Rural banks are of little comparison to failing banks abroad
While bank management and risk assessments are vastly different from a big-tech bank to a rural lending institution, there are some common economic concerns among all sectors.
Following the fallout of recent banking failures, including Silicon Valley Bank, depositors around the world have been asking their banks if they too should be worried.
That’s a concern that Kent Thiesse , senior vice president of farm management at MinnStar Bank in Lake Crystal, Minnesota, is happy to speak to.
“First of all they were mainly fast-growth type banks,” Thiesse said of the most recent high-profile bank failures. “They were in some higher-risk-type loans, a lot of early stage technology and scientific health care kind of loans that are a little higher risk.”
He said they grew fast, and as they grew, they needed to capitalize. They invested in low-interest bonds, and as interest rates climbed, it hurt their portfolios.
On the other side of the coin are the longtime banks that dot most of farm country.
Nate Franzén, ag banking president of First Dakota National Bank in Yankton, South Dakota, hangs his hat on the fact that the bank he's employed at just celebrated 150 years in business. It’s weathered storms that have left it in a position to remain strong.
He said community banks like First Dakota are focused on coaching people in weighing the risks.
“We try to help them think through those risks and manage it the best they can for their operation,” Franzén said. “So that’s where we put our energy. If we do that, we’re very confident they’ll survive the challenges in the economy and therefore we will as well.”
But both 150-year-old bank institutions and new startups are aware of what’s going on.
“I think if anything, lenders are becoming a little more wary of going into any high-risk loans, and they will likely seek to maintain their margins,” Thiesse said.
Those decisions are not necessarily because of the news of bank failure. They are the result of an increasing interest rate — one that’s been increased 11 times in recent months to an amount not seen since 2007 . They are also the result of the reason for that interest rate increase — a desire to reduce inflation. And for agriculture producers, input costs have risen while profits are expected to be lower in 2023.
“It is the fastest interest rate rising environment I’ve been in as a banker, and you have to go back to the '80s to see anything similar to it," said Franzén, who is about to celebrate 30 years in banking. He was on the family farm in the 1980s. It was at that time, he felt the urge to get into banking. "Obviously the '80s went a lot more extreme, a lot higher, and I don’t anticipate that will be necessary in this environment, but it’s happening faster than normal and that’s why it's being talked about like it is."
It’s there that rural depositors like Dan Rorvig of McVille, North Dakota, find themselves trying to paddle against the stream. Rorvig is a former owner of the McVille Bank and current cattle producer who also leads the National Cattlemen’s Beef Association Tax and Credit Committee.
He said rural, agriculture banks are a complete 180-degree difference from those that failed or are struggling.
“Our economy and the rest of the world’s economy have always been 180 degrees off,” Rorvig said. “You know when we’re doing well, they’re struggling. When we’re struggling, they’re economy is doing well.
With several years of strong grain markets and pandemic checks, both the banks and customers have had a pretty good run. Even so, the ag industry is not out of the woods.
“Our biggest concern right now from an economic side is this inflationary thing and the increase in interest rates,” Rorvig said.
From virtually nothing to now some loans with 8% interest, costs are rising. His input costs can be staggering. And this winter season — where he had to hire a professional snow mover to gain access to his feed for his cattle — is just the cherry on top.
Thiesse said he doesn’t blame people for having concerns, but rather than making a banking decision based on cable news information, reach out to your local bank. He added that depositors should take comfort that deposits of $250,000 are federally insured and, for a fee, they can insure even larger amounts of money. For those who exceed the $250,000 deposit, it’s as easy as opening multiple bank accounts, which each can be insured for up to $250,000.
One of the biggest concerns for banks is that depositors will get scared based on an isolated situation and start pulling out their money in droves. That brought the speedy demise of the Silicon Valley Bank, where $42 billion was removed by customers in one day. That left the bank with nearly $1 billion in negative balance, according to a regulatory filing. It was largely driven by social media, where news of instability in the bank took off like wildfire, draining the bank of all funds.