The biggest news story of 2008 was the deteriorating economy. It is a story we covered thoroughly in the pages of NorthWestern Financial Review magazine. Bank earnings were collectively off, even though they reached record levels at some institutions, particularly institutions in rural areas.
The decline in earnings actually started in 2007, with aggregate industry-wide earnings for that year coming in 27 percent lower than in 2006. Final year-end numbers of 2008 won’t be available until February, but we know the decline throughout the year was steep. In the third quarter, the industry collectively earned $1.7 billion, a 94 percent drop compared to third quarter 2007. One in four banks across the country reported losses for the third quarter, while 58 percent said third quarter earnings in 2008 were lower than they were in 2007.
In the Upper Midwest, 17.5 percent of the banks (611 out of 3,480) reported losses for the third quarter. That’s unusually high. Some states are suffering more than others; in Michigan, 38.3 percent of the banks reported third quarter losses; 25.6 percent reported losses in Colorado; and 24.0 percent reported losses in Missouri.
Earnings trouble put bank failures back in the news. Twenty-five banks closed this year, compared to three in 2007. The IndyMac Bank failure on July 11 captured a lot of headlines. With $32 billion in assets, it was the second-largest bank failure in history. The bank was somewhat emblematic of the mortgage finance troubles plaguing the economy; IndyMac specialized in Alt-A mortgages, the ones with reduced documentation.
First Integrity Bank, N.A., of Staples, Minn., was the nation’s fourth bank failure in 2008; it was closed by the OCC on May 30. This was a $57 million bank that reached beyond its home lending area by making loans in Florida, where the real estate bubble made business look promising a year or more earlier.
The housing bubble burst also caused trouble at Fannie Mae and Freddie Mac. When stock prices at the GSEs plummeted by 45 percent in early July, the U.S. Treasury Department stepped in to “help.” It made arrangements to shore up capital, but ultimately placed the two agencies in conservatorship on Sept. 7. The capital markets responded, all but freezing up. The Treasury Secretary begged Congress for money to restore faith in the markets. By Oct. 1, President Bush signed a $700 billion package.
In the meantime, Lehman Brothers filed for bankruptcy, while Morgan Stanley and Goldman Sachs applied for bank holding company status. Also, Wells Fargo struck a deal to acquire Wachovia, edging out a Citigroup, which thought it already had inked a deal to buy Wachovia.
Treasury Secretary Paulson used half the money from congress to create a new program called the Troubled Asset Recovery Program. In a dramatic move on Oct. 14, Treasury said it would buy $125 billion in preferred stock in nine of the largest banks in the country. Another $125 billion was to be used to buy stock in other banks. Treasury wanted the banks to lend the money, but as the economy has suffered, loan demand has fallen off. Paulson originally had said some of the TARP money would be used to buy troubled assets from banks, but on Nov. 12, he rescinded that idea, saying instead he would use the money to encourage rejuvenation of the asset-backed securities market.
The FDIC also helped out to lubricate the lending markets by guaranteeing loans between banks and by upping the level of insurance protection on deposits at banks. It is something the banks have wanted for a long time anyway. But it comes at a price. Insurance rates charged by the FDIC are going up, on average, seven cents for every $100 in deposits, a doubling of the rate for most banks.
The Federal Reserve aggressively lowered interest rates throughout the year in an effort to stimulate the economy. The Fed Funds rate currently stands at a historic low in a range from 0 to 0.25 percent; on Dec. 11, 2007, the rate was 4.25 percent.
As investors lost confidence in the economy, money migrated away from the commodities markets into U.S. Treasury bonds. That brought prices for farm commodities down out of the stratosphere. Equations for determining profits related to farm operations look entirely different today than they did a year ago. With the dollar strengthening, export opportunities are down, but the price of fuel is also down, making it easier to plant. Lower commodities prices are depressing farm land prices, which anecdotally had reached as high as $10,000 per acre in some parts of Iowa. Also, enthusiasm for ethanol seems to have waned, as lower gas prices and higher food prices reduce the incentive to convert corn into fuel.
Weather across much of the Upper Midwest allowed farmers to produce record yields, although in eastern Iowa, spring flooding and tornadoes had a significant negative impact on farmers and rural communities.
Other major stories for bankers in the Upper Midwest this year included the merger discussion that took place between the Federal Home Loan Banks for Chicago and Dallas, the rewrite of the banking code in South Dakota, and the attempt to beef up the laws governing mortgage transactions in Minnesota. The Chicago and Dallas home loan banks decided not to merge and the Chicago bank took steps throughout the year to improve its earnings. In South Dakota it became a little easier for a bank to set up a new branch; and in Minnesota, the bankers were able to persuade Gov. Tim Pawlenty to veto an onerous mortgage foreclosure bill.
Several well-known bankers in the Upper Midwest changed jobs in 2008. Suku Radia became the new president of Bankers Trust in Des Moines, replacing the retiring J. Michael Earley (a former NorthWestern Financial Review Banker of the Year). Jim Ghiglieri left his bank in Toluca, Ill., to join the Shazam ATM/EFT network. Phil Koepke, a correspondent banker for 30 years, retired from M&I Bank in Milwaukee in February. Wells Fargo correspondent bankers Bill Meyer, Mike Bodeen, Troy Rosenbrook and Cathy Morrissey all took new jobs; Meyer and Bodeen went to National Exchange Bank & Trust in Fond du Lac, Wis.; Rosenbrook went to American Bank in St. Paul, and Morrissey became the new president of NetWorks, the EFT network in Nebraska. Robert English, working in Chicago, now heads Wells Fargo’s correspondent banking department.
Kirby Davidson was promoted at the Graduate School of Banking in Madison, Wis., to president. Dorothy Bridges left Franklin Bank in Minneapolis to join a bank in the Washington, D.C. area. And Shari Weber, who had been president and CEO of the Community Bankers of Kansas for five years, left in order to run for a state senate seat. (She lost that election.) Also worth noting, former Iowa Gov. Tom Vilsak, who gave a speech on the unexpected topic of global warming at last May’s annual gathering hosted by the Iowa Superintendent of Banking, was appointed U.S. Secretary of Agriculture by president-elect Barak Obama.
It was a big year in financial services. We look forward to covering the industry’s events and developments throughout the coming year.