FORTUNE -- The credit crunch may be over, but we are crawling our way out.
After rising for all of last year, bank lending dropped in the first three months of the year, according to FDIC data compiled by bank research firm Bankregdata.com. The drop comes as low interest rates are squeezing how much money banks can make from their traditional loan business.
That wasn't enough to halt the recent rise in bank bottom lines, though. Banks earned more in the first quarter than in any three-month period since the downturn. Collectively, U.S. banks earned $40.3 billion. That was up $5.5 billion from a year ago.
Profits rose, even as banks appeared to be lending less. U.S. banks had $44 billion less in loans at the end of the first quarter than they did three months before. There is some seasonality to the numbers. The biggest drop was in credit card borrowing, which normally falls in the first three months of the year. But home loans were off, too. That's probably a result of higher interest rates in the first month or so of the year. Rates have fallen since, so mortgage lending could be rising again.
Other categories of lending, though, were up. Business lending rose $24.2 billion. Consumers took out an additional $5.6 billion in auto loans in the first three months of the year.
A portion of the profit jump came from banks selling their loans to investors rather than holding them on their books. Wall Street's securitization machine, which turns loans into bonds, has sprung back to life this year after freezing up in the financial crisis. Sales of bonds based on subprime auto loans and mortgages not backed by the government are up. That suggests the drop in borrowing was not as bad as it looked.
"It's entirely possible that lending was up, but banks sold more of the loans they made than in the past," says Bill Moreland, who runs Bankregdata.com.
What's more, nearly half of the profit jump at banks came from fewer loan charge-offs. That makes some sense. As the economy recovers, fewer borrowers are going delinquent on their loans.
The problem is loan charge-offs are dropping faster than delinquencies. That may be producing unsustainable gains, and setting the banks up for more losses down the road.
"They are delaying charge-offs," says Moreland. "And they are doing it more and more."
Had banks charged off loans at the same rate they did a year ago, which was already below average, profits would have been $2.4 billion lower in the quarter.
The banks are not quite fixed.
Unlike the U.S. mortgage market, an imploding student loan market will have few immediate consequences, and that could be its biggest risk.
By Lauren Silva Laughlin
FORTUNE -- Make no mistake: the student loan market is a disaster. The Wall Street Journal recently reported that a third of borrowers in the $900 billion market are subprime, and about a third of those subprime borrowers aren't paying bills on time. Lending standards MOREFeb 14, 2013 1:05 PM ET
Selling the massive glut of homes the U.S. government now owns hasn't exactly worked out. Now Washington is exploring the idea of renting them.
FORTUNE -- Owning once trumped renting, but the collapse of the U.S. housing market changed all that. Newly strapped consumers took it upon themselves to redefine the American dream, making it socially acceptable to mail in a rent check instead of a mortgage payment. Now, it seems MORENin-Hai Tseng, Writer - Aug 24, 2011 4:39 PM ET
Regulators have finally located a fraud for which they can hold an actual person accountable.
The Securities and Exchange Commission agreed Wednesday to settle a bubble-era subprime fraud suit against broker Morgan Keegan. And in an unusual twist, it managed to wring a stiff settlement out of the guy who oversaw the alleged fund-overpricing scheme.
Morgan Keegan will pay $200 million to settle charges it defrauded customers by selling mutual fund shares at MOREColin Barr - Jun 22, 2011 1:07 PM ET
Don't look now, but the rating agency just issued a report with this headline:
Municipal Risk For Rated U.S. Banks Appears To Be Contained
You might have thought no one in the financial markets would ever use that word with a straight face after Fed chief Ben Bernanke's March 2007 testimony before Congress on the subprime crisis. As you may recall, he said [emphasis is mine]:
Although the turmoil in the subprime mortgage market has MOREColin Barr - Mar 31, 2011 2:29 PM ET
It's hard to believe, but there are bankers out there who give the business a good name. Arthur F.F. Snyder was one of them.
Hating bankers is all the rage these days. Hey, what's not to hate when we hear bankers whine about being "demonized" while knocking down multimillion-dollar pay packages from banks that wouldn't exist if U.S. taxpayers hadn't rescued the world financial system? I was especially sensitive to the MOREAllan Sloan, senior editor-at-large - Feb 8, 2011 5:00 AM ET
Editor's note: This week FORTUNE is publishing excerpts from its favorite business books of 2010. This excerpt from Bethany McLean and Joe Nocera's All the Devils are Here talks about how Countrywide's Angelo Mozilo was blind to the risky mortgages that would eventually wound his firm and contribute to the global financial crisis.
CEO and co-founder Angelo Mozilo saw a subprime mortgage crisis coming -- for everyone except his own company.
By MOREDec 23, 2010 3:00 AM ET
Greg Lippman, the former Deutsche Bank (DB) trader profiled by Michael Lewis in "The Big Short," participated this morning in the Bloomberg 2010 Hedge Fund conference, held at the Guggenheim Museum in New York City. And since Bloomberg TV was taping, it also doubled as Lippman's first-ever television interview.
Kind of fascinating how mild-mannered he comes across, compared to the brash and unfiltered portrayal by Lewis.
Lippman earlier this year left Deutsche to MOREDan Primack - Dec 2, 2010 11:58 AM ET
Taking on too much risk got the banks in trouble. So why are Bank of America and GMAC taking on more by resuming foreclosures?
Earlier this week, Bank of America (BAC) and Ally Financial's GMAC mortgage unit announced they would resume foreclosures in many states, even while government investigations into foreclosure procedures ramp up.
Their timing was curious -- both banks went back in on the same day? But what's really remarkable MORENin-Hai Tseng, Writer - Oct 20, 2010 1:28 PM ET
Securities regulators charged two former State Street execs with ripping off investors in a subprime fraud scam.
The Securities and Exchange Commission said John Flannery and James Hopkins sold a State Street (STT) bond fund to investors as an alternative to supposedly safe money market funds. But by 2007, the agency said, the fund was invested almost entirely in subprime mortgage-backed securities and derivatives whose value collapsed when the markets for MOREColin Barr - Sep 30, 2010 2:15 PM ET
|4 federal agencies to shut Friday|
|Wall Street braces for China and Fed fallout|
|Japan plunge spooks global markets|
|Shazam overhauls iPad app as music market heats up|
|Bitcoin more powerful than fastest supercomputers|