners and small business owners in communities of all sizes, providing an important
The liquidity provided by FHLB funding will be helpful to my bank and others as the economy
continues to expand. Growth is up, people are moving back to my town and I am experiencing
unprecedented requests for new loans. Deposits, the traditional source of lendable funds for my
bank and many others, are not sufficient to meet the demand for loans. That is in part because
our customers have many more investment options today than just a few years ago. While there
is certainly not a liquidity crisis in rural banks, an additional source of competitively priced loan
funds would be very welcome and would help my bank to foster new and expanded businesses,
new homes for the employees of those businesses, and greater economic opportunities for
everyone living in my town.
Another important provision of this bill is Section Seven which would level the playing field
for Federal Home Loan Bank membership relative to capital requirements and borrowing costs
by eliminating the Qualified Thrift Lender (QTL) test. All Federal Home Loan Bank
members should be granted equal access to system funding. To differentiate members' access
is to disadvantage one community compared to another. The cost should be the same for all
members, both in terms of capital requirements and the pricing of advances. S. 1423
eliminates distinctions between qualified thrift lenders and non-QTL members of the FHLB
system, equalizing borrowing terms for all members.
My community of West Point has been mentioned a number of times. I should stress that my community is not unique. Expanded access to Federal Home Loan Bank funding will help hundreds of other similar communities across our country. I want to stress that it is extremely important to consider the total impact of expanded Federal Home Loan Bank access. Homeowners would have broader access to a competitively priced source of funds. Building contractors would benefit as would furniture store owners, plumbers and every other industry associated with home building. Small business owners would benefit as would school districts and city governments. Entire communities would benefit from additional access to affordable housing and small business financing made available through expanded access to the Federal Home Loan Bank System.
Again, thank you. I would be pleased to address any questions you may have.
1 Credit in Rural America, United States Department of Agriculture, Economic Research Service, Agricultural
Economic Report # 749, April, 1997.
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