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Profits soar 55% at First Niagara; Credit quality also improved

First Niagara Financial Group, fresh off completing its third major purchase in two years, said first-quarter profits soared 55 percent, as its acquisitions paid off in higher revenues, commercial lending and market share, while credit quality improved.

The Buffalo-based parent of First Niagara Bank reported net income of $44.9 million, or 22 cents per share, up from $28.9 million, or 16 cents per share. Profits actually fell by 2.2 percent from the fourth quarter, when the bank earned $45.9 million, although per-share results were flat at 22 cents.

Those results included one-time merger-related costs. Without them, the bank earned $49.8 million, or 24 cents per share, up 53 percent from $32.6 million, or 18 cents per share, in the first quarter of 2010. That matched Wall Street expectations of 24 cents per share.

Results were flat from $49.7 million, or 24 cents per share, in the fourth quarter.

"The company looks to have reported a solid, in-line quarter, due primarily to better-than-expected [revenue] growth, which bucks the trend we've seen from most other regional banks so far this reporting season," analyst Joseph Fenech of Sandler O'Neill & Partners LP wrote in a research report.

Compared with the fourth quarter, revenues grew at a 6 percent annualized pace to $224.9 million. Annualized means one quarter's pace multiplied by four. Commercial loans grew 18 percent annualized to $7 billion, while total loans grew 11 percent and core deposits grew 1 percent to $9.8 billion.

"We're off to a very good, very nice start to the new year," said First Niagara President and CEO John R. Koelmel. "We delivered another solid and clean quarter that well demonstrates the strength of our franchise. It's clear that we continue to differentiate ourselves."

However, executives also are "focused on how to more effectively run this business over the next nine months and beyond," to maximize performance.

During the conference call, executives disclosed initiatives to "reposition" the bank's branches and back-office operations, while restructuring its real estate holdings to get rid of facilities and properties it doesn't need.

Plans call for closing up to 10 percent of the bank's 345 branches and modifying staff schedules, while changing how the bank delivers back-office services to take advantage of its scale. The bank will incur pretax charges of $18 million and $15 million, respectively, for those two efforts, including contract terminations.

It will also spend $20 million to get out of recently acquired facilities, mostly in eastern Pennsylvania.

Koelmel said the moves are "not a cost-cutting exercise," but "a redeployment initiative," with no layoffs expected. Branch closings are more likely to occur in eastern and western Pennsylvania, rather than in upstate New York, where the bank has already pruned its network in the past.

And he said the bank will have more branches in three years than today. "This isn't about shrinking or laying off," he said.

First Niagara has exploded in growth in the past two years, tripling in size through two major acquisitions in Pennsylvania and one in New England. It bought 57 branches in Western Pennsylvania in September 2009, and then purchased Harleysville National Corp. with 83 branches in suburban Philadelphia in April 2010, gaining significant market share in Pittsburgh and Philadelphia.

Less than a week ago, the bank completed its largest deal, buying NewAlliance Bancshares of New Haven, Conn., to add 88 branches, 200,000 customers and $8.8 billion in assets in Connecticut and Massachusetts. Officials converted the branches and operations over the weekend, and it now has $30 billion in assets and $18 billion in deposits in four states.

For the first quarter, net interest income from taking deposits and making loans rose 51.4 percent to $172.9 million from a year ago, and was up 3.2 percent from $167.5 million in the fourth quarter.

The bank set aside $12.9 million for loan losses, down from $13.1 million a year ago and $13.5 million in the fourth quarter. That easily exceeded actual losses of $8.1 million. Both those losses and bad debts of $80.4 million were down.

Noninterest income rose 41.2 percent to $52.1 million from a year ago, though it was down 3.7 percent from $54.1 million in the fourth quarter.

Operating expenses soared 58.5 percent to $137.9 million from a year ago, prior to the completion of the Harleysville deal, but were up just 3.4 percent from $133.4 million in the fourth quarter. The bank spent heavily to build out its staffing, systems and infrastructure to accommodate its growth strategy, and also bought three insurance agencies in recent months.


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