‘93 Bank Failures Fewer Than Expected : Finance: The FDIC said the number dropped to 42 this year from 120 in 1992. Soaring earnings in the industry helped.

The number of commercial bank failures dropped this year to the smallest total since 1982, as the quality of banks’ assets improved and their earnings soared to record levels.

However, California led the nation in total failures, and more are expected.

Nationwide, 42 banks holding $3.8 billion in assets failed in 1993, the Federal Deposit Insurance Corp. said Wednesday. In 1992, the FDIC handled 120 failed banks and provided assistance to two small banks that were in danger of failing. Those 122 banks had combined assets of $44.2 billion.

The 1993 total is less than half what the FDIC projected earlier this year. In June, the agency estimated that commercial and savings banks with combined assets of $10 billion would fail this year. In March, the agency reduced its estimate of 1993 failed bank assets to $25 billion from $76 billion.

“This is one time when you’re not disappointed to come in under your estimates,” FDIC spokesman David Barr said.

In June, the FDIC said it expected banks with assets totaling $20 billion to fail in 1994. The agency has not reassessed that number, Barr said.

This year’s number of failed banks is the smallest since 1982, when 42 banks holding $11.6 billion of assets went under. The dollar amount of failed bank assets was the lowest since 1984, when the total reached $3.3 billion. The cost to the government of resolving a failed bank generally equals about 10% of its assets.

The reduction in bank failures follows a year of record earnings for the banking industry. Buoyed by historically wide interest rate margins and declining non-performing assets, U.S. commercial banks earned $32.6 billion in the first nine months of 1993, above the full-year record of $32.1 billion set in 1992. More than 95% of banks were profitable in the third quarter.

Paul Bauer, president of Bauer Financial Reports in Coral Gables, Fla., said he expects bank failures to be lower in 1994, although “a sharp rise in interest rates would catch a few in a bind.” Bauer Financial’s data show that only 66 of the nation’s 11,080 commercial banks were undercapitalized at the end of the third quarter or would be by the end of the year if loss trends continued.

Despite the improved outlook, deposit insurance assessment rates will probably remain unchanged in 1994 because the FDIC is required to recapitalize its insurance fund. Legislation enacted in 1991 says the fund must have $1.25 for every $100 of insured deposits within 15 years. At the end of the third quarter, the fund had $10.4 billion, or 56 cents per $100 of deposits.

California led this year’s failure list through 20 institutions holding a combined $1.4 billion in assets. Texas came in a distant second, with 10 banks holding $431 million of assets. Scott Winslow, research director at SNL Securities in Charlottesville, Va., said he expects southern California to continue to be a trouble spot for banks in 1994.

New England Savings Bank, a New London, Conn., institution with $915 million of assets, was the largest bank to fail this year, the FDIC’s Barr said. Bank of San Diego, with about $317 million of assets, was second. First National Bank of Vermont, with about $293 million of assets, was third.