Q&A: Koelmel Stands By HSBC Deal As Right Move for First Niagara

A major hurdle cleared, and fewer ahead.

That was the message this week from John Koelmel, the chief executive of First Niagara Financial Group Inc.

The Buffalo bank said Thursday that it had agreed to sell 37 branches in western New York for $110 million to KeyCorp. The branches, which technically still belong to HSBC Bank USA, are being sold by First Niagara as part of its larger $1 billion deal for 195 HSBC branches in upstate New York and Connecticut. The U.S. Justice Department ordered First Niagara to divest 26 of the branches after an antitrust review, and First Niagara had wanted to unload some of the others.

The deal with KeyCorp would resolve some, but not all, the issues that had dogged the $31 billion-asset First Niagara since the HSBC deal was unveiled in July. For one, the European debt crisis caused problems for the financing that First Niagara was to rely on. Then U.S. markets tanked, pushing First Niagara's shares down, further complicating capital-raising plans. It revised plans to finance the deal, but in the process lowered its expectations for the return it will get and halved its dividend starting this quarter.

In an interview with American Banker, Koelmel discussed the KeyCorp deal, how it helps First Niagara in overcoming the challenges its bigger deal with HSBC has faced, plans to sell more branches and why he thinks investors should be reassured at this point. Here is an edited transcript:

How did the branch deal with KeyCorp come about?
JOHN KOELMEL: We're very, very pleased with the outcome, and on the heels of our capital raise 30 days ago those clouds of uncertainty are definitely clearing and dissipating. From day one we knew we'd need to divest a couple dozen [HSBC] branches here in Buffalo, and we wanted to divest more branches overall. That we were able to achieve 60% of our overriding projection, and to satisfy the [U.S. Justice Department], it's a very positive, necessary and important additional piece of the puzzle.

Do you still plan to close or sell more HSBC branches, in addition to the ones KeyCorp is buying?
We've been open about that from the get-go. Yes we do plan on acting on the remaining 40% of the plan to sell or close HSBC branches. We reaffirmed it when we raised $1.1 billion of capital, and we still believe that's the right number for us in terms of managing our capital position. That's the direction we've been working toward, and we're pleased to get this biggest piece of the puzzle behind us. We're working in earnest to put any remaining pieces behind us as quickly as we can.

Do you have a time line for selling or closing these additional HSBC branches?
I'm reluctant to get too specific. Be assured that this isn't the only piece of the deal. We're still working. We wanted to get the DOJ piece out first.

Can you explain the part of the deal with KeyCorp that excludes commercial loans and deposits?
Our deal [with HSBC], as of Aug. 1 of last year, excluded commercial loans, so we have no commercial loans to pass through to Key or to any others.

HSBC has opted to retain their traditional commercial-and-industrial loan book in upstate New York. And they remain committed to servicing that market without a branch network. They never intended [to], and they didn't, sell their commercial book.

Any and all loans that we would be passing through to Key are linked to the branches themselves — talking about residential mortgages, home equity lines of credit, credit card installments, those types of loans.

Do you feel like the agreement with KeyCorp addresses some of the concerns investors had about the original HSBC deal?
This transaction strategically for us is an even better fit today than it was six to seven months ago when we announced it.

It's a better fit meaning, six-to-seven months later, how customers have responded, how [HSBC's] employees responded, how the communities' residents responded. It more than validated our expectations relative to the longer-term benefits associated with having the dominant market share across upstate New York.

Having said that, obviously to have the world and the market move literally on the heels of our announcement the way it did in terms of congressional gridlock, and the S&P downgrade [of the United States] and Fed actions and the interest rate environment and prolonged low levels of rates — clearly in the short term it impaired the economic benefits of the deal. But I'm confident the longer-term economic benefits will nicely rebound.

This, too, shall pass. Europe can't teeter forever. The economy will be energized. We'll elect a new president. Congress will have to pass some regulations. Regulatory leaders will ultimately have to be approved. Is there short-term pain for longer-term gain? Yes. Did we expect that pain? Obviously not, but I'm confident the longer-term benefit for shareholders will be ultimately what we anticipated.