The banking industry just closed the books on its first profitable year since 2007, posting net income of $87.5 billion overall.
In the fourth quarter, profits collectively surged to nearly $22 billion, a dramatic swing from the $1.8 billion in red ink that stained the fourth quarter of 2009.
"While earnings in 2010 remain well below pre-crisis levels, the past year marked a significant milestone on the road to recovery," Federal Deposit Insurance Corp. chairwoman Sheila Bair said in announcing the results late last month.
The turnaround largely has been fueled by banks setting aside less money to cover bad loans, which leaves more money to funnel to the bottom line. But there's a limit to how long smaller loan loss provisions can pump up profits.
With the provisions now returning to more normal levels, some analysts are wondering where earnings growth will come from in 2011.
Industrywide, loan loss provisions in the fourth quarter were about half what they were a year earlier as segments of the real estate industry improved and soured loans were consistently worked off the books.
Locally, eight of 15 financial institutions based in the Pittsburgh region reduced their provisions for bad loans in the fourth quarter, compared with the previous year. Five banks raised their provisions, while provisions at two banks were unchanged.
"This is the first part of a recovery, where banks are starting to decrease contributions to their reserves and are reporting higher earnings," said David Danielson, president of the bank consulting firm Danielson Associates in Bethesda, Md.
But similar earnings growth this year could prove difficult, he said.
"Banks can only increase earnings a few ways -- by increasing loans, decreasing the cost of funds or decreasing [loan loss] reserves," he said.
"The cost of funds already is as low as it is going to get, loan demand remains low and banks already got most of the benefit of lower reserves."
While the industry as a whole has been on an upswing, bank failures and the number of institutions in jeopardy of collapsing have continued to rise.
So far this year, roughly two dozen federally insured institutions were seized by the FDIC. That comes on top of the 157 failures in 2010 and 140 in 2009. (That compares with 25 failures in 2008, three in 2007 and none in 2006 and 2005.)
The number of institutions on the FDIC's problem list swelled to 884 at the end of December, the highest number since March 1993 when 928 were on the sick list. That's up from 702 considered troubled the previous year and 252 at the end of 2008. The agency does not release the names of troubled banks.
Unlike the beginning of the financial crisis when the nation's biggest banks needed bailing out, currently it's the smaller banks that are struggling.
Mr. Danielson expects the total number of failures to fall slightly this year but expects the FDIC's troubled list to grow. "The regulators are really for the most part trying to see if [ailing banks] can raise capital or find a merger partner" instead of stepping in to take them over, he said.
"I expect failures to continue but they will be confined to smaller banks that have less access to capital."
Financial institutions based in the Pittsburgh region and across the state generally have been holding up well.
Last year there were two bank failures in the state, both in eastern Pennsylvania. In 2009 the only institution to collapse statewide was Dwelling House Savings and Loan Association in Pittsburgh.
"In most of Pennsylvania, real estate values did not bubble up, so when the bubble burst, banks weren't caught" with mounting loan defaults and no collateral, Mr. Danielson said.
The FDIC's Ms. Bair said the industry made considerable progress in 2010 by cleaning up balance sheets and returning to profitability.
"Now we are looking to the industry to take the next step and begin to build their loan portfolios," she said.
"The long-term health of both the industry and our economy will depend on a reasonable expansion of bank lending at this pivotal point in the economic recovery."
Patricia Sabatini: email@example.com or 412-263-3066.