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Koelmel expects 'rough ride' for banks in next 2 years; Fed's pledge to keep rates low is having 'dramatic impact'

The CEO of First Niagara Financial Group warned Thursday that banks are in for a "rough ride" for the next two years and that investors shouldn't expect bank stocks to rise dramatically, given the Federal Reserve's pledge to hold interest rates low until 2013.

Speaking with investors and Wall Street analysts on a conference call about earnings, John R. Koelmel said the Fed announcement in August had a "dramatic impact" on the banking industry. The news hampered earnings growth significantly and caused bank and other stocks to nose-dive as investors fled.

"Overnight, the landscape changed," he said. "It threw investors in our sector in a tailspin, and they've been running to the hills since then."

The two months since have been a period of turmoil and disruption for capital markets, corporate banking and commercial lending, tightening profit margins and reducing revenues. And the industry faces continuing government and economic "dysfunction."

"August and September was an unprecedented time period for our industry. The entire industry is on a much more slippery slope than three years ago," Koelmel said, comparing it with the depths of the financial crisis in 2008. "Navigating this one will be much trickier. The sector's definitely in for a much bumpier ride for a while."

He reasserted that First Niagara is well-positioned and will continue "playing offense" in order to "drive earnings growth." Even so, he added, the bank will slow down its own spending and speed up efforts to be more efficient.

Buffalo-based First Niagara has been on an acquisition tear in recent years, pushing first into Pennsylvania with two deals and now New England.

It completed its $1.5 billion cash-and-stock purchase of New Haven, Conn.-based NewAlliance Bancshares on April 15, its biggest deal to that point. More recently, it agreed in late July to pay $1 billion in cash to buy 195 branches of HSBC Bank USA across upstate New York and southeastern Connecticut, with $15 billion in deposits, giving it a major boost in market share while linking its own operations in both areas.

As part of that deal, expected to close in the second quarter of next year, First Niagara expects the U.S. Justice Department to require it to sell some branches and deposits in Western New York.

Koelmel said that he still views the deal as "a strategic home run" and that the "buzz across upstate New York" has been "overwhelmingly positive."

First Niagara said Thursday that third-quarter operating profits rose by 57 percent on the backs of its acquisition of NewAlliance, as well as strong internal growth in core deposits and loans in other markets.

The area's No. 3 bank reported operating earnings of $73.6 million, or 25 cents per share, up from $46.9 million, or 23 cents per share, a year ago.

Operating results don't include one-time merger, integration, branch closure and other restructuring charges in both quarters, totaling $16.7 million and $1.3 million, respectively.

Including those, profits rose by 25 percent, to $57 million, from $45.6 million, but per-share profits fell by 14 percent, to 19 cents per share, from 22 cents.

Operating results missed Wall Street expectations by a penny per share. But Koelmel cautioned investors not to read into that, based on the bank's actual performance.

"Look carefully before leaping to that conclusion," he said. "We won't manufacture a penny of earnings just to meet Street estimates."

Net interest income rose by 46 percent from a year ago but fell by 2.3 percent from June, to $235.4 million.

Bank executives touted strong growth through routine business since June 30, citing a 14 percent annualized increase in commercial loans, to $9.6 billion, and a 16 percent annualized increase in low-cost core deposits, to $14.7 billion. Annualized means one quarter's pace multiplied by 4 to calculate a growth rate for the year.

The bank set aside $14.5 million for loan losses and wrote off $8.1 million as uncollectible.

Fee income grew by 39 percent from a year ago and by 10 percent from June, to $68.7 million. Expenses rose by 37 percent from a year ago and by 2 percent from June, to $177 million.


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