Banks on Watch

July 26, 2011 08:08 PM

Despite an upturn for the banking industry, the accelerated pace of bank failures will continue, says Peter Martin, a financial specialist with farm management consulting firm Kennedy and Coe.

Right now, roughly 1,500 of the 7,500 insured institutions in the U.S. are designated as "farm banks," which means they have the majority of their loans in agriculture.

"This consolidation is going to affect producers going forward," Martin says. That’s because roughly one-third of the remaining farm banks are only $50 million in asset size.

"This is a very small bank," Martin adds. "A lot of these can’t handle what top producers need when it comes to credit and financing options."

In addition, bank expenses are on the uptick, with new emphasis on tech-nology and additional insurance costs. For example, most customers today want online banking. "For a $50 million local bank, this is extremely expensive technology," Martin says.

FDIC insurance is another expense: not only have premiums skyrocketed, banks now have to prepay up to three years of insurance, Martin says.

As a result, the industry is witnessing a record number of bank foreclosures. From 2000 to 2008, only 52 banks closed. In 2009, that number reached 140. In 2010, the number of bank closings hit 157.

"So far in 2011, we are on track to close 150 banks," Martin says.

Proceed With Caution. Martin doesn’t like to be an alarmist, but he says top producers who are expanding and running larger businesses need to be cautious. "The reasons we used to choose a bank, such as personal relationships or knowledge of agriculture, are deteriorating," he adds. "We urge farmers to proceed with caution and spend time checking up on a bank."

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