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How a major U.S. farm lender left a trail of defaults, lawsuits

How a major U.S. farm lender left a trail of defaults, lawsuits
By P.J. Huffstutter

HARROD, Ohio (Reuters) – After completing a credit review in a half-hour phone call, a BMO Harris Bank underwriter cleared $12 million in loans for Ohio corn and soybean producer Greg Kruger in 2013.

Kruger had initially asked for a $2 million loan to build a grain elevator. But the Chicago-based bank, one of the largest U.S. farm lenders, ended up selling him a $5 million loan for the elevator and another $7 million to finance crops, machinery and debt consolidation, according to documents in the Ohio foreclosure case the bank filed to seize Kruger’s farm.

When Kruger offered to supply receipts of sold grain and other standard documentation, his loan officer told him not to bother. “‘Don’t worry. We’ll make the numbers work’,” Kruger, 67, recalled the officer saying.

Five years later, after aggressively expanding its U.S. farm loan portfolio, the bank called in Kruger’s loans as corn and soy prices collapsed and the United States was starting a trade war with China. As the U.S. agricultural economy sours and farmers’ financial woes pile up, BMO Harris is leaving behind a trail of farmers such as Kruger who have lost nearly everything.

The bank, a subsidiary of Canada’s Bank of Montreal  has struggled to recoup some of its investments through a slew of bitter legal fights, according to a Reuters review of court documents and bank regulator data, as well as interviews with dozens of U.S. farmers, bankers, and former and current BMO Harris employees.

“BMO Harris did push for growth, and they’ve had some of those deals blow up spectacularly in their faces,” said John Blanchfield, founder of Agricultural Banking Advisory Services, a consulting firm.

The plight of BMO Harris and its customers reflects broader distress in the U.S. farm sector. Farmers are struggling to pay back their loans or obtain new ones. Shrinking cash flow is pushing some to retire early and a growing number of producers to declare bankruptcy, according to farm economists and legal experts.

BMO Harris may yet face more defaults, judging by its high level of delinquent loans. At the end of June, nearly 13.1% of its farm loan portfolio was at least 90 days late or had stopped accruing interest because the lender doubts the money will be paid back – compared to 1.53% for all U.S. farm loans at banks insured by the Federal Deposit Insurance Corporation (FDIC). BMO Harris had the highest rate among the 30 largest FDIC banks, according to a Reuters analysis of loan data the banks reported to the regulator.

Ray Whitacre, head of BMO Harris Bank’s U.S. diversified industries unit, said in a statement that the bank’s distressed loans do not represent “the overwhelming majority” of its borrowers’ experiences. The Bank of Montreal and its U.S. businesses have been in farm lending for more than a century, he said. The bank takes a long-term view of helping farmers through “all stages of the economic cycle,” Whitacre said.

BMO Harris spokesman Patrick O’Herlihy attributed the high delinquency rates to the bank’s lending in the upper Midwest, where dairy and grain operators have faced serious financial challenges. Sam Miller, BMO Harris’ managing director of agriculture banking, said the bank is keeping a closer eye on its customers with cash-flow shortages and lending to fewer mid-sized operators. “We have to be more vigilant in underwriting the risk,” Miller said in an interview.

The bank declined to comment on any individual loans or borrowers, or on the prospect that it could face additional defaults based on its delinquency rates.

MISSING COLLATERAL

The bank’s exposure to the farm sector reached a peak of $1.59 billion in 2018. Most other major banks have been scaling back their farm-loan portfolios since about 2015, as prices fell due to a global grains glut, according to the Reuters analysis of FDIC data.

Among the BMO Harris deals that went belly-up was $43 million in farm operating loans to McM Inc, run by Ronald G. McMartin Jr. in North Dakota. The farm filed for Chapter 7 bankruptcy in 2017.

BMO Harris secured a $25 million loan with McM’s grain, cattle and other farm crops, along with other assets. McM agreed to use the sale of these crops to pay the bank back, according to a copy of the loan.

During the bankruptcy proceedings, BMO Harris’ attorneys told the court it was unable to locate all the crops backing its loans, alleging that McM had sold some of the crops to pay other creditors first. Court documents also show the bank had not audited some of the farm’s financial statements. An outside consultant later found McM’s accounts receivable and inventory was overstated by at least $11 million, according to court filings. Neither McMartin nor his attorney responded to requests for comment.

Some experts and bankruptcy attorneys representing former BMO Harris customers say the bank issued too many loans for too long that farmers simply could not pay back. The problems, they said, stem from the aggressive practices of some loan officers and a lack of oversight by bank auditors.

Michael and Byron Robinson borrowed $2.5 million in an agricultural loan and another $2.5 million on a line of credit in 2013 through their Indiana businesses, court records show. The bank sued the Robinsons in federal court as part of its foreclosure process in 2016 and later sold the farmland at auction. The property brought far less than the value the bank had estimated the properties were worth to justify the original loans, said their bankruptcy attorney, Maurice Doll.

Michael and Byron Robinson did not respond to requests for comment. Doll said BMO Harris had loaded his clients up with far more debt than they could reasonably pay.

‘DON’T WORRY. IT’LL BE FINE’

The Indiana-based BMO Harris banker working with the Robinsons and Kruger, Thomas “T.J.” Mattick, found his customers through farm magazine advertisements, word of mouth, at church gatherings and from rural loan brokers who were paid a finder’s fee, according to interviews with 10 farmers and one loan broker.

“I thought I could trust him,” Kruger said. “We would talk about church and faith all the time.”

When the Robinsons were looking to expand their corn and soybean operations, Mattick convinced them to buy two new farms instead of one – with BMO Harris financing 100% of the deal, said Michael Morrison, the Robinsons’ farm bookkeeper and a former agricultural banker.

Morrison told Reuters he was concerned by how the bank’s underwriters valued the family’s grain in storage, on the premise that its value would continue to rise – even as grain prices were starting to soften at the time.

“We used to say that T.J. never saw a loan he didn’t like,” Morrison said. “I kept telling them, ‘Don’t do this. Don’t take on the debt.’ But T.J. kept telling them, ‘Don’t worry, it’ll be fine’.”

Mattick, who no longer works for the bank, denied that he encouraged borrowers to take on more debt they could pay back. In written answers to questions from Reuters, Mattick said “extensive underwriting and analysis” were conducted on the loans for Kruger and the Robinsons, as with any other file.

Mattick denied telling Kruger that he would “make the numbers work” without standard documentation such as sold-grain receipts. And he said BMO Harris would not have given the Robinson’s 100% financing on their farms unless they pledged additional collateral. BMO Harris declined to comment on Mattick’s statements regarding individual loans and bank policy, and Reuters could not independently verify them.

“I worked with clients to help them determine what they could afford and never would have counseled them to incur debt beyond what they could afford,” Mattick said.

(Reporting By P.J. Huffstutter; additional reporting by Jason Lange and Pete Schroeder in Washington; editing by Caroline Stauffer and Brian Thevenot)

Size matters. Big U.S. farms get even bigger amid China trade war

By Mark Weinraub

HAZELTON, N.D. (Reuters) – As the 2018 harvest approached, North Dakota farmer Mike Appert had a problem – too many soybeans and nowhere to put them. Selling was a bad option. Prices were near-decade lows as U.S. President Donald Trump’s trade war with China weighed heavily on the market. Temporary storage would only buy him a little bit of time, particularly in an area where cold weather can damage crops stored in plastic bags.

So Appert, who farms 48,000 acres (19,425 hectares), cut a check for $800,000 to build eight new permanent steel bins. That allowed him to hold onto his bumper crop and wait for prices to recover.

He sold half of the 456,000 bushels stored on his farm throughout the following summer, earning about $1 more per bushel and avoiding storage at nearby CHS elevators or an Archer Daniels Midland Co. processor in the area.

But most farmers do not have $800,000 to spend on steel bins, and many are going under. The number of U.S. farms fell by 12,800 to 2.029 million in 2018, the smallest ever, as the trade war pushes more farmers into retirement or bankruptcy.

Roger Hadley, who farms 1,000 acres in Indiana, was unable to plant any corn and soybeans this year after heavy rains added to farmers’ woes.

He spent most of the summer trying to plant a combination of grasses, a so-called cover crop, so he could apply for government aid and try again next year.

“The guys that got rich are getting richer,” Hadley said. “It has frustrated a lot of guys.”

In farming, size does matter. The farms left standing after the trade war will likely be some of the biggest in the business. Appert’s operations are more than 100 times bigger than the average American farm and the advantages provided by that magnitude are becoming even more critical as the trade war stretches into a second year.

The declining number of U.S. farmers could hurt the world’s top grain merchants such as ADM and Bunge, who will have fewer suppliers. Additionally, farmers will have less need to rent space in the merchants’ grain silos as big farmers like Appert have plentiful storage on their own farms.

ADM said it would continue changing to meet the needs of its customers. Bunge did not respond to an email seeking comment.

By the end of 2018, the average U.S. farm size rose to 443 acres, a 12-year high and up from 441 million in 2017, according to the latest U.S. Department of Agriculture data.

And the biggest farmers are growing their operations even more as retiring farmers choose to lease their land rather than selling it.

When land becomes available for lease, only the biggest farmers can readily shoulder the costs needed to expand.

The size of the loans smaller farmers would need to buy equipment, for example, are too big for applicants with little collateral, said Dave Kusler, president of the Bank of Hazelton in Hazelton, North Dakota.

“It is almost impossible with what the costs are,” Kuslersaid. “In this area, you can’t make a living on 1,000 acres.”

Critics say the Trump administration’s policy of compensating growers for lost sales due to the trade war pays the bigger farm operations more since payments are calculated by acres farmed.

The Environmental Working Group, a conservation organization, said in a recent study the top 1% of aid recipients received an average of more than $180,000 while the bottom 80% were paid less than $5,000 in aid.

Appert said that big farmers receive bigger outright payments but less per acre than small farms because of a $500,000 cap per farm.

‘BOOM, BOOM, BOOM’

Big farms can reap the full benefits of new high-tech equipment that boosts farm yields.

Doug Zink, who farms 35,000 acres near Carrington, North Dakota, said he likes to trade in his fleet of four combines and planters nearly every year to ensure that his equipment is under warranty, which saves thousands of dollars in maintenance costs and helps avoid breakdowns during key seeding and planting periods.

They also receive deep discounts – as much as $40,000 for some combine harvesters that can cost as much as $400,000 – allowing them to upgrade more often.

Manufacturers are increasingly willing to cut such deals to keep clients as the number of customers falls. Deere & Co <DE.N> said that it will reduce production by 20% at its facilities in Illinois and Iowa in the second of half of the year. Rival agricultural machine makers AGCO Corp <AGCO.N> and CNH Industrial <CNHI.N> have also slashed production to keep inventory in line with retail demand.

Large farms also have the easiest access to capital, with bankers still eager to provide loans to growers with plenty of collateral. “The ag trend is going to larger farms,” Kusler, the bank president in Hazelton, North Dakota, said, “The loans get much larger.”

Appert had no problem getting a loan to finance expansion.

“If you want to get a mortgage and buy a piece of land it is just boom, boom, boom,” he said.

(Reporting by Mark Weinraub; Editing by Caroline Stauffer and Marguerita Choy)