A farm customer of First Dakota National Bank in Yankton, S.D., recently approached the bank about borrowing $8 million.

Problem was, the request exceeded the bank's legal lending limit by $6.8 million.

So Dennis A. Everson, senior vice president, sent word to about 20 other community banks that he was looking to share the loan and, within weeks, the $300 million-asset bank had found three partners.

"If we can't find a way to finance larger loans, then customers are going to go to the competition," Mr. Everson explains.

His story illustrates the ways in which small banks are banding together to serve farm borrowers that are getting bigger.

Indeed, statistics show that while the number of farms is shrinking each year, the size of the average farm is growing. Factor in rising production and land costs and it adds up to larger credit needs.

"It starts to get to the point where I can't make loans because they get over our lending limits," says David W. Combs, president of $91 million-asset First National Bank in Taylorville, Ill.

Most bankers say their current lending limits meet the needs of most customers. But that will change, they insist, if consolidation trends continue.

According to the U.S. Census Bureau, the number of farms in the United States fell to 2.06 million at the end of 1997, down some 400,000 since 1980. At the same time, the size of the average farm increased nearly 10%, to about 471 acres.

"Three or four years down the road, loan sharing will be the rule," says Mr. Everson.

Small banks are already losing farm loans to larger players. A report released by a Wisconsin agriculture research group in July found that banks with less than $100 million of assets had 48% of all farm loans in the state at the end of 1995. By the first quarter of 1999, the small banks' share had dwindled to 36%.

During that same period, market share among the state's six largest banks jumped from 35% to 37%.

"As times change, small banks like ours have got to find more credits" to share, says David G. Smith, president of $18 million-asset Jasper State Bank in Minnesota.

Loans can be shared in several ways. First National Bank in Taylorville partners almost exclusively with one bank -- State Bank of Blue Mound, Ill. -- and has done so at least since Mr. Combs joined the bank 34 years ago.

Jasper State, with a lending limit of just $260,000, often passes larger loans on to its correspondent bank -- though it does not tell its customers.

"For my customers, it's almost transparent -- they don't even know it's happening," says Mr. Smith, noting that the bank might share as much as two-thirds of a loan.

Bankers' banks are also a good starting point in the market for lending partners.

Midwest Independent Bank in Jefferson City, Mo., for example, will assemble groups of banks to share a loan that is too large for any one bank. Under such arrangements, the requesting bank will still be the borrower's point of contact, but Midwest Independent will handle all the bookkeeping and disbursement.

Indeed, the process of figuring out which bank is owed what can be enough to discourage banks from sharing loans.

While Mr. Everson acknowledges that the practice has allowed First Dakota to hang on to customers it would have lost, he says the process of dividing loan repayments among multiple banks can be a burden on the bank's accounting staff. "It starts to become a bookkeeping nightmare," he says.

Mr. Everson is working on one possible solution. He is trying to form a separate credit corporation that would be owned by a group of community banks.

The corporation's chief function would be to make loans that would be too large for any one of the corporation's member banks. Ideally, customers would include not just individual farmers -- which typically grow by buying neighbors' farms -- but fast-growing corporate farms and cooperatives. Collections and disbursement would be handled by the corporation, not the initiating bank, he says.

Funding the venture has been difficult, however.

Some banks that initially expressed interest have been reluctant to pony up the money. Also, banking laws prohibit banks from investing more than 5% of capital into separate service corporations.

Nevertheless, Mr. Everson continues to meet with bankers in hopes of launching the new corporation within the year.

"I don't think we have that many options," he says. "The kind of borrower that comes into my bank three years from now is going to require more resources than we have.''

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