The year-end FDIC Quarterly Banking Profile begins with a series of positive headlines – “Banks Earned $21.7 Billion in Fourth Quarter as Recovery Continues,” “Full Year Net Income … is Highest Since 2007,” “Asset Quality Improves for Third Consecutive Quarter.” But, as with many things, the devil is in the details.
Provisions fell industrywide by almost 50% relative to 2009 levels. For many institutions, this boosted net income that would otherwise have remained flat year-over-year. Banks and thrifts that did not benefit primarily from shrinking loan loss provisions were fortunate enough to be able to take advantage of other trends:
Low interest rates allowed many institutions to lower interest expenses – in some cases, by simply allowing CD run-off.
These same low rates prompted a wave of refinancing, restoring mortgage servicing income. Refinance activity represented 69% of all 1-4 family mortgages originated in 2010, according to the Mortgage Bankers Association, but is projected to drop to an average of 37% of originations in 2011.
Recovering asset prices gave many institutions the chance to book gains on the sale of securities and/or other assets (or at least, to incur smaller losses than in years past).
This recovery also increased the value of assets under management for institutions with trust businesses – thereby increasing the fees collected through this LOB.
Finally, FDIC-assisted acquisition activity continued, with 154 transactions occurring through the course of 2010. Acquiring institutions were able to book one-time bargain purchase gains.
While these trends were all positive, they are also mostly temporary means of generating income. Credit quality did improve, but the industry is still struggling to find a new earnings model to replace income lost through the normalization of mortgage banking activity and the near-elimination of NSF/OD fees due to changes in Reg E. CPG is in the process of reviewing the strategies used to generate strong 2010 earnings performance at large public banks, large private banks, and community banks for the ABA Banking Journal. We will be providing additional insights as we discover them – the first half of our two-part study will be published in April; the second in June. Until then, we welcome your thoughts on whether or not the industry is out of the woods and what can be done to prevent the proverbial boulder from rolling back down the hill in 2011.