First Niagara Financial Group Inc.'s acquisition of a western Pennsylvania branch network from PNC Financial Services Group Inc. is working out better than it had expected.

In a conference call announcing fourth-quarter earnings Thursday, the Lockport, N.Y., company reported a 95% retention rate of deposits from the 57 branches. It had expected losing 25% to 35% of the deposits following the deal for the branches, which PNC inherited with its acquisition of National City Corp.

John R. Koelmel, First Niagara's president and chief executive, said in an interview that he is pleased with the integration of the branches, which has largely been completed.

"You always know you are going to have to give some back before you build up, and in fact we have given very little back and we are already starting to build it up. We had an incredibly motivated team," he said. "They are able to get back on their game with new business development. They shifted from protecting and preserving what we acquired to growing."

In April, First Niagara won the bidding for the Pennsylvania branches and $4.2 billion of deposits that PNC was divesting after it bought National City. It was First Niagara's first acquisition outside its home state.

A few months later, in July, the company announced a second deal in Pennsylvania in which it agreed to acquire the struggling Harleysville National Corp. If that closes as expected in February, First Niagara would gain $5.6 billion of assets and 83 branches.

After both deals close, First Niagara is expected to have $19.3 billion of assets and 254 branches.

Analysts following First Niagara said retention of the deposits from the PNC deal will fuel its growth.

"They have done a much better job of retaining deposits that came with that franchise," said Matthew Kelley, an analyst with Sterne, Agee & Leach Inc. "A lot more relationships have been retained as part of the deal and now they can cross-sell. … They did indicate they are just starting the process of cross-selling to those customers and they had some success on the fee-income lines in the asset management business."

In another benefit to First Niagara, the retained deposits helped bolster its net interest margin, which was 3.69% at the end of the quarter, analysts said.

The company has other strengths: It still has plenty of capital, having raised $955 million in equity capital since September 2008, and loan quality is holding up. Also, analysts said First Niagara should be well positioned to seek more acquisitions.

"It is easier to do successive acquisitions," said Amanda Larsen, an analyst at Raymond James & Associates. "There will certainly be opportunities in their expanded footprint, and we think they will be looking at deals."

But first the company is trying to put in place a foundation for growth. First Niagara has hired 300 employees and plans to add 200 more — above the staff that comes with the acquisitions — and is expanding its operations.

"You have to appreciate a year ago we were a $9 billion business," Koelmel said. "We didn't have the systems platform to service a $20 billion business. So what we are doing is, first with talent, adding strength to the back office to run a $20 billion business."

Koelmel said the 300 employees hired so far would allow First Niagara to grow to become a $25 billion-asset company, though he has ambitions greater than that.

In the fourth quarter, First Niagara earned $28.9 million, a 26% increase from a year earlier. At the end of the quarter, its total risk-based capital ratio was 18.5% and its Tier 1 risk-based ratio was 17.4%. First Niagara reported deposits of $9.7 billion, down 1.9% from the third quarter.

Credit quality remained stable. Nonperforming loans were 0.94% of total loans, compared with 0.93% at the end of September and 0.72% at the end of 2008.

Analysts said the company's challenge will be to build on its base.

"Expectations in the marketplace are pretty high for this company to capitalize on the deposit network that it built out in 2009," Kelley said. "They need to layer on loan growth in 2010, and that is what investors are going to be focused on."

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