The search for loan growth is leading some banks to hunt in unfamiliar territory. Often that means traveling hundreds or thousands of miles from their branch networks.
Out-of-territory loans can be an enticing option for a variety of reasons. Most obviously, they can provide higher returns to banks that have excess deposits. Loans in faraway places can also help diversify a bank's portfolio.
Some regional banks are seeking to become national players in niche lending segments. And in certain geographic areas, the local banks face constraints on their ability to lend, offering an opening to outsiders.
But out-of-territory lending also carries risks that bankers with wandering eyes need to keep in mind, experts say.
Among the dangers is the challenge of evaluating credit in new, unfamiliar places. "It's generally in markets that you don't know as well as your own backyard, so there's an inherent risk," says Scott Siefers, a managing director at Sandler O'Neill.
Banks also may have to drop their prices in order to compete in places where they do not have the same longstanding relationships with borrowers that their competitors do.
"Not all of the banks that are actively pursuing that strategy are going to be able to do it successfully," says Anthony Plath, a finance professor at UNC Charlotte.
The Federal Deposit Insurance Corp.'s risk management manual calls an abnormal amount of out-of-territory lending one potential sign of poor risk selection, though it excludes from that assessment large banks that are properly staffed to handle those loans.
During the last credit cycle, some Midwestern banks made real estate loans in Sun Belt states that they came to regret years later. Similarly, it will likely be some time before it's clear whether today's expansionary banks were wise to grow their lending footprints.
"It's something that can only be judged over a period of time," says Allen Tischler, a senior vice president at Moody's.
"Right now we're still in a pretty conservative underwriting environment," Siefers says. "My guess is if there are concerns, they will probably take another year or two before they start to manifest into problems."
Banks that have recently expanded into new lending markets span a wide range of sizes, and they are focusing on a variety of credit segments.
Cole Taylor Bank, headquartered in Rosemont, Ill., is a $5.7 billion bank with 11 locations in the Chicago area.
The bank's chief executive, Mark Hoppe, is a 27-year veteran of LaSalle Bank, which Bank of America bought in 2007. Hoppe was brought onboard in 2008 as Cole Taylor was dealing with problems in its construction loan portfolio. Since Hoppe arrived, Cole Taylor Bank, a unit of Taylor Capital (TAYC), has established multi-state businesses in asset-based lending, residential mortgage origination, and equipment leasing. In all three cases, the new teams were built with former LaSalle bankers who had experience in the appropriate specialized lending area.
"I knew the people and that reduces the risk somewhat," Hoppe says.
Last year, Cole Taylor enjoyed nearly 10% growth in its loan portfolio, driven largely by residential mortgage lending and equipment finance. During the same period, its revenue was up 66%, and credit quality also improved.
The bank continues to expand into new areas. Last summer, it opened a commercial loan production office in southeastern Wisconsin and hired the former president of a Racine bank to run it.
Still, even as Cole Taylor adds experienced lenders outside of its markets, it continues to make credit decisions at its home office, Hoppe says.
The bank is "relying on the credit people, the credit approval officers who we've worked with the last five years, and have a lot of confidence in," he says. "So there's another kind of check and balance on the risk."
Other regional banks that have branched outside their territory to make loans in recent years include the $18 billion-asset TCF Financial (TCB) of Wayzata, Minn.
TCF has historically stuck to lending in its markets, but fierce competition and tepid loan demand in those areas has led to a change in strategy.
Over the last two years, TCF has acquired a nationwide auto lending company and established a niche business financing dealers of lawn equipment, recreational vehicles, boats and other products. Such loans now account for about 35% of the bank's loan portfolio, up from 27% at the end of 2011.
TCF did not return a call seeking comment for this story, but during an interview with American Banker in January, chief executive William Cooper was blunt about what is driving the bank's new approach.
"My whole life in banking my philosophy has been 'stick to your markets," he said, adding that today "a regional bank can't just stick to its region because there's not enough loan demand."
San Francisco-based Bank of the West, which has branches in 19 western states, is a larger regional bank that is moving out of its footprint. The $63 billion-asset unit of BNP Paribas announced earlier this month that it plans to open offices in several new markets, and hire roughly 50 experienced, middle-market lenders.
Mark Glasky, manager of Bank of the West's national banking division, says the ideal person to run a faraway office is an "experienced banker who's well known, established in that market, and has a lot of contacts in that market."
"We're not going to just play the price game," he says. "For us it's the relationships that companies have with the team we've hired."
Bank of the West's parent company has operations in more than 80 countries, which Glasky says is a potential selling point to clients that do business internationally.
There is no easy way to determine whether out-of-territory lending on the rise nationally, but some analysts suspect that it is as smaller regional banks have scaled back commercial real estate lending and shifted their focus to commercial and industrial lending.
Experts say that banks that are expanding geographically should be cautious about doing so too quickly. They should also focus on ensuring that they have the proper risk management controls in place.
"You lose the precision associated with risk analysis when you go out of market," says UNC Charlotte's Plath.
Regulators recognize the benefits of geographic diversification, says Kevin Jacques, a finance professor at Baldwin Wallace University and a former Treasury Department economist. But they become concerned, he says, when they see a bank aggressively trying to expand its commercial lending in a particular market.
Banks can help allay that concern by establishing loan concentration limits in new markets and sticking with then. "Just a simple thing like concentration limits can go a long way toward making sure that what could turn into a problematic issue doesn't get that big," says Moody's Tischler.