Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg holds a briefing to announce the bank and thrift industry earnings for the first quarter of 2013 in Washington.. (Gary Cameron/Reuters)

Profits at the nation’s banks topped $40.3 billion in the first three months of the year, the largest quarterly total on record and evidence of the industry’s robust recovery, the Federal Deposit Insurance Corp. said Wednesday.

The record earnings underscore the trend of borrowers keeping up with their loan payments, allowing banks to move more money out of rainy-day funds. Banks have tapped these reserves to boost profits as low interest rates have made it difficult for them to make money on loans. Funds set aside to cover losses on troubled loans, or loan-loss provisions, dropped 23 percent from a year ago to $11 billion, the lowest level since the first quarter of 2007. At the same time, lenders charged off $16 billion in debt they could not collect, down 27.7 percent from a year earlier.

Regulators have cautioned banks not to drain their reserves in the midst of a fragile economic recovery. Last year, Comptroller of the Currency Thomas Curry said if they continued doing so at the same pace, lenders would not be prepared to incur more losses from home-equity loans and commercial loans taken out from 2004 to 2008. FDIC Chairman Martin Gruenberg echoed that in a news conference Wednesday, warning banks that regulators will be closely watching any additional reduction in reserves, though he said he believes that process “has played itself out.”

Nevertheless, more than half of the 7,019 FDIC-insured banks reported lower loss provisions than 12 months ago. Lenders say it is good time to draw down on their reserve funds, with the housing market on the mend and consumer defaults on the decline.

On a conference call with analysts last month, Timothy Sloan, chief financial officer at Wells Fargo, attributed the bank’s release of $200 million in reserves to a “significant improvement” across its commercial and consumer portfolios. He said the bank will continue to release funds from reserves this year, unless the economy takes a turn for the worse.

But “as the impact of declining provision expenses diminishes, future earnings for the industry increasingly will be determined by revenues,” Gruenberg said. He said industry revenue, which inched up 1.6 percent from a year ago to $171 billion, has remained relatively flat because of paltry lending and lower net interest margins — the difference between what banks earn on loans and pay out on deposits. Loan balances fell by $36.8 billion for the quarter as a result of lower credit card balances, while the average net interest margin tumbled to 3.27 percent, the lowest level in seven years.

Moody’s Analytics chief economist Mark Zandi said the narrow interest margin reflects the Federal Reserve’s zero-interest-rate policy and quantitative easing, the bond purchasing program to stimulate the economy. He said the pressure on net interest, however, is “the only blemish” for the banks.

“The banks are back,” Zandi said. “Only four years after the banking system was literally looking into the abyss, it is highly profitable again.”

More than 90 percent of institutions reported positive earnings in the first three months of the year, although only half of all banks witnessed year-over-year growth in quarterly profits, according to the FDIC report. The nation’s largest banks, including Wells Fargo, Bank of America and Citigroup, accounted for a wealth of the industry profits. A few onetime items contributed to the bottom line, including reduced litigation expenses and settlement charges.

With much of the gain in profitability tied to improving credit quality, Zandi said, the trend “augurs well for future loan growth, and stronger lending is key to a healthier economic recovery.”

Yet, while the FDIC report highlights the rebound of the banking system, it’s also “a reminder loan demand is still lackluster, which is a sign that the broader economy still has room for improvement,” said Isaac Boltansky, a banking analyst with Compass Point Research and Trading.