Texas bankers who finance cotton, one of the state's biggest crops, are praying that next year's harvest won't be a repeat of this year's worm- infested devastation.

After a promising start, cotton producers in central and southern Texas finished this season with the worst crop most had ever seen.

"If a repeat of this year happens next year, I would say as high as 40% of the farmers will get out of the business," said Mark Heinze, president and chief executive of $14 million-asset Citizens State Bank, Miles. "It's going to be a situation where we can't keep dealing up their debt."

The Lone Star State, the largest cotton producer in the nation, is expected to harvest 4.8 million bales this year, 2% less than 1994, according to the Texas Department of Agriculture. Many had hoped this year's crop would rebound from recent years, in which weather- and pest- related problems depressed yields.

Indeed, cotton producers fared well in some parts of the state.

But in the Rio Grande and parts of the Concho Valley in central Texas, the crop was practically wiped out. While no figures exist to plot banks exposure to cotton, the crop amounts to a third of the agricultural production in the Rio Grande Valley, a fourth in the Concho, according Texas A&M.

The main culprit was "army worms" that swarmed in after an effort to kill destructive boll weevils, a kind of beetle. However, the chemicals that killed the boll weevils also killed the "essential" insects that keep undesirable insects like the worms in check.

"It's almost 90%, 95% destruction of the crop," said Donnie Ruppert, president and chief executive of $14 million-asset First National Bank, Rowena, in central Texas, where two cotton gins never even opened this year. "The thing about this year, in addition to the economic disaster, it was also a psychological disaster."

That's because the 1995 crop promised a good price, had sufficient moisture, and seemed on the home stretch to good harvest, especially after an early August "money rain" for good measure, he said.

After the rain, "Our farmers came in Friday and just smiled," Mr. Ruppert said. "The farmers came in Monday morning and said, 'The crop's gone.' It happened that quick."

So instead of seeing their cotton producers pay off carry-over debt from last year and get ahead a little bit, bankers are restructuring loans and wondering who will survive.

To compound things, cattle prices have been depressed from oversupply. "In the past when we've had crop disasters, cattle prices have been high," Mr. Ruppert said.

And although cotton fared the worse, crops were bad across the board in the Rio Grande Valley, according to Byron L. Calcote, senior vice president of $410 million-asset First State Bank and Trust Co., Mission.

With crop insurance payments for the cotton, farmers may break even, Mr. Heinze said, but they won't have extra money for land payments or equipment expenses. "That is very discouraging to a lot of people, and I think some people will get out of farming," he said.

He and other lenders said they don't expect to initiate many foreclosures, but some producers will shut down on their own.

Some producers are "just too deep in debt," Mr. Heinze said. "Most of them will realize that and will liquidate themselves before we can foreclose."

Mr. Ruppert said that he expects farmers to pay off operating loans, but that's about it.

Lenders said they're trying to help cotton customers by restructuring credits, doing cash flow projections for 1996 - and hoping they plant more of another crop next year, as worm problems are expected to continue plaguing the cotton crop.

First State Bank's Mr. Calcote said his bank is restructuring loans and exploring guarantees and disaster assistance for customers through the Department of Agriculture's Rural Housing and Community Development Service, formerly the Farmers Home Administration.

Mr. Heinze said Citizens Bank is working with correspondent banks as borrowers begin hitting Citizens' lending limit.

"I do not think there are going to be massive failures here," Mr. Calcote said. He said the impact on the bank would be negligible, because it has $60 million in capital and is well-diversified.

Other lenders were not yet sure of impact on their performance.

Despite the severity of the season, lenders noted the cyclical nature of agriculture that they and their customers have learned to expect.

"We will survive and a large majority of our customers will also," Mr. Calcote said.

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