Our industry profitability for the second quarter of $42.235 billion continues our very positive earnings trend and, when coupled with first quarter’s $40.292 billion,has us on pace for the most profitable year ever! Of course, much of this profit is coming from our very largest institutions where loss provisioning plays a significant role, but let’s not quibble over how we are doing it. Let us just be content with the fact that this crisis is clearly winding down and creating many new opportunities for those 6,940 institutions that have survived this second worst banking disaster in modern history. By the way, that is a key issue for the future of those survivors. We now have 6,940 institutions sharing a $15 trillion economy and this just has to be good news for our industry.
But, we do have a few “traps” to avoid this year and next and rising rates appear to me to be the single biggest potential issue. Of course, we would all love a prime rate in the more familiar 6.00% – 9.00% range in terms of creating a better NIM than was present at 6/30/13 (about 3.26%) but with those floors in our loan portfolio, there will be some pain in margin compression as the Fed begins moving the Fed Funds Target back to more normal historical rates. Unfortunately, there is likely to be an even more interesting “trap” in this rising rate scenario and that has to do with our investment portfolios where the overnight rate is much less significant but where the five and ten-year Treasury rates have a real impact. How we protect those investment gains or better yet how we protect against those investment losses promises to be a hot topic the remainder of this year and our session at this year’s Iowa Bankers Association Annual Convention will focus on this topic as well as some other ideas for keeping this earning momentum going in an upward direction.
Karl Nelson is the President and CEO of KPN Consulting. Karl is a popular speaker on such topics as Funding, Liquidity, Contingency Funding Plans, the ALCO Process, and ROE Enhancement and over the last 4 years, he has has provided 200 workshops to over 8,000 participants. He will present a session on Creating Net Income at the IBA Annual Convention on Monday, September 16.