First Niagara, TCF Show Dilemma in Business Lending

Yes, pricing is stiff. Competition is intense — agreed. But commercial lending, at this point in the economic rebound, is one of the best things that many regional banks have going for them.

To be certain, as the tally of second-quarter earnings reports comes to a close, the results have been mixed. For every U.S. Bancorp, which reported a 10.4% year-over-year increase in commercial loans, to $116 billion, there has been a Bank of America, which cautioned investors to temper expectations for growth. Other regionals, like BB&T and SunTrust, also saw higher commercial lending.

Most recently, First Niagara Financial Group and TCF Financial demonstrated the wide variance of results across the regional bank space. First Niagara's commercial loans rose 8.2%, to $13.7 billion, from a year earlier. But commercial lending at TCF fell 6.1%, to $3.1 billion.

Gregory Norwood, First Niagara's chief financial officer, said commercial lending has consistently provided positive results for the Buffalo, N.Y., company for several years.

"The model on the commercial side is very strong," Norwood said in an interview.

Commercial lending encompasses real estate loans backed by commercial properties, commercial and industrial loans and other business credits.

Analysts had positive impressions of First Niagara's commercial lending. Gary Crosby, said one reason was the bank's recent recruitment of bankers from larger rivals, including the hiring of Austin Adams, a former chief information officer at JPMorgan Chase.

"On the C&I side, the growth that you have seen … what in particular has been driving that?" asked Collyn Gilbert, an analyst at KBW.

"We continue to have the same strategy of hiring key, big-bank experience," Norwood said. "It is that ability to attract talent and that talent to attract new customers."

Crosby pointed to Adams' experience in bank technology, which will help First Niagara's plan to spend $200 million to $250 million to upgrade its technology and improve products and services.

"Austin was one of the first bankers to recognize that infrastructure, technology and data, can be leveraged to improve the customer experience," Crosby said.

The $39 billion-asset First Niagara and $19 billion-asset TCF, in Wayzata, Minn., echoed comments heard earlier in the month about the commercial lending market's brutal pricing competition.

"We're seeing people out there at 1.4% over LIBOR doing significant deals," William Cooper, TCF's chairman and chief executive, said during a Friday conference call. "I don't know where they are making their money, to be honest with you."

Making matters worse, the prolonged period of super-low interest rates is wreaking havoc on margins. Bankers' hands are tied, since loans that run off the books must be replaced with less-lucrative assets.

"Almost without exception, a new loan that's going on today has a rate that's lower than a loan that paid off that was made years ago," Cooper said.

To that point, TCF's net interest margin shrank by 7 basis points, to 4.65%, from a year earlier. First Niagara's NIM narrowed by 10 basis points to 3.26%.

Lower yields are fueling the margin compression. Average yields on total commercial loans at TCF fell 19 basis points, to 4.57%, from a year earlier. Average yields on total commercial loans at First Niagara fell 31 basis points to 3.68%.

First Niagara pointed out in its earnings press release that its yield was hurt by "prepayments and reinvestments at current market rates and to a lesser extent, the impact of one additional day in the quarter."

In terms of the rate environment, Norwood believes First Niagara is in a good position if rates rise in the short term. First Niagara has been replacing fixed-rate commercial loans with variable-rate loans. That increases the bank's asset sensitivity.

"The more asset-sensitive you are, the more net interest income will increase when short-term LIBOR rates increase," Norwood said in an interview.