The number of banks on the Federal Deposit Insurance Corporation's (FDIC) "Problem List" rose to 829, the highest level since March 1993, according to second-quarter earnings released today. Despite the drain on loan loss provisions, the FDIC says its liquidity remains strong and the bottom line of its Deposit Insurance Fund (DIF) is improving. The 829 figure is up from 775 problem banks in Q110 and accompanies a total of 45 failed FDIC insured banks for the second quarter. Total assets from problem banking institutions decreased to $403 billion from $431 billion quarter-over-quarter. Despite the increased number of unstable institutions, the FDIC claimed one of the best quarters in the past three years. The FDIC reported an aggregate profit of $21.6 billion for Q210, up $26 billion from a year ago (a net loss of $4.4 billion). These earnings, however, still remain below historical norms. "Without question, the industry still faces challenges," said FDIC chairman Sheila Bair. "But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction." The indicators Bair refers to include provisions for loan losses, which fell 40.2% year-over-year to $40.3 billion. This is still considered high by the historical standard. Net income increased 8.6% from a year ago to $8.5 billion and non-interest expenses decreased 1.5% to $1.5 billion. The FDIC noted signs of improvement in asset-quality trends as the amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) fell for the first time since the first quarter of 2006. Insured banks and thrifts charged off $49 billion in uncollectible loans during the quarter, down $214 million (0.4 %) from a year earlier. The DIF balance improved for the second consecutive quarter, to a loss of $15.2 billion from a loss of $20.7 billion, and liquid resources at the FDIC remained strong at $44 billion. "Banks added another $27 billion in equity capital in the second quarter and total industry capital is now just short of $1.5 trillion," said James Chessen, chief economist for the American Bankers Association. " When added to the more than $250 billion in reserves banks have set aside to cover losses, this makes for a total buffer of roughly $1.75 trillion against losses." In addition, Chessen said the capital-to-assets ratio – a key measure of financial strength – continues to improve and is at the highest level in decades.  In fact, 95.6% of banks – holding over 98.8% of the industry’s assets – are classified as ‘well capitalized,’ which is the highest regulatory designation possible. One other downfall in Q210 is that loan-loss reserves declined for the first time since the end of 2006. Although almost two out of every three banks (62.1%) increased their loan-loss reserves in the quarter, the industry's total reserves declined by $11.8 billion (4.5%), as a number of large banks reduced their loan-loss provisions. Bair issued a word of caution with the statistics saying, "Particularly given economic uncertainties, we believe all banks should continue to exercise caution and maintain strong reserves." Write to Christine Ricciardi.