ABA Banking Journal
By Brian Nixon
Minnwest Bank, a $1.6 billion institution serving Minnesota and South Dakota, makes no bones about posting its commitment to agricultural customers prominently on its website. “Agri-banking through thick and thin,” the bank says. “We’ll see it through.”The words are apropos in the Upper Midwest and throughout rural America, which is under stress from low row-crop commodity prices. Even so, despite a difficult and challenging economic environment, there is opportunity for both producers and ag lenders. With record low interest rates, producers are looking to restructure debt for the long term.
Faced with that demand from ag customers, banks have had to respond with creative—dare we say, innovative?—solutions that meet producers’ needs while mitigating their own interest rate risk concerns.
“It’s no secret that the ag economy is in tougher times right now,” says Dan Koster, who is one of Minnwest’s regional presidents. “What we’re doing is educating our borrowers and customers about proper debt structures, proper performance matrices, and really trying to help them to structure their businesses and finances so that they can withstand any downturns in the economy.”
The goal is one of helping producers position themselves to weather the current down cycle and to be ready to participate in the better times that will eventually follow.
Roots in rural America
Minnwest, which is based in Redwood Falls, Minn., executes this strategy with the help of an experienced team of bankers with farm backgrounds who understand the particular challenges producers face. “I view our competitive advantage as our lenders,” Koster says. “The lenders we have for the ag sector by and large come from the farm. They have grown up there. They understand the business. They understand the dedication it takes to be a successful farmer or agribusiness.”
Those lenders work with a fairly diverse client base because Minnwest’s $550 million ag loan portfolio reflects a broad production swath.
“We have corn and soybean growers,” Koster says. “We are big into livestock lending, particularly in the financing of cattle and hog operations. We have specialty crop growers like sugar beets, sweet corn, peas and edible beans. We also have organic growers on the crop side and organic dairies that we finance.” These customers all have specialized needs.
“Our philosophy is each business owner in the ag sector is a unique person, a unique individual and a unique business,” says Koster. “It’s our job and responsibility to deliver services that really benefit each one of them. We try to design our packages—whether its loan packages or the service part of our business—to really fit each customer.”
Such an approach requires a creative touch combined with sound analytics. “I view our lenders as really architects or engineers who go in and design a debt structure piece that helps that customer,” Koster says.
When done right, producers are better positioned to maximize potential and operate profitably for the long haul. “We view ourselves as part of their advisory team,” Koster says. “Our lenders are part of our customers’ advisory team, giving them ideas and helping them to prosper.”
It’s also important to note that lending is part of an overall products-and-services package. “We try to team up—really do a team approach—when we’re going out and meeting with customers or bringing new clients in,” says Koster. “That means using our personal bankers on the deposit side with our treasury management services, along with our lenders on the loan side, to bring a team approach.”
The bank’s customers, he explains, are going to utilize many of those services “whether it’s ACH for payroll for their employees to the loan side for borrowing for their operating lines or term lines.”
Competing against you-know-who
In an environment where producers are seeking long-term, fixed-rate loans, the Farm Credit System, with its tax and funding advantages, is a formidable competitor. In response Minnwest, like other ag banks, employs Farmer Mac’s secondary market products and services to structure debt instruments that meet both the needs of their clients and the bank.
“I don’t think it’s any secret that lots of customers desire long-term interest rates at this point,” says Koster. “That’s where we believe we’ve taken steps to help our borrowers, offering them long-term, fixed-rate loans through the Farmer Mac I and Farmer Mac II programs. That really helps them mitigate any interest rate risk on that portion of their debt.”
On the flip side, Koster adds that “by utilizing that program, the bank doesn’t take undue risk for long-term rates. The Farm Credit System has that advantage of cheaper funding and so this is a way for us to compete directly with them. We’ve had success actually competing with them.”
Patrick Kerrigan, Farmer Mac’s director of business development, notes that the organization’s products have evolved and continue to evolve to help meet lenders and their ag customers’ specific needs. (ABA, through its Corporation for American Banking subsidiary, endorses Farmer Mac’s secondary market programs, and members enjoy preferred rates.)
In the current economic environment, producers are looking to take advantage of record-low interest rates and lock them in for a long duration. “Longer amortizations and longer maturities work really well in the commodity down cycle that we’re in right now where everybody is a little cash-crunched,” Kerrigan says.
With competition from Farm Credit and other banks in their footprint, being able to meet customers’ debt structuring needs is critical. This is where Farmer Mac and the secondary market helps banks retain valuable relationships. (Kerrigan will moderate a panel discussion of ag bankers on this topic at the ABA National Agricultural Bankers Conference in Indianapolis, Nov. 13-16.)
“It’s kind of like a win-win for their customers,” Kerrigan says, “getting long-term fixed rates at record low yields. And the bank’s getting a good customer that’s going to be with them for a long, long time in a relationship that will continue to grow through operating loans, student loans, checking accounts, auto loans and everything else banks do for their borrowers.”
More immediately, says Koster, is that Minnwest, through Farmer Mac, can better position its producers to survive the current challenging economic times and to thrive when the cycle turns up again. “We all know it’s cyclical. You’ve just got to help them get through the down times so they can participate in the good times.”
