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Executives

John R. Koelmel – President, Chief Executive Officer and Director

Gregory W. Norwood – Chief Financial Officer

Analysts

Erika Penala – Bank of America Merrill Lynch

John G. Pancari – Evercore Partners Inc.

Josh Levin – Citigroup Global Markets Inc.

Casey Haire – Jefferies & Co., Inc.

Damon DelMonte – KBW

Thomas Frick – FBR Capital Markets

Joseph Fenech – Sandler O’Neill & Partners

First Niagara Financial Group, Inc. (FNFG) Securities Portfolio Repositioning Conference Call June 27, 2012 5:30 PM ET

Operator

This presentation contains forward-looking information for First Niagara Financial Group, Inc. Such information constitutes forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995, which involve significant risk and uncertainties. Actual results may differ materially from the results discussed on this forward-looking statement. Welcome and thank you for standing by. All lines will be placed on a listen only mode until the question-and-answer session. Today’s call is being recorded. If anyone has any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. John Koelmel, President and Chief Executive Officer. Sir, you may begin.

John R. Koelmel

Thanks very much, Victor. Good afternoon everyone. With me as usual is Greg Norwood, our CFO. And we certainly both appreciate all of you joining us on short notice. We acknowledge you’ve had little time to digest what we released just an hour ago. But given it’s a security sale itself and related debt repayment is fairly straight forward, our comments will primarily focus on how and why we made the decisions that resulted in the just announced actions. And given that it’s already 40 days after the completion of the HSBC branch transaction, we’ll also provide you a brief update as to the early results and outcomes before we open up for questions.

Let me start by putting the security sale and debt paydown in some context. We’ve built this business and franchise by focusing on the core banking business keeping it simple and creating real franchise value. Our investor value propositions consistently were predicated on creating an incremental and sustainable earnings stream via combination of organic growth and M&A that will drive long-term shareholder value by increasing the size and strength of our core earnings engine. And in spite of the market dynamics of the last year, we remain confident that consistent, predictable, sustainable operating earnings growth will be rewarded by the market over the longer run with the benefit of all of us as shareholders.

That said roll the clock back three years to the Nat City Bank branch transaction in 2009. It was clear that the nature of that transaction, a branch deposit deal that wasn’t asset-rich by its terms, gave us an opportunity to further support our build-out by investing our excess liquidity in a then outsized investment portfolio, that provided incremental income until we were able to deploy those funds into higher yielding loans that were customer and relationship driven. And that would add sustainable earnings and real franchise value.

And that’s the balance sheet rotation plan you’ve heard us consistently talk about over the last three years.

We’ve been executing and replicating that game plan with the two deals that followed, Harleysville and NewAlliance. Design and intent was simple, to bridge our ongoing excess liquidity challenge, support the cost of carry of our increasing infrastructure until we were able to deepen our in-market penetration and build out our commercial and consumer loan portfolios. And we openly talked about it as just that, a bridging strategy or initiative. In fact when asked sometimes about a run-rate leverage play, we always responded, not for us.

As Greg will explain, we’ve been evaluating the realities and unintended outcomes of that strategy during this year’s increasingly volatile environment. With the benefit of the review and analysis he will recap, we obviously concluded that it wasn’t beneficial to continue to carry the increasingly uncontrollable and very unpredictable risk associated with the portion of the MBS book we sold. That while still additive financially to our results and outcomes, those risks have become value-dilutive to the increasingly positive results and outcomes from a core business that’s performing better today than ever. So, in effect, we’ve significantly scaled back that bridging initiative now, rather than let it run its full course over the next couple years.

Do our actions reduce short-term earnings for the next couple of years? Sure, but that’s minimized by a combination of, one, the additional downside exposure that we believe would have materialized had we retained the entire portfolio, as well as, two, the benefits of the now improved asset sensitivity of the balance sheet.

More importantly, does it impact longer-term earnings growth and upside, not at all. Our lending team continues to perform at an industry-leading level and we’re fully confident about delivering on our improved opportunity to build our loan portfolio just as planned over the next few years.

Should our enhanced capital position against an even lower risk balance sheet better position shareholders for an improved valuation and return during these uncertain times, we believe it will. And at the heart of it for us, the market will now be able to focus fully and completely on the strength of our core business. And our execution continues to differentiate and distinguish versus peers and the sector at large. The latest evidence of that is in the early returns on the HSBC branch transaction just 40 days after closing. And I’ll give you a quick drive-by on that in a few minutes.

So, again, punch line. Our cost benefit analysis of perpetuating the full bridging strategy made it clear, be decisive, de-risk, deleverage, and make it even easier to sharpen everyone’s focus on the results and outcomes of running the business we have built.

With that, let me now have Greg recap the transactions and otherwise share his views and perspectives.

Gregory W. Norwood

Thanks, John. In addition to the press release we issued earlier, we’ve also issued a slide deck that fully explains the actions we’ve announced today. I’ll talk to them and reference them through my comments.

So let’s start with slide three. I want to frame this conversation around what we did, what were the impacts and why we did it. We repositioned our securities portfolio through a sale of $3.1 billion of mortgage-backed securities and collateralized mortgage obligations that were the most at risk to prepay and thus would reflect much lower yields over the next few years. And we shrunk our balance sheet by a like amount, paying off short-term wholesale borrowings. We meaningfully de-risked and delevered our balance sheet as a result of these actions.

Additionally we have taken a conservative stance in estimating the future prepayment speed and average life of our remaining $6.1 billion in mortgage-backed securities. A comment for clarity. This transaction included no HSBC pre-buy securities. Additionally, the HSBC transaction was not an element of our decision at all.

So what were the financial impacts of these transactions? Pretty simple to follow the numbers; sale gives us a one-time gain of roughly $16 million, deleveraging the balance sheet improves the capital ratios and improves asset sensitivity, given the short term nature of the liabilities that were repaid, and the lower EPS in the near term associated with shrinking the balance sheet.

Let me give some color on the short-term EPS impact of $0.04. The $0.04 number is the net contribution for the first quarter of these assets, less their funding costs. This was really the only calculation we could use for reference. There is no doubt that going forward, the yield would have been much less given our expectation for much higher prepayments over a much longer timeframe.

Another important aspect of the actions we have taken is our NIM, and our net interest income will be much more predictable, given less uncertainty from the mortgage-backed securities. In my words, this is a gooder, as we’ve not been able to provide that for a while.

Last comments on page three will be about the retroactive adjustment in the second quarter of 2012. This represents the cumulative catch-up to reflect the lower level yield for the life of the bonds we retained for the remaining life of the securities. Including the impact of the $8 million retro adjustment, we expect the second quarter NIM to be between 3.20% and 3.25%. But that is short lived, as you can see looking forward we expect NIM to improve in the back half of the year to between 3.50% and 3.60%.

Next, let me cover why we did choose to sell and why now. Before I start, I want to say these actions had nothing to do with the core business fundamentals. As John said, our loan and deposit engines are running better than ever. On the why sell question, we’ve been very transparent about our views of the volatile and uncertain interest rate environment banks operate in today and the headwinds that have resulted. Going back to the KBW Conference in late February, we noted that prepayments early in 2012 were as expected, but we thought both the level and more importantly the duration of the elevated prepayments may elongate.

A contributing factor we noted in the conference was the increasing servicer backlog. While we all saw some signs to be optimistic in late March and early April and other hawkish views from some Fed governors, those sentiments were short lived in hindsight. As we continue to look forward, we have become more hardened in our view that the recovery is going to be delayed and the Fed expect – beyond the Fed expectations and that they are very determined to keep rates low.

With that perspective, we conducted an extensive review of the outlook of mortgage prepayments for the next several years. Our conclusions of this review included the optimism of the first quarter was not sustainable nor repeatable for an extended period. The duration of elevated prepayments will remain high much longer than prior cycles.

Next, virtually all of the major servicers are adding capacity to support a longer refi period. And servicers still continue to have significant backlogs relative to refi volumes.

Another point was the government programs like HARP 2 are increasing the flow and are expected to do so for the near term. Additionally, high-quality paper originated post 2008 will see the greatest levels of prepayment. And finally, the flight of quality was benefiting current valuation of anything U.S guaranteed including mortgage-backed securities.

Given those views, we reviewed our MBS portfolio and saw a greater prepayment risk for some of our mortgage-backed securities, which would have resulted in significant accelerated premium amortization expense over time. So why did we sell versus hold? Certainly we looked carefully at this decision, but as we looked at the overall uncertainty and the duration of that uncertainty, we just couldn’t get comfortable that an accounting adjustment today would capture all the future risk to the yield.

In addition, the potential for large variability in the actual yield going forward would not allow us to provide the clarity to our otherwise very predictable earnings. And keeping the bonds would have added even more tail risk if the global economic environment suffers a severe shock.

When we looked at the potential future earnings stream, it would have been much less than the $0.04 we mentioned because the effective yield in that was 3.2% in the first quarter and that certainly would have diminished over the coming quarters over the next year or so. The benefits to the transaction also improved our asset sensitivity and capital ratios as John alluded.

In the end, the increased clarity, overall improvement in our balance sheet positioning and other key financial metrics made it clear to us that the sale was the right decision.

So, why sell $3.1 billion? Through our security selection process, which I’ll discuss next, we assessed various sale levels, do we sell $2 billion, $3 billion and $4 billion, as well to determine the right balance of the risk mitigation of those sales levels and the retained earnings power. For example, if we were to sell $4 billion, the benefit to future earnings was more significant, but the risk in retaining those securities was not much different than the $3 billion level we actually settled on. So in the end, it was clear to us, the balance – the potential for future risk with the future earnings, $3 billion was the right amount to sell.

So why now? We were comfortable we had accumulated enough data from enough sources to make a decision and waiting would be counterproductive. Finally, while not looking to pick the best market timing, we view this as a good time to sell from a valuation point given the high demand for credit assets coupled with the demand for anything U.S. government guaranteed.

Finally, I want to be clear on one point. We chose to take today’s actions based on our own initiative and risk assessment. No one else factored into our decision. Certainly, we informed our regulators and received very positive feedback.

Now let me move to slide 4 and talk about the security selection process. As I noted, we sliced and diced the MBS book in our review process every which way we could to determine which securities to sell. As you know, not all MBS securities are created equal, so as we looked at our portfolio, we studied different collateral as well as borrower characteristics such as underlying coupon, FICO score, maturity, size and the issuer.

For valuing these bonds, we used ADCO, which as you know is an industry-leading modeling tool. We cross checked and validated our results by comparison to Bloomberg consensus speed and other models utilized by our advisors, as well as benchmarking to other Street prepayment data. As we analyzed these bonds, no one single factor determined if a bond was sold or retained, rather it was the interplay between these factors that mattered.

Obviously borrowers with the highest FICO scores, lowest LTV, largest balances and highest interest rates have the highest economic incentive and ability to refinance their mortgage. Bond issuers relevant as Ginnie Mae issued securities tend to prepay less than Fannie or Freddie given lower average loan size and higher LTVs associated with them. The structures of the bonds also mattered, as sequentially tranched bonds and planned amortization class or PACs, structures provide some prepayment protection when compared to regular pass-through instruments.

Finally, the selection of securities sold was influenced by the bonds premium level. We were deliberate in picking those securities that had higher premiums attached and had a greater propensity for underlying borrower prepayments. To frame some of the numbers, the $3.1 billion in securities we sold had premium associated of $101 million or 3.3%, nearly 100 basis points higher than the premium out on the bonds we retained.

Let me now move to slide five, and give you an overview of the securities retained and then the overall portfolio. As I mentioned earlier, our retained MS book is approximately $6.1 billion. At a portfolio level, the key takeaways are the fact that a significant percentage of the remaining bonds are Ginnie Mae-issued which as I mentioned have lower prepayment propensity. We also have some bonds subject to prepayment protection by their structure, the PAC and the sequentials that support lower interest rate risk profiles.

From a modeling perspective, in our base case, we assume a 3.75%, 30-year fixed-rate mortgage rate for our spot view throughout the term of the modeling exercise. Further, the model assumes that prepayment rates are elevated longer than historic trends through 2017. In addition, in the base case, we are assuming prepayment speeds of 23 CPR, which is about 20% higher than what we saw in May for the same portfolio. And as you all know, May speeds have been at the highest levels that we’ve seen recently. Breaking down our assumptions further, we are assuming that the CPR peaks at 33, so nearly a 70% increase from where we were in May.

Now, could there be downside risk? Yes, but we think we have conservative view on our base case and conservative outlook for the future. But if CPR rates do turn out to be 20% higher than the conservative rates we’ve assumed, the resulting accelerated premium amortization will impact our pre-tax earnings by a cumulative $15 million to $20 million over the next three years. So very nominal downside if a tail risk scenario presents itself.

One final thought, the premium on the $140 million remaining as I mentioned earlier compares favorably to the 3.3% at 2.4% of par. Again, 100 basis points better. Moving to the total remaining portfolio, it remains very high quality, well diversified and is in line with what we told you last July. Post the sale, the mortgage-backed securities will comprise approximately 55% of the total book versus our estimate last July of 60%. We are done with the pre-buy program as part of the HSBC transaction.

Overall, the portfolio size that we have on the book right now will remain at about $11.3 billion. In the near to medium term, we expect the portfolio size to remain roughly around that number. So, no big moves up or down. We have for the most part mimicked the portfolio structure that we highlighted in the HSBC transaction.

As you can see, after both actions, 80% of the overall portfolio is rated AA or better by S&P and AAA by Moody’s. The difference between these is how the firms rate mortgage-backed security debt. Only 3% of the entire book will be rated below investment grade.

A final comment on the high quality of the overall book is that the risk-weighted asset will be about 25% in line with peers. So with that, let me turn it back over to John.

John R. Koelmel

And let me stay with the HSBC theme before wrapping it up. We included slide seven knowing at a minimum, there would be some curiosity as to how the transactions unfolded over the first month plus or minus and you’ll see there some conversion weekend stats and more importantly, I think, some business execution metrics that make me as CEO incredibly proud.

Over last month’s conversion weekend May 18, more than 0.5 million households, 1.2 million deposit loan accounts and 1,200 new teammates came on board to the First Niagara family. We completed a makeover of 137 new locations. That included consolidating 16 of our own branches into those new sites and incredible passion, commitment, teamwork that we saw during the weekend just the latest very real evidence that we have in fact created something really special here at First Niagara.

In terms of the numbers, put out in 8-K last month, converted a total of $9.8 billion of deposits and $1.6 billion in loans. And we said then, that means net-net we brought over about 93%, 94% of the deposit base relative to last year’s announcement date. And 40 days later, I couldn’t be more pleased.

Net deposit attrition on balances acquired continues to track very favorably to both our expectations as well as our historic experience and to-date is less than 2%. And we immediately shifted, most importantly to me, to deploy an offense. And customer activity in the acquired branches is running about 25% ahead of legacy new account activity levels. And the upgrade in online banking, investment management and credit card launches that everyone was concerned about, they are right on track.

And as you’re well aware, those initiatives will drive greater growth opportunities not only across Upstate New York and the old HSBC footprint, but across our entire franchise. So while it was a extra long wait to get started, team once again is knocking it out of the park and executing and delivering very, very well. Obviously, next month July 20, I think it is Q2 call, we will certainly give you more details and a more complete update.

So to wrap it up, takeaways, page eight I think it is. We once again acted decisively in volatile and challenging times to better position our balance sheet and business for the longer term. Combination of this transaction coupled with the actions that we took last month in completing the HSBC branch transaction reduces both our overall balance sheet risk as well as our leverage and enhances our ability, as Greg said, to be even more clear and transparent about our path forward. And be assured, we will continue to shine as much light as we can on our business results and outcomes. And the fundamentals that drive the earnings power of the franchise in what will unfortunately continue to be an unfriendly environment for all banks.

And on that, a couple final thoughts. Greg has already referenced one of the byproducts of the actions we just completed was the increase in our capital ratios, and yes, that’s a nice little outcome. Let me again be clear, the higher capital ratios were the result of the actions we undertook, not the cause or the reason therefore. And as we continue to build capital, our top priority will always be to optimize shareholder return. And for the foreseeable future, that means we’re completely focused on growing the franchise organically, same as we’ve been doing for the last five years in building out our commercial and consumer lending businesses. And further leveraging the footprint and branch density we have today to build a best-in-class regional retail franchise.

And while we continue to be asked about M&A appetite by analysts and investors, I can only reiterate the M&A timeout we imposed on ourselves is very real. And I repeat, the M&A timeout is very real. Our focus is completely on running the business we have even better than we’re already doing so today.

Big picture, industry clearly has to be all the more selective today about where they invest their dollars. And we don’t see that changing for quite a while. But for us, it’s all about executing on the HSBC branch transaction and the business we’ve already built. And we very much, very much like our position and preparedness to do just that.

Victor, if you would, please, now open up the lines for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) we do have a few questions queuing up and it’ll just be one moment sir.

John R. Koelmel

Thanks, Victor.

Operator

You’re welcome. And our first question comes from Erika Penala with Merrill Lynch. Your line is open.

Erika Penala – Bank of America Merrill Lynch

Good afternoon.

John R. Koelmel

Hi, Erika. How are you?

Erika Penala – Bank of America Merrill Lynch

Hi. Greg, I was wondering if you could walk me through the math behind getting to the pro forma NIM in the second half of the year. I don’t know if I caught this correctly, is it true that the $3.1 billion of securities that you sold or so had an average yield of 3.2% and subsequently, what were the cost of the borrowings that you repaid with that?

Gregory W. Norwood

Yeah, sure, let me walk you through that. Yeah, the yield in the first quarter of the securities was 3.2% and roughly, the associated borrowing was 0.7%, so for a net contribution in the first quarter of 2.5%. So when you take that out and adjust the average earning assets relative to our expectations for the remainder of the balance sheet investments and loans, that’s how we came up to the yield. There is a little bit of an impact in the back half of the year. If you follow the accounting for the $8 million adjustment, there is about a $4 million adjustment in each of the third and fourth quarters, so that would be another one of the adjustments to your model.

Erika Penala – Bank of America Merrill Lynch

So I guess, I don’t, I mean I haven’t – sorry, I apologize. I haven’t run this through our average balance sheet model. But I guess I don’t get why there is such an accretion in the second half of the year if you got such a positive spread on what you are selling. Am I missing something?

Gregory W. Norwood

Well, part of the impact is the HSBC portfolio. Again, there was going to be a lift in that as we talked about in the first quarter post transaction.

Erika Penala – Bank of America Merrill Lynch

Got it, so that impact is a blended impact of the deal closing plus this transaction?

Gregory W. Norwood

Yes.

Erika Penala – Bank of America Merrill Lynch

Okay, and could you give us an update on what the yield is of the HSBC loans that were brought on?

Gregory W. Norwood

The loans or the securities?

Erika Penala – Bank of America Merrill Lynch

The loans and the securities.

Gregory W. Norwood

Let me talk to the securities, Erica. We can chat later today. From a securities perspective because we bought those, it’s still consistent with where we were before, which is in the 3.30% to 3.50% range as we talked about at the end of the first quarter. The loans, the actual mark will be subject to the final PAA, which is not completed.

Erika Penala – Bank of America Merrill Lynch

Oh, I see, so we’re assuming a book yield ex-PAA of about 6.65%, which seems reasonable. But what could also factor into the second half is there could be accretive yield related to the loans that you’re acquiring.

John R. Koelmel

Correct.

Erika Penala – Bank of America Merrill Lynch

Okay. All right, I’m all there, thank you so much. Sorry to take so much time.

Gregory W. Norwood

Thank you.

John R. Koelmel

Thanks, Erica.

Operator

Our next question comes from John Pancari with Evercore Partners. Your line is open.

John G. Pancari – Evercore Partners Inc.

Good evening.

John R. Koelmel

Good evening, John.

Gregory W. Norwood

Hi, John.

John G. Pancari – Evercore Partners Inc.

Post these actions, can you give us your updated accretion estimates all-in here for the HSBC deal? And if you can just talk around it, how this is panning out now post the moves you have to do here with the bond book?

Gregory W. Norwood

Well, let me start by separating it. Nothing we’ve done here impacts the HSBC accretion. So as I mentioned, the securities we’re selling were not part of the HSBC pre-buy strategy and were not reflective of anything associated with the HSBC accretion. As John said, we’re 40 days in and we’ll definitely have a lot more information when we complete the purchase accounting adjustments and close the books. What I would tell you from an accretion perspective, we feel good about the overall – I would tell you that from a fee income perspective, the smaller balance sheet will impact it, but we don’t think it will impact it in a material way.

John R. Koelmel

The punch line is, I mean we’re buttoning all that up literally as we speak real-time and we’ll have a response to your questions and give you a better forward-looking view in 25 days, whatever it is here, John.

John G. Pancari – Evercore Partners Inc.

Okay, all right. Thank you.

John R. Koelmel

Once we close out the quarter and finalize the purchase accounting.

John G. Pancari – Evercore Partners Inc.

Okay. And then in terms of lost earning assets given the paring back of the securities portfolio here, can you talk about how you’re looking to replace that earning asset base. I know, John, you mentioned in your comments, I believe that you’re looking at a – you see the opportunities still on the loan book. So could you talk about your strategy there on the loan portfolio? Is there a greater push in indirect auto or how do you expect to replace the lost asset base?

John R. Koelmel

In terms of directly replacing the base over the next couple of years, John, we’re acknowledging that’s not going to happen. The plan has been, continues to be to “build out” and inherently rotate the balance sheet. So that as you look ahead two to three years, we’ve got a more robust complete commercial bank structure, whether it be on the commercial side, the consumer financing and otherwise. So we are going to continue to step into that as planned, we’ve got ambitious targets and we are very much on track.

On the consumer build-out, the commercial story continues to be very, very positive. We are always hustling hard. I don’t want to imply we are going to hustle any harder than we already are but that’s why I said longer term, there is no impact but we’re not trying to pull any punches or be coy or cute here. There is clearly some near term earnings give up but we think that’s the de minimis in the grand scheme of things relative to ensuring we’re fully valued for the earning stream that’s being generated out of the core business.

Gregory W. Norwood

I guess, John, the only thing I would add to that is information we’ve seen so far this quarter, I think we are definitely going to be able to deliver the same type of results we have in the past, and everything as John said, the people, the footprint, the product set is there to continue to be leveraged. So whether it’s indirect, John mentioned from a credit card perspective, the new platform into the future, we see that adding value. So again, I think the core franchise is moving well, but as John said, there is an impact to this.

John G. Pancari – Evercore Partners Inc.

Okay, thanks for taking my questions.

John R. Koelmel

Yeah, thanks, John.

Operator

Our next question comes from Josh Levin with Citigroup. Your line is open.

Josh Levin – Citigroup Global Markets Inc.

Hi, good evening.

John R. Koelmel

Hi, Josh.

Gregory W. Norwood

Hi, Josh.

Josh Levin – Citigroup Global Markets Inc.

I would like to just make sure, take a very basic question, to make sure I understand that the rationale for this transaction. So let me try to state it and you tell me if I’m incorrect. So there was prepayment risk in the MBS securities and that prepayment risk meant that there is EPS volatility as you go down in the future. So by selling the MBS today, you reduce the EPS volatility in the future, but the tradeoff is a near-term hit to EPS. Is that an accurate description of what you did?

John R. Koelmel

Yeah, I’d say so.

Josh Levin – Citigroup Global Markets Inc.

Okay. And the second question is earnings season is only two or three weeks away. Why did you feel compelled to announce this today and hold a call today as opposed to just waiting two or three weeks?

John R. Koelmel

We’re always in that doing our best to be in the no-surprise mode and on the premise, we deemed the impact of this meaningful enough relative to what the investor world is anticipating for us this quarter and beyond. We wanted at a minimum to be cautious, if not otherwise ensure we’re transparent and provide the information real-time.

Josh Levin – Citigroup Global Markets Inc.

Great, thank you very much.

John R. Koelmel

All right, thank you.

Operator

Our next question comes from Casey Haire with Jefferies. Your line is open.

John R. Koelmel

Hey, Casey.

Gregory W. Norwood

Hi, Casey.

John R. Koelmel

Casey?

Casey Haire – Jefferies & Co., Inc.

Can you hear me?

John R. Koelmel

I think you are on mute, Casey, sorry.

Casey Haire – Jefferies & Co., Inc.

(Inaudible)

John R. Koelmel

We’re here.

Casey Haire – Jefferies & Co., Inc.

All right. Can you hear me now?

John R. Koelmel

We can hear you now, loud and clear.

Casey Haire – Jefferies & Co., Inc.

Great, sorry, guys. Sorry guys.

John R. Koelmel

No problem.

Casey Haire – Jefferies & Co., Inc.

So just quick question on the second quarter NIM guidance, feels a little light at 3.20% to 3.25%. If we start with 3.34% on the first quarter, run the 8 bps of the premium amortization, we are already at 3.25% or thereabouts and that gives no – that assumes no snap back from the FHLB refi or the HSBC loans. So what, why no accretion from those transactions?

Gregory W. Norwood

Well, let me work with you on the number. So the $8 million is about a 10 basis point adjustment. And there is some accretion obviously to the NIM from the acquisition, but again, it’s only half of a quarter. There is also more amortization beyond the retro related to this for the activities throughout the quarter, so for the first two months’ impact.

Casey Haire – Jefferies & Co., Inc.

First two months, okay. So I’m not sure I follow. I mean, you’re saying it’s a 10 bps hit, so we’re at 3.24% and then you have a half quarter of these loans and a $5 billion restructure, you should be improving on that 3.24%, no?

Gregory W. Norwood

Well, again, maybe we should take this offline, because I don’t know your model per se, but the impact to the second quarter is a combination of the $8 million retroactive and other amortization prior to this action throughout the quarter. So as bonds have prepaid, that has had a small, negative impact.

Casey Haire – Jefferies & Co., Inc.

So it’s more than just – okay, got you. All right, and then I appreciate the update on the HSBC stuff, lots of moving parts here. Could you give us your best guess as to what – where the balance sheet shakes out third quarter, size-wise?

Gregory W. Norwood

$31 billion from an average earning asset perspective is kind of the expectation from the third quarter.

Casey Haire – Jefferies & Co., Inc.

Okay. And then just rotation.

John R. Koelmel

$35 billion is on a spot basis, I think all-in, the $38 billion we had talked about is now reduced by this $3 billion sale. So I mean big picture, it’s where we thought we were going to be, Casey, but this haircut for the near-term impact of this $3 billion give-up.

Casey Haire – Jefferies & Co., Inc.

Okay, gotcha. And then just…

John R. Koelmel

Significantly, other than that.

Casey Haire – Jefferies & Co., Inc.

Okay. Do you guys have an updated view as to, with this loan to deposit mix, what’s your – what kind of ROA this balance sheet should produce?

John R. Koelmel

We’ll give you an answer to that on July 20, all right…

Casey Haire – Jefferies & Co., Inc.

That’s fine.

John R. Koelmel

Through the end of the quarter, through all the accounting around the transaction. So we’d prefer to avoid the speculative game at this point.

Casey Haire – Jefferies & Co., Inc.

Okay, okay. Last one from me, just hear you loud and clear on the M&A pause button still, just is the timeline still good, through year-end 2013?

John R. Koelmel

I have no timeline, Casey. I mean that’s part of the world of the bizarre on this topic. Why don’t you see a timeline on page seven or whatever it is? We used a timeline whatever that was a year-ago or nine months ago to make it clear that this was a sustained time-out, a sustained pause I think was the word we used then, not to suggest there was a plan. Not to suggest that we’re targeting a point in time, it was merely used to provide additional evidence that we were very sincere about calling time out and focusing on the business that we have. We have no plan. I have no timeline. There is no point in time where that we’ve ever targeted or do target today to rethink or re-pursue our M&A strategy.

Our focus is completely on running the business we have. So while we have endured the speculation about, okay, now, does your timeline start when you said that? Does your timeline start when you announced the transaction? Does your timeline start when you close the transaction? There was no timeline thought process that ran to frankly the calendar other than the evidence we’re pulling back and given time and given facts and circumstances and if the world around us isn’t getting any better, we’re just completely focused on running what we have.

So those who want to continue to be skeptical as to our commitment, all I can do is do what I did in the script, I repeated it twice. It’s very real. We’re very focused on what we have, so I appreciate you asking the question for clarity and I appreciate the opportunity to give you a longer than short of an answer, the real short answer is no. There is no timeline and there is no intent to do other than run the business that we have. Is that responsive?

Casey Haire – Jefferies & Co., Inc.

No, that’s great. Thanks guys, I appreciate it.

John R. Koelmel

Thank you.

Operator

Our next question comes from Damon DelMonte with KBW. Your line is open.

Damon DelMonte – KBW

Hi, good evening, guys. How are you?

John R. Koelmel

Hi, Damon, great. How about you?

Damon DelMonte – KBW

Pretty good, John thanks. Are you guys able to provide an update on the pro forma tangible book value that we can expect for the second quarter?

Gregory W. Norwood

Yeah, if you think about the number we had at the HSBC time, it was like $5.25 and it will be north of that, say in the $5.30-ish range.

Damon DelMonte – KBW

Okay.

John R. Koelmel

Tangible book value.

Gregory W. Norwood

Per share.

Damon DelMonte – KBW

Tangible book value per share. Yes, in the $5.30 range?

John R. Koelmel

Yeah.

Damon DelMonte – KBW

Okay. All right and then…

John R. Koelmel

Our TCE ratio…

Gregory W. Norwood

TCE ratio is up by 50 bps.

John R. Koelmel

5.60%, north of $5.60%, right?

Gregory W. Norwood

Yes, it’s right in the 5.60% zip code, yes.

John R. Koelmel

Right. I mean we were had originally messaged 5% when we were out raising capital, I mean this moves that up 50, 60 basis points, right?

Gregory W. Norwood

Yeah.

Damon DelMonte – KBW

Okay.

John R. Koelmel

Damon, that lining up with you?

Damon DelMonte – KBW

Well, I think I was given the smaller size of the acquisition, I think I was targeting around a 5.5% right now, not taking into account the additional 50 bps. So I think based on my model, just simple math would put me closer to 6% I think. Is that a little too high?

John R. Koelmel

I’ll defer to these guys. It sounds a little high…

Damon DelMonte – KBW

Yeah.

John R. Koelmel

We’re not trying to overstate the case either.

Gregory W. Norwood

Yeah, it’s 5.60% range. So maybe you can walk through with Ram afterwards how you got to your numbers, so we can make sure you got the right clarity.

Damon DelMonte – KBW

Okay, fair enough. I guess all my other questions have been answered. So thank you very much.

John R. Koelmel

All right, thanks, Damon. Thanks for hanging in there.

Operator

(Operator Instructions) And our next question comes from Bob Ramsey with FBR. Your line is open.

Thomas Frick – FBR Capital Markets

Hi, good afternoon, guys. This is actually Tom for Bob. Hey, Greg, do you guys have a target for MBS as a percentage of the total securities portfolio?

Gregory W. Norwood

I would say in the 50% to 55%.

Thomas Frick – FBR Capital Markets

So does that – the current level is pretty much where you want to be?

Gregory W. Norwood

Yeah, again I could see it go in a little bit lower but that’s the way we’ve thought about it.

Thomas Frick – FBR Capital Markets

Okay. Great, thanks.

John R. Koelmel

Thanks, Tom for Bob. Give our best to Bob.

Operator

Our next question comes from Joe Fenech, Sandler O’Neill. Your line is open.

Joseph Fenech – Sandler O’Neill & Partners

Hey, guys just trying to think in broad terms about the annualized impact to earnings here. I am not asking obviously what your base is, but if we ex out all the noise, is annualizing sort of that $0.04 impact that you talked about relative to first quarter results the right way to think about this?

Gregory W. Norwood

Well, I think you have to look at it, Joe, in two different ways. First, I think the – the $0.04 is what we had without any better thinking around the retroactive adjustments and what would actually happen. And one way to think about the impact is the effective yield going forward would have been less than that by probably 75 basis points. And so, if you think about the impact going forward, you could look at it from that perspective. Maybe a more simple way is in the materials, we show that the security sold had about $100 million of premium associated with them and that premium would have been amortized over an accelerated period. So whether it’s four quarters, eight quarters, that’s the way to think about what the impact would have been had we kept those securities.

John R. Koelmel

I mean, Joe, know that I wasn’t crazy about using the $0.04 for the reasons we’re discussing here. It’s not a good barometer, it’s not a good indicator. But we didn’t have any other barometer or indicator. Clearly, part of our conclusion is that the $0.04 wasn’t real and the $0.04 would progressively run away from us as Greg was throwing assorted numbers and yields at you here.

So in terms of the real earning give-up, we think it’s meaningfully less than that. And the mere fact frankly that none of us can determine it is indicative of why we opted ultimately to sell. It’s that lack of confidence in predicting, lack of certainty, lack of clarity, and hence, it just isn’t relevant in the grand scheme. So, yep, it’s financially additive, hence, my phrase there but in terms of value, since there is not a high degree of confidence let alone certainty, it’s just not really a positive mix to the equation.

Joseph Fenech – Sandler O’Neill & Partners

Okay, so just real conceptually here, I know you don’t want to get too specific on the – but so looking at the dollar consensus, let’s call it for next year, the $1.01, whatever it is, the right way to look at this is not to say the new number is $0.84?

John R. Koelmel

Correct.

Joseph Fenech – Sandler O’Neill & Partners

Okay, okay, good. And then, John, I know you guys are still working through the numbers for the quarter. But any kind of general comment on any other aspects of the quarter, credit, loan growth relative to the commentary you offered back in April?

John R. Koelmel

In terms of the business fundamentals, Joe, I think we’ve both, Greg and I, have referenced that the drum beat is better, louder than ever and the pace has only picked up post May 18, May 21 in terms of the transaction, on both the commercial and the retail side. So very, very pleased, and while I haven’t seen numbers, obviously, it’s only June 27, so I can’t even imply I have numbers I can’t give you, the trends quarter-to-date continue to be real, real, real solid and real strong.

And in terms of what that translates to on the fee side and the consistency there, continue to be proud of what the organization does. The credit story, that’s coming together as it typically, does at the backend of the quarter. So, you’ll have to sit tight till the 20th, get the story there. But overall, pipelines, activity flows as I said earlier, new account activity, it popped up coming out of the HSBC transaction, it’s sustained. So overall, very, very pleased, I mean it sincerely the business is running better than ever.

Joseph Fenech – Sandler O’Neill & Partners

Okay, thanks.

John R. Koelmel

Yeah, thank you.

Operator

There are no further questions, sir.

John R. Koelmel

All right, Victor, great job hosting and moderating and facilitating. I appreciate your time, everyone, on the call. Again, I apologize if you are catching a later train or missing the earlier dinner. I do appreciate your continuing interest as always and probably most importantly to us, as you do digest on it, sleep on it right back in tomorrow. Please pick up the phone and talk to us. We’ve busted our butt working with you over the last six to nine months to be as clear and transparent as possible. This is another attempt to shine a really bright light on the balance sheet, the investment portfolio, margin and the like.

So if you can’t get it, don’t get it, if what we’ve said doesn’t resonate, please come back at us, Greg, Ram, Jeff Maddigan stand more than prepared and ready to be as responsive as necessary. I want to make sure you get the story, you get the story right. So it’s on us to deliver, but please come back to us. Otherwise, thanks so much. Safe ride home and we’ll talk again real soon.

Operator

Thank you for your participation in today’s conference. You may now disconnect.

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