Lending to small businesses is finally starting to pick up, but it's not the big banks that are loosening the purse strings. Smaller, regional banks have stepped up to the plate, loaning out funds to small companies starved for capital for the past few years -- and they're making money doing it.

Increased lending = bigger profits
While the megabanks have cut back on lending by nearly 5% this year, regionals have increased their activity by almost 10%. Banks like Comerica (NYS: CMA) and M&T Bank (NYS: MTB) have bumped up lending percentages by 12% and 7%, respectively, from the same time last year. Comerica's profit surge of almost 50% year over year, and its 11% net interest income increase show just how lucrative lending can be, even in this low-interest environment. M&T saw its profit fall in Q2, though it did beat estimates on EPS. Importantly, the bank's net interest income rose 18%.

KeyCorp (NYS: KEY) has seen its commercial lending shoot up by 20%, and net interest income rose 7% from last year. The bank recently closed its purchase of 37 HSBC branches, which added $400 million to its loan portfolio. Huntington Bancshares (NAS: HBAN) also reported an increase of 19% in its business loans, and Fifth Third Bancorp (NAS: FITB) plumped its portfolio of such loans by 18%. All three of these banks are located in the Midwest, which has seen increased demand for commercial loans.


Midwestern banks are thankful for the increased business, which allowed these three to report stellar numbers for their Q2 earnings reports. They note, however, that the sputtering economy could quickly put a damper on the rise in commercial lending. Small businesses are still jittery about the business climate, as are the bankers themselves. Huntington's CEO notes that his bank, like its commercial clients, will likely postpone any large investments until economic headwinds subside.

One Fool's take
It looks to me as if these regional banks are shrewdly gauging economic indicators and using that knowledge to their advantage. They seem to be working with the business community in building their loan portfolios, and taking advantage of the big banks' reluctance to loan to small companies. At the same time, they are cautious, knowing that the economy could flip-flop at any moment. These banks have also used acquisitions and cost-reduction measures to make up for income stifled by the current low-interest environment. For investors tired of the shenanigans being uncovered every day in the megabank sector, regionals must seem like a breath of fresh air.

If these smaller regional institutions have piqued your interest in financial stocks other than just the megabanks, I invite you to read more about the The Stocks Only the Smartest Investors Are Buying -- a special report that gives details about some intriguing gems in the banking sector. Don't miss out: It's free.

The article Regional Banks Get Down to Business originally appeared on Fool.com.

Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of KeyCorp, Huntington Bancshares, and Fifth Third Bancorp. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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