Bank profits up 10 percent to record levels

Increase occurs as institutions set aside less money for losses

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U.S. banking industry earnings increased nearly 10 percent last year to a record $154.7 billion, according to the Federal Deposit Insurance Corp., with the increase due mainly to banks setting aside less money to cover potential loan losses and litigation costs.

The FDIC said Wednesday that fourth-quarter profits at the nation’s commercial banks and thrifts rose 17 percent to a total of $40.3 billion, from $34.4 billion in the final quarter of 2012.

It was the 17th time in the past 18 quarters that earnings have registered a year-over-year gain as the industry continues a slow but steady recovery from the financial crisis and housing debacle.

“Banks continue to put bad loans behind them and overall asset quality is remarkably strong,” American Bankers Association chief economist James Chessen said in a statement. “Going forward, problem loans will continue to fall, but at a slower rate.”

“Problem banks,” those at risk of failure, fell for the 11th straight quarter to 467, less than 7 percent of the 6,798 banks and thrifts the FDIC said were operating as of Wednesday. The number is down from 515 in the third quarter and 47 percent below a recent high of 888 as of March 2011.

Still, growth overall was elusive, the FDIC said. Reduced income from mortgage lending and trading contributed to a decline in fourth-quarter revenue to $166.1 billion, down $2.8 billion, or 1.7 percent, from a year earlier.

Loan balances rose 1.2 percent during the quarter, with all lending categories higher except for residential mortgages. But the biggest contributor to the improved earnings was an $8.1 billion decline in loan-loss provisions, the FDIC said.

“Asset quality improved, loan balances were up, and there were fewer troubled institutions,” FDIC Chairman Martin J. Gruenberg said in a statement. But “challenges remain,” he added.

“Narrow (profit) margins, modest loan growth, and a decline in mortgage refinancing activity have made it difficult for banks to increase revenue and profitability,” Gruenberg said.