By Mark Huffman

September 1, 2010
Banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported a profit of $21.6 billion in the second quarter of 2010, a $26 billion improvement from the $4.4 billion net loss the industry posted in the second quarter of 2009.

It's the highest quarterly earnings total since the third quarter of 2007.

"This is the best quarterly profit for the banking sector in almost three years," said FDIC Chairman Sheila C. Bair. "Nearly two out of every three banks are reporting better year-over-year earnings. As long as economic conditions remain supportive, most institutions should maintain profitability and increase their capacity to lend."

But as you break down the numbers, you see that big banks are doing much better than small ones. So far this year, FDIC has helped close 118 banks -- most of them small local and regional lenders. And despite the overall improvement, earnings remain below historical norms.

On the positive side, 20 percent of institutions reported a net loss for the quarter, compared with 29 percent a year earlier. And, the average return on assets (ROA) -- a basic yardstick of profitability -- rose to 0.65 percent, from negative 0.13 percent a year ago.

Bodes well for the economy

The improvement in the banking sector is significant for the overall economy, since it was the banking meltdown that sent the economy into a downward spiral two years ago. Despite the remaining problems, Bair remains hopeful.

"The banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction," she said.

Another hopeful sign is the reason banks are doing better. According to the FDIC report, there are fewer bad loans. The report notes that non-current loans fell for the first time since the first quarter of 2006.

There are also fewer bad loans among credit card borrowers, making large banks that issue credit cards more profitable. Most issuers increased interest rates and reduced access to credit in the last 15 months to compensate for expected higher default rates.

Extra cash

Banks that were holding large amounts of capital in reserve to cover expected losses were free to release those reserves in the second quarter, adding to the bottom line.

For example, Citibank released $585 million of its reserve helping it achieve a profit of $2.7 billion. Wells Fargo released $341 million, boosting profits to $2.5 billion.

Small banks, meanwhile, continue to struggle under the weight of underwater commercial real estate loans. The bank failure toll for 2010 stands at 118, on pace to be significantly worse than last year.

But in a small but hopeful sign, FDIC did not report a single bank closing last week, a break from what has become a Friday evening ritual.