Constitution Day

Everyone knows the significance of July 4 when we celebrate the signing of the Declaration of Independence in 1776.  This formed the basis of principles for the Constitution, which was signed on September 17, 1787.  I will speak to that more later in this post.  But first, I want to bring out the significance of the Declaration.  First, realize that the Declaration was written in a time when it was widely believed that the only way to have governmental stability was to have family appointed rule.  When the son of King George III wanted to marry a lady of lower station, he was forbidden.  This was happening the time of the Revolution.

Next, consider that the signers of the Declaration were marked men.  General Gage had an order to find and detain them as traitors.  Many of them paid the price they had outlined in the last clause of the Declaration, “we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.”

Finally, note that the Declaration opens by speaking of universal principles.  It does not portray the Founding era, people, or law as unique.  “When in the course of human events” means any time.  The phrase “it becomes necessary for one people to dissolve the political bands” means any people.  The Declaration appeals to a law that is beyond English law.  It cites obedience to the “Laws of Nature and Nature’s God” and certain principles that “all men are created equal with certain unalienable Rights.” 

Now the Constitution does not represent a break from the Declaration or a second founding of the United States.  If the founders had decided those principles in the Declaration were not needed anymore, they would have noted that.  So, the Constitution is a continuation, a building on those ideas.

And the Constitution has lasted.  Do you know what is the oldest government that is based upon a constitution?  Ours is! 

The Constitution begins with an acknowledgement that the ultimate source of power is not with the government, it is with the people.  It starts with “We the people”.  Nowhere does it cede all power to rule to a government.  It places limits on what the federal government can do.  The founders knew that without these limits, people are subject to their own passions which will eventually lead them to make rule over others for their own benefit.  The Constitution outlines powers that are allowed by the Federal Government and the Tenth Amendment leaves all other powers not delegated to the United States nor expressively prohibited by the States, is reserved for the States respectively, or to the people.  The Bill of Rights (Amendments 1-10) is also sets important boundaries of areas that the government cannot infringe upon certain individual rights.

Representation is another important guide the Constitution establishes.  This is who or how government officials are chosen.  House of Representatives and Senators are selected by popular vote (thought the Senate was originally chosen by State legislatures until the 17th Amendment).  The President is selected by the Electoral College which electors are chosen by popular votes.  Federal judges are appointed by the President with the consent of the Senate. 

The third principle is the separation of powers.  The Constitution is not set up where the President can make laws that stand beyond his administration without Congress, or the Supreme Court can legislate from the bench.  Article 1 outlines the legislative branch.  Article 2 outlines the executive branch.  Article 3 outlines the judiciary.  Each of these outlines what the branches can and cannot do. 

The separation also comes with a series of checks and balances.  The president can veto a bill from the legislature and the legislature can override the veto.  The legislature can impeach a president or judge and remove them from office for certain crimes.  The judiciary can declare laws as unconstitutional.  The president appoints judges with the consent of the Senate.  Each of these are designed again, to prohibit an amassing of power with one branch or individual.  If that were to occur, based upon human nature, it would eventually lead to tyranny. 

In my opinion, Constitution Day should be celebrated as much as Independence Day.  At a minimum, all citizens should be required to read the Constitution annually.  This should cause all of us to be thankful we live in our country. 

Ideas on Fixing the Student Loan Mess

August signals another return of many back to the halls of higher education.  It has also been that way in our household, as we currently have three currently in classes for a bachelor’s degree and beyond currently.  Thankfully, we have one who graduated with his bachelors this summer.

Higher education has become ingrained in our culture as a necessity to achieve in life.  Statistics shows us that on average those with a bachelor’s degree will earn more than those with a high school diploma, those with is masters earn more than a bachelor’s, and so on.  So, we push those in our society to seek more education to achieve more in life.

The only problem with this is that it costs money to do so.  Lots of money.  This is met with sacrifice in the family to pay for the education and when there is not enough savings to do so, it requires student and parent loans.  Personally, I think this is a factor that hits the middle class, those who make too much money for the student to qualify for grants and needs based scholarships but do not make enough to outright write a check for college.

The Federal Reserve Bank of New York now states that student loan debt has surpassed consumer debt in our country.  It was the only form of consumer debt that has grown significantly since the crash in ’08.  Americans owe $1.4 trillion in student loan debt; $620 billion more than credit card debt.  The average graduate in 2017 will have $37,172 in student loan debt to pay.  This number is up 6% from last year.  The repayment on these debts is a problem.  The average 90-day delinquency rates among the different age groups ranged from 8 to 16% in 2012.  The Fed also believes this rate is understated as much of the loans are in deferral.  Now as a lender, I know that to be successful, I need to be right 99 1/2 % of the time.  With such a high percent as a problem student loans, it seems this lending is very risky.

So how did we get here?  There are several factors.  First, college costs seem to have consistently risen faster than overall inflation and real wages.  So, if someone is going to college, they must borrow more today than they would in the past, since family wages are not keeping up with tuition increases.  In society, there seems to be little to allow for market forces to begin to check the rapid growth of tuition. 

This seems to have accelerated since 2010 when the Federal Government took over the student loan program, which for 45 years had been run in the private sector with government guarantees.  Couple this with additional governmental spending on education and we have large sums of money that are thrown at the feet of institutions.  Education costs are pushed up and those in the middle class suffer the most. 

So, what are some solutions to the problem?  One is we need to embrace the fact that we need people in our country who enter the workforce without any sort of higher education.  Skilled trades are sometimes looked down upon by those in the ivory tower of education.  Yet their contribution to the economy and raising a family without a large student loan debt of the primary breadwinner should be celebrated. 

Another possibility is to get the Federal Government out of the direct business of student lending.  Again, we know that a lack of efficiency here will just continue to have student debt grow exponentially.  Perhaps some of this should be taken on by the institutions of higher education themselves.  This could provide ongoing interest income for the institution.  It also ties the college into making sure the graduated student remains successful in their field to better insure the payback of their loans to the school. 

Schools need to become more efficient and governed by the market.  Students should have a rating of different classes and degree programs as how these will translate into projected future income.  If this income is not as great as the required debt to achieve the education, then perhaps a student loan should not be granted.  This is a hard topic to come to grasp with, as everyone will have different value of different fields of education.  But, simply if you want to have people pay back their student loans, they need to be in a field that provides enough income to do so.  This may help eliminate classes and courses of study that do not seem to directly benefit the student economically from the ability to have said class paid with a student loan.

Every college should provide a required course of study in personal finance and the relation of student loans to budgets, future income, and savings.  This should start early in college to help the student make decisions on fields of study.

Many universities are beginning to embrace various distance learning models that allow for the students to attend class and save money on room and board costs that would be found in a traditional college setting.  This also may allow students to continue to work in their present job while using spare time for classes.  This model of education should be able to be delivered at a lower cost than traditional class settings.  Everyone in my family has used distance learning for a portion or for all a degree program.

Innovative ways to pay for college should be explored by institutions.  At College of the Ozarks in Branson, Missouri, students work one of hundreds of jobs on campus to help pay for their education.  Classes and campus jobs are scheduled to avoid conflicts.  The school also operates with less employee costs as it gets much of the labor from the students.  This work, in combination with scholarships has students graduating with no student loan debt.  The college has a 64% graduation rate and students who enter the workforce at the national average for wages.  Again, all this is completed with no federal student loan debt at “Hard Work U” and the college ranks high among several independent university rankings and as a great place to work.

Thoughts from the Road

We recently took an extended vacation-son moving-business trip cross country.  We moved my oldest son to Florida, where his fiancée is working on her graduate school work at U of Florida.  Then my wife and I traveled down the Atlantic Coast, to the Keys, and up the Gulf Coast, staying several nights in each place.  We then went back to Gainesville and met my son’s fiancée, who was coming to the U.S. for her first time.  We then went to the panhandle and Alabama to visit some key CU partners.  Next we stopped in central Tennessee to visit my brother.  Then we went to Louisville, where I saw my younger son and my wife met a long lost relative.  The final leg of the trip was back to Missouri to see friends and my dad, and then the long trip back home. 

While along on the trip, I had several random thoughts…

There is something right in the world when you are laying on the beach and looking up at blue skies and palm trees.

There is something seriously wrong with me when I ignored my wife’s counsel to put on more sunscreen.  Heck, I am in the shade, what could go wrong?  I was pretty out of commission for a day with part of my body the same color as a lobster.

Everyone needs some time to unplug and enjoy things in life you normally would not do.  For my wife and I, this was the longest vacation with the two of us since our honeymoon, 25 years ago.  We were able to snorkel in reefs, see dolphins in the wild, go to the southernmost geographic point in the continental U.S., and see the sunrise and sunset over the ocean on the same island. 

The best places for smoked meat have large smokers inside or outside the restaurant.  Also, if the staff can tell you what kind of wood they smoke with, you are probably guaranteed it is good.  We had some BBQ at a dive in Fort Myers, which had none of those characteristics.  Consequently, it was a failure.  We hit a home run with Mission BBQ in Louisville.  The owners proudly announced he only uses red oak seasoned for at least one year and then took me back to see his twin smokers—Myrtle and Enda—named after his grandmothers.  This was very emotionally touching.

Take time to enjoy the joys of others.  My son’s fiancée is from China and she had the first opportunity to experience American things for the first time.  In each case, her enthusiasm was infectious and caused us to seek out other new experiences for her.  She was able to experience good smoked meat, root beer, a real burger (not from McDonalds), onion rings, trips to an American mall, trip to the ocean, and ability to see hundreds of stars for the first time.  Her joy and laugh was infectious.

Any trip that you take where you can spend time with all your kids after they have moved out of the house, is a really good trip.  Bonuses are when you spend time with your brother and get to hug your dad.

When all comes down to it, what matters are the relationships that you have in life.

If you have an intensive planner combined with a go-with-the-flow guy on a trip, the best result will be a mixture of well-planned events and spontaneous activities.

A successful trip seeing your older brother is one where you discover another thing to irritate him with.  Now that we have a family member who is a Florida Gator, I have to show him how they are superior to the Tennessee Volunteers!

It is always great to visit fellow CU brethren in their communities.  I was able to see some CUs in small rural towns all the way up to visiting the fine folks at Navy Federal at their complex.  In each case, there was a strong commitment to make their small corner of the world better. 

As I write this I have on the news about the devastation in Texas from the hurricane and its aftermath.  It breaks my heart across the country but is nothing compared to the pain those who are there experience.  Our hearts and prayers go out to these folks.

It is also encouraging to see people helping their neighbors, rescuing the stranded, getting folks to safety.  Their compassion and action shows one of the greatest sides of America.

The Problems with Character Lending

Recently, we have worked with some loans that seem to make little sense economically or in the credit sense.  In some cases, the collateral is weak, advance rates are too high, or there may even be no collateral to speak of.  Collateral is what you are left with whenever the payments cannot be made anymore from the borrower or guarantor. 

Some have no history of being able to support the debt but the projections look good.  Well, I have never seen any projection that does not look attractive.  If a projection is much different than the history, there needs to be a logical reason. 

Some had a lack of personal reserves to fall back on, either in liquidity or in guarantor cash flow outside of the company.  This, coupled with any weakness in the company, and lack of adequate collateral is a reciepe for a loss. 

In many cases, the reason for considering the request is the character of the applicant.  Maybe he is well known in the community.  Perhaps she has been a member of the credit union for decades.  The borrower may also have a long term roots across multi-generations in the community.  Maybe she has never ever missed a payment in the past.

While character is important.  You would not want to lend to someone who you think is not trustworthy and who has a history of following through on their promises.   But an over-reliance upon character as the sole positive reason to do the loan is dangerous. 

It is dangerous because the lender is making assumptions that the circumstances which the borrower has acted upon, showing honorable character, in the past, may not continue in the future.  This overlooks the importance of external forces upon the actions of the borrower. 

How do you know what level of pain the borrower will experience before they cease providing payment support for a business that is failing?  At what time does hope for the better future become replaced with fear and the guarantor just gives up?  When is the point when the sponsor can’t economically support the deal anymore? 

How many years of crop failure or low prices can the farmer survive?  How much negative cash flow can the manufacturer absorb until they are forced to shut down?  How long can the apartment building stay empty before the lender has to take it back. 

Oh, character is important, but there is a level of pain where the sponsor cannot economically support the project or there is a time when the willingness of the sponsor to provide financial support is overtaken by the fear and loss of hope for a better future.  It is at that point that the lender will be forced to close the business down. 

So when looking at a credit request if you find the only reason for you to grant the loan is because of character, consider what may happen if the pressure of the outside overcomes the good character inside the applicant.

Don't Focus on the How

My wife, at times, has accurately pointed out that I can become the killjoy of ideas in our family by focusing on the obstacles that must be overcome to complete the idea.  Sometimes I view life as a series of obstacles to overcome and in doing so, can take the wind out of the sails for a great idea.  I have had several instances when the people around me needed encouragement to go for it, rather than a picture of all the mountains that need to be scaled. 

Many who see all the obstacles just give up.  The world does not belong to those who are the brightest and smartest who can sit and analyze everything.  No, the world belongs to the C and B students, who have an idea and are dumb enough to try it because they do not see the obstacles.  Andy Stanley once said that when ideas are presented in our family or organization, we need to stop saying “How?” and start saying “Wow!” as our first response.

In 1971, Starbucks was founded with a passion for good coffee.  It remained a small store that caught the eye of its current CEO, Howard Schultz.  Schultz joined the company in 1982 to direct retail operations and marketing.  In 1983, Schultz travelled to Italy, and became inspired by the coffeehouse atmosphere there.  He came back to Seattle and tried to convince the owners that Starbucks should not just be about good roasted coffee, but that it should sell the social experience of a coffeehouse.  The board put up a resistance with the questions of “How?” but allowed the first Starbucks coffee house to be opened in downtown Seattle in 1984.

This coffeehouse was a success and Schultz founded a new company called II Gironale in 1985 to make drinks from the Starbucks coffee beans and sell them in the coffeehouses.  The original owners of Starbucks focused on bean roasting. 

In 1987, Schultz bought all the assets of the original Starbucks, changed the name to Starbucks Corporation, and opened stores in Vancouver and Chicago.  By the end of the year there were 17 Starbucks coffeehouses. 

We all know what has happened to the company since then and all of us have been in a Starbucks at least once.  For some reading it is a daily visit.  Why?  The atmosphere and good drinks.  But in case you did not realize, here are some of Starbucks accomplishments in 2015.

Launches Cold Brew iced coffee and Evolution Fresh™ handcrafted smoothies.

Announces sixth two-for-one stock split.

Commits to hiring 10,000 opportunity youth by 2018.

Expands Starbucks College Achievement Plan to offer full tuition coverage for all four years of an undergraduate degree for qualifying U.S. Starbucks partners. Commits to 25,000 partners graduating by 2025.

Reaches 99% ethically sourced coffee milestone.

Opens stores in: Panama (now, this was the 68th different country where a Starbucks was located)

Total stores:  22,519 (as of June 28, 2015).

Cleary Schultz was one who did not let the “How?” take the wind out of the sails.  Most landmark changes in an industry begin with understanding what are the one or two things that if mastered, will result in a complete paradigm shift in the industry.

So how many of you have heard of Handy Dan Hardware Stores?  In 1978, the CEO and CFO of Handy Dan tried to convince the rest of the leadership that they needed to abandon the small mom-and-pop hardware store concept and create a big box hardware store to grow the company.  This had not been really tried on a grand scale and the rest of the board focused on “How?” to the extent that they fired the two leaders, Bernard Marcus and Arthur Blank. 

Marcus and Blank were undeterred by the firing and kept focusing on their idea as they started up a new company.  Today that company, housed in Atlanta, now has 2,274 locations in the U.S., Canada, and Mexico.  The company now has 385,000 employees and had revenues over $88 billion in 2016.  You probably have not seen Handy Dan, but you probably have been in at least one of Marcus and Blank’s stores, The Home Depot.  Oh, and Blank also owns a little professional team called the Atlanta Falcons. 

Again, this is another case of a clear dream that focused on a key obstacle, that once overcome, would create a paradigm shift in the industry.  Personally, when I have to go to the hardware store, I will visit a large box store 95 out of 100 times.  These guys were dumb enough to ignore the obstacles the Handy Dan owners saw, and just focused on the “Wow!” of the idea.

So, the take-a-ways here are to identify the key obstacles in your industry and know if these are overcome will result in a paradigm shift like Starbucks and The Home Depot.  Encourage ideas.  When the ideas come, have your first response be a “Wow!” and not a “How?”.

The Need for Fiscal Policy Reform

We have just finished the past eight years with no one single year posting a growth in GDP over 3%.  This is the only time in U.S. history that this feat has been achieved by a president.  The funny thing, is that this occurred during a time of historically low interest rates.  The Federal Reserve has been doing all it could to stimulate the economy with favorable monetary policy.

The other type of policy is fiscal policy.  You will remember from your basis economics class, that this is a combination of tax, government spending, and regulation.  These combined can provide either a stimulus to or a brake on economic growth.  For the past half-decade, the actions or inactions of the federal government has served to stimulate the economy like an anchor impacts the speed of a boat.

Jamie Dimon, CEO of JP Morgan Chase Bank, echoed some of these concerns in mid-July when he said to his shareholders, “It is almost embarrassing being an American citizen … and listening to the stupid s— we have to deal with in this country, the inability to make headway on significant legislation is holding us back and it is hurting the average American. It isn’t a Republican issue; it is not a Democratic issue.” 

Our government was created to be a servant of the people, not the ultimate ruler over everyone.  Our founding fathers bowed their knees to God and not the government as the ultimate Source of law.  Whenever that principal is lost, the moral compass that guides us is lost as well. 

So, what are some practical things that can be done to correct fiscal policy?  First on taxes, lower the corporate tax rate.  We have the third highest corporate tax rate in the world behind the United Arab Emirates and Chad.  A significant lowering of the rate would encourage more business to house more of their productive capabilities within the U.S.  A lowering, and simplification, of the personal tax is needed as well.

Next, government spending should be looked at in terms of efficiency.  Most government programs begin with a good idea to help people, but within a few years the goal of the program is to perpetuate and grow the program, not help the people.  Any organization conspires against the mission of said organization unless it is checked constantly. 

One example of this comes from England.  Someone in the 1990s asked why the British government was using resources to paint smokestacks dark.  This was a constant process that went on and on.  Well, it originated in WW2 when the dark smokestacks made it harder for German bombers to find and destroy factories.  This work was still being performed fifty years later!

A very sad example in our own country came on June 15, 2017.  President Trump ordered the government to stop work on the Y2K bug.  This eliminated dozens of requirements for different agencies, including one alone that consumed over 1,200 man hours annually.  This is utterly ridiculous that an event that occurred over 17 years ago, and had no impact after that was still consuming government time and resources another 17 years later.  It was not sad that Trump stopped the Y2K work, it was just sad that no one before him had done this.

The last area is to reduce regulations.  CUNA has a campaign to eliminate red tape in favor of common sense regulation.  Take banking for an example.  Have you ever stopped to think of the number of regulations and agencies that impact banking?  You have the CFPB, OCC, SEC, FDIC, NCUA, Federal Reserve, FCA, USDA, SBA, FHFA, FSOC, Treasury Department, Fair Labor, and state regulators, to name a few.  These folks have created more FED regulations than there are letters in the alphabet for more rules than one can easily count all in the name of protecting the consumer and making banking safe.  I do agree that a safe banking system is important.  But, most of these have the tendency to drive up the cost of banking services to the customer and make it harder to work with credit unions and banks.  In some cases, this is again the impact of the organization conspiring against the very mission of the organization.

These actions have created a large nexus of power and money in Washington DC.  In 2012, five of the six wealthiest counties in terms of average wage were located around our capitol.  I don’t this this was what was in the minds of the founders.  All this occurs while it seems impossible to get major legislation completed that will actually help move fiscal policy forward. 

Term limits may help as it is necessary to have fresh faces with different ideas in Congress.  The current turnover rate in the legislature is less than the Soviets had in their Politburo.  Also, I favor tying their salaries to a combination of performance in the U.S. economy and the federal budget.  Maybe a performance based system will create the proper motivation we need to kick start economic fiscal policy.

A Plan to Fail is a Failure to Plan

From time to time as lenders, you will have a face-to-face meeting with a borrower who is in trouble.  If you have not had this opportunity, it is because you have not been in the industry long enough or you have not lent enough.  This will also be a requirement that many lenders will have soon, especially those in post boom oil regions or those in troubled ag areas. 

I recently had one of these meetings.  Basically, the meetings are made up of three things: (1) what has happened to get the company to where you are now, (2) where are you at now, and (3) what is the plan to move forward?  I find that utilizing financial analysis tools available to the lender can help with the process, especially parts 1 and 2.  Many problem business owners need some assistance to show exactly where they are currently and how they got there.

It is amazing how many firms have not had a full written down business plan that they refer to on a consistent basis and update as often as necessary.  When your economy is booming, planning is often thrown out the window.  All the focus is on how to handle the mass of business that is coming in today.  There is no strategy for the future.  Each day is an exciting journey as the rudderless ship is blown to and fro as the strong winds of customer business push the sails as they want. 

But when the economy turns, a multitude of weaknesses will show up.  Warren Buffett once said, “When the tide goes out, you can see who was swimming naked!”  Well, when the business goes out, you get to see which owners are exposed!  Hopefully it is not ones you have lent to, but as luck will have it, you may undoubtedly have a few bare bottoms showing up in the sand that are your borrowers.  I believe the biggest single item that causes this exposure, is a lack of an executable plan for the firm.

So, it was with my borrower.  They had a great idea of what caused the problem and where they were currently.  They had even made some positive changes with restructuring debts, lowering supply and labor costs, and beginning to find new lines of business.  Good, good, good.  But when asked about what the plan was, the owners had some ideas, but nothing written down and nothing established that they were following.  They were in a lot of ways, the rudderless ship. 

Undoubtedly you will face this circumstance in lending.  It is up to you to provide guidance, but it must be done without directing the borrower into actions that can cause you lender liability.  You need to carefully lay out some options and allow the borrower to select.  This plan must be theirs, it cannot be yours.  However, if the plan requires debt restructuring, it must have the lender buy-in as well. 

The business required a shift from customers from one industry to customers who are not dominated by that one industry.  This way, any industrial downturn will insulate the company if they are diversified.  Our goal was to help identify factors that would be required to put in place to begin to put a rudder on the ship and steer the company forward.  We left the borrower with several questions and ideas to follow up on.

Eventually, we hope this will be the impetus for a workable business plan that can be shared among the organization and will help steer the company out of their problems. 

About ten years ago, I had a similar discussion with another problem borrower.  We showed our financial spreads to the company with industry averages.  In the meeting, we identified three problems, low gross margins, inadequate capital, and too much debt.  That borrower took all we had to heart.  They installed better bidding software and set a more realistic threshold for profit margin.  Then they brought in money from family to help recapitalize the company.  The final piece was to sell off a division of the company that was profitable, but kept them from their core business.  These proceeds were used to retire debt. 

In my last meeting with the owners, they informed me of a new problem.  They did not know what to do with all the extra money they had!  The company had reinstalled their employer match to the 401k and made up for some of the lean years.  They also began some strategic expansion in areas that made sense with their business plan. 

A failure to plan is a plan to fail.  I do not know of many people who wake up and say, “Today, I am really going to fall flat on my face!”  But I do know of many who have no direction as to where they are going.  It goes back to the old adage, if you aim at nothing, you will surely hit your target!

When Leaders Must Challenge the Process

In 1987, Kouzes and Posner published the book The Leadership Challenge.  It is still a classic today for leaders and continues to be republished.  The book is not an individual leader giving their ideas, this is two researchers who interviewed a lot of leaders to reach the conclusions in the book with results that are data based.

In the early part of the book, they bring up the idea of challenging the status quo or challenging the process as key to growth in any organization.  The writers argue that this is part of the leaders mandate for successful organizations.  Progress is always proceeded by change.  Change is always proceeded by challenge.  If something is going to get better, someone must come along and say, “Hey we have to make this better” before improvement. 

Now for young leaders, the execution on challenging the status quo may not always be completed tactfully and thus may not be welcome.  In my first managerial job in banking, I ran a branch that the proceeding branch manager retired after twenty years of service.  Our branch was one of the smallest in the organization and I wanted the branch to grow.  So, I came in all guns-a-blazing with all sorts of new changes to make us better.  I also submitted great ideas that would change the savings and loan as a whole. 

About two months into my tenure, my boss sat me down and showed me how for my leadership to be effective, I had to watch and listen to those longstanding employees under me and expect a slower pace of change.  I also had to challenge those things that were in my sphere of influence as giving ideas for other areas was not always welcome. 

Challenging the process must be linked to a picture of a preferred future.  The leader must cast a vision of what the future needs to be to have folks agree and decide to achieve that desired goal.  Challenging the status quo is not comfortable.  One thing we often fear more than being wrong is being irrelevant.  When a young leader begins to challenge the status quo of an organization that older leaders have been a part of for a while, it does feel personal as many times the status quo may be the older leader.  Also the older leaders have brought the organization to the current place. 

The task for older leaders is to listen to the new ideas objectively and without fear of personal assault.  Everything that is good has a shelf life and the great ideas of the past will probably not be the great ideas of the future.  Take music for example.  I remember the great improvement in music when I was a kid, moving from 8-trac tapes to cassette tapes.  Then when the Sony Walkman came around where you could take your music with you on a hike or run, wow I thought we had reached nirvana.  But then cassettes gave way to CDs.  CDs gave way to I-Pods.  I-Pods to now streaming music from your phone.  When I want to listen to music when I work out or a podcast, I just call it up from my smartphone.

We would be still using the cassette Sony Walkmans today if no one had challenged the status quo.  And many of those ideas had to come from the next generation of leaders.  Leaders can get stuck in “happy-dance land” where we are fixated on the past successes without looking to the future improvements.  The truth is also that the next generation leaders will probably come up with solutions for the next generation problems.  I want to be in an organization that is open to these ideas and older leaders need to not be threatened when these ideas come up and provide support for the younger ones.

This does not mean a complete abandonment of the path that has been taken to get us to the present place, as experience is invaluable and can avoid mistakes and pitfalls of youth.  But this process of mixing the inexperienced, fresh ideas with the old, established ones is more of an art than a science as the mixing of predictable systems and new ideas must mix carefully like a fine dance.  Much of this success comes from the culture we create of listening.  It will require leaders to go through a lot of bad ideas until we reach the good ones.  We can only benefit from these new ideas or we won’t.  The only way to benefit from them is if we know what the new ideas are.  The only way for us to know what they are is in an environment where the new ideas are free to rise to the surface easily and avoid creating an atmosphere where next generation leaders feel they are not listened to.

Andy Stanley once said, “Leaders must challenge the process, precisely because any system will unconsciously conspire to maintain the status quo and prevent change.”  If we are not careful, we will wake up one day and find out that the firm we have created is set to sabotage the reasons we created it in the first place.  Have you ever felt you had to work around your company to get your job done?  Andy Grove, former CEO of Intel said, “Success breeds complacency, and complacency breeds failure.”  So, the worst thing we can do is to remain in happy dance land as that will lead to future failure.

If this is the responsibility of the leader to initiate, what are some ways this can be done?  First, ask newer employees to rate the company.  This should be done at regular intervals during the first two years of tenure.  It is easier for a new set of eyes to look at the organization objectively, than it is for a seasoned staffer.  Also, find ways to see how your organization is seen by the outside world.  One of the vendors we use does not exercise this strategy and causes massive frustration for the Pactola team.

Next, create a culture where ideas can be freely advanced, debated, the good ones kept, and the bad ones shot down.  This requires mutual respect of all parties.  The young ones in the company must be OK with advancing the idea without fear of reprisal.  They also must learn to accept that the denial of their idea is not a denial of them.  Seasoned veterans must be open to new way of doing things that may bump them outside the status quo they created.  They also must not take new ideas that may contradict what has been done in the past as a personal attack.

These healthy debates must be kept within the confines of the organization.  Everyone needs to feel free to be critical of the processes if that criticism stays within the lines of healthy debate inside the company.  Also, this must not turn into factions or backbiting.  Once you get outside the four walls, everyone needs to be a raving fan. 

Creating this culture is easier said than done.  It is up to the leader to set the tone and often requires the leader to move off their own status quo.

Agriculture News from Washington

This articles highlights some of the legislation and regulations in the past few months that will impact our farmers, ranchers and rural communities.  As I am live in the Dakotas and we are in the throes of a drought, the USDA has opened up grazing for livestock on CRP land in the Dakotas and Montana.  This is welcome news and hopefully will help ease some of the stress ranchers have seen as many are taking more cattle to the market as they cannot find enough food for them. 

Another big potential impact for ranchers is the opening of the Chinese market for American beef on June 30.  This comes a week after announcing the halting of the imports of Brazilian beef because of safety concerns.  China has closed its doors to U.S. beef imports since 2004.  The reopening of the market of the most populated country on the earth will create more demand for ranchers. 

Agricultural trade is critical for both farmers and the U.S. economy as a whole.  One fifth of all agricultural production is exported and every dollar of exports brings in $1.27 of economic activity.  Each billion dollars of ag exports supports 8,000 jobs in the U.S. economy as well.  It is essential to find ways to be competitive on the world stage with our agricultural products.  The current administration appears to be focused on expanding American exports and opening up new markets. 

The EPA and the U.S. Army moved on June 27 to rescind the 2015 ruling on the Waters of the U.S. (WOTUS).  The old ruling had some possibly onerous consequences for farmers with possible federal regulation of water on their land that would not have been considered under federal regulation prior to the 2015 ruling.  Hopefully, this will eliminate more potential federal government red tape to the farm. The new WOTUS will set standards back to those traditionally set by court decisions, agency guidelines, and longstanding practice.

"We are taking significant action to return power to the states and provide regulatory certainty to our nation's farmers and businesses," said Administrator Scott Pruitt. "This is the first step in the two-step process to redefine 'waters of the U.S.' and we are committed to moving through this re-evaluation to quickly provide regulatory certainty, in a way that is thoughtful, transparent and collaborative with other agencies and the public."

Agricultural Secretary Sonny Purdue named Anne Hazlett to lead the Rural Development Agencies in the USDA.  This includes the Rural Housing Authority, Rural Business Service, and Rural Utilities Service.  Her appointment indicates a more important role that Rural Development will play.  She reports directly to Secretary Purdue.  Previously, Rural Development leaders reported to an undersecretary who then reported to the Secretary of Agriculture.

President Trump also created an interagency task force overseen by the Secretary of Agriculture that has heads of 21 different federal agencies involved.  The Interagency Task Force on Agriculture and Rural Prosperity will identify legislative, regulatory, and policy changes to promote in rural America agriculture, economic development, job growth, infrastructure improvements, technological innovation, energy security, and quality of life.  Hopefully, positive changes for rural America will result from this cooperation between agencies. 

Bigger is Not Always Better

The scene is a board room in Atlanta, Georgia in the mid to late 1990s.  Around a long board room sit various executives of Chick-Fil-A who are involved in a long debate about the future of the company.  At that time, Chick-Fil-A’s main competitor, as viewed by the top leadership, was Boston Market.  The companies both had similar products at that time.  Boston Market had also announced a major expansion plan where their goal was to top a billion in sales by the year 2000.

This expansion caused great consternation among the leadership at Chick-Fil-A.  The debate that day was how to be bigger, how to grow.  If their main competitor was targeting sales so lofty, would they become a distant memory in the minds of the fast-casual diner?  So many different strategies were presented and discussed in that meeting.

At the end of the table sat S. Truett Cathy, the founder and CEO of Chick-Fil-A.  He seemed disengaged through most of the meeting.  Then suddenly, he began to bang his fist on the table and continued to do so until the room was quiet.  All eyes were on him as he spoke.

“You have been consumed with how to make Chick-Fil-A bigger, how to grow.  You are focusing on the wrong goal.  You need to focus on how can we make our company better.  If we are better, then our customers will demand we for us to be bigger and growth will come naturally.” 

These comments framed the direction of the company from that time on.  Chick-Fil-A became focused on how to measure their restaurants and how to improve on all areas of their business.  The obsession with growth faded away and a new focus on quality emerged.  Oh and by the way, in the year 2000, Boston Market filed for bankruptcy, and, Chick-Fil-A topped a billion dollars in sales!

Cathy’s goal established a culture of continual improvement.  What we are doing today may be fine, but I must be willing to sacrifice the sacred cows of today to be better tomorrow.  Programs, processes, and procedures that we follow religiously today, will have to change in the future.  This corporate culture has the characteristic that permeates everyone on the team to “make it better”.

Chick-Fil-A began a passion to pursue quality, from the single customer experience to larger decisions of opening stores.  At the single customer level, phrases for a team member to express thanks to a customer like “my pleasure” were initiated.  This customer focus is not lost in any restaurant.  To keep quality control, Chick-Fil-A owns every one of its restaurants and is very selective about who can open a new store. 

To keep the culture of “make it better” means that everything must be continually evaluated.  Andy Stanley once said, “only what is worth doing is worth evaluating.”  A process of continual critical evaluation in what we do is necessary to determine what steps to take to improve and what changes must be made. 

Most leaders find evaluation easy when failure hits or when the wheels fall off the wagon.  Those are the times the emergency staff meetings are called to triage the problem and find the source and solutions to fix the issue going forward.  Most leaders find it less intuitive to evaluate what is going right.  This leaves leaders’ attention to all the squeaky wheels and totally ignores things that run smoothly.  If you ignore those items that work well, you will not know how to build on the successes that you have achieved. 

If you want to establish a culture of “make it better” you need to have an open forum that allows team members to be free to express critical ideas about the organization.  Extra emphasis should be placed on new employees as once folks are part of the team for a couple of years, they become ingrained into the culture.  One idea is to have your employees do evaluations on your organization every six months for the first two years. 

Another is to look critically at both successes and failures.  If you have activities that are not worth evaluating, then perhaps you should not be doing them.  Take time to evaluate to make changes where necessary and duplicate the success where there is some.  Chick-Fil-A discovered how positive customers felt about their experiences at the restaurant when they were treated with extra kindness compared to other eateries.  As they built on this, more people brought in more revenue, which created more growth. 

Better before bigger may require the sacred cows of today to be in the BBQ tomorrow.  Encourage critical assessment of your programs and processes while embracing the mission and vision of the organization.  If there is a better way to execute on your overall mission than what you are doing now, don’t be afraid to change. 

Rain, Rain, Come Again

My oldest made the trip home this weekend from his job in north central South Dakota.  Along the way he noted that he was seeing fewer cattle than he normally observed along the way.  He also noted that some fields that a month ago were full of wheat are now being baled into hay.  It is a sign of the times.

The latest US Drought Monitor has all of North Dakota, almost all of South Dakota, and the eastern third of Montana in a drought as of June 20, 2017.  A big portion in east Montana is rated as extreme, as spots in the Dakotas are.  Most of the rest is in the moderate to severe drought area.  The drought is beginning to move wheat prices higher, as the crop yields and quality is expected to suffer. 

Drought is a win-lose situation, if you are in an area not impacted by the drought, you will have a higher price for your commodity.  If you are in the drought area, you don’t have the commodity to take advantage of the higher price.  The other problem with this drought now for the Dakotas is that it comes after we are a few years into this commodity super-cycle of lower prices.  The days of high wheat prices in 2012 and 13 are but a memory now.  So, farmers have been dealing with much lower gross and net revenue streams over the past several years.  Many of you are now dealing with maybe the second year of how to deal with carryover debt that has not been resolved yet.

This will have a negative impact on the lenders in the area as well.  Note that not only the producers of grain and cattle, but also small town businesses are also going to be negatively impacted.   Dr. Kohl of Virginia Tech, believes that these factors will cause up to 30% of operators to liquidate in the next few years.  I think in areas where the weather is not favorable, that number will be even higher. 

Now is the time, and for many of the lenders, you have already been assessing this, to identify additional risk you may be prone to and seek to exit relationships where you can.  Kohl outlined ten credit risks in a recent article and believes that if you have seven of them present and can exit the relationship, you should.  With the drought, that number may be lower.

1.        Trade volatility-movements in the commodities markets can easily cause an operator to sell for a lower than break-even price.  Your producers need to know where their break-even price is at and what protections they are undertaking to protect them from operational losses.

2.       Living expenses-we often come across lenders who want us to underwrite deals with lower living expense factors.  These rose rapidly during the good price times and take longer to come back down.  The ND Ag farm record reports the median family living costs at $72,000 annually.  If the farm operation is too small and the only source of income is from the farm, it is likely not profitable enough to cover family living expenses. 

a.       Here also watch off-farm sources of income.  Before the price peak, spouses would often have jobs off the farm to provide extra income and also cover insurance costs.  When the prices rose to the stratosphere, some quit their day job since the farm was able to take care of their family expenses and more.  Now that pattern has flipped.

3.       Non-farm capital expenses-watch out for the new toys, personal vehicles, high end vacation homes, boats, retirement houses in Florida.

4.       Cash flow margins and taxes-poor cash flow margins and poor tax planning may result in too much taxable income.  Also watch managing from tax records without factoring in accrual adjustments. 

5.       Debt concentration-if you have too many loans to small operators with too much debt or too many loans to operators in poor producing areas, these both cause problems.

6.       Collateral complacency-the lender who thinks they are so well secured that they can lend without covenants or proper controls may face losses that devalue their collateral position.  Always focus on cash flow and look at collateral value with suspicion. 

7.       Regulator overreaction-regulators have acted moderately so far.  They have provided warnings but have not brought down the hammer yet.  When that does change, there has been a tendency in the past to overreact and force the lender to push out too many loans quickly with will result in excessive legal costs and more losses.  Take time now to cull out the portfolio in a sound manner.  Also make a practice to not go into collection on a credit where you have not warned the borrower at some point in writing if they do not perform, that you will request to be paid off.

8.       Alpha pups and dogs-Alpha pups expand just for the sake of expanding without considering the need for profits and capital.  Alpha dogs expand wisely and strategically to cover these bases.  Are you dealing with a borrower who has either of these tendencies?

9.       Fraud-watch out for this as the time gets worse.  Grain checks do not show up at the lender’s door or farm critters may disappear.  Equipment may also be an issue.  Farmers may trade in your collateral for something else without telling you. 

10.   Next generation-changing the farm operations and ownership from one generation to another can be a challenge.  If the farm is too small to successfully produce sufficient net revenue for the family or if the young farmer is too leveraged, it will set up the farm to fail. 

Kohl said that if you have 7 or more of the above present, you need to exit the relationship.  This may be too lenient.  If you see 3-4 of these characteristics, it is time to begin planning to move the relationship or to at least begin using strong controls to manage the farmer.  The presence of any one of them warrants a discussion with the borrower. 

The last significant ag downturn we had lasted for 7 years.  We are sitting in year 3 or maybe 4 in the present challenging times.  I don’t see the issue of the low prices ending soon.  Couple this with some poor weather and you have a formula for disaster for marginal producers.  Only the ones large enough and who have enough price and operational expense controls will survive. 

When the producer is hurt, the next one hurt is the lender.  Now is the time for a more aggressive stance to managing your farm credits.

Do You Have a Culture of Continual Improvement?

There are a couple of things I know that are true about change.  First, for us to improve in life, it requires change.  Second, what is very good today may not cut the mustard tomorrow.  Third, if you do not improve, someone else will leave you in the dust.

We see these characteristics in finance all the time.  Think about all the different changes to the delivery of financial services that have hit over the past decade—internet banking, using an app to bank on your phone, online mortgage and loan products, texting payment, crowdfunding—just to name a few.  Now would any of these items ever come up if credit union and banking folks decided in the year 2000 that what we have now is all OK and there is nothing ever more in the future that is needed to improve the communication of delivery channels between the client and finance professionals.

We must hoist the sacred cow upon the alter of improvement and start the bar-be-que if we are to ever grow as a company.  For this to work best in an organization, it requires a culture of continual improvement.  This concept is so important to some companies that you can find it as one of their core values.  But even if it is not identified as a core value, you still need a heart seeking attitude of how we can do better.  How can you grow?  If you don’t it is like my Aunt Lil used to say, “Once you have fully ripened, the next step is that you start to rot!  So, stay green and learning in life!”

This desired culture requires that you take time to inspect everything that you do to see what can be done better.  Many times, it is easy to do what we call the “spilt milk” analysis on something that went wrong.  In my last banking job, we took time periodically to do this with loans that went bad.  Sometimes, we could identify things that we failed to do at underwriting that would have mitigated some of the loss.  It is easier to look at a failure and analyze what could be done better.

We don’t often think about inspecting the times we succeed.  Often that time is spent on celebrating.  But with every win, there are key actions that should be repeated for the next success.  There are also those areas where further improvement can be made.  Recently, Bill Belichick, coach of the New England Patriots, was asked what other things he would want to accomplish in his coaching career before he retires, as he is already one of the most successful coaches in professional football history. 

“Well I just want to have a good practice tomorrow.”  was his reply.  This shows a commitment to continual improvement.   It also shows a method to break down what needs to be done in small steps.  It is easy to make today better than yesterday.  It is nearly impossible to make this year better than last.  But if you work on making each day better, you will accomplish the latter goal. 

Continual improvement creates momentum in the organization.  Momentum for items that are new or improving, can be one of the best friends of a leader.  A leader who is trying to swim upstream against a tide of negative momentum in the company, often fights losing battles.  I found this out years ago when doing martial arts.  If you can use the momentum of your attacker, it is much easier to get him to fall.

So, once your organization has decided that you will be committed to continual improvement, your next step is to brand that.  You may not want to just call it “a commitment to continual improvement.”  Maybe terms like “make it better”, “finding new solutions”, “grow outside your confines of yesterday”, or “do more today than yesterday” express continual improvement in a catchy way that the team can latch onto.  This language is important as you can drop it in your conversations with others in your company.

After branding it, the next step is for the leader to model continual improvement.  A leader must show that he/she is getting better personally to motivate the team to do the same.  The question here is if everyone in your area is doing the same things you are doing to get better, are you improving or are you just keeping busy each day.  If you want continual improvement as part of your culture, you must show it intentionally each day. 

The next step toward making continual improvement a part of your culture is to teach it.  Teaching a concept always helps you master that concept or skill.  We see that on our end when we teach lender classes.  This does not necessarily mean that each leader must get up and give sermons on continual improvement, but it needs to be sprinkled in normal conversations and may include an occasional sermon.

Andy Stanley gives five different questions that need to be answered when you teach a behavioral concept that you want in your organization.  You need to wrap your culture characteristic around each of these questions on a continual basis. 

·         What it is?

·         Why is the characteristic important?

·         What will it require of us?

·         What does it feel like once we have that?

·         What is at stake if we have it and if we do not?

After continual improvement is taught, the next step is to institutionalize it.  Now this is different for different companies.  It may include items like allowing your new employees to evaluate the company once or twice in their first year of work.  Another idea is to do a review of every major event once an event is complete.  We eliminated the traditional employee review process for a quarterly check-up that has many ways a team member can judge what is working and what it needs to be changed.

The final step is to recognize or reward continual improvement.  People will repeat those items they are rewarded for.  So, this can be publicly rewarding things that team members do to improve.  This encourages further innovation and initiative.  These items can be small or they can be large. 

You can probably guess now that this process is one that requires it to all be repeated, over and over again, in a company if they are committed to getting better each day.  Sometimes, a good place to start is to see what are you doing that is old and tired with your staff or clients.  Sometimes seeing that will help put ideas in your mind of where to begin the path of continual improvement.

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In other news, do you know who has silently become a giant bank that you do not think of as a bank?  Amazon!  Amazon reported that Amazon Lending Service has surpassed $3 billion in loans to small businesses since it started in 2011.  In the last 12 months alone, Amazon has loaned over $1 billion to businesses.  This helps the business expand and hikes up sales for third party merchants, which provides another Amazon revenue stream. 

Amazon Marketplace VP Peeyush Nahar stated, “We created Amazon Lending to make it simple for up-and-coming small businesses to efficiently get a business loan, because we know that an infusion of capital at the right moment can put a small business on the path to even greater success.”

The rate of repeat business is high as over 50% of the 20,000 small businesses that use Amazon Lending, end up taking additional loans.

So the lesson here is if you only think your main competitors for lending will always be banks, you are wrong.

Similarities and Differences in Consumer and Commercial Sales

Credit Unions tend to do quite well with serving their membership.  This service involves expanding the share of wallet of the member, whereby more of the financial services used by a member is supplied by the credit union.  Many CUs have a strong sales cultures that raise the awareness of their membership for the various consumer services they offer.  Some even go as far as measuring and rewarding successful efforts on the sales front, in a healthy sales culture.  We saw last year the results from an unhealthy sales culture with Wells Fargo!

But can a consumer sales culture be transformed to a commercial one?   Before leaders implement this change, it is good that similarities and differences between the two marketplaces are explored. 

A big similarity is that both areas require a command of the products by the loan officer.  In consumer, you must understand the different loan types, pricing matrix, and parameters that you will do loans in.   Commercial requires the ability to assess, manage, and get paid for the risk in the credit.  The discovery period for commercial risk is much longer than consumer risk and often involves assessment of several additional factors.  In the end, members on both sides enjoy working with people they view as competent and knowledgeable. 

One big difference is the sales conversion cycle is much different in consumer and commercial.  The consumer cycle is often shorter and is transaction oriented.  The member comes into the credit union needing to finance a new car or to open a checking account after they have moved to a new city.  Typically, this occurs after the individual has already researched and made their decision on what they need and which institution they want to use.  The transaction becomes the springboard into building a relationship and the initial cycle is short.

In commercial, the sales cycle is quite varied and can be very long at times.  Relationship building begins well before the loan is closed and often may take years to develop.  Often, showing that you are competent and can deliver for the business over a period of time, is what is needed for the business borrower to open up to you when a request with the primary institution has been delayed or denied.  The “no” answer in many cases is really “not now” or “not in the way you presented it to me”.

A commercial loan creates a bonding relationship between the company and lender, whereas many consumer activities are more transactional in nature.  Once the MBL is closed, ongoing check-ups are required to monitor the health of the business and assess if there are any changes to the risk profile for the borrower.  Most consumer transactions do not require frequent check-ups on the borrower if the payments are made timely. 

One key to success on both sides is having various folks that send business to you.  We call those centers of influence or referral sources.  On the consumer side this could be car dealers or residential realtors.  Commercial centers are often commercial or land realtors, economic development entities, attorneys, and accountants.  Developing relationships with these folks can help to drive commercial business your way.  It also requires getting out of the office.  I believe that much of the consumer side is reactionary to a member coming in, while the commercial side has success based on going out. 

Advertising is also different between the two lines of business.  Consumer advertising is often dominated by a special rate or program.  Commercial marketing is creating more top of mind market awareness in the community.  Rate cannot be decided upon until the financing request and risk inherent is known.  Also, starting out the MBL conversation with rate, places the lender at a huge disadvantage in the negotiation.  It also makes you gain business by often being the low-cost leader.  That is not a position that most smaller and many larger institutions want to get into. 

Both sides will require lenders who are great listeners, highly skilled in their field, and creative in order to long term success.  My hope is whatever area, consumer or commercial, you will win on the field that you play on.

Estoppels and SNDAs, Which to Use for Lending?

At times when financing real estate with commercial tenants, lenders will use legal forms called Estoppels or Subordination, Non-Disturbance, and Attornment forms.  Now I have never seen these for a residential rental and I have not seen them for smaller commercial deals or small leases. 

The most common document for a lease administrator is the estoppel.  This document is usually sent by the property owner or management company to a tenant, whenever the owner is refinancing or may be selling the property.  Either way, the estoppel is to find the executing party to specific statements of fact.  These may include certain details about the lease terms, rental rates, maturity, and status of any breaches of the lease contract from the landlord or the tenant. 

The purpose of the estoppel is to benefit third parties, like lenders, who may not understand the details of the landlord-tenant relationship.  Courts have held that a landlord can’t use the estoppel against a tenant.  An example her may be if the tenant has “agreed” that the landlord has not overcharged for common area maintenance charges.  But care must be given by the tenant when asked to execute the estoppel.

A more detailed form is the SNDA.  Actually, this is three agreements in one.  The first is subordination.  This permits the lender whose lien is junior to the lease (usually because the lease was recorded before the mortgage was recorded), to be recognized as superior to the lien of the lease.  Once the lender’s lien is superior, in the event of foreclosure, the lender can eliminate all junior liens.  Most lenders will insist their loan is in a first lien position.  Most property owners recognize their property is more valuable and attractive to a lender if the lease is subordinate to subsequent mortgages.  Most landlords will have leases that frequently include provisions that declare the lease is subordinate to the mortgage.

The next part of the SNDA is the non-disturbance section.  This section protects the tenant and allows the lease to stay in force if the tenant is not in default.  A tenant who has a long-term lease or who has spent a large sum of money for their custom tenant improvements, has a big vested interest in having this section in place.  This section may need to be added to the lease, as many of them may not include an adequate provision here.  For the lender, the SNDA means that if the tenant is not in default, the lease remains in place, even after foreclosure.

The final section is attornment.  This section protects the lender and it binds the tenant to fulfilling the lease terms, even after the lender forecloses on the property.  This is necessary in some states where lease agreements are extinguished during foreclosure.  This creates a bond between the tenant and the third-party mortgage holder. 

Many of the SNDA agreements also have a survivorship clause where the agreement will continue if the lender on the property changes due to refinance, lender merger, or loan sale to a third party. 

It is also worth noting another document here that is executed with the mortgage or deed of trust, and may be included inside that document.  This is an assignment of rents.  It allows the lender to step between the landlord and tenant to collect rents in the event the property owner fails to make payments in a timely manner, yet continues to receive rent payments from the tenants. 

It is important for the commercial lender to have knowledge of these forms--estoppels, SNDAs, and assignment of rents—when working with commercial tenants on a property you are financing. 

Graduation Thoughts

May is the time of year that we see many completing degrees or finishing high school.  My oldest son, Zach, just completed his bachelor’s degree.  One of our team members, Trevor, finished his MBA. 

One thing that is typical of graduation are graduation speeches.  Typical themes in these oratories are often like these: “the world is waiting for your talents”, “you are entitled to great things”, or “what you have completed today is your first step to lifelong success”.  Often, these speeches are filled with clichés and ideas that just are not true with real life.  So, in the effort of being realistic, I offer some of the following.

The world is not waiting for your talents and does not care who you are.  Once you begin a new job, you always begin as the new guy.  Your boss and co-workers already have a set way of doing things and often the new folks on the team will take more time and energy and may be viewed as a distraction by some in getting their work complete.  You must go out there and prove yourself.  Even if you are the number one draft pick on a professional sports team, you still have to prove yourself. 

You are not entitled to anything.  This is the unfortunate carry over of how we have coddled children throughout their lives.  We do whatever we can to insulate them from hardship and disappointment.  We now have snowflakes who think they have a right not to be disappointed, offended, or hurt.  About the only thing I can guaranteed that you will have are problems and obstacles.  It is how you approach those that will refine your character.

You will experience failure and success, not only success.  I have always learned more from my losses than I have from my wins.  Take to heart Winston Churchill’s thoughts, “Success is going from failure to failure with great optimism.” 

Learn persistence to stick through the tough times.  Quitters will never make it to the finish line.  Often the true people who finish the race may not be the smartest or most talented.  They are the ones who want to finish it, more than the others around them.  They decide to push forward, no matter how bad they may want to quit and lie down.

You have only started to learn what you need to know.  Completing a degree is wonderful, but you have barely started to learn what you need to succeed in life.  Commit to life-long learning.  Realize that your best education will happen outside of the classroom.  Treat every day as a new entrance into the school of life and learn all that you can.

Never forget to be full of gratitude.  Take time each day and set aside special time at the end of the week to thank those who have given to you of their time, talent, and treasure.  Never allow yourself to become so important that you lose sight of being thankful.  It helps you to stay grounded.

Find out who you are and your purpose, then live it out.  We all struggle with these questions.  You need to discover the answers and then orient your life to fulfilling your missions.

Never lose sight of the power of one individual.  A single person can have incredible power to make a difference in the world, once they out their mind to it and devote their energies to the cause.  Don’t just settle for what can be done in the group.  Work to excel in whatever roles you have personally and those in the group.  So, go make a real difference. 

The Time Factor

The scarcest resource we all have is time.  We are all allotted a specific time here on earth.  How we spend that time and the relationships we invest in, will determine our legacy after we are gone. 

The time factor plays an important role in business decisions.  It is often overlooked when deciding whether to invest in a new piece of equipment, capital asset, or even developing your team.  There is a tendency for the leader to just look at the dollars and cents on the surface and fail to grasp the true underlying costs and benefits. 

Can you imagine what our world would be like today if people decided to not purchase an automobile since the initial cost of a horse is cheaper?  What about how many cars would be in the world today if the investment was not made to building the assembly line for manufacturing?  I would guess it would have been cheaper to not spend the money on the assembly line.  But, imagine the limitations in production if cars were built in a big building with no organization.  Maybe workers have cars in different sections of the plant and put the car together at their own pace and each in a different way.  The lack of streamlining the production method would slow output to a snail’s pace.

So, the question is what areas of your business have you not invested in to increase efficiency and are still stuck in the pre-assembly line days?  Now if you do not have the financial resources to make the investment, that is one factor.  But if you do, you need to consider the time factor when deciding. 

The first impact of time is how much time will the new item save in staff time.  This is sometimes overlooked when a company is faced with a decision involving a capital outlay.  A little over a year ago, we began to look at what was a large capital investment for Pactola.  This was hiring a software engineering company to write a program for us that is used to securely save our loan file data.  The cost was expensive.  But when we looked realistically at the time savings from the investment, we estimated this would pay for itself inside of 14-16 months of saved staff time.  When we looked at the capital outlay in that fashion, how could we not make the investment?  Considering the time factor should be a portion in your decision process.

The next factor on time is to figure out how can time savings be better spent.  So, is your organization better keeping things as they are now or are you better to make the investment and utilize this time in other areas?  For us the answer was easy, time saved can now be spent interfacing with credit unions and other deals we need to underwrite.  In economics, this is known as opportunity cost.  The basis is that every time you engage in some activity, you are sacrificing time that could be spent in another activity. 

Our highest and best use of time is to serve you to make you successful in commercial and agricultural lending markets.  So, reasonable capital investments that will keep us on tract toward our overall mission, are warranted.  This is also driving us to make the next improvements to the PacPortal.  This summer we should have our secure file sharing platform upgraded to provide notification to users of significant file changes when we send it.  The upgrade will also provide some significant time savings on our end and make the upload process much quicker.  This time savings will help us fulfill our mission. 

Tackling the time factor may involve the slaughter of a sacred cow in your organization.  Now sacred cows make great steak but slaughtering just for slaughtering can create its own waste of time.  Before the sacred cow is killed and the feast ensues, you must ask if this action moves the organization forward.  If the answer is yes, then sharpen the knives!

Staff time and opportunity costs should be considered when looking at a capital investment as well as the obvious cost of the asset, cost of installing the asset, ongoing maintenance costs, and education specifically tied to the equipment.  When all those factors are considered, the high cost of the asset may be more affordable than you realize.

Are You Up or Getting Up?

In one of my banking jobs in Missouri, I worked with a Business Development Officer named Roger.  Roger was one of those people that you wanted to hang around.  He was always positive and every time you left a joint call with Roger, you felt like you had grown an inch in your own character development.  Everyone liked being around Roger, since he always made those around him, better. 

Roger was also very positive.  He once told me, “Phil, I am never down.  I am either up, or getting up.”  It is in that statement that one of the most profound truths in life reside. 

The first thought that came to my mind is the scene in the movie Chariots of Fire, where Eric Liddell is in a foot race and is knocked down by another runner as they go around a turn.  The movie slows down as it shows Eric rolling to his feet and then running as fast as he can.  Soon, he reaches the last runner and then passes him.  One by one, each runner is passed by Eric until he passes the last one and wins the race.  By the way, if you have never seen this movie, why haven’t you?

There is a temptation to look at those who are successful and think they have had it easy, that all the breaks have gone their way.  We use terms like “lucky” to describe them.  This view is incorrect.  Successful people have the same challenges, struggles, and problems as the rest of us have.  They have been knocked to the canvas, or stuck out more times than they can count.  We should not consider them immune to the struggles that all of us experience.

The difference is the winners refuse to wallow in self-pity on the canvas when they are knocked down.  They just simply get back up.  And when they are knocked down, they get back up again.  It reminds me of a saying by Winston Churchill, “Success is going from failure to failure with great enthusiasm.” 

Every one of us gets knocked down.  It is not a matter of if you get slammed to the ground, since we all will be there.  The question is what are you going to do once you have a severe blow.  Will you just lay there?  Or will you say, “This defeat does not define me.  I am to get back up.  I am to enter into the arena again.”  It is those people that are successful. 

Calvin Coolidge once stated, “Nothing in this world can take the place of persistence. Talent will not: nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not: the world is full of educated derelicts. Persistence and determination alone are omnipotent.”  Persistence is getting back up after you are knocked down.  Then it is getting back up again when you fall. 

Remember, both successful and unsuccessful people will be knocked down, have obstacles, and fail at times.  We all have these and we all will.  It continues as long as we are alive.  The question is, do we get back up?  So I encourage you to be like my friend Roger.  You can be either up, or getting back up!

A Clear Vision for the Path Ahead

When we lived in Colorado, we often made trips back to see family in Missouri.  On one of those trips in November, we started out with a wonderful 70-degree day in Pueblo.  We traveled up to Colorado Springs and stopped for gas.  As I was filling up, I noticed a massive wall cloud coming quickly from the west and a sharp cold biting wind hitting my face.  My wife received a call from a friend for us to watch the weather as a storm was approaching quickly.

The next stretch of road we traveled on from Colorado Springs to Limon was US 24.  Now this is a stretch of road winding through the eastern Colorado plains that has one lane in each direction.  There also are not a lot of towns the road goes through and the trip usually took a little over an hour.  We left the gas station and I noticed that the temperature had already dropped below 50. 

Within 20 minutes the temperature had plummeted to the upper 20s and the cloud was overtaking us.  The wind whipped up and tossed our SUV back and forth on the winding road.  In another 5 minutes a blizzard started.  Snow flew so thick in front of us that we were forced to crawl along at under 20 miles an hour.  Sometimes, you could see the taillights of the car in front of you, and most time you could not.  We were part of a group of six cars that snaked slowly through the blizzard in white out conditions. 

There is a verse in Proverbs that says “where there is no vision, the people perish.” If you have ever been driven in conditions where you cannot see, you can understand how this verse can be true.  I did find out where the term white out came from.  Three hours later, when we finally passed out of the storm into clear skies, white was the only color in my knuckles as they clutched onto the steering wheel.

Sometimes organizations can lose their vision.  This could come from a lack of clarity of purpose.  It could be the result of a failure of the group setting dreams and goals.  It may come from being lost in the everyday tasks and forgetting the bigger picture of where we are going.  To combat this, many companies have created vision statements. 

A vision statement starts with a dream.  When we arrive at our destination, what will it be like?  What will we be like?  What experience will our stakeholders be able to talk about?  What will others say about us? 

That dream needs to be turned into goals.  And not just regular goals, but great goals.  I believe every one of us has built in them the desire to be great and to be part of something great.  For a credit union, it may be to reach a certain asset size, expand their territory into a certain geographic footprint, or achieve membership numbers of a certain percentage within your community.  It may be as simple as just being viewed as the best financial resource that your membership has.  In their eyes, you will be great!

The vision needs to be communicated and embraced by everyone in the organization if great things are to be achieved. This characteristic is found in every individual or group that excels and achieves great things, even at times when there are unsurmountable circumstances arrayed against them.  We witnessed this earlier this year when the New England Patriots scored the last 31 points in the Superbowl to defeat Atlanta.  At one time with 8:31 left in the third quarter, the Patriots trailed 28-3 and were given a 0.5% chance of winning the game.  I think the difference was a clear vision that every team member bought into and a commitment for everyone to do their job to fulfill that vision. 

Recently, in our strategic planning retreat, we formed the beginning framework of a vision.  Now like all visions, this one will change over time and there may be some adjustments as we move forward.  Our vision is as follows:      

                “Pactola is a leading resource in the industry serving financial institutions throughout the United States by assisting them with commercial and agricultural lending.  Our work helps our stakeholders meet their goals by:

·         enlarging their impact in their communities;

·         elevating their vision to the possibilities around them;

·         exploring options, they believed impossible in the past; and,

·         expanding their reach.

We have expressed this vision in various ways over the past few years.  We want to make credit unions able to compete head to head with large regional banks and WIN clients.  We want to be known by 80% of the credit unions in the United States who do business loans.  We want to be the best MBL CUSO that is constantly sought after for our expertise.  We want to make you better.

If you have not joined us, now is a great time to.  If you are part of our group, we stand ready to help you in 2017 to make this your best year yet in making a real difference in your business and farming community.

Why is Your Credit Union Here?

I thought of this question this Sunday afternoon.  Our church is going through a sermon series designed for the listener to answer two large questions of, “Who am I?” and “Why am I here?”  Answering these questions are fundamental to finding direction in one’s life.

But what about an organization, specifically, what about your credit union?  Who are you?  Why do you exist?  When this question is asked, we often begin to hear of stories about how the credit union was founded, decades ago.  That story tells how you were started and not who are you and why you exist.  Many of you are in institutions which look vastly different today than they did at the beginning.  The field of membership may be different, the size of the institution, the leadership and team.  For many, who you were when the CU was birthed, does not have any implication as to who you are today. 

Organizations that achieve success, like people who achieve success, have an answer of who they are and why they are here.   Many times, this begins with a mission, vision, and values statements.  Many organizations have them; the best ones live the statements.  They are defined by them. 

Now if your CU has a mission, vision, and values, that is a good start.  But can you go to any employee and have them tell you what these are?  Often, these ideas are put down on paper and buried in an employee handbook or in a lunchroom on a wall.  But the staff does not really, really own these words as a guiding force for their daily actions.  Many of these may just be words thought up by the marketing or HR departments and not those of the team as a whole.

To be transparent, at Pactola, we operated the same as many other institutions where there was no ownership of our mission, vision, and values.  We had these drafted in our employee handbook, but they were drafted by myself and there was no common vision among the team and board as to what we should be.  No one, not even the author of these ideas, could recite them if asked to.

Now this did not mean that we wandered aimlessly from day to day.  We had a code of action, vision, and ideas that ruled our work.  We just never set down these ideas on paper.  I think our situation is similar to many other organizations.  Perhaps it is the same as yours. 

So, a couple of weekends ago, we held our first retreat with the board and our staff together.  Some of the tasks we completed was to form our mission, vision, and values as a group.  This is now something that we can own together.  Now these ideas are subject to some adjustments as we want every word to be impactful. 

Our Mission is to facilitate your success in the commercial and agricultural lending markets.  When you think of business lending in your community, you will think of established banks of local, regional, and national size.  These banks may have established departments and seasoned lenders.  They may have a customer base that is something you wish you would have.  Well, our mission in helping your success is to help make you compete with the commercial banks in your area.  This competition is not always on the cheapest rate or the highest leverage.  Our goal is that you will become a trusted financial advisor in the areas of commercial and agricultural lending in your communities. 

This means that you will be spoken of around the table at the local coffee shop when the farmers gather.  When the economic development authorities in your town have a new project, they will begin to include the credit union in the mix.  We are here to help you shine.  Just think of us as the guys in the background who are hooking up the power to your floodlight. 

I will write more of our vision and values later.  But the important point here is that in your life individually, as well as in your credit union (or whatever other organization you are a part of) knowing why you are here is essential.  It is the first step to aligning your team for success. 

Start at Home When Searching for MBLs

There is a question that is asked of every credit union after they have realized the importance of business lending to their membership.  Business lending is one of the best ways to serve your membership and your communities.  It truly makes a difference with establishing relationships that create employment, increase wealth, and fulfill the dreams of owners.  In many ways, it helps the credit union take its rightful seat at the table of economic progress in the community, when new companies are discussed with local economic growth officials.

Once that decision is made on what you want your credit union to look like in relation to your area that you serve, the question comes up.  It also is asked in shops that have seasoned commercial or agricultural credit departments at times as well.  The question is, “Where do we find our next commercial relationship?”

You will note that I said, “where do WE find…”  This begins with the recognition that commercial is much different than the consumer and mortgage lending credit unions do so well.  It is common to utilize mass marketing, rate specials, Realtor days, or auto shows to generate quick, transactional loans.  But commercial lending is much different.  Mass advertising of anything other than to raise awareness that we offer this service, often has the result of bringing in the rate shopper or the relationship that has already been turned down with several other banks before it lands on your door. 

Commercial prospecting is that in and of itself.  It requires work to seek and develop good business relationships.  At times, it will seem as though you need the patience of Job!  One of my largest clients was a construction company that I called on for five years before we landed substantial business.  Quitting along the way, which was very tempting, would have not yielded the desired results.  Persistence in relationship developing is a good topic for another blog.

So, asking, “where do WE find…” is the first step in realizing that the journey into business lending is much different that the transactional nature of consumer. 

Since business lending is based upon relationships, the starting point must be with your own membership base!  Undoubtedly, you will have small business owners, landlords, and entrepreneurs as members to your credit union.  This often can be the low hanging fruit as these people already know and like you.  You also know them and may understand more about what companies may be a good credit fit for your institution.  You understand the character of the owners. 

This may seem a simple and obvious place to start.  You may believe that all your members know that you are work with commercial and agricultural lending.  But I continue to be amazed at how many long-time members of credit unions with seasoned MBL departments, fail to realize that their credit union does business lending. 

Start with going through your membership list and identifying the successful farmers, business and property owners that are already working with you on the consumer side.  Perhaps, some may already use you for business deposits.  Now it is time to deepen that relationship with introducing them to your business department.  It is also important, now, to not let the size or complexity of the deal intimidate you.  Now is the time to listen and learn what the member’s need is.  We also are a resource to help you.

With all other things being equal, people enjoy doing business with their friends.  You may have already established deeper friendships than some of these businesses have with their local banks.  It is time to deepen that friendship.  It is also time to seek out new friends with successful business owners in your community that to not yet use your credit union. 

We stand by to help and support you.  Our mission is to facilitate your success in the commercial and agricultural lending markets.