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The FDIC reported Wednesday that U.S. bank profits fell 3.4% in Q2 on surging defaults. Earnings dropped to $36.7 billion from $38 billion in the year-ago period. Loans and leases at least 90 days past due (noncurrent) rose 10.6% to $66.9 billion from a year earlier, the fifth consecutive quarterly rise and the steepest quarterly rise since 1990. Noncurrent residential mortgage loans were up by $3.1 billion, or 12.6%. Noncurrent loans for real estate construction and development grew by $2.2 billion, a 39.5% jump. Banks and thrifts set aside $11.4 billion to cover loan losses in Q2, the highest level since Q4 2002. FDIC Chairman Sheila Bair said during a briefing that "banks continue to face two key challenges: a difficult interest rate environment and ongoing weakness in residential mortgage lending." She added that many subprime borrowers will face "resets," or changes in their monthly payments, in Q3 and Q4 2007 and into 2008. In related news, the Office of Thrift Supervision reported Tuesday that thrifts' earnings fell 8.6% in Q2 from a year ago. Net income was $3.84 billion in the quarter, down from $4.21 billion in the year-ago period. Troubled assets grew to 0.95% of all assets from 0.62% on higher delinquencies for mortgages and construction loans.

Sources: FDIC press release, Bloomberg, MarketWatch, Forbes
Commentary: As Mortgage Shops Close, Big Banks Are Looking Better and BetterMajor U.S. Banks Step Up to Discount WindowThe Central Banks are Worried, or at Least They Should Be
Stocks/ETFs to watch: PJB, KBE

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