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First Niagara’s HSBC Branch Buy

By Christina P. O’Neill

First Niagara Financial Group’s John Koelmel has been on the acquisition trail for the past two years. First, there was the NewAlliance acquisition announced early this year. Then, in early August, First Niagara announced its intent to purchase 195 branches that HSBC is divesting in upstate new York. And in mid-September, Koelmel indicated to American Banker that he was expecting Bank of America to sell branches as part of an initiative by BoA to cut $5 billion in costs by 2014. BoA’s 40 branches in the Albany, New York area are in part of First Niagara’s expanding geographic footprint.
Koelmel’s comment that banks such as his would have “an opportunity to play off” the rightsizing initiatives of larger banks is consistent with his prior remarks on the opportunities presented by today’s banking scene.
Back on August 1, Koelmel and his team were fully prepared for the questions they fielded from a group of investors about the purchase of 195 branches that HSBC is divesting. Investors asked: Is this too much, too soon? The acquisition, subject to regulatory approval, is First Niagara’s fourth major buy in three years, a result of many large banks re-assessing their branch structure. The series of buying opportunities, said Koelmel, “come to us faster than we would have expected two or three years ago.”
The transaction is expected to close in the first half of 2012.
The bank will pay a deposit premium of 6.67 percent of HSBC’s acquired deposits – about $1 billion based on May 31, 2011, balances. When the sale is done, First Niagara anticipates it will have about $38 billion in assets, $30 billion in deposits and 450 branches across upstate New York, Connecticut, Massachusetts and Pennsylvania. It will also employ more than 4,000 people in New York state, compared to 2,600 before the acquisition.
First Niagara expects to sell 25 percent of the total 195 branches in the HSBC package, and consolidate other branches, either because selected locations are outside its strategic focus, or because of antitrust concerns.
However, investors on the call were more interested in how First Niagara will absorb acquisition costs. The bank expects to retain $11 billion of the $15 billion in deposits and $1 billion of the $2.8 billion in loans coming with the transaction. Investors also pressed for details as to the bank’s plans for raising capital prior to the closing. Plans are to raise common equity of $750 million to $800 million by then, with debt issuance of $350 million to $400 million. The transaction is expected to result in a tangible book value per share dilution of 17 to 18 percent at the close, with a four to five-year earn-back period, and to be 10 to 11 percent accretive to 2011 operating earnings per share. Restructuring expense of $150 million to $175 million would be taken in 2012. The 10 to 11 percent accretion rate for 2012 is achievable and compatible with a four to five year earn-back, said First Niagara CFO Gregory Norwood, and accretion is expected to accelerate in 2013 and 2014.
As for the timing on raising capital in the markets, “the idea is to do it at the right time,” Koelmel said. “We will be patient to pick our spot. There are multiple opportunities in the weeks and months ahead. Right now, markets aren’t ideally where we would like to see [them].”
The bank’s estimates on internal rate of return of 20 to 22 percent – which one questioner commented seemed high – were based on “a modeling perspective we’re comfortable with,” said Norwood. Koelmel noted the low risk of the balance sheet, and said the bank will continue to assess the amount of risk as it rotates assets more into a loan book, requiring it to hold more capital. Expressing comfort with the earnings stream, he said, “we’ll continue to manage capital the way we always have.”■


Posted on Friday, October 14, 2011 (Archive on Thursday, January 12, 2012)
Posted by Scott  Contributed by Scott
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