Agricultural banks entered 1996 with solid capital and good profitability - and they'll need it to weather some of the problems plaguing farmers this year.

Farmers and their bankers are expecting 1996 to be a mixed bag at best. But as Tennessee banker Richard M. Knott observed, "one man's meat is another man's poison."

For instance, farmers who grew grain will be rewarded; grain prices are high. But high feed-grain prices hit livestock producers, particularly in the cattle industry; cattle prices have plummeted because of oversupply.

Meanwhile the months-long drought that has wiped out crops in Oklahoma, Texas, and Kansas has opened the door to potential loan problems for many bankers there.

"The sheep business right now is the only bright spot," said Bill Sneed, chief executive of $53 million-asset First Coleman National Bank, in Coleman, Tex. Drought has destroyed most of his customers' winter wheat crop, and his livestock producers have suffering high costs and low market prices for their animals.

Coming into this year, most farm banks were in good shape. Banks that make at least 25% of their loans to farmers reported an average yearend return on assets of 1.19%, according to Sheshunoff Information Services, Austin, Tex. That's slightly better than the 1.16% ROA for all banks.

Farm banks also remained well-capitalized. Their equity equaled 11.12% of assets at yearend, up from 10.38% a year earlier, and nonperforming assets remained around 0.8% of total assets.

Last year First Coleman had one of the top returns on assets among farm banks, 2.97%. But this year Mr. Sneed expects the area's farm woes to take their toll.

"Everything we have is really tied to agriculture," he said.

At Farmers State Bank of Elgin, N.D., officials doubt livestock problems will lead to a big uptick in loan problems, said Rodger Schock, assistant vice president.

"We've been able to work with the producers in setting up most of their loans so they can handle the downside," said Mr. Schock, whose $16.5 million-asset bank returned 2.75% on assets last year.

Bank of Huntland in Tennessee was also a top performer, with a 3.14% return on assets. Mr. Knott, president of the $20 million-asset bank, cited its blend of agricultural and consumer lending. The diversity of agricultural products nearby - including grains, cotton, chicken, dairy, livestock, tobacco, and plants raised for nurseries - also helps give the bank a stable base, he said.

Mr. Knott said he is upbeat about his bank's future. "Despite the up-and-down cycles that agriculture rides," he said, "this bank will do well - quite simply because of the quality of farmers and the quality of the land."

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