Banks Earn $18B in First Quarter; FASB 166 and 167 Alter Balance Sheets

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.

The earnings improved from $5.6 billion in the first quarter of 2009. Full financial results for the first quarter are contained in the FDIC’s latest Quarterly Banking Profile.

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 charge-offs 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. (For previous JofA coverage on the effect of the new accounting rules on FDIC regulations, click here.)

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 Deposit Insurance Fund (DIF) balance improved for the first time in two years. The DIF balance—the net worth of the fund—increased slightly to negative $20.7 billion, from negative $20.9 billion (unaudited) on Dec. 31, 2009.

The FDIC’s liquid resources—cash and marketable securities—was $63 billion at the end of the first quarter, a decline from $66 billion at year-end 2009. Liquidity was propped up by a rule approved late in 2009 that required insured institutions to prepay approximately three years of deposit insurance premiums—about $46 billion—at the end of 2009.