While many of the US's local lenders were hit by the subprime crisis, most of the larger regional banks are now back in growth mode. The Banker profiles four such banks.

Most of the US's 88 mid-sized banks, classified as those with assets of between $10bn and $100bn, follow a plain vanilla banking strategy, lending to small and medium-sized enterprises (SMEs), and originating (and refinancing) mortgages for single-income families. These are both credit markets where there have been significant upticks in growth in the past several quarters, according to the Federal Deposit Insurance Corporation (FDIC). Indeed, as of June 30, 2012, the medium-sized banks’ average return on assets and return on equity ratios were higher than the US banking industry’s average, according to the FDIC.

They are also banks with a specific regional franchise, with subsidiaries of bank holding companies, and bank branches and offices, typically straddling several US states.

Local importance

For Harris Simmons, CEO, president and chairman of Zions Bancorporation, which has $53bn in assets and focuses on the western states of the US, the importance of having strong local connections cannot be overestimated. “We have had the benefit of having a very strong core deposit base," he says. "That has been very beneficial to us over the past four or five years. It has helped us achieve one of the strongest net interest margins among large banks in the industry."

Zions operates eight different banks in Utah, California, Texas, Arizona, Nevada, Colorado, Washington and Oregon, though Mr Simmons says: “We are believers in trying to keep management teams local. We provide most of the back-office services centrally, but the people who run the banks are local. They really know the local markets.”

Some states have fared better than others over the past few years, with the so-called 'sand' states – among them Nevada, California and Florida – particularly badly hit by the US real estate and housing market collapse.

Stephen Steinour, chairman, president and CEO of Huntington Bancshares, which has $54bn in assets, is delighted that his bank holding company is based in Columbus, Ohio, with a franchise that includes the mid-western states of Indiana, Kentucky and Michigan. There, the economic recovery has been particularly robust, driven by strong manufacturing and export-oriented businesses and by the recent discovery of large shale gas deposits, the development of which has only just started.

Maintaining standards

The recent financial crisis saw eight large regional banks fail in the US. Crucially, FDIC officials and bank CEOs share the opinion that these banks failed because of a poor asset quality and the degree to which they relaxed lending standards before the US financial and economic meltdown. But the mid-sized bank sector also provides examples of banks that upheld lending standards. 

M&T Bank is the 16th largest commercial bank company in the US with $81bn in assets, and has all of its markets in the eastern states of the country. M&T is the largest bank in New York state – outside New York City’s metropolitan area – as well as being the biggest lender in the state of Delaware and central Pennsylvania. It is also the second largest bank in Maryland. M&T chief executive Robert Wilmers stresses that having “strict underwriting standards”, based on local knowledge is a key reason for his bank’s success.

Bearing this out, as of September 30, 2012, loans that M&T wrote down, because they were deemed uncollectable, amounted to $42m and represented only 0.26% of M&T’s total loans, compared to 0.39% at the same time in 2011.

A much smaller regional bank, Bank of Hawaii, with $13.3bn in assets – but which is Hawaii’s biggest bank in core deposits as well as being a leading residential mortgage lender – performed even better. It reported loan write-downs for the third quarter of 2012 of $1.5m, or just 0.1% of total $5.7bn loans, compared to 0.28% a year earlier. Peter Ho, CEO of Bank of Hawaii, has strong views on credit standards

“Though we began to see our mortgage market share slip pretty dramatically in 2006 to number four or number five [in Hawaii], when we dug deeper we realised that these other banks were taking on risks that we decided were not appropriate in terms of our risk tolerance, and frankly were not appropriate in terms of how we deliver customer service. So we were content to allow that business to flow to other providers,” he says.

Subprime pressures

At some other regional banks, non-performing loan ratios and loan write-down ratios have not recorded the impressive figures seen at Bank of Hawaii, M&T, Zion or Huntington. Nevertheless, the credit losses of regional banks that survived the crisis – unlike those that failed – never threatened the safety and soundness of these banks.

One example is Popular – which owns the biggest bank in Puerto Rico, accounting for about 75% of the bank holding company’s $36.5bn in assets – as well as a smaller US mainland bank. It has struggled with subprime loans from its mainland US bank and from souring construction industry loans in Puerto Rico, where the economy, almost entirely dependent on tourism, has been in recession since 2006.

Popular ran up $1.8bn in losses in 2008 and 2009, but the bank has returned to profitability every year since, thanks largely to its “very solid retail franchise in Puerto Rico, with some portfolios, whether they be in credit cards, on the mortgage side or in commercial loans, that are very stable”, says Richard Carrion, Popular’s CEO. Meanwhile, on the problem credit side, loans written off as unpaid fell to $95.8m in the three months to the end of September 2012, the fourth consecutive quarter that the figure has declined.

US regional banks relative performance, June 30 2012

Growth plans

So what are other regional banks, which are now largely free of crisis-related credit problems, doing to grow in the current environment, an environment characterised by sluggish economic recovery, interest rates that are still being held low by the Federal Reserve – putting pressure on banks’ profit margins – and new bank regulations that are costly and uncertain?

Strategies vary widely by bank and by region. Mr Simmons says that Zion is sticking to its strengths, which is focusing on SMEs in western US markets, as well as lending to small businesses, with the bank a national leader in US Small Business Administration programmes. The company is also increasing its fee-earning businesses from wealth and trust management to credit cards and its signature treasury management business and services, which the bank cross-promotes and cross-sells to its corporate borrowers as well as to public and private sector institutions.

Cross-selling is also a key component of the strategy launched by Mr Steinour shortly after his appointment as Huntington Bancshares CEO in 2009, and it has proved very successful. Some 32.6% of its commercial customers use four or more products from Huntington National Bank, which is significant as it means commercial clients count on Huntington for loans, current accounts, lines of credit, mortgages, credit cards and other banking needs.

“As we grow our customers, we grow our share of wallet with each of them, and that drives more revenue into the bank. That is what is propelling the growth in plain economic terms,” says Mr Steinour.

The bank has also introduced current accounts to attract new customers. One is a free current account, with no minimum deposit or balance, no mandatory automatic transfer of funds and no requirements on debit card or credit card use. Unsurprisingly, at a time when several larger US banks have raised retail fees and minimum balance requirements for most depositors in reaction to the low interest rate environment, being able to obtain a free account that is free of conditions has been a hit with Ohio customers.

Huntington, with a retail business that accounts for about 50% of the bank’s total income, has been prepared to go against the grain in another way. While many banks have been cutting costs, Huntington opened 62 branches in 2012 and hired more than 500 employees. It plans to open 12 more branches in 2013 and continue hiring.

“The pillar of our 2009 strategy is organic growth. We want more relationships, more share of wallet – of products per household, principally in Ohio and Michigan. Today, we are growing by 30,000 new households every quarter. And we believe we can do better,” says Mr Steinour.

Acquisition trail

At M&T, CEO Mr Wilmers says enigmatically: “Our strategy is not to have a strategy although that is a strategy in itself.” But he is more precise when it comes to describing the circumstances and requirements for growth by acquisitions where, he says, M&T has “a pretty good record”, having completed some 20 bank takeovers since 1983, when he became CEO.

A principal requirement is looking for good value for shareholders, which means that M&T tends to focus on acquisitions of distressed companies, though is willing to drop out if there is a bidding contest.

“We have a very strong feeling that if we pay too much for an acquisition we might no longer be in business. The bank radar screen is full of banks that have paid too much,” says Mr Wilmers.

It is also important that the earnings growth achieved by any acquisition does not impair M&T’s balance sheet. The lender being pursued must also complement, or add to, M&T’s existing franchise and businesses. The company’s two most recent acquisitions fulfil these conditions, and then some.

In 2011, M&T bought Wilmington Trust for about $351m in stock, and also took on the $350m that the bank owed to the US Treasury for the government’s post-crisis bank capital injection plan, the Troubled Asset Relief Programme. Wilmington Trust was clearly distressed, having offered itself for sale after losses caused by soured commercial real estate loans and investments in pools of trust-preferred securities.

The acquisition added to M&T’s market share in Delaware. But the really important prize was Wilmington’s top-drawer wealth and trust management business, which had a national reputation and considerably boosted M&T’s fee income. Before the deal, M&T’s wealth business accounted for 15% of the bank’s total fee income, but this share rose to 29% when the acquisition was completed.

More recently, when M&T acquired Hudson City Bancorp for $3.7bn, in one of the biggest US bank deals in 2012, this allowed it to expand its presence on the US east coast. Similar to Wilmington, Hudson City’s income was also squeezed more than most of its peers at the time of the sale, due mainly to falling interest rates, which hit the income it earned from residential mortgages, and relatively high-rate debt that the bank could not easily refinance. But for M&T the acquisition filled what Mr Wilmers calls “a gaping hole” in the bank’s franchise, which was New Jersey. Hudson City had most of its branches in the state, whereas M&T had practically none.

“So it fills that hole and it is accretive to earnings in the first year and it is accretive to capital. I don’t know that I have heard of another merger where the acquiring bank makes an acquisition accretive to capital,“ says Mr Wilmers.

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