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January 26, 2012updated 04 Apr 2017 1:06pm

The rise and rise of First Niagara

First Niagara has become one of the largest regional banks in the New York region following an aggressive buying spree, making nearly one acquisition every year for the past decade. It is now a top 50 US bank, having snapped up half of HSBCs underperforming US retail network. Charles Davis reports. One of the fastest-growing retail banks in the United States was a thrift holding company less than two years ago. Buffalo, New York-based First Niagara Financial Group gained approval from the Federal Reserve Board in 2010 to switch its classification from a third charter to a bank holding company charter, and accelerated an aggressive series of acquisitions that continues to this day. Early in 2011, First Niagara finalised the acquisition of Connecticut-based NewAlliance Bancshares, pushing into the ranks of the top 50 banks in the country and giving it a total of 333 branches in New York, Pennsylvania, Connecticut and Massachusetts and assets of more than $31bn

By Charles Davis

First Niagara has become one of the largest regional banks in the New York region following an aggressive buying spree, making nearly one acquisition every year for the past decade. It is now a top 50 US bank, having snapped up half of HSBC’s underperforming US retail network. Charles Davis reports.

 

Bar chart showing the market shares of banks in Upstate New York, 2011One of the fastest-growing retail banks in the United States was a thrift holding company less than two years ago.

Buffalo, New York-based First Niagara Financial Group gained approval from the Federal Reserve Board in 2010 to switch its classification from a third charter to a bank holding company charter, and accelerated an aggressive series of acquisitions that continues to this day.

Early in 2011, First Niagara finalised the acquisition of Connecticut-based NewAlliance Bancshares, pushing into the ranks of the top 50 banks in the country and giving it a total of 333 branches in New York, Pennsylvania, Connecticut and Massachusetts and assets of more than $31bn.

First Niagara, which also bought Pennsylvania-based Harleysville National in April of 2010, has acquired three insurance subsidiaries in the past two years as well.

The jewel in First Niagara’s crown, however, is its 2011 deal to buy 195 HSBC Bank USA branches across New York State and in Connecticut. First Niagara beat off much larger rivals for one of the region’s premier businesses – the former Marine Midland Bank – as HSBC shrinks its retail banking footprint. First Niagara reportedly beat out cross-town rival M&T Bank Corp. and Cleveland-based KeyCorp to win the bidding war.

The federal government held up the $1bn deal over antitrust concerns, but First Niagara broke the stalemate in November by agreeing to sell 26 of the HSBC branches and divest another 14 of its own branches to satisfy US Department of Justice issues. All 26 branches are located in Western New York in Erie, Niagara and Orleans counties.

In January, First Niagara announced the sale of 37 of the HSBC branches in the Buffalo and Rochester area to Cleveland, Ohio-based KeyCorp for nearly $110m, based on current deposit balances. With about 30% of First Niagara’s and HSBC’s branches within a mile of each other, the bank could save substantially through closures while consolidating its retail presence in more remote locations.

To swallow the HSBC deal, First Niagara Financial Group also plans to raise $1.1bn in new capital by selling common stock, preferred shares and debt, while also cutting its dividend in half. The bank said it would offer $450m in common stock. The bank will also grant the underwriters a 30-day option to buy up to $33.75m in additional shares to meet extra demand.

Additionally, the bank said its board of directors will slash the quarterly cash dividend in half in the first quarter, to 8 cents per share, to save about $110m next year. The weak stock market has made financing difficult, and the drawdown for the HSBC has been set at four to five years, raising analysts’ eyebrows.

It is a tough financial climb, but the kind of deal that has marked First Niagara’s stunning growth from a mid-sized, one-state presence to a regional player of import.

The HSBC deal will nearly double First Niagara’s branch presence across the state of New York, vaulting it into a leading or top position in every major market north of New York City and giving it more than 22% of deposits across the region’s four major metropolitan areas.

It bolsters its presence in markets like Rochester, Syracuse and Binghamton, while boosting it in Buffalo and Albany.

It is not without risk, given the volatility of the economy, but there certainly are benefits to growing for a bank in First Niagara’s market. It should be able to generate greater loan earnings by lowering its borrowing costs, and its larger deposit base will significantly lower its funding costs and boost its net interest margin.

“This transaction is a strategic home run for us,” said Gregory Norwood, First Niagara’s CFO, in a call with analysts upon closing the deal.

“This is our own backyard where we have extensive experience … The pricing is very attractive, given the significant value over the long term.”

The deal includes HSBC’s small business banking, retail brokerage and upstate credit card business, but HSBC retained its commercial banking, corporate and investment banking or private banking businesses in upstate New York.

First Niagara said the deal would vault it to first place from fifth in deposit share in upstate New York, while collecting some $11bn of cheap deposits, 650,000 new customers and one million new deposit accounts overall.

It levels the competitive playing field with its Buffalo rival M&T Bank Corp., another bank that has emerged as a Northeastern powerhouse during the downturn through a series of acquisitions.

After the deal closes and the divestitures are complete, First Niagara expects to have about $38bn in assets, $30bn in deposits, $9bn in assets under management and an impressive 450 branches across upstate New York, Pennsylvania, Connecticut and Massachusetts.

Its upstate branches will each have an average of $80m in deposits. And it expects to employ 6,500 overall, including 4,000 in New York, up from 2,600 today.

That’s an amazing growth story for an institution that a dozen years ago was the tiny Lockport Savings Bank in rural Niagara County, New York.

It is those small-town banking values that put First Niagara into position to capitalise on the errors of the bigger banks. First Niagara sat out the credit crisis and the subprime mortgage debacle, so it was well positioned when the dominoes began to fall and players like HSBC had no choice but to retrench.

Its upstate New York footprint weathered the recession better than most of the rest of the country, setting the stage for First Niagara’s emergence.

With the HSBC deal mostly behind it now, the bank can focus its energies on integrating its two latest acquisitions and enjoying its sudden trajectory.

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