Profits at commercial banks soared 21.6% in the first quarter to a record $18 billion, the Federal Deposit Insurance Corp. announced Friday.

The huge quarter smashed the previous record of $16.1 billion, set in the second quarter of 1998, and reversed a two-quarter trend of declining profits.

Fee income continued to drive earnings, but the FDIC attributed much of the first-quarter gains to large banks rebounding from last year's weak trading results and subpar performance overseas.

Comparing first quarter results with the year-earlier period, net income grew 13.2%. Fee income jumped 19.5%, to $34.7 billion. Trading activities set a quarterly record at $3.6 billion, up 35.4%. Net income from international operations hit $2.3 billion, up 33.1%.

The industry's average return on assets rose 6 basis points to 1.32%, tying the quarterly record set in the third quarter of 1995. But the FDIC said this figure masks the fact that roughly 60% of all banks had higher ROAs a year ago.

The industry's smallest players are being hurt by shrinking margins, according to the FDIC.

The average ROA at banks with less than $100 million of assets declined 9 basis points, to 1.10% during the first quarter - 22 basis points lower than the industry average.

The profitability gap would have been 33 basis points without the large number of small banks opting for subchapter S status, which pumps up income by lowering their tax bills. Nearly 20% of the banks with less than $100 million of assets are subchapter S banks.

At a press conference, FDIC Chairman Donna Tanoue said smaller bank profits depend more on interest rate sensitive assets. Though banks with less than $1 billion of assets earned nearly 75% of their income from lending in the first quarter, larger banks derived nearly half their income from other sources.

Though smaller banks still have wider spreads than larger banks, that edge is waning.

"The historical advantage smaller banks have had in net interest margins has eroded," Ms. Tanoue said. "Average margins at banks with less than $100 million were 26 basis points lower than a year ago." At 4.32% on March 31, small bank margins were at their lowest level in eight years. Still, the industry's average net interest margin was 4.05%, down 1 basis point from a year earlier.

Total interest income grew less than 2%, to $90.3 billion, from a year earlier, while total interest expense declined 3.1%, to $42.9 billion. Net interest income was $47.4 billion, up 6.9% from the first quarter of 1998.

Assets held by the 8,721 commercial banks dipped slightly in the quarter, to $5.4 trillion, but were up 5.9% from a year earlier. Deposits grew 5%, to $3.6 trillion.

Loans outstanding inched up just $12.5 billion in the first quarter-the smallest quarterly increase in two years. At this pace, total loans would grow less than $50 billion this year. By comparison, loans expanded $267.3 billion last year.

Commercial and industrial loans hit $922 billion, up 12.5% since the first quarter of 1998. Credit card loans declined $20.9 billion, to $207.9 billion.

Banks charged off $5 billion in bad loans during the first quarter, an increase of 7.3% over the first quarter of 1998. Commercial and industrial loan writeoffs surged 73.6%, or $429 million.

These loans also accounted for the majority of a $2.7 billion, or 9.2%, increase in noncurrent loans in the year that ended March 31. Noncurrent commercial and industrial loans increased by $1.3 billion in the first quarter and are 28.3% higher than a year earlier.

Loan-loss reserves increased $612 million, to $57.9 billion in the quarter. "Reserves are up on a nominal dollar basis, but that growth has not kept pace with the growth in total loans," said FDIC researcher Ross Waldrop. "The ratio of reserves to loans is at a 12-year low."

Equity capital rose 1.5%, to $470 billion in the quarter. Retained earnings set a quarterly record, at $8.9 billion, while cash dividends fell 28%, to $9 billion.

There were 64 new banks chartered in the first quarter; 114 were absorbed by mergers and one bank failed. The number of banks on the FDIC's problem list was 64 on March 31, with $4.7 billion of assets. That's down from 69 banks, with $5.4 billion on Dec. 31.

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