Third-quarter earnings at institutions insured by the Federal Deposit Insurance Corp. continue to get stronger even as the number of banks on the regulator's problem list nears the highest level in 17 years. The FDIC said banks it insures earned $14.5 billion for the three months ended Sept. 30, up substantially from $2 billion a year earlier and the fifth-straight quarter of earnings growth. While more than three-fifths of banks reported increased third-quarter earnings, almost one-fifth reported a loss, according to the FDIC. "The banking industry is indeed regaining its footing in spite of the still fragile economy," according to James Chessen, chief economist of the American Bankers Association. "Asset quality has improved, loan losses have declined, and banks continue to increase their capital levels.  As economic conditions improve, banks will be in a strong position to look for new lending opportunities and meet loan demands in their communities." Meanwhile, there are now 860 banks on the FDIC problem list, up from 829 in the second quarter and 55% higher than 552 a year ago. The regulator said the level of troubled banks is the highest since March 1993 when there were 928. Some 41 banking institutions were shuttered by the FDIC during the third quarter and another 22 have closed since, pushing the total of bank failures to 149 this year. For all of 2009, 140 banks failed. The deposit insurance fund, which protects depositors upon a bank's failure, improved for the third-consecutive quarter and now stands at a negative $8 billion, which is narrower than the negative $15.2 billion a year ago. The FDIC said assessment revenues and a reduction in the contingent loss reserve helped the DIF. The reserve, which covers costs of expected failures, declined to $21.3 billion from $27.5 billion. "While we expect demands on cash to continue, our projections indicate that our current resources are more than enough to resolve anticipated failures and meet outstanding obligations for banks that have already failed," FDIC Chairman Sheila Bair said. She said lower provisions for loan losses, which fell for the first time in four years, are helping bank earnings and fueling the recovery for the industry. Most banks increased loan loss provisions in the third quarter, but reductions at large banks resulted in an overall decline. An 8.1% increase in net interest income to $8.1 billion, and gains on securities and other assets of $7.3 billion also boosted the bottom line for the quarter. "Credit performance has been improving, and we remain cautiously optimistic about the outlook," Bair said. "At this point in the credit cycle it is too early for institutions to be reducing reserves without strong evidence of sustainable, improving loan performance and reduced loss rates. When it comes to the adequacy of reserves, institutions should always err on the side of caution." And many banks may be stockpiling reserves in anticipation of new capital requirements mandated in Basel 3. "Banks added another $18.4 billion in equity capital in the third quarter and total industry capital is now over $1.5 trillion," according to ABA's Chessen. "When added to the more than $240 billion in reserves banks have set aside to cover losses, this makes for a total buffer of roughly $1.74 trillion against losses." "In addition, the industry capital-to-assets ratio – a key measure of financial strength – continues to improve and is at the highest level since the 1920s.  In fact, 95.7% of banks – holding 99% of the industry’s assets – are classified as ‘well capitalized,’ which is the highest regulatory designation possible," Chessen said. The FDIC said the amount of loans and leases 90-days or more past due during the third quarter fell for a second-consecutive quarter. And the level of charge offs for uncollectible loans fell nearly 16% for the quarter to $42.9 billion from about $51 billion a year earlier. This is the second quarter in a row that net charge-offs posted a year-over-year decline. Write to Jason Philyaw.