When long-term interest rates ticked up late last year, it was widely believed that mortgage revenues would modestly decline in the first quarter.

Revenues did fall, but the drop-off was more extreme than most community banks expected. In a quarter where most results were consistent with expectations, the precipitous decline from a quarter earlier shocked many analysts and executives and left them wondering how to fill the hole.

"It's like the faucet was just turned off," said Daniel Cardenas, an analyst at Raymond James. "It was something that all banks, at least the ones I look at, experienced this quarter. Absent a rate reduction, it will be tough to see that number pop up again."

Mark Hoppe, the chief executive of Taylor Capital Group Inc. in Chicago, was among those shocked when the final tallies came in. Taylor broke from tradition in January to warn that mortgage revenue would be down. Little did executives know that the company would experience a 73% drop in revenue from mortgage originations in just three months.

"It fell way, way more than we or anybody else anticipated," Hoppe said.

Taylor was not the only bank hit by sharper-than-expected declines. Several companies used the words "dramatic" and "significant" in discussing them.

Though higher interest rates took the most blame, several bankers flagged other possible culprits. Some said the compensation rules for mortgage brokers under the Dodd-Frank Act have weakened the motivation for wholesale lenders.

Also the first quarter typically is shorter than other quarters, and some parts of the country endured a rough winter, they said.

Compared with a year earlier, activity was generally flat, said Scott Happ, the CEO of Mortgagebot LLC in Mequon, Wis., based on applications at the 1,000 lenders it works with nationwide.

"Year over year, it is almost identical," Happ said. "It might just feel worse because we are coming off a high-flying couple of years and those banks got used to the narcotic of very strong refinance activity."

Edward Wehmer, the president and CEO of Wintrust Financial Corp., noted the skewed results in the Lake Forest, Ill., company's first-quarter conference call. Its $562 million in production in the first quarter was roughly half that of a quarter earlier.

"Fees dropped from $22.6 million to $11.6 million," Wehmer said. "This wouldn't look so bad if the fourth quarter wasn't a record quarter for us."

To combat the waning activity and recent slump, several bankers said they plan to cast their nets wider and recruit additional lenders.

Taylor Capital, which launched its mortgage business in the first quarter of 2010 and increased its revenue fivefold last quarter compared with a year earlier, is focusing on expanding its nationwide presence and beefing up its staff of lenders.

"This is a startup business for us and we are continuing to invest in the business, because we think we can be a much bigger player," Hoppe said. "We did $840 million [of originations] last year, but the business nationwide is three-quarters of a trillion dollars to one-and-a-half trillion dollars annually. There is a lot of opportunity for us to expand."

Wehmer said that while he has brought on two new teams of lenders this year, the key to handling the cyclical nature of mortgage banking is to create an "accordion" strategy that expands and contracts as needed.

"With mortgage activity, sometimes it is strong and other times it just drops off the face of the earth," Wehmer said. "Your business has to be able to respond, but sometimes it takes 45 to 60 days to adjust the expenses."

Wehmer said that in the first quarter Wintrust shed about 100 positions, most of which were temporary. In the long term, Wehmer said, the company is looking to acquire lending teams to increase volume.

Jeff Davis, an analyst at Guggenheim Securities LLC, said the drop speaks to the post-crisis reality for community banks.

"It is a heck of a tough revenue environment for the industry in general. A lot of them can improve by taking share from others, but overall it is just tough," Davis said.

"The new normal for a lot of these banks is dog paddling and treading water. It takes a lot of work to just stay in place right now."