The FDIC said 57.5 percent of banks reported an increase in profit in the second quarter from a year earlier, and only 6.8 percent of banks were unprofitable — down from 8.4 percent a year earlier.
Banks reduced expenses by setting aside less in reserves to cover bad loans and making smaller payrolls, the report said.
FDIC Chairman Martin Gruenberg said the industry continued to improve in the latest quarter. However, he said, "challenges remain" for banks as their revenue is chipped away by lower income from mortgage business.
Total loan balances rose by $178.5 billion, or 2.3 percent, from the first quarter, led by increases in commercial and industrial loans, home mortgages, credit card lending and auto loans. The 2.3 percent increase was the biggest quarterly rise since the fourth quarter of 2007, about a year before the financial crisis struck.
Demand for loans has grown as the economy has improved, new jobs have been added over the past six months and business confidence has rebounded. Improved prospects for repayment of loans have prompted bankers to extend more credit.
"The improvement in loan balances has now been sustained over time," Gruenberg said, adding that the key will be for the trend to continue.
Community banks earned $4.9 billion in the second quarter, up 3.5 percent from a year earlier.
Banks with assets exceeding $10 billion continued to drive the bulk of the earnings growth in the May-June period. While they make up just 1.6 percent of U.S. banks, they accounted for about 82 percent of industry earnings.
Those banks include Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. Most of them have recovered with help from federal bailout money during the financial crisis and record-low borrowing rates.
Last year, the number of bank failures fell to 24. That is still more than normal. In a strong economy, an average of four or five banks close annually. But failures were down sharply from 51 in 2012, 92 in 2011 and 157 in 2010 — the most in one year since the height of the savings and loan crisis in 1992.
So far this year, 14 banks have failed. Twenty had been shuttered by this time last year.
The decline in bank failures has allowed the deposit insurance fund to strengthen. The fund, which turned from deficit to positive in the second quarter of 2011, had a $51.1 billion balance at the end of June, according to the FDIC. That compares with $48.9 billion as of March 31.
The FDIC, created during the Great Depression to ensure bank deposits, monitors and examines the financial condition of U.S. banks.
The agency guarantees bank deposits up to $250,000 per account. Apart from its deposit insurance fund, the FDIC also has tens of billions of dollars in reserves.