The US banking industry experienced a rough first quarter as the worst of the credit crisis continues to unwind, deteriorating assets take their toll on balance sheets and federal regulators expose weaknesses in capital buffers through exhaustive stress tests. Banks and savings institutions insured by the Federal Deposit Insurance Corp. (FDIC) reported a combined $7.6bn net income for Q109, $11.7bn or 60% below the net income reported in the year-ago quarter. The FDIC listed 305 institutions as "problem" banks representing $200bn in assets, up from 252 "problem" banks representing $159bn in assets in the previous quarter. During the same time, 21 insured banks failed -- the most in a single quarter since Q492 -- as the extent of the credit damage continued to unwind. "The first quarter results are telling us that the banking industry still faces tremendous challenges, and that going forward, asset quality remains a major concern," FDIC chairwoman Sheila Bair says in a media statement today. "Banks are making good efforts to deal with the challenges they're facing, but today's report says that we're not out of the woods yet." "Troubled loans continue to accumulate, and the costs associated with impaired assets are weighing heavily on the industry's performance," Bair adds. Banks reported almost $70bn in Tier 1 capital, marking the largest quarterly increase ever reported to the FDIC. Downsizing at some large banks drove the $302bn decline -- -2.2% -- in total industry assets, the FDIC found. Despite the decreased assets, the overall gain in insured deposits and influx of costly bank failures narrowed the FDIC's Deposit Insurance Fund reserve ratio to 0.27% from 0.36% in the previous quarter. Despite the bleak quarter, at least one banking group stresses the relative bright spots in the industry's performance. "Though first quarter earnings are down from what they were a year ago, they are the highest they have been in four quarters, and two out of every three banks increased their assets in the first quarter," says the American Bankers Association's chief economist James Chessen in a statement today. “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," he adds. The banks' equity capital totaled nearly $1.4trn and institutions reserved an additional $20bn in the quarter to cover losses, Chessen notes. More than 97% of banks representing 98% of the industry's assets retain their "well-capitalized" qualifications despite the rough quarter, he says. And major banks are making efforts to raise even more capital. Bank of America (BAC) today says it raised $26bn so far through its capital-raising plan, well over the halfway mark to the $33.9bn indicated through the Supervisory Capital Assessment Program (SCAP). The PNC Financial Services Group (PNC) says today it raised more than $600m in common equity by issuing 15m shares of common stock through an "at the market" offering. Both capital-raising efforts came as a response to the government-initiated stress tests conducted under the SCAP. Write to Diana Golobay. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.