Halfway through a third straight year of sagging crop prices, farm lenders are concerned about a possible rise in nonperforming loans.

Across nearly all commodities, prices have been pushed down by a world less hungry for agricultural goods, particularly in Asia, where recession hit in 1997.

Unfortunately, bankers say, there is no end in sight. The Department of Agriculture has forecast depressed prices for crops and livestock at least through yearend.

"If the ag economy has one bad year and comes back, it's no big deal," said Cornelius Gallagher, agribusiness portfolio manager for Bank of America Corp.'s consumer and commercial banking division. "But three bad years-and that's the concern for 1999-then problems begin to show."

Banks' agricultural loan portfolios have shown few signs of weakness this year.

But on the basis of global economic trends, bankers expect their borrowers may have trouble repaying their loans in the fourth quarter.

"It's going to be another tough year for agriculture," said William Henderson, executive vice president of San Francisco's Wells Fargo & Co. and head of agricultural lending in 10 western states. "We are carefully watching the portfolio."

In a May survey of bankers by the Minneapolis Federal Reserve Bank, 57% of the respondents said they thought loan repayment rates would be below normal this year.

This supported a similar fourth-quarter survey by the Kansas City Fed showing that a repayment index-the rate at which farmers pay back their debt-had dipped by 44% since a similar survey a year earlier.

An early sign that farmers are in trouble may not come from the producers themselves, bankers said, but from other businesses in rural America that serve the farm sector. As the agricultural economy weakens, farmers cut back on spending, and businesses like local fertilizer shops and farm equipment dealers feel the pain.

Bank of America lenders are now spot-checking credits to farm-service businesses to make sure those companies are staying afloat, Mr. Gallagher said.

Bankers said they are also turning away more borrowers this year because farmers cannot meet underwriting standards.

"I think everyone's being more cautious," Mr. Gallagher said.

Wells Fargo puts farms through extensive stress-testing before extending credit.

Farmers must demonstrate that they can withstand long periods of low prices before they can get a loan.

"We take a worst-case view," Mr. Henderson said. "We continue to bank them as long as we think they have the working capital."

Denying credit this year may give the impression that banks are not willing to stick with farmers through tough times, said Keith Leggett, a senior economist at the American Bankers Association.

But lenders have to make sound decisions, he added. Farmers that keep borrowing despite significant losses are eating away the equity in their businesses, he said.

Loan denials are "a sensitive issue," Mr. Leggett said. "But sometimes you have to migrate people out of agriculture."

Bankers say that they are committed to financing agriculture. But as fewer borrowers qualify for loans, those who do meet the standards are taking on more debt.

As a result, the agricultural loan portfolios of the biggest farm lenders have grown by 4.02% from a year earlier, to $12.9 billion at March 31.

The farm sector is part of the business plans of several large banks, including Wells Fargo, Bank of America, and U.S. Bancorp, Mr. Leggett said.

And bankers say farmers will continue to be important customers.

Though Cleveland-based KeyCorp shrank its agricultural loan portfolio by 3.9% in 1998, the company is working to boost its lending activities in Washington, Oregon, and Idaho, said Mike Lettig, KeyCorp's market area president and sales manager for eastern Washington State.

Peter Atkins, vice president of Norwest Agricultural Credit Corp., a Sioux Falls, S.D.-based unit of Wells Fargo, said the $201 billion-asset company has grown used to agriculture's cyclical nature.

"There have always been ups and downs. There always will be," he said. "We want to maintain a steady course."

Mr. Henderson of Wells agreed.

"We want to be known as the bank that's there through thick and thin," he said.

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