Great Expectations?

Just about every farm owner or manager, when asked, will tell you he or she is happy with the bank. If I can personalize that for a moment: Are you happy with your bank or are you simply not unhappy? Further, is this a question even worth thinking about?

If you can’t quickly and clearly come up with the answer to that question, let me suggest that a few minutes exploring the specifics of your relationship with your bank can materially reduce the financial risks your farm faces and improve the returns it generates.

If the best thing you can say about your banking relationship is that they cash your loan payments on time, it is worth looking into how much better and deeper the relationship can be.

Farm owners and managers are busy juggling every aspect of their business. Deciding on inputs, understanding pricing and hedging programs, managing and maintaining implements, identifying the timing of product sales, and accurately keeping track of everything is more than enough to fill the day. However, the financial glue that holds it all together–the banking relationship–is often taken for granted and ignored, usually because it doesn’t change much day-to-day. Further, it is simply part of the necessary but tedious background activity of the business part of farming. In fact, in most cases, nothing material has changed with the banking relationship in many years, often since the founding of the farm or its last major transition.

This stagnant relationship stands in stark contrast to the rapid pace of change in every other aspect of the business, from technology applications, to implement innovations and scale, to data and systems security, to transportation challenges, to maintaining production efficiency, to land management issues, etc.

It is often not until the farm needs to renew or expand a loan arrangement that any serious discussion occurs between banker and customer. By then, there is little time to adjust, little room to maneuver, and relatively little capacity to negotiate. Ironically, the deposit and transaction aspects of the business often just “come along for the ride,” but are really the lifeblood of the business of farming.

As in any relationship, both sides need to work at communicating clearly and openly about their needs and trying to understand the other side. Ideally, the bank is taking the initiative to stay on top of your needs and objectives, but if it is not doing so, you need to be more deliberate and proactive in managing the relationship. To have a healthy, and hopefully happy, relationship with your banker, here are six specific topics to explore:

1. What are the key drivers of how your bank views your credit capacity? How close are you to those thresholds and what risk does that pose for your next loan renewal or expansion request?

• Is your bank willing and able to make long-term (10-, 15-, or 30-year) fixed-rate mortgage loans on your farm property, or is it forcing you to take on the risk of rising rates because it can’t or won’t absorb it?
• Are there financial performance metrics that, if achieved, might allow a reduction in your loan rates?
• Are you using the appropriate tools in your deposit account to maximize the security of your payments - both inbound and outbound? What else could be useful?
• Do you schedule periodic (at least annual, if not semi-annual) performance updates with your banker or the bank’s credit analyst to keep them informed of any changing dynamics of your business and prepare for any changes as early as possible? Are they actively trying to understand the dynamics of your situation and future plans?
• What tools might be available for automated and secure updates of critical business and personal required documents (e.g., tax returns, financial statements, borrowing base certificates)

Pursuing these questions with your banker and staying up-to-date on them can provide both parties with comfort that you are protecting your financial resources, protecting your customer and vendor payments and data, and operating with the maximum credit flexibility available. While it might seem that your current arrangements are “good enough,” taking the time to manage the relationship can pay enormous dividends when pricing or production hiccups occur.

If you would like to explore these topics further, we would welcome a conversation. A good lender should be able to listen intently to your objectives and help you select the loan terms that best permit you to take advantage of today’s exceptional rates and structural alternatives. Although many banks may not be able to offer the full range of long-term fixed rates currently available, McHenry Savings Bank, through its relationships with FarmerMac and other leading farm lenders, can provide a full menu of attractive financing alternatives. Please feel free to contact us to discuss your situation or address any questions you may have.

Author: Don Wilson, Chairman, President & CEO

McHenry Savings Bank - NMLS# 630527

Tim Kempel | SVP, Agribusiness Banking - NMLS# 586675
 tkempel@mchenrysavings.com | 815-331-6406