S&P affirms ratings on First Niagara

(The following statement was released by the rating agency)

-- First Niagara plans to buy 195 branches, including $15 billion of deposits and $2.8 billion in loans, from HSBC Bank USA NA.

-- We are affirming our ratings on First Niagara and its subsidiary, First Niagara Bank N.A.

-- The ratings reflect our expectation that the enhanced market position and earnings capacity FNFG gains as a result of the transaction will mitigate the weakening of its currently robust capital position.

Rating Action Standard & Poor's Ratings Services affirmed its 'BBB' long-term counterparty credit rating on First Niagara Financial Group and its 'BBB+' rating on subsidiary First Niagara Bank N.A. The outlook is stable.

August 1 - Standard & Poor's Ratings Services said today that it affirmed its ratings on First Niagara Financial Group Inc. (FNFG; BBB/Stable/--) and its subsidiary First Niagara Bank (BBB+/Stable/--) following its announcement it would acquire 195 branches, including $15 billion in deposits and $2.8 billion in loans, from HSBC Bank USA NA. The transaction will result in a $38 billion organization with a 22% market share in upstate New York and a 450-branch franchise ranging from western Pennsylvania through Connecticut. FNFG will fund the $1.0 billion acquisition cost with a combination of approximately 75% common stock issuance and 25% new debt.

This would be FNFG's fourth major acquisition since 2009, essentially quadrupling its size in three years. We continue to view FNFG's rapid growth and the integration challenges posed by this and other recent acquisitions as potential vulnerabilities for the ratings. Nevertheless, FNFG has a track record of successfully integrating acquisitions while maintaining a strong balance sheet and good performance measures. The company ended the second quarter of 2011 with solid earnings, supported by good loan and core deposit growth and low credit costs. FNFG has also augmented its risk management and underwriting processes to support a broader, more diversified footprint.

"Following the HSBC transaction, which we expect to close in the second quarter of 2012, FNFG's balance sheet will be highly liquid, with pro forma loans to deposits of 61%, deposits at 91% of total liabilities, and investment securities about 37% of total assets," said Standard & Poor's credit analyst Catherine Mattson. However, tangible common equity will fall to 6% of tangible assets, from 7.4% currently and 10.5% at March 31, 2010, before the acquisition of Harleysville. Our ratings already incorporated our expectation that FNFG would be unlikely to maintain its tangible capital at those superior levels. Also, given the low risk nature of the assets acquired, we recognize that capital remains adequate on a risk-adjusted basis. However, we view the pro forma tangible ratios as being at the lower end of its peer group, and we would look at further reduction in the tangible capital position negatively.

Related Research "Bank Rating Analysis Methodology Profile," March 18, 2004

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(New York Ratings Team)