Total loans at the four largest U.S. banks — JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C) and Wells Fargo & Co. (WFC) — fell 4.9% to $3.04 trillion in the first quarter from the same period in 2010, according to data compiled by Bloomberg. Lending by the 17 smallest of the 24 firms in the KBW Bank Index increased 9.8% to $1.27 trillion.

The big banks are trimming assets to satisfy stricter capital rules and regulatory demands to dispose of risky loans, while regional lenders, most less than one-tenth the size of JPMorgan, are picking up customers. That could mean lower earnings and profitability for the largest firms, said David Trone, an analyst at JMP Securities LLC in New York.

"They're deliberately shrinking their size, but that has earnings implications," Trone said. The removed loans have "been identified as high-risk, but actually they're paying off at par and they're high interest-rate loans. People think they're just running off impaired loans that aren't paying, and that's not true."

That regional banks have taken up some of the slack is an encouraging sign to David Jones, a former economist at the Federal Reserve Bank of New York and president of Denver-based consulting firm DMJ Advisors LLC.

"It's the health of the banking system and the banks' ability and willingness to extend credit that's at the heart of any recovery," Jones said in an interview. "If anything helps in getting this recovery going, it'll be those regional banks."

Shrinking Share

Citigroup, the third-largest U.S. lender by assets, and Bank of America reported the biggest drops. Total loans at Citigroup fell 10%, to $648 billion, in the two-year period, while those at Bank of America declined 7.6%, to $902.3 billion.

At Wells Fargo, loans decreased 1.9% to $766.5 billion. JPMorgan, the largest U.S. bank, was the only one of the big banks to show an increase, of 1%.

The four banks held 41% of the $7.41 trillion in loans reported by the Federal Deposit Insurance Corp. at the end of the first quarter compared with 43% as of the end of March 2010, when the total was $7.5 trillion.

Considered global systemically important financial institutions, the four firms are facing a surcharge on top of capital requirements adopted last year by the Basel Committee on Banking Supervision that will be phased in by 2019. The need to hold more capital is leading some banks to reduce loans.

"Big money-center banks had some capital constraints — they actually started paring their loan portfolios," said Daniel Cantara, executive vice president of commercial banking at Buffalo, New York-based First Niagara Financial Group Inc. (FNFG), the 21st-largest U.S. lender by assets. "We were able to pick up a lot of customers."

Bank of America has sold more than $50 billion in assets to boost capital and simplify the firm since taking over in 2010. The company has scaled back in credit-card and home lending, businesses that inflicted more than $50 billion in losses and impairments since the financial crisis, as it focuses on the most profitable customers and cuts assets that regulators deem risky.

Citigroup has sold more than 60 businesses and reduced assets by at least $600 billion since 2008. It posted a 10% decline in credit-card lending in North America and reduced loans in Citi Holdings, a division it created for unwanted assets including toxic mortgages, by more than half, according to company filings.

The biggest banks have been paring home-equity and credit- card loans since 2010. JPMorgan cut total consumer loans, which includes credit-card, mortgage and auto lending, by 14%, to $430.1 billion, since the first quarter of that year. Wells Fargo's consumer loans, including mortgage and credit cards, have fallen 7.8%, to $420.8 billion, in the same period.

"The shrinking of the commercial real estate portfolio and the residential mortgage portfolio has been a function of de- risking strategies," said Charles Peabody, an analyst at Portales Partners LLC in New York. "Even in credit cards, you had de-risking strategies going on over the last two years."

That has created an opportunity for regional banks, which have increased credit-card and other consumer loans.

U.S. Bancorp, Cincinnati-based Fifth Third Bancorp (FITB) and BB&T Corp. (BBT) in Winston-Salem, N.C., have boosted residential mortgage loans since the first quarter of 2010, according to bank filings. U.S. Bancorp, the seventh-largest U.S. lender by assets, had $38.4 billion in mortgage loans at the end of the first quarter, 45% more than in 2010, while Fifth Third's portfolio rose 36% to $12.5 billion. BB&T's residential mortgage loans jumped 39%, to $21.5 billion.

Wells Fargo, JPMorgan and Citigroup have all bolstered commercial and corporate lending. Wells Fargo's $345.7 billion in commercial loans at the end of the first quarter was 16% higher than the first quarter of 2010. Citigroup's corporate loans jumped 42%, to $228 billion in that time. The biggest lenders are focusing on large transactions because they provide higher returns for the amount of effort, said Jim Dunlap, director of regional and commercial banking at Huntington Bancshares (HBAN). The Columbus, Ohio-based firm boosted total loans by 10% since the end of the first quarter of 2010, to $40.7 billion this year.

"We're finding some larger institutions less focused on that particular work, because to compete they have do it on price," Dunlap said. "It takes the same amount of effort if it's a $20 million loan or a $200 million loan. That's why you're seeing the bifurcation now. They need a much higher return on effort."

Corporate clients are now more open to switching banks or adding a regional lender, said Terry Begley, CEO of corporate banking at Pittsburgh-based PNC Financial Services Group Inc. (PNC)

"Corporate America had a crisis too in 2008 — it wasn't purely a banking crisis, it was an economic crisis, and there was some fear around the liquidity and balance sheets of some of the bank partners," Begley said. "If you were a corporate CFO or treasurer, there was some concern on that, and I think they spend more time evaluating their banks right now and the strength of those relationships."

Regional banks also increased loans through consolidation. Capital One Financial Corp. (COF) has spent more than $28 billion on acquisitions since 2005. The McLean, Va., firm's total loans have jumped 33% since the first quarter of 2010.

Regional and community banks are expanding total loans because their customers, including small businesses, are borrowing, said Dennis Logue, a professor of management at Dartmouth College's Tuck School of Business and chairman of Hanover, N.H.-based Ledyard Financial Group, which has $393.3 million of assets. "The community bankers' clientele are more in need of loans right now than the big banks' clientele," Logue said. "They don't have the big cash stashes that the large corporations have. The large corporations are either sitting on their money, or they're not borrowing."

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