The recent dip in mortgage rates has been a boon for community banks.
As low interest rates continue to pressure margins and net interest income, a spike in mortgage banking volume fueled by refinancing activity has provided a welcome boost for banks that sell their originations.
Several bankers, pleased that refi activity padded first-quarter results, were quick to caution that they aren't counting on refinancing levels remaining elevated going forward.
"When refinance comes around, that's extra for us," said Steve Brolly, chief financial officer at Fidelity Southern in Atlanta. Brolly said that he expects refinancing activity to decelerate in the second quarter, though purchase volume should benefit from a seasonal lift.
"It all depends on what happens in the secondary markets," said Lynne Pulford, mortgage division manager at Sandy Spring Bancorp in Olney, Md.
Banks with $40 billion or less in assets, on average, increased noninterest income by 11% in the first quarter compared to a year earlier, based on American Banker's preliminary analysis of earnings reports from nearly 180 banks.
Bankers, by and large, would prefer to see interest rates move up, since spread income often accounts for three-fourths of a community bank's revenue. But every bit of fee income helps, particularly in a quarter where mortgage revenue is seasonally slow.
"We'd give up some mortgage fees to get a rate increase," Phil Wenger, chief executive of Fulton Financial in Lancaster, Pa., said in an interview. Still, he agreed that having added fee income helps as the industry awaits some upward movement in rates.
Lower mortgage rates are a function of broader trepidation about the economy, industry observers said.
"We continue to see lower rates due to concerns over weaker economic growth abroad," said Joel Kan, associate vice president of industry surveys and forecasting at the Mortgage Bankers Association.
The average rate on a 30-year fixed-rate mortgage dipped as low as 3.59% in early February, and has since edged up to 3.65%, according to a weekly survey from Freddie Mac. Rates on 15-year loans also fell over the period.
At the same time, refinancing has increased, as consumers have taken advantage of the opportunity to reduce payments. Refinancing accounted for 59% of February's originations or more than double the share of new loans from six months earlier, according to mortgage data from Ellie Mae.
Refinancing levels are expected to remain high into the second quarter, as applications from the first quarter continue to pull through, Kan said.
That would be welcome news to bankers since rates aren't budging much.
Mortgage finance loans nearly doubled at Texas Capital Bancshares in the first quarter compared to a year earlier, to $3.7 billion, largely due to a late-period surge in refinance volume, Keith Cargill, the Dallas company's chairman and chief executive, said.
Such activity "lifted our volumes significantly in what could've been an otherwise softer seasonal quarter," Cargill said during a conference call to discuss quarterly results.
Fidelity Southern also benefited from heightened refinancing activity. The $3.1 billion-asset company's quarterly earnings beat Wall Street expectations in the first quarter, in part because of higher fee income.
Noninterest revenue jumped 65% from a year earlier, to $32 million, and mortgage banking revenue more than doubled. Refinancing accounted for 41% of the first quarter's loan production at Fidelity Southern, compared to 22% a year earlier.
Fidelity is "seeing an increase in the level of refinanced loans," said Brady Gailey, an analyst at Keefe, Bruyette & Woods, adding that some momentum is expected in the current quarter. "We are still in the middle of a refinance boom."
The $4.4 billion-asset Sandy Spring Bancorp also benefited from borrower demand for refis. Noninterest income increased 17% from a year earlier, to $13.2 million, featuring a nearly threefold increase in mortgage banking activity.
Most of Sandy Spring's originations came from refinanced loans, Daniel Schrider, the company's president and chief executive, said during the company's earnings call last week. Nearly 75% of the company's mortgages were refinancings, compared to 45% a year earlier, Schrider said.
"On the positive side, originations drove a significantly higher level of revenue for mortgage banking activity," Schrider said. "It was more refi activity that drove our mortgage performance and gains, as opposed to new home sales or construction originations."