Diverse portfolios lessen lender risks from ag loans

Roughly a third of the loans made by Greeley-area banks — large or small — is going into the hands of farmers, ranchers and dairymen. Most bankers consider that percentage comfortable because it signifies a diversified loan portfolio.

“For a bank of our size, that’s actually a fortunate deal in that we’re not extremely concentrated in ag,´ said Larry Wisehart, senior vice president of lending at Independent Bank of Kersey.

By contrast, Bill Hertneky, senior vice president at Norwest Bank Greeley, said that in many small farming towns in eastern Colorado and in Iowa and Kansas, “they may run 50-plus percent (in ag loans). I don’t think a lot of people really understand that.”

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Both bankers are referring, of course, to the risk of having a loan portfolio weighted in a single industry when that industry suffers a significant downturn.

“None of us really hope for any hiccups in terms of the ag economy, or construction or any other manufacturing. But the reality is, occasionally we will have those. It’s just the economic cycle and weather patterns, etc.,” Hertneky said.

For the most part, ag portfolios are made up of short-term loans, usually paid off over a year’s time, and medium-term loans, which may stretch over two or even seven years.

Short-term loans enable a farmer or rancher to meet yearly operating costs whereby the bulk of medium-term loans represents capital acquisitions such as equipment or herds.

To the farmer, a medium-term loan is significant because it comprises “probably 60 to 70 percent of a farmer’s total debt,” Wisehart said. “So it’s not unusual for farmers around here to carry a 60 percent static debt load and (40 percent) in annual payouts.”

But not all medium-term credits represent loans for capital outlays, which most people consider a positive indicator of a healthy agricultural economy.

Medium-term loans also include “carry-over” loans, or credits given to farmers or ranchers who were unable to pay off all or part of their annual operating loan.

While carry-over loans don’t necessarily signal that something is amiss in the agricultural community, they do tend to make a banker “kind of shudder,” Wisehart said, because his basic philosophy “is to keep the borrower as liquid as possible so that he is in a survivable position in the event of some adversity.”

More than likely, carry-over loans can be blamed on the weather and, like a red flag, their existence is a reminder of just how fickle and devastating Mother Nature can be.

“That’s why you’ll find that a lot of agricultural folks are kind of spiritual,” Wisehart half-joked. “Every day that the sun comes up, they know their livelihood is in someone else’s hands. That’s divine intervention and not blind luck,” he said.

Hertneky estimated that after a year of bad weather, carry-overs can make up as much as 30 percent to 40 percent of a bank’s total ag portfolio.

“For example, 1995 was basically a disastrous year for the majority of crop farmers and those in cattle feeding,” Hertneky said, “So the loan growth may have been greater (in 1996), but it wasn’t necessarily for the right reasons.”

Brett Brunner, vice president at The Eaton Bank, agreed that carry-over loans have been up “over the last three years due to Mother Nature.”

“We’ve had long, rainy wet springs, and they couldn’t get their crops planted,” he said. “If they did, the crops didn’t come up good, and they needed the extra time in the fall to make up the difference, and we didn’t get it. And last year we had a lot of hail. “

In spite of several damaging hailstorms in 1996, bankers agreed that the year was a good one for crop farmers overall. In 1997, many farmers will probably pay off substantial portions of carry-over loans from previous years, Hertneky said.

While Hertneky is hoping for a 5 percent to 6 percent increase in ag loans this year, that goal could be hard to reach “if my customers do a good job in 1997 and pay back more than they borrow. But that’s good, because that means the quality of my ag portfolio has improved and my ag customers are being successful.”

This is the time of year when banks compete most vigorously for their share of the ag-loan pie. Most rely on personal contact and individual attention to attract ag borrowers.

Anticipating at least a 10 percent growth in ag lending in 1997, Steve Kinsman, vice president of First National Bank in Greeley said, “We are going to make a lot of contacts with a lot of people, talking to people and seeing what their credit needs are and how we might be able to fill those.

“Each individual situation is going to be unique, so we will custom tailor each individual’s needs to the loan we’ll be providing for them,” he said.

With the high costs of farming, both in risks and dollars, bankers said that few new people are entering farming.

“We will see a father coming to us wanting to bring his son or son-in-law into the business. But it’s so expensive anymore that it’s difficult for some young man who may have all the desire and heart in the world to get started,” Kinsman said.

Despite the on-going selloff of large rural tracts to real estate developers, most observers think that farming is alive and well in this area that has long been one of the top five ag-producing counties in the nation.

It could be changing, though.

“It seems there are more farms being sold to nonfarm entities, like we’re losing ground in that aspect,” Brunner said. “And it seems like farmers have to take on more ground to accomplish the same types of income they had years ago on a much smaller farm. So the future may hold fewer farms, but larger farms,” he said.