Bank Failures Helped by Looming Collapse in Commercial Real Estate

by: Wall Street Strategies

Well, one has to wonder if there will be that morning-after feeling this week after the much anticipated jobs report has come and gone. I like when the market is left to its own devices as it gives us a greater glimpse into the soul of the investor. That being said, there is going to come a point soon when it feels like the train is pulling out of the station. In fact, I think that we are just about there, but we'll know more when the market rallies higher on days there isn't serious news or developments.

Speaking of cheer, there was inspiring news on Friday and it wasn't the jobs report. Consumer credit in January increased $4.96 billion or 2.4% year over year to $2.46 trillion. The report was somewhat mixed with non-revolving credit up $6.62 billion, or 5.0%, while revolving credit decreased $1.67 billion. The former represents things like student and auto loans while the latter represents credit cards. I realize that it's smart for households to continue to repair their own balance sheets but I always know credit is the lifeblood of the economic engine. In fact, I think that the spike in savings that kicked in last year has peaked, so I wonder how much people are dipping into their savings to make ends meet. Without a doubt the back to back increase in non-revolving consumer credit is a positive sign.

I think that this is going to be a big year for the auto industry (relatively speaking) despite the recalls and other uncertainties. I think that this is going to be a great year in the for-profit education industry. I think that this is going to be a better year for furniture sales and home appliances. People with jobs will probably spend some of the money under their mattresses as the year goes on and job growth begins. On that note, any job growth under 150,000 a month would still only be a moral victory. I must admit concern that job growth hasn't begun yet.

In the end, jobs come from end-demand and that comes from spending. This is the conundrum.

As for revolving credit, it's the 16th straight month of declines. Part of that is fiscal responsibility among consumers and is echoed by the surge in use of debit cards and cash. But part of this is also the result of banks retrenching. I don't know about you but I get fewer and fewer of those pre-approved credit card offers in the mail. It's less clutter, but I kind of liked being wooed. I know that consumers need more education before getting credit cards because it's not really fine print that gets folks in massive holes.

Another big issue for banks continues to be the looming collapse in the commercial real estate market. On Friday, four more banks bit the dust in part to poor commercial real estate loans. The tally for the year is now 26. In the first week of March last year there was only one bank failure and just five for the entire month. The red flag is the fact that the FDIC couldn't find buyers for two of the four, and that is very expensive.

Case in point is Centennial Bank of Ogden, Utah which had just $215.2 million in assets and $205.1 million in deposits. But the FDIC could only get Zion First National (NASDAQ:ZION) to buy direct deposits so this failure cost a whopping $96.3 million.

Sun American Bank of Boca Raton, Florida with $535.7 million in assets and $443.5 million in deposits was bought by First Citizens (NASDAQ:FCNCA), but will still cost the FDIC $103.8 million.

Bank of Illinois with $211.7 million in assets and $198.5 million in deposits will reopen as Heartland Bank & Trust but still cost the FDIC $53.7 million.

There were no takers for Waterfield Bank of Germantown, Maryland which had $155.6 million in assets and $156.4 million in deposits. The FDIC will run the bank until April 5, and it will cost $51.0 million.

This brings up the role of the Federal Reserve, which has been credited with sparking the market in commercial mortgage backed securities through the TALF program. The fact is that TALF has been helpful in tightening spreads, but legacy CMBS still look vulnerable. The TALF program is over at the end of this month for most loans, and for CMBS, at the end of June. I'm not sure what's going to happen but I wouldn't be surprised to see the program extended. The problem is that 2,988 U.S. banks are concentrated in commercial real estate loans and according to some reports, half of $1.4 trillion in outstanding loans that need refinancing between 2011 and 2014 are underwater.

In addition to concerns about the existence of a market for CMBS is the role securitization has played in our economy. According to the Dallas Fed, the ABS market funded 66% of all residential U.S. mortgages and 26% of all non-mortgage consumer credit loans.

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I'm not sure where this battle between Washington and the banks will finish but it has caused banks to hold onto more cash than they normally would, and like most of these skirmishes, it is regular people and the economy taking the deadly shrapnel.

We'll see what happens to the consumer financial protection agency, which should be easy to implement in one form or another. But, on Friday, Chris Dodd sounded about as dejected as he has been since announcing he wouldn't seek reelection.

Disclosure: None