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First Niagara defends bidding process that led to National City purchase

| Thursday, April 16, 2009

The CEO of First Niagara Financial Group — Pittsburgh's newest bank — responded to criticism of its purchase of 57 local branches, saying it fairly won a bidding process that was OK'd by the Federal Reserve and the Justice Department.

"It was a competitive auction. It was an open auction for these branches, and (PNC) solicited any and all bids," said CEO John Koelmel, whose First Niagara Bank is expected to take over 57 National City Bank offices around Labor Day.

Koelmel said he understood that PNC conducted due diligence on "a handful" of bidders before selecting First Niagara. He said the Fed and the Justice Department signed off on the deal.

First Niagara agreed to pay $54.1 million to PNC on April 7 for $4.2 billion in deposits at the National City branches. The deal makes the Buffalo-area bank the third-biggest in the Pittsburgh region.

An industry expert in Florida, though, has complained to the Justice Department that the divestiture to First Niagara represented mere "friendly competition."

In a letter dated Monday, bank consultant-economist Kenneth Thomas questioned the low price that First Niagara will pay for the National City deposits and branches; whether big-bank competitors were invited to bid; and a provision that enables First Niagara to sell stock and debt to PNC.

"My concern is about the actual bidding process," Thomas said yesterday. He owns neither company's stock but has intervened in several bank antitrust matters over the years.

Federal antitrust regulators had ordered PNC to divest the Western Pennsylvania branches as part of its $5.6 billion acquisition Dec. 31 of National City Corp.

"Pittsburgh is not a Chicago or a New York, but it's a good, attractive market," Thomas said. "What you needed was a U.S. Bank or Wells Fargo or JPMorgan Chase. Were they discouraged from bidding• I don't know."

PNC spokesman Fred Solomon declined to discuss the branch-bidding process.

Meantime, First Niagara yesterday set the price for an offering of 27 million common shares at $12.25, which will raise at least $331 million to repay government aid and pay for the branches that it is acquiring from PNC.

The bank sold $184 million in preferred shares to the federal government Nov. 21 as part of the Treasury's Troubled Asset Relief Program.

The stock offering, expected to close around Monday, is underwritten by Keefe Bruyette & Woods Inc. and Goldman Sachs & Co. They have a 30-day option to purchase up to 4.05 million shares, or about $49 million, for a potential total of $380 million.

Koelmel said the additional capital means First Niagara will "probably not" exercise an unusual financing option that it received in purchase negotiations with PNC. Under that part of the deal, PNC would buy as much as $225 million in First Niagara stock and debt by deal-closing time in September. First Niagara asked for and received an option for that financing, he said.

"That was always a 'Plan B' for us, an insurance policy," Koelmel said. "We put that in place because in the middle of negotiations in late February, the capital markets were in disarray, and we didn't know if we could bolster our capital."

"The fact the deposit (price) was low is a function of this being some of the worst times ever for the financial services industry," Koelmel said. "You can't compare the outcomes in historic terms and benchmarks."

First Niagara has 113 branches stretching from Buffalo eastward to Albany, N.Y. It has nearly $9.6 billion in assets and about $6.2 billion in deposits.

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