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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission file number 0-23975
FIRST NIAGARA FINANCIAL GROUP, INC.
(exact name of registrant as specified in its charter)
Delaware 42-1556195
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6950 South Transit Road,
P.O. Box 514, Lockport, NY 14095-0514
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(716) 625-7500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
The Registrant had 84,161,487 shares of Common Stock, $0.01 par value,
outstanding as of May 7, 2004.
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FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2004
TABLE OF CONTENTS
Item Number Page Number
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition as of
March 31, 2004 (unaudited) and December 31, 2003....................... 3
Condensed Consolidated Statements of Income for the
three months ended March 31, 2004 and 2003 (unaudited)................. 4
Condensed Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2004 and 2003 (unaudited)................. 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2004 and 2003 (unaudited)......... 6
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 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.......................................................... 12
3. Quantitative and Qualitative Disclosures about Market Risk............... 18
4. Controls and Procedures.................................................. 19
PART II - OTHER INFORMATION
1. Legal Proceedings........................................................ 19
2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities............................................................. 19
3. Defaults upon Senior Securities.......................................... 19
4. Submission of Matters to a Vote of Security Holders...................... 20
5. Other Information........................................................ 20
6. Exhibits and Reports on Form 8-K......................................... 20
Signatures.................................................................. 20
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Condition
March 31, December 31,
2004 2003
----------- ------------
(unaudited)
(In thousands except share
Assets and per share amounts)
Cash and cash equivalents:
Cash and due from banks ....................................... $ 63,025 49,997
Federal funds sold and other short-term investments ........... 32,373 124,255
----------- ---------
Total cash and cash equivalents ........................ 95,398 174,252
Securities available for sale ..................................... 1,239,025 845,883
Loans, net ........................................................ 3,033,132 2,269,203
Bank-owned life insurance ......................................... 84,059 70,767
Premises and equipment, net ....................................... 57,529 43,694
Goodwill .......................................................... 324,057 105,981
Intangible assets, net ............................................ 24,923 8,717
Other assets ...................................................... 121,767 71,010
----------- ---------
Total assets .................................. $ 4,979,890 3,589,507
=========== =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ...................................................... $ 3,299,050 2,355,216
Short-term borrowings ......................................... 154,383 87,148
Long-term borrowings .......................................... 507,443 370,818
Other liabilities ............................................. 80,991 48,151
----------- ---------
Total liabilities ............................. 4,041,867 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;
84,125,973 shares issued in 2004 and 70,813,651 shares issued
in 2003 ..................................................... 841 708
Additional paid-in capital .................................... 742,623 544,618
Retained earnings ............................................. 223,854 217,538
Accumulated other comprehensive income (loss) ................. 3,611 (740)
Common stock held by ESOP, 4,011,035 shares in 2004 and
4,049,659 shares in 2003 .................................... (30,118) (30,399)
Unearned compensation - recognition and retention plan, 402,795
shares in 2004 and 358,095 shares in 2003 ................... (2,788) (2,376)
Treasury stock, at cost, 79,422 shares in 2003 ................ -- (1,175)
----------- ---------
Total stockholders' equity .................... 938,023 728,174
----------- ---------
Total liabilities and stockholders' equity .... $ 4,979,890 3,589,507
=========== =========
3
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(unaudited)
Three months ended
March 31,
------------------------
2004 2003
------- -------
(In thousands except per
share amounts)
Interest income:
Real estate loans .......................................... $35,913 30,550
Other loans ................................................ 9,121 6,446
Mortgage-backed securities ................................. 5,240 3,114
Other investment securities ................................ 2,538 1,509
Other ...................................................... 244 1,304
------- -------
Total interest income ................................. 53,056 42,923
Interest expense:
Deposits ................................................... 10,285 12,017
Borrowings ................................................. 6,168 5,518
------- -------
Total interest expense ................................ 16,453 17,535
------- -------
Net interest income ................................... 36,603 25,388
Provision for credit losses ................................... 1,750 1,957
------- -------
Net interest income after provision for credit losses.. 34,853 23,431
Noninterest income:
Banking services ........................................... 4,210 3,800
Risk management services ................................... 4,448 3,309
Wealth management services ................................. 1,074 972
Lending and leasing ........................................ 923 899
Bank-owned life insurance .................................. 867 753
Net realized gains (losses) on securities available for sale 60 (16)
Other ...................................................... 269 330
------- -------
Total noninterest income .............................. 11,851 10,047
------- -------
Noninterest expense:
Salaries and employee benefits ............................. 15,883 12,572
Occupancy and equipment .................................... 3,356 2,441
Technology and communications .............................. 2,566 2,360
Marketing and advertising .................................. 956 1,068
Professional services ...................................... 781 362
Amortization of intangibles ............................... 1,041 318
Other ...................................................... 3,996 2,926
------- -------
Total noninterest expense ............................. 28,579 22,047
------- -------
Income from continuing operations before income taxes.. 18,125 11,431
Income taxes from continuing operations ....................... 6,210 3,980
------- -------
Income from continuing operations ..................... 11,915 7,451
Discontinued operations:
Income, including gain on sale in 2003, before income taxes -- 1,996
Income taxes ............................................... -- 1,833
------- -------
Income from discontinued operations ................... -- 163
------- -------
Net income ............................................ $11,915 7,614
======= =======
Earnings per common share:
Basic ................................................. $ 0.15 0.12
Diluted ............................................... 0.15 0.11
Weighted average common shares outstanding:
Basic ................................................. 77,407 65,758
Diluted ............................................... 78,917 67,268
4
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
Three months ended
March 31,
----------------------
2004 2003
-------- --------
(Amounts in thousands)
Net income .................................................... $ 11,915 7,614
Other comprehensive income (loss), net of income taxes:
Securities available for sale:
Net unrealized gains (losses) arising during the period 4,387 (907)
Reclassification adjustment for realized (gains) losses
included in net income ........................... (36) 10
-------- --------
Total other comprehensive income (loss) .......... 4,351 (897)
-------- --------
Total comprehensive income .................... $ 16,266 6,717
======== ========
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 (loss) 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 ................... -- -- 11,915 -- -- -- -- 11,915
Unrealized gain on
securities available for
sale, net .................. -- -- -- 4,351 -- -- -- 4,351
Common stock issued for the
acquisition of Troy
Financial Corporation ...... 133 201,147 -- -- -- -- -- 201,280
Purchase of treasury shares .. -- -- -- -- -- -- (6,820) (6,820)
Exercise of stock options, net -- (3,439) -- -- -- -- 7,334 3,895
ESOP shares committed to be
released ................... -- 282 -- -- 281 -- -- 563
Recognition and retention
plan, net .................. -- 15 -- -- -- (412) 661 264
Common stock dividend of
$0.07 per share ............ -- -- (5,599) -- -- -- -- (5,599)
-------- -------- -------- -------- -------- -------- -------- --------
Balances at March 31, 2004 ... $ 841 742,623 223,854 3,611 (30,118) (2,788) -- 938,023
======== ======== ======== ======== ======== ======== ======== ========
Balances at January 1, 2003 . $ 298 137,624 196,074 2,074 (11,024) (2,453) (38,897) 283,696
Net income ................... -- -- 7,614 -- -- -- -- 7,614
Unrealized loss on
securities
available for sale, net ...... -- -- -- (897) -- -- -- (897)
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 ................. 410 390,635 -- -- -- -- -- 391,045
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
Exercise of stock options, net -- 295 -- -- -- -- -- 295
ESOP shares committed to be
released ................... -- 154 -- -- 281 -- -- 435
Recognition and retention
plan, net .................. -- 25 -- -- -- 287 -- 312
Common stock dividend of
$0.05 per share ............ -- -- (3,326) -- -- -- -- (3,326)
-------- -------- -------- -------- -------- -------- -------- --------
Balances at March 31, 2003 ... $ 708 542,808 200,362 1,177 (31,243) (2,166) -- 711,646
======== ======== ======== ======== ======== ======== ======== ========
6
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three months ended March 31,
----------------------------
2004 2003
----------- ------------
Cash flows from operating activities: (In thousands)
Net income ........................................................... $ 11,915 $ 7,614
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of fees and discounts, net ........................ 2,663 2,965
Provision for credit losses .................................... 1,750 1,957
Depreciation of premises and equipment ......................... 1,741 1,542
Amortization of intangibles .................................... 1,041 351
Net realized gains ............................................. (60) (192)
Stock based compensation expense ............................... 826 795
Deferred income tax expense .................................... 911 1,073
Decrease in other assets ....................................... 8,338 927
Increase (decrease) in other liabilities ....................... 6,726 (5,786)
----------- ------------
Net cash provided by operating activities ................ 35,851 11,246
----------- ------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale ................. 66,109 6,137
Proceeds from maturities of securities available for sale ............ 36,990 328,052
Principal payments received on securities available for sale ......... 36,404 87,044
Purchases of securities available for sale ........................... (257,108) (319,752)
Net increase in loans ................................................ (20,866) (32,765)
Acquisitions, net of cash acquired ................................... (61,073) (28,527)
Proceeds from the sale of business, net of cash sold ................ -- 5,200
Other, net ........................................................... (4,786) 63
----------- ------------
Net cash provided by (used in) investing activities ...... (204,330) 45,452
----------- ------------
Cash flows from financing activities:
Net increase in deposits ............................................. 20,169 9,808
Net proceeds from Conversion and Offering ............................ -- 314,007
Proceeds from (repayments of) short-term borrowings, net ............. 9,607 (26,511)
Proceeds from long-term borrowings ................................... 75,000 --
Repayments of long-term borrowings ................................... (4,818) (4,214)
Proceeds from exercise of stock options .............................. 2,086 147
Purchase of treasury stock ........................................... (6,820) --
Dividends paid on common stock ....................................... (5,599) (3,326)
----------- ------------
Net cash provided by financing activities ................ 89,625 289,911
----------- ------------
Net increase (decrease) in cash and cash equivalents ................... (78,854) 346,609
Cash and cash equivalents at beginning of period ....................... 174,252 90,525
----------- ------------
Cash and cash equivalents at end of period ............................. $ 95,398 $ 437,134
=========== ============
Cash paid during the period for:
Income taxes ............................................. $ 1,573 $ 19
Interest expense ......................................... 15,727 17,269
Acquisition and disposition of banks and financial services companies:
Assets acquired (noncash) ...................................... $ 1,327,092 $ 405,392
Liabilities assumed ............................................ 1,064,742 342,950
Assets sold (noncash) .......................................... -- 1,384
Liabilities sold ............................................... -- 746
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
month period ended March 31, 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
March 31,
-------------------------
2004 2003
---------- ----------
Net income as reported $ 11,915 7,614
Add: Stock-based employee compensation
expense included in net income, net of
related income tax effects 158 216
Deduct: Stock-based employee compensation
expense determined under the fair-value
based method, net of related income
tax effects (401) (409)
---------- ----------
Pro forma net income $ 11,672 7,421
========== ==========
Basic earnings per share:
As reported $ 0.15 0.12
Pro forma 0.15 0.11
Diluted earnings per share:
As reported $ 0.15 0.11
Pro forma 0.15 0.11
8
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(2) Acquisitions
Troy Financial Corporation
On January 16, 2004, FNFG acquired 100% 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 $356.4 million included the
issuance of 13.3 million shares of FNFG stock, cash payments totaling
approximately $151.9 million and capitalized costs related to the acquisition,
primarily investment banking and professional fees, of approximately $3.3
million. The value assigned to the FNFG shares issued was $15.15 per share. This
was 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. 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 $ 94,091
Securities available for sale 250,969
Loans, net 745,399
Goodwill 217,996
Core deposit intangible 17,247
Other assets 95,481
----------
Total assets acquired 1,421,183
----------
Deposits 923,665
Borrowings 124,723
Other liabilities 16,354
----------
Total liabilities assumed 1,064,742
----------
Net assets acquired $ 356,441
==========
The core deposit intangible 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.
The following table presents unaudited pro forma information as if the
acquisition of TFC had been consummated on January 1, 2004 and 2003. This pro
forma information gives effect to certain adjustments, including accounting
adjustments related to 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 on January 1, 2004 and 2003. In particular, cost savings
and $1.3 million of merger and integration costs are included in the 2004 period
when realized but are not reflected in the 2003 pro forma amounts. Additionally,
the Company expects to achieve further cost savings, which are not reflected in
the pro forma amounts below (in thousands except per share amounts):
Three months ended
March 31,
------------------
2004 2003
------- -------
(Pro forma)
Net interest income $38,442 35,698
Noninterest income 12,180 11,898
Noninterest expense 30,038 30,254
Net income 12,380 10,207
Basic earnings per share $ 0.16 0.13
======= =======
Diluted earnings per share $ 0.15 0.13
======= =======
9
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 and the Hudson River Commercial
Bank, with total assets of approximately $2.6 billion and fifty branch
locations. At announcement, the aggregate merger consideration was comprised of
approximately 35.7 million shares of FNFG common stock and approximately $124.8
million in cash, for an aggregate purchase price of $619.4 million or $19.63 per
share. The actual 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 amount
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. 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 and is subject to the approval of
various regulatory agencies, as well as FNFG and HRB stockholders.
(3) Earnings Per Share
The computation of basic and diluted earnings per share for the three months
ended March 31, 2004 and 2003 is as follows (in thousands except per share
amounts):
Three months ended
March 31,
---------------------
2004 2003
-------- -------
Net income available to common stockholders $ 11,915 7,614
======== ======
Weighted average shares outstanding:
Total shares issued 81,914 71,913
Unallocated ESOP shares (4,049) (3,817)
Unvested restricted stock awards (396) (522)
Treasury shares (62) (1,816)
-------- ------
Total basic weighted average shares outstanding 77,407 65,758
Incremental shares from assumed exercise of
stock options 1,367 1,290
Incremental shares from assumed vesting of
restricted stock awards 143 220
-------- ------
Total diluted weighted average shares outstanding 78,917 67,268
======== ======
Basic earnings per share $ 0.15 0.12
======== ======
Diluted earnings per share $ 0.15 0.11
======== ======
(4) Pension and Other Postretirement Plans
Net postretirement cost (benefit), which is included 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
March 31, March 31,
------------------ ------------------
2004 2003 2004 2003
----- ----- ----- -----
Interest cost $ 452 242 108 69
Expected return on plan assets (685) (218) -- --
Amortization of unrecognized loss 65 54 23 14
Amortization of unrecognized prior service liability -- -- (16) (16)
----- ----- ----- -----
Net pension and postretirement cost (benefit) $(168) 78 115 67
===== ===== ===== =====
10
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(5) Segment Information
The Company has two business segments, banking and financial services. The
financial services segment includes the Company's risk management and wealth
management operations, which are organized under one Financial Services Group.
The banking segment includes the results of First Niagara excluding financial
services. Transactions between the banking and financial services segments are
primarily related to interest income and expense on intercompany deposit
accounts, and are eliminated in consolidation. Selected operating information
for the Company's segments follows (in thousands):
Financial Consolidated
For the three month period ended: Banking services Eliminations total
------- --------- ------------ ------------
March 31, 2004
Interest income $53,063 17 (24) 53,056
Interest expense 16,470 7 (24) 16,453
------- ------- ------- -------
Net interest income 36,593 10 -- 36,603
Provision for credit losses 1,750 -- -- 1,750
------- ------- ------- -------
Net interest income after provision
for credit losses 34,843 10 -- 34,853
Noninterest income 6,328 5,535 (12) 11,851
Amortization of intangibles 743 298 -- 1,041
Other noninterest expense 23,487 4,063 (12) 27,538
------- ------- ------- -------
Income before income taxes 16,941 1,184 -- 18,125
Income tax expense 5,805 405 -- 6,210
------- ------- ------- -------
Net income $11,136 779 -- 11,915
======= ======= ======= =======
March 31, 2003
Interest income $42,923 14 (14) 42,923
Interest expense 17,549 -- (14) 17,535
------- ------- ------- -------
Net interest income 25,374 14 -- 25,388
Provision for credit losses 1,957 -- -- 1,957
------- ------- ------- -------
Net interest income after provision
for credit losses 23,417 14 -- 23,431
Noninterest income 5,753 4,304 (10) 10,047
Amortization of intangibles 143 175 -- 318
Other noninterest expense 18,309 3,430 (10) 21,729
------- ------- ------- -------
Income from continuing operations
before income taxes 10,718 713 -- 11,431
Income tax expense from continuing operations 3,621 359 -- 3,980
------- ------- ------- -------
Income from continuing operations 7,097 354 -- 7,451
Income from discontinued operations -- 163 -- 163
------- ------- ------- -------
Net income $ 7,097 517 -- 7,614
======= ======= ======= =======
11
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
The Company provides banking and other financial services to individuals and
businesses in Upstate New York. The Company accepts deposits from customers
through its banking centers and invests those and other funds generated from
operations and borrowings, in residential loans, commercial real estate loans,
commercial business loans and leases, consumer loans, and investment securities.
Additionally, the Company offers risk (insurance) management and wealth
management services.
On January 16, 2004, FNFG acquired 100% of the outstanding common shares of TFC
for $35.50 per share. The aggregate purchase price of approximately $356.4
million included the issuance of 13.3 million shares of FNFG stock, cash
payments totaling approximately $151.9 million and capitalized costs related to
the acquisition, primarily investment banking and professional fees, of
approximately $3.3 million.
Total assets increased to $4.98 billion at March 31, 2004 from $3.59 billion at
December 31, 2003. This 39% increase resulted principally from the assets
acquired from TFC in January 2004. TFC added $760.0 million of loans, of which
64% were commercial mortgage and business loans, and approximately $923.7
million of deposits, 75% of which were core deposits. This acquisition expanded
the Company's market area to include the more attractive and higher growth
Capital Region in Eastern New York and furthered its strategic initiatives of
increasing commercial relationships and core deposits. Excluding the loans
acquired from TFC, the net increase in loans was $17.5 million during the
quarter. This increase was attributable to a $39.6 million, or 17% annualized,
increase in commercial real-estate and business loans, partially mitigated by
the continuing repayment of residential real-estate loans held in portfolio.
Excluding the accounts acquired from TFC, deposits increased slightly from the
December 31, 2003 levels as core deposit growth offset the maturities of higher
rate certificates of deposit.
Net income for the quarter ended March 31, 2004 increased to $11.9 million, or
$0.15 per diluted share from $7.6 million, or $0.11 per diluted share for the
same period of 2003. This represents a 56% increase in net income and a 36%
increase in diluted earnings per share over the prior year first quarter. The
2004 quarterly results included the benefits of a 50 basis point improvement in
net interest rate spread and a $96.0 million increase in average net earning
assets, which resulted in an $11.2 million increase in net interest income over
the prior year first quarter. Noninterest income and expense for the first
quarter of 2004 increased from the 2003 first quarter reflecting the impact of
the acquisition of TFC in January 2004 and two insurance agencies in July 2003,
as well as continuing internal growth.
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.
12
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,
as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No taxable equivalent adjustments were
made. All average balances are average daily balances.
Three months ended March 31,
------------------------------------------------------------------------------------
2004 2003
-------------------------------------- ------------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- -------- ------ ----------- ----------- ------
Interest-earning assets: (Dollars in thousands)
Mortgage-backed securities(1) ...... $ 587,884 $ 5,240 3.57% $ 433,495 $ 3,114 2.87%
----------- -------- ---- ----------- ----------- ----
Other investment securities(1) ..... 532,103 2,538 1.91 247,556 1,509 2.44
Loans(2) ........................... 2,910,952 45,034 6.20 2,157,965 36,996 6.90
Other .............................. 86,397 244 1.14 324,477 1,304 1.63
----------- -------- ---- --------- ----------- ----
Total interest-earning assets 4,117,336 53,056 5.16 3,163,493 42,923 5.46
----------- -------- ---- --------- ----------- ----
Allowance for credit losses ........... (37,329) (23,690)
Noninterest-earning assets(3)(4) ...... 621,754 320,348
----------- -----------
Total assets ................. $ 4,701,761 $ 3,460,151
=========== ===========
Interest-bearing liabilities:
Savings deposits ................... $ 929,639 $ 2,031 0.88% $ 706,930 $ 2,577 1.50%
Interest-bearing checking deposits . 816,016 1,735 0.86 485,655 1,346 1.12
Certificates of deposit ............ 1,147,295 6,519 2.29 1,014,610 8,094 3.24
Borrowed funds ..................... 610,134 6,168 4.07 438,047 5,518 5.11
Total interest-bearing ----------- -------- ---- --------- ----------- ----
liabilities ............... 3,503,084 16,453 1.89 2,645,242 17,535 2.69
----------- -------- ---- --------- ----------- ----
Noninterest-bearing deposits .......... 234,016 140,237
Other noninterest-bearing liabilities . 59,500 56,477
----------- -----------
Total liabilities ............ 3,796,600 2,841,956
Stockholders' equity(3) ............... 905,161 618,195
Total liabilities and ----------- -----------
stockholders' equity ...... $ 4,701,761 $ 3,460,151
=========== ===========
Net interest income ................... $ 36,603 $ 25,388
======== ===========
Net interest rate spread .............. 3.27% 2.77%
==== ====
Net earning assets .................... $ 614,252 $ 518,251
=========== ===========
Net interest income as a percentage of
average interest-earning assets .... 3.56 % 3.21%
======== ===========
Ratio of average interest-earning
assets to average interest-bearing
liabilities ........................ 117.53% 119.59%
=========== ===========
- ----------------
(1) Amounts shown are at amortized cost.
(2) Net of deferred costs, unearned discounts and non-accruing loans.
(3) Includes unrealized gains/losses on securities available for sale.
(4) Includes the cash surrender value of bank-owned life insurance, earnings
on which are reflected in other noninterest income.
Lending Activities
Total loans outstanding grew $777.6 million from December 31, 2003 to March 31,
2004. Approximately $760.0 million of this increase is attributable to the
acquisition of TFC in January 2004, which added $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. The Company continued to 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
$30.9 million, or 17% annualized, from December 31, 2003 to March 31, 2004,
while commercial business loans increased $8.7 million, or 16% annualized,
during the same period. This is consistent with the Company's targeted
commercial loan growth of 10% to 15% for 2004. This loan portfolio shift was
achieved through the Company's continued emphasis on commercial loan
originations, including the hiring of seasoned commercial loan officers and
management's asset and liability strategy of holding fewer long-term fixed-rate
residential real estate loans in portfolio.
13
Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Company's loan portfolio in dollar amounts and in
percentages as of the dates indicated.
March 31, 2004 December 31, 2003
---------------------- ----------------------
Amount Percent Amount Percent
----------- ------- ----------- -------
(Dollars in thousands)
Real estate loans:
Residential .............................. $ 1,154,084 37.7 $ 948,877 41.5%
Home equity .............................. 221,486 7.2 179,282 7.8
Commercial ............................... 970,516 31.7 653,976 28.6
Commercial construction .................. 107,323 3.5 86,154 3.8
----------- ----- ----------- -----
Total real estate loans ............... 2,453,409 80.1 1,868,289 81.7
Commercial business loans ................... 402,261 13.1 215,000 9.4
Consumer loans .............................. 207,834 6.8 202,630 8.9
----------- ----- ----------- -----
Total loans ........................... 3,063,504 100.0% 2,285,919 100.0%
----------- ===== ----------- =====
Net deferred costs and unearned discounts 10,394 8,704
Allowance for credit losses .............. (40,766) (25,420)
----------- -----------
Total loans, net ...................... $ 3,033,132 $ 2,269,203
=========== ===========
During the quarter, credit quality remained strong as non-accruing loans
decreased to 0.53% of total loans at March 31, 2004 from 0.54% of total loans at
December 31, 2003. Additionally, the allowance for credit losses, increased to
250.53% of non-accruing loans and 1.33% of total loans at the end of the 2004
first quarter. At March 31, 2004, the Company had $18.7 million in loans secured
by automobile leases originated through a third party. During the quarter, the
Company learned that the originator/servicer was experiencing cash flow
difficulties and would not have the ability to fulfill its obligations under the
servicing agreement. The Company is working with other lenders that hold leases
originated by the third party, to finalize contracts with a replacement servicer
and remarketing firm. The leases were originated to customers residing in New
York and New Jersey, with credit scores generally in excess of 700. As of
quarter-end, substantially all of the leases held by the Company were current.
While unable to specifically quantify the amount of loss exposure until further
information and analysis is available, the Company considered the entire
portfolio substandard for purposes of evaluating the adequacy of the allowance
for credit losses at March 31, 2004.
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.
March 31, December 31,
2004 2003
--------- ------------
Non-accruing loans(1): (Dollars in thousands)
Real estate:
Residential ......................................... $ 4,410 $ 3,905
Home equity ......................................... 440 401
Commercial .......................................... 7,057 3,878
Commercial business .................................... 3,771 3,583
Consumer ............................................... 594 538
------- -------
Total non-accruing loans ............................ 16,272 12,305
Real estate owned ......................................... 563 543
Total non-performing assets ......................... $16,835 $12,848
======= =======
Total non-accruing loans as a percentage of total loans ... 0.53% 0.54%
======= =======
Total non-performing assets as a percentage of total assets 0.34% 0.36%
======= =======
- ----------------
(1) Loans are generally placed on non-accrual status when they become 90 days
or more past due or if they have been identified by the Company as
presenting uncertainty with respect to the collectibility of interest or
principal.
14
Analysis of the Allowance for Credit Losses. The following table sets forth the
analysis of the allowance for credit losses for the periods indicated.
Three months ended March 31,
----------------------------
2004 2003
-------- --------
(Dollars in thousands)
Balance at beginning of period ........ $ 25,420 $ 20,873
Net charge-offs:
Charge-offs ........................ (1,421) (1,157)
Recoveries ......................... 367 239
-------- --------
Net charge-offs ................. (1,054) (918)
Allowance obtained through acquisitions 14,650 2,001
Provision for credit losses ........... 1,750 1,957
-------- --------
Balance at end of period .............. $ 40,766 $ 23,913
======== ========
Ratio of annualized net charge-offs to
average loans outstanding ........... 0.14% 0.17%
======== ========
Investing Activities
The Company's available for sale securities increased $393.1 million to $1.24
billion at March 31, 2004 from $845.9 million at December 31, 2003. This
reflects the $251.0 million of investment securities acquired with TFC, of which
$210.8 million were comprised of municipal debt securities. Excluding the
investment securities acquired from TFC, securities available for sale increased
$142.2 million, as the remaining proceeds from the Company's second-step stock
offering were further deployed from short-term assets to higher yielding
mortgage-backed securities and agency bonds with a weighted average life of 2 to
4 years. This was done to position the Company's balance sheet to optimize
earnings while limiting earnings volatility should interest rates change. As a
result of this repositioning and funding of the cash portion of the TFC
acquisition, cash and cash equivalents decreased to $95.4 million at March 31,
2004.
Funding Activities
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
accounts, $232.3 million of certificates of deposit and $86.8 million of
noninterest bearing deposits. During the first quarter of 2004, the Company
continued to focus on increasing its core deposit base. Excluding the accounts
acquired with TFC, core deposits increased $112.6 million, or 8%, from December
31, 2003 to March 31, 2004, while certificates of deposits decreased $92.5
million during the same period, as the rates offered on new certificates of
deposits were lowered based on alternative wholesale borrowing costs.
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.
March 31, 2004 December 31, 2003
-------------------- --------------------
Amount Percent Amount Percent
---------- ------- ---------- -------
(Dollars in thousands)
Savings ................. $1,049,151 31.8% $ 654,320 27.8%
Interest-bearing checking 869,556 26.4 538,967 22.9
Certificates of deposit . 1,131,373 34.3 991,545 42.1
Noninterest-bearing ..... 248,970 7.5 170,384 7.2
---------- ----- ---------- -----
Total deposits ....... $3,299,050 100.0% $2,355,216 100.0%
========== ===== ========== =====
Borrowed funds totaled $661.8 million at March 31, 2004 compared to $458.0
million at December 31, 2003. This $203.9 million increase included $124.7
million assumed in the TFC acquisition. Excluding the debt acquired, borrowed
funds increased $79.1 million with $75.0 million of this growth represented by
new fixed-rate, intermediate-term borrowings.
Equity Activities
Stockholders' equity increased to $938.0 million at March 31, 2004 compared to
$728.2 million at December 31, 2003. This $209.8 million increase was primarily
attributable to the issuance of 13.3 million shares of common stock with an
aggregate value of $201.3 million in connection with the TFC acquisition. Common
stock dividends paid of $0.07 per share reduced stockholders' equity by $5.6
million.
15
In July 2003 the Company announced that it had received a regulatory
non-objection from the OTS and approval from its Board of Directors to its
request to repurchase up to 2.1 million (3%) 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 conversion effective January 17, 2003. As of March 31,
2004, 575,000 shares had been repurchased under this program at an average cost
of $14.65 per share, including 465,000 shares repurchased in the 2004 quarter at
an average cost of $14.67 per share. The Company was restricted from
repurchasing shares for approximately half of the first quarter of 2004 due to
internal and regulatory trading quiet periods. Going forward, the Company will
continue to repurchase shares, although there may be limitations on the amount
of repurchases under SEC Rule 10b-18 and the pending HRB acquisition.
Results of Operations for the Three Months Ended March 31, 2004
Net Interest Income
Net interest income rose 44% when comparing the first quarter of 2004 to the
same period of 2003. One of the major factors contributing to this increase was
a 50 basis point improvement in net interest rate spread due to the Company's
active asset and liability management initiatives and lower mortgage-backed
security premium amortization. Additionally, net interest income benefited from
a $96.0 million increase in average net earning assets from the first quarter of
2003 to the first quarter of 2004 primarily due to a $93.8 million increase in
average noninterest bearing deposits resulting from the acquisition of TFC. The
improvement in net interest rate spread and average net earning assets caused
the Company's net interest margin to improve from 3.21% for the quarter ended
March 31, 2003 to 3.56% for the same period of 2004.
The increase in interest income in the first quarter of 2004 compared to the
same period in 2003 reflects the impact of a $953.8 million increase in average
interest earning assets due primarily to the acquisition of TFC and increased
commercial real estate and business loans. The benefits of the increase in
earning assets were partially offset by a 30 basis point decrease in the rate
earned on those assets when comparing the same periods. This was attributable to
the declining interest rate environment, which caused the Company's
variable-rate interest-earning assets to reprice to lower rates and fixed-rate
interest earning assets, mainly residential mortgages and mortgage-backed
securities ("MBS"), to prepay. More specifically, MBS premium amortization
recorded as a result of prepayments received on those securities amounted to
$644 thousand in the 2004 quarter compared to $2.2 million for the first quarter
of 2003.
The major factor contributing to the decrease in interest expense from the first
quarter of 2003 to the first quarter of 2004 was an 80 basis point reduction in
the rate paid on interest-bearing liabilities. This was largely due to the lower
interest rate environment, which caused the Company's variable rate
interest-bearing liabilities to reprice downward. Additionally, the rate paid on
interest-bearing liabilities benefited from the Company's decision to replace
higher-rate time deposits, with lower cost core deposits. The benefits of the
decrease in the rate paid on interest-bearing liabilities was partially offset
by an $857.8 million increase in average interest bearing liabilities when
comparing the 2003 and 2004 first quarters due to the deposits and borrowings
assumed in the TFC acquisition.
Provision for Credit Losses
A $1.8 million provision for credit losses was made in the 2004 first quarter
primarily due to continued loan growth, as well as the shift in mix of that loan
growth to commercial real estate and business loans. During the quarter, credit
quality remained stable and loan loss experience continued at low levels. For
the quarter ended March 31, 2004, the Company's annualized net charge-offs
amounted to 0.14% of average total loans compared to 0.17% for the same period
of 2003. Additionally, the non-performing assets as a percentage of total assets
ratio of 0.34% remained consistent with the first quarter of 2003 level of
0.32%. The provision is based on management's continuous assessment of the
adequacy of the allowance for credit losses with consideration given to such
interrelated factors as the composition and 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 first quarter of 2004, the Company earned $11.9 million of noninterest
income, compared to $10.0 million for the same period of 2003. This increase was
largely the result of the acquisition of TFC in January 2004 and two insurance
agencies in July 2003, which added approximately $1.3 million and $846 thousand
to noninterest income, respectively. These increases were partially offset by
lower banking services and wealth management revenues as a result of the
MasterCard/Visa settlement in August 2003 and annuity carriers reducing
commission rates as a result of the lower interest rate environment.
16
Noninterest Expense
Noninterest expenses for the first quarter of 2004 increased $6.5 million over
the 2003 first quarter. This increase includes $1.3 million of marketing,
training and other expenses associated with the TFC merger and integration.
Additionally, this increase is attributable to the operating costs associated
with the 21 additional banking centers, increased personnel and amortization of
core deposit intangibles as a result of the TFC acquisition, as well as the
insurance agency acquisitions in July 2003. The remainder of this variance in
noninterest expense is primarily attributable to the addition of two de novo
banking centers since March 2003. The above increases were partially offset by
lower marketing expenses in the 2004 quarter as a result of the "First Niagara"
branding campaign in the first quarter of 2003.
Income Taxes
The effective tax rate from continuing operations decreased slightly to 34.3%
for the first quarter of 2004 compared to 34.8% for the first quarter of 2003,
primarily as a result of tax advantaged municipal investments acquired from TFC.
Liquidity and Capital Resources
In addition to the Company's primary funding sources of 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 general
interest rates, the economic environment and local competitive conditions.
The primary investing activities of the Company are the origination of
residential mortgages, commercial loans, consumer loans, as well as the purchase
of mortgage-backed and other debt securities. During the first quarter of 2004,
loan originations totaled $217.9 million compared to $229.1 million for the
first quarter of 2003, while purchases of investment securities totaled $257.1
million during the 2004 quarter compared to $319.8 million for the same period
in 2003. The decrease in loan originations from 2003 to 2004 is due to lower
residential mortgage refinancings in 2004 offset by higher commercial mortgage,
consumer and commercial business loan originations. The higher amount of
investment security purchases in 2003 primarily relate to the investment of the
Company's second-step proceeds in that quarter, as well as the reinvestment of
funds from higher MBS prepayments received.
Cash flow from operations, deposit growth, as well as the sales, maturity and
principal payments received on loans and investment securities were used to fund
the investing activities described above. Additionally, the Company has 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. During the first quarter of 2004 cash flows provided by
the sale, principal payments and maturity of securities available for sale
amounted to $139.5 million compared to $421.2 million for the same period in
2003. This decrease from the prior year was primarily due to a lower level of
maturity of investment securities and prepayments received on mortgage-backed
securities. Deposit growth and borrowings, excluding those acquired from TFC,
provided $100.0 million of additional funding for the three months ended March
31, 2004.
In the ordinary course of business, the Company extends commitments to originate
residential and commercial loans and other consumer 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 March 31, 2004, the Company had outstanding commitments to
originate loans of approximately $147.7 million, which generally have an
expiration period of less than 120 days. Commitments to sell residential
mortgages amounted to $7.5 million at March 31, 2004.
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 unpredictable.
Unused lines of credit amounted to $374.9 million at March 31, 2004 and
generally have an expiration period of less than one year. In addition to the
above, the Company issues standby letters of credit to third parties that
guarantees 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 $32.7 million at March 31,
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.
17
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 March 31, 2004, the total of cash, interest-bearing
demand accounts, federal funds sold and other short-term investments was $95.4
million.
At March 31, 2004, First Niagara exceeded all regulatory capital requirements.
The current requirements and the actual levels for First Niagara are detailed in
the following table.
As of March 31, 2004
-----------------------------------------------------------------------
To be well capitalized
Minimum under prompt corrective
Actual capital adequacy action provisions
-------------------- ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- ------- -----
Tangible capital $524,765 11.39% 69,133 1.50% N/A N/A%
Tier 1 (core) capital 543,407 11.74 185,101 4.00 231,376 5.00
Tier 1 risk based capital 543,407 17.33 N/A N/A 188,190 6.00
Total risk based capital 582,613 18.58 250,919 8.00 313,649 10.00
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Net Interest Income Analysis
Market risk is the risk of loss from adverse changes in market prices and/or
interest rates of the Company's financial instruments. The primary market risk
the Company is exposed to is interest rate risk. Interest rate risk occurs when
assets and liabilities reprice at different times as interest rates change. The
Company monitors this interest rate sensitivity through the use of a net
interest income model, which generates estimates of changes in net income over a
range of interest rate scenarios.
The Asset 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 swap agreements.
The accompanying table as of March 31, 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 and decay rates. These assumptions
are inherently uncertain and, as a result, the Company cannot precisely predict
the impact of changes in interest rates on net interest income. Actual results
may differ significantly due to timing, magnitude and frequency of interest rate
changes and changes in market conditions. As a result of the TFC acquisition and
management's asset and liability initiatives, as of March 31, 2004, the
Company's net interest income is more interest rate neutral versus December 31,
2003.
Calculated increase (decrease) at
March 31, 2004
-------------------------------------------
Changes in
interest rates Net interest income % Change
----------------- ------------------- --------
(Dollars in thousands)
+200 basis points $ (144) (0.09)%
+100 basis points 121 0.08
-100 basis points (1,248) (0.81)
18
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 March 31, 2004. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of that date,
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the Company's
internal control over financial reporting during the most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiaries are a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
a) Not applicable.
b) Not applicable.
c) Not applicable.
d) Not applicable.
e) The following table discloses information regarding the open-market
purchases of FNFG stock made by the Company during the first quarter of
2004 in accordance with Rule 10b-18 under the Securities Exchange Act of
1934:
Cumulative number of
shares purchased as Maximum number
part of publicly of shares yet
Number of shares Average price per announced repurchase to be purchased
Date purchased share paid plan* under the plan
------------- ---------------- ----------------- -------------------- ---------------
January 2004 10,000 $ 14.88 120,000 1,987,161
February 2004 455,000 $ 14.66 575,000 1,532,161
March 2004 -- -- -- --
------------- ---------------- -----------------
Total 465,000 $ 14.67 575,000 1,532,161
================ ================= ==================== ===============
* 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. 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 March
31, 2004, the average cost of the 575,000 shares repurchased under this
program was $14.65 per share.
Item 3. Defaults upon Senior Securities
Not applicable.
19
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) The following 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 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 January 13, 2004 the Company filed a Current Report on Form 8-K,
which disclosed pursuant to Item 12 fourth quarter 2003 financial
results and provided earnings guidance for 2004. Such Current
Report, as an Item 7 exhibit included the Company's press release
dated January 13, 2004.
On January 16, 2004 the Company filed a Current Report on Form 8-K,
which disclosed pursuant to Item 5 that it had completed its
acquisition of Troy Financial Corporation. Such Current Report, as
an Item 7 exhibit included the Company's press release dated January
16, 2004.
On March 16, 2004 the Company filed a Current Report on Form 8-K,
which disclosed pursuant to Item 5 that investors will have an
opportunity to listen to a teleconference about the Company on March
18, 2004, as senior management makes presentations to a group of
institutional investors. The Company also released the
teleconference and website information that will allow investors to
listen and view the presentations that will take place that day.
Such Current Report, as an Item 7 exhibit included the Company's
press release dated March 16, 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: May 7, 2004 By: /s/ Paul J. Kolkmeyer
---------------------------------
Paul J. Kolkmeyer
President and Chief Executive
Officer
Date: May 7, 2004 By: /s/ John R. Koelmel
---------------------------------
John R. Koelmel
Executive Vice President,
Chief Financial Officer
20