Loan Growth Remains Elusive for Community Banks in Northeast

For all the excitement generated by mergers and acquisitions across the Northeast, there is little else in the region to arouse bankers' enthusiasm.

The economy has held up better in the region than elsewhere, and overall conditions have fed a bevy of deals. But loan growth remains elusive for banks that are unable to steal assets from others, and competition will only grow as more banks shift to offense from playing defense.

"The reality is, organic growth is not there," said Jason O'Donnell, an analyst at Boenning & Scattergood Inc. "That's kind of the elephant in the room."

Consolidators would be wise to keep that in mind as they pursue deals. Commercial loan demand has yet to rebound, and consumer lending remains weak, except for residential mortgage refinancings, analysts said.

Susquehanna Bancshares Inc., Community Bank System Inc., First Commonwealth Financial Corp. and Beneficial Mutual Bancorp are among the Northeast banking companies that pointed to weak demand as a reason for flat or declining fourth-quarter loan balances.

"Anybody who has shown some growth, it seems to have come from taking market share from larger competitors," said Damon DelMonte, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc.

First Niagara Financial Group in Buffalo seems to have mastered that strategy. The $21.1 billion-asset company is one of the few in the region to add loans last year, but it was aided by two deals. Fourth-quarter originations and line advances grew 64% in upstate New York and doubled in western Pennsylvania from a year earlier. They grew 34% in eastern Pennsylvania from the second quarter, when the company bought Harleysville National Corp.

John Koelmel, First Niagara's chief executive, said the company took advantage of challenges facing competitors and take a bigger slice of a "relatively static" pie. "Do we see signs that the pie is starting to expand a little bit? I'll say directionally, yes," he said in an interview last week. "But we're still bearish overall, and at best we're in a creep-and-crawl mode."

Even First Niagara is preparing for a year with little growth. Koelmel said the company will consider closing some of its recently acquired branches and unloading some real estate as it consolidates back-office operations. "It isn't just about building up the business," he said. "It's also about making sure we're running it productively and efficiently."

With muted expectations for loan growth, DelMonte said, managing capital will be critical for Northeast banks, many of which are flush with capital. Share buybacks and dividend payouts will remain in the forefront, he said.

Some of the bluntest assessments of the regional economy came from Beneficial, whose chief executive, Gerard Cuddy, said in October that economic growth had stagnated. The Philadelphia company's stock tanked after it charged off all of the collateral deficiencies for its criticized loans.

"It was a very uncomfortable quarter," Cuddy said in an interview Tuesday. "We were out there by ourselves for a better part of a month saying, 'We don't see it,'" before others started echoing similar concerns.

Beneficial continued its strategy in the fourth quarter, charging off $7.6 million. Though some credit-quality trends improved, Cuddy said it is "still too soon to hold a parade."

"I think that we're into the third quarter of 2011 before we can start pointing to trends that say this represents an inflection point," Cuddy said.

Jeff Marsico, an executive vice president at the Kafafian Group in Parsippany, N.J., which advises Beneficial, said many banks still face more scrutiny from regulators who are emphasizing cash flow from borrowers. "If the loan does not [generate] cash flow, the lender's being forced to write the loan down," he said. "That changes the paradigm, and what has happened is, there are fewer quality borrowers in the mix."

Cuddy said he is not a pessimist but a realist. Still, others were more hopeful.

National Penn Bancshares Inc. in Boyertown, Pa., which trimmed its loan portfolio last year, is returning to growth. It has been hiring commercial bankers, adding regional credit officers and calling on prospects since June to prepare for growth in early 2011. Scott Fainor, the company's president and CEO, said on an earnings call Thursday: "It's going to be a little more difficult because the markets we serve are still, you know, sort of in that soft economy."

Fainor said the company would look for in-market acquisitions that offer cost savings to offset limited growth opportunities.

Consolidators are quick to point out the silver lining: Lackluster growth is likely to force more banks to sell, though many are in markets that held up much better than those in other regions.

Susquehanna Bancshares, a Lititz, Pa., company that last week agreed to buy Abington Bancorp Inc. in Jenkintown, Pa., said it has high expectations for the Philadelphia area, where Abington is based. The region has some of the lowest unemployment and highest median incomes in the country, and it is poised for growth, said William J. Reuter, the company's president and chief executive, in an interview Monday.

"The economy is not as robust as we would like to see it, but when you compare it to other sections of the country, it's certainly pretty good," Reuter said. "Once small business starts to feel more confidence in the recovery and they start to employ more people, I think you'll start to see the economy moving forward."