Agricultural lenders in Oklahoma, Texas, and Kansas are facing a potential bumper crop of bad loans amid a drought that has nearly wiped out the region's winter wheat crop.
In Oklahoma, officials are predicting that at least 10% of the state's farmers will go bankrupt this year. The weather is the driest it has been in 40 years, and the wheat crop - the agricultural staple of the region - is expected to be the smallest in 25 years.
Moreover, ripples are spreading to the region's already suffering livestock industry as feed prices soar.
Bankers and regulators alike say it's too soon to gauge the possible losses, because crop loans won't begin coming due until summer. But they're bracing for big trouble.
"It's kind of like a storm's coming across," said Michael Bonnett, a vice president in the Enid, Okla., branch of $170 million-asset First Bank of Hennessey. "You're going to get hit, but you don't know the damage." He said prayers for rain are posted on "different marquees around town."
The Office of the Comptroller of the Currency is monitoring the economic fall-out from the drought and trying to identify which areas and banks could be most affected, said spokesman Edward Alwood. He added that the agency has not yet released any instructions regarding examinations in these areas.
Numerous banks in the drought area could suffer as a result. Statewide, nearly 11% of Oklahoma banks' loans are agriculture related. Similarly, in Texas 220 banks have at least 25% of their loans in agriculture.
To those bankers, the rainfall statistics reveal the severity of the situation.
Oklahoma's rainfall from October to April was half of normal levels, bringing the third-lowest statewide precipitation since observers began keeping records in 1892, according to the Oklahoma Climatological Survey at the University of Oklahoma.
Bankers said it looks pretty certain that some farmers won't be able to pay off their debts when they come due.
"It's going to be tough, because people are going to have carryover," said Beth Hodges, executive vice president at $60 million-asset First National Bank of Panhandle, in Texas. "Banks have to set aside loan-loss reserves. That's going to take a little money."
"We know farmers are going to have less income in general," added Mr. Bonnett, who chairs the Oklahoma Bankers Association's agriculture lending committee. "Any time you have less income, it's going to affect everybody who has ag loans."
As a result, lenders expect to face some tough decisions when loan renewal time rolls around this summer.
"Overall, the farming picture right now is somewhat bleak," said Mike Hatch, assistant vice president of the Oxford, Kan., branch of $125 million-asset First National Bank of Winfield, Kan.
"We do not want to put anybody out of business, but there's only so far we can go," added Mr. Hatch. He said nearly 80% of the winter wheat crop in his area was ruined.
Ross Love, an agricultural economics professor at Oklahoma State University, predicted that farm banks whose customers have had other crop problems in recent years will be hit hardest.
Meanwhile, anxieties are mounting over how regulators might react to any problems that bloom amid the drought.
The National Cattlemen's Beef Association, in a letter to Federal Reserve Bank Chairman Alan Greenspan, asked him to direct bank examiners to take it easy in judging credits to cattle producers.
And lenders are arguing that banks and their farm customers are better prepared to handle setbacks than in the past.
"Most of the banks are well capitalized. We've done more cash-flow lending than asset-based lending and are more qualified to go through this thing than we otherwise might be," said B.A. Donelson, president of $112 million-asset First State Bank, in Stratford, Tex.
Regulators are inclined to agree. "Fortunately, there is a lot of capital out there, which is very different from previous types of downturns like this," said Mr. Alwood of the Comptroller's Office.
Despite the ability of the farm industry and its lenders to cope, no one is willing to downplay the severity of the drought's damage on the region.
"I've never seen a drought like this one," said Mr. Donelson. "It's a very excruciating time. The weather will put you on edge - and the markets take you on over."