Commercial agricultural banks continued their upswing in performance in 1992, but Midwest flooding and Southeast drought leave a question mark on 1993, according to a trade group survey.

Record increases in earnings and capital last year mean agriculture lenders are well equipped to deal with problem credits likely to result from the widespread crop damage in the Mississippi River basin this past summer from flooding and in the Southeast from the lack of rain.

One economist predicted that credit problems from the flooding will probably be isolated to a few areas and will not hurt the performance of the farm bank industry.

Bright Outlook

A survey commissioned by the American Bankers Association showed that agricultural banks posted a record performance in 1992 that the total capital at the 3,886 institutions grew $1 billion, to $16 billion. Average equity capital at the banks grew from $ 9.3% to 9.6%

"This bodes well for future growth in rural areas since local economies are closely tied to credit available to farmers and ranchers," said James Chessen, the association's chief economist.

"It also marks the seventh year of recovery from the recession that nearly crippled the industry in the early 1980s."

The study, prepared by consultant Carlos Veintemillas, found that agricultural banks were enjoying some of the lowest loan losses, widest margins, and strongest capital in their history.

Culled from call reports, the data are from commercial banks that have more than the national weighted average of agriculture-based loans on their books and have less than $ 500 million of assets.

Good Health Cited

Earnings at farm banks increased 23% over 1991 to $2 billion. Asset quality also improved as noncurrent loans and repossessed real estate dropped to 0.98% in 1992, from 1.23% in 1991.

On top of the favorable operating statistics, the health of the farming industry in 1992 was a major contributor to farm bank performance, Mr. Chessen said.

He said farmers and ranchers increased production and had favorable weather and commodity prices.

Loan demand in the farm sector increased 4.1%, outpacing demand in most other lending markets. However, the study found that even in the agriculture sector, loan demand fell off 1991's 8.6%.

Total assets at farm banks increased 4% in 1992, compared with an increase of 2.2% for the banking industry as a whole. Yearend assets at farm banks were $ 168.1 billion, just less than 5% of the industry total.

Loans and leases at farm banks grew 5% in 1992, while they contracted in the industry as a whole.

The biggest change in asset composition at farm banks came in real estate loans. With toughter underwriting standards, Mr. Chessen said more banks are securing production loans with real estate. Real estate loans to farmers by farm banks rose 10.6% to 10.3 billion in 1992.

This year, however, will probably be different. Problem credits are likely to increase in the Corn Belt states of lowa, Missouri, Minnesota, and the Dakotas, where the bulk of the 12 billion in property damage from this summer's floods occurred.

Thomson Bank Watch, an American Banker affiliate, said in July that Iowa farm banks will be the hardest hit because of their lack of geographic diversification and their small size.

Banks 'Well Positioned'

But overall, Mr Chessen predicted, the farm banking industry will weather the storm well. Farm banks in the upper Mississipi basin went into 1993 better capitalized and more profitable that at any time in their history.

In addition, he said, farm banks have reduced their overall exposure to agriculture loans in recent years by diversifying their loan portfolios.

"I think there has been a significant impact from the floods," Mr. Chessen said.

"But to the extent those problems affect banks, farm banks are well positioned to deal with it."

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