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  Light at the End of the First-Quarter Tunnel
Light at the End of the First-Quarter Tunnel

BY Scott Van Voorhis

As the economic recovery picks up, Empire State banks are touting a return to healthy earnings as business loan demand rises and real estate woes level off.
While favorable interest rate spreads are certainly helping, mid-sized and community banks across the state say they are also seeing encouraging growth in core business areas.
Another positive trend: the bad-debt picture is easing, and with it, the level of capital requirements to cover potential losses. “I think all the banks are seeing less provision requirements to cover bad debt,” says John Millman, CEO of Sterling National Bank, based in New York City. “They are half of what they were a year ago. It translates into higher earnings.”
Geography plays a crucial role as well, helping different banks in different ways. While banks in Upstate New York are still dealing with job losses at major area companies, the region for the most part escaped the escalation and later crash in housing prices.
Their cousins in the state’s southern tier around New York City would have a hard time making such a claim, with the metro area still digging out after the implosion of the housing bubble.
Yet the rebound on Wall Street has gone a long way towards reviving the New York metro economy, bringing back job growth and demand for business lending.
After initial concern earlier this year that the recovery might be stalling locally, William Dudley, president of the Federal Reserve Bank of New York, recently gave a more encouraging pronouncement.
“The recovery of activity in New York state and New York City continues at a steady and sustained pace,’’ Dudley noted.
Overall, New York, New Jersey and Connecticut’s Fairfield County have regained 100,000 private sector jobs over the past year, he said.
For banks across the Empire State, the reviving job market has helped fuel a rise in commercial lending, even as the number of residential mortgages has dropped off amid the ongoing funk in the housing markets, a recent Beige Book report by the New York Fed found.
“Bankers report decreased demand for consumer loans and residential mortgages, increased demand for commercial mortgages, and no change in demand for commercial and industrial loans. The decrease was most prevalent for residential mortgages,” the report found.
Here’s a sample survey by Banking New York of bank performance across New York state, broken down by region:

New York City and Long Island
For two major community banks in the New York metro area, the first quarter saw profits soar amid a revival in commercial lending and a jump in deposits.
Long Island-based Community National Bank saw first quarter net income hit $623,000, up nearly fourfold from the first three months of 2010.
Sterling National Bank, based in New York, reported net income of $3.3 million in the first quarter, a 71 percent jump. John Millman, Sterling’s chief executive, is projecting double digit loan growth for the bank in 2011.
Driving the demand is the professional staffing industry, which has seen a surge in activity with the comeback in the economy.
“The staffing industry is an economic indicator,” he said. “It turns down first and it turns up first.”
“We are seeing very substantial opportunities,” he said.
Business lending also jumped at both banks.
Community National posted a 22 percent increase, or $37.5 million, in its commercial lending, to $202.5 million for the quarter, while Sterling saw earnings from fee-generating products aimed at commercial customers rise to $11.4 million for the quarter. These included services such accounts receivable management, factoring, trade finance and mortgage banking.
Community National has also pumped up its small business lending. The Small Business Administration recently honored the bank as its top lender on Long Island after Community National more than doubled its SBA portfolio to $17.9 million. (The bank earned $1.3 million during the quarter from the sale of SBA loans.)
Stuart Lubow, chairman, president and chief executive of Community National, noted his bank is ranked as the fourth highest SBA lender for the whole New York region.
Branch employees are given incentives to bring in commercial loan business, he said.
“It is just our philosophy,” Lubow told Banking New York. “We are focused on business relationships, on total relationships. Clearly, you grow your operating accounts, and depository relationships [grow] along with that.”
The two banks also recorded significant increases in overall loan volume, total assets and deposits.
Community Bank grew overall deposits by 12 percent in the first quarter, compared to the same period in 2010, to $369 million. Sterling saw total deposits expand by 7 percent in the quarter, to $1.7 billion.
Sterling also saw total loans in its portfolio post a 7.8 percent year-over-year increase during the quarter, to $1.3 billion. Total assets at Community National jumped to $475 million at the end of the first quarter, up from $432 million the year before.
“We have been bucking the trends,” Lubow said. “We have kept a pretty consistent growth rate through this period. A lot of it is taking business from larger institutions that lost focus during this period,” he said, adding his bank has been focusing on forging “good, solid portfolio banking relationships.”
The banks are also pointing to other significant milestones that would seem to suggest the economy recovery is gaining traction in the New York metro region.
Community National will open its ninth branch later this year in Melville, having just opened its eighth in Queens.
Sterling National saw provision for loan losses drop by half in the first quarter, to $3 million. The ratio of nonaccrual loans to total loans improved to .53 percent at the end of March, compared to 1.42 percent in the first quarter of 2010, according to Sterling.
But the growth on the commercial lending side was balanced somewhat by a contraction in residential lending.
Interest income from residential loans dropped to $1.5 million at the end of the first quarter at Community National, from $1.7 million from the year before. By contrast, interest earned on commercial loans jumped to $2.9 million from $2.4 million during the same period, the bank reported.

Western/Central New York
Cleveland-based Key Bank has a substantial and growing presence across Central and Western New York.
While the bank does not break out its New York state numbers, the bank’s operations in the Empire State were a significant contributor to a strong first quarter, bank executives said.
Key Bank reported net income of $184 million in the first quarter, a dramatic turnaround from a $98 million loss during the first three months of 2010.
In another milestone, the bank repaid the federal government, wrapping up its participation in the Troubled Asset Relief Program with the repurchase of $2.5 billion in stock owned by the U.S. Treasury Department.
Key Bank also has seen a big boost in asset quality. The bank reduced nonperforming assets by $249 million, while nonperforming loans dropped to $885 million, a fall of $183 million. Net charge offs dropped to $193 million in the quarter, down from $329 million during the first three months of 2010.
“Our aggressive actions to exit riskier lending categories, which began over four years ago, have led to significant credit quality improvement again this quarter, placing our credit statistics at or near the top of our peer group,” said Henry L. Meyer III, Key Bank’s chief executive, in a statement.
With the arrival of better times, the bank is also expanding its branch network, with a big boost planned for its presence in Western New York.
The bank opened four branches in Buffalo last year and plans to add three more this year, said Hugh Donlon, president of Key’s Northeast region. The bank also recently opened a branch in the Capital Region and has expanded its presence in the Hudson Valley region through the acquisition of a local bank.
In terms of commercial loan demand, the health care sector and small businesses have been two big drivers, Donlon noted.
“Obviously, loan demand has been the big question mark,” Donlon noted. “Our [loan] pipeline levels are up. I would say this has been pretty consistent across all of our markets across New York state.”
Another big player in the Western New York market, M&T Bank, also reported a significant improvement to its bottom line during the first quarter.
Buffalo-based M&T’s earnings jumped 37 percent, to $206.3 million for the first quarter, beating Wall Street earnings estimates. Favorable interest rate trends played a big role, with the bank able to widen the spread between what it paid out to bring in deposits compared to what it is now able to earn on interest charged on loans.
M&T was also able to boost first quarter earnings through the sale of residential mortgage-based securities backed by Fannie Mae, which contributed $24 million to the increase in net income. The bank also made progress in reducing losses from nonperforming loans and other assets. Provision for credit losses dropped to $75 million in the first quarter, down from $105 million a year earlier. Net charge-offs of bad loans fell to $74 million, down from $95 million.
The ratio of nonperforming assets to total loans dropped to 2.73 percent in the quarter, down from 2.78 in the first quarter of 2010, according to M&T.
In another encouraging sign, noninterest income hit $291 million, up from $284 million in the first quarter of 2010 amid higher commercial mortgage banking revenues, trading account and foreign exchange gains, and letter of credit and other credit related fees, the bank noted in its earnings statement.
Still, loans past due 90 days or more actually expanded during the quarter, to $264 million, up from $203 million the year before.
“We are also encouraged by continuing improved credit quality, which resulted in lower credit costs in the recent quarter,” said Rene Jones, executive vice president and chief financial officer at M&T, in a statement. “Although nonperforming assets remain at historically high levels, we have seen some encouraging signs of improving economic conditions within M&T’s footprint.”
In Central New York, Alliance Financial Corp. also enjoyed a solid first quarter.
While net interest income remained unchanged in the first quarter from a year earlier, the Syracuse-based bank saw a big improvement in losses from bad loans.
The provision for credit losses dropped fivefold, to $200,000 in the first quarter, down from $1.1 million a year earlier. That is the lowest level since 2005, the bank reported.
Alliance also doubled its commercial loan originations, to $16.5 million, in the first quarter, though the bank also faces continued economic headwinds, noted Jack Webb, president and chief executive, in a statement.
“Current economic conditions continue to suppress loan demand; however, we continue to see positive results from the execution of our commercial lending strategy,” Webb said.
Overall, Upstate New York has its share of challenges for local banks, notes Michael Pollock, president of Fulton Savings Bank.
With the region for the most part having missed the housing bubble, Fulton and other local banks have escaped big balance sheet hits related to residential real estate, he noted.
But the economy upstate remains sluggish, with companies continuing to cut jobs and downsize operations, said Pollock, rattling off companies that have closed or cut their operations.
While health care has grown, manufacturing, long a staple for the region, continues to decline.
“It is going to be very difficult to replace the jobs that have left,” Pollock said.

Capital Region – Albany
By comparison, conditions in the relatively thriving Capital Region have prompted one major local bank to significantly expand its footprint.
Chemung Financial reported a drop in first quarter net income as it comes off a major acquisition.
Chemung’s acquisition of Albany-based Fort Orange Financial Corp. and its subsidiary bank, Capital Bank & Trust Company, gives it four new Capital District branches, including one in Albany.
The now $1.2 billion bank also reported a $250,000 decrease during the quarter in its provision for bad loans.
“We are very excited about the opportunity that this expansion into one of the most attractive markets in New York state provides, and we expect it to be accretive to earnings in 2011, excluding one-time transaction costs,” said Ronald M. Bentley, Chemung’s president and chief executive, in a statement.

Scott Van Voorhis is a freelance writer.


Posted on Friday, July 01, 2011 (Archive on Thursday, September 29, 2011)
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