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First Niagara Financial Group (NASDAQ:FNFG)

Q3 2011 Earnings Conference Call

October 20, 2011 11:00 AM ET

Executives

John Koelmel – President and CEO

Gregory Norwood – CFO

Analysts

Jason O’Donnell – Boenning and Scattergood

Theodore Kovaleff – Horowitz & Associates

Damon Delmonte – KBW

Collyn Gilbert - Stifel Nicolaus

Bob Ramsey – FBR

Matthew Kelly – Sterne Agee

Marc Heilweil – Spectrum Advisory Services

Tom Alonso – Macquarie

Operator

Greetings and welcome to the First Niagara Financial Group third quarter earnings 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 for First Niagara Financial Group Incorporated such information constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which involves significant risks and uncertainties. Actual results may differ materially from those results discussed in these forward-looking statements.

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

John Koelmel

Thank you very much, Jackie and good morning, everyone. With me as always is Greg Norwood, our CFO and before Greg walk you through the quarter and look ahead to the end of the year, let me do my best to set that up by sharing some of my thinking on what we’ve done to-date this quarter included the macro realities, economic regulatory political, what all means to us, where we are with the HSBC transaction and how all of that shapes our thinking about 2012 and beyond.

So I’ll start with the quarter. Teams again may be very proud in delivering another solid performance, consistent with what we've been doing quarter-after-quarter for some time now. And for those of you that may look at the outcome as a mess, I strongly encourage you to look carefully before you leap to that conclusion.

Fundamentals, production volumes, risk management, operating metrics are all very strong and as to whether you look at our legacy footprint or across our newer markets. New England is the latest example of our proven ability to assimilate and grow in a new geography and our team is doing a bang up job in planting the First Niagara Flag up there.

So whether it be deposit growth loan production, customer acquisition, community profile or most importantly strengthening the talent on the bench, we are already more than delivering on our promise in the first six months, by that I mean we saw a plenty of accretion in this quarter from the transaction which further evidences the instant traction our team has created beginning to take an increased share of wallet market there, while continuing to do the same in all of our geographies.

Our loan and deposit growth stories are terrific. In total, I am very pleased with how we are managing the business. That we need to be better always that our track record and high quality performances stands out even more given today’s harsh environment.

Unfortunately, in spite of those very strong trends and results, the macro meltdown made it impossible to overcome the dramatic rate change over the last 60 days of the quarter. You just can’t generate enough additional volume in the short run to mitigate the magnitude of that kind of rate movement.

And we don’t and won’t otherwise manufacture a penny or two for just to meet street estimates by managing loan loss provisions. In fact, we again added to the level of our allowance this quarter is that direct way to run the railroad in this environment. Obviously, August and September was an unprecedented time period for our industry. In fact that’s just three years later; we’re comparing our current reality to the doom and bloom of 2008 as amazing and to me very disappointing.

And today in my view, the entire industry is on a much more slippery slope than it was three years ago, maybe better positioned in total to weather the storm, but navigating this one will be much trickier and more challenging for all of us. Sectors definitely in for a real bumpy ride for a while, and that’s hard for me acknowledge, we are always in the glasses more than half full camp, but the reality of the continuing political regulatory and economic dysfunction is impossible to ignore and that gets me to the Fed.

The August 9 announcement to put a stake in the ground to keep rates low through at least mid ‘13 coupled with operation Twist clearly has had dramatic impacts on the industry. Overnight literally the landscape changed. Most importantly through investors in our sector into a tailspin and we have been running through or hiding in the hills ever since and obviously look at all of us in a dramatically different way compared to what’s literal as 90 days ago.

Earnings projections, PE multiples and overall valuations are incredibly reduced.

Demand for the industry’s currencies at a real low. And, yes, we continue to have our flat roll seat to that show as we engage our investors on the market large around the HSBC transaction. Aggregate pressures on the sector have materially compromised the industry’s earnings power for the foreseeable future.

It’s clear it will take a couple of years, not quarters to construct an effective response. And while I believe some of us are much better positioned than others to do so, this will tough sliding for all for a while. So, what does that mean for us? Since the beginning of the financial crisis, we've been very adept at putting off under some tough conditions. You are sure that we will maintain our long-term offensive focus. We will continue to drive earnings growth. Given our firm belief is that how we and shareholders will ultimately win and be rewarded.

And although we haven't lost our confidence, conviction or courage to do what it takes to accomplish that objective, but we get it. Though that is impossible to ignore the current reality, it means we will balance the level of our continuing investment in the business with an expectation of the next version of the normal is two or more years away. We’ll ensure we preserve and protect what we've built to-date and put ourselves in the right position over the not longer recovery horizon to be able to play offense from a position real strength when sustainable growth opportunities again emerge. It means we will be all committed to fully integrating and efficiently and effectively operating the business we are already or assume we will have.

So let’s talk HSBC, where we expect it to be when we announced the transaction in August 1, a simple note, that we still believe we have a strategic home run, definitely. With the current environment makes the execution a lot trickier certainly. The traditional conversion and integration readiness and preparation process is going well, absolutely. Both integration teams are moving full speed ahead and are working collaboratively week in and out to ensure a smooth transition. Our guys are very, very good at this, and their side is right there with us. We just completed a series of five town hall meetings with 500 HSBC employees across the state where we gave them a high touch feel for our business model and unique and successful culture. The feedback both real-time and on the two week census been overwhelmingly positive and the excitement of our team-mates is clearly evident.

Overall above, there is a cross up speaking work about the transactions been incredibly positive and overwhelming and it further validates the relevance of our community banking model.

But, I am disappointed that we can’t give you any clarity about what really matters at the moment. Divestitures, balance sheet ramifications and capital to structure. Certainly wish, we could, as it was on August 1, time and circumstance has proven, it would only be speculation. So I can only repeat what we have already said, on the divestiture front, interest continues to be high. But, as we announced earlier this month, we always assume, we could advance what we have to sell, the Western New York DOJ driven process at the same pace than on a parallel path with what we may choose to sell.

As we announced earlier the DOJ process started on schedule in August but the timing of the completion of that review just can’t be predicted. We do believe just as now has all of the necessary information to make their decision and we will certainly continue to work diligently to ensure we enable them to complete their process as soon as possible. But until we’re able to market what we have to sell, we won’t make any decisions on what we may otherwise choose to sell.

DOJ has always been the important first domino to be checked and it means we can’t give you any more clarity on the absolute size of the pro forma balance sheet at closing nor the capital structure that will be needed to support that balance sheet. And that means you can’t model the benefits of the transaction with any certainty. So all I can do is assure you, that while we will be disciplined and patient and moving forward, we are very motivated to shed real light on the subject as soon as possible. So that we can begin to give you the much anticipated and needed clarity.

So let me wrap up by reinforcing how we view the next 24 months through the end of ’13. What we've done our best to be realistic about the possibilities and probabilities. So given today’s realities we will prioritize for tax income and preserving the value of the franchise we have built. We will further sharpen our focus and improve our execution to ensure we are all the more efficient and effective each and every day.

We will further accelerate planned efficiency moves along with taking a tougher approach to discretionary spending. We will slow the timing and pace of incremental investments in our business to better align them with now more extended payback timelines.

We’ll give you even greater priority to harvesting and honing what we’ve built. We have lot of intellectual capital on assuring optimal organizational effectiveness when the world begins to turn in a better direction a couple years from now. And we will manage capital with a clear understanding with the tangible book value gain as the only one being pointed right now.

That suggest the deviation from the straight ahead approach we’ve employed over the last two years, more on the pace within the direction. And that’s because none of us are immune from today’s headwinds and no one embarked on full force, especially the low level of rates and shape of the curve. But we remain very bullish about our franchise and how will it continue to distinguish ourselves in the industry even in this difficult reality. We will continue to get after customers and thinking even bigger slices of that pie. Our strong and positive organic growth trends clearly validate our focus.

And I did pull up my binoculars the other day to take a look far enough down the road to confirm that these strong plods will lift. The new normal will arrive and the tide will eventually come back in. So you can count on us, to position our company to perform well in the interim and be ready to further differentiate in the years ahead.

That means to be in a position to be among the real winners in our space. We definitely have what it takes to do just that. First and foremost talent, one of the best teams in the business, frankly one that many more want to join. We have more than matched our growth and size with best of experience and leadership. We have the horses that it takes to compete and are all very hungry to do so. The commitment to growth, we have proven and effective record of playing offense to grow the footprint and create a winning franchise, a low risk profile. We delivered consistent and strong results this quarter included with superior credit trends and a transparent balance sheet.

Being a leader not a follower we’ve consistently been at the forefront of the industry, whether it be strengthening capital, taking share, opportunistic M&A, winning with talent for building scale and the result is, we have a very strong brand and franchise and ultimately, that’s what it is all about. Creating a special brand that says we made good things happen for our customers and communities. They all know they can count on us, not only today, but in the years ahead.

And while, it shouldn’t be this hard, that combination gives me more confidence and conviction than ever that we will continue to creatively and effectively manage our company for our long-term benefit and success.

With that, let me flip it to Greg who will take you through the quarter and offer some thoughts on trends for the balance of the year.

Gregory Norwood

Thanks, John and good morning everyone. As you can see, we have included a PowerPoint deck to help ensure the key themes and messages are clear today.

Turning to page three, our themes are simple and consistent with our historic operating performance. The punch line is, our customer fundamentals are strong and continued to be so, even in the uncertainty in the business community and with consumers that John talked about.

Our C&I book continues to grow. We are growing new lending portfolios like leasing and asset based lending, we are expanding our fee generation capabilities. Our deposit strategy is gaining traction with meaningful growth in core deposits. All very positive indicators. I would put our growth metrics up against anybody in the industry.

Operating income which excludes restructuring and merger related charges came in at $73.6 million. On a per share basis, this equates to $0.25 which is unchanged from the linked quarter and a 9% growth from the third quarter of last year. But I think this is a strong quarter our flat results show that we are not immune to the headwinds we all see.

Our normalized net interest income was essentially flat, the margin decline is not only expected 90 days ago in July but only half is business related, more on that later.

Before I get into the details, to allow an apples-to-apples comparison, we normalize the income statement and balance sheet for the second quarter to assume new alliance was included for the full 90 days. We have included this on pages four and five.

Turning to page six let me highlight some strong fundamentals by starting with our organic loan growth. We have very positive overall, year-over-year loan growth of 12% and we see this in every region. Many of you saw this slide at the Barclay’s Conference and all percentages here are up from the year-over-year second quarter measures. Also for New England, we saw 21% annualized sequential C&I growth in the third quarter.

Overall, our C&I three year CAGR remains at 22%. Our linked quarter growth in commercial loans was 14%, down slightly from second quarter growth of 17%. Some of the C&I growth was driven by our business initiatives, such as leasing, healthcare and asset-based lending. This quarter our leasing business really began to gain traction.

Third quarter originations were approximately $100 million. Our commercial loan growth story is a nice combination of experience, in-market lenders, continuing to gain good market share and new products generating higher volumes as they gain traction. Having this combination drives the real diversification benefit of our model. Experienced bankers with an expanded product suite provides for multiple touch points with our customers and thus greater revenue potential.

Let me take a minute to describe the competitive environment in our markets. Needless to say, the lending environment is more competitive than a year ago as many previously sidelined players are now active. Overall loan demand remains soft, competition is intense and this is clearly resulting in tighter spreads. We are walking deals that do not meet our underwriting standards and you can see that in slightly growth this quarter. But we are again getting growth numbers that far surpass industry norms.

Be assured we won’t and don’t need to do the aggressive deals. We will continue to invest albeit at a measured pace in the commercial lending franchise for the long haul as we pursue new credit, and seek to increase our share of wallet by cross-selling additional products through our existing and new customers. One such example is our capital markets business, where we saw very good momentum in the third quarter from derivative sales activity. Derivative fee income for the third quarter was $3 million, up 188% from the second quarter.

Besides strengthening on our commercial business relationships by offering more and better solutions, this business also diversifies our revenue stream which in a market like this is important.

Turning to slide seven, the deposit story is solid and getting better every quarter. Normalized we grew average core deposits by 16% annualized in the third quarter, driven in large part by a 30% annualized growth in money market balances. Each region experienced solid year-over-year core deposit growth. Compared to last quarter’s year-over-year growth each region is up between 600 and 800 basis points higher. For our New England footprint, core deposit growth is up 6% annualized from the date of acquisition.

Last quarter I highlighted we launched a new money market customer acquisition strategy early in the second quarter that was designed to acquire both new customers and new balances.

As a result, this quarter we added nearly $800 million in new money markets deposit balances, approximately two-thirds of these balances were new to First Niagara. Due to the promotional rate the cost of these deposits picked up 7 basis points from the linked quarter. This quarter we rolled out our new suite of checking products under the YouFirst checking tagline. These products allow customers to choose what’s right for them and were designed based on extensive input from our customers. We migrated over 400,000 checking accounts and the transition was seamless for our customers. This is another example of how well we do conversions.

Our checking lines in New England generated over 8,000 new commercial and consumer checking accounts. Given we are new to the geography, this is really outstanding news. In light of both the HSBC transaction and the significant drop in rates in the third quarter we have drastically lowered the pricing threshold for the money market acquisition program while narrowing the focus to customer account acquisition only.

Let me move to page eight and talk about credit trends which remain positive. Non-performing assets declined 3.7% quarter-over-quarter to comprise a modest 29 basis points of total assets.

Net charge-offs totaled $8.1 million averaging 20 basis points of loans and was unchanged quarter-over-quarter. Provision for credit losses totaled $14.5 million and our allowance bill was entirely a function of asset growth. To connect the dots with the last quarter we had a one-time adjustment for unfunded commitments that we noted would not repeat in the third quarter.

Turning to capital, estimated total risk-based capital ratio stand at.5% and tier-1 common ratio is at 11.3% which puts us in a very solid position versus proposed Basel 3 guidelines. Uniquely with our capital level and necessary for a comparative assessment is the magnitude of our mark-to-market our 303 purchase accounting adjustments.

At September 30, we had approximately $250 million in cumulative credit marks which if added back to capital would increase our tangible common equity to tangible asset ratio to approximately 7.96%, up 52 basis points.

Turning to the P&L, net interest income was essentially flat on a normalized basis. As you can see on slide nine, normalized net interest margin declined 15 basis points sequentially to 348 from a normalized second quarter margin of 3.63%. Of the 15 basis point compression, there are three business drivers that account for eight basis points of the decline.

First four basis points of compression resulted from mortgage prepayment effect, another two basis points is attributable to promotional money market campaign and two basis points is attributable to commercial loan compression. For us, the mortgage prepayment impact was larger, given the size of our investment portfolio and the mark-to-market premiums recorded on mortgage assets acquired through various M&A transactions including New Alliance. For the purchase accounting effect, this means that New Alliance mark-to-market resulted in premiums on above market rate loans that given the drastic move in interest rates from April had a more negative impact than newly originated loans at the same time with the same effective yield. The same occurs for securities as well.

Regarding the money market deposit costs, almost immediately after the August 9 Fed announcement, we significantly dropped the money market acquisitions rate and at the same time lowered our go-to money market rate post the period. Both will lower cost going forward.

Further in our markets we were the first to reprice our deposit products including CDs. We saw the market immediately follow our lead. We anticipate the deposit repricing actions that we have taken will reduce deposit cost by 5 to 10 basis points in the fourth quarter.

With respect to the commercial loan yield decline, the size was driven by the magnitude of our growth in the commercial portfolio and the fact that our portfolio has been added significantly more variable rate loans for several years. We’ve planned to continue to grow prudently by pursuing good customers where we can deliver multiple products to enhance overall profitability, however some margin pressure will remain, as we continue to grow loan balances.

Of the remaining compression four basis points is attributable to the day count factor, pattern for residential loans and securities. Given the size of our investment portfolio, this quarter-over-quarter impact is greater. Overall, based on what we know now, we expect fourth quarter net interest margin to moderate another three basis points to five basis points to the low-to-mid 340 range.

Moving to non-interest income; we had a strong quarter, even adjusting for the full impact of New Alliance on the second quarter. Mortgage banking revenues increased $5.3 million as closed mortgage volume exceeded $400 million, which drove higher gains on sales and incremental net-interest income.

Other income grew by $5.9 million in large part due to the strong capital markets revenue growth of roughly $1.5 million over the linked quarter, driven by interest rates swap derivative sales. The pipeline for our derivative sales remain strong early in the fourth quarter as consumers seek to lock in low fixed rates.

Turning to Durbin, based on the final hire rates and our internal projections, we expect to recoup approximately $8 to $9 million of the $16 million in debit fees at risk. We will do this by increasing our current deposit fee schedule in line with market levels and growing our debit card penetration and usage rate. We estimate the net impact to the fourth quarter at about $3.5 million decline.

Turning to expenses, normalized operating expenses including merger and restructuring charges totaled $177 million for the third quarter. The increase reflected investments in marketing and technology to support our expected larger asset base and expanding franchise. Technology expenses increased as we expanded our data center capacity for future growth.

Salaries and benefits decreased 4% or $3.7 million, compared to the normalized linked quarter partially driven by certain technology outsourcing initiatives. Our normalized operating efficiency ratio for the third quarter was 58%. Our target efficiency ratio remains in the mid 50% range.

Reported GAAP expenses of $204 million included $25 million of restructuring and merger related costs with the majority associated with our previously announced branch restructuring initiatives and the remainder associated with final cost of the New Alliance merger.

Consistent with our message in the last couple of quarters, we are continuing to vest in new businesses. One of these new businesses this quarter is our launch of indirect auto lending platform. We hired a seasoned leader with years of indirect experience in our footprint. He has brought with him a group of veterans with an average of 15 plus years of experience in the auto finance industry.

Auto volumes are one of the very few bright spots for sourcing loans today. We can leverage our existing retail lending platforms to ramp up the business allowing us to begin sourcing new business before year end.

To wrap it up, we are pleased with the consistency and quality of our fundamental business. We are not happy with the current rate environment but are confident in holding our margin the low to mid 340 in the fourth quarter.

Going forward, we continue to identify and drive new business opportunities, actively manage our deposit cost and attract the best quality lending customers, because we realize the industry headwinds are strong and are expected to be so for an extended period.

We have built an exceptional team with the leadership and experience to navigate through this rough patch and we will emerge stronger on the other side of this cycle. In the meanwhile, our strong credit culture and no boom no buzz markets will help us deliver consistent value propositions to our customers and our shareholders.

Thank you and now Jackie, John and I would be happy to answer any questions.

Question-and-Answer-Session

Operator

(Operator Instructions). Thank you. Your first question is coming from Jason O’Donnell of Boenning and Scattergood.

Jason O’Donnell – Boenning and Scattergood

Mike, can you just give us an update on how much cash the securities portfolio is generating at this point and what the variances between your reinvestment rate and the yields you’re previously earning?

Gregory Norwood

Yeah, Jason, this is Greg. The way I would answer that, I have the details right with me on exactly the cash flow analysis. But I would say our cash flows have accelerated relative to the prepayments and the reinvestment rates are down as you would expect. One of the things that we are doing is, as we look at the reinvestment of those cash flows, what are alternative investments outside of the mortgage arena, so we are not subject to continue prepayment.

Jason O’Donnell – Boenning and Scattergood

Okay, okay. That’s helpful and then on the margin overall, you’ve stated in your prepared remarks, do you expect to see the margin in the low to mid 340 range in the fourth quarter, do you still expect to achieve margin expansion post completion of the HSBC deal next year?

Gregory Norwood

When we look at the HSBC deal, I think I look at a couple of ways, first look at net interest income and certainly that will grow and as I look at margin and we input the interest rate environment, frankly right now it’s difficult to protect not knowing what the future environment is. We indicated when we discussed the transaction in August that we would change the mix of securities to create a higher yield and what we would get on the existing book. But the exact incremental difference I really can’t identify right now Jason.

Jason O’Donnell – Boenning and Scattergood

Okay. Fair enough, thanks.

Operator

Thank you. Our next question is coming from Theodore Kovaleff of Horowitz & Associates.

Theodore Kovaleff – Horowitz & Associates

Yes, good morning.

John Koelmel

Good morning Ted.

Theodore Kovaleff – Horowitz & Associates

Got a couple of questions on the HSBC. Clearly, you have not integrated the HSBC branches into this quarter. However, what are you doing about the various expenditures that you have involved in this? I am thinking about the extra legal fees and negotiations to sell certain branches etcetera. Are those included in this quarter or are they going to be an extra?

John Koelmel

The expenses that are being incurred Ted you’ll see them “below the operating line” are part of restructuring and other costs that roll down to bottom line GAAP earnings. So as you’ve alluded just begun to incur some of those costs that are reflected on a real-time period-over-period basis below the operating line.

Theodore Kovaleff – Horowitz & Associates

Okay great. And at this juncture what sort of calendar do you have with the closure of the HSBC deal? Or are we waiting actually for adjustments?

John Koelmel

I mean just as the part of the puzzle that are not relevant to the overall approval of the transaction and timeline I think that we consistently talked about is second quarter of next year to close the deal and we’re working at everybody is doing is continues to hold to that kind of target date earlier than not in the second quarter as what we are all working toward at this point.

Theodore Kovaleff – Horowitz & Associates

Okay great, thanks a lot

John Koelmel

Thank you.

Operator

Thank you. Your next question is coming from Damon Delmonte of KBW.

Damon Delmonte – KBW

Hi good morning guys, how are you?

John Koelmel

Good Damon.

Damon Delmonte – KBW

Greg, could you just clarify on the Durbin Amendment? I think last quarter you guys were saying about $1.5 million, or $2 million of an impact in the fourth quarter and now that you say it’s going to be about $3.5 million?

Gregory Norwood

Yeah, when we look at all the final moving parts, we looked at it and looked at the acceleration of the benefits for the actions I talked about relative to our fee structure and usage and our best estimate now is about $3.5 million.

Damon Delmonte – KBW

Okay. And then expense front you talked a bit about what would core for this quarter, but could provide us some color around what the good run rate for us to use for the next couple of quarters for total amount of interest expense?

Gregory Norwood

When I think about the interest expense and – or not expense, operating expenses, I would say the operating run rate we have now would be good for the fourth quarter looking into 2012, as we said one of the things we’re doing is – is trying to figure out how we will manage that base going forward.

Damon Delmonte – KBW

Okay. And then you guys mentioned you know you are moving into the indirect auto lending arena. I mean that’s a category where you could kind of turn this figure on, it seems like that you can increase the amount loans outstanding quite rapidly. What are your expectations for this platform?

Gregory Norwood

I would they are modest going forward in the near term. One of the things you should take away from what we’re doing here is we’ve got an very experienced team in this footprint and beginning to source loans in the fourth quarter. Later in 2012 is when you started to see incremental benefit.

Damon Delmonte – KBW

Okay. And then I guess lastly the share count, the average diluted shares outstanding came in lower than what we are looking for. I think originally we expect something around $300 million to do, explain why they came in the low 290?

Gregory Norwood

There is no real difference between what we had expected from the second quarter to third quarter. So no real changes of note that would causing some move appreciably.

John Koelmel

But we are going to check out this.

Damon Delmonte – KBW

Okay

John Koelmel

We can circle back Damon, compare your math and our math.

Damon Delmonte – KBW

Okay, that’s good, that’s all I have. I’ll go back in the queue if I have any more questions. Thanks.

John Koelmel

All right. Thanks so much.

Operator

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

Collyn Gilbert - Stifel Nicolaus

Thanks, good morning gentlemen.

John Koelmel

Good morning Collyn.

Collyn Gilbert - Stifel Nicolaus

John just kind of follow-up on your comments about tangible book dilution. I mean is that changing your financing strategy at all on or do you anticipate changing your financial strategy at all on the HSBC deal?

John Koelmel

Embellish a bit on your question so.

Collyn Gilbert - Stifel Nicolaus

Well, I guess with the focus of trying to minimize tangible book dilution makes me wonder are you now thinking of minimizing the common equity raise or thinking more on the supplementing more with debt and just kind of if your financing strategy has changed at all and given the environment in the last couple of months for HSBC?

John Koelmel

I think it was well enough that we continually work by hand we’re dealt to the extent affect patterns today is different and fact that in the 90 days ago it’s not logical to assume Collyn that e are exploring all relevant considerations. So we’ll be smart and savvy about how we put our capital stack together and what makes the most sense for us going forward.

Collyn Gilbert - Stifel Nicolaus

Okay, and then, Greg I guess a question for you. Just and you sort of touched on this but just wanted to check again, the plans for the liquidity that’s going to come on with the transaction, I know you guys have talked in the past about looking at some near term investments kind of a more credit-oriented structures. Is that still the plan on the investment side that’s going to go out a little bit more on the risk curve just sort of capture some yield or has that strategy changed?

Gregory Norwood

Collyn, the strategy hasn’t changed. I think when we talked about last, we looked at the fact that we had excess liquidity and that we could trade that liquidity for what I would call a slight expansion of the credit risk, but relative to the overall portfolio, we will shorten it up by using a lot of variable rate instruments and we will increase the diversification creating higher yields and then in very slight way look at credit as another option.

John Koelmel

And that’s no really no different than what we’re doing today in terms of managing the current balance sheet. Given the liquidity reality into the market dynamic, Collyn tying think about how we can more appropriately, opportunistically reposition rotate that balance sheet or replicate the rotation of the balance sheet that we envisioned longer term. So, how we have managed the HSBC liquidity just as an extension of what we’re otherwise doing today has been.

Collyn Gilbert - Stifel Nicolaus

Okay, okay, great that’s helpful. And then just one final question on the, buyback, there is nothing – well let me ask it differently. How do you sort of view the buybacks right now as a capital deployment strategy? How aggressive would you could you see that going and sort of how are you utilizing that tool?

John Koelmel

Can’t imagine, you’d want us to dilute tangible book…

Collyn Gilbert - Stifel Nicolaus

No, of course, not John, I couldn’t imagine it. All right. So, does that mean you’re not interested in buybacks at this level?

John Koelmel

Well, I think, as we look ahead, if that’s a philosophical question, as we look ahead for the next through the five years we still deem buybacks relevant capital management through a relevant arrow in the quiver, as we look at shareholder returns and optimizing capital position, buybacks certainly would remain in the quiver to the extent you’re asking is it a relevant tool at the moment. I’d suggest they’re not so. So

I can try understand your question as it altered our theoretical view of life, not as a practical matter is it relevant today, obviously not.

Collyn Gilbert - Stifel Nicolaus

Okay, okay. That’s helpful.

John Koelmel

Okay.

Collyn Gilbert - Stifel Nicolaus

Yep, thanks very much.

John Koelmel

Yeah, thank you.

Operator

Thank you. And your next question is coming from Bob Ramsey of FBR.

Bob Ramsey – FBR

Hey, good morning.

John Koelmel

Good morning Bob.

Bob Ramsey – FBR

I know you all described the HSBC transaction as still being a strategic home run. But I was wondering if you could talk a little bit about the financial implications and if the market doesn’t give you a better opportunity to rise at a higher price is it still accretive by your math to EPS in 2012?

John Koelmel

Attempted to likely - in a politically correct fashion Bob. It’s impossible to engage in that discussion, just don’t know any more than we knew then. So rather not speculate your model, our model debate, because until we can start to better evidence the realities of our circumstance, it’s just not meaningful. So, as I said earlier, be assured that we are smartly managing our way through the process, albeit under different circumstances than any of us could have anticipated 90 days ago and once we’ve got some better clarity as to how the process starts to unfold, how divestitures start to come together, size of the balance sheet, size of the capital raise look forward to engaging you in that discussion.

Bob Ramsey – FBR

Okay. Maybe understanding the circumstances are different today than they were 90 days ago and concerns maybe different 90 days from now than they are today. Is there some point where fundamentally you just decide that the financial accretion is no longer enough to justify this deal and you would be willing to walk away.

John Koelmel

Not a relevant conversation at this point, Bob.

Bob Ramsey – FBR

Okay. Thank you

John Koelmel

Yes, thank you.

Operator

Thank you. Your next question is coming from Matthew Kelly of Sterne Agee.

John Koelmel

Hey Matt.

Matthew Kelly – Sterne Agee

It sounds like you are trying to find ways to reduce the dilution I mean the market expects that you go through this deal, your tangible book is going to get flat by 25%. So walk us through the types of options that you are steering at. At last quarter you talked about your capacity to issue debt, I think it was somewhere three and five hundred million, maybe start there and what the current capacity is and how that could change to avoid some of that massive book dilution and equity issuance?

John Koelmel

What do we expect, it’s not worth trying to walk anybody through the unknown Matt. At this point what we are trying to clearly message is that until we are all have better clarity as to the size of the business, size of the balance sheets that will have coming out the other end what we do and how we do it, is in the to be determine bucket. So, I am not trying to give you our time and not trying to obtuse about it. But at this point is not worth the whole a lot of speculation as that exactly what we would do, how we would do it, because you and I’d be negotiating with ourselves as to what the probabilities might be, unfortunately that last 75 80 days have proven it’s impossible to predict what’s going to happen next. So, bear with us and next quarter tell you,

Matthew Kelly – Sterne Agee

Last quarter you did comment that you had between $300 and $500 million of capacity for tier-2 capital and some debt, has that changed at all or is that the higher number today?

John Koelmel

I’m looking at Greg, I mean, I have no reason to believe it’s changed in terms of talking capacity and alike, it’s got to be about the same.

Gregory Norwood

Yeah, it would be about the same.

Matthew Kelly – Sterne Agee

Okay, all right. And last quarter we talked about, what is reasonable and I asked you the question on earn back periods and you commented three to four years and so, I think in the presentation you said this is four to five years and if you go through that it’s got to be close to 10 years. And so, if you went through and issued stock at these levels close to 10 years to be specific. Are you suggesting that potentially reduce the size of the overall balance sheet taking on by a much larger degree to what was outlined in the presentation, maybe a larger divestiture would you consider that?

John Koelmel

Just knock and take the beat Matt.

Matthew Kelly – Sterne Agee

So help us understand what the mile markers will be from now, through the first part of the next year? What are the key things that you will be able to telegraph to us on your intentions?

John Koelmel

Well as I attempted to articulate my comments will more than telegraph will enumerate, one that the divesture plan. Once justice gives us a nod, and once we’ve got the good clarity as to what means in Western New York, you’ll be first to know in terms of how we are pushing forward on that. If there is any silver lining in the circumstances that pent-up demand and readiness and preparedness on both our side and prospective buyers is clearly at a high. So upright on the premise that once that the gun goes off from justice we’ll be able to move forward there with the benefit of clarity of that thinking and what that means we will be able to make decisions relative to what we may choose to sell. And as you have alluded what that means to the size of the balance sheet. But don’t want to get ahead of ourselves. Frankly, don’t want to further of the speculation that’s already out there by employing anything, other than, we will continue to step through this. As we indicated day one, acknowledging it has been a trickier process to step through than one could have anticipated.

Matthew Kelly – Sterne Agee

Okay. And last quarter, when you talked about the deal when it was announced, you did mentioned, some timeline for getting some announcements on this divestiture, timeline specifically the – I think the Southern territories that wasn’t defended on the DOJ, what should we expected on that piece?

John Koelmel

Well, we have gave you an announcement. I think the 3rd of October that was a function of what we have said that we had expectations that we could provide some information at the end of September. We did that in this period of transparency and enumerated as it repeated a bit ago that there is a lot of overlapping interest in the collective markets and hence it made no sense for us to get ahead of ourselves will step through the DOJ Western New York process and pools way in the heels of that we’re able to talk more about what if anything comes next.

Matthew Kelly – Sterne Agee

Okay.

John Koelmel

This is going to have to hang top and tear a little bit.

Matthew Kelly – Sterne Agee

Switching gears, have you –where do you stand on executing and recognizing the full cost saves you anticipated from New Alliance. How much of that has been recognized?

John Koelmel

I think it’s virtually all there.

Gregory Norwood

Yeah.

John Koelmel

All there and part of that the benefit that we’re realizing today is a function not only of the positive market traction but our ability to very efficiently integrate it.

Matthew Kelly – Sterne Agee

And do you think you’re achieving the 5% accretion from the New Alliance transaction you anticipated?

John Koelmel

Very comfortable with that. I think a penny of this quarter annualizes, yeah, we feel really good about that.

Matthew Kelly – Sterne Agee

Okay. And what’s the charges we should expect for 4Q and Q1 in terms of repositioning and restructuring charges?

Gregory Norwood

Well, Matt, we can get to that detail or some ranges. The challenge would be breaking it between what’s in first quarter and second quarter it would depend really on the exact timing of certain execution and conversion planning. But what I would tell you is, restructuring charges for HSBC should be in the fourth quarter and the first quarter by and large with some in the closing as of the second quarter.

Matthew Kelly – Sterne Agee

Okay, all right. Thank you.

John Koelmel

Thanks, Matt.

Operator

Thank you. Your next question is coming from Marc Heilweil of Spectrum Advisory Services.

Marc Heilweil – Spectrum Advisory Services

Hello, I would like to ask and get a little bit of feel for the commercial loan situation. Do you have floors on most of these loans and if so, how many of these loans are at the floor levels can you just talk about that for a minute?

Gregory Norwood

Let me start at a high level of saying floors are less common than they were a year or so ago. And in some markets and some products , we are still able to get floors, but I would say that’s reducing in percentages. So, on an overall portfolio basis there are less floors. I think in our portfolio and frankly the competition in the marketplace is making it in certain places, certain sectors more difficult to get that is one o of the factors that drives new compression for assets as well as for others in the industry.

Marc Heilweil – Spectrum Advisory Services

So, can you give me idea of how, what percentage of your existing loans are at the floor levels and will they be lowering off soon in other words do you going to get a further hit to NIM based on these loans rolling off or being repriced?

Gregory Norwood

One of the factors impact in our guidance getting to the mid 340s or low 340s is part of the restructuring of the portfolio both with loans rolling off to head floors as well as just the general repricing. So that considered in our fourth quarter outlook for the NIM.

Marc Heilweil – Spectrum Advisory Services

And when you are working with a new loan proposal on a new customer, is pricing - would you give us an idea of your views towards competing on the basis of price, as opposed to competing on some other measures, such as deposits and just the quality of the account. I know that’s a very vague question, but I guess your philosophy on that would be nice to know?

Gregory Norwood

Let me talk from both parts of pricing and other structuring. And certainly what I indicated in my remarks is, there is price competition, to be clear. One of the things we have said is, we don’t need to and won’t chase transactions on price and price alone. We’ve walked deals, because of that. Another element of the marketplace is the structuring and we have also seen some participants willing to structure transactions or amount of facilities that we have literally walked away in the last 30 days.

So we believe our position in the marketplace is very positive. We have been there throughout the disruption we will be there. For the next several years just like we did 2009 and 2010 and that that consistency along with the additional products suites we have relative to being able to help customers do more than just give them credit, allow\s us to compete in ways we couldn’t two or three years ago and in ways a lot of competitors aren’t today.

John Koelmel

And we will continue to be a relationship and relationship profitability driven business Marc. So it’s a great recap. We look at the all in relationship and parts and pieces are the aggregate story it doesn’t fit for us or isn’t the right fit for us. We keep moving on the other hand, we think gathering share increasing customer base is important acknowledge it's a tough environment to do that in, but long-term those are the bigger slice of the pie where they come out on the winning end of the equation.

Marc Heilweil – Spectrum Advisory Services

Okay good luck on the winning.

John Koelmel

Thanks so much.

Operator

Thank you (Operator Instructions). Our next question is coming from Tom Alonso with Macquarie.

Tom Alonso – Macquarie

Good morning, guys. I guess a bigger picture question John on your comments that, that the earnings power for the industry has been impacted I mean I get the idea and certainly I would agree with you on that. From your perspective how that they you go about combating that? Is it just, do you shift to more fee income so there is not as much of a capital impact on the stuff you put on balance sheet. I’d just be curious to get your thoughts on that.

John Koelmel

Well one, there is limits speaking industry-wide. My view is there is real limits on how much we can combat this for the foreseeable future and that case was regulators and politicians to the extent everybody continues to tie our hands. What we can do and how we can do it, there is very little time in my view that the industry tend to be incrementally creative overall.

So, how do we try to navigate, it’s clearly some of what you are hearing from us. One be all the more efficient with what we have, make sure we better position ourselves with what we have and otherwise, identify the types of products and services that will position us for the longer runs.

In my view and in part of what I was trying to suggest there is that, if there is ever a time to keep one’s eye on the longer term, this is it, because I see this being a real rough ride of the industry for a couple years because it’s just isn’t a whole lot that anybody can load up into their gun in the near term and make it incremental haze. So you just need to be true to your convictions keep working in the longer term plan and the primus that it have to sort itself out. If it doesn’t, there is larger issues the challenges we have as an industry.

So, part of my message is it’s going to be very difficult I believe for the sector and to my comments that we are on a sloppier slope than we were back in ’08. And when we shortlist the people makings some less than smart decisions got themselves in trouble year out of business in the penalty bugs, but many of us were able to navigate through that.

Right now, there is not a whole lot to work with or the industry is. So you just keep go and what you do each and every day. We do it we believe incrementally better, keep taking shares and aggregate assets, customers, talent, franchise that when this does turn albeit further away than we what all like to believe that our boat will arrive that much faster when the tide does come in.

Tom Alonso – Macquarie

Okay, I appreciate that. That’s really everything else I was looking for with an answer. Thanks for that.

John Koelmel

Yeah. Thank you.

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

Well, thanks very much, Jackie and as always, we greatly appreciate everyone’s time and attention this morning. And appreciate your focus on the good work this organization and the team is doing. Have a great day and we look forward to talking to you in another 90 days. Thanks so much.

Operator

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

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