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Bank Profits Soar, Lending Falls As Banks Pay Next To Nothing For Funds

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Bank profits jumped 21 percent last quarter to nearly $22 billion, the highest level in three years, as banks put away less money to cover future losses, fewer borrowers fell behind on payments and lenders paid the least for their funds in perhaps 50 years, a government report released Tuesday shows.

Lending also dropped by about $96 billion, or 1.3 percent, as borrowers continue to remain skittish about the "slow recovery," Federal Deposit Insurance Corporation Chairman Sheila Bair told reporters Tuesday in Washington. "Consumers and businesses need to have confidence in the recovery before they will start making decisions on credit," Bair said, according to a transcript of her remarks.

Meanwhile, despite the sector's high profits, challenges remain: home prices are forecast to decline into next year while lenders continue to repossess homes at record rates; the commercial real estate market has yet to hit its nadir; community banks continue to fail; and the number of lenders on the FDIC's confidential "Problem List" continues to grow. Nearly 830 banks are on the list, up from 775 at the end of March, the FDIC's quarterly report shows.

"Without question, the industry still faces challenges," Bair said in a statement. "Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks and failures remain high. But the banking sector is gaining strength... most asset quality indicators are moving in the right direction."

It also helps that banks' cost of funds -- the money they pay to garner deposits and other funds that are then used to lend, invest or trade -- dropped to the lowest rate in 26 years of FDIC quarterly records. Banks paid 0.97 percent in interest for their funds, the first time they've paid less than one percent during a quarter since at least 1984, FDIC documents show.

Historical records on commercial banks' cost of funds going back to the inception of the agency in 1934 show that the last time banks paid less than one percent for the year was 1960.

With the main interest rate effectively at 0.19 percent, savers suffer in a low interest-rate environment as banks pay less to attract deposits. The Federal Reserve's policy-making body, the Federal Open Market Committee, has kept the rate at which banks lend to each other for overnight funds between 0 and 0.25 percent since December 2008.

Elsewhere in the FDIC report, the agency noted that two of every three banks reported higher profits compared to last year as firms put away the least amount of money to cover losses since the January-March period of 2008. Money socked away for a rainy day would otherwise be recorded as profit.

Though nearly two of every three banks increased their reserves for potential future losses, large banks cut theirs. Banks put away $40 billion, 40 percent less than during the same period last year, to cover future losses. Those with more than $10 billion in assets recorded $19.9 billion of the industry's $21.6 billion of profit, or more than 92 percent.

Also, lenders wrote off $49 billion in uncollectible loans, a small decline from a year earlier and the first year-over-year decline since 2006. Loan losses are stabilizing, the agency said. Commercial real estate loan charge-offs, though, saw an increase.

Loans delinquent for at least 90 days but not yet written off also declined for the first time in four years, though they increased for banks with less than $1 billion in assets, the agency said.

Loan balances continued their decline, led by real estate construction and development lending which dropped more than eight percent from last quarter, according to the FDIC. Loans to small businesses and farms dropped almost two percent, or more than $13 billion. Loans to large businesses, meanwhile, dropped just 0.4 percent.

Bair noted that community banks "slightly" increased their lending -- "to their credit," she added.

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Shahien Nasiripour is the business reporter for the Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.

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