As a key component of its farm loan underwriting, Pinnacle Bancorp encourages credit scoring at its 18 midwestern banks.

"It does not substitute for analysis and the professional opinion of our bankers, but it does have meaning," said Brad Koehn, vice president of the Central City, Neb.-based holding company. "We believe there are some very key financial components that illustrate good loans."

Many small farm banks have embraced credit scoring as a way to identify farm-loan risks and to assign interest rates. Many, including $1.7 billion- asset Pinnacle, tailor standard credit-scoring systems to fit farm lending.

Credit scoring is a staple in consumer lending, and its use for small- business loans is growing. Credit scoring usually means loan evaluation through technology, using third-party providers' services for credit applications and credit bureau reports to rate borrowers' repayment ability and to identify desirable customers.

At small banks making agriculture loans, credit scoring tends to be simpler, using in-house scoring systems that grade customers' loan risk.

"The smaller institutions typically aren't able to use some of the credit-scoring tools, because they're cost-prohibitive," said Ann Grochala, director of bank operations at the Independent Bankers Association of America.

However, Pinnacle's Mr. Koehn said he saw many internal scoring systems at farm banks when he was a national-bank examiner, and he expects more institutions to adopt them.

"As consolidation and efficiencies continue to develop, this tool will continue to play a larger role in the evaluation process," Mr. Koehn predicted.

Five years ago, Farmers and Merchants National Bank in West Point, Neb., established a formula to assess risk and determine interest rates on farm loans, said its president, Philip M. Burns. About 75% of the bank's $71 million in assets is in farm loans.

"It makes it easier to compare credits internally," he said.

Farmers and Merchants' borrowers can score up to 18 points based on their results in several areas, including debt load, collateral, liquidity, and profitability.

Depending on their scores, borrowers will pay one of seven possible interest rates, recently ranging from 8.25% to 12.5%, said Rosalie Hastings, the bank's assistant vice president.

Mr. Koehn said Pinnacle's 18 banks in Nebraska, Colorado, Wyoming, and Kansas have used what the company calls loan, or risk, grading, since the 1980s.

The banks examine ratios similar to those used at Farmers and Merchants and give "bonus" points for government guarantees on farm loans.

Mr. Burns said that Farmers and Merchants' agricultural borrowers like the credit-scoring system. "Customers want to know how they compare to other people," he said. "Our customers are beginning to use it as a management tool. That wasn't something we intended when we designed it."

However, not all community banks think credit scoring works on farm loans.

"I stay away from the cookie-cutter approach," said Bill McQuillan, chief executive of $16.5 million-asset City National Bank in Greeley, Neb. "It's very difficult to establish parameters for agriculture lending.

"My concern is that borrowers could be left out of the loop if they don't meet the stringent criteria."s

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