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First Niagara Makes CEO Change, Shifts Away From Deals

03/20/2013 | 01:19pm US/Eastern
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--First Niagara CEO Koelmel's departure leaves company seeking replacement who can increase

--Company has named Chief Administrative and Operations Officer Gary Crosby as interim CEO

--Analysts and investors applauded the executive change

(Adds details on December 2011 common-stock offering in the 11th paragraph.)

   By Matthias Rieker 
 

First Niagara Financial Group Inc. (>> First Niagara Financial Group Inc.) is searching for a new chief executive who will increase growth at the Buffalo, N.Y., bank with few acquisitions.

The move came after an ill-timed deal-driven strategy weighed on bank's share prices and, according to analysts, ultimately led to the departure of Chief Executive John Koelmel.

Analysts and investors applauded the executive change, with First Niagara's stock rising more than 4% Wednesday in early-afternoon trade, to $8.79.

The shares, however, are down 42% since Feb. 18, 2011, when they closed at $15.06, their highest closing price since the 2008 financial crisis. First Niagara also wasn't part of the recent rally in bank stocks: The benchmark KBW Bank index, of which First Niagara's stock is a component, has climbed almost 30% during that same period.

The bank said late Tuesday that its board and Mr. Koelmel, 60 years old and chief executive since 2006, "mutually agreed" that he would step down. Chief Administrative and Operations Officer Gary Crosby, 59, was appointed interim chief executive. A search for a permanent chief executive is under way, the bank said.

Citigroup Global Markets analyst Josh Levin noted, "The company under Koelmel pursued growth for the sake of growth and this was not always consistent with shareholder value creation."

On Tuesday, First Niagara Chairman Thomas Bowers said in a statement the board is focused "on enhancing shareholder value through continuing organic growth and the efficient operation of the business we have today."

First Niagara "has built a formidable Northeast franchise from what was a sleepy mutual thrift in Upstate New York, and Mr. Koelmel was a driving force behind that evolution," Sandler O'Neill + Partners LP analyst Joseph Fenech said. "But at the end of the day, senior management is ultimately judged on stock price performance, and from that standpoint, we can't say we're all that surprised by yesterday's announcement."

A spokesman for First Niagara declined to make Mr. Bowers available for an interview and wouldn't comment on the analysts' reports.

First Niagara has grown aggressively to become a regional banking presence in upstate New York, Connecticut and parts of Pennsylvania, but the expansion hit a snag when it agreed to buy the upstate New York retail branch network of HSBC Holdings PLC (HBC, HSBA.LN, 0005.HK). In May 2012, First Niagara closed the purchase of 195 upstate New York and Connecticut HSBC branches for $1 billion.

In December 2011, several months after it unveiled the HSBC deal, First Niagara raised $450 million through a common-stock offering, diluting existing shareholders, while slashing its quarterly dividend to eight cents per share from 16 cents.

To appease antitrust regulatory concerns, First Niagara last year sold 37 HSBC branches to KeyCorp (>> KeyCorp) for about $95 million. The bank also sold eight branches to Financial Institutions Inc. (>> Financial Institutions, Inc.) for $11.8 million, and 19 branches to Community Bank System Inc. (>> Community Bank System, Inc.) for $26.9 million. The latter two transactions included HSBC and First Niagara branches.

First Niagara reiterated in its annual earnings filing with the Securities and Exchange Commission last month that the HSBC acquisition was "a unique opportunity to acquire low cost deposits and valuable customer relationships," and that the deal "will result in earnings growth and strengthen our franchise."

Last year, First Niagara's profit fell 3.2%, to $168 million, from 2011 and the bank's net interest margin--the profit margin from lending and investing--fell 16 basis points, to 3.42%.

Loans rose 20% last year from 2011, but are virtually flat since the acquisition of the HSBC branch network, at $19.7 billion. The bank's Tier 1 common capital as a percentage of risk-weighted assets, a key measure of a bank's health, fell to 7.45% on Dec. 31, 2012, from 13.25% a year earlier.

Evercore Partners analyst John Pancari said he is concerned about the bank's weakening loan growth and rising delinquencies, among other issues, and said the HSBC deal was "poorly executed." He downgraded the stock in January to "underweight" from "equal-weight."

Those concerns "are all longer-term in nature, and accordingly will likely take time to remedy," Mr. Pancari said in a research note Wednesday. "The CEO change and implied new direction could drive positive restructuring and improved performance over time."

Write to Matthias Rieker at matthias.rieker@dowjones.com

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