First Niagara Has 20% Upside: Jefferies

The CEO said that after "evaluating the realities and unintended outcomes of that strategy during this year's increasingly volatile environment," First Niagara's management "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 had become value dilutive to the increasingly positive results and outcomes from our core business that's performing better today than ever."

While giving up some "short-term earnings for the next couple of years," the balance sheet restructuring has removed "the additional downside exposure that we believe would have materialized had we retained the entire portfolio," while also positioning the bank to take advantage of the eventual rise in interest rates, with the "now-improved asset sensitivity of the balance sheet," Koelmel said.

Speaking about the HSBC branch transition, Koelmel said that "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 that "customer activity in the acquired branches is running about 25% ahead of legacy new account activity levels."

Koelmel also sought to soothe investors by emphasizing First Niagara's "M&A timeout," with the bank focused "completely on running the business we have even better than we're already doing so today."

First Niagara's shares closed at $7.94 Wednesday, down 6% year-to-date, following a 35% decline during 2011.

Based on an eight-cent quarterly payout, the shares have a dividend yield of 4.03%.

The shares trade just above their reported March 31 tangible book value of $7.86, and for nearly eight times the consensus 2013 earnings estimate of 96 cents a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 84 cents. The 2013 consensus estimate is likely to be lowered further over coming days, as more sell-side analysts update their estimates.

Haire on Thursday reiterated his "Buy" rating for First Niagara, while lowering his 12-month price target for the shares by two dollars to $9.50, and lowering his 2012 EPS estimate to 76 cents from 90 cents and his 2013 estimate to 85 cents from $1.03.

Considering a longer term view, the analyst said that the "restructuring gives up some earnings power, but also reduces premium amortization risk and provides much-needed clarity to earnings stream, which should win the stock back some multiple." The added "clarity/predictability of the EPS forecast could be the catalyst for long-awaited multiple expansion. Applying a discounted P/E multiple (11x vs. 12x peer avg.) and factoring in a 4% dividend yield, puts upside at over 20% from here," according to Haire.

Interested in more on First Niagara Financial Group? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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