Following is the Federal Deposit Insurance Corp.'s report, slightly abridged, on the banking industry's performance in the third quarter.
Aided by favorable interest rate conditions and moderating asset-quality problems, commercial banks reported earnings of $8.5 billion in the third quarter of 1992.
This marked the third consecutive quarter that bank profits have set a new record. Net income was almost-twice the $4.3 billion earned a year earlier, bringing total earnings for the first nine months of 1992 to $24.1 billion.
The year-to-year improvement in earnings is attributable to the continued decline in interest rates and further modest improvements in asset quality.
Falling interest rates produced wider net interest margins in the quarter, with net interest income up by $3 billion compared with the third quarter of 1991.
Lower interest rates also resulted in higher market values for banks' investment securities portfolios, and banks realized $1.3 billion in gains from sales of securities, an increase of $600 million from the year earlier.
Provisions for future loan losses, at $6.8 billion, were down by $2.2 billion. The average return on assets was 0.99%, surpassing the record of 0.94% set in the previous quarter and up from 0.50% in the third quarter of 1991.
Lower interest rates reduced the interest income that banks earned and the interest expense.
The persistent wide yield differential between long- and short-term interest rates and the increased proportion of equity funding meant that interest expense fell more sharply than interest income, producing increased net interest income.
Total interest income of $63.7 billion was $8.4 billion less than in the third quarter of 1991, while total interest expense of $29.6 billion was $11.4 billion below the year-earlier level.
As a result, net interest income of $34.1 billion was $3 billion higher. The average net interest margin for commercial banks was 4.49%, up from 4.22% a year earlier. This was the widest quarterly net interest margin reported by commercial banks since quarterly income reporting began in 1983, and marked the sixth consecutive quarter that net interest margins widened.
Bad Loans Down
Troubled assets held by commercial banks fell for the second consecutive quarter, as a $2.5 billion decline in noncurrent loans outweighed a $237 million increase in other real estate owned.
Noncurrent loans have fallen in each of the last six quarters, from $83.3 billion at the end of the first quarter of 1991 to $69.4 billion at the end of September.
The largest reduction in noncurrent loans in the third quarter occurred in commercial and industrial loans, which fell by $1.3 billion as banks took net chargeoffs of $1.9 billion.
Noncurrent realty loans fell by only $824 million, despite chargeoffs of $2.6 billion, indicating that portfolios continue to experience new problems.
Bank reserves for future loan losses increased slightly. At the end of September, commercial banks held 79.7 cents of reserves for every dollar of noncurrent loans, the highest proportion since the first quarter of 1990.
High levels of retained earnings and a favorable environment for new debt and equity issues continued to boost commercial banks' net worth. Total equity capital increased by $8.8 billion, to $257.3 billion.
Retained earnings contributed $5.6 billion of the increase. The average ratio of equity capital to assets ratio rose to 7.39%, its highest level since 1966.
Commercial bank assets grew by $43 billion, led by expanded securities holdings. Mortgage-backed securities grew by $12.1 billion, and U.S. Treasury securities increased by $10 billion.
Loans and leases registered a $3.7 billion increase, ending six consecutive quarters of loan shrinkage. Residential mortgages, consumer installment loans, and home equity lines of credit were the main areas of lending strength, offsetting a $6.6 billion decline in commercial and industrial loans.
Banks in the West region were the only regional group to show an increase in their proportion of troubled assets in the third quarter. Other real estate owned grew by $582 million, overshadowing a $134 million drop in noncurrent loans.
West region banks were also the only group that did not experience an improvement in average net interest margin during the quarter, as average asset yields fell sharply.
Despite evidence of continuing asset-quality problems, banks in the West region reported higher earnings than a year ago, due largely to lower provisioning for future loan losses.
Banks in the Northeast region continue to have the highest average proportion of troubled assets, as well as the highest level of loan losses, but both indicators show improving trends.
Bank Failures Dwindle
The number of insured commercial banks reporting financial results fell to 11,590 at the end of September, a net decrease of 96 institutions during the quarter. Ten new commercial banks were chartered and 98 banks merged with other institutions.
Only nine commercial banks failed in the third quarter, the lowest such figure since seven banks failed in the fourth quarter of 1983. The number of commercial banks on the FDIC's "problem list" fell by 47, to 909 at the end of the quarter.
Combined assets of "problem" banks, at $48 7.9 billion, remained well above the level of a year earlier but were below the $528 billion reported at the end of 1991.
For calendar-year 1992, commercial banks should easily surpass the previous full-year earnings record of $24.9 billion, set in 1988.
Prospects for 1993 depend on the strength of the economy and the level of interest rates, but commercial banks as a group appear poised for continued strong earnings.
Net interest margins will probably be narrower, but loan demand should continue to strengthen. As economic conditions improve, more substantial reductions in troubled assets may be realized.
Strong capital growth has increased banks' lending capacity, and the proportion of highly liquid securities in their asset portfolios has risen, so they should be able to accommodate a strong increase in loan demand if it materializes.
The 421 savings banks insured by the FDIC Bank Insurance Fund earned $354 million in the quarter. This is the third quarter in a row in which savings banks have earned a profit, following 11 consecutive quarters of net losses.
Net income was $137 million higher than the amount earned in the previous quarter and represented a $713 million improvement over the $359 million net loss reported in the third quarter last year.
Much of the improvement reflects the FDIC's resolution of troubled institutions during the last 12 months. If the effect of resolutions is excluded, earnings of the remaining 421 savings banks increased $44 million from the second quarter of 1992.
Aggregate third-quarter return on assets was 0.63%, up from 0.37% the previous quarter and a negative 0.58% registered in the third quarter of 1991.
The 311 institutions in the New England states reported an aggregate return on assets 0.47%, while the 95 savings banks in the other Northeastern states reported a significantly higher figure: 0.67%. Return on assets at the 15 savings banks outside the Northeast averaged 1.72%.
The higher net income reported is attributable to today's low interest rates, the wide spread between short- and long-term rates, and lower loan-loss provisions. Securities gains are up substantially from the previous periods.
Net interest margins have increased seven quarters in a row as falling interest rates have reduced savings banks' interest paid to depositors and other creditors faster than income earned on loans and other assets decreased. Lower loan-loss provisions mainly resulted from failures of insolvent institutions.
Ninety-three percent of all savings banks were profitable in the third quarter, up from 87% the previous quarter.
New England Lagging Behind
In aggregate, institutions in the New England states have lower earnings than institutions headquartered elsewhere in the Northeast.
Eight percent of the New England institutions lost money, compared with 5% of the institutions in the other Northeastern states. All fifteen institutions headquartered outside of the Northeast were profitable.
Savings banks' troubled assets continue to decline - by $1.4 billion (12%) during the quarter and $3.5 billion in the 12-month period. Much of the reduction is due to FDIC resolutions.
Troubled assets held by the 421 surviving institutions fell by $289 million during the quarter. Their noncurrent loans declined by $431 million, while their other real estate owned - primarily repossessed real estate - increased $142 million.
Troubled assets held by the remaining institutions in the New England states decreased 4.1% ($198 million), while they decreased 1.3% ($72 million) in the other Northeast states.
Reserve coverage of troubled loans improved at the surviving savings banks during the quarter, due to the decline in noncurrent loans.
As of Sept. 30, institutions in the New England states held 53 cents in reserve for every dollar of troubled loans, while those in the other Northeastern states held 34 cents.
Reserve coverage levels remain strongest at the institutions outside New England and the Northeast. These institutions held 88 cents in reserves for each dollar of noncurrent loans.
Equity capital ratios continued to benefit from retained industry profits and shrinking assets. The 421 savings banks had an aggregate ratio of equity capital to assets of 7.69% at the end of the third quarter, up from 7.30% at the end of the second quarter.
Total assets of savings banks insured by the Bank Insurance Fund declined by $9.2 billion (4%) during the quarter - mainly due to the failure of seven savings banks (including the two institutions that failed Oct. 2) with total assets of $6.8 billion.
An unassisted merger resulted in a further asset shrinkage of $1.2 billion during the quarter.
Assets at the remaining 421 savings banks declined $1.2 billion. Their net loans were $965 million lower than in the previous quarter, and their mortgage-backed securities were $450 million lower.
Home mortgage loans increased slightly, by $2 million, while construction loans dropped $243 million and commercial real estate loans shrank $702 million.
Fourth-quarter earnings are likely to fall below the amount earned in the third quarter, especially if the remaining savings banks increase their loan loss provisions. If short-term interest rates continue to rise, net increase margins at savings banks likely will narrow.
The outlook for 1993 will depend on the economy in the Northeast and the level of interest rates.
One of every five savings banks - institutions holding 32% of the industry's assets - remain on FDIC's "problem list," despite removal of failed institutions and improvements at many survivors.