Four months ago it looked as if First Niagara Financial Group Inc. in Lockport, N.Y., would spend the better part of 2004 in a consolidation mode.
The $5 billion-asset company had just begun to integrate its biggest acquisition ever, the $1.1 billion-asset Troy Financial Corp. of Troy, N.Y., and it had announced that it would take a breather from mergers and acquisitions and focus on internal growth.
It seemed like a good time for a pause. First Niagara employees were still coping with the shock of the suicide of its charismatic longtime president and chief executive officer, William E. Swan. And the Troy deal (which was announced last Aug. 11 and closed Jan. 16) had diluted the tangible book value of its stock - the company's cash divided by outstanding shares - by 20%. Tangible book value is a key measure of value for many investors
These days, though, there is little talk of breathers or pauses, and 2004 is shaping up as perhaps the busiest year in First Niagara's 134-year history.
The company surprised many analysts and observers April 2 by announcing a deal substantially larger than the one for Troy: an agreement to buy the $2.6 billion-asset Hudson River Bancorp Inc. of Hudson, N.Y. for $620 million of stock and cash - about $19.38 a share.
First Niagara also has revamped its marketing, revved up its branch-building engine and is preparing to embark on what its president and CEO, Paul J. Kolkmeyer, says will be a three-year strategic planning initiative aimed at overhauling its retail banking operation.
Mr. Kolkmeyer has clearly settled into his role. He has negotiated a megadeal and charted a bold course for the future. But he also has been careful to preserve the collaborative management style he credits Mr. Swan with fostering.
"We function very much like a team, not one or two people out there hitting home runs," he said. "That culture helped rally this organization. We pulled together and got even closer. We weren't about to let this fail."
Nine days after announcing the Troy deal, Mr. Swan was found dead in the basement of his home. The death was ruled a suicide; news reports said that Mr. Swan had been distraught over the criticism of his handling of a basketball scandal at his alma mater, St. Bonaventure University, where he chaired the board of trustees.
First Niagara appointed Mr. Kolkmeyer, 51, to be interim president and CEO upon Mr. Swan's death; the job was his after a three-month search. He had been the chief financial officer for 13 years, all of them under Mr. Swan, who had been the CEO since 1989.
Analysts who have followed First Niagara said that the two men always worked well together but that Mr. Swan was clearly the face of the company and Mr. Kolkmeyer worked behind the scenes.
"Paul was definitely more the inside guy who was executing the deals Bill had done," said Kevin T. Timmons, an analyst with C.L. King & Associates in Albany, N.Y. "I'm sure many people did conclude that the company would be less aggressive" under Mr. Kolkmeyer's leadership.
Though some executives would have looked for ways to break with the past and put their own mark on the company, Mr. Kolkmeyer seems determined to preserve what he called Mr. Swan's legacy.
That was evident in the way he went about designing his strategic planning initiative. Rather than draw up a program himself and order its implementation, Mr. Kolkmeyer had a 10-person team develop a series of proposals.
He said the group is in the final stages of preparing its recommendations, which will be presented to the board for approval. Implementation should begin in the fourth quarter.
According to Mr. Kolkmeyer, the main goal is to make First Niagara a more important part of its customers' financial affairs. Over the past five years the company has aggressively built up its insurance and wealth management business, mainly through acquisitions. Now it seeks to tie them more tightly to its expanding branch network.
"Our rapid growth has made it very clear that we need to update the strategic focus of our company," Mr. Kolkmeyer said. "We're looking at continuing to drive the customer-relationship focus throughout the entire organization. We want to become what we would like to consider a financial adviser."
With so many balls in the air, it may be no surprise that Mr. Kolkmeyer is saying - for a second time - that First Niagara expects to "take a back seat on bank acquisitions over the next 18 months or so."
Judging by their initial reaction, many investors may have wished that he had skipped the Hudson River deal altogether. First Niagara's share price slid 15% in the six weeks after it was announced of the Hudson River deal, largely because the acquisition would dilute tangible book value as much or more than the Troy Financial deal.
"I think they may have wanted the company to take a little longer putting Troy Financial to bed, but the bigger issue was the dilution," said Anthony R. Davis, an analyst with Ryan Beck & Co. Inc. of Richmond, Va. "That's really what put the Street off."
Richard D. Weiss, an analyst with Janney Montgomery Scott LLC in Philadelphia, said the Hudson River deal would leave First Niagara shares with tangible book value of about $5.90, down 19% from the June 30 figure and 36% from a year earlier.
But Mr. Weiss said the merger with Hudson River "makes sense."
Other analysts who follow First Niagara said concerns about its tangible book value are overblown. Hudson River itself has been an active acquirer in New York's Capital Region - Albany and the area around it. By acquiring the holding company, First Niagara would gain the No. 3 deposit share in one of New York's most desirable markets.
Mr. Kolkmeyer said that the Hudson River acquisition, combined with the strategic-planning initiative that is set to get under way in the fourth quarter, would turn First Niagara into a top-tier financial performer, which it has failed to become despite rapid asset growth.
Mr. Kolkmeyer envisions First Niagara in 2006, after it has absorbed Hudson River, as having $8 billion of assets, return on tangible equity north of 15%, and an efficiency ratio near 50%. Ultimately, he said, assets could grow to $12 billion.
Between August 1998 and August 2003, four acquisitions increased First Niagara's assets by $2.3 billion. But though the company has always turned a profit, two stock offerings that brought in $526 million in all prevented it from producing a competitive return on equity.
ROE peaked at 11.22% in 2002 but dropped back to 5.19% last year, after the second stock offering, which raised $391 million of fresh capital. In the first half of this year the figure was 5.45%.
"You can grow without being a profitable organization," Mr. Kolkmeyer said. "We want our end result to be a ranking in the top quartile of our peers."
Ryan Beck's Mr. Davis said that even after paying for Hudson River, First Niagara would have more than enough capital to fund more growth and profits. An expanding wealth management business and distribution network would make it easier to do so, he said.
Before Hudson River went up for sale, First Niagara had been considering moving south, or even into western Pennsylvania. Those plans went by the wayside when it learned Hudson River was in play.
In a press release last month, First Niagara said that it started negotiating shortly after Hudson River put itself up for sale and that five other companies expressed interest, and four of them made offers.
The deal is expected to close early in 2005. All the required regulatory and Securities and Exchange Commission filings have been submitted and both companies have scheduled shareholder meetings in the third quarter.
Analysts said that losing Hudson River to a rival banking company would have made it difficult for First Niagara to grow in the rapidly consolidating Capital Region banking market.
"You can lay out what your desired path is, but when an opportunity arises, you have to take it," Mr. Timmons said.
Of course, as a larger company, First Niagara would likely be a more attractive target.
But Mr. Kolkmeyer said First Niagara is not interested prepping itself for a future sale.
"This is all premised on the fact that we intend to be there in the future," he said.
