Bracing for a fallout
As the fourth quarter came to a close, economists and policymakers were awaiting data on whether the subprime flu Connecticut contracted in the third quarter has worsened.
In the third quarter in Connecticut, the Federal Deposit Insurance Corp. reported, past-due and nonaccrual loans jumped to 1.16 percent of all loans outstanding, up from just over 0.8 percent both a year ago and in the second quarter.
At last report in Connecticut, there were 71,000 subprime loans outstanding, with the state Department of Banking declaring that many are already delinquent and in danger of default. Some 21,000 of those mortgages are scheduled to escalate to higher interest rates over the next two years.
The Congressional Joint Economic Committee recently forecast that Connecticut will suffer $1.4 billion in losses from the subprime crisis, noted Peter Gunther, an economist affiliated with the University of Connecticut”™s Center for Economic Analysis, both through foreclosures and declining property prices. Gunther and other economists foresee a two-year window for the debacle to work its way through the economy.
Nationally, bank earnings fell 25 percent in the third quarter to their lowest level in five years, according to the FDIC, as banks faced a steep jump in expenses for bad loans. Loan loss provisions were the highest in 20 years, sponging up 11 percent of net operating revenue.
Offsetting the dour tidings somewhat was a brisk 6.5 percent increase in net interest income, the best in five years, and a key measure for bank performance.
In a statement late last month, Gov. M. Jodi Rell said the CT FAMLIES refinancing program created in November has had “tremendous” demand, and applauded a new $125 million bailout package created by five banks under the oversight of the Federal Reserve Bank of Boston (see related story on pg. 2).
At the same time, banks have shifted their loan concentration from residential to commercial compared to a year ago, including commercial real estate.
Bridgeport-based People”™s United Financial Inc., the largest bank in Fairfield County, revealed its intent to do so a year ago as the subprime mortgage crisis became more apparent. Other banks are evidently embracing a similar strategy ”“ nationally, loans for commercial and industrial financing increased by a record 6.9 percent.
That plan did not spare People”™s United Bank from the subprime ramifications. For the third quarter, the bank reported $70 million in loans that were one to three months past due and still accruing interest, and another $23 million in loans that had entered nonaccrual status. Those figures were up 25 percent and 29 percent respectively from the second quarter.
When loans enter nonaccrual status, banks must set aside reserves as a hedge against the possibility of not being able to collect the loan. Those reserves can cut into bank earnings, depriving it of capital it could use for other moneymaking investments.
At Waterbury-based Webster Financial Group Inc., Connecticut”™s largest homegrown bank, past-due loans secured by real estate amounted to $80 million in the third quarter, up 38 percent from the second quarter, and nonaccrual loans were up 37 percent.
Relatively smaller banks have not been immune, either. While Ridgefield-based Fairfield County Bank enjoyed a 22 percent quarter-over-quarter decline in loans secured by real estate categorized under nonaccrual status, it suffered a whopping 150 percent increase in past-due real estate loans.?On a positive note, Connecticut continued to post strong employment figures in the latest figures from the U.S. Department of Labor, the stock market to date has proven resilient to the subprime problems and the Fed has been cutting interest rates in an effort to keep commerce flowing. With the latest loan delinquency figures due at month end, economists will get a better handle on the real estate loan portfolios of area banks.