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Bank Trouble in the Oil Patch Can Add to Farm Woe

March 15, 1987

WASHINGTON (AP) _ The financial bind on farmers the last few years has contributed to a rise in bank failures nationally, but an Agriculture Department economist says the crunch is even worse in states where low oil and natural gas prices have taken a toll.

Gregory Gajewski of the department’s Economic Research Service examined the plight of commercial banks in Colorado, Kansas, Louisiana, Oklahoma and Texas. The five states contain the majority of U.S. banks with energy credits exceeding 25 percent of their capital.

″Often above average in size, the region’s energy banks are important to agriculture, even though they tend not to meet the agricultural bank definition,″ Gajewski said. ″Many have farm loan volumes that exceed the total assets of a typical agricultural bank.″

Gajewski noted that as of mid-1986 non-agricultural banks held almost a third of the $9 billion in farm loans made by commercial banks in the five states.

″Sharp declines in performance, especially at non-agricultural banks, occurred during the first six months of 1986,″ he said. ″Many of these non- agricultural banks do not specialize in energy finance but are suffering from ripple effects, set off by the contractions in the farm and energy sectors.″

Gajewski reported his findings in the March issue of Agricultural Outlook magazine published by the USDA agency. In addition, Gajewski was a major contributor to another new report, Agricultural Finance, in which he also describes some of the problems of commercial banks.

There are two generally accepted definitions of agricultural banks. The Federal Deposit Insurance Corp. says a bank is agricultural when its farm loans account for more than 25 percent of the bank’s loan portfolios.

But the Federal Reserve Board says a bank is agricultural when its farm accounts are higher than the average for all banks. As of last June 30, banks nationally had farm loans equaling about 16.2 percent of their total loans.

In all, as of June 30, 1986, there were 14,184 commercial banks, of which 4,836 were classified as agricultural by the Fed’s definition.

The five-state region accounted for 52 percent of all U.S. bank closures last year - 71 out of a total of 137. Of the 71 closures in the five states, 29 were agricultural banks, representing 46 percent of the 63 agricultural bank closings nationally in 1986.

″Crude oil prices rose in early 1987 to around $18 a barrel, but analysts believe U.S. oil production will continue to decline unless prices rise above $20 a barrel,″ Gajewski said. ″Moreover, lags of 18 to 24 months are common in banks’ recognition of loss, so regional banking conditions are expected to continue deteriorating despite slightly higher oil prices.″

He added: ″Even though agricultural banking conditions in this five-state region are not as bad as might be expected, the region’s banking problems are severe enough to retard the availability of farm credit.″

More than 40 percent of the agricultural credit in the region comes from banks that do not specialize in farm finance, so the adverse developments affecting the region’s non-agricultural banks have negative implications for farm credit.

The region’s problems ″will probably reduce credit available for any use, including farming,″ Gajewski said.

Nationally, according to USDA economists, total farm debt - not counting household debt - dropped for the fourth straight year in 1986 to about $186.2 billion, and another decline to around $174.4 billion is likely in 1987.

Commercial banks were reported as of Dec. 31, 1986, to be holding 22.4 percent of the total farm debt, exceeded only by a 25.7 percent share held by the Farm Credit System.

Looking at banks nationally, Gajewski said, ″Despite the ongoing problems and adjustments associated with agricultural loans, there is little evidence that commercial banks as a group are making major portfolio changes to substandially reduce their agricultural exposure.″

Farm loans at agricultural banks averaged 35.2 percent of their total loan volume as of mid-1986, down only slightly from 37.3 percent over the previous year and a half.

″Commericial banks remain good sources of credit for farmers in solid financial positions,″ Gajewski said. ″Farm credit terms and creditworthiness requirements, however, have become more stringent.″

End Adv for Sunday, March 15

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