First Pittsburgh. Now Philadelphia. And First Niagara Financial Group Inc. says there's more to come.

The Lockport, N.Y., company announced Monday that it had agreed to buy the struggling Harleysville National Corp. for $237 million in stock, or $5.50 a share.

By itself, the deal would add $5.6 billion in assets and 83 branches in demographically attractive counties around Philadelphia to the $11.6 billion-asset First Niagara. Combined with a deal announced in April for 57 former National City Corp. branches in the western part of the Keystone State, the Harleysville National acquisition would increase First Niagara's asset size by 87% and double its branch count.

In each deal, First Niagara said it protected itself against downside risk — something that has discouraged some potential acquirers from taking advantage of opportunities to buy struggling institutions.

The company said it is far from done.

"We're going to keep pushing the shopping cart," John Koelmel, its president and chief executive, said in an interview.

Analysts said First Niagara's willingness to buy is not necessarily a signal that deal flow will pick up for the Middle Atlantic region in general. A lack of buyers overall and difficulty agreeing on a price continue to stymie consolidation, they said.

"I don't think there will be a flurry of deals this year," though the pace may pick up later in the year or early next year, said Collyn Gilbert, an analyst at Stifel, Nicolaus.

Koelmel talked about the lack of mergers and acquisition activity on his call with analysts Monday. "Among other reasons deal frequency 'isn't what it isn't' is because publicly people claim they have enough trouble getting their arms around their own portfolios, let alone someone else's," he said.

"We needed to get a fence around the downside risk and we believe creatively managed that."

He said the way the company has structured its deals would help it to stay nimble.

For example, he cited the structure of the Harleysville deal in helping First Niagara get comfortable.

Harleysville, which has been having loan trouble lately, needs $150 million in capital to satisfy regulators. It had missed a June deadline to add capital, under an order from the Office of the Comptroller of the Currency.

But First Niagara factored that into its pricing, Koelmel said. First Niagara pegs the cost at $400 million, including the capital hole, and it does not intend to go over that amount. So if the capital needs expand, the shareholder payout shrinks.

The agreement calls for each Harleysville share to be exchanged for 0.474 First Niagara shares, if loan delinquencies stay below $237.5 million. Otherwise, the exchange ratio can drop.

Harleysville had $226.8 million in delinquencies at the end of the first quarter.

The deal price works out to 1.13 times Harleysville's tangible book value and a 0.8% core deposit premium, according to First Niagara. The price is also a 37.5% premium over the Pennsylvania bank's July 24 closing price of $4 a share.

First Niagara is set to close this quarter on the purchase of the former National City branches, along with $4.16 billion of assets, from PNC Financial Services Group Inc. in Pittsburgh.

First Niagara insulated itself in this transaction by agreeing to take only select performing loans from PNC.

That deal also gives First Niagara the option to raise $75 million of common equity — which it now expects to do.

Koelmel said First Niagara also would consider tapping the market for another capital raise in the future.

That's because the current "window of opportunity" to grow is unique, he said. "And we can't do that without capital."

He said the company has great prospects for organic growth as others pull back on making loans. He said he also expects more strugglers to sell themselves and divest branches.

First Niagara had raised $300 million this spring, on top of $115 million in the fall, and repaid its government capital. So Koelmel said he believes investors will continue to allow the company "to reload on the fly" as more buying opportunities arise.

Several analysts said they liked the Harleysville National deal, though they said it increases execution risk for First Niagara.

Thomas Alonso, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, said he was surprised to see another deal announced before the PNC one closed.

"They have a lot of work ahead of them," he said. "But it's hard to argue with the way they structured it. They give themselves a lot of protection."

Gilbert called the deal structure "unique."

"It speaks to First Niagara's ability to think outside the box," she said.

But execution risk is an issue because First Niagara needs to leverage the PNC branches and, with Harleysville, First Niagara is entering a new market, must contain credit issues, and also grow.

"It helps that they have a track record of acquiring and integrating," she said. "But these are not smoothly running banks."

Koelmel acknowledged that "the fact that we're putting two transactions together bumper to bumper is bound to raise a few eyebrows."

But not to worry, he said. First Niagara has "been there, done that." It closed a deal for the $1.2 billion-asset Troy Financial only a few days after he joined the company in January 2004, then announced another one for the $2.5 billion-asset Hudson River Bancorp a few months later. The two together had doubled the size of the company at the time.

Koelmel said each Pennsylvania deal would make the other one more valuable; he compared the combination to a fast-food value meal.

He said the two deals would give First Niagara a rectangular "tent" with branches concentrated around Buffalo, Albany, Pittsburgh and Philadelphia.

In looking for more deals, the company could just as easily fill in that rectangle as expand outside of it, he said. "We wouldn't have any pause if there is opportunity to stretch the size of our tent."

First Niagara projected that its ratio of tangible common equity to tangible assets would be 6.38% after the two Pennsylvania deals close, including the $75 million of capital from PNC.

Paul D. Geraghty, Harleysville's president and CEO, would stay on after the deal closes. Koelmel credited Geraghty with helping to transform Harleysville in his two years there. The thrift company had been becoming more like a commercial bank, and had done two deals of its own.

In November 2007 it bought East Penn Bank in Emmaus and in December 2008 Willow Financial Bank in Wayne.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.