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First Niagara Financial Group, Inc. (NASDAQ:FNFG)

Q4 2008 Earnings Call

January 29, 2008 11:00 AM ET

Executives

John R. Koelmel - President & Chief Executive Officer

Michael W. Harrington - Chief Financial Officer

Daniel E. Cantara III - Executive Vice President, Commercial Business and Regional President

Analysts

Damon Delmonte - Keefe, Bruyette & Woods

Richard Weiss - Janney Montgomery Scott LLC

Operator

Greetings, ladies and gentlemen, and welcome to the First Niagara Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. John Koelmel, President and Chief Executive Officer of First Niagara. Thank you. You may now begin.

John R. Koelmel

Thank you very much, Ryan. Good morning, everyone. With me on the call today are Mike Harrington, our Chief Financial Officer; and Dan Cantara, who runs our Commercial Services Business Unit.

After my opening comments, Mike and Dan will provide some additional color on our 2008 results as well as give you a sense of what 2009 holds.

Our fourth quarter continued a sting of solid performances. And as we put 2008 behind us, I'd like to start by taking a few minutes to take a look back on the year as well as reference the current state that our franchise.

In what's been an unprecedented time in which we all experienced an incredibly challenging and dramatic economic downturn, unforeseen speed and magnitude, volatility, that's badly shaken the foundation of the financial industry.

At First Niagara, we're intensely proud of what we have been able to accomplish.

Despite the strong headwinds of a catastrophic storm for many, we were able to profitably sustain a strategic progress begun in 2007. As we called out another annual cycle, we're very proud that we ended the year on a stronger position then when we began.

There's a very short list of banks that can cite higher operating earnings in 2008, ours bumped up by 9% compared to '07. Our highest stock price one year earlier, we enjoyed robust appreciation of 34% as of December 31. A higher dividend pays out. Our shareholders received the 4% dividend increase for the year and higher tangible book value.

At year end our tangible book ratio was 11% and our tangible common equity ratio was 9. That set of accomplishments was the direct result of our concerted efforts to realign a franchise around our competitive strength in a very focused manner and continue to be very disciplined and executing our customer focus strategy.

An improved execution has enabled us to make continued strides in a number of key areas again this year. The commercial franchise, under Dan's able leadership delivered another solid performance, marked by strong double-digit loan growth and further cross selling of fee-based services

We've reengineered our commercial processes around local decision making, leveraged our in-depth knowledge of our markets and aggressively continue to hire seasoned lenders. And the outcome, the result; many new and extended relationships. There is no question, we are taking market share from our primary competitors.

On the retail side; we brought in Lanny Little about a year ago from Wells, and he has really taken our efforts to another level. He fundamentally transformed our approach to consumer in small business relationships and that's enabled us to increase our core household numbers while being even more disciplined in our pricing and improving the underlying profitability.

We pushed outmost over high-priced deposits and that was key to the significant improvement in our margin. We also reinvigorated our sales and service activities and it's well evidenced by our client satisfaction and loyalties scores.

This financial industry meltdown is proving anything, the value of a stable, reasonably priced deposit base and that's exactly what we have. We've also continued to manage our expense base intelligently, maintaining a tight check on day-to-day expenses or continuing to fund key growth initiatives. And our efficiency ration consistently remained below 60% though out the year.

Perhaps our most notable accomplishment's been our track record on credit. We haven't incurred any of the outside charges that have reflected many other institutions. That's because we never strayed from our disciplined under writing practices and our in-depth knowledge of individual markets, which allows our local lenders to make intelligent credit decisions.

Under Dan and Kevin O'Bryan's stewardship, we've avoided the troubled exposures that have plagued the industry. Although we did see some upward pressure on our credit staff during the last quarter, as the impact of this recession begins to deepen and non-performance are still less than 75 basis points of total loans and our charge-off rate for the full year was only 28 basis points.

So we head into 2009 with a stronger balance sheet as we've ever had.

In October you are well aware, we supplemented an already solid capital position with our own common equity offering that netted over $100 million. And then we accepted the Government's invitation to participate in the CPP Program and received a 184 million of capital at the end of November, which as I mentioned earlier, I think is our tangible equity ratio at over 11%.

That early inclusion by the Government in the program is a clear affirmation of the strength of our franchise and a sign of the confidence in our ability to deploy the added capital to meet the lending needs of our customers, benefit the communities we serve and ultimately provide our shareholders with the long-term growth they expect. Obviously, its non-stop and incredible media, political scrutiny, as to how exactly those funds are being employed by the recipient banks.

And the channel (ph) are they really being used to designed to feed the credit system in the credit-starved borrowers.

I can only reassure you that First Niagara we have been and continue to be there all along in meeting the credit needs of our local markets. Do all our originations line at credit advances last year sold at almost for $3 billion, three billion with a B.

And that's 18% more than 2007 and a creditable outcome under any circumstances let alone in this much tougher economic environment.

In fact in the fourth quarter alone, we supported the families and businesses of upstate New York by lending almost $800 million. That's our strong capital position that will enable us to further stimulate our markets as we move forward in 2009.

So all in all, with nearly 300 million of capital added in the fourth quarter allows us to pursue our growth strategy without any trepidation. Capital, clearly king in this environment and we are in a very, very good position in that regard.

And we carry that same sense of energy, confidence and opportunism into 2009. We're not distracted by any need to rethink our strategy or having to dig out from under any big write-offs or charges. And that gives us an advantage over many of our competitors and hence we intend to keep playing offence and further capitalize on our opportunity.

But we are pragmatists and we are definitely mind full of the very fragile economy and market conditions. So you can count on us to proceed cautiously and pursue a prudent course of action.

While the upstate New York markets have faired competitively, and comparatively much better than the rest of the country, we're certainly not immune. And signs of pressure are becoming more evident. But trust us, there is still a lot of good business to be had and we'll continue to stay after it.

In conclusion; we worked very hard to put ourselves in a strong position and we're very, very proud of last year's performance. More importantly, we're very bullish on our competitive opportunity. While many others were continued to be distracted by the industry turmoil as well as their own reality, we're confident we can further capitalize on our strengths for the benefit of both our customers as well as our shareholders.

With that, let me turn over to Mike. Mike and Dan will walk you though our operating results and take you through the numbers in a little more detail. Michael?

Michael W. Harrington

Thanks, John. Good morning. As just indicated 2008 was a very successful year for us as we produced outstanding financial performance and advanced the number of important strategic initiatives.

That we're confident we'll drive along in terms of growth. Against the backdrop of nearly daily reminders in the media that the turmoil is offering (ph) many other financial institutions, we have produced steady results and remain true to our business principles.

Before I start my review, please note that all balances will be stated in averages and mostly indicate otherwise and to help with an apples-to-apples comparison, I will exclude the effects of the credit layback position which closed in mid-February when discussing year-over-year trends and changes in balances.

Our solid performance continues in the fourth quarter of 2008 with operating net income of 22.8 million and earnings per share of $0.20. For the year, net operating income was up an impressive 9% from 2007. Operating earnings per share were $0.83, that's $0.03 or 4% better than 2007.

Now I'll provide you a bit more detail on our strong performance.

Let me start-off with our lending activities; our combined commercial loan portfolios grew by 405 (ph) or 14% in 2008 and loan originations topped 2007's exceptional levels, both outstanding in every region. Also, total lines of credit grew by 26% as both new and existing customers keeping their relationships with us.

In the fourth quarter, commercial loans grew by a healthy 7% annualized over a linked-quarter. Commercial business loan balances were higher at 24% last year. As we generated another year of growth above the $0.06 mark. Solid state-wide production from our middle market and small business sectors was augmented by higher line usage. And the CNI pipeline of approved loans picked up in December compared to the slower pace seemed growing in the quarter.

In the fourth quarter, CNI loan balances were higher than the linked-quarter by an annualized 9%. Commercial real estate loans posted solid results in 2008, with balances ending up 11%, significantly beating 2007's growth rate.

Another strong year of originations and lower levels or pay-downs due to decreased competition from financial conduits and insurance companies combined to generate robust growth from our largest loan portfolio.

For the fourth quarter, accrued balances were above the linked quarter by an annualized 7%. While the array of commercial loan growth has naturally decreased from the exceptional face of early 2007 we remain very pleased with the ongoing expansion of the portfolio, especially given the realities of the slowing economic environment in our footprint.

And we are continuing the move toward a more profitable bank loan mix as commercial loans now comprise 57% of the total loan portfolio, an indication of the ongoing and successful transformation of our franchise. As our loan production levels slow, we are building market share by adding quality customers that have become a science fad (ph) with our current providers of standard test or services and we're retaining more of the same business because of our improved strength in the marketplace, a clear sign of our substantial capabilities as a commercial service provider across the Upstate region.

Turning to the home equity portfolio; loan balances increased by 37 million or 7% for all of last year and grew by an annualized 11% over a linked quarter as our successful marketing efforts drove application volumes 21% higher in 2008. This in turn led to a significant increase in loan usage for the same period.

Additionally, most customers chose the variable rate line of credit versus our fixed product; a change from our 2007 behavior in anticipation of the declining rate environment in 2008. This portfolio continues to perform well with total delinquencies remaining below 1% at year-end.

Finally, the residential mortgage and other consumer loan balances steadily declined by 360 million throughout 2008. Our reversal (ph) was successful at originating over $200 million in home loans last year, consumer preference continues to be for the long-term fixed-rate mortgage products which we originate and sell into the secondary market.

Nevertheless, we continue to be very active mortgage lender in our marketplace and are heading into 2009 with a solid line of loans in place.

Looking at our available funding activities; core deposits rose up by 242 million or 7% in 2008. The ongoing change in deposit mix remains positive. That's core deposits are now 66% of total deposits, a nice increase from 63% a year earlier.

Contributing to the solid growth, there was a strong increase in municipal money market accounts and our business development efforts really paid off in this market segment as very successfully added municipalities for our program across the state.

Non-interest deposits also grew by 22 million in 2008 as our commercial banking units focused on expanding customer relationships through deposit gathering. Over the last half of 2008, the majority of our CD portfolio re-priced and our steadfast deterrence to a disciplined pricing strategy helped to substantially lower the portfolio's overall cost for the year.

Our branch dep has done a great job of retaining and maintaining customer relationships contributing to our profitability by switching the majority of their CD balances to the lost money market accounts. Total deposits declined by 3% for the full year primarily due to the reduction of CD balances of 431 million. The addition of active checking accounts is the real key in creating a solid and long-lasting bond with the customers, whether they are for retail or commercial.

We're focused on gathering and retaining these relationships and building accounts as evidenced by the pick-up in our checking deposits per hedge for 2008.

Let me now spend a few minutes on our investment portfolio. As we have noted previously, we did not earn any GSE preferred securities and 59% of our investment portfolio is MBS guaranteed by the GSEs (ph) now presumed to be fully backed by the U.S. Government.

Virtually all the remaining portfolio, 559 million or 38%, is comprised of municipal securities and non-agency CMOs. Municipal portfolio is comprised primarily of short-term municipal bonds totaling to 296 million with all but one bond with the par value of less than $1 million, below investment grade.

Our non-agency mortgage-backed securities with a book value of $264 million continued to be highly rated with 87% of the bonds rated AAA and all but one security rate of less than investment grade.

At year end the portfolio had an unrealized pre-tax loss of $35 million. We continue to be diligent in monitoring the performance of our entire portfolio with a special emphasis on the non-agency book.

Given the uncertainties around this asset class caused by the ongoing housing crisis, and potential Government innovation. Although our future outcomes are difficult to predict, it is possible despite the quality of the portfolio, that some of the bonds could become impaired if conditions continue to worsen.

As we have also noted previously we own three CDO (ph) trust preferred poles with a total par value of $3 million. At year end one of these poles was determined to be other than temporarily impaired and written down to fair value with a pretax charge of $700,000. Excluding bonds with a value of $1.6 million and considered nearest size of credit deterioration at this time, it could become exposed to OTTI (ph) in the future.

Before I move on to our operating results let me give... let me have Dan take a few minutes to review our clarity and share his thoughts on our current operating environment. Dan?

Daniel E. Cantara III

Thanks Mike, and good morning everyone. Overall, credit loan bonds continue to be generally consistent with our expectations. Especially in light of the macro environment in early sign pointing to an accelerating softening in our upstate New York marketplace. For the quarter, non-performing loans increased by just two basis points or lessen than $2 million. Offsetting this positive trend with a higher level of net charge-offs which total posted $8 million an annualized 49 basis points of total loans.

Although 50% of these charge-offs came from just two fully performing credits, it is clear that economic conditions worsened further in the fourth quarter and we have entered a new and warm certain environment as 2009 gets underway.

The long lost adequacy ratios, including coverage of non-performers at a 167%, remained strong. We also have to level of our allowances over the year with our provision exceeding next charge-offs by 26%. Nonetheless, it is evident as the severe downturn in economic activity nationally has begun to take hold on our upstate New York markets and that may, despite the quality of our underwritings, lead to higher level of credit losses in the coming years -- coming year.

Evidence for the softening accounting includes is a modest negative migration of a loan loss risk ratings as well as higher levels of delinquencies versus previous quarter. But, on a more offbeat note, despite the weakening economic conditions, we're very much open for business. New customer activity as noted previously by Mike and John, we arranged recommend us part (ph) as our competition closed in the marketplace and costumers looked to losses to serve all their needs in these difficult times.

At this point, I'll turn it back to Mike.

Michael W. Harrington

Thanks Dan. Moving on to operating results. Net interest income for 2008 increased by 44.4 million or 20% above 2007, a substantial improvement over the last year, cast by our fourth quarter increase of $1.5 million. This growth was direct result of our active and on going efforts. It increased the size of our balance sheet through organic growth and acquisition, reduced our funding cost through the execution of our deposit pricing strategy; improved our mix of deposits by deemphasizing CD sales and promoting the gathering of relationship building act and checking accounts; and finally in approving the mix of our earnings assets with our focus on growing higher yielding commercial loans.

Loans had a single impact on net interest income for the year was returning to disciplined CE pricing strategy. The fourth quarter average yield of this portfolio has dropped by almost a 160 basis points from a year ago to 200, 2.80% (ph) while the majority of this income was reprised by the end of the third quarter, our retention rate is held strong throughout the year attesting to our relationship building approach with customers.

And that CD pricing discipline also extended to our core deposits, including those accounts acquired from the Greater Buffalo Savings Bank. Our active management of these accounts and a lower rate environment combined to drive these rates further. In fact the fourth quarter rates on lending market accounts, the largest component of our core deposits, were reduced by a 188 basis points from a year ago and now stand at multi-year allowance.

(inaudible) also lower by 98 basis points from a year ago and we continue to extend the maturity of these borrowings as part of our overall asset liability management strategy to minimize our interest credit risk position. Effect of our year-long efforts resulted in a 43 basis point increase in our fourth quarter tax equivalent and interest margins at 3.68%, the highest we have seen in over two years.

In the quarter, net interest margin remained stable from the linked quarter as we continue to successfully manage competitive deposit pricing pressures, smartly deploy our capital proceeds and encourage lending activity across our markets.

As for fee income; operating non interest income for 2008 of 160 million was consistent with the prior year as industry wide softening in the insurance renewal rates was offset by higher deposit related banking service fees.

While we see some deterioration in the softening of the insurance market pricing, we don't anticipate any benefits of this trend until early 2010. Wealth management fees rose by 5% in 2008, increased referral activity from branched bankers helped to raise financial consultant production and mitigate the effect of the downtrodden financial markets.

Non-interest income for the current quarter was 26.6 million or 1.5 million loan on the third quarter levels reflecting the ongoing challenges in the insurance market and insurance market. Additionally, recession turbulent fear is for reduced demand at branched-based investment security sales.

That's for operating expenses. Operating non-interest expense in 2008 of 226 million was 8% above the prior year primarily due to the absorption of Greater Buffalo Savings Bank staff, long return of salary and benefit inflation.

Marketing cost increased by 26%, primarily due to the company's aggressive statewide advertising campaign which has been successful in generating new business and dramatically increasing brand awareness.

The continued discipline management for the expense base helped to improve the efficiency ratio from 62% in 2007 to 59% in 2008, the lowest level in three years. Non-interest expense for the current quarter increased only 1% from the prior quarter as lower employee helped to care cost minimizing impact of higher marketing and seasonal branch maintenance cost.

On the capital management front; as John stated earlier, we are in excellent shape for the fourth quarter equity offering and entire participation but the year end capital ratios to the first levels to the tangible equity ratio and tier I capital ratio in excess of 11%.

We remained attentive to shareholder returns just having to quote a common dividend of $0.14 per share consistent with the prior quarter and prior year and expect to continue to pay dividends at this level given our outlook for 2009, in the strong and consistent cash earnings we produce.

Regarding the payments (ph) which we received in late November, the 5% deferred dividend plus the cost of the warrants amounted to $1.2 million in the first quarter. Going forward, the fourth quarter equivalent of the dividend, inclusive of the warrant expenses, 2.7 million.

And finally on the subject of earnings in 2009; despite the truly unprecedented economic environment, which we find ourselves in, due to this environment, predicting earnings is obviously very difficult.

With that said, we offered a following for your consideration: Expect our margin to be in the 360 zone, for the year. Often levels achieved in the fourth quarter and possibly drifting up or down by five basis points on an inter-quarter basis. We expect this to happen because given the pull between deposit cost and what we expect to have with deposit costs, we're hoping as deposit cost to be able to manage us and keep them down, but also we're seeing asset yields drop as well, so that's why we are guiding into that 360 zone.

With the 360 zone for the margin we are projecting, average asset earnings asset yield to be in the 9% zone or at the 9% level, but included in this 9% is a full effect of the leverage strategy we deployed to neutralize the cost of the deferred stock. As for provision for loan losses; as we've noted credit trends have begun to soften, and given the current environment, maintaining strong coverage ratios is a priority. We intend to further strengthen our allowance in the foreseeable future, net of change in that charge-off activity that may surface.

Fee income growth to be solid and in a single-digit range and expense... and we expect expenses inclusive of a few uncontrollable items, to grow by 5% to 7%. These two uncontrollable items are reference are $2.5 million in additional pension cost related to the declining asset values.

And then $5 million of additional FDIC cost.

Lastly on the subject of taxes, we expect our affective tax rate to increase by 150 basis points due to the phase out that allowable deductions for re-dividends and the cap on the deduction of executive compensation associated with the participation in the capital purchase program.

And as you update your model, make sure you show account reflecting the impact of our common stock offering as well as the CPP warrants. Diluted earnings shares today are 115,800,000.

With that John, Dan and I would be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session. (Operator Instructions) And our first question comes from the line of Damon Delmonte with KBW. Please go ahead.

Damon Delmonte - Keefe, Bruyette & Woods

Hi, good morning guys. How are you?

Unidentified Analyst

Hi Damon,

Unidentified Analyst

Hi, Damon, how about you?

Damon Delmonte - Keefe, Bruyette & Woods

Good, thanks. With respect to your outlook for upstate New York region, are there any areas in particular you've seen a rapid deterioration in economic conditions or would characterize it more as a broad based -- more broad based across the entire space?

John Koelmel

We don't see any sector that's really moving in any kind of dramatic way, Damon. If anything is that we were a bit surprised there we had a couple of borrowers that are performing at current at September 30, so turnaround and file bankruptcy in the fourth quarter or so. The inherent risk in the portfolio, what we see in general across the state, clearly beginning to soften. Its just a periodic one-off surprises that underscore the volatility uncertainty of where we sit today.

Damon Delmonte - Keefe, Bruyette & Woods

Okay. And Mike kind of a specific question regarding charge-off levels, regarding your commentary with the provision in the reserve level going forward, would you characterize this quarter by level of charge-offs as unique or do you think that something in the 70, $80 million range is probably be more expected in '09?

Michael Harrington

Well, I think as John just noted, we had a couple of credits that came out of nowhere and it is unknown and knowns and we like to call them that creates some volatility in what that charge-off number is going to be. So whether or not its 49 basis points is a good number, is difficult to predict going forward. But even if it was less than that our intends to continue to build our provision like we did this year. So if charge-offs are less we're still going to ...we're still going to want to move our provision up to a higher level.

Damon Delmonte - Keefe, Bruyette & Woods

Okay great. That's all I had for now thank you.

John Koelmel

Thanks Damon.

Operator

(Operator Instructions). Our next question comes from the line of Rick Weiss with Janney Montgomery Scott.

Richard Weiss - Janney Montgomery Scott LLC

Good morning guys.

John Koelmel

Hey Rick.

Unidentified Analyst

Good morning.

Richard Weiss - Janney Montgomery Scott LLC

If you could flash in with regard to loan growth and would you ever consider doing more integrated participations or what you are feeling toward share national credits?

Michael Harrington

We've taken a measured view of that. We're getting more opportunities too and there is some good opportunities for us to participate. To the extent we do, we tend to focus on companies that are in our general footprint even though we may not be leading the credit. And we like to have it, the geographical knowledge into general industry knowledge to participate and monitor those credit mix.

So, we have taken a modest step in that direction, clearly opportunities will increase in 2009 given the pull from our competition.

John Koelmel

And underscore Rick, is that on a national basis that we're looking, our ability to move to the market and take share and employ and participate literally and figuratively, is a function of the bigger guys pulling back and retrenching us further establishing our credentials to the table, whether its on our own or as very active participant with some of the larger local companies that previously give us full consideration.

So, we're not stretching looking just to grow the footings. We want to continue to work the market, the footprint. But at least we are able to do that as I might have anticipated.

Richard Weiss - Janney Montgomery Scott LLC

Would be kind of like the dollar size or you the amount of exposure that you would go in?

Michael Harrington

Well I think consistent with the type of risk and that we're comfortable with, are the non-share credit as you talk that. We've looked at pieces and participations and that 15 to $20 million range north of that. And keeping with our overall credit philosophy and our overall capital base in our comfort zone, we start to see that pull back a bit.

Richard Weiss - Janney Montgomery Scott LLC

And do you have approximate dollar amount is on the books now of participated loans?

John Koelmel

I think it's in the 200 to $250 million range.

Daniel Cantara

I was going to say the same thing, it was a couple of hundred million bucks, Rick.

Richard Weiss - Janney Montgomery Scott LLC

Okay, so not too much on that.

John Koelmel

And most of ours indicated all were indicated (ph) if not most of it. It's not all as in upstate New York.

Daniel Cantara

Which is I what I will say are earlier that's all.

Richard Weiss - Janney Montgomery Scott LLC

Right. And to, as a result as I guess trying to leverage up now it's getting more difficult, Mike I think we talked about this as the rates are coming down of tar program, how long do you think you takes just really to leverage up?

Michael Harrington

We always talked about few years, a few years and not only leverage the preferred but also the following offering and that we were going to, that's how we are going to with the plan to do that over a number of deals. And Daniel?

Daniel Cantara

But I'll think that a reverse order, Rick and we rally a September rates in the 100 turning up to a 150. we said then, that was a multi-year process deliveries that up, took that and one of the expectation that we could do the same over a short period of time, so we're a little bit careful there. I want to say that to suggest, we can talk and leverage million in new capital to another 3 billion in our mark to on doing more of it.

We just wanted to ensure when we raised it that we have that current capital that sustain in the growth that we referenced, again with money the minimum want to go deep-end most of our capital positions, to maintain a lower cost to capital to enable us to complete the picture.

So, confident that we can continue take shares in spite of the challenging times, but I don't want to over quote to the math as to the how readily we can leverage the full 300 million versus the 100 million we raised on our own.

Michael Harrington

No, we did see talk proceeds as we did execute the strategy just to elaborate our balance sheet on a whole sale basis, so we have to look at our security, you shall see they are increasing and then we borrowed money to fund, the security purchases to neutralize the cost of the dividend.

Unidentified Analyst

Do you think you will be able to neutralize it for 2009?

Michael Harrington

Yes.

Unidentified Analyst

Okay.

Michael Harrington

Yes, we are well worth 60 to 70% through that as of year end putting that strategy.

Unidentified Analyst

Okay. And basically, I guess preferred dividend would double in the next quarters. Is that correct?

Michael Harrington

Yes. A little bit more than that, we had a less than a half a quarter.

John Koelmel

It was up there for 40 days, it was November 21st so we really have about 40 days with it.

Michael Harrington

I mean the exact number is 2.7 million per quarter.

Unidentified Analyst

Okay. One of the things I am finding very confusing is sort of the accounting for the preferred, I guess you are taking a mark-to-market on those, I don't know if it's right term?

Michael Harrington

No, just the warrants have a sort of preferred dividends 5% and then the warrants adds some value that's also will have to be expensed over the life of that one to presume life of the warrant. So whatever... yeah preferred is on that 84 million and whatever that math is we expect to be at 5% then you have to add on the expense to the warrant on top of that, and that gets you to the 2.7 million per quarter 10.7 million annualized.

John Koelmel

And there is simple math, its 9 million bucks on the preferred based on the face of month and you're throwing extra 2.5 million on top of that for amortization of the costs of the warrants. They are not unique that's you'll see everybody doing.

Michael Harrington

That's going to be done.

Unidentified Analyst

Okay. And also I guess some just doublecheck on intangible on a book value of 820 right. That's just your... that's in your press release if you're giving tangible equity that includes the TARP price or I'll will just take the TARP out?

Michael Harrington

Intangible equity intangible?

Unidentified Analyst

No, no on the intangible book value per share.

John Koelmel

Yeah what's in the table of each 20 and the 11% includes the TARP you back up the TARP and the 11 drops down to 9.

Unidentified Analyst

Okay that's nice. And 820.... 820, right because that's just tangible equity.

John Koelmel

It's not just tangible (Multiple Speakers)

John Koelmel

It's going to drop down.

Unidentified Analyst

Okay.

John Koelmel

All right.

Unidentified Analyst

Okay, thank you.

John Koelmel

Thank you.

Michael Harrington

Thank you.

Operator

Our next question comes from the Jon Stow (ph) with Sandler O'Neill.

Unidentified Analyst

Good morning guys.

John Koelmel

Good morning John.

Michael Harrington

How are you?

Unidentified Analyst

Good, thanks just a couple of clarification questions. Mike did you say there was a 700,000 pretax OTTI on one of the CDO towards this quarter?

Michael Harrington

Yes.

Unidentified Analyst

Okay. And that's for through other CN...

Michael Harrington

Right, exactly yes.

Unidentified Analyst

Okay. And then just to follow up on Damon's question earlier on the provision going forward, you mentioned that we have year-over-year is that on a full year basis so in other words from the 22.5 million in '08 or up according run rate basis from the 8 million in the fourth quarter?

John Koelmel

Clearly we would expect Jon on an annualized basis, we're going to be up or more 28 basis points for the year.

Unidentified Analyst

Right.

John Koelmel

The tough part is ballpark of where it goes, we sit here and think the inherit risk and our portfolio would result in 49 basis point charge-off number for all of the next year, no, but just don't know where the economic slip and slides going to take us. So do we think its north of 28? Yeah definitely and we're planning to build the level of our allowance in anticipation of some continued erosion.

And we're trying to balance, trying to be as transparent as we can. Yeah, we didn't expect 49 in the fourth quarter as Dan said couple of credits come out of nowhere, disappear from nowhere. So to the extent that type of... if that occurs so you're going to continue to see some abrasion. So, no our gut tells us 49 isn't a reasonable run rate but we're not going to sit here and tell you it couldn't happen either the kind of slips and slides or other somewhere owner ramification and so. With you guys and sort of through all of that, but 28-49 with there some guys post you can run through.

Unidentified Analyst

Okay. And you said that the unexpected credits were roughly 50% in quarters?

Michael Harrington

Right.

Unidentified Analyst

10.9 million?

Michael Harrington

Yeah, that's correct. Two, business making small middle size credits that's just in industries that particularly hard hit by that of economy and one from fully performing to bankrupts.

Unidentified Analyst

All right great, thanks guys.

John Koelmel

Thank you.

Operator

(Operator Instructions). We have a follow up question from Damon DelMonte.

Damon Delmonte - Keefe, Bruyette & Woods

Hi guys just a quick follow up, short of before Christmas I believe it was P&C announced that they were be divesting pretty decent credit on the Western Pennsylvania area. Just kind of wondering what your stocks are with M&A and bank... core bank deals have made you probably weak or must have been assisted in some fashion, but do we know what's you're thoughts are about maybe if you're looking to experience out of upgrading to any of Western Pennsylvania markets?

John Koelmel

Well I'll give you the same answer that you've heard from us consistently in the past. Priority one for us is to continue work of footprint, stay focus, deep and strengthen our reach across up state New York. But there is no question that we have longer term aspirations that would take us beyond our current geography and as always Damon you're not going give us bite on any particular opportunity that's out there.

But we'll continue to work where we think we've got some strategic benefits, strategic upside. And I think broader based to your question, branch deals I think a number of organizations are going after the right size operation or balance sheet and with some time shed some branches and whether they have been nationalized here or overseas. You're going to start to see some more fallout whether on the whole bank side, the pace picks up.

Your guess is probably better than mine but I'd expect to see more of that activity and as we consistently told you guys, we have been hard and we'll continue to take a look at opportunities that we think came together and would service well over the long-run.

Damon Delmonte - Keefe, Bruyette & Woods

Okay, great. Thank you very much for the color.

John Koelmel

Yes, thanks.

Operator

(Operator Instructions).

John Koelmel

It sounds like we're tapped on (ph).

Operator

There are no further questions. Do you have any concluding remarks?

John Koelmel

Just thank you for taking the time. We realize these are busy days and there's a lot to do, so I appreciate your time and interest. And we look forward to chat with you again in another three months. Have a good day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.

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Source: First Niagara Financial Group Q4 2008 Earnings Call Transcript
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