Mortgage BluesAside from the continually unfolding JPMorgan saga, the biggest trend for the banking industry in the third quarter was the tremendous decline in mortgage loan refinancing activity, along with a decline in gain-on-sale spreads, as a result of rising long-term interest rates. "Mortgage production fee revenues nearly halved Q-Q as originations dropped 20% and gain-on-sale margins declined 30%," Usdin wrote, adding "We expect another 20% reset in production fees in 4Q as origination volumes reset lower again." Usdin is not thrilled with prospects for improving noninterest income for the industry as a whole: "There is not a ton of momentum in most other fee income categories, and we believe tough mortgage banking comps will limit overall '14 fee growth to a few percentage points," he wrote.
Accentuate the Positive: Loan GrowthWith banks continuing to face pressure on their net interest margins, along with the continued mortgage finance decline and prospects for continued weakness in trading revenue for the largest players, the industry is sure to continue its focus on lowering expenses, with more layoffs being the unfortunate result. Investors may wish to focus regional names seeing success in growing non-real estate commercial and industrial (C&I) loans. Among large regional names, Fifth Third Bancorp ( FITB) of Cincinnati saw sequential growth in average C&I loans of just 1% during the third quarter, but loans of this coveted type were up 15% year-over-year. The company also saw the largest year-over-year growth in revenue-per-share among large-cap banks, despite a 40% drop in mortgage revenue, according to KBW. KeyCorp ( K) of Cleveland reported C&I loan growth of 2% quarter-over-quarter and 11% year-over-year. The company also said it had met its efficiency improvement goals.
Fastest Loan GrowthInvestors looking for the fastest loan growth need to focus on smaller regional names. Here are the "top three organic growers" during the third quarter, according to Usdin: Signature Bank ( SBNY) of New York saw its average total commercial loans and leases grow 8% sequentially and 40% year-over-year, to $11.2 billion in the third quarter. The company is focusing on quickly expanding its national equipment leasing business. Signature Bank's third-quarter return on average equity (ROA) was 13.77%, increasing from 12.08% a year earlier. Jefferies analyst Casey Haire rates the bank a "buy," with a $117 price target, representing 13% upside potential from Friday's closing price of $103.26. Texas Capital BancShares ( TCBI) of Dallas reported average portfolio loans of $7.7 billion during the third quarter, growing 8% from the previous quarter and 21% form a year earlier. The company is a mortgage warehouse lender, but most of its portfolio loans are business loans. Texas Capital reported a third-quarter return on average common equity of 13.74%. Jefferies analyst Emlen Harmon rates TCBI a "buy," with a price target of $57.00. The shares closed Friday at $53.77. Among the fastest growing banks, First Republic Bank ( FRC) of San Francisco stands out, because it focuses on a national jumbo mortgage lending business. The bank reported average loans of $31.4 billion during the third quarter, growing 6% from the second quarter and 18% year-over-year. First Republic's third-quarter return on average common equity was 12.72%. Haire rates First Republic a "hold," with a $50 price target, and wrote in a client note on Oct. 16 that the bank trades at "a premium to peers," which is "deserved given FRC's growth trajectory." First Republic's stock closed Friday at $50.97.
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