Garnet Capital Advisors Blog

The second-quarter reports for major financial institutions are in, and the results are mixed bag of good news, bad news and optimism.

Prior to these reports, eyes were focused on commercial lending and residential financing. The time of year was right for significant gains in these areas, and strong numbers could be indicative of banks' overall health.

"The combination of some residual impact of refinance spilling into second quarter and seasonably strong mortgage originations is one area that could possibly be better in the second quarter," Chris Mutascio of Keefe, Bruyette & Woods, told American Banker.

Now that the reports are in, it is interesting to see how financial institutions fared in the second quarter.

Smaller banks opt for fees
First looking at regional banks across the country, American Banker reported that many are reaping the rewards of fees. In fact, fee income was a major factor behind the second quarter earnings for these smaller banks.

"If we can't get it in loan growth, we'll get it in fees," Richard Davis, U.S. Bancorp's chairman and CEO, told analysts on a conference call, according to American Banker.

Overall, regional banks have benefited from a stronger economy. The mortgage-banking results were there thanks to this factor, slightly stronger in the second quarter alongside fees. Regional banks have also excelled in the commercial sphere, capitalizing on previous mistakes made by the big banks during and after the financial crisis.

Big banks make strides, but still have concerns
On the other hand, the major banks across the country also had some positive news to report from the second quarter. According to American Banker, the numbers beat out analysts' earning estimates and continued to move forward following the recession.

One example is Bank of America, which reported a profit of $5.3 billion for the quarter. A fair concern with this number, however, is how the bank earned it. There were several one-off gains reported in the second quarter, including $350 million in consumer loan sales and $669 million in bond premium amortization.

On a similar note, another big bank - Citigroup - also reported positive earnings of $4.8 billion in the second quarter, American Banker reported. Some of that gain belonged to Citi Holdings, the bank's division for bad assets and unwanted business. This specific unit earned $163 million.

Even so, Citi Holdings is not great for its parent company. It decreases return on equity due to its risk, and it has traditionally been a loss leader for the bank.

"While it's a drag, it's not a horrible drag on the overall performance," Citigroup CFO John Gerspach said on a conference call, according to American Banker.

In the end, the earnings reports for most banks were positive in the second quarter. Key factors like commercial lending and residential financing helped make the push forward, but one-off gains and other warning signs have resulted in a mixed bag of optimism.