FDIC: U.S. banks’ profits shrink as bad loans rise

The banking industry’s earnings fell 3.4 percent in the second quarter nationwide amid the biggest rise in delinquent loans in 17 years, according to the Federal Deposit Insurance Corporation’s latest Quarterly Banking Profile.
The decline came in part because banks increased provisions for loan losses to $11.4 billion, $4.9 billion more than the industry’s set-aside in the second quarter of 2006.
Still, the FDIC said the $36.7 billion in net income was the fourth-best quarterly earnings ever reported.
“Banks continued to face two key challenges – a difficult interest rate environment and ongoing weakness in residential mortgage lending,” FDIC Chairwoman Sheila Bair said in a statement.
“However, under the circumstances, the industry’s second quarter earnings performance was very solid,” Bair continued. “What we see is a banking industry that is generally well capitalized, well diversified and profitable, and is in good position as we go through this period of market adjustment.”
Banks added to loan-loss provisions as the amount of loans and leases that were non-current – 90 days or more delinquent or no longer accruing interest – rose 10.6 percent to $66.9 billion, with delinquent real estate loans accounting for most of that growth.
Non-current residential mortgage loans increased by $3.1 billion, or 12.6 percent, and non-current real estate construction and development loans rose by $2.2 billion, or 39.5 percent.
There were increases in both net interest income and non-interest income, according to the FDIC. Net interest income rose to $88.6 billion in the second quarter from $85.8 billion in June 2006, a 3.3-percent increase. Total non-interest income rose to $68 billion in the second quarter from $62.4 billion in the same quarter the year before, a 9-percent increase.
According to figures from the FDIC, Rhode Island commercial banks and savings institutions turned in mixed financial results in the second quarter.
The report said the total net income for the seven Rhode Island-based commercial banks was $116 million in the second quarter, up from $115 million in the period from the year before.
The commercial banks in the state also bucked the national trend in the ratio of non-current loans to total loans, according to FDIC figures. Banks nationwide experienced an increase in that ratio from 0.70 percent in June 2006 to 0.87 percent in June 2007.
For commercial banks in Rhode Island, the non-current loan ratio fell from 0.48 percent in June 2006 to 0.16 percent this past June, the FDIC said.
Meanwhile, profits for six savings banks in Rhode Island fell to $9 million in the second quarter, from $11 million in the second quarter of 2006. And the non-current loan ratio among Rhode Island savings banks increased from 0.30 percent to 0.42 percent.
Two key performance ratios, return on assets and return on equity, declined for both commercial banks and savings banks in Rhode Island in the second quarter.
Average return on assets – the amount of money a bank earned for each $100 in assets – for commercial banks in the state declined from 0.80 percent in June 2006 to 0.73 percent this past June. For savings banks, ROA dropped from 0.83 percent to 0.68 percent.
And the average return on equity declined from 12.07 percent to 10.42 percent for commercial banks in Rhode Island and 5.27 percent to 4.13 percent for savings banks.
Banks such as Westerly-based The Washington Trust Co. did well anyway, reporting a $6.3 million second-quarter profit, a 2.15-percent increase over the same period in 2006.
“We’re pleased with the results in a challenging environment,” David V. Devault, executive vice president and chief financial officer, said last week. He credited gains made in commercial lending and wealth management for the earnings increase.
Whereas provisions for loan losses were significantly higher nationally – which cut into earnings – Washington Trust’s provision remains at $300,000, the same amount it was in June 2006. “We haven’t seen any deterioration in our credit quality,” Devault explained.
Waterbury, Conn.-based Webster Bank did increase its loss provisions from $3 million in the second quarter of 2006 to $4.25 million this past quarter, according to Terry Mangan, senior vice president of investor relations.
“We’ve been experiencing what the industry has been experiencing,” Mangan said.
Webster Bank said its second-quarter profit dropped from $43.14 million in 2006 to $35.47 million in the second quarter this year, an 18-percent decline, on expenses from debt redemption and other costs.
After adjusting for those one-time costs, Mangan said, earnings for the second quarter were $43.95 million.
“We saw the second quarter as a solid performance for us,” Mangan said.
He said changes in Webster’s loan portfolio and its investment in securities helped the bank weather industry difficulties.
The bank has reduced the amount of securities – including mortgage-backed securities – from $3.4 billion in June 2006 to $2.5 billion in June 2007, Mangan said.
And its loan portfolio is shifting away from residential mortgages to commercial, commercial real estate and home equity loans. “These are for us higher-yielding loan categories,” Mangan said.
Commercial loans, commercial real estate and home equity loans made up 62 percent of the portfolio in June 2006. Now, it is 70 percent. •