John Koelmel is one of the few bankers who can be ambivalent about the financial crisis.

First Niagara Financial Group Inc. in Buffalo grew bigger and stronger during the recession. It ended 2007 as a profitable, low-profile thrift with 120 branches in upstate New York. Today, it is a still-profitable commercial bank that will soon have 340 branches in New York, Pennsylvania, Connecticut and Massachusetts.

"I'm proud," Koelmel, Niagara's CEO, said in an interview. "We like the near-term prospects [of our business.] But that's too selfish a perspective. I'd much rather be competing and winning in a growing, more robust economic environment than trying to just take a bigger slice of a stagnant pie."

First Niagara's August agreement to buy NewAlliance Bancshares Inc. in New Haven, Conn., is its third deal since early 2009. It is also the largest bank merger to be announced in two years.

Speaking with American Banker in New York on Tuesday, Koelmel offered a conservative outlook on the merger and acquisitions market, his thoughts on prudent growth and a critique of financial reform. The following is an edited transcript of the interview.

What's your outlook for bank mergers and acquisitions?
JOHN KOELMEL: There's a short list of us that have the potential and the resolve to be active in the M&A arena. It's going to be a while before you start to see any type of normal deal flow, however one redefines normal. People asked when we announced the deal back in August: "Will this open the doors, kick the doors open, on 'straight M&A'?" I said: "I don't really think so." I'll be surprised anyway if it does. Our transaction was fairly unique in terms of two strong organizations that were willing to come together. There's not that many strong organizations. I don't mean that critically. That's just an objective reality.

What about in the Northeast?
KOELMEL: In general, you are going to see more activity over the next couple years. I certainly don't believe, if you took a snapshot of the Northeast banking sector today, that what we have two years from now will bear real strong resemblance. There'll be reasonably meaningful shakeout and sort-out there. There'll be combinations at the top. I think there will be more roll-ups from the middle that will create more regional [players] similar to what we're building. And that will change the dynamic of the banking sector in the Northeast. And that's why we're trying to strategically, but opportunistically, get on the front end of that.

But why do you have to get bigger? Does that say something about the state of the industry? That it's going to be harder for community banks to absorb the costs of doing business? Or do you just see a competitive opening here?
KOELMEL: Yes, yes and yes. Whatever one's size — Koelmel's view is that scale will be beneficial. Margins are going to be skinnier, and [it is] more challenging to make a buck, let alone an extra buck. Economies of scale are important. Again — diversity. No matter how narrow or broad your current view of the world is, geographically, [by] product or otherwise, the more diverse you are — within reason — is beneficial, to diversify the risk. [Getting larger also improves] the ability to further establish yourself as a player in an environment and an industry with a lot of disruption and dislocation.

How big do you need to get? How big do you see the company getting?
KOELMEL: Do I think what we have is scalable at a larger level? No question. Do I think we can take what we have and make even more of it? Certainly, in the markets we've already established ourselves. We're looking forward to building up both organically and with additional strategic opportunities to deepen [shares of] those key markets in Buffalo, and Albany, and Boston, and southern New England and Philly and Pittsburgh. What does that translate to in overall size? To be determined. … The tipping point for me would be when there's a point of diminishing returns that you lose the differentiating factor. We don't aspire to be big for the sake of big. We don't aspire to be the next big guy.

What's your take on regulatory reform? Was it too much? Appropriate?
KOELMEL: I think some reform was inevitable, but it's too emotionally and politically charged, and the pendulum swung too far. Time and circumstances motivated others to make decisions that I think over time you'll see moderate, out of necessity, because we're in the risk management business. And most of us have done it pretty well. Those of us that continue to be successful I would suggest have done it very well, large and small. The lack of regulation wasn't what took the industry in the ditch as far as I'm concerned. It was just bad business decisions. It was poor execution. It was some in the industry losing their way for a variety of reasons. The whole industry didn't go in the ditch. The whole industry didn't drive off the cliff. Many of us are still here standing.

How are banks going to make money in this new environment? Is it about adding fees, customers?
KOELMEL: It comes back to taking what you have today and being more efficient and effective than ever. It comes back to … scale and the ability to leverage your business model in an even broader-based way. It comes from being even more disciplined than ever in pricing and otherwise managing the business. We can't as an industry innovate our way to replacing the kind of revenue that we're otherwise losing. It just — this business is too simple. And it's the creativity that arguably took some in the ditch. What's going to happen? Consumers are now going to have to underwrite … the cost of doing business that was otherwise previously [paid for by] those who consistently overdrew their accounts, or … [by] retailers that would pay a portion of the burden.

Overdraft protection and the consumer mentality, and the consumer advocacy that is pervasive, have prevailed in forcing a different business model upon the industry.

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