Lending growth resumes – sort of

After a second-quarter dip in lending, Connecticut banks pumped nearly $420 million more onto the street in the form of loans and leases and pushing the total back up above the $54 billion mark.

Banks nationally pushed up their lending totals, emboldened in part by better net interest margins and fewer problem loans on the books. According to Connecticut bank data published by the Federal Deposit Insurance Corp., problem loans amount to 2.2 percent of all loans outstanding in the second quarter, down 0.2 percentage points from the first quarter and well below the close to 3 percent figure for the fourth quarter of 2010.

Fairfield County”™s bank scene could be in for a profound change, with the market entry of M&T Bank via its acquisition of Hudson City Bancorp, which had $1.3 billion in deposits as of a year ago at nine branches in Fairfield County, and a focus on commercial lending.

“I think out of the gate our first focus ”¦ will be to sort of make sure we are all comfortable with the size of the portfolio and the environment, so you”™ve got a lot of natural runoff in (the loan) portfolio,” said Renee Jones, CFO of Buffalo, N.Y.-based M&T, in a conference call in late August. “After that we are going to get familiar with the franchise. These guys have done a very nice job on building a franchise that has worked from a credit perspective.”

After a first-quarter hiccup, banks resumed loan growth nationally in the second quarter by a full $100 billion, obviously an encouraging development to FDIC and its acting Chairman Martin Gruenberg.

“The net interest margins have been one of the constraints on revenue growth and that”™s been an ongoing challenge I think for institutions across the board,” Gruenberg said during a press conference. “The industry”™s improvement in net income has been driven thus far by reductions in reserves that have been made possible by improving credit quality. But there”™s only so far that can take you ”“ at some point, you”™re going to need to see sustained growth in lending.”

The gains came even as Fairfield community banks cut small business lending as a group in the second quarter and as the Connecticut Business & Industry Association found continued pessimism among small and mid-size businesses on bankers”™ appetite for extending credit.

Connecticut”™s credit conditions weakened in the second quarter, according to a poll of business owners, with just 15 percent of respondents saying they expect an improvement in the near term and 41 percent expecting a deterioration. The survey is sponsored by the Connecticut Business & Industry Association and Farmington Bank, in conjunction with DataCore Partners of New Haven.

“With economic growth waning, demand for credit has slackened as well,” Peter Gioia, a CBIA economist, said in a statement. “This lies in sharp contrast to what we saw earlier in the year when expectations for expansion were more favorable. It was hoped that the prospects for rising profits would boost business lending, thereby further reducing the risk of another downturn in the 2012-13 timeframe, but despite record-low interest rates, credit demand remains rather lackluster.”

About one in every four respondents saw credit availability as a problem for their business. Of that group, 27 percent said that lack of credit forced them to reduce their workforce and 62 percent said that they would be unable to grow or expand as a result of inadequate credit. Another 16 percent indicated employee compensation or benefits would likely be reduced as a result.

Small to medium-size banks in the tristate area, however, told the Federal Reserve Bank of New York of a noticeable pickup in demand for residential and commercial mortgages, though commercial and industrial loans decreased. Bankers also reported declining delinquency rates, particularly on commercial and industrial loans and residential mortgages.