As the last quarter of 2004 comes into view, some trends in banks' performance and range of opportunities are apparent.
Over all, the earnings of supercommunity banks improved this year, even before the Fed raised rates, as their margins stabilized and other sources of income kept growing.
One of those sources is the mortgage business, which has recovered somewhat from the predictable bust about a year ago.
The slowdown in mortgage originations certainly hampered companies that relied heavily on them to drive fee income. However, it helped those that approached the business more creatively and capitalized on the shift to build up their origination work force and capture market share.
Rising rates and expectations that they would rise faster hurt banks that had invested heavily in mortgage-backed securities after the loan demand slowdown in the past couple of years. Those that had borrowed from Federal Home Loan banks suffered even more.
Several banks sacrificed a full year's earnings to clean up their balance sheets, particularly the funding sources, and start 2005 fresh and unimpaired by impossible margin challenges.
As credit woes lightened throughout the industry, asset/liability issues were rising, as well as basic challenges in portfolio management. Some banks, including some of the top 50, have had to sell themselves in anticipation of the balance-sheet effects of rising rates.
Deposits continue to grow in most areas, despite better stock market results. One reason is the market's uncertainty, which recent the volatility and decline have reconfirmed.
Many banks that have increased deposits have done so through CD-like savings account (often named after costly metals - platinum, titanium). These accounts attract rate surfers who want maximum flexibility for withdrawing funds. Few banks have found such accounts a source of long-term customers; what they do produce is teaser-rate losses.
The free-checking war rages on, especially in markets that have been smothered with de novo branches, most notably Chicago. Though some banks have generated impressive growth in checking balances and fee income this way, the price is questionable, as is the loyalty of the customers attracted.
As rates rise, commercial borrowers are changing their tune; instead of variable-rate loans they want longer-term fixed-rate commitments.
Borrowers are taxing banks' discipline by claiming that other banks will meet their structure and rate requirements. Some banks may lend at any price (and terms), but the reckless will pay in the long run.
This is a time for supercommunity banks to make good on their relationship promises. The megabanks are no longer inward-focused; they are acutely aware of other banks' plans to capture some of their customers, and are taking steps to foil them.
Pricing to encourage small businesses to put their deposits in the banks they borrow from is always in vogue, but especially when the loan market is heating up. Many community banks speak of leveraging the small-business market this way; few do it well, among them Frost and Sterling in Texas.
There is much promise in the rest of the year. Don't get obsessed by Sarbanes-Oxley considerations. Those will be paramount as 2004 draws to a close, but keep your focus on the business at hand.
