It wasn't the first time a banker surprised farmers with an announcement about interest rates on operating loans. But it was a pleasant surprise last spring for the customers of First Bank and Trust, Paris, IL, when Larry Daily announced a unique program that rewards better risk management with lower interest rates.
"I want to see a written marketing plan with breakeven analysis within 30 days and I'll knock off 25 basis points (1/4%) from the operating loan," the vice president and trust officer stated. Daily explained that the bank would cut a check either for the 1/4% of the loan or at least $350 for those with smaller notes.
The reduced interest rate or flat fee covered the cost of developing marketing plans that Daily calculated would improve his customers' incomes and subsequently benefit the bank.
"Most bankers would think I'm crazy," he admits. However, this second-generation banker may be as crazy as the proverbial fox. Last year, by early October, one customer had already paid off his operating note of more than $150,000.
The innovative plan does make Daily "pretty much a Lone Ranger," concedes Denny Everson, senior vice president of First Dakota National Bank in Yankton, SD.
"It's a grand idea," says Everson, who chairs the ag bankers committee of the American Bankers Association. "Pricing risk is our (a banker's) job. The more risk you take off should improve your rate."
Everson knows of no other ag banker who is directly rewarding risk management but says that differential pricing of ag loans is common. One example is in Sidney, OH, where Richard Tangeman, assistant vice president of Firstar Bank, offers interest rates ranging from prime to prime plus 3%.
"As the asset-to-net-worth ratio improves or there's more equity or a better financial footing, they (farmers) are rewarded with a better rate," Tangeman notes. "It's something we've evolved over the last five years. There's definitely an incentive to improve your financial standing."
Daily's offer came at two bank-sponsored meetings that featured a speaker from RWA Financial Services Inc., a marketing consulting company in Austin, TX. All customers, not just those attending the marketing meetings, could participate. More than two dozen took Daily up. Some employed RWA's standard marketing plan while others wrote their own plans.
Customers weren't required to use RWA to qualify for the lower interest rate. Daily says he told farmers, "I don't care where I get it (the marketing plan) as long as I get it."
The bank didn't use any formal procedure for tracking market plan execution. Instead, Daily followed up "very informally, just by talking with producers" about their plans.
"For a start, it wasn't bad," he says, assessing both participation and results. "I'm hoping to do it again."