Banking

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BANKING

The FDIC reported that profits at commercial banks and savings institutions declined 3.4% from year-earlier levels in the second quarter of 2007, dragged down by higher expenses for bad loans and narrower net interest income. The sector’s net income in the quarter was $36.7 billion.

Loan-loss provisions totaled $11.4 billion in the quarter, a 75.3% increase from the year-ago period. The value of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) grew 10.6% from the previous quarter, the fifth consecutive quarterly increase. The noncurrent loan rate was 0.90% at the end of the quarter, an increase from 0.70% in the second quarter of 2006.

On the positive side, commercial and industrial loans grew by a record $51.3 billion (4.1%) in the quarter. Loans to small businesses increased at an annual rate of 9.6%, a sharp increase from the 3.5% growth for the 2005–2006 period.

The complete report is available in the Quarterly Banking Profile at www2.fdic.gov/qbp/index.asp.

Federal financial regulators and the Conference of State Bank Supervisors (CSBS) issued a statement encouraging federally regulated and state-supervised financial institutions to identify residential mortgage borrowers at risk for default and pursue loss mitigation strategies that preserve homeownership.

The statement notes that a significant number of hybrid adjustable-rate mortgages will reset throughout the remainder of the year. Many subprime and other mortgage loans have been transferred into securitization trusts governed by pooling and servicing agreements that may provide servicers with the flexibility to contact borrowers ahead of loan resets, especially in cases where default is reasonably foreseeable.

The statement was issued jointly by the Federal Reserve, FDIC, Office of the Comptroller of the Currency, Office of Thrift Supervision, National Credit Union Administration and the CSBS. The Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages is available at www.fdic.gov/news/news/press/2007/pr07073a.html.

In a separate release, the FDIC, CSBS and American Association of Residential Mortgage Regulators cautioned institutions against allowing debt-to-income (DTI) ratios above 50% in applying loss mitigation strategies. Loss mitigation strategies should create long-term stability for borrowers, investors and the marketplace, the agencies said. DTI ratios above 50% increase the future likelihood of delinquencies and defaults.