And the industry’s local stability is helping the regional housing market avoid a bust and high foreclosures.
“If you look at the performance of banks headquartered in (the) region, they are very comparable to the first quarter of last year,” said Gary Corner, a senior examiner with the Federal Reserve Bank in St. Louis.
That’s a good sign for banks in the region, which have performed well compared to rest of the nation, and to the Fed’s Eighth District, for several years.
Corner, as well as Bill Emmons, assistant vice president and economist for the Fed, reviewed data for seven community banks of $30 million to $500 million in assets in an eight-county area. Such banks make up about 53 percent of the regional market throughout McCracken, Ballard, Carlisle, Graves, Livingston, Marshall as well as Massac and Pope in southern Illinois.
Just as in the first quarter of 2010, the banks performed well in key measures of financial strength:
• Earnings performance roughly doubled the averages for the nation and the Fed’s Eighth District, which covers parts of seven states.
• Nonperforming loans were lower than the U.S. and district.
• The ratio of commercial real estate loans to total loans — a measure of risk — was lower than the national average and district.
The strong bank performance comes as somewhat of a surprise given a sputtering regional, and national, economy, Emmons said.
“The economic fundamentals don’t look terribly strong (in west Kentucky),” Emmons said. “High unemployment, little population growth, no building activity, so it’s surprising that some of these financial metrics and mortgage performance look quite good compared to other areas.”
Conservative lending practices, and consistently strong return on assets numbers, help explain how regional and Kentucky banks have remained strong, said Charles Vice, commissioner of the Kentucky Department of Financial Institutions.
Vice said banks in Kentucky, on average, have had higher return on assets percentages in the past three years than those in every border state. Vice said that comes from three factors:
• Kentucky banks had healthy income streams when the recession hit.
• They have maintained high capital levels, which helps to absorb some of the losses in the recession.
• Relatively conservative bank managers didn’t take too many risks.
“Those bank managers who want to run their banks profitably don’t take a lot of risks,” Vice said. That contributes to positive numbers for the share of mortgages 90 days delinquent or in some state of foreclosure.
Through April, the share of such mortgages in McCracken County was just under 4 percent, a percentage point lower than the Kentucky rate, and almost half of the national average, according to the Fed.
Sound banking is leading the way in sustaining a down-but-not-out regional housing market.
Signs of strength
The national housing market meltdown is no new topic or well-kept secret.
Sliding home values and bad mortgages, especially in high-growth states on both coasts and in Arizona and Nevada, still bring down the overall market.
Paducah, and western Kentucky, isn’t untouched by the industry’s conditions and the slow economy.
Single-family, residential home sales last year were the lowest throughout the region since 2005, according to Lyndell Gray, administrator of the 13-county West Kentucky Multiple Listing Service. Gray reported 1,767 homes sold from June 1, 2010, to May 31. The year before, 2,063 homes sold, a jump up from ‘08-’09 when 1,866 homes sold.
The Paducah Board of Realtors reported that sales of three- and four-bedroom homes fell in the first quarter of 2011 compared to the first quarter of 2010, but news about the average sale price and days on the market softened that blow.
The average sale price increased for three, four and five-bedroom homes, and the four- and five-bedroom homes spent less days on the market (see table).
An up tick in sale price and less days on the market, combined with less foreclosures than other parts of the U.S., should put the local market in position to be able to recover, said Bill Flynn, master commissioner. Up until his retirement from the position on May 31, Flynn held McCracken Circuit Court-ordered foreclosure sales.
He said he advertised about 250 to 270 sales in each of the past two years, up from about 165 sales in 2008.
Even though local foreclosure numbers are up in the last several years, Flynn said they aren’t near the levels in other troubled states.
So why aren’t they?
“I have come to the conclusion that the bankers have paid a lot more attention to (home) loans here in western Kentucky,” Flynn said.
Vice said prudent lending combined with other factors leads to Kentucky not having significant struggles with foreclosures.
• Kentucky didn’t see a drastic run up in home prices before the recession. Vice said the median home value (meaning the price at which half of home values were above and half were below) was about $65,000 in 1996 for Kentucky homes. That steadily increased to $110,000 by 2010. For the nation, median home value was around $100,000 in 1996, spiked in 2006 around $250,000 and came down to $180,000 in 2010. Home values swung even more drastically in states such as California, where the median home value peaked at $525,000 in 2006 and dropped in 2010 to $350,000, vice said.
“That’s a pretty significant decline,” Vice said of the California prices. “Kentucky did not experience wild swings where you get high foreclosure rates and losses.”
• Home occupancy rates are higher in Kentucky. Vice said since 1986, 70 to 73 percent of Kentuckians were homeowners, which is higher than the national average in that time period, which has stayed from 65 percent to 70 percent.
“We don’t take a lot of risks,” Vice said. “We have a lot of homeowners that do whatever they can to stay in their homes, making those mortgage payments.”
• The state’s unemployment rate is stressing people’s ability to make mortgage payments.
“Unemployment rate is the biggest factor impacting mortgage payments,” Vice said. Kentucky’s unemployment rate was at 9.8 percent through May, according to the Kentucky Education and Workforce Development Cabinet. It was the first time the unemployment rate fell below the 10 percent mark since February 2009.
The U.S. unemployment rate hit 9.1 percent in May, according to the U.S. Department of Labor.
Low interest rates, hovering around 4.5 percent in the region, continue to be one of the few enticing aspects of the real estate market for buyers.
When the housing market will improve in earnest remains to be seen, and will depend on more than regional bank performance.
“There’s still a lot of foreclosing to be done before we can dig out of the hole caused by the housing crisis,” Flynn said.
But strong regional bank performance has the local real estate market in a position to recover.
Contact Adam Shull, journal editor, at 270-575-8653.
Paducah home sales
Home sales figures in Paducah for the first quarters of 2010, 2011
|First quarter, 2010||# sold||Avg. price||Days on market|
|2 bedroom or less||13||$46,485||259|
|3 bedroom or less||73||$110,066||135|
|4 bedroom or less||22||$177,259||172|
|5 bedroom or less||4||$172,250||191|
|First quarter, 2011|
|2 bedroom or less||13||$46,046||125|
|3 bedroom or less||58||$129,524||173|
|4 bedroom or less||17||$216,000||153|
|5 bedroom or less||7||$258,785||137|
*Source: Paducah Board of Realtors
Home sales in 13 western Kentucky counties for years measured from June 1 to May 31.
June 1, 2010, to May 31 — 1,767
‘09 to ‘10 — 2,063
‘08 to ‘09 — 1,866
‘07 to ‘08 — 2,447
‘06 to ‘07 — 2,511
‘05 to ‘06 — 2,573
*Source: Western Kentucky Regional Multiple Listing Service