'Decent' Loan Growth Best Feature of Regional Banks' Q3 Earnings

NEW YORK ( TheStreet) -- For investors following U.S. bank stocks, the most positive aspect of third-quarter earnings season has been strong growth in commercial and industrial loans for several key regional players.

It was a mediocre quarter overall, without much excitement when it came to upward revisions of sell-side earnings estimates. "Including the universal banks (BAC, C, JPM), consensus EPS estimates for '14 for large/midcaps decreased 0.5% on average through earnings season. Ex. the universals, estimates decreased 0.4%," according to Jefferies analyst Ken Usdin, who summed up third-quarter industry results in a client note late Friday.

JPMorgan Chase ( JPM) made the biggest splash this earnings season, with a $387 million net loss, as the company set aside $9.15 billion for litigation reserves during the third quarter. The bank also surprised investors by actually reporting it had $23 billion in litigation reserves on its "fortress balance sheet," the term repeatedly used by JPMorgan CEO James Dimon.

JPMorgan is expected to enter settlements with the Justice Department and regulators covering criminal and civil investigations of the company's securitization of mortgage loans, as well as other mortgage-related areas. The total settlement cost to the company could be as high as $13 billion, according to various media reports. The first part of the big round of settlements was announced Friday, with the Federal Housing Finance Agency (FHFA) -- which regulates Fannie Mae ( FNMA) and Freddie Mac ( FMCC) -- announcing a $5.1 billion agreement.

Mortgage Blues

Aside from the continually unfolding JPMorgan saga, the biggest trend for the banking industry in the third quarter was the tremendous decline in mortgage loan refinancing activity, along with a decline in gain-on-sale spreads, as a result of rising long-term interest rates. "Mortgage production fee revenues nearly halved Q-Q as originations dropped 20% and gain-on-sale margins declined 30%," Usdin wrote, adding "We expect another 20% reset in production fees in 4Q as origination volumes reset lower again."

Usdin is not thrilled with prospects for improving noninterest income for the industry as a whole: "There is not a ton of momentum in most other fee income categories, and we believe tough mortgage banking comps will limit overall '14 fee growth to a few percentage points," he wrote.

Credit Leverage

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