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First Niagara's profits soar 59%

First Niagara Financial Group said Thursday that fourth-quarter profits soared 59 percent from a year ago on sharply higher revenues and stable credit.

Earnings were also helped by significant growth in its newer Pennsylvania markets, which it entered through two acquisitions.

It also raised its dividend for the second time in as many quarters, adding a penny to increase it to 16 cents per share.

The Buffalo-based parent of First Niagara Bank reported net income of $45.9 million, or 22 cents per share, up from $28.9 million, or 16 cents per share, in the same period a year ago. That included merger-related expenses of $3.8 million and $2.4 million, respectively.

Not including those factors, net operating income also rose 59 percent to $49.7 million, or 24 cents per share, from $31.3 million, or 17 cents per share, a year ago. That beat the Wall Street estimate by a penny per share.

Executives touted internal loan growth in each of the bank's markets and business lines, growth in customers and average core deposits, and success in taking market share in upstate New York while exceeding its own expectations in Pennsylvania. Credit quality also remains strong, with low levels of losses and bad debts.

"The fourth quarter topped off what's simply been a terrific year for us, with another record financial performance," President and CEO John R. Koelmel said on a call with analysts.

"We were able to readily see the power of the growth model that we've built, and it's on full display. With every quarter, the underlying strength of our franchise becomes more apparent."

The new dividend will be paid Feb. 22 to shareholders of record on Feb. 8. In addition, the company is well-capitalized even by new international regulatory standards, with more than $500 million in excess capital and enough flexibility to maintain its growth. And Koelmel said the earnings can support an even higher dividend, but he didn't promise anything.

"The state of our union is very, very good. I'd put it in the excellent bucket," he said.

He also said the bank hopes to restart stock buybacks by the end of April, after it buys New-Alliance Bancshares of New Haven, Conn. First Niagara is on track to complete that pending $1.5 billion purchase, which will add 88 branches in Connecticut and Massachusetts. The deal, approved overwhelmingly by shareholders in December, is slated to close in April.

"We're anxious and excited to get started," Koelmel said. "We've pitched our tent now, stretching it further east. With the benefit of that transaction, we've established ourselves as a strong regional player."

And he reiterated that it's prepared for more, noting that merger activity is already picking up in the industry. "We remain poised to be strategic and opportunistic in building out our footprint," Koelmel said. "The organization is as hungry as ever, and we're continuing to keep the pedal to the metal."

Koelmel acknowledged that neither of its two Pennsylvania franchises are perfectly situated with the ideal branch locations. The 57 Western Pennsylvania branches were artificially cobbled together for sale by PNC Financial Services Group under a government antitrust directive, while Harleysville Financial Corp. in Eastern Pennsylvania had been struggling.

So officials plan to review the bank's Pennsylvania branch network to close or consolidate underperforming branches and "right-size" the operation, as well as get out of business lines or products that aren't meeting expectations. Koelmel said officials plan to complete that effort by the end of June.

Koelmel said it won't need to make such changes with New-Alliance, which has outperformed Wall Street expectations for the past two quarters. It just reported a record $19.7 million in quarterly profits.

Total revenues rose 21 percent annualized from the third quarter, to $221.7 million, while average commercial loans grew 18 percent annualized to $6.7 billion, and average core deposits rose 5 percent annualized to $9.8 billion. Home equity loans grew 12 percent annualized to $1.5 billion, but mortgages fell despite "healthy" originations, as the bank sells those loans.

Annualized means one quarter's pace multiplied by four.

By region, business loans grew 25 percent to $1.27 billion from a year ago in upstate New York, 69 percent to $747 million in Western Pennsylvania and 7 percent to $381 million in Eastern Pennsylvania.

Net interest income from taking deposits and making loans rose 48 percent from a year ago to $167.5 million, as loan growth offset a lower profit margin. The bank set aside $13.5 million for losses, up 23 percent.

Fee and other income rose 52 percent to $54 million and was up 9.3 percent from the third quarter, as the bank increasingly emphasizes fee-based services and cross-selling of products.

Expenses rose 47 percent to $139.3 million because of the bank's growth but were also up 5.1 percent from the third quarter because of professional fees, deposit insurance premiums and occupancy costs, offset by lower employee costs. Without merger-related costs, expenses rose just 2 percent from the third quarter, to $133.4 million.

For the year, First Niagara earned $140.4 million, or 70 cents per share, up 77 percent from $79.4 million, or 46 cents per share, in 2009. Not counting one-time items, operating earnings rose 65 percent to $174.1 million, or 87 cents per share, from $105.6 million, or 72 cents per share.