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First Niagara zeroes in on resolving ‘process issue’

First Niagara Financial Group isn’t yet ready to share details of a “process issue” the bank reported a few months ago with some of its deposit accounts. But the Buffalo-based bank has reduced the amount of money set aside to handle the matter, and says it has a plan to address it.

The bank also said it ended up cutting 240 jobs across its four-state territory as part of a plan to simplify its organization that was disclosed last year.

Those details emerged Friday with the release of First Niagara’s fourth-quarter results. The bank’s net income was $77.6 million, virtually unchanged from $77.7 million a year ago. The bank recorded earnings per diluted share of 20 cents, the same as in the fourth quarter of 2013. Excluding one-time items, First Niagara had operating earnings per share of 17 cents, and beat analysts’ expectations of 16 cents.

The bank’s net interest income from making loans and taking deposits was $269.8 million, down 3.7 percent from a year ago. Its non-interest income from sources such as fees was $77.2 million, down 13.5 percent from a year ago.

Overall, the picture was far better than the third quarter, when the bank took an $800 million accounting write-down on the value of its prior deals. The bank subsequently increased the size of the write-down to $1.1 billion.

For all of 2014, First Niagara reported a net loss of $712 million, driven down by its accounting write-down in the third quarter, from a net income of $296 million in 2013. The bank had a full-year net loss of $2.12 per share, compared to 2013 net income of 75 cents per share.

Separately, First Niagara during the third quarter revealed it may have to pay up to $45 million in restitution to deal with an unspecified “process issue.” But after using an outside firm to review transactions going back to spring 2012, First Niagara has lowered the reserve recorded in its third quarter by $23 million.

First Niagara has emphasized that the problem was not related to any of its recent acquisitions, information security, or data breaches. But Gary Crosby, the bank’s president and chief executive officer, declined to explain the problem publicly yet.

The bank has submitted its “remediation plan” to its federal regulators, he said. “We feel really good about it. Now it’s a matter of us internally gearing up to execute on that remediation plan. It’s going to take a little while to gear up. Once we’re ready to pull the trigger, we will disclose more about the issue.”

An outside firm specializing in data mining went through 400 files of First Niagara data and merged them, and examined at least 1.5 billion transactions going back to April 2012, when the bank said the problem began. All told, there were 2.2 billion pieces of data in that repository, Crosby said.

Based on the firm’s findings, First Niagara decided it could lower the amount set aside for the issue and created a remediation plan that it shared with the Office of Comptroller of Currency, the Federal Reserve,and the Consumer Financial Protection Bureau.

Meanwhile, Crosby said the bank has finished making 240 job cuts that were aimed at simplifying its organization. The cuts added up to 3 to 4 percent of First Niagara’s work force of 5,800 people; the number of cuts in Western New York was not disclosed.

Last year was the first year of the bank’s three- to four-year “strategic investment plan” under which it will spend a total of $200 million to $250 million. In 2014, First Niagara spent $58 million in cash on the plan, and expects to spend $70 million this year.

Crosby said the bank had accelerated certain projects last year under its investment plan that will generate an incremental $20 million in revenue this year.

First Niagara last year completed 25 projects under its investment plan, including improvements in its mobile and online banking services. This year, the bank plans to improve its treasury management products and its business online banking.

Crosby said he was pleased with the results of the investment plan thus far, “especially given the reaction last year when (Wall) Street was expecting me to announce a big expense reduction initiative, and instead I said just the opposite, we’re going to be investing for the long term in our business.”

First Niagara’s stock has been trading at about $8 per share. Some analysts have wondered whether the bank could become an acquisition target, given an uptick in mergers and First Niagara’s struggles to capitalize on its acquisitions of recent years. Crosby reiterated the bank’s board is focused on staying independent.

“One thing that’s always held true: you can’t run your bank and try to sell your bank at the same time,” Crosby said. “We’re focused on running our bank. That’s what the board is focused on right now. However, the board has been very mindful of this, they have fiduciary responsibility to always consider strategic alternatives in order to maximize shareholder value.”

email: mglynn@buffnews.com