Housing took a spotlight in the Federal Deposit Insurance Corp.’s latest profile of Connecticut, but despite a slower housing market than that of the last few years, the profile shows that the capital levels of the state’s banks are thriving.
“[Housing] has an enormous potential impact [on banks],” said John Carusone, president of the Hartford-based Bank Analysis Center. Housing-related loans represent one-third to one-half of the loan portfolio of community banks in the state, he added. But the downturn in the housing market has not yet affected banks’ earnings.
There was a slight decline this year in median core-capital ratios reported by Connecticut’s FDIC-insured institutions, but overall it has increased steadily since the banking problems in the late 1980s and early 1990s, according to the FDIC state profile. Acceptable earnings and low loan-loss provision expenses have supported those strong capital levels.
Improvement in the core capital levels has been widespread across banks and thrifts in Connecticut, including those in the bottom and top percentiles, and concentrations in commercial real estate and construction and development loans have increased in the last decade. Those historically are higher-risk forms of lending. At the end of the second quarter this year, the median ratio of commercial real estate and construction and development loans to Tier 1 capital was 171 percent, the highest level since 1993. That is below the national level of 197 percent, according to the FDIC.
Tier 1 capital is the same as core capital, which is one of three capital standards established for savings institutions in 1989. The minimum amount of core capital for the soundest institutions is 3 percent of assets.
The strong capital funding of Connecticut banks bodes well for their future, according to Paul Driscoll, the Boston-based New England regional manager of the FDIC’s Division of Insurance and Research.
“If there was a downturn, they could weather that much better,” he said.
Widespread Trend
The fall 2006 state profile concentrated on Connecticut’s housing market, which was not addressed in the FDIC’s last profile of the state, Driscoll said. Connecticut saw double-digit growth in housing prices for the past two years, so the fact that price appreciation is declining is not a surprise.
“The rate of housing-price appreciation is declining,” Driscoll said. “Housing is a cycle and there’s no reason for us to believe cycles won’t repeat themselves.”
According to the profile, the deceleration of prices has been widespread across the state, occurring in all major cities. The quarterly rate of home-price appreciation has been slowing since the fourth quarter of last year, a trend that suggests such slowing might continue. Home sales also fell across the state during the second quarter, but sales volume remained high by historical standards.
Driscoll said he is not sure the slowing sales will lead to a decline in prices.
Residential construction across the state is also slowing. It peaked in the fourth quarter of 2004, according to the FDIC. Permits issued during the second quarter of this year for single- and multifamily homes fell 16 percent from the second quarter of 2005. The decline has been most pronounced for single-family homes.
According to the report, seasonally adjusted construction employment in Connecticut remained stable – near 66,000 from fourth-quarter 2004 through the first quarter of 2006. However, construction employment dipped below 64,000 in the second quarter of 2006, perhaps signaling a period of retrenchment.
Commercial real estate has fared better, as most areas of the state are seeing the market recover from the peak vacancy rates of 2002 and 2003. Fairfield County, however, appears to have lost momentum as net absorption stalled, according to the FDIC. Net absorption in Hartford was modest.
Office employment in both Fairfield County and Greater Hartford has been growing, but neither market has recovered all the jobs lost during the last recession. Rents in both markets have been increasing in tandem with the overall rate of inflation.
There was good news for Connecticut banks in terms of loan delinquencies. Past-due residential real estate loans remained at relatively low levels among Connecticut-based insured institutions in second-quarter 2006. The median percent of residential real estate loans past due was 0.35 percent, well below the national median of 1.2 percent, according to the profile.
Most banks in Connecticut do not hold many subprime loans – those most at risk for delinquency – in their credit portfolios, Driscoll said. The mortgage companies that do sell subprime loans often later sell them to other companies, so FDIC-insured institutions hold mostly traditional mortgages.
The residential real estate portfolio grew at a relatively strong median 14.2 percent rate during the year ending second-quarter 2006, a pace that may tend to mask any weakening in loan performance. Loan growth is expected to decelerate in the near term with the slowing in the region’s housing markets.
