UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from _________________ to ____________________
Commission File Number: 0-23975
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FIRST NIAGARA FINANCIAL GROUP, INC.
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(Exact Name of Registrant as specified in its Charter)
Delaware 16-1545669
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization
6950 South Transit Road, P.O. Box 514, Lockport, NY 14095-0514
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(Address of Principal Executive Officer) (Zip Code)
(716) 625-7500
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(Registrant's Telephone Number Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
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 twelve months (or for such shorter period that the Registrant was
required to file reports) and (2) has been subject to such requirements for the
past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |_|
As of March 11, 2002, there were outstanding, exclusive of treasury shares,
25,944,112 shares of the Registrant's Common Stock.
The aggregate market value of the 9,009,064 shares of voting stock held by
non-affiliates of the Registrant was $159,910,886, as computed by reference to
the last sales price on March 11, 2002, as reported by the NASDAQ National
Market. Solely for purposes of this calculation, all persons who are directors
and executive officers of the Registrant and all persons who are beneficial
owners of more than 10% of its outstanding stock have been deemed to be
affiliates.
DOCUMENTS INCORPORATED
BY REFERENCE
The following documents, in whole or in part, are specifically incorporated by
reference in the indicated Part of the Company's Proxy Statement:
Document Part
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Proxy Statement for the 2002 Annual Meeting of Part III, Item 10
Stockholders "Directors and Executive Officers of the Registrant"
Part III, Item 11
"Executive Compensation"
Part III, Item 12
"Security Ownership of Certain Beneficial Owners and Management"
Part III, Item 13
"Certain Relationships and Related Transactions"
2
TABLE OF CONTENTS
ITEM PAGE
NUMBER NUMBER
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PART I
1 Business.............................................................. 4
2 Properties............................................................ 18
3 Legal Proceedings..................................................... 18
4 Submission of Matters to a Vote of Security Holders................... 18
PART II
5 Market for Registrant's Common Equity and Related Stockholder
Matters............................................................... 18
6 Selected Financial Data............................................... 19
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 22
7A Quantitative and Qualitative Disclosure about Market Risk............. 38
8 Financial Statements and Supplementary Data........................... 41
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 78
PART III
10 Directors and Executive Officers of the Registrant.................... 78
11 Executive Compensation................................................ 78
12 Security Ownership of Certain Beneficial Owners and Management........ 78
13 Certain Relationships and Related Transactions........................ 78
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 79
Signatures............................................................ 80
3
PART I
ITEM 1. BUSINESS
GENERAL
First Niagara Financial Group, Inc.
First Niagara Financial Group, Inc. ("FNFG") is a Delaware corporation, which
holds all of the capital stock of First Niagara Bank ("First Niagara"), Cortland
Savings Bank ("Cortland") and Cayuga Bank ("Cayuga") (collectively, the
"Banks"). FNFG and its consolidated subsidiaries are hereinafter referred to
collectively as "the Company." FNFG was organized in December 1997 by First
Niagara in connection with its conversion from a New York State chartered mutual
savings bank to a New York State chartered stock savings bank and the
reorganization to a two-tiered mutual holding company. FNFG was formed for the
purpose of acquiring all of the capital stock of First Niagara upon completion
of the reorganization. As part of the reorganization, FNFG sold approximately
43.5% of the shares of its common stock to eligible depositors of First Niagara
(the "Offering") and issued approximately 53.3% of its shares of common stock to
First Niagara Financial Group, MHC (the "MHC"), a state-chartered mutual holding
company incorporated in New York State. Concurrent with the close of the
offering, 1.9% of the shares were issued to the Company's employee stock
ownership plan and 1.3% of the shares were issued to the First Niagara Bank
Foundation (the "Foundation"). At December 31, 2001, approximately 33.6% of the
outstanding shares (exclusive of treasury shares) of FNFG's common stock are
held by the public and approximately 61.7% of its outstanding shares are held by
the MHC. The remaining 4.7% of FNFG's outstanding shares of common stock are
held by the Foundation and the Company's employee stock ownership plan.
The business of FNFG consists of the management of its community banks and
financial services group. The Banks' business is primarily accepting deposits
from customers through their branch offices and investing those deposits,
together with funds generated from operations and borrowings, in one- to
four-family residential, multi-family residential and commercial real estate
loans, commercial business loans and leases, consumer loans, and investment
securities. Additionally, through its financial services subsidiaries, FNFG has
expanded its product offerings to include insurance products and services, as
well as trust and investment services. The Company emphasizes personal service,
attention and customer convenience in serving the financial needs of the
individuals, families and businesses residing in Western and Central New York.
First Niagara Bank
First Niagara was organized in 1870 as a New York State chartered mutual savings
bank. First Niagara operates as a wholly-owned subsidiary of FNFG and is a
full-service, community-oriented savings bank that provides financial services
to individuals, families and businesses located in the Western New York counties
of Niagara, Orleans, Erie, Monroe and Genesee. First Niagara has expanded its
market area beyond its traditional Western New York counties through new and
acquired branch locations, which totaled 23 as of December 31, 2001. In February
2002, First Niagara opened its 24th branch, which is located in the Town of
Greece, a Rochester suburb in Monroe County. On March 24, 2000, FNFG acquired
Albion Banc Corp. ("Albion") and merged the two branches of its subsidiary,
Albion Federal Savings and Loan, into First Niagara's branch system. As of
December 31, 2001, First Niagara had $2.0 billion of assets, $139.4 million of
stockholder's equity and employed 737 full-time equivalent personnel. For 2001,
First Niagara had $87.9 million of total revenue.
First Niagara Bank Subsidiaries
First Niagara Financial Services, Inc. First Niagara Financial Services, Inc.
("FNFS"), a wholly-owned subsidiary of First Niagara incorporated in 1997, is
engaged in the sale of annuities, mutual funds and life insurance. First Niagara
Financial Services, Inc. acts as an agent for third-party companies to sell and
service their investment products.
First Niagara Funding, Inc. First Niagara Funding, Inc. is a wholly-owned real
estate investment trust ("REIT") of First Niagara incorporated in 1997 that
primarily owns commercial mortgage loans. This REIT supplements its holdings of
commercial real estate loans with fixed rate residential mortgages, home equity
loans and commercial business loans.
First Niagara Leasing, Inc. (formerly Empire National Leasing, Inc.) First
Niagara Leasing, Inc. ("FNL") was acquired by First Niagara on January 1, 2000
and provides direct financing in the commercial small ticket lease market to the
equipment industry.
First Niagara Securities, Inc. First Niagara Securities, Inc., a wholly-owned
subsidiary of First Niagara incorporated in 1984, is a New York State Article 9A
company, which is primarily involved in the investment in U.S. government agency
and Treasury obligations.
4
Niagara Investment Advisors, Inc. Niagara Investment Advisors, Inc. ("NIA") is
an investment supervisory services firm that was acquired by First Niagara on
May 31, 2000. NIA specializes in equity, fixed-income and balanced portfolio
accounts for individuals, pension plans, corporations and charitable
institutions.
NOVA Healthcare Administrators, Inc. NOVA Healthcare Administrators, Inc.
("NOVA") was acquired on January 1, 1999 by First Niagara and provides
third-party administration of employee benefit plans.
Warren-Hoffman & Associates, Inc. Warren-Hoffman & Associates, Inc. ("WHA") was
acquired on January 1, 1999 by First Niagara and is a full service insurance
agency engaged in the sale of insurance products including business and personal
insurance, surety bonds, risk management, life, disability and long-term care
coverage. WHA was founded in 1968 and serves commercial and personal clients
throughout the Company's market area. In July 2001, WHA began offering
consulting and risk management services to commercial customers in the areas of
alternative risk and self-insurance through the trade name First Niagara Risk
Management. Allied Claim Services, Inc. ("Allied"), was acquired by WHA on
January 1, 2001 and is an independent insurance adjusting firm and third party
administrator. Allied represents insurance companies and self-insured employers
in the investigation, settlement and administration of claims brought under an
insurance contract or as a self-insured. It operates primarily in the coverage
areas of workers' compensation, automobile, general liability and property.
Cortland Savings Bank
On July 7, 2000 FNFG acquired all of the common stock of CNY Financial
Corporation, the holding company for Cortland Savings Bank. Cortland, which is a
New York State chartered savings bank founded in 1866 and headquartered in
Cortland, New York, operates as a wholly-owned subsidiary of FNFG. Cortland
provides full service community banking to individuals and businesses through
its network of 3 branches in Cortland County and a loan production office in
Tompkins County. As of December 31, 2001, Cortland had $255.6 million of assets,
$32.8 million of stockholder's equity and employed 62 full-time equivalent
personnel. For 2001, Cortland had $10.0 million of total revenue.
Cortland Savings Bank Subsidiary
Cortland REIT Corp. Cortland REIT Corp. is a wholly-owned real estate investment
trust of Cortland that owns residential mortgage loans. This REIT supplements
its holdings of residential real estate loans with commercial real estate and
home equity loans.
Cayuga Bank
On November 3, 2000 FNFG acquired all of the common stock of Iroquois Bancorp,
Inc., the holding company of Cayuga Bank and The Homestead Savings FA
("Homestead"). Upon closing of the transaction, FNFG merged Homestead into
Cayuga. As a result, Cayuga is a wholly-owned subsidiary of FNFG that operates
as a New York State chartered commercial bank. Cayuga provides community banking
services to consumers and businesses primarily located in Cayuga, Oswego and
Oneida Counties through 11 branches. As of December 31, 2001, Cayuga had $611.8
million of assets, $77.8 million of stockholder's equity and employed 120
full-time equivalent personnel. For 2001, Cayuga had $22.7 million of total
revenue.
Cayuga Bank Subsidiaries
Cayuga Financial Services and H.S. Service Corp. Cayuga Financial Services
("CFS") and H.S. Service Corp. are wholly-owned subsidiaries of Cayuga engaged
in the sale of annuities, mutual funds and insurance. CFS and H.S. Service
Corp., act as agents for third party companies to sell and service their
products. Effective January 1, 2001, all activities previously conducted by H.S.
Services Corp. were transferred to CFS.
Cayuga Funding Corp. Cayuga Funding Corp. is a wholly-owned real estate
investment trust of Cayuga that primarily owns residential mortgage loans.
During 2001, FNFG organized all of its financial services activities, namely
insurance, fiduciary and investment products and services, under one Financial
Services Group headed up by one dedicated executive. The Financial Services
Group includes the results of operations from the Company's WHA, Nova, NIA, FNFS
and CFS subsidiaries, as well as Cayuga's trust department. This was done in
order to maximize the Company's cross-selling capabilities.
5
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K may contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, 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, those related to the economic
environment, particularly in the market areas in which the Company operates,
competitive products and pricing, fiscal and monetary policies of the U.S.
Government, changes in government regulations affecting financial institutions,
including regulatory fees and capital requirements, changes in prevailing
interest rates, acquisitions and the integration of acquired businesses, credit
risk management, asset-liability management, the financial and securities
markets and the availability of and costs associated with sources of liquidity,
and other factors discussed elsewhere in this report and other reports filed by
the Company with the Securities and Exchange Commission ("SEC"). Many of these
factors are beyond the Company's control.
MARKET AREA AND COMPETITION
The Company's primary lending areas have historically been concentrated in the
same counties as its branch offices. The Company faces significant competition
in both making loans and attracting deposits. The Western and Central New York
regions have a high density of financial institutions, some of which are
significantly larger and have greater financial resources than the Company, and
all of which are competitors of the Company to varying degrees. The Company's
competition for loans comes principally from commercial banks, savings banks,
savings and loan associations, mortgage banking companies, credit unions,
insurance companies and other financial services companies. Its most direct
competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The Company
faces additional competition for deposits from non-depository competitors such
as the mutual fund industry, securities and brokerage firms and insurance
companies. Further competition may arise as a result of, among other things,
Internet banking, the elimination of restrictions on the interstate operations
of financial institutions, and legislation that permits affiliations between
banks, securities firms and insurance companies.
LENDING ACTIVITIES
General. The Company's principal lending activity has been the origination of
one- to four-family residential and commercial real estate loans and commercial
business loans to customers located within its primary market areas. The Company
generally sells in the secondary market 20-30 year monthly and 25-30 year
bi-weekly fixed rate residential mortgage loans, and retains for its portfolio
adjustable-rate loans and fixed-rate monthly 10-15 year residential mortgage
loans, together with fixed-rate bi-weekly mortgage loans with maturities of 20
years or less. However, for the majority of 2001, the Company was also selling
15 year monthly and 20 year bi-weekly fixed rate residential mortgage loans as
part of its asset/liability management strategy during the low interest rate
environment. The Company generally retains the servicing rights on mortgage
loans it sells and realizes monthly service fee income. The Company also
originates for retention in its portfolio, home equity and consumer loans that
it originates, with the exception of education loans which, as they enter their
repayment phase, are sold to the Student Loan Marketing Association ("Sallie
Mae").
One- to Four-Family Real Estate Lending. The Company's primary lending activity
has been the origination of mortgage loans to enable borrowers to finance one-
to four-family, owner-occupied properties located in its primary market areas.
The Company offers conforming and non-conforming, fixed-rate and
adjustable-rate, residential mortgage loans with maturities up to 30 years and
maximum loan amounts generally up to $500,000. Approximately 36%, or $348.7
million, of the Company's residential portfolio consists of bi-weekly mortgages,
which feature an accelerated repayment structure and a linked deposit account.
The Company currently offers both fixed and adjustable rate conventional and
government guaranteed Federal Housing Administration ("FHA") and Veterans
Administration ("VA") mortgage loans with terms of 10 to 30 years that are fully
amortizing with monthly or bi-weekly loan payments. The Company generally
originates both fixed-rate and adjustable-rate loans in amounts up to the
maximum conforming loan limits as established by Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
secondary market standards. Private mortgage insurance ("PMI") is required for
loans with loan-to-value ratios in excess of 80%.
6
In an effort to provide financing for low and moderate income buyers, the
Company actively participates in residential mortgage programs and products
sponsored by FNMA, FHLMC, and the State of New York Mortgage Agency ("SONYMA").
The SONYMA mortgage programs provide low and moderate income households with
fixed-rate loans which are generally set below prevailing fixed-rate mortgage
loans and which allow below-market down payments. These loans are sold by the
Company to SONYMA, with the Company retaining the contractual servicing rights.
The Company currently offers several one- to four-family, adjustable-rate
monthly and bi-weekly mortgage loan ("ARMs") products secured by residential
properties. The one- to four-family ARMs are offered with terms up to 30 years,
with rates that adjust every one, five or seven years. After origination, the
interest rate on one- to four-family ARMs is reset based upon a contractual
spread or margin above a specified index (i.e. U.S. Treasury Constant Maturity
Index).
ARMs are generally subject to limitations on interest rate increases of up to 2%
per adjustment period and an aggregate adjustment of up to 6% over the life of
the loan. The ARMs require that any payment adjustment resulting from a change
in the interest rate be sufficient to result in full amortization of the loan by
the end of the loan term, and thus, do not permit any of the increased payment
to be added to the principal amount of the loan, commonly referred to as
negative amortization.
The retention of ARMs in the Company's portfolio helps to reduce its exposure to
interest rate risk. However, ARMs generally pose credit risks different from the
credit risks inherent in fixed-rate loans primarily because, as interest rates
rise, the underlying debt service payments of the borrowers rise, thereby
increasing the potential for default. In order to minimize this risk, borrowers
of one- to four-family one year adjustable-rate loans are qualified at the rate
which would be in effect after the first interest rate adjustment, if that rate
is higher than the initial rate. The Company believes that these risks, which
have not had a material adverse effect on the Company to date, generally are
less onerous than the interest rate risks associated with holding fixed-rate
loans. Certain of the Company's conforming ARMs can be converted at a later date
to a fixed-rate mortgage loan with interest rates based upon the then-current
market rates plus a predetermined margin or spread that was established at the
loan closing. The Company sells ARMs, which are converted to 15 to 30 year
fixed-rate term loans, to either FNMA or FHLMC.
Commercial Real Estate and Multi-family Lending. The Company originates real
estate loans secured predominantly by first liens on apartment houses and
commercial and industrial real estate. The commercial real estate loans are
predominately secured by nonresidential properties such as office buildings,
shopping centers, retail strip centers, industrial and warehouse properties and
to a lesser extent, by more specialized properties such as churches, mobile home
parks, restaurants, motel/hotels and auto dealerships. The Company's current
policy with regard to such loans is to emphasize geographic distribution within
its market area, diversification of property types and minimization of credit
risk.
As part of the Company's ongoing strategic initiatives to minimize interest rate
risk, commercial and multi-family real estate loans originated for the Company's
portfolio are generally limited to one, three or five year ARM products which
are priced at prevailing market interest rates. The initial interest rates are
subsequently reset after completion of the initial one, three or five year
adjustment period at new market rates that generally range between 200 and 300
basis points over the then, current one, three or five year United States
Treasury Constant Maturity Index subject to interest rate floors. The maximum
term for commercial real estate loans is generally not more than 10 years, with
a payment schedule based on not more than a 25-year amortization schedule for
multi-family loans, and 20 years for commercial real estate loans.
The Company also offers commercial real estate and multi-family construction
mortgage loans. Most construction loans are made as "construction/permanent"
loans, which provide for disbursement of loan funds during the construction
period and automatic conversion to a permanent loan upon completion of
construction and the attainment of either tenant lease-up provisions or
prescribed debt service coverage ratios. The construction phase of the loan is
made on a short-term basis, usually not exceeding 2 years, with floating
interest rate levels generally established at a spread in excess of either the
LIBOR or prime rate. The construction loan application process includes the same
criteria which are required for permanent commercial mortgage loans, as well as
a submission to the Company of completed plans, specifications and cost
estimates related to the proposed construction. These items are used as an
additional basis to determine the appraised value of the subject property.
Construction loans involve additional risks attributable to the fact that loan
funds are advanced upon the security of the project under construction, which is
of uncertain value prior to the completion of construction.
7
The Company has increased its emphasis on commercial real estate and
multi-family lending desiring to invest in assets bearing higher interest rates,
which are more sensitive to changes in market interest rates but are less
susceptible to prepayment risk. Commercial real estate and multi-family loans,
however, entail significant additional risk as compared with one- to four-family
residential mortgage lending, as they typically involve large loan balances
concentrated with single borrowers or groups of related borrowers. In addition,
the payment experience on loans secured by income producing properties is
typically dependent on the successful operation of the related real estate
project and thus may be subject to a greater extent to adverse conditions in the
real estate market or in the general economy. To help mitigate this risk the
Company has put in place concentration limits based upon loan types and property
types and maximum amounts which may be lent to an individual or group of
borrowers.
Home Equity Lending. The Company offers fixed-rate, fixed-term, monthly and
bi-weekly home equity and second mortgage loans, and variable rate home equity
lines of credit ("HELOCs") in its market areas. Both fixed-rate and floating
rate home equity products are offered in amounts up to 90% of the appraised
value of the property (including the first mortgage) with a maximum loan amount
of $150,000. Mortgage insurance is required for HELOCs with loan-to-value ratios
in excess of 80%. Monthly fixed-rate home equity loans are offered with
repayment terms up to 15 years and HELOCs are offered for terms up to 30 years.
The line may be drawn upon for 10 years, during which principal and interest is
paid on the outstanding balance. Repayment of the remaining principal and
interest is then amortized over the remaining 20 years. Bi-weekly fixed-rate
home equity loans are offered with repayment terms up to 20 years, however,
because the loan amortizes bi-weekly and two additional half payments are made
each year, actual loan terms are significantly less.
Consumer Loans. The Company originates a variety of fixed-rate installment and
variable rate lines-of-credit consumer loans, including indirect new and used
automobile loans, mobile home loans, education loans and personal secured and
unsecured loans.
Mobile home loans have shorter terms to maturity than traditional 30-year
residential loans and higher yields than single-family residential mortgage
loans. The Company generally offers mobile home loans in New York and New Jersey
with fixed-rate, fully amortizing loan terms of 10 to 20 years. The Company has
contracted with an independent third-party to generate all mobile home loan
applications. However, prior to funding, all mobile home loan originations must
be underwritten and approved by designated Company underwriters. As part of a
negotiated servicing contract, the third party originator will, at the request
of the Company, contact borrowers who become delinquent in their payments and
when necessary, will oversee the repossession and sale of mobile homes on the
Company's behalf. For such services, and as part of the origination and
servicing contract, the Company pays the originator a fee at loan funding, of
which generally 50% is deposited into a noninterest bearing escrow account, and
is under the sole control of the Company to absorb future losses which may be
incurred on the loans.
The Company participates in indirect automobile lending programs with Western
and Central New York auto dealerships. These loans are underwritten by the
Company's consumer lending officers in accordance with Company policy. The
Company also purchases "A" quality lease paper through a third-party finance
company. While the Company retains the credit risk associated with the auto
leases, by contract, residual risk, repossessions and remarketing is the
responsibility of the financing company. Indirect auto loans have terms up to 72
months while auto leases have terms up to 40 months.
The Company originates personal secured and unsecured fixed rate installment
loans and variable rate lines of credit. Terms of the loans range from 6 to 60
months and generally do not exceed $50,000. Secured loans are collateralized by
savings accounts or certificates of deposits. Unsecured loans are only approved
for more creditworthy customers.
The Company continues to be an active originator of education loans.
Substantially all of the loans are originated under the auspices of the New York
State Higher Education Services Corporation ("NYSHESC") or the American Student
Association ("ASA"). Under the terms of these loans, no repayment is due until
the student graduates, with 98% of the principal guaranteed by NYSHESC or ASA.
The Company's general practice is to sell these education loans to Sallie Mae as
the loans reach repayment status. The Company generally receives a premium of
.25% to .75% on the sale of these loans.
8
Commercial Business Loans. The Company offers commercial business loans and
lines-of-credit to small and medium size companies in its market area, some of
which are secured in part by additional real estate collateral. Additionally,
secured and unsecured commercial loans and lines-of-credit are made for the
purpose of financing equipment acquisition, expansion, working capital and other
general business purposes. The terms of these loans generally range from less
than one year to seven years. The loans are either negotiated on a fixed-rate
basis or carry variable interest rates indexed to the prime rate.
Lines-of-credit expire after one year and generally carry a variable rate of
interest indexed to the prime rate. The Company has recently increased its
strategic focus to allocate a greater portion of available funds to both the
commercial middle income and small business lending markets. To facilitate the
Company's expansion of these areas, the Company has added commercial business
products such as cash management, merchant services and Internet banking,
together with credit scoring to enhance customer service to the small business
client.
The Company also offers installment direct financing leases, generally in
amounts up to $100,000 with terms no greater than 60 months, which are
guaranteed by the principals of the lessee and collateralized by the leased
equipment.
In 2000, the Company began to dedicate more resources to commercial business and
real-estate loans, which are 75% - 85% government guaranteed through the Small
Business Administration ("SBA"). Terms of these loans range from one year to
twenty-five years and generally carry a variable rate of interest indexed to the
prime rate. Through its increased emphasis on commercial lending, the Company
was able to become the fifth largest SBA lender in Western New York in one year.
This product allows the Company to better meet the needs of its small business
customers in the market areas it serves.
Commercial business lending is generally considered to involve a higher degree
of credit risk than secured real estate lending. The repayment of unsecured
commercial business loans are wholly dependent upon the success of the
borrower's business, while secured commercial business loans may be secured by
collateral that is not readily marketable.
Classification of Assets. Loans are reviewed on a regular basis and are placed
on nonaccrual status when, in the opinion of management, the collection of
additional interest is doubtful. Loans are generally placed on nonaccrual status
when either principal or interest is 90 days or more past due. Interest accrued
and unpaid at the time a loan is placed on nonaccrual status is reversed from
interest income.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as Real Estate Owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the value of the property is less than the carrying value of the loan, the
difference is charged against the allowance for credit losses. Any subsequent
write-down of REO is charged against earnings.
Consistent with regulatory guidelines, the Company provides for the
classification of loans considered to be of lesser quality as "substandard",
"doubtful", or "loss" assets. A loan is considered substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard loans include those
characterized by the distinct possibility that the Company will sustain some
loss if the deficiencies are not corrected. Loans classified as doubtful have
all of the weaknesses inherent in those classified substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Loans classified as loss are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. Loans that do not
expose the Company to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess some weaknesses, are required to be
designated "special mention" by management.
When the Company classifies problem loans as either substandard or doubtful, it
establishes a specific valuation allowance in an amount deemed prudent by
management. General allowances represent loss allowances that have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem loans. When the Company classifies problem loans as a loss, it is
required either to establish a specific allowance for losses equal to 100% of
the amount of the loans classified, or to charge-off such amount. The Company's
determination as to the classification of its loans and the amount of its
valuation allowance is subject to review by its regulatory agencies, which can
order the establishment of additional general or specific loss allowances. The
Company regularly reviews its loan portfolio to determine whether any loans
require classification in accordance with applicable regulations.
9
The allowance for credit losses is established through a provision for credit
losses based on management's evaluation of the losses inherent in the loan
portfolio. Such evaluation, which includes a review of all loans on which full
collectibility may not be reasonably assured, considers among other matters, the
estimated net realizable value or the fair value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate credit loss allowance. The
Company continues to monitor and modify the level of the allowance for credit
losses in order to maintain a level which management considers adequate to
provide for credit losses inherent in the loan portfolio. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for credit losses and valuation of
REO.
Management's evaluation of the allowance is based on a continuing review of the
loan portfolio. The methodology for determining the amount of the allowance for
credit losses consists of several elements. Non-accruing, impaired and
delinquent commercial loans are reviewed individually and the value of any
underlying collateral is considered in determining estimates of losses
associated with those loans and the need, if any, for a specific reserve.
Another element involves estimating losses inherent in categories of smaller
balance homogeneous loans (one- to four-family, home equity, consumer) based
primarily on historical experience, industry trends and trends in the real
estate market and the current economic environment in the Company's market
areas. The unallocated portion of the allowance for credit losses is based on
management's evaluation of various conditions, and involves a higher degree of
uncertainty because this component of the allowance is not identified with
specific problem credits or portfolio segments. The conditions evaluated in
connection with this element include the following: industry and regional
conditions (primarily Western and Central New York State where the Company is
subject to a high degree of concentration risk); seasoning of the loan portfolio
and changes in the composition of and growth in the loan portfolio; the strength
and duration of the current business cycle; existing general economic and
business conditions in the lending areas; credit quality trends, including
trends in nonaccruing loans; historical loan charge-off experience; and the
results of bank regulatory examinations.
INVESTMENT ACTIVITIES
General. The Company's investment policy, established by the Boards of Directors
of the Banks, provides that investment decisions will be made based on the
safety of the investment, liquidity requirements, potential returns, cash flow
targets, and desired risk parameters. In pursuing these objectives,
consideration is given to the ability of an investment to provide earnings
consistent with factors of quality, maturity, marketability and risk
diversification.
The Company limits securities investments to U.S. Government and agency
securities, municipal bonds, corporate debt obligations and corporate equity
securities. In addition, the policy permits investments in mortgage-backed
securities, including securities issued and guaranteed by FNMA, FHLMC,
Government National Mortgage Association ("GNMA") and privately-issued
collateralized mortgage obligations ("CMOs"). Also permitted are investments in
asset-backed securities ("ABSs"), backed by auto loans, credit card receivables,
home equity loans, student loans, and home improvement loans. The investment
strategy generally utilizes a risk management approach of diversified investing
between short-, intermediate- and long-term categories in order to increase
overall investment yields in addition to managing interest rate risk. To
accomplish these objectives, the Company's focus is on investments in
mortgage-backed securities, CMOs and ABSs, while U.S. Government and other
non-amortizing securities are utilized for call protection and liquidity
purposes. During 2001 emphasis was placed on investments with shorter durations
as a result of the lower interest rate environment. As with mortgage-backed
securities, the Company attempts to maintain a high degree of liquidity in its
other securities and generally does not invest in debt securities with expected
average lives in excess of 10 years. Additionally, the Company has a limited
covered call option program. Under this program the Company writes call options
on common stock already held within its available for sale investment security
portfolio. These options give the purchaser the right to purchase a specified
amount of the equity security the option was written on, at a pre-determined
strike price for a premium. As derivative instruments, the options are
recognized on the balance sheet at fair value and any subsequent changes in fair
value are recorded in earnings as investment and net security gains or losses.
If the options ultimately expire unexercised, the premiums received for writing
the options remaining on the balance sheet are realized into income by the
Company.
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SOURCES OF FUNDS
General. Deposits and borrowed funds, primarily Federal Home Loan Bank ("FHLB")
advances and reverse repurchase agreements, are the primary sources of the
Company's funds for use in lending, investing and for other general purposes. In
addition, repayments on loans, proceeds from sales of loans and securities, and
cash flows from operations have historically been additional sources of funds.
The Company has available lines of credit with the FHLB, Federal Reserve Bank
(FRB) and the MHC, which can provide liquidity if the above funding sources are
not sufficient to meet the Company's short-term liquidity needs.
Deposits. The Company offers a variety of deposit account products with a range
of interest rates and terms. The deposit accounts consist of savings accounts,
negotiable order of withdrawal ("NOW") accounts, checking accounts, money market
accounts, and certificates of deposit. The Company offers certificates of
deposit with balances in excess of $100,000 at preferential rates (jumbo
certificates) and also offers Individual Retirement Accounts ("IRAs") and other
qualified plan accounts. To enhance its deposit product offerings, the Company
also provides commercial business, as well as totally free checking accounts.
Borrowed Funds. Borrowings are utilized to lock-in lower cost funding, better
match interest rates and maturities of certain assets and liabilities and
leverage capital for the purpose of improving return on equity. Such borrowings
primarily consist of advances and reverse repurchase agreements entered into
with the FHLB, with nationally recognized securities brokerage firms and with
commercial customers.
SEGMENT INFORMATION
Information about the Company's business segments is included in note 16 of
"Notes to Consolidated Financial Statements" filed herewith in Part II, Item 8,
"Financial Statements and Supplementary Data." Based on the "Management
Approach" model as described in the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," the Company has
determined it has two business segments, its banking activities and its
financial services activities. Financial services activities for 2001 and 2000
consisted of the results of the Company's insurance products and services,
third-party administration services, as well as, fiduciary and investment
services subsidiaries, which were organized under one Financial Services Group
in 2001.
REGULATION
General
FNFG, as a bank holding company, is required to file certain reports with, and
otherwise comply with the rules and regulations of the FRB. First Niagara and
Cortland are New York State chartered stock savings banks, while Cayuga operates
as a commercial bank, chartered as a New York State trust company. The Banks are
subject to extensive regulation by the New York State Banking Department (the
"Department"), as their chartering agency, and by the Federal Deposit Insurance
Corporation ("FDIC") as their deposit insurer. The Banks are required to file
reports with, and are periodically examined by the FDIC and the Superintendent
of Banks of the State of New York (the "Superintendent") concerning their
activities and financial condition and must obtain regulatory approvals prior to
entering into certain transactions, including, but not limited to, mergers with
or acquisitions of other banking institutions. The Banks are also members of the
FHLB of New York and are subject to certain regulations by the Federal Home Loan
Bank System.
Regulatory authorities have extensive discretion in connection with their
supervisory and enforcement activities which are intended to strengthen the
financial condition of the banking and thrift industries, including the
imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the adequacy of an institution's
allowance for credit losses. Any change in such regulation and oversight whether
in the form of regulatory policy, regulations, or legislation, could have a
material impact on the Company and its operations.
New York Bank Regulation
The Banks derive their lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Department. The exercise by a FDIC-insured bank of the lending and
investment powers under the New York State Banking Law is limited by FDIC
regulations and other federal laws and regulations. In particular, the
applicable provisions of New York State Banking Law and regulations governing
the investment authority and activities of an FDIC insured bank are
substantially limited by the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") and the FDIC regulations issued pursuant thereto.
11
Insurance of Accounts and Regulation by the FDIC
The Banks are members of the Bank Insurance Fund ("BIF"), which is administered
by the FDIC. While the majority of the Banks deposits are insured by the BIF,
some of the deposits acquired from previous acquisitions are insured by the
Savings Association Insurance Fund ("SAIF"). Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the U.S. Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations and to require reporting by
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk. The FDIC also has the authority to initiate enforcement actions
against banks, after giving the Superintendent an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged or is engaging in unsafe or unsound practices, or is in
an unsafe or unsound condition. The Banks are also subject to certain FRB
regulations for the maintenance of reserves in cash or in non-interest bearing
accounts, the effect of which is to increase the cost of funds.
During 2001, the Company's insurance premiums increased to $367 thousand
compared with $276 thousand in 2000, as a result of the deposits acquired during
2000. The FDIC has established a system for setting deposit insurance premiums
based upon the risks a particular bank or savings association poses to its
deposit insurance funds. Under the risk-based deposit insurance assessment
system, the FDIC assigns an institution to one of three capital categories based
on the institution's financial information, as of the reporting period ending
six months before the assessment period. The three capital categories are (1)
well capitalized, (2) adequately capitalized and (3) undercapitalized. The FDIC
also assigns an institution to supervisory subgroups within each capital group,
based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds, which may include information provided by the
institution's state supervisor.
An institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Under the final risk-based assessment system,
there are nine assessment risk classifications or combinations of capital groups
and supervisory subgroups, to which different assessment rates are applied.
Assessment rates for deposit insurance for both BIF and SAIF currently range
from 0 basis points to 27 basis points. The capital and supervisory subgroup to
which an institution is assigned by the FDIC is confidential and may not be
disclosed. A bank's rate of deposit insurance assessments will depend upon the
category and subcategory to which the bank is assigned by the FDIC. The FDIC is
required to maintain a specified ratio of reserves to insured deposits, and may
be required to increase its assessment in order to maintain this ratio. Any
increase in insurance assessments could have an adverse effect on earnings.
Under the Deposit Insurance Funds Act of 1996, the assessment base for the
payments on the bonds issued in the late 1980's by the Financing Corporation
("FICO") to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation was expanded to include, beginning January 1, 1997, the deposits of
institutions insured by the BIF. Until December 31, 1999, the rate of assessment
for BIF-assessable deposits was one-fifth of the rate imposed on deposits
insured by the SAIF. Full pro-rata sharing of the FICO bond payments commenced
January 1, 2000. The annual rate of assessments for the payments on the FICO
bonds is 0.00455%.
Regulatory Capital Requirements
The FRB and the FDIC have adopted risk-based capital guidelines for bank holding
companies and banks under their supervision. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations. FNFG and
the Banks are required to maintain certain levels of regulatory capital in
relation to regulatory risk-weighted assets. The ratio of such regulatory
capital to regulatory risk-weighted assets is referred to as the "risk-based
capital ratio." Risk-based capital ratios are determined by allocating assets
and specified off-balance sheet items to four risk-weighted categories ranging
from 0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk.
These guidelines divide capital into two tiers. The first tier ("Tier I")
includes common equity, retained earnings, certain non-cumulative perpetual
preferred stock (excluding auction rate issues) and minority interests in equity
accounts of consolidated subsidiaries, less goodwill and other intangible
assets. Supplementary ("Tier II") capital includes, among other items,
cumulative perpetual and long-term limited-life preferred stock, mandatory
convertible securities, certain hybrid capital instruments, term subordinated
debt and the allowance for credit and lease losses, subject to certain
limitations, less required deductions. Banks are required to maintain a total
risk-based capital ratio of 8%, of which at least 4% must be Tier I capital.
12
In addition, the FDIC has established regulations prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
regulations). These regulations provide for a minimum Tier I leverage ratio of
3% for banks that meet certain specified criteria, including that they have the
highest examination rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant. Banks experiencing or
anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
At December 31, 2001, FNFG and the Banks exceeded all minimum regulatory capital
requirements. The current requirements and the actual levels for FNFG and the
Banks are detailed in note 9 of "Notes to Consolidated Financial Statements"
filed herewith in Part II, Item 8, "Financial Statements and Supplementary
Data."
The federal banking agencies have promulgated regulations to implement the
system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances); "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%; and "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Federal law and
regulations also specify circumstances under which a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized). Based on the foregoing, FNFG and the Banks are classified as
"well capitalized" institutions at December 31, 2001.
Standards for Safety and Soundness
The federal banking agencies have adopted a final regulation and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement the safety and soundness standards required under federal law. The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The standards set forth in the Guidelines
address internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. The agencies also adopted additions to the
Guidelines that require institutions to examine asset quality and earnings
standards. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by federal law. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Limitations on Dividends and Other Capital Distributions
The FDIC has the authority to use its enforcement powers to prohibit a bank from
paying dividends if, in its opinion, the payment of dividends would constitute
an unsafe or unsound practice. Federal law also prohibits the payment of
dividends by a bank that will result in the bank failing to meet its applicable
capital requirements on a pro forma basis. Under New York law, the Banks are
prohibited from paying a dividend in excess of its income for the year and the
two preceding years without the approval of the Superintendent.
Activities and Investments of Insured State-Chartered Banks
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things, acquiring or retaining a majority interest in a subsidiary;
investing as a limited partner in a partnership the sole purpose of which is the
direct or indirect investment in the acquisition, rehabilitation, or new
construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank's total assets; acquiring
up to 10% of the voting stock of a company that solely provides or reinsures
directors', trustees', and officers' liability insurance coverage or bankers'
blanket bond group insurance coverage for insured depository institutions; and
acquiring or retaining the voting shares of a depository institution if certain
requirements are met.
13
Federal law and FDIC regulations permit certain exceptions to the foregoing
limitation. For example, certain state-chartered banks, such as the Banks, may
continue to invest in common or preferred stock listed on a National Securities
Exchange or the National Market System of NASDAQ, and in the shares of an
investment company registered under the Investment Company Act of 1940, as
amended. As of December 31, 2001, the Banks had $20.3 million of securities
pursuant to this exception.
Savings bank life insurance activities are permitted if (1) the FDIC does not
decide that such activities pose a significant risk to the applicable deposit
insurance fund, (2) the insurance underwriting is conducted through a division
that meets the definition of a separate department under FDIC regulations, and
(3) disclosures are made to the purchasers of life insurance policies and other
products that they are not insured by the FDIC, among other things.
Transactions with Affiliates
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a bank is any company or entity that controls, is
controlled by, or is under common control with the bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a bank and any companies that are controlled by such parent holding
company are affiliates of the bank. Generally, Section 23A limits the extent to
which the bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such bank's capital stock and
surplus, and contains an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus. The term
"covered transaction" includes the making of loans or other extensions of credit
to an affiliate; the purchase of assets from an affiliate; the purchase of, or
an investment in, the securities of an affiliate; the acceptance of securities
of an affiliate as collateral for a loan or extension of credit to any person;
or issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to or guarantees acceptances on letters of credit
issued on behalf of an affiliate. Section 23B requires that covered transactions
and a broad list of other specified transactions be on terms substantially the
same, or no less favorable, to the bank or its subsidiary as similar
transactions with nonaffiliates. Under Section 23A transactions with a bank in
which 80 percent or more of the voting shares are controlled by the company that
controls 80 percent or more shares of the voting shares of the member bank are
exempt from the collateral requirements of the regulation. Thus, transactions
between the Banks controlled by FNFG are exempt from the collateral requirements
of regulation 23A.
Holding Company Regulation
Federal Bank Holding Company Regulation. FNFG, as the sole shareholder of the
Banks, is a bank holding company that is subject to comprehensive regulation and
regular examinations by the FRB under the Bank Holding Company Act of 1956, as
amended (the "BHCA"), and the regulations of the FRB. The FRB also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to require that a holding company divest subsidiaries
(including its bank subsidiaries). In general, enforcement actions may be
initiated for violations of law and regulations and unsafe or unsound practices.
FNFG is subject to capital adequacy guidelines for bank holding companies (on a
consolidated basis) which are substantially similar to those of the FDIC for the
Banks.
Under FRB policy, a bank holding company must serve as a source of strength for
its subsidiary banks. Under this policy, the FRB may require, and has required
in the past, a holding company to contribute additional capital to an
undercapitalized subsidiary bank.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits
bank holding companies to engage in transactions involving interstate
acquisitions and mergers if the holding company and banking institution are
adequately capitalized. However, under the BHCA, a bank holding company must
obtain FRB approval before acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); acquiring all or
substantially all of the assets of another bank or bank holding company; or
merging or consolidating with another bank holding company.
14
Under the Federal Change in Bank Control Act, a prior notice must be submitted
to the FRB if any person or group acting in concert seeks to acquire 10% or more
of FNFG's common stock. Under the BHCA, any company would be required to obtain
prior approval from the FRB before obtaining control of FNFG, which is defined
to include the acquisition of 25% or more of any class of voting securities of
FNFG. In addition, a bank holding company, which does not qualify as a
"financial holding company" under the Gramm-Leach-Bliley Financial Services
Modernization Act (the "GLB Act"), is generally prohibited from engaging in, or
acquiring direct or indirect control of, any company engaged in non-banking
activities. One of the principal exceptions to the prohibition is for activities
found by the FRB to be so closely related to banking or managing or controlling
banks as to be permissible. Some of the principal activities that the FRB has
determined by regulation to be so closely related to banking as to be
permissible are the making or servicing of loans; performing certain data
processing services; providing discount brokerage services; acting as fiduciary,
investment or financial advisor; leasing personal or real property; making
investments in corporations or projects designed primarily to promote community
welfare; and acquiring a savings and loan association.
Bank holding companies that do qualify as a financial holding company may engage
in activities that are financial in nature or incidental to activities which are
financial in nature, including banking, securities underwriting, insurance (both
underwriting and agency) and merchant banking. Bank holding companies may
qualify to become a financial holding company if each of its depository
institution subsidiaries is "well-capitalized;" each of its depository
institution subsidiaries is "well-managed;" each of its depository institution
subsidiaries has at least a "satisfactory" Community Reinvestment Act ("CRA")
rating at its most recent examination; and the bank holding company has filed a
certification with the FRB that it elects to become a financial holding company.
During 2000, the FDIC and the New York State Insurance Department issued final
regulations to implement the consumer privacy provisions of the GLB Act. On July
1, 2001, compliance with such regulations became mandatory for all financial and
insurance institutions. The regulations require such institutions to disclose
their policies and practices to protect the privacy of consumers' nonpublic
personal financial and health information. During 2001, the Company implemented
a corporate-wide program designed to achieve and maintain compliance with the
consumer privacy regulations.
Bank holding companies and their subsidiary banks are also subject to the
provisions of the CRA. Under the terms of the CRA, the FRB (or other appropriate
bank regulatory agency) is required, in connection with its examination of a
bank, to assess such bank's record in meeting the credit needs of the
communities served by that bank, including low- and moderate- income
neighborhoods. Furthermore, such assessment is also required of any bank that
has applied, among other things, to merge or consolidate with or acquire the
assets or assume the liabilities of a federally-regulated financial institution,
or to open or relocate a branch office. In the case of a bank holding company
applying for approval to acquire a bank or bank holding company, the FRB will
assess the record of each subsidiary bank of the applicant bank holding company
in considering the application. The Banking Law contains provisions similar to
the CRA that are applicable to New York-chartered banks.
Bank holding companies are required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.
The FRB has issued a policy statement on the payment of cash dividends by bank
holding companies, which expresses the FRB's view that a bank holding company
should pay cash dividends only to the extent that the holding company's net
income for the past year is sufficient to cover both the cash dividends and a
rate of earning retention that is consistent with the holding company's capital
needs, asset quality and overall financial condition. The FRB also indicated
that it would be inappropriate for a company experiencing serious financial
problems to borrow funds to pay dividends. Furthermore, under the prompt
corrective action regulations adopted by the FRB, the FRB may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized".
15
New York State Bank Holding Company Regulation. In addition to the federal bank
holding company regulations, a bank holding company organized or doing business
in New York State also may be subject to regulation under the New York State
Banking Law. The term "bank holding company", for the purposes of the New York
State Banking Law, is defined generally to include any person, company or trust
that directly or indirectly either controls the election of a majority of the
directors or owns, controls or holds with power to vote more than 10% of the
voting stock of a bank holding company or, if the company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions. In general, a bank holding company
controlling, directly or indirectly, only one banking institution will not be
deemed to be a bank holding company for the purposes of the New York State
Banking Law. Under New York State Banking Law, the prior approval of the
Department is required before: (1) any action is taken that causes any company
to become a bank holding company; (2) any action is taken that causes any
banking institution to become or be merged or consolidated with a subsidiary of
a bank holding company; (3) any bank holding company acquires direct or indirect
ownership or control of more than 5% of the voting stock of a banking
institution; (4) any bank holding company or subsidiary thereof acquires all or
substantially all of the assets of a banking institution; or (5) any action is
taken that causes any bank holding company to merge or consolidate with another
bank holding company.
RISK FACTORS
In addition to the various risks and uncertainties discussed throughout this
Form 10-K, the Company is also subject to the following risk factors:
Potential Effects of Changes in Interest Rates and the Current Interest Rate
Environment
The results of operations and financial condition of the Company are
significantly affected by changes in interest rates. The Company's results of
operations are dependent on net interest income, which is the difference between
the interest income earned on interest-earning assets and the interest expense
paid on interest-bearing liabilities. Because as a general matter the Company's
interest-bearing liabilities reprice or mature more quickly than its
interest-earning assets, an increase in interest rates generally would result in
a decrease in average interest rate spread and net interest income. See Part II
Item 7A "Quantitative and Qualitative Disclosure About Market Risk."
Changes in interest rates also affect the value of the Company's
interest-earning assets and interest rate contracts. In particular the Company's
investment securities and interest rate swaps designated as cash flow hedges.
Generally, the value of investment securities fluctuates inversely with changes
in interest rates. At December 31, 2001, the securities portfolio totaled $693.9
million. Unrealized gains and losses on securities available for sale are
reported as a separate component of stockholders' equity, net of applicable
taxes, and amounted to $2.8 million at December 31, 2001. In general, the value
of the Company's interest rate swaps increase or decrease as interest rates
increase or decrease. Under these agreements, the Company pays an annual fixed
rate and receives a floating three-month U.S. Dollar LIBOR rate over a two-year
period. As of December 31, 2001, these agreements had a notional amount totaling
$20.0 million. Unrealized gains and losses on interest rate swaps designated as
cash flow hedges are reported as a separate component of stockholders' equity,
net of applicable taxes and amounted to an unrealized loss of $206 thousand at
December 31, 2001. Decreases in the fair value of the Company's securities
available for sale and interest rate swaps therefore could have an adverse
effect on stockholders' equity.
The Company is also subject to reinvestment risk relating to interest rate
movements. Changes in interest rates can affect the average life of loans and
mortgage related securities. Decreases in interest rates can result in increased
prepayments of loans and mortgage related securities, as borrowers refinance to
reduce borrowing costs. Under these circumstances, the Company is subject to
reinvestment risk to the extent that reinvestment of such prepayments can not be
made at rates that are comparable to the rates on maturing loans or securities.
Potential Effects if the Allowance For Credit Losses is not Sufficient
Our loan customers may not repay their loans according to their terms, and the
collateral securing the payment of these loans may be insufficient to pay any
remaining loan balance. We may experience significant loan losses, which could
have a material adverse effect on our operating results. We make various
assumptions and judgments about the collectibility of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate
and other assets serving as collateral for the repayment of many of our loans.
In determining the amount of the allowance for credit losses, we rely on an
allowance valuation model that considers a review of loans, our experience and
our evaluation of economic conditions. If actual results are materially
different from the assumptions made, our allowance for credit losses may not be
sufficient to cover losses inherent in our loan portfolio, resulting in
additions to our allowance. Material additions to our allowance would materially
decrease our net income.
16
Potential Effects if Economic Conditions Deteriorate
Our financial results may be adversely affected by changes in prevailing
economic conditions, including decreases in real estate values, changes in
interest rates which may cause a decrease in interest rate spreads, adverse
employment conditions, the monetary and fiscal policies of the federal
government and other significant external events. Because we have a significant
amount of real estate loans, decreases in real estate values could adversely
affect the value of property used as collateral. Adverse changes in the economy
may also have a negative effect on the ability of our borrowers to make timely
repayments of their loans, which would have an adverse impact on our earnings.
Minority Public Ownership and Certain Anti-Takeover Provisions
Voting Control of the Mutual Company. Under New York law, FNFG's Plan of
Reorganization from a Mutual Savings Bank to a Mutual Holding Company and Stock
Issuance Plan (the "Plan of Reorganization"), and governing corporate
instruments, as long as FNFG remains under the MHC structure, at least 51% of
FNFG's voting shares must be owned by the MHC. The MHC will be controlled by its
board of trustees, who will consist of persons who are members of the board of
directors of FNFG. The MHC will elect all members of the board of directors of
FNFG, and as a general matter, will control the outcome of all matters presented
to the stockholders of FNFG for resolution by vote, except for matters that
require a vote greater than a majority. The MHC, acting through its board of
trustees, will be able to control the business and operations of FNFG and its
subsidiaries and will be able to prevent any challenge to the ownership or
control of FNFG by stockholders other than the MHC.
Provisions in the Governing Instruments. In addition, certain provisions of
FNFG's certificate of incorporation and bylaws, particularly a provision
limiting voting rights, as well as certain federal and state regulations, assist
FNFG in maintaining its status as an independent publicly owned corporation.
These provisions provide for, among other things, supermajority voting,
staggered boards of directors, noncumulative voting for directors, limits on the
calling of special meetings of stockholders, and limits on the ability of
stockholders to vote common stock in excess of 5% of the issued and outstanding
shares (inclusive of shares issued to the MHC).
Dividend Waivers by the MHC
In connection with its approval of the reorganization, the FRB imposed a
condition requiring the MHC to obtain prior FRB approval before it may waive any
dividends paid by FNFG on its common stock. As of the date hereof, management
does not believe the FRB has given its approval to any waiver of dividends by
any mutual holding company that has requested its approval. To date the MHC has
not requested approval for or waived any dividends. If the MHC converts to
capital stock form in the future, assets held by the MHC, including cash held by
the MHC, would reduce the percentage of the converted company's shares of common
stock issued to stockholders.
17
ITEM 2. PROPERTIES
Both FNFG and First Niagara maintain their executive offices at an
Administrative Center, located at 6950 South Transit Road, Lockport, New York.
The Administrative Center, built in 1997, has 76,000 square feet of space and is
owned by First Niagara. In addition to its branch network, First Niagara leases
nine offices and owns one building that it utilizes for its non-banking
subsidiaries, back office operations, training and storage. The total square
footage for these facilities is approximately 99,000 square feet and are located
in Erie and Niagara Counties.
In addition to its branch network, Cayuga owns four office buildings in Cayuga
and Oneida Counties. The total square footage of these facilities is
approximately 66,000 square feet and is utilized for administrative offices,
back office operations and training.
In addition to its branch network, Cortland owns three buildings in Cortland
County that are utilized for administrative offices, back office operations and
storage. The total square footage of these facilities is approximately 30,000
square feet.
The Company, as of December 31, 2001, conducts its business through 37
full-service banking offices, 2 loan production offices and 67 ATM locations. Of
the 37 branches, 12 are located in Erie County, 5 each in Niagara, Cayuga and
Oneida Counties, 3 each in Cortland and Monroe Counties, 2 in Orleans County and
1 each in Oswego and Genesee Counties. Additionally, 24 of the branches are
owned and 13 are leased. The loan production offices are located in Rochester
and Ithaca and are leased.
At December 31, 2001, the Company's premises and equipment had an aggregate net
book value of approximately $40.2 million. See note 5 of the "Notes to
Consolidated Financial Statements" filed herewith in Part II, Item 8, "Financial
Statements and Supplementary Data" for further detail on the Company's premises
and equipment and operating leases. All of these properties are generally in
good condition and are appropriate for their intended use.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings other than immaterial
proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended December
31, 2001 to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of FNFG is traded under the symbol of FNFG on the NASDAQ
National Market. At March 11, 2002, FNFG had 25,944,112 shares of common stock
outstanding and had approximately 6,700 shareholders of record. During 2001, the
high and low sales price of the common stock was $17.90 and $10.75,
respectively. FNFG paid dividends of $0.36 per common share during the year
ended December 31, 2001. See additional information regarding the market price
and dividends paid filed herewith in Part II, Item 6, "Selected Financial Data."
18
ITEM 6. SELECTED FINANCIAL DATA
As of December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Dollars and share amounts in thousands)
Selected financial condition data:
Total assets ................................ $2,857,946 $2,624,686 $1,711,712 $1,508,734 $1,179,026
Securities available for sale:
Mortgage-backed ........................... 339,881 302,334 384,329 392,975 272,955
Other ..................................... 354,016 199,500 179,144 187,776 176,326
Securities held to maturity ................. -- -- -- -- 17,000
Loans, net .................................. 1,853,141 1,823,174 985,628 744,739 635,396
Deposits .................................... 1,990,830 1,906,351 1,113,302 1,060,897 995,621
Borrowings .................................. 559,040 429,567 335,645 142,597 33,717
Stockholders' equity (1) .................... $ 260,617 $ 244,540 $ 232,616 $ 263,825 $ 130,471
Treasury shares repurchased ................. -- 1,098 3,111 -- --
Common shares outstanding ................... 24,802 24,667 25,658 28,716 --
Ratio of stockholders' equity to total assets 9.12% 9.32% 13.59% 17.49% 11.07%
For the year ended December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(In thousands)
Selected operations data:
Interest income ............................. $ 178,368 $ 137,040 $ 107,814 $ 92,102 $ 82,363
Interest expense ............................ 99,352 76,862 57,060 47,966 44,978
---------- ---------- ---------- ---------- ----------
Net interest income ....................... 79,016 60,178 50,754 44,136 37,385
Provision for credit losses ................. 4,160 2,258 2,466 2,084 1,493
---------- ---------- ---------- ---------- ----------
Net interest income after provision ......... 74,856 57,920 48,288 42,052 35,892
Noninterest income .......................... 42,072 34,090 27,688 9,182 6,796
Noninterest expense ......................... 83,005 61,518 47,643 35,946(2) 25,178
---------- ---------- ---------- ---------- ----------
Income before income taxes .................. 33,923 30,492 28,333 15,288 17,510
Income taxes ................................ 12,703 10,973 9,893 4,906 6,259
---------- ---------- ---------- ---------- ----------
Net income .................................. $ 21,220 $ 19,519 $ 18,440 $ 10,382(2) $ 11,251
========== ========== ========== ============ ==========
As of and for the year ended December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Stock and related per share data:
Earnings per common share:
Basic ..................................... $ 0.86 $ 0.79 $ 0.69 $ -- $ --
Diluted ................................... 0.85 0.79 0.69 -- --
Cash dividends .............................. $ 0.36 $ 0.28 $ 0.14(3) $ 0.06 $ --
Dividend payout ratio ....................... 41.86% 35.44% 20.30%(3) 16.60% --
Book value .................................. $ 10.51 $ 9.91 $ 9.07 $ 9.19 $ --
Market price (NASDAQ:FNFG):
High ...................................... $ 17.90 $ 11.06 $ 11.13 $ 17.06 $ --
Low ....................................... 10.75 8.25 9.00 8.38 --
Close ..................................... 16.83 10.81 10.25 10.50 --
19
As of and for the year ended December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(Dollars in thousands)
Selected financial ratios and other data (4):
Performance ratios:
Return on average assets ...................... 0.79% 0.98% 1.13% 0.77%(2) 0.98%
Return on average equity ...................... 8.30 8.38 7.52 4.65(2) 9.16
Net interest rate spread ...................... 2.99 2.82 2.72 2.75 2.86
Net interest margin as a percent of interest-
earning assets .............................. 3.25 3.26 3.33 3.48 3.39
As a percentage of average assets:
Noninterest income (5) ...................... 1.62 1.76 1.67 0.68 0.51
Noninterest expense ......................... 3.10 3.09 2.93 2.68(2) 2.20
------- ------- ------- ------- -------
Net overhead ................................ 1.48 1.33 1.26 2.00(2) 1.69
Average interest-earning assets
to average interest-bearing liabilities .... 106.33 110.45 116.10 119.38 113.12
Efficiency ratio .............................. 68.50% 65.02% 61.11% 67.59%(2) 58.19%
Asset quality data:
Total non-accruing loans ...................... $11,480 $ 6,483 $ 1,929 $ 3,296 $ 3,047
Other non-performing assets ................... 665 757 1,073 589 223
Allowance for credit losses ................... 18,727 17,746 9,862 8,010 6,921
Net loan charge-offs .......................... $ 3,179 $ 735 $ 614 $ 995 $ 1,111
Total non-accruing loans to total loans ....... 0.61% 0.35% 0.19% 0.43% 0.47%
Total non-performing assets as percentage of
total assets ............................... 0.42 0.28 0.18 0.26 0.28
Allowance for credit losses to non-
accruing loans .............................. 163.13 273.73 511.27 243.02 227.14
Allowance for credit losses to total loans .... 1.00 0.96 0.99 1.06 1.08
Net charge-offs to average loans .............. 0.17% 0.06% 0.07% 0.15% 0.18%
Other data:
Number of full-service offices ................ 37 36 18 18 15
Full time equivalent employees ................ 919 930 625 402 357
20
2001 2000
------------------------------------------- -------------------------------------------
Fourth Third Second First Fourth Third Second First
quarter quarter quarter quarter quarter quarter quarter quarter
------- ------- ------- ------- ------- ------- ------- -------
(In thousands except per share amounts)
Selected Quarterly Data:
Interest income .................... $43,774 $44,880 $44,627 $45,087 $41,835 $35,410 $30,836 $28,959
Interest expense ................... 22,686 24,787 25,537 26,342 24,441 19,936 16,727 15,759
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ........... 21,088 20,093 19,090 18,745 17,394 15,474 14,109 13,200
Provision for credit losses ........ 1,150 1,110 860 1,040 743 544 554 417
------- ------- ------- ------- ------- ------- ------- -------
Net interest income
after provision ........... 19,938 18,983 18,230 17,705 16,651 14,930 13,555 12,783
Noninterest income ................. 11,112 10,171 10,257 10,532 9,578 8,703 8,333 7,476
Noninterest expense ................ 20,393 18,552 19,083 19,299 17,210 14,757 13,764 12,735
Amortization of goodwill
and other intangibles ......... 1,421 1,421 1,418 1,418 1,126 864 609 452
------- ------- ------- ------- ------- ------- ------- -------
Net income before
income taxes ............... 9,236 9,181 7,986 7,520 7,893 8,012 7,515 7,072
Income taxes ....................... 3,440 3,432 2,973 2,858 3,009 2,895 2,653 2,416
------- ------- ------- ------- ------- ------- ------- -------
Net income .................... $ 5,796 $ 5,749 $ 5,013 $ 4,662 $ 4,884 $ 5,117 $ 4,862 $ 4,656
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic ......................... $ 0.23 $ 0.23 $ 0.20 $ 0.19 $ 0.20 $ 0.21 $ 0.20 $ 0.18
Diluted ....................... 0.23 0.23 0.20 0.19 0.20 0.21 0.20 0.18
Market price (NASDAQ:FNFG):
High .......................... $ 17.45 $ 17.90 $ 15.99 $ 12.00 $ 11.06 $ 9.75 $ 10.16 $ 10.38
Low ........................... 15.20 12.76 10.75 10.75 8.75 8.50 9.00 8.25
Close ......................... 16.83 15.87 15.53 11.19 10.81 9.25 9.38 9.75
Cash Dividends ..................... $ 0.10 $ 0.09 $ 0.09 $ 0.08 $ 0.08 $ 0.07 $ 0.07 $ 0.06
- ----------
(1) Amounts prior to 1998 represent retained earnings and unrealized
gains/losses on securities available for sale only.
(2) During the second quarter of 1998, FNFG contributed $4.0 million, net of
applicable income taxes to the First Niagara Foundation. Noninterest
expense includes $6.8 million for the one-time contribution of cash and
common stock. The following presentation excludes the effect of the
contribution, and the earnings per share calculation includes proforma
earnings of $0.10 per share for the period January 1, 1998 through April
17, 1998. (Dollars in thousands except per share amounts):
As of December 31, 1998
-----------------------
Net income ................................... $ 14,366
Net income per share:
Basic .................................... $ 0.50
Diluted .................................. $ 0.50
Return on average assets ..................... 1.07%
Return on average equity ..................... 6.43%
As a percentage of average assets:
Noninterest expense ...................... 2.18%
Net overhead ............................. 1.50%
Efficiency ratio ............................. 54.90%
(3) The dividend declaration date for the third and fourth quarters of 1999
was scheduled during the fourth quarter of 1999 and first quarter of 2000,
respectively, which coincided with FNFG's Board of Director's review of
quarterly and/or yearly results. For 1999, three quarterly dividends were
declared.
(4) Averages presented are daily averages.
(5) Excluding net gain/loss on sale of securities available for sale.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following is an analysis of the financial condition and results of
operations of the Company, which should be read in conjunction with the
consolidated financial statements and related notes filed herewith in Part II,
Item 8, "Financial Statements and Supplementary Data." The Company's results of
operations are dependent primarily on net interest income, the provision for
credit losses, noninterest income and noninterest expenses. Additionally,
results of operations are significantly affected by general economic and
competitive conditions, particularly changes in interest rates, government
policies and actions of regulatory authorities.
ANALYSIS OF FINANCIAL CONDITION
Overview
Total assets increased to $2.86 billion at December 31, 2001 from $2.62 billion
at December 31, 2000. This $233.3 million, or 9%, increase was realized
primarily due to internal growth and the purchase of $155.0 million of U.S.
Treasury securities in late 2001. During 2001, the Company's emphasis on
commercial real estate and business loan ("commercial loan") originations was
partially offset by the Company's strategic initiative to hold less fixed rate
long-term residential mortgages. Accordingly, loans increased only slightly to
$1.87 billion at December 31, 2001 from $1.84 billion at December 31, 2000.
Total liabilities increased 9% from $2.4 billion at December 31, 2000 to $2.6
billion at December 31, 2001. Of this $217.2 million increase, approximately
$84.5 million was attributable to growth in deposits, while $140.0 million can
be attributed to the funding of the purchase of U.S. Treasury securities. During
2000, total assets increased 53% from $1.7 billion at December 31, 1999
primarily due to the acquisitions in 2000.
Lending Activities
Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Company's loan portfolio in dollar amounts and in
percentages as of the dates indicated.
At December 31,
---------------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ----------- -------
(Dollars in thousands)
Real estate loans:
One- to four-family ..... $ 980,638 52.44% $ 1,089,607 59.21% $ 609,742 61.55%
Home equity ............. 114,443 6.12 104,254 5.67 22,499 2.27
Multi-family ............ 133,439 7.13 111,668 6.07 74,652 7.54
Commercial .............. 259,457 13.87 217,759 11.83 120,758 12.19
Construction ............ 64,502 3.45 35,059 1.91 28,413 2.87
----------- ------ ----------- ------ ----------- ------
Total real estate loans 1,552,479 83.01 1,558,347 84.69 856,064 86.42
----------- ------ ----------- ------ ----------- ------
Consumer loans:
Mobile home ............. 23,436 1.25 22,987 1.25 25,957 2.62
Recreational vehicle .... 23,453 1.25 31,246 1.70 23,389 2.36
Vehicle ................. 80,795 4.32 71,044 3.85 24,289 2.45
Personal ................ 30,756 1.65 38,024 2.06 15,771 1.59
Home improvement ........ 7,314 0.39 8,973 0.49 7,983 0.81
Guaranteed education .... 15,131 0.81 14,242 0.77 12,564 1.27
Other consumer .......... 1,241 0.07 1,613 0.09 280 0.03
----------- ------ ----------- ------ ----------- ------
Total consumer loans .. 182,126 9.74 188,129 10.21 110,233 11.13
----------- ------ ----------- ------ ----------- ------
Commercial business loans ... 135,621 7.25 93,730 5.10 24,301 2.45
----------- ------ ----------- ------ ----------- ------
Total loans ........... 1,870,226 100.00% 1,840,206 100.00% 990,598 100.00%
----------- ====== ----------- ====== ----------- ======
Net deferred costs and
unearned discounts .... 1,642 714 4,892
Allowance for credit losses . (18,727) (17,746) (9,862)
----------- ----------- -----------
Total loans, net ...... $ 1,853,141 $ 1,823,174 $ 985,628
=========== =========== ===========
At December 31,
---------------------------------------------
1998 1997
--------------------- --------------------
Amount Percent Amount Percent
----------- ------- ----------- -------
(Dollars in thousands)
Real estate loans:
One- to four-family ..... $ 456,197 60.97% $ 392,846 61.47%
Home equity ............. 15,520 2.07 13,587 2.13
Multi-family ............ 72,672 9.71 74,049 11.59
Commercial .............. 98,693 13.19 77,217 12.08
Construction ............ 19,476 2.60 10,791 1.69
----------- ------ ----------- ------
Total real estate loans 662,558 88.54 568,490 88.96
----------- ------ ----------- ------
Consumer loans:
Mobile home ............. 24,983 3.34 22,747 3.56
Recreational vehicle .... 8,906 1.19 1,553 0.24
Vehicle ................. 8,741 1.17 7,306 1.14
Personal ................ 15,642 2.09 15,157 2.37
Home improvement ........ 8,131 1.09 7,609 1.19
Guaranteed education .... 12,314 1.65 10,975 1.72
Other consumer .......... 342 0.05 321 0.05
----------- ------ ----------- ------
Total consumer loans .. 79,059 10.58 65,668 10.27
----------- ------ ----------- ------
Commercial business loans ... 6,616 0.88 4,893 0.77
----------- ------ ----------- ------
Total loans ........... 748,233 100.00% 639,051 100.00%
----------- ====== ----------- ======
Net deferred costs and
unearned discounts .... 4,516 3,266
Allowance for credit losses . (8,010) (6,921)
----------- -----------
Total loans, net ...... $ 744,739 $ 635,396
=========== ===========
22
Total loans increased to $1.87 billion at December 31, 2001 from $1.84 billion
at December 31, 2000. This $30.0 million, or 2%, increase is mainly attributable
to the Company's increased emphasis on commercial lending, which caused
commercial loans to increase $132.6 million, or 29% during 2001. This is
consistent with the Company's strategic initiative to increase the amount of
higher yielding loans in its loan portfolio to improve net interest margins and
to diversify the loan portfolio to become more commercial bank-like.
Additionally, home equity loans increased $10.2 million, or 10%, from December
31, 2000 to December 31, 2001. These increases were almost entirely offset by
the decrease in one- to four-family residential mortgage loans of $109.0 million
to $980.6 million at December 31, 2001 from $1.09 billion at December 31, 2000.
This decrease was a result of the Company's decision to sell the majority of
fixed rate residential mortgage loans originated in 2001, which should benefit
the Company during periods of higher interest rates. The Company remains
committed to being a strong originator of residential mortgages. Residential
mortgage originations increased to $201.6 million for 2001 from $158.2 million
for 2000.
During 2000, total loans increased $849.6 million, or 86%, from $990.6 million
at December 31, 1999. This increase was primarily due to the acquisitions in
2000, which added approximately $693.0 million of loans to the portfolio, and
commercial loan growth.
Allocation of Allowance for Credit Losses. The following table sets forth the
allocation of the allowance for credit losses by loan category at the dates
indicated.
At December 31,
------------------------------------------------------------------------------------------
2001 2000 1999
------------------------- ----------------------- -------------------------
Percent Percent Percent
of loans of loans of loans
Amount of in each Amount of in each Amount of in each
allowance category allowance category allowance category
for credit to total for credit to total for credit to total
losses loans losses loans losses loans
---------- --------- ---------- ------- ----------- ---------
(Dollars in thousands)
One- to four-family................. $1,996 53% $3,248 59% $1,522 62%
Home equity......................... 614 6 885 6 352 2
Commercial real estate and
multi-family ..................... 4,824 24 4,027 19 1,944 22
Consumer ........................... 3,379 10 3,014 11 1,739 12
Commercial business................. 4,883 7 4,307 5 1,790 2
Unallocated......................... 3,031 - 2,265 - 2,515 -
------- --- ------- --- ------ ---
Total............................ $18,727 100% $17,746 100% $9,862 100%
======= === ======= === ====== ===
At December 31,
---------------------------------------------------------
1998 1997
------------------------ -----------------------
Percent Percent
of loans of loans
Amount of in each Amount of in each
allowance category allowance category
for credit to total for credit to total
losses loans losses loans
---------- -------- ---------- -------
(Dollars in thousands)
One- to four-family................. $1,155 61% $ 955 62%
Home equity......................... 237 2 204 2
Commercial real estate and
multi-family ..................... 1,809 25 1,578 24
Consumer ........................... 1,177 11 1,040 11
Commercial business................. 599 1 666 1
Unallocated......................... 3,033 - 2,478 -
------ --- ------ ---
Total............................ $8,010 100% $6,921 100%
====== === ====== ===
23
Overall the allowance for credit losses increased $981 thousand, or 6%, from
December 31, 2000 to December 31, 2001. This increase can primarily be
attributed to the increase in delinquent and non-accrual commercial loans
experienced by the Company in 2001. Additionally, the Company increased its
unallocated reserve as a result of the economic downturn in 2001, the
significant growth in commercial loans and the trend observed near the end of
2001 of increased classified and non-accruing loans. These increases were
partially offset by a decrease in the amount of allowance for credit losses
allocated to one- to four-family residential loans primarily due to the decline
in the aggregate balance of these loans. The Company's allowance for credit
losses increased as a percentage of total loans to 1.00% at December 31, 2001,
compared to 0.96% at December 31, 2000.
While management uses 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 and may
require the Company to recognize additional provisions based on their judgement
of information available to them at the time of their examination. Management
believes that the allowance for credit losses is adequate to absorb credit
losses from existing loans.
Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and other non-performing assets.
At December 31,
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(Dollars in thousands)
Non-accruing loans (1):
Real estate:
One- to four-family ................. $ 4,833 $ 3,543 $ 974 $ 1,459 $ 1,126
Home equity ......................... 491 641 130 13 --
Commercial and multi-family ......... 2,402 926 640 1,706 1,364
Consumer ............................... 510 515 33 62 235
Commercial business .................... 3,244 858 152 56 322
------- ------- ------- ------- -------
Total non-accruing loans ................. 11,480 6,483 1,929 3,296 3,047
------- ------- ------- ------- -------
Non-performing assets:
Other real estate owned (2) ............ 665 757 1,073 589 223
------- ------- ------- ------- -------
Total non-performing assets (3) .......... $12,145 $ 7,240 $ 3,002 $ 3,885 $ 3,270
======= ======= ======= ======= =======
Total non-performing assets as a
percentage of total assets (3) ......... 0.42% 0.28% 0.18% 0.26% 0.28%
======= ======= ======= ======= =======
Total non-accruing loans to
total loans (3) ........................ 0.61% 0.35% 0.19% 0.43% 0.47%
======= ======= ======= ======= =======
(1) Loans generally are placed on non-accrual status when they become 90 days
or more past due or if they have been identified by the Company as
presenting uncertainty with respect to the collectibility of interest or
principal.
(2) Other real estate owned balances are shown net of related allowances.
(3) Excludes loans that are 90 days or more past due but are still accruing
interest, which is primarily comprised of loans that have matured and the
Company has not formally extended the maturity date. Regular principal and
interest payments continue in accordance with the original terms of the
loan. The Company continued to accrue interest on these loans as long as
regular payments received were less than 90 days delinquent. These loans
totaled $510,000, $221,000, $377,000 and $180,000 at December 31, 2001,
2000, 1999 and 1998, respectively. There were no such loans at December
31, 1997.
Nonaccrual loans increased $5.0 million from December 31, 2000 to December 31,
2001. This increase was primarily attributable to the higher level of commercial
loans at the end of 2001 compared to 2000 resulting from the Company's strategy
of transforming its loan portfolio to become more commercial bank-like. Overall,
management remains confident in the Company's credit quality but expects that
nonaccrual loans could continue to increase as the Company's commercial loans
increase and as a result of the slowing economy. The Company's ratio of
non-accruing loans to total loans increased to 0.61% at December 31, 2001 from
0.35% at December 31, 2000, but still remains consistent with thrift industry
averages, even though the Company has a higher level of commercial loans than
many thrifts.
24
Investing Activities
Securities Portfolio. At December 31, 2001, all of the Company's security
investments were classified as available for sale in order to maintain
flexibility in satisfying future investment and lending requirements. The
following table sets forth certain information with respect to the amortized
cost and fair values of the Company's portfolio as of the dates indicated.
At December 31,
--------------------------------------------------------------------------------------
2001 2000 1999
------------------------- -------------------------- -------------------------
Amortized Fair Amortized Fair Amortized Fair
cost value cost value cost value
---------- ---------- ---------- ---------- ---------- ----------
Investment securities available for sale: (Dollars in thousands)
Debt securities:
U.S. Treasury ....................... $ 164,992 $ 165,120 $ 37,970 $ 38,216 $ 47,446 $ 47,406
U.S. government agencies ............ 79,419 81,016 56,379 56,928 14,976 14,739
Corporate ........................... 27,264 27,026 8,209 8,193 6,985 6,996
States and political
subdivisions ...................... 26,696 27,208 23,548 23,948 2,449 2,336
---------- ---------- ---------- ---------- ---------- ----------
Total debt securities ............... 298,371 300,370 126,106 127,285 71,856 71,477
---------- ---------- ---------- ---------- ---------- ----------
Asset-backed securities ................. 28,062 28,850 41,783 42,007 85,768 84,133
Equity securities ....................... 21,530 20,325 23,547 25,764 19,028 23,534
Other securities ........................ 4,453 4,471 4,453 4,444 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total investment
securities ........................ $ 352,416 $ 354,016 $ 195,889 $ 199,500 $ 176,652 $ 179,144
========== ========== ========== ========== ========== ==========
Average remaining life of
investment securities (1) ............ 2.09 years 3.75 years 2.79 years
========== ========== ==========
Mortgage-backed securities:
FHLMC ............................... $ 37,081 $ 38,339 $ 48,891 $ 49,526 $ 66,930 $ 65,299
GNMA ................................ 16,094 16,799 22,645 23,016 15,246 15,323
FNMA ................................ 18,213 19,169 18,668 19,447 13,379 13,074
CMOs ................................ 265,489 265,574 215,181 210,345 306,339 290,633
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed
securities ........................ $ 336,877 $ 339,881 $ 305,385 $ 302,334 $ 401,894 $ 384,329
========== ========== ========== ========== ========== ==========
Average remaining life of
mortgage-backed securities ............ 4.82 years 6.41 years 5.19 years
========== ========== ==========
Net unrealized gains (losses)
on available for sale
securities ............................. $ 4,604 $ 560 $ (15,073)
---------- ---------- ----------
Total securities
available for sale ................ $ 693,897 $ 693,897 $ 501,834 $ 501,834 $ 563,473 $ 563,473
========== ========== ========== ========== ========== ==========
Average remaining life
of investment securities
available for sale(1).................. 3.48 years 5.46 years 4.68 years
========== ========== ==========
(1) Average remaining life does not include common stock or other securities
available for sale and is computed utilizing estimated maturities and
prepayment assumptions.
The Company's investment securities available for sale increased to $693.9
million at December 31, 2001 from $501.8 million at December 31, 2000. This
$192.1 million, or 38%, increase primarily resulted from the purchase of $155.0
million of U.S. Treasury securities in late 2001 in order to maintain the
Company's thrift status for New York State tax purposes. Additionally,
investment securities increased due to the excess funds generated from the sale
and prepayment of fixed rate residential real estate loans during 2001 and an
increase in deposits. These excess funds were invested in shorter-term
investments in order to reduce the Company's interest rate risk, which caused
the average remaining life of investment securities to decrease to 3.48 years at
December 31, 2001. Additionally, the Company's unrealized gain on investment
securities increased $4.0 million during 2001 mainly due to the declining
interest rate environment, which caused the Company's fixed income securities to
appreciate in value.
During 2000, securities available for sale decreased slightly from $563.5
million at December 31, 1999 as the sale and maturity of securities, used to
fund the acquisitions and expanding loan portfolio, exceeded the investment
securities acquired of $128.4 million.
25
Funding Activities
Deposits. The following tables set forth information regarding the average daily
balance and rate of deposits by type for the years indicated.
For the year ended December 31,
-------------------------------------------------------------------
2001 2000
------------------------------ ---------------------------------
Percent Percent
of total Weighted of total Weighted
Average average average Average average average
balance deposits rate balance deposits rate
---------- -------- ------- ---------- -------- --------
(Dollars in thousands)
Money market accounts ............. $ 391,745 20.10% 3.66% $ 295,588 21.56% 5.02%
Savings accounts .................. 417,256 21.41 2.62 338,475 24.69 2.77
NOW accounts ...................... 153,373 7.87 1.01 116,190 8.48 1.02
Noninterest-bearing accounts ...... 90,023 4.62 -- 46,799 3.41 --
Mortgagors' payments held in escrow 19,198 0.98 1.71 14,959 1.09 1.74
---------- ------ ---------- ------
Total ........................... 1,071,595 54.98 2.53 812,011 59.23 3.16
---------- ------ ---------- ------
Certificates of deposit:
Less than 6 months ................ 342,596 17.58 -- 201,279 14.67 --
Over 6 through 12 months .......... 241,709 12.40 -- 168,686 12.31 --
Over 12 through 24 months ......... 100,549 5.16 -- 83,437 6.09 --
Over 24 months .................... 34,295 1.76 -- 18,046 1.32 --
Over $100,000 ..................... 158,279 8.12 -- 87,412 6.38 --
---------- ------ ---------- ------
Total certificates of deposit ... 877,428 45.02 5.39 558,860 40.77 5.47
---------- ------ ---------- ------
Total average deposits .......... $1,949,023 100.00% 3.82% $1,370,871 100.00% 4.10%
========== ====== ========== ======
For the year ended December 31,
---------------------------------
1999
--------------------------------
Percent
of total Weighted
Average average average
balance deposits rate
---------- -------- --------
(Dollars in thousands)
Money market accounts ............. $ 221,800 20.44% 4.38%
Savings accounts .................. 302,583 27.88 3.01
NOW accounts ...................... 84,828 7.82 1.40
Noninterest-bearing accounts ...... 31,921 2.94 --
Mortgagors' payments held in escrow 10,834 1.00 1.79
---------- ------
Total ........................... 651,966 60.08 3.10
---------- ------
Certificates of deposit:
Less than 6 months ................ 164,474 15.16 --
Over 6 through 12 months .......... 107,122 9.87 --
Over 12 through 24 months ......... 76,627 7.06 --
Over 24 months .................... 15,248 1.41 --
Over $100,000 ..................... 69,697 6.42 --
---------- ------
Total certificates of deposit ... 433,168 39.92 5.12
---------- ------
Total average deposits .......... $1,085,134 100.00% 3.91%
========== ======
Total deposits at December 31, 2001 were $1.99 billion, an increase of $84.5
million, or 4%, when compared to the $1.91 billion of deposits at December 31,
2000. This increase was generally across all product lines and was a result of
the Company focusing on increasing its customer base, which included the opening
of its 37th branch in 2001, and a general increase in deposits experienced by
most banks in 2001. Additionally, noninterest-bearing deposits increased $23.7
million during 2001 primarily due to an increase in commercial business.
During 2000, total deposits increased $793.0 million, or 71%, when compared to
the $1.11 billion of deposits at December 31, 1999. This increase was primarily
the result of the three bank acquisitions and opening of two branch locations
during 2000. The bank acquisitions contributed $732.7 million of funding through
deposits.
26
Borrowings.
The following table sets forth certain information as to the Company's
borrowings for the years indicated.
For the year ended December 31,
------------------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Year end balance:
FHLB advances .................................... $315,416 $294,876 $224,697
Reverse repurchase agreements .................... 235,124 118,691 110,948
Loan payable to First Niagara Financial Group, MHC 6,000 6,000 --
Commercial bank loan ............................. 2,500 10,000 --
-------- -------- --------
Total borrowings ............................. $559,040 $429,567 $335,645
======== ======== ========
Maximum balance:
FHLB advances .................................... $315,416 $314,043 $224,697
Reverse repurchase agreements .................... 235,124 137,365 111,948
Loan payable to First Niagara Financial Group, MHC 6,000 6,000 --
Commercial bank loan ............................. 10,000 10,000 --
Average balance:
FHLB advances .................................... $277,879 $224,014 $167,279
Reverse repurchase agreements .................... 136,452 121,339 94,236
Loan payable to First Niagara Financial Group, MHC 6,000 967 --
Commercial bank loan ............................. 5,212 1,639 --
Year end weighted average interest rate:
FHLB advances .................................... 5.01% 6.05% 5.81%
Reverse repurchase agreements .................... 3.97% 5.77% 5.53%
Loan payable to First Niagara Financial Group, MHC 2.86% 9.50% --
Commercial bank loan ............................. 3.37% 8.12% --
The Company's borrowed funds increased 30% to $559.0 million at December 31,
2001 from $429.6 million at December 31, 2000. This $129.5 million increase was
almost exclusively attributable to the $140.0 million of FHLB advances and
reverse repurchase agreements utilized to purchase U.S. Treasury securities as
discussed earlier. Excluding these funds, borrowings decreased $10.5 million as
the cash on hand, increase in deposits and sale and maturity of investment
securities and loans were more than adequate to meet the operational funding
needs of the Company. During 2001, the Company replaced approximately $40.0
million of short-term borrowings with longer-term borrowings. This decision was
made as part of the Company's asset/liability management strategy, which should
provide benefits to the Company in periods of higher interest rates. As a
result, excluding the FHLB advances and reverse repurchase agreements used to
fund the purchase of U.S. Treasury securities, short-term borrowings decreased
$48.8 million during 2001, while long-term borrowings increased $38.3 million.
During 2000, borrowings increased $93.9 million from $335.6 million at December
31, 1999. This 28% increase was almost exclusively attributable to the
acquisition of the three banks during 2000.
Equity Activities
The increase in stockholders' equity of $16.1 million, or 7%, to $260.6 million
at December 31, 2001 was primarily attributable to net income of $21.2 million.
Additionally, the Company's accumulated other comprehensive income increased
$2.2 million primarily as a result of the increase in the unrealized gain/loss
on securities available for sale. These increases were partially offset by the
payment of dividends of $9.0 million during 2001. During 2001, the Company did
not repurchase any shares of its common stock as previously available capital
was utilized to fund acquisitions and treasury stock repurchases in 2000 and
1999. During 2000, stockholders' equity increased $11.9 million as a result of
net income and the appreciation of investment securities, partially offset by
the payment of dividends and repurchase of treasury stock.
27
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31,
2000
The following table shows the income and expense amounts attributable to the
Cayuga, Cortland, NIA and Allied acquisitions (collectively "the acquisitions")
during 2001 and 2000, and illustrates the effect they had on the Company's
consolidated statements of income for the years indicated. The results of
operations from the acquired companies are included since the effective date of
the respective acquisition (in thousands).
For the year ended December 31,
-------------------------------
2001 (1) 2000 (2) Change
-------- -------- --------
Interest income:
Loans ................................... $ 48,972 $ 13,162 $ 35,810
Investment securities ................... 7,688 2,033 5,655
Other ................................... 1,098 286 812
-------- -------- --------
Total interest income ............. 57,758 15,481 42,277
Interest expense:
Deposits ................................ 25,659 6,982 18,677
Borrowings .............................. 4,915 1,194 3,721
-------- -------- --------
Total interest expense ........... 30,574 8,176 22,398
Net interest income .............. 27,184 7,305 19,879
Provision for credit losses ................ 1,870 221 1,649
-------- -------- --------
Net interest income after
provision for credit losses . 25,314 7,084 18,230
-------- -------- --------
Noninterest income:
Banking service charges and fees ........ 2,663 672 1,991
Lending and leasing income .............. 1,415 309 1,106
Insurance services and fees ............. 1,133 12 1,121
Bank-owned life insurance income ........ 370 46 324
Annuity and mutual fund commissions ..... 191 22 169
Investment and security gains ........... 33 156 (123)
Investment and fiduciary services income 1,456 965 491
Other ................................... 420 75 345
-------- -------- --------
Total noninterest income ......... 7,681 2,257 5,424
Noninterest expense:
Salaries and employee benefits .......... 12,204 2,831 9,373
Occupancy and equipment ................. 2,173 522 1,651
Technology and communications ........... 2,293 650 1,643
Marketing and advertising ............... 478 116 362
Goodwill amortization ................... 3,455 950 2,505
Other ................................... 4,658 958 3,700
-------- -------- --------
Total noninterest expense ........ 25,261 6,027 19,234
Income before income taxes ....... 7,734 3,314 4,420
Income tax expense ......................... 3,606 1,511 2,095
-------- -------- --------
Net income ....................... $ 4,128 $ 1,803 $ 2,325
======== ======== ========
(1) Includes income from Allied, Cayuga, Cortland and NIA since January 1,
2001.
(2) Includes income from Cayuga since November 3, 2000, Cortland since July 7,
2000 and NIA since May 31, 2000. FNFG merged Albion's two branch locations
into First Niagara's branch network upon acquisition. Therefore, separate
income and expense amounts are not available for Albion and were excluded
from the analysis above. The effects of not including Albion is not deemed
material.
Net Income
For the year ended December 31, 2001, net income increased 9% to $21.2 million,
or $0.85 per diluted share as compared to $19.5 million, or $0.79 per diluted
share for 2000. Net income represented a return on average assets in 2001 of
0.79% compared to 0.98% in 2000 and a return on average equity in 2001 of 8.30%
compared to 8.38% in 2000.
28
Net Interest Income
Average Balance Sheet. The following table sets forth certain information
relating to the Company's consolidated statements of financial condition and
reflects the average yields earned on interest-earning assets, as well as the
average rates paid on interest-bearing liabilities for the years indicated. Such
yields and rates were derived by dividing interest income or expense by the
average balances of interest-earning assets or interest-bearing liabilities,
respectively, for the years shown. No tax equivalent adjustments were made. All
average balances are average daily balances. Non-accruing loans have been
excluded from the yield calculations in this table.
For the year ended December 31,
--------------------------------------------------------------------------------
2001 2000
--------------------------------------- --------------------------------------
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 ........................ $ 35,735 $ 1,346 3.77% $ 12,312 $ 771 6.26%
Investment securities (1) ................. 206,415 10,888 5.27 159,464 8,804 5.52
Mortgage-backed securities (1) ............ 312,863 20,138 6.44 361,890 24,045 6.64
Loans (2) ................................. 1,845,812 144,274 7.82 1,288,978 101,825 7.90
Other interest-earning assets (3) ......... 28,342 1,722 6.08 24,186 1,595 6.59
------------- --------- ---- ------------- --------- ----
Total interest-earning assets ........... 2,429,167 $ 178,368 7.34% 1,846,830 $ 137,040 7.42%
------------- --------- ---- ------------- --------- ----
Allowance for credit losses ................. (18,469) (12,766)
Other noninterest-earning assets (4) (5) .... 268,633 157,968
------------- -------------
Total assets ............................ $ 2,679,331 $ 1,992,032
============= =============
Interest-bearing liabilities:
Savings accounts .......................... $ 417,256 $ 10,918 2.62% $ 338,475 $ 9,380 2.77%
Interest-bearing checking ................. 545,118 15,878 2.91 411,778 16,038 3.89
Certificates of deposit ................... 877,428 47,284 5.39 558,860 30,593 5.47
Mortgagors' payments held in escrow ....... 19,198 329 1.71 14,959 261 1.74
Borrowed funds ............................ 425,543 24,943 5.86 347,959 20,590 5.92
------------- --------- ---- ------------- --------- ----
Total interest-bearing liabilities ...... 2,284,543 $ 99,352 4.35% 1,672,031 $ 76,862 4.60%
------------- --------- ---- ------------- --------- ----
Noninterest-bearing deposits ................ 90,023 46,799
Other noninterest-bearing liabilities ....... 49,128 40,253
------------- -------------
Total liabilities ....................... 2,423,694 1,759,083
Stockholders' equity (4) .................... 255,637 232,949
------------- -------------
Total liabilities and stockholders'
equity ................................ $ 2,679,331 $ 1,992,032
============= =============
Net interest income ......................... $ 79,016 $ 60,178
========= =========
Net interest rate spread .................... 2.99% 2.82%
==== ====
Net earning assets .......................... $ 144,624 $ 174,799
============= =============
Net interest income as a percentage of
average interest-earning assets ........... 3.25% 3.26%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities ... 106.33% 110.45%
====== ======
For the year ended December 31,
-------------------------------------
1999
-------------------------------------
Average Interest
outstanding earned/ Yield/
balance paid rate
----------- --------- ------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold ........................ $ 21,804 $ 1,104 5.06%
Investment securities (1) ................. 191,222 10,972 5.74
Mortgage-backed securities (1) ............ 422,952 27,004 6.38
Loans (2) ................................. 867,630 67,398 7.77
Other interest-earning assets (3) ......... 22,750 1,336 5.87
----------- --------- ----
Total interest-earning assets ........... 1,526,358 $ 107,814 7.06%
----------- --------- ----
Allowance for credit losses ................. (9,160)
Other noninterest-earning assets (4) (5) .... 109,851
-----------
Total assets ............................ $ 1,627,049
===========
Interest-bearing liabilities:
Savings accounts .......................... $ 302,583 $ 9,098 3.01%
Interest-bearing checking ................. 306,628 10,908 3.56
Certificates of deposit ................... 433,168 22,193 5.12
Mortgagors' payments held in escrow ....... 10,834 194 1.79
Borrowed funds ............................ 261,515 14,667 5.61
----------- --------- ----
Total interest-bearing liabilities ...... 1,314,728 $ 57,060 4.34%
----------- --------- ----
Noninterest-bearing deposits ................ 31,921
Other noninterest-bearing liabilities ....... 35,301
-----------
Total liabilities ....................... 1,381,950
Stockholders' equity (4) .................... 245,099
-----------
Total liabilities and stockholders'
equity ................................ $ 1,627,049
===========
Net interest income ......................... $ 50,754
=========
Net interest rate spread .................... 2.72%
====
Net earning assets .......................... $ 211,630
===========
Net interest income as a percentage of
average interest-earning assets ........... 3.33%
====
Ratio of average interest-earning assets
to average interest-bearing liabilities ... 116.10%
======
(1) Amounts shown are at amortized cost.
(2) Net of deferred costs, unearned discounts and non-accruing loans.
(3) Includes FHLB 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 and non-accruing loans.
Net interest income rose 31%, to $79.0 million for 2001 from $60.2 million for
2000. However, the Company's net interest margin decreased slightly to 3.25% for
2001 from 3.26% for 2000. The narrowing of the net interest margin resulted
primarily from a $30.2 million decline in average net earning assets to $144.6
million in 2001 as funds previously available for investment were utilized to
fund the Company's acquisition activity in 2000. This decrease in average net
earning assets was almost entirely offset by a 17 basis point increase in net
interest rate spread, as the Company's interest bearing liabilities repriced
faster than its interest earning assets during the declining rate environment in
2001. Additionally, the Company's net interest margin benefited in 2001 from the
redeployment of funds from lower yielding residential mortgages into higher
yielding commercial loans and the 92% increase in noninterest bearing deposits
due to increased commercial business.
29
Rate/Volume Analysis. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
For the year ended December 31,
---------------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
-------------------------------- ---------------------------------
Increase/(decrease) Increase/(decrease)
due to Total due to Total
-------------------- increase -------------------- increase
Volume Rate (decrease) Volume Rate (decrease)
-------- -------- ---------- -------- -------- ----------
Interest-earning assets: (in thousands)
Federal funds sold ....................... $ 983 $ (408) $ 575 $ (554) $ 221 $ (333)
Investment securities .................... 2,499 (415) 2,084 (1,766) (402) (2,168)
Mortgage-backed securities ............... (3,185) (722) (3,907) (4,022) 1,063 (2,959)
Loans .................................... 43,488 (1,039) 42,449 33,266 1,161 34,427
Other interest-earning assets ............ 258 (131) 127 88 171 259
-------- -------- -------- -------- -------- --------
Total interest-earning assets ......... 44,043 (2,715) 41,328 27,012 2,214 29,226
======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Savings accounts ......................... 2,075 (537) 1,538 1,028 (746) 282
Interest-bearing checking ................ 4,464 (4,624) (160) 4,019 1,111 5,130
Certificates of deposit .................. 17,169 (478) 16,691 6,796 1,604 8,400
Mortgagors' payments held in escrow ...... 73 (5) 68 72 (5) 67
Borrowed funds ........................... 4,554 (201) 4,353 5,077 846 5,923
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities .... $ 28,335 $ (5,845) $ 22,490 $ 16,992 $ 2,810 $ 19,802
======== ======== ======== ======== ======== ========
Net interest income ................ $ 18,838 $ 9,424
======== ========
Interest income rose to $178.4 million in 2001 from $137.0 million in 2000. This
$41.3 million, or 30%, increase was a result of growth in the Company's average
interest-earning assets of $582.3 million partially offset by a decrease in the
interest rate earned on those assets during 2001 of 8 basis points. Interest
income on loans increased $42.4 million to $144.3 million for 2001 from $101.8
million for 2000. This increase resulted from a $556.8 million increase in
average loans outstanding during 2001, due to the bank acquisitions in 2000 and
growth in commercial loans. Offsetting this increase was an 8 basis point
decrease in the average yield earned on loans caused by the low interest rate
environment in 2001 partially offset by the change in the Company's loan
portfolio composition to higher yielding commercial loans. Interest earned on
investment securities decreased $1.8 million during 2001 primarily due to the
prepayments received on mortgage backed securities and the sale of
mortgage-backed securities in the second half of 2000 to fund acquisitions,
which caused the average balance on those investments to decrease $49.0 million.
The 2000 bank acquisitions added approximately $42.3 million of additional
interest income in 2001 compared to 2000, primarily from loans acquired and
internal growth.
Interest expense increased to $99.4 million for 2001 from $76.9 million for
2000. This $22.5 million, or 29%, increase is primarily attributable to the
increase in average interest-bearing liabilities of $612.5 million partially
offset by a decrease in the interest rate paid on those liabilities of 25 basis
points in 2001. Interest expense on deposits increased $18.1 million to $74.4
million for 2001 from $56.3 million for 2000. This resulted from a $534.9
million increase in average interest bearing deposits outstanding during 2001,
mainly due to the bank acquisitions in 2000 and internal growth, partially
offset by a decrease in the average rate paid on those deposits over the same
period. Interest expense on borrowed funds increased to $24.9 million for the
year ended December 31, 2001, compared to $20.6 million for the same period in
2000. This was a result of an increase in the average balance of borrowed funds
of $77.6 million in 2001 resulting from the bank acquisitions in 2000, partially
offset by a 6 basis point decrease in the average rate paid on those borrowings
over the same period. This decline in the rate paid on deposits and borrowings
can be attributed to the lower interest rate environment during 2001. The 2000
bank acquisitions added approximately $22.4 million of additional interest
expense in 2001 compared to 2000, primarily from deposits acquired and internal
growth.
30
Provision for Credit Losses
The following table sets forth the analysis of the allowance for credit losses,
including charge-off and recovery data, for the years indicated.
For the year ended December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in thousands)
Balance at beginning of year ........... $ 17,746 $ 9,862 $ 8,010 $ 6,921 $ 6,539
Charge-offs:
Real estate:
One- to four- family .............. 382 175 101 14 46
Home equity ....................... 158 28 35 -- --
Multi-family ...................... -- 53 84 177 173
Commercial ........................ 519 78 62 581 198
Consumer ............................. 1,571 534 447 428 388
Commercial business .................. 1,441 204 6 52 557
-------- -------- -------- -------- --------
Total ........................... 4,071 1,072 735 1,252 1,362
-------- -------- -------- -------- --------
Recoveries:
Real estate:
One- to four- family .............. 30 22 -- -- --
Home equity ....................... -- 13 -- -- --
Multi-family ...................... -- 30 37 -- 149
Commercial ........................ 268 1 4 155 21
Consumer ............................. 425 224 80 98 81
Commercial business .................. 169 47 -- 4 --
-------- -------- -------- -------- --------
Total ........................... 892 337 121 257 251
-------- -------- -------- -------- --------
Net charge-offs ........................ 3,179 735 614 995 1,111
Provision for credit losses ............ 4,160 2,258 2,466 2,084 1,493
Allowance obtained through
acquisitions ........................ -- 6,361 -- -- --
-------- -------- -------- -------- --------
Balance at end of year ................. $ 18,727 $ 17,746 $ 9,862 $ 8,010 $ 6,921
======== ======== ======== ======== ========
Ratio of net charge-offs to average
loans outstanding during the year ... 0.17% 0.06% 0.07% 0.15% 0.18%
======== ======== ======== ======== ========
Ratio of allowance for credit losses
to total loans ...................... 1.00% 0.96% 0.99% 1.06% 1.08%
======== ======== ======== ======== ========
Ratio of allowance for credit losses
to non-accruing loans ............... 163.13% 273.73% 511.27% 243.02% 227.14%
======== ======== ======== ======== ========
Net charge-offs for 2001 amounted to $3.2 million compared to $735 thousand in
2000. This $2.4 million increase was primarily a result of having a full year of
the Cayuga, Cortland and Albion acquisitions in 2001 versus a partial year in
2000. Additionally, net charge-offs increased due to an increase in the amount
of higher risk commercial loans as a percentage of total loans and the downturn
in the economy. As a percentage of average loans outstanding, net charge-offs
increased to 0.17% for 2001 from 0.06% in 2000. Given the increase in
non-accrual and delinquent loans, the Company increased the provision for credit
losses to $4.2 million for the year ending December 31, 2001, from $2.3 million
in 2000. Of this $1.9 million increase, approximately $1.6 million related to
Cortland and Cayuga which were acquired in 2000. The provision is based on
management's quarterly assessment of the adequacy of the allowance for credit
losses with consideration given to such interrelated factors as the composition
and inherent risk within the loan portfolio, the level of non-accruing loans and
charge-offs, both current and historic economic conditions, as well as current
trends related to regulatory supervision. The Company establishes provisions for
credit losses, which are charged to operations, in order to maintain the
allowance for credit losses at a level sufficient to absorb credit losses
inherent in the existing loan portfolio.
31
Noninterest Income
Noninterest income increased $8.0 million, or 23%, to $42.1 million in 2001 from
$34.1 million in 2000. Revenue associated with the acquisitions resulted in $5.4
million of additional noninterest income for 2001, of which $3.1 million related
to bank service charges and fees and lending and leasing income from the banks
acquired and $1.1 million related to the acquisition of Allied. Other factors
that contributed to the overall increase in noninterest income included an
increase in gains on sales of mortgages of $1.0 million, due to the Company's
decision to sell the majority of fixed rate mortgage loans originated in 2001,
and approximately $1.0 million from the addition of new bank services.
Noninterest income continues to be a stable source of earnings for the Company,
and represented 35% of total revenue during 2001.
Noninterest Expenses
Noninterest expenses totaled $83.0 million for the year ended December 31, 2001
reflecting a $21.5 million, or 35%, increase over the 2000 total of $61.5
million. Approximately $19.2 million of this increase was attributable to the
acquisitions and was primarily in salaries and employee benefits and the
amortization of goodwill. Overall, salaries and employee benefits were $46.0
million in 2001 compared with $34.2 million in 2000. During 2001, the Company's
noninterest expense was impacted by the increased amortization of goodwill and
other intangibles associated with its acquisitions, which increased $2.6 million
when compared to 2000. Other increases in noninterest expenses related to
internal growth, which included ongoing upgrades of technology and
communications systems that will facilitate future expansion and costs due to
integration efforts of the acquired companies.
Income Taxes
The effective tax rate increased to 37.4% in 2001 from 36.0% in 2000, primarily
due to the nondeductible amortization of goodwill and other intangibles related
to the acquisitions.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31,
1999
Net Income
Net income increased $1.1 million to $19.5 million, or $0.79 per share for the
year ended December 31, 2000 compared to $18.4 million, or $0.69 per share for
1999. Net income represented a return on average assets in 2000 of 0.98%
compared to 1.13% in 1999. The return on average equity in 2000 was 8.38%
compared to 7.52% in 1999. The increase in the return on average equity in 2000
was enhanced by the impact of treasury stock repurchases.
Net Interest Income
Net interest income rose $9.4 million to $60.2 million for the year ended
December 31, 2000 from $50.8 million for the year ended December 31, 1999.
Additionally, the net interest margin was 3.26% for 2000 compared to 3.33% for
1999. The narrowing of the margin resulted primarily from a $36.8 million
decline in average net earning assets to $174.8 million in 2000 compared to
$211.6 million in 1999, as funds previously available for investment in
interest-earning assets were utilized to fund the Company's acquisition
activity. This decrease was partially offset by a 10 basis point increase in the
net interest rate spread, which can be attributed to the general increase in
market interest rates, as well as the redeployment of funds from lower yielding
investment securities into the higher yielding loan portfolio.
Interest income rose $29.2 million from $107.8 million in 1999 to $137.0 million
in 2000. This was mainly a result of the growth in average interest-earning
assets, which increased $320.5 million to $1.8 billion in 2000, as well as an
increase in the interest rate earned on those assets of 36 basis points for the
same period. Interest income on loans increased $34.4 million to $101.8 million
for 2000 from $67.4 million for 1999. This increase resulted from a 49% increase
in average loans outstanding during 2000 compared to 1999, as well as a 13 basis
point increase in the average yield on loans over the same period. This increase
was partially offset by a decrease in interest earned on investment and
mortgage-backed securities of $5.1 million to $32.8 million for the year ended
December 31, 2000 compared to $38.0 million for the same period in 1999,
partially offset by a 12 basis point increase in the average yield earned on
these investments. The increase in average yields earned on loans and
investments can be attributed to the higher interest rate environment in 2000
compared to 1999 and the change in the Company's asset and loan portfolio
composition to higher yielding commercial and consumer loans.
32
Interest expense increased $19.8 million to $76.9 million for 2000 from $57.1
million for 1999. This increase is primarily attributable to interest expense on
deposits, which increased $13.9 million for the same period. This was a result
of a 22 basis point increase in the average rate paid on deposits, in addition
to a $270.9 million increase in the average balances. Interest expense on
borrowed funds increased to $20.6 million for the year ended December 31, 2000,
compared to $14.7 million for the same period in 1999. This increase was a
result of an increase in the average balance of borrowed funds of $86.4 million,
in addition to an increase in the average rate paid on borrowed funds of 31
basis points when comparing the year ending December 31, 2000 to the year ending
December 31, 1999. The increase in the average rate paid on deposits and
borrowings can be attributed to the higher interest rate environment in 2000
compared to 1999.
Provision for Credit Losses
Even with the significant increase in loans during 2000 and the shift in
portfolio mix to higher risk categories such as commercial real estate,
commercial loans and indirect consumer loans, the Company did not experience a
significant increase in net charge-offs. Net charge-offs for 2000 increased to
$735 thousand compared to $614 thousand in 1999. However, as a percentage of
average loans outstanding, net charge-offs decreased to 0.06% for 2000, from
0.07% in 1999. Given this, and the fact that the quality of the loan portfolio
remains high, the Company reduced the provision for credit losses to $2.3
million for the year ending December 31, 2000, from $2.5 million in 1999.
Noninterest Income
Noninterest income increased $6.4 million to $34.1 million in 2000 from $27.7
million in 1999 as a result of the Company's efforts to become less reliant on
net interest income. Revenue associated with acquisitions, excluding Albion,
resulted in $3.4 million of additional noninterest income for the year, of which
$2.0 million related to the investment advisory and commercial leasing
subsidiaries acquired in 2000. Other factors that contributed to the increase
included third-party benefit administration fees, bank-owned life insurance
income, debit card, credit card and deposit account fees and income from
investments in limited partnerships. Noninterest income continues to be a stable
source of earnings for the Company, and represented 36% of total revenue during
2000.
Noninterest Expenses
Noninterest expenses totaled $61.5 million for the year ended December 31, 2000
reflecting a $13.9 million increase over the year ended December 31, 1999 total
of $47.6 million. Approximately $7.6 million of the increase in noninterest
expense was attributable to the acquired companies, excluding Albion, and was
primarily in salaries and employee benefits. As a result, salaries and employee
benefits were $34.2 million in 2000, an increase of $6.5 million from $27.7
million in 1999. During 2000, the Company's noninterest expense also continued
to be impacted by the increased amortization of goodwill associated with its
acquisitions, which increased $1.6 million when compared to the same period in
1999. Other increases related to the Company's ongoing upgrade of technology and
communications systems, expenses incurred for operating two new branch locations
opened in early 2000, and increased costs due to integration efforts of the
acquired companies. Management anticipates the integration of the acquisitions
will be completed during 2001.
Income Taxes
The effective tax rate increased to 36.0% in 2000 from 34.9% in 1999, primarily
due to the nondeductible amortization of goodwill and other intangibles related
to the acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
In addition to the Company's primary funding sources of income from operations,
deposits and borrowings, funding is provided from the principal and interest
payments on loans and investment securities, proceeds from the maturities and
sale of investment securities, as well as proceeds from the sale of fixed rate
mortgage loans in the secondary market. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
outflows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
33
The primary investing activities of the Company are the origination of
residential one- to-four family mortgages, commercial loans, consumer loans, as
well as the purchase of mortgage-backed, other debt and equity securities.
During 2001, loan originations totaled $534.3 million compared to $419.5 million
and $372.1 million for 2000 and 1999, respectively, while purchases of
investment securities totaled $434.6 million, $37.1 million and $301.1 million
for the same years. The increase in investment security purchases from 2000 is
primarily a result of the purchase of U.S. Treasury securities in late 2001 and
the reinvestment of funds received from the high level of loan and
mortgage-backed security repayments experienced in 2001. Additionally, this
increase can be attributed to the historically low amount of investment security
purchases made in 2000 due to the Company having to fund acquisitions in that
year.
The sales, maturity and principal payments on investment securities, as well as
deposit growth and existing liquid assets were used to fund the above investing
activities. During 2001 cash flow provided by the sale, maturity and principal
payments received on securities available for sale amounted to $245.4 million
compared to $241.2 million and $282.0 million in 2000 and 1999. Deposit growth,
primarily the Company's money market and certificates of deposit accounts,
provided $84.5 million, $60.4 million and $52.4 million of funding for the years
ending December 31, 2001, 2000 and 1999, respectively. Borrowings, excluding the
$140.0 million used to fund the purchase of U.S. Treasury securities in late
2001, decreased slightly from 2000 as the increase in deposits and sale and
maturity of investment securities and loans were more than adequate to meet the
funding needs of the Company.
Maturity Schedule of Certificates of Deposit. The following table indicates the
funding obligations of the Company relating to certificates of deposit by time
remaining until maturity.
At December 31, 2001
-------------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or less months months months Total
-------- -------- -------- -------- --------
(In thousands)
Certificates of deposit less than $100,000 .... $154,173 $194,323 $197,784 $159,640 $705,920
Certificates of deposit of $100,000 or more ... 50,033 41,208 37,116 29,440 157,797
-------- -------- -------- -------- --------
Total certificates of deposit ........... $204,206 $235,531 $234,900 $189,080 $863,717
======== ======== ======== ======== ========
In addition to the funding requirements of certificates of deposit illustrated
above, the Company has repayment obligations related to its borrowings as
follows: $213.0 million in 2002; $48.2 million in 2003; $42.3 million in 2004;
$58.9 million in 2005; $33.3 million in 2006; and $163.3 million in years
thereafter. However, certain advances and reverse repurchase agreements have
call provisions that could accelerate when these obligations require funding if
interest rates were to rise significantly from current levels as follows: $63.9
million in 2002; $39.0 million in 2003; $23.0 million in 2004; and $27.1
million in 2006.
Loan Commitments. In the ordinary course of business the Company extends
commitments to originate one- to-four family mortgages, commercial loans and
consumer loans. As of December 31, 2001, the Company had outstanding commitments
to originate loans of approximately $81.3 million, which generally have an
expiration period of less than one year. These commitments do not necessarily
represent future cash requirements since certain of these instruments may expire
without being funded. Commitments to sell residential mortgages amounted to $2.6
million at December 31, 2001.
The Company extends credit to consumer and commercial customers, up to a
specified amount, through lines of credit. The borrower is able to draw on these
lines as needed, thus the funding is generally unpredictable. Unused consumer
and commercial lines of credit amounted to $135.6 million at December 31, 2001
and generally have an expiration period of less than one year. In addition to
the above, the Company issues standby letters of credit to third parties which
guarantees payments on behalf of commercial customers in the event that the
customer fails to perform under the terms of the contract between the customer
and the third-party. Standby letters of credit amounted to $4.9 million at
December 31, 2001 and generally have an expiration period greater than one year.
Since the majority of unused lines of credit and outstanding standby letters of
credit expire without being funded, the Company's obligation to fund the above
commitment amounts is substantially less than the amounts reported. It is
anticipated that there will be sufficient funds available to meet the current
loan commitments and other obligations through the sources described above.
34
Security Yields, Maturities and Repricing Schedule The following table sets
forth certain information regarding the carrying value, weighted average yields
and estimated maturities, including prepayment assumptions, of the Company's
available for sale securities portfolio as of December 31, 2001. Adjustable-rate
securities are included in the period in which interest rates are next scheduled
to adjust and fixed-rate securities are included based upon the weighted average
life date. No tax equivalent adjustments were made to the weighted average
yields. Amounts are shown at fair value.
At December 31, 2001
-----------------------------------------------------------------------------------------
More than one More than five
One year or less year to five years years to ten years After ten years
-------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
carrying Average carrying Average carrying Average carrying Average
value yield value yield value yield value yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Mortgage-backed securities:
CMO's ....................... $ 14,634 6.38% 163,350 6.04% $ 34,953 6.48% $ 52,637 6.62%
FHLMC ....................... 4,545 5.64 30,125 6.50 -- -- 3,669 6.96
GNMA ........................ 1,172 6.72 11,399 6.89 1,683 9.64 2,545 7.84
FNMA ........................ 117 6.82 11,463 6.42 7,329 6.18 260 6.01
-------- ------- -------- --------
Total mortgage-backed
securities ............ 20,468 6.24 216,337 6.17 43,965 6.55 59,111 6.69
-------- ------- -------- --------
Debt securities:
U.S. Treasury ............... 165,104 1.88 16 5.25 -- -- -- --
U.S. government agencies .... 30,022 6.02 50,994 4.70 -- -- -- --
States and political
subdivisions .............. 5,643 3.30 12,156 4.22 9,301 4.68 108 4.58
Corporate ................... 7,386 5.07 17,003 5.89 2,202 3.54 435 3.26
-------- ------- -------- --------
Total debt securities ...... 208,155 2.63 80,169 4.88 11,503 4.46 543 3.52
-------- ------- -------- --------
Common stock (1) ............. -- -- -- -- -- -- -- --
Asset-backed securities ...... 58 4.50 17,330 6.31 9,580 5.81 1,882 2.89
Other securities (1) ......... -- -- -- -- -- -- -- --
-------- ------- -------- --------
Total securities available
for sale ................... $228,681 2.95% 313,836 5.85% $ 65,048 6.07% $ 61,536 6.55%
======== ======= ======== ========
At December 31, 2001
--------------------
Total
--------------------
Weighted
carrying Average
value yield
-------- --------
(Dollars in thousands)
Mortgage-backed securities:
CMO's ....................... $265,574 6.24%
FHLMC ....................... 38,339 6.44
GNMA ........................ 16,799 7.30
FNMA ........................ 19,169 6.33
--------
Total mortgage-backed
securities ............ 339,881 6.32
--------
Debt securities:
U.S. Treasury ............... 165,120 1.88
U.S. government agencies .... 81,016 5.19
States and political
subdivisions .............. 27,208 4.19
Corporate ................... 27,026 5.43
--------
Total debt securities ...... 300,370 3.30
--------
Common stock (1) ............. 20,325 --
Asset-backed securities ...... 28,850 5.91
Other securities (1) ......... 4,471 3.75
--------
Total securities available
for sale ................... $693,897 4.94%
========
(1) Estimated maturities do not include common stock or other securities
available for sale.
Loan Maturity and Repricing Schedule. The following table sets forth certain
information as of December 31, 2001, regarding the amount of loans maturing or
repricing in the Company's portfolio. Demand loans having no stated schedule of
repayment and no stated maturity and overdrafts are reported as due in one year
or less. Adjustable- and floating-rate loans are included in the period in which
interest rates are next scheduled to adjust rather than the period in which they
contractually mature, and fixed-rate loans (including bi-weekly loans) are
included in the period in which the final contractual repayment is due. No
adjustments have been made for amortization or prepayment of principal.
One
Within through After
one five five
year years years Total
-------- -------- -------- ----------
(In thousands)
Real estate loans:
One- to four-family ........... $226,835 $466,839 $286,964 $ 980,638
Home equity .................... 71,157 36,945 6,341 114,443
Commercial and multi-family .... 98,607 223,940 70,349 392,896
Construction ................... 37,934 21,535 5,033 64,502
-------- -------- -------- ----------
Total real estate loans ..... 434,533 749,259 368,687 1,552,479
-------- -------- -------- ----------
Consumer loans .................... 85,313 85,103 11,710 182,126
Commercial business loans ......... 78,626 40,125 16,870 135,621
-------- -------- -------- ----------
Total loans ................. $598,472 $874,487 $397,267 $1,870,226
======== ======== ======== ==========
35
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
December 31, 2001, the dollar amount of all fixed-rate and adjustable-rate loans
due after December 31, 2002.
Due after December 31, 2002
------------------------------------
Fixed Adjustable Total
---------- ---------- ----------
(In thousands)
Real estate loans:
One- to four-family ........... $ 653,426 $ 100,377 $ 753,803
Home equity ................... 43,286 -- 43,286
Commercial and multi-family ... 131,468 162,821 294,289
Construction .................. 4,923 21,645 26,568
---------- ---------- ----------
Total real estate loans .... 833,103 284,843 1,117,946
---------- ---------- ----------
Consumer loans .................... 96,810 3 96,813
Commercial business loans ......... 56,995 -- 56,995
---------- ---------- ----------
Total loans ................ $ 986,908 $ 284,846 $1,271,754
========== ========== ==========
In addition to the maturity of investment securities and loans, the Company has
lines of credit with the FHLB, FRB and MHC that provide funding sources, for
lending, liquidity, and asset/liability management. At December 31, 2001, the
FHLB line of credit totaled $713.1 million, under which $315.4 million was
utilized. The FRB line of credit totaled $10.2 million, under which there were
no borrowings outstanding as of December 31, 2001. FNFG also has an $11.0
million revolving line of credit with the MHC, the majority shareholder of FNFG.
As of December 31, 2001, FNFG had $6.0 million utilized under this line of
credit which bears an interest rate equal to the 30 day LIBOR rate plus 75 basis
points and resets every 30 days.
Cash, interest-bearing demand accounts at correspondent banks and federal funds
sold are the Company's most liquid assets. The level 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 as a result of higher than expected loan
commitment fundings, loan originations, deposit outflows or the amount of debt
being called, additional sources of funds are available through the use of
reverse repurchase agreements, the sale of loans or investments or the Company's
various lines of credit. As of December 31, 2001, the total of cash,
interest-bearing demand accounts and federal funds sold was $72.0 million, or
2.5% of total assets.
FOURTH QUARTER RESULTS
Net income for the quarter ended December 31, 2001 was $5.8 million, up from
$4.9 million for the same period in 2000. Earnings per share increased to $0.23
per share for the fourth quarter of 2001 compared to $0.20 per share for the
corresponding quarter in 2000.
For the quarter ended December 31, 2001, total loans remained consistent at $1.9
billion when compared to the quarter ended September 30, 2001 as commercial loan
growth was offset by a decrease in residential mortgage loans. During the
quarter the Company continued to benefit from increased levels of higher
yielding commercial loans and the lower interest rate environment, which reduced
its costs of funds. As a result, the net interest rate spread increased to 3.17%
for the quarter ended December 31, 2001 compared to 2.85% for the fourth quarter
of 2000.
Deposits also remained consistent at $2.0 billion at December 31, 2001 when
compared to the quarter ended September 30, 2001. For the quarter ended December
31, 2001, average noninterest bearing deposits increased 43% to $99.5 million
from $69.4 million for the same quarter in 2000, primarily due to the increase
in commercial business. As a result of this and the increase in net interest
rate spread discussed above, the net interest margin increased to 3.42% for the
quarter ended December 31, 2001, from 3.16% for the same period in 2000.
36
For the fourth quarter of 2001 the Company had $11.1 million in noninterest
income, an increase of 16% over the $9.6 million for the same period in 2000.
This increase primarily resulted from a full quarter of Cayuga Bank revenue
being included in the fourth quarter of 2001, versus two months in the prior
year quarter, and the acquisition of Allied Claim Services, Inc. in 2001, as
well as internal growth, which included the addition of new products and
services.
Operating expenses for the three months ended December 31, 2001 were $20.4
million as compared to $17.2 million for the comparable period of 2000. This
increase was partially due to a full quarter of Cayuga Bank operations being
included in the fourth quarter of 2001, versus two months in the prior year
quarter, and the acquisition of Allied Claim Services, Inc. in 2001.
Additionally, during the fourth quarter of 2001, the Company incurred $700
thousand in one-time expenses related to final integration costs from the
acquisitions completed in 2000 and severance from various reorganization
initiatives. Operating expenses also included $500 thousand of costs related to
the enhancement of the Company's infrastructure and upgrading existing systems
to allow for planned expansion in 2002.
CRITICAL ACCOUNTING POLICIES
Pursuant to recent SEC guidance, management of the Company is encouraged to
evaluate and disclose those accounting policies that are judged to be critical -
those most important to the portrayal of the Company's financial condition and
results, and that require management's most difficult, subjective and complex
judgements. Management considers the accounting policy relating to the allowance
for credit losses to be a critical accounting policy given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the portfolio and the material effect that such judgement can have on
the results of operations. A more detailed description of the Company's
methodology for calculating the allowance for credit losses and assumptions made
is included within the "Lending Activities" section filed herewith in Part I,
Item 1, "Business."
IMPACT OF NEW ACCOUNTING STANDARDS
In July 2001, FASB issued SFAS No. 141 "Business Combinations" and SFAS No. 142
"Goodwill and Other Intangible Assets." SFAS No. 141 supersedes APB Opinion No.
16, "Business Combinations," and requires all acquisitions to be accounted for
under the purchase method of accounting, thus eliminating the pooling of
interest method of accounting for acquisitions. The Statement did not change
many of the provisions of APB Opinion 16 related to the application of the
purchase method. However, the Statement does specify criteria for recognizing
intangible assets separate from goodwill and requires additional disclosures
regarding business combinations. The Statement was effective for business
combinations initiated after June 30, 2001. All of the Company's acquisitions to
date have been accounted for under the purchase method of accounting.
SFAS No. 142 requires acquired intangible assets (other than goodwill) to be
amortized over their useful economic life, while goodwill and any acquired
intangible asset with an indefinite useful economic life would not be amortized,
but would be reviewed for impairment on an annual basis based upon guidelines
specified by the Statement. SFAS No. 142 also requires additional disclosures
pertaining to goodwill and intangible assets. The provisions of SFAS No. 142
were required to be applied starting with fiscal years beginning after December
15, 2001 or January 1, 2002 for the Company. However, for goodwill and
intangible assets acquired after June 30, 2001, the provisions relative to
amortization of this Statement became effective immediately.
At December 31, 2001, the Company had $80.8 million of goodwill and other
intangibles, which includes $6.5 million of customer lists that will still be
required to be amortized upon adoption of SFAS No. 141 and No. 142. For the year
ended December 31, 2001 the Company recorded $5.7 million of goodwill and other
intangibles amortization expense of which approximately $0.9 million related to
the amortization of customer lists. It is anticipated that the adoption of SFAS
No. 141 and No. 142 will have a material impact on the Company's results of
operations, as goodwill will no longer be required to be amortized. The Company
is in the process of performing the first of the required annual impairment
tests of goodwill as of January 1, 2002 and has not yet determined what, if any,
effect these tests will have on the Company's earnings or financial position.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The principal objective of the Company's interest rate risk management is to
evaluate the interest rate risk inherent in certain assets and liabilities,
determine the appropriate level of risk given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board's approved guidelines
to reduce the vulnerability of operations to changes in interest rates. The
asset/liability committee ("ALCO") is comprised of senior management and
selected banking officers under the direction of the Board, with senior
management responsible for reviewing with the Board its activities and
strategies, the effect of those strategies on the net interest margin, the fair
value of the portfolio and the effect that changes in interest rates will have
on the portfolio and exposure limits.
The Company utilizes the following strategies to manage interest rate risk: (1)
emphasizing the origination and retention of residential monthly and bi-weekly
fixed-rate mortgage loans having terms to maturity of not more than twenty
years, residential and commercial adjustable-rate mortgage loans, and consumer
loans; (2) selling substantially all newly originated 20-30 year monthly and
25-30 year bi-weekly fixed-rate, residential mortgage loans into the secondary
market without recourse and on a servicing retained basis; and (3) investing in
shorter term securities which generally bear lower yields as compared to longer
term investments, but which better position the Company for increases in market
interest rates. Shortening the maturities of the Company's interest-earning
assets by increasing shorter term investments better matches the maturities of
the Company's deposit accounts, in particular its certificates of deposits that
mature in one year or less. At December 31, 2001, the Company had interest rate
swap agreements with third parties with notional amounts totaling $20.0 million.
Under these agreements, the Company pays an annual fixed rate ranging from 6.04%
to 7.10% and receives a floating three-month U.S. dollar LIBOR rate. The Company
entered into these transactions to match more closely the repricing of its money
market demand product, as well as provide greater flexibility in achieving a
desired interest rate risk profile. As of December 31, 2001, these agreements
had a weighted average remaining life of 7.3 months. The Company intends to
continue to analyze the future utilization of swap agreements as part of its
overall asset/liability management process.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a Company's interest rate sensitivity "gap." An
asset or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At December 31, 2001, the Company's one-year gap position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, was a negative 22.06%. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position is likely to experience a decline in net interest income
as the cost of its interest-bearing liabilities increase at a rate faster than
its yield on interest-earning assets. In comparison, an institution with a
positive gap is likely to realize an increase in its net interest income in a
rising interest rate environment. Given the Company's existing liquidity
position and its ability to sell securities from its available for sale
portfolio, management believes that its negative gap position will not have a
material adverse effect on its operating results or liquidity position.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2001, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "Gap table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of the
repricing date or the contractual maturity of the asset or liability. The table
sets forth an approximation of the projected repricing of assets and liabilities
at December 31, 2001, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within the selected time intervals.
One- to four-family residential and commercial real estate loans were projected
to repay at rates between 4% and 15% annually, while mortgage-backed securities
were projected to prepay at rates between 17% and 31% annually. Non-core savings
and negotiable order of withdrawal ("NOW") accounts were assumed to decay, or
run-off, at 11% annually. While the Company believes such assumptions to be
reasonable, there can be no assurance that assumed prepayment rates and decay
rates will approximate actual future loan prepayment and deposit withdrawal
activity.
38
Amounts maturing or repricing as of December 31, 2001
-----------------------------------------------------
Less than 3-6 6 months
3 months months to 1 year 1-3 years
--------- --------- --------- ---------
(Dollars in thousands)
Interest-earning assets:
Federal funds sold .................... $ 20,880 $ -- $ -- $ --
Mortgage-backed securities (1) ........ 12,887 16,772 38,147 168,577
Investment securities (1) ............. 189,132 9,591 8,533 79,941
Loans (2) ............................. 260,150 119,662 215,131 507,849
Other (1)(3) .......................... 1,351 -- -- --
--------- --------- --------- ---------
Total interest-earning assets .... 484,400 146,025 261,811 756,367
--------- --------- --------- ---------
Interest-bearing liabilities:
Savings accounts ...................... 28,577 27,700 55,400 70,496
Interest-bearing checking accounts .... 394,332 38,336 76,672 27,016
Certificates of deposit ............... 204,206 235,531 234,900 168,961
Mortgagors' payments held in escrow ... 3,488 3,488 6,976 --
Other borrowed funds .................. 171,313 10,587 31,092 90,540
--------- --------- --------- ---------
Total interest-bearing liabilities 801,916 315,642 405,040 357,013
--------- --------- --------- ---------
Interest rate sensitivity gap ........... ($317,516) ($169,617) ($143,229) $ 399,354
========= ========= ========= =========
Cumulative interest rate sensitivity gap ($317,516) ($487,133) ($630,362) ($231,008)
========= ========= ========= =========
Ratio of interest-earning assets to
interest-bearing liabilities .......... 60.41% 46.26% 64.64% 211.86%
Ratio of cumulative gap to total assets . (11.11%) (17.04%) (22.06%) (8.08%)
Amounts maturing or repricing as of December 31, 2001
-----------------------------------------------------
Over 10
3-5 years 5-10 years years Total
--------- ---------- --------- ----------
Interest-earning assets:
Federal funds sold .................... $ -- $ -- $ -- $ 20,880
Mortgage-backed securities (1) ........ 94,758 5,736 -- 336,877
Investment securities (1) ............. 12,565 18,708 33,946 352,416
Loans (2) ............................. 364,558 345,947 45,785 1,859,082
Other (1)(3) .......................... -- -- 24,865 26,216
-------- --------- --------- ----------
Total interest-earning assets .... 471,881 370,391 104,596 2,595,471
-------- --------- --------- ----------
Interest-bearing liabilities:
Savings accounts ...................... 55,840 93,949 118,800 450,762
Interest-bearing checking accounts .... 2,692 4,530 5,728 549,306
Certificates of deposit ............... 17,433 2,636 50 863,717
Mortgagors' payments held in escrow ... -- -- 3,198 17,150
Other borrowed funds .................. 92,201 131,128 32,179 559,040
-------- --------- --------- ----------
Total interest-bearing liabilities 168,166 232,243 159,955 2,439,975
-------- --------- --------- ----------
Interest rate sensitivity gap ........... $303,715 $ 138,148 ($ 55,359) $ 155,496
======== ========= --------- ----------
Cumulative interest rate sensitivity gap $ 72,707 $ 210,855 $ 155,496
======== ========= =========
Ratio of interest-earning assets to
interest-bearing liabilities .......... 280.60% 159.48% 65.39% 106.37%
Ratio of cumulative gap to total assets . 2.54% 7.38% 5.44%
(1) Amounts shown are at amortized cost.
(2) Amounts shown include principal balance net of deferred costs, unearned
discounts and non-accruing loans.
(3) Includes demand balances held at correspondent banks and FHLB stock.
Certain shortcomings are inherent in the method of analysis presented in the gap
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features, which restrict changes in interest rates, both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.
As a result of these shortcomings, the Company focuses more attention on
simulation modeling, such as the net interest income, analysis discussed below,
rather than gap analysis. Even though the gap analysis reflects a ratio of
cumulative gap to total assets within the Company's targeted range of acceptable
limits, the net interest income simulation modeling is considered by management
to be more informative in forecasting future income.
39
Net Interest Income Analysis. The accompanying table as of December 31, 2001 and
2000 sets forth the estimated impact on the Company's net interest income
resulting from changes in 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 similar to the gap analysis. These assumptions are inherently
uncertain and, as a result, the Company cannot precisely predict the impact of
changes in interest rates on net interest income. Actual results may differ
significantly due to timing, magnitude and frequency of interest rate changes
and changes in market conditions. During 2001 ALCO modified the repricing
assumptions related to various deposit products during routine comparisons of
these assumptions utilized versus actual repricing behavior. These
modifications, along with the Company's asset/liability restructuring in 2001
(not holding long-term fixed rate residential mortgages, replacing long-term
investment securities with shorter-term investment securities, and replacing
short-term borrowings with long-term borrowings), impacted the Company's
interest rate sensitivity position since December 31, 2000.
Calculated increase (decrease) at
------------------------------------------------
December 31, 2001 December 31, 2000
--------------------- ----------------------
Net Net
Changes in interest interest
interest rates income % Change income % Change
- ------------------- -------- -------- -------- --------
(In thousands)
+200 basis points $(670) (0.76)% $(4,229) (5.58)%
+100 basis points (155) (0.18) (2,090) (2.76)
- -100 basis points (22) (0.03) 1,990 2.63
- -200 basis points $(645) (0.73)% $ 3,852 5.08%
As is the case with the gap table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in net interest income requires the making of certain assumptions that may or
may not reflect the manner in which actual yields and costs respond to changes
in market interest rates. In this regard, the net interest income table
presented assumes that the composition of the Company's interest sensitive
assets and liabilities existing at the beginning of a period remains constant
over the period being measured and also assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities.
Accordingly, although the net interest income table provides an indication of
the Company's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest income
and will differ from actual results.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Board of Directors
First Niagara Financial Group, Inc.:
We have audited the accompanying consolidated statements of condition of First
Niagara Financial Group, Inc. and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Niagara
Financial Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
February 18, 2002
Buffalo, New York
41
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Condition
December 31, 2001 and 2000
(In thousands except share and per share amounts)
Assets 2001 2000
----------- -----------
Cash and cash equivalents:
Cash and due from banks $ 51,092 51,915
Federal funds sold 20,880 10,900
----------- -----------
Total cash and cash equivalents 71,972 62,815
Securities available for sale 693,897 501,834
Loans, net 1,853,141 1,823,174
Premises and equipment, net 40,233 40,094
Goodwill and other intangibles, net 80,762 84,955
Other assets 117,941 111,814
----------- -----------
Total assets $ 2,857,946 2,624,686
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 1,990,830 1,906,351
Short-term borrowings 212,992 121,803
Long-term borrowings 346,048 307,764
Other liabilities 47,459 44,228
----------- -----------
Total liabilities 2,597,329 2,380,146
----------- -----------
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 135,917 135,776
Retained earnings 176,073 163,836
Accumulated other comprehensive income 2,561 336
Common stock held by ESOP, 878,533 shares in 2001
and 935,083 shares in 2000 (11,630) (12,378)
Treasury stock, at cost, 4,075,498 shares in 2001
and 4,154,180 shares in 2000 (42,602) (43,328)
----------- -----------
Total stockholders' equity 260,617 244,540
----------- -----------
Total liabilities and stockholders' equity $ 2,857,946 2,624,686
=========== ===========
See accompanying notes to consolidated financial statements.
42
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 2001, 2000 and 1999
(In thousands except per share amounts)
2001 2000 1999
-------- -------- --------
Interest income:
Real estate loans $119,203 85,213 57,669
Other loans 25,071 16,612 9,729
Investment securities 10,888 8,804 10,972
Mortgage-backed securities 20,138 24,045 27,004
Federal funds sold 1,346 771 1,104
Other assets 1,722 1,595 1,336
-------- -------- --------
Total interest income 178,368 137,040 107,814
Interest expense:
Deposits 74,409 56,272 42,393
Borrowings 24,943 20,590 14,667
-------- -------- --------
Total interest expense 99,352 76,862 57,060
-------- -------- --------
Net interest income 79,016 60,178 50,754
Provision for credit losses 4,160 2,258 2,466
-------- -------- --------
Net interest income after provision
for credit losses 74,856 57,920 48,288
-------- -------- --------
Noninterest income:
Banking service charges and fees 10,222 7,257 4,816
Lending and leasing income 4,310 3,105 1,684
Insurance services and fees 18,456 16,685 15,723
Bank-owned life insurance income 2,507 2,070 1,581
Annuity and mutual fund commissions 1,750 1,348 1,382
Investment and net security gains 1,478 1,829 1,901
Investment and fiduciary services income 1,456 965 --
Other 1,893 831 601
-------- -------- --------
Total noninterest income 42,072 34,090 27,688
-------- -------- --------
Noninterest expense:
Salaries and employee benefits 45,989 34,224 27,708
Occupancy and equipment 7,664 5,735 4,506
Technology and communications 7,642 5,733 4,481
Marketing and advertising 2,126 2,603 1,893
Amortization of goodwill and other intangibles 5,678 3,051 1,494
Other 13,906 10,172 7,561
-------- -------- --------
Total noninterest expense 83,005 61,518 47,643
-------- -------- --------
Income before income taxes 33,923 30,492 28,333
Income tax expense 12,703 10,973 9,893
-------- -------- --------
Net income $ 21,220 19,519 18,440
======== ======== ========
Earnings per common share (see note 13):
Basic $ 0.86 0.79 0.69
Diluted 0.85 0.79 0.69
Cash dividends per common share $ 0.36 0.28 0.14
Weighted average common shares outstanding:
Basic 24,728 24,847 26,744
Diluted 25,010 24,858 26,744
See accompanying notes to consolidated financial statements.
43
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
-------- -------- --------
Net income $ 21,220 19,519 18,440
-------- -------- --------
Other comprehensive income (loss), net of income taxes:
Securities available for sale:
Net unrealized gains (losses) arising during the year 2,381 9,025 (13,198)
Reclassification adjustment for realized (gains) losses
included in net income 50 204 (282)
-------- -------- --------
2,431 9,229 (13,480)
Cash flow hedges:
Net unrealized losses arising during the year (503) -- --
Reclassification adjustment for realized losses
included in net income 392 -- --
-------- -------- --------
(111) -- --
-------- -------- --------
Total other comprehensive income (loss) before
cumulative effect of change in accounting principle 2,320 9,229 (13,480)
Cumulative effect of change in accounting principle
for derivatives, net of tax (95) -- --
-------- -------- --------
Total other comprehensive income (loss) 2,225 9,229 (13,480)
-------- -------- --------
Total comprehensive income $ 23,445 28,748 4,960
======== ======== ========
See accompanying notes to consolidated financial statements.
44
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999
(In thousands except share and per share amounts)
Accumulated Common
Additional other stock
Common paid-in Retained comprehensive held by Treasury
stock capital earnings income (loss) ESOP stock Total
-------- ---------- -------- ------------- -------- -------- --------
Balances at December 31, 1998 $ 298 136,114 136,602 4,587 (13,776) -- 263,825
Net income -- -- 18,440 -- -- -- 18,440
Unrealized loss on securities available for
sale, net of taxes and reclassification
adjustment -- -- -- (13,480) -- -- (13,480)
Purchase of treasury stock
(3,110,850 shares) -- -- -- -- -- (33,018) (33,018)
ESOP shares released
(52,908 shares) -- (150) -- -- 700 -- 550
Common stock dividends of $0.14 per share -- -- (3,701) -- -- -- (3,701)
-------- ---------- -------- ------------- -------- -------- --------
Balances at December 31, 1999 $ 298 135,964 151,341 (8,893) (13,076) (33,018) 232,616
Net income -- -- 19,519 -- -- -- 19,519
Unrealized gain on securities available for
sale, net of taxes and reclassification
adjustment -- -- -- 9,229 -- -- 9,229
Purchase of treasury stock
(1,098,300 shares) -- -- -- -- -- (10,871) (10,871)
ESOP shares released
(52,727 shares) -- (204) -- -- 698 -- 494
Vested restricted stock plan awards
(54,970 shares) -- 16 -- -- -- 561 577
Common stock dividends of $0.28 per share -- -- (7,024) -- -- -- (7,024)
-------- ---------- -------- ------------- -------- -------- --------
Balances at December 31, 2000 $ 298 135,776 163,836 336 (12,378) (43,328) 244,540
Net income -- -- 21,220 -- -- -- 21,220
Unrealized gain on securities available for
sale, net of taxes and reclassification
adjustment -- -- -- 2,431 -- -- 2,431
Unrealized loss on interest rate swaps, net
of taxes and reclassification adjustment -- -- -- (111) -- -- (111)
Cumulative effect of change in accounting
principle for derivatives -- -- -- (95) -- -- (95)
Exercise of stock options (39,700 shares) -- 99 -- -- -- 381 480
ESOP shares released
(56,550 shares) -- 55 -- -- 748 -- 803
Vested restricted stock plan awards
(38,982 shares) -- (13) -- -- -- 345 332
Common stock dividends of $0.36 per share -- -- (8,983) -- -- -- (8,983)
-------- ---------- -------- ------------- -------- -------- --------
Balances at December 31, 2001 $ 298 135,917 176,073 2,561 (11,630) (42,602) 260,617
======== ========== ======== ============= ======== ======== ========
See accompanying notes to consolidated financial statements.
45
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income $ 21,220 19,519 18,440
Adjustments to reconcile net income to net cash
provided by operating activities:
(Accretion) amortization of fees and discounts, net (124) (271) 894
Depreciation of premises and equipment 4,763 3,665 3,139
Provision for credit losses 4,160 2,258 2,466
Amortization of goodwill and other intangibles 5,678 3,051 1,494
Net decrease (increase) in loans held for sale 1,560 (1,751) (3,154)
Net loss (gain) on sale of securities available for sale 83 339 (478)
ESOP compensation expense 803 494 550
Deferred income tax expense (benefit) 829 420 (191)
(Increase) decrease in other assets (1,555) 8,589 (1,565)
Increase (decrease) in other liabilities 3,529 (4,120) (4,838)
--------- --------- ---------
Net cash provided by operating activities 40,946 32,193 16,757
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 76,751 135,556 67,212
Proceeds from maturities of securities available for sale 65,388 32,595 35,040
Principal payments received on securities available for sale 103,301 73,044 179,705
Purchases of securities available for sale (434,582) (37,116) (301,078)
Net increase in loans (35,834) (152,589) (239,946)
Purchase of bank-owned life insurance (4,000) -- (10,000)
Acquisitions, net of cash acquired (980) (90,865) (11,260)
Other, net (6,965) (5,018) (14,816)
--------- --------- ---------
Net cash used by investing activities (236,921) (44,393) (295,143)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 84,479 60,381 52,405
Proceeds from (repayments of) short-term borrowings 59,209 (41,850) 84,427
Proceeds from long-term borrowings 88,100 42,900 109,060
Repayments of long-term borrowings (18,079) (10,470) (439)
Proceeds from exercise of stock options 406 -- --
Purchase of treasury stock -- (10,871) (31,820)
Dividends paid on common stock (8,983) (7,024) (4,561)
--------- --------- ---------
Net cash provided by financing activities 205,132 33,066 209,072
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 9,157 20,866 (69,314)
Cash and cash equivalents at beginning of year 62,815 41,949 111,263
--------- --------- ---------
Cash and cash equivalents at end of year $ 71,972 62,815 41,949
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 10,050 9,661 16,013
Interest expense 100,121 75,886 55,317
========= ========= =========
Acquisition of banks and financial services companies:
Assets acquired (noncash) $ 141 872,460 2,889
Liabilities assumed 67 854,230 3,655
Purchase price payable 656 1,120 2,919
========= ========= =========
See accompanying notes to consolidated financial statements.
46
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
1) Summary of Significant Accounting Policies
First Niagara Financial Group, Inc. ("FNFG"), the holding company of First
Niagara Bank ("First Niagara"), Cortland Savings Bank ("Cortland") and
Cayuga Bank ("Cayuga"), is a Delaware incorporated bank holding company
organized in December 1997. FNFG and its consolidated subsidiaries are
hereinafter referred to collectively as "the Company." The Company
provides financial services to individuals and businesses in Western and
Central New York. The Company's business is primarily accepting deposits
from customers through its branch offices and investing those deposits,
together with funds generated from operations and borrowings, in one- to
four-family residential, multi-family residential and commercial real
estate loans, commercial business loans and leases, consumer loans, and
investment securities. Additionally, the Company offers insurance products
and services, as well as trust and investment services.
The accounting and reporting policies of the Company conform to general
practices within the banking industry and to generally accepted accounting
principles. Certain reclassification adjustments were made to the 2000 and
1999 financial statements to conform them to the 2001 presentation. The
following is a description of the Company's significant accounting
policies.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of FNFG
and all of its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash items in the
process of collection, amounts due from banks, and federal funds
sold, which generally mature within several business days or less.
(c) Investment Securities
All debt and marketable equity securities are classified as
available for sale. The securities are carried at fair value, with
unrealized gains and losses, net of the related deferred income tax
effect, reported as a component of accumulated other comprehensive
income. Realized gains and losses are included in the consolidated
statement of income and are determined using the specific
identification method. A decline in the fair value of any available
for sale security below cost that is deemed other than temporary is
charged to earnings, resulting in the establishment of a new cost
basis. Premiums and discounts on investment securities are
amortized/accreted to interest income utilizing a method that
approximates the level-yield method. Included in investment and net
security gains are realized gains/losses on securities available for
sale, dividends from SBIC investments and premium income received
under the Company's covered call option program.
47
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(d) Loans
Loans are stated at the principal amount outstanding, adjusted for
net unamortized deferred fees and costs, which are accrued to income
on the interest method. Accrual of interest income on loans is
generally discontinued after payments become more than ninety days
delinquent, unless the status of a particular loan clearly indicates
earlier discontinuance is more appropriate. All uncollected interest
income previously recognized on non-accrual loans is reversed and
subsequently recognized only to the extent payments are received. In
those instances where there is doubt as to the collectibility of
principal, interest payments are applied to principal. Loans are
generally returned to accrual status when principal and interest
payments are current, full collectibility of principal and interest
is reasonably assured and a consistent record of performance,
generally six months, has been demonstrated.
(e) Direct Financing Leases
The Company accounts for its direct financing leases in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 13
"Accounting for Leases." At lease inception, the present values of
future rentals and the residual are recorded as net investment in
direct financing leases. Unearned interest income and sales
commissions and other direct costs incurred are capitalized and are
amortized to interest income over the lease term utilizing a method
which produces a constant periodic rate of return on the outstanding
investment in the lease.
(f) Real Estate Owned
Real estate owned consists of property acquired in settlement of
loans which are initially valued at the lower of the carrying amount
of the loan or fair value, based on appraisals at foreclosure, less
the estimated cost to sell the property ("net realizable value").
These properties are periodically adjusted to the lower of adjusted
cost or net realizable value throughout the holding period.
(g) Allowance for Credit Losses
The allowance for credit losses is established through charges to
earnings through the provision for credit losses. Loan and lease
losses are charged and recoveries are credited to the allowance for
credit losses. Management's evaluation of the allowance is based on
a continuing review of the loan portfolio. The methodology for
determining the amount of the allowance for credit losses consists
of several elements. Larger balance nonaccruing, impaired and
delinquent loans are reviewed individually and the value of any
underlying collateral is considered in determining estimates of
losses associated with those loans and the need, if any, for a
specific reserve. Another element involves estimating losses
inherent in categories of smaller balance homogeneous loans based
primarily on historical experience, industry trends and trends in
the real estate market and the current economic environment in the
Company's market areas. The unallocated portion of the allowance for
credit losses is based on management's evaluation of various
conditions, and involves a higher degree of uncertainty because this
component of the allowance is not identified with specific problem
credits or portfolio segments. The conditions evaluated in
connection with this element include the following: industry and
regional conditions; seasoning of the loan portfolio and changes in
the composition of and growth in the loan portfolio; the strength
and duration of the current business cycle; existing general
economic and business conditions in the lending areas; credit
quality trends, including trends in nonaccruing loans; historical
loan charge-off experience; and the results of bank regulatory
examinations.
48
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
While management uses available information to recognize losses on
loans, future additions to the allowance 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 and may require
the Company to recognize additions to the allowance based on their
judgment of information available to them at the time of their
examination.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect
all amounts of principal and interest under the original terms of
the agreement. Such loans are measured based on the present value of
expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, the loan's observable
market price or the fair value of the underlying collateral if the
loan is collateral dependent. The Company collectively evaluates
smaller-balance homogeneous loans for impairment, including one- to
four-family residential mortgage loans, student loans and consumer
loans, other than those modified in a troubled debt restructuring.
(h) Premises and Equipment
Premises and equipment are carried at cost, net of accumulated
depreciation and amortization. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized on the straight-line method
over the lesser of the life of the improvements or the lease term.
(i) Goodwill
The excess of the cost of acquired entities over the fair value of
identifiable assets acquired less liabilities assumed is recorded as
goodwill. The Company's goodwill is being amortized on a
straight-line basis over periods of ten to twenty years. The Company
periodically assesses whether events or changes in circumstances
indicate that the carrying amount of goodwill may be impaired.
Impairment is measured using estimates of future discounted cash
flows or earnings potential of the acquired entities. See letter (p)
of this note for further information on the Company's accounting for
goodwill.
(j) Derivative Instruments
Effective January 1, 2001, the Company adopted the provisions of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended by SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - An Amendment
of FASB Statement No. 133." SFAS No. 133 and SFAS No. 138 establish
accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts, and for
hedging activities. These statements require that an entity
recognize all derivatives as either assets or liabilities in the
statement of condition and measures those instruments at fair value.
Changes in the fair value of the derivatives are recorded each
period in current earnings or other comprehensive income, depending
on whether the derivative is used in a qualifying hedge strategy
and, if so, whether the hedge is a cash flow or fair value hedge.
49
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
In order to qualify as a hedge, the Company must document the
hedging strategy at its inception, including the nature of the risk
being hedged and how the effectiveness of the hedge will be
measured. The Company accounts for the interest rate swap agreements
that it uses to hedge a portion of its Money Market Demand Accounts
("MMDA") as cash flow hedges. The Company recognizes the portion of
the change in fair value of the interest rate swaps that is
considered effective in hedging cash flows as a direct charge or
credit to accumulated other comprehensive income (equity), net of
tax. The ineffective portion of the change in fair value, if any, is
recorded to earnings. Amounts recorded in accumulated other
comprehensive income are periodically reclassified to interest
expense on deposits to offset interest expense on the hedged MMDA
accounts resulting from fluctuations in interest rates.
Prior to January 1, 2001, interest income or expense on the swaps
was recognized as an adjustment to interest expense on deposits as
accrued. The fair value of interest rate swaps as of January 1,
2001, net of the related deferred income tax effect, was recorded as
a cumulative effect of a change in accounting principle in
accumulated other comprehensive income.
Commitments to originate residential real estate loans that the
Company intends to sell, forward commitments to sell residential
real estate loans, and residential real estate loans held for sale
are generally recorded in the consolidated statement of condition at
fair value, with the corresponding unrealized gain or loss being
included in other noninterest income. Prior to January 1, 2001 these
financial instruments were recorded at the lower of aggregate cost
or market value. The Company enters into forward commitments to sell
fixed rate residential real estate loans in order to manage the
interest rate risk related to the repricing of those financial
instruments.
Option agreements that the Company writes in connection with its
limited covered call option program are carried on the balance sheet
at fair value. The change in fair value, if any, of these options is
recorded to investment and net security gains. The Company does not
enter into option agreements unless they already own the
corresponding equity security that the option is written on.
(k) Employee Benefits
The Company maintains a non-contributory, qualified, defined benefit
pension plan ("the pension plan") that covers substantially all
employees who meet certain age and service requirements. The
actuarially determined pension benefit in the form of a life annuity
is based on the employee's combined years of service, age and
compensation. The Company's policy is to fund the minimum amount
required by government regulations. Effective February 1, 2002, the
Company froze all benefit accruals and participation in the pension
plan.
Additionally, the Company maintains various defined contribution
plans and accrues contributions due under these plans as earned by
employees.
The Company also provides certain post-retirement benefits,
principally health care and group life insurance ("the
post-retirement plan"), to employees who meet certain age and
service requirements and their beneficiaries and dependents. The
expected cost of providing these post-retirement benefits are
accrued during an employee's active years of service. Effective
January 19, 2001, the Company modified its post-retirement plan so
that participation was closed to those employees who did not meet
the retirement eligibility by December 31, 2001.
50
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(l) Stock-Based Compensation
The Company maintains a fixed award stock option plan and restricted
stock plan for certain officers, directors, key employees and other
persons providing services to the Company. The Company applies the
intrinsic value-based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and Financial Accounting Standards Board
("FASB") Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation" in accounting for its fixed award
stock options. As such, compensation expense is recorded on the date
the options are granted only if the current market price of the
underlying stock exceeded the exercise price. Compensation expense
equal to the market value of FNFG's stock on the grant date is
accrued ratably over the vesting period for shares of restricted
stock granted.
SFAS No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As
allowed under SFAS No. 123, the Company has elected to continue to
apply the intrinsic value-based method of accounting described
above, and has only adopted the disclosure requirements of SFAS No.
123.
(m) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the periods in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through income tax expense.
(n) Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the
earnings of the Company.
(o) Investment and Fiduciary Services
Assets held in fiduciary or agency capacity for customers are not
included in the accompanying consolidated statements of condition,
since such assets are not assets of the Company. Fee income is
recognized on the accrual method based on the fair value of assets
administered.
51
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(p) New Accounting Standards
In July 2001, FASB issued SFAS No. 141 "Business Combinations" and
SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141
supersedes APB Opinion No. 16, "Business Combinations," and requires
all acquisitions to be accounted for under the purchase method of
accounting, thus eliminating the pooling of interest method of
accounting for acquisitions. The Statement did not change many of
the provisions of APB Opinion 16 related to the application of the
purchase method. However, the Statement does specify criteria for
recognizing intangible assets separate from goodwill and requires
additional disclosures regarding business combinations. The
Statement was effective for business combinations initiated after
June 30, 2001. All of the Company's acquisitions to date have been
accounted for under the purchase method of accounting.
SFAS No. 142 requires acquired intangible assets (other than
goodwill) to be amortized over their useful economic life, while
goodwill and any acquired intangible asset with an indefinite useful
economic life would not be amortized, but would be reviewed for
impairment on an annual basis based upon guidelines specified by the
Statement. SFAS No. 142 also requires additional disclosures
pertaining to goodwill and intangible assets. The provisions of SFAS
No. 142 were required to be applied starting with fiscal years
beginning after December 15, 2001 or January 1, 2002 for the
Company. However, for goodwill and intangible assets acquired after
June 30, 2001, the provisions relative to amortization of this
Statement became effective immediately.
At December 31, 2001, the Company had $80.8 million of goodwill and
other intangibles, which includes $6.5 million of customer lists
that will still be required to be amortized upon adoption of SFAS
No. 141 and No. 142. For the year ended December 31, 2001 the
Company recorded $5.7 million of goodwill and other intangibles
amortization expense of which approximately $0.9 million related to
the amortization of customer lists. It is anticipated that the
adoption of SFAS No. 141 and No. 142 will have a material impact on
the Company's results of operations, as goodwill will no longer be
required to be amortized. The Company is in the process of
performing the first of the required annual impairment tests of
goodwill as of January 1, 2002 and has not yet determined what, if
any, effect these tests will have on the Company's earnings or
financial position.
(q) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
52
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(2) Acquisitions
On January 1, 2001, Warren-Hoffman & Associates, Inc. ("WHA"), First
Niagara's wholly owned insurance subsidiary, acquired all of the common
stock of Allied Claim Services, Inc. ("Allied"), an independent insurance
adjusting firm and third party administrator. The transaction was
accounted for under the purchase method of accounting and accordingly,
$1.3 million of goodwill was recorded and was being amortized on a
straight-line basis over ten years.
On November 3, 2000, FNFG acquired all of the stock of Iroquois Bancorp,
Inc. ("Iroquois") and its wholly owned subsidiaries Cayuga Bank, of
Auburn, New York and The Homestead Savings FA, of Utica, New York. FNFG
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 was accounted for under the
purchase method of accounting and accordingly, the excess of the purchase
price over the fair value of identifiable assets acquired, less
liabilities assumed, was recorded as goodwill. Approximately, $44.1
million of such goodwill was recorded and was being amortized on a
straight-line basis over twenty years. Upon closing of the transaction,
FNFG merged the branches of Homestead Savings into Cayuga's branch
network, which is being operated as a wholly owned subsidiary of FNFG.
On July 7, 2000, FNFG acquired all of the common stock of CNY Financial
Corporation ("CNY") and its subsidiary bank, Cortland. FNFG 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 was accounted for as a purchase transaction and accordingly,
approximately $16.9 million of goodwill was recorded and was being
amortized on a straight-line basis over twenty years. Cortland is being
operated as a wholly owned subsidiary of FNFG.
On May 31, 2000, First Niagara completed the acquisition of all of the
common stock of Niagara Investment Advisors, Inc. ("NIA"), an investment
advisory services firm. The acquisition was accounted for as a purchase
transaction and accordingly, approximately $2.8 million of goodwill was
recorded and was being amortized on a straight-line basis over ten years.
The acquired company operates as a wholly owned subsidiary of First
Niagara.
On March 24, 2000, FNFG acquired all of the common stock of Albion Banc
Corp, Inc. ("Albion"). FNFG paid $15.75 per share in cash resulting in an
aggregate purchase price of approximately $11.9 million and merged
Albion's subsidiary bank, Albion Federal Savings and Loan Association, and
its two branch locations into First Niagara's branch network. The
transaction was accounted for as a purchase transaction and accordingly,
approximately $7.6 million of goodwill was recorded and was being
amortized on a straight-line basis over a period of fifteen years.
53
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(3) Securities Available for Sale
The amortized cost, gross unrealized gains and losses and approximate fair
value of securities available for sale at December 31, 2001 are summarized
as follows (in thousands):
Amortized Unrealized Unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
Debt securities:
U.S. Treasury $ 164,992 128 -- 165,120
U.S. government agencies 79,419 1,647 (50) 81,016
Corporate 27,264 176 (414) 27,026
States and political subdivisions 26,696 575 (63) 27,208
---------- ---------- ---------- ----------
298,371 2,526 (527) 300,370
---------- ---------- ---------- ----------
Mortgage-backed securities:
Collateralized mortgage obligations 265,489 2,183 (2,098) 265,574
Federal Home Loan Mortgage Corporation 37,081 1,258 -- 38,339
Government National Mortgage
Association 16,094 705 -- 16,799
Federal National Mortgage Association 18,213 956 -- 19,169
---------- ---------- ---------- ----------
336,877 5,102 (2,098) 339,881
---------- ---------- ---------- ----------
Asset-backed securities:
Non-U.S. government agencies 23,380 735 -- 24,115
U.S. government agencies 4,682 55 (2) 4,735
---------- ---------- ---------- ----------
28,062 790 (2) 28,850
---------- ---------- ---------- ----------
Equity securities - common stock 21,530 3,318 (4,523) 20,325
Other 4,453 18 -- 4,471
---------- ---------- ---------- ----------
$ 689,293 11,754 (7,150) 693,897
========== ========== ========== ==========
Scheduled contractual maturities of certain investment securities owned by
the Company at December 31, 2001 are as follows (in thousands):
Amortized Fair
cost value
--------- ---------
Debt securities:
Within one year $ 196,896 197,258
After one year through five years 79,429 80,942
After five years through ten years 11,393 11,707
After ten years 10,653 10,463
--------- ---------
298,371 300,370
Mortgage-backed securities 336,877 339,881
Asset-backed securities 28,062 28,850
--------- ---------
$ 663,310 669,101
========= =========
54
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
The contractual maturities of mortgage and asset-backed securities
available for sale generally exceed ten years. However, the effective
lives are expected to be shorter due to anticipated prepayments.
The amortized cost, gross unrealized gains and losses and approximate fair
value of securities available for sale at December 31, 2000 are summarized
as follows (in thousands):
Amortized Unrealized Unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
Debt securities:
U.S. Treasury $ 37,970 251 (5) 38,216
U.S. government agencies 56,379 585 (36) 56,928
Corporate 8,209 20 (36) 8,193
States and political subdivisions 23,548 427 (27) 23,948
---------- ---------- ---------- ----------
126,106 1,283 (104) 127,285
---------- ---------- ---------- ----------
Mortgage-backed securities:
Collateralized mortgage obligations 215,181 177 (5,013) 210,345
Federal Home Loan Mortgage Corporation 48,891 741 (106) 49,526
Government National Mortgage
Association 22,645 385 (14) 23,016
Federal National Mortgage Association 18,668 781 (2) 19,447
---------- ---------- ---------- ----------
305,385 2,084 (5,135) 302,334
---------- ---------- ---------- ----------
Asset-backed securities:
Non-U.S. government agencies 35,684 288 (83) 35,889
U.S. government agencies 6,099 19 -- 6,118
---------- ---------- ---------- ----------
41,783 307 (83) 42,007
---------- ---------- ---------- ----------
Equity securities - common stock 23,547 6,219 (4,002) 25,764
Other 4,453 -- (9) 4,444
---------- ---------- ---------- ----------
$ 501,274 9,893 (9,333) 501,834
========== ========== ========== ==========
Gross realized gains and losses on sales of securities available for
sale, which are included in investment and security gains, are summarized
as follows (in thousands):
2001 2000 1999
------- ------- -------
Gross realized gains $ 2,080 1,295 2,157
Gross realized losses (2,163) (1,634) (1,679)
------- ------- -------
Net realized (losses) gains $ (83) (339) 478
======= ======= =======
At December 31, 2001, $316.4 million of securities were pledged to secure
borrowings and lines of credit from the Federal Home Loan Bank and Federal
Reserve Bank, repurchase agreements, municipal deposits and interest rate
swap agreements.
55
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
At December 31, 2001, the Company had investments in mortgage-backed
securities issued by Bank of America Mortgage Securities that exceeded 10%
of stockholders' equity. The aggregate book value and fair value of these
securities at December 31, 2001 were $30.1 million and $29.8 million,
respectively. No other investment in securities of a single non-U.S.
Government or government agency issuer exceeded 10% of stockholders'
equity at December 31, 2001.
(4) Loans
Loans receivable at December 31, 2001 and 2000 consist of the following
(in thousands):
2001 2000
----------- -----------
Real estate:
One-to four-family $ 980,638 1,089,607
Home equity 114,443 104,254
Commercial and multi-family 392,896 329,427
Construction:
Commercial 56,394 29,195
Residential 8,108 5,864
----------- -----------
Total real estate loans 1,552,479 1,558,347
Consumer loans 182,126 188,129
Commercial business loans 135,621 93,730
----------- -----------
Total loans 1,870,226 1,840,206
Net deferred costs and unearned discounts 1,642 714
Allowance for credit losses (18,727) (17,746)
----------- -----------
Total loans, net $ 1,853,141 1,823,174
=========== ===========
Included in commercial business loans are approximately $18.4 million and
$10.7 million of direct financing leases at December 31, 2001 and 2000,
respectively. Under direct financing leases, the Company leases equipment
to small businesses with terms ranging from two to five years. During
2001, approximately $16.5 million of equipment leases were originated by
the Company, of which approximately $4.5 million were sold to outside
investors. The remainder of the leases originated were retained by the
Company.
Non-accrual loans amounted to $11.5 million, $6.5 million and $1.9 million
at December 31, 2001, 2000 and 1999, respectively, representing 0.61%,
0.35% and 0.19% of total loans. Interest income that would have been
recorded if the loans had been performing in accordance with their
original terms amounted to $604 thousand, $273 thousand and $161 thousand
in 2001, 2000 and 1999, respectively. At December 31, 2001, the balance of
impaired loans amounted to $5.3 million and approximately $1.3 million was
included within the allowance for credit losses to specifically reserve
for losses relating to those loans. Residential real estate owned, net of
related allowances of $363 thousand and $428 thousand, at December 31,
2001 and 2000 was $665 thousand and $757 thousand, respectively.
56
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
Residential mortgage loans held for sale were $3.3 million at December 31,
2001 and $4.9 million at December 31, 2000 and are included in one-to
four-family real estate loans. Mortgages serviced for others by the
Company amounted to $252.3 million and $190.1 million at December 31, 2001
and 2000, respectively. Mortgage loans sold amounted to $105.5 million,
$56.3 million and $28.6 million for 2001, 2000 and 1999, respectively.
Gains on the sale of loans amounted to $1.4 million, $378 thousand and
$468 thousand for 2001, 2000 and 1999, respectively.
The Company had outstanding commitments to originate loans of
approximately $81.3 million and $47.6 million at December 31, 2001 and
2000, respectively. These commitments have fixed expiration dates and are
at market rates. These commitments do not necessarily represent future
cash requirements since certain of these instruments may expire without
being funded. Commitments to sell residential mortgages amounted to $2.6
million and $10.3 million at December 31, 2001 and 2000, respectively.
Unused lines of credit and outstanding letters of credit amounted to
$140.5 million and $108.0 million at December 31, 2001 and 2000,
respectively. Since the majority of unused lines of credit and outstanding
letters of credit expire without being funded, the Company's obligation to
fund the above commitment amounts is substantially less than the amounts
reported.
Changes in the allowance for credit losses in 2001, 2000 and 1999 were as
follows (in thousands):
2001 2000 1999
-------- -------- --------
Balance, beginning of year $ 17,746 9,862 8,010
Provision for credit losses 4,160 2,258 2,466
Allowance obtained through
acquisitions -- 6,361 --
Charge-offs (4,071) (1,072) (735)
Recoveries 892 337 121
-------- -------- --------
Balance, end of year $ 18,727 17,746 9,862
======== ======== ========
Virtually all of the Company's mortgage and consumer loans are to
customers located in Upstate New York. Accordingly, the ultimate
collectibility of the Company's loan portfolio is susceptible to changes
in market conditions in this market area. Loans due from certain officers
and directors of the Company and affiliates amounted to $5.9 million and
$4.7 million at December 31, 2001 and 2000, respectively.
57
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(5) Premises and Equipment
A summary of premises and equipment at December 31, 2001 and 2000 follows
(in thousands):
2001 2000
-------- --------
Land $ 3,531 3,531
Buildings and improvements 30,742 29,421
Furniture and equipment 31,065 27,698
Property under capital leases 1,365 1,365
-------- --------
66,703 62,015
Accumulated depreciation and amortization (26,470) (21,921)
-------- --------
Premises and equipment, net $ 40,233 40,094
======== ========
Future minimum rental commitments for premises and equipment under
noncancellable operating leases at December 31, 2001 were $1.7 million in
2002; $1.6 million in 2003; $1.4 million in 2004; $1.3 million in 2005;
$1.2 million in 2006; and $6.9 million in years thereafter through 2021.
Real estate taxes, insurance and maintenance expenses related to these
leases are obligations of the Company. Rent expense was $1.5 million, $1.3
million and $1.1 million in 2001, 2000 and 1999, respectively, and is
included in occupancy and equipment expense.
(6) Other Assets
A summary of other assets at December 31, 2001 and 2000 follows (in
thousands):
2001 2000
-------- --------
Cash surrender value of bank
owned life insurance $ 51,357 44,848
Federal Home Loan Bank stock 24,865 24,668
Net deferred tax assets (note 12) 9,961 11,665
Accrued interest receivable 13,203 13,445
Other receivables and prepaid assets 3,499 6,947
Other 15,056 10,241
-------- --------
$117,941 111,814
======== ========
58
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(7) Deposits
Deposits consist of the following at December 31, 2001 and 2000 (in
thousands):
2001 2000
------------------------ ------------------------
Weighted Weighted
average average
Balance rate Balance rate
---------- ---------- ---------- ----------
Savings accounts $ 450,762 2.56% $ 417,643 2.63%
Certificates maturing:
Within one year 674,637 4.41 668,094 5.87
After one year, through two
years 148,965 4.23 136,219 6.06
After two years, through
three years 19,996 5.20 19,652 5.63
After three years, through
four years 10,771 5.81 10,304 5.86
After four years, through
five years 6,662 5.10 7,433 6.35
After five years 2,686 5.14 2,847 5.33
---------- ----------
863,717 4.43 844,549 5.90
---------- ----------
Checking accounts:
Non-interest bearing 109,895 -- 86,235 --
Interest-bearing:
NOW accounts 157,886 0.94 173,319 0.98
Money market accounts 391,420 2.14 365,836 5.07
---------- ----------
659,201 625,390
---------- ----------
Mortgagors' payments held in
escrow 17,150 2.00 18,769 2.00
---------- ----------
$1,990,830 3.01% $1,906,351 4.27%
========== ==========
Interest rates on certificates of deposits range from 1.80% to 7.50% at
December 31, 2001. Interest expense on deposits in 2001, 2000 and 1999 is
summarized as follows (in thousands):
2001 2000 1999
------- ------- -------
Certificates of deposit $47,284 30,593 22,193
Money market accounts 14,334 14,848 9,726
Savings accounts 10,919 9,380 9,097
NOW accounts 1,544 1,190 1,183
Mortgagors' payments
held in escrow 328 261 194
------- ------- -------
$74,409 56,272 42,393
======= ======= =======
59
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
Certificates of deposit issued in amounts over $100,000 amounted to $157.8
million, $162.4 million and $63.0 million at December 31, 2001, 2000 and
1999, respectively. Interest expense thereon approximated $9.3 million,
$4.8 million and $3.3 million in 2001, 2000 and 1999, respectively.
The carrying value of investment securities pledged as collateral for
municipal deposits at December 31, 2001 was $47.8 million. The aggregate
amount of deposits that have been reclassified as loans at December 31,
2001 due to them being in an over-draft position was $1.3 million.
(8) Other Borrowed Funds
Information relating to outstanding borrowings at December 31, 2001 and
2000 is summarized as follows (in thousands):
2001 2000
---------- ----------
Short-term borrowings:
FHLB advances $ 99,368 95,060
Reverse repurchase agreements 105,124 10,743
Loan payable to First Niagara
Financial Group, MHC 6,000 6,000
Commercial bank loan 2,500 10,000
---------- ----------
$ 212,992 121,803
========== ==========
Long-term borrowings:
FHLB advances $ 216,048 199,816
Reverse repurchase agreements 130,000 107,948
---------- ----------
$ 346,048 307,764
========== ==========
FHLB advances generally bear fixed interest rates ranging from 1.85% to
7.71% at December 31, 2001. Reverse repurchase agreements generally bear
fixed interest rates ranging from 1.60% to 6.53% at December 31, 2001. At
December 31, 2001, FNFG had a $2.5 million loan with a commercial bank
that was subsequently repaid on January 28, 2002 and had an interest rate
equal to the LIBOR rate plus 150 basis points.
Interest expense on borrowings in 2001, 2000 and 1999 is summarized as
follows (in thousands):
2001 2000 1999
---------- ---------- ----------
FHLB and FRB advances $ 16,514 13,099 9,514
Reverse repurchase agreements 7,669 7,253 5,153
Loan payable to First Niagara
Financial Group, MHC 394 90 --
Commercial bank loan 366 148 --
---------- ---------- ----------
$ 24,943 20,590 14,667
========== ========== ==========
60
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
The Company has a line of credit with the Federal Home Loan Bank (FHLB)
and Federal Reserve Bank (FRB), that provides a secondary funding source
for lending, liquidity, and asset/liability management. At December 31,
2001, the FHLB line of credit totaled $713.1 million, under which $315.4
million was utilized. The FRB line of credit totaled $10.2 million, under
which there were no borrowings outstanding as of December 31, 2001. The
Company is required to pledge loans or investment securities as collateral
for these borrowing facilities. Approximately $347.1 million of
residential mortgage and multifamily loans were pledged to secure the
amount outstanding under the FHLB line of credit at December 31, 2001.
FNFG also has an $11.0 million revolving line of credit with First Niagara
Financial Group, MHC ("the MHC"), the majority shareholder of FNFG. As of
December 31, 2001, FNFG had $6.0 million utilized under this line of
credit which bears an interest rate equal to the 30 day LIBOR rate plus 75
basis points and resets every 30 days.
The Company pledged to the FHLB and to broker-dealers, available for sale
securities with a carrying value of $260.2 million as collateral under
reverse repurchase agreements at December 31, 2001. These are treated as
financing transactions and the obligations to repurchase are reflected as
a liability in the consolidated financial statements. The dollar amount of
securities underlying the agreements are included in securities available
for sale in the consolidated statements of condition. However, the
securities are delivered to the dealer with whom each transaction is
executed. The dealers may sell, loan or otherwise dispose of such
securities to other parties in the normal course of their business, but
agree to resell to the Company the same securities at the maturities of
the agreements. The Company also retains the right of substitution of
collateral throughout the terms of the agreements. At December 31, 2001
there were no amounts at risk under reverse repurchase agreements with any
individual counterparty or group of related counterparties that exceeded
10% of stockholders' equity. The amount at risk is equal to the excess of
the carrying value (or market value if greater) of the securities sold
under agreements to repurchase over the amount of the repurchase
liability.
The aggregate maturities of long-term borrowings at December 31, 2001 are
as follows (in thousands):
2003 $ 48,225
2004 42,315
2005 58,878
2006 33,323
Thereafter 163,307
-----------
$ 346,048
===========
(9) Capital
FNFG and each of its banking subsidiaries are subject to various
regulatory capital requirements administered by Federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by regulators
that, if undertaken, could have a direct material effect on the Company's
consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, FNFG and each of
its banking subsidiaries must meet specific guidelines that involve
quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
61
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
Quantitative measures, established by regulation to ensure capital
adequacy, require FNFG and each of its banking subsidiaries to maintain
minimum amounts and ratios of total and Tier 1 capital to risk-weighted
assets and Tier 1 capital to average assets (leverage ratio), of 8.0%,
4.0% and 3.0%, respectively. As of December 31, 2001, FNFG and each of its
banking subsidiaries meet all minimum capital adequacy requirements to
which it is subject.
The most recent notification from the Federal Deposit Insurance
Corporation categorized FNFG and each of its banking subsidiaries as well
capitalized under the regulatory framework for prompt corrective action.
In order to be considered well capitalized FNFG and each of its banking
subsidiaries must maintain total and Tier 1 capital to risk-weighted
assets and leverage ratios of 10.0%, 6.0% and 5.0%, respectively.
Management is unaware of any conditions or events since the latest
notifications from federal regulators that have changed the capital
adequacy category of FNFG and its banking subsidiaries.
The actual capital amounts and ratios for FNFG and its banking
subsidiaries are presented in the following table (in thousands):
First Niagara
Financial First
Group, Inc. Niagara Cayuga Cortland
----------- ------- ------ --------
As of December 31, 2001
Total capital
Amount $ 195,164 126,035 39,592 18,545
Ratio 11.36% 10.45% 11.50% 11.29%
Minimum Required $ 137,410 96,459 27,542 13,142
Tier 1 capital
Amount $ 176,437 113,938 35,375 16,491
Ratio 10.27% 9.45% 10.28% 10.04%
Minimum Required $ 68,705 48,230 13,771 6,571
Leverage
Amount $ 176,437 113,938 35,375 16,491
Ratio 6.71% 6.27% 6.21% 6.88%
Minimum Required $ 78,914 54,519 17,086 7,192
62
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
First Niagara
Financial First
Group, Inc. Niagara Cayuga Cortland
----------- ------- ------ --------
As of December 31, 2000
Total capital
Amount $ 178,183 117,965 40,419 15,708
Ratio 11.13% 10.93% 11.36% 9.91%
Minimum Required $ 128,065 86,374 28,463 12,678
Tier 1 capital
Amount $ 159,439 105,173 36,663 13,722
Ratio 9.96% 9.74% 10.31% 8.66%
Minimum Required $ 64,032 43,187 14,231 6,339
Leverage
Amount $ 159,439 105,173 36,663 13,722
Ratio 6.78% 6.15% 6.20% 5.84%
Minimum Required $ 70,542 51,340 17,746 7,047
During 2000 and 1999, FNFG received authorization from its Board of
Directors and bank regulatory agencies to repurchase up to 6,158,010
shares of its common stock outstanding, of which 885,660 shares expired
without being purchased. No shares were repurchased under these programs
in 2001. During 2000 and 1999, FNFG purchased 1,098,300 and 3,110,850
shares at an average cost of $9.90 and $10.61 per share, respectively.
FNFG's ability to pay dividends is primarily dependent upon the ability of
its subsidiary banks to pay dividends to FNFG. The payment of dividends by
the subsidiary banks is subject to continued compliance with minimum
regulatory capital requirements. In addition, regulatory approval is
required prior to the subsidiary banks declaring dividends in excess of
net income for that year plus net income retained in the preceding two
years.
First Niagara established a liquidation account at the time of conversion
to a New York State chartered stock savings bank in an amount equal to its
net worth as of the date of the latest consolidated statement of financial
condition appearing in the final prospectus. In the event of a complete
liquidation of First Niagara, each eligible account holder will be
entitled, under New York State Law, to receive a distribution from the
liquidation account in an amount equal to their current adjusted account
balance for all such depositors then holding qualifying deposits in First
Niagara. Accordingly, retained earnings of the Company are deemed to be
restricted up to the balances of the liquidation accounts at December 31,
2001 and 2000. The liquidation account is maintained for the benefit of
eligible pre-conversion account holders who continue to maintain their
accounts at First Niagara after the date of conversion. The liquidation
account, which is reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary
date, totaled $36.0 million at December 31, 2001 and $43.3 million at
December 31, 2000. Similarly, Cortland maintains a liquidation account in
connection with its reorganization into a New York State chartered stock
savings bank. Cortland's liquidation account totaled $9.4 million at
December 31, 2001 and $10.9 million at December 31, 2000.
63
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(10) Derivative and Hedging Activities
The Company hedges a portion of its Money Market Deposit Accounts ("MMDA")
with interest rate swap agreements in order to manage the interest rate
risk related to the repricing of those accounts. Under these agreements,
the Company pays an annual fixed rate ranging from 6.04% to 7.10% and
receives a floating three-month U.S. Dollar LIBOR rate over a two-year
period. As of December 31, 2001, these agreements had a notional amount
totaling $20.0 million and a weighted average remaining life of 7.3
months. Since the swap agreements qualify as a cash flow hedge under the
provisions of SFAS No. 133, on January 1, 2001 a negative fair value
adjustment of $95 thousand was recorded in other comprehensive income, net
of income taxes of $63 thousand, as a cumulative effect of a change in
accounting principle. The following table illustrates the effect of
interest rate swaps on other comprehensive income during 2001 (in
thousands):
Before-tax Income Net-of-tax
amount taxes amount
---------- ---------- ----------
Net unrealized losses arising during 2001 $ (837) 334 (503)
Reclassification adjustment for realized
losses included in net income 652 (260) 392
-------- ------ -------
Net losses included in other
comprehensive income $ (185) 74 (111)
======== ====== =======
For the year ended December 31, 2001, an additional $117 thousand was
included in interest expense on deposits for the portion of the change in
fair value of the swaps that was determined to be ineffective during the
period. Amounts included in other comprehensive income relating to the
unrealized losses on swaps will be reclassified to interest expense on
deposit accounts as interest expense on the hedged MMDA accounts increase
or decrease, based upon fluctuations in the U.S. Dollar LIBOR rate. Such
reclassification is expected to amount to approximately $206 thousand over
the next twelve months, net of $137 thousand of income taxes.
During 2000 and 1999, $94 thousand of net interest income and $21 thousand
of net interest expense relating to interest rate swaps was reflected in
interest expense on the hedged MMDA accounts, respectively. Prior to
January 1, 2001 the net interest income or expense on these instruments
was recognized in income or expense over the lives of the respective
contracts as accrued.
(11) Stock Based Compensation
The Company has a stock option plan pursuant to which options may be
granted to officers, directors and key employees. The plan authorizes
grants of options to purchase up to 1,390,660 shares of authorized but
unissued common stock. Stock options are granted with an exercise price
equal to the stock's market value on the date of grant. All options have a
10-year term and generally become fully vested and exercisable over 5
years from the grant date. At December 31, 2001, there were options for
1,252,225 shares outstanding and 47,985 additional shares available for
grant under the plan.
64
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on fair value at the grant date for the stock
options under SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts indicated below. These amounts may not be
representative of the effects on reported net income for future years due
to changes in market conditions and the number of options outstanding (in
thousands except per share amounts):
2001 2000 1999
---------- --------- ---------
Net Income
As reported $ 21,220 19,519 18,440
Pro forma 20,644 18,906 18,209
Basic earnings per share
As reported $ 0.86 0.79 0.69
Pro forma 0.83 0.76 0.68
Diluted earnings per share
As reported $ 0.85 0.79 0.69
Pro forma 0.83 0.76 0.68
The per share weighted-average fair value of stock options granted during
2001, 2000 and 1999 were $4.19, $2.89 and $4.27 on the date of grant,
respectively, using the Black Scholes option-pricing model. The following
weighted-average assumptions were utilized: 2001, 2000 and 1999 expected
dividend yield of 2.79%, 3.13% and 1.86%; risk-free interest rate of
5.02%, 6.44% and 5.58%; expected life of 7.5 years for all three years;
and expected volatility of 32.30%, 30.13% and 35.30%, respectively. The
Company also deducted 10% in each year to reflect an estimate of the
probability of forfeiture prior to vesting.
The following is a summary of stock option activity for the years ending
December 31, 2001, 2000 and 1999:
Number of Weighted average
shares exercise price
--------- ----------------
Balance at January 1, 1999 -- $ --
Granted 789,750 10.75
Exercised -- --
Forfeited (6,500) 10.75
---------
Balance at December 31, 1999 783,250 10.75
Granted 471,500 9.07
Exercised -- --
Forfeited (15,600) 10.05
---------
Balance at December 31, 2000 1,239,150 10.12
Granted 173,375 13.06
Exercised (39,700) 10.22
Forfeited (120,600) 10.23
---------
Balance at December 31, 2001 1,252,225 $10.51
=========
65
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
The following is a summary of stock options outstanding at December 31,
2001 and 2000:
Weighted Weighted Weighted
average average average
Options exercise remaining Options exercise
Exercise price outstanding price life (years) exercisable price
- -------------------------- ----------- ------- ------------ ----------- --------
At December 31, 2001
$9.03 - $12.60 1,224,725 $10.40 7.97 348,500 $10.35
$13.80 - $16.86 27,500 $15.47 9.73 -- --
--------- -------
Total 1,252,225 $10.51 8.01 348,500 $10.35
========= ====== ==== ======== ======
At December 31, 2000
$9.03 - $10.75 1,239,150 $10.12 8.78 189,590 $10.64
========= ====== ==== ======== ======
During 1999, the Company allocated 556,264 shares for issuance under the
Restricted Stock Plan. The plan grants shares of FNFG's stock to executive
management and members of the Board of Directors. The restricted stock
generally becomes fully vested over 5 years from the grant date.
Compensation expense equal to the market value of FNFG's stock on the
grant date is accrued ratably over the service period for shares granted.
At December 31, 2001, there were 243,360 unvested shares outstanding and
205,714 additional shares available for grant under the plan.
Shares granted under the Restricted Stock Plan in 2001, 2000 and 1999
totaled 51,500, 139,250 and 179,500, respectively, and had a weighted
average market value on the date of grant of $13.51, $9.06 and $10.75,
respectively. Compensation expense related to this plan amounted to $648
thousand, $663 thousand and $248 thousand in 2001, 2000 and 1999,
respectively.
(12) Income Taxes
Total income taxes in 2001, 2000 and 1999 were allocated as follows (in
thousands):
2001 2000 1999
-------- -------- --------
Income from operations $ 12,703 $ 10,973 $ 9,893
Stockholders' equity (1,403) 6,404 (9,367)
======== ======== ========
The components of income taxes attributable to income from operations in
2001, 2000 and 1999 are as follows (in thousands):
2001 2000 1999
------- ------- -------
Current:
Federal $11,402 10,207 9,430
State 472 346 654
------- ------- -------
11,874 10,553 10,084
------- ------- -------
Deferred:
Federal 809 166 (330)
State 20 254 139
------- ------- -------
829 420 (191)
------- ------- -------
$12,703 10,973 9,893
======= ======= =======
66
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
Income tax expense attributable to income from operations in 2001, 2000
and 1999 differs from the expected tax expense (computed by applying the
Federal corporate tax rate of 35% to income before income taxes) as
follows (in thousands):
2001 2000 1999
-------- -------- --------
Expected tax expense $ 11,873 10,672 9,917
Increase (decrease) attributable to:
State income taxes, net of Federal
benefit and deferred state tax 326 479 564
Bank-owned life
insurance income (877) (724) (553)
Municipal interest (537) (126) (41)
Amortization of goodwill and other intangibles 1,936 1,016 523
Decrease in federal valuation allowance for
deferred tax assets (292) (542) (552)
Other 274 198 35
-------- -------- --------
$ 12,703 10,973 9,893
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2001 and 2000 are presented below (in thousands):
2001 2000
-------- --------
Deferred tax assets:
Financial reporting allowance for credit losses $ 7,472 7,081
Net purchase discount on acquired companies 1,705 2,290
Deferred compensation 2,081 2,164
Post-retirement benefit obligation 1,450 1,454
Losses on investments in affiliates 418 521
Acquired intangibles 779 863
Other 1,058 743
-------- --------
Total gross deferred tax assets 14,963 15,116
Valuation allowance -- (292)
-------- --------
Net deferred tax assets 14,963 14,824
-------- --------
Deferred tax liabilities:
Tax allowance for credit losses, in excess
of base year amount (820) (1,155)
Unrealized gain on securities available for sale (2,879) (1,037)
Excess of tax depreciation over financial reporting
depreciation (694) (499)
Prepaid pension costs -- (123)
Other (609) (345)
-------- --------
Total gross deferred tax liabilities (5,002) (3,159)
-------- --------
Net deferred tax asset $ 9,961 11,665
======== ========
67
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, availability of operating loss carrybacks, projected future
taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income, the opportunity for net
operating loss carrybacks, and projections for future taxable income over
the periods which deferred tax assets are deductible, management believes
it is more likely than not the Company will realize the benefits of these
deductible differences at December 31, 2001.
(13) Earnings Per Share
The computation of basic and diluted earnings per share for the years
ended December 31, 2001, 2000 and 1999 are as follows (in thousands except
per share amounts):
2001 2000 1999
-------- -------- --------
Net income available to common stockholders $ 21,220 19,519 18,440
======== ======== ========
Weighted average shares outstanding, basic and diluted:
Total shares issued 29,756 29,756 29,756
Unallocated ESOP shares (914) (968) (1,020)
Treasury shares (4,114) (3,941) (1,992)
-------- -------- --------
Total basic weighted average shares outstanding 24,728 24,847 26,744
-------- -------- --------
Incremental shares from assumed exercise of
stock options 220 9 --
Incremental shares from assumed vesting of
restricted stock awards 62 2 --
-------- -------- --------
Total diluted weighted average shares outstanding 25,010 24,858 26,744
======== ======== ========
Basic earnings per share $ 0.86 0.79 0.69
======== ======== ========
Diluted earnings per share $ 0.85 0.79 0.69
======== ======== ========
68
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(14) Benefit Plans
Pension Plan
The reconciliation of the change in the projected benefit obligation, the
fair value of plan assets and the funded status of the Company's pension
plan as of December 31, 2001 and 2000 are as follows (in thousands):
2001 2000
-------- --------
Change in projected benefit obligation:
Projected benefit obligation at beginning
of year $ 8,339 7,967
Service cost 676 408
Interest cost 739 621
Actuarial loss (gain) 783 (357)
Benefits paid (299) (275)
Settlements (9) (25)
Plan amendments 1,645 --
-------- --------
Projected benefit obligation at end of year 11,874 8,339
-------- --------
Change in fair value of plan assets:
Fair value of plan assets at beginning of year 11,753 10,284
Actual (loss) gain on plan assets (1,682) 1,769
Benefits paid (299) (275)
Settlements (9) (25)
-------- --------
Fair value of plan assets at end of year 9,763 11,753
-------- --------
Plan assets (less than) in excess of projected
benefit obligation at end of year (2,111) 3,414
Unrecognized actuarial loss (gain) 393 (3,249)
Unrecognized actuarial prior service cost 1,524 --
-------- --------
Prepaid (accrued) pension costs $ (194) 165
======== ========
Net pension cost in 2001, 2000 and 1999 is comprised of the following (in
thousands):
2001 2000 1999
------- ------- -------
Service cost $ 676 408 413
Interest cost 739 621 554
Expected return on plan assets (1,026) (862) (706)
Amortization of unrecognized gain (152) (76) --
Amortization of unrecognized prior
service liability 121 1 4
------- ------- -------
Net periodic pension cost $ 358 92 265
======= ======= =======
69
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
The principal actuarial assumptions used in 2001, 2000 and 1999 were as
follows:
2001 2000 1999
------- ------- -------
Discount rate 7.25% 8.00% 7.75%
Expected long-term rate of return
on plan assets 9.00% 9.00% 8.00%
Assumed rate of future
compensation increase 4.50% 5.00% 5.50%
======= ======= =======
The plan assets are in mutual funds consisting primarily of listed stocks
and bonds, government securities and cash equivalents. Effective February
1, 2002, the Company froze all benefit accruals and participation in the
pension plan. As a result, the Company estimates that it will recognize a
one-time pension curtailment credit of approximately $300 thousand in 2002
and net periodic pension cost will amount to approximately $170 thousand
for 2002.
Other Post-retirement Benefits
A reconciliation of the change in the benefit obligation and the accrued
benefit cost of the Company's post-retirement plan as of December 31, 2001
and 2000 are as follows (in thousands):
2001 2000
------- -------
Change in accumulated post-retirement benefit obligation:
Accumulated post-retirement benefit
obligation at beginning of year $ 3,256 1,885
Service cost 47 95
Interest cost 208 140
Actuarial loss (gain) 924 (291)
Benefits paid (210) (86)
Benefit obligation acquired -- 1,513
Plan amendments (930) --
Curtailment credit (11) --
------- -------
Accumulated post-retirement benefit obligation at end of year 3,284 3,256
------- -------
Fair value of plan assets at end of year -- --
------- -------
Post-retirement benefit obligation in excess of plan assets
at end of year (3,284) (3,256)
Unrecognized actuarial loss (gain) 535 (388)
Unrecognized prior service credit (884) --
------- -------
Accrued post-retirement benefit cost
at end of year $(3,633) (3,644)
======= =======
70
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
The components of net periodic post-retirement benefit cost for the years
ended December 31, 2001, 2000 and 1999 are as follows (in thousands):
2001 2000 1999
----- ----- -----
Service cost $ 47 95 126
Interest cost 208 140 126
Amortization of unrecognized loss (gain) 1 (12) --
Amortization of unrecognized prior service credit (46) -- --
Curtailment credit (11) -- --
----- ----- -----
Total periodic cost $ 199 223 252
===== ===== =====
The post-retirement benefit obligation was determined using a discount
rate of 7.25% for 2001 and 8.00% for 2000 and an assumed rate of future
compensation increases of 4.50% for 2001 and 5.00% for 2000. The assumed
health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation was 9.00% for 2002, and gradually
decreased to 4.50% in the year 2007 and thereafter, over the projected
payout of benefits. The health care cost trend rate assumption can have a
significant effect on the amounts reported. If the health care cost trend
rate were increased one percent, the accumulated post-retirement benefit
obligation as of December 31, 2001 would have increased by 5.6% and the
aggregate of service and interest cost would have increased by 2.7%. If
the health care cost trend rate were decreased one percent, the
accumulated post-retirement benefit obligation as of December 31, 2001
would have decreased by 4.9% and the aggregate of service and interest
cost would have decreased by 1.3%.
Effective January 19, 2001, the Company modified all of its
post-retirement health care and life insurance plans. Participation in the
plans was closed to those employees who did not meet the retirement
eligibility requirements as of December 31, 2001.
401(k) Plan
All full-time and part-time employees of the Company that meet certain age
and service requirements are eligible to participate in the Company
sponsored 401(k) plan. Under the plan, participants may make
contributions, in the form of salary reductions, up to 15% of their
eligible compensation subject to the Internal Revenue Code limit. The
Company contributes an amount to the plan equal to 75% of the employee
contributions up to a maximum of 6% of the employee's eligible
compensation. The Company's contribution to these plans amounted to $1.2
million, $524 thousand and $421 thousand in 2001, 2000 and 1999,
respectively. Effective with the first pay in February 2002, in
conjunction with the freezing of the pension plan, the Company increased
its contribution to the 401(k) plan to equal 100% of the first 2% of
employee contributions plus 75% of employee contributions between 3% and
6%.
Employee Stock Ownership Plan ("ESOP")
The Company's ESOP plan is accounted for in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
All full-time and part-time employees of the Company that meet certain age
and service requirements are eligible to participate. The ESOP holds
1,080,124 shares of FNFG common stock with 549,594 shares purchased in the
1998 initial public offering and 530,530 shares purchased in the open
market. The purchased shares were funded by a loan from FNFG payable in
equal quarterly installments over 30 years bearing an interest rate that
is adjustable with the prime rate. Loan payments are funded by cash
contributions from First Niagara and dividends on FNFG stock held by the
ESOP.
71
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
The loan can be prepaid without penalty. Shares purchased by the ESOP are
maintained in a suspense account and held for allocation among the
participants. As quarterly loan payments are made, shares are committed to
be released and subsequently allocated to employee accounts at each
calendar year end. Compensation expense is recognized in an amount equal
to the average market price of the committed to be released shares during
the respective quarterly period. Compensation expense of $803 thousand,
$494 thousand and $550 thousand was recognized for the years ended
December 31, 2001, 2000 and 1999, respectively, in connection with the
56,550, 52,727 and 52,908 shares allocated to participants during each
year. The fair value of unallocated ESOP shares was $14.8 million at
December 31, 2001 and $10.1 million at December 31, 2000.
Other Plans
The Company also sponsors various non-qualified compensation plans for
officers and employees. Awards are payable if certain earnings and
performance objectives are met. Awards under these plans amounted to $2.5
million, $1.3 million and $1.5 million in 2001, 2000 and 1999,
respectively. The Company also maintains supplemental benefit plans for
certain executive officers.
(15) Fair Value of Financial Instruments
The carrying value and estimated fair value of the Company's financial
instruments are as follows (in thousands):
Carrying Estimated fair
value value
----------- --------------
December 31, 2001:
Financial assets:
Cash and cash equivalents $ 71,972 71,972
Securities available for sale 693,897 693,897
Loans 1,853,141 1,915,712
Other assets 89,425 89,534
Financial liabilities:
Deposits $ 1,990,830 1,996,810
Borrowings 559,040 574,642
Other liabilities 2,957 2,957
Interest rate swaps (460) (460)
December 31, 2000:
Financial assets:
Cash and cash equivalents $ 62,815 62,815
Securities available for sale 501,834 501,834
Loans 1,823,174 1,821,540
Other assets 82,961 83,058
Financial liabilities:
Deposits $ 1,906,351 1,905,445
Borrowings 429,567 431,201
Other liabilities 3,727 3,727
Unrecognized financial instruments:
Interest rate swaps $ -- (158)
72
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in these estimates. Fair value estimates, methods, and
assumptions are set forth below for each type of financial instrument.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instruments, including judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Cash and Cash Equivalents
The carrying value approximates the fair value because the instruments
have original maturities of several business days or less.
Securities
The carrying value and fair value are estimated based on quoted market
prices. See note 3 for the amortized cost of securities available for
sale.
Loans
Residential revolving home equity and personal and commercial open ended
lines of credit reprice as the prime rate changes. Therefore, the carrying
value of such loans approximates their fair value.
The fair value of fixed-rate performing loans is calculated by discounting
scheduled cash flows through estimated maturity using current origination
rates. The estimate of maturity is based on the contractual cash flows
adjusted for prepayment estimates based on current economic and lending
conditions. Fair value for significant nonaccruing loans is based on
carrying value, which does not exceed recent external appraisals of any
underlying collateral.
Deposits
The fair value of deposits with no stated maturity, such as savings, money
market, checking, as well as mortgagors' payments held in escrow, is equal
to the amount payable on demand. The fair value of certificates of deposit
is based on the discounted value of contractual cash flows, using rates
currently offered for deposits of similar remaining maturities.
Borrowings
The fair value of borrowings is calculated by discounting scheduled cash
flows through the estimated maturity using current market rates.
Other Assets and Liabilities
The fair value of accrued interest receivable on loans and investments and
accrued interest payable on deposits and borrowings approximates the
carrying value because all interest is receivable or payable in 90 to 120
days. The fair value of bank-owned life insurance is calculated by
discounting scheduled cash flows through the estimated maturity using
current market rates. FHLB stock carrying value approximates fair value.
73
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
Interest Rate Swaps
The fair value of interest rate swaps is calculated by discounting
expected future cash flows through maturity using current market rates.
Commitments
The fair value of commitments to extend credit, standby letters of credit
and financial guarantees are not included in the above table as the
carrying value generally approximates fair value. These instruments
generate fees that approximate those currently charged to originate
similar commitments.
(16) Segment Information
Based on the "Management Approach" model as described in the provisions of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company has determined it has two business segments, its
banking activities and its financial services activities. Financial
services activities for 2001 and 2000 consisted of the results of the
Company's insurance products and services, third-party administration
services as well as fiduciary and investment services subsidiaries, which
were organized under one Financial Services Group in 2001. For 1999,
financial services activities primarily consisted of insurance products
and services and third-party administration services. Banking activities
for 2001 and 2000 consisted of the results of First Niagara, Cortland and
Cayuga, excluding financial services activities. For 1999, banking
activities primarily consisted of the operations of First Niagara,
excluding financial services activities. See note (2) for a description of
the various banking and financial services acquisitions that occurred in
2001 and 2000 and the corresponding periods for which the results of
operations are included in the Company's consolidated financial
statements.
Transactions between the banking and financial services segments are
primarily related to interest income and expense from intercompany deposit
accounts, which are eliminated in consolidation and are accounted for
under the accrual method of accounting. Information about the Company's
segments is presented in the following table (in thousands):
Financial
Banking services Consolidated
At or for the year ended: activities activities Eliminations total
---------- ---------- ------------ ------------
December 31, 2001
Interest income $ 178,368 149 (149) 178,368
Interest expense 99,501 -- (149) 99,352
---------- ---------- ------------ ------------
Net interest income 78,867 149 -- 79,016
Provision for credit losses 4,160 -- -- 4,160
---------- ---------- ------------ ------------
Net interest income after
provision for credit losses 74,707 149 -- 74,856
Noninterest income 20,433 21,662 (23) 42,072
Amortization of goodwill and
other intangibles 3,787 1,891 -- 5,678
Other noninterest expense 59,668 17,682 (23) 77,327
---------- ---------- ------------ ------------
Income before income taxes 31,685 2,238 -- 33,923
Income tax expense 11,148 1,555 -- 12,703
---------- ---------- ------------ ------------
Net income $ 20,537 683 -- 21,220
========== ========== ============ ============
Total assets $2,837,552 27,767 (7,373) 2,857,946
========== ========== ============ ============
74
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
Financial
Banking services Consolidated
At or for the year ended: activities activities Eliminations total
---------- ---------- ------------ ------------
December 31, 2000
Interest income $ 137,040 117 (117) 137,040
Interest expense 76,969 10 (117) 76,862
---------- ---------- ------------ ------------
Net interest income 60,071 107 -- 60,178
Provision for credit losses 2,258 -- -- 2,258
---------- ---------- ------------ ------------
Net interest income after
provision for credit losses 57,813 107 -- 57,920
Noninterest income 15,101 18,998 (9) 34,090
Amortization of goodwill and
other intangibles 1,401 1,650 -- 3,051
Other noninterest expense 43,716 14,760 (9) 58,467
---------- ---------- ------------ ------------
Income before income taxes 27,797 2,695 -- 30,492
Income tax expense 9,336 1,637 -- 10,973
---------- ---------- ------------ ------------
Net income $ 18,461 1,058 -- 19,519
========== ========== ============ ============
Total assets $2,605,507 24,724 (5,545) 2,624,686
========== ========== ============ ============
December 31, 1999
Interest income $ 107,870 62 (118) 107,814
Interest expense 57,094 84 (118) 57,060
---------- ---------- ------------ ------------
Net interest income 50,776 (22) -- 50,754
Provision for credit losses 2,466 -- -- 2,466
---------- ---------- ------------ ------------
Net interest income after
provision for credit losses 48,310 (22) -- 48,288
Noninterest income 10,583 17,105 -- 27,688
Amortization of goodwill and
other intangibles -- 1,494 -- 1,494
Other noninterest expense 33,124 13,025 -- 46,149
---------- ---------- ------------ ------------
Income before income taxes 25,769 2,564 -- 28,333
Income tax expense 8,175 1,718 -- 9,893
---------- ---------- ------------ ------------
Net income $ 17,594 846 -- 18,440
========== ========== ============ ============
Total assets $1,694,089 19,987 (2,364) 1,711,712
========== ========== ============ ============
75
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(17) Condensed Parent Company Only Financial Statements
The following condensed statements of condition as of December 31, 2001
and 2000 and the condensed statements of income and cash flows for the
years ended December 31, 2001, 2000 and 1999 should be read in conjunction
with the consolidated financial statements and related notes (in
thousands):
December 31,
-------------------
Condensed Statements of Condition 2001 2000
-------- --------
Assets:
Cash and cash equivalents $ 3,106 1,193
Securities available for sale 5,094 7,000
Loan receivable from ESOP 12,511 12,988
Investment in subsidiaries 250,021 241,129
Other assets 578 4,099
-------- --------
Total assets $271,310 266,409
======== ========
Liabilities:
Accounts payable and other liabilities $ 193 660
Short-term borrowings 4,500 15,209
Short-term loan payable to related parties 6,000 6,000
Stockholders' equity 260,617 244,540
-------- --------
Total liabilities and stockholders' equity $271,310 266,409
======== ========
Condensed Statements of Income 2001 2000 1999
-------- -------- --------
Interest income $ 1,482 3,538 3,911
Dividends received from subsidiaries 16,000 95,000 10,000
-------- -------- --------
Interest income 17,482 98,538 13,911
Interest expense 924 415 238
-------- -------- --------
Net interest income 16,558 98,123 13,673
Net gain (loss) on securities available
for sale 98 (422) (33)
Noninterest expenses 1,674 1,244 781
-------- -------- --------
Income before income taxes and
undisbursed (overdisbursed)
income of subsidiaries 14,982 96,457 12,859
Income tax expense (benefit) (425) 587 1,148
-------- -------- --------
Income before undisbursed
(overdisbursed) income
of subsidiaries 15,407 95,870 11,711
Undisbursed (overdisbursed) income
of subsidiaries 5,813 (76,351) 6,729
-------- -------- --------
Net income $ 21,220 19,519 18,440
======== ======== ========
76
FIRST NIAGARA FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
Condensed Statements of Cash Flows 2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income $ 21,220 19,519 18,440
Adjustments to reconcile net income to
net cash provided by operating activities:
Accretion of fees and discounts, net (17) (18) (6)
(Undisbursed) overdisbursed income
of subsidiaries (5,813) 76,351 (6,729)
Net (gain) loss on securities available
for sale (98) 422 33
Deferred income taxes 678 767 284
Decrease in other assets 2,711 2,869 889
(Decrease) increase in liabilities (60) (3,468) 190
-------- -------- --------
Net cash provided by operating
activities 18,621 96,442 13,101
-------- -------- --------
Cash flow from investing activities:
Proceeds from sales of securities available
for sale 195 25,085 3,968
Purchases of securities available for sale (125) (841) (5,965)
Principal payments on securities available
for sale 2,353 5,105 10,453
Acquisitions, net of cash acquired (322) (120,713) --
Repayments of ESOP loan receivable 477 476 477
-------- -------- --------
Net cash provided (used) by
investing activities 2,578 (90,888) 8,933
-------- -------- --------
Cash flows from financing activities:
Purchase of treasury stock -- (10,871) (31,820)
(Repayment) proceeds of loans from
related parties -- (5,408) 11,408
(Repayment) proceeds of short-term
borrowings (10,709) 15,209 --
Proceeds from exercise of stock options 406 -- --
Dividends paid on common stock (8,983) (7,024) (4,561)
-------- -------- --------
Net cash used by financing
activities (19,286) (8,094) (24,973)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 1,913 (2,540) (2,939)
Cash and cash equivalents at beginning
of period 1,193 3,733 6,672
-------- -------- --------
Cash and cash equivalents at end of period $ 3,106 1,193 3,733
======== ======== ========
77
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of FNFG in the
Proxy Statement for the 2002 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation in the Proxy Statement for
the 2002 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
of FNFG management in the Proxy Statement for the 2002 Annual Meeting
of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions in
the Proxy Statement for the 2002 Annual Meeting of Stockholders is
incorporated herein by reference.
78
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial statements filed as part of this Annual Report on Form
10-K. See Part II, Item 8. "Financial Statements and Supplementary
Data."
(b) Reports on Form 8-K
Not applicable.
(c) Exhibits
The exhibits listed below are filed herewith or are incorporated
by reference to other filings.
Exhibit Index to Form 10-K
--------------------------
Exhibit 3.1 Articles of Incorporation (1)
Exhibit 3.2 Bylaws (1)
Exhibit 10.1 Form of Employment Agreement with the Named
Executive Officers (1)
Exhibit 10.2 First Niagara Bank Deferred Compensation Plan (1)
Exhibit 10.3 First Niagara Financial Group, Inc. 1999
Stock Option Plan (2)
Exhibit 10.4 First Niagara Financial Group, Inc. 1999
Recognition and Retention Plan(2)
Exhibit 11 Calculations of Basic Earnings Per Share and
Diluted Earnings Per Share (See Note 13 to
Notes to Consolidated Financial Statements)
Exhibit 21 Subsidiaries of First Niagara Financial
Group, Inc. (See Part I, Item 1 of Form 10-K)
Exhibit 23 Consent of KPMG LLP
(1) Incorporated by reference from the Company's Registration Statement filed
on December 22, 1997.
(2) Incorporated by reference from the Company's Proxy Statement for the 1999
Annual Meeting of Stockholders filed on March 23, 1999.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 19, 2002 By: /s/ William E. Swan
-----------------------------------
William E. Swan
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ William E. Swan Chairman, President and Chief March 19, 2002
- ----------------------- Executive Officer
William E. Swan
/s/ Daniel A. Dintino, Jr. Senior Vice President and Chief March 19, 2002
- -------------------------- Financial Officer
Daniel A. Dintino, Jr.
/s/ Gordon P. Assad Director March 19, 2002
- --------------------
Gordon P. Assad
/s/ John J. Bisgrove, Jr. Director March 19, 2002
- -------------------------
John J. Bisgrove, Jr.
/s/ James W. Currie Director March 19, 2002
- -------------------
James W. Currie
/s/ Gary B. Fitch Director March 19, 2002
- -----------------
Gary B. Fitch
/s/ Daniel W. Judge Director March 19, 2002
- -------------------
Daniel W. Judge
/s/ Harvey D. Kaufman Director March 19, 2002
- ---------------------
Harvey D. Kaufman
/s/ B. Thomas Mancuso Director March 19, 2002
- ---------------------
B. Thomas Mancuso
80
/s/ James Miklinski Director March 19, 2002
- -------------------
James Miklinski
/s/ Robert G. Weber Director March 19, 2002
- -------------------
Robert G. Weber
81