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Small Banks Getting Battered By Construction Loans

Back on March 25, I mentioned that the Associated Press was reporting the Federal Deposit Insurance Corp., or FDIC, was planning to increase staffing 60% to handle an anticipated surge in troubled financial institutions. From that post:

The Federal Deposit Insurance Corp. wants to add 140 workers to bring staff levels to 360 workers in the division that handles bank failures, John Bovenzi, the agency’s chief operating officer, said Tuesday.

“We want to make sure that we’re prepared,” Bovenzi said…

Now, I can see why. The Wall Street Journal said last week:

According to the Federal Deposit Insurance Corp., $45.4 billion of the $631.8 billion in construction loans outstanding at the end of the first quarter were delinquent. When banks announce second-quarter results in coming weeks, they are expected to report sharp increases in loans that builders can’t repay. Banks are also facing intensifying pressure from federal and state regulators to deal with the problem loans on their books.

That will put additional pressure on an already stressed financial system. Banks have begun to dump bad construction and land loans at discounts, curtail new lending and halt construction projects that are under way to preserve capital. Some analysts even see a wave of bank failures as a possibility.

Delinquency Rates from Construction Loans
Source: Wall Street Journal

According to Journal reporters Michael Corkery, Jennifer S. Forsyth, and Lingling Wei, problems were brewing among small banks earlier this year. They wrote:

Scores of banks were already suffering headaches by the end of the first quarter, according to a review by The Wall Street Journal of FDIC-filed reports by 6,919 banks that make construction loans. The smallest banks, those with total assets of less than $5 billion, faced the biggest problems. The WSJ analysis didn’t include savings-and-loan institutions, or so-called thrift banks.

Nearly one in three of the banks analyzed — or 2,182 — had construction-loan portfolios that exceeded 100% of their total risk-based capital, a red flag to regulators, although it doesn’t mean the bank is in danger of failing. Risk-based capital is a cushion that banks can dig into to cover losses.

Even more alarming, 73 of those banks had construction-loan delinquency rates of more than 25%…

The outlook for small banks looks pretty grim, according to the Journal. Corkery, Forsyth, and Wei wrote:

Over the next few quarters, banks are expected to begin recording much larger losses. In 2007 and the first quarter of this year, U.S. banks wrote down just 0.7% of their residential construction and land assets as bad debt, according to Zelman & Associates, a research firm. Over the next five years that figure could rise to 10% and 26%, which would amount to about $65 billion to $165 billion, Zelman projects.

Source:

“Small Banks’ Reckoning Day Is Coming”
Michael Corkery, Jennifer S. Forsyth, Lingling Wei
Wall Street Journal, July 2, 2008

FDIC Ads: Should We Be Worried?

Leafing through the June 30 issue of Time magazine, I stumbled upon an advertisement from the Federal Deposit Insurance Corporation, or FDIC…

For those readers not familiar with the FDIC, their mission, according to their website, is to preserve and promote public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

Now, the FDIC says the ads were meant to commemorate the seventy-fifth anniversary of its creation as an “independent agency” of the U.S. government. However, some suspect there may be an ulterior motive for the ad program. Keep in mind that back on February 26, I discussed in a post how the fourth quarter of 2007 was the worst bank and thrift performance since the fourth quarter of 1991, whereas the FDIC classified 76 banks as “problem” institutions for the quarter (up from 65 a quarter earlier). In addition, it was revealed that the FDIC was looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

Additional justification for the FDIC to roll out a “reassurance campaign” appeared in the following months. On June 5, John Poirier of Reuters talked about an appearance by Federal Deposit Insurance Corporation Chairman Sheila Bair on Capitol Hill, and wrote:

An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, Bair told a Senate Banking Committee hearing on the state of the banking industry.

“There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past,” Bair said. “Uncertainties in today’s economic environment continue to pose significant challenges for the banking industry, households, and bank regulators.”

So far this year, four small U.S. banks with deposits insured by the FDIC have failed, up from three in 2007. The agency last week boosted its list of troubled banks to 90, which have a combined $26 billion in assets.

Ironically, the FDIC ad I came across featured a photo of the $100,000 Series 1934 Gold Certificate featuring the portrait of President Wilson, the largest denomination of currency ever printed by the Bureau of Engraving and Printing. Nothing more comforting than seeing the words “insuring” and “protecting” next to the image of a U.S. gold certificate with the phrase “one hundred thousand dollars in gold payable to bearer on demand as authorized by law.” Too bad those dollars sitting in banks across the United States haven’t been backed by the precious metal since 1971, when President Nixon abandoned the Bretton Woods Agreement and effectively took the U.S. off the gold standard. As the U.S Treasury says on its website:

Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything.

Oh, Tricky Dick, what another fine mess you’ve gotten us into…

Source:

“UPDATE 1-Bigger U.S. bank failures may be coming – FDIC”
John Poirier
Reuters, June 5, 2008

New Report Confirms Labor Market Shedding Jobs

In a post from yesterday, I talked about how some economists are predicting a deteriorating U.S. economy will take a significant toll on employment (6% jobless rate; 2 million lost jobs). Today, Kelly Evans wrote a post in the Wall Street Journal’s Real Time Economics blog that discussed the findings of the latest Job Openings and Labor Turnover Survey (JOLTS) from the U.S. Department of Labor, which showed that the rate of hiring by American businesses continues its downward trend (nearly two years now), and job openings have slowed over the last six months. Looking at job openings, manufacturing and construction showed considerable weakness, as did professional and business services, which had the largest monthly decline. However, openings in education and health services grew. Overall, the JOLTS data showed that there were a seasonally-adjusted 3.8 million total job openings in February, compared to 4.1 million a year ago at the same time. The “quits rate” also slowed from a seasonally-adjusted high of 61 in December 2006 to 56 in the latest report. Hirings continue to slow as well. In February there were a seasonally-adjusted 4.6 million hirings, compared to 4.8 million a year earlier. Evans wrote:

The JOLTS data confirm the signals from other employment reports that the labor market is slowly shedding jobs. On Friday, the government’s monthly payrolls report found the U.S. economy lost 80,000 jobs in March, following losses of 74,000 each in February and January. Meanwhile, claims for unemployment insurance benefits jumped in the week ending Mar. 29 to their highest level in more than two years.

Source:

“Job Openings, Hirings: The Slowdown Continues”
Kelly Evans
Wall Street Journal (Real Time Economics blog), April 8, 2008

Economists Predict 6% Jobless Rate, 2 Million Lost Jobs

Earlier today I read an interesting article that discussed the U.S. employment outlook and which jobs may or may not be good bets in a deteriorating economy. Martin Crutsinger of the Associated Press wrote:

While the downturn is expected to be short and mild, economists are still forecasting the unemployment rate, which jumped to 5.1 percent in March, will climb much higher before the nation’s job engine sputters back to life.

Economists are forecasting a jobless rate that will peak at around 6 percent, but probably not until early next year, several months after the recession is expected to end. Analysts said as many as 2 million people could lose their jobs in the current downturn.

Mark Zandi, chief economist at Moody’s Economy.com, said:

All the indicators suggest that we will see even larger job declines in coming months. Businesses are getting nervous and pulling back.

“Safe” Jobs:

• Healthcare
• Education
• Farming
• Some manufacturing (airplanes, heavy machinery)
• Government

“Unsafe” Jobs:

• Other manufacturing (automakers, housing-related like appliances, furniture)
• Construction
• Housing-related industries (real estate agents, mortgage brokers)
• Wall Street firms
• Discretionary services (tourism-related)

Source:

“Job winners and losers in hard times”
Martin Crutsinger
Associated Press, April 7, 2008