Frustrated investors listened Wednesday as First Niagara Financial Group CEO John R. Koelmel defended the purchase of 195 HSBC Bank USA branches, saying the stock decline and dividend cut last year stemmed from a "perfect storm" executives couldn't predict.
After months of touting the benefits of the $1 billion purchase that will double First Niagara's branch network across upstate New York, Koelmel found himself on the defensive in a bid to explain what had happened last year and why it's not a reflection of bad decisions about the deal or the bank itself.
That meant reassuring shareholders about the benefits of the acquisition and other actions the bank is taking to advance its strategy in retail banking, commercial lending and consumer finance. And it meant convincing them the bank hasn't taken its eye off the ball for shareholders or customers.
"Our business is in a better-than-ever position today," he said. "We've hit a speed bump during the last nine months. But know that we have both hands firmly on the wheel."
Speaking to more than 75 shareholders and employees at the bank's annual meeting, Koelmel acknowledged investor disappointment -- and even anger -- about the stock's performance since last July, as well as the dilution to existing shareholders and the decision in December to cut the dividend.
The latter, in particular, "was obviously a difficult decision for us to make," he said, but it was necessary to rebuild the bank's capital quickly. And while he hopes to raise the dividend again and start buying back stock, he said, that probably won't happen for at least 18 to 24 months.
"We know the strong and consistent dividend stream we have provided all of us over the years has been important," he said. "So to reduce what we were paying by 50 percent was not a decision we took lightly at all."
But he said the pain that shareholders -- including himself -- are feeling does not reflect the bank's performance or the deal.
"Whether it be our commercial or retail units, or our performance across our footprint, the team continues to deliver in an outstanding way for the customers and the communities we serve," he said, citing a 13 percent increase in earnings per share and a 16 percent increase in commercial lending last year.
Instead, he said, it's a result of a combination of macro-economic and even global circumstances that are out of any one company's control, but that hit at the same time that the bank announced the $1 billion branch purchase July 31.
As a result, the "market's reaction to the deal announcement in the midst of a series of unprecedented events" has punished the bank. And that resulted in what he called a "huge disconnect between operating results and share price" that continues to haunt the bank and its shareholders.
"There's no question that the last 12 months have played out very differently than anticipated when I stood in front of you a year ago. And the consequences and outcomes of the world around us, as well as the decisions and actions we have taken over the last year, are still very real today," he said.
"Life isn't a game of perfect. You have to take your lumps from time to time. And last year was a little bit lumpy."
Several shareholders spoke up, citing their own frustration while acknowledging the bank's efforts. But that didn't satisfy Peter Ninos, of Tonawanda, who has been a stockholder for several years and owns 3,500 shares.
"What you said is wonderful, but the results aren't favoring stockholders," he said. "The stockholders are suffering. But the executives are not."
Calling 2011 the "Tale of Two Years," Koelmel noted that the bank outperformed the industry for shareholder returns in the first half of the year, with results that were in the top 10 percent of the industry. That reversed in the second half, when its returns were in the bottom 25 percent, as the market reacted in an unusually "harsh manner" to the HSBC deal.
In part, he attributed that to the characteristics of the deal itself. At $15 billion in deposits, it's twice the size of any prior acquisition by the bank, and "bigger deals make investors nervous." Since it's just a branch deal, and not a whole bank, it's inherently trickier. And it was also more challenging because the bank was going to sell $4 billion in deposits and 46 branches to other banks.
Also, the bank had to raise $1 billion in new capital that it didn't already have in place, presenting it with market risk that it hadn't faced before. And the large cash price meant that it would be diluting the "book value" of its stock by twice as much Ñ almost 20 percent Ñ as in any previous deal.
Bad timing caused the worst damage. Two days after the deal was announced, Congress announced a resolution to the U.S. debt ceiling battle that "investors weren't very crazy about." S&P then downgraded U.S. debt. And the Federal Reserve said it would keep short-term interest rates low for another two years to stimulate the economy.
"How did the market react? Boom!" Koelmel said. "Long-term interest rates and bank stocks fell like a rock. We had caught a perfect storm. .‚.‚. Demand for bank stocks fell dramatically and continues to be relatively soft today."
Investors punished the bank for "taking on additional risk at the worst of times," he said. The bank had to change how and when it raised the capital and how it could strengthen its position, given "what were now the reduced near-term economic benefits" of the deal.
And economic conditions today "are not meaningfully different than they were last August," so banks are still out of favor, and "we've had no opportunity to begin to see our own price recover."
Still, the bank is now "poised to move forward," focusing on "playing small ball" for the next two years instead of going for the "snap, crackle and pop, and a little sizzle" of acquisitions, Koemel said. That means the routine business of growing deposits and loans, integrating its multiple acquisitions and delivering results, he said.
"Only time will enable us to show that the benefits .‚.‚. will be fully realized," he said.