WASHINGTON DC, United States – THE number of troubled banks tracked by the Federal Deposit Insurance Corp fell in the April-June quarter, the first quarterly drop in five years. But growth in bank earnings slowed, a sign that the financial industry is feeling the effects of a weak economy.

The FDIC said yesterday that there were 865 banks on its confidential “problem” list in the second quarter, or roughly 11.5 per cent of all federally insured banks. That was down from 888 in the January-March quarter and the first decline since mid-2006. Those are banks considered to have low capital cushions against risk.

The FDIC also said the banking industry earned US$28.8 billion in the second quarter, up from US$20.9 billion in the same period last year. That marked the eighth straight quarter that earnings rose from the previous year. But it was the smallest gain in the past seven quarters.

Banks with assets exceeding US$10 billion drove the bulk of the earnings growth. They made up 1.4 per cent of all banks but accounted for about US$23.4 billion of the industry’s earnings in the second quarter.

Those are the largest banks, such as Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co and Wells Fargo & Co. Most of these banks have recovered with help from federal bailout money and record-low borrowing rates.

“Banks have continued to make gradual but steady progress,” FDIC Acting Chairman Martin Gruenberg said at a news conference. But he noted that the industry revenues haven’t been growing. “In the last two quarters, revenues were lower than a year earlier,” he said.

Gruenberg and other FDIC officials said the industry continues to struggle with flat growth in loans. Banks’ loan balances increased US$64 billion in the second quarter. That was a modest gain, but it marked the first time in three years that there has been growth in balances, the FDIC said.

So far this year, 68 banks have failed. That’s down from the 157 banks that shuttered last year, which was the most for one year since 1992.

Most of the banks that have struggled or failed have been small or regional institutions. They depend heavily on loans for commercial property and development — sectors that have suffered huge losses. As companies shut down during the recession, they vacated shopping malls and office buildings financed by those loans.

Still, large banks are less profitable than they were before the 2008 financial crisis. As a result, many are shrinking their staffs.

Swiss bank UBS AG said yesterday that it is cutting 3,500 jobs worldwide as part of an effort to save two billion Swiss francs (US$2.5 billion) annually by the end of 2013.

Bank of America said last week that it is cutting 3,500 jobs. Goldman Sachs Group Inc, Bank of New York Mellon Corp, State Street Corp and other financial institutions have also announced layoffs this summer.

Many of the banks are posting profits right now. Their layoffs indicate permanent structural changes rather than temporary cuts in response to a weak economy.