WASHINGTON -- Commercial banks earned $11.8 billion in the third quarter, shattering the previous three-month profit record by $300 million, the Federal Deposit Insurance Corp. said Thursday.

These impressive results came despite the fact that -- for the first time in nearly five years -- the industry lost money on the sale of investment securities. Securities losses totaled $334 million in the quarter.

Still, the big third-quarter numbers make it likely that 1994 will smash last year's earnings record of $43.4 billion. If that happens, the banking industry will have set new annual earnings records for three years running.

The 1992-94 earnings total is headed for $120 billion.

The FDIC attributed the earnings growth to fatter interest rate margins and stronger loan demand at the 10,592 banks reporting.

Third-quarter earnings also got a boost as 427 banks converted $331 million from loan-loss reserves to income.

"The commercial banking industry has never been in better shape," FDIC Chairman Ricki R. Tigert said at a press conference. "Further, we see nothing in these figures that suggests any change in the positive outlook for commercial banking anytime soon."

For the second straight quarter, the spread widened between what banks charge for loans and the rates they paid on deposits. The spread had been narrowing for the five previous quarters.

The average net interest margin was 4.46% in the third quarter, up from 4.40% at midyear.

While rising rates are not hurting bank margins, they are taking a toll on securities portfolios.

For the first time since the end of 1988, the industry posted a net loss on the sale of investment securities. During the first nine months of 1994, securities gains were off 87% to $343 million from $2.7 billion.

The $334 million loss in the third quarter came as 1,976 banks lost $438 million and 1,500 banks gained $104 million.

FDIC researcher Ross Waldrop said banks are cutting their losses, selling securities that have declined in value as rates have risen.

Because the figures released on Thursday do not factor in the Federal Reserve's recent 0.75% hike, Ms. Waldrop said more banks may report securities losses in the fourth quarter.

"Some institutions are restructuring their portfolios," he said. "For institutions that can afford to take the loss ... we could see more of that in the fourth quarter."

Banks stripped $12 billion, to $837 billion, from their securities portfolios during the third quarter. That's almost twice the prior quarter's decrease. The decreases in securities holdings in the second and third quarters are the first in three years.

As securities are being shed, lending is on the rise.

Total loans grew $60.2 billion in the third quarter to $2.28 trillion. This follows the strong lending surge of $57.6 billion in the second quarter -- the best quarterly loan growth since the end of 1986.

Lending was up across the board in the third quarter: Real estate loans grew $27.1 billion to $971 billion; consumer loans were up $22.4 billion to $461 billion; home mortgages increased $20.2 billion to $550 billion; and commercial and industrial loans rose $10.6 billion to $575 billion.

Asset quality continued its comeback as noncurrent loans fell for the 14th consecutive quarter bY $2.5 billion to $33.4 billion.

Banks charged off $2.4 billion in the third quarter, the smallest amount since the first quarter of 1985. Reserves fell $200 million to $2.6 billion -- the smallest quarterly provision since early 1984.

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