WASHINGTON — Banks and thrifts had their best performance in almost three years during the second quarter, earning $21.6 billion, a 16% jump from a quarter earlier, the Federal Deposit Insurance Corp. said Tuesday.

The FDIC, which presented its Quarterly Banking Profile, said banks benefited from reduced loan-loss provisions. While still adding a historically high provision of $40 billion, the agency said it was the lowest increase since the first quarter of 2008 and 40% below the year-earlier provision.

"Lower expense for loan losses, particularly at the largest banks, was the biggest factor behind the improvement in earnings," FDIC Chairman Sheila Bair said in prepared remarks.

While two-thirds of banks increased their loss reserves in the second quarter, the FDIC said a number of large banks reduced such provisions, producing net declines in their reserve balances. The industry's ratio of reserves to total loans fell to 3.40% from 3.51% during the quarter. Still, the FDIC noted that was the second-highest ratio in the 63 years for which data is available.

Other encouraging signs included an 8.6% rise in net interest income from a year earlier to $8.5 billion, and a 1.5% decrease in noninterest expense.

Meanwhile, net charge-offs fell for the first time in four years, dropping 0.4% from a year earlier to $49 billion. Noncurrent loans also declined for the first time in four years, decreasing 4.8% from the first quarter to $386 billion.

The FDIC said 20% of institutions reported net losses, compared to 29% a year earlier. Nearly 60% of institutions reported higher net interest margins from a year earlier as, the FDIC said, "average funding costs fell more rapidly than average asset yields."

Still, despite the hopeful signs, loan balances still lagged.

"The banking sector has made much progress in cleaning up its balance sheet, and recent surveys show that lending standards are starting to ease for some types of credit," Bair said. "But lending will not pick up until businesses and consumers gain the confidence they need to hire and spend."

Net loans and leases dropped by $95.7 billion during the quarter, with all major loan categories reporting reduced balances. Real estate construction and development loans fell by $34.7 billion (8.3%), credit card loans dropped by $17.6 billion (2.5%), residential mortgage loans declined by $13.2 billion (0.7%), and commercial and industrial loans were down $12.1 billion (1%).

Other signs in the report were more positive. While the number of problem banks increased by 54 during the quarter to 829, total assets of such banks fell by $28 billion to $403 billion.

The Deposit Insurance Fund also recovered somewhat, with federal reserves increasing by $5.5 billion during the second quarter. Still, the fund remains insolvent, at -$15.2 billion. The ratio of reserves to insured deposits also increased by 10 basis points to -0.28%. Although it as the second consecutive increase for the reserve ratio, it remains the third lowest such level on record.

Overall, industry assets declined for the fifth time in the past six quarters, dropping by $136.2 billion. The industry continued to reduce holdings of riskier assets, with the ratio of risky assets to total assets dropping slightly to 69.1% from 69.4% during the quarter, the lowest level for that ratio in 15 years.

Deposits also fell for the second quarter in a row, dropping by $57.8 billion. Interest-bearing domestic deposits were off $45.4 billion while noninterest bearing deposits jumped by $20.8 billion. Nondeposit liabilities fell by $105.4 billion as institutions reduced Federal Home Loan Bank advances by $35 billion and short term unsecured borrowings by $48.2 billion, the FDIC said.

The number of FDIC insured institutions dropped by 104 in the second quarter, the first time in almost 10 years that the number of banks fell by more than 100 in a single quarter. During the quarter, 57 institutions were absorbed by mergers into other charters (including 29 charters that were consolidated into a single organization), while 45 banks failed. No new banks were added during the quarter, the first time in the 38 years for which records are available.

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