Costly Tech Worth the Sharper Picture It Delivers of Borrowers: First Niagara

First Niagara Financial Group in Buffalo, N.Y., is incurring expensive bills to reorganize and modernize its business. But management said Friday that signs of a payoff are starting to appear.

The $39 billion-asset company's first-quarter profit fell from a year earlier. An increase in noninterest expense was a primary factor, as First Niagara recorded about $18 million in restructuring charges in the first quarter to cover the closure of 17 branches and job cuts. Additionally, First Niagara booked higher costs to upgrade technology and for higher deposit-insurance premiums.

First Niagara's ongoing program to upgrade its technology has started to pay off in specific business lines, executives said Friday after releasing quarterly results. In First Niagara's indirect auto-lending business, the bank is now able to offer more precise loan rates without taking on additional risk, Chief Financial Officer Greg Norwood said in an interview.

"Without changing our credit standards, we can look at you and your neighbor with more detail and price loans accordingly," Norwood said.

Previously, First Niagara's underwriting software only allowed a limited number of factors to be considered when running a credit profile. With its new software, First Niagara can now take into consideration a wide range of factors when making a credit decision, including FICO scores, debt-to-income ratios, payment-to-income ratios, deposit activity and more, Norwood said.

"Now we know the risk and we can separate a lower score from a higher score, and we can charge more for the applicant with a lower score," he said. "Before we were using a blunt instrument. Now we can be more precise."

The new underwriting software, with its advanced analytical capabilities, can also be applied to some other business lines, such as credit cards, he said. Norwood declined to identify the company that supplies the new software to First Niagara.

On the retail front, First Niagara has closed between 10 and 20 branches per year for the past several years, and that trend is likely to continue, Norwood said.

Its first-quarter restructuring costs, however, will ultimately save First Niagara about $25 million this year, Norwood said.

"Our expense levels continue to be well-managed," Chief Executive Gary Crosby said in a conference call with analysts. "We're always focused on optimizing our branch network."

Meanwhile, First Niagara on Friday provided a minor update on the status of a "process issue on certain customer deposit accounts," which led the company in January to establish a reserve of $22 million to cover potential costs to address the matter.

Regulators are still reviewing the process-issue remediation plan that the company submitted in January, Crosby said during Friday's conference call.

"Their review continues and we're not aware of any issues," Crosby said. "We're confident that the reserves we have set aside for the customer remediation will be adequate to cover the costs associated with the resolution of this issue."

First Niagara has not spelled out exactly what the issue is, but has said it is unrelated to cybersecurity, a breach, fraud or prior acquisitions.