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First Niagara Financial Group Inc. (FNFG) $7.61
The Company:
First Niagara Financial Group is a regional bank that is headquartered in Buffalo, New York and the holding company for First Niagara Bank. First Niagara was one of the few banks that managed to increase its dividend through the last housing led recession and managed to grow steadily through a series of acquisitions.
In April 2010, First Niagara acquired Harleysville National Bank in an all-stock transaction valued at approximately $237 million or $5.50 per share. The deal provided First Niagara with $5.6 billion in assets, $3.6 billion in loans and $4.1 billion in deposits in 83 bank branches in nine eastern Pennsylvania counties. First Niagara then acquired New Alliance Bank in 2011. The acquisition gave the bank $5.1 billion in deposits, $4.9 billion in loans and 88 branches in Connecticut and Massachusetts.
The company followed that with the acquisition of 195 branches from HSBC USA based mostly in New York and Connecticut. The bank paid a premium of 6.67% for $15 billion in deposits for this $1 billion deal that was financed through a combination of equity and debt. First Niagara agreed to sell 37 of these branches representing $2.1 billion in deposits at a premium of 4.4% to KeyBank (KEY) in order to get approval for the HSBC deal.
First Niagara had to take a number of steps to shore up its liquidity in light of this large deal including cutting its dividend in half at the end of last year. The company also announced at the end of June that it had sold $3.1 billion of mortgage-backed securities (MBS) from a $14.4 billion securities portfolio that contained $9.2 billion of MBS.
These acquisitions have not been kind to the stock and it has been on a steady trajectory downwards for over a year. First Niagara has underperformed the regional banking index (KRE) by over 50% over the last year as you can see from the chart of KRE, the S&P 500 index and First Niagara below.
With a seasoned management team that did a great job navigating the company through the housing bust and that has been acquiring companies at a time of distress, it feels like the stock has dropped too far too soon. The company now trades for just 0.87 times tangible book value and sports a dividend yield of 4.2%. The company’s troubled asset ratio (TAR) at 7.6 is well below the national median of 12.8. First Niagara is not only one of the largest regional banks, it is also one of the top 50 U.S. banks when ranked by total assets ($38 billion following the HSBC purchase).
Business Statistics & Financials:
First Niagara’s operating net income available to common shareholders for the first quarter of 2012 was $0.19 per share when compared to $0.24 in the fourth quarter of 2011. The $0.05 decline in per-share operating net income was driven by the impact of the HSBC transaction. Total revenues increased 2% over Q4 2011, driven by strong fee revenue and despite contraction in net interest margin by 14 basis points.
Total Risk Based capital and Tier 1 Common Risk Based capital ratios were 16.8% and 12.5%, respectively, well above current regulatory guidelines.
Competitors:
| Stock | Symbol | Mkt Cap | EV/EBIDTA | P/B | Operating Margin |
| Huntington Bancshares Incorporated | HBAN | 5.60B | N/A | 1.05 | 42.81% |
| East West Bancorp, Inc. | EWBC | 3.41B | N/A | 1.52 | 62.76% |
| First Niagara Financial Group Inc. | FNFG | 2.65B | N/A | 0.57 | 42.81% |
| First Horizon National Corporation | FHN | 2.23B | N/A | 0.91 | 17.41% |
| Fulton Financial Corporation | FULT | 2.01B | N/A | 0.96 | 36.43% |
| Susquehanna Bancshares, Inc. | SUSQ | 1.99B | N/A | 0.77 | 25.85% |
| Umpqua Holdings Corporation | UMPQ | 1.52B | N/A | 0.88 | 34.73% |
| BancorpSouth, Inc. | BXS | 1.42B | N/A | 0.99 | 18.44% |
Insider Buying:
Four insiders purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for First Niagara Financial Group here.
| Owner | Relationship | Date | Cost | # Shares | Value($) | Total Shares |
| Thomas E Baker | Director | Jul-06 | $7.70 | 2,687 | 20,690 | 60,131 |
| Thomas E Baker | Director | Apr-04 | $9.96 | 2,079 | 20,707 | 57,444 |
| TOTAL | 4,766 | 41,397 | ||||
| Barabara S Jeremiah | Director | Jul-06 | $7.70 | 2,439 | 18,780 | 37,958 |
| Barabara S Jeremiah | Director | Apr-04 | $9.96 | 1,880 | 18,725 | 35,519 |
| TOTAL | 4,319 | 37,505 | ||||
| Philip George M Philip | Director | Jul-06 | $7.70 | 581 | 4,474 | 38,035 |
| Philip George M Philip | Director | Apr-04 | $9.96 | 449 | 4,472 | 37,454 |
| TOTAL | 1,030 | 8,946 | ||||
| Rendulic Mark R | EVP, Retail Banking | Mar-16 | $27.75 | 1,000 | 27,750 | 1,000 |
| TOTAL | 1,000 | 27,750 |
Risk Factors:
First Niagara has taken an aggressive approach to growth and its latest acquisition was a little too large for the company following the deal to acquire New Alliance. The sale of part of its MBS portfolio is going to impact earnings in coming quarters. Net charge-offs and provision for loan losses both increased in Q1 and are likely to continue increasing following the May 2012 closing of the HSBC transaction. The stock does appear to have factored in most of this bad news but the company will probably take a few quarters to fully digest these acquisitions.
Conclusion:
The best time for a regional bank to grow is after a recession, whether it is through participation in FDIC sponsored auctions or direct acquisitions and I believe First Niagara has positioned itself well for long-term growth. The stock is cheap and despite these acquisitions, their troubled assets have remained at a manageable level. The company remains profitable and the divided yield is now over 4%, providing some returns while investors wait for capital appreciation.