================================================================================
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 June 30, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|.
APPLICABLE ONLY TO ISSURES INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |_| No |_|
The Registrant had 110,529,382 shares of Common Stock, $0.01 par value,
outstanding as of August 8, 2006.
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1
FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2006
TABLE OF CONTENTS
Item Number Page Number
- ----------- -----------
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition as of
June 30, 2006 and December 31, 2005 (unaudited)............... 3
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 2006 and 2005 (unaudited). 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three and six months ended June 30, 2006 and 2005
(unaudited)................................................... 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the six months ended June 30, 2006 and 2005
(unaudited)................................................... 6
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2006 and 2005 (unaudited)........... 7
Notes to Condensed Consolidated Financial Statements (unaudited) 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 15
3. Quantitative and Qualitative Disclosures about Market Risk.......... 26
4. Controls and Procedures............................................. 26
PART II - OTHER INFORMATION
1. Legal Proceedings................................................... 27
1A. Risk Factors........................................................ 27
2. Unregistered Sales of Equity Securities and Use of Proceeds......... 27
3. Defaults Upon Senior Securities..................................... 27
4. Submission of Matters to a Vote of Security Holders................. 27
5. Other Information................................................... 28
6. Exhibits............................................................ 28
Signatures.............................................................. 29
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Condition
(unaudited)
June 30, December 31,
2006 2005
----------- -----------
(In thousands, except share
Assets and per share amounts)
Cash and cash equivalents ......................................... $ 157,945 $ 140,128
Securities available for sale ..................................... 1,317,035 1,604,888
Loans held for sale ............................................... 28,699 3,811
Loans and leases, net ............................................. 5,497,943 5,212,488
Premises and equipment, net ....................................... 95,690 92,118
Bank-owned life insurance ......................................... 78,176 76,667
Goodwill .......................................................... 698,947 698,636
Core deposit and other intangibles ................................ 56,171 62,071
Other assets ...................................................... 176,170 174,025
----------- -----------
Total assets .......................................... $ 8,106,776 $ 8,064,832
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ........................................................ $ 5,649,307 $ 5,479,412
Borrowings ...................................................... 990,463 1,096,427
Other liabilities ............................................... 106,080 114,570
----------- -----------
Total liabilities ..................................... 6,745,850 6,690,409
----------- -----------
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;
120,044,736 shares issued in 2006 and 120,046,007 shares
issued in 2005 ................................................ 1,200 1,200
Additional paid-in capital ...................................... 1,236,469 1,237,592
Retained earnings ............................................... 306,903 285,202
Accumulated other comprehensive loss ............................ (25,436) (18,330)
Common stock held by ESOP, 3,663,408 shares in 2006 and
3,740,659 shares in 2005 ...................................... (27,589) (28,150)
Unearned compensation - restricted stock awards,
368,599 shares in 2005 ........................................ -- (3,908)
Treasury stock, at cost, 9,549,461 shares in 2006
and 7,280,704 shares in 2005 .................................. (130,621) (99,183)
----------- -----------
Total stockholders' equity ............................ 1,360,926 1,374,423
----------- -----------
Total liabilities and stockholders' equity ............ $ 8,106,776 $ 8,064,832
=========== ===========
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 Six months ended
June 30, June 30,
-------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
(In thousands, except per share amounts)
Interest income:
Loans and leases ............................................. $ 89,307 78,194 $174,688 150,416
Securities available for sale and other investments .......... 14,704 15,736 29,953 30,029
-------- -------- -------- --------
Total interest income ............................... 104,011 93,930 204,641 180,445
Interest expense:
Deposits ..................................................... 31,831 19,130 59,304 34,895
Borrowings ................................................... 8,344 11,238 18,948 21,758
-------- -------- -------- --------
Total interest expense .............................. 40,175 30,368 78,252 56,653
-------- -------- -------- --------
Net interest income ................................. 63,836 63,562 126,389 123,792
Provision for credit losses ..................................... 1,556 900 3,856 3,201
-------- -------- -------- --------
Net interest income after provision for credit losses 62,280 62,662 122,533 120,591
-------- -------- -------- --------
Noninterest income:
Banking services ............................................. 9,983 9,448 19,034 17,437
Risk management services ..................................... 11,705 5,837 22,525 11,442
Wealth management services ................................... 2,133 1,776 4,406 3,481
Lending and leasing .......................................... 1,969 1,770 3,716 3,346
Employee benefits administration ............................. 923 -- 1,818 --
Bank-owned life insurance .................................... 756 1,072 1,503 2,128
Other ........................................................ 333 498 711 978
-------- -------- -------- --------
Total noninterest income ............................ 27,802 20,401 53,713 38,812
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits ............................... 30,411 23,677 60,013 45,886
Occupancy and equipment ...................................... 5,241 4,678 10,914 9,193
Technology and communications ................................ 5,109 4,827 10,103 8,891
Marketing and advertising .................................... 1,792 2,143 3,579 3,854
Professional services ........................................ 1,069 1,802 1,932 4,346
Amortization of core deposit and other intangibles .......... 2,994 2,854 6,074 5,362
Other ........................................................ 5,456 6,180 11,366 12,482
-------- -------- -------- --------
Total noninterest expense ........................... 52,072 46,161 103,981 90,014
-------- -------- -------- --------
Income before income taxes .......................... 38,010 36,902 72,265 69,389
Income taxes .................................................... 13,212 12,811 24,859 24,203
-------- -------- -------- --------
Net income .......................................... $ 24,798 24,091 $ 47,406 45,186
======== ======== ======== ========
Earnings per common share:
Basic ............................................... $ 0.23 0.22 $ 0.44 0.41
Diluted ............................................. $ 0.23 0.22 $ 0.44 0.41
Weighted average common shares outstanding:
Basic ............................................... 106,985 111,128 107,511 109,673
Diluted ............................................. 107,897 112,033 108,466 110,654
See accompanying notes to condensed consolidated financial statements.
4
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2006 2005 2006 2005
-------- -------- -------- --------
(In thousands)
Net income ................................................ $ 24,798 24,091 $ 47,406 45,186
Other comprehensive income (loss), net of income taxes:
Securities available for sale:
Net unrealized gains (losses) arising during the period (2,627) 7,167 (7,106) (2,971)
Reclassification adjustment for realized gains
included in net income .............................. -- -- -- (3)
-------- -------- -------- --------
(2,627) 7,167 (7,106) (2,974)
Minimum pension liability adjustment .................... -- -- -- 121
-------- -------- -------- --------
Total other comprehensive income (loss) ............. (2,627) 7,167 (7,106) (2,853)
-------- -------- -------- --------
Total comprehensive income ........................ $ 22,171 31,258 $ 40,300 42,333
======== ======== ======== ========
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, 2006 $ 1,200 1,237,592 285,202 (18,330) (28,150) (3,908) (99,183) 1,374,423
Net income ................. -- -- 47,406 -- -- -- -- 47,406
Total other comprehensive
loss, net ................. -- -- -- (7,106) -- -- -- (7,106)
Adoption of SFAS No. 123(R) -- (3,908) -- -- -- 3,908 -- --
Purchase of treasury stock . -- -- -- -- -- -- (34,509) (34,509)
Exercise of stock options .. -- 714 (1,940) -- -- -- 3,245 2,019
ESOP shares committed to be
released .................. -- 528 -- -- 561 -- -- 1,089
Restricted stock awards, net -- 786 -- -- -- -- (174) 612
Stock option expense ....... -- 757 -- -- -- -- -- 757
Common stock dividend of
$0.22 per share ........... -- -- (23,765) -- -- -- -- (23,765)
--------- --------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 2006 .. $ 1,200 1,236,469 306,903 (25,436) (27,589) -- (130,621) 1,360,926
========= ========= ========= ========= ========= ========= ========= =========
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 ................. -- -- 45,186 -- -- -- -- 45,186
Total other comprehensive
loss, net ................. -- -- -- (2,853) -- -- -- (2,853)
Common stock issued
for the acquisition of
Hudson River Bancorp ...... 357 484,093 -- -- -- -- -- 484,450
Purchase of treasury shares -- -- -- -- -- -- (56,607) (56,607)
Exercise of stock options .. -- 555 (2,721) -- -- -- 3,458 1,292
ESOP shares committed
to be released ............ -- 467 -- -- 562 -- -- 1,029
Restricted stock awards, net -- 316 (41) -- -- (1,136) 1,694 833
Common stock dividend
of $0.18 per share ........ -- -- (20,324) -- -- -- -- (20,324)
--------- --------- --------- --------- --------- --------- --------- ---------
Balances at June 30, 2005 .. $ 1,200 1,236,606 260,148 (8,290) (28,713) (4,309) (75,474) 1,381,168
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
6
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(unaudited)
Six months ended June 30,
-------------------------
2006 2005
----------- -----------
(In thousands)
Cash flows from operating activities:
Net income ................................................. $ 47,406 $ 45,186
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization (accretion) of fees and discounts, net ...... (274) 1,871
Provision for credit losses .............................. 3,856 3,201
Depreciation of premises and equipment ................... 5,982 5,402
Amortization of core deposit and other intangibles ....... 6,074 5,362
Originations of loans held for sale ...................... (19,657) (20,545)
Proceeds from sales of loans held for sale ............... 21,105 23,130
Loss (gain) on sale of loans ............................. 60 (47)
ESOP and stock based compensation expense, net ........... 2,596 1,814
Deferred income tax expense .............................. 2,612 4,679
Net increase in other assets ............................. (3,415) (5,755)
Net increase (decrease) in other liabilities ............. (8,539) 10,014
----------- -----------
Net cash provided by operating activities ............ 57,806 74,312
----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale .. 200,023 156,762
Principal payments received on securities available for sale 114,214 106,373
Purchases of securities available for sale ................. (39,691) (224,630)
Net increase in loans ...................................... (312,601) (136,863)
Acquisitions, net of cash and cash equivalents ............. -- (99,145)
Other, net ................................................. (13,993) (9,755)
----------- -----------
Net cash used in investing activities ................ (52,048) (207,258)
----------- -----------
Cash flows from financing activities:
Net increase in deposits ................................... 169,895 132,406
Repayments of short-term borrowings, net ................... (173,364) (4,418)
Proceeds from long-term borrowings ......................... 84,125 165,000
Repayments of long-term borrowings ......................... (12,379) (34,219)
Proceeds from exercise of stock options .................... 1,304 736
Excess tax benefit from stock based compensation ........... 752 871
Purchase of treasury stock ................................. (34,509) (56,607)
Dividends paid on common stock ............................. (23,765) (20,324)
----------- -----------
Net cash provided by financing activities ............ 12,059 183,445
----------- -----------
Net increase in cash and cash equivalents .................... 17,817 50,499
Cash and cash equivalents at beginning of period ............. 140,128 67,642
----------- -----------
Cash and cash equivalents at end of period ................... $ 157,945 $ 118,141
=========== ===========
Cash paid during the period for:
Income taxes ............................................ $ 25,392 $ 18,691
Interest expense ........................................ 77,947 53,584
Non-cash activity:
Loans transferred to held for sale ...................... $ 26,395 $ --
Acquisition of non-cash assets and liabilities:
Assets acquired ......................................... $ -- $ 2,760,164
Liabilities assumed ..................................... -- 2,166,093
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 using 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, these
financial statements do not include all of the information and footnotes
required by GAAP for a full year presentation. In our opinion, all adjustments
necessary for a fair presentation have been included. Results for the three and
six month periods ended June 30, 2006 do not necessarily reflect the results
that may be expected for the year ending December 31, 2006. Certain
reclassification adjustments were made to the 2005 financial statements to
conform them to the 2006 presentation. FNFG and First Niagara are referred to
collectively as "the Company," "we" or "our."
(1) Stock-Based Compensation
We offer several stock-based and incentive plans which are described below.
Stock Option Plans. We have two stock-based compensation plans under which
options may be granted to directors and key employees. The 1999 Stock Option
Plan authorizes the issuance of up to 3,597,373 shares of common stock. The
Amended and Restated 2002 Long-Term Incentive Stock Benefit Plan authorizes the
issuance of up to 8,020,454 shares of common stock for grants of stock options,
stock appreciation rights, accelerated ownership option rights or stock awards.
As of June 30, 2006, only stock options have been granted under the 2002 plan.
Under both plans, stock options have been granted with an exercise price equal
to the market price of our stock on the date of grant. All options have a
10-year term and become fully vested and exercisable over a period of 3 to 5
years from the grant date. At June 30, 2006, there was a total of 5,292,606
shares available for grant under these plans.
Restricted Stock Plan. Our 1999 Reward and Recognition Plan (the "RRP Plan")
authorizes the issuance of up to 1,438,949 shares of restricted stock to
directors and key employees. The restricted stock generally vests over 3 to 5
years from the grant date. As discussed above, restricted stock may also be
granted under the Amended and Restated 2002 Long-Term Incentive Stock Benefit
Plan.
Long-Term Performance Plan. We also have a Long-Term Performance Plan (the "LTIP
Plan") which provides our key executives with long term incentives as a reward
for performance, as a motivation for future performance and as a retention tool
for continued employment. This plan is a multi-year performance plan, with cash
and share-based incentive award opportunities if specific performance targets
are met. For the three year performance period beginning in 2005 these
performance metrics include the achievement of total revenue, earnings per share
growth, return on assets and total shareholder return targets, as well as
certain Strategic Plan initiatives specified by the Board of Directors. The LTIP
Plan will be funded by shares previously approved and authorized under our
existing stock-based compensation plans. During 2005, we allocated 42,400 shares
for potential future rewards.
When option recipients exercise their options, we issue shares from treasury
stock and record the proceeds as additions to capital. When restricted stock
grants are forfeited before they vest, we reacquire the shares, hold them in
treasury, and use them to grant new awards.
At June 30, 2006, we held more than 9.5 million shares of our stock as treasury
shares. This is more than adequate to meet the share requirements of our current
stock-based compensation plans. As part of our capital management initiatives,
we may repurchase additional shares under our current share repurchase programs.
As of June 30, 2006, there were 6,076,761 shares available for repurchase under
this program. During the first six months of 2006 we issued 237,851 shares from
treasury stock in connection with the exercise of stock options and grants of
restricted stock.
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 123(R), Share-Based Payment, which replaces SFAS No. 123,
Accounting for Stock-Based Compensation, and supercedes Accounting Principles
Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and
related interpretations. SFAS No. 123(R) requires us to record compensation
costs related to stock-based awards. Prior to this year, we accounted for stock
options following the requirements of APB No. 25 which did not require us to
record compensation expense for fixed stock options if the exercise price of the
option equaled or exceeded the fair market value of our stock at the grant date.
In the adoption of SFAS No. 123(R), we utilized the modified prospective
approach which applies to new awards and to awards modified, repurchased, or
cancelled after January 1, 2006. Additionally, any unvested stock awards granted
prior to that date are expensed as service is preformed based on the grant-date
fair value calculated in accordance with SFAS No. 123. For restricted stock
awards we recognize compensation expense on a straight-line basis over the
vesting period for the fair market value of the award, measured at the grant
date.
8
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
Our results for the six month period ended June 30, 2006 include share-based
compensation expense totaling $1.5 million. This amount has been recorded in
salaries and employee benefits expense in the Condensed Consolidated Statement
of Income.
The following table shows the effect on net income and earnings per share as if
we had adopted the fair value provisions of SFAS No. 123 for all outstanding and
unvested awards in the comparable prior year period (in thousands, except per
share amounts):
Three months Six months
ended ended
June 30, 2005 June 30, 2005
------------- -------------
Net income as reported $ 24,091 $ 45,186
Add: Stock-based compensation expense
included in net income, net of
related income tax effects 283 474
Deduct: Stock-based compensation expense
determined under the fair-value based
method, net of related income tax effects (661) (1,140)
---------- ----------
Pro forma net income $ 23,713 $ 44,520
========== ==========
Basic earnings per common share:
As reported $ 0.22 $ 0.41
Pro forma 0.21 0.41
Diluted earnings per common share:
As reported $ 0.22 $ 0.41
Pro forma 0.21 0.40
On December 28, 2005, our Board of Directors approved the accelerated vesting
for all stock options scheduled to vest by December 31, 2006. Due to this
acceleration, options to purchase 779,897 shares of our common stock, or 35% of
all unvested options outstanding, became exercisable immediately. All of the
accelerated options, except for 60,016 shares, had an exercise price above our
stock price on that date. All other contractual provisions related to these
options, including the portion of the options that will vest after 2006, remain
unchanged.
Stock Option Awards
The following is a summary of stock option activity during the six months ended
June 30, 2006:
Weighted
Number of average
shares Exercise price
---------- --------------
Outstanding at January 1, 2006 4,408,823 $ 9.89
Granted 20,000 14.06
Exercised (244,948) 5.73
Forfeited (89,125) 13.03
----------
Outstanding at June 30, 2006 4,094,750 $ 10.09
==========
9
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following is a summary of stock options outstanding at June 30, 2006:
Weighted Weighted Weighted
average average average
Options exercise remaining Options exercise
Exercise price outstanding price life (years) exercisable price
- -------------------- ----------- --------- ------------ ----------- ---------
$3.49 - $4.16 1,113,336 $ 3.87 3.36 1,113,336 $ 3.87
$4.87 - $12.87 1,124,389 10.76 6.74 846,439 10.09
$12.91 - $13.28 1,450,565 13.02 8.38 551,389 13.10
$13.52 - $16.21 406,460 14.76 7.89 217,707 14.84
--------- ---------
Total 4,094,750 $ 10.09 6.51 2,728,871 $ 8.54
========= =========
Weighted
average
Aggregate remaining
intrinsic contractual
Total shares value (1) term
----------- ----------- -----------
Options outstanding 4,094,750 $16,413,000 6.51 years
Options currently exercisable 2,728,871 15,139,000 5.55 years
(1) Intrinsic value is defined as the difference between the fair market value
of our stock at June 30, 2006 and the weighted average exercise price of
the stock award.
The total intrinsic value of stock options exercised during the six months ended
June 30, 2006 was $2.1 million. As of June 30, 2006, we have $4.5 million of
unrecognized compensation cost related to nonvested options granted. This cost
is expected to be recognized over a weighted average period of 1.6 years.
To estimate the fair value of stock option awards, we use the Black-Scholes
valuation method. This method is dependent upon certain assumptions. The
following is a summary of stock options granted for the periods indicated as
well as the weighted-average assumptions utilized to compute the fair value of
the options:
Six months ended
June 30,
-------------------------
2006 2005
---------- ----------
Options granted 20,000 1,266,470
Grant date weighted average fair value per share $ 3.75 $ 3.48
Grant date weighted average share price $ 14.06 $ 12.96
Expected forfeiture of unvested options 10% 10%
Dividend yield 3.13% 2.75%
Risk-free interest rate 4.94% 4.04%
Expected volatility factor 28.75% 29.34%
Expected life (in years) 6.50 6.50
In the table above the risk-free interest rate is the U.S. Treasury rate
commensurate with the expected life of options on the date of their grant. We
based the volatility of our stock on historical volatility over a span of time
equal to the expected life of the options.
Restricted Stock Awards
We expense the value of restricted stock grants over the applicable vesting
periods. At June 30, 2006 we have $3.3 million of unrecognized compensation cost
related to nonvested awards granted under the RRP Plan. This cost is expected to
be recognized over a weighted average period of 1.8 years.
10
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following is a summary of restricted stock activity during the six month
period ended June 30, 2006:
Weighted
Number of average grant
shares date fair value
-------- ---------------
Unvested at January 1, 2006 368,599 $ 12.89
Awarded -- --
Vested (83,345) 11.37
Forfeited -- --
--------
Unvested at June 30, 2006 285,254 $ 13.34
========
(2) Earnings Per Share
The computation of basic and diluted earnings per share for the three and six
month periods ended June 30, 2006 and 2005 is as follows (in thousands, except
per share amounts):
Three months ended Six months ended
June 30, June 30,
------------------------- -------------- ----------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net income available to common shareholders $ 24,798 24,091 $ 47,406 45,186
========== ========== ========== ==========
Weighted average common shares outstanding:
Unallocated ESOP shares (3,702) (3,856) (3,721) (3,875)
Unvested restricted stock awards (319) (407) (334) (401)
Treasury shares (9,039) (4,655) (8,479) (3,530)
---------- ---------- ---------- ----------
Total basic weighted average
common shares outstanding 106,985 111,128 107,511 109,673
Incremental shares from assumed exercise
of stock options 835 814 864 882
Incremental shares from assumed vesting
of restricted stock awards 77 91 91 99
---------- ---------- ---------- ----------
Total diluted weighted average
common shares outstanding 107,897 112,033 108,466 110,654
========== ========== ========== ==========
Basic and diluted earnings per share $ 0.23 0.22 $ 0.44 0.41
========== ========== ========== ==========
Anti-dilutive stock options and restricted stock
awards excluded from the diluted weighted average
common share calculations 1,313 875 1,324 342
========== ========== ========== ==========
11
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
(3) 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
-------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2006 2005 2006 2005
------- ------- ------- -------
Interest cost $ 909 964 $ 1,819 1,928
Expected return on plan assets (1,411) (1,396) (2,822) (2,792)
Amortization of unrecognized loss 143 95 287 190
Amortization of unrecognized prior service liability -- 4 -- 8
------- ------- ------- -------
Net pension benefit $ (359) (333) $ (716) (666)
======= ======= ======= =======
Other postretirement plans
-------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------- ----------- -------
2006 2005 2006 2005
------- ------- ------- -------
Interest cost $ 122 125 $ 244 250
Expected return on plan assets -- -- -- --
Amortization of unrecognized loss 40 26 (32) 51
Amortization of unrecognized prior service liability (16) (16) 80 (32)
------- ------- ------- -------
Net postretirement cost $ 146 135 $ 292 269
======= ======= ======= =======
Effective February 1, 2002, we froze all new participation and benefit accruals
in our pension plan. Accordingly, after that date, no employees are permitted to
enter the plan and future salary increases and years of credited service will
not be considered when computing benefits under the plan. Additionally, we
modified our post-retirement plan to include only those employees who met the
retirement eligibility requirements as of December 31, 2001.
(4) Segment Information
We have two business segments, banking and financial services. The financial
services segment includes our risk (insurance), employee benefits administration
and wealth management operations. The banking segment includes all of our other
operations. Predominantly all of our assets relate to our banking segment.
Selected information for our segments follows (in thousands):
Financial Consolidated
Banking Services Eliminations total
---------- ---------- ------------ ------------
For the three months ended:
June 30, 2006
Net interest income $ 63,788 $ 48 $ -- $ 63,836
Provision for credit losses 1,556 -- -- 1,556
---------- ---------- ---------- ----------
Net interest income after provision
for credit losses 62,232 48 -- 62,280
Noninterest income 13,040 14,791 (29) 27,802
Amortization of core deposit and
other intangibles 1,872 1,122 -- 2,994
Other noninterest expense 37,021 12,086 (29) 49,078
---------- ---------- ---------- ----------
Income before income taxes 36,379 1,631 -- 38,010
Income tax expense 12,560 652 -- 13,212
---------- ---------- ---------- ----------
Net income $ 23,819 $ 979 $ -- $ 24,798
========== ========== ========== ==========
12
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
Financial Consolidated
Banking Services Eliminations total
------------ ------------ ------------ ------------
For the three months ended:
June 30, 2005
Net interest income $ 63,561 $ 1 $ -- $ 63,562
Provision for credit losses 900 -- -- 900
------------ ------------ ------------ ------------
Net interest income after provision
for credit losses 62,661 1 -- 62,662
Noninterest income 12,726 7,697 (22) 20,401
Amortization of core deposit and
other intangibles 2,319 535 -- 2,854
Other noninterest expense 37,458 5,871 (22) 43,307
------------ ------------ ------------ ------------
Income before income taxes 35,610 1,292 -- 36,902
Income tax expense 12,294 517 -- 12,811
------------ ------------ ------------ ------------
Net income $ 23,316 $ 775 $ -- $ 24,091
============ ============ ============ ============
For the six months ended:
June 30, 2006
Net interest income $ 126,304 $ 85 $ -- $ 126,389
Provision for credit losses 3,856 -- -- 3,856
------------ ------------ ------------ ------------
Net interest income after provision
for credit losses 122,448 85 -- 122,533
Noninterest income 24,959 28,808 (54) 53,713
Amortization of core deposit and
other intangibles 3,805 2,269 -- 6,074
Other noninterest expense 75,210 22,751 (54) 97,907
------------ ------------ ------------ ------------
Income before income taxes 68,392 3,873 -- 72,265
Income tax expense 23,310 1,549 -- 24,859
------------ ------------ ------------ ------------
Net income $ 45,082 $ 2,324 $ -- $ 47,406
============ ============ ============ ============
For the six months ended:
June 30, 2005
Net interest income $ 123,787 $ 5 $ -- $ 123,792
Provision for credit losses 3,201 -- -- 3,201
------------ ------------ ------------ ------------
Net interest income after provision
for credit losses 120,586 5 -- 120,591
Noninterest income 23,824 15,034 (46) 38,812
Amortization of core deposit and
other intangibles 4,400 962 -- 5,362
Other noninterest expense 73,194 11,504 (46) 84,652
------------ ------------ ------------ ------------
Income before income taxes 66,816 2,573 -- 69,389
Income tax expense 23,174 1,029 -- 24,203
------------ ------------ ------------ ------------
Net income $ 43,642 $ 1,544 $ -- $ 45,186
============ ============ ============ ============
13
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
(5) Loans Held for Sale
Our accounting policy for loans originated and intended for sale in the
secondary market is to record such loans at the lower of the aggregate cost or
market value based upon observable market prices or prices obtained from a third
party. Any subsequent decreases in market value are recognized as a charge to
earnings at the time the decline in value occurs. Gains and losses on sales of
loans held for sale are included in Lending and Leasing Income.
(6) Recently Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board released Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement 109." Effective for fiscal years beginning after December 15, 2006,
this interpretation provides guidance on the financial statement recognition and
measurement for income tax positions taken or expected to be taken in an income
tax return. It also provides related guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. While we are currently evaluating the effect of the guidance
contained in Interpretation 48, we do not expect the implementation to have a
material impact on our consolidated financial statements.
(7) Subsequent Event - Manufactured Housing Loan Sale
On July 21, 2006, we completed the sale of $24.7 million of manufactured housing
loans that were originally included in the assets acquired with the Hudson River
Bancorp, Inc. acquisition in January 2005. Since that time, we had not
originated any new loans for that portfolio and the carrying amount of the loans
had accordingly been reduced from the originally acquired $35.2 million. During
the second quarter of 2006, we decided to sell the remaining loans and, as a
result, reclassified the net carrying amount of the loans to our held for sale
portfolio. The gain to be recognized in the third quarter of 2006 for this sale
is $3.0 million.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The following discussion and analysis is intended to provide greater details of
our results of operations and financial condition and should be read in
conjunction with our condensed consolidated financial statements and the notes
thereto included elsewhere in this document. Certain statements under this
caption constitute "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, which involve risks and uncertainties. These
forward-looking statements relate to, among other things, expectations of the
business environment in which First Niagara Financial Group and its subsidiary
operate, projections of future performance and perceived opportunities in the
market. Our actual results may differ significantly from the results,
performance and achievements expressed or implied in such forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, economic conditions, competition in the geographic and business
areas in which we conduct our operations, fluctuation in interest rates, credit
quality and government regulation and other factors discussed in the annual
report on Form 10-K for the year ended December 31, 2005 under Item 1A. "Risk
Factors." First Niagara Financial Group does not undertake, and specifically
disclaims, any obligation to update any forward-looking statements to reflect
the occurrence of events or circumstances after the date of such statements.
OVERVIEW
Who We Are
FNFG is a Delaware corporation and financial holding company providing products
and services through our one bank subsidiary, First Niagara, which is a
federally chartered savings bank subject to the Office of Thrift Supervision
regulation. We are positioned as one of the leading community banks in Upstate
New York, providing our customers with consumer and commercial banking and
financial services. First Niagara has, among its subsidiaries, a wholly owned
insurance agency, First Niagara Risk Management, and a wholly owned employee
benefits administration and compensation consulting firm, the Burke Group.
Principal Products and Services and Locations of Operations
We offer a full range of products and services in the following:
- --------------------------------------------------------------------------------------------
Customer Focused Area Includes
- --------------------------------------------------------------------------------------------
Consumer Banking Consumer lending and deposit gathering, small business lending,
branch banking, electronic banking, residential mortgage lending
and personal insurance
- --------------------------------------------------------------------------------------------
Commercial Banking Real estate and commercial lending, depository, and related
financial services to corporate, industrial, and financial customers
- --------------------------------------------------------------------------------------------
Business Services Business lending, leasing and other services including insurance,
employee benefits administration, merchant services and corporate
cash management
- --------------------------------------------------------------------------------------------
Wealth Management Asset management, financial planning, trust and investment
services, and third-party sales of mutual funds and annuities
- --------------------------------------------------------------------------------------------
We actively seek to deepen relationships with our customers and many of our
customers use more than one of these products and services. We operate 122
full-service banking offices, 164 ATMs and two loan production offices across
Upstate New York.
How We Generate Revenues and Information About Our Industry
Our profitability is primarily dependent on the difference between interest we
receive on loans and investment securities, and the interest we pay on deposits
and borrowings. The rate we earn on our assets and the rate we pay on our
liabilities is a function of the general level of interest rates and competition
within our markets. Interest rates are highly sensitive to many economic
conditions that are beyond our control, such as inflation, recession and
unemployment.
Our business is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve. The Federal Reserve implements national monetary policies (with
objectives such as curbing inflation and combating recession) through its
open-market operations in U.S. Government securities, by adjusting depository
institutions reserve requirements, and by varying the target federal funds and
discount rates. The actions of the Federal Reserve in these areas influence the
growth of our loans, investments, and deposits and also affect interest rates
that we earn on interest-earning assets and that we pay on interest-bearing
liabilities.
We also derive a significant amount of noninterest income from our banking and
financial services activities. In order to minimize the impact of adverse
changes in the interest rate environment we continue to diversify our revenue
sources through our customer focused strategy and by acquiring other financial
services companies that provide sources of noninterest income.
15
How Economic Factors Impact Us
Our business is concentrated in Upstate New York, therefore, our financial
results are affected by economic conditions in this geographic area. The Upstate
New York economy continues to be challenging manifesting in limited population
and job growth. An extended decline in economic and business conditions in our
markets could have a material impact on our loan portfolio or the demand for
other products and services, which may have a material adverse effect on our net
income.
Our Opportunities, Challenges and Risks
We believe that our growth will result from the execution of our customer
centric strategy which positions us as our customers "Trusted Financial
Advisor." Our Strategic Plan, which we refer to internally as our "Strategic
Blueprint" was updated in 2004 with that focus.
We also believe that the consolidation of community banks will continue and, in
that regard, we will continue to evaluate acquisition opportunities. We will
also consider acquisition opportunities in other business lines, including, but
not limited to, specialty finance, risk and wealth management. In the past, we
have successfully integrated acquired companies and de novo (new) branches into
our operations. If bank acquisition opportunities are limited in markets we wish
to enter or expand our business, we will evaluate opening de novo branches.
Competition in the banking and financial services industry across Upstate New
York is intense. We compete with commercial banks, savings institutions, credit
unions, finance companies, mutual funds, insurance companies, mortgage brokerage
firms and brokerage and investment banking firms. Many of these competitors
(whether regional or national) have substantially greater resources and lending
capacity than we do and may offer certain services that we do not or cannot
provide.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are important to understanding the financial results
that we report. Our accounting policies are described in Note 1 in the "Notes to
Consolidated Financial Statements" presented in our 2005 Form 10-K. Our most
complex accounting policies require judgment to determine the reported amount of
assets, liabilities, commitments and contingencies. We have established policies
and control procedures that are intended to ensure valuation methods are applied
consistently and that the process for changing those methodologies occurs in a
controlled manner. A brief description of our current accounting policies
involving significant management valuation judgments follows:
Allowance for Credit Losses
The allowance for credit losses represents our best estimate of expected losses
in our loan and lease portfolio. In establishing our provision for credit
losses, we consider the estimated net realizable value, the fair value of the
underlying collateral, as well as several other factors including: (i) current
economic conditions and the related impact on specific borrowers and industry
groups, (ii) historical default experiences, and (iii) expected loss in the
event of default.
While we use available information to recognize losses on loans, additional
credit loss provisions may be necessary based on numerous factors, including
changes in economic conditions. To the best of our knowledge, the allowance for
credit losses includes all losses that we believe are both probable and
reasonable to estimate at the balance sheet date. However, there can be no
assurance that the allowance for credit losses will be adequate to cover all
losses that may in fact be incurred on our present loan and lease portfolio.
Changes in the financial condition of individual borrowers, general economic
conditions, historical loss experience and the condition of the various markets
in which collateral may be sold may all affect the level of the allowance for
credit losses.
Goodwill
We assess goodwill each year for impairment in accordance with SFAS No. 142.
This assessment generally involves evaluating the estimated earnings from the
related assets and liabilities of our business segments based upon the present
value of future cash flows. If the estimated fair value of a business segment,
to which we have allocated goodwill, is less than the financial statement value
of that segment, we would take a charge against earnings to reduce the amount of
the goodwill. In our 2005 evaluation of the impairment of goodwill, we did not
identify any individual segment where the fair value was less than the financial
statement value. A more detailed description of our methodology for testing
goodwill for impairment and assumptions made can be found 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 our 2005 Form
10-K.
16
RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006
Overview
For the six months ended June 30, 2006 net income was $47.4 million, or $0.44
cents per diluted share. This represents a 5 percent increase in net income and
a 7 percent increase in diluted earnings per share from 2005. Net income for the
second quarter of 2006 was $24.8 million, or $0.23 per diluted share. These
results compare to the $24.1 million or $0.22 per diluted share for the same
period of 2005.
There were two significant and unusual items that impacted our earnings for the
second quarter of 2006. Net interest income includes the recognition of $2.2
million in accretion due to the call of $37.5 million in Federal Home Loan Bank
(FHLB) borrowings that we assumed in connection with the Hudson River
acquisition. In addition, salaries and benefits include $1.1 million of
severance charges resulting from the implementation of certain process
improvement efficiencies. Excluding the net benefit of these two items, net
income for the six months ended June 30, 2006 would have been $46.7 million, or
$0.43 per diluted share.
Given the constraints of our current operating environment, which includes a
flatter (and at times inverted) yield curve and very competitive loan and
deposit pricing, key trends noted during the first six months of the year
include:
o 12% annualized loan growth including double digit annualized
increases in commercial and home equity balances;
o A 6% annualized increase in deposits compared to year-end balances,
including a 15% annualized increase in certificates of deposits;
o A decline in the taxable equivalent net interest rate margin to
3.59% for the second quarter excluding the net interest income
benefit of the called FHLB borrowing;
o Very favorable credit trends, and
o Noninterest income at 30% of total revenues, driven by strong growth
in our financial services businesses.
Analysis of Financial Condition as of June 30, 2006
Total assets increased from $8.06 billion at December 31, 2005 to $8.11 billion
at June 30, 2006. Key factors included:
o Higher yielding commercial loans represent an increasing percentage
of our total loans;
o Variable rate, Relationship-based home equity loans increased at a
21% annualized rate over the first six months of 2006;
o Nonperforming loans decreased to $17.5 million at June 30, 2006
improving the ratio of our allowance for credit losses to
nonperforming loans to 415%;
o The interest rate driven shift in our deposit mix continued, with
certificate of deposit balances increasing to 40% of deposits from
38% at December 31, 2005;
o Noninterest bearing deposits increased to $628.5 million, a 12%
annualized increase from December 31, 2005.
17
Lending Activities
Our loan portfolio is concentrated in commercial real estate and business
lending, as well as residential mortgages. Our strategy calls for a continued
emphasis on increasing commercial loan originations because of the higher
yielding nature of these loans. We also actively market home equity loans given
their low credit risk and relationship building benefits. The following table
presents the composition of our loan portfolio at the dates indicated. The loan
balances on this table include loans held for sale.
(Dollars in thousands) June 30, 2006 December 31, 2005
---------------------------- ---------------------------
Amount Percent Amount Percent
------------ ------------ ------------ ------------
Commercial:
Real estate $ 1,788,709 32.1% $ 1,647,576 31.3%
Construction 206,578 3.7 222,907 4.2
Business 529,627 9.5 473,571 9.0
------------ ------------ ------------ ------------
Total commercial loans 2,524,914 45.3 2,344,054 44.5
Residential real estate 2,245,795 40.3 2,182,907 41.4
Home equity 446,562 8.0 403,340 7.7
Other consumer 180,041 3.2 178,732 3.4
Specialized lending (1) 177,375 3.2 159,759 3.0
------------ ------------ ------------ ------------
Total loans and leases 5,574,687 100.0% 5,268,792 100.0%
------------ ------------ ------------ ------------
Net deferred costs and premiums 24,617 19,847
Allowance for credit losses (72,662) (72,340)
------------ ------------
Total loans and leases, net $ 5,526,642 $ 5,216,299
============ ============
(1) Includes commercial leases, financed insurance premiums and certain
manufactured housing loans.
Total loan balances increased by $305.9 million from December 31, 2005 to June
30, 2006. This increase was driven by a 16% annualized overall commercial loan
growth, including a 24% annualized increase in commercial business lending. We
also had growth in both our residential mortgage and home equity portfolios
which are key components of our customer relationship-based strategy.
Our overall credit quality continues to trend favorably. While our ratio of net
charge-offs to average loans is 3 basis points above the 2005 second quarter, it
is down 9 basis points from the fourth quarter of 2005 and 10 basis points below
our five year average. Additionally, total nonperforming loans declined $4.4
million from December 31, 2005, resulting in an allowance for credit losses to
non-accruing loan ratio of 415%.
Analysis of the Allowance for Credit Losses. The following table presents the
analysis of the allowance for credit losses for the periods indicated.
Six months ended June 30,
------------------------
(Dollars in thousands) 2006 2005
-------- --------
Balance at beginning of period ........................... $ 72,340 $ 41,422
Net charge-offs:
Charge-offs ............................................ (4,435) (4,212)
Recoveries ............................................. 901 1,774
-------- --------
Net charge-offs .................................... (3,534) (2,438)
Allowance obtained through acquisitions .................. -- 30,684
Provision for credit losses .............................. 3,856 3,201
-------- --------
Balance at end of period ................................. $ 72,662 $ 72,869
======== ========
Ratio of annualized net charge-offs to average loans
outstanding during the period .......................... 0.13% 0.10%
======== ========
Ratio of annualized provision for credit losses to average
loans outstanding during the period .................... 0.14% 0.13%
======== ========
Non-Accruing Loans and Non-Performing Assets. We place loans on nonaccrual
status when they become 90 days past due or if there is uncertainty regarding
the collectibility of interest or principal. When a loan is placed on nonaccrual
status, any interest previously accrued and not collected is reversed from
income. Loans are charged-off when we determine that collection has become
unlikely. Other real estate owned consists of real property acquired through
foreclosure on the related defaulted loans.
18
The following table presents our non-accruing loans and non-performing assets at
the dates indicated.
(Dollars in thousands) June 30, December 31,
2006 2005
-------- ------------
Non-accruing loans:
Commercial real estate ................................... $ 7,482 $ 6,755
Commercial business ...................................... 2,458 3,171
Residential real estate .................................. 3,904 5,911
Home equity .............................................. 620 567
Other consumer ........................................... 592 953
Specialized lending ...................................... 2,473 4,573
------- -------
Total non-accruing loans ............................... 17,529 21,930
Real estate owned .......................................... 1,039 843
------- -------
Total non-performing assets ............................ $18,568 $22,773
======= =======
Total non-accruing loans as a percentage of total loans .... 0.31% 0.41%
======= =======
Total non-performing assets as a percentage of total assets 0.23% 0.28%
======= =======
Allowance for credit losses to total loans ................. 1.30% 1.37%
======= =======
Allowance for credit losses to non-accruing loans .......... 415% 330%
======= =======
Investment Activities
Given the flat yield curve and narrow spreads between investment yields and
rates paid on wholesale borrowings, we have been funding loan growth with cash
flows from maturing investment securities. Therefore, securities available for
sale decreased $287.9 million from December 31, 2005. Our investment portfolio
remains well positioned to continue to provide a stable source of cash flow and
limited earnings volatility, as the weighted average estimated life of
securities available for sale at June 30, 2006 was 2.4 years.
Our securities portfolio is comprised primarily of U.S. government agency
securities, mortgage backed securities, collateralized mortgage obligations,
obligations of states and political subdivisions and corporate debt instruments.
All of our investment securities are classified as available for sale and are
recorded at fair value with unrealized gains or losses, net of the deferred tax
effect, reported as increases or decreases in our stockholders' equity. Portions
of the portfolio are utilized for pledging requirements for deposits of state
and local subdivisions, securities sold under repurchase agreements, and FHLB
advances. Federal Funds sold and certain other short-term instruments are
included in cash and cash equivalents.
Funding Activities
We continue to focus our efforts on deposit gathering and retention given the
importance of this lower cost funding to support our loan growth. During the
first half of 2006, our deposit balances increased $170.0 million, or 6%
annualized. Although declining as a percent of total deposits, the amount of
core deposits increased since December 31, 2005 due to a 12% annualized increase
in noninterest bearing accounts. Certificates of deposit and money market
accounts increased 16% on an annualized basis due to the continuing migration
from lower cost core accounts and targeted marketing initiatives in connection
with our opening five new branches during the last six months. We believe our
strategic initiatives designed to drive core account growth are being realized
in spite of the challenging interest rate environment, evidenced by a 4%
annualized increase in the overall number of deposit accounts and improvement in
our open/closed account ratio.
The following table depicts the composition of our deposits as of the dates
indicated:
(Dollars in thousands) June 30, 2006 December 31, 2005
---------------------- ----------------------
Amount Percent Amount Percent
---------- ------- ---------- -------
Core Deposits:
Savings ................. $1,585,934 28.1% $1,619,187 29.6%
Interest-bearing checking 1,189,275 21.0 1,182,995 21.6
Noninterest-bearing ..... 628,478 11.1 592,076 10.8
---------- ------ ---------- ------
Total core deposits ... 3,403,687 60.2 3,394,258 62.0
Certificates ............. 2,245,620 39.8 2,085,154 38.0
---------- ------ ---------- ------
Total deposits ........ $5,649,307 100.0% $5,479,412 100.0%
========== ====== ========== ======
19
We reduced our wholesale borrowings by $113.4 million during the first six
months as we expanded our base of municipal deposits and funded our loan growth
with cash flow from our securities portfolio. While the margins on municipal
deposits are narrow, these deposits currently carry a lower cost than new
wholesale borrowings. Since December 31, 2005, our municipal deposits increased
15% to $353.9 million.
Equity Activities
We repurchased 2.5 million shares of our common stock during the first half of
2006. As of June 30, 2006, 6.1 million shares remain available for repurchase,
including a 5.6 million share authorization from our Board of Directors
announced near the end of the first quarter. While treasury stock purchases are
an important component of our capital management strategy, the extent to which
we repurchase shares in the future will depend on a number of factors including
market trends and prices and alternative uses for our capital.
We declared two common stock dividends totaling $0.22 per share, or $23.8
million. This represents a 22% increase over the first half of 2005 on a per
share basis and a payout ratio of 50%.
Results of Operations for the Three and Six Months Ended June 30, 2006 and June
30, 2005
The following table summarizes our net income, earnings per common share and
other key financial ratios for the periods indicated:
Three months ended Six months ended
-------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
(Dollars in thousands, except per
share amounts)
Net interest income ................ $ 63,836 $ 63,562 $ 126,389 $ 123,792
Noninterest income ................. 27,802 20,401 53,713 38,812
----------- ----------- ----------- -----------
Total income ....................... 91,638 83,963 180,102 162,604
Noninterest expense ................ 52,072 46,161 103,981 90,014
Net income ......................... 24,798 24,091 47,406 45,186
Earnings per common share:
Basic ............................ $ 0.23 $ 0.22 $ 0.44 $ 0.41
Diluted .......................... $ 0.23 $ 0.22 $ 0.44 $ 0.41
Return on average assets, annualized 1.23% 1.22% 1.19% 1.18%
Return on average equity, annualized 7.27% 6.95% 6.97% 6.68%
Return on average tangible equity,
annualized (1) ............... 16.28% 14.81% 15.58% 13.85%
(1) Tangible equity is defined as total stockholders' equity less goodwill and
other intangibles assets.
20
Net Interest Income
The following table presents our condensed average balance sheet information as
well as tax equivalent interest income and yields. A tax equivalent basis is
used in order to provide the most comparative yields among all types of interest
earning assets. That is, interest on tax-exempt securities and loans are
restated as if the interest we earned was taxed at our statutory income tax
rates adjusted for the non-deductible portion of interest expense that we
incurred to acquire these assets. Yields earned on interest-earning assets,
rates paid on interest-bearing liabilities and average balances are based on
average daily balances:
Three months ended June 30,
-------------------------------------------------------------------------------------
2006 2005
--------------------------------------- ----------------------------------------
Average Interest Average Interest
(Dollars in thousands) outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- ----------- ---- ----------- ----------- ----
Interest-earning assets:
Loans and leases(1) ................... $ 5,487,919 $ 89,508 6.53% $ 5,018,204 $ 78,401 6.25%
Securities available for sale and
other investments(2) ................ 1,543,195 15,943 4.13 1,827,220 16,524 3.62
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets ...... 7,031,114 105,451 6.00 6,845,424 94,925 5.55
----------- ----------- ---- ----------- ----------- ----
Allowance for credit losses ............. (72,653) (73,320)
Noninterest-earning assets(3)(4) ........ 1,124,333 1,162,511
----------- -----------
Total assets ....................... $ 8,082,794 $ 7,934,615
=========== ===========
Interest-bearing liabilities:
Savings deposits ...................... $ 1,585,764 $ 5,764 1.46% $ 1,675,953 $ 4,217 1.01%
Checking deposits ..................... 1,181,493 5,262 1.79 1,187,863 3,197 1.08
Certificates of deposit ............... 2,207,201 20,804 3.78 1,800,333 11,716 2.61
Borrowed funds ........................ 1,045,184 8,344 3.18 1,239,808 11,238 3.61
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing liabilities . 6,019,642 40,174 2.67 5,903,957 30,368 2.06
----------- ----------- ---- ----------- ----------- ----
Noninterest-bearing deposits ............ 590,754 547,366
Other noninterest-bearing liabilities ... 105,051 93,393
----------- -----------
Total liabilities .................. 6,715,447 6,544,716
Stockholders' equity(3) ................. 1,367,347 1,389,899
----------- -----------
Total liabilities and stockholders'
equity .......................... $ 8,082,794 $ 7,934,615
=========== ===========
Net interest income ..................... $ 65,277 $ 64,557
=========== ===========
Net interest rate spread ................ 3.33% 3.49%
==== ====
Net earning assets ...................... $ 1,011,472 $ 941,467
=========== ===========
Net interest rate margin ................ 3.71% 3.77%
=========== ===========
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.80% 115.95%
=========== ===========
21
Six months ended June 30,
--------------------------------------------------------------------------
2006 2005
----------------------------------- -----------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- ----------- ---- ----------- ----------- ----
Interest-earning assets:
Loans and leases(1) ................... $ 5,404,588 $ 175,086 6.50 $ 4,860,976 $ 150,813 6.23%
Securities available for sale and
other investments(2) ................ 1,599,273 32,512 4.07 1,779,450 31,443 3.54
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets ...... 7,003,861 207,598 5.95 6,640,426 182,256 5.50
----------- ----------- ---- ----------- ----------- ----
Allowance for credit losses ............. (72,532) (74,120)
Noninterest-earning assets(3)(4) ........ 1,128,122 1,128,824
----------- -----------
Total assets ....................... $ 8,059,451 $ 7,695,130
=========== ===========
Interest-bearing liabilities:
Savings deposits ...................... $ 1,593,772 $ 11,130 1.41 $ 1,638,918 $ 8,077 0.99%
Checking deposits ..................... 1,165,095 9,540 1.65 1,188,542 6,120 1.04
Certificates of deposit ............... 2,157,800 38,634 3.61 1,685,878 20,699 2.48
Borrowed funds ........................ 1,086,303 18,948 3.50 1,210,831 21,758 3.63
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing liabilities . 6,002,970 78,252 2.63 5,724,169 56,654 1.99
----------- ----------- ---- ----------- ----------- ----
Noninterest-bearing deposits ............ 573,891 515,050
Other noninterest-bearing liabilities ... 111,272 92,799
----------- -----------
Total liabilities .................. 6,688,133 6,332,018
Stockholders' equity(3) ................. 1,371,318 1,363,112
----------- -----------
Total liabilities and stockholders'
equity .......................... $ 8,059,451 $ 7,695,130
=========== ===========
Net interest income ..................... $ 129,346 $ 125,602
=========== ===========
Net interest rate spread ................ 3.32% 3.51%
==== ====
Net earning assets ...................... $ 1,000,891 $ 916,257
=========== ===========
Net interest rate margin ................ 3.70% 3.79%
=========== ===========
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.67% 116.01%
=========== ===========
(1) Average outstanding balances are net of deferred costs and premiums and
include loans held for sale.
(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.
Similar to other financial institutions, our net interest rate margin has been
negatively impacted by various factors:
o Pressures from the flatter (and at times inverted) yield curve,
which caused the rates paid on our interest-bearing liabilities to
increase faster than the yield received on our interest-earning
assets;
o The continuing shift in our deposit mix from lower paying core
deposits to higher rate certificate and money market accounts; and
o The competitive environment for loans and deposits.
Net interest income for the second quarter includes the recognition of $2.2
million in accretion related to the call of $37.5 million of FHLB borrowings
assumed in connection with the Hudson River acquisition. Excluding this benefit,
the second quarter net interest margin of 3.59% represents an 18 basis point
decline from the second quarter 2005, and the six month margin for 2006 of 3.63%
represents a 16 basis point decline from the same period in 2005.
Provision for Credit Losses
During the first six months of 2006, our provision for credit losses of $3.9
million represented 13 basis points of average loans, consistent with the same
period in 2005.
22
Noninterest Income
The following table sets forth information by category of noninterest income for
the periods indicated:
Three months ended Six months ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
(Dollars in thousands)
Banking services 9,983 $ 9,448 $ 19,034 $ 17,437
Risk management services 11,705 5,837 22,525 11,442
Employee benefits administration 923 -- 1,818 --
Wealth management services 2,133 1,776 4,406 3,481
Lending and leasing 1,969 1,770 3,716 3,346
Bank-owned life insurance 753 1,072 1,503 2,128
Other 333 498 711 978
------------ ------------ ------------ ------------
Total noninterest income 27,802 $ 20,401 $ 53,713 $ 38,812
============ ============ ============ ============
As a % of total revenues 30.34% 24.30% 29.82% 23.87%
============ ============ ============ ============
We are focused on increasing the ratio of noninterest income to total revenues
in order to help mitigate the volatility created by fluctuations in the yield
curve and the impact that has on our net income. Despite operating in a soft
insurance market (defined as a competitive pricing environment),the increase in
revenues from risk management services reflects the benefits of our expanded
sales force from the Hatch Leonard Naples, Inc. ("HLN") acquisition. Risk
management (insurance) revenues have also benefited from increased referrals
generated by an integrated relationship-based sales approach utilized by our
commercial lenders and risk management sales teams. The increase in wealth
management revenue is a result of our stepped up efforts within our branch
network to have retail sales personnel licensed to sell our investment products.
Expanding these businesses is one of our key strategic objectives, as they are
an important component of our customer relationship-based strategy.
Our success with our customer relationship-based strategy is also reflected in
the increase in banking service fees, which is a result of a rise in debit card
transactions. Core deposit growth remains a key driver for continued build up in
this important component of our revenue.
Other significant events impacting noninterest income variation year over year
are as follows:
o In July 2005 we acquired HLN, an insurance agency with operations
across Upstate New York;
o In September 2005, we acquired the Burke Group, an employee benefits
administration and compensation consulting firm; and
o Beginning in the third quarter of 2005, income earned on bank-owned
life insurance decreased due to the surrender of $40.0 million of
policies obtained through acquisitions.
Noninterest Expense
The efficiency ratio, which is a standard banking industry metric used to
measure the average cost required to earn one dollar of revenue, is computed by
dividing noninterest expenses by the sum of net interest income and noninterest
income. Improving the efficiency ratio is achieved through an increase in
revenues and/or a corresponding decrease in operating expenses, which would
generally indicate a more efficient operating structure. Conversely, an increase
in the efficiency ratio would generally indicate a decrease in overall
efficiency. As with any standard ratio, there are limitations inherent in this
measure.
23
The following table shows the major components of operating expenses for the
periods indicated:
Three months ended Six months ended
----------------------------- -----------------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
(Dollars in thousands)
Salaries and benefits 30,411 $ 23,677 $ 60,013 $ 45,886
Occupancy and equipment 5,241 4,678 10,914 9,193
Technology and communications 5,109 4,827 10,103 8,891
Marketing and advertising 1,792 2,143 3,579 3,854
Professional services 1,069 1,802 1,932 4,346
Amortization of intangibles 2,994 2,854 6,074 5,362
Other 5,456 6,180 11,366 12,482
------------ ------------ ------------ ------------
Total noninterest expense 52,072 $ 46,161 $ 103,981 $ 90,014
============ ============ ============ ============
Efficiency Ratio 56.8% 55.0% 57.7% 55.4%
============ ============ ============ ============
Increases in noninterest expenses for the three and six month periods of 2006
include:
o $1.1 million of severance costs in the second quarter of 2006
resulting from the implementation of certain process improvement
efficiencies;
o Increased commissions attributable to revenue growth in risk and
wealth management;
o Incentive payments related to an increased level of cross-sell
activity;
o Increased occupancy costs related to opening de novo branches and a
new regional market center in Western New York;
o Additional compensation costs related to the expensing of stock
options due to the implementation of SFAS 123(R), and;
o Operating costs associated with the acquisition of HLN and Burke
Group.
The first quarter of 2005 includes $2.3 million of merger costs related to the
acquisition of Hudson River Bancorp, Inc. The decrease in our professional
services expense is primarily related to implementation costs associated with
our Strategic Blueprint initiatives incurred during 2005.
Given the pressures on revenue growth, we have accelerated the implementation of
certain strategic process improvement initiatives. During the second quarter we
consolidated two branch locations and combined our two call centers. We will
continue identifying potential areas of improvement including:
o Consolidating other branches where we have overlap or duplication as
a result of our more recent bank acquisitions;
o Evaluating cash supply levels;
o Further utilizing the benefits of electronic check presentment
(Check 21).
We expect that these and other expense management efforts should reduce our
efficiency ratio in the future.
Income Taxes
Our effective tax rate for the first half of 2006 declined to 34.4% as compared
to 34.9% for the first half of 2005 due to the benefit of our expanding
municipal banking business and the related increased investment in
tax-advantaged securities and loans.
Liquidity and Capital Resources
Liquidity and Cash Flow
The objective of our liquidity management is to maintain our ability to meet
day-to-day cash obligations and to allow us to meet the funding needs of our
customers while minimizing the amount of excess liquidity balances because of
the relatively low-yields we earn on those balances. Cash, interest-bearing
demand accounts at correspondent banks and brokerage houses, federal funds sold,
and other short-term money market investments are our most liquid assets. The
levels of those 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
24
maturing, additional sources of funds are available through the use of
repurchase agreements, the sale of loans or investments or the use of our
various lines of credit. As of June 30, 2006, our total of cash,
interest-bearing demand accounts, federal funds sold and other money market
investments was $157.9 million. 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 the pace of mortgage prepayments are greatly influenced by
the level of interest rates, the economic environment and local competitive
conditions.
Our primary investing activities are the origination of loans, the purchase of
investment securities and the acquisition of banking and financial services
companies. Cash used for investing activities decreased to $52.0 million for the
six months ended June 30, 2006 as compared to $207.3 million for the six months
ended June 30, 2005 primarily as a result of our 2005 acquisition of Hudson
River Bancorp, Inc. The use of cash for net loan growth was $312.6 million for
the six months ended June 30, 2006 as compared to $136.9 million for the six
months ended June 30, 2005. The net cash provided by securities, including
maturities, partial pay downs, sales and purchases, was $274.5 million for the
six months ended June 30, 2006 compared to $38.5 million for the six months
ended June 30, 2005. The higher level of loan growth and the lower level of
investment security purchase activity in 2006 reflects our strategy of funding
loan growth with the cash flow generated from our investment securities.
We have a total of $920.7 million 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
our asset and liability position. Our standing in the national markets, and our
ability to obtain funding from them, factor into our liquidity management
strategies. In many cases, national market investors use the findings of the
major credit rating agencies - Standard & Poor's, Moody's Investors Service, and
Fitch - to guide their decisions. Our credit ratings are investment grade, and
they substantiate our financial stability and consistency, over time, of our
earnings. Fitch Rating has assigned us a long-term issuer default rating of BBB
and a short-term issuer rating of F2.
In the ordinary course of business, we extend commitments to originate
residential, commercial and other loans to our customers. Commitments to extend
credit are agreements to lend to a customer as long as conditions established
under the contract are not violated. Commitments generally have fixed expiration
dates or other termination clauses and may require the customer to pay a fee.
Since we do not expect all of our commitments to be funded, the total commitment
amounts do not necessarily represent our future cash requirements. We evaluate
each customer's creditworthiness on a case-by-case basis. Collateral may be
obtained based upon our assessment of the customers' creditworthiness. In
addition, we may extend credit commitments on fixed rate loans which expose us
to interest rate risk given the possibility that market rates may change between
the commitment date and the actual extension of credit. As of June 30, 2006, we
had outstanding commitments to originate residential real estate, commercial
real estate and business, and consumer loans of approximately $339.4 million,
which generally have an expiration period of less than 120 days. Commitments to
sell residential mortgages amounted to $10.6 million at the end of the second
quarter.
We also extend 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, therefore the funding requirements for these products are generally more
difficult to predict. 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 total amount of these instruments. Unused commercial lines of
credit amounted to $447.5 million at June 30, 2006 and generally have an
expiration period of less than one year. Home equity and other consumer lines of
credit totaled $203.6 million and have an expiration period of up to ten years.
In addition to the above, we issue 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 $57.6 million at June
30, 2006 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, our obligation under the above commitment amounts
is substantially less than the amounts reported. It is anticipated that we will
have sufficient funds available to meet our current loan commitments and other
obligations through our normal business operations.
25
At June 30, 2006, First Niagara exceeded all minimum regulatory capital
requirements, as detailed in the following table:
To be well capitalized
Minimum under prompt corrective
Actual capital adequacy action provisions
-------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Tangible capital ........ $583,901 7.92% $110,621 1.50% $ N/A N/A%
Tier 1 (core) capital ... 583,901 7.92 204,934 4.00 368,735 5.00
Tier 1 risk based capital 583,901 11.40 N/A N/A 307,401 6.00
Total risk based capital 647,943 12.65 409,869 8.00 512,336 10.00
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------------
Our primary market risk is interest rate risk, that is, the potential volatility
of our earnings that arises from fluctuations in market interest rates. Changes
in market interest rates, whether they are increases or decreases, and the pace
at which the changes occur can trigger repricings and changes in the pace of
payments, which individually or in combination may affect our net interest
income, positively or negatively.
Most of the yields on our interest earning assets, including floating-rate loans
and investments, are related to market interest rates. So is our cost of funds,
which includes the rates we pay on interest-bearing deposits and borrowings.
Interest rate sensitivity occurs when the interest income (yields) we earn on
our assets changes at a pace that differs from the interest expense (rates) we
pay on liabilities.
Our Asset and Liability Committee, which is comprised of members of senior
management, monitors our sensitivity to interest rates and enacts strategies to
manage our exposure to interest rate risk. Our goal is to maximize the growth of
net interest income on a consistent basis by minimizing the effects of
fluctuations associated with changing market interest rates. In other words, we
want changes in loan and deposit balances, rather than changes in market
interest rates, to be the primary drivers of growth in net interest income.
The primary tool we use to assess our exposure to interest rate risk is a
computer modeling technique that simulates the effects of variations in interest
rates on net interest income. These simulations, which we conduct at least
quarterly, compare multiple hypothetical interest rate scenarios to a stable,
interest rate environment.
The following table shows the estimated impact on net interest income for the
next twelve months resulting from potential changes in the interest rates. The
calculated changes assume a parallel shift across the yield curve. The effects
of changing the yield curve slope are not considered in the analysis. These
estimates require us to make certain assumptions including the pace of payments
from loan and mortgage-related investments, reinvestment rates, and deposit
maturities. These assumptions are inherently uncertain and, as a result, we
cannot precisely predict the impact of changes in interest rates on net interest
income. Given this, actual results may differ significantly due to the timing,
magnitude and frequency of interest rate changes and changes in market
conditions:
Calculated increase (decrease) at
June 30, 2006
------------------------------------------
Changes in Net interest
interest rates income % Change
- ---------------------------- ----------------- -------------------
(Dollars in thousands)
+200 basis points $ (4,883) (2.02)%
+100 basis points (2,022) (0.84)
-100 basis points 1,130 0.47
-200 basis points 1,678 0.69
Item 4. Controls and Procedures
- --------------------------------------------------------------------------------
In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an
evaluation as of June 30, 2006 under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of
26
the design and operation of our disclosure controls and procedures as defined in
Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective as of June 30, 2006.
During the quarter ended June 30, 2006, there have been no changes in our
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, these controls.
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 our
businesses.
Item 1A. Risk Factors
- --------------------------------------------------------------------------------
There are no material changes to the risk factors as previously disclosed in
Item 1A. to Part I of our 2005 Form 10-K.
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 repurchases of our
common stock made during the second quarter of 2006:
Total number of
shares purchased as Maximum number
part of publicly of shares yet
Number of shares Average price per announced repurchase to be purchased
Month purchased share paid plans (1) under the plans
- ---------------------- ---------------- ----------------- -------------------- ---------------
April 347,800 $ 13.98 4,304,539 7,095,461
May 1,008,700 13.87 5,313,239 6,086,761
June 10,000 13.99 5,323,239 6,076,761
------------
Second quarter 2006 1,366,500 $ 13.90
============
Item 3. Defaults upon Senior Securities
- --------------------------------------------------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
At our Annual Meeting of Stockholders on May 16, 2006 (Annual Meeting), the
nominees for directors of the Company proposed were elected. Stockholders cast
votes for those nominees as follows:
Number of Votes
---------------------------
Matter Considered For Withheld
- ----------------------------------------- ---------- ----------
Election of Directors
Paul J. Kolkmeyer 94,353,463 1,140,445
Daniel J. Hogarty, Jr 93,519,851 1,974,057
James Miklinski 94,710,907 783,001
Sharon D. Randaccio 94,785,962 707,946
David M. Zebro 94,820,381 673,527
The terms of Gordon P. Assad, John J. Bisgrove, Jr., Daniel W. Judge, Richard P.
Koskey, Louise Woerner, G. Thomas Bowers, James W. Currie, William H. (Tony)
Jones, B. Thomas Mancuso, and Robert G. Weber continued after the Annual
Meeting.
27
In other business at the Annual Meeting, stockholders ratified the appointment
of KPMG LLP as independent auditors for the year ending December 31, 2006.
Stockholders cast votes for the ratification as follows:
Number of Votes
------------------------
Matter Considered For Withheld
- ------------------------------------------------ ---------- ----------
Ratification of KPMG LLP as independent
auditors for the Company for the year ending
December 31, 2006 94,362,498 799,161
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
28
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: August 9, 2006 By: /s/ Paul J. Kolkmeyer
----------------------------------
Paul J. Kolkmeyer
President and Chief Executive
Officer
Date: August 9, 2006 By: /s/ John R. Koelmel
----------------------------------
John R. Koelmel
Executive Vice President, Chief
Financial Officer
29