Federally insured banks and savings institutions posted their biggest profits in nearly three years during the second quarter, despite the fact that one in five institutions posted a loss, 45 failed, and the number of banks on regulators’ "problem list" grew to 829 — the highest level in 17 years.

"Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high," FDIC Chairwoman Sheila Bair said in a press release. "But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction."

Federally insured banks and savings institutions posted their biggest profits in nearly three years during the second quarter, despite the fact that one in five institutions posted a loss, 45 failed, and the number of banks on regulators’ "problem list" grew to 829 — the highest level in 17 years.

"Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high," FDIC Chairwoman Sheila Bair said in a press release. "But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction."

The 7,830 banks and savings institutions insured by the Federal Deposit Insurance Corp. posted an aggregate profit of $21.6 billion for the three months ending June 30. That compares with a $4.4 billion net loss during the same period in 2009.

Nearly two out of three banks reported better year-over-year earnings, Bair said, and "as long as economic conditions remain supportive, most institutions should maintain profitability and increase their capacity to lend."

There’s no indication banks are boosting lending yet, with the FDIC’s Quarterly Banking Profile showing loan balances declining for the fifth time in the past six quarters.

Net loan and lease balances were down 1.3 percent, to $95.7 billion, with reductions in all major categories. Real estate C&D loans fell by $34.7 billion (8.3 percent), credit card balances dropped by $17.6 billion (2.5 percent), and residential mortgage loans declined by $13.2 billion (0.7 percent).

The biggest factor in the improved earnings was reduced provisions for loan losses, which were down $27.1 billion from a year ago, to $40.3 billion.

Charge-offs of uncollectible loans were also down $214 million, to $49 billion. While that’s only a slight reduction, it was the first time in nearly four years that net charge-offs posted a year-over-year decline. Charge-offs of one- to four-family residential mortgage loans fell more sharply, falling $1.4 billion, or 16 percent.

The improved outlook allowed the FDIC to lower its contingent loss reserve, which is supposed to cover the cost of expected failures, from $40.7 billion to $27.5 billion. That, along with increased assessment revenues, helped the Deposit Insurance Fund (DIF) balance improve from negative $20.7 billion to $15.2 billion.

The FDIC finished the quarter with $44 billion of cash and securities — down from $63 billion at the end of March but "more than enough to resolve anticipated failures," Bair said.

The government insurer was appointed the receiver of 45 failed banks during the quarter, down from 73 during the first quarter. The FDIC has intervened in 118 bank failures so far this year, putting it on a pace to exceed last year’s total of 140.

While the number of institutions on the FDIC’s "Problem List" rose from 775 to 829, the total assets at problem institutions declined from $431 billion to $403 billion. The number of problem institutions — equal to just over 10 percent of all those insured — is the highest since March 31, 1993, when there were 928 on the list.

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