WASHINGTON — Industry earnings soared to $18 billion in the first quarter, partly due to lower loan-loss provisions and, to a lesser extent, an increase in net interest income that resulted from an accounting rule change, the Federal Deposit Insurance Corp. said Thursday.
First-quarter earnings were a significant improvement over the $914 million that the industry earned in the fourth quarter, and the $5.6 billion it earned a year earlier.
The FDIC said the Financial Accounting Standards Board change that forced banks to bring securitizations onto the balance sheet boosted total assets, as well as interest income and expense, charge-offs, capital and reserves. But the agency said the jump in earnings still indicates "clear improvement in certain performance indicators," including loan-loss reserves and expenses tied to goodwill.
The industry set aside $51 billion to cover loan losses in the quarter, a 16.6% decline from a year earlier.
"These are encouraging signs," FDIC Chairman Sheila Bair said in a statement.
The FASB change was designed to give more transparency and accountability to the securitization market, which is blamed for contributing to the financial crisis. Regulators are considering further restrictions on securitizers, while the financial overhaul bill would require lenders to retain a piece of loans they originate.
Net interest income grew 9.7% from a year earlier, to $109 billion, and average net interest margins increased 30 basis points from the fourth quarter, to 3.83%, which were both largely due to the accounting change.
But the report indicated there was still marked improvement over previous quarters, independent of the rule change.
"Application of the accounting changes had no significant effect on the year-over-year increase in the industry's reported net income; lower provisions for loan losses and reduced expenses for goodwill impairment were the main sources of the improvement in industry earnings," the report said.
The report said banks' asset deterioration "continues to moderate." Noncurrent loans rose $17.4 billion, or 4.4%, from the previous quarter, to $409 billion, which was the smallest quarterly increase in three years.
As a result of the accounting change, industry assets rose 1.9% from the end of 2009, to $13.36 trillion.
After 41 failures in the first quarter, the agency said total number of insured institutions fell below 8,000, to 7,932.
Banks on the "problem list" rose by 73 institutions, to 775, and assets held by these institutions rose $28 billion, to $431 billion. But the agency's reserves increased for the first time since the first quarter of 2008. Even though the Deposit Insurance Fund is still in the red, its balance increased by $145 million, to -$20.7 billion. The ratio of reserves to insured deposits increased 1 basis point, to -0.38%.