Cooperative Advantage: $4.8 Million Reasons it Pays to be a Member

[00:00:07.850] - Chris Griffin
Welcome to Back to your Roots, a podcast that provides insight into all things farming, financing, and farm life, guiding you back to your roots.

[00:00:17.530] - Chris Griffin
Thanks for joining us today. I'm your host, Chris Griffin.

[00:00:19.760] - Jordan Turnage
Hey, guys. I'm Jordan Turnage. Thanks for listening to us again. Today, we're getting to sit in the head shed with our CEO, Mr. Kyle Yancey. The big question we're going to talk about today and go over is patronage, what that involves, and the patronage refund program that we give back to our borrowers. Kyle, thank you so much for coming in. This is number three for us with you here in the office.

[00:00:39.740] - Kyle Yancey
Yeah, that adds up quick, but I'm happy to be here. I guess you can put me on here anytime you want to.

[00:00:50.360] - Jordan Turnage
Just walk on down the hallway and we'll get you in.

[00:00:52.300] - Kyle Yancey
Yeah, that's right.

[00:00:52.800] - Chris Griffin
We can do it.

[00:00:54.510] - Kyle Yancey
You all have got a script. I don't even have a script.

[00:00:57.160] - Chris Griffin
I've heard he doesn't need it anyway.

[00:00:59.460] - Jordan Turnage
No, ours are just suggestions.

[00:01:01.640] - Chris Griffin
He did a commercial today with no script.

[00:01:03.010] - Kyle Yancey
Exactly right.

[00:01:03.900] - Chris Griffin
He didn't need that darn script that Shea made. People that aren't customers of River Valley may not be as accustomed to the fact that we're cooperative and what that actually means, and the fact that we do give out patronage on an annual basis as long as it's available. From my understanding, you can say how many years in a row that's been out, and we've given that out. But can you explain, dive into patronage, what goes into that, and what does that look like for a borrowing member of ours?

[00:01:32.500] - Kyle Yancey
Okay, so I think of patronage, some people call it a dividend, similar to a dividend off a stock. Even though that's not what that is, it's based on the performance of the organization. For 30 years, we've performed well enough to where we've been able to give out $95 million of patronage, and we're adding from 2024 earnings $4.8 million this year.

[00:01:57.690] - Jordan Turnage
Say that again.

[00:01:58.970] - Kyle Yancey
$4. 8 million bucks.

[00:02:00.180] - Jordan Turnage
Yes, sir.

[00:02:00.530] - Chris Griffin
Say one more time for the people in the bag.

[00:02:02.900] - Kyle Yancey
For the people in the bag, it's 4. 8 million American dollars. A funny story about patronage because many people do not know what it was. It was me and Seth Carter and Shea, and we had somebody from the media. If she's listening, she'll know who I'm talking about. We were going around giving out patronage checks, okay? What would we do? Half a day's worth of work, Shea, and we're handing the people these envelopes. We get in the car. One guy decided to open up his, and it was somewhere north of $30,000 is what his check was. We got in the car, and the lady that was doing the reporting, she said, I can't believe that. She said, I thought you were passing out $50 gift cards.

[00:02:48.020] - Jordan Turnage
It's not small potatoes.

[00:02:49.610] - Kyle Yancey
It is real money. If you average it up, you can do whatever you want to with it. Some people go on vacation with it. Some people buy cars or clothes or whatever. But if you were to take that check and hand it right back to me and say, just add that as principal balance of my loan, it's an average of 1% rate reduction. So not only did you get a market rate, but you got a 1% rate reduction through your patronage check. And then you were probably called or will be called by a loan officer saying, hey, the rates are lower. I want to reduce your rate for free. I know some people that got probably a half, three quarters off their rate this year just through a note mod. So by the time you do that plus patronage, it's one and three quarter %. My question is, what is your bank giving you?

[00:03:41.570] - Jordan Turnage
Yeah, I mean, watch Family Feud, and you're not going to see those things come up for what a banker does. No other answers are going to come up. But let's go in deep on that. Let's talk about, so who decides how much the refund is each year and what's that based on?

[00:03:57.100] - Kyle Yancey
All right, so if you've ever been to a place that sells landscaping stuff, particularly waterfalls. This is the best way to describe patronage. You go see this water fountain, and at the top, it's spewing out water, and that water trickles into, I would call it a bowl. Somebody that's in landscaping will not call that a bowl, but I call it a bowl. That bowl fills up and the rest of it trickles out and goes into a bigger bowl. Then that bowl fills up and goes into another bowl, and then it's eventually returned. That is how the patronage program works and is decided. We make loans. We make loans to where those loans produce gross income to us. The first little bowl in that equation is operating expenses. You're talking about salaries and benefits of employees. You're talking about the light bill. You're talking about fuel for our company vehicles, operating expenses. Once that bowl is filled, you got to pay your bills.

[00:04:54.640] - Jordan Turnage
Sure.

[00:04:55.050] - Kyle Yancey
Once your bills are paid, it flows into another bowl called, let's just call it the capital bowl. And that is you set aside money for allowance just in case you were to lose on a loan.

[00:05:08.940] - Kyle Yancey
So every loan has some risk profile. So the best, strongest financial person could come in I'm going to get a loan, and I've still got to equate some money off to the side just in case they were to lose. You got the strong, then as credit deteriorates, the more you put into allowance. Then you also have to capture enough of the earnings that are flowing out of that bowl in order to capitalize your association for projected growth next year to meet regulatory ratios. Also, you want to capitalize it just in case your allowance wasn't enough and you had a really bad year, you've got capital to pull from. I think we're running, well, as of January, we had $134 million in capital, which is basically it's $134 million sitting in your business or your bank account. So once that bowl was filled up, that spills over to membership, and that is where the patronage refund comes out. We take that to the board, say, okay, here's the money available to go to patronage. They have the ability to say, okay, the capital bowl was a little too full, so let's make it a smaller bowl and spill more in the patronage and give a bigger refund to the members.

[00:06:26.610] - Kyle Yancey
If economic times worsen, they can say, okay, the patronage capital is probably a little too full. Let's hold back some for capital. I can tell you we haven't changed anything since 2016. We went to an all-cash patronage. So the formula for how a member gets their check has not changed at all since 2016.

[00:06:46.480] - Jordan Turnage
I hope that goes along with what you were talking about with us in a meeting we had previously. Some folks would say, well, you're given up more patronage now. That means you're charging too much for the loans or we're making too much money off of it. That is certainly not the case.

[00:07:00.650] - Chris Griffin
Actually, I had that at a realtor meeting the other day when I was talking about our ag real estate loans.

[00:07:05.340] - Kyle Yancey
The competition likes to say, well, if you got enough money to pay patronage, then you've got enough money, you're overcharging me for my loan. We do a competition analysis, Farm Credit is put here for serving rural America. We are not supposed to be the cheapest. We are not supposed to be the highest. We are supposed to be the most consistent. So, your rate or your product will not change depending upon economic times. The rate that is given to the borrower is based off of what market conditions are doing. It's based off the level of risk that is tied to the borrower. It's based off the loan amount. But at the end of the day, the patronage is based off the individual customer. So somebody that comes in and gets a sweetheart deal because we've had to compete with 100 banks that we have to get competitive on, their patronage refund will be a little bit less than the 1% rate reduction because we didn't make that interest off of them. But the average person... We have a pricing model to where everybody's priced equally. We actually are regulatorily required equal pricing.

[00:08:15.530] - Kyle Yancey
I bet banks don't do that either to keep it fair. We're in the market. We watch ourselves in the market quite a bit. If we eliminated the patronage program, the interest rates would not go down any because we still have to pay bills and we still have to capitalize the association. What would happen is we'd be overcapitalized, and you'd be a cooperative that was not functioning like any other cooperative that is around.

[00:08:41.060] - Chris Griffin
Well, yeah. I guess that's where when I had that realtor ask me that, I said, yeah, but your banks, they're not owned by the members. They don't have a share in that bank, typically. I said, we're a member-owned association. I think when you look at it like that, they're just getting back what based on our performance. If we do well, we have a great year, which we did last year, which I know this is off topic, but I also think that's pretty amazing. I've told people that how much we grew last year in a higher interest rate environment. I think that just speaks volumes for our loan officers and our relationship building and the type of people that we have that come back to us. But when you look at it that way, if you've got to share in a company, you want some type of dividend at the end of the year, and that's all we're doing. We're giving back.

[00:09:27.050] - Kyle Yancey
That's correct.

[00:09:27.500] - Chris Griffin
When we perform well, they're going to get a bigger We're patronage a lot of times. If we have a little bit lower year, like you said, or smaller year and don't do as well, then we're going to have to hold back a little bit more in some other spots, and that refund might be a little bit less.

[00:09:40.470] - Kyle Yancey
It was one year. I don't know if either you all worked here then. I can't think if it was 21 or 22, or maybe even 20. But our capital ratios got a little higher than what the board wanted them to. We actually did a special revolvement of capital. I think the check came out in two weeks before the end of the year.

[00:10:00.790] - Jordan Turnage
That special patronage. Yeah. I remember that when we gave that out.

[00:10:04.760] - Kyle Yancey
All that is, is that your cooperative at work? We could have kept that and overcapitalized ourselves, but the membership comes first.

[00:10:13.220] - Jordan Turnage
Absolutely.

[00:10:13.430] - Kyle Yancey
If we are above the goals that we set for our capital, that money goes back out to the borrower.

[00:10:19.260] - Chris Griffin
You're even talking about the membership coming first. I mean, even you talk about the patronage, even loans that we do, right? When we put somebody that's maybe a little worse credit quality or whatever that is, we're still not only am I working for you as our CEO and the fellow employees, but you're also working and making decisions that will affect the other members of the association.

[00:10:40.930] - Kyle Yancey
That's correct.

[00:10:41.500] - Jordan Turnage
We have to think about the whole shooting match.

[00:10:43.170] - Chris Griffin
Which is a lot different than a bank. They're bringing in deposits, they're lending off other people's money. It's just a different structure here coming from another bank. That's something for the listeners to keep in mind when Kyle says that. When we do well, you're just getting benefit out of that when we do well as an association and build good relationships and keep having people as repeat customers.

[00:11:07.470] - Jordan Turnage
Our passion is our people.

[00:11:08.760] - Chris Griffin
Yeah. I mean, that's lending a support for generations, isn't that right?

[00:11:12.990] - Kyle Yancey
That's right.

[00:11:13.220] - Chris Griffin
I could sing that jingo if you really wanted me to, but it's always been stuck in my head. How many years? You went in a really good detail, probably the best basic example and illustration that I've heard since I've been here. But as far as the Patronage fund, how many years has that given out? Has it always been something that's been part of the Farm Credit System? I know it was Jackson Purchase, ACA before that, and then River Valley.

[00:11:38.180] - Kyle Yancey
Yeah, there's Chattanooga Ag Credit. The patronage program started in 1993, and they weren't given out $4.8 million in 1993. But through performance from prior employees, existing employees, our business is the largest it's ever been. We've got the most number of members that we've ever had. The growth has added that to where a common number of 4. 8 should be the low, barring no economic black swan events. But as we continue to grow, I'll tell you this, the expenses don't grow as fast as the income has been the last few years. I'm kind of frugal. You all are laughing.

[00:12:22.580] - Chris Griffin
Yeah, we know. It's all right.

[00:12:24.800] - Kyle Yancey
So 4. 8 this year, we meet our goals, we meet our budget. We should give out more than $4. 8 million next year.

[00:12:32.360] - Chris Griffin
Yeah.

[00:12:33.140] - Chris Griffin
Funny story, which I'll tell you the name after we get off here, but there's a good friend of mine that did an ag real estate loan one of the first years I was here, and I didn't know much about patronage. I didn't explain it very well. When he got a check in the mail, he texted me a picture of it. He goes, Is this legit? I think it was a smaller aggregate estate loan, but it was $2,200 or something. It was a pretty good check. He was very confused. He was like, man, that is awesome. I was like, Yeah, I clearly didn't do a very good job explaining to you what patronage was my first year here.

[00:13:04.360] - Kyle Yancey
There's a lot of people that are like, well, you're overcharging me for my interest rate. Well, the way to solve that is to hand me your patronage back, put it on your principal, and there's your...

[00:13:12.170] - Chris Griffin
That's what most people do.

[00:13:12.850] - Chris Griffin
I would say the majority of people do that, and that's what he did. He came in and he was making extra payments anyway, and then he threw that extra $2,200 at the principal.

[00:13:20.310] - Kyle Yancey
It's all the same.

[00:13:21.330] - Chris Griffin
Yeah.

[00:13:22.530] - Jordan Turnage
Then that just helps them get it paid off quicker.

[00:13:25.470] - Chris Griffin
I always laugh about that story because he was like, is this legit or something like a scam? He was very confused.

[00:13:30.060] - Kyle Yancey
It's a nice time for it to come out because it comes out very close to tax season.

[00:13:35.730] - Chris Griffin
It does.

[00:13:36.810] - Kyle Yancey
You pay one day and then you get this check from River Valley another day.

[00:13:42.090] - Jordan Turnage
That's what my next question was going to be. We're getting close to patronage season. What is the best thing borrowers can do to increase their patronage checks? It's like a... do more loans.

[00:13:55.590] - Kyle Yancey
That's it.

[00:13:57.160] - Kyle Yancey
Crop insurance.

[00:13:58.160] - Kyle Yancey
The way that patronage would go up would be for the association to make more net income. If you want it to go up in a way that doesn't involve just through loan growth, you provide yourself other ways of making money. We call that on our income statement, financially related services. We sell credit life insurance, which I would recommend everybody to look into. We sell crop insurance. Any money made off the sales of credit life insurance, any money made off the sale of crop insurance, goes directly to the bottom line, the River Valley AgCredit. That goes directly into that water fountain that I was talking about. But it has no offsetting asset that's got to have an allowance tied to it or a capital piece tied. You don't have to capitalize that money. That is one way. Leasing. Instead of buying, leasing, we do a lot of grain bin leasing, we do a lot of farm building leasing, we earn a fee income off of that. That is how the patronage would go up.

[00:15:03.180] - Jordan Turnage
So everybody listening and tell your friends whatever ag you're needing, come to us because you're helping them and you're helping yourself because you're going to get a bigger patronage check by having everybody involved. And we've got the recommendation stuff, too, for folks. With patronage season just right around the corner, let's just talk about when patronage comes out and how is that done.

[00:15:24.110] - Kyle Yancey
We got two options now. We would typically just mail you your check, and it comes It's about sometime the first week of April through the middle of April. The other option is new this year. You have the option of signing up and have it direct deposited into your bank account. We've got a few people that have signed up. Actually, it was on a call yesterday. I don't know if you all were on it, but sometime in March, those that have signed up are going to see something from River Valley. It's a zero-dollar debit. Do you know what I am talking about.

[00:15:54.820] - Chris Griffin
Yes.

[00:15:55.320] - Kyle Yancey
It's basically proving that their account is working and ready to receive need the check. It'll be sometime between the first of April and the 15th of April.

[00:16:04.450] - Jordan Turnage
Just in time to help out with inputs for folks on getting that corn planted and fertilizer.

[00:16:10.050] - Chris Griffin
I definitely think people should take it. I know we love going out and giving out the actual checks because it's always great to meet your borrowers. Also, it's nice, too. You don't have to get the check and then take it back to the bank and everything else. If you still want us to come out, we're always up to go for a farm visit or visit our borrowers.

[00:16:27.660] - Kyle Yancey
We will come out. We're just going. If you did the direct deposit, we'll just bring a blank envelope.

[00:16:32.580] - Chris Griffin
We'll just bring one of those big checks and just dry erase.

[00:16:36.780] - Chris Griffin
Publishers Clearing House.

[00:16:36.790] - Chris Griffin
I think that's what we should do.

[00:16:39.220] - Jordan Turnage
Well, I think this is a good 30,000-foot view of how the patronage system works, how it's distributed, how it benefits our clients and our borrowers. Kyle, thank you so much for your time. I know you're a busy man. We appreciate you taking the time to come in here to help explain things and hopefully get a little bit of understanding because I know we're going to have commercials. We've got on our signs. We've got them posted on social media. Is there anything that we can help out as far as clarity with what we do as an association with patronage and showing that we do all we can to give back to our borrowers. You're the tip of the spear on that. We appreciate you and your time and works.

[00:17:16.900] - Kyle Yancey
Well, you're going to have to challenge me a little more for my fourth one. Patronage is easy.

[00:17:21.700] - Jordan Turnage
We'll see what we can do. I'm sure we can drum up something.

[00:17:23.640] - Chris Griffin
All I know is that people are going to get tired of hearing about patronage. I heard over the next...

[00:17:27.680] - Kyle Yancey
They are.

[00:17:28.590] - Chris Griffin
I like it. I think you sent out your second invite or something yesterday on Facebook, I think, is all you put.

[00:17:34.710] - Kyle Yancey
Yeah, I'm proud of patronage. I'm proud of the people that created it back in the '90s. I'm proud of the staff that have performed to allow us to do it. Honestly, you can come sit in our boardroom. I'm proud of the board. They want it all to go to the members. There's not a human involved with River Valley that doesn't want to make those patronage checks as large as they can be.

[00:17:56.110] - Chris Griffin
I know we're trying to wrap up, but I was just going to say one thing. You joked about being frugal. I've been here almost three years, and I know Jordan and I have talked about this, too. But it is nice. I mean, sometimes, you're like, man, why are we cutting back on that or being so conservative with that? But then when you're in a pretty good financial position as a company, your employees feel good about that because you know you work for somebody that's doing stuff conservatively and being frugal with the money that's coming in. I know we laughed about it, but that definitely doesn't go unnoticed, I think. Because I know sometimes you got to rein Shea in as your I'm a marketing person. I've seen that before.

[00:18:31.890] - Kyle Yancey
Sometimes she- The hardest part about being CEO is the first two months of the year because you really can't count money because you don't make much money in January and February.

[00:18:39.800] - Kyle Yancey
You just be stressing yourself out in the first two months.

[00:18:41.430] - Kyle Yancey
You sure don't want Shea over there ordering her semi load of specialties in January.

[00:18:46.780] - Chris Griffin
You should see how many raingauges we got. I know, 600.

[00:18:48.700] - Kyle Yancey
600 rain gages.

[00:18:50.800] - Chris Griffin
Hey, listen, I'm married to a business owner. When January run rolls around, it's like it's a totally different. I'm like, you were just talking back in December. Yeah, but it's a new year.

[00:18:58.670] - Kyle Yancey
I'm a totally I'm a different person. I'm like a gun-shy dog in January. I'm sitting there shaking. Then Beth gives me the financials for January, and I see we already made $784,000 for the year, so I can sit back and relax a little bit. But we are blessed.

[00:19:18.190] - Chris Griffin
Can you order hats now?

[00:19:19.460] - Kyle Yancey
I actually went in Shea's office. I said, you can order your specialties now.

[00:19:23.250] - Chris Griffin
I'm like, Yeah.

[00:19:24.600] - Chris Griffin
You can go ahead. I'll loosen the reins a little bit on you now.

[00:19:29.090] - Jordan Turnage
Even if you do the direct deposit for your patronage, we can bring you out a raingauge.

[00:19:33.530] - Chris Griffin
Yeah, I mean, you know.

[00:19:35.710] - Jordan Turnage
Well, guys, thank you so much for listening to us as always. This is the Back to your Roots podcast. For Chris, I'm Jordan. Thanks for listening.

[00:19:43.750] - Chris Griffin
Thanks for tuning in to Back to your Roots, where we dish the dirt on all things AG. Be sure to never miss an episode by following and subscribing. While there, leave us a review about what you want to hear next. Stay in the know between episodes by following us on Facebook, Instagram, Twitter, LinkedIn, and TikTok. For more resources, go to our website at rivervalleyagcredit.com.