The year 2018 opened with expectations for strong economic performance across most sectors, including banking. There was concern about agriculture, but most other areas of the economy were participating in the lengthy expansion. A sweeping tax bill passed in late 2017 set the stage for a robust 2018. And in May, when Congress passed regulatory relief for the banking industry, prospects grew even stronger.
There was early optimism; many banks – especially the C corps – shared their anticipated tax savings, and business owners across the board said they anticipated rewarding returns. Lending was generally strong in the early part of the year, as small business owners and commercial real estate owners shared expectations of growth.
Bank earnings across the industry were strong, as reported by the FDIC for the first quarter, second quarter and third quarter. But that doesn’t mean there weren’t challenges.
The Federal Open Markets Committee continued to raise the Fed Funds rate. At the beginning of the year, the rate was 1.25 percent to 1.5 percent; after the December 19, 2018 meeting where the committee raised a quarter percent, the rate is finishing the year at 2.25 percent to 2.5 percent.
The Treasury bond yield curve flattened considerably during the year. At the beginning of 2018, the difference between the one-year Note and the 10-year was 63 cents. As of mid-December, it was 18 cents. At the beginning of the year, there was a spread of about 100 basis points between the Fed funds rate and the 10-year bond; today the difference is closer to 30 basis points.
The stock market started the year strong, but toward the end of the year, the indexes became volatile and any gains made in the first half of the year have been wiped out. The Dow Jones Industrial Average, for example, was down 5.69 percent year-to-date, through Dec. 19.
Modest commodity prices continue to make it difficult for farmers to make money, particularly if they are renting land. The ag slump has continued long enough that many ag bankers are having tough conversations with customers about whether it makes sense for them to remain in farming. The trade tariffs introduced by the Trump administration this year hit farmers particularly hard, although the U.S. Department of Agriculture announced Dec. 17 it would distribute a second round of aid to farmers producing soybeans, pork and dairy.