Despite market wobbles, the Federal Deposit Insurance Corporation (FDIC) released a piece of good news that some analysts count as further proof the worst is behind us.

Banks and institutions insured by the FDIC reported a profit of $18 billion in the first quarter of 2010, a $12.5 billion improvement from the $5.6 billion the industry earned in the first quarter of 2009. Although the FDIC was quick to note it was well below historical norms for quarterly profits, the results still represent the strongest returns in two years.

More than half of all institutions (52.2%) reported year-over-year improvements in their quarterly net income. Less than one in five institutions (18.7%) reported net losses for the quarter, compared to 22.3% a year earlier. The average return on assets, a basic yardstick of profitability, rose to 54%, from 16% a year ago. This is the highest quarterly ROA for the industry since the first quarter of 2008.

“There are encouraging signs in the first-quarter numbers,” said FDIC Chairman Sheila Bair in a prepared statement. “Industry earnings are up. More banks reported higher earnings, and fewer lost money.”

She added that the $18 billion in net income during the quarter “is more than three times as much as banks earned a year ago, and it is the best quarterly earnings for the industry in two years.”

The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. While first-quarter provisions were still high, at $51.3 billion, they were $10.2 billion (16.6%) lower than a year earlier. Lower expenses for goodwill impairment and other intangible asset charges added $5 billion to pretax earnings.

Financial results for the first quarter are contained in the FDIC’s latest Quarterly Banking Profile, which was released Thursday. Among the findings:

The new accounting standards affected the reporting of cash flows and balance sheet totals. FAS 166 and FAS 167 limited the types of structures that can be used to securitize loans and report them as off-balance-sheet. In addition to consolidating some securitized loan balances into banks’ balance sheets, the new standards resulted in the reclassification of some income and expense flows, but the impact on the industry’s overall profitability was negligible. Banks that had securitized and sold large amounts of credit card receivables were most affected by the changes.

The number of institutions on the FDIC’s “Problem List” rose to 775, up from 702 at the end of 2009. In addition, the total assets of “problem” institutions increased during the quarter from $403 billion to $431 billion. These levels are the highest since June 30, 1993, when the number and assets of “problem” institutions totaled 793 and $467 billion, respectively, but the increase in the number of problem banks was the smallest in four quarters. Forty-one institutions failed during the first quarter. Chairman Bair noted that the vast majority of “problem” institutions do not fail.

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 December 31, 2009. The fund balance reflects a $40.7 billion contingent loss reserve that has been set aside to cover estimated losses. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated closings. Combining the fund balance with this contingent loss reserve shows total DIF reserves of $20 billion. Total insured deposits increased by 1.3% ($70.0 billion) during the first quarter.

The FDIC’s liquid resources – cash and marketable securities – remained strong. Liquid resources stood at $63 billion at the end of the first quarter, a decline from $66 billion at year-end 2009. To provide the funds needed to resolve failed institutions in 2010 and beyond without immediately reducing the industry’s earnings and capital, the FDIC Board approved a measure on November 12, 2009, that required most insured institutions to prepay approximately three years’ worth of deposit insurance premiums – about $46 billion – at the end of 2009.

Bair concluded by stating, “There will be more failures, to be sure. The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility. But the positive signs I’ve outlined today suggest that the trends continue to move in the right direction.”