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First Niagara Financial Group, Inc. (FNFG)

Securities Portfolio Repositioning Conference Call

June 27, 2012 5:30 pm ET


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

Gregory W. Norwood – Chief Financial Officer


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


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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.

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