As bankers head into the second half of the '90s, they are a decidedly upbeat lot.

After suffering through a real estate crisis early in the decade, the industry is firmly back on its feet. It's pulling in deposits, cranking out loans, and booking record profits.

Says Carl J. Schmitt, chairman and chief executive of California's University Bank and Trust: "I think we are on the verge of being a very dynamic industry. God knows, we haven't been called that for years."

This seven-part series will explore that new dynamism and offer some insights into what lies ahead for 1995 and beyond.

To some extent, the industry is simply going back to basics. While banks spent the past two years learning how to sell mutual funds, they are now stepping up sales of old-fashioned certificates of deposit.

The volume of small CDs at banks was up 4% in the six months through September, and the rise appears to be accelerating.

While the industry invested heavily in securities in recent years, it is now plowing its funds into loans -- to consumers, farmers, businesses, and even real estate developers. Total bank loans outstanding rose 9% in the 12 months through September.

As they rediscover traditional businesses, banks are also facing some breathtaking changes. The Republican sweep in November, for example, is sure to reshape federal banking policy in the months to come. Consolidation is proceeding swiftly. And, perhaps most important, the industry is taking its place on the information superhighway.

"We are just at the beginning of the communications revolution," says L.M. Baker, chief executive of Wachovia Corp. "I think banks will be right in the middle of that. They will have a great opportunity to expand their franchises, but it will also be a very big challenge."

Certainly, the industry is facing the future from a position of strength. Banks earned a record $11.8 billion in the third quarter, putting 1994 on track to top last year's record profits of $43.4 billion.

"This is the first normal year since the great firestorm of the '80s," said L. William Seidman, former chairman of the Federal Deposit Insurance Corp.

Not so long ago, he said, bankers "were kind of like the guy out there drowing. They have gotten into the lifeboat and on shore and now they can think about the future."

Of course, there are still some worrisome trends. Chief among them is fierce competition, among banks themselves and against nonbanks.

"Everybody and their brother is in our business," said Walter Wriston, the former chairman of Citicorp. "7-Eleven will sell you a telephone card ... along with a six-pack."

Many big banks have responded with aggressive cost cutting. Chemical Banking Corp., for example, recently unveiled plans to cut 3,700 employees, or 9% of its staff.

A number of community banks and regionals, meanwhile, have been posting losses on their securities holdings as a result of the run-up in interest rates.

If, as expected, the Federal Reserve tightens credit again, such losses could spread still further in 1995.

None of which has escaped the notice of Wall Street. Investors have been pounding bank stocks steadily for the past few months. (See related story, page 20).

On the whole, though, bank executives are upbeat about the future.

"I'm optimistic about performance," said Frank V. Cahouet, chairman of Pittsburgh-based Mellon Bank Corp.

Added Mr. Seidman, now a commentator for CNBC: "If banks become what they can be, they will be a major growth industry. Everything that I see says they really have a good future."

The key, he and others say, is management.

"Banks have got to develop management that can move quickly at all levels," Mr. Seidman said. "They are still slow decision-makers."

Certainly, there are some big strategic decisions to be made -- such as whether to expand overseas. Mr. Wriston says that too many banks are content to restrict themselves to the domestic market.

"The global marketplace is here," he said. "Nafta [North America Free Trade Agreement], and GATT [General Agreement on Tariffs and Trade] have passed. There is value added in a dozen different countries. How is that all going to be financed?"

Closer to home, bankers will have to make sure the renewed interest in lending doesn't get out of hand.

"I'm seeing a lot of the same practices that we saw in the mid-'80s starting to rear their ugly head again," said Richard D. Parsons, chairman and chief executive of New York-based Dime Bancorp, who is leaving to become president of Time Warner Inc. in February.

"You see it in the mortgage business. Guys are making mortgages they couldn't possibly make money on in year one or two."

The ultimate strategic question may be how to best harness the ever-growing power of computers and communications.

"Technology is the enabling factor for modern banking," Mr. Wriston said.

Cathy E. Minehan, chief executive of the Federal Reserve Bank of Boston, says the industry is already on the right track.

"I think the banking industry is extraordinarily well prepared from a technological point of view," she said. "They have spent a lot of money on the infrastructure necessary to do payments and a whole host of other things," she said.

One of the biggest wild cards the industry has faced in the past has been Congress. But bankers are expecting favorable treatment with Republicans controlling both the House and Senate.

And they will have the ear of Rep. Jim Leach, (R-Iowa), who is slated to become chairman of the House Banking Committee, as they push to reform the Glass-Steagall Act, which bars them from dealing in and underwriting certain securities.

The industry may also have luck watering down the Community Reinvestment Act and fair lending, which it considers a huge burden.

"I think fair lending is an issue the Justice Department has taken on with a vengeance," said Terry J. Jorde, president and chief executive of Towner County State Bank, Cando, N.D.

The banking industry itself, however, is quite capable of waging a good fight -- be it on Capitol Hill or in the market. And not too many bankers plan to throw in the towel in '95.

Next: The legislative outlook.

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