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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, 2003
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 42-1556195
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
The Registrant had 70,749,243 shares of Common Stock, $0.01 par value,
outstanding as of May 12, 2003.
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1
FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2003
TABLE OF CONTENTS
Item Number Page Number
- ----------- -----------
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition as of
March 31, 2003 (unaudited) and December 31, 2002...................................... 3
Condensed Consolidated Statements of Income for the
three months ended March 31, 2003 and 2002 (unaudited)................................ 4
Condensed Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2003 and 2002 (unaudited)................................ 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2003 and 2002 (unaudited)........................ 6
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2003 and 2002 (unaudited)................................ 8
Notes to Condensed Consolidated Financial Statements (unaudited)........................ 9
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 15
3. Quantitative and Qualitative Disclosures about Market Risk................................. 21
4. Controls and Procedures.................................................................... 21
PART II - OTHER INFORMATION
1. Legal Proceedings.......................................................................... 22
2. Changes in Securities and Use of Proceeds.................................................. 22
3. Defaults upon Senior Securities............................................................ 22
4. Submission of Matters to a Vote of Security Holders........................................ 23
5. Other Information.......................................................................... 23
6. Exhibits and Reports on Form 8-K........................................................... 23
Signatures.................................................................................... 24
Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002................................................................. 25
Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002................................................................. 26
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,
2003 2002
----------- -----------
(unaudited)
(In thousands except share
Assets and per share amounts)
Cash and cash equivalents:
Cash and due from banks .............................................. $ 44,178 $ 45,358
Federal funds sold and other short-term investments .................. 392,956 45,167
----------- -----------
Total cash and cash equivalents ............................... 437,134 90,525
Securities available for sale ............................................ 672,296 632,364
Loans, net ............................................................... 2,207,269 1,974,560
Premises and equipment, net .............................................. 43,095 40,445
Goodwill ................................................................. 99,965 74,101
Amortizing intangible assets, net ........................................ 7,083 6,392
Other assets ............................................................. 136,590 116,408
----------- -----------
Total assets ............................................... $ 3,603,432 $ 2,934,795
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ............................................................... $ 2,398,797 $ 2,129,469
Stock offering subscription proceeds ................................... -- 75,952
Short-term borrowings .................................................. 63,980 69,312
Long-term borrowings ................................................... 377,730 327,823
Other liabilities ...................................................... 51,279 48,543
----------- -----------
Total liabilities .......................................... 2,891,786 2,651,099
----------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized in 2003
and 5,000,000 shares authorized in 2002, none issued ............. -- --
Common stock, $0.01 par value, 250,000,000 shares authorized and
70,750,636 issued in 2003 and 45,000,000 shares authorized and
29,756,250 issued in 2002 ........................................ 708 298
Additional paid-in capital ........................................... 542,808 137,624
Retained earnings .................................................... 200,362 196,074
Accumulated other comprehensive income ............................... 1,177 2,074
Common stock held by ESOP, 4,165,533 shares in 2003 and
832,747 shares in 2002 ............................................. (31,243) (11,024)
Unearned compensation - recognition and retention plan,
513,935 shares in 2003 and 203,675 shares in 2002 .................. (2,166) (2,453)
Treasury stock, at cost, 3,715,303 shares in 2002 .................... -- (38,897)
----------- -----------
Total stockholders' equity ................................. 711,646 283,696
----------- -----------
Total liabilities and stockholders' equity ................. $ 3,603,432 $ 2,934,795
=========== ===========
3
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(unaudited)
Three months ended
March 31,
-----------------------
2003 2002
-------- --------
(In thousands except per share amounts)
Interest income:
Real estate loans ............................................. $ 30,550 28,776
Other loans ................................................... 6,446 6,019
Investment securities ......................................... 1,509 2,295
Mortgage-backed securities .................................... 3,114 4,851
Federal funds sold and other short-term investments ........... 937 326
Other ......................................................... 367 266
-------- --------
Total interest income .................................... 42,923 42,533
Interest expense:
Deposits ...................................................... 12,017 14,562
Borrowings .................................................... 5,518 5,757
-------- --------
Total interest expense ................................... 17,535 20,319
-------- --------
Net interest income ...................................... 25,388 22,214
Provision for credit losses ...................................... 1,957 1,530
-------- --------
Net interest income after provision
for credit losses ..................................... 23,431 20,684
-------- --------
Noninterest income:
Banking service charges and fees .............................. 3,800 3,339
Insurance services and fees ................................... 3,309 3,122
Lending and leasing income .................................... 899 1,039
Bank-owned life insurance income .............................. 753 654
Annuity and mutual fund commissions ........................... 752 473
Investment and fiduciary services income ...................... 220 327
Net realized losses on investment securities available for sale (16) (14)
Other ......................................................... 330 318
-------- --------
Total noninterest income ................................. 10,047 9,258
-------- --------
Noninterest expense:
Salaries and employee benefits ................................ 12,572 11,113
Occupancy and equipment ....................................... 2,441 1,930
Technology and communications ................................. 2,360 1,906
Marketing and advertising ..................................... 1,068 538
Amortization of other intangibles ............................. 318 162
Other ......................................................... 3,288 2,982
-------- --------
Total noninterest expense ................................ 22,047 18,631
-------- --------
Income from continuing operations before income taxes .... 11,431 11,311
Income tax expense from continuing operations .................... 3,980 3,914
-------- --------
Income from continuing operations ........................ 7,451 7,397
Discontinued operations (See note 3):
Income from discontinued operations before income taxes ....... 1,996 137
Income tax expense from discontinued operations ............... 1,833 84
-------- --------
Income from discontinued operations ...................... 163 53
-------- --------
Net income ............................................... $ 7,614 7,450
======== ========
Earnings per share (See note 4):
Basic .................................................... $ 0.12 0.12
Diluted .................................................. 0.11 0.11
Weighted average common shares outstanding:
Basic .................................................... 65,758 64,205
Diluted .................................................. 67,268 65,307
4
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
Three months ended
March 31,
---------------------
2003 2002
------- -------
(Amounts in thousands)
Net income ........................................................ $ 7,614 7,450
Other comprehensive income, net of income taxes:
Securities available for sale:
Net unrealized losses arising during the period ........... (907) (2,226)
Reclassification adjustment for realized losses included in
net income ........................................... 10 8
------- -------
(897) (2,218)
------- -------
Cash flow hedges:
Net unrealized losses arising during the period ........... -- (23)
Reclassification adjustment for realized losses included in
net income ........................................... -- 134
------- -------
-- 111
------- -------
Total other comprehensive loss ....................... (897) (2,107)
------- -------
Total comprehensive income ....................... $ 6,717 5,343
======= =======
5
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Accumulated Common Unearned
Additional other stock compensation -
Common paid-in Retained comprehensive held by recognition and Treasury
stock capital earnings income ESOP retention plan stock Total
-------- --------- -------- ------------- ------- --------------- -------- --------
(In thousands except share and per share amounts)
Balances at January 1, 2003 ..... $ 298 137,624 196,074 2,074 (11,024) (2,453) (38,897) 283,696
Net income ...................... -- -- 7,614 -- -- -- -- 7,614
Unrealized loss on securities
available for sale, net of
reclassification adjustment
and taxes .................... -- -- -- (897) -- -- -- (897)
Merger of First Niagara
Financial Group, MHC
pursuant to reorganization
(15,849,650 shares) .......... (158) 19,608 -- -- -- -- -- 19,450
Treasury stock retired
pursuant to reorganization
(3,715,303 shares) ........... (37) (38,860) -- -- -- -- 38,897 --
Exchange of common stock
pursuant to reorganization
(10,191,297 shares exchanged
for 26,359,327 shares, 3,622
shares paid cash in lieu) .... 161 (198) -- -- -- -- -- (37)
Proceeds from stock offering,
net of related expenses of
$18,955 and issuance of
41,000,000 shares of
common stock ................. 410 390,635 -- -- -- -- -- 391,045
Purchase of shares by ESOP
(2,050,000 shares) ........... -- -- -- -- (20,500) -- -- (20,500)
Common stock issued for the
acquisition of Finger Lakes
Bancorp, Inc. (3,355,868
shares) ...................... 34 33,525 -- -- -- -- -- 33,559
Exercise of stock options after
reorganization (35,441 shares) -- 295 -- -- -- -- -- 295
ESOP shares committed to be
released (38,625 shares) .... -- 154 -- -- 281 -- -- 435
Recognition and retention
plan (12,933 shares) ......... -- 25 -- -- -- 287 -- 312
Common stock dividend of
$0.05 per share .............. -- -- (3,326) -- -- -- -- (3,326)
-------- -------- -------- -------- -------- -------- -------- --------
Balances at March 31, 2003 ..... $ 708 542,808 200,362 1,177 (31,243) (2,166) -- 711,646
======== ======== ======== ======== ======== ======== ======== ========
6
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Accumulated Common Unearned
Additional other stock compensation -
Common paid-in Retained comprehensive held by recognition and Treasury
stock capital earnings income ESOP retention plan stock Total
-------- ---------- -------- ------------- -------- --------------- -------- --------
(In thousands except share and per share amounts)
Balances at January 1, 2002 .. $ 298 135,917 176,073 2,561 (11,630) (2,153) (40,449) 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
Recognition and retention
plan (10,040 shares) ...... -- -- -- -- -- 72 30 102
Common stock dividend of
$0.10 per share (equivalent
to $0.04 per share after
the reorganization in 2003) -- -- (2,506) -- -- -- -- (2,506)
-------- -------- -------- -------- -------- -------- -------- --------
Balances at March 31, 2002 ... $ 298 136,094 181,017 454 (11,478) (2,081) (40,102) 264,202
======== ======== ======== ======== ======== ======== ======== ========
7
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three months ended March 31,
2003 2002
--------- ---------
Cash flows from operating activities: (In thousands)
Net income ................................................... $ 7,614 $ 7,450
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of fees and discounts, net ................ 2,965 309
Depreciation of premises and equipment ................. 1,542 1,278
Provision for credit losses ............................ 1,957 1,530
Amortization of intangibles ............................ 351 211
Gain on sale of discontinued operations ................ (2,046) --
Net realized losses on securities available for sale ... 16 14
ESOP and stock based compensation expense .............. 795 204
Deferred income tax expense (benefit) .................. 1,073 (317)
Decrease (increase) in other assets .................... 927 (1,980)
Decrease in other liabilities .......................... (3,948) (4,850)
--------- ---------
Net cash provided by operating activities ........... 11,246 3,849
--------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale ......... 6,137 12,338
Proceeds from maturities of securities available for sale .... 328,052 180,338
Principal payments received on securities available for sale . 87,044 46,356
Purchases of securities available for sale ................... (319,752) (103,482)
Net increase in loans ........................................ (32,765) (23,717)
Acquisitions, net of cash .................................... (28,527) (300)
Proceeds from the sale of discontinued operations, net of cash 5,200 --
Other, net ................................................... 63 1,010
--------- ---------
Net cash provided by investing activities ........... 45,452 112,543
--------- ---------
Cash flows from financing activities:
Net increase in deposits ..................................... 9,808 141,460
Repayments of short-term borrowings .......................... (26,511) (149,356)
Proceeds from long-term borrowings ........................... -- 10,000
Repayments of long-term borrowings ........................... (4,214) (3,593)
Proceeds from exercise of stock options ...................... 147 349
Net proceeds from second step stock offering ................. 294,594 --
Cash payment in lieu of fractional shares .................... (37) --
Transfer of assets from First Niagara Financial Group, MHC ... 19,450 --
Dividends paid on common stock ............................... (3,326) (2,506)
--------- ---------
Net cash provided by (used in) financing activities . 289,911 (3,646)
--------- ---------
Net increase in cash and cash equivalents ....................... 346,609 112,746
Cash and cash equivalents at beginning of period ................ 90,525 71,972
--------- ---------
Cash and cash equivalents at end of period ...................... $ 437,134 $ 184,718
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes ............................................ $ 19 $ 1,411
Interest expense ........................................ 17,269 20,686
========= =========
Acquisitions:
Assets acquired (noncash) ............................... $ 375,644 $ --
Liabilities assumed ..................................... 342,950 --
========= =========
Dispositions:
Assets sold (noncash) ................................... $ 1,384 $ --
Liabilities disposed of ................................. 746 --
========= =========
8
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The accompanying condensed consolidated financial statements of First Niagara
Financial Group, Inc. ("FNFG") and its wholly owned subsidiary First Niagara
Bank ("First Niagara") have been prepared in accordance with generally accepted
accounting principles ("GAAP") for interim financial information and the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
necessary for a fair presentation have been included. Results for the three
month period ended March 31, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003. Certain
reclassification adjustments were made to the 2002 financial statements to
conform them to the 2003 presentation. FNFG and its consolidated subsidiary are
hereinafter referred to collectively as the "Company."
(1) Stock-Based Compensation
The Company maintains various long-term incentive stock benefit plans under
which fixed award stock options and restricted stock awards may be granted to
certain officers, directors, key employees and other persons providing services
to the Company. Statement of Financial Accounting Standards ("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
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and has only adopted the disclosure requirements
of SFAS No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123." 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.
Had the Company determined compensation cost based on the fair value method
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):
Three months ended
March 31,
-------------------------
2003 2002
--------- ---------
Net Income
As reported $ 7,614 7,450
Add: Stock-based employee compensation
expense included in net income, net of
related tax effects 216 102
Deduct: Stock-based employee compensation
expense determined under the fair-value
based method, net of related tax effects (409) (226)
--------- ---------
Pro forma net income $ 7,421 7,326
========= =========
Basic earnings per share:
As reported $ 0.12 0.12
Pro forma 0.11 0.11
Diluted earnings per share:
As reported $ 0.11 0.11
Pro forma 0.11 0.11
9
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(2) Corporate Structure and Stock Offering
FNFG is a Delaware corporation which holds all of the capital stock of First
Niagara, a federally chartered savings bank. First Niagara originally was
organized in 1870 as a New York State chartered mutual savings bank. FNFG was
organized 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, which was
completed in April 1998. As part of the reorganization, FNFG sold shares of
common stock to eligible depositors of First Niagara and issued approximately
53% of its shares of common stock to First Niagara Financial Group, MHC (the
"MHC"), a mutual holding company. As a result of share repurchases subsequent to
the reorganization, the MHC's ownership interest increased to 61% of the issued
and outstanding shares of common stock of FNFG.
The Company utilized the proceeds raised in its initial offering to make three
bank and five non-bank acquisitions between 1999 and 2001. In March 2000, FNFG
acquired Albion Banc Corp, Inc., the holding company of Albion Federal Savings
and Loan Association ("Albion"). Subsequent to the acquisition, Albion's two
branch locations were merged into First Niagara's banking center network. In
July 2000, FNFG acquired CNY Financial Corporation ("CNY"), the holding company
of Cortland Savings Bank ("Cortland"). In November 2000, FNFG acquired all of
the common stock of Iroquois Bancorp, Inc. ("Iroquois"), the holding company of
Cayuga Bank ("Cayuga") and The Homestead Savings, FA. Following completion of
this transaction, The Homestead Savings was merged into Cayuga. Initially,
Cortland and Cayuga were operated as wholly owned subsidiaries of FNFG. On
November 8, 2002, FNFG merged Cortland and Cayuga into First Niagara and
converted First Niagara and the MHC to federal charters subject to Office of
Thrift Supervision ("OTS") regulation. The conversion of FNFG to a federal
charter was approved by stockholders' of the Company on January 9, 2003 and was
effective January 17, 2003.
On July 21, 2002, the Boards of Directors of the MHC, FNFG and First Niagara
adopted a plan of conversion and reorganization to convert the MHC from mutual
to stock form (the "Conversion"). In connection with the Conversion the 61%
ownership interest of the MHC in FNFG was sold to depositors of First Niagara
and the public (the "Offering"). Completion of the Conversion and Offering was
effective on January 17, 2003 and resulted in the issuance of 67.4 million
shares of common stock. A total of 41.0 million shares were sold in
subscription, community and syndicated offerings, at $10.00 per share, and an
additional 26.4 million shares were issued to the former public stockholders of
FNFG based upon an exchange ratio of 2.58681 new shares for each share of FNFG
held as of the close of business on January 17, 2003. Cash was paid in lieu of
fractional shares. The Conversion was accounted for as a reorganization in
corporate form with no change in the historical basis of the Company's assets,
liabilities and equity. All references to the number of shares outstanding for
purposes of calculating per share amounts are restated to give retroactive
recognition to the exchange ratio applied in the Conversion. Prior year share
data within the consolidated statement of condition have not been restated for
the exchange ratio.
Costs related to the Offering, primarily marketing fees paid to the Company's
investment banking firm, professional fees, registration fees and printing and
mailing costs, were $19.0 million and accordingly, net offering proceeds were
$391.0 million. As a result of the Conversion and Offering, FNFG was succeeded
by a new, fully public, Delaware corporation with the same name and the MHC
ceased to exist.
(3) Acquisitions and Dispositions
On February 19, 2003 the Company sold its wholly owned third-party benefit plan
administrator subsidiary, NOVA Healthcare Administrators, Inc. ("NOVA"), as it
was not considered one of the Company's core strategic businesses of banking,
investments or insurance. The sale of NOVA, which had assets of $5.8 million,
including goodwill of $1.0 million and customer lists of $1.5 million, resulted
in a gross gain of $2.0 million, before $1.8 million of income taxes. The
Company has classified the results of operations from NOVA from January 1, 2003
to the sale date (loss of $44 thousand), including the net gain on sale ($207
thousand), as discontinued operations in the consolidated statements of income.
10
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
On January 17, 2003, simultaneously with the Conversion and Offering, the
Company acquired 100% of the outstanding common shares of Finger Lakes Bancorp,
Inc. ("FLBC") the holding company of Savings Bank of the Finger Lakes ("SBFL"),
headquartered in Geneva, New York. Subsequent to the acquisition, SBFL was
merged into First Niagara and one of the seven SBFL branches acquired was
consolidated with an existing First Niagara banking center. The FLBC acquisition
increased the Company's presence in Cayuga and Tompkins Counties, bridged the
Company's western and central New York markets and provided an initial presence
in two additional central New York counties, Ontario and Seneca.
Under terms of the agreement, the Company paid $20.00 per share, in a
combination of cash and stock from the Offering, for all of the outstanding
shares and options of FLBC for an aggregate purchase price of $66.7 million. As
a result, 3.4 million shares of FNFG stock from the Offering were issued and
cash payments totaling $33.2 million were made. Capitalized costs related to the
acquisition, primarily management and professional fees, were $600 thousand. The
value of the shares issued to FLBC shareholders was based on the Company's
Offering price of $10.00 per share. This acquisition was accounted for under the
purchase method of accounting. Accordingly, the results of operations of FLBC
have been included in the consolidated statement of income from the date of
acquisition.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (in thousands):
January 17,
2003
-----------
Cash and cash equivalents $ 4,873
Securities available for sale 146,147
Loans, net 201,084
Goodwill 27,170
Core deposit intangible 2,578
Other assets 28,413
--------
Total assets acquired 410,265
--------
Deposits 259,520
Borrowings 75,621
Other liabilities 7,809
--------
Total liabilities assumed 342,950
--------
Net assets acquired $ 67,315
========
The core deposit intangible asset acquired is being amortized based upon the
projected discounted cash flows of the deposit accounts acquired, over a period
of approximately 11 years, with the majority of the amortization being recorded
over the first five years subsequent to the acquisition. The goodwill was
assigned to the Company's banking segment of which none is deductible for tax
purposes.
11
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(4) Earnings Per Share
The computation of basic and diluted earnings per share ("EPS") for the three
months ended March 31, 2003 and 2002 are as follows. All references to the
number of shares outstanding for purposes of calculating prior year per share
amounts are restated to give retroactive recognition to the 2.58681 exchange
ratio applied in the January 17, 2003 Conversion (in thousands except per share
amounts):
Three months ended
March 31,
-----------------------
2003 2002
-------- --------
Net income available to common shareholders $ 7,614 7,450
======== ========
Weighted average shares outstanding basic and diluted:
Total shares issued 71,913 76,973
Unallocated ESOP shares (3,817) (2,271)
Unvested restricted stock awards (522) (624)
Treasury shares (1,816) (9,873)
-------- --------
Total basic weighted average shares outstanding 65,758 64,205
Incremental shares from assumed exercise of
stock options 1,290 887
Incremental shares from assumed vesting of
restricted stock awards 220 215
-------- --------
Total diluted weighted average shares outstanding 67,268 65,307
======== ========
Basic earnings per share $ 0.12 0.12
======== ========
Diluted earnings per share $ 0.11 0.11
======== ========
EPS from discontinued operations is equal to EPS from net income available to
common shareholders shown above.
(5) Segment Information
The Company has two business segments, banking and financial services. The
financial services segment includes the Company's insurance and investment
advisory subsidiaries, which are organized under one Financial Services Group.
The banking segment includes the results of First Niagara excluding financial
services. In accordance with SFAS No. 144, the Company has classified the
results of operations from NOVA, its wholly owned third-party benefit plan
administrator subsidiary, as discontinued operations in the consolidated
statements of income, which previously were included as part of the Company's
financial services segment.
12
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 tables (in thousands):
Financial Consolidated
For the three month period ended: Banking services Eliminations total
------- --------- ------------ ------------
March 31, 2003
Interest income $42,923 14 (14) 42,923
Interest expense 17,549 -- (14) 17,535
------- ------- ------- -------
Net interest income 25,374 14 -- 25,388
Provision for credit losses 1,957 -- -- 1,957
------- ------- ------- -------
Net interest income after provision
for credit losses 23,417 14 -- 23,431
Noninterest income 5,753 4,304 (10) 10,047
Amortization of intangible assets 143 175 -- 318
Other noninterest expense 18,309 3,430 (10) 21,729
------- ------- ------- -------
Income from continuing operations
before income taxes 10,718 713 -- 11,431
Income tax expense from continuing
operations 3,621 359 -- 3,980
------- ------- ------- -------
Income from continuing operations 7,097 354 -- 7,451
Income from discontinued operations -- 163 -- 163
------- ------- ------- -------
Net income $ 7,097 517 -- 7,614
======= ======= ======= =======
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 3,922 (4) 9,258
Amortization of intangible assets -- 162 -- 162
Other noninterest expense 15,423 3,050 (4) 18,469
------- ------- ------- -------
Income from continuing operations
before income taxes 10,570 741 -- 11,311
Income tax expense from continuing
operations 3,490 424 -- 3,914
------- ------- ------- -------
Income from continuing operations 7,080 317 -- 7,397
Income from discontinued operations -- 53 -- 53
------- ------- ------- -------
Net income $ 7,080 370 -- 7,450
======= ======= ======= =======
(6) Recently Issued Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." This
statement nullifies Emerging Issues Task Force Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)" and requires
that a liability for costs associated with an exit or disposal activity be
recognized when the liability is probable and represents obligations to transfer
assets or provide services as a result of past transactions. The provisions of
this statement are effective for exit or disposal activities that are initiated
after December 31, 2002.
13
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This Interpretation enhances the disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of Interpretation No. 45 are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The Company adopted Interpretation No. 45 effective January 1, 2003, which did
not have a material impact on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123." This statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to provide three alternative methods for a voluntary change to
the fair value based method of accounting for stock-based compensation and
requires prominent disclosures in both interim and annual financial statements
about the method of accounting for stock-based compensation and its effect on
reported results. The provisions of this statement were effective for fiscal
years ending after December 15, 2002 and interim periods beginning after
December 15, 2002. The Company made the applicable disclosures required by SFAS
No. 148 in this quarterly report on Form 10-Q and in its 2002 annual report on
Form 10-K.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements." More
specifically, the Interpretation explains how to identify variable interest
entities and how to determine whether or not those entities should be
consolidated. The Interpretation requires the primary beneficiaries of variable
interest entities to consolidate the variable interest entities if they are
subject to a majority of the risk of loss or are entitled to receive a majority
of the residual returns. It also requires that both the primary beneficiary and
all other enterprises with a significant variable interest in a variable
interest entity make certain disclosures. Interpretation No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The provisions of this
Interpretation are not expected to have a material impact on the Company's
consolidated financial statements.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
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, and Section 21E of the Securities Exchange Act of 1934, as amended,
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.
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 taxable
equivalent adjustments were made. All average balances are average daily
balances.
Three months ended March 31,
--------------------------------------------------------------------------------
2003 2002
-------------------------------------- --------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- ----------- ------ ----------- ----------- ------
Interest-earning assets: (Dollars in thousands)
Federal funds sold and other
short-term investments ................... $ 295,743 $ 937 1.28% $ 74,813 $ 326 1.77%
Investment securities (1) .................. 247,556 1,509 2.44 201,150 2,295 4.57
Mortgage-backed securities (1) ............. 433,495 3,114 2.87 343,301 4,851 5.65
Loans (2) .................................. 2,157,965 36,996 6.90 1,872,409 34,795 7.48
Other interest-earning assets (3) .......... 28,734 367 5.18 24,529 266 4.39
----------- ----------- ----------- -----------
Total interest-earning assets ........ 3,163,493 42,923 5.46 2,516,202 42,533 6.80
----------- ----------- ----------- -----------
Allowance for credit losses ................... (23,690) (18,830)
Other noninterest-earning assets (4) (5) ...... 320,348 275,789
----------- -----------
Total assets ......................... $ 3,460,151 $ 2,773,161
=========== ===========
Interest-bearing liabilities:
Savings accounts ........................... $ 671,930 $ 2,485 1.50% $ 498,453 $ 3,032 2.47%
Interest-bearing checking .................. 485,655 1,346 1.12 538,325 2,363 1.78
Certificates of deposit .................... 1,014,610 8,094 3.24 879,491 9,105 4.20
Mortgagors' payments held in escrow ........ 12,237 -- -- 15,135 62 1.66
Stock offering subscription proceeds ....... 35,000 92 1.07 -- -- --
Borrowed funds ............................. 438,047 5,518 5.11 424,190 5,757 5.50
----------- ----------- ----------- -----------
Total interest-bearing liabilities ... 2,657,479 17,535 2.68 2,355,594 20,319 3.50
----------- ----------- ----------- -----------
Noninterest-bearing demand deposits ........... 128,000 103,410
Other noninterest-bearing liabilities ......... 56,477 48,208
----------- -----------
Total liabilities ........................ 2,841,956 2,507,212
Stockholders' equity (4) ...................... 618,195 265,949
----------- -----------
Total liabilities and stockholders'
equity ............................... $ 3,460,151 $ 2,773,161
=========== ===========
Net interest income ........................... $ 25,388 $ 22,214
=========== ===========
Net interest rate spread ...................... 2.78% 3.30%
==== ====
Net earning assets ............................ $ 506,014 $ 160,608
=========== ===========
Net interest income as a percentage of
average interest-earning assets ............ 3.21% 3.52%
=========== ===========
Ratio of average interest-earning assets
to average interest-bearing liabilities .... 119.04% 106.82%
=========== ===========
- ----------
(1) Amounts shown are at amortized cost.
(2) Net of deferred costs, unearned discounts and non-accruing loans.
(3) Primarily includes Federal Home Loan Bank stock.
(4) Includes unrealized gains/losses on securities available for sale.
(5) Includes bank-owned life insurance, earnings on which are reflected in
other noninterest income.
15
Lending Activities
Total loans outstanding, net of deferred costs and unearned discounts, at March
31, 2003 increased to $2.23 billion from the year-end December 31, 2002 balance
of $2.00 billion. Approximately $203.1 million of this increase can be
attributed to the acquisition of FLBC in January 2003 which added $66.4 million
of residential mortgages, $30.1 million of home equity loans, $64.6 million of
commercial mortgages, $21.4 million of consumer loans and $20.6 million of
commercial business loans. Additionally, the Company continued to shift its
portfolio mix from one-to four-family real estate loans to commercial real
estate, commercial construction and commercial business loans ("commercial
loans"). As a result, excluding the loans acquired from FLBC, commercial loans
increased $30.5 million or 4% from December 31, 2002 to March 31, 2003, while
one-to four-family real estate loans decreased $913 thousand during the same
period. This shift was achieved through the Company's continued emphasis on
commercial loan originations and management's asset/liability strategy of
holding fewer longer-term fixed-rate residential real estate loans, which is
expected to 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 as of the dates indicated.
March 31, 2003 December 31, 2002
------------------------------ -----------------------------
Amount Percent Amount Percent
----------- ------------ ----------- ------------
(Dollars in thousands)
Real estate loans:
One-to four-family .............. $ 992,949 44.7 % $ 927,453 46.5 %
Home equity ..................... 167,087 7.5 136,986 6.9
Multi-family .................... 171,582 7.7 170,357 8.6
Commercial ...................... 377,878 17.0 303,136 15.2
Construction .................... 117,324 5.3 107,200 5.4
----------- ------------ ----------- ------------
Total real estate loans ...... 1,826,820 82.2 1,645,132 82.6
----------- ------------ ----------- ------------
Consumer loans ..................... 188,260 8.5 169,155 8.5
Commercial business loans .......... 208,137 9.3 178,555 8.9
----------- ------------ ----------- ------------
Total loans .................. 2,223,217 100 % 1,992,842 100 %
----------- ============ ----------- ============
Net deferred costs and
unearned discounts ......... 7,965 2,591
Allowance for credit losses .... (23,913) (20,873)
----------- -----------
Total loans, net ............. $ 2,207,269 $ 1,974,560
=========== ===========
Even with the increase in higher risk commercial loans, credit quality has
remained strong. Non-accruing loans increased slightly to $9.9 million, or 0.45%
of total loans at March 31, 2003 from $7.5 million, or 0.37% of total loans at
December 31, 2002, but are still below the level of non-accruing loans at the
end of the three previous quarters of 2002. Approximately, $1.0 million of this
$2.5 million increase can be attributed to one well-collateralized commercial
relationship and does not reflect an overall deterioration in the credit quality
of the Company's loan portfolio. The allowance for credit losses, which amounted
to 240.67% of non-accruing loans and 1.07% of total loans at March 31, 2003, is
based upon management's review of the loan portfolio and to the best of
management's knowledge, includes all known and inherent losses that are both
probable and reasonable to estimate.
The Company's allowance for credit losses is continuously reviewed with
consideration given to losses inherent within the loan portfolio, the status of
particular loans, historical loan loss experience, as well as current 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.
16
Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and non-performing assets.
March 31, 2003 December 31, 2002
-------------- -----------------
Non-accruing loans (1): (Dollars in thousands)
One-to four-family ...................................... $ 3,723 $ 4,071
Home equity ............................................. 474 332
Commercial real estate and multi-family ................. 1,537 1,225
Consumer ................................................ 630 652
Commercial business ..................................... 3,572 1,198
------- -------
Total non-accruing loans ........................... 9,936 7,478
Other real estate owned .................................... 1,646 1,423
------- -------
Total non-performing assets .......................... $11,582 $ 8,901
======= =======
Total non-performing assets as a percentage of total assets 0.32% 0.30%
======= =======
Total non-accruing loans to total loans .................... 0.45% 0.37%
======= =======
Allowance for credit losses to total loans ................. 1.07% 1.05%
======= =======
Allowance for credit losses to non-accruing loans .......... 240.67% 279.13%
======= =======
- ----------
(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.
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,
----------------------------
2003 2002
-------- --------
(Dollars in thousands)
Balance at beginning of period ......................... $ 20,873 $ 18,727
Net charge-offs:
Charge-offs ......................................... (1,157) (1,498)
Recoveries .......................................... 239 224
-------- --------
Net charge-offs .................................. (918) (1,274)
Allowance obtained through acquisitions ................ 2,001 --
Provision for credit losses ............................ 1,957 1,530
-------- --------
Balance at end of period ............................... $ 23,913 $ 18,983
======== ========
Ratio of annualized net charge-offs during the period to
average loans outstanding during the period ......... 0.17% 0.27%
======== ========
Investing Activities
The Company's securities available for sale increased $39.9 million to $672.3
million at March 31, 2003 from $632.4 million at December 31, 2002. This
increase was a result of $146.1 million of investment securities obtained from
the FLBC acquisition partially offset by the Company's decision to invest a
portion of the funds received from the sales, maturity and principal payments on
securities available for sale in short-term investments classified as cash and
cash equivalents. This decision is part of the Company's asset/liability
management strategy of conservatively investing the proceeds from the Offering
and excess funds from operations in short-term investments due to the
historically low interest rate environment and the increased risk of extending
out on the yield curve due to this interest rate environment. Management
believes this strategy will benefit the Company in the long-term as interest
rates begin to rise. As a result of this strategy and the Offering, cash and
cash equivalents, which have maturities of less than 60 days, increased $346.6
million to $437.1 million at March 31, 2003 from $90.5 million at December 31,
2002.
Funding Activities
Total deposits increased from $2.13 billion at December 31, 2002 to $2.40
billion at March 31, 2003. This $269.3 million increase primarily resulted from
the acquisition of FLBC, which added $259.5 million of funding, as well as the
Company's focus on increasing its customer base, which included the opening of
its 45th banking center in January 2003. The deposits acquired from FLBC
consisted of $46.4 million of savings deposits, $36.7 million of interest
bearing checking accounts, $160.7 million of certificates of deposit, $15.3
million of noninterest bearing deposits and $388 thousand of escrow deposits.
This increase in deposits was partially offset by $13.2 million of deposits on
hand at December 31, 2002 that were used by depositors to fund stock purchases
in the Offering and approximately $13.0 million in deposits of the MHC that were
reallocated to equity as part of the Conversion.
17
Borrowed funds increased $44.6 million to $441.7 million at March 31, 2003 from
$397.1 million at December 31, 2002. This increase was a result of the FLBC
acquisition, which added $75.6 million of borrowings to the Company's balance
sheet. Excluding the debt acquired from FLBC, borrowed funds decreased $31.0
million, as the cash flow from operations and the Offering were more than
adequate to meet the funding needs of the Company.
Equity Activities
Stockholders' equity increased to $711.6 million at March 31, 2003 compared to
$283.7 million at December 31, 2002. This $428.0 million increase was primarily
attributable to the Offering and Conversion completed in January 2003, which
added $390.0 million of new capital, net of $20.5 million of FNFG shares
contributed to the Company's ESOP plan in connection with the Offering.
Additionally, stockholders' equity increased $33.6 million from the issuance of
shares in connection with the FLBC acquisition and net income during the first
quarter of $7.6 million. The above increases were partially offset by common
stock dividends paid of $0.05 per share, which reduced stockholders' equity by
$3.3 million.
Results of Operations for the Three Months Ended March 31, 2003
Net Income
Net income for the quarter ended March 31, 2003 increased to $7.6 million from
$7.5 million for the same period of 2002, or $0.11 per diluted share for both
periods. As a result of the Conversion, effective January 17, 2003, all prior
year per share amounts have been adjusted to reflect the 2.58681 exchange ratio.
Net income for the first quarter of 2003 represented an annualized return on
average stockholders' equity of 5.00% and an annualized return on average assets
of 0.89%. As discussed further in Note 3, the Company has classified the results
of operations from NOVA, including the net gain on sale, as discontinued
operations in the consolidated statements of income.
Net Interest Income
Net interest income rose to $25.4 million for the quarter ended March 31, 2003
from $22.2 million for the same period in 2002. This was primarily the result of
a $345.4 million increase in average net earning assets when comparing the same
periods, due to the Offering, acquisition of FLBC and internal growth. This
increase in average net earning assets was partially offset by a 52 basis point
decrease in net interest rate spread from the first quarter of 2002 to the first
quarter of 2003, as the Company's interest-earning assets repriced faster than
its interest-bearing liabilities due to the declining interest rate environment.
As a result, the Company's net interest margin decreased to 3.21% for the
quarter ended March 31, 2003 from 3.52% for the same period in 2002.
Interest income increased $390 thousand for the quarter ended March 31, 2003
when compared to the same period in 2002. This was mainly the result of a $647.3
million increase in average interest earning assets from the first quarter of
2002 to the first quarter of 2003 due to the Offering, acquisition of FLBC and
internal growth. More specifically, the average outstanding balance of loans,
federal funds sold and other short-term investments, as well as investment
securities increased $285.6 million, $220.9 million and $136.6 million from the
quarter ended March 31, 2002 to the quarter ended March 31, 2003, respectively.
These increases in average interest earning assets were offset by a 134 basis
point decrease in the rate earned on those assets from the first quarter of 2002
to the first quarter of 2003, due to the declining interest rate environment,
which caused the Company's variable rate interest-earning assets to reprice to
lower rates and fixed rate interest earning assets to prepay faster. The higher
level of principal prepayments received reduced the effective yield earned on
mortgage-backed securities as the Company was required to amortize approximately
$2.3 million of premiums paid at the time of purchase for those securities in
the first quarter of 2003 compared to $456 thousand for the first quarter of
2002. Additionally, the rate on interest earning assets decreased as a result of
the Company's decision to invest the funds from the Offering and excess funds
from operations in lower yielding federal funds sold and other short-term
investments, which represented 9% of average interest earning assets for the
quarter ended March 31, 2003 compared to 3% for the same quarter in 2002.
Interest expense decreased $2.8 million from the first quarter of 2002 to the
first quarter of 2003, primarily due to the 82 basis point decrease in the rate
paid on interest-bearing liabilities from 3.50% to 2.68%, 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 to $2.7 billion for the first quarter of 2003 from $2.4 billion for
the same period in 2002, due to the acquisition of FLBC and internal growth.
18
Provision for Credit Losses
The provision for credit losses increased to $2.0 million for the quarter ended
March 31, 2003 from $1.5 million for the same period in 2002. This was a result
of an increase in the concentration of commercial loans from the first quarter
of 2002 to the first quarter of 2003, as well as an increase in non-accruing
loans from the end of 2002 to March 31, 2003. However, credit quality remains
strong as net charge-offs for the first quarter of 2003 amounted to $918
thousand, or 0.17% of average loans outstanding, compared to $1.3 million, or
0.27% of average loans outstanding for the same period in 2002. The provision is
based on management's continuous 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 and delinquent loans and related collateral or government
guarantees, charge-offs and both current and historic economic conditions. The
Company establishes provisions for credit losses, which are charged to
operations, in order to maintain the allowance for credit losses at a level to
absorb credit losses inherent in the existing loan portfolio.
Noninterest Income
For the first quarter of 2003, the Company had $10.0 million of noninterest
income from continuing operations, an increase of $789 thousand over the same
period in 2002. This increase was largely the result of increased bank service
charges and fee income of $461 thousand due primarily to the FLBC acquisition
and its six branch locations. Additionally, during the first quarter of 2003,
the Company's insurance agency realized an additional $350 thousand from the
receipt of contingent profit sharing commissions as loss experience and the
origination and retention of insurance policies was more favorable than
originally estimated. Finally, noninterest income increased $279 thousand from
the quarter ended March 31, 2002 to the quarter ended March 31, 2003 due to
strong annuity sales resulting from the Company's increased emphasis on this
line of business as well as more favorable market conditions for these products.
Noninterest Expense
Noninterest expense from continuing operations for the three months ended March
31, 2003 increased $3.4 million to $22.0 million from $18.6 million for the
comparable period of 2002. This increase was primarily due to the acquisition of
FLBC and internal growth, which included the addition of new banking centers.
More specifically, salaries and benefits expense grew $1.5 million from the
first quarter of 2002 to the first quarter of 2003, of which approximately $800
thousand can be attributed to the acquisition of FLBC. Additionally, salaries
and benefits increased as a result of annual merit increases, as well as the
additional ESOP shares purchased in the second step offering, accelerated
vesting of stock options and awards, and the rise in the Company's stock price,
which caused stock-based compensation expense to increase $409 thousand. During
the first quarter of 2003, marketing and advertising expense increased $530
thousand in comparison to the same period in 2002 primarily due to the
continuation of the "First Niagara" branding campaign, which began in the fourth
quarter of 2002. For the quarter ended March 31, 2003, occupancy and equipment,
as well as technology and communications expense increased a combined $965
thousand, of which approximately $500 thousand can be attributed to the FLBC
acquisition and the remainder was due to other increased business activity and
the continuous upgrading of the Company's systems.
Income Taxes
The effective tax rate from continuing operations was relatively consistent with
the prior year, increasing slightly to 34.8% for the first quarter of 2003
compared to 34.6% for the first quarter of 2002.
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 received 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 balances and mortgage prepayments are greatly influenced by general
interest rates, the economic environment and local competitive conditions.
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 and other debt securities. During the
first quarter of 2003, loan originations totaled $229.1 million compared to
$164.6 million for the first quarter of 2002, while purchases of investment
securities totaled $319.8 million during the first quarter of 2003 compared to
$103.5 million for the same period in 2002.
19
Deposit growth, the sales, maturity and principal payments received on loans and
investment securities and proceeds from the Offering were used to fund the
investing activities described above. Additionally, the Company has lines of
credit with the Federal Home Loan Bank and Federal Reserve Bank that provide
funding sources, for lending, liquidity and asset/liability management as
needed. During the first quarter of 2003 cash flows provided by the sale,
principal payments and maturity of securities available for sale amounted to
$421.2 million compared to $239.0 million for the same period in 2002. This
increase from the prior year was primarily due to the maturity of investment
securities, the higher level of prepayments received on mortgage-backed
securities due to the declining interest rate environment, as well as the
Company's strategic decision to shorten the duration of its investment
portfolio. Deposit growth, excluding those acquired from FLBC, provided $9.8
million of funding for the three months ended March 31, 2003. In addition to
these funding sources, the Company also received $294.6 million of funds related
to the completion of the Offering in the first quarter of 2003.
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, 2003, the Company had outstanding commitments to originate loans of
approximately $126.3 million, which generally have an expiration period of less
than 120 days. Commitments to sell residential mortgages amounted to $11.5
million at March 31, 2003.
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 $186.1 million at March 31, 2003 and
generally have an expiration period of less than one year. The Company also
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 $15.0 million at March 31, 2003 and
generally have an expiration period greater than one year but less than two
years. Since a significant portion of unused lines of credit and the majority of
outstanding standby letters of credit expire without being funded, the Company's
expectation is that its 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 borrowed funds 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, 2003, the total of cash and cash equivalents was $437.1 million. This
included $44.2 million of cash and due from banks, $143.2 million of federal
funds sold, $65.0 million of money market preferred stock, $57.3 million of
commercial paper, $75.0 million of repurchase agreements and $52.4 million of
interest earning deposit accounts with brokers. All short-term investments are
purchased from or are debt to investment grade companies.
At March 31, 2003, First Niagara exceeded all regulatory capital requirements.
The current requirements and the actual levels for First Niagara are detailed in
the following table.
As of March 31, 2003
---------------------------------------------------------------------------------------------
To be well capitalized
Minimum under prompt corrective
Actual capital adequacy action provisions
--------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----- -------- ----- -------- -----
Tangible capital $ 415,978 12.15% 51,360 1.50% N/A N/A%
Tier 1 (core) capital 418,413 12.21 137,057 4.00 171,321 5.00
Tier 1 risk based capital 418,413 18.64 N/A N/A 134,717 6.00
Total risk based capital 442,325 19.70 179,623 8.00 224,528 10.00
20
Critical Accounting Estimates
Pursuant to recent SEC guidance, management of the Company is encouraged to
evaluate and disclose those accounting estimates 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
judgments. Management considers the accounting estimates relating to the
allowance for credit losses and goodwill to be critical given the inherent
uncertainty in evaluating the levels of the allowance required to cover credit
losses in the portfolio and assessing whether or not goodwill is impaired. The
judgments made regarding the allowance for credit losses and goodwill can have a
material effect on the results of operations of the Company. 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 2002 10-K dated
March 24, 2003. A more detailed description of the Company's methodology for
testing goodwill for impairment and assumptions made is included within the
"Critical Accounting Estimates" section filed in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Company's 2002 10-K dated March 24, 2003.
Item 3. Quantitative and Qualitative Disclosures 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 is comprised of 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, 2003 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 conditions. As a result of the Offering and
management's strategy of investing the funds from the Offering and excess funds
from operations in short-term investments with minimal extension risk, the
Company is now more asset sensitive and is likely to experience an increase in
net interest income in a rising interest rate environment.
Calculated increase (decrease) at
March 31, 2003
-----------------------------------------
Changes in
interest rates Net interest income % Change
----------------- ------------------- --------
(Dollars in thousands)
+200 basis points $ 7,706 6.95 %
+100 basis points 4,316 3.89
-100 basis points (3,749) (3.38)
Item 4. Controls and Procedures
- --------------------------------------------------------------------------------
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Exchange Act)
as of a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, our disclosure
controls and procedures are effective to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the
time periods specified in the Securities and Exchange Commission's rules and
forms. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the Evaluation Date.
21
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
- --------------------------------------------------------------------------------
A Plan of Conversion and Reorganization (the "Plan") to convert the MHC
from mutual to stock form and to sell the shares of common stock
representing the MHC's ownership interest in FNFG was approved by the
stockholders of FNFG and the depositors of First Niagara on January 9,
2003 and by the OTS on December 13, 2002.
Pursuant to the registration statement on Form S-1, declared effective on
November 14, 2002 (Commission File No. 333-99737) (the "Registration
Statement"), the Company registered up to 47.2 million shares of common
stock for purchase at a price of $10.00 per share. In accordance with the
Plan and pursuant to the Registration Statement, the stock was first
offered to eligible depositors of First Niagara, stockholders of FNFG and
to persons residing in the counties that First Niagara conducts its
business. Such parties subscribed for 13.8 million of the shares sold.
Additionally, 25.1 million shares were sold in a syndicated community
offering. In connection with the offering 2.1 million shares were issued
to the Company's ESOP plan and 3.4 million shares were issued to acquire
FLBC. Ryan Beck & Co., Inc. was engaged to assist in the marketing of the
common stock and to manage a selling group of broker dealers in the
syndicated community offering. For their services in connection with the
stock offering and acquisition of FLBC, Ryan Beck & Co., Inc. received
fees of $16.6 million and $436,000, respectively.
The stock offering, which was completed on January 17, 2003, resulted in
net proceeds of $391.0 million. Expenses related to the offering were
$19.0 million, including the expenses paid to Ryan Beck & Co., Inc.
described above. An additional 26.4 million shares were issued to existing
stockholders based on an exchange rate of 2.58681 new shares of common
stock for each existing share. Cash was paid in lieu of fractional shares.
Upon completion of the offering, the exchange of shares and the
acquisition of FLBC, 70.7 million shares were outstanding. On January 17,
2003, the net assets of the MHC ($19.5 million) were transferred into
First Niagara.
All of the proceeds from the Offering were invested in short-term
investments with maturities of sixty days or less. Simultaneously with the
Offering, $33.2 million of the proceeds were used to purchase FLBC. During
the remainder of 2003, upon maturity of some of the short-term
investments, the resulting funds will be re-invested in securities with
maturities in the one to three year range, used to fund loan growth or
used to fund other capital management opportunities as identified.
See notes 2 and 3 to the condensed consolidated financial statements filed
herewith in Item 1 "Financial Statements" for further details regarding
the above transactions.
Item 3. Defaults upon Senior Securities
- --------------------------------------------------------------------------------
Not applicable.
22
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
A special meeting of stockholders of FNFG was held on January 9, 2003. The
Meeting was conducted for the purpose of considering and acting upon the
approval of the plan of re-chartering and approval of the plan of conversion and
reorganization. The following table reflects the tabulation of the votes with
respect to each matter voted upon at the special meeting:
Number of votes (a)
----------------------------------------
Matters considered For Against Abstain
- ----------------------------------------------------------------------------------- ---------- ------- -------
(1) A plan of re-chartering by which FNFG will convert its charter from a Delaware 23,589,821 32,840 3,516
corporation to a Federal corporation.
(2) A plan of conversion and reorganization pursuant to which the MHC will be 23,587,735 34,724 3,717
merged into First Niagara and FNFG will be succeeded by a new Delaware
corporation with the same name. As part of the conversion and reorganization,
shares of common stock representing the MHC's ownership interest in FNFG will
be offered for sale in a subscription and community offering.
(a) For matters (1) and (2) there were no broker non-votes.
Item 5. Other Information
- --------------------------------------------------------------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a) The following exhibits are filed herewith:
Exhibits
99.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Summary of Quarterly Financial Data
(b) Reports on Form 8-K
On January 10, 2003 the Company filed a Current Report on Form 8-K,
which disclosed that it has received stockholder and depositor
approval at special meetings held on January 9, 2003 to complete the
second-step mutual-to-stock conversion of First Niagara Financial
Group, MHC and to complete the related stock offering. Such Current
Report, as an Item 7 exhibit included the Company's press release
dated January 9, 2003.
On January 17, 2003 the Company filed a Current Report on Form 8-K,
which disclosed that it had consummated its second-step conversion
and related public stock offering. Additionally, the Company
announced that it had completed the acquisition of Finger Lakes
Bancorp, Inc. Such Current Report, as an Item 7 exhibit included the
Company's press release dated January 17, 2003.
On February 24, 2003 the Company filed a Current Report on Form 8-K,
which disclosed that its Board of Directors approved the sale of
NOVA Healthcare Administrators, Inc. Such Current Report, as an Item
7 exhibit included the Company's press release dated February 20,
2003.
23
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 12, 2003 By: /s/ William E. Swan
-----------------------------------------------
William E. Swan
Chairman, President and Chief Executive Officer
Date: May 12, 2003 By: /s/ Paul J. Kolkmeyer
-----------------------------------------------
Paul J. Kolkmeyer
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
24
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, William E. Swan, Chairman, President and Chief Executive Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of First Niagara
Financial Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ William E. Swan
-----------------------------------------------
William E. Swan
Chairman, President and Chief Executive Officer
25
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Paul J. Kolkmeyer, Executive Vice President, Chief Operating Officer and
Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Niagara
Financial Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Paul J. Kolkmeyer
-----------------------------------------------
Paul J. Kolkmeyer
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
26