Banks profit after record loss, but FDIC calls 305 troubled

— -- The number of troubled U.S. banks on the government's "problem list" jumped 21% to a 15-year high of 305 in the first quarter from the previous quarter, the Federal Deposit Insurance Corp. said Wednesday.

In another sign the banking industry is under a lot of pressure, banks wrote off $38 billion of loans, even as the number of delinquent loans continued to increase, according to the FDIC report. A total of 36 banks have failed so far this year, compared with just four during the same period last year.

"The banking industry still faces tremendous challenges," says Sheila Bair, chairwoman of the FDIC. However, Bair says there are signs of improvement, and she's hopeful about the rest of 2009.

That's because U.S. banks returned to profitability in the first quarter, after posting a large loss in the previous quarter. Many banks, including Wells Fargo, Citigroup and JPMorgan Chase, reported first-quarter profits.

Still, the industry's $7.6 billion profit was 61% lower than last year's.

Many industry analysts don't believe that the profits are sustainable, especially because the unemployment rate keeps climbing. Borrowers usually get delinquent on their loans a few months after they lose their jobs. Many are already behind on their real estate payments — non-current loans rose to $291 billion in the first quarter, more than double from $137 billion last year.

Banks' overall rate of defaults, 3.76% of current loans, is at the highest level since the second quarter of 1991.

"We are clearly not out of the woods yet — the question is, are we in the fifth inning or the seventh?" says Alan Villalon, senior research analyst for First American Funds, which owns shares in several banks, including Bank of America.

FDIC chief economist Richard Brown says businesses also cut spending, and there was weak demand for credit in the last two quarters. "This recession is the longest since the 1930s and the most severe in terms of lost jobs and lost output."

He expects corporate defaults to continue to rise, which would lead to an increase in commercial loan charge-offs. To prepare to absorb these losses, FDIC-insured banks set aside $60 billion in pretax earnings, which was more than double the $26 billion banks reserved during the same period last year.