Line up resources to prepare for ag lending growth.
Ag lending is one of the more time-consuming activities at a financial institution due to the underwriting requirements and the fact that so many banks and credit unions are using manual processes. Spreading seven years of financials, developing projections, and putting together a loan committee presentation – all while entering the same data multiple times in multiple systems or on spreadsheets and Word documents – can mean bankers can spend as much time on a $200,000 line of credit for a farm as they can on a $1 million commercial real estate loan, Newberry noted.
Meanwhile, recruiting and retaining talent with specialized experience and the desired level of knowledge is increasingly challenging in banking. Indeed, the Office of the Comptroller of the Currency said recently that combined with strong competition from both banks and nonbanks, staffing challenges present increased risks to banks.
Now is the time for ag lenders to find talent. With some banks and fintech companies letting staff go, it might be an opportunity to recruit new staff and get them up to speed in ag lending. At the same time, financial institutions should continue their digital transformation so they can handle increased ag loan volume more efficiently. Banks and credit unions have found that streamlining lending with ag lending software also enables them to handle increased loan volume without adding staff. Instead of slowing technology investment out of fear of a recession, financial institutions and others should be investing in the right digital initiatives at the right cost, according to research and advisory experts at Gartner Inc. Such moves “can blunt the negative effects of economic pressures in the short term and build long-term competitive advantage,” the firm wrote recently.
Automating the ag loan from application to loan onboarding allows experienced staff to focus on relationship development and higher-level analysis and decision-making rather than sending emails and chasing down documents. Online loan applications also make it easier for farmers and ranchers to apply when it’s most convenient, or for a lender to visit the farm and help fill out the application on a tablet or phone.
Develop and manage relationships with ag borrowers.
Ag lenders know that their relationships with farmers and ranchers go a long way toward winning more loan deals. Considering the current volume of new loan growth, however, retaining good customers or members may be just as important as looking for new ones until demand picks back up.
“If we have a hole in our bucket, it doesn’t matter how much stuff we bring in if we’re not retaining the clients that we have,” Newberry said during the webinar, “How to Position Yourself for Profitable Ag Loan Growth.”
Central to being able to keep good loans on the books? Maintaining relationships and proactively managing the portfolio.
One of the first steps for managing borrower relationships should be to determine or revisit what your institution is willing to do to keep existing ag loans. So even though ag lending has been slow for the last two years, now is the time for financial institutions to develop or dust off their retention strategies for loan portfolios.
Know up front what level of return on assets (ROA) or return on equity (ROE) the institution is willing to live with to keep a deal rather than having to find a new ag loan to replace it, Newberry advised.
Be proactive and talk about this with your lenders, he said.
It’s also important to be proactive with your borrowers. Keeping in regular touch with them helps you understand where they are with their supply of stimulus money and might keep you from losing a good customer who is approached by a competitor.
Using credit analysis software that provides narrative reports explaining in plain language how the business is performing or projections of how performance or profitability might change in various scenarios allows you to provide existing borrowers or prospects insight into their farm or ranch’s financial performance. That deepens the relationship and develops lending opportunities.
Newberry also suggests identifying credits that might be resetting in the near future. Even though financial institutions might be leery of interest rate risk, there’s potentially good money to be made.
“If you had [a borrower with] an operating line or you had a three-year balloon or five-year balloon, you might look to see if they’re a good credit and can you maybe you refinance them a little early to take advantage of the interest rate cycle,” Newberry said.
Understanding the loan’s cash flows and your ability to reinvest those at a higher rate going forward, as well as what it actually costs the institution to book a longer-term fixed rate product given rates today, allows the institution to make loans profitably, Newberry said. “You can leverage all the information in the market about raising rates to increase your net interest margin on that loan.”
Loan pricing software can help while creating consistency among lenders and more satisfied borrowers.
