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PROFITS SOAR 43 PERCENT AT FIRST NIAGARA <br> LOCKPORT BANK EARNED $13.3 MILLION

Profits at First Niagara Financial Corp. soared 43 percent in the third quarter, as the company grew loans to businesses and benefited from its purchase in January of Troy Financial Corp.

The Lockport-based thrift reported earnings of $13.3 million, or 17 cents per share, up from $9.3 million, or 14 cents per share a year ago. That beat Wall Street expectations by a penny as measured by Thomson First Call. The thrift's shares closed at $13.60, up 3.5 cents for the day.

"They pretty much hit the mark," said Kevin Timmons, bank analyst at C.L. King & Associates in Albany, who doesn't own the stock but rates it "accumulate." "Things were running pretty much as expected."

Much of the thrift's gains in the quarter stemmed from the acquisition of Troy, which gave First Niagara its first foothold in the Capital District around Albany, with 21 branches.

The company is now preparing to complete its second major acquisition in a year, spending $600 million to buy Hudson River Bancorp to gain the No. 2 market share in the Albany area and the No. 7 share in upstate New York. That deal will give First Niagara a total of 110 branches in 24 counties statewide -- a far cry from the 15 branches in two Western New York counties it had before selling shares to the public in 1998.

Shareholders of both companies approved the deal last month, and regulators will review it in the fourth quarter. If they approve, it will close in mid-January, with computer systems and accounts converting during Martin Luther King Jr. weekend, said president and chief executive Paul Kolkmeyer.

The company expects to incur most integration costs in the fourth quarter and the first quarter of next year, while most savings will be in place by March. "Everything's moving as anticipated and we've got everyone geared up for our closing in January," Kolkmeyer said.

The company is also finalizing its "strategic blueprint for the future," details of which have not been released. The plan will be phased in over the next 15 months and some features "will begin to hit on all cylinders" in the first quarter, but most of the impact will happen later in 2005, Kolkmeyer said.

The plan will focus on growth, not cost-cutting. "We're in a growth mode. We want to continue to expand," said spokeswoman Leslie Garrity. "Cutting jobs is not the focus or goal of our strategic blueprint."

Besides its purchases of banks, insurance agencies and leasing firms -- it bought Adirondack Leasing in the Albany area during the quarter -- First Niagara plans to open five to six new branches a year, particularly in the Rochester and Buffalo markets, until it gains critical mass.

Net interest income from taking deposits and making loans rose 46 percent from a year ago to $39.6 million. It was up just 1.8 percent from the second quarter, which is more comparable because it included Troy.

The gains stemmed from efforts to add higher-yielding commercial loans and lower-cost checking and savings deposits, while reducing high-cost certificates of deposit. Its profit margin on lending rose slightly for the sixth straight quarter, an unusual feat when rising rates are pressuring many banks.

Total loans of $3.2 billion rose 39 percent from a year ago, but just 1.8 percent from the second quarter. A falloff in mortgages and consumer loans was offset by overall commercial loan growth, which is on pace to exceed 15 percent for the year.

Total deposits increased 43 percent from a year ago, but were nearly flat with June 30 at $3.3 billion, in part because of slack growth in the deposit market overall, officials said.

The thrift gained $18.5 million in checking and savings accounts and $11.2 million from buying a branch in Pittsford. But efforts to control rates on deposits led to the runoff of $19.3 million in CDs. Escrow balances fell by $10.5 million as mortgage customers paid taxes.

Insurance and money management revenue dropped, but banking services fees rose 7.3 percent to $5.3 million because of expansion. Fee income is one-fourth of total revenues.

Operating expenses rose 1.8 percent to $88.8 million, driven by higher professional services costs, while marketing and advertising costs fell. Bad loans were low, but rose because of a $700,000 real estate loan to an educational institution and three leases to a Rochester business for $795,000.

e-mail: jepstein@buffnews.com

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