INDIANAPOLIS — The Federal Deposit Insurance Corp. may not have farm banks specifically in its cross hairs, but it definitely wants them to stay on alert.

Richard A Fredricks, a bank examiner in the FDIC's Grand Island, Neb., office, told about 100 bankers attending the American Bankers Association's National Agricultural Bankers Conference Monday that there is a simple reason why the agency is watching agricultural lending.

"Why should we be concerned?" Fredricks asked rhetorically. "Because everything has its cycles."

Fredricks was part of a panel called "How Does the FDIC View Agricultural Banking?" During the session, he reaffirmed the FDIC's stance that while the agricultural segment had remained robust during the economic downturn, farm bank executives would be wise to observe the experiences of commercial lenders.

"Why not learn as much as we can from what our commercial brethren have been through?" Fredricks said. Such banks "plain quit underwriting … all the baseline credit risk profiling got thrown out the window when growth was the goal."

Fredricks outlined several best practices that agricultural banks should follow, placing particular emphasis on the importance of monitoring borrowers' finances on farm real estate. "It is more important to look at cash flow than it is to look at loan to value ratios. That's second," he said.

Fredricks also noted that examiners want to see confidence from the bankers. "We want to show up and validate and trust" bank's reporting, he said.

The FDIC also wants farm banks to stress test as much as possible, particularly if the portfolio has a heavy concentration in any particular agricultural sector.

Fredricks said that it is particularly important for bankers to focus on the potential weakness of performing loans that could endure stress when economic conditions change. That way a bank can "seek credit enhancements now, while they are still available," he said.

Still, Fredricks said the FDIC is giving community banks a lot of latitude to decide what kind of stress testing is appropriate.

Analysts, as well as Fredricks, have said that farm banks' saving grace has largely been driven by lessons learned during the farm crisis of the 1980s.

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