Stories from the Denver Post this month
tell of a grim reality for struggling banks, and their customers, across the country. The economic situation, which to this point has left agriculture alone for the most part, spilled over into the agriculture-heavy region surrounding Greeley, Colo., when New Frontier Bank was closed
by the state of Colorado on April 10.
Despite assurances from Treasury Secretary Timothy Geithner earlier this month that more than 90% of the country's banks are in good financial health, economist Neil Harl is growing increasingly worried. The first bank closing this year was January 16. To date, there have been 29 bank closings in the United States.
Not a typical bank. By all accounts the Greeley bank had made a number of risky loans and suffered from poor investment decisions and is not representative of most banks. They have yet to find a buyer for the institution. Still, the numbers tell the story behind Harl's concern.
"About half of the Iowa banks reported non-performing loans above one-percent as of 12/31/08,” says The Iowa State University emeritus professor of economics. "That is considered the point at which regulatory scrutiny intensifies.”
"As of that date, 26.9% of the commercial banks in Iowa reported 2% or more non-performing loans (a 70% jump over a year earlier and a 155% increase as of 12/31/06).
Harl pulls some quick numbers from the Federal Deposit Insurance Corp. (FDIC) Web site. It paints a potentially tough picture for banks across the heart of production agriculture:
- As of 12/31/08, Colorado banks reported 2.26% of past due and non-performing loans compared to 1.54% the year earlier.
- Kansas 2.04%, compared to 1.62% on the last day of 2007.
- Nebraska: 2.00%, compared to 1.51% in 2007.
- Oklahoma: 2.64% compared to 2.43% in 2007.
"It does not take a lot of loans in default to wipe out the narrow band of equity capital of banks, typically around 8% equity,” he says. "But the figure is lower for big banks. That was a lesson we learned in the 80s.”
Talk to your banker. John Blanchfield, the agricultural division director for the American Banker's Association (ABA) says his group is confident in Geithner's statements about the health of the nation's banking system. That doesn't mean some banks won't be in trouble, however. He encourages businesses to talk to their bankers about their institution's financial health.
"Have a frank discussion with your bank,” Blanchfield encourages farmers. "Let the banker know your concerns. Bankers want to talk about their business with their customers.”
Blanchfield further encourages bank customers to discuss their deposit account structure with their banks to ensure they are maintained to comply with FDIC safeguards. All accounts up to $250,000 are 100% guaranteed by FDIC. "Nobody has ever lost money in an FDIC insured account.”
Added protection. Furthermore, many banks have additional insurance from FDIC that guarantees accounts of any size—but only on non-interest bearing accountsuntil December 31, 2009. Recognizing that many farmers and ranchers deal with accounts well in excess of $250,000, he says it's a good idea to talk with your banker to ensure they have this additional coverage.