) --

First Niagara Financial


president and CEO John Koelmel has a conundrum on his hands. As the head of a $14 billion-asset bank with roots in upstate New York, but a growing presence in Pennsylvania, does the ardent football fan continue to root for the home team of the Buffalo Bills, or does he dare switch his allegiance to one of the two solid teams located in his new market?

First Niagara

It's a question he has received from at least one local media outlet, Koelmel tells


in an interview conducted last week.

"It's tough to be a Bills fan," he says, referring to the football team's 6-10 record in the 2009 regular season. "The

Pittsburgh Steelers obviously have a team to cheer for. I took some abuse in the Buffalo papers for that."

Sports analogies often bubble up in Koelmel's speech, and he has even shown up to employee town hall meetings wearing a football uniform as a way to motivate his staff. While that attitude will hopefully get a chuckle or two for the 57-year-old former accounting executive, Koelmel is constantly thinking of the end game for his company. One analyst described Koelmel, who joined First Niagara as CFO in 2004 and became CEO late in 2006, as energetic, passionate, motivational and charismatic.

"He's kind of evolving as the company evolves," says Keefe, Bruyette & Woods analyst Damon DelMonte. "He's got a good story to tell and a lot of people want to hear it."

"I enjoy playing offense," Koelmel says. "That's what we're about as an organization."

"The economy, the industry, the regulatory and political environment is still a couple of years away from shaking itself out," he adds. "Whatever the new norm will be, it won't be clear for a couple more years and I think we're nicely positioned to continue to rise above the fray, perpetuate our position of relative, if not absolute strength, and come out of this meaningfully stronger than we were today, let alone a couple of years ago. So it's being opportunistic, it's being nimble, it's being ready, it's planning the work and working the plan."

But Koelmel's football allegiance conundrum exemplifies the opportunities First Niagara has outside its traditional market of upstate New York for growth and expansion.

On the one hand, housing in the Buffalo and western New York region held up relatively well during the economic downturn of the last two years. Between the demographics and

First Niagara's

own conservative lending standards, it didn't experience the credit problems that much of the industry did. Instead, First Niagara was able to concentrate on filling its coffers with nearly $1 billion in capital raises since 2008 that could in turn be used to expand the banking franchise.

On the other hand, upstate New York is a lower growth demographic dominated by larger players including




Bank of America

(BAC) - Get Report



(KEY) - Get Report


Royal Bank of Scotland's

(RBS) - Get Report

Citizens Financial and

M&T Bank

(MTB) - Get Report

. Also FDIC-assisted transactions have been minimal, Koelmel says.

"Most of banks up here are pretty well run, even if they don't have the scale or capacity to grow, nobody's ready to tip over," he says.

So First Niagara is looking to a neighboring state to fund its growth aspirations, Pennsylvania. It entered Western Pennsylvania last year after it bought 57 former National City branches, the troubled institution that

PNC Financial Services

(PNC) - Get Report

acquired in 2008. PNC was forced to divest some branches due to anti-trust regulations.

"I'm not looking to be bigger just for the sake of being bigger, but I think size will continue to matter because we want to be able to compete and win, not just throw our hat in the ring whether that's for a new customer opportunity or whether that's for a M&A transaction," Koelmel says. "We think there will be multiple combinations of M&A expansion opportunities for us to investigate and explore."

Koelmel says that, by cherry picking only good quality loans, First Niagara was able to avoid taking on any real credit risk as a result of the PNC deal.

First Niagara is also getting ready to close on the purchase of

Harleysville National

( HNBC), which it agreed to acquire in July in an all-stock deal worth $237 million. Harleysville was being required by the Office of the Comptroller of the Currency to raise additional capital when First Niagara stepped in with an offer. The addition of Harleysville will increase First Niagara's assets to $19 billion and increase the bank's branch franchise to roughly 250 across upstate New York, western Pennsylvania and the Philadelphia area.

Harleysville's management, after two years of ring-fencing troubled credits, "simply ran out of time," Koelmel says.

According to the terms of the deal, Harleysville shareholders will receive 0.474 shares of First Niagara's common stock for each Harleysville share owned, which represents a 37.5% premium to its $4 closing share price the day the acquisition was announced. Harleysville's stock has risen by two-thirds since the July announcement and closed Monday at $6.40. (First Niagara shares have risen more than 12% in the same time frame.)

In the Harleysville acquisition, First Niagara was able to stipulate in the terms of the agreement that if loans worsened beyond the bank's expectations, the change would be reflected in the final deal price.

"We structured the transaction to protect our downside in terms of the credit exposure," he says. "So being forward looking, a little better prepared, being a little more nimble and creative in terms of how we pursue and or structure transactions has been advantageous for us."

Still, to deal with any further credit problems, Koelmel says he is more inclined to sell assets rather than devote resources to a sizable loan workout group.

"We entered that market to play offense and grow and take share profitability rather than be workout specialists," he says. "So I am inclined to exit those questionable relationships in some form of asset sale transaction. It minimizes the incremental risk."

Matthew Kelley, an analyst at Sterne Agee, says that First Niagara's credit discipline has earned the company kudos.

"They were never strained from their core markets. A lot of Northeast institutions went on adventures out of market in search of growth and First Niagara did not follow that path. So the underlying credit culture and sticking to a core in-market strategy was important in not getting them into frothy assets during the bubble," Kelley says. "They had first mover advantage of raising capital."

First Niagara was one of the five small banks that the Office of Thrift Supervision invited to the table when the original TARP program was established in October 2008. Koelmel says the bank was willing to accept the funds at the time but, as the requirements attached to the monies increased, the bank quickly realized they did not want to be party to these restrictions. (It repaid TARP funds in the spring of last year.)

Koelmel says the regulatory backlash that has ensued as a result of the financial crisis is worrisome. He admits that with all the moving pieces in the banking industry right now, it's difficult to "just stay above the fray."

"Today's environment is so politicized, is such a moving target on the regulatory front, you don't know who's up and who's down and who's going to win, who's going to lose," he says. "So we're persevering and continuing to stay focused and pursue our strategy on the premise that over the next two years as the new norm prevails ... common business sense will ultimately prevail. But in the near term, it's tough."

To support its continuing expansion, First Niagara recently moved its headquarters to Buffalo from Lockport, N.Y.

Along with moving headquarters, the firm has also applied to the Federal Reserve to convert from a thrift to a bank holding company as well as to change lead regulators from the Office of Thrift Supervision to the Office of the Comptroller of the Currency. Last month, the company received first-time investment grade debt ratings from both Moody's Investors Service and Standard & Poor's Ratings Services of Baa1 and BBB-, respectively. First Niagara previously received BBB ratings from Fitch Ratings.

First Niagara says the ratings will help it access the debt markets easier and further contribute to its long-term growth aspirations.

Still some investors worry about the company's ability to execute on two integrations at the same time.

"First Niagara possesses a lot of the characteristics of a winner," DelMonte says. "It has a strong balance sheet with clean credit quality, competent management team and a footprint being created by disruption in the marketplace. The buy-in for investors is that when all the dust settles First Niagara is going to emerge as a premier regional banking franchise in Northeast. Before all this it was just a community bank in the upstate New York."

--Written by Laurie Kulikowski in New York.

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