Deal to 'Redefine' N.Y.'S First Niagara; Gaining a Beachhead in Pennsylvania and Conserving Capital

By McGeer, Bonnie | American Banker, April 8, 2009 | Go to article overview
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Deal to 'Redefine' N.Y.'S First Niagara; Gaining a Beachhead in Pennsylvania and Conserving Capital


McGeer, Bonnie, American Banker


Byline: Bonnie McGeer

Now this is capitalizing.

Since last fall John Koelmel, the president and chief executive officer of First Niagara Financial Group in Lockport, N.Y., has talked openly about using its $300 million of fresh capital to expand.

On Tuesday the $9.3 billion-asset First Niagara announced a deal to snap up $4.2 billion of deposits and 57 western Pennsylvania branches that had belonged to National City Corp. for a 1.3% deposit premium.

The purchase would "redefine" First Niagara, Koelmel said on a conference call Tuesday. It would take his company into a neighboring state, give it the third-largest deposit share in the Pittsburgh market and increase its branch network by nearly half, to 173.

"There's obviously a lot of uncertainty and anxiety in our business," given the economic challenges, he said. "This very much affirms us as a strong player and a real winner coming out of the current mess."

Koelmel hinted that more deals are likely, saying opportunities are presenting themselves even more rapidly than he expected.

Analysts said the unusual way this branch deal is structured could help in that regard by softening the impact on First Niagara's capital levels and improving its liquidity.

Regulators had required PNC Financial Services Group Inc. of Pittsburgh to divest the branches as a condition of acquiring Nat City in December.

In what some observers interpreted as a sign of few willing buyers, PNC essentially agreed to help finance the transaction.

First Niagara has the option to issue equity and debt to PNC at the deal's closing.

PNC would take either $75 million of First Niagara's common stock or 6.8 million shares - whichever is the lesser amount.

First Niagara also could issue up to $150 million of senior unsecured debt to Nat City, minus the common stock proceeds. The notes would have a 12% coupon and would mature in five years.

PNC would not discuss the deal's financial terms.

When asked on the conference call why First Niagara negotiated the backstop with PNC instead of going to the market, Koelmel called it "an insurance policy" for his company."The market is somewhere between volatile and unpredictable," he said. "We wanted to ensure we had a bit of a safety net."

Damon DelMonte, an analyst at KBW Inc.'s Keefe Bruyette & Woods Inc., said the arrangement would help First Niagara protect its tangible common equity ratio - a measure that investors watch closely to gauge a company's health.

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