The worst drought to hit the Midwest in more than 20 years is forcing bankers to make tough calls on how to handle delinquent agricultural loans.

Banks with big ag exposure have been fortunate in recent years. A drought of this magnitude hasn't hit taken place since the 2008 financial crisis. Agriculture had been booming, and family farmers who make up the majority of ag loan borrowers at small banks have been in high cotton.

That's why regulators should refrain from giving banks trouble if they're lenient with farmers, says Roy Dean Schwartz, the president and chief executive of Campbell County Bank in Herreid, S.D.

"They better not give us crap, because these farmers make a lot more money than me or you," he told American Banker, a Collections & Credit Risk sister publication. "When you're getting $8 for a bushel of corn … you don't need a bailout or disaster payments. Farmers are going to be fine."

The $104 million-asset Campbell County Bank has a large percentage of its loans tied to agriculture — about 81% — or more than any bank, according to SNL Financial. With deep ties to farming communities, ag lenders hope regulators will acknowledge that banks know the best way to handle distressed borrowers, says John Blanchfield, a senior vice president at the Center for Agricultural and Rural Banking of the American Bankers Association.

Bankers will renegotiate the terms of loans tied to farms hit by the drought, "if they believe the customer has the ability to recover," Blanchfield says. "You can't be in ag banking and not be willing to work with customers because of extraordinary circumstances."

Many banks prefer to avoid classifying such loans as troubled-debt restructurings (TDR) because it will change how the asset is treated on their books.

Kreg Denton, a senior vice president at $79 million-asset First Community Bank of Western Kentucky in Fancy Farm, Ky., says he likely would not count an ag loan as a TDR this year, if it was modified because a drought hurt a farmer's livestock or crops.

Some bankers say they would record modified ag loans as TDRs, including Keith Geis, the president of $206 million-asset Platte Valley Bank in Torrington, Wyo. "If we give concessions outside of what are our normal underwriting standards, it's our position that it would qualify as a TDR," he says.

The Federal Deposit Insurance Corp. has not issued new guidance on ag loans stressed by the drought, says FDIC spokesman Greg Hernandez.

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