The nation's biggest banks may be getting their financial footing, but as 2009 comes to a close the bad news mounts for many regional and community banks. Real estate-related losses continue to pile up and most experts are predicting that hundreds of more banks could fail before the crisis subsides.
Then there is First Niagara Financial Group Inc. in Lockport, N.Y. - one mid-tier banking company that is ending the year on a roll.
Led by its charismatic chief executive, John Koelmel, First Niagara has raised close to $1 billion in three separate stock offerings since the fall of 2008 and used much of the proceeds to strike two big deals - first for 57 National City Bank branches in western Pennsylvania, and then for the embattled Harleysville National Corp. in suburban Philadelphia. By the time the deal for the $5.6 billion-asset Harleysville closes in early 2010, First Niagara will have doubled its assets in less than a year, to $20 billion, and significantly expanded its footprint beyond the confines of upstate New York.
Flush with capital and not burdened by asset quality issues, First Niagara is not done dealing, either. Just as banks a generation ago expanded by rolling up troubled or failing thrifts, Koelmel - a first-time CEO who's been on the job just three years - is determined to take advantage of the current turmoil to transform First Niagara into a regional power, says John Gorman, a partner at Luse Gorman Pomerenk & Schick in Washington and a long-time advisor to First Niagara.
"There are companies that made their mark by the way they came through the [savings-and-loan] crisis," says Gorman. Koelmel "sees the opportunity that way."
Says Koelmel: "Our aspirations are to be something more than we are, something more than we will be even with Harleysville."
There are potential obstacles, to be sure, starting with the challenge of integrating two franchises in a new state and maintaining First Niagara's strong asset quality in a still-weakening economy.
But analysts and other observers who, in the last three years, have watched First Niagara evolve from an undperforming company that was under pressure to find a buyer to one of the industry's shining stars aren't about to bet against Koelmel.
"If all executives ran their companies like First Niagara, we would not have had a financial crisis," says Rick Weiss, an analyst at Janney Montgomery Scott. "It's as simple as that."
LOCAL BOY MAKES GOOD
Koelmel, 57, grew up in Orchard Park, N.Y., just outside of Buffalo, where his dad was a salesman for General Electric and his mother was a schoolteacher. When he went off to attend The College of Holy Cross in Worcester, Mass., in 1970 he figured he'd wind up in Boston or New York, but upon graduation, his aptitude for math took him on a round of interviews with the Big Eight accounting firms and, eventually, to Peat Marwick's Buffalo office.
Koelmel says he showed up "with hair too long, pants a bit too wide, and red shoes with heels more than a bit too high," Koelmel says. "It was the Saturday Night Fever days and I had all the disco Danny looks."
Bob Weber, then a manager in the Buffalo office, remembers immediately taking a shine to the shaggy local boy who didn't fit the accounting stereotype. Like many youth Koelmel could be intemperate, and Weber often had to reel in his young prot
"I saw a lot of talent. But in his formative years he'd speak his mind with superiors and get himself in a little bit of trouble," Weber says. "At regional meetings he'd disagree with what they were saying, and later I'd tell him, 'John, you might think that way, but don't shoot yourself in the foot.'"
Koelmel took those early lessons to heart and rose rapidly through the ranks as the accounting firm got larger and eventually merged with KPMG. When Weber retired in 1995, Koelmel replaced his mentor as the managing partner of the Buffalo office.
Many of Koelmel's clients back then were banks, and what he liked best was working with management to help develop strategic plans. But by the end of the 1990s, he sensed a "philosophical shift" in which accountants who worked too closely with clients were perceived as biased and unable to objectively evaluate their finances. "It was increasingly harder for me to have that trusted advisor relationship with clients that I'd had for 20 or 25 years," Koelmel says. "I realized that my ability to add value and derive satisfaction day-in-and-day out was waning and I worried would diminish quickly."
So in 2000, Koelmel left KPMG for the No. 2 job at Five Star Bank in Warsaw, N.Y. It wasn't quite the right fit, though, and he left after a couple of years.
After that, for the first time, he began to seriously ponder what else he might do with his life. He interviewed to run a private school, contemplated seats on corporate boards, considered consulting, and even worked at a friend's collections company. "I was enjoying the flexibility, and I asked myself whether I wanted to get back on the corporate treadmill."
That all changed in early 2003 when Koelmel reconnected with then-First Niagara CEO Bill Swan. Koelmel knew Swan from his KPMG days and soon the two began to discuss whether there might be a role for Koelmel at the bank. Then, a few months later, there was a tragic turn of events. Swan, also the chairman of the board of trustees at St. Bonaventure University, grew despondent over a basketball scandal at his alma mater and took his own life.
Just days earlier, Swan had announced that First Niagara was buying the $1 billion-asset Troy Savings Bank in what was then its largest deal ever. Under Swan, First Niagara began an aggressive expansion into the Albany, N.Y., market, and Koelmel says his death was a catalyst for him and others "to step up and step in to perpetuate what Bill set in motion."
Koelmel ultimately joined First Niagara as chief financial officer in January 2004 and in December 2006 he was named interim CEO when Paul Kolkmeyer stepped aside. In February 2007 he officially became CEO.
His first few months on the job were rocky as shareholders, frustrated by its sagging share price, pressured the company to find a buyer or - as many of its Rust Belt peers did - expand into faster-growing states, such as Florida. Koelmel, though, wasn't interested in either and instead struck a low-premium, in-market deal for Greater Buffalo Savings Bank in late 2007 that won him praise from the investment community.
Critics were further quieted by First Niagara's performance, which as mortgage crisis worsened, began looking better and better relative to the rest of the industry.
Koelmel does not profess to have some magic formula for keeping First Niagara out of trouble. He's steered clear of the worst of the financial crisis by following some basic principles of banking: carefully manage capital, credit underwriting, and liquidity.
"Those that lost their focus took a wrong path, whether geographically stretching too far too fast, or pursuing product alternatives that were misguided," he says. "The whole industry took on way too much risk for way too little reward."
After keeping a tight hold on the reins during the boom years, Koelmel sprang into action in the fall of 2008. He managed to raise $115 million just a few weeks after the collapse of Lehman Bros. - when the capital markets were essentially frozen - and soon thereafter accepted $184 million from the Treasury Department's Troubled Asset Relief fund.
In an interview with U.S. Banker in late 2008 he said the rationale for raising the capital was simple. "We're going to play offense, and to do that you need capital," he said. "There will be opportunities to lend more significantly over the next year or two and grow in our footprint organically."
The first big score occurred in April when First Niagara announced it would acquire the National City branches, which PNC Financial Services Group Inc. of Pittsburgh was divesting as a condition of buying Nat City. The deal, which closed in September, included $3.9 billion in deposits and $757 million in performing loans, and to finance it, First Niagara entered into a securities purchase agreement with PNC for a total of $150 million. (The 12 percent notes are callable without penalty at any time.) After raising another $380 million in April, then paying back TARP in May, Koelmel struck again, announcing the $237 million all-stock purchase of Harleysville, which has 83 branches in the Philadelphia area. The deal was priced at about 110 percent of tangible book value and included a novel provision that adjusted the exchange ratio should Harleysville's loan delinquencies rise above a certain level between the announcement and the close of the deal.
Tom Alonso, an analyst at Fox-Pitt Kelton, says he gives Koelmel and his team credit for capitalizing on a "once in a generation opportunity to expand the franchise in a tight time frame to a much bigger geographic footprint."
Gorman, meanwhile, says the deals were vintage Koelmel. While Koelmel has made no secret of his growth ambitions, one thing he won't do, Gorman says, is overpay.
"Some CEOs get starry-eyed, they get caught up in the momentum of the deal. It gets to where they've got to get the deal, no matter what - what's another 50 cents a share? But that's not John."
PLOTTING THE FUTURE
Weiss says two acquisitions right on top of each other pose "integration challenges," though he points out that Koelmel and his management team had some practice after First Niagara bought Troy Savings and Husdon River Bank at roughly the same time earlier this decade.
On the physical integration of the Harleysville and Nat City franchises, Koelmel says his job is to "make sure we have the right resources in place and then I get out of the way. The team is incredibly good at that physical integration."
On the cultural side, he takes a more active part. "I establish the tone, I personalize the company. I make it real and engage across the new organization so that people feel connected."
It's a role that plays well to his strengths, says Tom Bowers, First Niagara's chairman. "He's a really strong communicator in both the written and spoken word. He's an unusual combination of CPA and charisma."
Mostly, though, Koelmel spends his time doing what he enjoys most: plotting the next move. "My job is to look ahead and keep running up the next hill and stay focused on opportunities. That requires us to have capital; it requires us to be nimble and to respond to opportunities," he says.
Koelmel cites three main levers for M&A growth over the near term. First, he expects to acquire customers and perhaps branches from big banks operating in First Niagara's footprint, such as Bank of America and Citibank.
"They can't access enough capital in this new regulatory environment to support their business model and that means they have to shrink and shed not just assets but deposits," he says.
Second, he reckons that the tough economic environment and new regulatory requirements will force some smaller banks that had been fighting to remain independent to throw in the towel.
And, finally, he's looking for opportunities to buy failed banks - but he won't stray too far.
"These show up in my email every day, but none have been in our footprint," Koelmel says. "We'll be eyes wide open for FDIC- assisted transactions, but we'll be disciplined and diligent so we don't stretch ourselves too far and increase execution risk."
Koelmel says he won't rule out expanding into Ohio, Michigan, New England or the Mid-Atlantic states, but his priority is to fill in the wide gaps in New York and Pennsylvania. In New York, First Niagara has a strong presence in the Buffalo and Albany areas, but only a smattering of branches in between. In Pennsylvania, its branches will be largely concentrated in the state's two largest cities, Philadelphia and Pittsburgh, which are separated by roughly 300 miles.
"Long-term shareholder value will come from staying relatively narrowly focused and deepening our market share to become a premier player in each market, versus being a mile wide and an inch deep," Koelmel says.
The growth plan also includes a relocation of the company's corporate headquarters from Lockport to Buffalo, a move Koelmel says will further raise First Niagara's profile.
"In five years we'll have further emerged as a strong regional player in the new world order of financial services," he says.