First Niagara Financial Group (FNFG) accepted short-term pain in the fourth quarter, making adjustments and recording higher costs, to improve its financial outlook in coming years.

Management also disclosed plans Wednesday to cut annual costs by roughly $40 million this year as it looks to become more efficient.

The Buffalo, N.Y., company's quarterly earnings fell compared to a year earlier after it adjusted the amortization rate on some mortgage securities and absorbed higher costs associated with its purchase of 100 branches from HSBC Bank.

Management expressed discontent with the company's efficiency ratio, which hit 69.4% at Dec. 31 compared to 66% a year earlier. Noninterest expense rose 18% from a year earlier, to $239 million.

Costs remain too high, John Koelmel, First Niagara's president and chief executive, said during a conference call Wednesday to discuss quarterly results.

"We must spend less [where] the potential for revenue growth is compromised," Koelmel said. "We need to be extra disciplined in 2013 and reduce overall costs."

This year, First Niagara plans to cut costs by reducing staff at branch offices, renegotiating vendor contracts and taking other measures, Greg Norwood, the company's chief financial officer, said during the conference call. First Niagara "might look at over time" the possibility of closing some branches, but nothing is imminent, he said.

First Niagara expects to reach its cost-cutting target by the fourth quarter.

First Niagara's quarterly net income decreased 8.4% from a year earlier, to $53.5 million. Roughly $16 million of the difference was associated with management's decision to accelerate the premium amortization on a portfolio of collateralized mortgage obligations. The company warned investors last week that it would take the hit from the adjustment.

Last June, First Niagara sold $3.1 billion of mortgage-backed securities to pay off short-term debt, but it retained $4.7 billion in mortgage securities.

Starting in the fourth quarter, First Niagara began to notice higher repayment rates on the retained securities, Norwood said in an interview. He said that the company sold the mortgage-backed securities in June because it predicted a higher repayment rate.

First Niagara also incurred $3.7 million in expenses tied to its purchase of HSBC's branches, which included severance expenses. Such costs have gradually declined in recent quarters, and the fourth-quarter expenses mark the final slug of higher costs from the deal, Norwood said.

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