Now this is capitalizing.

Since last fall John Koelmel, the president and chief executive officer of First Niagara Financial Group in Lockport, N.Y., has talked openly about using its $300 million of fresh capital to expand.

On Tuesday the $9.3 billion-asset First Niagara announced a deal to snap up $4.2 billion of deposits and 57 western Pennsylvania branches that had belonged to National City Corp. for a 1.3% deposit premium.

The purchase would "redefine" First Niagara, Koelmel said on a conference call Tuesday. It would take his company into a neighboring state, give it the third-largest deposit share in the Pittsburgh market and increase its branch network by nearly half, to 173.

"There's obviously a lot of uncertainty and anxiety in our business," given the current economic challenges, he said. "This very much affirms us as a strong player and a real winner coming out of the current mess."

Koelmel hinted that more deals are likely. He said opportunities are presenting themselves even more rapidly than he expected.

Analysts said the unusual way this branch deal is structured could help in that regard by softening the impact on First Niagara's capital levels and improving its liquidity.

Regulators had required PNC Financial Services Group Inc. of Pittsburgh to divest the branches as a condition of acquiring Nat City in December.

In what some observers interpreted as a sign that there were few willing buyers, PNC essentially agreed to help finance the transaction.

First Niagara has the option to issue equity and debt to PNC at the deal's closing.

PNC would take either $75 million of First Niagara's common stock or 6.8 million shares — whichever is the lesser amount.

First Niagara also could issue up to $150 million of senior unsecured debt to Nat City, minus the common stock proceeds. The notes would have a 12% coupon and would mature in five years.

PNC would not discuss the deal's financial terms.

When asked on the conference call why First Niagara negotiated the backstop with PNC instead of going to the market, Koelmel called it "an insurance policy" for his company. "The market is somewhere between volatile and unpredictable," he said. "We wanted to ensure we had a bit of a safety net."

Damon DelMonte, an analyst at KBW Inc.'s Keefe Bruyette & Woods Inc., said the arrangement would help First Niagara protect its tangible common equity ratio — a measure that investors watch closely to gauge a company's health.

"I think it shows you PNC's commitment to getting this deal done," DelMonte said. "Without the support of PNC, I don't think this deal looks as attractive."

First Niagara said its ratio of tangible common equity to total assets would be 5.5% at closing but would grow to 6.4% by the end of next year.

The deal is expected to boost earnings per share by about 20% next year.

Tony Davis, an analyst at Stifel, Nicolaus & Co. Inc., described the deal as "very attractive," because of the low deposit premium and the potential earnings lift.

First Niagara also would gain $3.2 billion in cash to boost its liquidity. Its loan-to-deposit ratio would drop by over a third, to 72%.

That is partly what makes the deal "a home run" for First Niagara, further enabling it to add loans at an accelerated rate, Koelmel said.

Davis agreed with that assessment and said the only drawback he can see is the initial 400-basis-point drop in the tangible common equity ratio, to 5.5%. The agreement to sell equity and debt softened the impact on that ratio, he said. "It's somewhat unusual in that the seller is financing the sale, in effect. That typically is not done. It's symptomatic of the market environment."

First Niagara raised $115 million of capital on its own last fall and accepted $184 million of government capital. It has been on the prowl for deals since then.

Koelmel said that even though the western Pennsylvania market will be a new one for First Niagara, the demographics there are much like those of the area where the company already operates, making the move less risky.

"Pittsburgh and Erie look a lot like upstate New York," he said. "It's an area we will be very comfortable with, and, more importantly, customers will be comfortable with us."

The premium works out to $54 million, based on the deposits at Dec. 31.

First Niagara would gain 400,000 customer accounts and $839 million of performing business and consumer loans.

It also would have an 8% deposit share in the Pittsburgh area. PNC ranks first in the market, with 35%, and Royal Bank of Scotland Group PLC's Citizens Financial Group Inc. ranks second, with 13%.

The market would be First Niagara's largest, making up 38.2% of its overall deposits.

First Niagara would retain all 500 branch employees and add 150 to 200 jobs in Pittsburgh and upstate New York to support the growth, Koelmel said.

The deal is expected to close in September.

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