Academic journal article ABA Banking Journal

Strong Balance Sheets Ease Flood Effects

Academic journal article ABA Banking Journal

Strong Balance Sheets Ease Flood Effects

Article excerpt

The mood of midwest ag bankers in mid-September was one of cautious optimism. Even though the flood waters had receded, the prospects for decent harvests in much of Iowa, Illinois, and Missouri were bleak.

Add to that the question of whether farmers would be able to plant winter crops any time soon because of over-saturation of their fields, and the fall was shaping up to be a washout. Still, few bankers were worried about long-term effects of the summer flood on their ag customers--or on their own institutions.

Not a knockout punch. "Iowa's ag banks are strong enough to withstand anything resulting from this flood," says Dick Summerwill, president and CEO of Iowa State Bank & Trust, a bank with $273 million in assets in Iowa City. "This will be a setback for them--and for agriculture--but it won't be a knockout punch."

If banks in total are performing above average, ag banks, generally, are healthier still. In 1992, farm banks reported earnings of more than $2 billion, a 23% increase over 1991, according to an ABA report, Agricultural Bank Performance, December 1992. The report also notes that farm debt-to-asset ratios fell last year for the third consecutive year. Farmers have been paying down debt and have been financing a greater portion of production out of current income.

The country's 3,800 ag banks averaged a return on assets of 1.24 in 1992, up from 1.14 the year before. The ag banks in the flooded region of the upper Mississippi River reported a 1.21 ROA in 1992, up from 1.07 the year before. Loan growth for the group was a modest 4%, but nearly double that of all banks in 1992.

All of which suggests that ag banks are in a good position to absorb the effects of the floods.

"The banks really don't have enough data yet to make a solid determination of the flood effect," says Neil Miner, executive vice-president of the Iowa Bankers Association. "But most feel comfortable that given the shakeout they went through in the mid-1980s, their customers and the lenders have done a much better job of structuring the debt and working on cash flows."

The current interest rate climate, too, helps borrowers restructure their debt to improve cash flows, a strategy that had negligible benefits in the early-to-mid-1980s, when interest rates were in the double digits, points out


To their credit, ag banks early on were proactive in establishing attractive loan packages for customers affected by the flooding, thanks, again, to their healthy balance sheets.

Low-interest-loans. "Our bank agreed to make loans at a 6% rate for longer terms to any flood related business or customer," says Summerwill, of Iowa State Bank Trust. Members of the business community in Iowa City who were not affected by the flood subsidize 4% of the loan rate for three years, and the bank picks up the other 2%. "Essentially, a business that needs the money has an interest-free loan for a three-year period," says Summerwill.

Many other banks in Iowa offered loans of up to $250,000 at a 5% annual percentage rate with no closing costs.

Missouri banker Jon Lawson, vice-president at Lawson Bank ($29 million in assets), is taking advantage of the Farmers Home Administration guaranteed lender program to aid flood-affected customers.

"We're one of 42 banks in Missouri that are certified guaranteed lenders," says Lawson. "If I have to, I'll use that for customers that aren't with an FmHA guaranteed loan right now--it may help them operate another year."

Community assistance. Aside from the expansion of credit at low interest rates, ag banks were in the thick of flood-relief efforts in their communities from the beginning. The Illinois Bankers Association (IBA), for example, established a "Bankers Flood Relief Fund" for flooding victims in july. Monies collected by mid September totaled about $25,000, which was to be distributed via the Red Cross, the Salvation Army, and the governor's Farm Help Trust Fund. …

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