While Connecticut banks and savings institutions reported weaker results in the second quarter, they fared considerably better than their counterparts nationally as the housing slump and credit crisis continued to take its toll.
Net income at Connecticut’s 57 federally-insured financial institutions dropped to $204 million in the period ended June 30, compared with $283 million a year earlier.
Nationally, earnings at federally-insured banks and savings institutions plunged to $5 billion from $36.8 billion a year earlier.
Financial institutions in the Northeast generally performed better than the national average in the April to June quarter, though earnings and credit quality deteriorated virtually across the board.
“Right now I think banks are performing satisfactorily, but we continue to closely monitor them” said state Banking Commissioner Howard Pitkin. “We are always keeping track of the risk factors.”
According to statistics from the Federal Deposit Insurance Corp., the return on assets at Connecticut’s 24 banks fell to 0.35 percent from 0.88 percent a year earlier, while ROA at its 33 savings institutions slipped to 0.70 from 0.86.
Connecticut banks and savings institutions also reported sharp increases in nonperforming loans — loans that are at least 90 days past due. Nonperforming loans as a percentage of total loans at banks rose to 1.12 percent from 0.43 percent in the 2007 second quarter. That ratio at the state’s savings institutions rose to 0.53 percent from 0.23 percent.
Nationally, the nonperforming ratio jumped to 1.22 percent from 0.58 at banks and to 2.31 percent from 0.85 percent at savings institutions.
“Quite frankly, their results were pretty dismal,” FDIC Chairman Sheila Bair said at a news conference.
Bair also reported that the number of troubled U.S. banks rose to 117, up from 90 in the previous quarter.
“More banks will come on the [troubled] list as credit problems worsen,” Bair said. “Assets of problem institutions will also continue to rise.”
Liquidity Questions
Pitkin said he was concerned about potential liquidity problems at Connecticut banks. The nine U.S. banks that have failed this year did so because they could no longer broker deposits, Pitkin said.
“[They] didn’t fail because of their asset quality, which is traditionally how banks get into trouble,” Pitkin said.
In the second quarter, Connecticut banks and savings institutions reported slightly higher assets and deposits, even as their profitability ratios deteriorated.
“It’s not surprising, given the housing market and disruption of the financial markets,” Pitkin said. “Banks earnings are going to be down.”
Pitkin said as the number of overdue loans rises banks will likely tighten lending standards and be forced to increase their reserves, eroding profitability.
“It’s not an immediate cause for concern, but we are watching the trend,” Pitkin said.
Pitkin said the housing slump and unsteady financial markets have also contributed to the weakened performance.
He noted that some Connecticut banks have investments in Freddy Mac and Fannie Mae, the struggling quasi-government institutions that hold a majority of all U.S. home mortgages.
Several rescue plans have been suggested for the weakened housing giants. Under one plan, the U.S. Treasury could buy shares on the institutions, thus propping up the value of the stock held by existing shareholders.
Massachusetts Rolls
Nationally, financial institutions maintained a return on assets of between 1.30 percent and 1.40 percent for the years 2003 through 2006. The national return on assets dipped to 0.93 in 2007 and to 0.52 percent in the April to June quarter.
In New England, ROA for savings institutions fell in every state except Vermont in the second quarter. But ROA actually rose at banks in Massachusetts, Rhode Island and Maine.
Massachusetts banks, in particular, bucked the negative trend in the second quarter. Their total net income rose to $1.2 billion from $1.1 billion, and their combined ROA rose to 1.40 percent.
Meanwhile, Massachusetts banks maintained excellent credit quality. Nonperforming loans as a percentage of total loans fell to 0.05 percent from 0.06 percent.
