Lending, ur doin it rong? Banks aren’t lending, and the loans that are still out there are starting to look a) ugly and b) like their mother dresses them funny:

Besides registering their biggest full-year decline in total loans outstanding in 67 years, U.S. banks set a number of grim milestones. According to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702. More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. And the problems are expected to last through 2010.

The FDIC’s report revealed that asset-quality indicators for banks continued to deteriorate in the fourth quarter as borrowers continued to fall behind on their loans. Banks wrote down $53 billion in loans in the final three months of last year. The quarterly write-off rate was the highest ever recorded in the 26 years the FDIC has collected the data. A total of $391.3 billion of all loans and leases, or 5.4%, were at least three months past due at the end of 2009.

Banks indicate it is difficult to lend money and add to reserves at the same time, which has been the heart of the problem of the credit crunch for a while. Additionally cited is the problem of a lack of creditworthy borrowers, which has probably always been the situation, it’s just that “creditworthy” has only recently been added back to the list of criteria banks use when deciding to issue loans or not.

Still, WSJ closes with a quote that tells us not to worry:

“While the economy is moving ahead banking results tend to lag behind… the problem loans and the earnings of the industry will improve somewhat after the economy improves.”

Pay no attention to the commercial real-estate loans behind the curtain, and carry on.