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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-23975
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
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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The Registrant had 113,204,223 shares of Common Stock, $0.01 par value,
outstanding as of November 4, 2005.
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1
FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2005
TABLE OF CONTENTS
Item Number Page Number
- ----------- -----------
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition as of
September 30, 2005 and December 31, 2004 (unaudited)..................... 3
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 2005 and 2004 (unaudited)...... 4
Condensed Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 2005 and 2004 (unaudited)...... 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 2005 and 2004 (unaudited)........ 6
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2005 and 2004 (unaudited)................ 7
Notes to Condensed Consolidated Financial Statements (unaudited)........... 8
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................ 12
3. Quantitative and Qualitative Disclosures about Market Risk..................... 20
4. Controls and Procedures........................................................ 21
PART II - OTHER INFORMATION
1. Legal Proceedings.............................................................. 21
2. Unregistered Sales of Equity Securities and Use of Proceeds.................... 21
3. Defaults Upon Senior Securities................................................ 21
4. Submission of Matters to a Vote of Security Holders............................ 21
5. Other Information.............................................................. 22
6. Exhibits....................................................................... 22
Signatures........................................................................ 22
2
PART I - FINANCIAL INFORMATION
1. Financial Statements
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Condition
(unaudited)
September 30, December 31,
2005 2004
------------- -------------
(In thousands, except share
Assets and per share amounts)
Cash and cash equivalents .......................................... $ 160,840 $ 67,642
Securities available for sale ...................................... 1,663,178 1,170,129
Loans and leases, net .............................................. 5,103,287 3,215,255
Bank-owned life insurance .......................................... 76,043 86,464
Premises and equipment, net ........................................ 91,133 61,760
Goodwill ........................................................... 698,000 323,782
Core deposit and other intangibles ................................. 65,250 21,878
Other assets ....................................................... 181,553 131,464
----------- -----------
Total assets .......................................... $ 8,039,284 $ 5,078,374
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ......................................................... $ 5,348,221 $ 3,337,682
Short-term borrowings ............................................ 436,348 209,236
Long-term borrowings ............................................. 726,979 541,450
Other liabilities ................................................ 146,766 61,844
----------- -----------
Total liabilities ..................................... 6,658,314 4,150,212
----------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized;
none issued .................................................... -- --
Common stock, $0.01 par value, 250,000,000 shares authorized;
120,046,007 shares issued in 2005 and 84,298,473 shares issued
in 2004 ........................................................ 1,200 843
Additional paid-in capital ....................................... 1,237,199 751,175
Retained earnings ................................................ 272,777 238,048
Accumulated other comprehensive loss ............................. (15,215) (5,437)
Common stock held by ESOP, 3,779,282 shares in 2005 and
3,895,159 shares in 2004 ....................................... (28,432) (29,275)
Unearned compensation - restricted stock awards,
437,069 shares in 2005 and 345,410 shares in 2004 .............. (4,836) (3,173)
Treasury stock, at cost, 6,074,949 shares in 2005
and 1,781,029 shares in 2004 ................................... (81,723) (24,019)
----------- -----------
Total stockholders' equity ............................ 1,380,970 928,162
----------- -----------
Total liabilities and stockholders' equity ............ $ 8,039,284 $ 5,078,374
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Income
(unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(In thousands, except per share amounts)
Interest income:
Loans and leases .................................. $ 80,547 $ 47,937 $ 230,963 $ 140,101
Securities available for sale and other investments 15,750 8,881 45,779 25,523
--------- --------- --------- ---------
Total interest income ........................ 96,297 56,818 276,742 165,624
Interest expense:
Deposits .......................................... 21,743 10,449 56,638 30,998
Borrowings ........................................ 11,058 6,731 32,816 19,450
--------- --------- --------- ---------
Total interest expense ....................... 32,801 17,180 89,454 50,448
--------- --------- --------- ---------
Net interest income .......................... 63,496 39,638 187,288 115,176
Provision for credit losses .......................... 1,647 1,742 4,848 6,596
--------- --------- --------- ---------
Net interest income after provision for ...... 61,849 37,896 182,440 108,580
credit losses --------- --------- --------- ---------
Noninterest income:
Banking services .................................. 10,115 5,296 27,552 14,440
Risk management services .......................... 8,840 4,308 20,871 13,198
Lending and leasing ............................... 1,923 1,117 5,269 3,317
Wealth management services ........................ 1,435 1,257 4,327 3,592
Gain on sale of real estate partnership ........... 1,377 -- 1,377 --
Bank-owned life insurance ......................... 965 826 3,093 2,901
Other ............................................. 985 303 1,963 897
--------- --------- --------- ---------
Total noninterest income ..................... 25,640 13,107 64,452 38,345
--------- --------- --------- ---------
Noninterest expense:
Salaries and employee benefits .................... 26,006 16,790 71,892 48,588
Technology and communications ..................... 5,091 2,883 13,982 8,336
Occupancy and equipment ........................... 4,765 3,079 13,919 9,555
Professional services ............................. 1,718 1,460 6,064 3,228
Marketing and advertising ......................... 1,685 998 5,539 3,335
Amortization of core deposit and other intangibles 3,254 1,182 8,616 3,387
Other ............................................. 5,289 3,986 17,810 12,377
--------- --------- --------- ---------
Total noninterest expense .................... 47,808 30,378 137,822 88,806
--------- --------- --------- ---------
Income before income taxes ................... 39,681 20,625 109,070 58,119
Income tax expense ................................... 15,508 7,295 39,711 19,861
--------- --------- --------- ---------
Net income ................................... $ 24,173 $ 13,330 $ 69,359 $ 38,258
========= ========= ========= =========
Earnings per common share:
Basic ........................................ $ 0.22 $ 0.17 $ 0.63 $ 0.49
Diluted ...................................... $ 0.22 $ 0.17 $ 0.63 $ 0.48
Weighted average common shares outstanding:
Basic ........................................ 110,227 79,257 109,859 78,755
Diluted ...................................... 111,239 80,312 110,858 79,994
See accompanying notes to condensed consolidated financial statements.
4
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
(In thousands)
Net income ................................................ $ 24,173 $ 13,330 $ 69,359 $ 38,258
Other comprehensive income (loss), net of income taxes:
Securities available for sale:
Net unrealized gains (losses) arising during the period (6,927) 5,673 (9,898) (3,248)
Reclassification adjustment for realized (gains) losses
included in net income .............................. 2 -- (1) (36)
--------- --------- --------- ---------
(6,925) 5,673 (9,899) (3,284)
Minimum pension liability adjustment .................... -- 129 121 129
--------- --------- --------- ---------
Total other comprehensive income (loss) ............. (6,925) 5,802 (9,778) (3,155)
--------- --------- --------- ---------
Total comprehensive income .......................... $ 17,248 $ 19,132 $ 59,581 $ 35,103
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
5
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Accumulated Common Unearned
Additional other stock compensation
Common paid-in Retained comprehensive held by - restricted Treasury
stock capital earnings loss ESOP stock awards stock Total
--------- ---------- --------- ------------- --------- ------------ --------- ---------
(In thousands, except per share amounts)
Balances at January 1, 2005 . $ 843 751,175 238,048 (5,437) (29,275) (3,173) (24,019) 928,162
Net income .................. -- -- 69,359 -- -- -- -- 69,359
Total other comprehensive
loss, net ................. -- -- -- (9,778) -- -- -- (9,778)
Common stock issued for the
acquisition of Hudson River
Bancorp ..................... 357 484,093 -- -- -- -- -- 484,450
Treasury shares issued for
the acquisition of Hatch
Leonard Naples, Inc. ........ -- 215 -- -- -- -- 5,785 6,000
Purchase of treasury shares . -- -- -- -- -- -- (71,040) (71,040)
Exercise of stock options ... -- 647 (3,214) -- -- -- 5,068 2,501
ESOP shares committed to be
released .................. -- 743 -- -- 843 -- -- 1,586
Restricted stock awards ..... -- 326 -- -- -- (1,663) 2,483 1,146
Common stock dividend of
$0.28 per share ........... -- -- (31,416) -- -- -- -- (31,416)
--------- --------- --------- --------- --------- --------- --------- ---------
Balances at September 30,
2005 ...................... $ 1,200 1,237,199 272,777 (15,215) (28,432) (4,836) (81,723) 1,380,970
========= ========= ========= ========= ========= ========= ========= =========
Balances at January 1, 2004 . $ 708 544,618 217,538 (740) (30,399) (2,376) (1,175) 728,174
Net income .................. -- -- 38,258 -- -- -- -- 38,258
Total other comprehensive
loss, net ................. -- -- -- (3,155) -- -- -- (3,155)
Common stock issued for the
acquisition of Troy
Financial Corporation ..... 133 201,147 -- -- -- -- -- 201,280
Purchase of treasury shares . -- -- -- -- -- -- (19,211) (19,211)
Exercise of stock options ... 2 3,863 (6,485) -- -- -- 9,481 6,861
ESOP shares committed to be
released .................. -- 691 -- -- 843 -- -- 1,534
Restricted stock awards ..... -- 585 -- -- -- (1,072) 1,630 1,143
Common stock dividend of
$0.22 per share ........... -- -- (17,577) -- -- -- -- (17,577)
--------- --------- --------- --------- --------- --------- --------- ---------
Balances at September 30,
2004 ...................... $ 843 750,904 231,734 (3,895) (29,556) (3,448) (9,275) 937,307
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
6
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine months ended September 30,
-------------------------------
2005 2004
------------- -------------
Cash flows from operating activities: (In thousands)
Net income ..................................................... $ 69,359 $ 38,258
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of fees and discounts, net ................... 2,906 7,783
Provision for credit losses ............................... 4,848 6,596
Depreciation of premises and equipment .................... 8,320 5,593
Amortization of core deposit and other intangibles ........ 8,616 3,387
Gain on sale of real estate partnership ................... (1,377) --
ESOP and stock based compensation expense ................. 2,767 2,357
Deferred income tax expense ............................... 9,211 1,328
Net increase in other assets .............................. (10,952) (2,153)
Net increase in other liabilities ......................... 48,715 31,102
----------- -----------
Net cash provided by operating activities ............... 142,413 94,251
----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale ........... 3,002 66,113
Proceeds from maturities of securities available for sale ...... 250,852 182,117
Principal payments received on securities available for sale ... 178,262 124,202
Purchases of securities available for sale ..................... (352,373) (458,132)
Net increase in loans .......................................... (230,533) (170,363)
Proceeds from surrender of bank-owned life insurance ........... 42,119 --
Acquisitions and disposition, net of cash and cash equivalents . (118,404) (45,111)
Other, net ..................................................... (11,296) (15,262)
----------- -----------
Net cash used in investing activities ................... (238,371) (316,436)
----------- -----------
Cash flows from financing activities:
Net increase in deposits ..................................... 231,581 26,552
Repayments of short-term borrowings, net ..................... (88,029) (12,535)
Proceeds from long-term borrowings ........................... 185,000 171,500
Repayments of long-term borrowings ........................... (38,553) (14,493)
Proceeds from exercise of stock options ...................... 1,613 3,818
Purchase of treasury stock ................................... (71,040) (19,211)
Dividends paid on common stock ............................... (31,416) (17,577)
----------- -----------
Net cash provided by financing activities ............... 189,156 138,054
----------- -----------
Net increase (decrease) in cash and cash equivalents ............ 93,198 (84,131)
Cash and cash equivalents at beginning of period ................ 67,642 174,252
----------- -----------
Cash and cash equivalents at end of period ...................... $ 160,840 $ 90,121
=========== ===========
Cash paid during the period for:
Income taxes ............................................... $ 25,711 $ 12,608
Interest expense ........................................... 86,274 49,801
Acquisitions and disposition of noncash assets and liabilities:
Assets acquired, net of dispositions ....................... $ 2,786,672 $ 1,330,008
Liabilities assumed, net of dispositions ................... 2,166,729 1,077,034
See accompanying notes to condensed consolidated financial statements.
7
First Niagara Financial Group, Inc. and Subsidiary
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 U.S. 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
full year financial statements. In the opinion of management, all adjustments
necessary for a fair presentation have been included. Results for the three and
nine month periods ended September 30, 2005 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2005. Certain
reclassification adjustments were made to the 2004 financial statements to
conform them to the 2005 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 stock options and restricted stock awards may be granted to directors and
key employees. The Company has continued 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 Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123." Had the Company determined compensation
cost based on the fair value method under SFAS No. 123, 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 (dollars in
thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income as reported $ 24,173 $ 13,330 $ 69,359 $ 38,258
Add: Stock-based employee compensation
expense included in net income, net of
related income tax effects 234 164 708 494
Deduct: Stock-based employee compensation
expense determined under the fair-value
based method, net of related income tax effects (639) (456) (1,779) (1,310)
---------- ---------- ---------- ----------
Pro forma net income $ 23,768 $ 13,038 $ 68,288 $ 37,442
========== ========== ========== ==========
Basic earnings per share:
As reported $ 0.22 $ 0.17 $ 0.63 $ 0.49
Pro forma 0.22 0.16 0.62 0.48
Diluted earnings per share:
As reported $ 0.22 $ 0.17 $ 0.63 $ 0.48
Pro forma 0.21 0.16 0.62 0.47
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R, "Share Based Payment," which revised SFAS No. 123 and superseded APB
Opinion No. 25. More specifically, this Statement requires companies to
recognize in the income statement, over the required service period, the
estimated grant-date fair value of stock options and other equity-based
compensation issued to employees and directors using option pricing models. This
Statement is effective for the Company's first annual period beginning after
June 15, 2005 and the Company has chosen to apply the modified prospective
approach. Accordingly, awards that are granted, modified or settled after
January 1, 2006 will be accounted for in accordance with SFAS No. 123R and any
unvested equity awards granted prior to that date will be recognized in the
income statement as service is rendered based on their grant-date fair value
calculated in accordance with SFAS No. 123.
8
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
(2) Acquisitions
Hudson River Bancorp, Inc.
On January 14, 2005, FNFG acquired all of the outstanding common shares of
Hudson River Bancorp, Inc. ("HRB"), and its wholly owned subsidiary Hudson River
Bank & Trust Company. Following completion of the acquisition, HRB's locations
were merged into First Niagara's branch network.
The aggregate purchase price of $615.8 million included the issuance of 35.7
million shares of FNFG stock (valued at $13.552 per share), cash payments
totaling $126.8 million and capitalized costs related to the acquisition,
primarily investment banking and professional fees, of $4.5 million. The results
of HRB's operations are included in the 2005 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 14,
2005
------------
Cash and cash equivalents $ 23,396
Securities available for sale 591,610
Loans, net 1,662,925
Goodwill 352,168
Core deposit and other intangibles 35,817
Other assets 117,118
------------
Total assets acquired 2,783,034
------------
Deposits 1,778,958
Borrowings 371,556
Other liabilities 16,714
------------
Total liabilities assumed 2,167,228
------------
Net assets acquired $ 615,806
============
As a result of the implementation of Statement of Position ("SOP") 03-3,
"Accounting for Certain Loans or Debt Securities Acquired in a Transfer,"
effective January 1, 2005, loans acquired from HRB with evidence of
deterioration of credit quality since origination, such that the Company
estimates all contractually required payments will not be collected, are being
carried at estimated net realizable value. Those loans had an outstanding
balance and carrying value of approximately $18.3 million and $9.8 million,
respectively, and no additional allowance has been allocated to them at
September 30, 2005.
The core deposit and other intangible assets acquired are being amortized using
the double declining balance method over their estimated useful-life of 10
years. The goodwill was primarily assigned to the Company's banking segment of
which none is deductible for tax purposes.
The following table presents unaudited pro forma information as if the
acquisition of HRB had been consummated as of the beginning of 2004. Pro forma
information for 2005 is not presented since such results were not materially
different from actual results due to the timing of the acquisition. This pro
forma information gives effect to certain adjustments, including purchase
accounting fair value adjustments, amortization of core deposit and other
intangibles and related income tax effects. The pro forma information does not
reflect the results of operations that would have occurred had the Company
acquired HRB at the beginning of 2004. Among other items, operational
efficiencies, revenue enhancements and indirect merger and integration costs
incurred by both FNFG and HRB are not reflected in the pro forma amounts (in
thousands, except per share amounts):
Three months ended Nine months ended
September 30, 2004 September 30, 2004
------------------ ------------------
(Pro forma)
Net interest income $ 64,447 $ 187,961
Noninterest income 18,298 53,765
Noninterest expense 45,615 135,161
Net income 21,295 62,615
Basic earnings per share $ 0.19 $ 0.55
========= =========
Diluted earnings per share $ 0.18 $ 0.54
========= =========
9
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
Hatch Leonard Naples, Inc. and Burke Group, Inc.
On July 29, 2005, First Niagara Risk Management, Inc., the wholly owned
insurance subsidiary of First Niagara, acquired all of the outstanding shares of
Hatch Leonard Naples, Inc. ("HLN"), an insurance agency with operations across
Upstate New York. Under terms of the agreement, the consideration included a
combination of cash and 435,375 shares of FNFG common stock (valued at $13.781
per share). On September 12, 2005, FNFG acquired Burke Group, Inc. ("Burke
Group") an employee benefits administration and compensation consulting firm in
a cash transaction. The results of HLN and Burke Group have been included in the
consolidated statement of income from the respective dates of acquisition.
Additionally, the Company recorded a total of $23.4 million of goodwill and
$15.1 million in customer list intangibles. The customer lists are being
amortized on an accelerated basis over 18 years. The goodwill was assigned to
the Company's financial services segment of which none is deductible for tax
purposes.
(3) Earnings Per Share
The computation of basic and diluted earnings per share for the three and nine
months ended September 30, 2005 and 2004 is as follows (in thousands, except per
share amounts):
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income available to common shareholders $ 24,173 $ 13,330 $ 69,359 $ 38,258
========== ========== ========== ==========
Weighted average shares outstanding basic
and diluted:
Total shares issued 120,046 84,298 118,344 83,503
Unallocated ESOP shares (3,817) (3,972) (3,856) (4,010)
Unvested restricted stock awards (388) (377) (397) (394)
Treasury shares (5,614) (692) (4,232) (344)
---------- ---------- ---------- ----------
Total basic weighted average shares
outstanding 110,227 79,257 109,859 78,755
Incremental shares from assumed exercise
of stock options 936 983 897 1,121
Incremental shares from assumed vesting
of restricted stock awards 76 72 102 118
---------- ---------- ---------- ----------
Total diluted weighted average shares
outstanding 111,239 80,312 110,858 79,994
========== ========== ========== ==========
Basic earnings per share $ 0.22 $ 0.17 $ 0.63 $ 0.49
========== ========== ========== ==========
Diluted earnings per share $ 0.22 $ 0.17 $ 0.63 $ 0.48
========== ========== ========== ==========
The above diluted weighted average common share calculations do not include 332
thousand and 1.5 million of stock option and restricted stock awards for the
three months ended September 30, 2005 and 2004, respectively, and 314 thousand
and 811 thousand of stock option and restricted stock awards for the nine months
ended September 30, 2005 and 2004, respectively, that are not dilutive to the
earnings per share calculations.
10
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
(4) Pension and Other Postretirement Plans
Net pension and postretirement cost (benefit), which is recorded within salaries
and employee benefits expense in the condensed consolidated statements of
income, is comprised of the following (in thousands):
Pension plans Other postretirement plans
--------------------- --------------------------
For the three months ended September 30: 2005 2004 2005 2004
-------- -------- -------- --------
Interest cost $ 964 $ 452 $ 125 $ 108
Expected return on plan assets (1,396) (685) -- --
Amortization of unrecognized loss 95 65 25 23
Amortization of unrecognized prior service liability 4 -- (16) (16)
-------- -------- -------- --------
Net pension and postretirement cost (benefit) $ (333) $ (168) $ 134 $ 115
======== ======== ======== ========
For the nine months ended September 30:
Interest cost $ 2,891 $ 1,357 $ 375 $ 325
Expected return on plan assets (4,188) (2,056) -- --
Amortization of unrecognized loss 286 194 76 68
Amortization of unrecognized prior service liability 12 -- (48) (48)
-------- -------- -------- --------
Net pension and postretirement cost (benefit) $ (999) $ (505) $ 403 $ 345
======== ======== ======== ========
All benefit accruals and participation in the First Niagara pension plan are
frozen. Accordingly, no employees are permitted to commence participation in the
plan and future salary increases and years of credited service will not be
considered when computing an employee's benefits under the plan. Additionally,
the Company modified its post-retirement plan so that participation is closed to
new employees. In September 2005 and 2004, the Company made contributions of
$6.2 million and $2.8 million, respectively, to fund its pension plans.
(5) Segment Information
The Company has two business segments, banking and financial services. The
financial services segment includes the Company's risk (insurance) and wealth
management operations, including those acquired from HRB and HLN. The banking
segment includes the results of all other First Niagara operations.
Predominantly all of the Company's assets relate to its banking segment.
Selected information for the Company's segments follows (in thousands):
Financial Consolidated
For the three months ended: Banking services Eliminations total
-------- --------- ------------ ------------
September 30, 2005
Net interest income $ 63,487 9 -- 63,496
Provision for credit losses 1,647 -- -- 1,647
-------- -------- -------- --------
Net interest income after provision
for credit losses 61,840 9 -- 61,849
Noninterest income 15,350 10,314 (24) 25,640
Amortization of core deposit and
other intangibles 2,330 924 -- 3,254
Other noninterest expense 36,405 8,173 (24) 44,554
-------- -------- -------- --------
Income before income taxes 38,455 1,226 -- 39,681
Income tax expense 15,017 491 -- 15,508
-------- -------- -------- --------
Net income $ 23,438 735 -- 24,173
======== ======== ======== ========
11
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
Financial Consolidated
For the three month period ended: Banking services Eliminations total
--------- --------- ------------ ------------
September 30, 2004
Net interest income $ 39,625 13 -- 39,638
Provision for credit losses 1,742 -- -- 1,742
--------- --------- --------- ---------
Net interest income after provision
for credit losses 37,883 13 -- 37,896
Noninterest income 7,543 5,580 (16) 13,107
Amortization of core deposit and
other intangibles 896 286 -- 1,182
Other noninterest expense 24,658 4,554 (16) 29,196
--------- --------- --------- ---------
Income before income taxes 19,872 753 -- 20,625
Income tax expense 6,994 301 -- 7,295
--------- --------- --------- ---------
Net income $ 12,878 452 -- 13,330
========= ========= ========= =========
For the nine months ended:
September 30, 2005
Net interest income $ 187,274 14 -- 187,288
Provision for credit losses 4,848 -- -- 4,848
--------- --------- --------- ---------
Net interest income after provision
for credit losses 182,426 14 -- 182,440
Noninterest income 39,174 25,348 (70) 64,452
Amortization of core deposit and
other intangibles 6,730 1,886 -- 8,616
Other noninterest expense 109,599 19,677 (70) 129,206
--------- --------- --------- ---------
Income before income taxes 105,271 3,799 -- 109,070
Income tax expense 38,191 1,520 -- 39,711
--------- --------- --------- ---------
Net income $ 67,080 2,279 -- 69,359
========= ========= ========= =========
September 30, 2004
Net interest income $ 115,149 27 -- 115,176
Provision for credit losses 6,596 -- -- 6,596
--------- --------- --------- ---------
Net interest income after provision
for credit losses 108,553 27 -- 108,580
Noninterest income 21,551 16,851 (57) 38,345
Amortization of core deposit and
other intangibles 2,505 882 -- 3,387
Other noninterest expense 72,660 12,816 (57) 85,419
--------- --------- --------- ---------
Income before income taxes 54,939 3,180 -- 58,119
Income tax expense 18,589 1,272 -- 19,861
--------- --------- --------- ---------
Net income $ 36,350 1,908 -- 38,258
========= ========= ========= =========
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'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.
12
Overview
Total assets increased to more than $8.0 billion at September 30, 2005. Loan
growth during the first three quarters of 2005 included a $164.7 million, or 10%
annualized, organic increase in commercial real-estate and business loans and a
$39.0 million, or 15% annualized, increase in home equity loans. These results
include the benefits of the on-going execution of the Company's strategic plan,
including a focus on relationship based products. Those strategic initiatives
also contributed to the 6% annualized organic growth in deposits during the
first three quarters of 2005. However, profitable loan and core deposit growth
continue to be a challenge given the current interest rate environment and
competitive market conditions. In particular, that combination of factors has
resulted in a significant change in the Company's funding mix as consumer
preferences have shifted towards higher rate money market and certificate
accounts. As of September 30, 2005, core (non-time) deposits declined to 63% of
total deposits compared to 69% at the end of 2004.
Net income for the three months ended September 30, 2005 increased to $24.2
million, or $0.22 per diluted share from $13.3 million, or $0.17 per diluted
share for the same period of 2004. While the 2005 results include a 9 basis
point improvement in net interest rate margin as a result of the higher rate net
earning assets acquired from HRB, the change in deposit mix and resulting 37
basis point increase in rate paid on interest-bearing liabilities has resulted
in a decline in margin for the last two quarters. However, the effects of this
margin pressure on net interest income have been lessened through continuing
loan and deposit growth, as well as effective asset-liability management. The
favorable credit environment experienced during the first half of 2005 continued
during the third quarter. As a result, the provision for credit losses was 0.13%
of average loans compared to 0.22% of average loans for the corresponding period
of 2004. Increases in both noninterest income and expense over the prior year
reflect the impact of the acquisition of HRB and four financial services
companies, as well as the addition of two de novo branches since the 2004 third
quarter. Additionally, 2005 third quarter results include a $1.4 million pre-tax
gain from the sale of a real-estate joint venture, as well as a $1.4 million tax
charge from the surrender of bank owned life insurance policies.
For the first nine months of 2005, net income totaled $69.4 million or $0.63 per
diluted share compared to $38.3 million, or $0.48 per diluted share for the same
period of 2004.
Critical Accounting Estimates
Management of the Company evaluates those accounting estimates that are judged
to be critical, that is, those most important to the portrayal of the Company's
financial condition and results, and that require management's most subjective
and complex judgments. Accordingly, management considers the accounting
estimates relating to the adequacy of the allowance for credit losses and the
analysis of the carrying value of goodwill for impairment to be critical. 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 2004 Form 10-K
dated March 14, 2005. 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 2004 Form 10-K dated March 14, 2005. There have not been any material
changes to the above critical accounting policies during the current year.
Analysis of Financial Condition as of September 30, 2005
Lending Activities
Total loans and leases outstanding increased to $5.2 billion at September 30,
2005. Growth during the first three quarters of 2005 included a $164.7 million,
or 10% annualized, increase in commercial real estate and business loans, which
has been accomplished despite competitive market conditions. At September 30,
2005, commercial loans comprised 45% of the total portfolio. The Company's
strategy is to continue to emphasize commercial loan originations.
Growth in the residential real estate portfolio continues to be a challenge
given the interest rate environment, which has caused consumers to move away
from short-term and variable rate loans, which are the products the Company
typically holds in portfolio. As a result, organic residential real estate loan
growth year-to-date is only 1% on an annualized basis. That is in contrast to
the 15% annualized increase in home equity loans, which the Company continues to
actively market given its low credit risk and relationship benefits.
13
Set forth below is selected information concerning the composition of the
Company's loan and lease portfolio as of the dates indicated (dollars in
thousands):
September 30, 2005 December 31, 2004
--------------------------- ---------------------------
Amount Percent Amount Percent
----------- ----------- ----------- -----------
Commercial:
Real estate $ 1,591,059 30.8% $ 1,081,709 33.3%
Construction 227,158 4.4 187,149 5.8
Business 479,473 9.3 345,520 10.6
----------- ----------- ----------- -----------
Total commercial loans 2,297,690 44.5 1,614,378 49.7
Residential real estate 2,136,961 41.4 1,132,471 34.9
Home equity 383,350 7.4 247,190 7.6
Other consumer 181,488 3.6 174,309 5.4
Specialized lending (1) 159,935 3.1 79,358 2.4
----------- ----------- ----------- -----------
Total loans and leases 5,159,424 100.0% 3,247,706 100.0%
----------- ----------- ----------- -----------
Net deferred costs and unearned discounts 16,153 8,971
Allowance for credit losses (72,290) (41,422)
----------- -----------
Total loans and leases, net $ 5,103,287 $ 3,215,255
=========== ===========
- ----------
(1) Includes commercial leases, financed insurance premiums and manufactured
housing loans.
Credit Quality. During the first three quarters of 2005, the Company benefited
from a very favorable credit environment. Annualized net loan charge-offs have
totaled only 0.13% of average loans, compared to the 0.24% experienced over the
last three years. Non-performing assets were 0.29% of total assets at September
30, 2005, as two commercial real estate loans totaling $4.1 million were added
to non-accruing status during the quarter. The allowance for credit losses to
total loans ratio was 1.40% at September 30, 2005 compared to 1.48% following
the HRB acquisition in January, which reflects the impact of portfolio growth
and the favorable credit experience. The ratio of the allowance to non-accruing
loans of 323% at September 30, 2005, compares to 344% at December 31, 2004.
While management uses available information to recognize losses on loans, future
credit loss provisions will be necessary based on numerous factors, including
changes in economic conditions. To the best of management's knowledge, the
allowance for credit losses includes all losses at each reporting date that are
both probable and reasonable to estimate. However, there can be no assurance
that the allowance for credit losses will be adequate to cover all losses that
may in fact be realized in the future or that additional provisions for credit
losses will not be required.
Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and non-performing assets (dollars in
thousands):
September 30, December 31,
2005 2004
------------- ------------
Non-accruing loans (1):
Commercial real estate .................................. $ 8,791 $ 3,416
Commercial business ..................................... 2,541 1,564
Residential real estate ................................. 5,389 4,276
Home equity ............................................ 621 519
Other consumer ......................................... 1,060 801
Specialized lending .................................... 3,945 1,452
-------- --------
Total non-accruing loans ............................ 22,347 12,028
Real estate owned .......................................... 1,097 740
-------- --------
Total non-performing assets .......................... $ 23,444 $ 12,768
======== ========
Total non-accruing loans as a percentage of total loans .... 0.43% 0.37%
======== ========
Total non-performing assets as a percentage of total assets 0.29% 0.25%
======== ========
Allowance for credit losses to total loans ................. 1.40% 1.27%
======== ========
Allowance for credit losses to non-accruing loans .......... 323% 344%
======== ========
- ----------
(1) Loans are generally 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.
14
Analysis of the Allowance for Credit Losses. The following table sets forth the
analysis of the allowance for credit losses for the periods indicated (dollars
in thousands):
Nine months ended September 30,
-------------------------------
2005 2004
------------ -------------
Balance at beginning of period ........................... $ 41,422 $ 25,420
Net charge-offs:
Charge-offs ........................................... (7,452) (6,381)
Recoveries ............................................ 2,788 988
--------- ---------
Net charge-offs .................................... (4,664) (5,393)
Acquired bank allowance at acquisition date .............. 30,684 14,650
Provision for credit losses .............................. 4,848 6,596
--------- ---------
Balance at end of period ................................. $ 72,290 $ 41,273
========= =========
Ratio of annualized net charge-offs to average loans
outstanding during the period ......................... 0.13% 0.23%
========= =========
Ratio of annualized provision for credit losses to average
loans outstanding during the period ................... 0.13% 0.29%
========= =========
Investing Activities
Excluding the investment securities acquired from HRB, the Company's securities
available for sale decreased $98.6 million from December 31, 2004. This reflects
the Company's decision to begin de-leveraging the balance sheet given the
flattening yield curve and narrow spreads between investment yields and rates
paid on wholesale borrowings. However, the Company's investment portfolio
remains well positioned to provide a stable source of cash flow and limited
earnings volatility, as the weighted average life of securities available for
sale at September 30, 2005 was 2.3 years.
Funding Activities
Deposits. The Company continues to prioritize deposit gathering and retention
efforts given the competitiveness of its low growth markets and the importance
of lower cost funding to support loan growth. During the first three quarters of
2005, organic deposit growth was $231.6 million, or 6% annualized. While this
increase continues to be driven by higher-rate certificate and money market
accounts, those relationship products have also contributed to an increase in
the number of transaction accounts, which the Company anticipates will drive
core deposit and fee income growth as those accounts mature. Deposit growth
continues to also benefit from expansion of the Company's municipal banking
business and de novo branch expansion strategy, which have contributed an
additional $67.1 million and $17.7 million of funds, respectively, during 2005.
Set forth below is selected information depicting the composition of the
Company's deposits as of the dates indicated (dollars in thousands):
September 30, 2005 December 31, 2004
------------------------ ------------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
Core Deposits:
Savings ................. $1,652,552 30.9% $1,086,769 32.6%
Interest-bearing checking 1,130,264 21.1 912,598 27.3
Noninterest-bearing ..... 569,308 10.7 291,491 8.7
---------- ---------- ---------- ----------
Total core deposits .. 3,352,124 62.7 2,290,858 68.6
Certificates ............... 1,996,097 37.3 1,046,824 31.4
---------- ---------- ---------- ----------
Total deposits ....... $5,348,221 100.0% $3,337,682 100.0%
========== ========== ========== ==========
Borrowings. Excluding borrowings resulting from the HRB transaction, wholesale
indebtedness decreased $38.9 million to $1.16 billion at September 30, 2005.
This decrease resulted from the Company's deleveraging strategy discussed above.
Equity Activities
Stockholders' equity increased to $1.38 billion at September 30, 2005 compared
to $928.2 million at December 31, 2004, primarily as a result of the issuance of
36.2 million shares of common stock ($490.5 million) in connection with the HRB
and HLN acquisitions. Year-to-date common stock dividends declared of $0.28 per
share totaled $31.4 million, which represents a 27% increase over the prior year
on a per share basis and a 44% payout ratio.
15
The Company repurchased 1.0 million of its shares during the third quarter of
2005, which brings the year-to-date total to 5.3 million. As of September 30,
2005, 4.1 million shares remain available for repurchase under the current
authorization. While treasury stock purchases are an important component of the
Company's capital management strategy, the extent to which shares are
repurchased in the future will depend on a number of factors including market
trends and prices and alternative uses for capital.
Results of Operations for the Three Months Ended September 30, 2005 and
September 30, 2004
Net Interest Income
When compared to the prior year, the net interest rate margin for the third
quarter improved 9 basis points, which reflects the benefits of the higher
yielding net earning assets acquired from HRB, as well as continuing organic
growth in the loan portfolio. However, pressure on the Company's net interest
rate margin, resulting from the flat yield curve and competitive loan and
deposit pricing, continued during the third quarter and caused a 3 basis point
decline to 3.69% from the second quarter of 2005. The Company expects that
pressure on the net interest rate margin will continue for the remainder of 2005
and into 2006, but believes the impact on net interest income will be partially
mitigated by loan and deposit growth and effective asset-liability management.
Interest income increased to $96.3 million for the quarter ended September 30,
2005. This increase was primarily the result of the growth in interest earning
assets, as well as the increase in yield from the repricing of the Company's
variable-rate loans and short-term investment securities portfolio. However,
during the last two quarters, that benefit has been more than offset by the rise
in deposit interest rates due to competitive pricing and a shift in portfolio
mix to higher yielding money market and certificate products.
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 (dollars in thousands):
Three months ended September 30,
------------------------------------------------------------------------------
2005 2004
-------------------------------------- --------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- ----------- ------ ----------- ----------- ------
Interest-earning assets:
Loans and leases(1) ................ $ 5,081,331 $ 80,547 6.31% $ 3,162,777 $ 47,937 6.05%
Securities available for sale and
other investments(2) ............. 1,784,864 15,750 3.53 1,245,280 8,881 2.79
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets .. 6,866,195 96,297 5.59 4,408,057 56,818 5.15
----------- ----------- ---- ----------- ----------- ----
Allowance for credit losses .......... (72,788) (41,423)
Noninterest-earning assets(3)(4) ..... 1,209,175 666,443
----------- -----------
Total assets ................... $ 8,002,582 $ 5,033,077
=========== ===========
Interest-bearing liabilities:
Savings deposits ................... $ 1,669,466 $ 4,736 1.13% $ 1,074,032 $ 2,569 0.95%
Checking deposits .................. 1,151,334 3,311 1.14 928,300 2,202 0.94
Certificates of deposit ............ 1,905,781 13,696 2.86 1,039,097 5,678 2.17
Borrowed funds ..................... 1,183,924 11,058 3.70 686,437 6,731 3.90
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing
liabilities .................. 5,910,505 32,801 2.20 3,727,866 17,180 1.83
----------- ----------- ---- ----------- ----------- ----
Noninterest-bearing deposits ......... 584,871 303,244
Other noninterest-bearing liabilities 114,389 67,412
----------- -----------
Total liabilities .............. 6,609,765 4,098,522
Stockholders' equity(3) .............. 1,392,817 934,555
----------- -----------
Total liabilities and
stockholders' equity ......... $ 8,002,582 $ 5,033,077
=========== ===========
Net interest income .................. $ 63,496 $ 39,638
=========== ===========
Net interest rate spread ............. 3.39% 3.32%
==== ====
Net earning assets ................... $ 955,690 $ 680,191
=========== ===========
Net interest rate margin ............. 3.69% 3.60%
=========== ===========
Ratio of average interest-earning
assets to average interest-bearing
liabilities ........................ 116.17% 118.25%
=========== ===========
16
Nine months ended September 30,
------------------------------------------------------------------------------
2005 2004
-------------------------------------- --------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- ----------- ------ ----------- ----------- ------
Interest-earning assets:
Loans and leases(1) ................ $ 4,921,752 $ 230,963 6.26% $ 3,053,303 $ 140,101 6.12%
Securities available for sale and
other investments(2) ............. 1,781,275 45,779 3.43 1,243,467 25,523 2.73
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets .. 6,703,027 276,742 5.51 4,296,770 165,624 5.14
----------- ----------- ---- ----------- ----------- ----
Allowance for credit losses .......... (73,671) (39,880)
Noninterest-earning assets(3)(4) ..... 1,169,384 650,653
----------- -----------
Total assets ................... $ 7,798,740 $ 4,907,543
Interest-bearing liabilities:
Savings deposits ................... $ 1,649,212 $ 12,813 1.04% $ 1,020,184 $ 7,049 0.92%
Checking deposits .................. 1,176,003 9,430 1.07 879,569 5,912 0.90
Certificates of deposit ............ 1,759,985 34,395 2.62 1,093,601 18,037 2.20
Borrowed funds ..................... 1,201,764 32,816 3.65 656,543 19,450 3.96
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing
liabilities .................. 5,786,964 89,454 2.07 3,649,897 50,448 1.85
----------- ----------- ---- ----------- ----------- ----
Noninterest-bearing deposits ......... 538,579 269,574
Other noninterest-bearing liabilities 100,075 63,208
----------- -----------
Total liabilities .............. 6,425,618 3,982,679
Stockholders' equity(3) .............. 1,373,122 924,864
----------- -----------
Total liabilities and
stockholders' equity ......... $ 7,798,740 $ 4,907,543
=========== ===========
Net interest income .................. $ 187,288 $ 115,176
=========== ===========
Net interest rate spread ............. 3.44% 3.29%
==== ====
Net earning assets ................... $ 916,063 $ 646,873
=========== ===========
Net interest rate margin ............. 3.72% 3.57%
=========== ===========
Ratio of average interest-earning
assets to average interest-bearing
liabilities ........................ 115.83% 117.72%
=========== ===========
- ----------
(1) Average outstanding balances are net of deferred costs, unearned premiums
and non-accruing loans.
(2) Average outstanding balances are at amortized cost.
(3) Average outstanding balances include unrealized gains/losses on securities
available for sale.
(4) Average outstanding balances include bank-owned life insurance, earnings
on which are reflected in noninterest income.
Provision for Credit Losses
During the third quarter, the provision for credit losses was $1.6 million,
which at 13 basis points of average loans, reflects the favorable credit
environment in 2005. This provision is based upon management's assessment of the
adequacy of the allowance for credit losses with consideration given to such
interrelated factors as the composition and risk in the loan portfolio, the
level of non-accruing and delinquent loans and related collateral or government
guarantees, charge-offs and 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 in
the existing loan portfolio.
Noninterest Income
For the quarter ended September 30, 2005, noninterest income totaled $25.6
million compared to $13.1 million for the same period of 2004. This increase
reflects the benefit of the expanded customer base in Eastern New York, as well
as the Company's efforts to further its diversified financial services business
model. During the third quarter, the HLN and the Burke Group acquisitions added
$3.3 million to noninterest income. Banking services revenue continues to
increase, reflecting growth in the Company's customer base and relationship
strategy. While wealth management revenues for the quarter increased 14% over
the corresponding period in 2004, revenue from that business unit has been flat
throughout the year as the benefits of the added customer base in Eastern New
York were mitigated by lower annuity sales due to the unfavorable interest rate
environment for these products. In addition to the above, noninterest income for
the third quarter of 2005 benefited from a $1.4 million pre-tax gain from the
sale of a real-estate joint venture which was acquired with the Troy Financial
Corporation transaction in 2004. Excluding this joint venture gain, noninterest
income represented 28% of total net revenues versus 25% for the prior year
quarter. The Company expects this ratio to approach 30% during the fourth
quarter of 2005, which will help mitigate the continuing impact that the flat
yield curve and interest rate margin compression are having on net income.
17
Noninterest Expense
Noninterest expense totaled $47.8 million during the third quarter. In addition
to the costs associated with the Company's expanded operations, $3.2 million of
the increase was attributable to HLN and Burke Group operations. Even with the
continuing investment in operating infrastructure, the Company's efficiency
ratio improved to 54.5% for the third quarter, excluding the joint venture gain.
Income Taxes
The effective tax rate of 39.1% for the current quarter included a $1.4 million
tax charge relating to the surrender of $40 million of bank owned life insurance
obtained with the Troy Financial Corporation and HRB acquisitions. Excluding
this charge, the effective tax rate was 35.5%, which is consistent with the
prior year quarter.
Results of Operations for the Nine Months Ended September 30, 2005 and September
30, 2004
Net Interest Income
Net interest rate margin was 3.72% for the first three quarters of 2005,
compared to 3.57% for the same period of 2004. This improvement reflects the
benefits of the higher yielding net earning assets acquired from HRB, as well as
growth in the loan portfolio and noninterest bearing deposits. However, the net
interest rate margin has declined 7 basis points since the first quarter of 2005
as a result of the flat yield curve and competitive loan and deposit pricing.
The Company expects that pressure on the net interest rate margin will continue
for the remainder of 2005 and into 2006, but believes the impact on net interest
income will be partially mitigated by loan and deposit growth and effective
asset-liability management.
Interest income totaled $276.7 million for the nine months ended September 30,
2005. This increase was primarily the result of the growth in interest earning
assets, as well as the increase in yield from the repricing of the Company's
variable-rate loans and short-term investment securities portfolio. However,
interest expense was also impacted by the rise in short-term interest rates due
to competitive deposit pricing and a shift in portfolio mix towards higher
yielding money market and certificate products.
Provision for Credit Losses
During the first nine months of 2005, the provision for credit losses was $4.8
million compared to $6.6 million for the prior year period. That reduction
reflects the favorable credit environment and lower loss rates experienced by
the Company in 2005.
Noninterest Income
For the first three quarters of 2005, noninterest income totaled $64.5 million
compared to $38.3 million for the same period of 2004. This increase reflects
the expanded customer base in Eastern New York, as well as the Company's efforts
to further its diversified financial services business model, which included the
addition of two new branches and four financial services acquisitions. During
the third quarter of 2005, the HLN and Burke Group acquisitions added $3.3
million to noninterest income. Banking services revenue continues to increase,
reflecting growth in the Company's customer base and its relationship strategy,
as well as debit card usage becoming more widely accepted by consumers. While
wealth management revenues for the first nine months of 2005 increased 20% over
the corresponding period in 2004, revenue from that business unit has been flat
throughout the year as the benefits of the added customer base in Eastern New
York have been mitigated by lower annuity sales due to the unfavorable interest
rate environment for these products. Noninterest income also benefited from a
$1.4 million pre-tax gain from the sale of a real-estate joint venture during
the third quarter of 2005.
Noninterest Expense
Noninterest expense totaled $137.8 million during the first three quarters of
2005 and included the operating costs associated with the former HRB branches,
as well as the addition of two new branch locations and four financial services
companies since the 2004 third quarter. The 2005 results also include $2.5
million of merger and integration expenses compared to $1.6 million of such
expenses incurred during the 2004 period. Additionally, noninterest expenses
reflect the Company's continuous investment in its infrastructure and
implementation of its strategic plan. Even with these increases, the Company's
efficiency ratio improved to 55.1% for the first nine months of 2005, excluding
the joint venture gain.
18
Income Taxes
The effective tax rate of 35.1% for the current year period, excluding the bank
owned life insurance charge, increased from 34.2% for the prior year as the
assets acquired from HRB generated less tax advantaged income. Additionally, the
results for 2004 include nonrecurring tax-exempt payments from bank owned life
insurance proceeds.
Liquidity and Capital Resources
In addition to cash flow from operations, deposits and borrowings, funding is
provided from the principal and interest payments received on loans and
investment securities. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit balances and mortgage
prepayments are greatly influenced by the level of interest rates, economic
environment and local competitive conditions.
The Company's primary investing activities are the origination of loans and the
purchase of investment securities. During the first nine months of 2005, loan
originations totaled $1.43 billion compared to $860.4 million for the same
period of 2004, while purchases of investment securities totaled $352.4 million
during the 2005 period compared to $458.1 million for the 2004 period. The
increase in loan originations is a result of increased lending activity due to
the HRB acquisition and continuing growth. The lower level of investment
security purchases in 2005 primarily relates to the Company's decision to begin
de-leveraging the balance sheet given the narrow spreads between investments and
wholesale borrowings.
During the first three quarters of 2005, cash flows provided by securities
available for sale amounted to $432.1 million compared to $372.4 million for the
same period in 2004. Deposit growth and borrowings, excluding those acquired
from HRB, provided $290.0 million of additional funding for the nine months
ended September 30, 2005. The Company has a total of $1.1 billion available
under existing lines of credit with the Federal Home Loan Bank, Federal Reserve
Bank and a commercial bank that may be used to fund lending activities,
liquidity needs and/or to adjust and manage the asset and liability position of
the Company.
In the ordinary course of business, the Company extends commitments to originate
residential, commercial and other loans. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since the Company does not expect all of the commitments to be funded, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis.
Collateral may be obtained based upon management's assessment of the customers'
creditworthiness. Commitments to extend credit may be written on a fixed rate
basis exposing the Company to interest rate risk given the possibility that
market rates may change between the commitment date and the actual extension of
credit. As of September 30, 2005, the Company had outstanding commitments to
originate residential real estate, commercial real estate and business, and
other consumer loans of approximately $353.4 million, which generally have an
expiration period of less than 120 days. Commitments to sell residential
mortgages amounted to $18.3 million at the end of the third quarter.
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 requirements are generally more difficult to
predict. Unused commercial lines of credit amounted to $362.2 million at
September 30, 2005 and generally have an expiration period of less than one
year. Home equity and other consumer lines of credit totaled $186.1 million and
have an expiration period of up to ten years. In addition to the above, the
Company issues standby letters of credit to third parties that guarantee
payments on behalf of commercial customers in the event the customer fails to
perform under the terms of the contract between the customer and the
third-party. Standby letters of credit amounted to $57.0 million at September
30, 2005 and generally have an expiration period of less than two years. Since
the majority of unused lines of credit and outstanding standby letters of credit
expire without being funded, the Company's obligation under 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. The credit risk
involved in issuing these commitments is essentially the same as that involved
in extending loans to customers and is limited to the contractual notional
amount of those instruments.
Cash, interest-bearing demand accounts at correspondent banks, 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. In the
event that funds beyond those generated internally are required due to higher
than expected loan commitment fundings, deposit outflows or the amount of debt
being called, additional sources of funds are available through the use of
repurchase agreements, the sale of loans or investments or the Company's various
lines of credit. As of September 30, 2005, the total of cash, interest-bearing
demand accounts, federal funds sold and other money market investments was
$160.8 million.
19
At September 30, 2005, First Niagara exceeded all regulatory capital
requirements, as detailed in the following table (dollars in thousands):
As of September 30, 2005
----------------------------------------------------------------------------
To be well capitalized
Minimum under prompt corrective
Actual capital adequacy action provisions
---------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- --------- --------- ---------- ----------
Tangible capital $ 591,480 8.11% $ 109,403 1.50% $ N/A N/A%
Tier 1 (core) capital 591,480 8.11 291,741 4.00 364,676 5.00
Tier 1 risk based capital 591,480 11.95 N/A N/A 296,956 6.00
Total risk based capital 653,346 13.20 395,942 8.00 494,927 10.00
Item 3. Quantitative and Qualitative Disclosures about Market 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 estimates changes in net
interest income over a range of interest rate scenarios.
The Asset and Liability Committee, which is comprised of members of senior
management, monitors the Company's sensitivity to interest rates. The Committee
also enacts strategies to manage exposure to interest rate risk and may take
action utilizing on- or off-balance sheet financial instruments including, but
not limited to, changes in the pricing of loan and deposit products, modifying
the composition of interest-earning assets and interest-bearing liabilities, and
interest rate derivatives. As of September 30, 2005, the Company's off-balance
sheet financial instruments included customer lines and letters of credit, and
commitments to originate and sell loans, which were entered into in the ordinary
course of business (See Liquidity and Capital Resources for further description
of these items).
The accompanying table as of September 30, 2005 sets forth the estimated impact
on the Company's net interest income for the next twelve months resulting from
potential changes in the interest rates over that time period and assumes a
parallel shift across the yield curve. The effects of a "flattening" or
"steepening" of the yield curve are not considered in the analysis. These
estimates require making certain assumptions including loan and mortgage-related
investment prepayment speeds, reinvestment rates, and deposit maturities. 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 (dollars in
thousands):
Calculated increase (decrease) at
September 30, 2005
----------------------------------------------
Changes in Net interest
interest rates income % Change
---------------------- ---------------------- ------------------
+200 basis points $ (1,928) (0.80)%
+100 basis points (1,034) (0.43)
-100 basis points (754) (0.31)
-200 basis points (3,982) (1.66)
20
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this quarterly report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this quarterly
report, the Company's 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 has been no change in the Company's
internal control over financial reporting during the most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiary are a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
a) Not applicable.
b) Not applicable.
c) The following table discloses information regarding the purchases of FNFG
stock made by the Company during the third quarter of 2005:
Total number of
shares purchased Maximum number
Number Average as part of of shares yet
of shares price per publicly announced to be purchased
Month purchased share paid repurchase plans (1) under the plans (1)
------------------ --------- ---------- -------------------- -------------------
July -- -- 652,239 5,147,761
August 480,000 14.28 1,132,239 4,667,761
September 530,000 14.30 1,662,239 4,137,761
---------
Third quarter 2005 1,010,000 14.29
========= =====
(1) On May 18, 2005, the Company announced a 5,800,000 share stock repurchase
program that does not have an expiration date. As of September 30, 2005,
the average cost of the 1,662,239 shares repurchased under the current
program was $13.95 per share.
In addition to the above, during the third quarter of 2005, the Company
repurchased 5,332 shares from executives of the Company at an average cost
of $14.43 per share to satisfy option exercises and minimum tax
withholding requirements on vested restricted stock awards as allowed
under the Company's stock option and restricted stock plans. The price of
these repurchases is based upon the closing market price of the Company's
stock on the date of exercise or vesting.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
21
Item 5. Other Information
(a) Not applicable.
(b) Not applicable.
Item 6. Exhibits
The following exhibits are filed herewith:
Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Summary of Quarterly Financial Data
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST NIAGARA FINANCIAL GROUP, INC.
Date: November 8, 2005 By: /s/ Paul J. Kolkmeyer
-------------------------------------------------
Paul J. Kolkmeyer
President and Chief Executive Officer
Date: November 8, 2005 By: /s/ John R. Koelmel
-------------------------------------------------
John R. Koelmel
Executive Vice President, Chief Financial Officer
22