Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q2 2011 Earnings Call

July 21, 2011 11:00 am ET

Executives

John Koelmel – President and CEO

Gregory Norwood – CFO

Mike Harrington – Treasurer and Chief Investment Officer

Analysts

Damon DelMonte – KBW

Collyn Gilbert – Stifel Nicolaus

Bob Ramsey – FBR Capital Markets

Tom Alonso – Macquarie

Theodore Kovaleff – Horwitz

Matthew Kelley – Stern Agee

Operator

Greetings and welcome to the First Niagara Financial Group Incorporated Second Quarter 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. This presentation contains forward-looking information with respect to the financial conditions and results of operations of First Niagara Financial Group Incorporated, including without limitations statements relating to the earnings outlook of the company. Such information constitutes forward-looking statements, which involve significant risks and uncertainties. Actual results may differ materially from the results discussed in those forward-looking statements. For a list of factors that may cause actual results to differ to materially from those contemplated by such forward-looking statements, please see our earnings press release, which has been posted on our website.

It is now my pleasure to introduce your host, Mr. John Koelmel, President and CEO for First Niagara Financial Group Incorporated. Thank you, Mr. Koelmel, you may begin.

John Koelmel

Thank you very much, Jess, and good morning, everyone. Welcome again and we appreciate you taking time to chat with us. This morning with me is, Greg Norwood, our new CFO. He will handle the bulk of the lot of this morning’s discussion. Mike Harrington, Kevin O’Bryan are also with us and they will offer their perspectives once we get into the Q&A.

I’ll make a couple quick opening comments and then turn it over to Greg. Clearly, for us it’s another solid quarter and continues to the string of consistent performances for us. You see real organic growth again, as well as positive fundamentals and trends all of which provide further evidence that are differentiating story continues to unfold. For those that were curious or wondering about our early traction in New England, you can see that we are off and running again there as well and that makes it a three P, three deals, three new markets, three increasingly solid conversions over the last 19 months I couldn’t be more proud of the organization and the collective ability to execute. All of which underscores our ability to do just that execute very well and our commitment to be ready and prepared to always move forward.

As you always heard me say that starts with team and talent, we continue to win because of the tremendous people in the organization we’ve built and their collective focus from the customers and communities across our footprint. They continue to deliver for the benefit of our constituents each and every day.

And given the ongoing stream of new customers while those other strategic opportunities, Greg talk about this, you’ll see us continue to strengthen our team and ensure we have the infrastructure we need to be even more successful on an even larger stage. Our focus continues to be ever stronger although more efficient and that much better positioned as we move ahead and no question we are disappointed like everyone else with the macro realities, the substance of the economic regulatory and political challenges.

But, in spite of all of that we still very much like what we would see on the horizon for First Niagara and little bit rather more focused and ready to further advance our growth strategy with ever increasing confidence and conviction.

With that, I’m happy to have Greg pick it up and recap the quarter for you.

Gregory Norwood

Thanks, John. Before we dive into the numbers, let me share some thoughts about First Niagara, given that I’ve been on the job about 100 days now. First and foremost, we are a growth company. We have proven that we can effectively grow market share organically and through M&A.

In both contexts, we grow by making the customer our focus and providing them with the right products in the right way. Two simple examples of our focus on the customer are the recent launch of our new checking products, which I’ll talk about more later and our buddy system for putting seasoned First Niagara bankers in the branches of a merger acquisition during the conversion window to help new associates serve our new customers.

For sure, economic recovery we are experiencing or lack there up is not creating real business growth for our domestic companies. However the plain fact is that if you do the right things and make the right investments for your customers and shareholders now, you will be able to take market share and when businesses and consumers come back you will be the company that benefits the most.

We believe that is exactly what First Niagara is doing. So we will continue to invest in our company, to do otherwise and stop investing and focus on cutting cost to generate earnings would be short sighted and compromised long-term growth of our franchise and shareholder value. The success of our commercial business continues to be strong evidence that our strategy is working. We invested heavily in this function during the work part of the cycle adding talent and more sophisticated process. Our strategy actions have been really created attractive returns as tested by the three year 20% compounded annual growth rate we have organically generated in our commercial loan portfolio Dan Cantara and his team run this business and he and the team are definitely getting this done.

Similarly, we are investing in our retail franchise and distribution network. Beginning in the latter half of last year Mark Rendulic, assumed responsibility for our Retail business and has assembled an experienced leadership team that compete with any of the big boys that I’ve seen. They have been actively developing customer acquisition strategies, rolling out new products and with voice of the customer input, eliminating pain points in how our customers do business with us.

I will highlight some of this when I get into our results. I want to acknowledge that we are not making these investments in a vacuum and are very mindful of the challenging environment that John referenced that we are operating in currently. We did operate very effectively this quarter again in that environment. We will continue to be prudent and disciplined and constantly analyze our revenue growth and efficiency gains with the desired level of investments to grow.

As mentioned last quarter, we will continue to focus on repositioning and restructuring our franchise and our process efficiency efforts to help fund our growth and drive long-term value creation.

Now, I’d like to talk about NewAlliance from a slightly different perspective. First, it was our largest to-date and definitely our best conversion activity. The degree of assimilation in the three months since closing has been positive. Through quarter end, we have not experienced any net decline in loans or core deposits and are well positioned for growth in the second half of the year.

We are often asked about our ability to execute on large merger transactions. So I want to give some color on why we do this so well in my opinion. The plain fact is that the core competency of ours and as a direct result of how we position M&A and our considerable investments that we’ve made in that organization.

First M&A is positioned for us as a LOB. Ollie Sommer leads his function and has developed the team that has industry-leading and integration skills. On top of that, our broad based organizational experience given our history of managing nine bank acquisitions is second to none.

Also we spend considerable time developing the people, systems and scale across the franchise that has enabled us to efficiently handle these efforts when coupled with the skills of Ollie’s core group. Equally important is we conduct legal closing and customer conversion activities at the same time. In the 30 years of my banking experience, I have not seen this before. Why is this important? This allows us to start the race on day one like it was a sprint and not the first day of practice.

What does that means for us? It gives us flexibility with a proven track record. This means for NewAlliance on day one or April 18, we have converted our core systems new team mates and our First Niagara buddies wherein the branches and ready to serve customers and drive value.

This means today, the NewAlliance is the foundation for our New England footprint and we are not tied up in conversion activities, rather, we are ready to look forward and serve customers as we’ve been doing for the past 100 days.

With that backdrop, let me turn to second quarter results. Operating income came in at $71.2 million. This equates to $0.25 per diluted share, which is ahead of last quarter’s 24%. Both our legacy footprint and the New England footprint drove this increase. Once again, we delivered quality earnings that did not include any reserve releases or unusual gains.

To the contrary, just on that later we continue to build our allowance. GAAP reported results were low whereas they included expected charges from the NewAlliance merger and to a lesser degree cost associated with the repositioning and restructuring initiatives.

Let me start with the balance sheet, which provides strong evidence that how our customers are doing business with us. Overall, legacy loan originations are up across all regions and across all product types. Once again our commercial loan volumes stand out.

Excluding the New England footprint, balances grew 17% annualized in the second quarter. As I said earlier, this business has a three year organic CAGR of 20%, which I believe is unique in the industry. Strong growth was created across all major New York and PA markets, while New England showed no evidence of market attrition. Our pipeline also remains good. However competition is definitely heating and many sideline players, both banks and non-banks are getting back into the game.

That said, we remain focused on the marketplace, driving growth while maintaining the strong credit culture. On the deposit side, activity was solid as well. Excluding the New England footprint we grew core deposits by 22% annualized in the second quarter. As I mentioned, our retail team has been very busy with new customer acquisition strategy, focused on a money market growth campaign driving growth in this category of approximately 30% in the second quarter.

We also introduced as I mentioned the new suite of checking products under the You First checking tagline. These products allowed customers to choose what’s right for them and were designed based on extensive inputs from our customers. In addition, we have eliminated some pain points for our customers and we are already seeing improved attrition metrics. On the credit quality side, we continue to distinguish ourselves within the industry. Credit trends were solid and NPAs and net charge-offs being pretty consistent with first quarter levels.

Our legacy credit size and classified loans also remained stable on a linked quarter basis. Once again, we grew earnings while still building our loan loss reserves. Our provision for credit loss totaled $17.3 million and included a traditional provision for loan losses of about $14.4 million and a provision for unfunded commitment of about $2.9 million. The latter will be much smaller number in future periods. Our allowance build is reflective of our growing balance sheet and has become a more commercial bank like, it’s simply a cost of moving up the market.

In the areas of capital management and liquidity, let me start with capital. Capital continues to be a positive position for us and a source of strength. We have maintained a consistent capital philosophy that is to manage capital given the current conditions both in the context of opportunities to grow the business as well as from a capital market’s perspective for funding that growth.

Total risk-based capital stands at approximately 12.7% and tier-1 common is over 11%, which puts us in a very solid position versus Basel III guidelines. Also this is without the mark-to-market aspects of capital that’s embedded in our loan mark relative to purchase accounting.

Unique to our capital position is, the 0303 mark-to-market adjustment. At June 30, we had approximately $265 million in cumulative marks, which when added to the capital level gives a more holistic view of capital. During the second quarter we bought back approximately 8.7 million shares of common stock at a total cost of $121 million. Future activity of course will depend on prevailing stock price and other factors that drive our desired capital levels.

Next is liquidity. We are in a solid liquidity position with core deposit ratio of 76% and loan-to-deposit ratios of 86%. We are certainly ready and able to meet the credit needs of our customers. Our liquidity serves as a source of future profitability as we progressively rotate existing securities in the higher yielding loans with attractive fee income and we will do this over the next few years.

Turning to the P&L let me start within that interest margin, which grew by $58 million in the second quarter. This growth reflects the addition of about $7 billion in average earning assets from the NewAlliance acquisition along with strong legacy loan growth. While we are seeing more competition in commercial loan pricing, it should not have a real impact in the second quarter. As expected, our margin declined to 0.365%. But this is consistent with the expectations we shared last quarter related to the NewAlliance merger where we expected the margins drop by 10 basis points in the second quarter from the first quarter amount of 3.75.

On the loan front, we saw a decrease in yields consistent with results over the last few quarters and the general trend related to lower levels of absolute interest rates. To a lesser extent these loan yields also reflect some spread compression and a change in the loan mix to a more variable rate portfolio. To the extent that this is a source – to the extent we shorten our deposits, which we are doing with the introduction of money market accounts, we are factoring this availability into our funds pricing and in how we invest these dollars. Our near term perspective on interest rates is rather benign. That said, we continue to term out our borrowings to lock in longer term costs.

Additionally, our focus on commercial lending will naturally shorten in the duration of our assets reducing future closure to rising rates. Looking ahead to the remainder of 2011, we expect the margin to stay in the mid 360s with a slight drift lower as the margin begins to come under modest pressure due to the constricting of credit spreads.

Moving on to non-interest income, we have mixed results driven by slower than expected economy, regulatory headwinds, and our need to continue to better. Revenue increased by over $9 million in Q1, mostly attributable to the NewAlliance inclusion, but did includes small legacy growth in revenues. Excluding New England, mortgage banking revenues bounced back increasing approximately $1 million from the significantly reduced first quarter activity.

Banking services again excluding New England were up $2 million due to seasonality. Offsetting these increase was a drop-off in other income, which fell by nearly $2 million. This was mostly related to lower capital markets revenue, which normalized in the second quarter after an exceptionally strong first quarter.

As we said in the past, we would reduce, revenue by approximately $18 million for the full year 2012, and we anticipate that we could recover about half that amount. Based on new rates, we think the impact for 2012 is more or like $14 million and we still think we can recoup about $9 million. For 2011, based on the final rule and the implementation date, versus what we were anticipating the final outcome would be the drag on 2011 is pretty much a push at $1 million or $2 million.

In general, we have talked last quarter, that we had a real push in the company to raise fee income as a component of total revenues. Our new checking account launch is designed to raise fee income and to noticeably reduce attrition. Further, we have been effecting our fee income practices and expect further lift and improvement in attrition in the second half of 2011.

Let me move to the expense side. Operating expenses of $167 million in the second quarter reflects nearly a full quarter of New England. Excluding New England, expenses were essentially flat, compared to the prior quarter on a legacy basis. Reported expenses included $77 million of merger related costs and $12 million from the repositioning and restructuring initiatives.

With respect to our repositioning and restructuring initiatives let me give you a brief update. Consistent with our message last quarter, we anticipate that the total cost will be approximately $57 million, which is in line with the $53 million we disclosed last quarter, plus or minus 10%. We expect in the second quarter that $12 million is about $8 million after-tax. The remaining charge of about $44 million or $30 million after-tax will be taken in the third quarter.

As you know, the accounts require that facilities be vacated before recognizing the charge and that is why actions we announced and started in the second quarter will be recorded in the third quarter. We expect the opportunities will create roughly $25 million in pre-tax opportunities that we can invest going forward.

Let me talk a little bit, because there is a lot being said about cutting expenses across the banking industry. Being efficient is part of how we operate, we have given this message internally for years. We have also said that this is not about cutting expenses, for us it’s about getting better. It’s about redeploying our expense base to grow revenue and not to drop expense savings in the bottom-line. By creating operating leverage, we return more value.

You can be sure, we are even more diligent and it is the real focus of our management team and the whole organization. You can also be assured that we will continue to invest to grow revenue in the future over the long term.

Concluding, we had an overall, very strong quarter in a string of strong quarters. We have performed well for the first six months. NewAlliance is integrated with positive post-conversion activity and this supports the commitment we made when we announced the deal that it would be accretive in 2011. So when I look at the total picture, that our capabilities against the headwinds in the marketplace and the industry, I feel good about the second half of 2011.

Thank you, for your time and your attention and now I turn it back over to John.

John Koelmel

Let me wrap up quickly by adding my two cents on a couple topics. Obviously, it is great reference multiple times that lot of moving parts and pieces to our industry today and operating at the benefit clarity as through the outcomes on our economic regulatory and political challenges is a necessary core competency for all of us. So, that makes keeping it simple and sharpening your focus on the cost curve and all the more essential key to success.

And hopefully, one of the takeaways again today for all of you is that our continuing and consistently solid performance is a function of this team’s ability to do just that, focus on the customer and the communities that we serve and keep them at the center of all we do. We take great pride in how transformed ourselves over the years on many fronts but most importantly, our ability to clear pass the better pass to the customer and adapt to the rapidly changing environment, Greg talked about some of the newer product offerings obviously across the board, we have elevated service levels and consistently referenced the team and the talent and add skills and expertise that we have, the visibility that we’ve been able to create in our legacy footprint as well as on our new markets and obviously most importantly that how we energize work force play and to win. That’s created tremendous momentum for us and I’m confident that in spite of the challenges of today, somewhat to Greg’s concluding comments we’re incredibly well positioned and as a new order of banking sorts itself over the next couple of years, we’ll find ourselves in an increasingly better place.

That takes me to M&A. It’s been a relatively active six months of the sector including a handful of smaller deals here in the northeast from where I sit, motivations for those transactions in particular were very, there were some strategic positioning but also think there was some reaction to market investor expectations. It’s not little defensive posturing of the outcome, but some rather aggressive pricing, aggressive pricing that I don’t think is sustainable, either it’s pace or it’s level.

Recently, we’ve also seen a couple really large deals that were clearly gone for strategic reasons that levels that I would think to be much more rational and I do expect that we’ll see more of that. We long anticipated that some of that in fact will have occur what I hear in the northeast, you’ve heard us repeatedly reference that in our investor presentations over the last couple years. We’ve been very clear about why we pitched or tapping this region as well as our intent to work the farm the opportunities whether they’d be larger or small to deepen our share of the market. We’ve also made clear that a continuing priority for us is to be ready and prepared to take advantage over the next right strategic opportunity.

So now that what you’ve seen is what you will continue to get from us disciplined measured and opportunistic execution with a sharp focus on being a much better albeit bigger business. What we are seeing so far this year I think confirms that the flow of opportunities for us to do just that will continue and that even better days are ahead for us. With that, Jess, if you’d open up the lines for questions and not only Greg, but as I said earlier, Kevin O’Bryan, Mike Harrington are with us and we are all be happy to take your questions.

Question-and-Answer-Session

Operator

Thank you. (Operator Instructions) Your first question is coming from Damon DelMonte of KBW.

Damon DelMonte – KBW

My first question, I think goes to Greg. Just want to clarify on the comments on Durban. You said for the fourth quarter you are expecting about a $1 million to $2 million impact?

Gregory Norwood

From inception in October, so yes mostly that would all be in the fourth quarter for $1 million to $2 million.

Damon DelMonte – KBW

Okay, and then for full year 2012, you said that risk is about $14 million. You expect to avail with the recoup of about $9 million of that is that right?

Gregory Norwood

Correct.

Damon DelMonte – KBW

Okay, and would that be kind of on day one or is that going to be spread out throughout the…

Gregory Norwood

It will be spread out just as the impact would be spread out over a calendar period, the benefits will also. I would also point out that, a lot of what we are doing around that, we’ve been doing for some time. So, I feel real comfortable that, on a total year basis those numbers are good.

Damon DelMonte – KBW

Okay, great. Thanks, and then with regard to the NewAlliance franchise, I know that an asset-based lending group that was kind of more focused in the Massachusetts area. Can you lever to that team and try to expand into other areas of commercial lending and that part of New England?

Gregory Norwood

In terms of asset-based lending that’s our core competency and yes, we expect to be able to leverage that and have traction in some areas where they are currently, but also sort of reading into your question little bit, there is spillover in terms of our own commercial activities and they can help us make us a little better and we expect to leverage that across the footprint.

Damon DelMonte – KBW

Okay, great. And I guess my last question regarding the provision, as you guys continue to see growth throughout the expansion of branch so we continue to see a provision level of this level of this $17 million range or so?

Gregory Norwood

No, let me bifurcate that in a couple of ways. What I would call the traditional provision was $14.8 and the other component was related to unfunded commitments as we move up bank into the bank market that becomes a bigger component. You will not see that number repeat itself at that magnitude. When we look at the provision as I said, we continue to view at it some degree as a cost of doing business. We look at a lot of different metrics, one that is often referred to as just the allowance to loans excluding the loan to fair value. You can see for the last couple of quarters we’ve been at 1.2%, or 120 basis points. So, that’s a reasonable to be thinking about how we move forward.

Damon DelMonte – KBW

Okay. That’s helpful. Thank you very much.

John Koelmel

Damon, while we add my two cents on the topic, I think we said this last couple quarters. We are credit experienced, our credit trends are dramatically inconsistent with our peer banks today. We outperform larger bank peers in a very significant way. Having said that because we are deemed one of the larger banks and play at that level. As Greg said across the door business there is expectations that we maintain level of allowance that is more consistent with reflective of our peer status and maybe not directly inconsistently connected to real-time credit trends. So, now that we are continuing to bolster our position to support our current reality, don’t spend too much time analyzing how you connect some incredibly favorable credit trends with which otherwise see reflected.

Damon DelMonte – KBW

Great, thank you very much.

Operator

Thank you. Your next question is coming from Collyn Gilbert of Stifel, Nicolaus

Collyn Gilbert – Stifel Nicolaus

Thanks, good morning gentlemen. Just I think my first question is to you Greg. Just on expenses, could you just give a little color perhaps just to what you think the run rate could be there, because I guess the way I’m looking at it and it seems like you guys are on track to achieve maybe a 55% efficiency ratio by the fourth quarter, which was earlier than what I had previously thought. I mean, this quarter it came like you really ranted expenses more so than what I had anticipated. So maybe just a little bit of color there on what you think the run rate is?

Gregory Norwood

We’ve talked in the past, what we’ve said is our goal is to be in the mid 55 range and what we’ve said too is, that number may move from quarter-to-quarter, because we are mindful of investing, but we are not looking at one quarter measure versus another. I think, what you’ll see us do and what we said in the past is expenses will remain relatively flat. They’ll move in and out of salaries expenses versus other expenses. But I think the way I would look at it is, we are at 57% this quarter, that number plus or minus a couple basis points is our goal for the foreseeable future.

Collyn Gilbert – Stifel Nicolaus

Okay.

John Koelmel

You are seeing the benefits of being able to scale the infrastructure we have built Collyn in anticipation of being where we are. So on the way up, that ratio has been a bit inflated. Now that we have the benefits wise impact of NewAlliance and use it back to what we think will be a more normalized level. So in a long-term view, we’d certainly agree with how fast we get there as Greg said we need to continue the balance being efficient with the ongoing investment in building up and building out the business. So, don’t get too far yourself but directionally, certainly agree with how you are looking at it.

Collyn Gilbert – Stifel Nicolaus

Okay. Okay, that’s helpful and then, just on the reserve fund you commented a little bit on the provision but, given the mix of the business and how you see the mix evolving overtime here. What do you think? Do you have a reasonable reserve target in mind relative to loans?

Gregory Norwood

I think, Collyn we just messaged that as best that we are able to do right now. We want to stay consistent and still realized our expectations than the industry’s expectations us is a larger and more diversified institution. So, you’ll see it stay within this overall number.

Collyn Gilbert – Stifel Nicolaus

Okay. Okay, that’s helpful and then, just one final question John, this is kind of a big picture more strategic question for you. When you said and described the marketplace was seeing aggressive pricing that’s not sustainable, would you thought what the end-game is going to be then for those folks?

John Koelmel

Those folks meaning…

Collyn Gilbert – Stifel Nicolaus

I’m just curious what happens, like why is the aggressive pricing not sustainable or what happened that will make it not sustainable?

John Koelmel

My view is M&A market came out of the gates here a little overheated and that there clearly was some pent-up demand real unperceived to get some deals done, think some deals happened. There was little bit of a feeding frenzy. So when I say I don’t see it’s sustainable I think the buyer pool is just too limited the number.

The capacity to pay other than in a very rational way is just unrealistic. So, I must seize that for ideal constituents and that I think what you are starting to see as some of the bigger players may make some decision strategically. I just expect the pricing in general and the flow of activity to settle down a little bit. So, I’ve been very clear for a while that there is just a limited number of buyers that I think have the ability to sustain and perform over the longer term, he can’t do that by getting that how do yourself on pricing.

Collyn Gilbert – Stifel Nicolaus

Gotcha. Okay, that’s helpful. Thank you.

Operator

Your next question is coming from Bob Ramsey of FBR.

Bob Ramsey – FBR Capital Markets

Hey, good morning guys. I was hoping you could just touch a little bit on buybacks. First of all was the activity this quarter primarily to offset some of the dilution for the shares issued for NewAlliance or was it just, you decided now is the good time to do it? And then in the prepared remarks, I know you all said that further activity will depend on stock price and other factors and I was just hoping you could elaborate a little bit on how you are thinking about other factors and sort of capital levels?

Mike Harrington

This is Mike. We’ve been messaging the last quarters that as soon as we have the opportunity we look at getting back into the market on the buyback front, been pretty clear that capital position was in excess of where we wanted it to be and that would be the case on a prospective basis after the closing. So, when we got the opportunity, we evaluated the price point that was available then we start to move into the market. On a go forward basis, I don’t think our message has changed a whole lot we are going to continue to look for opportunities, continue to look for our capital and part of that message, we are also going to look for opportunities to just rebalance or optimize the capital structure and you talked last quarter about changing the mix of capital whilst we are also going to look at that on a go forward basis.

John Koelmel

I mean a word north of what we consider to be a run rate target zone Bob, so as Michael just recapped and you guys have heard us consistently, we have historically that we’ll continue to use all the tools available to us. We’re obviously accumulating capital at a nice consistent predictable rate. So, we’ll remain focused and whether it’s on the dividend side or buybacks other means to manage the capital appropriately back down the level that we think are relevant longer term. And it’s a tough environment to carry excess capital and we want to manage that for the benefit of all shareholders.

Bob Ramsey – FBR Capital Markets

Great, and then maybe a last question. Tax rate was a little low this quarter. You just talked about how you are thinking about the tax rate going forward, what’s a good tax rate for modeling purposes?

Gregory Norwood

Obviously, the tax rate moved a little bit when you bring in the components of NewAlliance. From a modeling perspective, I think the tax rate we have now did benefit a little bit from about $1 million or $2 cumulative catch up, which was a benefit. So if you back that out that would give you the number you should be thinking about.

Bob Ramsey – FBR Capital Markets

Okay, so it is, back – I am thinking back kind of 34% rate give or take is what a good rate is?

Gregory Norwood

I don’t have the actual number in front of me. But again the only unusual item in there that I would think, you would want to understand is we did have a adjustment about $1 million that made the number favorable. So if you back that out this quarter, that would give you kind of the basic run rate tax rate going forward.

Bob Ramsey – FBR Capital Markets

Okay, thank you guys.

Operator

Your next question is coming from Tom Alonso of Macquarie

Tom Alonso – Macquarie

In your prepared comments you said that some of the actions that you are taking this quarter and coming up will create $25 million in pre-tax opportunities to invest. So, any thoughts on what that can generate in terms of revenues or any kind of help you can give us we think will come of that?

Gregory Norwood

Let me address that first, others can jump in. One of the things that we said consistently is, we want to free up dollars and capacity to redeploy it in different markets different products and different customer segments. So I can’t give you the exact laundry list. One of the things we are very focused on is, continuing to look at the branch structure, we will continue to look at that and make sure that our branches are performing to the level we think they should. We will also continue to look at ways to grow fee revenue. As we said, that’s a big component of our management push. So you can expect us to take that type of investment and put it into both the commercial and retail side of the business to focus on fee revenue generation.

Tom Alonso – Macquarie

Okay, okay fair enough. If I’m thinking about it in terms of timing, for your expenses, does that come out of the expense base and then come back in or is it always there?

Gregory Norwood

I think the timing of realizing it, which is you think about closing a lot of branches in the third quarter, it will basically zero out I think if I would do the model and as we will invest and reap the benefits of the – or repositioning pretty much in the same timeframe. So you shouldn’t see big swings from quarter-to-quarter. What you’ll see is us invest in that as I said into the fee revenue generating capacity that we want to grow.

Tom Alonso – Macquarie

Okay, okay that’s great. And then just your commentary on spread compression. Is that just driven by the fact that you are moving up market and you are bumping into larger players?

Gregory Norwood

Well, I think it’s a couple of factors. One, you have to think of it in this overall rates are coming down across the yield curve. What we said, there are people getting back into the markets. So there is more competition around that and then thirdly as we move more into commercial banking we have more variable rate lending relationship with customers, which in this market obviously has a drag. Certainly as rate move, it helps us in our interest rate sensitivity and will also help us in margin as we go forward.

Tom Alonso – Macquarie

Okay, great. Thank lot guys.

Operator

Your next question is coming from Theodore Kovaleff of Horwitz.

Theodore Kovaleff – Horwitz

Got a question for you about the potential of the HSBC, say a lot of branches. A, is that something you might be interested in and B, would that necessitate going to the well again?

John Koelmel

If I ask this about specific opportunities Ted, you’ve heard us the give the stock answer to that. We don’t comment on any specific opportunities. So, that’s the answer I just gave you on that. Having said that, part of I editorialized a bit the end of our prepared comments around M&A what we’ve foreseen as we’ve worked ahead over the last couple of years is, that very type of decision by some of the larger players. So if the type of opportunity that we’ve anticipated, the type of opportunity in addition to some of the bank transactions we’ve done and other that we think might be available. We’ve prepared ourselves for. So, beyond directional affirmation of what our M&A thinking and focus of strategy has been, is always can’t or won’t comment on any specific opportunities.

Theodore Kovaleff – Horwitz

Fair enough. All right, thank you.

Operator

(Operator Instructions) Our next question is coming from Matthew Kelley of Stern Agee.

Matthew Kelley – Stern Agee

The total $57 million that you guys are expensing, the restructuring charges, can you help us better understand what exactly you are doing with the money in terms of space, how is allocated in space people, technology, branches, maybe just quantify what you are doing over the next couple of quarters?

Gregory Norwood

Sure Matt, this is Greg. First of all, we kind of give you, just a breakdown of the second quarter charge. About $3 million of that was in our branch optimization, about $6 million was in actions taken to improve the efficiency of our back office. And then in the restructuring arena, about $3 million was taken to move the Harleysville headquarters to a location and a facility that we think will help us business going forward. So that kind of how the second quarter cost played out. I think, where we see the actual cost incurred is, a small amount in severance, about $5 million or $6 million in lease terminations and fixed asset write-offs. The bulk of that will come next quarter as I said when we actually exit facilities and then about another $3 million or so in the beginnings of the conversion that’s both internal and external cost related to accelerating the conversion efforts of consolidating the branches.

John Koelmel

The biggest sluggish facility Durban, Matt whether that be on the branch side or just real estate at large, trying to reposition ourselves or it makes more sense better aligning the distribution system. Some of it comes on the technology related initiatives, some of it of just sourcing and being more efficient in leveraging the scale and the reach. But the bulk of it’s really off of what we can do to reallocate and redeploy dollars or otherwise invest it in real estate whether that be administratively or more importantly the delivery system and better align it and produce incremental revenue going forward.

Matthew Kelley – Stern Agee

Okay, and how much of the $44 million in the third quarter is lease terminations and fixed asset write-offs?

Gregory Norwood

As John pointed, the vast majority will be that. I would think two-thirds or 75%.

Matthew Kelley – Stern Agee

Okay, and is it still roughly 10% of the branch count that’s being impacted by this?

Gregory Norwood

The actual number of branches that we announced in the second quarter is 16. The number we gave last is 10% is what we could see in the foreseeable future, but the actions we’re contemplating have taken in the second quarter relates to 16 branches.

Matthew Kelley – Stern Agee

Okay, got it. And then a question for Mike, can you talk about those changes in the capital structure and how much debt in the tier-2 capital you think you might be able to take into the overall operations or issue I should say to help you finance potential transactions?

Mike Harrington

Right now, with the balance sheet we have today, we are looking in anywhere range $300 million to $500 million that we might put on to the balance sheet at some point in time. And that would be, probably in the form of that what you talked about before. So, if you look at our capital structure we’ve got almost no tier-2 capital as part of that structure. So that’s something is so far by tier-2 that’s really the first place we are looking to do something.

Matthew Kelley – Stern Agee

Okay, and last question for John, when you talk about pricing being elevated, looking back, I think there is need on transactions in the northeast for healthy banks and not look at what you guys paid for NewAlliance, those 20 times earnings, 1.7 times book, 12% deposit premium and the median for those either 10 deals of similar stripe is not that far off than that. So what metric in particular do you think has been elevated in the transactions you’ve been looking at and commenting on?

John Koelmel

I won’t say I’m honed in on any one per se Matt. I look at it in terms of what we think is realistic from a return basis and the ability to drive the kind of returns that make transactions viable over the longer run. So the value add that comes to us we might have evaluated some of those opportunities, my view is, it was a little rich for the opportunities that were there to be that.

Matthew Kelley – Stern Agee

Okay, and can you remind us on your view, what is more reasonable in terms of earn-back periods on tangible dilution?

John Koelmel

Well I think, all you have to do is just look back what we’ve done. We’ve kept it in the three to four year zone. I think often times we’ve talked about it even being shorter than that NewAlliance. We talked it being no more than two to three years. So, that’s clearly a metric on one end. We continue to endorse the need to trade capital for earning stream and the fact that that typically is dilutive for tangible book. We are sensitive to the need to bring it back and get back hold sooner than that.

Operator

(Operator Instructions) We have a follow-up question coming from Tom Alonso of Macquarie.

Tom Alonso – Macquarie

Just real quick on the excess capital fund. You guys in the past have said that the number in your mind that you've penciled in as about $500 million. Is that still a good number? Or should we think of the 121 that you put to use in buybacks is coming out of that $500 million stock, if you will?

Gregory Norwood

That’s the right way to think about it Tom.

Tom Alonso – Macquarie

Okay, great. Thanks guys.

Operator

Thank you. There are no further questions at this time. I’d like to hand the floor back over to management for any closing comments.

John Koelmel

All right, just thanks very much and thank you to everyone on the phone for spending the last 50 minutes with us. We appreciate as always the opportunity to keep you current on our story and look forward to doing so again in another 90 days. Beat the heat, enjoy your day and we’ll talk again. Thank you.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: First Niagara Financial Group CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts