After exorcising many of their demons, community bankers are talking less about the past and more about the future.
In reporting first-quarter results, many banks are focusing not on credit quality but on loan growth, and they are saying all the right things about positive momentum and an end-of-year kick. Profitability is still mostly dependent on lower credit costs, and the whispers aren't about organic loan growth, but about stealing market share from others.
"Every bank I've spoken to tells me that the pipeline is at a 12-month high, and in some cases a record high," said Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners LP. "I think some people are optimistic for the latter part of 2011 for loan demand, but it really wasn't there yet in a big way this quarter," he said
Some industry observers said they expect bigger profits, better asset quality and lower credit costs as small banks report results in coming weeks. "To me that's a pretty bullish sign," Fitzgibbon said. "It is likely to mean that we're going to have a pretty decent quarter from most companies."
Of the companies that have already reported, analysts said they were pleased by most early returns, which included commercial loan growth and better-than-expected net interest margins.
Prosperity Bancshares Inc. in Houston, which reported on Thursday, said average loans rose 2.8% from the fourth quarter and 5.2% from a year earlier, to $3.5 billion on March 31.
David Zalman, the $9.7 billion-asset company's CEO, said during a conference call Thursday that Prosperity challenged employees last fall to increase loans by $1 billion by the end of 2012. It was the second straight quarter with loan growth, and Zalman said he is "extremely enthusiastic" about Prosperity's prospects for the rest of the year.
"We intend to capitalize on the current environment by going out and attracting new loan customers, as well as taking care of our existing customers' growth needs," Zalman said. "Many of our competitors are limited as to the loans they are able to make, due in part to concentrations in commercial real estate loans and asset-quality issues."
On a Friday conference call, executives at Independent Bank Corp. in Rockland, Mass., said loan demand is as strong as it has been in more than a year, with $630 million in potential loans in the pipeline and $140 million in approved, but not completed, deals. The $4.6 billion-asset company, which reported earnings late Thursday, said it expects loans to grow by at least 4% this year.
Webster Financial Corp. in Waterbury, Conn., reported a 3.3% rise in commercial loans from the fourth quarter and a 1% increase in commercial real estate loans. (Still, total loans were flat at $11 billion as of March 31.)
Other analysts are curbing their enthusiasm. Stephen Moss at Janney Montgomery Scott was one of many observers more tempered about loan growth, which he says will be extremely difficult as long as the economy remains in recovery mode. He said credit improvement will likely be the main driver of profits in 2011.
"Revenue is going to be under pressure, but I expect earnings will continue to go higher throughout the year," Moss said.
Damon DelMonte, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc., agreed. A March 31 KBW report forecast that profitability across the industry should increase in the first quarter. But the devil is in the details, he said.
A rebound in earnings will probably be offset by weaker spread income and lower fee income, as banks continue to realize the full impact of the Federal Reserve's changes to Regulation E. (Banks say the changes, which require them to obtain permission from customers for automatic overdraft protection, a move they say will cripple fee income.)
While credit quality is improving, DelMonte said, banks are still somewhat concerned about late-cycle CRE problems creeping up on them. "When you pull back some of the layers of the onion, some of the underlying trends are not as positive or optimistic as it may seem from the bottom line," he said.
DelMonte said banks reporting loan growth are taking a bigger slice of the pie, but the pie isn't getting much bigger. "We're not of the belief that the demand for new loans is really ramping up," he said. "It seems like it's more of a shifting of market share. Smaller banks are going to benefit at the expense of larger banks."
For now, many banks continue to unload the types of loans that have plagued banks for the past three years — construction and commercial real estate.
Jeff Rulis, an analyst at D.A. Davidson & Co., said runoff will "cannibalize" bottom-line growth in the near term, but there is an end in sight. "On a net basis, that runoff is diminishing, and most [banks] kind of indicate the back half of the year is going to be a brighter outlook. At least [they] may be able to stabilize loan totals, if not grow them some," he said.
It is getting easier to spot those that struggle, said Dan Bass, a managing director at FBR Capital Markets. Continuing to release reserves by charging off less than the provision is a positive, not just for the bottom line, but for a bank's image. Those banks stand out as confident and in control, which makes it harder for others to hide, Bass said.
"A lot of banks are saying, 'We're working on this' and, 'We're working on that,' but how many consecutive quarters can you continue to say that?" Bass said. "The market is starting to distinguish between the winners and losers."
New disclosure requirements may give analysts and investors a better picture of credit-quality improvement. In 2009 the Financial Accounting Standards Board proposed rules to require every bank to report more granular data on commercial loans' credit quality, the bank's internal risk ratings and the movement of problem assets. The standards took effect in December, and analysts will be looking carefully at the new data.
"This new disclosure is incredibly helpful because it puts a level playing field, and allows me as an analyst and others to really understand what is going on," said Chris Marinac, an analyst at FIG Partners LLC. "You're going to start to see that you no longer get a pattern of wondering whether things are getting better or worse."