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First Niagara Financial Group Inc. (NASDAQ:FNFG)

Q2 2010 Earnings Conference Call

July 22, 2010 11:00 am ET

Executives

John Koelmel - CEO

Michael Harrington - CFO

Kevin O'Bryan - CCO

Analysts

Bob Ramsey - FBR Capital Markets

Brian Foran - Goldman Sachs

Jason O'Donnell - Boenning & Scattergood

Damon Delmonte - KBW

Rick Weiss - Janney Montgomery Scott

Collyn Gilbert - Stifel Nicolaus

Mathew Kelley - Sterne, Agee

Operator

Greetings and welcome to the First Niagara Financial Group Second Quarter 2010 Earnings Release 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.

It is now my pleasure to introduce your host, John Koelmel, President and Chief Executive Officer from First Niagara Financial Group. Thank you Mr. Koelmel, you may begin.

John Koelmel

Thank you very much Christine and good morning everyone, welcome again. As usual, I'm joined by Mike Harrington, our CFO and Kevin O'Bryan, our Chief Credit Officer.

Second quarter for us, another very solid performance and outcome on that from our standpoint was at least in line with our expectations. All the fundamentals keep moving in a very positive direction you see either strong balance sheet growth on the asset side. You continue to see the double digit type movement in our commercial portfolio in particular which I think is differentiating evidence of the effectiveness of our strategy and our approach and from the quality of the team that we have on the street day in and day out.

But, for us me in particular want to start with the Pennsylvania update, in particular since we last chatted we have now formally converted and begun to integrate Eastern Pennsylvania. So it's now little more than three months for that franchise in north of 10 for [Western PA] continues to demonstrate and take hopefully for all of you, the execution of risk question well that's mostly hung-over ahead but continually referenced as we have stressed our franchise, doubled our footing, moved into core-to-core bigger market, like to believe that with now the benefit of a more full look back albeit more to come, but the look back that you are able to see and evaluate, paints a very, very positive story and while I am very pleased to reference here briefly and Michael will take you through more of the detail.

And then not only as translated to date relative to core operating trends and statistics, but bottom line results we have talked year and 15 months ago when we announced [The national City] and our usual transactions we are expecting less than 2010 combined in those two transactions somewhere in the $50 million zone on an operating basis and I am proud to say that we are already more than a halfway there even with the delay and the timing of the Harleysville franchise, evidence of just how well those teams are executing in the organization overall continues to perform. Harleysville, senior about 100 days in core deposits about 95% of what we acquired even better, I think that how we came out of the gates in Western PA very nice household growth.

We are seeing positive trends there as well and on the loan side talking to Kevin before we got going here demand very, very strong and I think you see referenced in the release north of $300 million in new origination. So, evidence that we have come out of the gate very, very positively there as well as continuing to sustain real strong outcomes on the western side of the state.

Retail core deposits are now well north of a 100%, well north of what we acquired just kind of 11 months ago and I said to others that's well in advance of anything that we had modeled or otherwise suggested. The commercial loan demand continues to bump along very nicely there. As you see balance was up the better part of a $100 million or more and that pipeline continues to expand and what's been a nice best practice benefit there is their ability to execute on the wealth management side of the house has even been better than our historical pattern and performance and we are not leveraging that across the greater footprint.

So, be anything, but we miss if it just didn't give kudos to all those involved whether beyond the ground in Eastern as well as Western Pennsylvania. So, whereas the rest of the organization that continues to demonstrate our ability to execute, convert and integrate with the best of them.

Really good news is that none of that continues to come at the expense of the core business, the legacy business if you will where you continue to see that strong loan growth as everyone just started to report off late that's inconsistent in terms of who is able to grow that balance sheet in particular as the loan portfolio and this is at least four or five quarters in a row now where we continue to produce double digit growth on the loan side as well as on the deposit gathering front as well.

So, our ability to work the local markets continue to take share, whether we are competing against the bigger boys and girls or whether we are working more of the Q&D bank market, we believe we continue to differentiate in our performance. So it is reflective of that. On the credit front, punch line is couldn't be more proud of the team.

We've stayed the course that were drifted quite along gone in the ditch over these last several years for that the many before, but just continue to see ample evidence of that in terms of how we work the book and what we do and in this case, how we work the relationships to ensure we have got the right collateral and if we need more, we continue to secure that, that back away from where relevant the need for personal guarantees and otherwise we are thrilled to work out the more problematic credits and as Mike will chat little bit more.

Our approach to disclosing over the quarter-on-quarter troubled portfolio in Harleysville is indicative of the fact that we don't look at ourselves as a workout shop and we think we can make an extra buck pulling it off and so growing the portfolio rather than trying to spend undue time, effort and energy to work out or clean up the more troubled portion.

Having said all that, the headwinds, not giving you anything different from us than you've heard from everybody else. They're blowing a little bit stiffer than all of us in the industry, at least wanted or hoped to be the case of the overall economy.

We've consistently been more bearish than not as to where it isn't going and there is no evidence to indicate that more bearish perspective is off the mark with debate over double dips and all that kind of stuff I won't get into but certainly as we have alongside we see this as a slow rebound and a slow bounce back, don't say that to indicate is problematic here, its just going to be a steady but very slow climb out in terms of Reg reform.

We'll give you a little bit more but there is no question in addition to the overhang there but everybody chats about and comes with double on the details and the rules of Regs that will be promulgated over the next couple of years.

In the short term, the fee income challenges are very real, customer behavior continues to change and migrate, big picture and a better direction in terms of how they are managing their personal finances, but obviously that creates new challenges for us, so as an industry and we are not immune to that as well.

We'll continue to look at and follow closely what the competition in the landscape looks like as that continues to evolve in terms of our account patterns and pricing structure but there is no question that will continue to [nip] us a little bit as we move forward. But put that and the uncontrollable bucket, we continue to just stay focused on that which is within our control, that's start with the customer and we think that has been and continues to be the key to our ongoing success. We've never lost sight of the customer and our ability to be nimble and responsive, proactive, creative for their benefit is really what continues to further differentiate us and ultimately translate into where the kind of growth and performance that you see.\

So, we continue to invest, we run the business for what we believe the opportunities of tomorrow are, not without an eye on the incremental challenges of the current environment, economically regulatory and otherwise, but we haven't waffled or wavered in terms of our commitment to continue to invest in the business built without people systems infrastructure aggressively promote and position ourselves further step up and investment in all of the communities as we serve them and the combination there continues to benefit us we believe in a very substantive way as well as obviously do the right things in terms of how we manage the core business and balance sheet in general.

So, quick little recap for me and I'll swap it over to Michael. No question with bigger, better, stronger today than ever. And that's our continuing result and focus and commitment. Business development the momentum is sustained albeit and a extended soft environment but the team is second to none and continues to produce real strong growth trends and results and the matter of fact as a result is we continue to believe there will be a consistent pool of opportunities both organically and otherwise. On the otherwise, we'll come back on the back end and shared a bit about the world of M&A and our current view of it. But, let me first have Michael walk you through the quarter in a little more depth and detail.

Michael Harrington

Thanks, John. As noted earlier second quarter was another in a string of solid performances, even more impressive as we did it while pulling off to nearly flawless integration of the largest acquisition in the history of this company. With operating income up $49 million, we generated $0.22 per share. Strong EPS growth over both the linked quarter and prior years as both Pennsylvania franchises are contributing in a very meaningful way to our operating results. In fact, versus our expectations that we laid out when we announced these deals, the collective PA franchise's earnings are exceeding our expectations by 20% allowing us the flexibility to continue to invest in our business.

Before I turn to our principal earnings drivers, please note that all comparisons are to the linked quarter. Balances are stated as averages and the impact of the Harleysville acquired balances are excluded unless otherwise noted.

Let's start with commercial loan growth which again posted a double digit gain, growing 15% annualized and matching last quarter's outstanding performance. Both New York and Western PA markets continue to exhibit strong growth patterns which are loan originations and line events is up 11% in those regions from the prior quarter.

And Eastern Pennsylvania is back on offense, generating over $325 million in new loan originations including $100 million in new line commitments. What's really important about these results is that they reflect our move up market strategy, gaining market share, going after larger and more sophisticated businesses.

In New York and Western Pennsylvania, markets we booked over 30 C&I loans that were at least $100 million each for a total of $80 million and we've already added over $80 million in our newly formed capital markets group.

On the retail front, our home equity loans continue to grow and the completion of a successful home equity campaign that helps propel balances higher by 7% annualized during the quarter.

Now on the topic of credit quality, we remain in very good shape. With all credit quality metrics, MPA's, charge-offs and reserve coverage ratios, either consistent with or better and first quarter results. Delinquencies in the upstate New York market and Western PA portfolios also improved not only over last quarter but over year-end 2009.

As noted earlier, the Harleysville distress loan sale was accomplished on schedule, substantially reducing classified loans and further reinforcing our forward looking strategy. We sold nearly $300 million of classified loans of pricing consistent with our expectations entering the process. The remaining loans in the Eastern Pennsylvania portfolio are performing well consistent with the improved risk profile.

Moving to core deposits, another positive story, organic growth was up 14% annualized in the second quarter and was the first across multiple product lines and geographies. In the upstate New York market, total deposits were up 11% due to our focus on building quality relationships and the reduced CD run-off as the re-pricing of this product in the upstate New York market is mostly behind us. Strong core deposit trends were also exhibited in Western Pennsylvania. In that market we continue to allow higher price CDs to run-off but are retaining a higher and expected proportion of these funds in the form of core deposits. The early results from Eastern Pennsylvania market are also encouraging as John noted earlier.

Total core deposits are now at 71% of total deposits and our loan deposit ratio is at 73%. Although we are a big fan of liquidity, too much of a good thing can be a problem.

Deploying these excess funds is our key challenge as we look forward especially giving our very liquid position in an economy which appears to be slowing down.

Now for some perspectives on our net interest income and margin for the quarter. The price here revolves around the net interest margin which jumps to 3.68% in the second quarter, higher than we expected. The biggest factor here lies in those very same Harleysville loans we sold because of the way we are required to account for these lower quality loans. We recorded double digit yield during the holding period. The recognized yield on these loans had the effect of inflating our margin by a few basis points during the quarter. Adjusted for this loans are normalized margin was in the low 360s.

Looking ahead, we expect our top line net interest income to increase as it continued to grow our footings and rotate cash flow into loans. Additionally, our net interest margin, we expect our net interest margin to track in a normalized range, consistent with what I noted above in that low 360 range. With some modest pressure potentially due to the low absolute level of rates which could lead to the reinvestment of cash flows of lower yields and tighter lending spreads given the reemergence of competition for high quality loan deals.

Turning to fee income, excluding Harleysville impact overall fee income was up 2% from the prior quarter. Mostly due to increased lending activity and branch based wealth management sales especially from the continued cross selling success in Western Pennsylvania.

On the bank and services side, we continue to see pressure on this fee income line going forward as it relates to NSF or overdraft charges. From a customer behavioral standpoint, average overdrafts per account have been steadily decreasing over the last year. Part of this trend as John noted earlier is a function of prolonged slow economy and customers watching their finances more closely than ever before. In fact, on a year-over-year basis, NSF for currencies are down 25% in up state New York and 30% in Pennsylvania.

And for that impact the implementation of Reg-E which kicks in August and we believe overdraft revenue which equals 50% of our banking service fees could go another 20% to 25% from levels realized in the second quarter based on a percentage of customers who elect to opt in for this service. That equates into a $0.02 to $0.03 share impact in the second half of 2010.

Today, our optimum rates are encouraging and they lead to a decrease in revenue that is at the lower end of the range I just stated. However, caution is warranted in that customer activity on overdrafts has been difficult to predict over the last few quarters. We're evaluating our product design and will likely make changes to our offering in order to offset this decrease in checking account profitability. That said, we cannot make up for this diminished revenue through product re-design alone in the near term.

Moving to operating expenses. Excluding the Eastern Pennsylvania operations, they were higher by 8%, primarily driven by investment and building brand awareness in our new markets. We're also continuing to make investments in our infrastructure especially our talent upgrade as we mentioned previously. In fact, in addition to the 700 folks we brought on with the closing of Harleysville, we added over 230 additional people to the team in 2010 as we continue to scale the organization.

Beyond these investments, we are keeping a tight reign on expenses where we're still comfortable with operating ratio in the 60% range for the foreseeable future. What does all this mean for the rest of 2010? Despite the headwinds on fee income, we remain comfortable with consensus estimates given our expectation of a top line net interest income growth and a stable credit profile.

And finally, our fortress balance sheet remains intact with strong capital levels coming out of the Harleysville closing. Although always keenly focused on capital, with an environment that is starting to stabilize and the Harleysville closing behind us, we're starting to think about how best to manage our capital position on a go-forward basis knowing that our existing capital levels are well in excess of what we need to run the business we have today.

With that, I'll turn it over to John for some closing remarks.

John Koelmel

Thanks Michael. To set up front, we see a good flow opportunities not only day in and day out in terms of organic growth, new customer growth on both sides of the balance sheet but also continue to push our shopping cart around the region with an eye towards furthering our efforts to deepen as well as stretch our franchise footprint.

From our perspective, the good news and I have read over the last couple of days others within our footprint that are counting the readiness to get back in the M&A game as the buyer so it takes that as encouraging sign that the industry is starting to stabilize or begin to normalize.

We said all along its been real short list of buyers that as a fact of matter been out there and frankly I am happy to see others now operate from a stronger position.

Having said that, still in my mind a short list of us that are actively and otherwise able to push that shopping cart so like the flow of opportunities that's there, think as we've continued to say over the next couple of three years, we're well positioned to benefit from further consolidation of industry. We'll be persistent but we'll be patient, we'll be disciplined but opportunistic, we'll play offense as we do otherwise in our business but do that with the sharp focus that I think we consistently demonstrated over the last many years.

With that, wrap up it with just again our version of the quick headline, execution risk in Pennsylvania. Our ability to continue to grow this franchise at a meaningful pace couldn't be more proud of how well we've responded to that reality and that challenge whether it be the core conversion in this initial integration, whether it be the operating performance.

The plan along has been to continue to organically grow balance sheet as well as bottom line, the legacy business and use that to fund another continued build out of the business and that continues to work very, very well and while acknowledging as Michael just deliberated that, that the headwinds are real. We remain comfortable with our ability to manage that which we can control, that which we can more readily influence and feel in that very good about the near prospects to continue to make the kind of progress that you have grown accustomed to receiving from us.

So with that, very pleased to hover back to Christine and Michael, Kevin and I will do our best to respond to your questions. Christine?

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions). Thank you, our first question is from Bob Ramsey with FBR Capital Markets. Please proceed with your question.

Bob Ramsey - FBR Capital Markets

Hey could you talk a little bit about how is your loans that you all sold in the quarter and what pricing looks like relative to your expectations and whether there is anything else that you are currently planning to sell or whether that's done at this point?

Michael Harrington

Sure, then it is pretty much done at this point. There is really not anything else we're planning on selling. We pick the pool of loans very carefully to make sure the impact down there on a going forward basis was minimized. The sale price came back well within our expectations particularly when you consider the short time table we put on ourselves and we were very pleased with the outcome and it fell well within our original credit assumptions when we did the deal.

Bob Ramsey - FBR Capital Markets

And then also, just in terms of M&A, you were talking about peers getting sort of back in the game, I'm sure you saw that LSPX in Boston and Smith Town on Long Island, both announced plans to sell last week, did you look at those transaction and are those geographies that you would consider or are they a little bit further outside of your targeted regions?

John Koelmel

Well, as you would expect, we're not going to respond specifically to any individuals or situation Bob. Having said that, we've been very overt about the geography that we're working and it includes the geographies that you've just referenced in terms of the deals peoples announced. We'll continue to look at those situations that we think make strategic sense for us. If we're going to stretch our footprint and they want to do that in meaningful substantive way. At the same time, I think there's ample opportunity to fill in the franchise that we've already framed. So whether it's peoples or others, everyone long expected and presumed.

You are going to see some type of activity but as I said, that there's no surprise there and we think we're very well positioned whether it be the strength of our balance sheet and business model or more importantly, the story and the opportunity that we have to partner with others to push the ball further down the field. So, we like where we are, we'll continue to work the footprint that we framed and we'll keep you posted.

Operator

Our next question comes from the line of Brian Foran with Goldman Sachs. Please proceed with your question.

Brian Foran - Goldman Sachs

I guess first just on the marketing and advertising spend, should we think about the $9 million as an add blitz what's in the new markets or should we think about that as a run rate going forward?

John Koelmel

More the former, we clearly we're surging in that first and second quarter as we're entering the market. So, if I were your shoes, I'd probably dial that back a little bit from what referenced there run rate basis.

Michael Harrington

Yes, I think you are looking at early total Brian the second quarter in that seven and half ton.

Brian Foran - Goldman Sachs

Yes, so between the one and half and the seven and half, one half's too low but seven and half's too high and somewhere in the middle is a good run rate to think about?

John Koelmel

(Inaudible)

Michael Harrington

Yes, that's why I wanted to clarify so, the [nine] year year-to-date I think the run rate you're seeing now is closer to what you should expect to see at least in the near term as we build our brand awareness and enter new marketplaces in Pennsylvania.

Brian Foran - Goldman Sachs

And then just to follow up on the M&A question recognizing that every deal is different, if we just kind of think about through most of 2000s the M&A pricing kind of worked out to modest dilution one and breakeven year two for your typical deal and then there was a brief window, last year where it was immediate double digit accretion.

As you look at deals now generically, where do you think the benchmark is in terms of the accretion range that can be achieved from doing deals given the current pricing environment?

John Koelmel

I think the reality is I think those who consider their strategic alternatives and whether or not they can effectively, successfully battle the headwinds as they come to grips with their own circumstance, they are still emotionally engaged at a minimum and I think its going to take some time for pricing to settle down a little bit.

So for the expense you can get transactions done in this environment. You're certainly not going to see the kind of benefit and the structure that existed last year. The flip side is I think its important to ensure we get the appropriate kind of returns and what that translates to in terms of year-over-year accretion is going to vary, but we're focused on the returns on the capital we deploy and as I said, we'll be persistent but patient to it ensure we can achieve the kind of overweight that we think are appropriate for us.

Operator

Our next question is from Jason O'Donnell with Boenning & Scattergood. Please proceed with your question.

Jason O'Donnell - Boenning & Scattergood

Mike, can you just give us an update on the status of the $40 million in pooled and single issue chops that you acquired from Harleysville. Were those able to be liquidated by the end of the prior quarter?

Michael Harrington

Yes. They are sold. So we sold those, we had plan to sell those similar to the loan sale, the distress loan sell we also de-risked the investment portfolio as well.

Jason O'Donnell - Boenning & Scattergood

Okay, what about the $21 million in equities that were acquired. Those were sold as well?

Michael Harrington

Yes.

Jason O'Donnell - Boenning & Scattergood

Okay, great. And then just going back to the acquisition, can you just tell us how much of it if you have it, how much of the amortization and accretion of fair value adjustments from Harleysville is contributed to your net interest income in the second quarter?

Michael Harrington

Well, we don't really do the amortization of premium separately. I mean we acquired fair market value, we acquired assets and liabilities at the time of closing and we're recording those premiums and discounts into our margin, that's in part of our margin now and we don't really separate the accounting that way. And don't' think about it that way either. We acquired the margin and we're recognizing that we're very comfortable with.

Jason O'Donnell - Boenning & Scattergood

And then I guess finally, just switching gears on expenses, how long do you expect to realize your target cost saves on the Harleysville deal and how should we be thinking about any residual M&A expense in the third quarter. Should we expect to see anything there?

Michael Harrington

Well in the latter, we don't expect to see anything material. We made every effort we could to book all the integration and transaction cost in the second quarter. The cost saves are quite confident. The cost saves are there. If you look at Harleysville in a vacuum but we're also in a mood where we're building capacity organizationally.

That's why I messaged what I did relative to the efficiency ratio and expecting that to stay for in a zone and that 60% some which is historically high for us but part of the reason that's in that 60% range is because of our continued effort to build our capacity. So overtime, we would expect to work that down.

Operator

Our next question comes from Damon Delmonte with KBW. Please proceed with your question.

Damon Delmonte - KBW

Could you guys talk a little bit about your expectations for loan growth as far as percentage increases in the upcoming quarters?

Michael Harrington

Sure. What we expect it to be consistent with what we've experienced so far and we're pleasantly surprised in the Harleysville market, the growth continues to be pretty good in Western Pennsylvania and across the upstate the legacy footprint. Certainly on the C&I and corporate side, but even commercial real estate appears to maybe parts of the project economy you're coming back so that the commercial real estate demand has improved a little bit as well.

Damon Delmonte - KBW

[Multiple Speakers] in the 15% on annual growth rate, is that a target number which you look to?

John Koelmel

I think that as well Damon we can't give you a level of precision. You guys get paid to do that. Our hope is to continue to drive this as aggressively as we can either from Kevin's point of view that we think and are confident that we can drive meaningful double digit rate growth across not only the legacy business but the newer markets as well.

Damon Delmonte - KBW

Okay, that's helpful, thank you. And then I think you had mentioned that you had booked as a part of your move up strategy you booked like six loans of around $30 million each. Could you just give us a little color on that strategy again and what's helping you get looks at these larger credits? Is it just the size of your balance sheet or is it because of the hires you made or if we could get a little color on that that would be great.

Michael Harrington

All of the above, let me throw one more in there, the exposure for the first time over the last eight or nine moths to a major metropolitan market Western Pennsylvania but certainly our size which in the acquisition of talent which is a risk mitigate in it of itself has caused us to sort of take another look at opportunities that a couple of years ago we wouldn't have looked at, of high quality, bigger balance, get better businesses kinds of deals. And we've been pretty fortunate that we've been able to get some very strong credits of a larger dollar amount.

Operator

Our next question comes from the line of Rick Weiss with Janney Montgomery Scott. Please proceed with your question.

Rick Weiss - Janney Montgomery Scott

I just want to follow-up a little bit on Damon's questions with regard to the loan growth. If you can may be give some color in terms of the pricing because frankly haven't seen the word robust to describe loan growth until your press release. Sort of wondering what's going on with your company versus some of the other companies that follow?

Michael Harrington

Well, I'll just talk about spreads have held up very well. Really haven't seen any diminishment of spread so far, what I discussed in my prepared remarks was that we're expecting what we see in pipelines and what we're hearing from our sales peoples as we are starting to see the competition come back into the marketplace and that's why we expect spreads to start to tighten, but what we've booked so far has been running consistent with what we have seen.

Kevin O'Bryan

And as far as demand, with the prior answer. Over the last 18 months or so we moved up market across the entire footprint. In Western Pennsylvania we acquired some very strong lenders and we've have also looked at deals across the legacy footprint that we didn't look at before because of our loan size. So that's turned out to be very good loan demand because of our asset size. That's turned out to be very good loan demand for us and like I have said several times before, the upstate the legacy footprint economy has not really been a boon or bust economy. It's been pretty steady, had its issues but its been pretty steady and we've been able to pick our spots pretty well and I continue to characterize that demand as robust.

John Koelmel

Allow me to just reinforce, its just the perfect commentary on how well our strategies positioned and more importantly, our team is able to execute Rick. We have got the capacity certain fully in terms of balance sheet, liquidity, funding and our capital to leverage and deploy, but we've got a team that obviously is proving more than equal to the competition and we are able to develop those relationships, we are able to leverage the confidence that our customers have in us at a time when confidence in the rest of the industry has been spotty to inconsistent and there is no question we are benefiting as a result. So, I agree as I have looked at in the series of releases but otherwise see loan growth is lacking metric.

It's just not a story that you see many talk about. Perhaps where I sit, I'm all the more proud of what we are able to do in terms of stepping up, stepping in as the old main stream, story continue to deliver for the customers. When Damon was talking earlier with Kevin about the larger deals, the syndicate is tough. We get invited as much as we go knocking. We were asking people to lead where we didn't even make the radar a couple of years ago. So, vindictive of the strengths of the team we have their ability to service clients and the confidence that the market place increasingly have has enough to execute.

Rick Weiss - Janney Montgomery Scott

When you talk about the new lenders are they coming from the Harleysville and PNC, Nat City? Were there lenders coming in from other banks as well?

Kevin O'Bryan

All of the above. We acquired a team in the Nat City deal. We've incrementally, while we had a very good team to start with, we incrementally added new lenders to that team, they brought with them both books of business and levels of sophistication that we didn't have in house before in certain areas but this has been a good team from the get going, it's only got better and I do want to reinforce one point. That this is often done without any real expansion in our risk policies with the possible exception of larger loan sizes which are risked onto themselves. But in terms of anything else we've done this without deciding to out risk the competition.

John Koelmel

Again on Harleysville the team that had best played defense for the last couple of years. One may argue that do we all get a chance to suit up, never get out of the locker room for much of that time. So they have continued to really step up and step in, they are enthused to have the opportunity. That said Bob Keane came over from PNC to lead the charge there for us, he has continue to recruit new talent no different than Todd (inaudible), Bob Moore has did on the western side of the state, we have a life continue to build out the team across the legacy footprint, Tony Russell just joined us from Citizens. We continue to recruit so if you look across the roster Ric you'll see a lot of new names and faces coming from other institutions as well as increased output from those that either have been here in start or have now joined the team with an opportunity to really get after it at again.

Rick Weiss - Janney Montgomery Scott

Just one final question about how many people are on the lending team commercial team today versus say year and half ago before the Nat City deal. Can you just kind of give a ballpark figure.

John Koelmel

I am reluctant to do that too, come back…

Rick Weiss - Janney Montgomery Scott

(Inaudible).

John Koelmel

I mean I don't say that's a dicey question, I mean the directional answer is that's the meaningful step up Ric building out of the bank, the bench in both quantity as well as quality has been and continues to be a focus for us.

Rick Weiss - Janney Montgomery Scott

It's been very helpful to explain just like why the loans grow in from the number of people. So if I could get that answer may be we can touch the base later on?

John Koelmel

We are taking share. I mean we are taking a bigger size of relatively static [price] there is no question there. Same story continues to hold.

Operator

(Operator Instructions). Our next question comes from Collyn Gilbert with Stifel Nicolaus. Please proceed with your questions.

Collyn Gilbert - Stifel Nicolaus

John, just a follow-up on some of your comments on the M&A front. What you do see kind of your current capital structure could support what size deal? And are you thinking about it like that and is there a possibility if the right opportunity along you'd come back to the market to raise more capital?

John Koelmel

We are comfortable in doing either, Collyn, we clearly got excess capital today, that we could deploy to do another transaction or as a component of another transaction, we are also confident given the track record and what continue to look solidly the structural for future opportunities that the market will respond favorably the best. So, I appreciate that as we raised the billion dollars over the 18 months, our consistent, my consistent response to those who want us to take more than les was. We are not going raise and take more than we can reasonably deploy at a reasonable period of time.

So, we manage that number down as we went back to the markets. So, we didn't get too far ahead of ourselves and to the extent we are today was only a response to what we felt, I felt was a little bit of overzealous regulatory view of the need for capital buffer. So, you sit with few a 100 million of excess capital that we can certainly deploy, but whether it be the structure of the transaction which would primarily be an equity deal on all bank circumstance, obviously shares would be issued there. The need for pure funding would come with some type of branch transaction, whatever sword can cut either way.

Collyn Gilbert - Stifel Nicolaus

And then, Mike, just a question maintenance question, I know you had suggested a targeted efficiency, I think is what you said is 60%. Within that, can you just give us sort of a range of what you think our run rate should be on expenses?

Michael Harrington

Well, we ran this quarter at 121-122, would expect some growth in that number, but not a lot. So, 2% growth in that number, we expect earning to grow. So that will help.

John Koelmel

If anything the growth can probably come, because we are going to pick up after 10 days our Harleysville, Just when we speak to the simple math or column.

Michael Harrington

After you had normalized for that, we would expect it to be very modest growth. [Want to continue] that normalization.

John Koelmel

We haven't lost our way on operating leverage here. We are continuing to invest and put our earning back in to the business. But its just that put our earnings back in to business. Saw some revenue growth is a bit more of a challenge in this environment. We remain sensitive to managing that while at the same time, leaning towards the longer end of the scale to invest more than less build out for tomorrow. But we are going to be prudent disciplined there as well.

Collyn Gilbert - Stifel Nicolaus

And just one final question on the loan growth that you are seeing, and the new relationship that you are seeing coming on, should we assume by the size of the credits you are talking about that most of these loans are LIBOR based priced?

Kevin O'Bryan

Particularly on the C&I side, pretty much. With the pricing discipline though nevertheless but pretty much.

Operator

Our next question comes from the line of Mathew Kelley, Sterne, Agee, please proceed with your question.

Mathew Kelley - Sterne, Agee

Why don't you go back to the fee income guidance there, banking and service charges for $21.5 million this quarter, assuming you get a little bit more from Harleysville given where it's closed? So work off of the annualized number of 88, you said half of that was in NSF and overdraft is that correct?

Michael Harrington

That's correct, yes.

Mathew Kelley - Sterne, Agee

Okay and of that amount 20% to 25% at risk?

Michael Harrington

That's correct. Based on our projection right now and that all be a function of what percentage of the high users of our service, what percentage that they were marked in, and then not only what percentage of the marked in, but then even if they opt in if they continue to maintain a same type of behavior they have in the past, so that too variable share, while we need them not then and then two the behavior needs to stay consistent and that's really what we've seen as behavior occurrences of overdraft have just been trending downwards for extended period of time here.

Mathew Kelley - Sterne, Agee

And then on the other half, lets call it $44 million, how much of that is debit interchange?

Michael Harrington

There is another debit I would say is what is percentage is that call it 30%

Mathew Kelley - Sterne, Agee

Of the 44

Michael Harrington

Yes

Mathew Kelley - Sterne, Agee

Okay

John Koelmel

30%

Kevin O'Bryan

About 30% of the 21 banking services not the 22, 21 we recorded not the 44 banking debit is in the 21, that's on posted on the press release table.

Mathew Kelley - Sterne, Agee

Okay, would you think in there was driven?

Michael Harrington

Well just our current thinking right now I mean that doesn't kick until the second half of next year, so we are thinking in the $2 million to $3 million range that would just be for the second half of next year. So we are thinking in the $2 million to $3 million range that would just be for the second half of next year. And that's 15% to 20% hit, but none of us, we don't really know. We don't know what that number is going to be?

Mathew Kelley - Sterne, Agee

Okay.

Michael Harrington

Okay so for our internally that's what we are thinking about but then we are going have to wait and see how this things works out.

Mathew Kelley - Sterne, Agee

Internally 15% to 20% just on Durbin.

Michael Harrington

Right.

Mathew Kelley - Sterne, Agee

And what about the tax rate with the season?

Michael Harrington

Not a margin rate. Our effective rates 34%, 34.5%.

Mathew Kelley - Sterne, Agee

Okay, no big change there?

Michael Harrington

No.

Mathew Kelley - Sterne, Agee

Final question on your securities portfolio, $7 billion, 3.5% current yield, what are we looking like for cash flow and what are the reinvestment yield there going forward in a static rate environment?

Michael Harrington

Well, cash flow is substantial on a monthly basis probably over $100 million and rates are lower. So for the same product rates are lower and that's part of our thinking as we think about the margin going forward. I mean we are comfortable with the range we put out there but some of the pressure relative to that; the possible pressure on the margin could this be a function of that cash flow being reinvested at lower rates.

Mathew Kelley - Sterne, Agee

Where was the Delta on yields on the $300 million reinvested in the second quarter? How much did you go down?

Kevin O'Bryan

Not. Well we did pretty well in the second quarter, our timing was good and we bought some of that either in the quarter and we are just selective of when we purchased. So, I don't think there is a lot of diminishment relative to the average yield quarter-over-quarter, but today's cash flows are definitely being that you are buying the same product or being invested at a lower yield.

Mathew Kelley - Sterne, Agee

How much can you quantify that in the same product? Keep it apples-to-apples, repurchase the same securities. How much…

Unidentified Company Representative

30-40 basis points. I am just ballpark

John Koelmel

Obviously matter of focus there is far as our focus rather on continuing to rotate those cash flows into the low portfolio rather and as we battle the rate volume challenge or confident in our ability to grow that loan book and mitigate the impact of what probably Mike were just chatting about.

Anyone else, Christine?

Operator

There are no further questions in the queue at this time.

John Koelmel

Well as always, we appreciate your time and attention and continuing interest in our story. And if not before, we'll talk again in another 90 days. Have a good one.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: First Niagara Financial Group Inc. Q2 2010 Earnings Call Transcript
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