Suddenly, slow and steady is in.
As community banks and thrifts in the West and Southeast struggle with plunging property values and surging problem loans, the former industry laggards in the Northeast are now among the industry's top performers.
A Sandler O'Neill & Partners LP analysis of first-quarter earnings data found that companies in the Northeast with a market capitalization of $250 million to $10 billion posted a median increase in earnings per share of 5% from a year earlier. That compares with declines in the Southeast, West, and Midwest.
Resilient credit quality tops the list of reasons why Northeast banks and thrifts are faring better.
"The only section of the country where banks haven't been overwhelmed by credit issues has been the Northeast," said Mark Fitzgibbon, the head of research at Sandler O'Neill.
Credit quality is slipping, but not nearly as badly as in other parts of the country. For the first quarter, the median increase in nonperforming assets at Northeast bank and thrift companies was 76% over the year-earlier period, compared with a median increase of 140% for the country overall, according to Sandler O'Neill's analysis of data provided by SNL Financial LC.
For some companies, loan growth and improved margins also helped buoy earnings.
Peyton R. Patterson, the chairman, president, and chief executive officer at NewAlliance Bancshares Inc. in New Haven, Conn., said her company's first-quarter revenue increased 3.5% from the previous quarter, because lower deposit costs led to a wider margin; its competition pulled back on lending, making for steady loan growth, particularly in mortgages; and its noninterest income increased, partly from the sale of more annuities.
Analysts said that because the Northeast has not been growing as fast as regions of the West and Southeast, it has not been as hard hit by the economic slowdown.
They also said companies in fast-growing markets attracted far more loan competition and likely felt pressured into lowering their standards and their rates to get business. Richard D. Weiss of Janney Montgomery Scott LLC said shareholders in a market with 20% growth could get cranky with a bank that failed to keep pace.
Collyn Gilbert of Stifel, Nicolaus & Co. Inc. said even some banks in the Northeast have been "ridiculed" for their lack of growth, despite the rationale that the risk return had diminished and that they wanted to preserve credit quality.
That choice is paying off now, Ms. Gilbert said. "For every name in large-caps banks that is just completely blowing up, I'm having names that are reporting positive surprises," she said. "There is something to be said for consistent underwriting — where you know your borrowers, where you're focusing on collateral and cash flow, where you're not doing purchase loans or large participations to borrowers that nobody knows."
Besides the relatively stronger credit quality, many companies in the Northeast posted loan growth in the first quarter, as competition from conduits, investment banks, and large banks eased, analysts and bankers said.
The $8.2 billion-asset NewAlliance reported "substantial" mortgage growth in the first quarter, which Ms. Patterson attributed to less competition.
"We've been deluged with mortgage applications," she said. "A lot of the mortgage lenders — nonsubprime — that were in the market have effectively exited. So we were able to capture market share."
She said home equity loans also shot up with more consumers looking to pay off their credit card debt.
Though not being in a market like California helps, Ms. Patterson said NewAlliance also has been a "very conservative" lender. She said its credit quality and risk management team intensified account monitoring more than a year ago in anticipation of an economic downturn.
Unlike at many other companies, NewAlliance's credit quality actually improved. First-quarter net chargeoffs dropped 54% from a year earlier and 33% from the previous quarter, to $99,000. The ratio of nonperforming loans to loans was roughly the same as a year earlier, at 0.40%.
NewAlliance's stock is down 12% from a year ago but has been climbing lately. It is up about 18% in 2008.
The stocks of community banks and thrifts in the New England and Middle Atlantic regions are up 9% this year, outperforming their counterparts elsewhere. They are down slightly year over year but have held up well compared with their stocks of community banks and thrifts in the West and Southeast.
Mr. Fitzgibbon said he expects the stocks of Southeast banks in particular to rebound further. "What I've heard a lot of investors say is, even though these banks are having issues, these are long-term going to be growth markets, because as the baby boomers approach retirement, they want to move to warmer climates," he said.
For now, though, investors perceive the Northeast as less risky because few companies there have large construction lending portfolios, since it is more developed than the Southeast, Mr. Fitzgibbon said. For community banks and thrifts in the Northeast, construction loans make up a median of 6% of their total, compared with 9% for those in the Midwest, 16% for the Southeast, and 19% for the West.
There are exceptions.
Bradley Rock, the chairman and CEO of the $1.3 billion-asset Smithtown Bancorp in New York, said construction loans have made up about 25% of his company's total for years. But he said its applications for "good construction loans" have declined lately. Housing prices have not fallen much in its Long Island market, but sales are slower, he said.
At the same time, however, demand for commercial mortgages is up, Mr. Rock said. With the company's proximity to New York City, conduit lenders had been scooping up those loans previously.
But now Wall Street firms — and the securitization market — are struggling and the loan competition has eased. "We really think that has created a lot of opportunities for us," Mr. Rock said.
Despite the heavy construction lending, Smithtown has strong asset quality, which Mr. Rock attributes to a centralized lending process and an experienced staff that has longtime relationships with borrowers. And the company is "picky" with loans, he said.
Smithtown's stock — which fell 9.5% last year, only its second decline in 19 years — has not benefited much from the solid credit quality, Mr. Rock said. But he said he does not think its exposure to construction lending is to blame so much as investors fleeing the financial sector. Mr. Rock said one institutional investor told him that he had to sell off all financial stocks but that he planned to buy into the company again as soon as he could get back into the sector.
Ms. Gilbert said she had a "doom and gloom" view of community banks after the market seizure last summer because they are heavily dependent on real estate. But she said her sentiment is changing as she talks with more community banks like S&T Bancorp Inc. in Indiana, Pa. "S&T is perhaps the most optimistic in its outlook for business as it has ever been. They say that, and they are not alone," Ms. Gilbert said.
Large banks are "so preoccupied with preserving their own capital and their own balance sheets that they've totally pulled back the reins on lending," she said. "Now that we've seen the exodus of all of this competition and all of this cash chasing so few assets, maybe there is some life back for the traditional community bank model."
