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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23975
FIRST NIAGARA FINANCIAL GROUP, INC.
(exact name of registrant as specified in its charter)
Delaware 16-1545669
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6950 South Transit Road, P.O. Box 514, Lockport, NY 14095-0514
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(716) 625-7500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------------- ---------------
The Registrant had 25,966,112 shares of Common Stock, $.01 par value,
outstanding as of May 7, 2002.
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FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2002
TABLE OF CONTENTS
Item Number Page Number
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition as of
March 31, 2002 (unaudited) and December 31, 2001...................................... 3
Condensed Consolidated Statements of Income for the
three months ended March 31, 2002 and 2001 (unaudited)................................ 4
Condensed Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2002 and 2001 (unaudited)................................ 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2002 and 2001 (unaudited)........................ 6
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2001 (unaudited)................................ 7
Notes to Condensed Consolidated Financial Statements (unaudited)........................ 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................. 11
3. Quantitative and Qualitative Disclosures about Market Risk ................................. 18
PART II - OTHER INFORMATION
1. Legal Proceedings........................................................................... 19
2. Changes in Securities and Use of Proceeds................................................... 19
3. Defaults upon Senior Securities............................................................. 19
4. Submission of Matters to a Vote of Security Holders......................................... 19
5. Other Information........................................................................... 19
6. Exhibits and Reports on Form 8-K............................................................ 19
Signatures....................................................................................... 19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- -------------------------------------------------------------------------------
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Condition
March 31, December 31,
2002 2001
------------ ------------
(unaudited)
(In thousands except share
Assets and per share amounts)
------
Cash and cash equivalents:
Cash and due from banks....................................... $ 36,917 49,741
Federal funds sold and other short-term investments........... 147,801 22,231
------------- -------------
Total cash and cash equivalents........................ 184,718 71,972
Securities available for sale..................................... 554,224 693,897
Loans, net........................................................ 1,875,307 1,853,141
Premises and equipment, net....................................... 40,683 40,233
Goodwill, net..................................................... 74,130 74,213
Intangible assets, net............................................ 6,886 6,797
Other assets...................................................... 118,815 117,693
------------- -------------
Total assets.................................. $ 2,854,763 2,857,946
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits........................................................ $ 2,132,290 1,990,830
Short-term borrowings........................................... 72,251 212,992
Long-term borrowings............................................ 343,874 346,048
Other liabilities............................................... 42,146 47,459
------------- -------------
Total liabilities............................. 2,590,561 2,597,329
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued................................... - -
Common stock, $.01 par value, 45,000,000 shares
authorized, 29,756,250 shares issued...................... 298 298
Additional paid-in capital.................................... 136,094 135,917
Retained earnings............................................. 181,017 176,073
Accumulated other comprehensive income........................ 454 2,561
Common stock held by ESOP, 867,082 shares in 2002 and
878,533 shares in 2001...................................... (11,478) (11,630)
Treasury stock, at cost, 4,033,158 shares in 2002 and
4,075,498 shares in 2001.................................... (42,183) (42,602)
------------- -------------
Total stockholders' equity.................... 264,202 260,617
------------- -------------
Total liabilities and stockholders' equity.... $ 2,854,763 2,857,946
============= ============
3
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(unaudited)
Three Months Ended
March 31,
------------------------------------
2002 2001
----------------- --------------
(In thousands except per share amounts)
Interest income:
Loans................................................. $ 34,795 36,475
Investment securities................................. 2,295 2,765
Mortgage-backed securities............................ 4,851 5,028
Federal funds sold and other short-term investments... 326 355
Other................................................. 266 464
----------- -----------
Total interest income........................ 42,533 45,087
Interest expense:
Deposits.............................................. 14,562 19,881
Borrowings............................................ 5,757 6,461
----------- -----------
Total interest expense....................... 20,319 26,342
----------- -----------
Net interest income.......................... 22,214 18,745
Provision for credit losses.............................. 1,530 1,040
----------- -----------
Net interest income after provision
for credit losses........................ 20,684 17,705
----------- -----------
Noninterest income:
Banking service charges and fees...................... 3,339 2,228
Lending and leasing income............................ 1,039 1,044
Insurance services and fees........................... 5,074 4,787
Bank-owned life insurance income...................... 654 583
Annuity and mutual fund commissions................... 473 445
Investment and fiduciary services income.............. 327 398
Other................................................. 304 1,047
----------- -----------
Total noninterest income..................... 11,210 10,532
----------- -----------
Noninterest expense:
Salaries and employee benefits........................ 12,348 11,669
Occupancy and equipment............................... 2,034 2,075
Technology and communications......................... 2,050 1,990
Marketing and advertising............................. 540 433
Amortization of goodwill and other intangibles........ 211 1,418
Other................................................. 3,388 3,132
----------- -----------
Total noninterest expense.................... 20,571 20,717
----------- -----------
Income before income taxes................... 11,323 7,520
Income tax expense....................................... 3,873 2,858
----------- -----------
Net income................................... 7,450 4,662
Add back: Goodwill amortization.............. - 1,184
----------- -----------
Adjusted net income (See note 3)............. $ 7,450 5,846
=========== ===========
Basic and diluted earnings per share:
Net income................................... $ 0.30 0.19
Goodwill amortization........................ - 0.05
----------- -----------
Adjusted net income.......................... $ 0.30 0.24
=========== ===========
Weighted average common shares outstanding:
Basic........................................ 24,820 24,667
Diluted...................................... 25,246 24,788
4
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended
March 31,
--------------------------------
2002 2001
--------------- ---------------
(Amounts in thousands)
Net income ................................................. $ 7,450 4,662
Other comprehensive income (loss), net of income taxes:
Securities available for sale:
Net unrealized (losses) gains arising during the
period......................................... (2,226) 2,000
Reclassification adjustment for realized losses
(gains) included in net income................ 8 (1)
--------------- ---------------
(2,218) 1,999
Cash flow hedges:
Net unrealized losses arising during the period..... (23) (291)
Reclassification adjustment for realized losses
included in net income......................... 134 13
--------------- ---------------
111 (278)
--------------- ---------------
Total other comprehensive (loss) income
before cumulative effect of change in
accounting principle..................... (2,107) 1,721
Cumulative effect of change in accounting principle
for derivatives, net of tax....................... - (95)
--------------- --------------
Total other comprehensive (loss) income.... (2,107) 1,626
--------------- --------------
Total comprehensive income................. $ 5,343 6,288
=============== ==============
5
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Accumulated Common
Additional other stock
Common paid-in Retained comprehensive held by Treasury
stock capital earnings income ESOP stock Total
------ ---------- -------- ------------- -------- --------- -----
(In thousands except share and per share amounts)
Balances at January 1, 2001................ $ 298 135,776 163,836 336 (12,378) (43,328) 244,540
Net income.............................. - - 4,662 - - - 4,662
Unrealized gain on securities available
for sale, net of reclassification
adjustment and taxes................. - - - 1,999 - - 1,999
Unrealized loss on interest rate swaps,
net of reclassification adjustment
and taxes............................ - - - (278) - - (278)
Cumulative effect of change in
accounting principle for derivatives - - - (95) - - (95)
ESOP shares committed to be released
(13,219 shares)..................... - (25) - - 175 - 150
Common stock dividend of $0.08 per
share............................... - - (1,993) - - - (1,993)
----- ------- --------- --------- ---------- ---------- --------
Balances at March 31, 2001................ $ 298 135,751 166,505 1,962 (12,203) (43,328) 248,985
===== ======= ========= ========= ========== ========== ========
Balances at January 1, 2002............... $ 298 135,917 176,073 2,561 (11,630) (42,602) 260,617
Net income............................. - - 7,450 - - - 7,450
Unrealized loss on securities available
for sale, net of reclassification
adjustment and taxes.................. - - - (2,218) - - (2,218)
Unrealized gain on interest rate swaps,
net of reclassification adjustment
and taxes............................ - - - 111 - - 111
Exercise of stock options (32,300 shares) - 125 - - - 317 442
ESOP shares committed to be released
(11,451 shares)...................... - 52 - - 152 - 204
Vested restricted stock plan awards
(10,040 shares) ..................... - - - - - 102 102
Common stock dividend of $0.10 per
share................................ - - (2,506) - - - (2,506)
----- ------- --------- --------- ---------- ---------- --------
Balances at March 31, 2002................. $ 298 136,094 181,017 454 (11,478) (42,183) 264,202
===== ======= ========= ========= ========== ========== ========
6
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
------------------------------
2002 2001
----------- ---------
(Amounts in thousands)
Cash flows from operating activities:
Net income $ 7,450 4,662
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization (accretion) of fees and discounts, net........... 309 (95)
Depreciation of premises and equipment........................ 1,278 1,114
Provision for credit losses................................... 1,530 1,040
Amortization of goodwill and other intangibles................ 211 1,418
Net loss (gain) on sale of securities available for sale...... 14 (2)
ESOP compensation expense..................................... 204 150
Deferred income tax (benefit) expense......................... (317) 264
Increase in other assets...................................... (1,980) (1,254)
(Decrease) increase in other liabilities...................... (4,850) 1,189
---------- ---------
Net cash provided by operating activities............... 3,849 8,486
---------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale............... 12,338 48,129
Proceeds from maturities of securities available for sale.......... 180,338 5,770
Principal payments received on securities available for sale....... 46,356 13,107
Purchases of securities available for sale......................... (103,482) (55,664)
Net (increase) decrease in loans................................... (23,717) 7,830
Acquisitions, net of cash acquired................................. (300) (882)
Other, net......................................................... 1,010 (1,307)
---------- ---------
Net cash provided by investing activities............... 112,543 16,983
---------- ---------
Cash flows from financing activities:
Net increase in deposits........................................... 141,460 24,889
Repayments of short-term borrowings................................ (149,356) (31,061)
Proceeds from long-term borrowings................................. 10,000 30,000
Repayments of long-term borrowings................................. (3,593) (4,926)
Proceeds from exercise of stock options............................ 349 -
Dividends paid on common stock..................................... (2,506) (1,993)
---------- ---------
Net cash (used) provided by financing activities......... (3,646) 16,909
---------- ---------
Net increase in cash and cash equivalents............................ 112,746 42,378
Cash and cash equivalents at beginning of period..................... 71,972 62,815
---------- ---------
Cash and cash equivalents at end of period........................... $ 184,718 105,193
========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes................................................ $ 1,411 81
Interest expense............................................ $ 20,686 25,802
========== =========
7
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Financial Statement Presentation
The accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP") for interim financial information and the instructions for
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments necessary for a fair
presentation have been included. Results for the three months ended March 31,
2002 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002. Certain reclassification adjustments were made to
the 2001 financial statements to conform them to the 2002 presentation.
(2) Business
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 operates under a Mutual Holding Company
(MHC) Structure. In accordance with New York State law, as long as FNFG remains
under the MHC structure, at least 51% of FNFG's voting shares must be owned by
the MHC. 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 and commercial real estate loans,
commercial business loans, consumer loans, and investment securities.
Additionally, through its financial services group, FNFG has an expanded product
line, which includes 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.
(3) Goodwill and Intangible Assets
Effective January 1, 2002 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." 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 are not amortized, but are reviewed for
impairment on an annual basis based upon guidelines specified by the Statement.
The following tables set forth information regarding the Company's amortized
intangible assets (in thousands):
March 31, December 31,
2002 2001
-------------- -------------
Customer lists
Gross carrying amount $ 9,936 9,636
Accumulated amortization (3,050) (2,839)
-------------- ------------
Net carrying amount $ 6,886 6,797
============== ============
Estimated intangible asset amortization expense for the year
ended December 31:
2002 $ 844
2003 844
2004 844
2005 844
2006 811
8
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
In January 2002, Warren-Hoffman & Associates, Inc. ("WHA"), First Niagara's
wholly owned insurance subsidiary, acquired the customer list of a property and
casualty insurance agency located in Western New York. WHA paid $300 thousand
for the customer list which is being amortized over five years.
The following tables set forth information regarding the Company's goodwill (in
thousands):
Financial
Banking services Consolidated
segment segment total
--------- ---------- -------------
Balances at January 1, 2002 $ 63,875 10,338 74,213
Contingent earn-out adjustment - (83) (83)
------------- ----------- ---------
Balances at March 31, 2002 $ 63,875 10,255 74,130
============= =========== =========
The Company is in the process of performing the first of the annual impairment
tests of goodwill required by SFAS No. 142 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.
(4) Earnings Per Share
The computation of basic and diluted earnings per share for the three-month
period ended March 31, 2002 and 2001 are as follows (in thousands except per
share amounts):
Three months ended
March 31,
----------------------------------------
2002 2001
------------------ ------------------
Net income available to common shareholders $ 7,450 4,662
================== ==================
Weighted average shares outstanding, basic and diluted:
Total shares issued 29,756 29,756
Unallocated ESOP shares (878) (935)
Treasury shares (4,058) (4,154)
------------------ ------------------
Total basic weighted average shares outstanding 24,820 24,667
------------------ ------------------
Incremental shares from assumed exercise
of stock options 343 93
Incremental shares from assumed vesting
of restricted stock awards 83 28
------------------ ------------------
Total diluted weighted average shares outstanding $ 25,246 24,788
================== ==================
Basic earnings per share $ 0.30 0.19
================== ==================
Diluted earnings per share $ 0.30 0.19
================== ==================
9
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(5) 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, banking and financial
services. The financial services segment includes the Company's insurance,
third-party administration and investment advisory subsidiaries, which are
organized under one Financial Services Group. The banking segment includes the
results of First Niagara, Cortland and Cayuga, excluding financial services.
Transactions between the banking and financial services segments primarily
relate to interest income and expense from intercompany deposit accounts, which
are eliminated in consolidation. Information about the Company's segments is
presented in the following table (in thousands):
Financial Consolidated
For the three month period ended: Banking services Eliminations total
-------------- -------------- -------------- ----------------
March 31, 2002
Interest income $ 42,533 31 (31) 42,533
Interest expense 20,350 -- (31) 20,319
-------------- -------------- --------------- ----------------
Net interest income 22,183 31 -- 22,214
Provision for credit losses 1,530 -- -- 1,530
-------------- -------------- --------------- ----------------
Net interest income after
provision for credit losses 20,653 31 -- 20,684
Noninterest income 5,340 5,874 (4) 11,210
Amortization of intangible
assets -- 211 -- 211
Other noninterest expense 15,548 4,816 (4) 20,360
-------------- -------------- --------------- ----------------
Income before income taxes 10,445 878 -- 11,323
Income tax expense 3,365 508 -- 3,873
-------------- -------------- --------------- ----------------
Net income $ 7,080 370 -- 7,450
============== ============== =============== ================
March 31, 2001
Interest income $ 45,087 38 (38) 45,087
Interest expense 26,380 -- (38) 26,342
-------------- -------------- --------------- ----------------
Net interest income 18,707 38 -- 18,745
Provision for credit losses 1,040 -- -- 1,040
-------------- -------------- --------------- ----------------
Net interest income after
provision for credit losses 17,667 38 -- 17,705
Noninterest income 4,911 5,630 (9) 10,532
Amortization of goodwill and
other intangibles 945 473 -- 1,418
Other noninterest expense 14,777 4,531 (9) 19,299
-------------- -------------- --------------- ----------------
Income before income taxes 6,856 664 -- 7,520
Income tax expense 2,429 429 -- 2,858
-------------- -------------- --------------- ----------------
Net income $ 4,427 235 -- 4,662
============== ============== =============== ================
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
This Quarterly Report on Form 10-Q may contain certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 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, economic,
competitive, regulatory, and other factors affecting the Company's operations,
markets, products and services, as well as expansion strategies and other
factors discussed elsewhere in this report and other reports filed by the
Company with the Securities and Exchange Commission. Many of these factors are
beyond the Company's control.
The Company's results of operations are dependent primarily on net interest
income, 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.
11
Analysis of Financial Condition
Average Balance Sheet. The following table presents, for the periods indicated,
the total dollar amount of interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No tax
equivalent adjustments were made. All average balances are average daily
balances. Non-accruing loans have been excluded from the yield calculations in
these tables.
Three Months Ended March 31,
---------------------------------------------------------------------------------
2002 2001
------------------------------------ -----------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- -----
(Dollars in thousands)
Interest-earning assets:
Federal funds sold and other
short-term investments................ $ 74,813 $ 326 1.77% $ 24,548 $ 355 5.87%
Investment securities (1)............... 201,150 2,295 4.57 195,945 2,765 5.51
Mortgage-backed securities (1).......... 343,301 4,851 5.65 306,048 5,028 6.67
Loans (2)............................... 1,872,409 34,795 7.48 1,830,110 36,475 8.02
Other interest-earning assets (3)....... 24,529 266 4.39 25,027 464 7.52
----------- ------------ ------------ ------------
Total interest-earning assets........ 2,516,202 $ 42,533 6.80 2,381,678 $ 45,087 7.61
----------- ------------ ------------ ------------
Allowance for credit losses................ (18,830) (18,084)
Other noninterest-earning assets (4)(5).... 275,789 264,972
----------- ------------
Total assets......................... $ 2,773,161 $ 2,628,566
=========== ============
Interest-bearing liabilities:
Savings accounts........................ $ 498,453 $ 3,032 2.47% $ 412,219 $ 2,717 2.67%
Interest-bearing checking............... 538,325 2,363 1.78 536,589 4,783 3.62
Certificates of deposit................. 879,491 9,105 4.20 854,165 12,324 5.85
Mortgagors' payments held in escrow..... 15,135 62 1.66 15,359 57 1.50
Borrowed funds.......................... 424,190 5,757 5.50 429,736 6,461 6.10
----------- ------------ ------------ ------------
Total interest-bearing liabilities... 2,355,594 20,319 3.50 2,248,068 26,342 4.75
----------- ------------ ------------ ------------
Noninterest-bearing demand deposits........ 103,410 79,992
Other noninterest-bearing liabilities (4).. 48,208 51,325
----------- ------------
Total liabilities..................... 2,507,212 2,379,385
Stockholders' equity (4)................... 265,949 249,181
----------- ------------
Total liabilities and stockholders'
equity............................ $ 2,773,161 $ 2,628,566
=========== ============
Net interest income........................ $ 22,214 $ 18,745
=========== ===========
Net interest rate spread................... 3.30% 2.86%
======== ======
Net earning assets......................... $ 160,608 $ 133,610
=========== ============
Net interest income as a percentage of
average interest-earning assets......... 3.52% 3.13%
=========== ===========
Ratio of average interest-earning assets
to average interest-bearing liabilties.. 106.82% 105.94%
=========== ============
- ----------------
(1) Amounts shown are at amortized cost.
(2) Net of deferred costs, unearned discounts and non-accruing loans.
(3) Includes Federal Home Loan Bank stock and SBIC investments.
(4) Includes unrealized gains/losses on securities available for sale and
interest rate swaps.
(5) Includes bank-owned life insurance, earnings on which are reflected in
other noninterest income.
12
Lending Activities
Total loans outstanding at March 31, 2002 remained consistent with the year-end
December 31, 2001 balance of $1.9 billion. However, during the quarter the
Company continued to shift its portfolio mix from one-to four-family real estate
loans to higher yielding commercial real estate and commercial business loans
("commercial loans"). As a result, commercial loans increased $34.6 million or
6% from December 31, 2001 to March 31, 2002. Additionally, one-to four-family
real estate loans decreased $18.2 million or 2.0% during the first quarter of
2002. This shift was primarily achieved through the Company's continued emphasis
on commercial loan originations through its small business lending unit and
management's strategic initiative to hold less fixed rate residential real
estate loans originated. This decision was made as part of the Company's
asset/liability management strategy, and should benefit the Company during
periods of higher interest rates.
Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for deferred costs, unearned discounts and
allowances for credit losses) as of the dates indicated.
March 31, 2002 December 31, 2001
------------------------------ -------------------------------
Amount Percent Amount Percent
-------------- -------------- -------------- ------------
(Amounts in thousands)
Real estate loans:
One-to four-family..................... $ 962,433 50.9% $ 980,638 52.4%
Home equity............................ 121,212 6.4 114,443 6.1
Multi-family........................... 142,955 7.5 133,439 7.1
Commercial............................. 264,397 14.0 259,457 13.9
Construction........................... 77,204 4.0 64,502 3.5
-------------- -------- -------------- ------
Total real estate loans............. 1,568,201 82.8 1,552,479 83.0
-------------- -------- -------------- ------
Consumer loans............................ 181,182 9.6 182,126 9.7
Commercial business loans................. 143,121 7.6 135,621 7.3
-------------- -------- -------------- ------
Total loans........................ 1,892,504 100% 1,870,226 100%
-------------- ======== -------------- ======
Net deferred costs and
unearned discounts.............. 1,786 1,642
Allowance for credit losses........... (18,983) (18,727)
-------------- --------------
Total loans, net................... $ 1,875,307 $ 1,853,141
============== ==============
Non-accruing loans were $12.7 million at March 31, 2002 compared to $11.5
million at December 31, 2001. While the amount of non-accruing loans increased
from the 2001 year-end, total loans greater than 30 days delinquent, which
includes non-accruing loans, decreased to $23.6 million at March 31, 2002 from
$25.4 million at December 31, 2001. The increase in non-accruing loans over the
last three quarters can be attributed to the continued growth in the Company's
commercial loan portfolio as well as the economic downturn. Overall, management
remains confident in the Company's credit quality but expects that non-accruing
loans and net loan charge-offs could increase as the Company's commercial
lending activities increase or as a result of a further weakening in the
economy. The allowance for credit losses, which amounted to 149% of non-accruing
loans and 1.0% of total loans at March 31, 2002, is based upon management's
review of the loan portfolio and continues to provide adequate coverage for
losses inherent in the loan portfolio.
The adequacy of the Company's allowance for credit losses is reviewed quarterly
with consideration given to estimated losses inherent within the loan portfolio,
the status of particular loans, historical loan loss experience, as well as
current and anticipated economic and market conditions. While management uses
available information to recognize losses on loans, future credit loss
provisions may be necessary based on changes in economic conditions or other
factors such as loan portfolio mix. 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.
13
Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and non-performing assets.
March 31, 2002 December 31, 2001
-------------- -----------------
(Dollars in thousands)
Non-accruing loans (1):
One-to four-family....................................... $ 5,040 4,833
Home equity.............................................. 504 491
Commercial real estate and multi-family.................. 2,365 2,402
Consumer ................................................ 746 510
Commercial business...................................... 4,062 3,244
----------- ---------
Total............................................... 12,717 11,480
Non-performing assets....................................... 676 665
----------- ---------
Total non-accruing loans and non-performing assets.......... $ 13,393 12,145
=========== =========
Total non-accruing loans and non-performing assets
as a percentage of total assets.......................... 0.47% 0.42%
=========== =========
Total non-accruing loans to total loans .................... 0.67% 0.61%
=========== =========
- ----------------
(1) Loans 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.
Investing Activities
The Company's investment securities portfolio decreased from $693.9 million at
December 31, 2001 to $554.2 million at March 31, 2002. This decrease was
primarily a result of the maturity of $155.0 million of U.S. Treasury securities
during the first quarter of 2002, which were purchased in late 2001.
Additionally, during the first quarter of 2002 the Company's unrealized gain on
its investment securities available for sale decreased $3.7 million as a result
of an increase in interest rates during the period, which caused the Company's
fixed rate investment securities portfolio to decrease in value.
Funding Activities
Total deposits increased $141.5 million from $1.99 billion at December 31, 2001
to $2.13 billion at March 31, 2002. This increase was a result of the Company's
focus on increasing its customer base, which included the opening of its 38th
Banking Center and the introduction of a money market savings account in the
first quarter of 2002, and a general increase in deposits experienced by most
financial services companies. More specifically, the Company's savings accounts
increased $100.2 million from the end of 2001 to the end of the first quarter of
2002.
Borrowed funds decreased $142.9 million to $416.1 million at March 31, 2002 from
$559.0 million at December 31, 2001. This decrease was a result of the maturity
of $140.0 million of FHLB advances and reverse repurchase agreements during the
first quarter of 2002 that were utilized to purchase U.S. Treasury securities
during the fourth quarter of 2001.
Equity Activities
Stockholders' equity increased to $264.2 million at March 31, 2002 compared to
$260.6 million at December 31, 2001. The increase was primarily attributable to
net income during the quarter of $7.5 million partially offset by the common
stock dividend declared during the quarter of $0.10 per share, which reduced
stockholders' equity by $2.5 million. Additionally, stockholders' equity was
negatively impacted by a $2.2 million decrease in the unrealized gain on
investment securities available for sale, as discussed earlier, which is
included in accumulated other comprehensive income, net of tax.
14
Results of Operations
- ---------------------
Net Income
Net income for the quarter ended March 31, 2002 increased 60% to $7.5 million,
or $0.30 per share from $4.7 million, or $0.19 per share for the first quarter
of 2001. As discussed in note 3 of the condensed consolidated financial
statements filed herewith in Item 1, on January 1, 2002, the Company adopted
SFAS No. 142, which no longer requires goodwill to be amortized. Adjusting prior
period results to exclude the effects of goodwill amortization similar to the
2002 first quarter, net income for the current quarter increased $1.6 million or
27% from the first quarter of 2001. On the same basis, net income increased
$0.06 per share for the quarter ended March 31, 2002 compared to the same period
in 2001. Net income represented an annualized return on average equity of 11.4%
for the first quarter of 2002 compared to 9.5% for the first quarter of 2001,
adjusted for the adoption of SFAS No. 142.
Net Interest Income
Net interest income rose 19%, to $22.2 million for the quarter ended March 31,
2002 from $18.7 million for the same period in 2001. Additionally, the Company's
net interest margin increased to 3.52% for the first quarter of 2002 from 3.13%
for the first quarter of 2001. The increase in net interest income and margin
resulted primarily from a 44 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 rate spread benefited from the Company's strategic
initiative to shift its loan portfolio mix from lower yielding residential
mortgages to higher yielding commercial loans. The increase in net interest
income and margin can also be attributed to the increase in average net earning
assets from $133.6 million for the first quarter of 2001 to $160.6 million for
the same period in 2002, primarily due to the $23.4 million increase in average
noninterest-bearing demand deposits for the same period as a result of increased
commercial business.
Interest income decreased $2.6 million for the period ending March 31, 2002
compared to the same period in 2001. This decrease reflects an 81 basis point
decrease in the overall yield on interest-earning assets from 7.61% for the
three months ended March 31, 2001 to 6.80% for the same period in 2002. This
decrease primarily resulted from the lower interest rate environment, which
caused interest-earning assets to reprice at lower rates partially offset by the
shift in loan portfolio mix from lower yielding residential mortgage loans to
higher yielding commercial loans. This decrease in rate earned on
interest-earning assets was partially offset by an increase in average
interest-earning asset balances from $2.4 billion for the first quarter of 2001
to $2.5 billion for the same period in 2002.
Interest expense decreased $6.0 million from the first quarter of 2001 to the
first quarter of 2002, primarily due to the 125 basis point decrease in the rate
paid on interest bearing liabilities from 4.75% to 3.50% for the same period due
to the lower interest rate environment. This decrease in rate paid on
interest-bearing liabilities was partially offset by an increase in average
interest-bearing liabilities from $2.2 billion for the first quarter of 2001 to
$2.4 billion for the same period in 2002.
Provision for Credit Losses
Analysis of the Allowance for Credit Losses. The following table sets forth the
analysis of the allowance for credit losses for the periods indicated.
Three months ended March 31,
-------------------------------
2002 2001
------------ ------------
(Dollars in thousands)
Balance at beginning of period............................. $ 18,727 17,746
Net charge-offs:
Charge-offs............................................. (1,498) (798)
Recoveries.............................................. 224 160
----------- -------------
Total net charge-offs................................ (1,274) (638)
Provision for credit losses................................ 1,530 1,040
----------- -------------
Balance at end of period................................... $ 18,983 18,148
=========== =============
Ratio of net charge-offs during the period to
average loans outstanding during the period............. 0.27% 0.14%
=========== =============
Allowance for credit losses to total loans at end of period 1.00% 0.99%
=========== =============
Allowance for credit losses to non-accruing loans at end
of period............................................... 149.27% 281.19%
=========== =============
15
Net charge-offs for the first quarter of 2002 amounted to $1.3 million compared
to $638 thousand for the same period in 2001. This $636 thousand increase was
primarily a result of an increase in the amount of commercial loans outstanding
as a percentage of total loans and the downturn in the economy. As a percentage
of average loans outstanding, net charge-offs increased to 0.27% for the three
months ended March 31, 2002 from 0.14% for the same period in 2001. Given the
increase in non-accrual loans compared to those outstanding at March 31, 2001,
the Company increased the provision for credit losses to $1.5 million for the
quarter ending March 31, 2002, from $1.0 million for the same quarter in 2001.
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.
Noninterest Income
For the first quarter of 2002 the Company had $11.2 million in noninterest
income, an increase of 6% over the $10.5 million for the same period in 2001.
This increase primarily resulted from internal growth, which included the
addition of new banking products and services, as well as an increase in the
Company's insurance business. This increase was partially offset by the
Company's decision to significantly reduce its covered call option program and
to hold more direct finance leases it originates versus selling them service
released to third parties. Noninterest income continues to be a strong stable
source of earnings for the Company as it represented 34% of net revenue for the
quarter ended March 31, 2002.
Noninterest Expense
Noninterest expense for the three months ended March 31, 2002 was $20.6 million
as compared to $20.7 million for the comparable period of 2001. Adjusting the
first quarter of 2001 amounts for the effect of the Company no longer being
required to amortize goodwill, noninterest expense for the first quarter of 2002
increased $1.0 million primarily due to a $679 thousand, or 6%, increase in
salaries and benefits. The Company's efficiency ratio improved to 61.5% for the
quarter ended March 31, 2002 from 66.7% for the same quarter in 2001, adjusted
for the new accounting for goodwill, as the Company's continued focus on
efficiency through its Adding Value Always ("AVA") initiative has helped net
revenue to increase faster than noninterest expense.
Income Taxes
The effective tax rate decreased to 34% for the first three months of 2002
compared to 38% for the same period in 2001, due to the new accounting for
goodwill, which is not deductible for tax purposes. Excluding the effects of
goodwill amortization for the 2001 first quarter, the effective tax rate
remained relatively consistent.
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.
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 the first quarter of 2002, loan originations totaled $164.6 million
compared to $79.8 million for the first quarter of 2001. However, loans only
increased $22.4 million as these loan originations were partially offset by
payments received on loans and the normal sale of fixed rate residential
mortgages. Purchases of investment securities totaled $103.5 million during the
first quarter of 2002 as funds obtained from the sale, maturity and payments
received on securities available for sale were reinvested in shorter-term
investments.
Deposit growth, the sales, maturity and principal payments on loans and
investment securities were used to fund the investing activities described
above. During the first quarter of 2002 cash flow provided by the sale,
principal payments and maturity of securities available for sale amounted to
$239.0 million compared to $67.0 million for the same period in 2001. This
increase from the prior year quarter was primarily due to the maturity of $155.0
million of U.S. Treasury securities purchased in the fourth quarter of 2001, the
proceeds from which were used to repay short-term borrowings. Deposit growth,
primarily the Company's savings accounts, provided $141.5 million of funding for
the quarter ending March 31, 2002. Additionally, the Company has lines of credit
with the Federal Home Loan Bank, Federal Reserve Bank and the Mutual Holding
Company that provide funding sources, for lending, liquidity and asset/liability
management.
16
In the ordinary course of business the Company extends commitments to originate
one- to-four family mortgages, commercial loans and other consumer loans. As of
March 31, 2002, the Company had outstanding commitments to originate loans of
approximately $71.0 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 $7.1 million at March 31,
2002.
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 $149.1 million at March 31, 2002 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 $5.6 million at March
31, 2002 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.
Cash, interest-bearing demand accounts at correspondent banks and brokers,
federal funds sold and other short-term investments 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 or other short-term investments with maturities of less than 60 days.
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 March 31,
2002, the total of cash, interest-bearing demand accounts, federal funds sold
and other short-term investments was $184.7 million.
At March 31, 2002, the Company and each of its banking subsidiaries exceeded all
regulatory capital requirements. The current requirements and the actual levels
for the Company are detailed in the following table.
As of March 31, 2002
------------------------------------------------------------------------
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purpose Action Provisions
---------------- ---------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ----- -----
(Dollars in thousands)
Total Capital (to risk-weighted assets).... $ 200,710 11.06% $ 145,130 8.00% $ 181,413 10.00%
Tier 1 Capital (to risk-weighted assets)... 181,727 10.02 72,565 4.00 108,848 6.00
Leverage Capital (to average assets)....... $ 181,727 6.76% $ 80,658 3.00% $ 134,430 5.00%
Critical Accounting Policies
Pursuant to 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 in Part I, Item 1,
"Business" of the Company's 2001 10-K dated March 19, 2002.
17
Item 3. Quantitative and Qualitative Disclosure about Market Risk
- ------------------------------------------------------------------
Net Interest Income Analysis
Market risk is the risk of loss from adverse changes in market prices and/or
interest rates of the Company's financial instruments. The primary market risk
the Company is exposed to is interest rate risk. Interest rate risk occurs when
assets and liabilities reprice at different times as interest rates change. The
Company monitors this interest rate sensitivity through the use of a net
interest income model, which generates estimates of changes in net income over a
range of interest rate scenarios.
The Asset-Liability Committee, which includes members of senior management,
monitors the Company's interest rate sensitivity. When deemed prudent,
management has taken actions, and intends to do so in the future, to mitigate
exposure to interest rate risk through the use of on- or off-balance sheet
financial instruments. Possible actions include, but are not limited to, changes
in the pricing of loan and deposit products, modifying the composition of
interest-earning assets and interest-bearing liabilities, and the use of
interest rate swap agreements.
The accompanying table as of March 31, 2002 sets forth the estimated impact on
the Company's net interest income resulting from changes in the interest rates
during the next twelve months. These estimates require making certain
assumptions including loan and mortgage-related investment prepayment speeds,
reinvestment rates, and deposit maturities and decay rates. These assumptions
are inherently uncertain and, as a result, the Company cannot precisely predict
the impact of changes in interest rates on net interest income. Actual results
may differ significantly due to timing, magnitude and frequency of interest rate
changes and changes in market condition.
Calculated increase (decrease) at
March 31, 2002
--------------------------------------------------------
Changes in
interest rates Net interest income % Change
------------------------ --------------------- ----------------------------
(Dollars in thousands)
+200 basis points $ (652) (0.7)%
+100 basis points (248) (0.3)
-100 basis points (252) (0.3)
-200 basis points $ (623) (0.7)%
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------------------------------------------------------------
There are no material pending legal proceedings to which the Company or
its subsidiaries are a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------------------------------------
Not applicable.
Item 3. Defaults upon Senior Securities
- --------------------------------------------------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
Not applicable.
Item 5. Other Information
- --------------------------------------------------------------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a) The following exhibit is filed herewith:
Exhibit No.
99.1 Summary of Quarterly Financial Data
(b) Reports on Form 8-K
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST NIAGARA FINANCIAL GROUP, INC.
Date: May 7, 2002 By: /s/ William E. Swan
-----------------------------------------------
William E. Swan
Chairman, President and Chief Executive Officer
Date: May 7, 2002 By: /s/ Daniel A. Dintino, Jr.
-----------------------------------------------------
Daniel A. Dintino, Jr.
Senior Vice President and Chief Financial Officer
19