WASHINGTON - In 1995 - midway through eight consecutive years of record-setting profits - bank regulators first sounded credit quality alarms. With rising interest rates slowing the economy and investors pounding bank stocks, credit quality warnings are finally beginning to bite.

Federal bank regulators again warned that bad loans may hurt future profits as they announced Monday that the industry earned a record $19.5 billion in the first quarter. "Bank earnings are becoming increasingly dependent on favorable economic and financial conditions," Federal Deposit Insurance Corp. Chairman Donna Tanoue said. "Because a growing share of bank earnings is dependent on these conditions - that is to say, they are more exposed to higher interest rates and a less robust economy - we see bank revenues becoming more volatile."

Particularly worrisome to FDIC officials is that noncurrent commercial and industrial loans increased 12.3% to $12.8 billion in the first quarter while $1.3 billion of these loans were charged off.

The noncurrent rate on commercial and industrial loans rose to 1.28%, the highest level since the third quarter of 1994, when the rate was at 1.36%.

"We're bailing faster, but the boat is still sinking a little lower in the water," said Ross Waldrop, an analyst with the agency. "Normally when one of those rates is going up, the other is going down. But in spite of the higher chargeoffs, we are still seeing the rate of noncurrent loans go up."

American Bankers Association chief economist Jim Chessen said bankers listen to regulators - no matter how often the warning is sounded. And last week's moves by Wachovia Corp. and Unionbancal Corp. to bolster reserves to cover bad loans only reinforces what the regulators are saying.

"They've been sounding alarms about credit underwriting standards for a long time," Mr. Chessen said, "but it seems more real because the economic picture seems to be changing more dramatically now."

Bert Ely, an independent consultant in Alexandria, Va., said the big question is how much the economy will slow. "We won't know for another year if things are really going to hell right now," he said. "That's why regulators are pounding so hard on credit quality. They know that the damage is already done by the time loan losses start showing up."

To be sure, first-quarter earnings of $19.5 billion were impressive - $125 million higher than the previous quarterly record set in the third quarter of 1999, and up $1.8 billion from fourth quarter 1999. The average return on assets rose to 1.35%, the second-best quarterly return ever.

But FDIC officials credited much of the record to the strong economy. Growth in noninterest income, especially at large banks, continues to make the greatest contribution to the improvement in earnings, according to the agency's Quarterly Bank Profile.

The FDIC also warned that changes in the composition of their assets, liabilities, and revenues have made banks more sensitive to rising interest rates. While the share of assets that do not mature or reprice for at least five years continues to increase, the share of lower-cost deposits is declining and short-term liabilities are on the rise, the FDIC said.

The share of commercial banks' assets funded by deposits fell for the eighth time in the last nine quarters, to 72.4%. That raises a flag for officials because the declining dependence on insured deposits makes funding volatile, and more vulnerable should a shift in the economy occur.

The FDIC also noted that the number of relatively large construction, commercial real estate, and non-consumer loans is at the highest level since 1991. With such a concentration of large loans, Mr. Waldrop said a small number of defaults could impair a bank's capital or income.

Another warning issued by the agency concerned bank reserves, which increased by $1.1 billion in the first quarter. The ratio of reserves to total loans remained at 1.68% - a 13-year low. The "coverage ratio" - or reserves to noncurrent assets - fell to its lowest level in four years, with $1.73 for every $1 in loans 90-plus days overdue.

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