U.S. lenders posted their biggest quarterly profit in almost three years, even as the number of banks at risk of failure rose to 11 percent of the insured institutions, the Federal Deposit Insurance Corp. said.

Bank profits rose to $21.6 billion in the three-month period that ended June 30, an increase from $18 billion in the first quarter, the FDIC said today in its quarterly report on industry performance.

"The economic recovery that began last year is beginning to be reflected in the rising earnings and improving credit quality," FDIC Chairman Sheila Bair said in a statement.

As the largest banks continued to show improvement in earnings and credit quality, the FDIC's "problem" bank list reached the highest level since 1992 amid slowing recovery from the worst economic crisis since the Great Depression, the Federal Deposit Insurance Corp. said.

The FDIC had 829 banks with $403 billion in assets on its list of so-called problem lenders at the end of the second quarter, a 7 percent increase from the 775 the on the list at the end of the first quarter, the regulator said.

"Earnings remain low by historical standards, and the numbers of unprofitable institutions, problem banks, and failures remain high," Bair said.

Regulators are closing banks at the fastest pace since 1992, seizing 118 lenders so far this year after shutting 140 institutions in 2009 amid loan losses stemming from the collapse of U.S. mortgage markets. The total assets for the "problem" institutions fell from $431 billion last quarter, illustrating how the smallest lenders remain the hardest hit.

Eoin Treacy's view While the US yield curve (the spread between the 10yr and 2yr) has in all likelihood topped out, monetary conditions remain extraordinarily accommodative. Not without good reason you might add since so many banks remain in trouble. However, this attitude overshadows the fact that some of the larger successful banks are making money in the current environment and while they will not all survive, those with healthier balance sheets have ample opportunity to perform over the medium term. In the short-term shares of most US financials remain under pressure and require upward dynamics to offset current scope for additional tests of underlying trading.

The S&P500 Banks Index has now declined for six consecutive weeks and broke below the July low on the 19th. A clear upward dynamic would be required to check momentum, while a sustained move back above 130 would be needed to indicate demand is beginning to return to dominance beyond potential for a short-term relief rally.

Wells Fargo broke downwards from the yearlong range two weeks ago and needs an upward dynamic to check potential for some additional downside. JP Morgan has also pulled back rather sharply of late and is now testing the July lows. A sustained move back above $40 is needed to suggest demand is returning to dominance. T.Rowe Price has a relatively similar pattern.

M&T Bank and Ameriprise Financial are both outperforming at present and have held above their 200-day MAs. Sustained moves below $80 and $36 respectively would be required to question medium-term uptrend consistency.

The KBW Regional Banks Index had become somewhat overextended relative to the 200-day MA when it encountered resistance in the region of 60. It paused, mostly below 50 (in the region of the 200-day MA) from June but broke downwards once more four weeks ago and would need to hold a move back above 50 to begin to repair the technical damage already sustained.

Bank of Hawaii was among the better performers on the Index but broke below the 200-day MA two weeks ago and broke the progression of higher reaction lows last week. While it is somewhat oversold in the short-term a sustained move back above $50 is needed to check potential for an additional test of underlying trading.

Here are results of Chart Library Performance Filters for the members of the KBW Regional Banks Index. None have posted a positive return over the last 1-month of 3-month period. 4 have finished in the positive column over the last 6 months.

These are the results of a similar filter for a sample of larger US Financial Institutions most of which are in the S&P500. None are making even new 3-month highs, only two have posted a positive return over the last month and only 7 of the 47 have finished the last 3 months in positive territory.

The results of these filters reflect a large degree of commonality across the sector with just about every share having pulled back to one extent or another over the last few months. This is against a background in which banks are reporting profitable trading conditions on aggregate. Since the latter condition is likely to continue with monetary conditions so accommodative, it would appear to be only a matter of time before those with better balance sheets present favourable medium-term buying opportunities.