WASHINGTON — The banking industry earned a record $40.3 billion in the first quarter as rising noninterest income and the continued drop in loss provisions made up for declines in interest-related income, the Federal Deposit Insurance Corp. said Wednesday.

The FDIC's Quarterly Banking Profile reported an earnings total that was nearly 16% higher than the net income earned in the first quarter of 2012. Institutions achieved an average return on assets of 1.12%, which was an improvement from the 1% ROA set a year earlier and was the highest quarterly return since the second quarter of 2007.

Half of the industry showed a year-over-year improvement in earnings and just 8.4% of all institutions reported a quarterly loss, the lowest percentage since the third quarter of 2006.

"Asset quality continues to improve, more institutions are profitable, and the number of failures and problem institutions continues to decline," FDIC Chairman Martin Gruenberg said in remarks prepared for the release of the report.

Yet the agency indicated that a substantial portion of the earnings boost was due to the activities of a few large institutions, and the report specifically cited "a reduction in expenses for litigation costs and proceeds from a legal settlement" as an income driver.

"We … note that large, nonrecurring income and expense items at some of the industry's largest institutions exerted a significant influence on the quarterly change in net income and helped push industry net income above $40 billion for the first time," said Gruenberg, who added that the previous earnings record occurred over six years ago "when the industry was 20% smaller" as measured by total assets.

Once again, a reduction in loss provisions also played a role in overall earnings. Provisions fell to a pre-crisis level, dropping to $11 billion, which was a declined of more than 23% from a year earlier. It was the lowest quarterly provision since the first quarter of 2007. Total noninterest income rose 8.3% from a year earlier to $66.5 billion, helped by a nearly 18% boost in trading revenue and 30% higher gains from asset sales. Meanwhile, noninterest expense was nearly 4% lower than a year earlier. Yet the agency said over half of that reduction was attributed to a single large bank. Overall, fewer than 40% of institutions reported lower noninterest expenses.

The report demonstrated continued challenges by the industry to derive growth from interest-related income. The average net interest margin of 3.27% was the lowest since the fourth quarter of 2006. Net interest income declined year-over-year by 2.2% to $104 billion. It was the third straight quarter of a year-over-year decline.

"The principal reason why revenue has been nearly flat — growing just 1.6% from a year ago — is the downward pressure on net interest margins that banks have experienced in this low interest rate, flat yield curve environment," Gruenberg said.

The industry posted a "seasonal decline" in loan balances, the report said. Total loans fell by 0.5% during the quarter to $7.66 trillion. The agency attributed much of the decline to the fact that consumers tend to pay off large portions of credit card balances during the first quarter. Card balances declined 5.2% during the quarter to $660 billion.

The agency's list of "problem" institutions shrank by 39 to 612 institutions, and total assets of banks on the list fell from $233 billion to $213 billion. Meanwhile, the ratio of reserves to insured deposits in the Deposit Insurance Fund rose by 15 basis points to 0.59%. The fund's total balance stood at $35.7 billion at the end of the quarter.

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