WASHINGTON - The banking industry set another record for profits in the third quarter and increased its total loans for the first time in 18 months, the Federal Deposit Insurance Corp. announced Thursday.
The bullish report, which confirmed expectations, prompted FDIC officials to say they would lower their 1993 projection for bank failures.
The agency reported that 11,590 banks earned $8.5 billion in the third quarter, almost double the $4.3 billion made in the same period a year earlier.
The results marked the third quarterly record in a row, and brought this year's total profits to $24.1 billion.
That puts the industry easily in reach of the annual record of $24.8 billion set in 1988. "For banking, 1992 has been nothing less than remarkable," said Andrew C. Hove Jr., the FDIC's acting chairman. He noted that the industry's average return on assets climbed to 0.99% during the third quarter.
The FDIC attributed the strong performance to wide profit margins stemming from unusually low interest rates.
Net interest margin widened for the sixth consecutive quarter. The average spread, at 4.49%, was the largest since the FDIC's quarterly reports began in 1983.
Total loans rose by a slim $3.7 billion, to $2.04 trillion. Nevertheless, that marked the first increase since the second quarter of 1991.
Commercial Loans Decline
Residential mortgages, consumer installment loans, and home equity lines rose by a total of $13.7 billion, while commercial and industrial loans declined by $6.6 billion.
Total assets rose $43 billion during the quarter, thanks mainly to securities purchases.
Net interest income in the quarter was up almost 10% to $34.1 billion over third quarter 1991. On the year, net interest income is $98.8 billion compared to $90.1 billion in the first nine months of 1991.
Low interest rates also resulted in higher market values for bank securities portfolios. Further, banks realized $1.3 billion in gains from securities sales during the quarter, up $600 million from a year earlier.
Paring Failure Projection
Because of the strong performance, the FDIC plans to pare its current projection that 120-125 banks with $76 billion in assets will fail next year, Mr. Hove said at a press conference.
"We'll be making a revision," he said. "It's likely with the earnings we've had, the decline we've had in problem banks, and the increase we've had in capital in the banks that these numbers could change."
Mr. Hove did not say how much he expects to lower the failure forecast for 1993.
For this year, the agency expects 120 banks with $40 billion to $45 billion in assets to fail. Mr. Hove said the FDIC's losses on the year will total less than $6 billion.
Another big factor behind the record earnings is that banks reserved less to cover problem loans during the quarter, socking away $6.8 billion compared to $8.9 billion in the third quarter of 1991.
Problem Loans Shrinking
But Mr. Hove added that the volume of past-due loans dropped $2.25 billion during the quarter to $97.4 billion or about 2.8% of total industry assets. Problem loans have been shrinking for six straight quarters; during the first nine months of 1992, problem loans declined $5.2 billion.
But while troubled loans are decreasing overall, banks branded another $1.8 billion in real estate loans as troubled. Banks now hold $37.2 billion in past-due real estate loans.
Asked if the industry's nearly $100 billion in bad loans is a ticking time bomb, Mr. Hove said the credits are "an area of concern." But he quickly added that the volume of troubled loans is shrinking and is at a "manageable" level.
The FDIC noted that banks now have 80 cents behind every $1 of troubled loans - an amount that has been increasing for six quarters.
Capital Up $8.8 Billion
Banks added $8.8 billion to capital during the quarter, bringing the industry's average equity capital ratio to 7.39%. That's the highest average since 1966. From January through September, banks added $26.9 billion to capital for a total of $257 billion.
The FDIC trimmed its list of problem banks to 909 as of Sept. 30 - the lowest total in five years. The amount of assets in these banks, considered candidates for failure, fell as well - to $488 billion from more than $600 billion at the beginning of the year.
While the bulk of Mr. Hove's comments were upbeat, he did say the industry still has some problems. The number of problem banks in the West is expanding, he said, while commercial real estate in the Northeast remains a concern.
But Mr.Hove is not terribly worried about the effect rising interest rates might have on the industry.
"As interest rate rise, they rise on both sides of the balance sheet for banks," he noted.