LINCOLN, Neb. - Roger Johnson headed his green Dodge pickup truck off a paved highway and onto a bumpy dirt farm road just outside Lincoln.
For the past 10 years, Mr. Johnson, a serious 54-year-old, has been traveling dusty country roads searching for farm customers for Union Bank and Trust, and checking on existing borrowers.
"In order to understand what their business is, it's good to be out there with them," said Mr. Johnson, vice president of agricultural loans. "Rather than sit behind a desk, I get a better feel for their management abilities."
Ten years ago, Union had almost no agricultural loans on its books. Today, the $404 million-asset bank is the biggest agricultural lender in the country among banks with at least 25% of loans in agriculture.
Since Union Bank began agricultural lending full force in 1985, farm- related loans have jumped to more than 40% of its total loans, reaching $131 million at yearend.
For a bank that took on the ag lending business just after the worst financial crisis since the Depression, Union Bank has been extremely profitable. Return on assets and return on equity have outdone industry averages for several years and Union has never had ag-related loan losses.
"I think it has exceeded all our expectations, both in terms of quantity and quality of the credits," said president Ross Wilcox.
Still, maintaining agriculture loan growth in the future will be challenging in an environment that's more competitive for fewer farm customers.
The privately held bank, which is owned by Farmers and Merchants Investment Inc., Milford, Neb., previously focused mainly on commercial lending and has been a longtime player in student lending.
But in 1985 when commercial banks and the Farm Credit System were downsizing and turning away agriculture business, Union Bank chairman Jay L. Dunlop saw opportunity in a state where farms and ranches use about 96% of the land.
"No one else was in the business," said Mr. Dunlap, whose father bought the bank in 1964. "We weren't looking at the failure as much as we were looking at the void. In the state of Nebraska, you've got to make the assumption agriculture will survive or you should move out of state."
At the same time, the bank acquired the deposits of two failed institutions in rural areas - enabling it to start building its agriculture portfolio.
Those familiar with the bank credit Mr. Dunlap with directing the company toward agriculture lending.
"He's very creative," said Nebraska bank commissioner James A. Hansen. "He's not afraid to try new things. He manages his risk well."
Without agriculture lending expertise of its own, Union Bank hired Mr. Johnson, who brought 21 years of Farm Credit System experience in Iowa and Nebraska, and who like many people at the bank, has personal experience in farming.
Mr. Johnson built a lending team and started out slowly. Initially, the bank only was going to make a total of $10 million in operating loans.
But as Union Bank reached a comfort level and acquired more deposits, it continued to make ag loans and expanded into farm real estate loans in 1986. Today, farm real estate loans make up about 80% of all its agricultural loans, Mr. Johnson said.
Because real estate values were so low then, such lending wasn't risky. But farmland values have risen.
"Now is the time when it could be risky," Mr. Johnson said.
But he doesn't think the business is much of a gamble for Union Bank because it has tough underwriting standards and requires customers to put up a hefty portion of a loan in equity.
"We'll finance any type of agriculture, any size as long as they have the right equity ratios and they have the management," Mr. Johnson said.
For example, Union Bank requires customers to maintain 60% ownership equity in their assets before it will make a land loan. If the customer meets the requirement, the bank will lend up to 40% of the borrower's assets, he said. That means the bank could sustain a 60% decline in land values before the loan is affected.
"That reduces the exposure they've got on those loans,' said Art Barnaby, a professor of agricultural economics at Kansas State University. "You're talking about a major hit before it would get into their loan."
Thus, the biggest risk that could affect the bank would be dramatically rising interest rates that could affect returns, Mr. Barnaby said.
The bank's lending standards have helped it through unexpected weather problems.
When 1993 brought excessive rain and heavy winds that ruined the corn crop, "The farmers we finance, because we're conservative and we set the lines (of credit) up accordingly, they withstood it," said Joe Rohach, a senior vice president in the lending division. "Go down the street to another farmer who, due to various reasons has too much debt, he might not."
The bulk of the farm loans the bank finances are for crops such as corn and beans. Other products it bankrolls include cattle and hogs.
Most of the ag loans come to the bank through a subsidiary of its holding company called Union Loan Inc., which operates seven agricultural loan origination offices throughout eastern Nebraska.
Union Bank, which employs 400 people, also has nine branches in Lincoln and nine in more rural communities in the eastern half of the state. The company's headquarters is set on a campus of six buildings where employees can get a free lunch in the cafeteria.
A big part of Union's agriculture lending success is that the department is so new it wasn't hurt by the agriculture crisis.
"The experts say you can collect and you can make loans at the same time," Mr. Johnson said. "Well, that's a fallacy. If all you've got is bad loans . . . it's hard to go out there and put on a new hat to get a new loan. We started with no collections. Today with not having any problem loans, we can see those that are coming and we can correct them and we can continue to make loans."
Union Bank has far outperformed its peers, with return on assets of 2.39% for 1994 and return on equity of 24.59%.
Last year, all commercial banks in the country posted an average ROA of 1.15% and average ROE of 14.63%. Nebraska banks averaged a 1.45% ROA and a 16.61% ROE.
Union Bank's management said agricultural lending has contributed to an increase in earnings, which were up nearly 26% to $8.8 million for 1994. Student lending contributed significantly to last year's earnings, Mr. Wilcox said.
Union Bank's agricultural lending growth has leveled off in recent years as ag loans have become a greater percentage of the bank's lending portfolio.
But the bank hopes to continue increasing ag loans by about 10% a year, despite such challenges as increased competition for loans and a shrinking farm population, Mr. Johnson said.
Union Bank expects the pending acquisition of seven branches from First Bank System to lower its loan-to-deposit ratio - which jumped to more than 80% at the end of 1994 from 51% in 1991 - and bring additional farm lending business in new areas.
"We plan to be a dominant force in agricultural lending," Mr. Johnson said.
