Profits slip for state banking industry

Total profits for Wisconsin's banking industry fell 15.6% in the first half of the year compared with the same period  in 2015, as banks beefed up their loan-loss reserves.

A report by the Federal Deposit Insurance Corp. released Tuesday shows Wisconsin-based banks posted net income of $518.2 million through June. That compared with $613.7 million in the January-through-June period last year.

The decline in profits came despite an overall increase in lending by banks in the state. But as lending went up, so did allocations by banks to their loan-loss reserves. Adding money to loan-loss reserves cuts directly into banks' profits.

In the first six months of 2016, banks headquartered in Wisconsin added more than $88.4 million to loan-loss reserves, up 58% from a $55.9 million allocation in the same period last year.

Associated Bank added $34 million to its loan-loss reserves through June, in part because of uncertainty in the bank's energy loan portfolio, which has been under pressure from lower oil prices. Because Green Bay-based Associated is by far the largest bank of the 231 counted by the FDIC in Wisconsin's total, it can influence the overall industry report for the state.

But some other banks have been allocating more money to loan-loss reserves, too, reflecting negative and positive trends in lending, said Rose Oswald Poels, president and chief executive of the Wisconsin Bankers Association, in an interview.

"There's a little bit of stress right now in the energy sector, and even some emerging stress in the ag sector, that potentially could be reasons why banks put more in their loan-loss provisions than before. That's sort of the negative side of it," she said.

On the positive side, Oswald Poels said, banks also must add to loan-loss reserves when their loan portfolios grow, as they have been in Wisconsin.

The FDIC report shows total loans and leases were up 4.8% in Wisconsin, to almost $76.8 billion from $73.3 billion in the first half of 2015.

"We've seen really good numbers, quarter after quarter here lately, of very positive loan growth," she said.

Oswald Poels said now that the economy is healthy and lending is increasing, regulators want banks to account for loan growth by setting aside money just in case some of those new loans eventually go bad.

At the end of June,  only 1.15% of total loans and leases on the books of Wisconsin banks were considered shaky, down from 1.23% in last year's first half.

"Banks have to do the prudent thing in setting some money aside — not really believing that any of those loans are going to go bad — but just because that's the way the accounting rules are changing," she said.

Deposits also were up 1.7% at Wisconsin banks, to $83.1 billion from $81.7 billion in last year's first half.

Green Bay-based Associated Bank recorded the highest net income among Wisconsin banks in the first six months of 2016, at $102.2 million. Other's with top net income: Ixonia Bank, $13.5 million; Racine's Johnson Bank, $12.7 million; Wauwatosa's WaterStone Bank, $11.6 million; and National Exchange Bank and Trust of Fond du Lac, $11.1 million.

Wisconsin banks with the largest losses in the first half: Guaranty of Glendale, $1.2 million; Community Financial Bank of Prentice, $442,000; Livingston State Bank, $210,000; Mid America Bank of Janesville, $144,000; and Fidelity National Bank of Medford, $99,000.

The Wisconsin Bankers Association noted that state banks still face a variety of challenges, such as a long-running low interest rate environment, higher regulatory costs and technology expenses.

The industry continues to consolidate. Seventeen mergers have been announced in 2016. There were 12 in 2015.

Nationally, the results for the banking industry were "largely positive in the second quarter," FDIC Chairman Martin Gruenberg said Tuesday.

“Income and revenue both increased from a year ago, loan growth remained strong, the number of unprofitable banks was at an 18-year low, and there were fewer banks on the problem list,” Gruenberg said in a statement.

Through the first six months of 2016, bank profits in the U.S. were flat, at $82.6 billion compared with $82.8 billion in the first half of 2015. But total loans and leases were up 6.7%, to $9.1 trillion from more than $8.5 trillion at the same time a year earlier.

Gruenberg said the industry still has challenges.

“Revenue growth remains sluggish as a prolonged period of low interest rates has put downward pressure on net interest margins. This has led some institutions to reach for yield, increasing their exposure to interest-rate risk," he said. "More recently, persistent stress in the energy sector has resulted in asset quality deterioration at banks that lend to oil and gas producers."