By the end of last year, 702 banks’ names had landed on the FDIC’s “problem list.” That’s up 27 percent from the 552 insured institutions on the list just three monthsearlier. In a statement, the FDIC called the increase “expected.” The total amount of assets held by these “problem” institutions was $402.8 billion as of the end of Q409.

The FDIC noted that 45 institutions failed during the fourth quarter period, bringing the total number of failures for the 2009 calendar year to 140, the most in a single year since the height of the savings & loan crisis. So far in 2010, 20 institutions have gone under.

The banks on the FDIC’s problem list are thought to be at risk of collapse. The 702 that sit there now are the most since 1993. The number of banks under the agency’s watchful eye has grown significantly since the recession began. In the fourth quarter of 2007, just 76 financial institutions were on the list.

The FDIC does not publish its “problem list” for fear of the stigma that would be attached to those names, and the agency notes that a large percentage are able to get back on their feet.

The federal agency’s own wallet has taken quite a hit from the growing tally of bank failures, with its deposit insurance fund falling into the red last year. The fund decreased by another $12.7 billion during the fourth quarter of last year, falling to negative $20.9 billion as of December 31. However, the FDIC noted that it in addition to the insurance fund, it has a $44 billion contingent loss reserve set aside, which combined with the fund balance brings the agency’s total reserves to $23.1 billion.

To handle what’s expected to be an even larger number of failed institutions over the next couple of years, the FDIC board approved a measure last November that required most insured institutions to prepay three years worth of deposit insurance premiums – almost $46 billion – at the end of 2009.

There were a few positives in the FDIC’s report. The agency said insured institutions reported an aggregate profit of $914 million in the fourth quarter of 2009, a $38.7 billion improvement from the $37.8 billion net loss the industry sustained in the fourth quarter of 2008.

“Consistent with a recovering economy, we saw signs of improvement in industry performance,” said FDIC Chairman Sheila C. Bair. “But as we have said before, recovery in the banking industry tends to lag behind the economy, as the industry works through its problem assets.”

Among other factors contributing to the year-over-year improvement in quarterly earnings, the FDIC noted that realized losses on securities and other assets were $8.7 billion lower than 12 months earlier and net interest income was $1.7 billion higher.

The industry’s provisions for loan losses totaled $61.1 billion in the quarter, a decline of $10.0 billion, or 14.1 percent, compared to the fourth quarter of 2008. The FDIC said this marked the first time since the third quarter of 2006 that quarterly loss provisions have been below year-earlier levels.

The FDIC noted that indicators of asset quality continued to deteriorate during the fourth quarter, although the pace of deterioration slowed for a third consecutive quarter. Insured banks and thrifts charged off $53.0 billion in uncollectible loans during the quarter, up from $38.6 billion a year earlier, and noncurrent loans and leases increased by $24.3 billion during the fourth quarter. At the end of 2009, noncurrent loans and leases totaled $391.3 billion, or 5.37 percent of the industry’s total loans and leases.

As a result of losses, banks have pulled back on loans and leases for the sixth consecutive quarter, with balances these loans dropping by $128.8 billion in Q4. Loans to commercial and industrial (C&I) borrowers declined by $54.5 billion and real estate construction and development loans declined by $41.5 billion.

Referring to more stringent lending standards and lower real estate values, Bair said, “Resolving these credit market dislocations will take time. We encourage institutions to lend using a balanced approach. Institutions should neither over-rely on models to identify and manage concentration risk nor automatically refuse credit to sound borrowers because of those borrowers’ particular industry or geographic location.”

The FDIC also reported that banks’ investments in mortgage-backed securities (MBS) increased by $44.8 billion, or 3.3 percent, last quarter.