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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23975
FIRST NIAGARA FINANCIAL GROUP, INC.
(exact name of registrant as specified in its charter)
Delaware 16-1545669
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
6950 South Transit Road,
P.O. Box 514, Lockport, NY 14095-0514
-------------------------- ----------
(Address of principal (Zip Code)
executive offices)
(716)625-7500
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------------- ---------------
The Registrant had 25,585,320 shares of Common Stock, $.01 par value,
outstanding as of November 13, 2000.
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FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2000
TABLE OF CONTENTS
Item Number Page Number
- ----------- -----------
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition as of
September 30, 2000 (unaudited) and December 31, 1999.................................. 3
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 2000 and 1999 (unaudited)................... 4
Condensed Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 2000 and 1999 (unaudited)................... 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 2000 and 1999 (unaudited)..................... 6
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 (unaudited)............................. 7
Notes to Condensed Consolidated Financial Statements (unaudited)........................ 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 13
3. Quantitative and Qualitative Disclosures about Market Risk................................ 23
PART II - OTHER INFORMATION
1. Legal Proceedings......................................................................... 24
2. Changes in Securities and Use of Proceeds................................................. 24
3. Defaults upon Senior Securities........................................................... 24
4. Submission of Matters to a Vote of Security Holders....................................... 24
5. Other Information......................................................................... 24
6. Exhibits and Reports on Form 8-K.......................................................... 24
Signatures......................................................................................... 24
Exhibit Index...................................................................................... 25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Condition
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
(Amounts in thousands)
Assets
------
Cash and cash equivalents:
Cash and due from banks....................................... $ 27,069 24,449
Federal funds sold and securities purchased
under resale agreements.................................... - 17,500
------------------ -----------------
Total cash and cash equivalents........................ 27,069 41,949
Securities available for sale..................................... 479,980 563,473
Loans, net........................................................ 1,364,937 985,628
Premises and equipment, net....................................... 30,414 25,886
Goodwill.......................................................... 44,316 13,450
Other assets...................................................... 94,240 81,326
------------------ -----------------
$ 2,040,956 1,711,712
================== =================
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits........................................................ $ 1,427,304 1,113,302
Short-term borrowings........................................... 58,103 90,005
Long-term borrowings............................................ 273,826 245,640
Other liabilities............................................... 45,702 30,149
------------------ ----------------
1,804,935 1,479,096
------------------ ----------------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, none issued................................... - -
Common stock, $0.01 par value, 45,000,000 shares
authorized, 29,756,250 shares issued...................... 298 298
Additional paid-in capital.................................... 135,827 135,964
Retained earnings............................................. 161,005 151,341
Accumulated other comprehensive loss.......................... (5,064) (8,893)
Common stock held by ESOP..................................... (12,542) (13,076)
Treasury stock, at cost, 4,170,930 and 3,110,850 shares
in 2000 and 1999, respectively.............................. (43,503) (33,018)
------------------ ---------------
236,021 232,616
------------------ ---------------
$ 2,040,956 1,711,712
================== ===============
3
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------ -------------- ------------ -------------
(Amounts in thousands)
Interest income:
Loans................................................. $ 26,714 17,693 68,214 48,694
Investment securities................................. 8,114 9,714 25,112 28,770
Federal funds sold and securities purchased
under resale agreements........................... 167 132 677 966
Other................................................. 415 353 1,202 982
------------ ------------- ------------ ------------
Total interest income........................ 35,410 27,892 95,205 79,412
Interest expense:
Deposits.............................................. 14,809 10,659 38,034 31,464
Borrowings............................................ 5,127 4,213 14,388 10,137
------------ ------------- ------------ ------------
Total interest expense....................... 19,936 14,872 52,422 41,601
------------ ------------- ------------ ------------
Net interest income...................................... 15,474 13,020 42,783 37,811
Provision for credit losses.............................. 544 554 1,515 1,922
------------ ------------- ------------ ------------
Net interest income after provision
for credit losses........................ 14,930 12,466 41,268 35,889
------------ ------------- ------------ ------------
Noninterest income:
Banking service charges and fees...................... 1,941 1,258 5,103 3,524
Loan fees............................................. 498 379 1,248 1,294
Insurance services and fees........................... 4,244 3,961 12,576 11,911
Bank-owned life insurance earnings.................... 515 419 1,500 1,083
Annuity and mutual fund sales commissions............. 380 354 1,096 1,051
Covered call option premium........................... 211 428 801 1,225
Leasing income........................................ 277 - 943 -
Net gain on sales of securities available for sale.... 36 1 19 183
Other................................................. 601 229 1,226 528
------------ ------------- ------------ ------------
Total noninterest income..................... 8,703 7,029 24,512 20,799
------------ ------------- ------------ ------------
Noninterest expense:
Salaries and employee benefits........................ 8,896 7,234 24,510 20,522
Occupancy and equipment............................... 1,446 1,105 4,054 3,348
Technology and communications......................... 1,459 1,132 3,939 3,276
Marketing and advertising............................. 522 462 2,101 1,480
Goodwill amortization................................. 864 374 1,924 1,121
Other................................................. 2,434 1,822 6,653 5,373
------------ ------------- ----------- ------------
Total noninterest expense.................... 15,621 12,129 43,181 35,120
------------ ------------- ------------ ------------
Income before income taxes................... 8,012 7,366 22,599 21,568
Income tax expense ...................................... 2,895 2,580 7,964 7,577
------------ ------------- ------------ ------------
Net income .................................. $ 5,117 4,786 14,635 13,991
============ ============= ============ ============
Earnings per common share:
Basic and diluted................................. $ 0.21 0.18 0.59 0.52
Cash dividends per common share.......................... $ 0.07 - 0.20 0.08
Weighted average common shares outstanding:
Basic............................................. 24,632 26,225 24,913 27,040
Diluted........................................... 24,643 26,225 24,923 27,040
4
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Amounts in thousands)
Net income............................................... $ 5,117 4,786 14,635 13,991
Other comprehensive income (loss), net of income taxes:
Net unrealized gains (losses) on securities available
for sale arising during the period................. 3,779 (3,911) 3,818 (10,481)
Less: Reclassification adjustment for gains
(losses) included in net income.................... (1) 1 (11) 108
------------ ------------ ------------ ------------
Total other comprehensive income (loss) ......... 3,780 (3,912) 3,829 (10,589)
------------ ------------ ------------ ------------
Total comprehensive income................. $ 8,897 874 18,464 3,402
============ ============ ============ ============
5
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Additional Other
Common paid-in Retained comprehensive ESOP Treasury
stock capital earnings income (loss) shares stock
------------- -------------- ------------- --------------- --------------- ------------
(Amounts in thousands)
Balances at January 1, 1999............$ 298 136,114 136,602 4,587 (13,776) -
Net income.......................... - - 13,991 - - -
Unrealized loss on securities
available for sale, net of
reclassification adjustment........ - - - (10,589) - -
Purchase of treasury stock
(2,802,550 shares)............... - - - - - (29,814)
ESOP shares committed to be
released (40,564 shares)......... - (115) - - 536 -
Common stock dividend of $0.08 per
share.............................. - - (2,144) - - -
------------- -------------- ------------- --------------- --------------- ------------
Balances at September 30, 1999.........$ 298 135,999 148,449 (6,002) (13,240) (29,814)
============= ============== ============= =============== =============== ============
Balances at January 1, 2000............$ 298 135,964 151,341 (8,893) (13,076) (33,018)
Net income.......................... - - 14,635 - - -
Unrealized gain on securities
available for sale, net
of reclassification adjustment.... - - - 3,829 - -
Purchase of treasury stock
(1,093,300 shares)............... - - - - - (10,824)
ESOP shares committed to be
released (40,366 shares)......... - (155) - - 534 -
Vested restricted stock plan awards
(33,220 shares) ................... - 18 - - - 339
Common stock dividend of $0.20 per
share.............................. - - (4,971) - - -
------------- -------------- ------------- --------------- --------------- ------------
Balances at September 30, 2000.........$ 298 135,827 161,005 (5,064) (12,542) (43,503)
============= ============== ============= =============== =============== ============
Total
------------
Balances at January 1, 1999............ 263,825
Net income.......................... 13,991
Unrealized loss on securities
available for sale, net of
reclassification adjustment....... (10,589)
Purchase of treasury stock
(2,802,550 shares)............... (29,814)
ESOP shares committed to be
released (40,564 shares)......... 421
Common stock dividend of $0.08 per
share.............................. (2,144)
------------
Balances at September 30, 1999......... 235,690
============
Balances at January 1, 2000............ 232,616
Net income.......................... 14,635
Unrealized gain on securities
available for sale, net
of reclassification adjustment.... 3,829
Purchase of treasury stock
(1,093,300 shares)............... (10,824)
ESOP shares committed to be
released (40,366 shares)......... 379
Vested restricted stock plan awards
(33,220 shares) ................... 357
Common stock dividend of $0.20 per
share.............................. (4,971)
------------
Balances at September 30, 2000......... 236,021
============
6
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended September 30,
-------------------------------------
2000 1999
--------------- --------------
(Amounts in thousands)
Net cash provided by operating activities................................ $ 28,487 28,366
--------------- ------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale..................... 62,790 15,605
Proceeds from maturities of securities available for sale................ 25,045 15,040
Principal payments received on securities available for sale............. 60,192 152,200
Purchases of securities available for sale............................... (22,453) (233,948)
Net increase in loans.................................................... (144,966) (194,216)
Purchase of bank-owned life insurance.................................... - (10,000)
Acquisitions, net of cash acquired:
Warren-Hoffman & Associates, Inc. .................................. - (11,260)
Albion Banc Corp, Inc. ............................................. 1,022 -
Empire National Leasing, Inc. ...................................... (3,395) -
Niagara Investment Advisors, Inc. .................................. (1,648) -
CNY Financial, Inc.................................................. (26,025) -
Other, net............................................................... (3,623) (11,156)
-------------- ------------
Net cash used by investing activities..................... (53,061) (277,735)
-------------- ------------
Cash flows from financing activities:
Net increase in deposits................................................. 56,162 38,867
Proceeds from (repayments of) short-term borrowings...................... (62,225) 39,890
Proceeds from long-term borrowings....................................... 41,900 118,060
Repayments of long-term borrowings....................................... (10,348) (326)
Purchase of treasury stock............................................... (10,824) (29,814)
Dividends paid on common stock........................................... (4,971) (3,004)
-------------- ------------
Net cash provided by financing activities................... 9,694 163,673
-------------- ------------
Net decrease in cash and cash equivalents................... (14,880) (85,696)
Cash and cash equivalents at beginning of period........................... 41,949 111,263
-------------- ------------
Cash and cash equivalents at end of period................................. $ 27,069 25,567
============== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes..................................................... $ 7,644 8,588
Interest expense................................................. 52,434 40,637
============== ============
Acquisition of banks and financial services companies:
Fair value of:
Assets acquired (noncash) ........................................ $ 297,228 2,889
Liabilities assumed............................................... 296,867 3,655
Purchase price payable............................................ $ 2,320 2,919
============== ===========
7
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Financial Statement Presentation
The accompanying condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments necessary for a fair presentation have been
included. Results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. Certain reclassification adjustments were made to the 1999
financial statements to conform them to the 2000 presentation.
(2) Business
First Niagara Financial Group, Inc. (the "Company"), the parent holding company
of First Niagara Bank ("First Niagara") and Cortland Savings Bank ("Cortland"),
is a Delaware corporation organized in December 1997. The Company was organized
in connection with the conversion of First Niagara from a New York chartered
mutual savings bank to a New York chartered stock savings bank and the
reorganization to a two-tiered mutual holding company. The business and
management of the Company consist primarily of the business and management of
its banking subsidiaries. Currently, the Company neither owns nor leases any
property, but instead uses the premises, equipment and furniture of First
Niagara. At the present time, the Company does not have any employees but
utilizes certain officers and support staff of First Niagara. Employees will be
hired as appropriate to the extent the Company expands its business in the
future. As of July 7, 2000, the Company became a multi-bank holding company
through its acquisition of Cortland, which will continue to maintain its own
identity by operating as a wholly owned subsidiary of the Company under the
direction of its own management team and Board of Directors. On November 3,
2000, the Company expanded its multi-bank holding company structure by closing
on the acquisition of Iroquois Bancorp, Inc. ("Iroquois") and its subsidiary,
Cayuga Bank ("Cayuga"). The Company intends to operate Cayuga as a wholly owned
subsidiary of the Company under the direction of its own management and Board of
Directors (see Note 3).
First Niagara and Cortland (collectively, the "Banks") operate as wholly owned
subsidiaries of the Company and are traditional, full-service,
community-oriented savings banks. The Banks' business is primarily accepting
deposits from customers through its twenty-five branch locations in the Western
and Central New York counties of Niagara, Orleans, Erie, Genesee, Monroe,
Cortland, Onondaga and Tompkins and investing those deposits, together with
funds generated from operations and borrowings, in various loan and investment
products. Additionally, the Banks provide consumer, commercial and electronic
banking services, as well as a variety of insurance, leasing and investment
products.
(3) Acquisitions
During the third quarter of 2000, the Company acquired all of the common stock
of CNY Financial Corporation ("CNY") and its subsidiary bank, Cortland.
Cortland, headquartered in Cortland, New York, has three branch locations and
two loan production offices. The Company paid $18.75 per share in cash for each
of the outstanding shares and options of CNY common stock for an aggregate
purchase price of $86.3 million. This acquisition has been accounted for as a
purchase transaction and accordingly, the excess of the purchase price over the
fair value of identifiable assets acquired, less liabilities assumed, has been
recorded by the Company as goodwill. Approximately, $17.0 million of such
goodwill is being amortized on a straight-line basis over a period of twenty
years.
On November 3, 2000, the Company continued to increase its presence in Central
New York State by acquiring all of the stock of Iroquois. The Company paid
$33.25 per share in cash for each of the outstanding shares and options of
Iroquois' common stock for an aggregate purchase price of approximately $80.2
million. The transaction will be accounted for under the purchase method of
accounting. Iroquois, with over $610 million in assets, is the holding company
of Cayuga Bank, of Auburn, New York and
8
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Homestead Savings FA, of Utica, New York. Upon the closing of the
transaction, the Company merged the branches of Homestead Savings into Cayuga's
branch network. As a result, Cayuga has eleven branch locations and one loan
production office.
Presented below is certain pro forma information as if the Albion Banc Corp,
Inc. and CNY acquisitions, which occurred in 2000, had all been consummated on
January 1, 1999. This pro forma information gives effect to certain adjustments,
including accounting adjustments related to fair value adjustments, amortization
of goodwill and related income tax effects. The pro forma information does not
necessarily reflect the results of operations that would have occurred had the
Company acquired these entities on January 1, 1999. The effect of Empire
National Leasing, Inc. and Niagara Investment Advisors, Inc. was not deemed
material, and therefore, has not been included in this pro forma information.
Pro Forma
----------------------------------------------
Nine months ended September 30,
----------------------------------------------
2000 1999
-------------------- ----------------------
(Amounts in thousands)
Net interest income............... $ 48,351 46,625
-------------------- ----------------------
Noninterest income................ $ 25,184 21,868
-------------------- ----------------------
Net income........................ $ 15,622 14,625
==================== ======================
Basic/diluted earnings per share.. $ 0.63 0.54
==================== ======================
(4) Earnings per Share
Earnings per share is based on the weighted average number of shares outstanding
during the three and nine month periods ended September 30, 2000 and 1999. The
Company's "basic" and "diluted" earnings per share computations are presented
below.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------ ------------
Net income available to common stockholders................ $ 5,117 4,786 14,635 13,991
------------- ------------- ------------ ------------
Weighted average shares outstanding:
Total shares issued................................. 29,756 29,756 29,756 29,756
Unallocated ESOP shares............................. (988) (1,041) (988) (1,041)
ESOP shares committed to be released during the
period.............................................. 27 27 14 14
Treasury shares..................................... (4,197) (2,517) (3,885) (1,689)
Vested restricted stock awards...................... 34 - 16 -
------------- ------------- ------------ ------------
Total weighted average shares outstanding.................. 24,632 26,225 24,913 27,040
------------- ------------- ------------ ------------
Basic earnings per share for the period.................... $ 0.21 0.18 0.59 0.52
============= ============= ============ ============
9
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
2000 1999 2000 1999
------------ ------------- ------------ ------------
Net income available to common stockholders............... $ 5,117 4,786 14,635 13,991
------------ ------------- ------------ ------------
Weighted average shares outstanding:
Total shares issued................................. 29,756 29,756 29,756 29,756
Unallocated ESOP shares............................. (988) (1,041) (988) (1,041)
ESOP shares committed to be released during the 27 27 14 14
period.............................................
Treasury shares..................................... (4,197) (2,517) (3,885) (1,689)
Vested restricted stock awards...................... 34 - 16 -
Incremental shares from assumed conversion of
stock options...................................... 8 - 7 -
Incremental shares from assumed conversion of
restricted stock awards............................ 3 - 3 -
------------ ------------- ------------ ------------
Total weighted average shares outstanding................. 24,643 26,225 24,923 27,040
------------ ------------- ------------ ------------
Diluted earnings per share for the period................. $ 0.21 0.18 0.59 0.52
============ ============= ============ ============
(5) Treasury Stock
During the quarter ended September 30, 2000, the Company repurchased 30,000
shares of common stock outstanding at an average cost of $9.13 per share as part
of the Company's stock buyback strategy. The Company has repurchased
approximately 4.2 million shares of common stock outstanding since the beginning
of 1999 under several approved buyback programs. These purchases were made in
the open market at an average cost of $10.43 per share.
(6) Dividends
The Board approved and declared a regular quarterly dividend of $0.08 (eight
cents) per common share on October 18, 2000. The dividend will be paid on
November 14, 2000 to shareholders of record as of November 1, 2000. Dividends
totaling $0.28 per share have been declared during 2000.
(7) Segment Information
Based on the "management approach" model, the Company has determined that it has
two primary business segments, its banking franchise and its insurance
activities. For the three and nine month periods ended September 30, 1999, the
Company's insurance activities consisted of those conducted through its
Warren-Hoffman & Associates, Inc. ("WHA") and Nova Healthcare Administrators,
Inc. ("NOVA") subsidiaries, as well as through the Company's relationship with
Saving Bank Life Insurance ("SBLI"). Effective January 1, 2000, as a result of
the reorganization of SBLI into a mutual insurance company, the Company's
insurance activities through SBLI have been limited to the servicing of life
insurance policies and the collection of income generated by insurance sales.
Information about the Company's segments is presented in the following table for
the periods indicated (amounts in thousands):
10
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Three Months Ended September 30,
----------------------------------------------
2000
----------------------------------------------
Banking Insurance
activities activities Total
------------- ------------ -------------
Net interest income...................... $ 15,474 - 15,474
Provision for credit losses ............. 544 - 544
------------- ------------ -------------
Net interest income after provision
for credit losses................. 14,930 - 14,930
Noninterest income....................... 4,423 4,244 8,667
Net securities gains..................... 36 - 36
Noninterest expense...................... 11,847 3,774 15,621
------------- ------------ -------------
Income before income taxes.......... 7,542 470 8,012
Income tax expense....................... 2,603 292 2,895
------------- ------------ -------------
Net income.......................... $ 4,939 178 5,117
============= ============ =============
---------------------------------------------
1999
---------------------------------------------
Banking Insurance
activities activities Total
------------ ------------ ------------
Net interest income...................... $ 13,012 8 13,020
Provision for credit losses ............. 554 - 554
------------ ------------ ------------
Net interest income after provision
for credit losses................. 12,458 8 12,466
Noninterest income....................... 3,067 3,961 7,028
Net securities gains..................... 1 - 1
Noninterest expense...................... 8,506 3,623 12,129
------------ ------------ ------------
Income before income taxes.......... 7,020 346 7,366
Income tax expense....................... 2,307 273 2,580
------------ ------------ ------------
Net income.......................... $ 4,713 73 4,786
============ ============ ============
Nine Months Ended September 30,
----------------------------------------------
2000
----------------------------------------------
Banking Insurance
activities activities Total
------------- ------------ -------------
Net interest income...................... $ 42,773 10 42,783
Provision for credit losses ............. 1,515 - 1,515
------------- ------------ -------------
Net interest income after provision
for credit losses................. 41,258 10 41,268
Noninterest income....................... 11,915 12,578 24,493
Net securities gains..................... 19 - 19
Noninterest expense...................... 31,959 11,222 43,181
------------- ------------ -------------
Income before income taxes.......... 21,233 1,366 22,599
Income tax expense....................... 6,992 972 7,964
------------- ------------ -------------
Net income.......................... $ 14,241 394 14,635
============= ============ =============
---------------------------------------------
1999
---------------------------------------------
Banking Insurance
activities activities Total
------------ ------------ ------------
Net interest income...................... $ 37,790 21 37,811
Provision for credit losses ............. 1,922 - 1,922
------------ ------------ ------------
Net interest income after provision
for credit losses................. 35,868 21 35,889
Noninterest income....................... 8,705 11,911 20,616
Net securities gains..................... 183 - 183
Noninterest expense...................... 25,082 10,038 35,120
------------ ------------ ------------
Income before income taxes.......... 19,674 1,894 21,568
Income tax expense....................... 6,427 1,150 7,577
------------ ------------ ------------
Net income.......................... $ 13,247 744 13,991
============ ============ ============
(8) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivatives
embedded in other contracts, and for hedging activities. This statement requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This standard also requires an entity to establish a method, consistent with its
approach to managing risk, that it will use to assess the effectiveness of the
hedging derivative and the measurement approach for determining the ineffective
aspect of the hedge. This statement is effective for fiscal years beginning
after June 15, 2000 with earlier application encouraged. The adoption of this
standard, at this time, will not have a significant impact on the Company's
financial condition or results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140,
which replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," revises the standards
related to the accounting for securitizations and other transfers of financial
assets and collateral. This statement requires certain disclosures, but carries
over most of the provisions of
11
First Niagara Financial Group, Inc. and
Subsidiaries Notes to Condensed Consolidated Financial Statements
(unaudited)
SFAS No. 125 without consideration. SFAS No. 140 is effective for transfers and
servicing of financial assets and exinguishments of liabilities of the company
occurring after March 31, 2001. However, the provisions of SFAS No. 140
concerning the recognition and reclassification of collateral and disclosures
relating to securitization transactions and collateral are effective for the
Company for the year ending December 31, 2000. This statement is to be applied
prospectively with certain exceptions. Adoption is not expected to have a
material impact on the Company's financial statements.
In March 2000, FASB Interpretation ("FIN") No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" was issued. This interpretation
clarifies the application of certain issues of APB Opinion No. 25, "Accounting
for Stock Issued to Employees." FIN No. 44, which was effective July 1, 2000,
did not have a material impact on the Company's financial statements.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
- -------
This Quarterly Report on Form 10-Q may contain certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1993, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this report, or in the documents incorporated by
reference herein, the words "anticipate", "believe", "estimate", "expect",
"intend", "may", and similar expressions identify such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. These forward-looking statements are based largely on the
expectations of the Company or the Company's management and are subject to a
number of risks and uncertainties, including but not limited to, economic,
competitive, regulatory, and other factors affecting the Company's operations,
markets, products and services, as well as expansion strategies and other
factors discussed elsewhere in this report filed by the Company with the
Securities and Exchange Commission. Many of these factors are beyond the
Company's control.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on loans and
securities and the Company's cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
provision for credit losses, investment activities, loan origination, sale and
servicing activities, service charges and fees collected on deposit accounts,
and insurance services and fees. Noninterest expense primarily consists of
salaries and employee benefits, occupancy and equipment expense, technology and
communication expenses, and goodwill amortization.
13
Analysis of Financial Condition
- -------------------------------
Average Balance Sheet. The following table presents, for the periods indicated,
the total dollar amount of interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No tax
equivalent adjustments were made. All average balances are average daily
balances. Non-accruing loans have been excluded from the yield calculations in
these tables.
Three Months Ended September 30,
-----------------------------------------------------------------------------------
2000 1999
--------------------------------------- --------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities
purchased under resale
agreements .......................... $ 9,930 $ 167 6.67% 10,092 132 5.19
Investment securities (1)............... 142,791 2,055 5.76 201,356 2,882 5.73
Mortgage related securities (1)......... 368,646 6,059 6.57 425,903 6,832 6.42
Loans (2)............................... 1,347,421 26,714 7.93 915,656 17,693 7.73
Other interest-earning assets (3)....... 24,623 415 6.69 27,675 353 5.06
----------- ---------- ----------- --------
Total interest-earning assets..... 1,893,411 $ 35,410 7.48% 1,580,682 27,892 7.06
----------- ---------- ----------- --------
Allowance for credit losses................ (13,710) (9,457)
Other noninterest-earning assets (4)(5).... 164,536 99,840
----------- -----------
Total assets...................... $ 2,044,237 1,671,065
=========== ===========
Interest-bearing liabilities:
Savings accounts........................ $ 354,858 $ 2,373 2.65% 308,467 2,338 3.01
Interest-bearing checking............... 425,986 4,389 4.09 320,868 2,955 3.65
Certificates of deposit................. 577,313 7,960 5.47 423,590 5,297 4.96
Mortgagors' payments held in escrow..... 19,671 87 1.75 15,191 69 1.80
Borrowed funds.......................... 341,811 5,127 5.95 296,739 4,213 5.63
----------- ---------- ----------- -------- -----
Total interest-bearing
liabilities...................... 1,719,639 $ 19,936 4.60% 1,364,855 14,872 4.32
----------- ---------- ----------- --------
Noninterest-bearing demand deposits........ 48,980 31,839
Other noninterest-bearing liabilities...... 42,594 36,189
----------- -----------
Total liabilities................. 1,811,213 1,432,883
Stockholders' equity (4)................... 233,024 238,182
----------- -----------
Total liabilities and
stockholders' equity............ $ 2,044,237 1,671,065
=========== ===========
Net interest income........................ $ 15,474 13,020
========== ========
Net interest rate spread................... 2.88% 2.74
======= =======
Net earning assets......................... $ 173,772 215,827
=========== ===========
Net interest income as a percentage of
average interest-earning assets......... 3.24% 3.27
========== ========
Ratio of average interest-earning assets
to average interest-bearing liabilities. 110.11% 115.81%
========== ========
14
Nine Months Ended September 30,
-------------------------------------------------------------------------------------
2000 1999
---------------------------------------- ---------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and securities
purchased under resale
agreements...................... $ 14,451 $ 677 6.24% 25,857 966 4.99
Investment securities (1).......... 154,756 6,565 5.66 194,013 8,325 5.72
Mortgage related securities (1).... 375,963 18,547 6.58 428,407 20,445 6.36
Loans (2).......................... 1,157,173 68,214 7.86 836,564 48,694 7.76
Other interest-earning assets (3).. 23,243 1,202 6.89 22,043 982 5.96
----------- ---------- ----------- ----------
Total interest-earning assets 1,725,586 $ 95,205 7.36% 1,506,884 79,412 7.03
----------- ---------- ----------- ----------
Allowance for credit losses........... (11,587) (8,947)
Other noninterest-earning assets (4)(5) 135,167 106,312
----------- -----------
Total assets................. $ 1,849,166 1,604,249
=========== ===========
Interest-bearing liabilities:
Savings accounts................... $ 321,066 $ 6,788 2.82% 304,255 6,843 3.01
Interest-bearing checking.......... 384,700 11,419 3.95 297,075 7,745 3.49
Certificates of deposit............ 492,530 19,640 5.31 434,028 16,730 5.15
Mortgagors' payments held in escrow 14,224 187 1.75 11,323 146 1.72
Borrowed funds..................... 329,044 14,388 5.82 243,717 10,137 5.56
----------- ---------- ----------- ----------
Total interest-bearing
liabilities............... 1,541,564 $ 52,422 4.53% 1,290,398 41,601 4.31
----------- ---------- ----------- ----------
Noninterest-bearing demand deposits... 39,199 31,314
Other noninterest-bearing liabilities. 38,052 34,500
----------- -----------
Total liabilities................ 1,618,815 1,356,212
Stockholders' equity (4).............. 230,351 248,037
----------- -----------
Total liabilities and
stockholders' equity......... $ 1,849,166 1,604,249
=========== ===========
Net interest income................... $ 42,783 37,811
========== ==========
Net interest rate spread.............. 2.83% 2.72
======= =======
Net earning assets.................... $ 184,022 216,486
=========== ===========
Net interest income as a percentage of
average interest-earning assets.... 3.30% 3.35
========== ==========
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................ 111.94% 116.78
========== ==========
- -----------------------------------------
(1) Amounts shown are at amortized cost.
(2) Net of deferred loan fees and expenses, loan discounts, loans-in-process
and non-accruing loans.
(3) Includes Federal Home Loan Bank stock and interest-bearing demand accounts.
(4) Includes unrealized gains (losses) on securities available for sale.
(5) Includes bank-owned life insurance, earnings on which are reflected in
other noninterest income.
15
Lending Activities
The acquisition of Cortland and Albion, the latter of which occurred on March
24, 2000, resulted in the lending portfolio increasing 39% to $1.38 billion at
September 30, 2000 from $990.6 million at December 31, 1999. The acquisitions
contributed approximately $178.3 million and $63.8 million, respectively, to
this loan growth. The residential real estate and home equity lending portfolios
grew a combined 35%, or $219.0 million, since the year ended December 31, 1999,
with $172.2 million of one-to four-family residential real estate and fixed and
variable rate home equity loans acquired through both transactions. The
Company's continued focus on the small business commercial lending market
coupled with the acquisitions closed also resulted in the commercial real estate
and business lending portfolios increasing 64% during the nine month period
ending September 30, 2000.
Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and allowances for credit losses) as of the dates indicated.
September 30, 2000 December 31, 1999
--------------------------------- -------------------------------
Amount Percent Amount Percent
----------------- ----------- ------------- ----------
(Dollars in thousands)
Real estate loans:
- ------------------
One-to four-family..................... $ 805,569 58.52% 609,742 61.55
Home equity............................ 45,633 3.31 22,499 2.27
Multi-family........................... 87,970 6.39 74,652 7.54
Commercial real estate................. 191,137 13.88 120,758 12.19
Construction........................... 32,655 2.37 28,413 2.87
----------------- ----------- ------------- ----------
Total real estate loans............. 1,162,964 84.47 856,064 86.42
----------------- ----------- ------------- ----------
Consumer loans:
- ---------------
Mobile home......................... 23,457 1.70 25,957 2.62
Recreational vehicle................ 32,657 2.37 23,389 2.36
Vehicle............................. 66,374 4.82 24,289 2.45
Personal............................ 21,689 1.58 15,771 1.59
Home improvement.................... 7,484 0.54 7,983 0.81
Guaranteed education................ 14,283 1.04 12,564 1.27
Other consumer...................... 995 0.07 280 0.03
----------------- ----------- ------------- ----------
Total consumer loans............. 166,939 12.12 110,233 11.13
Commercial business loans and leases...... 46,794 3.41 24,301 2.45
----------------- ----------- ------------- ----------
Total loans...................... 1,376,697 100.00% 990,598 100.00
----------------- =========== ------------- ==========
Net deferred costs and unearned
discounts.......................... 1,885 4,892
Allowance for credit losses........... (13,645) (9,862)
----------------- -------------
Total loans, net................. $ 1,364,937 985,628
================= =============
Total non-performing loans as a percentage of total loans increased slightly
from 0.21% at September 30, 1999 to 0.26% at September 30, 2000. Additionally,
the allowance for credit losses as a percentage of total non-performing loans
decreased to 382.85% at September 30, 2000 compared to 477.26% at September 30,
1999. The continued positive performance of recoveries has allowed management to
reduce the provision for credit losses to $1.5 million for the nine month period
ended September 30, 2000 compared to $1.9 million for the same period in 1999.
The allowance for credit losses as a percentage of total loans also decreased to
0.99% at September 30, 2000 compared to 1.01% at September 30, 1999. The
adequacy of the Company's allowance for credit losses is reviewed quarterly with
consideration given to potential risk inherent within the loan portfolio, the
status of particular loans, historical loan loss experience, as well as current
and anticipated economic and market conditions. While management utilizes
available information to recognize losses on loans, future credit loss
provisions may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for credit losses calculation and may
require the Company to recognize additional provisions based on their judgement
of information available to them at the time of their examination.
16
Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and non-performing assets.
September 30, 2000 September 30, 1999
-------------------- --------------------
(Dollars in thousands)
Non-accruing loans:
One-to four-family............................................ $ 2,536 926
Home equity................................................... 47 132
Commercial real estate and multi-family....................... 551 641
Consumer ..................................................... 164 145
Commercial business........................................... 266 152
----------- ----------
Total.................................................... 3,564 1,996
----------- ----------
Non-performing assets............................................ $ 507 1,017
----------- ----------
Total non-accruing loans and non-performing assets............... $ 4,071 3,013
=========== ==========
Total non-accruing loans and non-performing assets
as a percentage of total assets............................... 0.20% 0.18
=========== ==========
Total non-accruing loans to total loans ......................... 0.26% 0.21
=========== ==========
Analysis of the Allowance For Credit Losses. The following table sets forth the
analysis of the allowance for credit losses for the periods indicated.
Nine months ended September 30,
-------------------------------------------
2000 1999
------------ -----------
(Dollars in thousands)
Balance at beginning of period....................................... $ 9,862 8,010
Net charge-offs:
Charge-offs....................................................... (658) (461)
Recoveries........................................................ 230 55
------------ -----------
Total net charge-offs................................................ (428) (406)
Provision for credit losses.......................................... 1,515 1,922
Allowance obtained through acquisitions.............................. 2,696 -
------------ -----------
Balance at end of period............................................. $ 13,645 9,526
============ ===========
Percentage of net charge-offs during the period to
average loans outstanding during the period....................... 0.04% 0.05
============ ===========
Allowance for credit losses to total loans at end of period.......... 0.99% 1.01
Allowance for credit losses to non-accruing loans at end of period... 382.85% 477.26
============ ===========
17
Investing Activities
The Company's securities available for sale portfolio decreased to $480.0
million, net of $36.8 million in securities acquired through the CNY
acquisition, at September 30, 2000 from $563.5 million at December 31, 1999.
Approximately, $87.8 million of sales and maturities, primarily in the
collaterized mortgage obligations, mortgage- and asset-backed and U. S. Treasury
securities portfolios and $60.2 million of principal repayments resulted in
$148.0 million of available funds during the first nine months of 2000. These
amounts were utilized to consummate the various acquisition activities initiated
by the Company, fund loan growth, and repay matured borrowings. The $60.2
million in principal repayments received on securities available for sale
represents a 60%, or $92.0 million, decrease from the same nine month period in
1999 reflective of the general increase in the market interest rates and the
corresponding effect on prepayment speeds.
Funding Activities
Total deposits increased 28%, or $314.0 million, during the first nine months of
2000, primarily as a result of five branch locations obtained by the Company
through the various acquisitions completed during the first nine months of 2000.
These transactions contributed $196.2 million and $61.7 million in deposit
liabilities from Cortland and Albion, respectively. Additionally, deposits grew
due to the two de-novo branch locations opened by First Niagara during the first
quarter of 2000.
Other borrowed funds decreased slightly to $331.9 million at September 30, 2000
from $335.6 million at December 31, 1999 due to the scheduled maturities of
various FHLB advances and repurchase agreements that were originally recorded as
part of the Company's leveraging program. The repayments, primarily in
short-term borrowings totaling $72.6 million, were partially offset by $26.7
million in borrowings acquired in the Cortland and Albion transactions and $41.9
million in new long-term borrowings to lock-in lower long-term rates in this
period of an inverted interest rate yield curve.
Equity Activities
Stockholders' equity increased to $236.0 million for the period ended September
30, 2000 as compared to $232.6 million at December 31, 1999. The increase was
attributable to the $14.6 million in net income earned by the Company and a $3.8
million improvement of the unrealized gain/loss in the Company's available for
sale investment portfolio. The increases were offset by $5.0 million in
dividends paid by the Company during the period in addition to the $10.8 million
in treasury stock purchases made by the Company as part of its capital
management program.
18
Results of Operations for the Three Months Ended September 30, 2000
- -------------------------------------------------------------------
Net Income
The Company recorded earnings of $5.1 million for the quarter ended September
30, 2000, an increase of 6% from $4.8 million for the same quarter in 1999.
Additionally, earnings per share for the third quarter of 2000 increased 17% to
$0.21 per share from $0.18 per share for the third quarter of 1999. This
increase primarily reflects the Company's efforts to change the mix of its
assets from investment securities to the lending portfolio and to increase
fee-based sources of revenue. Net income represented a return on average assets
of 1.00% for the quarter ended September 30, 2000 compared to 1.14% for the same
period in 1999. The return on average equity for the third quarter of 2000
increased to 8.74% compared to 7.97% for the third quarter of 1999.
Net Interest Income
The net interest margin as a percentage of average interest-earning assets
decreased slightly to 3.24% for the three months ended September 30, 2000
compared to 3.27% for the same quarter in 1999. This decrease resulted from the
Company's net interest-earning assets declining by $42.1 million as funds
previously available for investment in interest-earning assets were utilized to
fund the Company's acquisition activity.
Interest income increased $7.5 million, or 27%, for the three month period ended
September 30, 2000 compared to the three month period ended September 30, 1999.
This increase reflects the $312.7 million, or 20%, increase in average
interest-earning assets to $1.89 billion for the third quarter of 2000 from
$1.58 billion for the third quarter of 1999. This increase in average
interest-earning assets resulted primarily from additional loans obtained
through the Company's acquisitions and continued emphasis on loan originations.
The increase in interest income also reflects a 42 basis point increase in the
overall yield on interest-earning assets to 7.48% for the three months ended
September 30, 2000 from 7.06% for the same period in 1999. The increase in
overall yield resulted primarily from the general increase in market interest
rates, as well as the redeployment of funds from the lower yielding investment
and mortgage related securities into the higher yielding loan portfolio. The
average balance of loans outstanding increased 47% when comparing the third
quarter of 1999 to the same quarter in 2000. Correspondingly, interest income on
loans increased 51% to $26.7 million for the quarter ended September 30, 2000
from $17.7 million for the same period in 1999.
Interest expense increased 34% from the third quarter of 1999 when compared to
the third quarter of 2000, primarily due to the $354.8 million increase in
average interest-bearing liabilities. This increase resulted primarily from the
deposits and borrowings obtained through the Company's acquisitions. Also
contributing to the increase in interest expense was the 28 basis point increase
paid on deposits and borrowings resulting from the overall general increase in
market interest rates. An increase of 41% in the money market deposit account
product, which typically carries a market-based cost of funds that is slightly
higher than other interest-bearing deposits offered by the Company, also
negatively impacted interest expense when comparing the third quarters of 1999
and 2000. Partially offsetting these increases was a 36 basis point decrease in
the rate paid on savings accounts resulting from the acquisition of $60.1
million of savings accounts obtained in the Cortland acquisition that carry a
lower market-based rate than the Company's existing savings accounts offered
through First Niagara.
Provision for Credit Losses
Despite the significant increase in the loan portfolio balances, the Company's
management team slightly decreased the provision for credit losses from $554,000
in the third quarter of 1999 to $544,000 in the third quarter of 2000 as a
result of the high credit quality of the loan portfolio. The Company's
acquisitions partially contributed to the increase in non-performing loan to
total loans ratio and the decrease in the non-performing loan to allowance for
credit losses ratio. The adequacy of the Company's allowance for credit losses
is reviewed quarterly with consideration given to potential risk inherent within
the loan portfolio, the status of particular loans, historical loan loss
experience, as well as current and anticipated economic and market conditions.
Noninterest Income
Noninterest income increased to $8.7 million for the three months ended
September 30, 2000 from $7.0 million for the same period in 1999. This 24%, or
$1.7 million, increase is reflective of the Company's efforts to become less
reliant on net interest income, to offset the inherent risks associated with
fluctuating market interest rates and to expand its financial product and
service offerings. The acquisition of a commercial leasing company and an
investment advisory company provided an additional $683,000 of noninterest
income when comparing the two quarters. Increased revenues from the Company's
insurance and third-party benefit administration activities, increased fees and
service charges collected on checking accounts and electronic banking products,
as well as tax exempt earnings on additional bank owned life insurance purchased
during the third quarter of 1999 also contributed to the increase in noninterest
income.
19
Noninterest Expense
Noninterest expense totaled $15.6 million for the third quarter of 2000
reflecting a $3.5 million increase over the third quarter of 1999 total of $12.1
million. Approximately $2.3 million of this increase, primarily salaries and
benefits, occupancy and equipment costs and goodwill amortization, is directly
attributable to the operations of Cortland and the leasing and investment
advisory companies acquired during 2000. Additionally, costs associated with the
two branch locations and goodwill amortization relating to the Albion
acquisition and two de-novo branches opened by First Niagara during the first
quarter of 2000 contributed to the increase in noninterest expenses.
Income Tax Expense
Income tax expense totaled $2.9 million and $2.6 million for the three month
periods ended September 30, 2000 and 1999, respectively. The Company's effective
tax rate increased during the quarter to 36.1% from 35.0% for the same period in
1999 reflecting the impact of goodwill, substantially all of which is not tax
deductible.
Results of Operations for the Nine Months Ended September 30, 2000
- ------------------------------------------------------------------
Net Income
Net income increased to $14.6 million, or $0.59 per share for the nine month
period ended September 30, 2000 compared to $14.0 million, or $0.52 per share
for the same period in 1999. This increase was driven by growth realized in the
loan portfolios, as well as a continued emphasis on the development of
additional sources of noninterest income. The return on average assets was 1.06%
for the nine months ended September 30, 2000 compared to 1.17% for the same
period in 1999. The return on average equity for the first nine months of 2000
was 8.49% compared to 7.54% for the same period in 1999.
Net Interest Income
Net interest income increased 13% to $42.8 million for the nine months ended
September 30, 2000 compared to $37.8 million for the same period in 1999 despite
a $32.5 million decrease in the average net interest-earning assets between the
two periods. The decrease in average net interest-earning assets, which resulted
primarily from previously held investments being utilized to fund the Company's
acquisitions and stock buy-back program, was offset by a 11 basis point increase
in the net interest rate spread from 2.72% for the 1999 period to 2.83% for the
2000 period. This increase is reflective of the general increase in market
interest rates and the redeployment of funds invested in securities into the
higher yielding loan portfolio.
Interest income, which increased 20% for the nine months ended September 30,
2000 compared to the nine months ended September 30, 1999, reflects a $19.5
million increase in interest income earned on loans resulting from the
investment of funds into the higher yielding loan portfolio. Interest expense,
which increased $10.8 million, or 26%, for the nine month period ended September
30, 2000 compared to the same period ended September 30, 1999, was also impacted
by the increase in market interest rates, the Company's leverage program
initially implemented in early 1999, as well as deposit and borrowing
liabilities acquired through the Cortland and Albion acquisitions.
The net interest margin was 3.30% for the first nine months of 2000 compared to
3.35% for the same period in 1999. Interest-earning assets increased primarily
due to increased loan activity, but was partially offset by decreases in
interest-earning assets resulting from the utilization of funds for the
Company's stock buyback program, the purchase of the Cortland, Albion and the
commercial leasing and investment advisory subsidiaries, as well as investments
in bank-owned life insurance, earnings on which are recognized as noninterest
income.
Provision for Credit Losses
Despite the growth in the loan portfolio, the provision for credit losses was
decreased slightly to $1.5 million for the nine months ended September 30, 2000
compared to $1.9 million for the same period in 1999, reflecting the high credit
quality of the portfolio. The provision for credit losses is based on
management's quarterly assessment of the adequacy of the allowance for credit
losses with consideration given on such interrelated factors as the composition
and inherent risk within the loan portfolio, the level of nonperforming loans
and charge-offs, both current and historic economic conditions, as well as
current trends related to regulatory supervision.
20
Noninterest Income
Noninterest income increased 18% to $24.5 million for the nine months ended
September 30, 2000 from $20.8 million for the same period in 1999. When
comparing the two periods, the acquisition of the commercial leasing company and
investment advisory company provided an additional $1.5 million of noninterest
income. Increased fees and service charges collected on checking accounts and
electronic banking products, as well as tax-exempt earnings on additional third
quarter 1999 purchases of bank-owned life insurance also contributed to the
increase. These increases were partially offset by a decrease in gains on the
sale of securities available for sale and a market related decrease in premiums
earned on the Company's covered call option program.
Noninterest Expense
Noninterest expense totaled $43.2 million for the period ended September 30,
2000 reflecting an $8.1 million increase over the September 30, 1999 total of
$35.1 million. Approximately, $3.2 million of the increase, primarily salaries
and benefits, occupancy and equipment expenses and goodwill amortization, is
directly attributable to the operations of Cortland and the commercial leasing
and investment advisory companies acquired during 2000. Additional costs have
been incurred as a result of the acquisition of the Albion branches, including
the related goodwill amortization, the opening of two de-novo branches and the
Company's corporate branding campaign and name change initiated during the first
quarter of 2000.
Income Taxes
Income tax expense totaled $8.0 million and $7.6 million for the nine month
periods ended September 30, 2000 and 1999, respectively, with the effective tax
rate remaining consistent at 35% for both periods.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, proceeds from
the principal and interest payments on loans, mortgage related and debt and
equity securities, as well as proceeds from the limited sale of fixed rate
mortgage loans to the secondary market. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
outflows, mortgage prepayments, mortgage loan sales, and borrowings are greatly
influenced by market interest rates, economic conditions and competition.
Principal repayments on loans and mortgage related and other available for sale
securities contributed $132.7 million and $60.2 million, respectively, of
liquidity for the nine months ended September 30, 2000 compared to $112.0
million and $152.2 million, respectively, for same period in 1999. The decrease
in prepayments reflects the general increase in market interest rates that has
resulted in a significant slow down in refinancing activity.
The primary investing activities of the Company are the origination of both
residential one- to four-family and commercial real estate loans and the
purchase of mortgage related and debt and equity securities. During the first
nine months of 2000 and 1999, loan originations totaled $310.9 million and
$282.2 million, respectively, reflecting the Company's emphasis on originating
these higher yielding assets. The Company also funded four acquisitions during
the nine months ended September 30, 2000 requiring approximately $30.0 million
of net cash outflow. Purchases of investment securities totaled $22.5 million
for the nine months ended September 30, 2000 compared to $233.9 million for the
nine months ended September 30, 1999. For the first nine months of 1999, such
purchases were funded by FHLB advances and repurchase agreements as part of the
Company's leveraging strategy and by the redeployment of funds from federal
funds sold. Due to the increase in market borrowing rates during the first half
of 2000, the Company discontinued its leveraging program and utilized $30.7
million to repay matured borrowings.
At September 30, 2000, outstanding loan commitments totaled $127.9 million.
These commitments do not necessarily represent future cash requirements since
certain of these instruments may expire without being funded and others may not
be fully drawn upon. It is anticipated that there will be sufficient funds
available to meet the current loan commitments and other obligations.
Cash, interest-bearing demand accounts at correspondent banks, federal funds
sold and securities purchased under resale agreements are the Company's most
liquid assets. The levels of these assets are monitored daily and are dependent
on operating, financing, lending and investing activities during any given
period. Excess short-term liquidity is usually invested in overnight federal
funds sold. In the event that funds beyond those generated internally are
required, additional sources of funds are available through the use of reverse
repurchase agreements and FHLB advances. As of September 30, 2000, the total of
cash, interest-bearing demand accounts, federal funds sold and securities
purchased under resale agreements was $27.1 million, or 1.3% of total assets.
21
On July 7, 2000, the Company funded its $86.3 million acquisition of CNY
utilizing existing cash and cash equivalents and short-term borrowings. The
short-term borrowings were subsequently repaid from the cash and cash
equivalents obtained from CNY. The Company funded the $80.2 million purchase
price for its fourth quarter of 2000 acquisition of Iroquois with currently held
cash and cash equivalents, sales of available for sale securities and short-term
borrowings.
At September 30, 2000, the Company exceeded all regulatory capital requirements.
The current requirements and the actual levels for the Company are detailed in
the following table.
As of September 30, 2000
--------------------------------------------------------------------------------
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ----------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------------ ----------- ----------- ----------- ---------------
(Dollars in thousands)
Total Capital (to risk-weighted assets).... $ 212,105 16.98% 99,903 8.00 124,878 10.00
Tier 1 Capital (to risk-weighted assets)... 196,843 15.76 49,951 4.00 74,927 6.00
Leverage Capital (to average assets)....... $ 196,843 9.81% 60,204 3.00 100,340 5.00
22
Item 3. Quantitative and Qualitative Disclosure about Market Risk
- --------------------------------------------------------------------------------
Net Income and Net Portfolio Value Analysis
Market risk is the risk of loss from adverse changes in market prices and/or
interest rates of the Company's financial instruments. The primary market risk
the Company is exposed to is interest rate risk. Interest rate risk occurs when
assets and liabilities reprice at different times as interest rates change. The
Company monitors this interest rate sensitivity partially through the use of a
net income model, which generates estimates of changes in net income over a
range of interest rate scenarios.
The Asset-Liability Committee, which includes members of senior management,
monitors the Company's interest rate sensitivity. When deemed prudent,
management has taken actions, and intends to do so in the future, to mitigate
exposure to interest rate risk through the use of on- or off-balance sheet
financial instruments. Possible actions include, but are not limited to, changes
in the pricing of loan and deposit products, modifying the composition of
interest-earning assets and interest-bearing liabilities, and the use of
interest rate swap agreements.
The accompanying table as of September 30, 2000 sets forth the estimated impact
on the Company's net income resulting from changes in the interest rates during
the next twelve months. These estimates require making certain assumptions
including loan and mortgage-related investment prepayment speeds, reinvestment
rates, and deposit maturities and decay rates. These assumptions are inherently
uncertain and, as a result, the Company cannot precisely predict the impact of
changes in interest rates on net income. Actual results may differ significantly
due to timing, magnitude and frequency of interest rate changes and changes in
market condition.
Changes in Calculated increase (decrease) at September 30, 2000
----------------------------------------------------------
interest rates Net Income Net Portfolio Value
------------------------ ---------------------------- --------------------------
$ Change % Change $ Change % Change
------------ ------------ ----------- -----------
(Dollars in thousands)
+200 basis points $ (2,717) (10.8)% (30,317) (12.7)
+100 basis points (1,338) (5.3) (14,866) (6.2)
-100 basis points 1,405 5.6 12,906 5.4
-200 basis points $ 2,726 10.8% 22,111 9.2
23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------------------------------------------------------------
There are no material pending legal proceedings to which the Company
or its subsidiaries are a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------------------------------------
Not applicable.
Item 3. Defaults upon Senior Securities
- --------------------------------------------------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
Not applicable.
Item 5. Other Information
- --------------------------------------------------------------------------------
On November 3, 2000, the Company completed its acquisition of Iroquois
Bancorp, Inc., the holding company for Cayuga Bank and The Homestead
Savings (FA). The Homestead Savings was merged into Cayuga Bank with
its five locations becoming Cayuga Bank branches. Cayuga Bank will
retain its name and operate as a subsidiary of First Niagara Financial
Group, Inc. The transaction was accounted for using the purchase
method. The financial statements and pro forma information required to
be filed by this Item will be filed as an amendment when the
information becomes available; however, in no event will such
information be filed any later than 60 days from the last date on
which this Form 10-Q was required to be filed.
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a) The following exhibits are filed herewith or are incorporated by
reference to other filings:
Exhibit No.
----------
99.1 Summary of Quarterly Financial Data
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed on July 24, 2000 a Current Report on Form 8-K dated
July 7, 2000, which disclosed that the acquisition of CNY Financial
Corporation and its wholly owned subsidiary, Cortland Savings Bank was
completed on July 7, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST NIAGARA FINANCIAL GROUP, INC.
Date: November 13, 2000 By: /s/ William E. Swan
------------------------------------------------
William E. Swan
President and Chief Executive Officer
Date: November 13, 2000 By: /s/ Paul J. Kolkmeyer
------------------------------------------------
Paul J. Kolkmeyer
Executive Vice President and Chief
Operating Officer
Date: November 13, 2000 By: /s/ Daniel A. Dintino, Jr.
------------------------------------------------
Daniel A. Dintino, Jr.
Senior Vice President and Chief
Financial Officer
24
EXHIBIT INDEX
Exhibit
Number
- -------------
27.1 Financial Data Schedule. Filed herewith.
99.1 Summary of Quarterly Financial Data. Filed herewith.
25