Family farms define rural communities. Bankers help aging farmers transfer to owners who continue operations..Like other community banks in rural markets, the Peoples National Bank in southern Illinois is ringed by working farms, which often have been in the hands of the same family for multiple generations.These family operations not only feed the nation but anchor the economies of the area. “They support the seed, chemical and equipment retailers; the other local shops; the insurance agents and other professionals; and the schools and churches. If we lose those farms to big corporations, that all goes away,” notes Brian Gansauer, community bank president for the southern region of the $2.3 billion Peoples National. Moreover, the local banks active in ag services are tied to the viability of the family farm. “What would happen if there were only a few farms in a county?” asks Gansauer.Now, with the U.S. Department of Agriculture reporting more farm owners 75 and older than under age 35, that threat looms large.Nudging nudgingMany owners prefer to ignore the reality that they won’t always be running the farm. “I have heard farmers say, ‘My kids get along and love each other; they’ll work it out,’” relates Brett Olson, co-founder of Renewing the Countryside, a Hammond, Minn., nonprofit that advocates for farmers. “But I know of one case where there were six kids, and they all lawyered up and fought each other, “ultimately spending their inheritance on the fight.Mark Zierden, founder of TrueGrowth Consultants, Eden Prairie, Minn., who teaches ‘consultive banking,’ says that it’s part of any banker’s job to “help their customer achieve their financial goals.” It’s well within an ag banker’s purview as a trusted advisor to suggest succession planning, Zierden says.“You want to open their minds to what is possible.”Not that clients will immediately acknowledge the necessity of planning. “The goal is to respectfully challenge them to talk about it,” agrees Jeff Wolfgram, SVP, Landera Ag Finance, a division of the $3.1 billion First Dakota National Bank in Yankton, S.D. He suggests “taking good notes” on client conversations to persistently nudge action. “I might say: ‘The last time we talked you were going to meet with a law firm; how did that go?’”Their local banker may be best equipped to nudge planning, since they’re often farmers’ most trusted adviser, says Olson. Eric Reed, SVP and senior ag lender at Carmi, Ill.’s First Bank, adds that ag bankers “wear a lot of hats,” through working with ag clients over many years. “Sometimes you are a psychologist. We get to know all the dynamics of the family.”The ag officers of community banks are also familiar with local attorneys and tax professionals who they’ve seen help other farm families manage through the succession planning maze, and coordinate referrals. When passing on names, Zierden advises saying, “I would advise you to also consult with someone else for comparison.”Just like their farm clients, bankers should guard against procrastinating. “The earlier you start [bringing up succession], the better,” says Emily Schwickerath, community bank president and relationship manager at Bank Iowa, based in West Des Moines.Getting in positionOwnership structures, farm values, and successors’ financial abilities to buy vary, with each plan customized for unique circumstances. Current ownership, for example, might consist of married partners, a single owner, or a part-owner who operates the farm with siblings who each own shares, among other variations. Likewise, successors’ desires run the gamut: Some may want to continue operating the farm; some may want to immediately sell their share, while others want to hold on to their share to receive the farm income.Starting years before anticipated ownership transition is advisable, because owners and successors need time to determine and convey their wishes to each other. “The first thing we advise is have a family meeting, then talk to legal counsel,” shares Lynn Paulson, SVP of the $14 billion, Fargo-based Bell Bank.A lengthy headstart allows time for steps to ease financial hurdles heirs may face taking over operations, and perhaps buying out siblings. For instance, given today’s farmland prices, which can reach many thousands of dollars per acre, Gansauer notes that some owners transfer a portion of their assets to heirs before formal succession. Then, heirs buying the farm have downpayment funds.“If planning starts 10 years out,” Reed says, “that gives time for the owners to communicate what will happen with the family, and prepare. In some cases “there are ‘non-farm kids’ and kids who want to take over. The farming kids get the land, and the others get life insurance or other assets—it’s the owners’ decision.”Time is needed, too, to prepare a successor who wants to eventually operate the farm, but may be unfamiliar with certain aspects of management. “Maybe someone knows much of the operation, but isn’t knowledgeable about the financial aspects of management,” Schwickerath explains.Another scenario where lead time is an advantage is when owners have no heirs, or heirs who aren’t interested in keeping the farmland. Those owners may still want the land to remain a small “family” operation. “The local bank can have a good idea of who is out there willing to buy [and manage] the farm,” says Olson. For example, “They might have a client whose one child is taking over their farm, but wants more land for another child.”Moreover, when farmers hold their wealth in the value of their land, succession planning involves carving out a retirement income—another concern that professionals can advise on.Finding the right financingWhile bankers provide intangibles like references to attorneys and other professionals, arranging the financing that enables successors to purchase and start their own operations is their tangible contribution to successful succession. Often, a bank’s traditional ag loan menu of real estate, equipment and livestock loans and operating lines of credit are more appropriate for seasoned owners than for a new owner without a proven track record. But bankers might be able to tap state and nonprofit programs, as well as federal USDA-FSA guaranteed loans to package feasible financing for a new farmer.For instance, Schwickerath points to “a bond program in Iowa [The Beginning Farmer Loan Program] that will lower the interest rate,” making it more affordable. Many other states offer similar programs. “The Bank of North Dakota has[such] programs,” says Paulson. The Illinois Finance Authority, adds Reed, provides funds that allow bankers in the state to offer more affordable financing to successors.Moreover, a USDA-FSA option that is popular with many lenders is the “Direct Farm Ownership Down Payment Loan,” informally known as the “5-45-50” because it requires a five percent down payment, and then 45 percent is financed by the FSA and 50 percent by the lender. “We embrace the 5-45-50 as well as the FSA’s 50-50 program, where the farmer doesn’t put any money down,” says Wolfgram.Taking unique approachUnderwriting ag loans “is a blend of art and science,” Paulson observes. “The science part is the numbers, there are other intangibles like the work ethic Paving the way to succession and management skill” of a borrower, he notes.Indeed, many ag bankers grew up on farms, and may even still own farmland, and act as an adviser on operations. Schwickerath of Bank Iowa, who holds a degree in Ag Education from Iowa State University, says she’s discussed when it’s appropriate to diversify crops or add livestock. “In recent years, protein profits have made up for low profits in the crop market,” she says. When making long-term ag loans, banks often prefer selling off the loan to entities like Farmer Mac. When underwriting a loan that will be sold, or defined by outside guidelines, “the process is more efficient,” with specified documentation largely defining whether a borrower meets approval. By contrast, loans kept in portfolios often hinge on a loan officer’s judgement. For instance, in cases where a farmer takes on heavy debt in relation to expected farm income, bankers say they assess the borrowers’ determination to succeed. In some cases, borrowers “have to be willing to put some sweat equity into it,” working other jobs to earn extra income, says Paulson.Reaping retention and rewardsA successor is likely to retain the banking relationship when they are introduced by owners to the banker, and it’s even more likely to be a sticky relationship when financing is provided to the successor. “Helping farmers successfully transition ownership is critical to a bank’s ability to retain agriculture clients and support the communities they serve. Banks that are proactive in showing clients how a transition can work are better positioned to maintain those relationships,” said Jennifer Roths, senior partner, ag lending, West Monroe Partners.Because some community banks may run up against their lending limits, they often prefer to have a third-party arrange the funding, while still maintaining the lending relationship with the successor, Paulson notes.Besides the benefit to the bank to keep, and perhaps grow, business with successors, working to pave successions is particularly satisfying, says Wolfgram. “It is extremely rewarding to see the significant amount of pride both generations [owners and heirs] have in the farm. At the same time, it’s not easy to thread that needle.”
