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Though the ag sector remains strong, regulators are warning banks to avoid concentration risk - a message that is not going over too well.
March 1
Agricultural lenders are a bit like their customers — they often provide a range of financial services and payment options as varied as the crops they finance, and are prone to similar risks.
"We lend along the full spectrum of the yield curve, everything from short-term floating rate loans all the way to 30-year fixed mortgages, and everything in between," says Mark Hancock, vice president and finance, and treasurer of Farm Credit Services of Mid-America, which is implementing new software for asset/liability management. "We also convert and go from variable to fixed products and vice versa."
To free up the process from Excel and add agility, the institution has contracted with Jack Henry to provide a ProfitStars engine that leverages the institution's database, performance records and external market conditions to predict future impacts on liquidity that can be used to inform pricing. Farm Credit is outsourcing the service at first, but plans to gradually migrate to a licensing agreement over time, as the institution becomes familiar with the modeling and analytics techniques and eventually extends the use of the tech beyond ALM and rate risk to broader credit management and budgeting.
Farm Credit Services of Mid-America is an $18 billion-asset agricultural lending cooperative with a client base of more than 95,000 farmers, agricultural businesses and rural residents in Kentucky, Ohio, Indiana and Tennessee. Its products include farm real estate financing, operating loans and equipment and livestock loans. It also offers crop insurance and leasing options and finances land purchases for rural residences.
While Farm Credit Services is not linking its automation project to any specific current condition, such as the drought that's afflicting most of the country, such conditions can impact national interest rates and other variables used to price the mix of short-term and long term credit extended to famers. Hancock predicts this rate volatility will likely increase soon — which would put an onus on the institution to improve visibility into how changing market conditions affect its ability to accurate price its financial services.
"Given that the market is extremely volatile and we've been in this low-rate environment, there's a lot of uncertainty and speculation about which way rates will go. Given how low the rates are, they will likely have to go up, but it's when they do that you have to predict for," Hancock says. "As we plan for different rate environments, this new technology will allow us to more extensively analyze and prepare for what the environment may look like in the future."
At the onset of the relationship, ProfitStars will uses the lender's data to custom build an analytics model that analyzes the various financial conditions that the lender will use to help price its mix of agricultural credit products. That includes rate shock risk, forward modeling of income, loan prepayment risks, potential weaknesses and predictive analysis of general ALM risks, such as a mismatch between outstanding credit and incoming payments that can be created by external shocks to local or national agriculture markets. ProfitStars will build a middleware layer that will integrate these economic and loan models with the institution's back-office and loan systems to produce and deliver the reports and outlooks to executives at the institution. The outsourced service also includes consultations that focus on how risks are changing over time and how the bank can adjust its relationships and financial strategy to mitigate ALM risks. "This will allow us to calculate the impact of rates and due dates on a loan level basis. We can run different forward looking scenarios and make more strategic pricing decisions," Hancock says.
