U.S. Banks’ 2nd-Quarter Profits Set a Record : Finance: They reap the benefit of paying low interest rates. But California real estate loans are a growing problem.

Commercial bank profits jumped to a new record in the second quarter as banks reaped the benefits of rock-bottom interest rates, but California institutions continued to report a troublesome rise in problem real estate loans, the government reported Wednesday.

The nation’s 11,685 commercial banks earned $7.9 billion in the three months ended June 30, the Federal Deposit Insurance Corp. reported. That surpassed the previous record of $7.6 billion in the first quarter, when banks also benefited from lower interest rates.

In California, profits for the 464 FDIC-insured banks rose 9% to $383 million from $358 million a year earlier. But government statisticians said the two figures are not comparable because of accounting differences caused by the merger of the state’s two largest banks, Bank of America and Security Pacific National Bank, in the second quarter.

Of more concern in California is the rise in troubled real estate loans, or loans in which borrowers are behind on payments or where a bank has foreclosed. Troubled real estate loans, which can result in losses or lower profits in future quarters, now make up 8.51% of the state’s total, compared to slightly more than 8% in the first quarter and 7.43% nationwide.

That puts California eighth highest among the 50 states and Washington, D.C., in the percentage of problem real estate loans. California reported the fourth-highest jump in troubled real estate loans between the first and second quarters, ranking only behind fellow western states Hawaii, Washington and Oregon.

The state’s growing real estate troubles has some analysts worried not only because California is so large, but because the state has a high proportion of loans in real estate. Of the state’s $336 billion in bank assets, $126 billion, or 37%, are real estate loans, the fifth-highest concentration in the country, according to FDIC figures. Nearly $11 billion of those loans are listed as troubled by the FDIC.

Some analysts say that problem loans will continue to rise in the state for several months. James J. McDermott Jr., president of Keefe, Bruyette & Woods, a New York firm specializing in bank analysis, said troubled loans could continue to climb into the middle of next year.

Jonathan Neuberger, economist with the Federal Reserve Bank of San Francisco, said that California banks are now aggressively recognizing problems, albeit later than other banks nationwide did. “What you are seeing is where the rest of the country was a year or two ago in recognizing problems and reserving for them,” he said. “But I don’t have a good sense how long that will go on,” he said.

Nationwide, the record profits stem largely from the huge “spread” between what banks pay out to depositors in interest and the money they take in from borrower payments and other sources. When interest rates drop rapidly as they have been doing, bank spreads tend to be wide initially before contracting later as the rates charged on loans drops. That results in higher profits for banks, but lower interest earned by consumers.

Ross Waldrop, senior financial analyst with the FDIC, cited two other reasons for the higher profits: Banks nationwide reported that problem loans dropped slightly in the period, and many banks recorded healthy gains from the sale of investment securities. Troubled loans and other assets fell below $100 billion for the first time in 19 months.

Analysts added that banks also are benefiting from past cost cutting and are significantly boosting capital, the cushion that protect against losses.

Analysts and government regulators, although still concerned about banks in the West as well as a few large money center banks, say that the rosier second-quarter profits help boost confidence in an industry that some doomsayers two years ago were predicting was headed for a financial debacle rivaling the savings and loan mess. Indeed, at the current pace, banks will shatter the industry’s full-year record of $24.9 billion in profit set in 1988.

“What it does is very starkly and appropriately point out the significant difference between what happened to savings and loans as an industry and what is happening to the commercial banking industry,” McDermott said.

But the FDIC warned that if interest rates rise, the value of government securities that many banks have been buying in lieu of making loans could could drop sharply.

Separately, the FDIC noted an improvement in the insurance fund that protects deposits up to $100,000, but said it still remains $5.5 billion in the red.

Loan Woes Continue

Problem real estate loans eased nationwide in the second quarter, but continued t grow in California, where the percentage of real estate loans in which the borrower is behind on payments or the bank has foreclosed rose to a troublesome 8.51%.

Percentage of problem real estate loan by state: ALABAMA: 2.24 ALASKA: 4.73 ARKANSAS: 3.33 CALIFORNIA: 8.51 COLORADO: 5.43 CONNECTICUT: 10.61 DELAWARE: 3.93 DISTRICT OF COLUMBIA: 20.53 FLORIDA: 6.10 GEORGIA: 3.90 HAWAII: 1.59 IDAHO: 2.19 ILLINOIS: 4.62 INDIANA: 3.54 IOWA: 1.77 KANSAS: 6.03 KENTUCKY: 2.87 LOUISIANA: 9.58 MAINE: 5.90 MARYLAND: 8.42 MASSACHUSETTS: 8.86 MICHIGAN: 3.11 MINNESOTA: 2.78 MISSISSIPPI: 3.42 MISSOURI: 5.08 NEVADA: 6.16 NEW HAMPSHIRE: 7.68 NEW JERSEY: 11.40 NEW MEXICO: 7.12 NEW YORK: 16.26 NO. CAROLINA: 3.48 NO. DAKOTA: 2.79 OHIO: 3.66 OKLAHOMA: 7.16 OREGON: 3.67 PENNSYLVANIA: 5.51 RHODE ISLAND: 9.71 SO. CAROLINA: 4.45 SO. DAKOTA: 2.39 TENNESSEE: 4.38 TEXAS: 7.29 UTAH: 3.79 VERMONT: 7.25 VIRGINIA: 7.94 WASHINGTON: 5.55 WEST VIRGINIA: 2.54 WISCONSIN: 2.07 WYOMING: 2.78 UNITED STATES: 7.43

Bank Profits by State

Here is a list of commercial bank profits, or losses, by state for second quarter of 1992 and the same period in 1991. The figures, provided by the Federal Deposit Insurance Corp., are in millions of dollars.

State 1992 1991 Alabama $132 $109 Alaska 20 18 Arizona 51 0 Arkansas 83 60 California 382 358 Colorado 75 38 Connecticut -28 -138 Delaware 455 366 D.C. -18 -117 Florida 357 38 Georgia 259 200 Hawaii 63 56 Idaho 30 23 Illinois 511 385 Indiana 148 126 Iowa 113 96 Kansas 84 66 Kentucky 121 83 Louisiana 115 14 Maine 6 -7 Maryland 97 12 Massachusetts 184 -44 Michigan 221 242 Minnesota 191 136 Mississippi 60 51 Missouri 150 144 Montana 25 18 Nebraska 76 63 Nevada 80 47 New Hampshire 24 -25 New Jersey 148 -287 New Mexico 33 11 New York 1,010 680 North Carolina 192 145 North Dakota 23 18 Ohio 418 306 Oklahoma 89 64 Oregon 85 10 Pennsylvania 450 298 Rhode Island 22 1 South Carolina 70 55 South Dakota 106 126 Tennessee 135 94 Texas 435 279 Utah 45 34 Vermont 3 -33 Virginia 179 99 Washington 127 115 West Virginia 58 47 Wisconsin 162 117 Wyoming 13 13 United States 7,912 4,645