In Bank Earnings, Quantity Over Quality BANK stocks are back, and with a vengeance. Last week, the KBW Bank Index of 24 leading national and regional bank stocks climbed to its highest closing price since 2008. The index is up 20 percent so far in 2013 and 40 percent if you measure from 12 months ago. The new high followed a report last week from the Federal Deposit Insurance Corporation, showing record earnings across a wide swath of the banking sector in the first quarter. The F.D.I.C. did not break out individual bank performance, but the data showed that the roughly 7,000 banks whose deposits were federally insured earned $40.3 billion, up from $34.8 billion in the same period last year. That's a nifty 15.8 percent increase. There was other good news about the banks in the F.D.I.C."s report. Returns on assets increased to 1.12 percent, on average, from 1 percent for the same period in 2012. And the number of banks on the regulator's problem list fell to 612 from 651 at the end of last year. Only four insured institutions failed in the first three months of 2013 - the fewest since mid-2008. These are all welcome developments, especially after the near-death experience of so many banks and their shareholders during the financial crisis. Clearly, the United States banking industry as a whole is better off than it has been for years. But, as is often the case, a more nuanced tale emerges when you look more closely at the profit figures. Put simply, there is less to the headline number than some investors may think. For one thing, the good news wasn't across the board: only half of the insured institutions reported higher quarterly profits, year-over-year. That was the lowest percentage since the last quarter of 2009. But the quality of the banks" earnings - an important consideration for investors - starts to look less pretty when you start examining the data. Once you do that, you can identify one-time gains or other gimmicks that can create ephemeral increases or otherwise make the results appear better than they actually are. Several red flags pop up in the F.D.I.C. report. The most important appears in its discussion of banks" net interest income, the measure of what a bank earns on its lending after deducting what it pays out on deposits and other liabilities. This is a crucial gauge of bank profitability - after all, banks are in the business of lending money - and it is on a downward slide. It declined $2.4 billion, or 2.2 percent, among the banks the F.D.I.C. examined during the first quarter, with the average net interest margin falling to 3.27 percent from 3.51 percent in the same period last year. The most recent figure is the lowest since 2006, the F.D.I.C. said. This crimp comes courtesy of the zero-interest-rate policy of the Federal Reserve Board. As borrowers pay off older loans made at higher rates, banks can replace them only with lower-yielding loans. Sure, their costs are lower, but the spread between what they earn and what they pay out has become razor thin. Loan balances at these banks also fell slightly during the quarter. Total loans and leases shrank by almost $37 billion, or 0.5 percent, a decline fueled by lower credit card balances, home equity lines of credit and residential mortgage loans. Many bankers may be hesitating to make loans, worrying that interest rates will soon rise; when they do, loans made at current low rates will fall in value. So how did the banks manage to bolster their overall profits so substantially? They searched for income elsewhere, and found it in the annoying and sometimes egregious fees they charge to consumers. Noninterest income at the banks rose by $5.1 billion in the quarter, according to the F.D.I.C., or 8.3 percent. Cost-cutting at a few large institutions also contributed to the overall brighter picture in earnings. This was evident in the $4.2 billion decline in noninterest expenses in the quarter, a drop of almost 4 percent. Another red flag is seen in reductions in set-asides for loan losses. Banks have a good deal of leeway in deciding how much money to provide for future losses. If banks play down the risks in their portfolios and reduce the amount to cover potential losses, that additional money makes their earnings look better. The loan-loss provisions fell to $11 billion in the quarter, a decline of $3.3 billion, or 23 percent, from the same period a year ago. As the F.D.I.C. noted, this provision is the lowest among the banks since early 2007, at the height of the housing bubble. Reduced allowances for losses were reported by 53 percent of the institutions covered by the report. So is everything rosy in these institution's loan portfolios? Are their risks much lower? Not exactly. Loans that are delinquent more than 90 days accounted for 3.41 percent of total loans in the first quarter, the F.D.I.C. said. Although this is down from more than 5 percent, a few years ago, it is still high. In 2007, for example, it was 0.83 percent. Put it all together, and you see the clouds moving in on the sunny earnings report. Banks" considerable profits seem fueled by cost-cutting and lowered loan-loss provisions. The effects of such tonics only last so long. Scott A. Anderson, chief economist at Bank of the West, said the F.D.I.C. report showed that scars from the financial crisis remained in the banking system. With banks still reluctant to lend, he said, the nation's economic recovery was being held back. If banks don't make loans, Mr. Anderson noted, our economy can't expand as it normally does in a recovery. Even six years after credit started to seize up around the world, we are still relying on the Fed to keep the economy moving. SUCH is the box the Fed finds itself in. Its muscular response to the credit crisis staved off economic disaster. But its continued efforts to keep interest rates low are doing nothing to encourage lending by banks. How does the Fed unwind what it's done over the past five years without disrupting the bond market and interrupting the flow of loans in the banking system? Mr. Anderson asked in an interview. How do you do that without reversing some of the positives? Taking away the punch bowl at the party has never been easy for Fed chairmen. This time, though, it's going to be downright treacherous.