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Tickers in this Article: FNFG, MTB, KEY
Between the Erie Canal and Niagara Falls, Buffalo once had it all. Companies set up there to be near electricity and good transportation. At the beginning of the Great Depression, Buffalo's population was 573,000; it was the 13th largest city in the United States. Prosperity was in the air. The median income in Buffalo was about $33,000, 40% less than the national average of $55,000. So how is it in all this hopelessness that a bank is able to survive and thrive in places like Buffalo, Rochester and Syracuse? Simple. They have a plan.

A Long History
First Niagara Financial Group (Nasdaq:FNFG) got its start 138 years ago in Lockport, N.Y., just outside Buffalo, providing financial services to individuals, families and businesses throughout upstate New York. These services are provided through its subsidiary First Niagara Bank, which received its federal charter in November 2002, as did the holding company. A couple of months later the holding company was demutualized and shares sold to depositors and investors.

Today, it operates in 22 counties in upstate New York with 117 branches and $6.1 billion in deposits. With its average TTM revenue of $330 million, it's not very big when compared to two of its regional competitors, M&T Bank Corp. (NYSE:MTB) and KeyCorp (NYSE:KEY). KeyCorp and M&T's averaged TTM revenues are $3.4 billion, over ten times that of First Niagara Financial. Despite this obvious disadvantage, it's more than holding its own. On February 15, 2008, it acquired Great Lakes Bancorp Inc., parent of Greater Buffalo Savings Bank, for $141.9 million in cash and stock. With it, came $800 million in assets, deposits of $610 million and 16 branches in the Buffalo area, substantially increasing its presence in the City of Light. Earnings are due to be released on Thursday, July 24, 2008.

A Matter Of Survival
Despite the serious problems faced by the city of Buffalo, the surrounding areas in upstate New York seem to have fared better, if First Niagara's business is any indication. The company's plan includes a move to gain commercial business, achieving double-digit growth in its commercial and industrial portfolio in the first quarter of 2008. Commercial loans now represent 54% of its total portfolio. Business deposits have grown to $605 million and it's moved from sixth to fourth in deposit market share in western New York. To reduce costs in an extremely competitive market, it cut staff by 5% and sold nine branches that weren't a strategic fit. It doesn't sound like much but when you consider commercial loans were up 23%, municipal deposits up 33% and home equity loans up 12%, from 2006 to 2007, it is slowly building a more profitable business. (Discover how to pick apart a reports in Analyzing A Bank's Financial Statements.)

Smart Lending Practices
In addition to the steps taken above, it has maintained a disciplined credit policy with zero subprime activity and a robust business services platform. For instance, 82% of its commercial and industrial portfolio is secured. Management does not intend to throw away a business that's been around since 1870.

Lending activities as of December 31, 2007 include:
Type of Commercial Loan Amount Percent
Real Estate $1.9B 34%
Construction $293M 5%
Business $730M 13%

Further to that, loans also include residential mortgages of $2.0 billion, home equity loans of $503.8 million, and consumer/specialized loans of $311 million. It also services annual insurance premiums of $425 million and its wealth management arm manages another $332.4 million in assets.

First Niagara intends to fill a gap between the big institutions and the smaller banks. In Albany, it has 13% deposit market share compared to 20% for the leader. In Rochester and Syracuse, it's 3% compared to 18-20% for the market leader. These are the opportunities that it's after.

Bottom Line
Upstate New York has more promise than many give it credit. Here's an area that's been ravaged by corporate relocations and plant closures, yet it's still ticking. According to the National Association of Realtors, Buffalo's median sales price for single-family homes was up 9% in Q4 2007 over Q4 2006, Rochester 8% and Syracuse 9%.

According to Equifax as of November 2007, 63% of First Niagara's home equity clients have FICO scores above 740, compared to the New York State average of 49% and only 12% are under 660, compared to 24% for the entire state. Further, 35% of its revenue is from non-interest income products like insurance and investments, up from 25% in 2004. That's diversification. (Credit worthiness determines a borrower's ability to repay a loan, find out how in The Importance Of Your Credit Rating and How is my credit score calculated?)

Two investors who see the forest through the trees are Private Capital, which owns about 7% of the stock and Keeley Asset Management, with 3,066,801 shares or approximately 3% of outstanding shares. Private Capital is famed investor Bruce Sherman's company. The Keeley's Small Cap Value fund is one of the best small cap funds over the last five years with an annualized return of 20.82%, 13.66% better the S&P 500. Their opinions speak volumes over this tiny Niagra bank.

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