First Niagara Grows Into a Regional Bank

| About: First Niagara (FNFG)

I took notice of First Niagara Financial Group (NASDAQ:FNFG) in the second half of last year, liked what I saw, did my due diligence and initiated a position in January of this year. I felt that FNFG was going to become a regional bank and would no longer be just the home-town bank it was a few short years ago.

What had first piqued my interest was that in the first half of 2010, FNFG had acquired Pennsylvania-based Harleysville National Bank for $237 million, after Harleysville failed to meet capital requirements of federal regulators. That acquisition provided FNFG with $5.6 billion in assets, $3.6 billion in loans and $4.1 billion in deposits along with 83 bank branches across nine eastern Pennsylvania counties. After the deal was completed, FNFG ended up with 140 branches in Pennsylvania.

FNFG did not let me down. In the first part of this year, FNFG acquired NewAlliance Bancshares for cash and FNFG stock valued at $1.5 billion. NewAlliance had 88 branches and $8.7 billion in assets. FNFG had become a retail and commercial bank providing financial services through some 346 branches in upstate New York, Pennsylvania, Connecticut, and Massachusetts with $30 billion in assets, $18 billion in deposits, and some 3,900 employees. FNFG had grown into a regional bank with just two major acquisitions.

I looked at earnings and saw that it earned 70¢/share for 2010, up from the depressed 46¢ posted in 2009, caused in no small part by the recession. Consensus estimates from the 11 analysts following FNFG are looking for $1.02/share for all of 2011 and $1.15 for 2012. Book value right now is slightly higher than $14/share, and at this writing, the price is $11.92/share. Share prices are very close to the 52-week low of $11.23 posted on August 31, 2010, and only about $4 below the 52-week high of $15.10 hit back on February 16, 2011.
On August 1, 2011, FNFG and HSBC Holdings Plc (HSC.A), which is Europe’s largest bank by market value, struck a deal whereby HSC.A agreed to sell its upstate New York and Connecticut-based 195 branch network to FNFG for some $1 billion. The price amounts to a 6.7% premium for the $15 billion of deposits.
The deal helps FNFG expand in markets surrounding its home city of Buffalo, New York. This transaction could very well help FNFG surpass M&T Bank Corp. (NYSE:MTB) as the lender with the most branches in the Buffalo area.
According to the FDIC, M&T had 60 branches in the Buffalo region as of June 30, 2010, compared with 58 for HSBC and 35 for FNFG. On initial news of the deal, FNFG fell 51¢, or 4.2% to $11.74 at 10:14 AM in Nasdaq trading and finished the day down just 3%. So for a projected 17% to 18% dilution of common equity, FNFG shares dropped only 3%. FNFG will raise some $750-800 million from a common stock offering and $350-400 million in additional debt. With the $1 billion thus raised, FNFG will have acquired the 195 branches and increase its balance sheet by roughly $15 billion. The deal is expected to be completed early next year. This should give FNFG some 20% deposit market share in and around the Buffalo area.
CEO John Koelmel said that following a review by the Department of Justice, he expected FNFG to close or sell roughly 100 branches. After disposing of those branches, FNFG estimates it will retain $11 billion in deposits and $2 billion in loans, and change FNFG’s funding mix more toward lower-cost commercial deposits.
Dividends now stand at 16¢/Q, up from the 5¢/Q paid in 2003 and is yielding a generous 5.2%. There were no dividend increases during the 2008-09 recession years. The 17-18% share dilution may cause the annual dividend to be reduced by a like amount to around 52¢, which would mean FNFG would be still yielding over 4%. It is a good thing to be paid while you wait.
Also, according to J3 Information Services, three directors purchased over 3,000 shares during this past July. And in the past 12 months directors made over 28 buys acquiring over 22,000 shares with none selling, a very bullish sign. I found two funds holding 12.4% of the 303.2 million outstanding shares, while officers and directors own just under 1%.
Disclosure: I am long FNFG.

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