Portfolios at farm banks with the highest ratio of bad loans have gone from bad to worse despite improvements in asset quality industrywide.
Noncurrent farm loans rose nearly 41% last year for the 100 banks with the highest percentages of problem agricultural credits, an American Banker analysis shows.
Banks with the most problem loans also blamed their unwelcome distinction on riskier credits from guaranteed loans and on underwriting standards that were too weak.
Noncurrent loans - farm loans 90 days past due plus loans not collecting interest or principal - averaged 8.72% of farm loans at the group of 100 banks, up from 6.09% in 1993.
That compares with 1.14% for the group of nearly 2,000 U.S. banks with at least 25% of their loans in agriculture, down from 1.27% in 1993.
Iowa ag lender Dan O'Rourke, whose bank is on the list, said, "The old adage is: You make money about four out of 10 years, and the rest of the time, you try to hold it together."
The troubled livestock industry played a role in various regions represented in the top 100, including Texas and Oklahoma, which appeared the most often.
Seeing several banks from the same areas indicates "certain commodities prices or weather cycles," said Danny Klinefelter, a professor of agricultural economics at Texas A&M University. "In general, a one-year picture doesn't say much about the management of the bank."
Some farm lenders on the list also cited government-guaranteed loans as a big source of their problems. Such loans tend to be riskier, and it can take time to collect the guarantees if they go bad.
"We specialize in (Farmers Home Administration)-guaranteed farm loans," primarily to low- and middle-income farmers in Louisiana and Texas, said John V. Raymond, senior vice president at $35 million-asset Southwest Bank in Jennings, La. "We have a higher delinquency rate than someone who is making unguaranteed loans."
Southwest Bank had the third-highest percentage of noncurrent farm loans at yearend, with 21.9%, or $4.2 million, many from cotton crop problems in the early '90s.
Delinquencies will be up again this year, Mr. Raymond said. "We're still having a backlog from the '91, '92 loans" from cotton crop problems. "By the end of this year, we're hoping we've cleared the logjam from prior years."
First Capital Bank, Guthrie, Okla., reported a 123% increase in noncurrent farm loans in 1994, to $4.3 million. Jack Stuteville, president of the $57 million-asset bank, expects more this year from livestock- related loans.
"As long as the ag sector's struggling, there's going to be more problems," he said.
Mr. Stuteville, who also uses government-guaranteed loans, said that when such loans become troubled, the guaranteeing agency must sign off before a bank can restructure them.
And the reorganization of the Farmers Home Administration into the Rural Housing and Community Development Service has made doing business with the agency slower, he said.
And although claims on most guaranteed loans eventually are paid once collateral is liquidated and the unguaranteed portion charged off, it can take two months to two years for the agency to pay a claim, Mr. Raymond said.
The bank with the highest percentage of noncurrent farm loans, Citizens Bank of Weir, Kan., also cited troubled guaranteed loans. Nearly all its farm loans are cattle related.
But Joe Fowler, vice president and cashier of the $6.7 million-asset bank, said the Federal Deposit Insurance Corp. has since said that Citizens Bank does not need to put guaranteed loans that are well secured and in the collection process in nonaccrual status.
That, coupled with recoveries from borrowers and guarantees, means 1995 noncurrent loans "will look different," from the 27.6% noncurrents in 1994, Mr. Fowler said. He expects at least 80% of the $501,000 in noncurrent loans at yearend to be paid or recovered by the end of this year.
"I look for a good year here, one of the better years in the last three or four," Mr. Fowler said.
In Sigourney, Iowa, flooding from '93 still haunted farms loans at $30 million-asset Keokuk County State Bank last year, Mr. O'Rourke said.
And Ray Bernard is still revamping past "too liberal" underwriting policies at State National Bank of Garfield, Wash. However, the $11.6 million-asset bank saw a 40% decrease in noncurrent farm loans at yearend 1994 to $644,000.
Many farm lenders with high percentages of noncurrent loans said they have changed the way they evaluate agricultural credits.
"I'll be a lot more conservative," Mr. Fowler said. "I'll require more of the customers' money in it or a government guarantee of some kind."
