With a few exceptions, the fourth quarter was kind to the nation's banks. On average, analysts are predicting bank earnings will rise about 10% over the year-ago quarter, fueled by higher consumer borrowing, a slight uptick in commercial lending and robust capital markets activity at the big money-center banks such as Citigroup ( C), J.P. Morgan Chase ( JPM) and Bank of America ( BAC). To date, there have been only a handful of earnings warnings in the banking sector. The most serious one was from Fifth Third Bancorp ( FITB), which said earnings would fall some 50 cents a share below previous estimates. The Cincinnati-based bank blamed the shortfall on charges it took to reposition its balance sheet, after rising interest rates took a big bite out of its portfolio of mortgage-backed securities. Some analysts and investors had expected other banks, not properly hedged for the rise in interest rates, to report similar balance-sheet woes. But no similar warnings ever materialized. That has led many who follow the banking sector to expect a minimum of bad news from the quarter when banks begin reporting their numbers in earnest over the next two weeks. "Earnings will likely be in line or slightly above," says Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, N.Y. But going forward, the banking sector is likely to find tougher terrain due to a combination of rising interest rates, tepid commercial borrowing and a slowdown in the mortgage market. A flattening of the yield curve -- the spread between short-term and long-term interest rates -- also will bring to an end the so-called carry trade, which had been a big source of income for many banks. In the past few years, banks have feasted on the wide divergence between rates. The historically low short-term rates enabled banks to borrow money on the cheap and reinvest in higher-yielding mortgage-backed securities.