Buy puts First Niagara on the map in Philly and Allentown-Bethlehem region. First Niagara Financial Group, an acquisitive community bank based in Lockport, N.Y., has agreed to buy Harrisburg, Pa.-based Harleysville National Corporation, which owns Harleysville National Bank, East Penn Bank, Millennium Wealth Management and the multifamily office Cornerstone. First Niagara says the acquisition is in keeping with its strategy of buying into markets with attractive demographics and long-term growth potential.

The all-stock deal gives First Niagara 83 bank branches in and around Philadelphia and in eastern Pennsylvania's Lehigh Valley, assets of $5.6 billion and deposits of $4.1 billion as well the investment- and wealth-mangement and trust services of Millenium and Cornerstone, which have offices in Allentown, Bethlehem, Lansdale and Spring House in Pennsylvania and in Wilmington, Del., and combined assets under management of around $2.5 billion.

"The communities served by Harleysville are perfect complements to First Niagara's stable and resilient markets in Upstate New York and Western Pennsylvania," says First Niagara's president and CEO John Koelmel. "We're also excited to offer Harleysville employees opportunities to further build their careers with our growing company, while giving them the resources they need to continue providing customers the high level of personalized service they've come to expect."

Bright side

The $237-million price First Niagara has agreed to pay amounts to a premium 37.5% on Harleysville's stock price as of last Friday's close. Using First Niagara's 22 July 2009 closing stock price of $11.60 as the exchange ratio, the deal calls for Harleysville shareholders to receive 0.474 shares of First Niagara common stock per Harleysville share.

In a significant proviso given the trouble some acquirers have got into as a result of buying banks with toxic loan portfolios, the exchange ratio is in this case subject to adjustment if loan delinquencies at Harleysville exceed specified amounts.

First Niagara has forked over a quarterly dividend of 14 cents a share since August 2007. Harleysville paid out a dividend of a penny a share in mid June 2009, down from 10 cents a share in mid March. In the previous 12 quarters, going back to March 2006, Harleysville paid dividends ranging from 18.1 cents a share to 20 cents a share.

"We're very pleased to have found an acquirer with experience in dealing with the integration and cultural issues that come with any two companies combining their businesses," says Paul Geraghty, Harleysville's president and CEO. "In First Niagara, we have a strong and profitable partner that will allow us to maintain our focus on community banking customers, while offering employees and investors attractive growth prospects."

Adds Geraghty: "This is a great transaction for our customers, our employees, and our shareholders."

Anglers

But Dallas-based Kendall Law Group says it's looking into "shareholder claims" that Harleysville's board of directors breached its fiduciary duty to Harleysville shareholders "given that (i) the Company's shares traded at $6.47 as recently as 5 June 2009 and over $14.50 per share in January 2009; (ii) the Company has a book value of over $11.00 per share; and (iii) because the Company agreed to a non-solicitation provision and a termination fee of $10.0 million that will all but ensure that no superior offer will ever be forthcoming."

At least two other law firms are fishing in the same pond.

Geraghty will stay on as an officer of First Niagara to run "his in-market team," according to First Niagara, which plans to re-brand Harleysville's banks in its own image; the jury is still out on branding for Millenium and Cornserstone. The Upstate New York bank will maintain all Harleysville National Bank and East Penn Bank branches, as well as Harleysville's wealth-management offices. It says it has no layoffs in mind for Harleysville's 1,100 or so employees.

First Niagara likes to buy its way into markets. Since late 1998, it has purchased seven New York-chartered banks and thrifts, a single branch of Savannah, N.Y.-based Savannah Bank, seven insurance brokerages, an asset manager, a couple of leasing companies, and five business-service providers -- healthcare-plan administrators and the like. In April 2009, First Niagara agreed to buy 57 former branches of Cleveland-based National City, all located in western Pennsylvania, from National City's new owner Pittsburgh-based PNC; that one is supposed to close in about a month.

With Harleysville and the PNC branches under its belt, First Niagara will have 140 bank locations in Pennsylvania and decent positioning in the state's biggest cities, Philadelphia and Pittsburgh. The holding company has 113 branches in New York. -FWR

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