Communication, honesty and cooperation
November 2, 2017
I read with interest the Guest Opinion submitted by JT Korkow in the October 7 edition of this publication. His explanation of several of the ratios used by lending institutions is for the most part accurate and informational. Although the ratios he presents may vary somewhat based on the lending/loan policy of any particular institution.
And yes his statement, "I am seeing more dollar losses taken on operations for the past couple years than what I believe was lost in the 80s," can be true for some operations. However, when the size of operations have tripled, quadrupled or grown by whatever magnitude as compared to the 80s, the losses will follow the same trend. By the same token the improvement of a well-managed operation can be beyond comprehension when the pendulum swings. It is just a numbers game and how the numbers are managed can and will make the difference over the long haul.
I do however take offense to the statement, "The first thing you need to know is that your banker has no loyalty to you." If a borrower is just now realizing that, they should have sought other sources of financing long before the fall of 2017.
I am confident that most ag lending institutions in rural communities will go the extra mile to keep a long term customer in their loan portfolio. With the availability of lending software, lenders can and should do shock testing for income declines, cost increases, interest rate increases, and land value changes to determine the soundness of individual loans. This shock testing can also assist the borrower in determining the results of a "what if" situation when possible expansion of the existing operation is presented to the borrower.
Lenders and borrowers need to be keenly aware the earned net worth is more crucial on a long term basis than appreciated net worth. If the only financial gain is from appreciating asset values rather than actual positive income, the operation is truly unprepared financially for a major downturn in asset values. This was the trap that agriculture fell into during the late 1970s into the 1980s, both from the lender and borrower side.
Lending institutions are permitted to work with problem credits. From the FDIC Federal Institution Letter (FIL) issued July 16, 2014, "From a supervisory perspective, restructured loans to farming operations with the documented ability to repay debts under reasonably modified terms will not be subject to adverse classification solely because the value of the underlying collateral has declined. Further, an institution that implements prudent loan workout arrangement after performing a comprehensive review of a borrower's financial condition will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse classification." Lenders have the ability to work with borrowers, but that is a two way street.
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The article also states, "Bankers all got the memo this past year that agriculture was not going to be good for a couple more years, and interest rate were most likely going up." True, the Federal Reserve has had three rate increases totaling .75 percent over roughly the past 12 months. These increases are certainly not with the rapidity that was expected, say 24 months ago. I am not an economist, but with the fragile state of the US and World economies, interest rates will only increase as rapidly as there is proof that economies improve.
Referring to the first part of the above quote from Mr Korkow's article. I pull a quote from a presentation at the American Agricultural Economies Association Annual Meeting, Portland, Oregon, July 29-August 1, 2007. This is from The Changing Structure of Commercial Banks Lending to Agriculture. "The banking industry is highly regulated to ensure the safety and soundness of the institutions and to protect the interest of the public and the bank's customers."
I also give you a quote from the 2009 presentation by Dr David Kohl, Ag Economist, titled, FDIC Sees Ag Banks As the Next Big Crisis. "Yes, banks, farm credit, and other financial institutions are tightening agricultural credit extension. Credit is still available, but information and collateral requirements from borrowers are increasing and being scrutinized. For the most part, lending examinations of institutions loaning to agriculture are intensifying, particularly as bank failures increase." Safety and soundness in lending is not a "knee jerk" occurrence. Loans are the primary source of income for lending institutions, and frankly the primary reason for lending institution failures.
Folks, this wheel was not recently reinvented when it comes to lending and examinations. In fact, examiners no longer just drop in for a two to three week examination, nowadays a call from your regulator is initiated approximately four to six weeks ahead of the exam date, with requested information sent, so that the exam may only be 3-5 days in length. Prudent lenders maintain internal "watch lists" and review their internal "problem loans," on most likely a quarterly basis. This is intended to prevent surprises to both lenders and borrowers.
Some statements in the Guest Opinion appear to want to eliminate probably the most important premise between borrower and lender. From "How to Ruin Your Relationship with Your Banker"-News/Agweb.com:
In the current economic environment, having a solid relationship with our banker is critical. This week at World Dairy Expo (early October 2017), Arthur Moessner, Vice President-Dairy Team lead, American AgCredit gave farmers some tips to improve their rapport with their banker, and also some pitfalls to avoid. Here are six ways to ruin your relationship with your banker, according to Moessner.
1) Limit Communication. "Your banker has to know what is going on at your dairy," he says. "If your banker knows what challenges could lie ahead, they will be better able to help you work through them".
2) Supply financial information late. "When a banker asks for financial info, it's important to get it to them on time," he says.
3) Volatile financial ratios or collateral advance requirements. "Lenders like predictability," he says.
4) Draw excessive amounts of money from the business. Your banker doesn't want to see you drawing more money from the business than your balance sheet can support.
5) Borrow significant funds outside the business without telling your banker. Moessner says your lender needs to know about all of the loans you have at any given time.
6) Make significant capital expenditures without telling your banker. Again, communicating with your banker is key, Moessner says.
I certainly think this could be presented to nearly any ag production audience, and the words would still ring true.
As far as completing and furnishing a financial statement and cash flow(projection). Please refer to some of the previous commentary in this article as to why this should be of interest to not only the lender but the borrower as well. Plainly, it would be like venturing on a cross country trip without a road map or GPS. You may not know where you have been or where you are headed. With the financial assets at stake, shouldn't both parties want and need to know what is at risk?
Communication, honesty, and cooperation, it is as simple as that. Making the tough calls on a loan request is never easy, and after 42+ years on my side of the desk, it is still not easy. Without true and accurate information, the tough call is made that much more difficult.
My retired pastor friend and high school classmate, Pastor Timothy Heupel, referred me to this Bible Passage.
Psalm 37:21 The wicked borrow and do not repay, but the righteous give generously.
I will also leave you with this advice from my father, now 89 years old, given to me in 1975 when I began my lending career. Dad retired a farmer/rancher, and passed the reins to my two brothers and my son. "Always remember you can't keep everybody in business."
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