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Local banks to use funds from federal bailout First Niagara and KeyCorp plan futures

First Niagara Financial Group and KeyCorp said they hope to use additional capital from the Treasury Department to expand their lending and grow through acquisitions, as the federal government uses taxpayer money to stimulate the economy.

The two banks on Monday said they were named among a handful of healthy banks nationwide approved to receive capital investments under the Treausry Department's new program to buy stock in banks.

First Niagara said the government approved it to receive up to $186 million, while KeyCorp will get $2.5 billion through participation in the voluntary Capital Purchase Program.

Both banks have raised cash on their own in recent months and are already well-capitalized by regulatory standards, so they didn't need the money.

Key raised $1.74 billion in common and preferred stock in June, using the money to boost loan loss reserves and divert money to its core businesses. First Niagara raised $108 million early this month.

However, the investments will bolster both banks' balance sheets, enabling them to grow their business both by making more loans and by acquiring other banks or branches.

"It's really taking what is a strong institution and making it stronger," said SterlingKozlowski, Western New York district president for Cleveland-based KeyCorp, the third-largest bank locally and one of the nation's 20 largest institutions. "Anytime you can increase your capital base, you can increase the lending that you do."

The program calls for the government to receive senior preferred shares plus warrants to buy common stock in an amount equal to 15 percent of the preferred investment. The shares will carry a 5 percent annual dividend for the first five years and 9 percent afterwards.

There are no restrictions on use of the money, though Treasury officials hope banks won't horde it.

"We're going to continue to invest in our franchise and our business and take advantage of what we think is an incremental opportunity across our marketplace to grow organically," said First Niagara CEO John R. Koelmel. "It's also a unique opportunity to bolster our capital level in anticipation of acquisitions."

The government has given the go-ahead for stronger banks to use the money it receives in the rescue program to acquire weaker banks, prompting critics to say the government should not be financing the consolidation of the banking system.

But officials said the administration's major aim is to stabilize the financial system and that stronger institutions will be in a better position to make loans and support the economy.

Koelmel said First Niagara was focused on growing through loans and investments in its existing markets, including possibly building new branches to fill in gaps in its footprint. But the bank could now also "explore acquisition opportunities that I'm confident will surface," including outside its market.

"It enables us to look at acquisitions in a little different way, potentially play at a little higher level a little sooner than we might have anticipated," he said. "It gives us greater capacity and firepower to do that."

M&T Bank Corp. has not signed on, but officials are reviewing the program's terms and analyzing several factors, including whether it would be at a disadvantage if it doesn't participate.

"We continue to examine the program and determine how it would benefit a healthy bank like M&T," said spokesman C. Michael Zabel.

The two banks are in good company, part of a list of at least 18 banks that were chosen by Treasury officials for the second round of investments under the Troubled Asset Relief Program, or TARP, which was authorized by the $700 billion bailout package passed Oct. 3. About $35 billion in government investment was awarded to both large and small companies.

The government unveiled the Capital Purchase Program earlier this month to restore confidence and liquidity to the banking system, and to restart the stalled flow of credit. The program uses the first $250 billion from the $700 billion bailout bill, with $125 billion already allocated to the nation's nine largest banks.

That money will start flowing this week, after the government signed agreements with the nine major banks Sunday night. Assistant Treasury Secretary David Nason told the Associated Press that the government will make the necessary purchases this week.

The bailout plan is also aimed at clearing banks' balance sheets of bad assets. That effort has yet to begin although the administration expects to use $100 billion to purchase bad assets in coming months.

The government is still taking and reviewing additional applications from other banks, who have until Nov. 14 to apply to participate. If approved, they then have 30 days in which to submit investment agreements.


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