updated 11/23/2010 12:27:41 PM ET 2010-11-23T17:27:41

The number of banks on the Federal Deposit Insurance Corp.'s "problem" list grew over the summer, even as the industry posted solid net income and fewer loans soured.

The number of troubled banks rose to 860 in the July-September quarter from 829 in the previous quarter. That's the most since 1993, during the savings and loan crisis.

The FDIC also said banks earned $14.5 billion during the third quarter. That was a decrease from the previous quarter's result of $21.4 billion, but well above the $2 billion banks earned a year earlier.

The troubled banks were smaller, on average, holding $379.2 billion in assets. That's down from $403.2 billion in the April-June quarter.

FDIC Chairman Sheila Bair said she remained "cautiously optimistic" about the industry as banks work through bad loans made during the real estate bubble.

"The industry has come a long way in cleaning up balance sheets, building capital and adjusting to changes in the financial markets and the economy," Bair said. But she said "the adjustments are not over, and this is no time for complacency."

The strong earnings were reported as banks set aside less money for future loan losses than at any time since the October-December quarter of 2007, before the financial crisis. Fewer borrowers were behind on payments for credit cards and construction loans.

Bair said banks' solid profits in the past three quarters were the result of stable revenues and lower provisions for loan losses. At some point, she said, "the industry must begin to grow its revenues, and loan growth will be an essential ingredient."

Banks constricted lending more modestly in the third quarter, reducing total loans and leases by $6.8 billion. The reduction was small compared to the second quarter, when loan balances fell by $106.6 billion.

The fund that insures bank deposits added $7.2 billion during the quarter, but remained $8.0 billion in the red. It was the third quarterly increase in a row for the fund, which is managed by the FDIC and guaranteed by the Treasury Department.

The Associated Press and Reuters contributed to this report.

Video: Banking Industry Optimism


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