Nebraska banks weathering economic storm
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BY MATT OLBERDING / Lincoln Journal Star
Historically, Nebraska banks have not fared well during major economic crises.
From 1929 to 1932, during the beginning of the Great Depression, 358 banks failed in Nebraska — the third highest total of all the states during that period.
And those failures happened despite Nebraska, like seven other states, having a system of state bank deposit insurance at the time.
During the farm crisis of the 1980s, Nebraska had 33 bank failures between 1982 and 1989, the 10th highest number of failures nationally.
No Nebraska bank has failed since 1989 — Farmers State Bank of Lyman collapsed on Sept. 23 of that year and was taken over by First National Bank of Morrill.
But with a current financial crisis that’s being called the worst since the Depression, should Nebraskans be worried about that streak being broken?
Not at all, say state officials, financial experts and bankers themselves.
“The balance sheets of banks in Nebraska and rural main street are fairly solid,” Creighton economist Ernie Goss said in an interview last month.
Goss said Nebraska has not been affected as much by the housing downturn as most of the rest of the country.
Nebraska banks as a whole did not engage in a lot of subprime lending — giving mortgages to people with spotty credit — and so are are not experiencing the consequences.
Goss’ assertions are backed up by another economist: John E. Anderson, associate dean of the College of Business Administration at the University of Nebraska-Lincoln.
“Community and regional banks are very stable and very solid,” said Anderson, who served a term on the staff of the White House Council of Economic Advisers from 2005 to 2006. “Our housing market hasn’t been subject to the weakness of more distressed parts of the country.”
As of August, there were 11,228 subprime mortgages in Nebraska, according to data compiled by the Federal Reserve Bank of New York.
More than 90 percent of those mortgages are held by people who live in the homes, and two-thirds are current on their payments.
Only about one out of every 1,000 Nebraska homes is in foreclosure, according to the New York branch of the Federal Reserve. That’s well below the national average.
But that’s not to say the state’s banks are immune from the problems caused by bad mortgages and falling home prices.
Overall, as of June 30, the 245 Nebraska institutions insured by the Federal Deposit Insurance Corporation had a combined $437 million in non-current loans, or loans on which the payments are at least 90 days past due.
That’s an increase of more than 20 percent since the first of the year and nearly double what banks had on their books at the start of 2007. But it’s also $32 million less than what those same banks have put aside in reserve to cover those losses.
John Munn, director of the Nebraska Department of Banking and Finance, recently attended a meeting at the Kansas City branch of the Federal Reserve, where he spoke to some of his counterparts in other states.
After hearing what’s going on in other states, Munn said, “I’m glad I’m the state banking commissioner in Nebraska.”
He cited a number of figures that show Nebraska banks’ relative strength and profitability compared with those in the rest of the country.
For instance, through the first six months of this year, banks’ return on assets nationally dropped to 0.52 percent from 1.24 percent during the same period last year. For the more than 180 state-chartered Nebraska banks, however, return on assets dropped only from 1.39 percent to 1.3 percent during the same time period.
The state’s banks also are in a better position when it comes to liquidity, Munn said.
Seventy-three percent of Nebraska banks’ deposits are core deposits, such as checking and savings accounts opened at branches in their main markets.
By contrast, the national average is only slightly more than 47 percent.
That means Nebraska banks rely less on other sources of funding, such as loans from other banks, that are becoming harder to get as the credit crisis dries up lending.
“I really felt good about that number,” Munn said.
Bankers feel good about those numbers, too.
“Credit is readily available,” Jeff Krejci, president and vice chairman of First State Bank in Lincoln, said in an interview with the Journal Star last week.
Krejci, who also is chairman of the Nebraska Bankers Association, said, “ I don’t think we have a credit crunch in the state of Nebraska.”
That’s a view echoed by Carl Sjulin, president of Lincoln’s West Gate Bank.
West Gate sells mortgages it originates on the secondary market, and Sjulin said the bank is having no trouble finding buyers for those loans.
“2008 will be one of our best years ever,” he said.
Sjulin said he thinks most community banks are doing well, despite the nation’s economic and financial crisis.
“It actually brings business to us,” he said.
Munn said he thinks the lack of out-of-whack real estate prices is the No. 1 reason the state’s banks have largely stayed out of trouble. A strong ag economy also has helped to boost community banks’ bottom lines.
In some ways, good fortune has played a role as well.
For instance, Nebraska has had, for at least a decade, a state law that limits the amount of stock the state’s banks can own in Fannie Mae and Freddie Mac.
In the past, that might have seemed like unneeded regulation, but it recently became important when the two mortgage finance giants had to be taken over by the federal government.
The takeover did not include any sort of guarantee to help holders of the companies’ preferred stock, which includes thousands of banks large and small.
Analysts think the stock will wind up worthless and, according to the Wall Street Journal, more than 50 small banks are expected to either fail or have to be sold because of losses related to it.
“I think we dodged a big one,” Munn said about the Fannie Mae and Freddie Mac situation.
While Nebraska officials would be expected to put as positive a spin as possible on the state’s banking industry, at least one neutral source suggests they aren’t embellishing
Bauer Financial, a private company that has rated the financial condition of the nation’s banks since 1983, gives the state’s banks high marks.
About three-fourths of the 245 FDIC-insured institutions in the state are rated excellent or superior by Bauer, and only five do not have a rating of at least adequate.
While Nebraska banks are currently doing well, no one can say with certainty what will happen if the country’s — and the world’s — financial problems continue.
Goss said cracks are already starting to show.
“There has been a considerable deterioration for the rural main street economy over the past year,”Goss said in his monthly Midwest economy report released Wednesday. “The national economic downturn and the housing depression are showing up on rural main street.”
Richard Piersol contributed to this story. Reach Matt Olberding at 473-2647 or molberding@journalstar.com.
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