Industry made near-record $11 billion in first quarter.

WASHINGTON -- Earning $11.1 billion in the first quarter, the banking industry turned in its second-best performance ever - just $400 million shy of the all-time record set in the third quarter of 1993.

Announcing the results on Wednesday, the Federal Deposit Insurance Corp. said declines in net interest income were offset by rebounding asset values, a reduction in noninterest expenses, and higher revenues from fees.

The spread between the rate banks pay for deposits and what they earn on loans narrowed for the fifth consecutive quarter to 4.26% from 4.40% in December, the FDIC said. That's the smallest margin since the third quarter of 1991.

As market interest rates continue to decline, bank earnings could suffer, acting FDIC chairman Andrew C. Hove Jr. said Wednesday.

No Big Decline Seen

"I don't know that they'll [earnings] continue at this level," Mr. Hove said, citing the interest margin squeeze. "There could be some decline, but I don't think we're going to see a big, big decline in earnings."

Mr. Hove is upbeat about asset quality at the nation's 10,840 commercial banks.

Loan-loss reserves fell for the sixth straight quarter. To cover bad loans, the industry set aside just $2.7 billion, or 42.5% less than the $4.7 billion socked away in the first quarter of last year.

That $2 billion, was the single largest year-to-year boost to earnings ever, the FDIC said. Illustrating a new trend of reverse reserving, 347 banks transferred $167 million from reserves to earnings.

Noncurrent loans fell for the 12th consecutive quarter to $40.3 billion, which is $18.6 billion less than a year ago. That total is less than half of the bad-asset peak, which was set in first quarter 1991 at $83.3 billion.

Foreclosed real estate totaled just $14.9 billion on March 31, down from $25.2 billion a year ago.

The industry's first-quarter profits also were helped by the very first annual reduction in noninterest expenses. Losses at banks in the Northeast and West were lower this quarter because they sold loans and foreclosed properties for more than expected, the FDIC said.

Total noninterest expense of $34.6 billion in the first quarter was $2.1 billion less than the previous quarter and $429 million lower than a year ago.

Noninterest income also grew in the first quarter, though not as fast as in the past because several large banks lost $436 million on foreign exchange trades.

Banks earned $18.6 billion in noninterest income in the first quarter, compared with $17.7 billion in the first quarter of 1993, the FDIC said.

The industry's assets grew 9.4% or $137 billion to $3.84 trillion in the first quarter. However, $99 billion of that increase is due to an accounting change requiring netted derivative contracts to be shown on both sides of the balance sheet.

Commercial and industrial loan volume spurted $10.6 billion to $549 billion in the quarter. That's the second consecutive strong quarterly gain and the biggest three-month increase since the fourth quarter of 1986, FDIC said.

Colorado banks led the nation, registering a 23.4% increase in commercial loans. Six other states had growth rates above 10%: South Carolina at 15.4%, North Dakota at 14.5%, Oregon at 13.4%, Oklahoma and Georgia at 13.2% each, and Tennessee at 11.1%.

Residential loans grew just $104 million during the quarter as banks shed $1.4 billion in residential mortgages and construction and development loans fell $2.4 billion.

Securities holdings grew $19 billion to $856 billion in the first quarter.

The FDIC whacked its list of troubled institutions to 383 banks with just $53 billion in assets. That's down from 671 banks with $377 billion in assets a year ago.

The industry's average return on assets was 1.17%, down from 1.18% in the previous quarter and 1.23% a year ago. Equity capital increased $4.2 billion in the first quarter, which is the smallest quarterly increase since the fourth quarter of 1991. Retained earnings of $4.9 billion were off 25% from a year ago as dividends rose 44% to $6.2 billion.

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