|First Niagara Financial Group CEO John R. Koelmel|
NEW YORK. ( TheStreet) -- Shares of First Niagara Financial Group ( FNFG) dipped 5% to $11.65 Monday, as investors digested the company's deal with HSBC ( HBC). Investors appear less than thrilled at the prospect of a 17% to 18% dilution of common equity, as First Niagara plans to "raise approximately $750 million to $800 million in common stock and $350 million to $400 million in debt," prior to closing its purchase of 195 branches in Upstate New York and Connecticut from HSBC.
First Niagara has agreed to pay roughly $1 billion, or a 6.67% premium on deposits, to acquire the branches, growing its balance sheet by roughly $15 billion. As part of the transaction -- expected to be completed early next year -- First Niagara will also acquire "$2.8 billion of small business, residential mortgage and consumer loans, as well as $4.3 billion of assets under management." First Niagara expects to "earn back" the diluted tangible book value in a "period of 4-8 years." First Niagara said that roughly 30% of the acquired HSBC branches would be located within 1 mile of a current First Niagara branch. With First Niagara expected to have roughly a 20% deposit market share in Buffalo and surrounding areas in Upstate New York, CEO John Koelmel said during a Monday morning conference call with analysts thatm, following an anti-trust review by the Department of Justice, he expected his company to close or sell roughly 100 branches with a very rough estimate of 2/3 sales and 1/3 closures. After the divestitures, First Niagara estimates it will retain $11 billion in deposits and $2 billion in loans, from the HSBC transaction. One of the great advantages of the acquisition of the former Marine Midland branches, will be a change in First Niagara's funding mix, more toward lower-cost commercial deposits. The company estimates it will pay-off about $5 billion in wholesale borrowings when the transaction is completed, and that the net interest margin -- the difference between the average yield on loans and investments and the average cost of funding -- for the acquired earning assets from HSBC, will range between 4.50% and 5.00%. This is a healthy figure, compared to First Niagara's second-quarter net interest margin of 3.65%.
First Niagara estimates $150 million to $175 million in pre-tax integration costs from the HSBC deal, which will all be expenses during 2012. The company also estimates that after the HSBC deal is completed, its Tier 1 common equity ratio will be in a solid range of 9.6% to 10%. -- Written by Philip van Doorn in Jupiter, Fla. To contact the writer, click here: Philip van Doorn. To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn. To submit a news tip, send an email to: firstname.lastname@example.org.