Banking


   FDIC-insured commercial banks and savings institutions posted an aggregate profit of $18 billion in the first quarter of 2010, driven mostly by a 16.6% year-over-year drop in provisions for loan losses. It was the industry’s most profitable quarter since the first quarter of 2008, although the FDIC noted it is “still low by historical standards.” The regulator said the extent of improvement in both noncurrent loans and charge-offs was understated because of the implementation of new accounting standards—FASB Statement no. 166 and Statement no. 167.

 

Earnings improved from $5.6 billion in the first quarter of 2009. Full financial results for the first quarter are in the FDIC’s latest Quarterly Banking Profile, available at tinyurl.com/y89xzyn.

 

Despite the improved overall profit picture, the number of institutions on the FDIC’s “Problem List” rose to 775, up from 702 at the end of 2009. The total assets of “problem” institutions increased from $403 billion to $431 billion.

 

Provisions for loan losses in the first quarter totaled $51.3 billion—$10.2 billion (16.6%) lower than a year earlier. Although the percentage of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) rose from 5.38% to 5.45% at the end of the first quarter, the highest level in the 27 years that insured institutions have reported these data, the $17.4 billion (4.4%) increase in noncurrent loans was the smallest quarterly increase in two and a half years.

 

The FDIC said the extent of improvement in both noncurrent loans and chargeoffs was understated because of the implementation of FASB Statement no. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140, and Statement no. 167, Amendments to FASB Interpretation No. 46(R), both of which went into effect for annual reporting periods beginning after Nov. 15, 2009. These rules require banks to report on their balance sheets many existing securitized credit card and other consumer loans that previously were not included in banks’ loan portfolios. The rules also require reporting the noncurrent loans and charge-offs associated with these securitized loans.

 

Total loans and leases increased by $220.4 billion (3%) during the quarter, but the growth was the result of Statements no. 166 and 167, which caused more than $300 billion in existing securitized loans to be included in institutions’ reported loans. Total assets of insured institutions rose by $248.6 billion (1.9%), but the industry’s total assets and total loans would have declined in the quarter absent the new accounting rules.

 

  The Board of Directors of the FDIC approved a Notice of Proposed Rulemaking (NPR) to clarify the safe harbor protection in a conservatorship or receivership for financial assets transferred by an insured depository institution in connection with a securitization or participation.

 

The action was necessitated by FASB’s changes in June 2009 to the accounting standards on which the FDIC’s prior rule, 12 C.F.R. § 360.6, was based. The changes are contained in FASB Statement no. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140, and Statement no. 167, Amendments to FASB Interpretation No. 46(R). The standards went into effect for annual financial reporting periods beginning after Nov. 15, 2009. The changes affect whether a special-purpose entity (SPE) must be consolidated for financial reporting purposes, thereby subjecting many SPEs to GAAP consolidation requirements.

 

Late in 2009, the FDIC approved an Advanced Notice of Proposed Rulemaking (ANPR) (available at tinyurl.com/36lq4sw) regarding what standards should be applied to securitizations seeking safe harbor treatment for transactions created after March 31, 2010. However, in March 2010, the FDIC Board extended the transitional safe harbor that permanently grandfathered securitizations or participations in process through Sept. 30, 2010.

 

Conditions for safe harbor treatment focus on greater clarity in the securitization capital structure, enhanced disclosure requirements, and risk retention and origination requirements. In response to comments on the ANPR, the FDIC proposed some changes to the standards in the NPR, but in a news release said it has retained a clear focus on improved transparency and a better alignment of incentives for strong underwriting in the securitization process.

 

Among the key proposed changes from the sample regulatory text included with the ANPR, the FDIC is proposing: (1) a 5% reserve fund for residential mortgage-backed securities to cover potential put backs during the first year of the securitization, rather than the prior 12-month seasoning requirement; (2) required disclosure of any competing ownership interests held by the servicer, or its affiliates, in other loans secured by the same property; and (3) requiring deferred compensation only for rating agencies, rather than all service providers.

 

The NPR is available at tinyurl.com/26juhkq.

 

  U.S. thrifts reported a profit of $1.82 billion in the first quarter of 2010, the third consecutive quarterly profit for the industry, the Office of Thrift Supervision (OTS) said.

 

Thrifts’ earnings improved from $442 million in the previous quarter and a loss of more than $1.6 billion in the first quarter of 2009. This year’s first quarter profits were the highest since the second quarter of 2007; approximately 60% of thrifts reported higher earnings than in the prior quarter.

 

Troubled assets (noncurrent loans and repossessed assets) were slightly lower (3.27%) than during the previous quarter (3.29%) and a year earlier (3.35%), but remained at elevated levels. However, reflecting the challenges that remain, the number of problem thrifts continued to climb; and thrifts allocated $2.7 billion to loan-loss provisions. Capital ratios were at record high levels.

 

Problem thrifts (those with composite examination ratings of 4 or 5, the worst ratings on a scale of 1 to 5) increased to 50 thrifts at the end of the first quarter, from 43 thrifts at the end of 2009 and 31 thrifts a year earlier.

 

More details, as well as charts and selected indicators, are available at tinyurl.com/2fl8fm5.

 

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