What a consolidating industry means for large operators
Sam Miller has been in the same office for nearly three decades. But the name on the outside of the building has changed three times. As a career ag banker in Appleton, Wis., Miller has seen firsthand the evolution and consolidation of his industry—a trend that’s expected to continue.
“Look at the consolidation of ag retailers, grain elevators, processors and at the farm level,” says Miller, managing director of agriculture banking at BMO Harris Bank. “When you have that happening within those sides of the business, it’s natural to occur in banking.”
As farms scale in size and take out larger loans, and as regulatory costs grow for lenders, mergers and acquisitions in ag banking have accelerated, a trend that could bring pros and cons for top operators.
The Hard Numbers. In 2005, just under 5,000 banks and Farm Credit System (FCS) associations reported ag lending portfolios. In early 2016, that number dropped to 3,900, says Jackson Takach, economist with Farmer Mac, which provides low-interest, long-term real estate financing to rural community banks.
“If past trends continue, there will be more than 100 fewer banks with ag portfolios at the end of 2016 than there were at the beginning, and at least two fewer FCS associations,” Takach says. “By 2020, projections show around 500 fewer banks with ag portfolios and FCS associations.”
Yet ag banks have been slower to consolidate than their commercial and residential siblings, Takach says.
Some of this reduction stems from technology. The adoption of mobile and online banking means banks can downsize physical locations and staff.
Yet a big driver is regulatory reform and the cost of compliance. Enacted in 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act aimed to improve accountability and transparency for financial institutions. For banks, it has meant additional documentation and, typically, additional full-time employees, says Curt Covington, senior vice president of agricultural finance with Farmer Mac. The annual cost for a bank to keep up with the ever-changing regulatory environment tops $150,000, according to Continuity, an industry compliance consultant.
That’s just a blip on the balance sheet for large national lenders, but banks with smaller asset bases and employees have suffered.
“This is a significant burden on smaller rural community banks, as these are non-recoverable costs that don’t enhance borrower relationships,” Covington says.
The unique nature of ag credit also has slowed consolidation in ag banks, which tend to sell or be acquired by other ag banks.
Fewer players in any industry means reduced competition. Yet consolidation can also make organizations more efficient and, in the case of ag banks, increase their ability to provide capital to large operations. “When two community banks merge, the merged capital provides them a greater base of lending ability,” Covington explains. “That can be a good thing for larger borrowers, as they won’t outgrow their local banks as quickly.”
Additionally, heightened competition typically causes lenders to aggressively seek out new customers or fight to keep current ones. This could mean more competitive rates in the short-run as lenders reduce overhead costs and compete for volume, Takach says.
Farmers can benefit if their local bank merges, but it might not happen instantly. Because of the confidential nature of mergers and acquisitions, information and plans can trickle out slowly.
Across The Desk. Miller encourages farmers to be patient with lenders and to not be surprised if they have limited answers to questions. “One of the times my bank was acquired, I got a phone call saying, ‘It will be announced in the next half-hour that we are being sold,’” he recalls.
Previously, Covington worked with Bank of the West, FCS and Rabobank. He bought many rural community banks. “To merge processes, lending practices and policies is not easy,” he says. “Sometimes you make an acquisition, let the dust settle and then figure out how to merge.”
Personnel changes, different policies and new business priorities are common when an ag lender goes through a merger or acquisition. Use it as an opportunity to challenge and learn more about your lender, Covington suggests.
“If you have any questions about the future of your bank, ask your financial institution, ‘How do I know you are in a position to fund me in the future? Are you in a position to grow with me?’” he says. “Borrowers need to be as proactive in their borrowing relationship as their bank is.”
How You Can Benefit from Buyouts
For large-scale farmers and ranchers, consolidation in the ag banking industry creates some advantages, according to Curt Covington with Farmer Mac and Sam Miller with BMO Harris Bank. Yet producers should be prepared for the changes associated with a shrinking marketplace. These veteran ag lenders provide the following advice.
Get to know and interact with several tiers of managers at your bank because personnel changes are common with a merger or acquisition.
Accept calls from other financial institutions, even if you have a great rapport with your lender. Then, if your primary lending arrangement is interrupted, you have a relationship started.
Ensure your financial house is in order so banks approach you first when they have new or better rates or programs. “The most sought-after clients have good financial records, a strong balance sheet, strong working capital and a price-risk management plan,” Miller says.
Don’t be offended if your banker requires more information. “As deals get bigger, they get more complicated. There’s more risk that requires lenders to ask more questions and get more documents on that larger relationship,” Covington adds.
Don’t be shy. If you plan to grow your operation, see if your bank will be in a position to grow with you in the future.