County's largest lender builds more than $2 billion in assets by helping ranchers, vintners flourish

Kenwood grape growers Bob and Fred Kunde started borrowing from American AgCredit 30 years ago.

Now their kids have many more acres in grapes, a 90,000-case winery and a much larger need for credit. But they still do much of their borrowing from the Santa Rosa farm lender.

"Agriculture is cyclic. There are years when it's tough and years when it's good. But they're in it with us for the long haul," said Jeff Kunde, 48, one of five partners at Kunde Estate Winery & Vineyards. Both the winery and vineyards have lines of credit with American AgCredit.

The need to keep up with growing customers is the key reason that 87-year-old American AgCredit, the largest financial institution based in Sonoma County, sailed above $2 billion in assets last year, said Ron Carli. Carli has been CEO since 1982. That makes AgCredit nearly twice the size of the county's largest commercial bank, Exchange Bank.

Farmers and ranchers have been growing, and their needs for capital have also grown - as land prices, building materials and other costs rise. During recent years of low interest rates, loan demand has been particularly strong as farmers tried to take advantage of low-cost credit.

"Agriculture is getting more diverse and more vertically integrated. Customers are getting larger as a whole," Carli said. Also, "as agriculture has become more capital intensive, the borrowing needs of our customers have grown."

American AgCredit could add another $700 million in assets later this year if it acquires a Stockton ag lender now under consideration. Such a merger could improve efficiency and help American AgCredit keep interest rates down in a rising rate environment, Carli said.

The ascension of American AgCredit beyond $2 billion - the largest ever for a financial institution headquartered on the North Coast - is an important milestone for farmers, ranchers and the economy of the areas served by the farm lender.

It's especially helpful in Sonoma County, where American AgCredit makes 14 percent of its loans, the most of any county. Monterey County is second.

Last year American AgCredit had $252 million in loans outstanding in Sonoma County, up 11 percent over 2002, according to Chief Financial Officer Chris Call.

Its share of agriculture lending in Sonoma County is higher than its companywide average, according to Obrecht & Associates, a St. Louis research firm.

For mortgage loans to agriculture, American AgCredit had 54 percent of the business in its territory at the end of 2002, but in Sonoma County it had 66 percent. For commercial loans to agriculture, it had 37 percent companywide but 46? percent in Sonoma County.

Other agriculture lenders include commercial banks, insurance companies and private lenders.

American AgCredit serves farmers and ranchers in 23 California counties and has loans in 49 California counties and 29 states.

Earnings were up 10 percent at American AgCredit last year, to $24.7 million, after dropping 13 percent in 2002, mainly because of falling interest rates. Carli said the agriculture industry in general appears to be stronger than in some recent years.

The dairy industry is getting higher prices for its milk, the wine industry seems to be recovering from its slump and vegetable growers in the Salinas area did well last year, Carli said.

Vineyards and wineries represented 26 percent of the company's loans last year. Dairies were 20 percent, and vegetables and forest products were next at 9 percent each.

Demand for loans was strong in 2001 and 2002 but fell off in 2003 and 2004 because of the economic downturn, Carli said. Still, total loans held by the company have grown steadily, up 6 percent in 2002 and 2 percent in 2003, to $1.9 billion - in spite of a large number of loan paydowns.

"We saw more principal paydowns in 2003 and (early) 2004 ... just because that was the best way for people to invest their money," Carli said.

Loan quality at American AgCredit is high, with less than 1 percent of its loans - 0.5 percent - characterized as problem loans.

"We've been able to maintain real strong credit quality even in some difficult times in the last couple of years," Carli said.

The company joins with other lenders to make very large ag loans, and it services more than $1 billion in loans for other institutions.

"The staff is handling about $3 billion in assets today," Carli said.

American AgCredit is the seventh-largest of 84 farm credit associations in the nation, part of the federal farm credit system set up in 1916 to provide a reliable source of financing for farmers. It has 170 employees, including 61 in Sonoma County.

Unlike commercial banks, farm credit associations don't take deposits. Instead they get their money mainly through the sale of bonds and other securities to investors.

Even though Congress set up the system, it said it would not use taxpayer money to bail out the associations if they had financial problems too big for their insurance to handle. Investors generally believe, however, that Congress would step in to avoid failures.

American AgCredit's growth in recent years - both through increased lending and through mergers - is symptomatic of the entire farm credit system, said Jerold Harris, chief executive of U.S. AgBank in Wichita. U.S. AgBank, a member of the farm credit system, is a wholesale bank that sells securities for American AgCredit and 29 other farm credit associations.

"There's been a lot of financial activity occurring in the agriculture business," Harris said. "We've been in a very low interest rate environment, so agriculture is looking at the opportunity to refinance, purchase additional property, purchase new equipment at these kinds of interest rates. A lot of investment has been made in agriculture in the last few years."

Mergers have been another engine of growth, as associations try to improve their efficiency, make bigger loans, diversify and boost financial soundness. Ten years ago there were 253 associations and other institutions in the farm credit system. Today there are 105, according to Ross Sargent, a spokesman for the Farm Credit Administration, which oversees the program.