(c) 2013, The Washington Post.

(c) 2013, The Washington Post.

Profits at banks and credit unions climbed during the second quarter as fee income rose and institutions reduce the money they set aside to cover losses on loans, according to separate regulatory reports released Thursday.

In the three years since the official end of the recession, savings institutions have cleaned up their balance sheets by shedding troubled loans. That has allowed them to move money out of rainy-day funds to boost earnings. Boosting revenue remains a challenge with interest rates low, but some institutions have upped their fee income through increased lending and trading.

A $5.1 billion spike in trading income, reversing credit-derivative losses a year ago, helped lift overall revenue for the banking industry, according to a quarterly report from the Federal Deposit Insurance Corp. Net operating revenue during the quarter hit $171 billion, up 3 percent, or $4.9 billion, from the same period a year ago.

The FDIC said banks netted $42.2 billion in earnings during the three months that ended in June, up $7.8 billion, or 23 percent, from a year earlier. The average return on assets, a key measure of profitability, inched up 1.17 percent, the highest quarterly gain for the industry since 2007.

"Asset quality continues to recover, loan balances are trending up, fewer institutions are unprofitable . . . and the number of failures is significantly below levels of a year ago," FDIC Chairman Martin Gruenberg said.

Lending at the nation's banks crept up 1 percent, or $73.8 billion, during the second quarter.

Credit unions showed even faster growth in lending during the same period, though the total amount was much smaller than that of banks. Credit unions reported $613.7 billion in total loans in the second quarter, an increase of nearly $14 billion over the previous quarter, according to a report from the National Credit Union Administration. They have posted 5.5 percent loan growth over the past four quarters, the strongest annual growth since early 2009.

The uptick in lending comes as financial cooperatives have attracted more members, nearly 2.1 million in the past four quarters. Membership has now reached 95.2 million at the 6,681 credit unions across the country.

"The increases in lending, net worth and membership are especially positive signs," said Debbie Matz, chairman of the NCUA. "The brisk loan growth shows that federally insured credit unions are meeting the needs of more borrowers and putting their assets to productive use."

Demand for auto loans fueled much of the lending that credit unions recorded in the second quarter, with lending for new vehicles expanding to $66.4 billion and lending for used cars rising to $121.3 billion, according to the NCUA.

"If you look back through the financial crisis, credit unions continued to lend while banks pulled back or completely stopped. That trend is just continuing on as the economy gets stronger," said Dan Berger, president of the National Association of Federal Credit Unions, a trade group.

All told, credit unions pulled in $4.4 billion in net income in the second quarter, compared with $4.2 billion a year earlier.

Even as savings institutions rebound, legal hangover from the financial crisis and interest rate risk still threaten to disrupt gains.

Large banks such as JPMorgan Chase remain tangled in federal and state investigations, which have hurt their share prices and damaged their reputation.

It is unclear whether penalties tied to those cases will have a material impact on the banks' bottom line.

Meanwhile, Gruenberg said he is concerned that low interest rates have created an incentive for banks to buy high-yield assets that carry heavy risk. And although most credit unions are performing well, Matz said small shops continue to face challenges with making loans, generating earnings and attracting members.

Banks and credit unions are also trying to gauge how the flurry of new regulations from the Dodd-Frank financial reform law will affect their earnings.

"Institutions face challenges as they recover from a one-two punch of rising compliance costs and weaker-than-normal loan demand that makes it difficult to grow top-line revenue," said James Chessen, chief economist at the American Bankers Association, a trade group.

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