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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, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-23975
FIRST NIAGARA FINANCIAL GROUP, INC.
(exact name of registrant as specified in its charter)
Delaware 42-1556195
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6950 South Transit Road, P.O. Box 514, Lockport, NY 14095-0514
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(716) 625-7500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
The Registrant had 115,619,758 shares of Common Stock, $0.01 par value,
outstanding as of May 6, 2005.
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FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2005
TABLE OF CONTENTS
Item Number Page Number
- ----------- -----------
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition as of
March 31, 2005 and December 31, 2004 (unaudited)...................... 3
Condensed Consolidated Statements of Income for the
three months ended March 31, 2005 and 2004 (unaudited)................ 4
Condensed Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2005 and 2004 (unaudited)................ 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2005 and 2004 (unaudited)........ 6
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 and 2004 (unaudited)................ 7
Notes to Condensed Consolidated Financial Statements (unaudited)........ 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 12
3. Quantitative and Qualitative Disclosures about Market Risk.............. 18
4. Controls and Procedures................................................. 19
PART II - OTHER INFORMATION
1. Legal Proceedings....................................................... 19
2. Unregistered Sales of Equity Securities and Use of Proceeds............. 19
3. Defaults upon Senior Securities......................................... 19
4. Submission of Matters to a Vote of Security Holders..................... 19
5. Other Information....................................................... 20
6. Exhibits................................................................ 20
Signatures.................................................................. 20
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Condition
(unaudited)
March 31, December 31,
2005 2004
----------- ------------
(In thousands, except share
Assets and per share amounts)
Cash and due from banks ............................................ $ 105,652 $ 64,342
Money market investments ........................................... 2,194 3,300
Securities available for sale ...................................... 1,741,486 1,170,129
Loans and leases, net .............................................. 4,923,449 3,215,255
Bank-owned life insurance .......................................... 117,347 86,464
Premises and equipment, net ........................................ 89,866 61,760
Goodwill ........................................................... 682,327 323,782
Core deposit and other intangibles ................................. 55,864 21,878
Other assets ....................................................... 189,791 131,464
----------- -----------
Total assets ................................... $ 7,907,976 $ 5,078,374
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits ......................................................... $ 5,175,735 $ 3,337,682
Short-term borrowings ............................................ 384,399 209,236
Long-term borrowings ............................................. 851,461 541,450
Other liabilities ................................................ 105,668 61,844
----------- -----------
Total liabilities .............................. 6,517,263 4,150,212
----------- -----------
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized;
none issued .................................................. -- --
Common stock, $0.01 par value, 250,000,000 shares authorized;
120,046,007 shares issued in 2005 and 84,298,473 shares issued
in 2004 ...................................................... 1,200 843
Additional paid-in capital ..................................... 1,235,964 751,175
Retained earnings .............................................. 246,583 238,048
Accumulated other comprehensive loss ........................... (15,457) (5,437)
Common stock held by ESOP, 3,856,532 shares in 2005 and
3,895,159 shares in 2004 ..................................... (28,994) (29,275)
Unearned compensation - recognition and retention plan,
403,205 shares in 2005 and 345,410 shares in 2004 ............ (3,740) (3,173)
Treasury stock, at cost, 3,326,741 shares in 2005
and 1,781,029 shares in 2004 ................................. (44,843) (24,019)
----------- -----------
Total stockholders' equity ..................... 1,390,713 928,162
----------- -----------
Total liabilities and stockholders' equity ..... $ 7,907,976 $ 5,078,374
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Income
(unaudited)
Three months ended
March 31,
------------------------------
2005 2004
------------ ------------
(In thousands, except per share amounts)
Interest income:
Loans and leases, including fees ............................... $ 72,223 $ 45,034
Securities available for sale and other investments ............ 14,292 8,022
------------ ------------
Total interest income ............................... 86,515 53,056
Interest expense:
Deposits ...................................................... 15,765 10,285
Borrowings .................................................... 10,520 6,168
------------ ------------
Total interest expense .............................. 26,285 16,453
------------ ------------
Net interest income ...................................... 60,230 36,603
Provision for credit losses ...................................... 2,301 1,750
------------ ------------
Net interest income after provision for credit losses 57,929 34,853
Noninterest income:
Banking services .............................................. 7,989 4,210
Risk management services ...................................... 5,869 4,448
Wealth management services .................................... 1,441 1,074
Lending and leasing ........................................... 1,576 1,073
Bank-owned life insurance ..................................... 1,056 867
Other ......................................................... 480 179
------------ ------------
Total noninterest income ............................ 18,411 11,851
------------ ------------
Noninterest expense:
Salaries and employee benefits ................................ 22,209 15,883
Occupancy and equipment ....................................... 4,477 3,356
Technology and communications ................................. 4,064 2,608
Professional services ......................................... 2,544 781
Marketing and advertising ..................................... 1,711 956
Amortization of core deposit and other intangibles ........... 2,508 1,041
Other ......................................................... 6,340 3,954
------------ ------------
Total noninterest expense ........................... 43,853 28,579
------------ ------------
Income before income taxes .......................... 32,487 18,125
Income taxes ..................................................... 11,392 6,210
------------ ------------
Net income ............................................... $ 21,095 $ 11,915
============ ============
Basic and diluted earnings per common share ...................... $ 0.19 $ 0.15
Weighted average common shares outstanding:
Basic .............................................. 108,200 77,407
Diluted ............................................ 109,246 78,917
See accompanying notes to condensed consolidated financial statements.
4
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
Three months ended
March 31,
---------------------------
2005 2004
---------- ----------
(In thousands)
Net income ....................................................... $ 21,095 $ 11,915
Other comprehensive income (loss), net of income taxes:
Securities available for sale:
Net unrealized gains (losses) arising during the period .. (10,138) 4,387
Reclassification adjustment for realized gains included in
net income .......................................... (3) (36)
---------- ----------
(10,141) 4,351
Minimum pension liability adjustment ........................... 121 --
---------- ----------
Total other comprehensive income (loss) ............. (10,020) 4,351
---------- ----------
Total comprehensive income ............................ $ 11,075 $ 16,266
========== ==========
See accompanying notes to condensed consolidated financial statements.
5
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
Accumulated Common
Additional other stock
Common paid-in Retained comprehensive held by
stock capital earnings income(loss) ESOP
---------- ---------- ---------- ------------- ----------
(In thousands, except per share amounts)
Balances at January 1, 2005 .. $ 843 751,175 238,048 (5,437) (29,275)
Net income ................... -- -- 21,095 -- --
Total other comprehensive
loss, net .................... -- -- -- (10,020) --
Common stock issued for the
acquisition of Hudson River
Bancorp ...................... 357 484,093 -- -- --
Purchase of treasury shares .. -- -- -- -- --
Exercise of stock options .... -- 440 (2,284) -- --
ESOP shares committed to be
released ..................... -- 238 -- -- 281
Recognition and retention plan -- 18 (13) -- --
Common stock dividend of
$0.09 per share ............. -- -- (10,263) -- --
---------- ---------- ---------- ---------- ----------
Balances at March 31, 2005 ... $ 1,200 1,235,964 246,583 (15,457) (28,994)
========== ========== ========== ========== ==========
Balances at January 1, 2004 .. $ 708 544,618 217,538 (740) (30,399)
Net income ................... -- -- 11,915 -- --
Total other comprehensive
income, net .................. -- -- -- 4,351 --
Common stock issued for the
acquisition of Troy
Financial Corporation ........ 133 201,147 -- -- --
Purchase of treasury shares .. -- -- -- -- --
Exercise of stock options .... -- 1,905 (5,344) -- --
ESOP shares committed to be
released ..................... -- 282 -- -- 281
Recognition and retention plan -- 15 -- -- --
Common stock dividend of
$0.07 per share ............. -- -- (5,599) -- --
---------- ---------- ---------- ---------- ----------
Balances at March 31, 2004 .. $ 841 747,967 218,510 3,611 (30,118)
========== ========== ========== ========== ==========
Unearned
compensation -
recognition and Treasury
retention plan stock Total
--------------- ---------- ----------
(In thousands, except per share amounts)
Balances at January 1, 2005 .. (3,173) (24,019) 928,162
Net income ................... -- -- 21,095
Total other comprehensive
loss, net .................... -- -- (10,020)
Common stock issued for the
acquisition of Hudson River
Bancorp ...................... -- -- 484,450
Purchase of treasury shares .. -- (24,531) (24,531)
Exercise of stock options .... -- 2,827 983
ESOP shares committed to be
released ..................... -- -- 519
Recognition and retention plan (567) 880 318
Common stock dividend of
$0.09 per share ............. -- -- (10,263)
---------- ---------- ----------
Balances at March 31, 2005 ... (3,740) (44,843) 1,390,713
========== ========== ==========
Balances at January 1, 2004 .. (2,376) (1,175) 728,174
Net income ................... -- -- 11,915
Total other comprehensive
income, net .................. -- -- 4,351
Common stock issued for the
acquisition of Troy
Financial Corporation ........ -- -- 201,280
Purchase of treasury shares .. -- (6,820) (6,820)
Exercise of stock options .... -- 7,334 3,895
ESOP shares committed to be
released ..................... -- -- 563
Recognition and retention plan (412) 661 264
Common stock dividend of
$0.07 per share ............. -- -- (5,599)
---------- ---------- ----------
Balances at March 31, 2004 .. (2,788) -- 938,023
========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
6
First Niagara Financial Group, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three months ended March 31,
2005 2004
----------- -----------
Cash flows from operating activities: (In thousands)
Net income .............................................................. $ 21,095 $ 11,915
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of fees and discounts, net ........................... 1,015 2,663
Provision for credit losses ....................................... 2,301 1,750
Depreciation of premises and equipment ............................ 2,577 1,741
Amortization of core deposit and other intangibles ................ 2,508 1,041
ESOP and stock based compensation expense ......................... 837 826
Deferred income tax expense ....................................... 4,104 911
Net (increase) decrease in other assets ........................... (463) 1,668
Net increase in other liabilities ................................. 18,173 6,726
----------- -----------
Net cash provided by operating activities .................... 52,147 29,241
----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale ................... 5 66,109
Proceeds from maturities of securities available for sale .............. 85,693 36,990
Principal payments received on securities available for sale ........... 43,765 36,404
Purchases of securities available for sale ............................. (125,798) (257,108)
Net increase in loans .................................................. (48,860) (20,866)
Acquisitions, net of cash and cash equivalents acquired ................ (98,534) (61,073)
Other, net ............................................................. (9,404) 1,824
----------- -----------
Net cash used in investing activities ........................ (153,133) (197,720)
----------- -----------
Cash flows from financing activities:
Net increase in deposits ............................................. 59,095 20,169
Proceeds from (repayments of) short-term borrowings, net ............. (25,398) 9,607
Proceeds from long-term borrowings ................................... 145,000 75,000
Repayments of long-term borrowings ................................... (4,483) (4,818)
Proceeds from exercise of stock options .............................. 543 2,086
Purchase of treasury stock ........................................... (23,304) (6,820)
Dividends paid on common stock ....................................... (10,263) (5,599)
----------- -----------
Net cash provided by financing activities .................... 141,190 89,625
----------- -----------
Net increase (decrease) in cash and cash equivalents ...................... 40,204 (78,854)
Cash and cash equivalents at beginning of period .......................... 67,642 174,252
----------- -----------
Cash and cash equivalents at end of period ................................ $ 107,846 $ 95,398
=========== ===========
Cash paid during the period for:
Income taxes ................................................. $ 2,388 $ 1,573
Interest expense ............................................. 23,448 15,727
Acquisition of banks and financial services companies:
Assets acquired (excluding cash and cash equivalents acquired) $ 2,759,553 $ 1,327,092
Liabilities assumed .......................................... 2,166,093 1,064,742
See accompanying notes to condensed consolidated financial statements.
7
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
The accompanying condensed consolidated financial statements of First Niagara
Financial Group, Inc. ("FNFG") and its wholly owned subsidiary First Niagara
Bank ("First Niagara") have been prepared in accordance with U.S. generally
accepted accounting principles ("GAAP") for interim financial information and
the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for
full year financial statements. In the opinion of management, all adjustments
necessary for a fair presentation have been included. Results for the three
month period ended March 31, 2005 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005. Certain
reclassification adjustments were made to the 2004 financial statements to
conform them to the 2005 presentation. FNFG and its consolidated subsidiary are
hereinafter referred to collectively as the "Company."
(1) Stock-Based Compensation
The Company maintains various long-term incentive stock benefit plans under
which fixed award stock options and restricted stock may be granted to certain
directors and key employees. The Company has continued to apply the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and has only
adopted the disclosure requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - An Amendment of FASB Statement No. 123." As such, compensation
expense is recorded on the date the options are granted only if the current
market price of the underlying stock exceeded the exercise price. Compensation
expense 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.
Had the Company determined compensation cost based on the fair value method
under SFAS No. 123, net income would have been reduced to the pro forma amounts
indicated below. These amounts may not be representative of the effects on
reported net income for future years due to changes in market conditions and the
number of options outstanding (in thousands, except per share amounts):
Three months ended
March 31,
---------------------
2005 2004
-------- --------
Net income as reported $ 21,095 $ 11,915
Add: Stock-based compensation expense
included in net income, net of
related income tax effects 191 158
Deduct: Stock-based compensation expense
determined under the fair-value based
method, net of related income tax effects (479) (401)
-------- --------
Pro forma net income $ 20,807 $ 11,672
======== ========
Basic and diluted earnings per common share:
As reported $ 0.19 $ 0.15
Pro forma 0.19 0.15
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123R "Share Based Payment," which revised SFAS No. 123 and superseded APB
Opinion No. 25. More specifically, this Statement requires companies to
recognize in the income statement, over the required service period, the
estimated grant-date fair value of stock options and other equity-based
compensation issued to employees and directors using option pricing models. This
Statement is effective for the Company's first annual period beginning after
June 15, 2005 and the Company has chosen to apply the modified prospective
approach. Accordingly, awards that are granted, modified or settled after
January 1, 2006 will be accounted for in accordance with SFAS No. 123R and any
unvested equity awards granted prior to that date will continue to be recognized
in the income statement as service is rendered based on their grant-date fair
value calculated in accordance with SFAS No. 123.
8
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
(2) Acquisition
Hudson River Bancorp, Inc.
On January 14, 2005, FNFG acquired all of the outstanding common shares of
Hudson River Bancorp, Inc. ("HRB"), and its wholly-owned subsidiary Hudson River
Bank & Trust Company. Following completion of the acquisition, HRB's fifty
branch locations were merged into First Niagara's branch network.
The aggregate purchase price of $615.7 million included the issuance of 35.7
million shares of FNFG stock (valued at $13.552 per share), cash payments
totaling $126.8 million and capitalized costs related to the acquisition,
primarily investment banking and professional fees, of $4.4 million. This
acquisition was accounted for under the purchase method of accounting. The
results of HRB's operations were included in the 2005 consolidated statement of
income from the date of acquisition.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition (in thousands):
January 14,
2005
----------
Cash and cash equivalents $ 23,396
Securities available for sale 591,610
Loans, net 1,662,925
Goodwill 358,060
Core deposit and other intangibles 35,817
Other assets 109,979
----------
Total assets acquired 2,781,787
----------
Deposits 1,778,958
Borrowings 371,556
Other liabilities 15,579
----------
Total liabilities assumed 2,166,093
----------
Net assets acquired $ 615,694
==========
As a result of the implementation of Statement of Position ("SOP") 03-3,
"Accounting for Certain Loans or Debt Securities Acquired in a Transfer," which
was effective January 1, 2005, loans acquired from HRB with evidence of a
deterioration of credit quality since origination that the Company believes it
will not collect all contractually required payments are being carried at
estimated net realizable value. Those loans had an outstanding balance and
carrying value of $24.8 million and $14.9 million, respectively, at March 31,
2005 and an accretable yield related of approximately $2.2 million. Accordingly,
the amount of HRB's historical allowance for credit losses at acquisition date
was reduced by approximately $10.0 million.
The core deposit and other intangible assets acquired are being amortized using
the double declining balance method over their estimated useful-life of 10
years. The goodwill was primarily assigned to the Company's banking segment of
which none is deductible for tax purposes.
The following table presents unaudited pro forma information as if the
acquisition of HRB had been consummated as of the beginning of the 2004 first
quarter. Pro forma information for 2005 is not presented since such 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 and other 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 HRB at
the beginning of 2004. In particular, cost savings and $2.3 million of indirect
merger and integration costs are not reflected in the pro forma amounts (in
thousands, except per share amounts):
Three months ended
March 31, 2004
------------------
(Pro forma)
Net interest income $ 60,468
Noninterest income 17,133
Noninterest expense 44,403
Net income 19,879
Basic earnings per share $ 0.18
=============
Diluted earnings per share $ 0.17
=============
9
First Niagara Financial Group, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(unaudited)
(3) Earnings Per Share
The computation of basic and diluted earnings per share for the three months
ended March 31, 2005 and 2004 is as follows (in thousands, except per share
amounts):
Three months ended
March 31,
----------------------
2005 2004
--------- ---------
Net income available to common shareholders $ 21,095 $ 11,915
========= =========
Weighted average common shares outstanding:
Total shares issued 114,882 81,914
Unallocated ESOP shares (3,895) (4,049)
Unvested restricted stock awards (395) (396)
Treasury shares (2,392) (62)
--------- ---------
Total basic weighted average common
shares outstanding 108,200 77,407
Incremental shares from assumed exercise of
stock options 950 1,367
Incremental shares from assumed vesting of
restricted stock awards 96 143
--------- ---------
Total diluted weighted average common
shares outstanding 109,246 78,917
========= =========
Basic and diluted earnings per common share $ 0.19 $ 0.15
========= =========
The above diluted weighted average common share calculations do not include 337
thousand and 242 thousand of stock option and restricted stock awards for the
three months ended March 31, 2005 and 2004, respectively, as they are not
dilutive to the earnings per share calculations.
(4) Pension and Other Postretirement Plans
Net pension and postretirement cost (benefit), which is recorded within salaries
and employee benefits expense in the condensed consolidated statements of
income, is comprised of the following (in thousands):
Pension plans Other postretirement plans
----------------------- --------------------------
Three months ended Three months ended
March 31, March 31,
----------------------- -----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Interest cost $ 964 $ 452 $ 125 $ 108
Expected return on plan assets (1,362) (685) -- --
Amortization of unrecognized loss 95 65 25 23
Amortization of unrecognized prior service liability 4 -- (16) (16)
--------- --------- --------- ---------
Net pension and postretirement cost (benefit) $ (299) $ (168) $ 134 $ 115
========= ========= ========= =========
10
First Niagara Financial Group, Inc. and Subsidiary
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 (insurance) and wealth
management operations, including those acquired from HRB. The banking segment
includes the results of First Niagara excluding financial services. Selected
operating information for those segments follows (in thousands):
Financial Consolidated
For the three month period ended: Banking services Eliminations total
---------- ---------- ------------ ------------
March 31, 2005
Net interest income $ 60,226 4 -- 60,230
Provision for credit losses 2,301 -- -- 2,301
---------- ---------- ---------- ----------
Net interest income after provision
for credit losses 57,925 4 -- 57,929
Noninterest income 11,098 7,337 (24) 18,411
Amortization of core deposit and
other intangibles 2,081 427 -- 2,508
Other noninterest expense 35,736 5,633 (24) 41,345
---------- ---------- ---------- ----------
Income before income taxes 31,206 1,281 -- 32,487
Income tax expense 10,880 512 -- 11,392
---------- ---------- ---------- ----------
Net income $ 20,326 769 -- 21,095
========== ========== ========== ==========
March 31, 2004
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 core deposit and
other 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 5,736 474 -- 6,210
---------- ---------- ---------- ----------
Net income $ 11,205 710 -- 11,915
========== ========== ========== ==========
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'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 $7.9 billion at March 31, 2005 from $5.1 billion at
December 31, 2004. The acquisition of HRB in January 2005 added $1.69 billion of
loans, 31% of which were commercial mortgage and business loans, and $1.78
billion of deposits, 68% of which were core accounts. Loan growth also included
a $50.9 million, or 10% annualized, organic increase in commercial real-estate
and business loans. The Company continued to deepen customer relationships as
called for in its strategic plan, including the introduction of relationship
deposit products. These initiatives contributed to the 5% annualized organic
growth in deposits during the quarter.
Net income for the quarter ended March 31, 2005 increased to $21.1 million, or
$0.19 per diluted share from $11.9 million, or $0.15 per diluted share for the
same period of 2004. The 2005 results included a $23.6 million or 65% increase
in net interest income and a 20 basis point improvement in net interest margin
over the prior year quarter. Credit quality remained very strong during the 2005
first quarter as annualized net charge-offs amounted to 0.13% of average loans
and non-performing assets continued at low levels. Accordingly, the Company set
aside a provision for credit losses of $2.3 million. Increases in both
noninterest income and expense reflect the impact of the acquisition of HRB in
January 2005, as well as the continuing expansion of existing operations. That
includes the addition of three new branches, an insurance agency and a leasing
company since the 2004 first quarter. Additionally, noninterest income continues
to benefit from higher banking services income, as consumers become more
comfortable with debit card usage and conducting banking activities
electronically, while noninterest expenses reflect the Company's continuous
investment in its infrastructure and implementation of its strategic plan.
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 2004 10-K dated March 14, 2005. A
more detailed description of the Company's methodology for testing goodwill for
impairment and assumptions made is included within the "Critical Accounting
Estimates" section filed in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of the Company's 2004
10-K dated March 14, 2005.
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
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No taxable
equivalent adjustments were made. All average balances are average daily
balances (dollars in thousands):
Three months ended March 31,
------------------------------------------------------------------------------------
2005 2004
---------------------------------------- ----------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- ----------- ------ ----------- ----------- ------
Interest-earning assets:
Securities available for sale(1) $ 1,667,038 $ 13,943 3.35% $ 1,119,987 $ 7,778 2.78%
Loans and leases(2) 4,680,551 72,223 6.21 2,910,952 45,034 6.20
Money market and other investments 64,112 349 2.21 86,397 244 1.14
----------- ----------- ------ ----------- ----------- ------
Total interest-earning assets 6,411,701 86,515 5.43 4,117,336 53,056 5.16
----------- ----------- ------ ----------- ----------- ------
Allowance for credit losses (74,928) (37,329)
Noninterest-earning assets(3)(4) 1,116,211 621,754
----------- -----------
Total assets $ 7,452,984 $ 4,701,761
=========== ===========
Interest-bearing liabilities:
Savings deposits $ 1,601,471 $ 3,860 0.98% $ 929,639 $ 2,031 0.88%
Checking accounts 1,189,229 2,922 1.00 816,016 1,735 0.86
Certificates of deposit 1,570,152 8,983 2.32 1,147,295 6,519 2.29
Borrowed funds 1,181,532 10,520 3.62 610,134 6,168 4.07
----------- ----------- ------ ----------- ----------- ------
Total interest-bearing
liabilities 5,542,384 26,285 1.92 3,503,084 16,453 1.89
----------- ----------- ------ ----------- ----------- ------
Noninterest-bearing deposits 482,375 234,016
Other noninterest-bearing liabilities 92,199 59,500
----------- -----------
Total liabilities 6,116,958 3,796,600
Stockholders' equity(3) 1,336,026 905,161
----------- -----------
Total liabilities and
stockholders' equity $ 7,452,984 $ 4,701,761
=========== ===========
Net interest income $ 60,230 $ 36,603
=========== ===========
Net interest rate spread 3.51% 3.27%
====== ======
Net earning assets $ 869,317 $ 614,252
=========== ===========
Net interest rate margin 3.76% 3.56%
=========== ===========
Ratio of average interest-earning
assets to average
interest-bearing liabilities 115.68% 117.53%
=========== ===========
- ----------
(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
Total loans and leases outstanding increased $1.74 billion from December 31,
2004 to March 31, 2005. That includes $1.69 billion of loans from the
acquisition of HRB in January 2005, which added $984.2 million of residential
mortgages, $97.2 million of home equity loans, $414.1 million of commercial
mortgages, $104.5 million of commercial business loans and $18.8 million of
consumer loans. Additionally, the HRB portfolio included $39.5 million of
financed insurance premiums and $35.3 million of manufactured housing loans,
which the Company is managing within its specialized lending operations. During
the quarter, the Company's continuing emphasis on commercial lending resulted in
a $38.4 million, or 9% annualized increase in commercial real estate loans, from
December 31, 2004, while commercial business loans increased $12.5 million, or
11% annualized, during the same period. That level of growth is consistent with
the Company's targeted internal commercial loan growth of 10% for 2005. Another
highlight for the quarter was the reversal of the residential mortgage pay-off
trend seen over the past few years during the challenging refinance rate
environment. This positive development is attributed to the Company's decision
to outsource residential loan originations in the Eastern region of New York
State and various other strategic initiatives, which are expected to continue to
benefit this portfolio in future periods.
13
Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Company's loan and lease portfolio in dollar amounts and
in percentages as of the dates indicated (dollars in thousands):
March 31, 2005 December 31, 2004
----------------------------- ---------------------------
Amount Percent Amount Percent
----------- --------- ----------- ---------
Commercial:
Real estate $ 1,496,133 30.0% $ 1,081,709 33.3
Construction 225,260 4.5 187,149 5.8
Business 462,549 9.3 345,520 10.6
----------- --------- ----------- ---------
Total commercial loans 2,183,942 43.8 1,614,378 49.7
Residential real estate 2,114,420 42.4 1,132,471 34.9
Home equity 344,589 6.9 247,190 7.6
Other consumer 186,413 3.8 174,309 5.4
Specialized lending (1) 154,380 3.1 79,358 2.4
----------- --------- ----------- ---------
Total loans and leases 4,983,744 100.0% 3,247,706 100.0
----------- --------- ----------- ---------
Net deferred costs and unearned discounts 12,573 8,971
Allowance for credit losses (72,868) (41,422)
----------- -----------
Total loans and leases, net $ 4,923,449 $ 3,215,255
=========== ===========
- ----------
(1) Includes commercial leases, financed insurance premiums and manufactured
housing loans.
During the first quarter of 2005, credit quality remained strong as annualized
net loan charge-offs were 0.13% of average loans, which is the Company's lowest
level in over three years. Non-performing assets increased modestly to 0.27% of
total assets at March 31, 2005 from 0.25% of total assets at December 31, 2004.
However, excluding the non-performing assets related to the financed insurance
premiums and manufactured housing loan portfolios acquired from HRB, this
percentage was comparable to the 2004 year-end level. The increase in the ratio
of the allowance for credit losses to total loans of 1.27% at December 31, 2004
to 1.46% at March 31, 2005 reflects the impact of the acquisition of HRB,
including the allowance related to the financed insurance premiums and
manufactured housing loan portfolios acquired, that typically carry a higher
loss percentage, as well as the continuing growth in larger balance, higher risk
commercial real estate and business loans, which are still relatively
unseasoned. The ratio of the allowance for credit losses to non-accruing loans
of 363% at March 31, 2005, compares to 344% at December 31, 2004.
While management uses available information to recognize losses on loans, future
credit loss provisions will be necessary based on numerous factors, including
changes in economic conditions. 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 credit losses will be adequate to cover all losses that may in fact be
realized in the future or that additional provisions for credit losses will not
be required.
Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and non-performing assets (dollars in
thousands):
March 31, December 31,
2005 2004
---------- ------------
Non-accruing loans (1):
Commercial real estate ................................. $ 4,513 $ 3,416
Commercial business .................................... 2,005 1,564
Residential real estate ................................ 7,694 4,276
Home equity ............................................ 803 519
Other consumer ......................................... 915 801
Specialized lending .................................... 4,148 1,452
---------- ----------
Total non-accruing loans .......................... 20,078 12,028
Real estate owned ......................................... 1,111 740
---------- ----------
Total non-performing assets ....................... $ 21,189 $ 12,768
========== ==========
Total non-accruing loans as a percentage of total loans ... 0.40% 0.37%
========== ==========
Total non-performing assets as a percentage of total assets 0.27% 0.25%
========== ==========
Allowance for credit losses to total loans ................ 1.46% 1.27%
========== ==========
Allowance for credit losses to non-accruing loans ......... 363% 344%
========== ==========
- ----------
(1) Loans are generally placed on non-accrual status when they become 90 days
or more past due or if they have been identified by the Company as
presenting uncertainty with respect to the collectibility of interest or
principal.
14
Analysis of the Allowance for Credit Losses. The following table sets forth the
analysis of the allowance for credit losses for the periods indicated (dollars
in thousands):
Three months ended March 31,
----------------------------
2005 2004
-------- --------
Balance at beginning of period ................... $ 41,422 $ 25,420
Net charge-offs:
Charge-offs ................................... (2,282) (1,421)
Recoveries .................................... 743 367
-------- --------
Net charge-offs ............................ (1,539) (1,054)
Acquired bank allowance at acquisition date ...... 30,684 14,650
Provision for credit losses ...................... 2,301 1,750
-------- --------
Balance at end of period ......................... $ 72,868 $ 40,766
======== ========
Ratio of annualized net charge-offs to average
loans outstanding during the period ........... 0.13% 0.14%
======== ========
Investing Activities
The Company's securities available for sale increased to $1.74 billion at March
31, 2005 from $1.17 billion at December 31, 2004. This reflects the $591.6
million of investment securities acquired from HRB, which had a weighted average
life of 2.6 years, including $362.8 million of mortgage-backed securities. The
Company's investment portfolio remains positioned to provide a stable source of
earnings while limiting earnings volatility, as the weighted average life of the
Company's securities available for sale at March 31, 2005 was 2.3 years.
Funding Activities
Deposits. The increase in deposits from December 31, 2004 includes a total of
$1.78 billion acquired from HRB, including $602.6 million of savings accounts,
$371.2 million of interest bearing checking accounts, $570.2 million of
certificates of deposit and $234.9 million of noninterest bearing deposits.
During the first quarter, the Company continued to focus on deepening customer
relationships and executing its customer centric strategic initiatives. As a
result, organic growth of $59.1 million from December 31, 2004 was realized,
primarily in relationship money market and relationship certificates of deposit
accounts, as well as municipal deposits. The certificate accounts brought with
them new checking relationships, which the Company anticipates will drive core
deposit growth as those accounts mature. Going forward, deposit growth will also
benefit from the Company's de novo branch expansion strategy which calls for the
opening of up to eight new branches in 2005. During the first quarter, leases
were signed for seven of those locations. 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 in managing
net interest margin. A nominal outflow of HRB retail deposits was experienced
during the quarter, which amounted to only 1% of the acquired balance, due
primarily to the Company's decision to adjust interest rates and fees on certain
accounts to be more in line with the Company's pricing policies.
Set forth below is selected information depicting the composition of the
Company's deposits in dollar amounts and in percentages as of the dates
indicated (dollars in thousands):
March 31, 2005 December 31, 2004
-------------------------- --------------------------
Amount Percent Amount Percent
---------- ---------- ---------- ----------
Core Deposits:
Savings ..................... $1,705,258 33.0% $1,086,769 32.6%
Interest-bearing checking ... 1,241,760 24.0 912,598 27.3
Noninterest-bearing ......... 524,219 10.1 291,491 8.7
---------- ---------- ---------- ----------
Total core deposits ...... 3,471,237 67.1 2,290,858 68.6
Certificates ................... 1,704,498 32.9 1,046,824 31.4
---------- ---------- ---------- ----------
Total deposits ........... $5,175,735 100.0% $3,337,682 100.0%
========== ========== ========== ==========
Borrowings. Borrowed funds totaled $1.24 billion at March 31, 2005 compared to
$750.7 million at December 31, 2004. Excluding the $371.6 million assumed in the
HRB acquisition, the additional $113.6 million of borrowings were used to fund
commercial loan growth and the cash portion of the HRB acquisition.
15
Equity Activities
Stockholders' equity increased to $1.39 billion at March 31, 2005 compared to
$928.2 million at December 31, 2004. The HRB acquisition included the issuance
of 35.7 million shares of common stock with an aggregate value of $484.5
million. During the first quarter of 2005, common stock dividends declared of
$0.09 per share totaled $10.3 million, which represents a 29% increase over the
prior year first quarter and equated to a 47% payout ratio.
The Company repurchased 1.8 million of its shares during the first three months
of 2005 at an average cost of $13.48 per share. As of March 31, 2005, the
Company has repurchased 2.4 million of the 4.2 million buy-back program
announced in the third quarter of 2004. The extent to which shares are
repurchased in the future will depend on a number of factors including market
trends and prices, economic conditions, and alternative uses for capital.
However, the Company anticipates repurchasing the remaining 1.8 million shares
under the current authorization by the end of the second quarter of 2005.
Results of Operations for the Three Months Ended March 31, 2005 and March 31,
2004
Net Interest Income
Net interest margin improved to 3.76% during the first quarter of 2005, compared
to 3.56% for the same period of 2004. This improvement reflects the higher
yielding net earning assets acquired from HRB, as well as the growth of the
commercial real estate and business loan portfolios and increases in
non-interest bearing deposits. The Company expects its net interest margin to
gradually tighten for the remainder of 2005 as the flattening yield curve and
increasingly competitive deposit pricing impact the pricing on interest bearing
assets and liabilities. The Company anticipates that its full year net interest
rate margin will be approximately 3.70%.
In addition to the impact of a $2.3 billion increase in average interest earning
assets, due primarily to the acquisition of HRB, the Company's interest income
benefited from a 27 basis point improvement in the yield earned on those assets
as a result of the higher yields on assets acquired from HRB and the recent rise
in short-term rates which caused the yield on the Company's variable-rate assets
and short-term investment securities portfolio to increase.
The increase in interest expense during the 2005 first quarter resulted from a
$2.0 billion increase in average interest bearing liabilities, due primarily to
the deposits and borrowings assumed in the HRB acquisition. The continuing
pay-off of higher rate borrowings contributed to the yield on borrowed funds
declining from 4.07% in 2004 compared to 3.62% in the 2005 period. However, the
benefit of that decrease on the average rate paid on interest-bearing
liabilities was mitigated by the recent rise in short-term rates and competitive
deposit pricing.
Provision for Credit Losses
During the quarter, the Company set aside a $2.3 million provision for credit
losses. This provision 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 first quarter of 2005, the Company earned $18.4 million of noninterest
income compared to $11.9 million for the same period of 2004. This increase
reflects the benefit of the HRB transaction, which added approximately $4.9
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 as well as the addition of three new branches, an insurance agency and
a leasing Company since the 2004 first quarter. Noninterest income also
continues to benefit from higher banking services income, as consumers become
more comfortable with debit card usage and conducting banking activities
electronically.
16
Noninterest Expense
Noninterest expense increased $15.3 million over the 2004 first quarter due
primarily to the operating costs associated with the 44 former HRB branches, as
well as three new branch locations, an insurance agency and a leasing Company
added since the 2004 first quarter. Additionally, the 2005 quarter includes $2.3
million of merger related expenses, compared to $1.1 million for the 2004 first
quarter, as well as costs related to the implementation of the Company's
strategic planning initiative and commercial lending and financial services
business growth. Even with these increases, the Company's efficiency ratio of
56% for the first quarter of 2005 improved when compared to the 59% for the
prior year period. Excluding merger related expenses, the efficiency ratio was
53% for the 2005 period.
Income Taxes
The effective tax rate of 35.1% for the current quarter increased from the first
quarter of 2004 rate of 34.3%, as the HRB assets acquired generated less tax
advantaged income than the Company's existing assets. The above effective tax
rates include the benefit of excluding 60% of the dividends paid to First
Niagara from its real estate investment trust subsidiary for New York State
income tax purposes. The legislation to eliminate this benefit in the proposed
2005 New York State budget was not enacted.
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. Additionally, the Company sells longer-term 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 level of
interest rates, economic environment and local competitive conditions.
The Company's primary investing activities are the origination of loans and the
purchase of investment securities. During the first three months of 2005, loan
originations totaled $371.5 million compared to $217.9 million for the same
period of 2004, while purchases of investment securities totaled $125.8 million
during the 2005 period compared to $257.1 million for the 2004 period. The
increase in loan originations is a result of increased lending activity due to
the HRB acquisition and continuing growth in the commercial portfolio. The
investment security purchases in 2004 primarily relate to the investment of the
remainder of the Company's second-step stock offering proceeds.
During the first quarter of 2005, cash flows provided by securities available
for sale amounted to $129.5 million compared to $139.5 million for the same
period in 2004. Deposit growth and borrowings, excluding those acquired from
HRB, provided $174.2 million of additional funding for the three months ended
March 31, 2005. The Company has a total of $760.5 million available under
existing lines of credit with the Federal Home Loan Bank, Federal Reserve Bank
and a commercial bank that may be used to fund lending activities, liquidity
needs and/or to adjust and manage the asset and liability position of the
Company.
In the ordinary course of business, the Company extends commitments to originate
residential, commercial and other loans. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since the Company does not expect all of the commitments to be funded, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis.
Collateral may be obtained based upon management's assessment of the customers'
creditworthiness. Commitments to extend credit may be written on a fixed rate
basis exposing the Company to interest rate risk given the possibility that
market rates may change between the commitment date and the actual extension of
credit. As of March 31, 2005, the Company had outstanding commitments to
originate residential real estate, commercial real estate and business, and
other consumer loans of approximately $273.7 million, which generally have an
expiration period of less than 120 days. Commitments to sell residential
mortgages amounted to $6.8 million at the end of the first quarter.
The Company extends credit to consumer and commercial customers, up to a
specified amount, through lines of credit. The borrower is able to draw on these
lines as needed, thus the funding requirements are generally more difficult to
predict. Unused commercial lines of credit amounted to $389.1 million at March
31, 2005 and generally have an expiration period of less than one year. Home
equity and other consumer lines of credit totaled $167.9 million and have an
expiration period of up to ten years. In addition to the above, the Company
issues standby letters of credit to third parties that guarantee payments on
behalf of commercial customers in the event the customer fails to perform under
the terms of the contract between the customer and the third-party. Standby
letters of credit amounted to $60.8 million at March 31, 2005 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, 2005, the total of cash, interest-bearing
demand accounts, federal funds sold and other money market investments was
$107.8 million.
At March 31, 2005, First Niagara exceeded all regulatory capital requirements,
as detailed in the following table (dollars in thousands):
As of March 31, 2005
-------------------------------------------------------------------------------------
To be well capitalized
Minimum under prompt corrective
Actual capital adequacy action provisions
---------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------- ----------- ------- ----------- -------
Tangible capital $ 604,935 8.44% $ 107,525 1.50% $ N/A N/A%
Tier 1 (core) capital 604,935 8.44 286,732 4.00 358,415 5.00
Tier 1 risk based capital 604,935 12.52 N/A N/A 289,823 6.00
Total risk based capital 665,315 13.77 386,430 8.00 483,038 10.00
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk occurs when assets and liabilities reprice at different times
as interest rates change. The Company monitors this interest rate sensitivity
through the use of a net interest income model, which estimates changes in net
interest income over a range of interest rate scenarios.
The Asset and Liability Committee, which is comprised of members of senior
management, monitors the Company's interest rate sensitivity. Management takes
actions to mitigate exposure to interest rate risk through the use of on- or
off-balance sheet financial instruments including, but not limited to, changes
in the pricing of loan and deposit products, modifying the composition of
interest-earning assets and interest-bearing liabilities, and the use of
interest rate derivatives. As of March 31, 2005, the Company's off-balance sheet
financial instruments were comprised only 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 March 31, 2005 sets forth the estimated impact on
the Company's net interest income for the next twelve months resulting from
potential changes in the interest rates. 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. The HRB acquisition did not materially impact
the Company' interest rate risk exposure. Given the very limited projected
impact of interest rate changes on net interest income, as shown below,
management believes that the Company remains interest rate "neutral" at March
31, 2005 (dollars in thousands):
Calculated increase (decrease) at
March 31, 2005
Changes in -------------------------------------------
interest rates Net interest income % Change
----------------- ------------------- ---------------
+200 basis points $ (799) (0.32)%
+100 basis points (587) (0.23)
-100 basis points (832) (0.33)
-200 basis points (2,047) (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 the end of the period covered by this quarterly report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this quarterly
report, the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the Company's
internal control over financial reporting during the most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or its
subsidiary are a party other than ordinary routine litigation incidental to
their respective businesses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
a) Not applicable.
b) Not applicable.
c) The following table discloses information regarding the purchases of FNFG
stock made by the Company during the first quarter of 2005:
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
Month purchased share paid plans (1) under the plans
- ------------------ ---------------- ----------------- -------------------- ---------------
January 290,000 13.52 2,968,300 3,338,861
February 685,000 13.53 3,653,300 2,653,861
March 845,000 13.43 4,498,300 1,808,861
----------------
First quarter 2005 1,820,000 13.48
================ =================
(1) In July 2003 the Company announced a program to repurchase up to 2,107,161
shares of its outstanding common stock in order to fund the Company's
vested stock options at that time. This program was completed in the
fourth quarter of 2004 at an average cost of $13.44 per share. On August
31, 2004, the Company announced an additional 4,200,000 share stock
repurchase program to supplement that authorization. This program does not
have an expiration date. As of March 31, 2005, the average cost of the
2,391,139 shares repurchased under the current program was $13.68 per
share. 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.
In addition to the above purchases, during the first quarter of 2005, the
Company repurchased 1,480 shares from executives of the Company at an
average cost of $13.31 per share to satisfy minimum 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
19
Item 5. Other Information
(a) Not applicable.
(b) Not applicable.
Item 6. Exhibits
The following exhibits are filed herewith:
Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.1 Summary of Quarterly Financial Data
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST NIAGARA FINANCIAL GROUP, INC.
Date: May 6, 2005 By: /s/ Paul J. Kolkmeyer
-------------------------------------
Paul J. Kolkmeyer
President and Chief Executive Officer
Date: May 6, 2005 By: /s/ John R. Koelmel
-------------------------------------
John R. Koelmel
Executive Vice President, Chief
Financial Officer
21