This past year, a comment in an evaluation from the Wisconsin Bankers Association (WBA) Agricultural Lending School read, “Brad needs to write out all of his banker sayings.” I took that as a pretty meaningful compliment. The truth is most of these sayings aren’t original to me; they’ve been picked up from bankers and fellow instructors I’ve learned from over the years. They’ve stuck with me, and they continue to pass the test of time because they’re simple, relevant and they get straight to the point.
Good banker sayings endure because banking fundamentals don’t change nearly as fast as markets or technology. While they may sound like short, simple phrases, they offer real insight into how a banker is thinking about risk, relationships and, ultimately, how we’re looking at your operation. Let’s go over a few of them.
‘If you have the dirt, you won’t get hurt’
Not sure where this one came from, but it likely originated with a banker in the late 1970s or early ’80s, as it was essentially the slogan for lending deep into the real estate collateral value. The thought process was that real estate values would never decrease. So, as a banker, you would always at least have collateral to secure a loan, even when it did not cash flow. We all know that in the ’80s real estate values did in fact fall – a long way. In fact, they fell to the value that could be supported by its ability to generate cash flow.
The insight here, though, is that bankers really like real estate collateral. Why? Some additional sayings that bankers use when describing collateral for loans come to mind, such as, “At least the land can’t get up and move,” which is tied closely to “If it has four legs or wheels, it can disappear, die, rust or break down.” There’s also, “We all know that feed turns to manure.”
This is why bankers use discount factors when analyzing collateral values. They are not always going to rise, and the value can depreciate. Borrowing 100% of the collateral value on anything is generally a risky move. It means that if the cash flow capacity does not meet expectations and cover repayment, there is nothing left to do but sell the collateral.
‘Asset rich and cash poor’
This one is a reality of production agriculture as a whole, describing an operation that has a strong market-based balance sheet but struggles to generate a profit. This one is often misunderstood as it takes a deeper dive into what is really going on in the farm’s financials.
If we’re only looking at market-based balance sheets, appreciation in asset values can result in a strong-looking balance sheet, one that is trending positive year after year. This makes you a great investor, but it doesn’t tell you anything about how good a producer you are. If your balance sheet is only getting stronger because of appreciation in asset values, diving into earnings is critical. The prompt here is that you need to calculate accrual-adjusted earnings and reconcile them to the changes in the balance sheet (see online for guidelines). Be sure you understand why your balance sheet is showing improvement.
‘Hope is not a strategy’
This one isn’t exclusive to bankers. I first heard it from Sam Miller, who was my boss and mentor at the time. He used it when talking about the why behind a risk management plan.
The reality is that sitting on your hands and hoping for the market to recover is not a risk management strategy. That’s being a market price taker. Managing margins is critical more than ever right now. Understanding all the tools available and deploying them in a consistent manner separates the top 25% of managers from the rest. The key is to be proactive.
‘One year does not make a trend’
Dr. Kevin Bernhardt was the guy who introduced me to this one while we were reviewing market cycles at the WBA Ag Lending School. In a market conditions context, this is often tied closely to the “new normal” conversation. For example, when corn was over $8 per bushel in 2012, everyone was thinking, “Yep, this is the new normal. We will never see $3 corn prices again.” Yet we did.
We’ve all seen hot markets retrace, so be consistent in risk management. You can apply the same saying on the farm financial side. Just because an operation has one good year does not mean that will continue every year going forward. You need to understand why that year was particularly good. Is it truly a management shift or just the result of a hot market? Be cautious in using a hot markets continuation as the basis for your projections and go-forward strategy.
This leads to a bankerism attributed to Warren Buffett …
‘Only when the tide goes out do you learn who has been swimming naked’
That is, when the market drops, we find out who the truly good managers are. Those who were proactive in risk management, managed their details and built a high-performing culture. They will be the ones still making money despite shrinking margins. The current hot beef-on-dairy market gets a lot of attention here. Continuing to manage your dairy’s margin in all areas is critical, so when that market retraces, you’ll still have a viable business model, and the banker has a viable client.
‘New paint disease’
This is usually a diagnosis by a banker that a producer has some less-than-ideal capital purchasing habits. That is, they’re always buying the next best thing to try and solve a problem, while they miss the management steps needed to improve. It also shares timing with the previous comment, in that the diagnosis is usually made after one good year. The result is an increase in debt repayment requirements that shows up when margins narrow. The debt service of the new equipment becomes burdensome to the operation and almost always results in loan restructuring. The challenge is that a restructure costs the operation equity in that the payments have to be extended over a longer term, resulting in real depreciation outpacing repayment. The best managers have a planned capital budget year in and year out, resulting in consistent performance.
‘Team roping’
The idea that every problem that needs to be solved is easier with two people than with one, and that backup matters. On my team, it means that I always have a backup. This was critical while I was out of the office to support my wife after a farm accident a couple of years ago. Another banker stepped in to cover my accounts without missing a beat. She’s also a banker I lean on to solve problems with. Who is your backup on your farm? Who knows what you do and can jump in and keep things moving if needed? Does your team know who they back up? These questions are critical to your business continuity and culture.
Finally, Paul Salm, a co-worker of mine, shared a saying used not only in banking but life …
‘Success breeds success’
Culture, winning consistently, surrounding yourself with successful teammates – they all matter. Taking time to focus on success at all levels of your organization can help build the winning culture you are striving for. While not always quantifiable, culture is the “it” factor that separates the “A” players from the “C” players. A winning culture not only attracts more winners, it changes financial performance in a measurable way, compounding its impact over time.
Whether in banking or life, the phrase “make hay while the sun shines” still rings true. Insightful, truthful and wise statements pass the test of time by offering sound advice and direction that lead to wise decisions and, ultimately, success.
This article is provided for information purposes only. Readers should consult their own professional advisers for specific advice tailored to their needs. Information contained in this article may be subject to change without notice.
