Last year was the worst year for bank-sold annuities in the past decade—yet banks’ income from the products seems to have defied gravity, posting just a small decline.

What’s going on? It appears that banks have shifted significantly to a fee-based sales approach for the products, away from the old up-front-commission model.

“I think this is an increasing trend,” says Michael White, president of research firm Michael White Associates, in Radnor, Pa. 

Last year, total annuity sales through banks declined 25% from the prior year, which itself was down 18% from the year before that, according to another research firm, Kehrer-LIMRA, of Windsor, Conn. The $33.2 billion of annuities that banks sold in 2010 was the lowest level since the $31 billion sold in 2000.

Yet newly release data from the Michael White-ABIA Bank Annuity Fee Income Report shows that income from annuities was down just 1.8%. Banks took in $2.62 billion in 2010, $2.57 billion in 2009 to, according to the report.

The report is based on data from all 6,927 commercial and FDIC-supervised banks as well as 911 large top-tier bank holding companies. It appears that more of the annuity revenues accruing to bank holding companies are in the form of asset fees or trailer commissions, which make sellers less dependent on front-end commissions from new sales, according to Valerie Barton, executive director of the American Bankers Insurance Association, which sponsored the report.

The biggest banks led the decline in annuity fees last year, the report indicates. Nearly three-fourths bank holding companies with more than $10 billion in assets earned annuity commissions of $2.43 billion, a decrease of 2% from their $2.48 billion of annuity fee income in 2009. That category of banks constituted 94.4% of total annuity commissions reported.

Smaller categories of banks did better. Holding companies with assets between $1 billion and $10 billion recorded income of $123.2 million, an increase of 1.9% from 2009. The category got a lift from the movement of mutual fund manufacturer Franklin Resources to the largest asset class, according to the report.

Meanwhile, bank holding companies with $500 million to $1 billion in assets generated $22.2 million in annuity commissions in 2010, up .9% from their 2009 total.

Wells Fargo & Co., Morgan Stanley, JPMorgan Chase & Co., Bank of America Corp. and Regions Financial Corp. led all bank holding companies in annuity commission income in 2010. Wells Fargo and Bank of America and PNC benefited from their respective acquisitions of Wachovia Corp. and Merrill Lynch. 

Among bank holding companies with assets between $1 billion and $10 billion, leaders included Stifel Financial Corp., Hancock Holding Co. and National Penn Bancshares, Inc.