Major Nebraska banks serving Omaha rebound from the darkest days of loan losses

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Posted: Tuesday, March 19, 2013 12:00 am

The president of the largest Nebraska-based bank remembers exactly where he was when everything started toward Hades: Yankee Stadium, the Bronx, N.Y.

Dan O'Neill of First National Bank was at a baseball game in the summer of 2008, seated among a coterie of Wall Street bankers in the good seats. BlackBerries and iPhones started to buzz: It was big news in the financial business, the acquisition of giant but struggling California mortgage lender Countrywide Financial by Bank of America Corp.

“I figured that Countrywide was in California, everything is a little different there, it won't affect us in Omaha,” O'Neill said, describing his 2008 evaluation of the mortgage and banking troubles engulfing the coasts. “I went back to my hot dog and Coke.”

O'Neill and his counterparts in Omaha banking circles can afford to casually reminisce these days. The danger is over. The Nebraska-based banks with the largest shares of Omaha deposits have largely recovered from the loan losses that spread through the industry starting in 2008. The economy has improved and the bad debts have been sold, written off or otherwise disposed of.

An examination of Federal Deposit Insurance Corp. records shows that the largest deposit holders in the Omaha metro area have reduced their loans not being paid as agreed from the elevated levels that hammered profits and dividends starting in 2008.

Four of the five Nebraska-based banks with the largest Omaha deposit shares also share another trait: Even during the worst of the housing and credit crisis, their loans not being paid as agreed never exceeded those of their national peer groups. The fifth, Security National Bank, had a 2007 bad loan rate so low, it would have been almost impossible to better.

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It wasn't all management expertise, said John Munn, director of the Nebraska Banking Department.

“Residential and commercial real estate did not devalue to the same degree in Nebraska as other places in the country,” Munn said. “Agricultural lending remained strong throughout.”

Nebraska bankers got a hefty helping hand from the overall local economy — diverse and propped up by high farm income — and the Midwestern investors' abstinence from the financial benders that became a sport in high-profile spots such as Los Angeles, Seattle, Las Vegas and Miami.

House “flippers” in those areas sought and got easy loans to quickly rehab and sell residences, often to another speculator looking for the next one in line. Loads of lenders were left as the last one standing at a game of musical houses.

Countrywide was the poster child for the subprime mortgage industry, the no-money-down, “pick-your-payment” loans with the phantom job and credit checks.

In 2008, the $4 billion acquisition by staid Bank of America, the largest U.S. lender, was seen as an aggressive and potentially lucrative bet on the U.S. housing market's recovery. When it was finalized that summer during O'Neill's baseball game, it resounded natonwide.

The First National president now knows exactly how his analysis at the time missed the mark: Bank of America's inability to decipher the depths of Countrywide's troubles was a mere symbol of greater myopia among the nation's bankers and financiers. The acquisition almost sank BofA.

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Within a year or two, the red ink staining bank income statements from defaulted borrowers, foreclosed houses and bankrupt businesses would splash in from the coasts and the desert Southwest, reaching as far as the Great Plains, though in much smaller volumes.

Broke borrowers lead to loans not being paid as agreed, a key banking measurement with ripple effects throughout an economy. When borrowers do not pay off as specified in loan contracts, banks by law must write down the loan to a lower projected net worth, if any, and set aside money in an internal fund to cover the defaults.

The reserve kitty is money that could otherwise go to profit, among the greatest pillars of financial stability for banks.

Banks lose current income from not collecting principal and interest payments.

Then come the reverberations. Lower current income and higher loan loss reserves can wind up crimping the capital cushion banks need to cover all of their liabilities, such as deposits and their own debt and interest payments. That, in turn, can limit a bank's willingness to lend, or at least to lend at the rates borrowers find attractive.

“Nonperforming loans have two very negative aspects,” said Gordon Karels, Nebraska Bankers Association banking professor at the University of Nebraska-Lincoln. “You lose the interest revenue and you have to classify the loan as a loss and write down its value.”

Loans not being paid as agreed began to uptick throughout the nation in 2008, as the housing bubble burst and millions of people who should not have qualified for mortgages began defaulting.

That in turn depressed the housing market, leaving real-estate developers with half-finished residential projects, no buyers and lots of bank debt. Then unemployment rose, and people otherwise not affected by the housing bubble began defaulting on credit cards, personal loans and other lending agreements.

For the banks, it was like the main hatchway gave in during a typhoon.

Here's how that played out locally:

>> For First National Bank of Omaha, the metro-area deposit share leader with 27 percent, loans not being paid as agreed more than tripled from December 2007 to December 2009. By that point, 2.91 percent of total loans were off the tracks, up from less than 1 percent three years earlier. By the end of last year, the bad-loan rate had fallen to 1.56 percent.

“September 2009 was probably the depth of our problems,” O'Neill said. “At that point we had been through eight straight quarters of rising nonperforming assets and were wondering when it was going to stop.”

>> Mutual of Omaha Bank's bad loans spiked at 2.26 percent of total loans in 2010.

The banking subsidiary of insurer Mutual of Omaha started operations in 2007, so it missed a lot of the housing bubble that started earlier in the decade, CEO Jeffrey Schmid said. Bad loans are now back down to 1.26 percent.

>> Pinnacle Bank's worst year also was 2010, when bad loans were 1.37 percent of total loans, up from 0.62 percent in 2007. They are down to less than 1 percent now.

“We are family-owned, conservative and tend to know our customers very well,” said Steve Zey, Pinnacle's Omaha city president. “Some banks jumped out of their area of expertise and went into California and Florida trying to hit a home run.”

>> American National Bank's nonperforming loans are lower than during 2007, when they ended the year at 1.43 percent. They hit a crisis-period high of 2.08 percent in 2009 and have dipped to 0.77 percent.

“Nebraska banks weren't heavily concentrated in the riskier asset classes, residential development and commercial real estate,” said Steve Ritzman, CEO of American National. “We have also experienced considerably lower unemployment, and that has a positive impact on real estate prices.”

>> Security National Bank of Omaha's bad loans barely registered in 2007, at 0.04 percent of total loans. The high was still less than 1 percent, in 2011. In December, they were 0.76 percent of loans.

For anyone who thinks the percentages are small, that a bad-loan rate of 3 or 4 percent doesn't seem like much, they have another thing coming, said Amiyatosh Purnanadam, a banking professor at the University of Michigan's Ross School of Business. That is because the average bank, on a $100 loan, has only 8 percent of ownership's money in the deal; the rest of the cash loaned out comes from deposits, Purnanadam said.

So, he said, a 4 percent bad-loan rate adds up to a 50 percent reduction of owner's capital for the average bank in the average loan, the professor said. Regulators want that ownership capital to be the buffer that keeps operating losses from eroding depositor money, not vice versa, Purnanadam said.

Still, the worst Omaha saw was tame by national standards, said Tony Path, a banking professor at the University of North Carolina at Charlotte. Nebraska's mild housing troubles and stable employment prevented debacles that engulfed other areas.

“Four percent bad loans is a number some of the banks in Alabama, Georgia and Florida would have killed for,” Plath said. “Losses were 10 percent and more in some of those areas.”

Contact the writer: 402-444-3133, russell.hubbard@owh.com

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