Wisconsin Chapter of the Appraisal Institute: Year in Review Symposium

1
Economic Overview Banking Update

• Wisconsin Chapter of the Appraisal Institute
  Year in Review Symposium
• November 19, 2008

Patrick Dervin FDIC --Chicago Region Economist,
Division of Insurance and Research pdervin_at_fdic.g
ov
2
Disclaimer

• The views expressed in this presentation are
  those of the author and do not necessarily
  reflect official positions of the Federal Deposit
  Insurance Corporation.
• Some of the information used in the presentation
  were obtained from publicly available sources
  that are considered reliable. However, the use
  of this information does not constitute an
  endorsement of its accuracy by the Federal
  Deposit Insurance Corporation.

3
National Picture
4
Downturn in GDP is evident.
5
SUV and light truck sales declines are expected
to continue
6
And car sales have crashed.
Source Autodata Corporation via Haver Analytics
7
Midwest industrial production is showing signs of
weakness.
8
Wisconsin and the Region
9
Employment
10
Job growth has turned negative in Wisconsin.
11
Wisconsin employment growth trails some states in
the region.
12
Manufacturing sector job losses continue in
Wisconsin.
Change - Year to Year
Total Nonfarm
Manufacturing
Source Bureau of Labor Statistics
13
Construction and Manufacturing sectors drag down
employment growth.
14
Office-using employment growth in Milwaukee is
stable to this point, but expected to weaken
Year-Year change in office-using employment
U.S.
Milwaukee
Source Property and Portfolio Research
15
Wisconsin personal income growth is slowing.
Change Year to Year Per Capita Personal Income
Source Bureau of Economic Analysis
16
Personal bankruptcies are rising after 2005
legislative reform.
Nonbusiness Bankruptcy Filings Per Capita
(filings per 1,000)
Source Administrative Office of the U.S. Courts
17
Unemployment in northern Wisconsin remains a
challenge.
18
GMs decision to close its Janesville Assembly
plant in December will not help manufacturing
employment.
19
Janesville Assembly makes light trucks and SUVs.
20
Residential Housing
21
Home sales and price appreciation are down in
Wisconsin
Change Yr to Yr
Thousands (annual rate)
Existing Home Sales (R)
House Price Index (L)
Sources FHFA, National Association of Realtors
22
Though home price appreciation remains positive
(at least by one measure).
23
Home price appreciation across most metros is
modest.
24
Wisconsin households are seeing foreclosures rise
faster than some other parts of the region.
25
Foreclosure rates are much higher for subprime
mortgages
Foreclosures Started ()
Subprime
All Mortgages
Source Mortgage Bankers Association (via Haver
Analytics)
26
But both prime and subprime foreclosures have
risen dramatically.
Source Mortgage Bankers Association (via Haver
Analytics)
27
Demand-side implications for Commercial Real
Estate Sectors

• Slowing or declining employment will stem demand
  in the office sector.
• Declining industrial production will limit demand
  in the industrial sector.
• Weak housing and labor markets limit the upside
  for retail developments following new residential
  construction.
• Uncertainties
• Credit markets impact on generalized lending
  across multiple sectors and industries

28
National Banking Trends
29
Earnings remain well below year-earlier levels.
Source FDIC
30
Noncurrent rates continue to increase rapidly.
Source FDIC
31
Noncurrent rates on CD loans are much higher
than in recent years.
Source FDIC
32
Wisconsin Bank Performance
33
NIM decline and provision increases impact
profitability.
Source Bank/Thrift Call Reports Wisconsin
Community Institutions (assetslt1B) Aggregate Data
34
NIMs reflect challenging rate environment.
Wisconsin
Nation
Source Bank/Thrift Call Reports Community
Institutions (assets lt1B)
35
Asset yields have slipped (Median ROA) for
Community Banks.
Wisconsin
Nation
Source Bank/Thrift Call Reports Community
Institutions (assetslt1B)
36
Net charge off rates are higher than in recent
years, and reserve ratios are falling.
Percent of all loans
Percent of noncurrent loans
Loan loss reserve (L)
Net charge-off (R)
Source Bank/Thrift Call Reports Wisconsin
Community Institutions (assetslt1B)
37
Increased noncore funding implies a higher cost
of capital.
Aggregate noncore funding
Source Bank/Thrift Call Reports Wisconsin
Community Institutions (assetslt1B)
38
Loan delinquency rates are on the rise
Past-Due 30-89
Past-Due 90 or Nonaccrual
Source Bank/Thrift Call Reports Wisconsin
Community Institutions (assetslt1B)
39
Most severely for commercial construction-related
lending at community banks
Percent of Loan Category Past Due, June 08
Percentage Point Change in Past-Due Rate from
Year Ago
Source FDIC. Aggregate Bank and Thrift Call
Reports for Wisconsin Community Institutions
(assetslt1bil) data merger adjusted.
40
As well as at large banks.
Percent of Loan Category Past Due, June 08
Percentage Point Change in Past-Due Rate from
Year Ago
Source FDIC. Aggregate Bank and Thrift Call
Reports for Wisconsin Large Banks (assetsgt1bil)
data merger adjusted.
41
Multi family past due rates move the most for
community banks
2Q07 Blue Bars 2Q08 Red Bars
Source Bank/Thrift Call Reports Wisconsin
Community Institutions (assetslt1B)
42
But CD past due rates move the most for large
banks.
2Q07 Blue Bars 2Q08 Red Bars
Source Bank/Thrift Call Reports Wisconsin
Large Banks (assetsgt1B)
43
CRE delinquency rates are much higher than in
recent years at community banks
CD Non Res Multi Family
Past Due Rate
Source Bank/Thrift Call Reports Wisconsin
Community Institutions (assetslt1B)
44
As well as at large banks.
CD Non Res Multi Family
Past Due Rate
Source Bank/Thrift Call Reports Wisconsin
Large Banks (assetsgt1B)
45
CD is the worst performing CRE sector...
Community Banks Large Banks
Past Due Rate
Source Bank/Thrift Call Reports Wisconsin
Insured Institutions
46
Followed by multi-family...
Community Banks Large Banks
Past Due Rate
Source Bank/Thrift Call Reports Wisconsin
Insured Institutions
47
And Nonresidential delinquency rates are passing
prior cyclical peaks.
Past Due Rate
Community Banks Large Banks
Source Bank/Thrift Call Reports Wisconsin
Insured Institutions
48
CRE delinquency rates are below 2001 levels...
Past Due Rate
Wisconsin Institutions
Source Bank/Thrift Call Reports Wisconsin
Insured Institutions
49
But CD delinquency rates have blown past
historical highs.
Past Due Rate
Wisconsin Institutions
Source Bank/Thrift Call Reports Wisconsin
Insured Institutions
50
CD loan growth has declined sharply for
community banks
Annual Loan Growth Rate
CD Non Res Multi Family
Source Bank/Thrift Call Reports Wisconsin
Community Institutions (assetslt1B)
51
But even more severely for large banks.
CD Non Res Multi Family
Annual Loan Growth Rate
Source Bank/Thrift Call Reports Wisconsin
Large Banks (assetsgt1B)
52
Implications for Commercial Real Estate Sectors

• Wisconsin institutions pressed by thinning NIMs
  and increasing reserves.
• CD delinquencies and write-offs are increasing
  rapidly.
• Slower loan growth reflects tighter lending
  standards and concerns about preserving capital.
• Financing in the CD sector likely to be more
  costly and scarce. Contagion to other sectors?

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Milwaukee CRE Situation
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Milwaukee office supply and demand side are
coming unhinged
Square feet (thousands)
1000
800
600
Net Completions (L)
400
200
0
Net Absorption (L)
-200
-400
Q2-98
Q2-00
Q2-02
Q2-04
Q2-06
Q2-08
Source Property and Portfolio Research
55
And office vacancy rates across the Midwest are
poised to increase.
Vacancy rate ()
Source Property and Portfolio Research Torto
Wheaton Research
56
Retail vacancies are climbing in Milwaukee
Square feet (thousands)
Vacancy Rate (R)
Net Completions (L)
Net Absorption (L)
Source Property and Portfolio Research
57
And may show much greater volatility.
Vacancy rate ()
Source Property and Portfolio Research Torto
Wheaton Research
58
Synopsis

• Wisconsin community institutions are seeing NIMs
  squeezed and credit quality is eroding a growing
  number of insured institutions are unprofitable
  in 2008.
• Employment growth is showing persistent pattern
  of slowing manufacturing job losses are likely
  to continue, and housing markets continue to show
  signs of instability.
• Weak economic fundamentals point to increased
  downside risk to CRE demand deteriorating bank
  performance and credit quality will make capital
  for the sector more scarce and costly.
• Uncertainties
• Efficacy of policy responses
• Depth and duration of current negative trends

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Patrick Dervin pdervin_at_fdic.gov [phone]