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Banks post record $40.3-billion profit in first quarter, FDIC says

WASHINGTON -- U.S. banks posted a record $40.3-billion profit in the first three months of the year as the industry continued to recover from the financial crisis, though record low interest rates pose an obstacle to growth, the Federal Deposit Insurance Corp. said Wednesday.

The first-quarter profit tops the previous record set more than six years ago, before the crisis and Great Recession. The financial results were driven by the need to set aside less money to cover bad loans as well as some one-time savings, including proceeds from legal settlements.

Just four of the nation's approximately 7,000 FDIC-insured banks failed in the January-through-March period, down from 16 a year earlier and the lowest quarterly figure since 2008.

The number of so-called problem institutions -- banks at risk of failure -- dropped to 612, the eighth straight quarterly decline.

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"Today’s report shows further progress in the recovery that has been underway in the banking industry for more than three years continues," said FDIC Chair Martin J. Gruenberg.

But he cautioned against reading too much into the record quarterly profit. The industry has 20% more assets than it had six years ago. And the prospect for future earnings is hampered by low interest rates.

Net interest income was down $2.4 billion from the first quarter of last year, the third time in four quarters there has been a year-over-year decrease.

And the industry's net interest margin -- the difference between the rate that banks can pay to depositors and earn on their assets -- dropped to its lowest level since 2006, the FDIC said.

"We see an industry where more institutions are profitable, but fewer are able to continue to increase their net income," Gruenberg said.

In such an environment, bankers might be tempted to look for higher-yielding investments and regulators will be watching to make sure banks don't take excessive risks, he said.

Bank profits were helped by the need to set aside less money to cover bad loans. Loan losses dropped to $16 billion in the first quarter, the lowest level since 2007. The biggest improvement was on residential mortgages.

Total loans and leases on banks' books dipped slightly to $35.9 billion in the first quarter, caused mostly by a seasonal drop in credit card balances, the FDIC said.

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