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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, 2004
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 incorporation or organization) (I.R.S. Employer 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 [ ]
The Registrant had 83,099,631 shares of Common Stock, $0.01 par value,
outstanding as of November 4, 2004.
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FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2004
TABLE OF CONTENTS
Item Number Page Number
- ----------- -----------
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition as of
September 30, 2004 and December 31, 2003 (unaudited)............................... 3
Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 2004 and 2003 (unaudited)................ 4
Condensed Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 2004 and 2003 (unaudited)................ 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 30, 2004 and 2003 (unaudited).................. 6
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003 (unaudited).......................... 7
Notes to Condensed Consolidated Financial Statements (unaudited)..................... 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 13
3. Quantitative and Qualitative Disclosures about Market Risk.............................. 22
4. Controls and Procedures................................................................. 22
PART II - OTHER INFORMATION
1. Legal Proceedings....................................................................... 23
2. Unregistered Sales of Equity Securities and Use of Proceeds............................. 23
3. Defaults upon Senior Securities......................................................... 23
4. Submission of Matters to a Vote of Security Holders..................................... 24
5. Other Information....................................................................... 24
6. Exhibits................................................................................ 24
Signatures................................................................................. 25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Condition
(unaudited)
September 30, December 31,
2004 2003
------------- ------------
(In thousands, except share
Assets and per share amounts)
------
Cash and due from banks ................................................ $ 77,259 $ 49,997
Money market investments ............................................... 12,862 124,255
Securities available for sale .......................................... 1,171,011 845,883
Loans, net ............................................................. 3,174,948 2,269,203
Bank-owned life insurance .............................................. 85,598 70,767
Premises and equipment, net ............................................ 59,632 43,694
Goodwill ............................................................... 324,769 105,981
Core deposit and other intangibles ..................................... 23,096 8,717
Other assets ........................................................... 135,960 71,010
----------- -----------
Total assets ....................................... $ 5,065,135 $ 3,589,507
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits ............................................................. $ 3,316,625 $ 2,355,216
Short-term borrowings ................................................ 192,282 87,148
Long-term borrowings ................................................. 532,996 370,818
Other liabilities .................................................... 85,925 48,151
----------- -----------
Total liabilities .................................. 4,127,828 2,861,333
----------- -----------
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;
84,298,473 shares issued in 2004 and 70,813,651 shares issued
in 2003 ............................................................ 843 708
Additional paid-in capital ........................................... 750,904 544,618
Retained earnings .................................................... 231,734 217,538
Accumulated other comprehensive loss ................................. (3,895) (740)
Common stock held by ESOP, 3,933,786 shares in 2004 and
4,049,659 shares in 2003 ........................................... (29,556) (30,399)
Unearned compensation - recognition and retention plan,
371,457 shares in 2004 and 358,095 shares in 2003 .................. (3,448) (2,376)
Treasury stock, at cost, 747,491 shares in 2004
and 79,422 shares in 2003 .......................................... (9,275) (1,175)
----------- -----------
Total stockholders' equity ........................... 937,307 728,174
----------- -----------
Total liabilities and stockholders' equity ........... $ 5,065,135 $ 3,589,507
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands, except per share amounts)
Interest income:
Real estate loans .................................................. $ 38,402 30,077 $111,941 91,634
Other loans ........................................................ 9,535 7,143 28,160 20,655
Mortgage-backed securities ......................................... 5,827 2,145 16,632 6,889
Other investment securities ........................................ 2,841 1,881 8,261 5,097
Money market investments ........................................... 213 738 630 3,234
-------- -------- -------- --------
Total interest income .................................... 56,818 41,984 165,624 127,509
Interest expense:
Deposits ........................................................... 10,449 9,438 30,998 31,923
Borrowings ......................................................... 6,731 5,398 19,450 16,424
-------- -------- -------- --------
Total interest expense ................................... 17,180 14,836 50,448 48,347
-------- -------- -------- --------
Net interest income ...................................... 39,638 27,148 115,176 79,162
Provision for credit losses ........................................... 1,742 1,757 6,596 5,922
-------- -------- -------- --------
Net interest income after provision for credit losses .... 37,896 25,391 108,580 73,240
-------- -------- -------- --------
Noninterest income:
Banking services ................................................... 5,296 4,289 14,440 12,335
Risk management services ........................................... 4,308 3,818 13,198 10,758
Wealth management services ......................................... 1,257 775 3,592 2,799
Lending and leasing ................................................ 943 853 2,795 2,711
Bank-owned life insurance .......................................... 826 1,141 2,901 2,693
Net realized gains (losses) on securities available for sale ....... -- (24) 60 (42)
Other .............................................................. 477 523 1,359 972
-------- -------- -------- --------
Total noninterest income ................................. 13,107 11,375 38,345 32,226
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits ..................................... 16,790 13,037 48,588 37,634
Occupancy and equipment ............................................ 3,079 2,284 9,555 6,984
Technology and communications ...................................... 2,828 2,553 8,166 7,250
Marketing and advertising .......................................... 998 810 3,335 2,664
Professional services .............................................. 1,460 460 3,228 1,232
Amortization of core deposit and other intangibles ................. 1,182 398 3,387 1,006
Other .............................................................. 4,041 2,878 12,547 8,769
-------- -------- -------- --------
Total noninterest expense ................................ 30,378 22,420 88,806 65,539
-------- -------- -------- --------
Income from continuing operations before income taxes .... 20,625 14,346 58,119 39,927
Income taxes from continuing operations ............................... 7,295 5,042 19,861 14,095
-------- -------- -------- --------
Income from continuing operations ........................ 13,330 9,304 38,258 25,832
Income from discontinued operations, net of income taxes .............. -- -- -- 186
-------- -------- -------- --------
Net income ............................................... $ 13,330 9,304 $ 38,258 26,018
======== ======== ======== ========
Earnings per common share:
Basic .................................................... $ 0.17 0.14 $ 0.49 0.39
Diluted .................................................. 0.17 0.14 0.48 0.38
Weighted average common shares outstanding:
Basic .................................................... 79,257 66,276 78,755 66,055
Diluted .................................................. 80,312 68,002 79,994 67,689
See accompanying notes to condensed consolidated financial statements.
4
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands)
Net income ............................................................. $ 13,330 9,304 $ 38,258 26,018
Other comprehensive income (loss), net of income taxes:
Securities available for sale:
Net unrealized gains (losses) arising during the period ........ 5,673 (2,175) (3,248) (2,858)
Reclassification adjustment for net realized (gains) losses
included in net income ...................................... -- 14 (36) 25
-------- -------- -------- --------
5,673 (2,161) (3,284) (2,833)
Minimum pension liability adjustment ............................... 129 -- 129 --
-------- -------- -------- --------
Total other comprehensive income (loss) ..................... 5,802 (2,161) (3,155) (2,833)
-------- -------- -------- --------
Total comprehensive income ............................... $ 19,132 7,143 $ 35,103 23,185
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
5
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Accumulated Common Unearned
Additional other stock compensation -
Common paid-in Retained comprehensive held by recognition and Treasury
Stock capital earnings income ESOP retention plan stock Total
-------- ---------- -------- ------------- -------- --------------- -------- -------
(In thousands, except per share amounts)
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
Unrealized loss on securities
available for sale, net .......... -- -- -- (3,284) -- -- -- (3,284)
Minimum pension liability
adjustment adjustment ............ -- -- -- 129 -- -- -- 129
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, net ..... 2 3,863 (6,485) -- -- -- 9,481 6,861
ESOP shares committed to be
released ......................... -- 691 -- -- 843 -- -- 1,534
Recognition and retention
plan, net ........................ -- 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
===== ======== ======== ======= ======= ====== ======= ========
Balances at January 1, 2003 ........ $ 298 137,624 196,074 2,074 (11,024) (2,453) (38,897) 283,696
Net income ......................... -- -- 26,018 -- -- -- -- 26,018
Unrealized loss on securities
available for sale, net .......... -- -- -- (2,833) -- -- -- (2,833)
Corporate reorganization:
Merger of First Niagara
Financial Group, MHC ........... (158) 19,608 -- -- -- -- -- 19,450
Treasury stock retired ........... (37) (38,860) -- -- -- -- 38,897 --
Exchange of common stock ......... 161 (198) -- -- -- -- -- (37)
Proceeds from stock offering,
net of related expenses ........ 410 390,543 -- -- -- -- -- 390,953
Purchase of shares by ESOP ......... -- -- -- -- (20,500) -- -- (20,500)
Common stock issued for the
acquisition of Finger
Lakes Bancorp, Inc. .............. 34 33,525 -- -- -- -- -- 33,559
Purchase of treasury shares ........ -- -- -- -- -- -- (78) (78)
Exercise of stock options, net ..... -- 376 -- -- -- -- 12 388
ESOP shares committed to be
released ......................... -- 676 -- -- 844 -- -- 1,520
Recognition and retention
plan, net ........................ -- 1,296 -- -- -- 304 (40) 1,560
Common stock dividend of
$0.16 per share .................. -- -- (10,649) -- -- -- -- (10,649)
----- -------- -------- ------- ------- ------ ------- --------
Balances at September 30, 2003 ..... $ 708 544,590 211,443 (759) (30,680) (2,149) (106) 723,047
===== ======== ======== ======= ======= ====== ======= ========
See accompanying notes to condensed consolidated financial statements.
6
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Nine months ended September 30,
-------------------------------
2004 2003
------------- --------------
Cash flows from operating activities: (In thousands)
Net income .......................................................... $ 38,258 $ 26,018
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of fees and discounts, net ....................... 7,783 11,467
Provision for credit losses ................................... 6,596 5,922
Depreciation of premises and equipment ........................ 5,593 4,647
Amortization of core deposit and other intangibles ............ 3,387 1,039
Net realized gains ............................................ (60) (188)
Stock based compensation expense .............................. 2,357 2,793
Deferred income tax expense ................................... 1,328 2,547
Decrease in other assets ...................................... 4,517 2,985
Increase in other liabilities ................................. 31,102 8,885
----------- -----------
Net cash provided by operating activities ............... 100,861 66,115
----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale ............... 66,113 63,321
Proceeds from maturities of securities available for sale .......... 182,117 367,229
Principal payments received on securities available for sale ....... 124,202 353,583
Purchases of securities available for sale ......................... (458,132) (777,348)
Net increase in loans .............................................. (170,363) (114,063)
Acquisitions, net of cash acquired ................................. (51,721) (32,470)
Other, net ......................................................... (15,262) (8,018)
----------- -----------
Net cash used in investing activities ................... (323,046) (147,766)
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits .............................. 26,552 (69,721)
Net proceeds from Conversion and Offering ........................ -- 313,915
Repayments of short-term borrowings, net ......................... (12,535) (38,623)
Proceeds from long-term borrowings ............................... 171,500 5,000
Repayments of long-term borrowings ............................... (14,493) (12,442)
Proceeds from exercise of stock options .......................... 3,818 276
Purchase of treasury stock ....................................... (19,211) (78)
Dividends paid on common stock ................................... (17,577) (10,649)
----------- -----------
Net cash provided by financing activities ............... 138,054 187,678
----------- -----------
Net increase (decrease) in cash and cash equivalents .... (84,131) 106,027
Cash and cash equivalents at beginning of period ...................... 174,252 90,525
----------- -----------
Cash and cash equivalents at end of period ............................ $ 90,121 $ 196,552
=========== ===========
Cash paid during the period for:
Income taxes ................................................ $ 12,608 $ 10,279
Interest expense ............................................ 49,801 48,380
Acquisition of banks and financial services companies:
Assets acquired (excluding cash acquired) ................... $ 1,330,008 $ 377,209
Liabilities assumed ......................................... 1,077,034 343,791
See accompanying notes to condensed consolidated financial statements.
7
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The accompanying condensed consolidated financial statements of First Niagara
Financial Group, Inc. ("FNFG") and its wholly owned subsidiary First Niagara
Bank ("First Niagara") have been prepared in accordance with generally accepted
accounting principles ("GAAP") for interim financial information and the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by GAAP for 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, 2004 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004. Certain
reclassification adjustments were made to the 2003 financial statements to
conform them to the 2004 presentation. FNFG and its consolidated subsidiary are
hereinafter referred to collectively as the "Company."
(1) Stock-Based Compensation
The Company maintains various long-term incentive stock benefit plans under
which fixed award stock options and restricted stock awards may be granted to
key employees and directors. Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. Compensation expense
related to restricted stock awards is based upon the market value of FNFG's
stock on the grant date and is accrued ratably over the required service period.
However, in accounting for stock options, as allowed under SFAS No. 123, the
Company has elected 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 therefore has only adopted the disclosure
requirements of SFAS No. 123, as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123." As such, compensation expense is recorded on the date the
options are granted only if the current market price of the underlying stock
exceeded the exercise price.
Had the Company determined compensation expense related to stock option grants
based on the fair value method under SFAS No. 123, the Company's net income
would have been reduced to the pro forma amounts indicated below. These amounts
may not be representative of the effects on reported net income for future years
due to changes in market conditions and the number of options outstanding (in
thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income as reported $ 13,330 9,304 $ 38,258 26,018
Add: Stock-based employee compensation
expense included in net income, net of
related income tax effects 164 418 494 771
Deduct: Stock-based employee compensation
expense determined under the fair-value
based method, net of related income tax effects (456) (921) (1,310) (1,652)
---------- ---------- ---------- ----------
Pro forma net income $ 13,038 8,801 $ 37,442 25,137
========== ========== ========== ==========
Basic earnings per share:
As reported $ 0.17 0.14 $ 0.49 0.39
Pro forma 0.16 0.13 0.48 0.38
Diluted earnings per share:
As reported $ 0.17 0.14 $ 0.48 0.38
Pro forma 0.16 0.13 0.47 0.37
8
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(2) Acquisitions
Hudson River Bancorp, Inc.
- --------------------------
On April 1, 2004, FNFG entered into a definitive agreement to acquire all of the
common shares outstanding of Hudson River Bancorp, Inc. ("HRB"), the holding
company of Hudson River Bank & Trust Company, with total assets of approximately
$2.5 billion and forty-nine branch locations. In connection with the
acquisition, FNFG has agreed to issue a total of 34.1 million of its shares and
to pay $124.8 million in cash, subject to adjustment for the exercise of
outstanding HRB stock options. At announcement, the aggregate purchase price of
the transaction was $597.6 million or $19.63 per share, based upon a $13.87 FNFG
share price. The final value of the merger consideration to be paid upon closing
will depend on the average stock price of FNFG just prior to closing and the
number of outstanding shares of HRB. HRB stockholders will be entitled to elect
to receive merger consideration in shares of FNFG stock, cash, or a combination
of stock and cash, subject to allocation and pro-ration procedures. HRB stock
options will be exchanged for FNFG stock upon completion of the merger, if not
previously exercised. The acquisition is expected to be completed in January
2005. The transaction was approved by FNFG and HRB stockholders on September 28,
2004 and is still subject to the approvals of various regulatory agencies, which
are expected to be received in the fourth quarter of 2004.
Troy Financial Corporation
- --------------------------
On January 16, 2004, FNFG acquired all of the outstanding common shares of Troy
Financial Corporation ("TFC"), the holding company of The Troy Savings Bank
("TSB") and The Troy Commercial Bank ("TCB"), which had twenty-one retail
branches. Following completion of the acquisition, TSB branch locations were
merged into First Niagara's banking center network and TCB became a wholly-owned
subsidiary of First Niagara as a New York State chartered commercial bank. FNFG
paid $35.50 per share in a combination of cash and stock for all of the
outstanding shares and options of TFC.
The aggregate purchase price of approximately $356.5 million included the
issuance of 13.3 million shares of FNFG stock, cash payments totaling $151.9
million and capitalized costs related to the acquisition, primarily investment
banking and professional fees, of $3.4 million. The value assigned to the FNFG
shares issued was $15.15 per share based upon the average closing price of FNFG
common stock for the five trading days immediately preceding the receipt of
final bank regulatory approval on December 15, 2003, which is the date the
number of shares being issued became fixed. This acquisition was accounted for
under the purchase method of accounting. Accordingly, the results of operations
of TFC were included in the 2004 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 16,
2004
----------
Cash and cash equivalents $ 94,090
Securities available for sale 250,969
Loans, net 745,399
Goodwill 218,378
Core deposit intangible 17,247
Other assets 96,180
----------
Total assets acquired 1,422,263
----------
Deposits 923,665
Borrowings 124,723
Other liabilities 17,354
----------
Total liabilities assumed 1,065,742
----------
Net assets acquired $ 356,521
==========
The core deposit intangible asset acquired is being amortized over 11 years
utilizing the double declining balance method. The goodwill was assigned to the
Company's banking segment of which none is deductible for tax purposes.
9
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table presents unaudited pro forma information as if the
acquisition of TFC had been consummated as of the beginning of each period
presented. Pro forma information for 2004 is not presented since such pro forma
results were not materially different from actual results. This pro forma
information gives effect to certain adjustments, including purchase accounting
fair value adjustments, amortization of core deposit intangibles and related
income tax effects. The pro forma information does not necessarily reflect the
results of operations that would have occurred had the Company acquired TFC at
the beginning of the periods presented. In particular, cost savings and $1.5
million of indirect merger and integration costs are not reflected in the pro
forma amounts (in thousands, except per share amounts):
Three months ended Nine months ended
September 30, 2003 September 30, 2003
------------------ ------------------
(Pro forma)
Net interest income $ 36,652 $ 108,963
Noninterest income 15,009 39,582
Noninterest expense 32,763 92,164
Net income 10,998 32,788
Basic earnings per share $ 0.14 $ 0.41
================== ==================
Diluted earnings per share $ 0.14 $ 0.40
================== ==================
(3) Earnings Per Share
The computation of basic and diluted earnings per share for the three and nine
months ended September 30, 2004 and 2003 is as follows (in thousands, except per
share amounts):
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income available to common shareholders $ 13,330 9,304 $ 38,258 26,018
======== ======== ======== ========
Weighted average shares outstanding basic and diluted:
Total shares issued 84,298 70,801 83,503 71,155
Unallocated ESOP shares (3,972) (4,127) (4,010) (4,037)
Unvested restricted stock awards (377) (395) (394) (463)
Treasury shares (692) (3) (344) (600)
-------- -------- -------- --------
Total basic weighted average shares outstanding 79,257 66,276 78,755 66,055
Incremental shares from assumed exercise of
stock options 983 1,554 1,121 1,412
Incremental shares from assumed vesting of
restricted stock awards 72 172 118 222
-------- -------- -------- --------
Total diluted weighted average shares outstanding 80,312 68,002 79,994 67,689
======== ======== ======== ========
Basic earnings per share $ 0.17 0.14 $ 0.49 0.39
======== ======== ======== ========
Diluted earnings per share $ 0.17 0.14 $ 0.48 0.38
======== ======== ======== ========
The above weighted average share calculations do not include 1.5 million and 17
thousand of stock option and restricted stock awards for the three months ended
September 30, 2004 and 2003, respectively, and 811 thousand and 249 thousand of
stock option and restricted stock awards for the nine months ended September 30,
2004 and 2003, respectively, as they are not dilutive to the earnings per share
calculations.
10
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(4) Pension and Other Postretirement Plans
Net 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
---------------------------- ----------------------------
Three months ended Three months ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Interest cost $ 452 188 $ 108 70
Expected return on plan assets (685) (218) -- --
Amortization of unrecognized loss 65 54 23 13
Amortization of unrecognized prior service liability -- -- (16) (16)
------------ ------------ ------------ ------------
Net pension and postretirement cost (benefit) $ (168) 24 $ 115 67
============ ============ ============ ============
Pension plans Other postretirement plans
---------------------------- ----------------------------
Nine months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Interest cost $ 1,357 643 $ 325 208
Expected return on plan assets (2,056) (655) -- --
Amortization of unrecognized loss 194 163 68 40
Amortization of unrecognized prior service liability -- -- (48) (48)
------------ ------------ ------------ ------------
Net pension and postretirement cost (benefit) $ (505) 151 $ 345 200
============ ============ ============ ============
During the third quarter of 2004, the Company made contributions totaling $2.8
million to fund its defined benefit pension plans and does not anticipate making
any further contributions for the remainder of 2004.
(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, which are organized under one Financial Services Group.
The banking segment includes the results of First Niagara excluding financial
services. Selected operating information for the Company's segments follows (in
thousands):
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
============ ============ ============ ============
11
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Financial Consolidated
For the three month period ended Banking services Eliminations total
------------ ------------ ------------ ------------
September 30, 2003
- ------------------
Net interest income $ 27,132 16 -- 27,148
Provision for credit losses 1,757 -- -- 1,757
------------ ------------ ------------ ------------
Net interest income after provision
for credit losses 25,375 16 -- 25,391
Noninterest income 6,781 4,606 (12) 11,375
Amortization of core deposit and
other intangibles 101 297 -- 398
Other noninterest expense 18,287 3,747 (12) 22,022
------------ ------------ ------------ ------------
Income before income taxes 13,768 578 -- 14,346
Income tax expense 4,811 231 -- 5,042
------------ ------------ ------------ ------------
Net income $ 8,957 347 -- 9,304
============ ============ ============ ============
Financial Consolidated
For the nine month period ended Banking services Eliminations total
------------ ------------ ------------ ------------
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
============ ============ ============ ============
Financial Consolidated
For the nine month period ended Banking services Eliminations total
------------ ------------ ------------ ------------
September 30, 2003
- ------------------
Net interest income $ 79,109 53 -- 79,162
Provision for credit losses 5,922 -- -- 5,922
------------ ------------ ------------ ------------
Net interest income after provision
for credit losses 73,187 53 -- 73,240
Noninterest income 18,652 13,602 (28) 32,226
Amortization of core deposit and
other intangibles 359 647 -- 1,006
Other noninterest expense 54,023 10,538 (28) 64,533
------------ ------------ ------------ ------------
Income from continuing operations
before income taxes 37,457 2,470 -- 39,927
Income tax expense from continuing
operations 13,107 988 -- 14,095
------------ ------------ ------------ ------------
Income from continuing operations 24,350 1,482 -- 25,832
Income from discontinued operations, net
of income taxes -- 186 -- 186
------------ ------------ ------------ ------------
Net income $ 24,350 1,668 -- 26,018
============ ============ ============ ============
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
This Quarterly Report on Form 10-Q may contain certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
that involve substantial risks and uncertainties. When used in this report, or
in the documents incorporated by reference herein, the words "anticipate",
"believe", "estimate", "expect", "intend", "may", and similar expressions
identify such forward-looking statements. Actual results, performance or
achievements could differ materially from those contemplated, expressed or
implied by the forward-looking statements contained herein. These
forward-looking statements are based largely on the expectations of the Company
or the Company's management and are subject to a number of risks and
uncertainties, including but not limited to, economic, competitive, regulatory,
and other factors affecting the Company's operations, markets, products and
services, as well as expansion strategies and other factors discussed elsewhere
in this report and other reports filed by the Company with the Securities and
Exchange Commission ("SEC"). Many of these factors are beyond the Company's
control.
Overview
Total assets increased to $5.1 billion at September 30, 2004 from $3.6 billion
at December 31, 2003. The acquisition of TFC in January 2004 added $760.0
million of loans, 64% of which were comprised of commercial mortgage and
business loans, and $923.7 million of deposits, 75% of which were core deposits.
The acquisition also expanded the Company's market area to include the higher
growth Capital Region in Eastern New York and furthered its strategic
initiatives of increasing commercial relationships and core deposits.
Year-to-date loan growth also includes a $194.7 million, or 18% annualized,
organic increase in commercial real-estate and business loans. Deposits also
increased modestly from December 31, 2003, as the benefit of 14% annualized core
deposit growth was offset by the maturities of higher rate certificates of
deposit.
Net income for the quarter ended September 30, 2004 increased to $13.3 million,
or $0.17 per diluted share from $9.3 million, or $0.14 per diluted share for the
same period of 2003. The 2004 results included the benefits of a 41 basis point
improvement in net interest rate spread and a $44.5 million increase in average
net earning assets, which resulted in a $12.5 million or 46% increase in net
interest income and a 24 basis point improvement in net interest margin over the
prior year quarter. Increases in both noninterest income and expense reflects
the impact of the acquisition of TFC in January 2004, as well as the continuing
expansion of existing operations, including the addition of four new banking
centers.
For the first nine months of 2004, net income totaled $38.3 million or $0.48 per
diluted share compared to $26.0 million, or $0.38 per diluted share for the same
period of 2003. These increases can primarily be attributed to the same factors
that resulted in the improvement in quarterly results.
Critical Accounting Estimates
- -----------------------------
Management of the Company evaluates those accounting estimates that are judged
to be critical - those most important to the portrayal of the Company's
financial condition and results, and that require management's most difficult,
subjective and complex judgments. Management considers the accounting estimates
relating to the 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 2003 10-K dated March 12, 2004. 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 2003
10-K dated March 12, 2004.
13
Analysis of Financial Condition
- -------------------------------
Average Balance Sheet. The following table presents, for the periods indicated,
the total dollar amount of interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No taxable
equivalent adjustments were made. All average balances are average daily
balances.
Three months ended September 30,
---------------------------------------------------------------------------------
2004 2003
------------------------------------ ------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
Interest-earning assets:
Mortgage-backed securities(1)...... $ 620,099 $ 5,827 3.76% $ 400,296 $ 2,145 2.14%
Other investment securities(1)..... 571,668 2,841 1.99 358,975 1,881 2.10
Loans(2)........................... 3,162,777 47,937 6.05 2,282,298 37,220 6.50
Money market investments........... 53,513 213 1.58 189,402 738 1.55
----------- -------- ---- ----------- -------- ----
Total interest-earning assets 4,408,057 56,818 5.15 3,230,971 41,984 5.18
----------- -------- ---- ----------- -------- ----
Allowance for credit losses........... (41,423) (24,920)
Noninterest-earning assets(3)(4)...... 666,443 334,352
----------- -----------
Total assets................. $ 5,033,077 $ 3,540,403
=========== ===========
Interest-bearing liabilities:
Savings deposits................... $ 1,074,032 $ 2,569 0.95% $ 654,076 $ 1,379 0.84%
Checking deposits.................. 928,300 2,202 0.94 550,020 1,175 0.85
Certificates of deposit............ 1,039,097 5,678 2.17 966,017 6,884 2.83
Borrowed funds..................... 686,437 6,731 3.90 425,166 5,398 5.03
----------- -------- ---- ----------- -------- ----
Total interest-bearing
liabilities................ 3,727,866 17,180 1.83 2,595,279 14,836 2.27
----------- -------- ---- ----------- -------- ----
Noninterest-bearing deposits.......... 303,244 167,862
Other noninterest-bearing liabilities. 67,412 57,656
----------- -----------
Total liabilities............... 4,098,522 2,820,797
Stockholders' equity(3)............... 934,555 719,606
----------- -----------
Total liabilities and
stockholders' equity.......... $ 5,033,077 $ 3,540,403
=========== ===========
Net interest income................... $ 39,638 $ 27,148
======== ========
Net interest rate spread.............. 3.32% 2.91%
==== ====
Net earning assets.................... $ 680,191 $ 635,692
=========== ===========
Net interest income as a percentage of
average interest-earning assets... 3.60% 3.36%
======== ========
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 118.25% 124.49%
=========== ===========
14
Nine months ended September 30,
---------------------------------------------------------------------------------
2004 2003
------------------------------------ ------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
Interest-earning assets:
Mortgage-backed securities(1)...... $ 610,374 $ 16,632 3.63% $ 424,764 $ 6,889 2.16%
Other investment securities(1)..... 567,519 8,261 1.94 300,459 5,097 2.26
Loans(2)........................... 3,053,303 140,101 6.12 2,227,880 112,289 6.73
Money market investments........... 65,574 630 1.28 272,246 3,234 1.59
----------- --------- ---- ----------- --------- ----
Total interest-earning assets ... 4,296,770 165,624 5.14 3,225,349 127,509 5.28
----------- --------- ---- ----------- --------- ----
Allowance for credit losses........... (39,880) (24,027)
Noninterest-earning assets(3)(4)...... 650,653 325,791
----------- -----------
Total assets................. $ 4,907,543 $ 3,527,113
=========== ===========
Interest-bearing liabilities:
Savings deposits................... $ 1,020,184 $ 7,049 0.92% $ 678,816 $ 5,580 1.10%
Checking deposits.................. 879,569 5,912 0.90 521,274 3,644 0.93
Certificates of deposit............ 1,093,601 18,037 2.20 1,000,488 22,699 3.03
Borrowed funds..................... 656,543 19,450 3.96 433,083 16,424 5.07
----------- --------- ---- ----------- --------- ----
Total interest-bearing
liabilities................... 3,649,897 50,448 1.85 2,633,661 48,347 2.45
----------- --------- ---- ----------- --------- ----
Noninterest-bearing deposits.......... 269,574 152,709
Other noninterest-bearing liabilities. 63,208 55,444
----------- -----------
Total liabilities............... 3,982,679 2,841,814
Stockholders' equity(3)............... 924,864 685,299
----------- -----------
Total liabilities and
stockholders' equity.......... $ 4,907,543 $ 3,527,113
=========== ===========
Net interest income................... $ 115,176 $ 79,162
========= =========
Net interest rate spread.............. 3.29% 2.83%
==== ====
Net earning assets.................... $ 646,873 $ 591,688
=========== ===========
Net interest income as a percentage of
average interest-earning assets... 3.57% 3.27%
========= =========
Ratio of average interest-earning
assets to average interest-bearing
liabilities....................... 117.72% 122.47%
=========== ===========
- -------------
(1) Average outstanding balances are at amortized cost.
(2) Average outstanding balances are net of deferred costs, unearned premiums
and non-accruing loans.
(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.
Lending Activities
During the first three quarters of 2004, the Company continued to strategically
shift its portfolio mix from residential mortgage loans to commercial real
estate and business loans. Excluding the loans acquired with TFC, commercial
real estate loans increased $165.6 million, or 21% annualized, from December 31,
2003 to September 30, 2004, while commercial business loans increased $29.0
million, or 10% annualized, during the same period. At September 30, 2004,
commercial loans comprised 51% of the loan portfolio versus 42% as of December
31, 2003.
Steady organic growth in the home equity portfolio, which grew at an annualized
rate of 10% during the first three quarters, was a direct result of the
Company's increased focus on this product given the natural cross-sell with
other products offered by First Niagara and the popularity of this product with
customers. Other loan activity included a slight reduction in residential
balances due to refinance related prepayments and a decline in consumer loan
balances due to the de-emphasis on indirect lending, including the Company's
strategic decision to exit the third-party indirect auto business. The
acquisition of TFC added $760.0 million of total loans, including $226.1 million
of residential mortgages, $40.2 million of home equity loans, $306.8 million of
commercial mortgages, $178.6 million of commercial business loans and $8.3
million of consumer loans.
15
Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Company's loan portfolio in dollar amounts and in
percentages as of the dates indicated.
September 30, 2004 December 31, 2003
------------------------ -----------------------------
Amount Percent Amount Percent
----------- ------- ----------- -------
(Dollars in thousands)
Real estate loans:
- ------------------
Residential $ 1,150,032 35.9% $ 948,877 41.5%
Home equity 236,357 7.3 179,282 7.8
Commercial 1,052,875 32.8 653,976 28.6
Commercial construction 159,670 5.0 86,154 3.8
----------- ------ ----------- ------
Total real estate loans 2,598,934 81.0 1,868,289 81.7
Commercial business loans 422,656 13.2 215,000 9.4
Consumer loans 185,518 5.8 202,630 8.9
----------- ------ ----------- ------
Total loans 3,207,108 100.0% 2,285,919 100.0%
----------- ====== ----------- ======
Net deferred costs and
unearned premiums 9,113 8,704
Allowance for credit losses (41,273) (25,420)
----------- -----------
Total loans, net $ 3,174,948 $ 2,269,203
=========== ===========
During the first three quarters of 2004, overall credit quality remained solid
as non- accruing loans decreased to 0.46% of total loans at September 30, 2004
from 0.54% of total loans at December 31, 2003. Consistent with this
improvement, nonperforming assets as a percentage of total assets decreased to
0.31% from 0.36% at the end of 2003. Net loan charge-offs totaled $1.9 million
for the third quarter of 2004 or 0.24% of average loans, which is consistent
with the Company's historical charge-off rate for each of the last two years. At
September 30, 2004, the allowance for credit losses represented 1.28% of total
loans and 276% of non-accruing loans compared to 1.11% and 207% at December 31,
2003, respectively.
While management uses available information to recognize losses on loans, future
credit loss provisions may be necessary based on numerous factors, including
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for credit losses and may require the Company to recognize additional provisions
based on their judgment of information available to them at the time of their
examination. 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 loan 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.
September 30, December 31,
2004 2003
------------- ------------
(Dollars in thousands)
Non-accruing loans (1):
Residential.............................................. $ 4,536 $ 3,905
Home equity.............................................. 390 401
Commercial............................................... 5,414 3,878
Commercial business...................................... 3,922 3,583
Consumer................................................. 677 538
--------- ----------
Total non-accruing loans.............................. 14,939 12,305
Real estate owned........................................... 691 543
--------- ----------
Total non-performing assets........................... $ 15,630 $ 12,848
========= ==========
Total non-accruing loans as a percentage of total loans..... 0.46% 0.54%
========= ==========
Total non-performing assets as a percentage of total assets. 0.31% 0.36%
========= ==========
Allowance for credit losses to total loans.................. 1.28% 1.11%
========= ==========
Allowance for credit losses to non-accruing loans........... 276.28% 206.58%
========= ==========
- -------------------
(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.
16
Analysis of the Allowance for Credit Losses. The following table sets forth the
analysis of the allowance for credit losses for the periods indicated.
Nine months ended September 30,
-------------------------------
2004 2003
------------ -----------
(Dollars in thousands)
Balance at beginning of period.............................. $ 25,420 $ 20,873
Net charge-offs:
Charge-offs.............................................. (6,381) (4,752)
Recoveries............................................... 988 1,175
--------- ---------
Net charge-offs....................................... (5,393) (3,577)
Allowance obtained through acquisitions..................... 14,650 2,001
Provision for credit losses................................. 6,596 5,922
--------- ---------
Balance at end of period.................................... $ 41,273 $ 25,219
========= =========
Ratio of annualized net charge-offs during the period to
average loans outstanding during the period.............. 0.23% 0.21%
========= =========
Investing Activities
The Company's available for sale securities increased $325.1 million to $1.2
billion at September 30, 2004 from $845.9 million at December 31, 2003. The
$251.0 million of investment securities acquired with TFC included $210.8
million of tax advantaged municipal debt securities. Securities available for
sale otherwise increased $74.2 million, as the remaining proceeds from the
Company's second-step stock offering were further deployed from short-term
investments to higher yielding mortgage-backed securities ("MBS") and agency
bonds with a weighted average life of 2 to 4 years. The weighted average life
and duration of the total portfolio at September 30, 2004 are 2.95 years and
2.21 years, respectively. The Company's balance sheet remains positioned to
optimize earnings while limiting earnings volatility due to interest rate
fluctuations.
Funding Activities
Deposits. In 2004, the Company has further focused its marketing and sales
efforts on increasing its core deposit base through the continued development of
customer relationships as well as the on-going execution of its branch expansion
strategy. As a result, core deposits have organically increased $216.0 million,
or 14% annualized, from December 31, 2003 to September 30, 2004. The opening of
two de novo branches in the second quarter of this year has added $16.3 million
of deposits and the purchase of a Monroe County branch in the third quarter
added $11.2 million of deposits. The impact of this growth on total deposits is
not evident given that certificates of deposits decreased $178.2 million during
the same period as the rates offered by the Company on new certificates were
lowered based on alternative wholesale borrowing options. The Company continues
to prioritize its deposit gathering and retention efforts given the low growth
and competitiveness of its markets and the importance of low cost funds to the
continued expansion of its net interest margin.
The increase in deposits from December 31, 2003 resulted primarily from the
acquisition of TFC, which added a total of $923.7 million of deposits, including
$273.6 million of savings accounts, $331.0 million of interest bearing checking,
$232.3 million of certificates of deposit and $86.8 million of noninterest
bearing accounts.
Set forth below is selected information concerning the composition of the
Company's deposits in dollar amounts and in percentages as of the dates
indicated.
September 30, 2004 December 31, 2003
------------------------- --------------------------
Amount Percent Amount Percent
------------ ----------- ------------- -----------
(Dollars in thousands)
Savings..................................... $ 1,066,321 32.2% $ 654,320 27.8%
Interest-bearing checking................... 919,378 27.7 538,967 22.9
Certificates of deposit..................... 1,045,604 31.5 991,545 42.1
Noninterest-bearing......................... 285,322 8.6 170,384 7.2
----------- ----- ----------- -----
Total deposits........................... $ 3,316,625 100.0% $ 2,355,216 100.0%
=========== ===== =========== =====
Borrowings. Borrowed funds totaled $725.3 million at September 30, 2004 compared
to $458.0 million at December 31, 2003. Excluding $124.7 million assumed in the
TFC acquisition, the additional $142.6 million of borrowings were used to fund
commercial loan growth and the maturities of higher-rate certificates of
deposit.
17
Equity Activities
Stockholders' equity increased to $937.3 million at September 30, 2004 compared
to $728.2 million at December 31, 2003. The TFC acquisition included the
issuance of 13.3 million shares of common stock with an aggregate value of
$201.3 million. During the nine month period, common stock dividends declared of
$0.22 per share totaled $17.6 million and 1,455,000 treasury shares were
purchased at a total cost of $19.2 million.
In July 2003 the Company announced that it had received approval from its Board
of Directors to repurchase up to 2.1 million (3%) of its outstanding common
stock in order to fund vested stock options. Since that authorization, the
Company has been restricted for substantial periods of time from repurchasing
shares due to internal and regulatory quiet periods. Nonetheless, as of
September 30, 2004, 1.6 million shares had been repurchased under this program
at an average cost of $13.27 per share. The Company anticipates completing the
program in the fourth quarter of this year. Therefore, in this quarter, the
Company announced that it had received authorization from its Board of Directors
for an additional 4.2 million (5%) buy back program.
Results of Operations for the Three Months Ended September 30, 2004
- -------------------------------------------------------------------
Net Interest Income
Net interest margin improved to 3.60% during the third quarter of 2004, compared
to 3.36% for the same period of 2003. One of the factors contributing to this
increase was a 41 basis point improvement in net interest rate spread due to the
Company's active asset and liability management initiatives and lower MBS
premium amortization. Additionally, net interest income benefited from a $44.5
million increase in average net earning assets from the third quarter of 2003 to
the third quarter of 2004, primarily due to a $48.6 million core increase in
average noninterest bearing deposits.
The $1.2 billion increase in average interest-earning assets is due primarily to
the acquisition of TFC and increases in higher yielding commercial real estate
and business loans. The benefits of that increase were partially offset by a 3
basis point decrease in the yield on those assets when compared to the 2003
period. This was attributable to the impact of the generally lower interest rate
environment since the end of the third quarter of 2003. While interest rates
began to rise during the recent quarter, the benefits of the increase in yield
on variable-rate assets was offset by the impact of the repayment of higher-rate
commercial and residential mortgages during the period. MBS premium amortization
recorded amounted to $332 thousand in the 2004 period compared to $1.8 million
for the third quarter of 2003.
The increase in interest expense during the third quarter of 2004 resulted from
a $1.1 billion increase in average interest bearing liabilities due to deposits
and borrowings assumed in the TFC acquisition and core deposit growth. A 44
basis point reduction in the rate paid on those liabilities resulted from a
combination of a generally lower interest rate environment, which caused the
Company's variable rate interest-bearing liabilities to reprice downward, and
the Company's ongoing strategy to replace higher-rate time deposits with lower
cost core deposits and borrowings.
Provision for Credit Losses
During the quarter, credit quality remained stable and loan loss experience
continued at low levels. Net loan charge-offs totaled $1.9 million for the third
quarter of 2004 or 0.24% of average loans, which is consistent with the 0.23%
experienced in the 2003 period. As a result of this and the current quarter
provision, the allowance for credit losses was 276% of non-accruing loans and
1.28% of total loans at September 30, 2004 compared to 207% and 1.11%,
respectively, at December 31, 2003. The $1.7 million provision for credit losses
in the third quarter is based upon management's continuous 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 both current and historic economic conditions. The
Company establishes provisions for credit losses, which are charged to
operations, in order to maintain the allowance for credit losses at a level to
absorb credit losses in the existing loan portfolio.
Noninterest Income
For the third quarter of 2004, the Company earned $13.1 million of noninterest
income compared to $11.4 million for the same period of 2003. This reflects the
impact of the addition of former TFC customers, which added approximately $2.0
million in fee income during the quarter. Additionally, core banking services,
risk management, and mutual fund and annuity revenue have increased as a result
of the continuing implementation of the Company's business model across its
franchise. Partially offsetting these increases was the impact of a decline in
mortgage loan originations from 2003 record levels, lower bank owned life
insurance proceeds and charges related to the Company's small business
investment corporation ("SBIC") investments. Noninterest income continues to be
a strong diversified source of revenue for the Company and amounted to 25% of
net revenue during the current year quarter.
18
Noninterest Expense
Noninterest expense increased $8.0 million over the 2003 third quarter due
primarily to the operating costs associated with the 21 former TFC banking
centers, as well as the addition of four banking center locations. Additionally,
the 2004 quarter includes costs related to growth in the commercial lending and
financial services businesses, as well as the Company's strategic planning
initiative. Even with these increases, the Company's efficiency ratio of 57.6%
for the third quarter of 2004 improved when compared to the 58.2% for the prior
year period.
Income Taxes
The effective tax rate from continuing operations of 35.4% for the current
quarter remained consistent with the third quarter of 2003 rate of 35.1%, as the
effect of tax advantaged municipal investments acquired from TFC was nearly
equal to the benefit from tax exempt proceeds from bank owned life insurance
received during the third quarter of 2003.
Results of Operations for the Nine Months Ended September 30, 2004
- ------------------------------------------------------------------
Net Interest Income
Net interest margin improved to 3.57% for the first nine months of 2004 compared
to 3.27% for the same period of 2003. One of the factors contributing to this
increase was a 46 basis point improvement in net interest rate spread due to the
Company's active asset and liability management initiatives and lower MBS
premium amortization. Additionally, net interest income benefited from a $55.2
million increase in average net earning assets from the first three quarters of
2003 to the same period of 2004 primarily due to a $30.1 million core increase
in average noninterest-bearing deposits and the acquisition of TFC.
The $1.1 billion increase in average interest-earning assets is due primarily to
the acquisition of TFC, and increased higher yielding commercial real estate and
business loans. The benefits of that increase were partially offset by a 14
basis point decrease in the yield on those assets when compared to the 2003
period. This was attributable to the generally lower rate environment. While
interest rates began to rise during the period, the benefits of the increase in
yield on variable-rate assets was offset by the impact of the repayment of
higher-rate commercial and residential mortgages. MBS premium amortization
recorded amounted to $1.5 million for the first three quarters of 2004 compared
to $7.4 million for the same period of 2003.
The increase in interest expense during the first nine months of 2004 resulted
from a $1.0 billion increase in average interest bearing liabilities, due to the
deposits and borrowings assumed in the TFC acquisition and core deposit growth.
A 60 basis point reduction in the rate paid on those liabilities resulted from
the generally lower interest rate environment, which caused the Company's
variable rate interest-bearing liabilities to reprice downward, and the
Company's ongoing strategy to replace higher-rate time deposits with lower cost
core deposits and borrowings.
Provision for Credit Losses
As a result of the continuing growth in its loan portfolio, particularly growth
in commercial loans, as well as additional charge-offs related to an indirect
auto relationship, the Company increased its provision for credit losses to $6.6
million for the nine months ended September 30, 2004, compared to $5.9 million
for the same period of 2003.
Noninterest Income
For the first nine months of 2004, the Company earned $38.3 million of
noninterest income, compared to $32.2 million for the same period of 2003. This
reflects the impact of the acquisition of TFC, as well as two insurance agencies
in the Rochester market, which added approximately $5.1 million and $1.8 million
in fee income, respectively. Additionally, core risk management revenue for the
first nine months of 2004 was $688 thousand higher than the 2003 period as
increased plan administration fees and agency commissions more than offset the
impact of lower contingent profit sharing commissions. For the first nine months
of 2004, contingent commission income amounted to $1.0 million compared to $1.1
million for the same period of 2003. Partially offsetting these increases was
the impact of a decline in mortgage loan originations from 2003 record levels
and charges related to the Company's SBIC investments. Noninterest income
continues to be a strong diversified source of revenue for the Company and
amounted to 25% of net revenue for the first nine months of 2004.
19
Noninterest Expense
Noninterest expenses for the nine months ended September 30, 2004 increased
$23.3 million over the same 2003 period due primarily to the operating costs
associated with the 21 former TFC banking centers, as well as the insurance
agency acquisitions. Additionally, 2004 results include non-recurring marketing,
training and other expenses associated with the TFC merger and integration. The
remainder of this variance in noninterest expense is primarily attributable to
the addition of four banking centers, growth in commercial operations, which
included the hiring of seasoned commercial loan officers, as well as costs
incurred in connection with the Company's strategic planning initiative. Even
with these increases, the Company's efficiency ratio of 57.8% for the first nine
months of 2004 improved from the 58.8% for the same period of 2003.
Income Taxes
The effective tax rate from continuing operations decreased to 34.2% for the
first nine months of 2004 compared to 35.3 % for the first nine months of 2003.
This improvement is primarily attributable to the tax advantaged municipal
investments acquired from TFC.
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, proceeds from the maturities and sale of investment
securities, as well as proceeds from the sale of fixed rate mortgage loans in
the secondary market. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit balances and mortgage
prepayments are greatly influenced by the general level of interest rates, the
economic environment and local competitive conditions.
The Company's primary investing activities are the origination of loans and the
purchase of mortgage-backed and other investment securities. During the first
nine months of 2004, loan originations totaled $860.4 million compared to $773.6
million for the first nine months of 2003, while purchases of investment
securities totaled $458.1 million during the 2004 period compared to $777.3
million for the 2003 period. The impact of higher commercial real estate and
business loan originations was partially offset by lower residential mortgage
refinancings in 2004. The higher amount of investment security purchases in 2003
primarily relates to the investment of the Company's second-step proceeds, as
well as the reinvestment of funds from MBS prepayments.
During the first three quarters of 2004, cash flows provided by the sale,
repayment and maturity of securities available for sale amounted to $372.4
million compared to $784.1 million for the same period in 2003. This decrease
was primarily due to a lower level of interest rate driven prepayments received
on MBS's. Deposit growth and borrowings, excluding those acquired from TFC,
provided $171.0 million of additional funding for the nine months ended
September 30, 2004. The Company has $523.8 million available under existing
lines of credit with the Federal Home Loan Bank, Federal Reserve Bank and a
commercial bank that provide funding sources for lending, liquidity and asset
and liability management as needed.
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, 2004, the Company had outstanding commitments to
originate loans of approximately $159.2 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 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 lines of credit amounted to $368.6 million at September 30, 2004
and generally have an expiration period of less than one year except for home
equity lines of credit which 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 $30.3
million at September 30, 2004 and generally have an expiration period greater
than one year. Since the majority of unused lines of credit and outstanding
standby letters of credit expire without being funded, the Company's obligation
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.
20
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, 2004, the total of cash, interest-bearing
demand accounts, federal funds sold and other short-term investments was $90.1
million.
At September 30, 2004, First Niagara exceeded all regulatory capital
requirements, as detailed in the following table.
As of September 30, 2004
--------------------------------------------------------------------------------------------
To be well capitalized
Minimum under prompt corrective
Actual capital adequacy action provisions
---------------------- ------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------- ------------- -------- ---------------- -------
Tangible capital $ 533,089 11.31% $ 70,695 1.50% $ N/A N/A %
Tier 1 (core) capital 533,089 11.31 188,519 4.00 235,649 5.00
Tier 1 risk based capital 533,089 16.43 N/A N/A 194,726 6.00
Total risk based capital 573,657 17.68 259,635 8.00 324,544 10.00
21
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------------
Net Interest Income Analysis
Interest rate risk occurs when assets and liabilities reprice at different times
as interest rates change. The Company monitors this interest rate sensitivity
through the use of a net interest income model, which generates estimates of
changes in net income over a range of interest rate scenarios.
The Asset and Liability Committee, which is comprised of members of senior
management, monitors the Company's interest rate sensitivity. When deemed
prudent, management has taken actions, and intends to do so in the future, to
mitigate exposure to interest rate risk through the use of on- or off-balance
sheet financial instruments. Possible actions include, but are not limited to,
changes in the pricing of loan and deposit products, modifying the composition
of interest-earning assets and interest-bearing liabilities, and the use of
interest rate derivatives. As of September 30, 2004, the Company's off-balance
sheet financial instruments were comprised of 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, 2004 sets forth the estimated impact
on the Company's net interest income resulting from changes in the interest
rates during the next twelve months. These estimates require making certain
assumptions including loan and mortgage-related investment prepayment speeds,
reinvestment rates, and deposit maturities. 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.
Calculated increase (decrease) at
September 30, 2004
--------------------------------------------------------
Changes in Net interest
interest rates income % Change
------------------------ --------------------- ----------------------------
(Dollars in thousands)
+200 basis points $ 2,734 1.66%
+100 basis points 1,404 0.85
-100 basis points (2,516) (1.53)
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.
22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------------------------------------------------------------
There are no material pending legal proceedings to which the Company or its
subsidiaries are a party other than ordinary routine litigation incidental
to their respective businesses.
Item 2. 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 2004:
Cumulative number of Maximum number
shares purchased as part of shares yet
Number of shares Average price per of publicly announced to be purchased
Date purchased share paid repurchase plan* under the plan
------------------ --------------------- -------------------- ------------------------ -----------------
July 2004 150,000 $12.63 1,430,000 677,161
August 2004 135,000 $12.37 1,565,000 542,161
September 2004 -- -- 1,565,000 542,161
------------------ --------------------- -------------------- ======================== =================
Total 285,000 $12.51
===================== ====================
* In July 2003 the Company announced that it had received a regulatory
non-objection from the OTS and approval from its Board of Directors with no
set expiration date to its request to repurchase up to 2,107,161 shares of
its outstanding common stock in order to fund vested stock options. The
regulatory non-objection was necessary because the repurchase program
commenced less than one year from the date of the Company's second step
stock offering effective January 17, 2003. On August 31, 2004, the Company
announced that its Board of Directors had approved an additional 4,200,000
stock repurchase program to supplement the current authorization. No shares
were purchased under this program during the third quarter. The extent to
which shares are repurchased will depend on a number of factors including
market trends and prices, economic conditions, and alternative uses for
capital. As of September 30, 2004, the average cost of the 1,565,000 shares
repurchased under this program was $13.27 per share. In addition to the
above purchases, during the third quarter of 2004, the Company repurchased
1,838 shares from executives of the Company at an average cost of $12.53
per share to satisfy tax withholding requirements on vested restricted
shares as allowed under the Company's restricted stock plans. The price of
these repurchases is based upon the closing market price of the Company's
stock on the date of vesting.
Item 3. Defaults upon Senior Securities
- --------------------------------------------------------------------------------
Not applicable.
23
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
A Special Meeting of Stockholders of First Niagara Financial Group, Inc.
was held on September 28, 2004. The Special Meeting was conducted for the
purpose of 1) considering and acting upon the election of the Agreement and
Plan of Merger, dated as of April 1, 2004, by and between First Niagara
Financial Group, Inc. and Hudson River Bancorp, Inc. and the transactions
contemplated in the merger agreement pursuant to which Hudson River
Bancorp, Inc. will merge with and into First Niagara Financial Group, Inc.
with First Niagara Financial Group, Inc. being the surviving corporation
and 2) to authorize the Board of Directors, in its discretion, to vote upon
such other business as may properly come before the Special Meeting or any
adjournment or postponement of the Special Meeting, including, without
limitation, a motion to adjourn the Special Meeting to another time or
place for the purpose of soliciting additional proxies to approve the
merger agreement. The following table reflects the tabulation of the votes
with respect to each matter voted upon at the Special Meeting:
Number of Votes(a)
----------------------------------------------------------
Matter Considered For Against Abstain
----------------------------------------------------------- ------------------- ---------------- ---------------
(1) Election of Agreement and Plan of Merger 63,265,677 815,644 113,598
(2) Authorization of the Board to vote upon other business 36,068,531 27,531,787 594,601
(a) For matters (1) and (2) there were no broker non-votes.
Item 5. Other Information
- --------------------------------------------------------------------------------
(a) Not applicable.
(b) Not applicable.
Item 6. Exhibits
- --------------------------------------------------------------------------------
(a) The following exhibits are filed herewith:
Exhibits
--------
3.1 Amended and Restated Bylaws of First Niagara Financial Group,
Inc.
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
(b) Reports on Form 8-K
On July 19, 2004 the Company filed a Current Report on Form 8-K,
which disclosed second quarter 2004 financial results. Such
Current Report, as an Item 7 exhibit, included the Company's press
release dated July 19, 2004.
On July 22, 2004 the Company filed a Current Report on Form 8-K,
which disclosed that investors will have an opportunity to listen
to a web cast about the Company's strategy and future outlook on
July 28, 2004, as management of the Company presents at the Keefe,
Bruyette & Woods (KBW), Community Bank Investors Conference. The
Company also released the web cast information that will allow
investors to listen and view the presentation that will take place
that day. Such Current Report, as an Item 7 exhibit, included the
Company's press release dated July 21, 2004.
24
Item 6b. Reports on Form 8-K (con't)
- --------------------------------------------------------------------------------
On August 31, 2004, the Company filed a Current Report on Form
8-K, which disclosed that it has been authorized by its Board of
Directors to repurchase up to an additional 4.2 million (5%) of
its outstanding common stock, as part of its ongoing capital
management program and that it expects to complete its current 2.1
million program early in the fourth quarter of this year. The
Company also disclosed that due to regulatory restrictions, it is
restricted from repurchasing additional stock until late October.
Such Current Report, as an Item 9.01 exhibit, included the
Company's press release dated August 31, 2004.
On September 29, 2004, the Company filed a Current Report on Form
8-K, which disclosed that the Company's Board of Directors amended
certain sections of the Company's bylaws. These amendments changed
the Company's bylaws to allow for the initial election as a
Director of an individual who is sixty-five years of age or more
with a 2/3 vote of the Board of Directors. Additionally, these
amendments updated Article III of the Company's bylaws for the
Company's requirement that all members of the
Governance/Nominating, Audit and Compensation Committees be
independent as determined by the Board of Directors under the
NASDAQ corporate governance listing standards, the Company's
Governance Guidelines and the Securities and Exchange Commission
Rule 10A-3. Additionally, this current report disclosed that they
had received approval from the shareholders of the Company and
Hudson River Bancorp, Inc. to proceed with their previously
announced merger. Such Current Report, as an Item 9.01 exhibit,
included the amended sections of the Company's bylaws and the
Company's press release dated September 28, 2004.
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 4, 2004 By: /s/ Paul J. Kolkmeyer
-----------------------------------------------------
Paul J. Kolkmeyer
President and Chief Executive Officer
Date: November 4, 2004 By: /s/ John R. Koelmel
---------------------------------------------------
John R. Koelmel
Executive Vice President, Chief Financial Officer
25