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Finance

A leading Northwest agricultural lender talks fish, and explains how seafood harvesters can be successful borrowers

Northwest Farm Credit Services is heavily involved in cattle. Wheat. Potatoes. Apples. Timber.

And fish.

The Spokane-headquartered lending cooperative is a significant player in North Pacific commercial fisheries, financing quota shares, permits, vessel improvements, and much more.

We asked Joe Bratt, Seattle branch manager for Northwest FCS, and his fisheries team to tell us more about the company. Our interview covers a lot of ground, including how Northwest FCS makes loan decisions, how it sees the industry environment for the year ahead, and how it assists young and beginning fishermen.

Q: How does Northwest FCS differ from a regular bank or credit union?

A: Northwest FCS is a financial cooperative that provides $12 billion in financing and related services (crop insurance and appraisal services) to farmers, ranchers, agribusinesses, commercial fishermen, and timber producers in Montana, Idaho, Oregon, Washington, and Alaska.

As a cooperative, we are privately owned and governed by our customer-members, who take out loans and purchase stock in the cooperative and share in its profits in the form of annual patronage dividends. For 2018, Northwest FCS paid $138.4 million to its 16,000 eligible customer-members.

Northwest FCS is a member of the 100-year-old Farm Credit System, a group of four banks and 69 associations, designed to meet the credit needs of farmers, ranchers, fishermen, foresters, rural cooperatives, and others who are eligible to borrow from the system. Collectively, these cooperatively owned entities provide $272 billion in loans and are not authorized to offer depository or investment services as are commercial banks and credit unions.

The four banks raise money by working through a central funding entity to sell securities in the national and international money markets, then lend money to the associations, which in turn, lend to U.S. farmers, ranchers, foresters, fishermen, and other eligible borrowers. Northwest FCS obtains its funds through CoBank, which is one of the four Farm Credit banks that finances Farm Credit associations and other agricultural and rural infrastructure cooperatives.

The Farm Credit System is a government-sponsored enterprise (GSE) chartered by Congress to assure adequate and constructive credit is available to those in agriculture, forestry, and fisheries. The system does not receive any government funding and is regulated by the Farm Credit Administration, who also reports to Congress.

Q: Your website says you "serve all major fisheries of the West Coast and Alaska." Do you have a physical presence in the Seattle area?

A: Our Fisheries lending branch, located on Lake Union in Seattle, houses an experienced team committed to meeting the unique financing needs of the seafood industry in Alaska and along the West Coast. Seafood lending is all that we do in the Fisheries branch. Our customers, whether local or remote, work with advisers who truly understand the needs of their businesses and the challenges they face every day.

Northwest FCS team members regularly participate in council meetings, industry forums, and local charity events. The team also volunteers in the local community, in activities such as cleaning up Lake Union or a local beach. Team members are meeting with customers up and down the coast, climbing aboard vessels and talking about financing needs on the docks. Seafood is in our blood and we love to get out and talk with fishermen. This ensures we can provide our customers with the best service and expertise possible to meet their current and future financing needs.

Q: How big is your average commercial fishing loan, and are there any caps on loan size?

A: There is no "average" loan size in our portfolio. We are committed to serving the entire fishing sector and loan sizes vary significantly, depending on the fishery and business model. There are no caps on loan size, which is a big advantage to our customer-members who have larger credit needs or are planning for growth.

Q: Can you say something about your loan interest rates at the moment?

A: Northwest FCS offers both variable and fixed-rate loan options. From a historical perspective, interest rates have remained very low. While rates in general have been trending upwards over the past couple of years, they have softened recently. Federal Reserve officials recently indicated they are unlikely to raise interest rates in 2019. This news, along with other factors, has put downward pressure on long-term interest rates.

As a member-owned cooperative, one of our key business principles is to return a significant portion of net earnings to members based upon their use of the cooperative in the form of a cash patronage dividend. Cash patronage is allocated among stockholders based on their eligible average daily loan balance. Assuming the association meets its financial goals and other factors do not adversely impact the association, the board's objective is to annually declare cash patronage of 1.25 percent of a customer's eligible average daily loan balance.

Q: In general, what is Northwest FCS looking for in a loan applicant?

A: Every lending institution has a set of credit standards or guidelines that are used to analyze and approve loans. At Northwest FCS, these guidelines ensure constructive credit to help customers achieve their financial goals and protect the interests of our member stockholders. These include evaluating the loan applicant's character, capital, capacity, collateral, and conditions. New loans are made to customers with proven financial and production management capabilities who are believed to be long-term contributors to the seafood industry and whose loans will not present undue risk to the association's customer-members.

Bottom line, we look to work with fishermen who have developed a plan they can execute through various industry cycles. More information on our application process and lending criteria can be found at northwestfcs.com/en/Resources/business-tools.

Q: You publish excellent reports such as your annual "Fisheries Industry Perspective" and your quarterly "Fisheries Market Snapshot." Your latest "Snapshot" came out Dec. 31, 2018. Can you give us a brief recap of that report here?

A: Our outlook for fisheries suggests slight profit margins over the next 12 months. Pollock and cod prices are strong and profits for those fisheries will be solid. Profitability for sablefish this season is subdued due to an abundance of small fish, which capture lower prices. Difficult halibut fishing conditions have pushed costs up, cutting into profits. Salmon run forecasts are down, especially for Southeast Alaska pink salmon.

Northwest FCS reports can be found at northwestfcs.com/en/Resources/industry-insights/Fisheries. The next update will be published April 4.

Q: With respect to its agricultural financing, Northwest FCS emphasizes serving young and beginning farmers and ranchers. Does this commitment extend to young and beginning commercial fishermen?

A: We are committed to helping young and beginning fishermen. We understand the added difficulty, challenges, and risks facing fishermen when they are starting out in any fishery. Our AgVision program for young, beginning, and small fishermen has more flexible underwriting guidelines and waivers of the loan fees for eligible applicants. They can attend financial workshops at no cost and participate in a rate reduction program called RateWise. This not only helps fishermen become better financial managers but rewards them with a rate reduction on a future loan for doing so. Fishermen can sign up for this program without being a current customer. For more details and to sign up, go to northwestfcs.com/ratewise.

Q: In Alaska, fishermen have unique financing options such as the state-run commercial fishing loan program and the Alaska Commercial Fishing and Agriculture Bank. How does Northwest FCS compare with these options?

A: We all provide financing for commercial fisheries in Alaska. However, unlike CFAB and the state, Northwest FCS can finance fishermen who live outside the state of Alaska, and we offer fixed-rate loans. Another difference is that CFAB and the state can use state limited entry permits as collateral for a loan, while Northwest FCS (and all other lenders) are unable to do so.

Q: All things considered, what's your basic advice today for any fisherman thinking of taking a loan for whatever reason?

A: For fishermen seeking financing, we would advise you to start planning for it now. Maximize your income, watch your costs, and save your earnings. It takes time to build capital to invest in a fishing business, and lenders look for loan applicants to have some equity to contribute along with loan proceeds. Develop a business plan to evaluate the potential risks and rewards of your potential investment.

Find a mentor or other fisherman who has gone through this process before and learn how they did it. It's never too early to get started with your plan – a good lender understands this. We often start a conversation with a fishermen years before they take out their first loan and view the upfront time as an investment in a process that will generate rewards in the future.