Insured commercial banks earned a record $7.6 billion in first-quarter 1992, a $2 billion increase from first-quarter 1991.

Favorable interest rate conditions produced wider spreads between the rates banks earned on their assets and the rates they paid for their liabilities.

Low interest rates also created opportunities for profits on sales of investment securities. Net interest income was $2.8 billion higher than a year ago, while gains from securities sales added $682 million to the year-to-year improvement in the industry's pre-tax earnings.

Commercial banks' return on assets averaged 0.88% in the first quarter, the highest percentage since second-quarter 1989. Almost three out of every four banks reported higher earnings than a year ago, and over 93% of commercial banks were profitable.

Dividend Payments Lower

Although quarterly earnings reached an all-time high, dividend payments were one-third lower than in 1991, and retained earnings also set a quarterly record, contributing $4.7 billion to a $7.5 billion increase in banks' equity capital during the quarter.

Although there was some slight improvement in credit quality compared with a year ago, it had little impact on earnings. Banks charged off $6.3 billion in bad loans, and set aside $7.2 billion in provisions for future loan losses, both unchanged from first-quarter 1991.

The high level of loan charge-offs contributed to a $69 million reduction in noncurrent loans and a $1 billion increase in the industry's foreclosed property holdings during the quarter.

At the end of March, noncurrent loans were $7.9 billion below the peak level reached a year earlier while foreclosed properties were $4.5 billion higher.

Most of the improvement in noncurrent loan levels in the past 12 months has been in commercial and industrial loans.

Margin of 4.31%

The average net interest margin at commercial banks in the first quarter was 4.31%, the highest level since fourth-quarter 1988, when sizable payments of past-due loan interest from developing-country borrowers provided a one-time boost to large banks' net interest income.

The interest that banks earned on their assets and paid for their liabilities both declined during the quarter, but liability costs fell more sharply, producing the wider net margins.

This marked the fourth consecutive quarter that net interest margins have widened. the benefits of the favorable interest rate environment were distributed relatively evenly among banks of different size and regions.

Totals loans at commercial banks fell by $16.6 billion in the first quarter, the fifth consecutive quarter that they have declined.

Largest Decline

Consumer loans had the largest decline in the first quarter, they fell by $13.6 billion, due to decreasing levels of installment debt and seasonal factors in credit card loans.

Commercial and industrial loans fell by $7.3 billion, largely due to a $9.8 billion reduction in banks' exposure to highly leveraged transactions.

Real estate loans registered moderate growth of $3 billion, due to increases in residential mortgage lending. Commercial real estate loans increased slightly, while loans for construction and development continued to decline sharply.

Total loans and losses held by commercial banks are now at their lowest level since third-quarter 1989. The largest decliners has been in commercial and industrial loans, which have shrunk by $71.5 billion (11.5%) in the past two years.

Growth in Assets

Despite the shrinkage in loan portfolio, bank assets grew by $5.3 billion in the first quarter as banks increased their holdings of U.s. Treasury securities, mortgage-backed securities, and other liquid investments.

Banks holdings of U. S. Treasury securities increased by $19 billion, while they added $8.3 billion to their holdings of mortgage-backed securities. Collateralized mortgage obligations accounted for about 80% of the increase in mortgage-backed securities.

Credit losses remained highest at banks in the Northeast. Although quarterly net chargeoffs fell for the third executive quarter, they were still above the level of first-quarter 1991. Almost one-third (30.7%) of the loans charged off in the first quarter were for commercial real estate or construction and development.

Despite continuing credit-quality woes, earnings at Northeast region banks were almost double the level of a year ago, thanks to improved net interest margins, gains from sales of securities, control of overhead expense growth, and lower provisions for future loan losses.

Banks in the West were the only regional group with lower net income than a year ago, but this decline was due to depressed results at the five largest California banks.

Earnings at the other banks in the West registered a slight year-to-year increase. The proportion of unprofitable banks declined and two out of every three banks reported improved earnings.

Provisions for future loan losses were 75% higher than a year ago (also due to increases at the five largest California banks), while gains from securities sales were below year-ago levels.

Although earnings were about one-third lower than in first-quarter 1991, banks in the West reduced their dividend payments by two-thirds compared with last year, so that their retained earnings actually increased. The West was also the only region whose banks showed a 12-month increase in noncurrent loans.

At the end of March, there were 11,806 banks reporting financial results, a net reduction of 114 institutions since yearend 1991. Twenty-nine banks failed in the first quarter, while 15 new banks were chartered and 97 merged with other institutions.

The number of commercial banks on the "problem list" shrank by 35 institutions, while the combined assets of "problem" commercial and savings banks remain at historically high levels

Favorable interest rate conditions have allowed banks to improve their earnings and capitalization even as credit losses remain high.

In the near term, conditions are likey to remain favorable for continued wide lending margins, although further margin improvement will be more difficult to achieve.

In the longer term, the outlook for commercial bank profitability is closely tied to trends in credit quality. Loan losses and provisioning for future losses are no longer rising, although they remain at record-high levels.

As loan portfolios have shrunk, banks balance sheets have become more liquid. If lending conditions improve, commercial banks will face few balance-sheet constraints to increasing their loan volume.

Savings Bank Results

Savings banks insured by the Bank Insurance Fund earned $176 million in first-quarter 1982. This is the first quarterly profit reported by the savings bank industry since first-quarter 1989.

FDIC resolutions of the most impaired institutions continued to reduce losses and to remove troubled assets from the industry, and figured significantly in the profitable first quarter.

During first-quarter 1992, six institutions with assets of $12.7 billion failed, including two of the largest institutions - Cross-land Savings Bank, with $7.4 billion in total assets, and Dollar Dry Dock Bank, with $4 billion in total assets.

The earnings performance and asset quality indicators at the remaining savings banks showed improvement in the first quarter compared with the final quarter of 1991. First-quarter earnings of the 435 remaining banks were aided by improved net interest income, reduced loan-loss provisioning and lower noninterest expenses.

Return on Assets

The 321 institutions headquartered in New England states reported an aggregate average return on assets of 0.21%, while the 99 savings banks in the other Northeastern states reported a slightly higher figure: 0.27%. Return on assets at the 15 savings banks located outside the Northeast averaged 1.43%.

Interest margins - net interest income as a percent of earning assets - reported by the 435 surviving institutions averaged 3.41% during first-quarter 1992, compared with 3.07% the previous quarter. Sixteen percent lost money in the first quarter, compared with 30% in the final quarter of 1991.

The savings bank industry's troubled assets - noncurrent loans plus other real estate owned - declined overall by $943 million during the quarter, reflecting FDIC's resolution activities as well as improvement in surviving institutions

A $374 million decrease in noncurrent loans during the quarter in the 435 remaining institutions was partially offset by an increase of $196 million in their other real estate owned.

Net Chargeoffs

Troubled assets comprised 5.5% of these BIF-insured saving banks' assets at the end of the quarter, down slightly from 5.7% at the end of 1991. Net chargeoffs of $422 million were down significantly from the $610 million charged off by the 435 saving banks during the fourth quarter of 1991.

Loan loss reserves at the remaining savings banks increased $162 million (5.5$) compared with their reserve levels at the end of the previous quarter.

As of March 31, 1992, savings banks held almost 38 cents in reserve for each dollar of noncurrent loans, up from 34 cents reported by the same institutions at the end of the pervious quarter.

Reserve coverage levles remain strongest for savings banks located outside New England and the Northeast.

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