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) -- U.S. banks put a gold star on the industry's continued recovery during the first quarter, with aggregate earnings of $40.3 billion, according to a Federal Deposit Insurance Corp. report issued Wednesday.

The first-quarter industry results improved from combined profits of $34.7 billion during the fourth quarter, and $34.8 in the first quarter of 2012. The FDIC said "half of all insured institutions reported year-over-year improvement in quarterly earnings, the lowest proportion since fourth quarter 2009."

Then again, "only 8.4 percent of institutions reported negative net income, the lowest proportion of unprofitable banks since third quarter 2006," The FDIC said.

The combined U.S. banking industry's first-quarter return on average assets (ROA) was 1.08%, increasing from 0.97% the previous quarter and 1.00% a year earlier.

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Reserve Releases Continue

Credit leverage continues to be a major theme for the industry, with quarterly provisions for loan losses falling to a six-year low. The provision is the amount added to loan loss reserves each quarter. If the provision is less than the amount of loans charged off, a bank "releases" loan loss reserves, which provides a direct boost to pretax earnings.

The FDIC said that loan loss provisions fell to a six-year low during the first quarter to $11 billion, compared to $14.3 billion during the first quarter of 2012.

According to data supplied by

Thomson Reuters Bank Insight

, 16 of the nation's 19 banks with total assets exceeding $100 billion released loan loss reserves during the first quarter. Among the exceptions, the only bank adding reserves of any significance was


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Branch Banking & Trust Co.

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of Winston-Salem, N.C., which added a net $32.9 million in loan loss reserves.

The following figures for several of the nation's largest banks underscore the likelihood of continued reserve releases, since reserve coverage of nonperforming loans remains quite strong:

  • Citibank, NA -- the main banking subsidiary of Citigroup (C) - Get Citigroup Inc. Report -- saw its loan loss reserves decline by $1.4 billion during the first quarter. The bank's March 31 ratio of nonperforming assets to total assets was 1.44%. Its annualized ratio of net charge-offs to average loans was 1.97%, while the ratio of reserves plus allocated risk-transfer reserves for loans held-for-sale was 3.29% as of March 31.
  • Bank of America (BAC) - Get Bank of America Corp Report main subsidiary Bank of America, NA released $1.4 billion in reserves during the first quarter. Bank of America NA's nonperforming assets ratio (NPA) was 2.23% as of March 31. Its reserves covered 2.05% as of March 31, while the first-quarter net charge-off ratio was just 0.64%. Bank of America's FIA Card Services, NA subsidiary released $272 million in loan loss reserves during the first quarter.
  • JPMorgan Chase's (JPM) - Get JPMorgan Chase & Co. Report main banking subsidiary JPMorgan Chase Bank, NA, saw its allowance for loan losses decline by $792 million during the first quarter. The bank's NPA ratio as of March 31 was 1.21%. Reserves covered 2.63% of total loans, while the first-quarter net charge-off ratio was 0.54%.

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The FDIC said noncurrent loans (90 days or more past due or in nonaccrual status) declined to $261.2 billion as of March 31, to "the lowest level since year-end 2008."

"Insured institutions reduced their loss reserves by $6.6 billion (4 percent) in the quarter, as the $16 billion in charge-offs taken out of reserves exceeded the $11 billion in loss provisions added to reserves," the FDIC said. "This is the 12th consecutive quarter in which banks have lowered their reserves."

More Margin Pressure

The Federal Reserve has kept the short-term federal funds rate in a range of zero to 0.25% since late 2008. The central bank has also been making monthly purchases of $85 billion in long-term securities since September, in an effort to hold long-term rates down. The relatively flat yield curve means continued pressure on net interest margins for most banks, since they have already enjoyed the bulk of their funding cost reduction, while their loans and securities investments continue to reprice at lower rates.

The FDIC reported the U.S. banking industry's aggregate first-quarter net interest margin was 3.27%, declining from 3.35% the previous quarter and 3.51% a year earlier. This was the narrowest net interest margin since the fourth quarter of 2006.

On a brighter note, the FDIC said banks' combined noninterest income grew to $66.5 billion in the first quarter from $64.6 billion in the fourth quarter and $61.4 billion during the first quarter of 2012. "Trading revenue was $1.1 billion (17.8 percent) higher than in first quarter 2012, while gains from asset sales were up by $1 billion (30.1 percent)," the agency said.

Expense reduction has been a major focus for many of the largest U.S. banks, with several even giving brand names to their cost-cutting programs, including Bank of America's "project BAC" and


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"Keyvolution." The industry's combined efficiency ratio was 58.92% during the first quarter, improving from 62.62% the previous quarter and 61.67% during the first quarter of 2012. The efficiency ratio is, essentially, the number of pennies of expenses incurred for each dollar of revenue.

There were no new banking charters granted in the U.S. during the first quarter, making seven straight quarters that no new banks have been added. "Except for charters created to absorb failed banks, there have been no new charters added since fourth quarter 2010," the FDIC said.

There were 7,019 U.S. banks at the end of the first quarter, following four bank failures and the absorption of another 55 institutions through mergers.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.