New England, Southwest Pacing U.S. Loan Growth

Community banks in New England and the Southwest are successfully booking loans, while the Southeast continues to struggle.

Banks in states across New England and the Southwest had less exposure to areas of lending, such as mortgages, that caused headaches elsewhere. That has helped banks in those regions gain traction, especially in commercial lending, as the economy slowly rebounds, industry experts say.

"Their economies weren't in such a bad state," Mark Fitzgibbon, an analyst at Sandler O'Neill, says of regions where loans are rising. "It stands to reason that the banks there are making more loans."

Banks with less than $10 billion of assets in New England reported a nearly 7% median rise in loans from a year earlier, according to SNL Financial. Banks in the Southwest posted a more than 4% rise in loans from a year earlier.

Historically, market watchers would not view such numbers as "robust … but we've redefined expectations," says Steve Reider, president of Bancography.

The Southeast was the only region with a year-over-year decline in lending, with a 0.6% decrease, SNL found. Nationally, banks with $10 billion or less in assets increased the size of their loan books by 2% from a year earlier.

Bankers in key parts of New England and the Southwest used past experiences to navigate through the most recent economic crisis, industry observers say.

Texas banks "learned their lesson" about loan exposure during the S&L crisis of the 1980s, says Derek Cunningham, a managing director of Commerce Street Capital in Dallas. A few years later, banks in New England were hard hit by problems with commercial real estate, Fitzgibbon says.

New England did not have a major spike in housing prices before the last financial crisis, industry experts say. Land in that region is pricey, which discourages speculative land deals that were popular elsewhere, Reider says.

The Texas economy likely influenced the Southwest's data, Reider says. Before the crisis, Texas banks had low concentrations of mortgages, focusing instead on commercial-and-industrial loans, Cunningham says.

Texas has also benefitted from a steady population growth, low taxes and the strength of the energy sector. Oil and chemical firms plan to spend $50 billion in the next 18 months in an area stretching from Baton Rouge, La., to Houston, says Rusty Cloutier, president and chief executive of MidSouth Bancorp (MSL) in Lafayette, La.

Other parts in the Southwest, including Phoenix, were harder hit than Texas but have finally reached equilibrium in housing prices and are starting to rebound, Reider says.

Banks across the Southeast are still reeling from high concentrations of residential mortgages, Cunningham says. The region is likely to see "a couple more quarters of negative loans balances" as banks keep pushing "bad loans out the door by selling distressed assets to equity buyers," Fitzgibbon adds.

Different pockets in the Southeast, such as wealthy suburbs of Nashville, Tenn., are doing well, Cunningham says. But the region's overall turnaround "will take several years," he adds.

Small banks' focus on originating commercial loans is paying off everywhere except the Southeast, according to SNL. Nationally banks with less than $10 billion of assets reported a nearly 2% increase in C&I loans from a year earlier, led by gains in New England and the Southwest.

C&I loans have solid yields and are an area that smaller banks can outshine larger banks, Fitzgibbon says. Smaller banks "know the customers in their communities and see how they operate," he says. "You need people on the ground that appreciate the uniqueness of each small business."

Still, there is risk associated with C&I lending that small banks must consider, says Randy Dennis, president of DD&F Consulting Group. Community banks are sometimes ill-equipped to handle such loans, which are harder to manage than commercial real estate because of the type of collateral involved, Dennis says. Still, growth in this area is a positive because it means businesses are starting to borrow, he adds.

Larger community banks posted better loan growth than smaller ones, according to SNL. Banks with $1 billion to $10 billion of assets had median loan growth of almost 6% from a year earlier. Banks with $100 million to $1 billion of assets reported just over 2% growth. Loans increased by less than 1% at banks with less than $100 million of assets.

Lending trends could influence consolidation, particularly in the Southeast, industry experts say. Mergers in that region could rev up as loan demand continues to stall.

Renasant's (RNST) Feb. 7 agreement to acquire First M&F (FMFC) in Mississippi serves as an example of this emerging trend, industry experts say. Both buyers and sellers view deals like the one between those banks and they "become more intrigued … so they are beginning to look for partners," Fitzgibbon says.