An Ag Lender's Thoughts on Successful Restructuring

We received a few comments on the interview I sent on our blog post from a couple weeks ago with a farm restructuring expert.

Click here to read the blog post.

Some comments were supportive, some were critical.

I want to share with you a response I received from Cary Anderson, the VP of Ag Lending at Security State Bank of North Dakota. I thank Cary for his thoughtful reply!

At Harvest Profit, we are dedicated to sharing thoughts and building tools to help farmers with the “Business of Farming”. As you know, it’s not all gumdrops and lollipops in farm country these days. We don’t want to shy away from these tough topics.

In that sprit, see below for Cary’s unedited thoughts on farm restructurings.

After reading the commentary of J.T. Korkow, I think it’s important to get a perspective of a lender on some of the issues. Admittedly, some of the comments struck a nerve as I felt the overall message on the topic of dealing with lenders was “don’t trust them with things get tough”. Most lenders want long-term customers and will work with those customers with things turn tough. Replacing customers and related loan volume is difficult and time-consuming. It is important to identify a lender that is committed to Ag lending and that has historically had a significant percentage of Ag loan volume in their business. A local lender, committed to agriculture, simply can’t “move on” and drop borrowers and/or Ag lending when the Ag economy has a downturn.

The Korkow article discussed issues dealing with lenders when the business and lending relationship is breaking down. It is important to understand the perspective of the lender when trying to negotiate restructures, future loan commitments, etc. versus foreclosure or bankruptcy options.

It is absolutely critical the borrower knows their finances, in good times and bad. Future plans have to be based upon accurate historical, up-to-date information that appears reasonable. If an operation is reliant upon a third party or the lender to prepare their financials and then tell them what they mean, they tend not to understand the numbers. Management decisions are not made proactively based upon the financials under those circumstances. A lender is going to have a difficult time accepting a restructure package that includes projections that have a wide deviation from historical numbers.

Past history has a huge impact on what can or can’t be done in the future. If a restructure or forbearance is being negotiated, the lender is going to be considering how that borrower has carried through with past plans, deadlines, etc. If the borrower has a history of carrying through with past commitments and the communication has been good; it is much more likely future plans, restructures will be approved. Conversely, if deadlines come and go and the lender continually has to contact the borrower only to find out agreed upon plans have not been carried out, there’s little chance they’ll agree to a restructure plan. How has the relationship been; cooperative or combative in the past? It is much easier to end a business relationship with combative individuals. The lender is going to have to make a judgment call on if they think the borrower has the capacity to learn from mistakes and make changes. If it appears the opposite has been true, there’s no basis to continue.

The loan officer is answering to someone (i.e. Loan Committee). A Loan Committee is going to take a hard look at those past plans, communication, and credibility of that borrower. “Working with a borrower” is a two-way street and is established long before consideration of liquidation/bankruptcy.

Professional advice is always important to the success of a farm/ranch but becomes essential in times of economic stress. The right third party can be of great benefit working with a stressed lending relationship. It has been my experience a loan mediator typically can be of great benefit, helping with communication and keep the process on track. When it appears a restructure is not a possibility or there are questions on the details of a restructure, professional tax and legal advice are absolutely necessary. The best interests of a borrower and a lender may not be the same at that point. Ultimately, the final decision will always be with the manager who can take all the advice and opinions and then implement decisions necessary for the business and individuals involved. Critically assess the perspective and motivation of the one giving the advice and take ownership of the decision. Character is defined in times of stress; that is true with both borrowers and lenders.

A few other points to be aware of:

• Trust is essential. If trust is lost, it is time for the business relationship to end. That is true for either party.
• Generally, stressed financials lead to depression and with it, immobility. Therefore actions, plans, deadlines agreed to with the lender tend to slide. Procrastination is not your friend.
• A huge mistake of the 80’s was to blindly keep operating and hoping for a change versus making a serious assessment of where the operation has been headed and realistically evaluating if it can change directions. Too many operations kept burning equity versus simply quitting or making major changes. The more time passes and losses accumulate, the more equity is consumed and options evaporate.

Cary Anderson - VP Commercial & Ag Lending & Business Development cary@securityfirstbank.com