Caught in the Middle

! Tina Bochart no longer answers the telephone at State Bank of Dannebrog, Neb., with a cheery "Good morning. State Bank." Instead, she simply says, "FDIC." Bochart, a former assistant cashier, goes on to explain that State Bank, the only bank in town, has folded and been taken over by the Federal Deposit Insurance Corporation. "We're here," she says, "until things are cleaned up." The closing is a severe blow to Dannebrog, a farming village of 380, where the landmarks are groves of giant sycamore trees, a Lutheran church spire and the Silver Dollar Bar. Ray Johnson, owner of Johnson Grocery, may drop plans to double his store's size by moving it across Main Street to the building where the Lions Club meets. Says he: "The closing of the bank is going to hurt our community so much that, unless we get another bank or credit union, I wouldn't want to spend the money to expand."

Rural banks have long been respected and profitable cornerstones of small farming towns. Now, however, many of the lenders have become both unwilling villains and victims in the grim drama unfolding in the American farm belt. Caught between their sympathy for the farmers' plight and their own fight for survival, banks have had to foreclose on loan after loan. But in many cases the foreclosures have not prevented banks from failing. Says James McDermott, senior vice president of Keefe Bruyette & Woods, a Wall Street investment firm that specializes in bank stocks: "The farm-belt mom-and-pop banks are in a state of crisis."

U.S. Government officials are trying to be reassuring. Federal Reserve Chairman Paul Volcker told Congress last week that agricultural banks have historically been "quite profitable, so fortunately they have a certain financial cushion of liquidity and capital to draw on." Still, 25 of the 79 U.S. banks that failed last year had at least 25% of their loans out to farmers. Volcker admitted that the farm-bank failure toll will be higher this year. Some 325 institutions on the FDIC's list of 889 problem banks are agricultural lenders.

Most communities that suffer closings are not as unfortunate as Dannebrog, which now has no bank at all. Sometimes failed ones quickly reopen under new owners who receive federal assistance. Two small farm banks closed last week by the FDIC opened their doors again the very next day under new ownership. The Farmers National Bank of Erick, Okla., was taken over by the First American Bank of Erick, and the First National Bank of Woodbine, Iowa, became the Iowa Savings Bank, a new subsidiary of a local holding company. In other cases, healthy banks in neighboring towns or cities take over collapsed institutions. Almost always, the new management pursues more conservative lending policies and demands payment more quickly from cash-strapped farmers.

Resentment of small-town bankers is boiling. Some say that they now get the silent treatment on the street, and a few have been assaulted by angry customers. Nebraska farmers have taken to wearing black armbands to protest foreclosures. Bankers have also become the target of a bitter joke making the rounds in the Midwest: "Question: What's the difference between a dead skunk on the road and a dead loan officer? Answer: There are skid marks by the skunk." That kind of talk deeply offends the bankers, who in many cases grew up with and went to school with their customers.

Despite their troubles, many farm bankers remain optimistic. Says Edward Ellanson, vice president of Farmers State Bank of Trimont, Minn. (pop. 800): "It's gloom and doom, and we're all feeling the pressures. But we have good strong capital. Hopefully, we'll survive this mess."