More than 700 of the nation’s financial institutions are now considered to be “troubled,” according to the latest quarterly report by the Federal Deposit Insurance Corp. (FDIC). The report paints a picture of an industry that’s still reeling from loan losses that could lead to further bank failures.

Slightly more than half of all institutions reported year-over-year improvements in their quarterly net income, but nearly one-third of all institutions reported net losses for the quarter. Federally insured commercial banks and savings 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, but still well below historical norms for quarterly profits.

“Consistent with a recovering economy, we saw signs of improvement in industry performance” in the fourth quarter, FDIC Chairman Sheila Bair said at a news conference. She noted, though, that a recovery in the banking industry usually lags behind an economic rebound.

“It’s not that this was a strong quarter,” Bair said. “It’s simply that everything was so bad a year ago.”

The increase in the number of banks on the FDIC’s confidential “problem” list — from 552 in the third quarter to 702 last quarter — “points to a likely rise in the number of failures,” Bair said. The combined assets of the 702 banks were $402.8 billion, up from $345.9 billion for problem banks in the third quarter.

Troubled loans continued to increase. Loan charge-offs – the debt that banks don’t expect to be repaid – vaulted to $53 billion from $38.6 billion in the fourth quarter of 2008.

Bank failures pushed the FDIC’s deposit insurance fund into the red last year. It was $20.9 billion in deficit as of Dec. 31, the agency reported — $12.6 billion deeper than the deficit three months earlier.

Bair said the fund is expected to bottom out this year. The FDIC expects further bank failures to cost the fund around $100 billion through 2013.