Banks in the Northeast are weathering the recession better than rivals in the rest of the country, giving them a competitive edge in terms of doing deals and taking market share as the economy rebounds.

In the second quarter, Northeast-based banks — particularly in New England — outperformed players in the West, South and Midwest on key fronts like credit quality, deposit growth and loan growth, according to industry data.

This bodes well for profitable, midtier companies in the Northeast like M&T Bank Corp., New York Community Bancorp Inc. and People's United Financial Inc. Industry watchers said they could lead a wave of bank consolidation in coming years. All three have made clear their intentions to get bigger in and outside their home regions.

"It's a good lesson for banks in other sections of the country. If you are disciplined in underwriting standards and avoid a lot of the esoteric loans, you can fare well," said Mark Fitzgibbon, director of research at Sandler O'Neill & Partners LP. "The banks in the Northeast have significantly more capital than banks in other sections of the country. I think they are going to opportunistically expand into neighboring regions."

Fitzgibbon cited two reasons for the geographic disparity. Northeastern companies, having emerged from the early 1990s recession later than the rest of the country, learned their lesson and tightened underwriting standards. Also, since there is less room to build, Northeastern banks extended far fewer construction loans than banks in the Southeast, for instance.

Damon DelMonte, an analyst with KBW Inc.'s Keefe Bruyette & Woods Inc., agreed. "The Northeast, by and large, was a pretty developed area to begin with — we didn't have a high amount, a rapid amount, of growth, especially in the way of construction," he said. "The value of homes was more or less dictated by supply and demand — it wasn't a brand new market. … They weren't taking as much risk with residential mortgages."

This is reflected in Northeastern companies' credit quality and deposit and loan growth, he said.

In the first quarter, New England firms had the lowest percentage of nonperforming assets and lowest chargeoffs out of the 150 companies KBW covers. New England's nonperforming assets as a percentage of total assets was 1.26% and its chargeoff rate as a percentage of total loans was 0.32%. In turn, the Southeast's NPA rate was 3.38% and its chargeoff rate was 1.41%, according to KBW data.

DelMonte said companies in the Northeast also came in first place in terms of deposit and loan growth, reflecting a flight to quality as well as the fact that they were taking advantage of distractions plaguing the national banking companies, like Bank of America Corp., with a presence in their region.

Rene Jones, an executive vice president and the chief financial officer of M&T Bank, said his company has benefitted from operating in a region that has not been as wracked with unemployment and depreciating home values as other parts of the country. He said this — combined with sound underwriting standards — has helped M&T's chargeoff rate stay well under the industry average.

"We actually have markets where, year over year, we have real estate appreciation." Jones said in an interview last month. "If you are not dealing with heavily inflated asset prices, that is a very large benefit."

In a separate conference call to discuss earnings last month, he said the Buffalo company's financial health positioned it to make acquisitions, even after just closing its purchase of Provident Bankshares Corp. of Baltimore in May.

"Now that we've gotten through the integration process of the Provident deal, we're open to things that would improve our franchise value, and things that are — that probably — stay particularly close to our existing market," Jones said.

He is not alone. Aware of their strong hand, other small and midsize Northeastern players have broadcast their intention to do deals. Of course, tempering everybody's appetite is the economic uncertainty that makes it tough to value targets with a vulnerable stash of business or home loans.

Still, Joseph Ficalora, the chairman, president and chief executive of New York Community Bancorp., indicated last month that the Westbury, N.Y., company may do a deal sooner rather than later.

"You could assume that we've looked at every deal that has been recently announced anywhere in proximity to our market. And certainly, we virtually have the ability to look at every deal that is coming through," Ficalora said in a conference call. "I'd say that easily within this year we should be looking at a highly accretive deal."

New York Community has remained profitable through the recession on the strength of its portfolio of loans to New York area landlords. Ficalora has said repeatedly that the downturn will present chances to increase its deposits through acquisitions. It has not done any deals since 2007, after a flurry of activity early in the decade.

People's United Financial — among the most well-capitalized banking companies in the country — has made no secret that it is looking for opportunities from Maine to Washington, D.C. "We're probably going to wait a while longer. And I don't want to be overly specific, just because I think that there are actually probably very good opportunities for us in the months ahead," Philip R. Sherringham, the president and CEO of the Bridgeport, Conn., company said last month.

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