TREYNOR, Iowa — A crew is installing water pipes in the Stephen's Ridge housing development on the north side of town, a project that stalled in 2008, the victim of the financial heat wave that engulfed the banking and real-estate development business that year.
Today's plumbing work is a welcome sight to Roger Williams, vice president at Treynor's four-branch TS Bank, the project's lender. Developer Aspen Builders, of Lincoln, is selling about six lots a year now; about half of the 50-odd lots in the town about 25 miles east of Omaha have been sold to people who are building or plan to build.
“It was pretty dead here until late 2009,” Williams said. “But we knew at the time it would come back to normal; we never considered divesting.”
The project's limbo period coincided with the great banking and financial crisis of September 2008. That is when rampant speculation by the nation's largest banks in mortgage-backed securities, anticipation of constantly rising home prices and the collapse of financial derivatives related to both led to the largest total of U.S. bank failures since the Great Depression. Housing demand collapsed as the recession deepened, unemployment rose and credit dried up.
Since then, banks from Wall Street to Main Street have been through a period that included bailouts, tighter capital requirements and rigorous “stress” tests.
The effects that harmed the coasts and the Sun Belt were far more muted in Omaha, where the banks concentrate on loans and deposits, not trading for their own account or making speculative interest-rate gambits. An examination of their lending during the banking crisis shows loans not only failed to contract, they skyrocketed far past national figures.
That suggests Omaha banks were either more willing or more able to extend credit. It also indicates that businesses here were less damaged by the recession than elsewhere, less indebted to begin with and, therefore, more willing to continue borrowing for capital expenses, inventories and other business requirements.
“The financial crisis occurred during very positive times in agriculture, which is where we live,” said Mick Guttau, chief executive of TS Bank. “Plus, the very durable Omaha economy just kept clicking.”
Nationally, loans outstanding did not even come close to keeping pace with Nebraska, according to the statistics kept by the Federal Reserve. Banks elsewhere were unable or unwilling to extend credit after the 2008 debacle, or lacked customers for such credit as the recession deepened and businesses pared borrowing.
According to Fed figures, U.S. commercial banks in June 2007 held loans and leases worth about $630 trillion. By June of this year, the total was about $730 trillion, about a 16 percent increase, in round numbers, over the six-year period.
In the Omaha area, the lending picture is dramatically different. In June 2007, the five Nebraska-based banks with a metro-area deposit share of more than 2 percent held loans and leases worth about $8 billion; by June 2013, the figure had more than doubled, to $18.6 billion.
Bottom line: While some of the country's largest banks were taking federal bailout money, contracting lending and selling off any loan with a hint of a repayment problem, Omaha's banks were opening the vault doors.
“We have had a pretty healthy economy,” said Gordon Karels, a banking professor at the University of Nebraska-Lincoln. “We didn't get dragged down nearly as much by the housing market.”
Commercial real-estate loans remained readily available during the period, staying level or rising slightly throughout, having fallen only about 3 percent so far this year, the first drop since 2007. Commercial and industrial loans dipped slightly.
“There was a small shakeout in small and medium-sized businesses,” said Jeff Schmid, CEO of Mutual of Omaha Bank. “We have boatloads of capital to lend to good businesses, but so does everyone else; it is a borrowers market.”
There were dim spots. While Nebraska's home prices never reached the levels seen elsewhere, the banks showed a robust appetite for loans to developers in the flush years: Such loans by the metro area's five largest, Nebraska-based banks (ranked by deposit market share) rose 42 percent in 2008, and 24 percent in 2009, a full year into the trouble period.
Then, loans for new home construction and development of raw land began falling in 2010, the start of a three-year period during which they fell by 12 percent, 13 percent and 15 percent through June 2012.
“The construction business kind of ground to a halt,” said Schmid. “The sanitary and improvement districts all sunk, it all went to zero as fast as I have ever seen.”
The fate of the metro area's SIDs, geographic areas with government powers to sell bonds and levy taxes to develop land, illustrate what happened to the housing economy. Fourteen of them have filed for bankruptcy protection in recent years, after selling bonds to convert raw land into housing, only to fail because new home sales stalled and tax revenue was insufficient to pay the debt.
Writ small, it was very close to the same thing that happened to the largest U.S. banks that failed, such as Bear Stearns, and closer to home, Tier One Bank, the state's only institution to fail during the crisis. In all, there were 465 failures nationally between 2008 and 2012, according to FDIC figures.
The common theme, regulators and lawmakers contend, was too much risk and too little capital. It was the crash of 2008 that ushered in the most sweeping round of financial industry reforms since the Great Depression, the Dodd-Frank legislation.
The expansive law set up new financial industry regulators and watchdogs, such as the Consumer Financial Protection Bureau. It also tightened requirements governing interest-rate and credit-default swaps, risky financial contracts that played a part in the failure of Lehman Brothers, the Wall Street investment bank whose bankruptcy on Sept. 15, 2008, gave the banking crisis a precise starting date.
For Main Street banks, one of the key provisions of Dodd-Frank was the Durbin Amendment. It slashed the fees banks are allowed to collect from merchants for debit-card processing to 21 cents a swipe, from 44.
None of it is cheap, it all adds to the cost of banking, and some portion will be passed on to customers as higher fees or interest rates. First National of Omaha CEO Dan O'Neill said during the holding company's annual meeting in June that new regulatory and compliance costs would be about $30 million in the first year.
“The legislation is gargantuan, and much of it has yet to be written in final form,” said Jerry O'Flanagan, chief credit officer at First National Bank of Omaha. “On the theme of overhang from 2008, it certainly has increased costs.”
Many banks have responded by adding fees and dropping free checking accounts. O'Flanagan said First National hasn't done so, considering free checking “a cornerstone strategy.” The bank, he said, is trying to sell more products and services to each customer to compensate.
Bob Benes, the owner of Aspen Builders, said a “one-size-fits-all” regulatory stance is common among government bank oversight agencies, which even before Dodd-Frank eyed new development loans with suspicion.
“What basically happened is that regulators came in and told the banks they were in a crisis,” Benes said. “They were telling our local banks what to do based upon what was happening nationally. It is a shame because some developers with good projects saw those projects die.”
The banking business, said banking professor Karels, is one that is prone to manic cycles. Bubbles still loom, he said, and if Wall Street bursts again, the residue easily could wind up once again on Main Street.
“I don't think this is done yet,” he said. “Things could easily spin back out of control. Europe is very unsettled, and I don't think the new regulations have fixed things at the Wall Street level.”