Regional Banks Finding Key Geographies to Their Liking

Regional banks are sounding cautiously optimistic about their ability to make loans.

Many of those banks are finding success in specific regions. As a result, they are looking at ways to devote more resources to those areas.

Still, executives are still paying close attention to expenses. Here is a look at what U.S. Bancorp, PNC Financial and Huntington Bancshares had to say about regional opportunity, lending and cost control.

U.S. Bancorp

It was westward ho for the $371 billion-asset U.S. Bancorp (USB). Richard Davis, the Minneapolis company's chairman and chief executive, said during a conference call Wednesday that the western part of the country helped spur a 1.3% increase in loans since Dec. 31, a mark that was consistent with the company's projections.

The lift came in two areas: corporate lending and commercial real estate. In corporate lending, management has been focusing on expanding its wholesale lending business and is gaining market share, Andrew Cecere, U.S. Bancorp's chief financial officer, said in an interview.

"We grew commitments 11.7% and the market is not growing that fast," Cecere added.

The economy is slowly expanding, which helps. And a majority of the wholesale banking growth came from food, retail and agriculture firms on the West Coast, so some of the improvement is seasonal.

Commercial real estate loans rose 1.9% from Dec. 31. Davis said during the call that Seattle, San Francisco, Los Angeles and Orange County were the most-active areas.

Most of the growth is coming from existing clients. "We have a number of longstanding core customers and the growth is more a function of their activity increasing," Cecere said.

Davis has long said he is willing to compete on price to retain customers.

"Because of our cost-of-funds advantage and our rating benefits, we will continue to compete on price and we may be one of those culprits for why it is more competitive on the margin," Davis said in the call. "But we will not give it up if it is a great customer."

Management also discussed growth in small-business lending, which rose 30% from a year earlier. Indirect car loans also increased 33% from a year earlier.

Davis' comments about loan growth and future expectations came in response to a question from Jon Arfstrom, an analyst at RBC Capital Markets. Arfstrom said in an interview that Davis' detailed response was a positive sign.

"He went through everything and there was a fair amount of optimism in most categories," Arfrstrom says. "They keep getting a little bit better each quarter and his response to my question was more robust and optimistic than I expected."

PNC Financial

PNC Financial Services (PNC) surpassed first-quarter expectations by building from within and keeping costs down. No surprise there: William Demchak has preached expense control and sensible loan growth since succeeding Jim Rohr as CEO last year.

The Pittsburgh company earned $1.1 billion, while increasing the size of its loan book by about 6% from a year earlier, to $198 billion. The $323 billion-asset company's strategy remained unchanged, but there were two positive surprises: growth in its southeastern region and a faster-than-expected pace of expense cuts.

PNC made a big splash in the Southeast by buying RBC Bank in 2012. Since then, PNC has been adding money-management and corporate-banking services across the region, and Demchak says growth has been faster than he expected, despite heavy competition for new clients.

"Across virtually all lines of businesses, the growth in the Southeast is outpacing what we are doing in our legacy franchises," Demchak said during a quarterly call with analysts Wednesday. "Surprisingly, this is probably most pronounced on the retail side, where client growth is much higher than in the legacy markets."

Though he didn't provide specifics numbers, Demchak said growth rates are "massive," though he added that PNC was "starting from scratch" in the Southeast in terms of wealth management and corporate and investment banking. RBC had about 420 branches and $18 billion in deposits, but its products were limited. PNC has been hiring and now has about 4,000 employees in the region, he said.

PNC's Southeast franchise "is still a relatively small part of the whole operation," Paul Miller, an analyst at FBR Capital Markets, said in an interview. It may be growing, "but that doesn't mean it has a big impact right now," he said.

Despite progress with the RBC franchise, Demchak swore off future deals. Integrating acquisitions would require PNC to "freeze" its internal systems while adding the acquired systems. "We don't see value in small deals today," he added.

Expense control, which has been a priority for Demchak, was a positive surprise for analysts. The company shaved $250 million from its fourth-quarter costs, or roughly $100 million more than Miller had forecast. The company's noninterest expenses totaled $1.1 billion, which included higher legal fees over mortgage buybacks.

PNC delivered on cost cutting, Demchak said. "The franchise really has gotten its arms around the importance of saving money to reinvest, and the importance of improving our efficiency ratio."

Huntington Bancshares

An improving Midwest economy is helping Huntington Bancshares (HBAN) book more loans, management said after the Columbus, Ohio, company released its first-quarter earnings. The unemployment rate in the Midwest dipped slightly below the national number in February.

"Almost all of our lending is in our footprint," Stephen Steinour, the $60 billion-asset company's chairman and chief executive, said during an interview. "That's a reflection of the economy here in the Midwest. It is strengthening. It is continuing to improve."

Manufacturing has been "particularly strong," Steinour said. Huntington reported Wednesday that total loans rose 6% from a year earlier, to $43.4 billion, largely because of a rise in the commercial and industrial and automobile portfolios.

Niche areas such as agriculture, energy and health care have been "dynamic," and Huntington became the largest Small Business Administration lender by total loans during the first quarter, Steinour said. The company is also expanding in Michigan by agreeing to buy 11 branches from Bank of America (BAC) and planning to open branches in Meijer supermarkets.

Though such expansion might seem contrarian to some, Steinour touted it as a way to take advantage as other banks have pulled back in the state. "We love Michigan," he said. "We've experienced very good growth in Michigan."

Huntington's pipeline for loans was good for the current quarter, Steinour said. Despite his optimism, Huntington's revenue rose just 1% from a year earlier; noninterest income fell 3% as mortgage banking continued to slump.

Huntington could lose another $6 million per quarter in fee income after it changes its overdraft policy in July. Management hopes the changes, which include giving depositors until midnight to cover an overdraft charge, help it retain and recruit more customers. Executives said that, despite a change last year that reduced overdraft fees by $30 million, average service charges in the first quarter still rose by roughly 6%.

"We continue to look at things through the consumer lens and are getting feedback on what we could do differently," Steinour said.

Huntington's quarterly earnings fell 3% from a year earlier, to $149 million, though it was largely because of litigation reserves and $13 million in one-time merger-related expenses for its March purchase of Camco Financial.