By Ryan Tracy
WASHINGTON--U.S. banks, facing a revenue decline and other
headwinds, boosted lending in the second quarter at a pace unseen
since the financial crisis, according to a government report.
The Federal Deposit Insurance Corp. said banks' loan and lease
balances rose to $8.11 trillion, a 2.3% increase over the first
quarter of 2014 and the largest quarter-over-quarter jump since the
end of 2007.
It was the first time U.S. bank lending has topped $8 trillion,
as banks boosted construction loans, agriculture loans, credit-card
balances and auto loans. Mortgage lending also was up compared with
the first quarter but down from the year-ago period, reflecting a
retreat from that market by some banks amid new regulatory and
legal risks.
The lending data came on the same day the Commerce Department
reported robust second-quarter growth across the U.S. economy, as a
steadying economic expansion headed into its sixth year. The
strengthening economy is helping fuel demand for consumer borrowing
and giving banks more comfort to take on additional risk, bankers
said.
J. David Williams, who manages 14 bank offices across Texas as
chief executive of Centennial Bank, said a rainy year has helped
boost his customers' demand for agriculture loans, while
small-business loans also are up at his branch outside San
Antonio.
"What we're seeing here is more consistent, steady growth
instead of peaks and valleys," Mr. Williams said.
FDIC Chairman Martin Gruenberg said Thursday's data marked a
transition for banks from a period of recovery to one in which they
are putting more money at risk. He cautioned that stiff headwinds
remain, including a period of sustained low interest rates and
lower mortgage-related income amid a sharp drop in refinancing
loans.
"We are moving into a different stage of the financial and
economic cycle," Mr. Gruenberg said. "The industry, I think, is
well positioned, having strengthened its balance sheet to respond
to increasing credit demand...but that changing environment is
going to carry risks and challenges for the industry as well."
While the 6,656 U.S. banks are lending more, profits remain
under pressure, particularly at larger firms. The nation's biggest
banks are taking in less trading revenue amid tepid client activity
and experiencing declines in lending profitability as the spread
narrows between the rates they charge on loans and the rates they
pay on deposits.
The FDIC said the industry reported collective revenue below the
prior year for the fourth consecutive quarter. Net income rose to
$40.2 billion, up 5.3% compared with the same period in 2013, but
that pace wasn't good enough to make the first half of 2014 a
stronger one for profits. Net income in the first half fell 1.4%
compared with the same period last year. Industrywide trading
revenue fell for the fourth quarter in a row.
Banks made up for the revenue challenges with lower expenses.
Reserves set aside to cover loan losses dropped for the 17th
consecutive quarter, the FDIC said. Banks have said those
reductions are justified, as they have fewer bad loans on their
books. The total amount of reserves accounted for 70.5% of the
value of banks' noncurrent loans, the highest level since the end
of 2008, according to the FDIC.
San Francisco-based Bank of the West, a unit of BNP Paribas SA
that operates in 20 states, is witnessing "a broad-based pickup in
loan demand," including credit cards and auto loans, compared with
previously sluggish consumer lending, said chief economist Scott
Anderson.
Still, Mr. Anderson said banks' margins are under pressure
because of low interest rates and higher regulatory costs. "Even
with stronger loan demand, it is going to take a while before the
banks see it on the bottom line," he said.
While higher interest rates could boost banks' revenue,
regulators are concerned about the risks firms face if historically
low rates rise suddenly.
Mr. Gruenberg said the FDIC is seeing banks, particularly small
institutions that target local lending markets, holding an
increasing portion of long-term loans and investments as a share of
total assets. Regulators are concerned such long-term assets can
pose risks if rates rise in the future, because banks that start
paying depositors more will be earning lower rates on long-term
assets. The Federal Reserve has signaled that it may start raising
interest rates next year. Fed Chairwoman Janet Yellen, at a
central-bank conference last week, didn't signal any shift in the
Fed's plans.
James Chessen, chief economist at the American Bankers
Association, said banks are prepared for a rise in rates, thanks in
part to the fact that regulators are forcing lenders to pay
attention to the issue. "It is a very competitive environment, and
borrowers know they can push out the term of the loan. And in that
environment, the banks need to meet that" demand, Mr. Chessen said.
"It's a risk, but I think that banks are able to manage."
Write to Ryan Tracy at ryan.tracy@wsj.com