Start Thinking About Loan Renewals

October 22, 2016 02:03 AM

By Peter Martin

Given current commodity prices, loan renewals will be more challenging than in recent memory. For the most part, there were more options in 2015 because there was more equity on the balance sheet. As a result, many farmers got through fairly unscathed. I was surprised. This year, however, there will undoubtedly be problems. Two years of losses have not only eaten into working capital and equity but also triggered additional scrutiny of credits.

The lending process is about relationships, not just function, which means a good relationship with your lender is key. There are going to be challenges, but proficient farm management is more evident today than ever before.

In order to bring light to the situation, we asked a seasoned lender what he thinks about the current environment and how to best manage upcoming credit renewals. Here’s what Stephen Hatz, senior vice president of Bank of the West, the third largest commercial bank lender to agriculture in the U.S., has to offer:

What do you wish borrowers would do? 
Hatz: Borrowers should lay out their plan and go through what they’re going to do in 2017 and what’s different from 2016.

It’s a combination of dialog and written plan. We expect the farmer to put time into it. If it’s just verbal, it might just be sporadic thoughts. Writing it down and laying it out tells the banker the borrower’s completed a thorough assessment. The verbal dialog can complement the plan.

How can borrowers and lenders avoid frustrations during this process?
Hatz: Good communication with the borrower provides the best opportunity to assess if the borrower is taking ownership of the information he’s providing. The borrower needs to understand his business projections and what makes them tick. We want it to be a competent presentation for both sides, but it comes down to communication. 

For example, sophisticated borrowers know all the details. In discussing cash flow, a organized borrower can communicate why a new combine makes sense. The less sophisticated borrower understands cash flow needs conceptually, but the sophisticated borrower has his plan when he walks in the door and knows it in detail.

Are there factors today you’re more conscious of or that look different?
Hatz: As a bank we’re always looking to see what changes could make the process better. Change is fine, but we look to the principles that got us here. We are consistent and pragmatic. We understand there’s volatility in the production of commodities and we want to understand how the producer is managing that volatility. 

The simplest way to describe how we function is we conduct light asset-based lending—our methods work in the good times and they work in the tough times. Our approach is simple but effective. The reality is if you don’t have any risk you don’t have any opportunity. It’s about managing risk. You have to understand how to use the available tools to effectively manage risk.

In your opinion, what are the biggest concerns facing agriculture?
Hatz: We can’t change all the economic activity that goes on day-to-day on the farm and in the industry, so our focus is underwriting the credit. For us that’s about structure and monitoring. The variability from a banking standpoint goes back to being consistent. Some of the fundamentals of underwriting include knowing what the borrower wants the money for, how they are going to pay it back and what is a secondary source of repayments. 

This column is not a substitute for financial advice. The views are those of the author and do not necessarily reflect the official policy or position of Bank of the West. 

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