updated 5/29/2008 8:39:15 PM ET 2008-05-30T00:39:15

Federally insured banks and thrifts set aside a record $37.1 billion to cover losses from soured mortgages and other loans in the first quarter, when profits were nearly halved, regulators said Thursday.

Federal Deposit Insurance Corp. data show that Citigroup Inc., Bank of America Corp. and roughly 8,500 other institutions earned a combined $19.3 billion in the January-March period. That was a drop of 45.7 percent from the $35.6 billion earned a year earlier.

The FDIC has said it will beef up its staff of examiners to handle an anticipated spike in bank failures this year. At the same time, the agency is hopeful that the industry will begin to turn around by year's end, according to Sheila Bair, who heads the FDIC.

Three banks have failed so far this year.

Troubled assets — loans that are 90 or more days past due — continued to soar in the first quarter, rising to $136 billion, an increase of 24 percent from last year.

"We've been hearing so much bad news; obviously it's been hitting the banks," said Bert Ely, a banking consultant based in Alexandria, Va.

The $37.1 billion set aside to cover loan losses was more than four times as great as the same period a year ago. It was the largest quarterly amount since the FDIC began keeping the statistics in the mid-1980s.

Yet even the record level of reserves that banks salted away against losses didn't keep pace with the increase in troubled loans, Bair said, calling it "a worrisome trend ... that gives regulators heartburn."

She said the agency is urging bank managers "to stay on their toes" and ensure that their reserves set aside are large enough to cover anticipated losses.

The FDIC is keeping an especially close eye on banks and thrifts with high levels of exposure to the riskiest borrowers and markets, Bair said. Those include subprime mortgages and construction loans in overbuilt areas.

Smaller community banks generally fared better than other institutions during the quarter because they tend to avoid exposure to commercial real estate loans and higher-risk home mortgages, FDIC officials said.

The $19.3 billion earned by banks and thrifts during the first quarter was an improvement over the fourth quarter of 2007. The FDIC said restatements of fourth-quarter earnings by several institutions slashed the industry's profits to $646 million, an 89 percent drop from the previously reported $5.8 billion — which already was the worst performance in 16 years.

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