U.S. banks earned $2.8 billion in the third quarter, but loan balances plummeted and the fund that insures their deposits was $8.2 billion in the red. Souring loans continued to hurt bank balance sheets, but they were buoyed by higher operating revenues and a revived market for securities, the FDIC said.

The number of banks on the FDIC's “problem list” rose to 552 from 416 on June 30, the highest level in 16 years. Fifty banks failed during the quarter - the largest number since the second quarter of 1990.

The FDIC's fund that insures bank deposits fell by $18.6 billion, mostly because $21.7 billion was set aside for expected losses on future bank failures. The FDIC voted to require banks to prepay three years of deposit insurance premiums at the end of the year to help replenish the dwindling fund, which is at its lowest point on record. The last similar deficit was in December 1991, when a predecessor fund was more than $7 billion in the red.

Bank failures this year through 2013 are expected to cost the fund $100 billion - mostly in 2009 and 2010. But depositors' money - insured up to $250,000 per account - is not at risk, with the FDIC backed by the government.

Bank profits returned in the third quarter after a $4.3 billion loss in the previous quarter and $879 million in earnings last year.

"While bank and thrift earnings have improved, the effects of the recession continue to be reflected in their financial performance,'' FDIC Chairman Sheila Bair said.

A 2.8 per cent drop-off in loans outstanding - the largest percentage decline on record - showed that credit for consumers and businesses remained tight, she said.

"There is no question that credit availability is an important issue for the economic recovery,'' Bair said. "We need to see banks making more loans to their business customers,'' especially small businesses.