Koelmel Out at First Niagara as Acquisition Strategy Falters

John Koelmel seems to have joined a list of CEOs to pay the price for expanding their companies too aggressively.

First Niagara Financial Group (FNFG) said late Tuesday that it had replaced Koelmel as president and chief executive after more than six years on the job. Gary Crosby, the Buffalo, N.Y. company's chief administrative and operations officer, was named interim president and CEO.

The company's performance has suffered since it embarked on an acquisition spree in April 2010. Last year, First Niagara's market cap fell by almost $250 million, and it posted a total return in 2012 of negative-4.8%.

The last straw may have been First Niagara's purchase of more than 100 HSBC Bank branches in upstate New York and Connecticut. The company was forced to divest a number of those branches to address antitrust concerns. Robert Wilmers, chief executive of crosstown rival M&T Bank (MTB), hinted in his annual letter to shareholders that First Niagara overpaid for the HSBC branches.

M&T took a hard look at buying the branches, but its offer "fell short of the eventual pricing," Wilmers wrote.

Cost savings and earnings accretion from the HSBC deal, as well as two previous whole bank deals, never materialized, says Ted Kovaleff, an analyst at Informed Sources Service Group. "I've been very disappointed," says Kovaleff, who owns First Niagara shares. "We never got to enjoy the promised results of all the acquisitions."

"Our sense was that the company under Koelmel pursued growth for the sake of growth and this was not always consistent with shareholder value creation," Josh Levin, an analyst at Citigroup, wrote in a Wednesday note to clients. "We think the potential for better execution and value creation is higher than it was" under Koelmel.

A First Niagara spokesman said that Crosby and Thomas Bowers, the $37 billion-asset company's chairman, were not available for comment. Koelmel did not return a call seeking comment.

First Niagara's buying binge began with its 2010 purchase of Harleysville National for $237 million. A year later, it bought NewAlliance Bancshares in New Haven, Conn., for $1.5 billion.

Both of those acquisitions were outside of First Niagara's traditional upstate New York territory, so the company was unable to benefit from widespread expense cuts, Kovaleff says. "The only cost savings you were going to get were essentially in the back office, because they weren't in the footprint, and you weren't going to be able to eliminate duplicative branches," he says.

First Niagara's problems extend beyond overzealous acquisitions, John Pancari, an analyst at Evercore Partners, wrote in a note following the announcement of Koelmel's departure. Pancari expressed concerns about the company's heightened net interest margin risk and a "levered up" balance sheet. In a note to clients Tuesday evening, he also wrote that First Niagara was battling "weakening quality loan growth, slipping credit trends and thin capital."

Other problems cropped up along the way. The company's fourth-quarter earnings fell from a year earlier after First Niagara adjusted the amortization rate on some mortgage securities.

Costs remained persistently high, too. First Niagara in January said it would cut yearly costs by $40 million in 2013, as its efficiency ratio rose to 69.4% as of Dec. 31.

"We fully understand and embrace the need to run today's business more effectively and efficient," Koelmel said in a Jan. 23 conference call with analysts to discuss quarterly results.

First Niagara's proxy statement, filed Thursday with the Securities and Exchange Commission, provided no indication that any changes were afoot. For instance, the filing states that First Niagara had awarded Koelmel $2.2 million last year as part of a long-term incentive compensation plan.