By Brian NixonWith interest rates expected to continue their way up—and with an overhanging risk of volatility—Northwest Financial Corporation President and CEO Jeff Plagge knew his agricultural customers would be looking for solutions.
“We really started looking at these interest rate cycles and saying, ‘Shame on us if we don’t have a good solution to recommend to our farmers who really need or want a fixed-rate funding mechanism,’” he says.
Like many ag banks around the nation, Northwest Financial’s two banks—$1.5 billion Northwest Bank of Spencer and $240 million First National Bank of Creston, serving customers in Iowa and Nebraska—have seen ag customers experiencing some stresses on their cash flow as a result of low commodity prices. Providing an option to structure longer-term credit at fixed rates can help put producers in a better position to weather these challenging conditions in the ag economy, Plagge decided.
To meet these anticipated needs, Sharon Hotz—an ag and commercial lender based in Northwest Bank’s Fort Dodge, Iowa, office—found an option in Farmer Mac’s fixed-rate solutions. “What we’ve done here is create a centralized process to provide our ag bankers the resources available and to understand the Farmer Mac products,” she says. “We work directly with Farmer Mac at the centralized desk for onboarding the information and underwriting the credit application.”
“If we’re going to restructure something in order to give them liquidity and working capital, this is an opportunity to give them a structure that really guarantees their interest rate for a long time,” says Plagge, who served as ABA’s chairman in 2013-14. “It allows them at least that option. We can sleep at night knowing that we gave them several options to consider.”
The evolution of the secondary market
Curt Covington has seen both sides of what Farmer Mac can do for ag lenders and their producer clients as an ag banker, including a stint at Bank of the West, and more recently as Farmer Mac’s SVP for agricultural finance. “During the ‘golden age of agriculture’ a few years back, banks needed us to help them keep up with the demands of their borrowers,” he says. “Now banks are coming to us to help them mitigate some of their credit risk.”
Working capital is the first defense against commodity price volatility. “However, you’re starting to see working capital dwindle,” he notes. “That’s a looming problem, particularly for midwestern farmers, as we move into harvesting the 2017 crop and the 2018 loan renewal season.” Excessive leverage is an additional concern, Covington adds—“and I am concerned about rising interest rates and the impact on the leverage on the balance sheet and ability to repay the debt.”
Ed Coates, SVP and agricultural banking manager at NBT Bank, based in Norwich, N.Y., said his institution a quarter-century ago became one of the first banks to use Farmer Mac, particularly Farmer Mac II, which purchases the guaranteed portion of Farm Service Agency-guaranteed loans. “When it was initially started, we used the program from the standpoint of selling loans on the secondary market and then providing additional funding for the bank to re-loan funds back out,” explains Coates, who recently became chairman of ABA’s Agricultural and Rural Bankers Committee. “Probably for the last 10 or 12 years, we’ve utilized it not so much from a funding standpoint, but more from the standpoint to provide long-term, fixed interest rates to our borrowers.” This has provided NBT Bank with a competitive advantage against Farm Credit System lenders and generated substantial fee income as well.
This shifting of a bank’s uses of Farmer Mac is not unusual. “The breadth of lenders that we do business with has expanded tremendously,” says Tim Buzby, Farmer Mac’s president and CEO. “We find over the years that at different times there are different reasons for lenders to use us. Sometimes it’s for managing capital. Sometimes it’s for liquidity purposes. Sometimes it’s for credit purposes, such as borrower exposure limits.
“There’s a lot of competition for good loans and that puts pricing pressure on everyone,” he adds. “It’s been a rough couple of years for a lot of farmers. Another year like that and people start to get worried. I think there’s a little bit of concern about what’s going to happen when this crop comes out and how farmers are going to fare. That’s actually caused a lot of institutions to take a look at the way they manage their risks and, quite frankly, in that type of environment, business tends to flow more to Farmer Mac, so we have seen a pickup in business this year.”
Customer service first
Importantly, Buzby points out, “We don’t see it as lenders deciding, ‘Oh, these aren’t good loans, so I’m going to try to sell them to Farmer Mac.’ It’s more just the way lenders serve their borrowers. They want to sell the real estate loans, so they can be ready to advance more credit to their borrowers if they need to. I think as interest rates start to go up, people will start to convert to fixed rates.”
Eighty percent of NBT Bank’s $150 million ag portfolio is in loans to dairy farmers. “They are the ultimate price takers when it comes to selling their product, selling milk,” Coates says. “When they realize they can lock in an interest rate, that’s one more thing they can control. Their long-term payments aren’t going to be changing anytime soon. That’s something that appeals to a lot of dairy farmers.”
Having fixed-rate options at the ready helps ag bankers serve as “true relationship managers” with their producer clients, says Coates. “That’s one of the ways we try to differentiate ourselves from some of our competitors. We’re not going to tell people how to run their business, but we do want to make sure they understand their options and what’s available to them, and try to point out the benefits of each option versus what’s not so great about them. It’s been a good partnership for us and I’m sure we’ll continue to grow that relationship in the future.”
LEARN MORE > NATIONAL AGRICULTURAL BANKERS CONFERENCE
For more insights on meeting ag producers’ credit, liquidity and risk management needs in challenging times, check out the ABA National Agricultural Bankers Conference, Nov. 12-15 in Milwaukee.