As banks yanked loans last week, sparking the collapse of Bear Stearns and threatening several more pillars of finance, newly released federal data showed eight of Connecticut”™s 24 commercial banks recorded a net loss in the fourth quarter.
Nationally, banks reported their lowest fourth-quarter combined profit since 1991, according to the Federal Deposit Insurance Corp., with earnings down 84 percent from the fourth quarter of 2006.
Banks set aside a record $31 billion against potential loan losses, FDIC reported, as net charge-offs for commercial and industrial borrowers doubled and overdue loans increased by a third, the largest rise since 1983.
For the first time in recorded history, banks incurred a loss on trades during a financial quarter.
Amid the steady thud of repercussions from the financial markets, there were a few relatively bright spots. Banks notched record deposit growth in the quarter, and net interest income recorded a 12 percent gain from the fourth quarter of 2006.
The magnitude of the industry losses was concentrated in a relatively small number of large institutions. And while the number of “problem institutions” increased from 50 in 2006 to 76 in 2007, that was still well off the 2002 total of 136 problem institutions.
The question that remains to be answered is whether the first quarter numbers will eclipse that mark. At Connecticut commercial banks, 0.88 percent of total loans were classified as overdue at year end, up from 0.74 percent in September and from 0.49 percent in December 2006.
Among commercial banks in Connecticut with less than $100 million in assets, more than half reported a loss in the fourth quarter as noncurrent loans rocketed up from 0.1 percent of all loans outstanding in September, to 1.8 percent in December.
Smaller commercial banks often build their loan portfolios through lending on multifamily dwellings, which, as investment opportunities, spurred a significant amount of subprime mortgage borrowing nationally.
After initiating new reporting requirements last year for banks with high concentrations of commercial real estate ”“ a category that includes multifamily dwellings ”“ the FDIC last week issued a circular last week reminding banks of the capital requirements needed to support such debt.
The Connecticut Department of Banking has issued several statements related to the mortgage crisis”™ impact on consumers, but has yet to issue a formal statement on the health of Connecticut”™s banks. In remarks last month to a Connecticut General Assembly committee, state banking Commissioner Howard Pitkin said that fully 20 percent of the $15 billion in subprime mortgages lent in Connecticut were past due, creating a possibility of foreclosures totaling $3 billion.
If there was a bright spot, Pitkin said, it was that state-chartered institutions appear to have sidestepped the crisis.
“Unlike national banks and large thrifts throughout the country that purchase large amounts of collateralized pools of subprime loans, as well as providing warehouse lines of credit that supported this industry, state-chartered banks in Connecticut did nothing of the sort,” Pitkin said. “Our examiners have verified that not one subprime loan was made by a state-chartered bank in Connecticut. This is not a banking problem in so far as our state banking system is concerned.”
While a mortgage industry reform bill is working through the Connecticut General Assembly, Pitkin said the Gov. M. Jodi Rell administration will likely wait to see what changes come out of Washington, D.C., before taking any additional action.
“I think I would wait on the banking side to see what happens with the Federal Reserve and other bills that are proposed down there,” Pitkin said. “We don’t want the state-chartered banks to have two tiers of regulation that they have to comply with ”¦ It would really be a negative point of a state charter, if that happened.”
