An emerging fourth-quarter theme at many regional banks is a focus on commercial lending, though some have had more success than others.

First Horizon National (FHN) is trying to grow it by emphasizing specialty business lines such as healthcare and asset-based lending. Others, including Comerica (CMA), are largely sticking with the industries and markets that they know.

To be sure, regionals face big challenges. Competition, particularly for commercial loans, is fierce. Executives have been complaining about competitors providing irrational terms or pricing to lure business.

Some banks are struggling with credit line utilization, which is "at the lowest levels we've seen in quite some time," William Losch 3rd, First Horizon's chief financial officer, said during a conference call to discuss quarterly results.

Still, bankers are starting to get help from a slowly improving economy. Some markets, such as south Florida and Atlanta, have turned a corner, allowing companies like SunTrust Banks (STI) to record strong loan growth without cutting pricing too much.

First Horizon

The Memphis, Tenn., company is counting on new markets and expanded specialty lending to reverse a trend of shrinking revenue. Management, which opened a Charleston, S.C., branch in the fourth quarter, is considering other markets, D. Bryan Jordan, First Horizon's chairman and chief executive, said during Friday's call. He did not identify specific markets.

About 70% of First Horizon's loan book is in Tennessee, where it gained the top deposit share last year, executives said. The company's size in the state makes it tough to grow there. Executives see its greatest opportunities in mid-Atlantic markets, such as the North Carolina cities of Winston-Salem and Greensboro, where it has operated for about a decade.

The $23.8 billion-asset company wants to expand in specialty lines of business, such as healthcare, "where we're not particularly large today but are growing very nicely," and asset-based lending, Jordan said. Management also needs to gain more business with existing Tennessee customers by providing services such as wealth management.

"We think in regions... where we have a very small toehold, we have a continued ability to pick up additional market share," Jordan said. "I think, in the outside markets [and] in the specialty businesses, we can grow a little bit faster because of just the dynamics and where we're positioned."

First Horizon also hopes it will eventually benefit from established relationships once line utilization rebounds, said Losch, who called it a way to "grow balances at very minimal cost" to the company.

Commercial-and-industrial loans fell 2% from the third quarter and 8% from a year earlier, to $7.7 billion, though the decline was mostly due to warehouse lending, which fell 21% from the end of 2012 as refinancing activity slowed. The company reported a 6% rise in asset-based lending from a year earlier.

The overall quarter was noisy. Earnings rose 21% from a year earlier, to $49 million, though it featured a $37 million benefit for income taxes. The company also set aside $30 million for litigation tied to a mortgage business it sold in 2008. Revenue fell 8% from a year earlier, to $292.2 million, partially because of a run-off in the company's non-strategic loan book.


While some banks are looking to make more commercial loans by entering new markets or targeting niches, the $65.2 billion-assert Comerica remains largely focused on existing markets.

The Dallas company operates primarily in three states – Texas, Michigan and California — and it largely targets middle-market firms in areas such as energy, technology and automotive. Its conservative approach has sometimes frustrated investors who have hoped for more robust loan growth, but changing course in response to economic conditions or competition has never really been Comerica's style.

"We have a very strong culture of credit discipline in this company, and when that culture is so ingrained we focus on maintaining it through the cycles," Chief Financial Officer Karen Parkhill says. That discipline, she adds, "is one of the reasons why you see our net chargeoffs through the cycle among the lowest of our peer groups."

Still, after several quarters of flat or very modest loan growth, Comerica is starting to see meaningful improvement in loan demand, especially from its middle-market customers. Middle-market loans rose by roughly 2% from the third quarter and almost 4% from a year earlier, to $24.8 billion. Demand is particularly strong from automobile dealers that need to replenish inventory at a time when car sales are soaring.

Loans outstanding in its national dealer services business rose 8% from the third quarter and 15% from a year earlier, to $5.3 billion. That growth, combined with modest growth in other middle-market sectors, has helped Comerica offset a slowdown in corporate banking and a steep drop in warehouse lending.

Comerica expects increased demand for loans to carry over into 2014. In a conference call Friday, Chairman and CEO Ralph Babb, said total loan commitments at Dec. 31 were at their highest levels in four years, at $716 million. At a time when some other banks are seeing line utilization at or near all-time lows, Comerica said its utilization rate rose to 46.9% in the fourth quarter, up from 45.6% three months earlier.

"As the economy picks up, it will be a positive for all of our lines of business across all of our markets," Babb said.


The Atlanta company's executives discussed cost-cutting for most of Friday's conference call, but they didn't fail mention a surge in loan demand. They singled out C&I loans and nonguaranteed residential mortgages as areas of strength that should continue this year.

Commercial real estate proved particularly exciting to Chairman and Chief Executive Bill Rogers.

"We've sort of turned that inflection point in [CRE] where now we are really starting to see core growth," Rogers said during the call. "It is very diverse. It's sort of from our REIT investments, it's from the things we do in geography and multifamily, retail, office and industrial."

Total loans rose 3% from the third quarter and 5% from a year earlier, to $127.9 billion. C&I loans increased 7% to $58 billion over that time; nonguaranteed residential mortgages rose 4%, to $24.4 billion.

Commercial lending received some help from nonprofit and government borrowers, said Aleem Gillani, the $175 billion-asset company's chief financial officer.

"Loan growth was solid this quarter as the investments we made in many of our businesses continue to bear fruit and the economic indicators in our markets continue to improve," Gillani said.

Analysts seemed pleased by the yields for the commercial loans. Yields typically decline dramatically on strong loan growth.

SunTrust, in particular, is benefiting from an economic rebound in south Florida, one of its biggest markets, and a more-modest pick up in Atlanta and the Carolinas, says Chris Marinac, an analyst at FIG Partners.

"You'd think there would have been a noticeable drop in yield [in C&I lending], but there wasn't," Marinac says. "That's an encouraging sign that they had some pricing discipline."

Yields on the average balance of total loans fell 3 basis points from a year earlier, to 3.77%. The net interest margin compressed by 16 basis points from a year earlier, to 3.2%. A prolonged environment of historically low short-term interest rates has continued to suppress loan yields, Gillani said.

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