The number of problem U.S. banks and thrifts soared to 305 in the first quarter of 2009, up 21 percent from 252 in the prior quarter and marking the highest number since 1994, the Federal Deposit Insurance Corp said on Wednesday.

The sharp rise came as banks faced mounting credit losses from home mortgages, commercial real estate and consumer credit cards in the economic recession. The FDIC also said its deposit insurance fund fell to $13 billion at the end of the first quarter from $17.3 billion at the end of 2008.

Bank failures continued to mount and they will continue to do so, FDIC Chairman Sheila Bair told reporters.

Despite bank lobbying efforts reported by the Wall Street Journal on Wednesday, Bair said U.S. banks will not be allowed to bid on the same loans they offer for sale in the government's new public-private investment program aimed at getting hard-to-value loans off the banks' books.

There should be no confusion; banks will not be able to bid on their own assets, Bair said. The government's public-private investment program will be launched soon with billions of dollars in taxpayer dollars to help attract private investors to buy distressed loans that banks want to sell.

The FDIC's quarterly list of problem banks held combined assets totaling $220 billion on March 31, up from $159.4 billion at the end of 2008, the agency said. It does not release the names of problem banks and compiles the list from regulators' confidential assessments of banks' capital adequacy, asset quality, management, earnings and liquidity.

The rise in problem banks is reflected in the growing number of U.S. bank failures so far in 2009, which stood at 36 last Friday. If that pace continued, more than 100 FDIC-insured banks could fail this year, up sharply from 25 in 2008 and just three in 2007.

The banking outlook prompted Congress to more than triple the FDIC's line of credit with the Treasury Department to $100 billion. The increase in borrowing authority, signed into law earlier this month, is intended to give the agency more breathing room as it tries to replenish its insurance fund.

Bair said the agency has no plan to tap the new borrowing authority. We view the Treasury line as a back-up line, she said.

Last week, the FDIC's board imposed a special levy of 5 basis points on each bank's assets, minus its strongest capital holdings, to raise $5.6 billion.

JPMorgan Chase & Co , the second-largest U.S. bank, said it will likely incur $700 million to $750 million of pretax charges related to the FDIC special assessment, either this quarter or in the next couple of quarters.

The FDIC said it might have to assess additional fees in the future to maintain public confidence in its insurance fund.

Industrywide, U.S. banks had a net profit of $7.6 billion in the first quarter. That was a decline of 61 percent from the year-ago quarter but a turnaround from the industrywide loss in the fourth quarter of 2008.

TROUBLED LOANS, ASSETS WEIGHING ON EARNINGS

Troubled loans continue to accumulate, and the costs associated with the impaired assets are weighing heavily on the industry's performance, Bair said. Nevertheless, compared to a year ago, we see some positives, she added, referring to net interest income and non-interest revenue, which rose at larger banks.

Banks in the first quarter set aside $60.9 billion in loan loss provisions, which severely depressed earnings. That was down slightly from $70.8 billion in the fourth quarter of 2008 but almost twice the amount in the first quarter of 2008.

In a sign that banks still face problems with consumers falling behind on their payments, noncurrent loans rose to $291 billion in the first quarter, more than double $137 billion in noncurrent loans the same period a year before.

The FDIC said the noncurrent rate -- 3.76 percent of current loans -- is now at the highest level since the second quarter of 1991. Noncurrent real estate loans accounted for most of the overall increase in the first quarter, the agency said.

Net charge-offs -- which are loans including credit cards and real estate construction that banks won't see repaid -- dropped slightly to $37.8 billion in the first quarter from $38.5 billion in the fourth quarter, according to the FDIC, but were almost twice the amount of a year earlier.

James Chessen, chief economist at the American Bankers Association, said banks are continuing to work through their problems. Banks are putting losses behind them and are taking prudent steps to ensure they are well-positioned to cover additional losses expected this year as the economy regains its footing, Chessen said in a statement.

Bair said more than 97 percent of banks remain within the regulatory designation of well-capitalized.

(Additional reporting by Tenzin Pema and Jonathan Stempel; Editing by Gerald E. McCormick and Tim Dobbyn)

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