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First Niagara's profits edge up

First Niagara Financial Group's third-quarter profits grew by 3 percent as lower interest rates paid on deposits helped offset a 33 percent jump in its write-offs of bad loans, the bank said Wednesday.

First Niagara's profits improved to $23.7 million, or 22 cents per share, from $21.1 million, or 21 cents per share, a year earlier. The earnings matched analyst forecasts.

John R. Koelmel, First Niagara's president and chief executive officer, called the improved earnings "a performance that is especially noteworthy in light of the highly stressed environment" that is leading to a wave of bank failures and big losses nationwide.

"These are some very interesting and challenging times," Koelmel said. "The good news is they have not been a deterrent."

The Lockport-based banking company's profits improved because of a wider spread between the interest it pays on deposits and the interest it charges on loans. That spread widened mainly because First Niagara sharply reduced its higher-yielding certificate of deposit balances and increased its deposits that pay no interest.

Average yields on the bank's CDs dropped by six basis points to less than 3 percent during the quarter, causing about 30 percent of those customers to move their money once their CDs matured, said Michael Harrington, First Niagara's chief financial officer.

"The hot money that sloshes around in the system, we opted to let that run off to another place," he said.

As a result, the bank's net interest income grew by 26 percent from a year ago to $70.2 million.

First Niagara's lending operations also remained active, with the company's loan portfolio growing by 7 percent, although that pace has slowed from the double-digit increases of previous quarters.

The bank's provisions for credit losses rose by a third to $6.5 million during the quarter, from $4.9 million at the end of June. A total of 0.7 percent of the bank's loans were classified as non-performing at the end of the quarter, up from 0.53 percent at the end of the second quarter.

Three commercial loans, including two from an Atlanta customer inherited from the Great Lakes Bancorp acquisition earlier this year, account for 90 percent of the rise in non-performing loans.

Still, First Niagara's troubled loans are a relatively small part of its overall portfolio, and Koelmel said the relative stability of the upstate New York economy is helping to mute the impact from the financial crisis that is roiling the nation's banking and financial markets.

Koelmel repeated his forecast that First Niagara's fourth-quarter profits will be around 85 cents per share, although the additional shares issued through the company's recent stock offering will dilute those earnings to around 83 cents per share.

First Niagara stock fell 38 cents Wednesday, or 3 percent, to close at $13.76.


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