WASHINGTON Securities sales pushed bank profits to a record high of $19.9 billion in the first quarter, even as troubled commercial and industrial loans continued to grow and narrower interest margins hurt community bank profits, the Federal Deposit Insurance Corp. reported Thursday.
Though the record was a welcome surprise, given the slowing economy, the FDIC said that without unusually strong securities sales bank earnings would have fallen 2.9% from the previous record of $19.5 billion in the first quarter of last year. Stronger fundamentals overcame securities losses of $730 million in that quarter.
FDIC analysts said that the first-quarter securities gain of $1.2 billion came primarily from the sale of fixed-rate debt instruments, such as Treasury bills, that rise in value when interest rates are cut.
Overall, the industrys return on assets improved slightly, to 1.27% from 1.16% in the fourth quarter. But return on assets fell from a year earlier at more than 53% of banks.
Such mixed results were among what FDIC Chairman Donna Tanoue described as several nagging concerns that alarmed regulators.
While earnings strength remained widespread, we are seeing signs that banks may have difficulty sustaining their profitability, she said.
These signs included the continuing growth of troubled commercial and industrial loans which increased 8.7% from the fourth quarter, to $19 billion. The share of commercial and industrial loans that were noncurrent, or at least 90 days past due, hit a seven-year high of 1.82%.
Noncurrent loans increased in other areas as well by 5.4%, to $388 million, for residential loans, and by 21.3%, to $263 million, for real estate construction and development loans.
Net chargeoffs in all categories of loans declined 9.1% from the fourth quarter, to $7 billion, including a $700 million decrease in commercial and industrial chargeoffs. But Ms. Tanoue said that chargeoffs still were up 38% from a year earlier and that commercial and industrial loans accounted for more than half the increase.
This deterioration was concentrated among large banks, the FDIC said. Though only 33.6% of banks reported a higher net chargeoff rate on their commercial and industrial loans, these banks held 67.4% of such loans.
The news was similarly troubling for small banks. The average net interest margin at banks with less than $100 million of assets dropped to its lowest point in the 17 years the FDIC has tracked such data, to 4.28%, and the industrys average margin declined to 3.83%, its lowest level since 1987. For banks with less than $1 billion of assets, the margin declined to 4.31%.
Ms. Tanoue said her agency is concerned about the drop, which was caused primarily by the three rate cuts during the quarter by the Federal Reserve.
Industry representatives said that community bankers cannot cut interest rates on deposits as quickly as the Fed cuts its rates because the banks are afraid of losing customers and deposits, which fund their lending. Since almost all of the profits at smaller banks come from lending, there could be serious problems if margins continue to shrink, industry sources said.
If this continues in the long term, the shrinking margins could affect the viability of community banks because it is hard for smaller banks to find alternate sources of income, said Karen Thomas, director of regulatory affairs at the Independent Community Bankers of America. This bolsters our case to raise the deposit insurance coverage level. Higher coverage levels would attract new deposits and enable them to meet the loan demand in their communities.
Loan growth slowed to $12 billion, the smallest quarterly amount in four years. Commercial and industrial loans fell by $3 billion, the first decline since 1993.
Still, savings deposits grew 24.6%, to $86.6 billion. FDIC analysts said this was probably caused by the recent decline in the stock market.
Brokered deposits also continued to grow as a few brokerage houses continued to move money from uninsured accounts into insured ones. The FDIC said these sweep accounts grew by about $24 billion during the quarter, with $20 billion of that fully insured.
Bank reserves for losses grew by $580 million during the quarter, which the FDIC said was enough to keep pace with the sluggish loan growth. However, the industrys coverage ratio of reserves per $1 of noncurrent loans fell 9 cents from the fourth quarter and 33 cents from a year earlier, to $1.40 its lowest level since 1994. 
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