UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 000-23975
FIRST NIAGARA FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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42-1556195 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
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726 Exchange Street, Suite 618, Buffalo, NY
(Address of Principal Executive Offices)
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14210
(Zip Code) |
(716) 819-5500
(Registrants telephone number)
Securities Registered Pursuant to Section 12(b) of the Act:
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Common Stock, par value $0.01 per share |
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The NASDAQ Stock Market LLC |
(Title of Class)
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(Name of Exchange on which Registered) |
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
YES o NO þ
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 twelve months (or
for such shorter period that the Registrant was required to file such reports) and (2) has been
subject to such requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
YES o NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO þ
As of February 22, 2010, there were issued and outstanding 188,515,378 shares of the Registrants
Common Stock. The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2009, as
reported by The NASDAQ Stock Market LLC, was approximately $1,690,881,892.
DOCUMENTS INCORPORATED
BY REFERENCE
The following documents, in whole or in part, are specifically incorporated by reference in the
indicated part of our Proxy Statement:
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Document |
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Part |
Proxy Statement for
the 2010 Annual
Meeting of
Stockholders
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Part III, Item 10
Directors, Executive Officers and Corporate Governance |
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Part III, Item 11
Executive Compensation |
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Part III, Item 12
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters |
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Part III, Item 13
Certain Relationships and Related Transactions, and Director Independence |
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Part III, Item 14
Principal Accountant Fees and Services |
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Unless the context otherwise requires, the terms we, us, and our refer to First
Niagara Financial Group, Inc. and its subsidiary on a consolidated basis.
PART I
ITEM 1. Business
GENERAL
First Niagara Financial Group, Inc.
First Niagara Financial Group, Inc., (the Company), a Delaware corporation whose principal
executive offices are located at 726 Exchange Street, Suite 618, Buffalo, New York, provides a wide
range of retail and commercial banking as well as other financial services through our
wholly-owned, federally chartered savings bank subsidiary, First Niagara Bank (the Bank). In
September 2009, we acquired 57 branch locations in Western Pennsylvania from National City Bank and
our proposed merger with Harleysville National Corporation, which is expected to close early in the
second quarter of 2010, will add 83 branch locations in Southeastern Pennsylvania. In November
2009, the Company applied to the Board of Governors of the Federal Reserve System (Federal
Reserve) to convert from a savings and loan holding company to a bank holding company, which will
allow us to acquire both savings and loan associations and commercial banks, as well as provide
more flexibility in the execution and completion of acquisitions.
We are positioned as one of the leading community banks in Upstate New York and Western
Pennsylvania, providing our retail consumer and business customers with banking services including
residential and commercial real estate loans, commercial business loans and leases, consumer loans,
wealth management products, as well as retail and commercial deposit products. Additionally, we
offer insurance and employee benefits consulting services through a wholly-owned subsidiary of the
Bank. At December 31, 2009, we had $14.6 billion of assets and stockholders equity of $2.4
billion.
We were organized in April 1998 in connection with the conversion of First Niagara Bank from a New
York State chartered mutual savings bank to a New York State chartered stock savings bank and a
reorganization to a two-tiered mutual holding company. In November 2002, we converted First
Niagara Bank and the mutual holding company to a federal charter subject to Office of Thrift
Supervision (OTS) regulation. In January 2003, we converted the mutual holding company to stock
form, with our shares of common stock owned by the mutual holding company being sold to depositors
and other investors.
Since 1998, we deployed the proceeds from several stock offerings through multiple whole-bank and
nonbank financial services company acquisitions, as well as the opening of several de novo branches
in target markets across Upstate New York. This strategy, coupled with our organic growth
initiatives, which includes an emphasis on expanding our commercial operations and financial
services businesses, has resulted in our successful transition from a traditional thrift to a
commercial bank.
First Niagara Bank
First Niagara Bank was organized in 1870, and is a community-oriented savings bank providing
financial services to individuals, families, and businesses through our branch network located
across Upstate New York and Western Pennsylvania. As of December 31, 2009, the Bank and all of its
subsidiaries had $14.5 billion of assets, $9.7 billion of deposits, $1.9 billion of stockholders
equity, employed almost 3,000 people, and operated through 171 branches and several financial
services subsidiaries. In December 2009, the Bank applied to the Office of the Comptroller of the
Currency (the OCC) to become a national bank, in order to provide us with more flexibility in
serving the diverse financial needs of our growing customer base.
The Banks subsidiaries provide a range of financial services to individuals and small and medium
size companies in our market areas. These subsidiaries include: First Niagara Commercial Bank (the
Commercial Bank), our New York State chartered bank whose primary purpose is to generate
municipal deposits; First Niagara Funding, Inc., our real estate investment trust (REIT) which
primarily originates and holds some of our commercial real estate and business loans; and First
Niagara Risk Management, Inc. (FNRM), our full service insurance agency and employee benefits
consulting firm engaged in the sale of insurance products including commercial and personal
insurance, surety bonds, life, disability and long-term care coverage, as well as other risk
management advisory services. FNRMs risk management consulting business includes alternative risk
and self-insurance, claims investigation and adjusting services, and third party administration of
self insured workers compensation plans. FNRMs employee benefits consulting business includes a
retirement plan practice, compliance services, benefit plan administration, as well as a
compensation consulting practice. FNRM also provides industry specific insurance programs related
to long-term care, moving and storage, ice rinks and municipalities.
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OTHER INFORMATION
We
maintain a website at www.fnfg.com. Our annual reports on Form 10-K, proxy statements,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports,
are made available, free of charge, on the Investor Relations page on our website, as soon as
reasonably practicable after we electronically file them or furnish them to the Securities
and Exchange Commission (SEC). You may also obtain copies, without charge, by writing to our
Investor Relations Department, 726 Exchange Street, Suite 618, Buffalo, New York 14210.
We have adopted a Code of Ethics that is applicable to our senior financial officers, including our
Chief Executive Officer, Chief Financial Officer and Corporate Controller, among others. The Code
of Ethics is available on the Investor Relations page of our website along with any amendments to
or waivers from that policy. Additionally, we have adopted a general Code of Ethics that sets
forth standards of ethical business conduct for all of our directors, officers and employees. This
Code of Ethics is also available on our website.
FORWARD LOOKING STATEMENTS
Certain statements we make in this document may be considered forward-looking statements as that
term is defined in Section 27A of the Securities Act of 1933, as amended (the Securities Act),
and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), that
involve substantial risks and uncertainties. You can identify these forward-looking statements by
our use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect, and
other similar expressions. These forward-looking statements include: statements of our goals,
intentions, and expectations; statements regarding our business plans, prospects, growth, and
operating strategies; statements regarding the asset quality of our loan and investment portfolios;
and estimates of our risks and future costs and benefits.
Forward-looking statements are subject to significant risks, assumptions, and uncertainties,
including, among other things, the following important factors that could affect the actual outcome
of future events:
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General economic conditions, either nationally or in our market areas, that are worse than
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Significantly increased competition among depository and other financial institutions; |
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Inflation and changes in the interest rate environment that reduce our margins or fair
value of financial instruments; |
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Changes in laws or government regulations affecting financial institutions, including
changes in regulatory fees and capital requirements; |
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Our ability to enter new markets successfully and capitalize on growth opportunities; |
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Our ability to successfully integrate acquired entities; |
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Changes in consumer spending, borrowing, and savings habits; |
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Changes in accounting policies and practices, as may be adopted by the bank regulatory
agencies, taxing authorities and the Financial Accounting Standards Board; and |
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Changes in our organization, compensation, and benefit plans. |
Because of these and other uncertainties, our actual future results may be materially different
from the results indicated by these forward-looking statements.
MARKET AREAS AND COMPETITION
Our primary lending and deposit gathering areas are generally concentrated in the same counties as
our branches. We face significant competition in both making loans and attracting deposits in our
markets as the Upstate New York and Western Pennsylvania regions have a high density of financial
institutions, some of which are significantly larger than we are and have greater financial
resources. Our competition for loans comes principally from commercial banks, savings banks,
savings and loan associations, mortgage banking companies, credit unions, insurance companies, and
other financial services companies. Our most direct competition for deposits has historically come
from commercial banks, savings banks and credit unions. We face additional competition for
deposits from the mutual fund industry, internet banks, securities and brokerage firms, and
insurance companies.
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We offer a variety of financial services to meet the needs of the communities that we serve,
functioning under a philosophy that includes a commitment to customer service and the community.
As of December 31, 2009 we operated 171 bank branches, including 114 in Upstate New York primarily
located near Buffalo, Rochester, Syracuse and Albany, which have a combined total population of
nearly four million and are the top four Metropolitan Statistical Areas in New York State outside
of New York City. We also operated 57 branches in Western Pennsylvania primarily located near
Pittsburgh, Erie, and Warren, which have a combined total population of approximately three
million.
LENDING ACTIVITIES
Our principal lending activity has been the origination of business and commercial real estate
loans, leases, and residential mortgages to customers located within our primary market areas.
Consistent with our long-term customer relationship focus, we generally retain the servicing rights
on residential mortgage loans that we sell which results in monthly service fee income to us. We
also originate and retain in our lending portfolio various types of home equity and consumer loan
products.
Commercial Real Estate and Multi-family Lending
We originate commercial real estate loans secured predominantly by first liens on apartment houses,
office buildings, shopping centers, and industrial and warehouse properties. Our current policy
with regard to these loans is to minimize our risk by emphasizing geographic distribution within
our market areas and diversification of these property types.
As part of our ongoing strategic initiative to manage interest rate risk, commercial and
multi-family real estate loans that we originate are generally limited to three, five, or seven
year adjustable-rate products which we initially price at prevailing market interest rates. These
interest rates, subject to interest rate floors, subsequently reset annually after completion of
the initial adjustment period at new market rates that generally range at a spread over the current
applicable market index such as Federal Home Loan Bank (FHLB) Advance Rates. The maximum term
that we offer for commercial real estate loans is generally not more than 10 years, with a payment
schedule based on not more than a 30-year amortization schedule for multi-family loans, and 20
years for commercial real estate loans.
As part of our product mix, we also offer the availability of commercial real estate and
multi-family construction loans to our relationship borrowers. We make most of our construction
loans as construction/permanent loans, which provide for disbursement of loan funds during the
construction period and conversion to a permanent loan when the construction is complete and either
tenant lease-up provisions or prescribed debt service coverage ratios are met. We make the
construction phase of the loan on a short-term basis, usually not exceeding two years, with
floating interest rates that are indexed to either a London Inter-Bank Offered Rate (LIBOR) or
prime rate. The construction loan application process includes the same criteria which are
required for our permanent commercial mortgage loans, as well as a submission of completed plans,
specifications, and cost estimates related to the proposed construction. We use these items as an
additional basis to determine the appraised value of the subject property. The appraisal is an
important component because construction loans involve additional risks related to advancing loan
funds upon the security of the project under construction, which is of uncertain value prior to the
completion of construction and subsequent pro-forma lease-up.
We continue to emphasize commercial real estate and multi-family lending because of the higher
interest rates associated with this asset class. Commercial real estate and multi-family loans,
however, carry significantly more risk as compared to residential mortgage lending, because they
typically involve larger loan balances concentrated with a single borrower or groups of related
borrowers. Additionally, the payment experience on loans that are secured by income producing
properties is typically dependent on the successful operation of the related real estate project
and thus, may subject us to adverse conditions in the real estate market or to the general economy.
To help manage this risk, we have put in place concentration limits based upon property types and
maximum amounts that we lend to an individual or group of borrowers. In addition, our policy for
commercial lending generally requires a maximum loan-to-value (LTV) ratio of 75% on purchases of
existing commercial real estate and 80% on purchases of existing multi-family real estate. For
construction loans, the maximum LTV ratio varies depending on the project, however it generally
does not exceed the lesser of 75% to 80% LTV based on property type or 90% of cost.
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Commercial Business Loans
Our commercial business loans portfolio includes business term loans and lines of credit issued to
small and medium size companies in our market areas, some of which are secured in part by
additional owner occupied real estate. Additionally, we make secured and unsecured commercial
loans and extend lines of credit for the purpose of financing equipment purchases, inventory,
business expansion, working capital, and other general business purposes. The terms of these loans
generally range from less than one year to seven years with either a fixed interest rate or a
variable interest rate indexed to a LIBOR or our prime rate. Our lines of credit generally expire
after one year and typically carry a variable interest rate indexed to either LIBOR or our prime
rate. As part of the Banks strategic initiatives to fully service clients located within our
retail branch geographic footprint, the Bank also purchases loan participations in various Shared
National Credit (SNC) syndications. Our balance exposure to SNCs amounted to $151.8 million and
$146.4 million at December 31, 2009 and 2008, respectively. The recent acquisition of the National
City (NatCity) branch network in Western Pennsylvania, together with the accompanying $657.3
million commercial loan portfolio, emphasizes the Banks ongoing commitment to the development of
commercial business relationships as the Bank looks to allocate a greater portion of our available
funds and personnel resources to both our commercial middle market and small business lending
markets. To facilitate expansion in these areas, we offer additional commercial business products
and services such as letters of credit, cash management, remote deposit capture, merchant services,
wire transfer capabilities, lock-box, business credit and debit cards, and online banking.
We also make commercial business and real estate loans which are 50% to 85% government guaranteed
through the Small Business Administration. Terms of these loans range from one year to twenty
years and generally carry a variable rate of interest indexed to the prime rate. This product
allows us to better meet the needs of our small business customers while protecting us from undue
credit risk.
Commercial business lending is generally considered to involve a higher degree of credit risk than
secured real estate lending. The repayment of unsecured commercial business loans are wholly
dependent upon the success of the borrowers business, while secured commercial business loans may
be secured by collateral that we cannot readily market.
Specialized Lending
Our specialized lending portfolio consists of commercial leases and loans to finance insurance
premiums. The bank has traditionally offered installment direct financing small ticket equipment
leases, generally in amounts between $15 thousand and $125 thousand. Terms of these leases are up
to 60 months, generally guaranteed by the principals of the lessee, collateralized by the leased
equipment and typically bear interest rates that are higher than traditional commercial lending.
During 2009, we expanded and redefined our equipment financing product offering by developing the
capability to provide both middle market and municipal leases to both existing and new customers in
amounts up to $5.0 million.
Both the traditional small ticket leasing and financed insurance premium product lines have been
impacted by the current economic environment. This is evidenced by the ongoing softness in the
insurance markets that are driving down the dollar amount of insurance premiums being financed, and
in the small business leasing market, which has been the traditional target for our equipment
leasing activities.
Residential Real Estate Lending
We originate mortgage loans to enable our customers to finance residential real estate, both
owner occupied and non-owner occupied, in our primary market areas. We offer traditional
fixed-rate and adjustable-rate mortgage (ARM) products, with monthly and bi-weekly payment
options, that have maturities generally up to 30 years, and maximum loan amounts generally up to
$750 thousand. Our bi-weekly mortgages feature an accelerated repayment schedule and are linked to
a deposit account to facilitate payments.
We generally sell newly originated conventional 15 to 30 year fixed-rate loans as well as FHA and
VA loans in the secondary market to government sponsored enterprises such as Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) or to wholesale
lenders. We intend to continue to hold our newly originated ARMs in our portfolio. Our LTV
requirements for residential real estate loans vary depending on the loan program as well as the
secondary market investor. Loans with LTVs in excess of 85% are required to carry private mortgage
insurance. We generally originate loans that meet accepted secondary market underwriting
standards.
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We offer monthly ARM products secured by residential properties. These ARMs have terms generally
up to 30 years, with rates that generally adjust annually after three, five, or seven years. After
that initial fixed rate period of time, the interest rate on these loans is reset based upon a
spread or margin above a specified index (e.g. a U.S. Treasury Constant Maturity Index). The
appropriate index utilized at each interest rate change date depends on the initial adjustment
period of the loan. Our ARM loans are generally subject to limitations on interest rate increases
and decreases of up to 2% per adjustment period and a total adjustment of up to 6% over the life of
the loan. These loans require that any payment adjustment resulting from a change in the interest
rate be sufficient to result in full amortization of the loan by the end of the term, and thus, do
not permit any of the increased payment to be added to the principal amount of the loan, commonly
referred to as negative amortization.
ARMs generally pose higher credit risks relative to fixed-rate loans primarily because, as interest
rates rise, the payment amounts due from the borrowers rise, thereby increasing the potential for
default. In order to manage this risk, we do not originate adjustable-rate loans with less than an
initial fixed term of three years. Adjustable rate loans with less than a five year fixed term are
subject to more stringent underwriting standards. Additionally, we do not offer ARM loans with
initial teaser rates.
Home Equity Lending
We offer fixed-rate, fixed-term, monthly and bi-weekly home equity loans, and prime-based home
equity lines of credit (HELOCs) in our market areas. We offer both fixed-rate and floating-rate
home equity products in amounts up to 85% of the appraised value of the property (including the
first mortgage) with a maximum loan amount generally up to $500 thousand. We offer monthly
fixed-rate home equity loans with repayment terms generally up to 15 years and HELOCs with terms up
to 30 years. We also offer an Ultraflex home equity line of credit which allows borrowers the
option of a five year interest only draw period or a 10 year draw period with principal and
interest payments. Additionally, with this product we offer a card option to access available
funds and an option that allows our customers to convert their variable rate line to a fixed rate
loan up to three times over the term of the line. The minimum line of credit is $10 thousand and
the maximum is $500 thousand (limited to $100 thousand if the loan to value exceeds 80%).
Consumer Loans
We offer a variety of fixed-rate installment and variable rate line-of-credit consumer loans,
including indirect mobile home loans as well as personal
secured and unsecured loans. Consumer loans generally entail greater risk of loss than residential
mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets
that tend to depreciate rapidly, such as automobiles and mobile homes. Mobile home loans have
shorter terms to maturity and higher yields than traditional single-family residential mortgage
loans. We generally offer mobile home loans with fixed-rate, fully amortizing terms of 10 to 20
years. We originate mobile home loans at higher interest rates than residential mortgage loans
because mobile homes typically decline in value following their initial sale, potentially resulting
in the value of the collateral being less than the loan balance. At the time of origination, we
require appraisals on all mobile homes to substantiate their current market values.
We contract with an independent third party to generate all mobile home loan applications for us.
However, we underwrite all loans prior to funding them. As part of the negotiated servicing
contract, the third party originator contacts borrowers who become delinquent in their payments and
when necessary, will oversee the repossession and sale of mobile homes on our behalf. For these
services we pay the originator a fee at loan funding, of which generally 50% is deposited into a
noninterest bearing escrow account that we control in order to compensate us for any early
prepayments and future losses which we may incur on these loans.
We also originate personal secured and unsecured fixed rate installment loans and variable rate
credit cards and lines of credit. Terms of these loans range from 6 months to 72 months and
generally do not exceed $50 thousand. Secured loans are collateralized by vehicles, savings
accounts, or certificates of deposit. We only approve unsecured loans for our more creditworthy
customers.
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Classification of Assets
We review loans on a regular basis and place them on nonaccrual status when, in our opinion, the
collection of principal or interest is less than probable or when contractual payments are 90 days
or more past due. At that time, we reverse interest accrued and unpaid from interest income.
Consistent with regulatory guidelines, we provide for the classification of loans which are
considered to be of lesser quality as substandard, doubtful, or loss. We consider a loan
substandard if it is inadequately protected by the current net worth and paying capacity of the
borrower or of the collateral pledged, if any. Substandard loans include those loans where there
is the distinct possibility that we will sustain some loss of principal if the deficiencies are not
corrected. Loans that we classify as doubtful have all of the weaknesses inherent in those loans
that are classified as substandard but also have the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable. Loans that we classify as loss are
those considered uncollectible and of such little value that their continuance as assets without
the establishment of a substantial specific loss reserve is not warranted. Loans that do not
expose us to risk sufficient to warrant classification in one of the aforementioned categories, but
which possess some weaknesses, are designated special mention.
When we classify problem loans as either
substandard or doubtful, we evaluate them for impairment. When we classify problem loans as a loss,
we charge-off such amount against the allowance for credit losses. Our determination as to the classification
of our loans and the amount of our allowance is subject to ongoing review by regulatory agencies, which can require
us to establish additional general or specific loss allowances. We regularly review our loan portfolio to determine
whether any loans require classification in accordance with our policy or applicable regulations.
Allowance for Credit Losses
We establish our allowance for credit losses through a provision for credit losses based on our
evaluation of the credit quality of our loan portfolio. This evaluation, which includes a review
of all loans on which full collectibility may not be reasonably assured, considers among other
matters, the estimated fair value of the underlying collateral, economic conditions, historical
loan loss experience, and other factors that warrant recognition in determining our credit loss
allowance. We continue to monitor and modify the level of our allowance for credit losses in order
to include all losses at each reporting date that are both probable and reasonable to estimate. In
addition, various regulatory agencies, as an integral part of their examination process,
periodically review our allowance for credit losses.
Our evaluation of our allowance for credit losses is based on a continuing review of our loan
portfolio. The methodology that we use for determining the amount of the allowance for credit
losses consists of several elements. We formally review all individual commercial real estate and
business credits and/or total loan concentrations to one borrower greater than $500 thousand and
less than $1 million no less frequently than every 36 months and those over $1 million no less
frequently than every 18 months. We review nonaccruing, impaired, and delinquent commercial loans
individually every month and we consider the value of any underlying collateral or future
cash flows when determining estimates of losses on those loans and the need, if any, for a specific
allowance. All loans over $300 thousand classified as special mention and all loans over $200
thousand classified as substandard or doubtful are reviewed quarterly in accordance with our
Allowance for Loan and Lease Loss Policy. In addition, a substantial portion of our commercial
business loan portfolio is reviewed and rated by an external service provider during the year as
well as our internal loan review unit. For all nonclassified loans, we estimate losses and
allocate allowance by common categories (commercial real estate, multi-family, residential, home
equity, consumer, etc.) based primarily on our historical loss experience, industry trends, trends
in the local real estate market and the current business and economic environment in our market
areas.
Prior to 2009, we also maintained
an unallocated portion of our allowance for credit losses related to a general assessment of
potential variability of applicable qualitative considerations subject to a higher degree of uncertainty.
During the first quarter of 2009, we refined our estimation methodology related to the allocation of the allowance.
The result was the allocation of the previous unallocated portion of the allowance for credit losses to
the specific loan portfolios related to a general assessment of each respective portfolio's potential
variability of applicable qualitative considerations subject to a higher degree of uncertainty. Management
does not consider this refinement to the methodology to be significant.
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INVESTMENT ACTIVITIES
Our investment policy provides that investment decisions will be made based on the ability of an
investment to generate earnings consistent with factors of quality, maturity, marketability, and
risk diversification.
We limit our investments to U.S. Government and agency securities, municipal bonds, corporate debt
obligations, and corporate equity securities. In addition, our policy permits investments in
mortgage-backed securities, including collateralized mortgage obligations (CMOs) issued and
guaranteed by FNMA, FHLMC, Government National Mortgage Association (GNMA), or non-agency issued
and backed by residential conventional whole loans. Also permitted are investments in
asset-backed securities (ABS), supported by auto loans, credit card receivables, home equity
loans, student loans, and home improvement loans. Our investment strategy generally utilizes a
risk management approach of diversified investing to optimize investment yields while managing our
overall interest rate risk position. To accomplish these objectives, we focus on investments in
mortgage related securities, including CMOs, while we utilize U.S. Government and agency and other
non-amortizing securities for call protection and liquidity purposes. We attempt to maintain a
high degree of liquidity in our investment securities and generally do not invest in debt
securities with expected average lives at purchase in excess of five years. At December 31, 2009,
$4.4 billion of securities within our investment portfolio were designated as available for sale
and $1.1 billion were designated as held to maturity. These amounts included securities issued by
FHLMC, FNMA and GNMA with a fair value of $1.1 billion, $1.2 billion, and $2.5 billion,
respectively. We had no other investments in securities of a single issuer that exceeded 10% of
our stockholders equity.
WEALTH MANAGEMENT
We offer wealth management services to manage client funds utilizing various third party investment
vehicles including stocks, bonds, mutual funds, annuities, and other investment products, including
individual retirement accounts, education savings plans, and retirement plans for both our retail
and commercial clients. We offer mutual funds and annuities as well as other investment products
through our branch network using financial consultants and appropriately licensed employees.
Revenue from mutual funds and annuities consists primarily of commissions paid by our clients,
investment managers, and third party product providers. New business activity and the
corresponding revenue that we earn are particularly affected by fluctuations in stock and bond
market prices, the development of new products, markets and services, the relative attractiveness
of investment products offered under current market conditions, and changes in the investment
patterns of our clients.
SOURCES OF FUNDS
Deposits and borrowed funds, primarily FHLB advances and repurchase agreements, are the primary
sources of funds we use in lending, investing, and other general purposes. In addition, we receive
repayments on and proceeds from our sales of loans and securities, and cash flows from our
operations. We have available lines of credit with the FHLB of New York, Federal Reserve Bank
(FRB), and two commercial banks, which can provide us liquidity if the above funding sources are
not sufficient to meet our short-term liquidity needs.
Deposits
We offer a variety of deposit products with a range of interest rates and terms. Our retail
deposit accounts consist of savings, negotiable order of withdrawal (NOW), checking, money
market, and certificate of deposit accounts. Our commercial account offerings include business
savings and checking, money market, cash management accounts, and a totally free
checking product. We also accept deposits on a limited basis through the Certificate of Deposit
Account Registry Service (CDARS). Additionally, we accept municipal deposits through our
Commercial Bank.
Borrowed Funds
We utilize borrowings to manage the overall maturity of our liabilities and to leverage our capital
for the purpose of improving our return on equity. These borrowings primarily consist of advances
and repurchase agreements with the FHLB, nationally recognized securities brokerage firms, and with
our commercial and municipal customers. In January 2010, Moodys Investors Service and Standard &
Poors Ratings Services announced that they assigned first time long-term issuer credit ratings of
Baa1 and BBB-, respectively, to us, complementing our existing BBB long-term issuer credit rating
from Fitch Ratings that was last affirmed in July 2009. These ratings will increase our ability to
efficiently access the capital markets to meet our liquidity needs.
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FINANCIAL SERVICES
To complement our traditional core banking business, we offer a wide range of insurance products
and consulting services to help both our retail and commercial customers achieve their financial
goals. These products and services are delivered through our financial services business, which
includes risk management (insurance) and employee benefits and compensation consulting services.
Risk Management
Through FNRM, we offer a wide range of commercial and personal insurance products and services
including our claims investigation and adjusting services, third party administration of self
insured workers compensation plans, alternative risk management services, as well as self insurance
consulting services. FNRM also provides industry specific insurance programs related to long-term
care, moving and storage, ice rinks, and municipalities.
The revenue attributable to FNRM consists primarily of fees paid by our clients as well as
commissions, fees, and contingent profit sharing paid by insurance carriers. Commission rates that
we earn vary based on the type of insurance product, the carrier being represented, and the
services that our agency provides. We are currently servicing approximately $410.7 million in
annual insurance premium volume.
Employee Benefits Consulting
We also offer full service employee benefits plan and compensation consulting through FNRM. Our
primary practice areas include health and welfare plan consulting, defined contribution plan
consulting and administration, defined benefit plan consulting and actuarial valuations,
compensation consulting and salary administration, and worksite benefits enrollment and on-going
administration. We are paid on a flat fee basis on certain of our services in accordance with
service agreements with our clients. Our fees vary based on the number of participants in the
plans, the amount of assets that we service, and the amount of hours required to perform the
services. Revenue from certain other services is received based on the fair value of assets being
managed and is, therefore, subject to changes in market conditions.
SEGMENT INFORMATION
Information about our business segments is included in Note 20 of Notes to Consolidated Financial
Statements filed herewith in Part II, Item 8, Financial Statements and Supplementary Data. We
have identified two business segments, banking and financial services. Our financial services
activities consist of insurance and employee benefits consulting services. All of our other
activities are considered banking.
SUPERVISION AND REGULATION
We are currently a savings and loan holding company examined and supervised by the OTS, while our
Bank is currently a federal savings association examined and supervised by the OTS and, to a lesser
extent, the Federal Deposit Insurance Corporation (FDIC). This regulation and supervision
establishes a comprehensive framework of activities that we may engage in and is intended primarily
for the protection of the FDICs deposit insurance fund and depositors. Under this system of
federal regulation, we are periodically examined to ensure that we satisfy applicable standards
with respect to our capital adequacy, assets, management, earnings, liquidity, and sensitivity to
market interest rates. Following completion of an examination, the OTS evaluates our operations
and assigns our Bank a rating (known as a CAMELS rating). Under federal law, we may not disclose
our CAMELS rating to the public. Additionally, our Bank is regulated, to a lesser extent, by the
Board of Governors of the Federal Reserve System, governing reserves that we are required to
maintain against deposits and other operational matters. The OTS examines us and prepares reports
for the consideration of our Board of Directors on any operating deficiencies that they may
identify. Our relationship with our depositors and borrowers are also regulated to a great extent
by both federal and state laws, especially in matters concerning privacy, the ownership of deposit
accounts, and the form and content of loan documents. Any change in these laws or regulations,
whether by the OTS or Congress, could have a material impact on us and our operations.
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In November 2009, the Company applied to the Federal Reserve to convert from a savings and loan
holding company to a bank holding company, which will allow us to acquire both thrifts and
commercial banks, as well as provide more flexibility in the execution and completion of
acquisitions. Upon approval by the Federal Reserve, we will be subject to supervision and
regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the BHC
Act). The Federal Reserve will require regular reports from us and will be authorized to conduct
regular examinations of us. For more information, see Regulation as a Bank Holding Company with
National Bank Subsidiary.
Recent market disruptions have led to numerous proposals in the United States for potentially
significant changes in the regulation of the financial services industry. See Risk
FactorsProposed Legislative and Regulatory Reforms Could, If Enacted or Adopted, Result in Our
Business Becoming Subject to Significant and Extensive Additional Regulations and/or Could
Adversely Affect Our Results of Operations and Financial Condition for a further discussion of
some of these proposals and their potential impact on us.
Federal Regulation of Our Savings Bank
Business Activities
Our Banks lending and investment powers come from the Home Owners Loan Act, as amended, and the
regulations of the OTS. Under these laws and regulations, our Bank may primarily invest in
mortgage loans secured by residential and commercial real estate, commercial business and consumer
loans, certain types of debt securities, and certain other assets. We also may establish
subsidiaries that may engage in activities not otherwise permissible for our Bank, including real
estate investment and securities and insurance brokerage.
In December 2009, our Bank applied to the OCC to become a national bank organized under the
National Bank Act, providing us with more flexibility in serving the diverse financial needs of our
growing customer base. If that application is granted, our Bank would have as its primary
regulator the OCC rather than the OTS. The various laws and regulations administered by the OCC
affect corporate practices such as payments of dividends, incurring debt, and acquisition of
financial institutions and other companies. Supervision and regulation by the OCC also affects
business practices, such as interest on deposits, the charging of interest on loans, types of
business conducted, and location of offices.
Capital Requirements
OTS regulations require our Bank to meet three minimum capital standards: A 1.5% tangible capital
ratio, a 4% leverage (core) ratio, and an 8% total risk-based capital ratio. The OTS prompt
corrective action rules discussed below, in effect, establish a minimum 2% tangible capital
standard.
The risk-based capital rules require our Bank to maintain Tier 1 (core) and total capital (which is
defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of our risk-weighted assets, all of our Banks assets,
including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 200%,
which is assigned by OTS regulation based on the risks they believe are inherent in the type of
asset. Core capital is defined as common stockholders equity (including retained earnings),
certain noncumulative perpetual preferred stock, and related surplus and minority interests in
equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and credit card relationships. The components of supplementary capital currently
include certain cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt, and intermediate preferred stock, the allowance for
credit losses (limited to a maximum of 1.25% of risk-weighted assets), and up to 45% of net
unrealized gains on available for sale equity securities with readily determinable fair market
values. Overall, the amount of supplementary capital included as part of our Banks total capital
cannot exceed 100% of core capital.
At December 31, 2009, our Bank exceeded all minimum regulatory capital requirements. In 2009, to
further strengthen our Banks capital, the Company contributed $353.6 million of the
proceeds from our follow-on stock offerings to the Bank. The current requirements and our actual
capital levels are detailed in Note 14 of Notes to Consolidated Financial Statements filed in
Part II, Item 8, Financial Statements and Supplementary Data.
Prompt Corrective Action Regulations
Under the prompt corrective action regulations, the OTS is required and authorized to take
supervisory actions against undercapitalized savings banks. For this purpose, a bank is placed in
one of the following five categories based on its capital levels:
|
|
Well-capitalized (at least 5% leverage (core) capital,
6% Tier 1 risk-based capital and 10%
total risk-based capital); |
|
|
Adequately capitalized (at least 4% leverage
(core) capital, 4% Tier 1 risk-based capital
and 8% total risk-based capital); |
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|
|
Undercapitalized (less than 4% leverage (core) capital,
4% Tier 1 risk-based capital, or 8%
total risk-based capital); |
|
|
Significantly undercapitalized (less than 3% leverage
(core) capital, 3% Tier 1 risk-based
capital, or 6% total risk-based capital); or |
|
|
Critically undercapitalized (less than 2% tangible capital). |
Generally, the banking regulator is required to appoint a receiver or conservator if a bank is
critically undercapitalized. The regulation also provides that a capital restoration plan must
be filed with the OTS within 45 days of the date on which a bank receives notice that it is
undercapitalized, significantly undercapitalized, or critically undercapitalized. A capital
restoration plan must disclose, among other things, the steps that would be taken to become
adequately capitalized without appreciably increasing the risk to which the bank is exposed. In
addition, each company that controls the savings bank must guarantee that the savings bank will
comply with the plan until the savings bank has been adequately capitalized on average during each
of four consecutive calendar quarters. Further, numerous mandatory supervisory actions become
immediately applicable, including, but not limited to, restrictions on growth, investment
activities, capital distributions, and affiliate transactions. The OTS may also take any one of a
number of discretionary supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At December 31, 2009, our Bank met the criteria for being considered well-capitalized. The
current requirements and the actual levels for our Bank are detailed in Note 14 of Notes to
Consolidated Financial Statements filed herewith in Part II, Item 8, Financial Statements and
Supplementary Data.
Loans-to-One-Borrower
Our Bank generally may not make a loan or extend credit to a single borrower in excess of 15% of
our unimpaired capital and surplus on either a secured or unsecured basis. As of December 31,
2009, our Bank was in compliance with loans-to-one-borrower limitations (15% of unimpaired capital
and surplus) of $164.7 million based upon $1.1 billion of unimpaired capital and surplus. However,
given our desire to diversify credit risk, we have established an internal loans-to-one-borrower
limit of approximately $109.8 million (10% of unimpaired capital and surplus) as of December 31,
2009. Borrower concentration levels in excess of this threshold are reviewed quarterly by the Risk
Committee of the Board of Directors, with a full portfolio review of these borrower concentrations
on an annual basis.
Qualified Thrift Lender Test
Our Bank is also currently subject to a qualified thrift lender (QTL) test. Under the QTL test,
our Bank must maintain at least 65% of its portfolio assets in qualified thrift investments in
at least nine months of the most recent 12 month period. As of December 31, 2009, our Bank had 80%
of its portfolio assets in qualified thrift investments. Portfolio assets generally means total
assets of a savings bank, less the sum of specified liquid assets up to 20% of total assets,
goodwill and other intangible assets, and the value of property used in the conduct of our Banks
business.
Qualified thrift investments include various types of loans that our Bank makes for residential
and housing purposes, investments related to those purposes, including certain mortgage-backed and
related securities, and loans that our Bank makes for personal, family, household, and certain
other purposes up to a limit of 20% of our Banks portfolio assets. Qualified thrift investments
can also include 100% of our Banks small business loans. Our Bank also may satisfy the QTL test
by qualifying as a domestic building and loan association as defined by the Internal Revenue Code
of 1986, as amended.
Capital Distributions
The Company is a legal entity separate and distinct from its bank subsidiaries and other
subsidiaries. Dividends and interest from our subsidiaries are our principal sources of funds to
make capital contributions or loans to our Bank subsidiaries and other subsidiaries, or to pay
dividends on our own equity securities.
OTS regulations govern capital distributions that our Bank can make to our holding company. Our
Bank must file an application for approval of a capital distribution if the total capital
distribution for the applicable calendar year exceeds the sum of current year to date net income
plus retained net income for the preceding two years that is still available for distribution; our
Bank would not be at least adequately capitalized following the distribution; the distribution
would violate any applicable statute, regulation, agreement, or OTS-imposed condition; or our Bank
is not eligible for expedited treatment of its filings.
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Even if an application is not otherwise required, our Bank must file a notice with the OTS before a
dividend or capital distribution is remitted to shareholders. The OTS may disapprove our notice or
application within 30 days if: our Bank would be undercapitalized following the distribution; the
proposed capital distribution raises safety and soundness concerns; or the capital distribution
would violate a prohibition contained in any statute, regulation, or agreement. Our Bank did not
pay a dividend to our holding company in 2009 in order to maintain our Banks strong capital
levels.
Community Reinvestment Act and Fair Lending Laws
We have a responsibility under the Community Reinvestment Act (CRA) and related regulations of
the OTS to help meet the credit needs of our communities, including low and moderate income
neighborhoods. In connection with its examination, the OTS assesses our Banks record of
compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act
prohibit us from discriminating in our lending practices on the basis of characteristics specified
in those statutes. Our failure to comply with the provisions of the CRA could, at a minimum,
result in regulatory restrictions on our activities. Our failure to comply with the Equal
Credit Opportunity Act and the Fair Housing Act could result in enforcement actions against us by
the OTS, as well as other federal regulatory agencies and the Department of Justice. Our Bank
received a Satisfactory CRA rating on our most recent federal examination.
Transactions with Our Holding Company
Our Banks authority to engage in transactions with our holding company and any nonbank subsidiary
of our holding company is limited by Sections 23A and 23B of the Federal Reserve Act (the FRA)
and its implementing regulations. In general, transactions with our holding company must be on
terms comparable to transactions with unrelated third parties. In addition, certain types of
transactions are restricted to an aggregate percentage of capital. Collateral in specified amounts
must usually be provided by our holding company in order to receive loans.
Loans to Insiders
Our Banks authority to make loans to insiders (our directors, executive officers, and 10%
stockholders, as well as to companies controlled by these people) is currently governed by the
requirements of Sections 22(g) and 22(h) of the FRA and its implementing regulations. These
provisions require that loans to our insiders (i) be made on terms that are substantially the same
as, and follow credit underwriting procedures that are not less stringent than, those for
comparable transactions with unaffiliated persons and that do not involve more than the normal risk
of repayment or present other unfavorable features, and (ii) do not exceed certain limitations on
the amount of the loan extended to insiders, individually and in the aggregate, which limits are
based, in part, on the amount of our capital. In addition, loans in excess of certain limits must
be approved by our Board of Directors. Total credit facilities extended to certain of our officers
and directors and affiliates amounted to $3.2 million and $4.1 million at December 31, 2009 and
2008, respectively. During 2009, new loans to these officers and directors amounted to $346
thousand and principal repayments amounted to $150 thousand. The balances due from these insiders
under these facilities amounted to $2.4 million and $2.6 million at December 31, 2009 and 2008,
respectively. The remaining change from 2008 to 2009 is due to
changes in insiders status.
Standards for Safety and Soundness
Federal law requires each federal banking agency to prescribe certain standards for all insured
banks. These standards relate to, among other things, internal controls, information and audit
systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth,
compensation, and other operational and managerial standards as the agency deems appropriate. The
federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness to implement the safety and soundness standards required under federal law. The
guidelines set forth the standards that the federal banking agencies use to identify and address
problems at insured banks before capital becomes impaired. If the appropriate federal banking
agency determines that a bank fails to meet any standard prescribed by the guidelines, the agency
may require the bank to submit to the agency an acceptable plan to achieve compliance with the
standard. If a bank fails to meet these standards, the appropriate federal banking agency may
require the bank to submit a compliance plan.
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Insurance of Deposit Accounts
Our deposit accounts are insured by the FDIC up to applicable legal limits under the FDICs general
deposit insurance rules. The FDICs deposit insurance fund is funded by assessments on insured depository institutions,
which depend on the risk category of an institution and the amount of insured deposits that it
holds. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis.
Effective April 2009, assessment rates are subject to adjustments based upon the
insured depository institutions ratio of (i) long-term unsecured debt to domestic deposits, (ii)
secured liabilities to domestic deposits and (iii) brokered deposits to domestic deposits (if
greater than 10%).
Federal legislation establishes a range of 1.15% to 1.50% for the FDICs designated reserve ratio;
and grants the FDIC discretion to set insurance premium rates according to the risk for all insured
banks regardless of the level of the reserve ratio. The legislation also granted a one-time
initial assessment credit to certain banks in recognition of their past contributions to the fund.
During 2009 and 2008, our Bank used $1.1 million and $2.6 million in credits, respectively, to
offset insurance premiums assessed by the FDIC. At December 31, 2009, we had no further credits
available to offset assessments by the FDIC.
In conjunction with the October 2008 enactment of the Emergency Economic Stabilization Act of 2008
(EESA), the limit on FDIC insurance coverage was increased to $250,000 for all accounts through
December 31, 2009, which Congress has since extended through December 31, 2013.
In addition, in October 2008, the Secretary of the Treasury invoked the systemic risk exception of
the FDIC Improvement Act of 1991, allowing the FDIC to provide a 100% guarantee for newly issued
senior unsecured debt issued before June 30, 2009 and noninterest bearing transaction deposit
accounts through December 31, 2009 at FDIC insured institutions under the Temporary Liquidity
Guarantee Program (TLGP). Fees for coverage were waived for the first 30 days of the program.
We elected to participate in the program beyond this time period for coverage of noninterest
bearing transaction deposit accounts not otherwise covered by the existing deposit
insurance limit of $250,000, but not for the guarantee of senior unsecured debt. An annual
surcharge of 10 basis points is applied to noninterest bearing transaction deposit amounts in
excess of $250,000. On August 26, 2009, the FDIC extended this coverage under the TLGP through
June 30, 2010 for noninterest bearing transaction deposit accounts not otherwise covered by the
existing deposit insurance limit of $250,000. We did not elect to participate in this extension of
the TLGP, and accordingly, such coverage ended on December 31, 2009.
On May 22, 2009, the FDIC adopted a rule levying a five basis point special assessment on
each insured depository institutions assets minus Tier 1 capital as of June 30, 2009. The special
assessment was payable on September 30, 2009. We recorded an expense of $5.4 million
during the second quarter of 2009 to reflect the special assessment. On September 29, 2009 the
FDIC increased assessment rates on deposit insurance premiums by three basis points effective
January 1, 2011. In addition, in lieu of another special assessment, on November 12, 2009, the
FDIC board adopted a final rule requiring insured institutions to prepay their estimated quarterly
risk-based assessments for the fourth quarter of 2009, as well as for all of 2010, 2011, and 2012
on December 30, 2009, which amounted to $38.5 million for us. The rate increases and special
assessment resulted in a significant increase to our FDIC insurance premiums, to $16.7 million in
2009 from $1.3 million in 2008.
FDIC guidance provides that as of December 31, 2009, and each quarter thereafter, each insured
institution will be required to record an expense for its regular quarterly assessment and an
offsetting credit to the prepaid assessment until the prepaid asset is exhausted. Once the asset
is exhausted, the institution will resume paying and accounting for quarterly deposit insurance
assessments as it currently does. Any further special assessments that the FDIC levies will be
recorded as an expense during the appropriate period.
Prohibitions Against Tying Arrangements
We are prohibited, subject to some exceptions, from making loans or offering any other services, or
fixing or varying the payment for making loans or providing services, on the condition that a
customer obtains some additional service from us or not obtain services from one of our
competitors.
Federal Home Loan Bank System
We are a member of the FHLB System, which consists of 12 regional Federal Home Loan Banks. The
FHLB System provides a central credit facility primarily for member banks. As a member of the FHLB
of New York, we are required to acquire and hold shares of capital stock in the FHLB in an amount
equal to 0.2% of the total principal amount of our unpaid residential mortgage loans, commercial
real estate loans, home equity loans, CMOs, and other similar obligations at the beginning of each
year, and 4.5% of our borrowings from the FHLB. At December 31, 2009, we were in compliance with
this requirement.
15
Federal Reserve System
Federal Reserve regulations require us to maintain noninterest-earning cash reserves against our
transaction accounts, such as NOW and regular checking accounts. Our reserve balances of $600
thousand at December 31, 2009 and 2008 were in compliance with the reserve requirements. We may
use balances maintained to meet the reserve requirements imposed by the Federal Reserve to satisfy
our liquidity requirements imposed by the OTS.
Privacy Standards
Federal regulations require us to disclose our privacy policy, including identifying with whom we
share nonpublic personal information, to our customers at the time the customer establishes a
relationship with us and annually thereafter. In addition, we are required to provide our
customers with the ability to opt-out of having us share their nonpublic personal information
with nonaffiliated third parties before we can disclose that information, subject to certain
exceptions.
The federal banking agencies adopted guidelines establishing standards for safeguarding our
customer information. The guidelines describe the agencies expectation that we create, implement,
and maintain an information security program, which would include administrative, technical, and
physical safeguards appropriate to our size and complexity and the nature and scope of our
activities. The standards set forth in the guidelines are intended to ensure the security and
confidentiality of our customer records and information, protect against any anticipated threats or
hazards to the security or integrity of our customer records, and protect against unauthorized
access to records or information that could result in substantial harm or inconvenience to our
customers. Additionally, the guidance states that banks, such as our Bank, should develop and
implement a response program to address security breaches involving customer information, including
customer notification procedures. We have developed such a program.
Holding Company Regulation
As a savings and loan holding company, we are subject to regulation and supervision by the OTS,
which has enforcement authority over us. Among other responsibilities, this authority permits the
OTS to restrict or prohibit activities that are determined to be a significant risk to our Bank.
The Gramm-Leach-Bliley Act of 1999 (the GLB Act) restricts us to those activities permissible for
financial holding companies. As such, we may engage in activities that are financial in nature,
including underwriting equity securities and insurance, incidental to financial activities or
complementary to a financial activity. Federal law prohibits us, directly or indirectly, or
through one or more subsidiaries, from acquiring control of another savings bank or holding company
without prior written approval of the OTS. It also prohibits us from acquiring or retaining, with
specified exceptions, more than 5% of the equity securities of a company engaged in activities that
are not closely related to banking or financial in nature, or acquiring or retaining control of a
bank that is not federally insured. In evaluating applications by holding companies to acquire
savings banks, the OTS considers the financial and managerial resources, future prospects of the
savings bank involved, the effect of the acquisition on the risk to the Deposit Insurance Fund, the
convenience and needs of the community, and competitive factors.
In November 2009, the Company applied to the Federal Reserve to convert from a savings and loan
holding company into a bank holding company, which will allow us to acquire both thrifts and
commercial banks, as well as provide more flexibility in the execution and completion of
acquisitions.
For more information, see Regulation as a Bank Holding Company with National Bank Subsidiary.
Commercial Bank Regulation
Our Commercial Bank is subject to extensive regulation by the New York State Banking Department
(NYSBD) as its chartering agency and by the FDIC as its federal regulator and deposit insurer.
Our Commercial Bank must file reports with the NYSBD and the FDIC concerning its activities and
financial condition, and must obtain regulatory approval prior to entering into certain
transactions, such as mergers with, or acquisitions of, other banks and opening or acquiring branch
offices. The NYSBD and the FDIC conduct periodic examinations to assess compliance with various
regulatory requirements. This regulation and supervision is intended primarily for the protection
of the Deposit Insurance Fund and depositors. The regulatory authorities have extensive discretion
in connection with the exercise of their supervisory and enforcement activities. This enforcement
authority includes, among other things, the ability to assess civil monetary penalties, to issue
cease and desist orders, and to remove directors and officers. These enforcement actions may be
initiated in response to violations of laws, regulations or unsafe or unsound practices.
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Our Commercial Bank derives its authority primarily from the applicable provisions of the New York
Banking Law and the regulations adopted under that law. We are limited in our investments and the
activities that we may engage in to those permissible under applicable state law and those
permissible for national banks and their subsidiaries, unless those investments and activities are
specifically permitted by the Federal Deposit Insurance Act or the FDIC determines that the
activity or investment would pose no significant risk to the Deposit Insurance Fund. We limit our
Commercial Bank activities to accepting municipal deposits and acquiring municipal and other
securities.
Under New York Banking Law, our Commercial Bank is not permitted to declare, credit, or pay any
dividends if its capital stock is impaired or would be impaired as a result of the dividend. In
addition, the New York Banking Law provides that our Commercial Bank cannot declare nor pay
dividends in any calendar year in excess of net profits for such year combined with retained net
profits of the two preceding years, less any required transfer to surplus or a fund for the
retirement of preferred stock, without prior regulatory approval.
Our Commercial Bank is subject to minimum capital requirements imposed by the FDIC that are
substantially similar to the capital requirements imposed on our Bank. The FDIC regulations
require that our Commercial Bank maintain a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, and a minimum ratio of Tier 1 capital to risk-weighted assets of 4%.
In addition, under the minimum leverage-based capital requirement adopted by the FDIC, our
Commercial Bank must maintain a ratio of Tier 1 capital to average total assets (leverage ratio) of
at least 3% to 5%, depending on our Commercial Banks CAMELS composite examination rating. Capital
requirements higher than the generally applicable minimum requirements may be established for a
particular bank if the FDIC determines that a banks capital is, or may become, inadequate in view
of the banks particular circumstances. Failure to meet capital guidelines could subject a bank to
a variety of enforcement actions, including actions under the FDICs prompt corrective action
regulations.
At December 31, 2009, our Commercial Bank met the criteria for being considered well-capitalized.
The current requirements and the actual levels for our Commercial Bank are detailed in Note 14 of
Notes to Consolidated Financial Statements filed herewith in Part II, Item 8, Financial
Statements and Supplementary Data. For more information on proposed changes to currently
applicable capital and liquidity requirements, see Proposed Capital and Liquidity Requirements.
In connection our Banks planned conversion from a savings bank to a national commercial bank, we
plan to merge our Commercial Bank into First Niagara Bank during 2010.
Regulation as a Bank Holding Company With a National Bank Subsidiary
If our applications to become a bank holding company under the BHC Act, and to convert our Bank to
a national banking association are accepted, the laws and regulations applicable to us as a bank
holding company whose principal subsidiary is a national banking association will be the same or
similar in most respects to those described above under Federal Regulation of Our Savings Bank
and Holding Company Regulation. However, they will differ in some respects from the laws and
regulations to which we are currently subject. See Federal Regulations of Our Savings
BankBusiness Activities and the discussion below of certain of those differences.
Scope of Permitted Activities
We have applied to the Federal Reserve to become a bank holding company under the BHC Act but have
not applied for the broader powers that are permitted to bank holding companies that are also
financial holding companies. In general, the BHC Act limits the business of bank holding
companies that are not financial holding companies to banking, managing or controlling banks,
performing certain surfacing activities for subsidiaries, and engaging in activities that the
Federal Reserve has determined, by order or regulation, are so closely related to banking as to be
a proper incident thereto. As a savings and loan company, the regulations currently
applicable to us permit us to engage not only in those activities but also to engage in the
broader range of activities permitted for financial holding companies that is, activities that
are financial in nature, including underwriting equity securities and insurance and other
activities that are incidental to financial activities or complementary to a financial activity.
We do not currently engage in any activities other than those permitted for bank holding companies
that are not financial holding companies.
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Capital Requirements
As a bank holding company having as its principal subsidiary a national bank, the Company will be
subject to formal quantitative capital requirements under the capital guidelines of the Federal
Reserve and our Bank, as a national bank, will be subject to the capital regulations of the OCC.
Although the OTS regulates the capital of savings and loan holding companies such as the Company,
it does not apply specific capital regulations or guidelines to savings and loan holding companies.
The Federal Reserves risk-based capital guidelines applicable to bank holding companies, and the
OCCs risk-based capital regulations applicable to national banks, require that the holding company
or bank maintain Tier 1 and total capital to risk-weighted assets of at least 4% and 8%,
respectively. The definitions of Tier 1 capital and total capital and the determinations or
risk-weighted assets, as applicable to the Company and the Bank under the Federal Reserves and
OCCs guidelines and regulations, are similar to those in the OTS regulations that currently apply
to the Bank, as described above under Federal Regulation of Our Savings Bank Capital
Requirements. There are differences, however, including that bank holding companies may include a
limited amount of cumulative perpetual preferred stock and trust preferred securities in Tier 1
capital.
The Federal Reserve capital guidelines and OCC capital regulations require bank holding companies
and national banks to comply with a minimum leverage ratio requirement. The leverage ratio is the
ratio of the banking institutions Tier 1 capital to its total consolidated quarterly average
assets (as defined for regulatory purposes), net of the loan loss reserve, goodwill and certain
other intangible assets. The guidelines and regulations require a minimum leverage ratio of 3% for
banking institutions that either have the highest supervisory rating or have implemented the
relevant regulators (the Federal Reserve as to a bank holding company and the OCC as to a national
bank) risk-adjusted measure for market risks. All other bank holding companies and national banks
are required to maintain a minimum leverage ratio of 4%.
The Federal Reserves capital guidelines provide that banking organizations experiencing internal
growth or making acquisitions are expected to maintain strong capital positions substantially above
the minimum supervisory levels, without significant reliance on intangible assets.
Although the Federal Reserve and the OCC guidelines and regulations do not include a minimum
tangible capital ratio, the Federal Reserves guidelines indicate that the Federal Reserve will
consider a tangible Tier 1 leverage ratio in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking organizations Tier 1
capital (excluding intangibles) to total assets (excluding intangibles).
Dividend Restrictions
If our Bank converts to a national banking association charter as contemplated, under the National
Bank Act and OCC regulations, it will be subject to limitations on dividends similar to those
described above applicable to our Bank under OTS regulations. The amount of dividends that may be
paid by a national bank without prior OCC approval is limited to the lesser of the amounts
calculated under a recent earnings test and an undivided profits test. Under the recent
earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any
calendar year is in excess of the current years net income combined with the retained net income
of the two preceding years, unless the bank obtains the approval of
the OCC. Under the undivided profits test, a dividend may not be paid in excess of a banks
undivided profits.
In addition to the dividend restrictions described above, the OCC has the authority to prohibit or
limit the payment of dividends by a national bank if, in the OCCs opinion, payment of a dividend
would constitute an unsafe or unsound practice in light of the financial condition of the national
bank.
It is also the policy of the Federal Reserve that a bank holding company generally only pay
dividends on common stock out of net income available to common shareholders over the past year and
only if the prospective rate of earnings retention appears consistent with the bank holding
companys capital needs, asset quality, and overall financial condition. In the current financial
and economic environment, the Federal Reserve has indicated that bank holding companies should
carefully review their dividend policy and discouraged dividend payout ratios that are at the 100%
level unless both asset quality and capital are very strong. A bank holding company also should
not maintain a dividend level that places undue pressure on the capital of bank depository
institution subsidiaries, or that may undermine the bank holding companys ability to serve as a
source of strength for such bank depository institution subsidiaries.
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Source of Strength
Under the BHC Act and Federal Reserve regulations, as a bank holding company the Company would be
expected to act as a source of financial strength to its bank subsidiaries and to commit capital
and financial resources to those subsidiaries. Such support may be required by the Federal Reserve
at times when we might otherwise determine not to provide it. In addition, any loans by the
Company to its bank subsidiaries will be subordinate in right of payment to depositors and to
certain other indebtedness of the bank. In the event of a bank holding companys bankruptcy, any
commitment by the bank holding company to a federal bank regulator to maintain the capital of a
subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Provisions Applicable to Savings and Loan Holding Companies and Savings Associations That Do Not
Apply to Bank Holding Companies and National Banks
The QTL test, described above under Federal Regulation of Our Savings BankQualified Thrift
Lender Test will not apply to the Bank as a national bank.
Proposed Capital and Liquidity Requirements
The risk-based capital guidelines currently applicable to us and that will apply to us as a bank
holding company owning a national bank are based on the 1998 Capital Accord (Basel I) of the
Basel Committee on Banking Supervision (the Basel Committee).
In December 2009, the Basel Committee issued two consultative documents proposing reforms to bank
capital and liquidity regulation. The Basel Committees capital proposals would significantly
revise the definitions of Tier 1 capital and Tier 2 capital. Among other things, they would:
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re-emphasize that common equity is the predominant component of Tier 1 capital by adding
a minimum common equity to risk-weighted assets ratio, with the ratio itself to be determined
based on the outcome of an impact study that the Basel Committee is conducting, and requiring
that goodwill, general intangibles and certain other items that currently must be deducted
from Tier 1 capital instead be deducted from common equity as a component of Tier 1 capital; |
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disqualify innovative capital instruments, including trust preferred securities and other
instruments that effectively pay cumulative dividends, from Tier 1 capital status; |
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strengthen the risk coverage of the capital framework, particularly with respect to
counterparty credit risk exposures arising from derivatives,
repurchase agreements and securities financing
activities; |
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introduce a leverage ratio requirement as an international standard; and |
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implement measures to promote the build up of capital buffers in good times that can be
drawn upon during periods of stress, introducing a countercyclical component designed to
address the concern that existing capital requirements are procyclical (that is, they
encourage reducing capital buffers in good times, when capital could more easily be raised,
and increasing capital buffers in times of distress, when access to capital markets may be
limited or they may effectively be closed). |
The capital proposals do not specify a percentage for the new ratio of common equity to
risk-weighted assets or changes in the current minimum Tier 1 capital (4%) and total capital (8%)
risk-based capital requirements. Instead, they state that the minimum percentage requirements for
the new ratio of common equity to risk-weighted assets and the other
capital ratios, including Tier
1 capital to risk-weighted assets, total capital to risk-weighted assets and the new leverage
ratio, will be included in a fully calibrated, comprehensive set of capital and liquidity
proposals to be released by December 31, 2010. Independently in September 2009, the U.S. Department of
the Treasury (the Treasury) issued a policy statement titled Principals for Reforming the U.S. and International
Regulatory Capital Framework for Banking Firms setting forth core principals intended to address
many of the same
substantive items as the Basel Committee capital proposals and specifically calling for increased
capital requirements for financial institutions.
The Basel Committees liquidity proposals, although similar in many respects to tests historically
applied by banking organizations and regulators for management and supervisory purposes, if
implemented, would for the first time be formulaic and required by regulation. They would impose
two measures of liquidity risk exposure, one based on a 30 day time horizon and the other
addressing longer term structural liquidity mismatches over a one year time period.
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The Basel Committee indicated that it expects final provisions responsive to the proposals to be
implemented by December 31, 2012. Ultimate implementation in individual countries, including the
United States, is subject to the discretion of the bank regulators in those countries. The Basel
Committees final proposals may differ from the proposals released in December 2010, and the
regulations and guidelines adopted by regulatory authorities having jurisdiction over us may differ
from the final accord of the Basel Committee. Moreover, although some aspects of the Basel
Committee proposals were quite specific (for example, the definition of the components of capital),
others were merely conceptual (for example, the description of the leverage test), and others not
specifically addressed (for example, the minimum percentages for required capital ratios). We are
not able to predict at this time the content of guidelines or regulations that will ultimately be
adopted by regulatory agencies having authority over us or the impact of changes in capital and
liquidity regulation upon us. However, a requirement that we maintain more capital, with common
equity as a more predominant component, or manage the configuration of our assets and liabilities
in order to comply with formulaic liquidity requirements, could significantly impact our financial
condition, operations, capital position and ability to pursue business opportunities.
Other Regulatory Considerations
Cross Guarantee Provisions
Each insured depository institution that is controlled (as defined in the BHC Act) by the same
holding company can be held liable to the FDIC for any loss incurred, or reasonably expected to be
incurred, by the FDIC due to the default of any other insured depository institution controlled by
that holding company and for any assistance provided by the FDIC to any of those banks that is in
danger of default. Such a cross-guarantee claim against a depository institution is generally
superior in right of payment to claims of the holding company and its affiliates against that
depository institution. If we become a bank holding company and, as contemplated, merge
Harleysville National Bank and the Commercial Bank into First Niagara Bank, we will have only one
insured depository institution for this purpose. However, if, in the future, we were to control
other insured depository institutions, such cross-guarantee would apply to all such insured
depository institutions.
Compensation Practices
If we become a bank holding company as contemplated, our compensation practices will be subject to
oversight by the Federal Reserve. In October 2009, the Federal Reserve issued a comprehensive
proposal on incentive compensation policies that applies to all banking organizations supervised by
the Federal Reserve, including bank holding companies. The proposal sets forth three key
principles for incentive compensation arrangements that are designed to help ensure that incentive
compensation plans do not encourage excessive risk taking and are consistent with the safety and
soundness of banking organizations. The three principles provide that a banking organizations
incentive compensation arrangements should provide incentives that do not encourage risk taking
beyond the organizations ability to effectively identify and manage risks, be compatible with
effective internal controls and risk management, and be supported by strong corporate governance.
The proposal also contemplates a detailed review by the Federal Reserve of the incentive
compensation policies and practices of a number of large, complex banking organizations,
including us. Any deficiencies in compensation practices that are identified may be incorporated
into the organizations supervisory ratings, which can affect its ability to make acquisitions or
perform other actions. The proposal provides that enforcement actions may be taken against a
banking organization if its incentive compensation arrangements or related risk management control
or governance processes pose a risk to the organizations safety and soundness and the organization
is not taking prompt and effective measures to correct the deficiencies. The scope and content of
the Federal Reserves policies on executive compensation are continuing to develop, and we expect
that these policies will evolve over a number of years.
Insolvency of an Insured Depository Institution
If the FDIC is appointed the conservator or receiver of an insured depository institution, upon its insolvency or in certain other events, the FDIC has the power:
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to transfer any of the depository institutions assets and liabilities to a new obligor
without the approval of the depository institutions creditors; |
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to enforce the terms of the depository institutions contracts pursuant to their terms; or |
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to repudiate or disaffirm any contract or lease to which the depository institution is a
party, the performance of which is determined by the FDIC to be burdensome and the
disaffirmance or
repudiation of which is determined by the FDIC to promote the orderly administration of the
depository institution. |
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In addition, under federal law, the claims of holders of deposit liabilities and certain claims for
administrative expenses against an insured depository institution would be afforded a priority over
other general unsecured claims against such an institution, including claims of debt holders of the
institution, in the liquidation or other resolution of such an institution by any receiver. As a
result, whether or not the FDIC ever sought to repudiate any debt
obligations of our Bank, the debt holders would be treated differently from, and could receive, if anything,
substantially less than, the depositors of the depository institution.
Other Legislation
USA PATRIOT Act of 2001
The USA PATRIOT Act of 2001 (the PATRIOT Act) was enacted to strengthen U.S. law enforcement and
the intelligence communities abilities to work cohesively to combat money laundering and terrorist
financing, and requires financial institutions to assist in the prevention, detection, and
prosecution of such activities. The PATRIOT Act established anti-money laundering and financial
transparency laws and requires cooperation among financial institutions, regulators, and law
enforcement entities in identifying parties that may be involved in terrorism or money laundering.
Sarbanes-Oxley Act
The stated goals of the Sarbanes-Oxley Act of 2002 (SOX) are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies, and to protect investors by improving the accuracy and reliability of
corporate disclosures pursuant to the securities laws.
SOX addresses, among other matters, audit committees; certification of financial statements and
internal controls by the Chief Executive Officer and Chief Financial Officer; the forfeiture of
bonuses or other incentive-based compensation and profits from the sale of an issuers securities
by directors and senior officers in the twelve month period following initial publication of any
financial statements that later require restatement; a prohibition on insider trading during
pension plan black out periods; disclosure of off-balance sheet transactions; a prohibition on
certain loans to directors and officers; expedited filing requirements for Forms 4; disclosure of a
code of ethics and filing a Form 8-K for significant changes or waivers of such code; real time
filing of periodic reports; the formation of a public accounting oversight board; auditor
independence; and various increased criminal penalties for violations of securities laws. The SEC
has enacted rules to implement various provisions of SOX.
The Fair and Accurate Credit Transactions (FACT) Act of 2003
The FACT Act includes many provisions concerning national credit reporting standards, and permits
consumers, including our customers, to opt out of information sharing among affiliated companies
for marketing purposes. The FACT Act also requires us to notify our customers if we report
negative information about them to credit bureaus or if the credit that we grant to them is on less
favorable terms than are generally available. We also must comply with guidelines established by
our federal banking regulators to help detect identity theft.
Troubled Assets Relief Program Capital Purchase Program
On November 21, 2008, we sold to the Treasury for an
aggregate purchase price of $184.0 million, 184 thousand shares of preferred stock and a warrant to
purchase 1.9 million shares of common stock under the Troubled Assets Relief Program (TARP)
Capital Purchase Program (the CPP). Upon the February 2009 enactment of the American
Recovery and Reinvestment Act of 2009, we were able to redeem the preferred stock at any time, and
without regard to having proceeds from a qualified equity offering, subject to consultation with
our primary federal regulator, the OTS. The terms of the CPP prohibited us from increasing the
dividends on our common stock as well as from making repurchases of our common stock without the
Treasurys consent prior to November 21, 2011 unless we had fully redeemed the preferred stock.
Furthermore, participation in the CPP limited the compensation and tax deductibility of the
compensation we paid to certain of our executives.
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On May 27, 2009, we redeemed the preferred stock and the related final accrued dividend for a total
of $184.3 million. At the time of payment, all rights of the Treasury, as holder of the preferred
stock, terminated. The redemption of the preferred stock, which had a carrying value of $176.3
million, required us to record $7.7 million of discount accretion for the difference between the
redemption price and the carrying value of the preferred stock. The number of shares of common
stock available under the warrant was reduced by one-half as a result of the capital we raised in
our April 2009 common stock offering.
On June 24, 2009, we entered into a Warrant Repurchase Agreement with the Treasury to repurchase
the warrant for the remaining 953 thousand shares of our common stock that we had issued and sold
to the Treasury. As a result of the repurchase, our stockholders equity decreased by $2.7
million.
TAXATION
We are subject to federal and state income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of taxation is
intended only to summarize certain pertinent federal and state income tax matters and is not a
comprehensive description of the tax rules applicable to us.
Method of Accounting
For federal income tax purposes, we report our income and expenses on the accrual method of
accounting and use a tax year ending December 31st for filing our consolidated federal
income tax returns.
Corporate Dividends
We may exclude from income 100% of dividends received from our Bank as a member of the same
affiliated group of corporations.
Net Operating Loss Carryovers
We may carry back net operating losses to the preceding two taxable years for federal income tax
purposes and forward to the succeeding twenty taxable years for federal and New York State income
tax purposes, subject to certain limitations. At December 31, 2009, we had net operating loss
carryforwards of $145.6 million for federal income tax purposes. We obtained these net operating
loss carryforwards upon our acquisition of Great Lakes Bancorp, Inc. and expect to utilize the
carryforwards, subject to an annual limitation, each year through 2020.
Taxable Distributions and Recapture
Under current federal law, bad debt reserves created prior to January 1, 1988 are subject to
recapture into taxable income should our Bank make nondividend
distributions, make distributions in excess of earnings and profits
retained, as defined, or cease to maintain a
banking type charter. At December 31, 2009, our Banks federal pre-1988 reserve, for which no federal
income tax provision has been made, was approximately $42.0 million.
State of New York
We report income on a calendar year combined basis to New York State. New York State franchise tax
on corporations is imposed in an amount equal to the greater of (a) 7.1% of entire net income
allocable to New York State, (b) 3% of alternative entire net income allocable to New York State,
(c) 0.01% of the average value of assets allocable to New York State, or (d) nominal minimum tax.
Entire net income is based on Federal taxable income, subject to certain modifications.
Alternative entire net income is based on entire net income with certain modifications.
During 2008, New York State revised legislation that phases out the exclusion of dividends paid by
a REIT to a bank when the taxable assets of the banks combined reporting group exceed $8 billion.
In 2008, we were entitled to exclude from taxation 50% of our REITs taxable income and in 2009 and
2010, we are entitled to exclude from taxation 25% of our REITs taxable income. Without the 25%
REIT dividend exclusion, our 2009 effective tax rate would have been approximately 34.9%, compared
to our actual rate of 33.9%.
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In its current form, we do not expect to be materially impacted by any provisions of the proposed
2010 New York State budget bill.
Commonwealth of Pennsylvania
We report income on a calendar year separate company basis in Pennsylvania. In 2009, our Bank was
subject to the Pennsylvania Mutual Thrift Institutions Tax, which is imposed in an amount equal to
11.5% of taxable income allocable to Pennsylvania. Taxable income is based on financial statement
net income, subject to certain modifications.
In 2010, due to the anticipated change in its charter, our Bank will be subject to the Pennsylvania
Bank Shares Tax, which is imposed in an amount equal to 1.25% of taxable net equity allocable to
Pennsylvania. Taxable net equity is based on consolidated financial statement net equity, subject
to certain modifications.
Status of Audits by Taxing Authorities
We are subject to routine audits of our tax returns by the Internal Revenue Service and various
state taxing authorities. With few exceptions, we are no longer subject to federal and state
income tax examinations by tax authorities for years before 2004. As described in Note 15 to the
Consolidated Financial Statements, there are no indications of any material
adjustments relating to any examination currently being conducted by these taxing authorities.
ITEM 1A. Risk Factors
Making or continuing an investment in securities issued by the Company, including our common stock,
involves certain risks that you should carefully consider. The risks and uncertainties described
below are not the only risks that may have a material adverse effect on the Company. Additional
risks and uncertainties also could adversely affect our business, financial condition and results
of operations. If any of the following risks actually occur, our business, financial condition or
results of operations could be negatively affected, the market price for your securities could
decline, and you could lose all or a part of your investment. Further, to the extent that any of
the information contained in this Annual Report on Form 10-K constitutes forward-looking
statements, the risk factors set forth below also are cautionary statements identifying important
factors that could cause the Companys actual results to differ materially from those expressed in
any forward-looking statements made by or on behalf of the Company.
Economic Conditions May Adversely Affect Our Liquidity and Financial Condition
As a consequence of the economic slowdown that the United States has been experiencing, business
activity across a wide range of industries faces serious difficulties due to the lack of consumer
spending and the lack of liquidity in the global credit markets. Unemployment has also increased
significantly. A sustained weakness or weakening in business and economic conditions generally or
specifically in the principal markets in which we do
business could have one or more of the following adverse effects on our business:
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A decrease in the demand for loans and other products and services offered by us; |
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A decrease in the value of our loans held for sale or other assets secured by consumer or
commercial real estate; |
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An impairment of certain intangible assets, such as goodwill;
and |
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An increase in the number of clients and counterparties who become delinquent, file for
protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of
delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net
charge-offs, provision for loan losses, and valuation adjustments on loans held for sale.
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Commercial Real Estate and Business Loans Increase Our Exposure to Credit Risks
At December 31, 2009, our portfolio of commercial real estate and business loans totaled $4.8
billion, or 65% of total loans. We plan to continue to emphasize the origination of these types of
loans, which generally exposes us to a greater risk of nonpayment and loss than residential real
estate loans because repayment of such loans often depends on the successful operations and income
stream of the borrowers. Additionally, such loans typically involve larger loan balances to single
borrowers or groups of related borrowers compared to residential real estate loans. Also, many of
our borrowers have more than one commercial loan outstanding. Consequently, an adverse development
with respect to one loan or one credit relationship can expose us to a significantly greater risk
of loss compared to an adverse development with respect to a residential real estate loan.
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We target our business lending and marketing strategy towards small to medium-sized businesses.
These small to medium-sized businesses generally have fewer financial resources in terms of capital
or borrowing capacity than larger entities. If general economic conditions negatively impact these
businesses, our results of operations and financial condition may be adversely affected.
Increases to the Allowance for Credit Losses May Cause Our Earnings to Decrease
Our customers might not repay their loans according to the original terms, and the collateral
securing the payment of those loans might be insufficient to pay any remaining loan balance.
Hence, we may experience significant loan losses, which could have a materially adverse effect on
our operating results. We make various assumptions and judgments about the collectability of our
loan portfolio, including the creditworthiness of our borrowers and the value of the real estate
and other assets serving as collateral for the repayment of loans. In determining the amount of
the allowance for credit losses, we rely on loan quality reviews, past loss experience, and an
evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect,
our allowance for credit losses may not be sufficient to cover losses inherent in our loan
portfolio, resulting in additions to the allowance. Material additions to the allowance would
materially decrease our net income.
Our emphasis on the origination of commercial real estate and business loans is one of the more
significant factors in evaluating our allowance for credit
losses. As we continue to increase the amount of these loans, additional or increased provisions
for credit losses may be necessary and as a result would decrease our earnings.
Bank regulators periodically review our allowance for credit losses and may require us to increase
our provision for credit losses or loan charge-offs. Any increase in our allowance for credit
losses or loan charge-offs as required by these regulatory authorities could have a materially
adverse effect on our results of operations and/or financial condition.
Concentration of Loans in Our Primary Market Area May Increase Risk
Our success depends primarily on the general economic conditions in the geographic areas in which
we operate, currently Upstate New York and Western Pennsylvania and, if the Harleysville
acquisition is completed, Southeastern Pennsylvania. Accordingly, the local economic conditions
in both Upstate New York and Western Pennsylvania, and Southeastern Pennsylvania after the merger, have a significant impact on the ability of
borrowers to repay loans. As such, a decline in real estate valuations in these markets would
lower the value of the collateral securing those loans. In addition, a significant weakening in
general economic conditions such as inflation, recession, unemployment, or other factors beyond our
control could increase default rates on those loans and otherwise negatively affect our financial
results.
Changes in Interest Rates Could Adversely Affect Our Results of Operations and Financial Condition
Our results of operations and financial condition could be significantly affected by unanticipated
changes in interest rates. Our financial results depend substantially on net interest income,
which is the difference between the interest income that we earn on interest-earning assets and the
interest expense we pay on interest-bearing liabilities. Because our interest-bearing liabilities
generally reprice or mature more quickly than our interest-earning assets, an increase in interest
rates generally would tend to result in a decrease in our net interest income.
Changes in interest rates also affect the value of our interest-earning assets and in particular
our investment securities available for sale. Generally, the value of our investment securities
fluctuates inversely with changes in interest rates. Decreases in the fair value of our securities
available for sale, therefore, could have an adverse effect on our stockholders equity or our
earnings if the decrease in fair value is deemed to be other than temporary.
Changes in interest rates may also affect the average life of our loans and mortgage-related
securities. Decreases in interest rates can result in increased prepayments of loans and
mortgage-related securities, as borrowers refinance to reduce borrowing costs. Under these
circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the
cash received from such prepayments at rates that are comparable to the rates on our existing loans
and securities. Additionally, increases in interest rates may decrease loan demand and make it
more difficult for borrowers to repay adjustable rate loans.
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Our Ability to Grow May Be Limited if We Cannot Make Acquisitions
In an effort to fully deploy our capital and to increase our loans and deposits, we intend to
continue to acquire other financial institutions, financial services companies, or branches. We
compete with other financial institutions with respect to proposed acquisitions. We cannot predict
if or when we will be able to identify and attract acquisition candidates or make acquisitions on
favorable terms. Additionally, acquisitions are subject to approvals by Federal and state bank
regulatory authorities, and we cannot predict whether acquisitions we may wish to make will receive
the required approvals. We incur risks and challenges associated with the integration of acquired
institutions in a timely and efficient manner, and we cannot guarantee that
we will be successful in retaining existing customer relationships or achieving anticipated
operating efficiencies.
Growing By Acquisition Entails Certain Risks
In September 2009, we acquired 57 branch locations in Western Pennsylvania from National City Bank
and have pending a proposed merger with Harleysville National Corporation, which is expected to
close in the second quarter of 2010 and will add at least 83 branch locations in Southeastern
Pennsylvania. As indicated above under Our Ability to Grow May Be Limited If We Cannot Make
Acquisitions, we intend to continue to acquire other financial institutions, financial service
companies or branches. Growth by acquisition involves risks. The success of our acquisitions
may depend on, among other things, our ability to realize anticipated cost savings and to combine the
businesses of the acquired company with our businesses in a manner that does not result in decreased revenues
resulting from disruption of
existing customer
relationships of the acquired company. If we are not able to achieve these objectives,
the anticipated benefits of an acquisition may not be realized fully or at all or may take longer
to realize than planned.
Further, the asset quality or other financial characteristics of a company we plan to acquire
may deteriorate between the date a merger or other acquisition agreement is entered into and the
transaction is completed. Depending upon the terms we negotiate in the related merger or
acquisition agreement, the deterioration may not allow us to fail to close the proposed
transaction. Or, we may be required to close the proposed transaction with such a company to the detriment of our future financial condition.
Strong Competition May Limit Our Growth and Profitability
Competition in the banking and financial services industry is intense. We compete with commercial
banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual
funds, insurance companies, and brokerage and investment banking firms operating locally and
elsewhere. Many of these competitors (whether regional or national institutions) have
substantially greater resources and lending limits than us and may offer certain services that we
do not or cannot provide. Our profitability depends upon our ability to successfully compete in
our market area.
We May Not Be Able to Attract and Retain Skilled People
Our success depends, in large part, on our ability to attract new employees, retain and motivate
our existing employees, and continue to compensate employees competitively amid intense public and
regulatory scrutiny on the compensation practices of financial institutions. Competition for the
best people in most activities engaged in by us can be intense and we may not be able to hire
people or to retain them.
We Operate in a Highly Regulated Environment and May Be Adversely Affected by Changes in Laws and
Regulations
We are subject to extensive regulation, supervision, and examination by the OTS, the FDIC, and the
NYSBD. Assuming that our Bank becomes a national bank, the Federal Reserve will be the primary
federal bank regulatory agency for our holding company and the OCC for our Bank. Such regulators
govern the activities in which we may engage, primarily for the protection of depositors. These
regulatory authorities have extensive discretion in connection with their supervisory and
enforcement activities, including the imposition of restrictions on the operation of a bank, the
classification of assets by a bank, and the adequacy of a banks allowance for credit losses. Any
change in such regulation and oversight, whether in the form of regulatory policy, regulations, or
legislation, could have a material impact on us and our operations. We believe we are in
substantial compliance with applicable federal, state and local laws, rules and regulations.
Because our business is highly regulated, the laws, rules and applicable regulations are subject to
regular modification and change. There can be no assurance that proposed laws, rules and
regulations, or any other laws, rules, or regulation, will not be adopted in the future, which
could make compliance more difficult or expensive or otherwise adversely affect our business,
financial condition or prospects.
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Proposed Legislative and Regulatory Reforms Could, if Enacted or Adopted, Result in Our Business
Becoming Subject to Significant and Extensive Additional Regulations and/or Could Adversely Affect
Our Results of Operations and Financial Condition
The extreme disruptions in the capital markets since mid-2007 and the resulting instability and
failure of numerous financial institutions have led to numerous proposals for legislative and
regulatory reform that could substantially intensify the regulation of the financial services
industry and that may significantly impact our business. These proposals include the following:
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tightening controls on the ability of banking institutions to engage in transactions with
affiliates; |
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limiting the size and activities of financial institutions; |
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amending regulatory capital standards, and increasing regulatory capital requirements, for
banks and other financial institutions and establishing new formulaic liquidity requirements
applicable to financial institutions, including those proposals described above under
Supervision and RegulationProposed Capital and Liquidity Requirements; |
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establishing a new Financial Services Oversight Council chaired by the Treasury and a
Consumer Financial Protection Agency; |
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establishing greater government powers to regulate risk across the financial system; and |
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establishing heightened standards for and increased scrutiny of compensation policies at
financial institutions. |
Lawmakers and regulators in the United States continue to consider these and a number of other
wide ranging and comprehensive proposals for altering the structure,
regulation, and competitive
relationships of the nations financial institutions. For example, separate comprehensive
financial reform bills were introduced in both houses of Congress in the second half of 2009, and
the U.S. House of Representatives passed a financial reform bill in December of 2009, which has not
been passed by the U.S. Senate.
We cannot predict the final form, or effects on us, of these or other potential or proposed
reforms. These and other potential or proposed legislative and regulatory changes could adversely impact the
profitability our business activities, limit our ability to pursue business opportunities, require
us to change certain of our business practices or alter our relationships with customers, affect
retention of key Company personnel, or expose us to additional costs (including increased
compliance costs and increased risk of litigation). Such changes also may require us to invest significant management attention and
resources to make any necessary changes and could adversely affect our results of operations and
financial condition.
See Supervision and Regulation for more information about the regulation to which we are subject.
Any Future FDIC Insurance Premiums May Adversely Affect our Earnings
We are generally unable to control the amount of premiums that we are required to pay for FDIC
insurance. If there are additional bank or financial institution
failures, we may be required to
pay even higher FDIC premiums than the recently increased levels. Further, on January 12, 2010,
the FDIC requested comments on a proposed rule tying assessment rates
of FDIC insured institutions
to the institutions employee compensation programs. The exact requirements of and whether such a
rule ultimately will be adopted are not yet known, but such a rule could increase the amount of
premiums the Company must pay for FDIC insurance. These announced increases and any future
increases or required prepayments of FDIC insurance premiums may adversely impact our earnings.
We Are a Holding Company and Depend on Our Subsidiaries for Dividends, Distributions and Other
Payments
We are a legal entity separate and distinct from our banking and other subsidiaries. Our principal
source of cash flow, including cash flow to pay dividends to our stockholders and principal and
interest on our outstanding debt, is dividends from our Bank. There are statutory and regulatory
limitations on the payment of dividends by our Bank to us, as well as by us to our stockholders.
Regulations of the OTS and, upon our Banks conversion to a national bank charter, the OCC affect
or will affect the ability of our Bank to pay dividends and other distributions to us and to make
loans to us. If our Bank is unable to make dividend payments to us and sufficient capital is not
otherwise available, we may not be able to make dividend payments to our common stockholders or
principal and interest payments on our outstanding debt. See Federal Regulation of Our Savings
BankCapital Distributions and Regulation as a Bank Holding Company With a National Bank
SubsidiaryDividend Restrictions above under Supervision and Regulation in Item 1 of this
Annual Report on Form 10-K.
26
In addition, our right to participate in a distribution of assets upon a subsidiarys liquidation
or reorganization is subject to the prior claims of the subsidiarys creditors.
We Hold Certain Intangible Assets that Could Be Classified as Impaired in The Future. If These
Assets Are Considered to Be Either Partially or Fully Impaired in the Future, the Book
Values of These Assets Would Decrease.
We are required to test our goodwill and core deposit intangible assets for impairment on a
periodic basis. The impairment testing process considers a variety of factors, including the
current market price of our common shares, the estimated net present value of our assets and
liabilities, and information concerning the terminal valuation of similarly situated insured
depository institutions. It is possible that future impairment testing could result in a partial
or full impairment of the value of our goodwill or core deposit intangible assets, or both. If an
impairment determination is made in a future reporting period, our earnings and the book value of
these intangible assets will be reduced by the amount of the impairment. If an impairment loss is
recorded, it will have little or no impact on the tangible book value of our common shares or our
regulatory capital levels.
We Are Subject to a Variety of Operational Risks, Including Reputational Risk, Legal and Compliance
Risk, the Risk of Fraud or Theft by Employees or Outsiders, Which May Adversely Affect Our Business
and Results of Operations
We are exposed to many types of operational risks, including reputational risk, legal and
compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by
employees, or operational errors, including clerical or record keeping errors or those resulting
from faulty or disabled computer or telecommunications systems. Negative public opinion can result
from our actual or alleged conduct in any number of activities, including lending practices,
corporate governance and acquisitions and from
actions taken by government regulators and community organizations in response to those activities.
Negative public opinion can adversely affect our ability to attract and keep customers and can
expose us to litigation and regulatory action. Actual or alleged conduct by the Company can result
in negative public opinion about our other business.
If
personal, nonpublic, confidential, or proprietary information of customers in our possession were
to be mishandled or misused, we could suffer significant regulatory consequences, reputational
damage, and financial loss. Such mishandling or misuse could include, for example, if such
information were erroneously provided to parties who are not permitted to have the information,
either by fault of our systems, employees, or counterparties, or where such information is
intercepted or otherwise inappropriately taken by third parties.
Because the nature of the financial services business involves a high volume of transactions,
certain errors may be repeated or compounded before they are discovered and successfully rectified.
Our necessary dependence upon automated systems to record and process transactions and the large
transaction volumes may further increase the risk that technical flaws or employee tampering or
manipulation of those systems will result in losses that are difficult to detect. We also may be
subject to disruptions of its operating systems arising from events that are wholly or partially
beyond its control (for example, computer viruses or electrical or telecommunications outages),
which may give rise to disruption of service to customers and to financial loss or liability. We
are further exposed to the risk that our external vendors may be unable to fulfill their
contractual obligations (or will be subject to the same risk of fraud or operational errors by
their respective employees as we are) and to the risk that we (or our vendors) business continuity
and data security systems prove to be inadequate. The occurrence of any of these risks could
result in a diminished ability to operate our business, potential liability to clients,
reputational damage, and regulatory intervention, which could adversely affect our business,
financial condition, and results of operations, perhaps materially.
27
Our Information Systems May Experience an Interruption or Security Breach
We rely heavily on communications and information systems to conduct our business. Any failure,
interruption or breach in security of these systems could result in failures or disruptions in our
customer relationship management, general ledger, deposit, loan and
other systems or disclosure of confidential or proprietary information of our clients. While we have
policies and procedures designed to prevent or limit the effect of the possible failure,
interruption or security breach of our information systems, there can be no assurance that any such
failure, interruption or security breach will not occur or, if they do occur, that they will be
adequately addressed. The occurrence of any failure, interruption or security breach of our
information systems could damage our reputation, result in a loss of customer business, subject us
to additional regulatory scrutiny, or expose us to civil litigation and possible financial
liability.
Anti-takeover Laws and Certain Agreements and Charter Provisions May Adversely Affect Share Value
Certain provisions of state and federal law and our certificate of incorporation may make it more
difficult for someone to acquire control of us without our board of directors approval. Under
federal law, subject to certain exemptions, a person, entity or group must notify the federal
banking agencies before acquiring control of a bank holding company. Acquisition of 10% or more of
any class of voting stock of a thrift bank holding company, state member bank or national bank,
including shares of our common stock, creates a rebuttable presumption that the acquiror controls
the bank holding company or state member bank. Also, a bank holding company must obtain the prior
approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership
or control of more than 5% of the voting shares of any bank, including the Bank. There also are
provisions in our certificate of incorporation that may be used to delay or block a takeover
attempt. As a result, these statutory provisions and provisions in our certificate of
incorporation could result in the Company being less attractive to a potential acquiror.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
In 2009, we relocated our executive offices to our regional market center at 726 Exchange Street,
Suite 618, Buffalo, New York where we lease 88,000 square feet of space. At December 31, 2009, we
conducted our business through 171 full-service branches located across Upstate New York and
Western Pennsylvania as well as several financial services subsidiaries. Seventy-three of our
branches are owned and 98 are leased.
In addition to our branch network and Buffalo regional market center, we occupy office space in our
four other regional market centers located in
Rochester, Albany, and Syracuse, New York and Pittsburgh, Pennsylvania, where we conduct financial
services and certain back office operations. We also lease or own other facilities which are used
for training centers, tenant rental, and storage. These properties include 20 leased offices and
11 buildings which we own with a total occupancy of approximately 454,000 square feet, including
our administrative center in Lockport, New York which has 76,000 square feet. At December 31,
2009, our premises and equipment had a net book value of $156.2 million. See Note 5 of the Notes
to Consolidated Financial Statements filed herewith in Part II, Item 8, Financial Statements and
Supplementary Data for further detail on our premises and equipment. All of these properties are
generally in good condition and are appropriate for their intended use.
28
ITEM 3. Legal Proceedings
In the ordinary course of business, we are involved in various threatened and pending legal
proceedings. We believe that we are not a party to any pending legal, arbitration, or regulatory
proceedings that would have a material adverse impact on our financial results or liquidity.
Certain legal proceedings in which we are involved are described below:
The Company has been named as a defendant in two separate class actions pending in the Court of
Common Pleas, Montgomery County, Pennsylvania: Seibert v. Harleysville National Corp., et al.; and
McAuvic v. Geraghty, et al. Both actions challenge the terms of the proposed merger. The Seibert
and McAuvic complaints each charge that Harleysville and its directors breached their fiduciary
duties to Harleysville stockholders by failing to negotiate a fair price for Harleysville National
Corporation stock. In addition, the plaintiffs claim that the process leading to the proposed
merger was unfair. The complaints allege that the Company aided and abetted the breaches of
fiduciary duty by Harleysville and its directors. The complaints seek to enjoin the proposed
merger and to recover money damages. There are also five substantially similar cases pending (four
in Philadelphia County and one in Montgomery County) naming only Harleysville and its directors as
defendants. The Company believes the claims in the complaints are without merit.
On January 6, 2010, the plaintiffs in the Seibert and McAuvic cases moved to lift the stay of
proceedings previously stipulated by the parties, and sought an order granting expedited discovery
and scheduling a preliminary injunction hearing. On January 7, 2010, the Court denied plaintiffs
motions in their entirety.
On January 4, 2010, a complaint was filed in the United States District Court for the Eastern
District of Pennsylvania in a case entitled Valerius, et al. v. Geraghty, et al. That complaint
alleges that the Harleysville proxy issued in connection with the proposed merger was materially
misleading. It names Harleysville and its directors as defendants and seeks to enjoin the proposed
merger. On January 15, 2010, the Company was sued in the United States District Court for the
Eastern District of Pennsylvania in a case entitled Shoemaker, et al. v. Geraghty, et al. The
complaint names the Company and Harleysville and its directors as defendants and asserts that the
Harleysville proxy issued in connection with the proposed merger transaction was incomplete and
materially misleading. On January 15, 2010, plaintiffs in the Valerius and Shoemaker actions both
filed motions for temporary restraining orders barring the Harleysville shareholder vote on the
proposed merger from going forward. On January 15, 2010, Harleysville and its directors moved to
dismiss the Valerius complaint. On January 21, 2010, the Court denied plaintiffs motions to
restrain the Harleysville shareholder vote and ruled that plaintiffs had failed to show a
likelihood that they would succeed on their claims.
On January 27, 2010, Harleysville and its directors moved to dismiss the Shoemaker complaint. The
Company moved to dismiss the Shoemaker complaint on February 2, 2010.
On February 8, 2010, plaintiffs filed a stipulation of dismissal with prejudice of the Shoemaker action.
On February 26, 2010, plaintiffs in the Valerius and Maffia actions filed stipulations
dismissing those actions with prejudice.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the year
ended December 31, 2009.
29
PART II
ITEM 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is traded under the symbol FNFG on the NASDAQ Global Select Market. At December
31, 2009, we had approximately 16,400 stockholders of record. During 2009, the high sales price of
our common stock was $16.32 and the low sales price of our common stock was $9.48. We paid
dividends of $0.56 per common share during the year ended December 31, 2009. See additional
information regarding the market price and dividends paid filed herewith in Part II, Item 6,
Selected Financial Data.
Our ability to pay dividends to our stockholders is substantially dependent upon the ability of
First Niagara Bank to pay dividends to the Company. The payment of
dividends by our Bank is
subject to OTS regulations and continued compliance with minimum regulatory capital requirements.
The OTS may disapprove a dividend if: our Bank would be undercapitalized following the
distribution; the proposed capital distribution raises safety and soundness concerns; or the
capital distribution would violate a prohibition contained in any statute, regulation or agreement.
Management does not believe these regulatory requirements will affect our Banks ability to pay
dividends in the future given its well-capitalized position. See Part I Item 1 Supervision
and Regulation Capital Distributions for a discussion of the OTS regulatory restrictions on
dividend payments by the Bank.
We did not repurchase any shares of our common stock during the fourth quarter of 2009.
30
Stock Performance Graph
Below is a stock performance graph comparing (a) the cumulative total return on our common stock
for the period beginning December 31, 2004 as reported by the NASDAQ Global Select Market, through
December 31, 2009, (b) the cumulative total return on stocks included in the NASDAQ Composite Index
over the same period, and (c) the cumulative total return of publicly traded midcap banks and
thrifts over the same period. Cumulative return assumes the reinvestment of dividends, and is
expressed in dollars based on an assumed investment of $100.
FIRST NIAGARA FINANCIAL GROUP, INC.
|
|
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|
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|
|
Period Ended |
|
Index |
|
12/31/04 |
|
|
12/31/05 |
|
|
12/31/06 |
|
|
12/31/07 |
|
|
12/31/08 |
|
|
12/31/09 |
|
First Niagara Financial Group, Inc. |
|
|
100.00 |
|
|
|
106.62 |
|
|
|
113.09 |
|
|
|
95.34 |
|
|
|
133.26 |
|
|
|
119.62 |
|
NASDAQ Composite |
|
|
100.00 |
|
|
|
101.37 |
|
|
|
111.03 |
|
|
|
121.92 |
|
|
|
72.49 |
|
|
|
104.31 |
|
SNL Mid Cap Bank & Thrift |
|
|
100.00 |
|
|
|
95.34 |
|
|
|
103.40 |
|
|
|
81.99 |
|
|
|
43.16 |
|
|
|
36.87 |
|
31
ITEM 6. Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the year ended December 31, |
|
2009(1) |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except per share amounts) |
|
Selected financial condition data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,584,833 |
|
|
$ |
9,331,372 |
|
|
$ |
8,096,228 |
|
|
$ |
7,945,526 |
|
|
$ |
8,064,832 |
|
Loans and
leases, net(2) |
|
|
7,241,153 |
|
|
|
6,385,982 |
|
|
|
5,654,705 |
|
|
|
5,593,512 |
|
|
|
5,216,299 |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed |
|
|
3,650,058 |
|
|
|
1,232,383 |
|
|
|
817,614 |
|
|
|
717,601 |
|
|
|
867,037 |
|
Other |
|
|
771,620 |
|
|
|
340,718 |
|
|
|
399,550 |
|
|
|
342,821 |
|
|
|
737,851 |
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed |
|
|
1,093,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
9,729,524 |
|
|
|
5,943,613 |
|
|
|
5,548,984 |
|
|
|
5,709,736 |
|
|
|
5,479,412 |
|
Borrowings |
|
|
2,302,280 |
|
|
|
1,540,227 |
|
|
|
1,094,981 |
|
|
|
747,554 |
|
|
|
1,096,427 |
|
Stockholders equity |
|
$ |
2,373,661 |
|
|
$ |
1,727,263 |
|
|
$ |
1,353,179 |
|
|
$ |
1,387,197 |
|
|
$ |
1,374,423 |
|
Common shares outstanding |
|
|
188,215 |
|
|
|
118,562 |
|
|
|
104,770 |
|
|
|
110,719 |
|
|
|
112,808 |
|
Preferred shares outstanding |
|
|
|
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
490,758 |
|
|
$ |
441,138 |
|
|
$ |
422,772 |
|
|
$ |
415,830 |
|
|
$ |
375,217 |
|
Interest expense |
|
|
126,358 |
|
|
|
172,561 |
|
|
|
198,594 |
|
|
|
169,349 |
|
|
|
125,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
364,400 |
|
|
|
268,577 |
|
|
|
224,178 |
|
|
|
246,481 |
|
|
|
250,150 |
|
Provision for credit losses |
|
|
43,650 |
|
|
|
22,500 |
|
|
|
8,500 |
|
|
|
6,456 |
|
|
|
7,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses |
|
|
320,750 |
|
|
|
246,077 |
|
|
|
215,678 |
|
|
|
240,025 |
|
|
|
242,802 |
|
Noninterest income |
|
|
125,975 |
|
|
|
115,735 |
|
|
|
131,811 |
|
|
|
111,218 |
|
|
|
90,663 |
|
Noninterest expense |
|
|
326,672 |
|
|
|
228,410 |
|
|
|
222,466 |
|
|
|
211,851 |
|
|
|
188,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
120,053 |
|
|
|
133,402 |
|
|
|
125,023 |
|
|
|
139,392 |
|
|
|
145,259 |
|
Income taxes |
|
|
40,676 |
|
|
|
44,964 |
|
|
|
40,938 |
|
|
|
47,533 |
|
|
|
52,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
79,377 |
|
|
|
88,438 |
|
|
|
84,085 |
|
|
|
91,859 |
|
|
|
92,859 |
|
Preferred stock dividend |
|
|
3,731 |
|
|
|
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock discount |
|
|
8,315 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
67,331 |
|
|
$ |
87,254 |
|
|
$ |
84,085 |
|
|
$ |
91,859 |
|
|
$ |
92,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock and related per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share(1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.46 |
|
|
$ |
0.81 |
|
|
$ |
0.82 |
|
|
$ |
0.86 |
|
|
$ |
0.85 |
|
Diluted |
|
|
0.46 |
|
|
|
0.81 |
|
|
|
0.81 |
|
|
|
0.85 |
|
|
|
0.84 |
|
Cash dividends |
|
|
0.56 |
|
|
|
0.56 |
|
|
|
0.54 |
|
|
|
0.46 |
|
|
|
0.38 |
|
Book value |
|
|
12.84 |
|
|
|
15.02 |
|
|
|
13.41 |
|
|
|
12.99 |
|
|
|
12.65 |
|
Market Price (NASDAQ: FNFG): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
16.32 |
|
|
|
22.38 |
|
|
|
15.13 |
|
|
|
15.43 |
|
|
|
15.16 |
|
Low |
|
|
9.48 |
|
|
|
9.98 |
|
|
|
11.15 |
|
|
|
13.38 |
|
|
|
12.05 |
|
Close |
|
$ |
13.91 |
|
|
$ |
16.17 |
|
|
$ |
12.04 |
|
|
$ |
14.86 |
|
|
$ |
14.47 |
|
|
|
|
(1) |
|
Includes the impact of the acquisition of 57 NatCity branch locations on September
4, 2009. |
(2) |
|
Includes loans held for sale. |
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the year ended December 31, |
|
2009(1) |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(Dollar amounts in thousands) |
|
Selected financial ratios and other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance ratios(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets |
|
|
0.69 |
% |
|
|
0.99 |
% |
|
|
1.05 |
% |
|
|
1.14 |
% |
|
|
1.18 |
% |
Common
equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average common equity |
|
|
3.47 |
|
|
|
5.99 |
|
|
|
6.24 |
|
|
|
6.67 |
|
|
|
6.76 |
|
Return on average tangible common equity(3) |
|
|
6.06 |
|
|
|
13.19 |
|
|
|
14.12 |
|
|
|
14.75 |
|
|
|
14.41 |
|
Total
equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity |
|
|
3.95 |
|
|
|
5.99 |
|
|
|
6.24 |
|
|
|
6.67 |
|
|
|
6.76 |
|
Return on average tangible equity(4) |
|
|
6.71 |
|
|
|
12.98 |
|
|
|
14.12 |
|
|
|
14.75 |
|
|
|
14.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
3.40 |
|
|
|
3.19 |
|
|
|
2.84 |
|
|
|
3.20 |
|
|
|
3.46 |
|
Net interest rate margin |
|
|
3.65 |
|
|
|
3.55 |
|
|
|
3.33 |
|
|
|
3.61 |
|
|
|
3.75 |
|
Efficiency ratio(5) |
|
|
66.62 |
|
|
|
59.43 |
|
|
|
62.49 |
|
|
|
59.23 |
|
|
|
55.22 |
|
Dividend payout ratio |
|
|
121.74 |
% |
|
|
69.14 |
% |
|
|
65.85 |
% |
|
|
53.49 |
% |
|
|
44.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Niagara Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
|
13.73 |
% |
|
|
12.72 |
% |
|
|
11.35 |
% |
|
|
12.16 |
% |
|
|
12.26 |
% |
Tier 1 risk-based capital |
|
|
12.63 |
|
|
|
11.48 |
|
|
|
10.10 |
|
|
|
10.91 |
|
|
|
11.01 |
|
Tier 1 (core) capital |
|
|
7.48 |
|
|
|
8.47 |
|
|
|
7.54 |
|
|
|
7.73 |
|
|
|
7.56 |
|
Tangible capital |
|
|
7.48 |
|
|
|
8.47 |
|
|
|
7.54 |
|
|
|
7.73 |
|
|
|
7.56 |
|
Consolidated equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of stockholders equity to total assets |
|
|
16.27 |
|
|
|
18.51 |
|
|
|
16.71 |
|
|
|
17.46 |
|
|
|
17.04 |
|
Ratio of tangible common stockholders equity
to tangible assets(6) |
|
|
10.54 |
% |
|
|
8.96 |
% |
|
|
8.21 |
% |
|
|
8.88 |
% |
|
|
8.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset quality: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing loans |
|
$ |
68,561 |
|
|
$ |
46,417 |
|
|
$ |
28,054 |
|
|
$ |
15,528 |
|
|
$ |
21,930 |
|
Other nonperforming assets |
|
|
7,057 |
|
|
|
2,001 |
|
|
|
237 |
|
|
|
632 |
|
|
|
843 |
|
Allowance for credit losses |
|
|
88,303 |
|
|
|
77,793 |
|
|
|
70,247 |
|
|
|
71,913 |
|
|
|
72,340 |
|
Net loan charge-offs |
|
$ |
33,140 |
|
|
$ |
17,844 |
|
|
$ |
10,084 |
|
|
$ |
6,883 |
|
|
$ |
7,114 |
|
Total nonaccruing loans to total loans |
|
|
0.94 |
% |
|
|
0.72 |
% |
|
|
0.49 |
% |
|
|
0.27 |
% |
|
|
0.41 |
% |
Total nonperforming assets to total assets |
|
|
0.52 |
|
|
|
0.52 |
|
|
|
0.35 |
|
|
|
0.20 |
|
|
|
0.28 |
|
Allowance for credit losses to nonaccruing loans |
|
|
128.8 |
|
|
|
167.6 |
|
|
|
250.4 |
|
|
|
463.1 |
|
|
|
329.9 |
|
Allowance for credit losses to total loans |
|
|
1.20 |
|
|
|
1.20 |
|
|
|
1.23 |
|
|
|
1.27 |
|
|
|
1.37 |
|
Net charge-offs to average loans |
|
|
0.50 |
% |
|
|
0.28 |
% |
|
|
0.18 |
% |
|
|
0.12 |
% |
|
|
0.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of branches |
|
|
171 |
|
|
|
114 |
|
|
|
110 |
|
|
|
119 |
|
|
|
118 |
|
Full time equivalent employees |
|
|
2,816 |
|
|
|
1,909 |
|
|
|
1,824 |
|
|
|
1,922 |
|
|
|
1,984 |
|
|
|
|
(1) |
|
Includes the impact of the acquisition of 57 NatCity branch locations on
September 4, 2009. |
|
(2) |
|
Computed using daily averages. |
|
(3) |
|
Average tangible common equity excludes average goodwill, other intangibles, and
preferred stock of $899.5 million, $814.6 million, $752.5 million, $754.9 million, and
$729.8 million for 2009, 2008, 2007, 2006, and 2005, respectively. This is a non-GAAP
financial measure that we believe provides investors with information that is useful in
understanding our financial performance and condition. |
|
(4) |
|
Average tangible equity excludes average goodwill and other intangibles of
$828.6 million, $794.9 million, $752.5 million, $754.9 million, and $729.8 million for
2009, 2008, 2007, 2006, and 2005, respectively. This is a non-GAAP financial measure that
we believe provides investors with information that is useful in understanding our
financial performance and condition. |
|
(5) |
|
Computed by dividing noninterest expense by the sum of net interest income
and noninterest income. |
|
(6) |
|
Tangible common stockholders equity and tangible assets exclude goodwill and
other intangibles of $935.4 million, $784.5 million, $750.1 million, $748.1 million, and
$760.7 million for 2009, 2008, 2007, 2006, and 2005. This is a non-GAAP financial measure
that we believe provides investors with information that is useful in understanding our
financial performance and condition. |
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
quarter |
|
|
|
(In thousands, except per share amounts) |
|
Selected Quarterly Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
145,357 |
|
|
$ |
128,788 |
|
|
$ |
110,794 |
|
|
$ |
105,819 |
|
|
$ |
109,798 |
|
|
$ |
109,951 |
|
|
$ |
111,402 |
|
|
$ |
109,987 |
|
Interest expense |
|
|
32,454 |
|
|
|
29,866 |
|
|
|
30,849 |
|
|
|
33,189 |
|
|
|
38,092 |
|
|
|
39,751 |
|
|
|
44,793 |
|
|
|
49,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest income |
|
|
112,903 |
|
|
|
98,922 |
|
|
|
79,945 |
|
|
|
72,630 |
|
|
|
71,706 |
|
|
|
70,200 |
|
|
|
66,609 |
|
|
|
60,062 |
|
Provision for credit losses |
|
|
11,000 |
|
|
|
15,000 |
|
|
|
8,900 |
|
|
|
8,750 |
|
|
|
8,000 |
|
|
|
6,500 |
|
|
|
4,900 |
|
|
|
3,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
credit losses |
|
|
101,903 |
|
|
|
83,922 |
|
|
|
71,045 |
|
|
|
63,880 |
|
|
|
63,706 |
|
|
|
63,700 |
|
|
|
61,709 |
|
|
|
56,962 |
|
Noninterest income |
|
|
35,517 |
|
|
|
33,224 |
(2) |
|
|
28,774 |
|
|
|
28,460 |
|
|
|
27,643 |
|
|
|
29,189 |
|
|
|
29,636 |
|
|
|
29,267 |
|
Noninterest expense |
|
|
94,720 |
(1) |
|
|
100,720 |
(3) |
|
|
68,085 |
(4) |
|
|
63,147 |
(5) |
|
|
57,555 |
|
|
|
56,754 |
|
|
|
56,594 |
|
|
|
57,507 |
(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before Income taxes |
|
|
42,700 |
|
|
|
16,426 |
|
|
|
31,734 |
|
|
|
29,193 |
|
|
|
33,794 |
|
|
|
36,135 |
|
|
|
34,751 |
|
|
|
28,722 |
|
Income taxes |
|
|
13,796 |
|
|
|
5,495 |
|
|
|
10,934 |
|
|
|
10,451 |
|
|
|
10,988 |
|
|
|
12,395 |
|
|
|
11,672 |
|
|
|
9,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
28,904 |
|
|
|
10,931 |
|
|
|
20,800 |
|
|
|
18,742 |
|
|
|
22,806 |
|
|
|
23,740 |
|
|
|
23,079 |
|
|
|
18,813 |
|
Preferred stock dividend |
|
|
|
|
|
|
|
|
|
|
1,431 |
|
|
|
2,300 |
|
|
|
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock discount |
|
|
|
|
|
|
|
|
|
|
7,947 |
|
|
|
368 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
28,904 |
|
|
$ |
10,931 |
|
|
$ |
11,422 |
|
|
$ |
16,074 |
|
|
$ |
21,622 |
|
|
$ |
23,740 |
|
|
$ |
23,079 |
|
|
$ |
18,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.16 |
|
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
$ |
0.14 |
|
|
$ |
0.19 |
|
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.18 |
|
Diluted |
|
|
0.16 |
|
|
|
0.07 |
|
|
|
0.08 |
|
|
|
0.14 |
|
|
|
0.19 |
|
|
|
0.22 |
|
|
|
0.22 |
|
|
|
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price (NASDAQ: FNFG): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
14.47 |
|
|
|
14.06 |
|
|
|
14.23 |
|
|
|
16.32 |
|
|
|
16.45 |
|
|
|
22.38 |
|
|
|
15.00 |
|
|
|
14.15 |
|
Low |
|
|
12.40 |
|
|
|
10.73 |
|
|
|
10.53 |
|
|
|
9.48 |
|
|
|
11.00 |
|
|
|
11.68 |
|
|
|
12.60 |
|
|
|
9.98 |
|
Close |
|
|
13.91 |
|
|
|
12.33 |
|
|
|
11.42 |
|
|
|
10.89 |
|
|
|
16.17 |
|
|
|
15.75 |
|
|
|
12.86 |
|
|
|
13.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends |
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
|
|
(1) |
|
Includes merger and acquisition integration costs of $4.0 million related to the
acquisition of 57 NatCity Bank branch locations and proposed merger with Harleysville National
Corporation. |
|
(2) |
|
Includes gain on sale of merchant services customer list of $2.5 million. |
|
(3) |
|
Includes merger and acquisition integration costs of $23.4 million related to the
acquisition of 57 NatCity branch locations and the proposed merger with Harleysville National
Corporation and a $5.0 million charitable contribution to the First Niagara Bank Foundation. |
|
(4) |
|
Includes FDIC special assessment of $5.4 million and merger and acquisition
integration costs of $2.3 million related to the acquisition of 57 NatCity Bank branch
locations and the proposed merger with Harleysville National Corporation. |
|
(5) |
|
Includes merger and acquisition integration costs of $1.7 million related to the
acquisition of 57 NatCity branch locations. |
|
(6) |
|
Includes real estate writedowns and integration costs of $2.0 million related to the
acquisition of Great Lakes Bancorp, Inc. |
34
ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following is an analysis of our financial condition and results of operations. You should read
this item in conjunction with our Consolidated Financial Statements and related notes filed with
this report in Part II, Item 8, Financial Statements and Supplementary Data and the description
of our business filed here within Part I, Item I, Business.
OVERVIEW
First Niagara Financial Group, Inc. holds all of the capital stock of First Niagara Bank, a
federally chartered savings bank subject to OTS regulation. We are positioned as a multi-faceted
community bank in Upstate New York and Western Pennsylvania with $14.6 billion of assets, $9.7
billion of deposits, and 171 branch locations as of December 31, 2009.
We were organized in April 1998 in connection with the conversion of First Niagara Bank from a
mutual savings bank to a stock savings bank. Since that time we have strategically deployed
capital through the acquisition of community banks and financial services companies throughout
Upstate New York, and most recently through the acquisition of 57 National City Bank (NatCity)
branch locations in Western Pennsylvania in September 2009. As a result, we provide our customers with a
full range of products and services delivered through our customer focused operations, which
include retail and commercial banking; financial services and risk management (insurance); and
commercial business services. These include commercial real estate loans, commercial business
loans and leases, residential, home equity and other consumer loans, as well as retail and
commercial deposit products and insurance services. We also provide wealth management products and
services.
In addition to acquiring banking and financial services organizations, our strategy includes steady
organic growth, as we have continued to open de novo branch locations, especially in areas where
acquisition opportunities have been more limited. We committed to a de novo branch expansion
strategy in order to expand our service area and fill coverage gaps within our footprint. We have
also significantly expanded our commercial lending and business services, to include a full
complement of cash management and merchant banking services. We have
redirected our lending focus such that our loan portfolio has become more like a commercial bank as opposed to
a traditional thrift. This strategy has been effective in minimizing interest rate risk
sensitivity and is a solid source of noninterest bearing deposits.
On July 26, 2009, First Niagara Financial Group, Inc. and Harleysville National Corporation
(Harleysville), the holding company for Harleysville National Bank, jointly announced a
definitive merger agreement under which Harleysville will merge into the Company in a transaction
valued at approximately $237.0 million on the day of announcement. At December 31, 2009,
Harleysville had total assets of approximately $5.2 billion, including $3.0 billion in loans, and
deposits of approximately $3.9 billion in 83 branches across nine Southeastern Pennsylvania
counties. Harleysvilles shareholders approved the merger on January 22, 2010. The merger is
expected to be completed in the second quarter of 2010 and is subject to the approvals of the
applicable regulatory agencies.
In December 2009, we lent $50.0 million to Harleysville, the proceeds of which
Harleysville contributed to Harleysville National Bank as Tier 1 capital.
Harleysville pledged the stock of Harleysville National Bank to us to secure
repayment of the loan. In addition, in December 2009, First Niagara Bank purchased performing
commercial loans with a fair value of $62.2 million from Harleysville National Bank.
FINANCIAL OVERVIEW
During 2009, continued turmoil in the financial sector resulted in a low level of confidence in
financial markets among borrowers, lenders, and depositors, as well as extreme volatility in the
capital and credit markets. The U.S. economy was in a recession, and housing prices continued to
decline. Even under these difficult market conditions, we were able to raise additional capital by
issuing 69.4 million shares of common stock in two separate underwritten follow-on stock
offerings in 2009, resulting in net aggregate proceeds of $802.2 million, in addition to the 8.5
million shares of common stock we issued in a follow-on stock offering in 2008, which resulted in
net proceeds of $108.8 million. A portion of the proceeds from the 2009 follow-on stock offerings
was used to fully redeem the $184.0 million of preferred stock we issued and sold to the Treasury
under the CPP and to repurchase the warrant for the shares of our common stock that we had issued
and sold to the Treasury.
35
In 2009, we continued to capitalize on our financial strength and proven business model to drive
profitable growth across our Upstate New York and Western
Pennsylvania markets. The NatCity branch acquisition expanded our presence into the Pittsburgh, Erie, and Warren,
Pennsylvania markets, growing our footprint and enabling us to cross-sell our products and services
to this new customer base. We
acquired 57 branch locations from NatCity, including cash of $3.1 billion, performing loans with a
fair value of approximately $717.3 million, core deposit intangible of $29.8 million, and deposits
with a fair value of $4.0 billion, resulting in goodwill of $130.1 million.
Our net income for the year ended December 31, 2009 was $79.4 million as compared to $88.4 million
for 2008. Diluted earnings per share in 2009 was $0.46, compared to
$0.81 in 2008, and reflected
$31.5 million of merger and acquisition integration expenses, $15.4 million in additional FDIC
insurance premiums, and the impact of the additional shares issued in our follow-on stock
offerings. Net interest income increased significantly to $364.4 million in 2009, or 36% from
2008. This increase was driven by a number of factors including strong commercial loan growth,
considerably lower funding costs, and the September acquisition of
the NatCity branch locations. Our net
interest margin increased each successive quarter during 2009 and amounted to 3.65% for 2009, an
increase of 10 basis points compared to 2008. Noninterest income increased $10.2 million due
primarily to higher deposit related banking fees, including those from the acquired NatCity
branch locations. Excluding the $31.5 million in merger and acquisition integration expenses related to
the NatCity acquisition and Harleysville merger and the $15.4 million increase in FDIC insurance
premiums, our noninterest expense increased $51.4 million during 2009. This increase was primarily
attributable to the acquired NatCity branches and targeted investments to build operational
capacity to support the Harleysville acquisition as well as future growth opportunities.
The NatCity branch acquisition resulted in higher loan, investment, and deposit balances.
Excluding the loans acquired from NatCity, our higher yielding commercial loan portfolio increased
$363.0 million, or 10%, and now comprises 65% of our total loans. While our total deposit balances
decreased slightly to $5.8 billion, excluding deposits acquired from NatCity, our core deposits
increased to 80% of our total deposits at the end of 2009, from 66% at the end of 2008, as
repricing of our certificates of deposit resulted in a shift in customer preferences to lower cost
money market deposits. Borrowings, which increased to $2.3 billion at the end of 2009 from $1.5
billion at the end of 2008, provided us with a low cost alternative to deposits for funding our
loan growth.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We evaluate those accounting policies and estimates that we judge to be critical: those most
important to the presentation of our financial condition and results of operations, and that
require our most subjective and complex judgments. Accordingly, our accounting estimates relating
to the adequacy of our allowance for credit losses, the valuation and other than temporary
impairment analysis of our investment securities, the accounting treatment and valuation of our
acquired loans, and the analysis of the carrying value of goodwill for impairment are deemed to be
critical, as our judgments could have a material effect on our results of operations.
A detailed description of our methodology for calculating our allowance for credit losses and
assumptions made is included within the Lending Activities section filed herewith in Part I, Item
1, Business.
Investment Securities
Fair value of our investment securities is based upon quoted market prices of identical securities,
where available. If such quoted prices are not available, fair value is based upon valuation
models that use cash flow, security structure, and other observable information. Where sufficient
data is not available to produce a fair valuation, fair value is based on broker quotes of similar
securities. Broker quotes may be adjusted to ensure that investment securities are recorded at
fair value. These adjustments may include amounts to reflect counterparty credit quality and our
creditworthiness, among other things, as well as unobservable parameters. Any such valuation
adjustments are applied consistently over time.
36
We conduct a quarterly review and evaluation of our investment securities portfolio to determine if
any declines in fair value below amortized cost are other than temporary. In making this
determination we consider some or all of the following factors: the period of time the securities
were in an unrealized loss position, the percentage decline in comparison to the securities
amortized cost, credit rating, the financial condition of the issuer and guarantor, where
applicable, the delinquency or default rates of underlying collateral, credit enhancement,
projected losses, level of credit loss, and projected cash flows. Any valuation decline below
amortized cost that we determine to be other than temporary would require us to write down the
credit component of such unrealized loss through a charge to current period operations. If we
intend to sell a security with a fair value below amortized cost or if it is more likely than not
that we will be required to sell such a security, we would record an other than temporary
impairment charge through current period earnings for the full decline in fair value below
amortized cost.
Acquired Loans
Loans that we acquire in connection with acquisitions subsequent to January 1, 2009 are recorded at
fair value with no carryover of the related allowance for credit losses. Fair value of the loans
involves estimating the amount and timing of principal and interest cash flows expected to be
collected on the loans and discounting those cash flows at a market rate of interest.
The excess of cash flows expected at acquisition over the estimated fair value is referred to as
the accretable discount and is recognized into interest income over the remaining life of the loan.
The difference between contractually required payments at acquisition and the cash flows expected
to be collected at acquisition is referred to as the
nonaccretable discount. The nonaccretable discount includes estimated future credit losses
expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows
will require us to evaluate the need for an additional allowance for credit losses. Subsequent
improvement in expected cash flows will result in the reversal of a corresponding amount of the
nonaccretable discount which we will then reclassify as accretable discount that will be recognized
into interest income over the remaining life of the loan.
Acquired loans that met
the criteria for
nonaccrual of interest prior to the acquisition may be
considered performing upon acquisition, regardless of whether the customer is contractually
delinquent. We expect to fully collect the new carrying value (i.e., fair value) of the
loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may
accrue interest on these loans, including the impact of any accretable discount. In addition,
charge-offs on such loans would be first applied to the nonaccretable difference portion of the
fair value adjustment.
Goodwill
We test goodwill for impairment annually, as of November 1, using a two-step process that begins
with an estimation of the fair value of a reporting unit. Goodwill impairment exists when a
reporting units carrying value of goodwill exceeds its implied fair value. Goodwill is also
tested for impairment on an interim basis if an event occurs or circumstances change between annual
tests that would more likely than not reduce the fair value of the reporting unit below its
carrying amount. Significant judgment is applied when goodwill is assessed for impairment. This
judgment includes developing cash flow projections, selecting appropriate discount rates,
identifying relevant market comparables, incorporating general
economic and market conditions, and
selecting an appropriate control premium. The selection and weighting of the various fair value
techniques may result in a higher or lower fair value. Judgment is applied in determining the
weightings that are most representative of fair value. The assumptions used in the goodwill
impairment assessment and the application of these estimates and assumptions are discussed below.
The first step (Step 1) of impairment testing requires a comparison of each reporting units fair
value to carrying value to identify potential impairment. We have two reporting units: banking and
financial services.
For our banking reporting unit, we utilized both the income and market approaches to determine fair
value. The income approach was based on discounted cash flows derived from assumptions of balance
sheet and income statement activity. An internal forecast was developed by considering several
long-term key business drivers such as anticipated loan and deposit growth. For the market
approach, earnings and market capitalization multiples of comparable public companies were selected
and applied to the Banking reporting units applicable metrics. The results of the income and
market approaches were weighted equally to arrive at the final calculation of fair value.
37
For our financial services reporting unit, we utilized both the income and market approaches to
determine fair value. The income approach was primarily based on discounted cash flows derived
from assumptions of income statement activity. An internal forecast was developed by considering
several long-term key business metrics such as revenue growth and operating margins. For the
market approach, earnings and tangible book value multiples of comparable companies were selected
and applied to the Financial Services reporting units applicable metrics. The results of the
income and market approaches were weighted equally to arrive at the final calculation of fair
value.
The aggregate fair values were compared to our market capitalization as an assessment of the
appropriateness of the fair value measurements. A control premium analysis indicated that the
implied control premium was within range of overall control premiums observed in the market place.
The second step (Step 2) of impairment testing is necessary only if a reporting units carrying
amount exceeds its fair value. Step 2 compares the implied fair value of the reporting unit
goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair value
of goodwill is determined in the same manner as goodwill that is recognized in a business
combination. Significant judgment and estimates are involved in estimating the fair value of the
assets and liabilities of the reporting unit. As both of our reporting units fair values
substantially exceeded their carrying amount, we were not required to perform Step 2.
ANALYSIS OF FINANCIAL CONDITION
Lending Activities
Our total loans and leases outstanding increased $873.1 million from December 31, 2008
to December 31, 2009, including the $717.3 million (fair value) of loans we acquired from the
NatCity branch acquisition and a $92.3 million increase in our Western Pennsylvania portfolio from the
acquisition date.
The $363.0 million, or 10%, increase in our commercial loans portfolio, excluding the NatCity
acquired loans and Harleysville purchased loans, resulted from our continued strategic focus on the
portfolio and decreased competition as larger banks and nonbank entities continued to face
liquidity and capital issues. While the majority of this increase was in our Upstate New York
portfolio, our Western Pennsylvania commercial loan portfolio contributed nearly $50.0 million
since the acquisition date. Commercial loans now comprise 65% of our total loan portfolio as
compared to 57% at December 31, 2008.
Despite originating $575.3 million in new residential real estate loans during 2009, we experienced
a net decline in balances of $335.2 million in Upstate New York as consumer demand continued to be
for long-term fixed rate products which we generally do not maintain in our loan portfolio for
interest rate risk management purposes. Home equity balances increased by $66.6 million, including
$17.0 million in Western Pennsylvania, as a result of our active marketing of this relationship
building product which has a lower credit risk compared to other consumer lending products. Other
consumer lending balances also decreased, excluding loans acquired from NatCity, as we reduced our
emphasis on these loans from a business strategy standpoint.
38
Loan Portfolio Composition
The table below is selected information concerning the composition of our loan and lease
portfolios, including loans held for sale, as of December 31
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
$ |
2,713,542 |
|
|
|
37.2 |
% |
|
$ |
2,211,402 |
|
|
|
34.4 |
% |
|
$ |
1,902,334 |
|
|
|
33.5 |
% |
|
$ |
1,786,384 |
|
|
|
31.7 |
% |
|
$ |
1,647,576 |
|
|
|
31.3 |
% |
Construction |
|
|
348,040 |
|
|
|
4.8 |
|
|
|
340,564 |
|
|
|
5.3 |
|
|
|
292,675 |
|
|
|
5.1 |
|
|
|
248,325 |
|
|
|
4.4 |
|
|
|
222,907 |
|
|
|
4.2 |
|
Business |
|
|
1,481,845 |
|
|
|
20.3 |
|
|
|
940,304 |
|
|
|
14.6 |
|
|
|
730,029 |
|
|
|
12.8 |
|
|
|
561,323 |
|
|
|
10.0 |
|
|
|
473,571 |
|
|
|
9.0 |
|
Specialized lending |
|
|
207,749 |
|
|
|
2.8 |
|
|
|
178,916 |
|
|
|
2.8 |
|
|
|
183,747 |
|
|
|
3.2 |
|
|
|
155,032 |
|
|
|
2.7 |
|
|
|
159,759 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
4,751,176 |
|
|
|
65.1 |
|
|
|
3,671,186 |
|
|
|
57.1 |
|
|
|
3,108,785 |
|
|
|
54.6 |
|
|
|
2,751,064 |
|
|
|
48.8 |
|
|
|
2,503,813 |
|
|
|
47.5 |
|
Residential real estate |
|
|
1,674,961 |
|
|
|
22.9 |
|
|
|
1,990,784 |
|
|
|
31.0 |
|
|
|
1,955,690 |
|
|
|
34.3 |
|
|
|
2,252,473 |
|
|
|
40.0 |
|
|
|
2,182,907 |
|
|
|
41.4 |
|
Home equity |
|
|
691,069 |
|
|
|
9.5 |
|
|
|
624,495 |
|
|
|
9.7 |
|
|
|
503,779 |
|
|
|
8.9 |
|
|
|
470,714 |
|
|
|
8.3 |
|
|
|
403,340 |
|
|
|
7.7 |
|
Other consumer |
|
|
186,341 |
|
|
|
2.5 |
|
|
|
143,989 |
|
|
|
2.2 |
|
|
|
127,169 |
|
|
|
2.2 |
|
|
|
163,824 |
|
|
|
2.9 |
|
|
|
178,732 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
7,303,547 |
|
|
|
100.0 |
% |
|
|
6,430,454 |
|
|
|
100.0 |
% |
|
|
5,695,423 |
|
|
|
100.0 |
% |
|
|
5,638,075 |
|
|
|
100.0 |
% |
|
|
5,268,792 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred costs and
unearned discounts |
|
|
25,909 |
|
|
|
|
|
|
|
33,321 |
|
|
|
|
|
|
|
29,529 |
|
|
|
|
|
|
|
27,350 |
|
|
|
|
|
|
|
19,847 |
|
|
|
|
|
Allowance for credit losses |
|
|
(88,303 |
) |
|
|
|
|
|
|
(77,793 |
) |
|
|
|
|
|
|
(70,247 |
) |
|
|
|
|
|
|
(71,913 |
) |
|
|
|
|
|
|
(72,340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases, net |
|
$ |
7,241,153 |
|
|
|
|
|
|
$ |
6,385,982 |
|
|
|
|
|
|
$ |
5,654,705 |
|
|
|
|
|
|
$ |
5,593,512 |
|
|
|
|
|
|
$ |
5,216,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below is selected information concerning the composition of our loan and lease
portfolios, including loans held for sale, by originating branch location as of December 31, 2009
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstate New |
|
|
Western |
|
|
Total loans and |
|
|
|
York |
|
|
Pennsylvania (1) |
|
|
leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
$ |
2,414,478 |
|
|
$ |
299,064 |
|
|
$ |
2,713,542 |
|
Construction |
|
|
348,040 |
|
|
|
|
|
|
|
348,040 |
|
Business |
|
|
1,013,995 |
|
|
|
467,850 |
|
|
|
1,481,845 |
|
Specialized lending |
|
|
207,749 |
|
|
|
|
|
|
|
207,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
3,984,262 |
|
|
|
766,914 |
|
|
|
4,751,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
1,655,627 |
|
|
|
19,334 |
|
|
|
1,674,961 |
|
Home equity |
|
|
674,047 |
|
|
|
17,022 |
|
|
|
691,069 |
|
Other consumer |
|
|
120,293 |
|
|
|
66,048 |
|
|
|
186,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
6,434,229 |
|
|
$ |
869,318 |
|
|
$ |
7,303,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Commercial loans in Western Pennsylvania include $34.9 million of performing
commercial real estate loans and $24.8 million of performing business loans purchased from
Harleysville in December 2009. |
39
Allowance for Credit Losses and Nonperforming Assets
The following table details our allocation of our allowance for credit losses by loan category as
of December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
Amount of |
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
allowance |
|
|
Percent of |
|
|
allowance |
|
|
Percent of |
|
|
allowance |
|
|
Percent of |
|
|
allowance |
|
|
Percent of |
|
|
allowance |
|
|
Percent of |
|
|
|
for credit |
|
|
loans to |
|
|
for credit |
|
|
loans to |
|
|
for credit |
|
|
loans to |
|
|
for credit |
|
|
loans to |
|
|
for credit |
|
|
loans to |
|
|
|
losses |
|
|
toal loans |
|
|
losses |
|
|
toal loans |
|
|
losses |
|
|
toal loans |
|
|
losses |
|
|
toal loans |
|
|
losses |
|
|
toal loans |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate and construction |
|
$ |
44,497 |
|
|
|
42.0 |
% |
|
$ |
32,789 |
|
|
|
39.7 |
% |
|
$ |
24,886 |
|
|
|
38.6 |
% |
|
$ |
25,434 |
|
|
|
36.1 |
% |
|
$ |
26,751 |
|
|
|
35.5 |
% |
Business |
|
|
30,972 |
|
|
|
20.3 |
|
|
|
25,816 |
|
|
|
14.6 |
|
|
|
19,107 |
|
|
|
12.8 |
|
|
|
18,209 |
|
|
|
10.0 |
|
|
|
15,644 |
|
|
|
9.0 |
|
Specialized lending |
|
|
7,352 |
|
|
|
2.8 |
|
|
|
10,138 |
|
|
|
2.8 |
|
|
|
8,705 |
|
|
|
3.2 |
|
|
|
7,443 |
|
|
|
2.7 |
|
|
|
7,892 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
82,821 |
|
|
|
65.1 |
|
|
|
68,743 |
|
|
|
57.1 |
|
|
|
52,698 |
|
|
|
54.6 |
|
|
|
51,086 |
|
|
|
48.8 |
|
|
|
50,287 |
|
|
|
47.5 |
|
|
Residential real estate |
|
|
1,825 |
|
|
|
22.9 |
|
|
|
1,663 |
|
|
|
31.0 |
|
|
|
3,384 |
|
|
|
34.3 |
|
|
|
3,898 |
|
|
|
40.0 |
|
|
|
4,036 |
|
|
|
41.4 |
|
Home equity |
|
|
1,216 |
|
|
|
9.5 |
|
|
|
775 |
|
|
|
9.7 |
|
|
|
1,344 |
|
|
|
8.9 |
|
|
|
1,278 |
|
|
|
8.3 |
|
|
|
1,667 |
|
|
|
7.7 |
|
Other consumer |
|
|
2,441 |
|
|
|
2.5 |
|
|
|
2,524 |
|
|
|
2.2 |
|
|
|
2,974 |
|
|
|
2.2 |
|
|
|
4,250 |
|
|
|
2.9 |
|
|
|
5,299 |
|
|
|
3.4 |
|
Unallocated |
|
|
|
|
|
|
|
|
|
|
4,088 |
|
|
|
|
|
|
|
9,847 |
|
|
|
|
|
|
|
11,401 |
|
|
|
|
|
|
|
11,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
88,303 |
|
|
|
100.0 |
% |
|
$ |
77,793 |
|
|
|
100.0 |
% |
|
$ |
70,247 |
|
|
|
100.0 |
% |
|
$ |
71,913 |
|
|
|
100.0 |
% |
|
$ |
72,340 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses to
total loans |
|
|
1.20 |
% |
|
|
|
|
|
|
1.20 |
% |
|
|
|
|
|
|
1.23 |
% |
|
|
|
|
|
|
1.27 |
% |
|
|
|
|
|
|
1.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In determining the level of our allowance, we consider our historical loss experience by
type of credit and internal risk grade, specific homogeneous risk pools, and specific loss
allocations, with adjustments for current events and conditions. Our process for establishing the
level of the allowance for credit losses is designed to account for credit deterioration as it
occurs. The provision for credit losses reflects loan quality trends, including the levels of and
trends related to nonaccruing loans, past due loans, potential problem loans, criticized loans, and
net charge-offs or recoveries, among other factors.
The level of the allowance reflects our continuing evaluation of industry concentrations, specific
credit risks, loan loss experience, current loan portfolio quality, present economic, political,
and regulatory conditions, and the estimate of losses inherent in the current loan portfolio.
Portions of the allowance may be allocated for specific credits; however, the entire allowance is
available for any credit that, in our judgment, should be charged off. While we utilize our best
judgment and information currently available, the ultimate adequacy of the allowance is dependent
upon a variety of factors beyond our control, including the performance of our loan portfolio, the
economy, changes in interest rates, and the view of the regulatory authorities toward loan
classifications.
Our allowance for credit losses consists of the following elements: (i) specific valuation
allowances based on probable losses on specific loans and (ii) valuation allowances based on net
historical loan loss experience for similar loans with similar characteristics and trends, adjusted
as appropriate for risk factors specific to respective loan types.
The allowance established for probable losses on specific loans is based on a regular analysis and
evaluation of classified loans. Loans are classified based on an internal credit risk grading
process that evaluates, among other things: (i) the obligors ability to repay; (ii) the underlying
collateral, if any; and (iii) the economic environment and industry in which the borrower operates.
This analysis is performed by our relationship managers for all commercial loans. Loans with a
calculated grade that is below a predetermined grade are adversely classified. Once a loan is
adversely classified, an analysis is performed to determine whether the loan is impaired and, if
impaired, the need to specifically allocate a portion of the allowance to the loan is assessed. Specific
valuation allowances are determined by analyzing the borrowers ability to repay amounts owed based
on an estimate of future cash flows expected to be received on the loan, discounted at the loans
effective interest rate, or, if the loan is collateral dependent, based upon the fair value of the
collateral, less costs to sell the collateral.
40
Valuation allowances are calculated based on the historical net loss experience of specific types
of loans. We calculate historical loss ratios, adjusted as appropriate for risk factors specific
to respective loan types, for pools of similar loans with similar characteristics based on the
proportion of actual net charge-offs experienced to the total population of loans in the pool. The
loss ratios are regularly updated based on actual net charge-off experience. A valuation
allowance is established for each pool of similar loans based upon the product of the loss ratio
impacting the total loan portfolio and the total dollar amount of the loans in the pool. Our pools
of similar loans include similarly risk-graded groups of commercial and industrial loans,
commercial real estate loans, consumer loans and 1-4 family residential mortgages.
Prior to 2009, we also
maintained an unallocated portion of our allowance for credit losses related to a
general assessment of potential variability of applicable qualitative considerations
subject to a higher degree of uncertainty. During the first quarter of 2009, we
refined our estimation methodology related to the allocation of the allowance. The result
was the allocation of the previous unallocated portion of the allowance for credit losses
to the specific loan portfolios related to a general assessment of each respective portfolio's
potential variability of applicable qualitative considerations subject to a higher degree of
uncertainty. Management does not consider this refinement to the methodology to be significant.
The following table sets forth information regarding our nonaccruing loans and other nonperforming
assets as of December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Nonaccruing loans (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
$ |
37,129 |
|
|
$ |
26,546 |
|
|
$ |
16,229 |
|
|
$ |
4,513 |
|
|
$ |
6,755 |
|
Business |
|
|
4,759 |
|
|
|
7,411 |
|
|
|
3,430 |
|
|
|
2,599 |
|
|
|
3,171 |
|
Specialized lending |
|
|
1,962 |
|
|
|
4,354 |
|
|
|
2,920 |
|
|
|
1,751 |
|
|
|
4,573 |
|
Shared national credits |
|
|
11,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
55,253 |
|
|
|
38,311 |
|
|
|
22,579 |
|
|
|
8,863 |
|
|
|
14,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
9,468 |
|
|
|
5,516 |
|
|
|
3,741 |
|
|
|
4,490 |
|
|
|
5,911 |
|
Home equity |
|
|
2,330 |
|
|
|
2,076 |
|
|
|
849 |
|
|
|
819 |
|
|
|
567 |
|
Other consumer |
|
|
1,510 |
|
|
|
514 |
|
|
|
885 |
|
|
|
1,356 |
|
|
|
953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing loans |
|
|
68,561 |
|
|
|
46,417 |
|
|
|
28,054 |
|
|
|
15,528 |
|
|
|
21,930 |
|
Real estate owned |
|
|
7,057 |
|
|
|
2,001 |
|
|
|
237 |
|
|
|
632 |
|
|
|
843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets (2) |
|
$ |
75,618 |
|
|
$ |
48,418 |
|
|
$ |
28,291 |
|
|
$ |
16,160 |
|
|
$ |
22,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans 90 days past due and still
accruing interest |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets as a
percentage of total assets |
|
|
0.52 |
% |
|
|
0.52 |
% |
|
|
0.35 |
% |
|
|
0.20 |
% |
|
|
0.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing loans as a
percentage of total loans |
|
|
0.94 |
% |
|
|
0.72 |
% |
|
|
0.49 |
% |
|
|
0.27 |
% |
|
|
0.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses to nonaccruing loans |
|
|
128.8 |
% |
|
|
167.6 |
% |
|
|
250.4 |
% |
|
|
463.1 |
% |
|
|
329.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We place loans on nonaccrual status when they become 90 days past due or if we have
uncertainty about collecting all interest or principal. |
|
(2) |
|
Nonperforming assets do not include $29.3 million, $6.9 million, $6.1 million, $4.1
million, and $3.1 million of performing renegotiated loans that are accruing interest at
December 31, 2009, 2008, 2007, 2006, and 2005 respectively. |
41
The following table details our net charge-offs by loan category for the years ended December 31
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
$ |
9,679 |
|
|
$ |
5,295 |
|
|
$ |
4,729 |
|
|
$ |
1,285 |
|
|
$ |
421 |
|
Business |
|
|
5,690 |
|
|
|
7,460 |
|
|
|
1,388 |
|
|
|
141 |
|
|
|
1,119 |
|
Specialized lending |
|
|
6,588 |
|
|
|
3,532 |
|
|
|
2,123 |
|
|
|
1,640 |
|
|
|
2,260 |
|
Shared national credits |
|
|
8,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
30,500 |
|
|
|
16,287 |
|
|
|
8,240 |
|
|
|
3,066 |
|
|
|
3,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
157 |
|
|
|
77 |
|
|
|
219 |
|
|
|
258 |
|
|
|
131 |
|
Home equity |
|
|
871 |
|
|
|
187 |
|
|
|
98 |
|
|
|
32 |
|
|
|
34 |
|
Other consumer |
|
|
1,612 |
|
|
|
1,293 |
|
|
|
1,527 |
|
|
|
3,527 |
|
|
|
3,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,140 |
|
|
$ |
17,844 |
|
|
$ |
10,084 |
|
|
$ |
6,883 |
|
|
$ |
7,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Despite some deterioration in our portfolio, our credit quality continued to compare
favorably to the industry and our peers. The loans obtained in the NatCity branch acquisition were
recorded at fair value on date of acquisition, and there was no carryover of the related allowance
for credit losses that NatCity may have previously recorded on the loans.
Our allowance for credit losses increased $10.5 million from December 31, 2008 to $88.3 million at
December 31, 2009, as our provision for credit losses exceeded our net charge-offs. The ratio of
our allowance for credit losses to total loans was 1.20% at each of December 31, 2009 and 2008.
Including the remaining credit related discount on the loans obtained in the NatCity branch
acquisition of $43.0 million, the ratio of our allowance for credit losses was 1.78% at December
31, 2009. We believe that this non-GAAP measure, which adds the credit related discount on the
acquired NatCity loans to our allowance for credit losses, provides a meaningful analysis of our
ability to withstand credit losses in our loan portfolio and provides for a better comparison to
our peers.
The increase in our net charge-offs to average loans outstanding to 0.50% at December 31, 2009 from
0.28% at December 31, 2008 was a reflection of the slow recovery of the economy and our growing
commercial loan portfolio, in addition to the charge-off of one commercial business shared national
credit in the third quarter of 2009.
Throughout most of 2008, the economy in Upstate New York was relatively stable and only modestly
affected by deteriorating credit conditions experienced in other areas of the country. However,
late in 2008 and into 2009, there was some deterioration in credit conditions, as reflected by the
$22.1 million increase in our nonaccruing loans in 2009. This increase can also be attributed to
the increase in our total loan portfolio as well as two large commercial business shared national
credits. As a result, our nonaccruing loans increased to 0.94% of total loans at December 31, 2009
from 0.72% at December 31, 2008.
Investing Activities
Securities Portfolio
Our investment securities portfolio increased $3.9 billion from December 31, 2008 to $5.5 billion
at December 31, 2009 primarily due to the investment of a portion of the $802.2 million in proceeds
from our two follow-on stock offerings and a portion of the funds received from the NatCity
acquisition. The majority of the funds were invested in collateralized mortgage obligations
(CMOs) guaranteed by the Federal National Mortgage Association, Federal Home Loan Mortgage
Association, or Government National Mortgage Association with an expected average life at the time
of purchase ranging from two to four years. Approximately $1.1 billion of the CMOs purchased
during the year were classified as held to maturity, as we have the intent and ability to hold
these securities to maturity. The remaining securities purchased were classified as available for
sale. Our investment securities available for sale portfolio remains well positioned to provide a
stable source of cash flow with a weighted average estimated remaining life of 2.9 years at
December 31, 2009, compared to 3.8 years at December 31, 2008.
42
We have assessed our securities that were in an unrealized loss position at December 31, 2009
to determine whether any decline in fair value below amortized cost is other than temporary. In
making this determination we considered some or all of the following factors: the period of time
the securities were in an unrealized loss position, the percentage decline in comparison to the
securities amortized cost, credit rating, the financial condition of the issuer and guarantor,
where applicable, the delinquency or default rates of underlying collateral, credit enhancement,
projected losses, levels of credit loss, and projected cash flows. We also considered any
intention to sell these securities and whether it is more likely than not that we will be required
to sell these securities before the recovery of their amortized
cost basis, which may be at maturity. Based on this analysis, we determined that three
securities with a total amortized cost of $5.0 million and a
fair value of $3.0 million were other than
temporarily impaired at December 31, 2009. The impairment loss of $2.0 million is included in
other noninterest income in our Consolidated Statement of Income and primarily resulted from our
intention to sell certain investment securities that were in an unrealized loss position at
December 31, 2009.
All of our non-agency collateralized mortgage obligations carry various amounts of credit
enhancement and none are collateralized with loans that were considered to be sub-prime at
origination. These securities were purchased based on the underlying loan characteristics such as
loan-to-value ratio, credit scores, property type, location, and the level of credit enhancement.
Current characteristics of each security such as credit rating, delinquency and foreclosure levels,
credit enhancement, projected collateral losses, and the level of credit loss and coverage are
reviewed regularly by management. If the level of credit enhancement is sufficient based on our
expectations of future collateral losses, we conclude that we will receive all of the originally
scheduled cash flows. When the level of credit loss coverage for an individual security
significantly deteriorates, we expand our analysis of the security to include detailed cash flow
projections based upon loan level credit characteristics and prepayment assumptions.
43
The following table shows certain information with respect to the amortized cost and fair values of
our portfolio as of December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
cost |
|
|
value |
|
|
cost |
|
|
value |
|
|
cost |
|
|
value |
|
Investment securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
416,847 |
|
|
$ |
422,844 |
|
|
$ |
295,639 |
|
|
$ |
299,747 |
|
|
$ |
359,153 |
|
|
$ |
361,360 |
|
U.S. government agencies and government
sponsored enterprises |
|
|
340,806 |
|
|
|
339,832 |
|
|
|
29,968 |
|
|
|
29,998 |
|
|
|
28,817 |
|
|
|
28,839 |
|
Corporate |
|
|
3,395 |
|
|
|
2,213 |
|
|
|
5,028 |
|
|
|
3,440 |
|
|
|
3,788 |
|
|
|
3,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
761,048 |
|
|
|
764,889 |
|
|
|
330,635 |
|
|
|
333,185 |
|
|
|
391,758 |
|
|
|
393,982 |
|
Other |
|
|
3,651 |
|
|
|
3,664 |
|
|
|
5,307 |
|
|
|
4,156 |
|
|
|
5,307 |
|
|
|
5,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and other securities |
|
$ |
764,699 |
|
|
$ |
768,553 |
|
|
$ |
335,942 |
|
|
$ |
337,341 |
|
|
$ |
397,065 |
|
|
$ |
399,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average remaining life of debt securities(1) |
|
2.8 years |
|
|
|
|
|
|
1.5 years |
|
|
|
|
|
|
1.5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
30,906 |
|
|
$ |
30,833 |
|
|
$ |
11,711 |
|
|
$ |
11,376 |
|
|
$ |
3,408 |
|
|
$ |
3,491 |
|
FNMA |
|
|
101,578 |
|
|
|
105,039 |
|
|
|
146,646 |
|
|
|
149,262 |
|
|
|
106,297 |
|
|
|
106,163 |
|
FHLMC |
|
|
59,527 |
|
|
|
62,746 |
|
|
|
182,929 |
|
|
|
188,838 |
|
|
|
230,427 |
|
|
|
230,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
|
1,977,458 |
|
|
|
1,976,881 |
|
|
|
24,257 |
|
|
|
23,940 |
|
|
|
|
|
|
|
|
|
FNMA |
|
|
692,614 |
|
|
|
705,257 |
|
|
|
179,657 |
|
|
|
179,861 |
|
|
|
54,441 |
|
|
|
54,392 |
|
FHLMC |
|
|
590,172 |
|
|
|
602,023 |
|
|
|
446,086 |
|
|
|
450,091 |
|
|
|
255,334 |
|
|
|
254,689 |
|
Non-agency issued |
|
|
173,080 |
|
|
|
167,279 |
|
|
|
263,432 |
|
|
|
229,015 |
|
|
|
169,872 |
|
|
|
168,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
3,433,324 |
|
|
|
3,451,440 |
|
|
|
913,432 |
|
|
|
882,907 |
|
|
|
479,647 |
|
|
|
477,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed securities |
|
$ |
3,625,335 |
|
|
$ |
3,650,058 |
|
|
$ |
1,254,718 |
|
|
$ |
1,232,383 |
|
|
$ |
819,779 |
|
|
$ |
817,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average remaining life of mortgage-backed
securities(1) |
|
2.9 years |
|
|
|
|
|
|
4.4 years |
|
|
|
|
|
|
5.2 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
$ |
3,165 |
|
|
$ |
3,067 |
|
|
$ |
3,499 |
|
|
$ |
3,377 |
|
|
$ |
360 |
|
|
$ |
359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average remaining life of asset-backed securities(1) |
|
10.1 years |
|
|
|
|
|
|
11.1 years |
|
|
|
|
|
|
4.2 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
4,393,199 |
|
|
$ |
4,421,678 |
|
|
$ |
1,594,159 |
|
|
$ |
1,573,101 |
|
|
$ |
1,217,204 |
|
|
$ |
1,217,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average remaining life of investment securities
available for sale(1) |
|
2.9 years |
|
|
|
|
|
|
3.8 years |
|
|
|
|
|
|
4.0 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
467,473 |
|
|
$ |
471,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA |
|
|
319,190 |
|
|
|
323,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
306,889 |
|
|
|
311,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed securities |
|
$ |
1,093,552 |
|
|
$ |
1,106,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average remaining life of investment securities
held to maturity(1) |
|
2.9 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average remaining life is computed utilizing estimated maturities and prepayment
assumptions. |
44
Funding Activities
Deposits
The increase in our total deposits from December 31, 2008 to December 31, 2009 is
primarily due to the $4.0 billion of deposits acquired from NatCity. Our core deposits increased
$687.4 million during 2009, excluding the $2.2 billion of core deposits acquired from NatCity, as a
result of our focus on growing these low cost profitable relationships, as well as customer
preference for short-term products. Excluding the impact of the deposits acquired from NatCity,
maturation of certificates of deposit coupled with repricing at lower rates resulted in customer
preferences shifting towards money market deposit accounts as evidenced by an $863.2 million, or
43%, decrease in certificates of deposit accounts, and an $845.5 million, or 44%, increase in money
market deposit accounts. This shift in our deposit mix resulted in an increase in our core
deposits to 70% of total deposits at December 31, 2009 from 66% at December 31, 2008. Certificates
of deposit balances at December 31, 2009 included $142.1 million of deposits in the CDARS
administered by the Promontory Financial Network.
We continued to focus our efforts on growing our municipal deposit base, which amounted to $987.0
million at December 31, 2009. Excluding the $73.8 million in municipal deposits acquired from
NatCity, our municipal deposits increased $228.9 million, or 33%, from December 31, 2009, primarily
in money market deposits.
The table below contains selected information on the composition of our deposits as of December 31
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Amount |
|
|
Percent |
|
|
average rate |
|
|
Amount |
|
|
Percent |
|
|
average rate |
|
|
Amount |
|
|
Percent |
|
|
average rate |
|
Core deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
916,854 |
|
|
|
9.4 |
% |
|
|
0.14 |
% |
|
$ |
788,767 |
|
|
|
13.3 |
% |
|
|
0.24 |
% |
|
$ |
786,759 |
|
|
|
14.2 |
% |
|
|
0.35 |
% |
Interest-bearing
checking |
|
|
1,063,065 |
|
|
|
10.9 |
|
|
|
0.13 |
|
|
|
485,220 |
|
|
|
8.2 |
|
|
|
0.17 |
|
|
|
468,165 |
|
|
|
8.4 |
|
|
|
0.37 |
|
Money market deposit |
|
|
3,535,736 |
|
|
|
36.4 |
|
|
|
0.72 |
|
|
|
1,940,136 |
|
|
|
32.6 |
|
|
|
1.47 |
|
|
|
1,607,137 |
|
|
|
29.0 |
|
|
|
3.69 |
|
Noninterest-bearing |
|
|
1,256,537 |
|
|
|
12.9 |
|
|
|
|
|
|
|
718,593 |
|
|
|
12.1 |
|
|
|
|
|
|
|
631,801 |
|
|
|
11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
6,772,192 |
|
|
|
69.6 |
|
|
|
0.41 |
|
|
|
3,932,716 |
|
|
|
66.2 |
|
|
|
0.79 |
|
|
|
3,493,862 |
|
|
|
63.0 |
|
|
|
1.83 |
|
Certificates |
|
|
2,957,332 |
|
|
|
30.4 |
|
|
|
1.52 |
|
|
|
2,010,897 |
|
|
|
33.8 |
|
|
|
2.79 |
|
|
|
2,055,122 |
|
|
|
37.0 |
|
|
|
4.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
9,729,524 |
|
|
|
100.0 |
% |
|
|
0.75 |
% |
|
$ |
5,943,613 |
|
|
|
100.0 |
% |
|
|
1.47 |
% |
|
$ |
5,548,984 |
|
|
|
100.0 |
% |
|
|
2.76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below contains selected information on the composition of our deposits, by
originating branch location as of December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upstate New |
|
|
Western |
|
|
|
|
|
|
York |
|
|
Pennsylvania |
|
|
Total deposits |
|
Core deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
796,845 |
|
|
$ |
120,009 |
|
|
$ |
916,854 |
|
Interest-bearing checking |
|
|
537,767 |
|
|
|
525,298 |
|
|
|
1,063,065 |
|
Money market deposit |
|
|
2,654,865 |
|
|
|
880,871 |
|
|
|
3,535,736 |
|
Noninterest-bearing |
|
|
795,322 |
|
|
|
461,215 |
|
|
|
1,256,537 |
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
4,784,799 |
|
|
|
1,987,393 |
|
|
|
6,772,192 |
|
Certificates |
|
|
1,385,402 |
|
|
|
1,571,930 |
|
|
|
2,957,332 |
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
6,170,201 |
|
|
$ |
3,559,323 |
|
|
$ |
9,729,524 |
|
|
|
|
|
|
|
|
|
|
|
45
The following table shows maturities of outstanding certificates of deposit and other time
deposits in denominations of $100,000 and greater and $250,000 and greater at December 31, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Over |
|
|
Over |
|
|
|
$100,000 |
|
|
$250,000 |
|
Less than three months |
|
$ |
317,575 |
|
|
$ |
164,003 |
|
Over three months to six months |
|
|
149,118 |
|
|
|
67,652 |
|
Over six months to 12 months |
|
|
166,246 |
|
|
|
65,612 |
|
Over 12 months |
|
|
232,369 |
|
|
|
42,101 |
|
|
|
|
|
|
|
|
Total |
|
$ |
865,308 |
|
|
$ |
339,368 |
|
|
|
|
|
|
|
|
Borrowings
The following table shows certain information on our borrowings for the dates indicated
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Period-end balance: |
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
631,703 |
|
|
$ |
1,005,467 |
|
|
$ |
715,808 |
|
Repurchase agreements |
|
|
1,458,205 |
|
|
|
462,418 |
|
|
|
379,173 |
|
Senior notes |
|
|
150,000 |
|
|
|
|
|
|
|
|
|
Other borrowings |
|
|
62,372 |
|
|
|
72,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
$ |
2,302,280 |
|
|
$ |
1,540,227 |
|
|
$ |
1,094,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum balance at any month end: |
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
3,435,825 |
|
|
$ |
1,194,195 |
|
|
$ |
716,243 |
|
Repurchase agreements |
|
|
1,458,205 |
|
|
|
462,418 |
|
|
|
406,098 |
|
Senior notes |
|
|
150,000 |
|
|
|
|
|
|
|
|
|
Other borrowings |
|
|
62,372 |
|
|
|
92,315 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance: |
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
1,267,342 |
|
|
$ |
907,673 |
|
|
$ |
479,299 |
|
Repurchase agreements |
|
|
582,151 |
|
|
|
395,030 |
|
|
|
367,549 |
|
Senior notes |
|
|
48,904 |
|
|
|
|
|
|
|
|
|
Other borrowings |
|
|
62,776 |
|
|
|
69,610 |
|
|
|
6,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-end weighted average interest rate: |
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances |
|
|
3.53 |
% |
|
|
3.63 |
% |
|
|
4.57 |
% |
Repurchase agreements |
|
|
1.18 |
|
|
|
3.31 |
|
|
|
4.42 |
|
Senior notes |
|
|
12.00 |
|
|
|
|
|
|
|
|
|
Other |
|
|
1.98 |
|
|
|
2.65 |
|
|
|
|
|
Concurrent with the closing of the NatCity branch acquisition on September 4, 2009, we issued, and
NatCity purchased, $150.0 million of 12% Senior Notes due September 10, 2014 (the Senior Notes).
The Senior Notes are redeemable, in whole or in part (in increments of $10.0 million), prior to
September 10, 2014. The Senior Notes are senior unsecured obligations of the Company and rank
equal in right of payment with our existing and future indebtedness that is not contractually
subordinated to the Senior Notes.
Our borrowings
increased $762.1 million during 2009, primarily due to an increase in
repurchase agreements and the issuance of the Senior Notes to NatCity. During 2009,
we used borrowings to fund the run-off of certificates of deposit account balances and the growth
in our loan portfolio. As the yield curve returned to a more normal slope due to multiple
reductions in the federal funds interest rate in 2008, we were able to take advantage of
historically low rates on borrowings, resulting in a 123 basis point reduction in our borrowing
costs. At December 31, 2009, our repurchase agreements include $71.1 million that have call
provisions that could accelerate their maturity during 2010 if rates were to rise significantly
from current levels.
Capital Resources
During 2009, our stockholders equity increased by $646.4 million to $2.4 billion primarily
as a result of the issuance of 69.4 million shares in two follow-on stock offerings with net
aggregate proceeds of $802.2 million. Our stockholders equity also increased due to our 2009 net
income of $79.4 million; unrealized gains on our investment securities available for sale of $30.6
million, net of tax; and $7.5 million from our employee stock ownership plan and stock-based
compensation plans.
46
Somewhat offsetting these increases were the redemption of our preferred stock for $184.0 million;
$4.8 million in preferred stock dividends; the repurchase of our common stock warrant for $2.7
million; and dividends paid on our common stock.
For the year ended December 31, 2009, we declared common stock dividends totaling $0.56 per share,
or $83.2 million. This represents a dividend payout ratio of 122%.
We did not repurchase any shares of our common stock during 2009 and as of December 31, 2009, we
are authorized to repurchase 3.5 million shares. While treasury stock purchases are an important
component of our capital management strategy, we are not likely to make additional purchases until
the economy improves.
At December 31, 2009, our savings bank exceeded all minimum regulatory capital requirements. The
current requirements and our actual capital levels are detailed in Note 14 of Notes to
Consolidated Financial Statements filed in Part II, Item 8, Financial Statements and
Supplementary Data.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009 AND DECEMBER 31, 2008
Net income for the year ended December 31, 2009 was $79.4 million as compared to $88.4
million for 2008. Our diluted earnings per share for 2009 was $0.46, compared to $0.81 for 2008,
and reflected the additional shares issued in our April 2009 and September 2009 follow-on stock
offerings; $12.0 million of preferred stock dividends and discount accretion, including $7.7
million of accelerated discount accretion related to the full redemption of our preferred stock
issued to the Treasury; and $31.5 million in merger and acquisition
integration expenses related to our acquisition of the NatCity branches and our proposed merger
with Harleysville. In addition, our results were impacted by a $15.4 million increase in FDIC
premiums, including a $5.4 million special assessment, and a $21.2 million increase in our
provision for credit losses due to credit quality deterioration resulting primarily from the
current economic environment.
These results also reflected a $95.8 million, or 36%, increase in our net interest income resulting
from an increase in our average earning assets, our strategy of pre-buying investments in
anticipation of the NatCity branch acquisition, and a more favorable funding mix as lower cost core
deposits and wholesale borrowings replaced higher rate certificates of deposit balances.
During 2009, our noninterest income increased $10.2 million, primarily as a result of the NatCity
branches. Our noninterest expense increased $98.3 million during 2009, primarily as a result of
merger and acquisition integration expenses, increased FDIC premiums, and increased costs due to the
addition of the NatCity branches.
Net Interest Income
The yield on our interest earning assets decreased 89 basis points to 4.89% during 2009,
while our funding costs decreased 110 basis points to 1.49%, resulting in a 10 basis point
improvement to our net interest margin to 3.65%, the highest annual level in four years. The yield
that we earned on our loans decreased 56 basis points in 2009 as compared to 2008, including a 74
basis point reduction in our commercial loan portfolio yield to 5.44% and an 85 basis point
reduction to 5.01% in the yield from our home equity loan portfolio.
Our disciplined approach to deposit pricing, including our decision to allow higher priced maturing
certificates of deposit accounts to run off during the year, resulted in a 153 basis point
reduction in the rates paid on this product.
The multiple reductions in the federal funds rate throughout 2008 and our efforts to take advantage
of this lower cost funding source resulted in a $588.9 million increase in our average borrowing
balances during 2009 at an average rate that was 123 basis points lower than the previous year.
47
The following table presents our condensed average balance sheet information as well as
tax-equivalent interest income and yields. We use a tax-equivalent basis in order to provide the
most comparative yields among all types of interest-earning assets. That is, interest on
tax-exempt securities and loans are presented as if the interest we earned was taxed at our
statutory income tax rates adjusted for the nondeductible portion of interest expense that we
incurred to acquire these assets. Yields earned on interest-earning assets, rates paid on
interest-bearing liabilities and average balances are based on average daily balances for the years
ended December 31 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
outstanding |
|
|
Interest |
|
|
|
|
|
|
outstanding |
|
|
Interest |
|
|
|
|
|
|
outstanding |
|
|
Interest |
|
|
|
|
|
|
balance |
|
|
earned/paid |
|
|
Yield/rate |
|
|
balance |
|
|
earned/paid |
|
|
Yield/rate |
|
|
balance |
|
|
earned/paid |
|
|
Yield/rate |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1) |
|
$ |
6,682,117 |
|
|
$ |
361,789 |
|
|
|
5.41 |
% |
|
$ |
6,325,608 |
|
|
$ |
378,092 |
|
|
|
5.97 |
% |
|
$ |
5,725,938 |
|
|
$ |
374,330 |
|
|
|
6.53 |
% |
Mortgage-backed securities(2) |
|
|
2,828,434 |
|
|
|
114,168 |
|
|
|
4.04 |
|
|
|
946,398 |
|
|
|
47,121 |
|
|
|
4.98 |
|
|
|
760,626 |
|
|
|
32,822 |
|
|
|
4.32 |
|
Other investment securities(2) |
|
|
465,004 |
|
|
|
17,496 |
|
|
|
3.76 |
|
|
|
380,786 |
|
|
|
18,242 |
|
|
|
4.79 |
|
|
|
374,595 |
|
|
|
18,137 |
|
|
|
4.84 |
|
Money market and other
investments |
|
|
175,633 |
|
|
|
3,114 |
|
|
|
1.77 |
|
|
|
82,753 |
|
|
|
4,038 |
|
|
|
4.88 |
|
|
|
53,979 |
|
|
|
3,434 |
|
|
|
6.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
10,151,188 |
|
|
$ |
496,567 |
|
|
|
4.89 |
% |
|
|
7,735,545 |
|
|
$ |
447,493 |
|
|
|
5.78 |
% |
|
|
6,915,138 |
|
|
$ |
428,723 |
|
|
|
6.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning assets(3)(4) |
|
|
1,383,719 |
|
|
|
|
|
|
|
|
|
|
|
1,227,596 |
|
|
|
|
|
|
|
|
|
|
|
1,082,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,534,907 |
|
|
|
|
|
|
|
|
|
|
$ |
8,963,141 |
|
|
|
|
|
|
|
|
|
|
$ |
7,997,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits |
|
$ |
829,246 |
|
|
$ |
1,931 |
|
|
|
0.23 |
% |
|
$ |
790,707 |
|
|
$ |
2,198 |
|
|
|
0.28 |
% |
|
$ |
889,398 |
|
|
$ |
3,918 |
|
|
|
0.44 |
% |
Checking accounts |
|
|
680,606 |
|
|
|
996 |
|
|
|
0.15 |
|
|
|
486,789 |
|
|
|
1,378 |
|
|
|
0.28 |
|
|
|
487,173 |
|
|
|
2,043 |
|
|
|
0.42 |
|
Money market deposits |
|
|
2,696,157 |
|
|
|
27,700 |
|
|
|
1.03 |
|
|
|
1,899,010 |
|
|
|
43,573 |
|
|
|
2.29 |
|
|
|
1,413,178 |
|
|
|
52,249 |
|
|
|
3.70 |
|
Certificates of deposit |
|
|
2,290,845 |
|
|
|
42,924 |
|
|
|
1.87 |
|
|
|
2,106,481 |
|
|
|
71,534 |
|
|
|
3.40 |
|
|
|
2,263,933 |
|
|
|
101,161 |
|
|
|
4.47 |
|
Borrowings |
|
|
1,961,173 |
|
|
|
52,807 |
|
|
|
2.68 |
|
|
|
1,372,314 |
|
|
|
53,878 |
|
|
|
3.91 |
|
|
|
853,297 |
|
|
|
39,223 |
|
|
|
4.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
8,458,027 |
|
|
$ |
126,358 |
|
|
|
1.49 |
% |
|
|
6,655,301 |
|
|
$ |
172,561 |
|
|
|
2.59 |
% |
|
|
5,906,979 |
|
|
$ |
198,594 |
|
|
|
3.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
897,684 |
|
|
|
|
|
|
|
|
|
|
|
687,741 |
|
|
|
|
|
|
|
|
|
|
|
627,259 |
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities |
|
|
168,221 |
|
|
|
|
|
|
|
|
|
|
|
143,775 |
|
|
|
|
|
|
|
|
|
|
|
115,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
9,523,932 |
|
|
|
|
|
|
|
|
|
|
|
7,486,817 |
|
|
|
|
|
|
|
|
|
|
|
6,649,427 |
|
|
|
|
|
|
|
|
|
Stockholders equity(3) |
|
|
2,010,975 |
|
|
|
|
|
|
|
|
|
|
|
1,476,324 |
|
|
|
|
|
|
|
|
|
|
|
1,347,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders equity |
|
$ |
11,534,907 |
|
|
|
|
|
|
|
|
|
|
$ |
8,963,141 |
|
|
|
|
|
|
|
|
|
|
$ |
7,997,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
370,209 |
|
|
|
|
|
|
|
|
|
|
$ |
274,932 |
|
|
|
|
|
|
|
|
|
|
$ |
230,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.40 |
% |
|
|
|
|
|
|
|
|
|
|
3.19 |
% |
|
|
|
|
|
|
|
|
|
|
2.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earning assets |
|
$ |
1,693,161 |
|
|
|
|
|
|
|
|
|
|
$ |
1,080,244 |
|
|
|
|
|
|
|
|
|
|
$ |
1,008,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate margin |
|
|
|
|
|
|
3.65 |
% |
|
|
|
|
|
|
|
|
|
|
3.55 |
% |
|
|
|
|
|
|
|
|
|
|
3.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning
assets to average interest-bearing liabilities |
|
|
120.02 |
% |
|
|
|
|
|
|
|
|
|
|
116.23 |
% |
|
|
|
|
|
|
|
|
|
|
117.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average outstanding balances are net of deferred costs and premiums and include
nonperforming loans and loans held for sale. |
|
(2) |
|
Average outstanding balances are amortized cost. |
|
(3) |
|
Average outstanding balances include unrealized gains/losses on securities available
for sale. |
|
(4) |
|
Average outstanding balances include bank-owned life insurance, earnings from which
are reflected in noninterest income, and our allowance for credit losses. |
48
Rate/Volume Analysis
The following table presents (on a tax-equivalent basis) the extent to which changes in
interest rates and changes in the volume of our interest-earning assets and interest-bearing
liabilities have affected our net interest income during the years indicated. We have provided
information in each category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the changes due to volume
and the changes due to rate for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008 |
|
|
2008 vs. 2007 |
|
|
|
Increase/(decrease) |
|
|
|
|
|
|
Increase/(decrease) |
|
|
|
|
|
|
due to |
|
|
Total increase |
|
|
due to |
|
|
Total increase |
|
|
|
Volume |
|
|
Rate |
|
|
(decrease) |
|
|
Volume |
|
|
Rate |
|
|
(decrease) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
20,497 |
|
|
$ |
(36,800 |
) |
|
$ |
(16,303 |
) |
|
$ |
21,035 |
|
|
$ |
(17,273 |
) |
|
$ |
3,762 |
|
Mortgage-backed securities |
|
|
74,101 |
|
|
|
(7,054 |
) |
|
|
67,047 |
|
|
|
8,773 |
|
|
|
5,526 |
|
|
|
14,299 |
|
Other investment securities |
|
|
3,594 |
|
|
|
(4,340 |
) |
|
|
(746 |
) |
|
|
298 |
|
|
|
(193 |
) |
|
|
105 |
|
Money market and other investments |
|
|
(478 |
) |
|
|
(446 |
) |
|
|
(924 |
) |
|
|
1,507 |
|
|
|
(903 |
) |
|
|
604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
97,714 |
|
|
$ |
(48,640 |
) |
|
$ |
49,074 |
|
|
$ |
31,613 |
|
|
$ |
(12,843 |
) |
|
$ |
18,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits |
|
$ |
115 |
|
|
$ |
(382 |
) |
|
$ |
(267 |
) |
|
$ |
(398 |
) |
|
$ |
(1,322 |
) |
|
$ |
(1,720 |
) |
Checking accounts |
|
|
(20,181 |
) |
|
|
19,799 |
|
|
|
(382 |
) |
|
|
10 |
|
|
|
(675 |
) |
|
|
(665 |
) |
Money market deposits |
|
|
51,630 |
|
|
|
(67,503 |
) |
|
|
(15,873 |
) |
|
|
12,347 |
|
|
|
(21,023 |
) |
|
|
(8,676 |
) |
Certificates of deposit |
|
|
7,545 |
|
|
|
(36,155 |
) |
|
|
(28,610 |
) |
|
|
(6,570 |
) |
|
|
(23,057 |
) |
|
|
(29,627 |
) |
Borrowings |
|
|
18,824 |
|
|
|
(19,895 |
) |
|
|
(1,071 |
) |
|
|
20,999 |
|
|
|
(6,344 |
) |
|
|
14,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
$ |
57,933 |
|
|
$ |
(104,136 |
) |
|
$ |
(46,203 |
) |
|
$ |
26,388 |
|
|
$ |
(52,421 |
) |
|
$ |
(26,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
39,781 |
|
|
$ |
55,496 |
|
|
$ |
95,277 |
|
|
$ |
5,225 |
|
|
$ |
39,578 |
|
|
$ |
44,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses
Our provision for credit losses increased $21.2 million for the year ended December 31, 2009
to $43.7 million, or 0.65% of average loans, as compared to 0.36% for 2008. The deterioration of
the Upstate New York economy, which is considered to be relatively modest given the deterioration
of credit quality experienced in other areas of the country, as well as the increased size of our
commercial loan portfolio, especially within our commercial real estate and shared national credit
loan portfolios, resulted in an $22.1 million increase in our overall level of nonperforming loans.
Total nonperforming loans at December 31, 2009 of $68.6 million, or 0.94% of total loans, compares
to $46.4 million, or 0.72% of total loans, at
December 31, 2008. As a result, our ratio of allowance for credit losses to nonperforming loans
declined to 129% at year end 2009 from 168% at year end 2008. In addition, our net charge-off
levels increased to 0.50% of average loans during 2009 as compared to 0.28% during 2008. Our
provision was based upon our assessment of the adequacy of our allowance for credit losses with
consideration given to such interrelated factors as the composition and risk in our loan portfolio,
the level of our nonaccruing and delinquent loans, and related collateral or government guarantees,
charge-offs, and economic conditions. Overall, the increase in the provision for credit losses as
compared to 2008 is due to a combination of a changing loan mix and the resulting increased credit
risk in our loan portfolio, as well as modest deterioration in our market areas.
49
The following table presents an analysis of our allowance for credit losses, including charge-off
and recovery data, for the years ended December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Balance at beginning of year |
|
$ |
77,793 |
|
|
$ |
70,247 |
|
|
$ |
71,913 |
|
|
$ |
72,340 |
|
|
$ |
41,422 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
9,846 |
|
|
|
5,617 |
|
|
|
4,803 |
|
|
|
1,422 |
|
|
|
1,285 |
|
Business |
|
|
5,810 |
|
|
|
7,723 |
|
|
|
1,607 |
|
|
|
1,052 |
|
|
|
2,402 |
|
Specialized lending |
|
|
7,320 |
|
|
|
4,241 |
|
|
|
2,803 |
|
|
|
2,512 |
|
|
|
2,785 |
|
Shared national credits |
|
|
8,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
31,532 |
|
|
|
17,581 |
|
|
|
9,213 |
|
|
|
4,986 |
|
|
|
6,472 |
|
Residential real estate |
|
|
245 |
|
|
|
143 |
|
|
|
226 |
|
|
|
295 |
|
|
|
192 |
|
Home equity |
|
|
876 |
|
|
|
206 |
|
|
|
100 |
|
|
|
56 |
|
|
|
34 |
|
Other consumer |
|
|
2,493 |
|
|
|
2,192 |
|
|
|
2,362 |
|
|
|
4,565 |
|
|
|
3,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
35,146 |
|
|
|
20,122 |
|
|
|
11,901 |
|
|
|
9,902 |
|
|
|
10,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
167 |
|
|
|
322 |
|
|
|
74 |
|
|
|
137 |
|
|
|
864 |
|
Business |
|
|
120 |
|
|
|
263 |
|
|
|
219 |
|
|
|
911 |
|
|
|
1,283 |
|
Specialized lending |
|
|
732 |
|
|
|
709 |
|
|
|
680 |
|
|
|
872 |
|
|
|
525 |
|
Shared national credits |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
1,032 |
|
|
|
1,294 |
|
|
|
973 |
|
|
|
1,920 |
|
|
|
2,672 |
|
Residential real estate |
|
|
88 |
|
|
|
66 |
|
|
|
7 |
|
|
|
37 |
|
|
|
61 |
|
Home equity |
|
|
5 |
|
|
|
19 |
|
|
|
2 |
|
|
|
24 |
|
|
|
|
|
Other consumer |
|
|
881 |
|
|
|
899 |
|
|
|
835 |
|
|
|
1,038 |
|
|
|
777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
2,006 |
|
|
|
2,278 |
|
|
|
1,817 |
|
|
|
3,019 |
|
|
|
3,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
33,140 |
|
|
|
17,844 |
|
|
|
10,084 |
|
|
|
6,883 |
|
|
|
7,114 |
|
Provision for credit losses |
|
|
43,650 |
|
|
|
22,500 |
|
|
|
8,500 |
|
|
|
6,456 |
|
|
|
7,348 |
|
Allowance obtained through acquisitions |
|
|
|
|
|
|
2,890 |
|
|
|
|
|
|
|
|
|
|
|
30,684 |
|
Loans sold |
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
88,303 |
|
|
$ |
77,793 |
|
|
$ |
70,247 |
|
|
$ |
71,913 |
|
|
$ |
72,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average
loans outstanding |
|
|
0.50 |
% |
|
|
0.28 |
% |
|
|
0.18 |
% |
|
|
0.12 |
% |
|
|
0.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for credit losses
to total loans |
|
|
1.20 |
% |
|
|
1.20 |
% |
|
|
1.23 |
% |
|
|
1.27 |
% |
|
|
1.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for credit losses
to nonaccruing loans |
|
|
129 |
% |
|
|
168 |
% |
|
|
250 |
% |
|
|
463 |
% |
|
|
330 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Income
Noninterest income increased $10.2 million during 2009 to $126.0 million primarily due to the
additional customer relationships obtained in the NatCity acquisition, which contributed
approximately $6.7 million of the $9.5 million, or 24%, increase in revenue from transaction-based
banking service fees. Modest decreases in revenues from insurance and benefits consulting and
wealth management services were offset by an increase in lending and leasing revenues and a $1.2
million net gain on the sale of investment securities.
The
decrease in our noninterest income as a percent of total revenues to 26% for 2009, as compared
to 30% for 2008, is reflective of the growth of our net interest income outpacing the growth of our
noninterest income. Noninterest income remains a significant source of stable revenue not subject
to the volatility of changing interest rates.
Noninterest Expenses
Noninterest expenses increased $98.3 million from 2008 to $326.7 million in 2009, and
included $31.5 million in merger and acquisition integration expenses. These expenses included
$4.5 million in salaries and benefits, $1.8 million in occupancy and equipment, $1.2 million in
technology and communications, $4.3 million in marketing and advertising, $12.8 million in
professional services, and $6.9 million in other noninterest expenses. Expenses related to the
NatCity branch acquisition totaled $26.5 million and those related to Harleysville totaled $4.5
million.
50
Salaries and benefits increased substantially during 2009 as a result of an increase in our
workforce related to the NatCity branch acquisition and merger with Harleysville, routine merit
increases, and an increase in performance-based incentive compensation. FDIC insurance premiums
increased $15.4 million during 2009 due to an increase in rates and our deposit base, the $5.4
million special assessment, the effect of the temporary increase to $250 thousand of FDIC coverage
on all accounts, and our participation in the TLPG for noninterest bearing accounts. During 2009,
we contributed $5.0 million to the First Niagara Bank Foundation in support of charitable giving in
Western Pennsylvania where the acquired NatCity branches are located. Increases in occupancy and
equipment expenses, technology and communication expenses, and other noninterest expenses resulted
from the increase in the number of branch locations to 171 and the increase in our supporting
infrastructure.
Our efficiency ratio increased to 66.6% in 2009, from 59.4% in 2008, primarily due to the merger
and acquisition integration expenses of $31.5 million. Excluding these expenses, our efficiency
ratio increased only slightly to 60.2% for 2009 from 58.9%. We believe this non-GAAP measure
provides a meaningful comparison of our underlying operational performance and facilitates
investors assessments of business and performance trends in comparison to others in the financial
services industry. This increase was due to the ongoing costs of the newly acquired NatCity
branches and targeted investments to build operational capacity to support the Harleysville
acquisition as well as future growth opportunities, offset by our continued disciplined management
of expenses and an increase in our net interest income.
Income Taxes
Our effective tax rate increased to 33.9% for 2009 from 33.7% in 2008 primarily due to New
York State legislation partially phasing out the exclusion of dividends paid by our REIT subsidiary
to First Niagara Bank and the limitation on the deductibility of certain executive compensation
under the terms of the CPP.
RESULTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008 AND DECEMBER 31, 2007
Net income for the year ended December 31, 2008 was $88.4 million as compared to $84.1
million for 2007. Our diluted earnings per share for 2008 was $0.81 and reflected the impact of
$1.2 million of preferred stock dividends and discount accretion related to the CPP, compared to
$0.81 for 2007. These results reflected a $44.4 million, or 20%, increase in our net interest
income resulting from strong commercial loan growth and a reduction in our funding costs due to a
disciplined approach to deposit pricing combined with an improved deposit mix. Excluding
nonrecurring items, noninterest income was stable for the year at $115.7 million while noninterest
expenses increased $8.5 million from 2007.
Net Interest Income
The Federal Reserves efforts to calm the credit markets and relieve the liquidity crisis in
the financial industry led it to reduce the benchmark overnight federal funds rates by 400 basis
points throughout 2008 to 0.25%. During 2008, our net interest income improved as a result of our
ability to reduce deposit rates and take advantage of lower wholesale borrowing costs.
Although the yield on our interest earning assets decreased 42 basis points to 5.78% during 2008,
our funding costs decreased 77 basis points to 2.59%, resulting in a 22 basis point improvement to
our net interest margin to 3.55%. The yield that we earned on our loans decreased 56 basis points
in 2008 as compared to 2007, including an 88 basis point reduction in our commercial loan portfolio
yield to 6.11% and a 109 basis point reduction to 5.86% in the yield from our home equity loan
portfolio. Higher average loan balances in 2008 resulting from the deployment of a portion of our
proceeds from the CPP and the continued shift into commercial loan products offset these declines
in yields, resulting in a slight increase in our interest income from loans and leases. The
temporary investment of a portion of the proceeds from our follow-on stock offering and the CPP
resulted in an additional $185.8 million in average mortgage-backed securities during 2008. The
increased balances, coupled with higher yields on these investments, contributed significantly to
the $17.5 million increase in interest income from securities available for sale and other
investments.
51
While our average deposit balances increased $289.8 million during 2008, the interest expense we
paid on deposits declined $40.7 million from 2007. Our disciplined approach to pricing, including
our decision to allow higher priced maturing certificates of deposit accounts to run off during the
year, resulted in a 107 basis point reduction in the rates paid on this product. As a result of
this, and
the overall lower level of market rates, customers migrated toward money market deposit accounts,
which is reflected in the $485.8 million increase in average balances in these accounts at an
interest rate 141 basis points lower than 2007. Our continued emphasis on expanding customer
relationships resulted in a $60.5 million increase in average noninterest bearing deposits during
the year.
The multiple reductions in the federal funds rate throughout 2008 and our efforts to take advantage
of this lower cost funding source resulted in our average borrowing balances increasing $519.0
million during 2008 at an average rate that was 67 basis points lower than the previous year.
Provision for Credit Losses
Our provision for credit losses increased $14.0 million for the year ended December 31, 2008
to $22.5 million, or 0.36% of average loans, as compared to 0.15% for 2007. The deterioration of
the Upstate New York economy, which is considered to be relatively modest given the deterioration
of credit quality experienced in other areas of the country, as well as the maturation of our
steadily growing commercial loan portfolio resulted in an $18.4 million increase in our overall
level of nonperforming loans. Total nonperforming loans at December 31, 2008 of $46.4 million, or
0.72% of total loans, compares to $28.1 million, or 0.49% of total loans, at December 31, 2007. As
a result, our ratio of allowance for credit losses to nonperforming loans declined to 168% at year
end 2008 from 250% at year end 2007. In addition, our net charge-off levels increased to 0.28% of
average loans during 2008 as compared to 0.18% during 2007.
Noninterest Income
Noninterest income remained stable in 2008, excluding the $21.6 million gain on the sale of
nine branches and $5.4 million of realized losses from the sales of investment securities in 2007.
The industry-wide softening in insurance renewal rates in 2008 resulted in a $1.9 million decrease
in our insurance and benefits consulting revenues. This was offset by a modest increase in revenue
from transaction based banking service fees
despite a shift in consumer spending habits due to the uncertainties in the economy. Revenue from
our wealth management activities increased despite the reduced demand for our broker sold
investment securities and the third quarter outsourcing of our trust activities.
Noninterest Expenses
Excluding $2.2 million in Great Lakes Bancorp, Inc. integration costs in 2008 and a $4.8
million real estate impairment loss in 2007, our noninterest expenses for 2008 increased $8.5
million over 2007. The most substantial increase was $8.1 million in salaries and benefits,
resulting from additional Great Lakes Bancorp, Inc. personnel, routine merit increases, and
increases in performance based incentive and equity compensation. A $2.1 million increase in
marketing expenses reflects a full year of expenses related to our brand awareness campaign as well
as for enhancements to our advertising to address customers concerns regarding the health of the
financial services industry. These increases were slightly offset by a decrease in intangible
amortization related to previous bank and financial services company acquisitions.
Income Taxes
Our effective tax rate increased to 33.7% for 2008 from 32.7% in 2007 primarily due to New
York State legislation partially phasing out the exclusion of dividends paid by our REIT subsidiary
to First Niagara Bank.
52
LIQUIDITY AND CAPITAL RESOURCES
In addition to cash flow from operations, deposits and borrowings, our funding is
provided from the principal and interest payments that we receive from our loans and investment
securities. While maturities and scheduled amortization of loans and securities are predictable
sources of funds, our deposit balances and loan prepayments are greatly influenced by the level of
interest rates, the economic environment and local competitive conditions.
Our primary investing activities are the origination of loans and the purchase of investment
securities. Our loan originations totaled $1.9 billion and $1.5 billion during 2009 and 2008,
respectively. In addition, we made advances on business lines of credit totaling $1.5 billion in
2009 and $1.4 billion in 2008, reflecting our continued focus on growing our higher-yielding
commercial loan portfolio. Our purchases of investment securities increased to $5.8 billion during
2009, as compared to $797.3 million during 2007, reflecting the investment of a portion of the
$802.2 million in proceeds from our two follow-on stock offerings as well as $3.1 billion in funds
received in the NatCity branch acquisition. During 2009, principal payments on and proceeds from
sales and maturities of our investment securities amounted to
$1.9 billion, compared to $628.3
million during 2008, reflecting increased prepayments and a larger mortgage-backed securities
portfolio.
Net cash provided by our financing activities totaled $1.1 billion in 2009 and $341.9 million for
2008. Our borrowing activities provided $758.4 million of additional low cost short-term financing
allowing us to pre-purchase interest earning assets in anticipation of the NatCity branch
acquisition, resulting in a 123 basis point decrease in borrowing rates. Further, we sold 12%
senior notes to NatCity in the amount of $150.0 million upon the closing of the acquisition. We
have a total borrowing capacity of up to $6.1 billion available from various funding sources which
include the Federal Home Loan Bank, Federal Reserve Bank, and commercial banks that we may use to
fund our lending activities, liquidity needs and/or to adjust and manage our asset and liability
position, of which $3.9 billion was available at December 31, 2009. Other financing activities
during 2009 included two follow-on stock offerings with net aggregate proceeds of $802.2 million,
in addition to the redemption of our preferred stock to the Treasury in the amount of $184.0
million, the repurchase of the common stock warrant issued to the
Treasury, and dividends paid on
preferred stock.
In January 2010, Moodys Investors Service and Standard & Poors Ratings Services announced that
they assigned first-time long-term issuer credit ratings of Baa1 and BBB-, respectively, to us,
complementing our existing BBB long-term issuer credit rating from Fitch Ratings that was last
affirmed in July 2009. These ratings will increase our ability to efficiently access the capital
markets to meet our liquidity needs.
53
Contractual Obligations and Other Commitments(1)
The following table indicates certain of our funding obligations by time remaining until
maturity as of December 31, 2009 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
Over 1 to 3 |
|
|
Over 3 to 5 |
|
|
Over |
|
|
|
|
|
|
1 year |
|
|
years |
|
|
years |
|
|
5 years |
|
|
Total |
|
Certificates of deposit |
|
$ |
2,074,683 |
|
|
$ |
702,572 |
|
|
$ |
118,069 |
|
|
$ |
62,008 |
|
|
$ |
2,957,332 |
|
Borrowings |
|
|
1,674,761 |
|
|
|
370,583 |
|
|
|
226,809 |
|
|
|
30,127 |
|
|
|
2,302,280 |
|
Commitments to extend credit (2) |
|
|
2,158,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,158,424 |
|
Standby letters of credit (2) |
|
|
142,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,900 |
|
Purchase obligations |
|
|
11,285 |
|
|
|
26,216 |
|
|
|
28,698 |
|
|
|
31,380 |
|
|
|
97,579 |
|
Operating leases |
|
|
9,826 |
|
|
|
16,839 |
|
|
|
14,623 |
|
|
|
34,381 |
|
|
|
75,669 |
|
Capital leases |
|
|
439 |
|
|
|
1,963 |
|
|
|
3,112 |
|
|
|
19,962 |
|
|
|
25,476 |
|
Partnership investment commitments |
|
|
125 |
|
|
|
|
|
|
|
266 |
|
|
|
1,690 |
|
|
|
2,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
6,072,443 |
|
|
$ |
1,118,173 |
|
|
$ |
391,577 |
|
|
$ |
179,548 |
|
|
$ |
7,761,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts do not include contractual interest. |
|
(2) |
|
We do not expect all of our commitments to extend credit and standby
letters of credit to be fully funded. Thus, the total commitment amounts do not necessarily
represent our future cash requirements. Our commitments to extend credit include $1.9 billion
available under lines of credit, which generally expire one year from the date of origination
if unfunded. |
Loan Commitments
In the
ordinary course of business, we extend commitments to originate commercial and 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. Our commitments generally have fixed
expiration dates or other termination clauses and may require our customer to pay us a fee. Since
we do not expect all of our commitments to be funded, the total commitment amounts do not
necessarily represent our future cash requirements. We evaluate each customers creditworthiness
on a case-by-case basis. We may obtain collateral based upon our assessment of the customers
creditworthiness. We may write a commitment to extend credit on a fixed rate basis exposing us to
interest rate risk given the possibility that market rates may change between the commitment date
and the actual extension of credit. We had outstanding commitments to originate residential real
estate, commercial real estate and business, and consumer loans of approximately $2.2 billion and
$1.2 billion at December 31, 2009 and 2008, respectively.
To assist us with our asset and liability management and to provide us cash flow to support our
loan growth, we generally sell newly originated conventional, 15 to 30 year and most FHA and VA
loans in the secondary market to government sponsored enterprises such as FNMA and FHLMC or to
wholesale lenders. We generally retain the servicing rights on residential mortgage loans sold
which results in monthly service fee income. We will,
however, sell select loans with servicing released on a nonrecourse
basis. Not reflected in the table above, our commitments to sell
residential mortgages amounted to $84.1 million and $30.9 million at December 31, 2009 and 2008,
respectively. The increase in 2009 is reflective of a lower interest rate environment, which has
caused many borrowers to refinance into lower rate mortgage loans.
We also extend credit to retail and commercial customers, up to a specified amount, through lines
of credit. Borrowers are able to draw on these lines as needed, making our funding requirements
generally more difficult to predict. Indicative of our strategic focus on commercial lending and
relationship based home equity lending, at December 31, 2009 our unused commercial lines of credit
increased to $1.4 billion from $678.1 million at December 31, 2008, and our unused home equity and
other consumer lines of credit increased to $469.0 million from $300.8 million at the end of 2008.
Our commercial business lines of credit generally possess an expiration period of less than one
year and our home equity and
other consumer lines of credit have an expiration period of up to ten years.
In addition to the above, we issue standby letters of credit to third parties that guarantee
payments on behalf of our commercial customers in the event our customer fails to perform under the
terms of the contract between our customer and the third party. Our standby letters of credit,
which generally have an expiration period of less than two years, amounted to $142.9 million and
$98.1 million at December 31, 2009 and 2008, respectively. Since the majority of our
unused lines of credit and outstanding standby letters of credit expire without being fully funded,
our actual funding requirements may be substantially less than the amounts that we report. We
anticipate that we will have sufficient funds available to meet our current loan commitments and
other
obligations through the sources described above. The credit risk involved in our issuing of 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.
54
Security Yields, Maturities and Repricing Schedule
The following table sets forth certain information as of December 31, 2009 regarding the
carrying value, weighted average yields and contractual maturities of our investment securities
portfolio. Our adjustable-rate securities are included in the period in which interest rates are
next scheduled to adjust and fixed-rate securities are included in the period in which the final
contractual repayment is due. We have made no adjustments for prepayment of principal. Actual
maturities are expected to be significantly shorter as a result of loan repayments underlying
mortgage-backed securities. The tax benefits of certain of our tax exempt investment securities
have not been factored into the yield calculations in this table. Amounts are shown at fair value
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than one |
|
|
More than five |
|
|
|
|
|
|
|
|
|
One year or less |
|
|
year to five years |
|
|
years to ten years |
|
|
After ten years |
|
|
Total |
|
|
|
Carrying |
|
|
|
Weighted |
|
|
Carrying |
|
|
|
Weighted |
|
|
Carrying |
|
|
|
Weighted |
|
|
Carrying |
|
|
|
Weighted |
|
|
Carrying |
|
|
|
Weighted |
|
|
|
value |
|
|
|
average yield |
|
|
value |
|
|
|
average yield |
|
|
value |
|
|
|
average yield |
|
|
value |
|
|
|
average yield |
|
|
value |
|
|
|
average yield |
|
Investment securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
286,118 |
|
|
|
2.20 |
% |
|
$ |
113,132 |
|
|
|
3.00 |
% |
|
$ |
23,594 |
|
|
|
2.46 |
% |
|
$ |
|
|
|
|
|
% |
|
$ |
422,844 |
|
|
|
2.43 |
% |
U.S. Government agencies and
government sponsored enterprises |
|
|
150,365 |
|
|
|
2.42 |
|
|
|
189,467 |
|
|
|
2.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,832 |
|
|
|
2.53 |
|
Corporate |
|
|
250 |
|
|
|
4.25 |
|
|
|
1,488 |
|
|
|
1.31 |
|
|
|
|
|
|
|
|
|
|
|
475 |
|
|
|
3.17 |
|
|
|
2,213 |
|
|
|
2.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
436,733 |
|
|
|
2.28 |
|
|
|
304,087 |
|
|
|
2.76 |
|
|
|
23,594 |
|
|
|
2.46 |
|
|
|
475 |
|
|
|
3.17 |
|
|
|
764,889 |
|
|
|
2.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
355 |
|
|
|
7.78 |
|
|
|
30,478 |
|
|
|
4.22 |
|
|
|
30,833 |
|
|
|
4.26 |
|
FNMA |
|
|
|
|
|
|
|
|
|
|
12,301 |
|
|
|
4.21 |
|
|
|
44,624 |
|
|
|
4.38 |
|
|
|
48,114 |
|
|
|
3.75 |
|
|
|
105,039 |
|
|
|
4.07 |
|
FHLMC |
|
|
22 |
|
|
|
6.53 |
|
|
|
3,633 |
|
|
|
4.85 |
|
|
|
13,089 |
|
|
|
4.52 |
|
|
|
46,002 |
|
|
|
5.40 |
|
|
|
62,746 |
|
|
|
5.18 |
|
CMOs |
|
|
|
|
|
|
|
|
|
|
14,586 |
|
|
|
4.56 |
|
|
|
211,516 |
|
|
|
4.47 |
|
|
|
3,225,338 |
|
|
|
4.36 |
|
|
|
3,451,440 |
|
|
|
4.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
22 |
|
|
|
6.53 |
|
|
|
30,520 |
|
|
|
4.45 |
|
|
|
269,584 |
|
|
|
4.46 |
|
|
|
3,349,932 |
|
|
|
4.36 |
|
|
|
3,650,058 |
|
|
|
4.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,067 |
|
|
|
0.90 |
|
|
|
3,067 |
|
|
|
0.90 |
|
Other (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,664 |
|
|
|
4.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
436,755 |
|
|
|
2.28 |
% |
|
$ |
334,607 |
|
|
|
2.91 |
% |
|
$ |
293,178 |
|
|
|
4.30 |
% |
|
$ |
3,353,474 |
|
|
|
4.36 |
% |
|
$ |
4,421,678 |
|
|
|
4.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMOs |
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
|
$ |
1,093,552 |
|
|
|
4.47 |
% |
|
$ |
1,093,552 |
|
|
|
4.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other securities available for sale include investments with no stated
maturity date. |
55
Loan Maturity and Repricing Schedule
The following table sets forth certain information as of December 31, 2009 regarding the
amount of loans maturing or repricing in our portfolio. Demand loans having no stated schedule of
repayment and no stated maturity are reported as due in one year or less. Adjustable-rate loans
are included in the period in which interest rates are next scheduled to adjust rather than the
period in which they contractually mature, and fixed-rate loans (including bi-weekly loans) are
included in the period in which contractual payments are due. No adjustments have been made for
prepayment of principal (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One through five |
|
|
|
|
|
|
|
|
|
Within one year |
|
|
years |
|
|
After five years |
|
|
Total |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
$ |
1,015,184 |
|
|
$ |
1,480,804 |
|
|
$ |
217,554 |
|
|
$ |
2,713,542 |
|
Construction |
|
|
341,076 |
|
|
|
6,894 |
|
|
|
70 |
|
|
|
348,040 |
|
Business |
|
|
1,180,880 |
|
|
|
247,626 |
|
|
|
53,339 |
|
|
|
1,481,845 |
|
Specialized lending |
|
|
96,949 |
|
|
|
110,800 |
|
|
|
|
|
|
|
207,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
2,634,089 |
|
|
|
1,846,124 |
|
|
|
270,963 |
|
|
|
4,751,176 |
|
Residential real estate |
|
|
296,499 |
|
|
|
480,196 |
|
|
|
898,266 |
|
|
|
1,674,961 |
|
Home equity |
|
|
407,457 |
|
|
|
95,000 |
|
|
|
188,612 |
|
|
|
691,069 |
|
Other consumer |
|
|
85,659 |
|
|
|
51,606 |
|
|
|
49,076 |
|
|
|
186,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
3,423,704 |
|
|
$ |
2,472,926 |
|
|
$ |
1,406,917 |
|
|
$ |
7,303,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the loans reported in the preceding table, the following sets forth at December
31, 2009, the dollar amount of all of our fixed-rate and adjustable-rate loans due after December
31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Adjustable |
|
|
Total |
|
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
$ |
786,965 |
|
|
$ |
911,393 |
|
|
$ |
1,698,358 |
|
Construction |
|
|
6,964 |
|
|
|
|
|
|
|
6,964 |
|
Business |
|
|
256,657 |
|
|
|
44,308 |
|
|
|
300,965 |
|
Specialized lending |
|
|
110,800 |
|
|
|
|
|
|
|
110,800 |
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
1,161,386 |
|
|
|
955,701 |
|
|
|
2,117,087 |
|
Residential real estate |
|
|
1,289,170 |
|
|
|
89,292 |
|
|
|
1,378,462 |
|
Home equity |
|
|
283,612 |
|
|
|
|
|
|
|
283,612 |
|
Other consumer |
|
|
100,682 |
|
|
|
|
|
|
|
100,682 |
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases |
|
$ |
2,834,850 |
|
|
$ |
1,044,993 |
|
|
$ |
3,879,843 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
Cash, interest-bearing demand accounts at correspondent banks, federal funds sold, and other
short-term investments are our most liquid assets. We monitor the level of these assets daily and
they are dependent on operating, financing, lending, and investing activities during any given
period. We usually invest excess short-term liquidity in overnight federal funds sold. In the
event that we require funds beyond those that we generate internally due to higher than expected
loan commitment fundings, deposit outflows or the amount of debt being called, additional sources
of funds are available to us through the use of repurchase agreements, the sale of loans or
investments or our various lines of credit. As of December 31, 2009, available cash,
interest-bearing demand accounts, federal funds sold, and other short-term investments totaled
$232.3 million, or 1.6% of total assets.
FOURTH QUARTER RESULTS
During the fourth quarter of 2009, our loan portfolio increased $57.8 million, excluding
commercial loans purchased from Harleysville
with a carrying value of $59.7 million at December 31, 2009. This increase is reflective of an
$83.0 million, or 7%, increase in our commercial loan portfolio, including $44.9 million in our
Western Pennsylvania portfolio, offset by a $51.0 million decrease in residential real estate loans
as consumer preference continues to be for long term fixed rate products which we sell. Total loan
and line originations of $1.2 billion during the fourth quarter of 2009 as compared to $785.0
million for the same period in 2008 also contributed to the increase. Our total deposits decreased
$193.8 million to $9.7 billion during the quarter ended December 31, 2009; however, lower cost core
deposits increased $124.6 million, or 7%. Certificates of deposit balances decreased $318.4
million during this period primarily due to the maturity and repricing of the portfolio. Our
borrowings increased $787.1 million from the prior quarter, primarily due to repurchase agreements
added in December 2009.
56
Net income for the quarter ended December 31, 2009 increased to $28.9 million from $22.8 million
for the same quarter in 2008. Diluted earnings per share for the fourth quarter of 2009 was $0.16,
which reflects the additional shares issued in our two follow-on stock offerings, as compared to
$0.19 for the same quarter in 2008, which included $1.2 million of preferred stock dividends and
discount accretion.
Our net interest income for the fourth quarter of 2009 increased 57% from the same period in 2008
to $112.9 million, reflecting a 32% increase in our interest income which was only partially offset
by a 15% decrease in our interest expense. This was primarily due to the shift in our deposit mix
towards lower cost core deposits combined with the increased use of low cost wholesale borrowings
which resulted in a 100 basis point decrease in the cost of interest-bearing liabilities to 1.26%.
During the quarter ended December 31, 2009, we recorded an $11.0 million provision for credit
losses as compared to $8.0 million during the quarter ended December 31, 2008. At December 31,
2009, our total nonperforming loans increased to $68.6 million, as compared to $46.4 million at
December 31, 2008, with higher nonperforming loans primarily in our shared national credits and
commercial real estate portfolios. However, net loan charge-offs decreased to $5.8 million, or
0.32% annualized of average loans for the quarter as compared to $7.9 million, or 0.49% annualized
of average loans for the fourth quarter of 2008.
For the
three months ended December 31, 2009, our noninterest income
increased $7.9 million from the three months ended December 31,
2008,
reflecting higher deposit related banking services fees, including those from the NatCity branches.
Our fourth quarter noninterest expenses increased to
$94.7 million, from $57.6 million for
the fourth quarter of 2008, primarily due to increased costs related to the NatCity branches, $4.0
million of merger and acquisition integration expenses, a $3.9 million increase in FDIC premiums,
and targeted investments in personnel, occupancy, equipment, technology, and communications in an effort to
build additional operating capacity to support the Harleysville acquisition as well as future growth opportunities.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 2009, the Financial Accounting Standards Board (the FASB) released new guidance to
improve the relevance, representational faithfulness, and comparability of the information that we
provide in our financial statements about a transfer of financial assets; the effects of a transfer
on our financial position, financial performance, and cash flows; and our continuing involvement,
if any, in transferred financial assets. Additionally, this guidance removes the concept of a
qualifying special-purpose entity from current accounting guidance. This new guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009.
This guidance is to be applied prospectively to transfers of financial assets beginning January 1,
2010 and is not expected to have a material impact on our Consolidated Financial Statements.
In June 2009, the FASB also released new guidance which addresses the effects on certain provisions
of current accounting guidance relating to the consolidation of variable interest entities, as a
result of the elimination of the qualifying special-purpose entity concept. It addresses concerns
about the application of certain key provisions of current accounting guidance, including those in
which the accounting and disclosures do not always provide timely and useful information about a
companys involvement in a variable interest entity. This guidance requires us to perform an
analysis to determine whether any of our variable interests give us a controlling financial
interest in a variable interest entity. In addition, this guidance requires ongoing assessments of
whether we are the primary beneficiary of a variable interest entity. This guidance is effective
for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009.
This guidance is not expected to have a material impact on our Consolidated Financial Statements.
In January 2010, the FASB released new guidance requiring entities to make new disclosures about
recurring and nonrecurring fair value measurements, including significant transfers into and out of
Level 1 and Level 2 fair value measurements. This guidance also requires information on purchases,
sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value
measurements. This guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2009, except for the detailed Level 3 roll forward disclosures,
which is effective for fiscal years, and interim periods within those fiscal years, beginning on
after December 15, 2010. Early adoption is permitted.
57
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk is interest rate risk, that is, the potential volatility of
our earnings that arises from fluctuations in market interest rates. Changes in market interest
rates, whether they are increases or decreases, and the pace at which the changes occur can trigger
repricings of the interest we receive or pay and changes in the pace of payments, which
individually or in combination may affect our net interest income, positively or negatively.
Most of the yields on our interest earning assets, including floating-rate loans and investments,
are related to market interest rates. So is our cost of funds, which includes the rates we pay on
interest-bearing deposits and borrowings. Interest rate sensitivity occurs when the interest
income (yields) we earn on our assets changes at a pace that differs from the interest expense
(rates) we pay on liabilities.
Our Asset and Liability Committee (ALCO), comprised of members of our senior management, monitors
our sensitivity to interest rates and enacts strategies to manage our exposure to interest rate
risk. Our goal is to maximize the growth of net interest income on a consistent basis while
minimizing the effects of fluctuations associated with changing market interest rates. In other
words, we want changes in loan and deposit balances, rather than changes in market interest rates,
to be the primary drivers of growth in net interest income.
We utilize the following strategies to manage our interest rate risk: (1) emphasizing the
origination and retention of residential and commercial adjustable-rate loans, home equity loans,
and residential fixed-rate mortgage loans having contractual maturities of no more than 20 years;
(2) selling newly originated 15 to 30 year fixed-rate, residential mortgage loans into the
secondary market without recourse; (3) investing in shorter term securities which generally bear
lower yields as compared to longer term investments, but which better position us for increases in
market interest rates; (4) growing core deposits; and (5) utilizing wholesale borrowings to support
cash flow needs and help match asset repricing. Additionally, we intend to evaluate further the
utilization of derivative instruments such as interest rate swaps, caps, and collars as part of our
overall asset and liability management process as permitted by our ALCO Policy.
Net Interest Income Analysis
We use simulations of the effects of variations in interest rates on net interest income.
These simulations, which we conduct at least quarterly, compare multiple hypothetical interest rate
scenarios to a stable, interest rate environment.
58
The following table shows the estimated impact on net interest income for the next twelve months
resulting from potential changes in interest rates. The calculated changes assume a gradual
parallel shift across the yield curve over the next 12 months. The effects of changing the yield
curve slope are not considered in the analysis, nor do we consider changes in the spread
relationships between various indexes which impact our net interest income. These estimates
require us to make 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, we cannot precisely predict the impact of changes in
interest rates on our net interest income. Actual results may differ significantly due to timing,
magnitude, and frequency of interest rate changes and changes in market conditions (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculated increase (decrease) at December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Net interest |
|
|
|
|
|
|
Net interest |
|
|
|
|
Changes in interest rates |
|
income |
|
|
% Change |
|
|
income |
|
|
% Change |
|
+200 basis points |
|
$ |
(2,837 |
) |
|
|
(0.6 |
)% |
|
$ |
(5,376 |
) |
|
|
(2.4 |
)% |
+100 basis points |
|
|
(828 |
) |
|
|
(0.2 |
) |
|
|
(2,119 |
) |
|
|
(0.9 |
) |
-100 basis points |
|
|
|
(1) |
|
|
|
(1) |
|
|
4,307 |
|
|
|
1.9 |
|
-200 basis points |
|
|
|
(1) |
|
|
|
(1) |
|
|
6,626 |
|
|
|
3.0 |
|
|
|
|
(1) |
|
The Federal Reserve benchmark overnight federal funds rate was 0.25% at
December 31, 2009, therefore, the calculation of the effect of the decrease in interest rates
is not measurable. |
Certain shortcomings are inherent in the methodology used in the above interest rate risk
measurements. Modeling changes in net interest income require us to make certain assumptions that
may or may not reflect the manner in which actual yields respond to changes in market interest
rates. In this regard, the net interest income table presented assumes that the change in interest
rates is reflected uniformly across the yield curve regardless of the duration to maturity or
repricing of specific assets and liabilities. Accordingly, although the net interest income table
provides an indication of our interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the effect of changes in
market interest rates on our net interest income and will differ from actual results.
59
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Managements Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial
reporting for First Niagara Financial Group, Inc. and its subsidiary (we and our), as that term
is defined in Exchange Act Rules 13a-15(f). We conducted an evaluation of the effectiveness of our
internal control over our financial reporting as of December 31, 2009 based on the framework in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, we concluded that our internal control over
financial reporting is effective as of December 31, 2009.
KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial
statements included in this Annual Report and has issued a report on the effectiveness of our
internal control over financial reporting. Their reports follow this statement.
|
|
|
|
|
|
|
/s/ John R. Koelmel
John R. Koelmel
|
|
|
|
/s/ Michael W. Harrington
Michael W. Harrington
|
|
|
President and Chief Executive Officer
|
|
|
|
Chief Financial Officer |
|
|
60
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Niagara Financial Group, Inc.:
We have audited First Niagara Financial Group, Inc. and subsidiarys (the Company) internal control
over financial reporting as of December 31, 2009, based on criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated statements of condition of First Niagara Financial Group,
Inc. and subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of
income, comprehensive income, changes in stockholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2009, and our report dated February 26, 2010 expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Buffalo, New York
February 26, 2010
61
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
First Niagara Financial Group, Inc.:
We have audited the accompanying consolidated statements of condition of First Niagara Financial
Group, Inc. and subsidiary (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of income, comprehensive income, changes in stockholders equity, and cash
flows for each of the years in the three-year period ended December 31, 2009. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of First Niagara Financial Group, Inc. and subsidiary as
of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 141(R), Business Combinations (included in
Financial Accounting Standards Board Accounting Standards Codification Topic 805, Business
Combinations), in 2009.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
February 26, 2010 expressed an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting.
/s/ KPMG LLP
Buffalo, New York
February 26, 2010
62
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Condition
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
232,268 |
|
|
|
110,552 |
|
Restricted cash |
|
|
4,000 |
|
|
|
3,999 |
|
Investment securities: |
|
|
|
|
|
|
|
|
Available for sale, at estimated fair value |
|
|
4,421,678 |
|
|
|
1,573,101 |
|
Held to maturity, at amortized cost (estimated fair value of $1,106,650) |
|
|
1,093,552 |
|
|
|
|
|
Loans held for sale |
|
|
32,270 |
|
|
|
1,698 |
|
Loans and leases (net of allowance for credit losses of $88,303
and $77,793 in 2009 and 2008) |
|
|
7,208,883 |
|
|
|
6,384,284 |
|
Bank-owned life insurance |
|
|
132,414 |
|
|
|
127,151 |
|
Premises and equipment, net |
|
|
156,213 |
|
|
|
95,978 |
|
Goodwill |
|
|
879,107 |
|
|
|
748,971 |
|
Core deposit and other intangibles, net |
|
|
56,277 |
|
|
|
35,578 |
|
Other assets |
|
|
368,171 |
|
|
|
250,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
14,584,833 |
|
|
|
9,331,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Deposits |
|
$ |
9,729,524 |
|
|
|
5,943,613 |
|
Short-term borrowings |
|
|
1,674,761 |
|
|
|
717,464 |
|
Long-term borrowings |
|
|
627,519 |
|
|
|
822,763 |
|
Other |
|
|
179,368 |
|
|
|
120,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
12,211,172 |
|
|
|
7,604,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities (Note 12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 50,000,000 shares authorized;
Series A, cumulative perpetual preferred stock, $1,000 liquidation value,
184,011 shares issued and outstanding in 2008 (Note 13) |
|
|
|
|
|
|
176,719 |
|
Common stock, $0.01 par value, 250,000,000 shares authorized;
194,810,261 and 125,419,261 shares issued in 2009 and 2008 |
|
|
1,948 |
|
|
|
1,254 |
|
Additional paid-in capital |
|
|
2,128,196 |
|
|
|
1,326,159 |
|
Retained earnings |
|
|
352,948 |
|
|
|
369,671 |
|
Accumulated other comprehensive income (loss) |
|
|
2,514 |
|
|
|
(29,429 |
) |
Common stock held by ESOP, 2,874,196 and 3,094,365 shares
in 2009 and 2008 |
|
|
(22,382 |
) |
|
|
(23,843 |
) |
Treasury stock, at cost, 6,595,500 and 6,857,554 shares
in 2009 and 2008 |
|
|
(89,563 |
) |
|
|
(93,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
2,373,661 |
|
|
|
1,727,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
14,584,833 |
|
|
|
9,331,372 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
63
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
360,689 |
|
|
|
377,037 |
|
|
|
376,123 |
|
Investment securities and other |
|
|
130,069 |
|
|
|
64,101 |
|
|
|
46,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
490,758 |
|
|
|
441,138 |
|
|
|
422,772 |
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
73,551 |
|
|
|
118,683 |
|
|
|
159,371 |
|
Borrowings |
|
|
52,807 |
|
|
|
53,878 |
|
|
|
39,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
126,358 |
|
|
|
172,561 |
|
|
|
198,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
364,400 |
|
|
|
268,577 |
|
|
|
224,178 |
|
Provision for credit losses |
|
|
43,650 |
|
|
|
22,500 |
|
|
|
8,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses |
|
|
320,750 |
|
|
|
246,077 |
|
|
|
215,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Banking services |
|
|
49,538 |
|
|
|
40,082 |
|
|
|
39,289 |
|
Insurance and benefits consulting |
|
|
48,958 |
|
|
|
49,733 |
|
|
|
51,646 |
|
Lending and leasing |
|
|
10,888 |
|
|
|
8,783 |
|
|
|
8,880 |
|
Wealth management services |
|
|
8,555 |
|
|
|
9,922 |
|
|
|
9,494 |
|
Bank owned life insurance |
|
|
5,251 |
|
|
|
5,449 |
|
|
|
4,848 |
|
Gain (loss) on sale of securities , net |
|
|
1,211 |
|
|
|
|
|
|
|
(5,395 |
) |
Gain on sale of branches, net |
|
|
|
|
|
|
|
|
|
|
21,564 |
|
Other |
|
|
1,574 |
|
|
|
1,766 |
|
|
|
1,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
125,975 |
|
|
|
115,735 |
|
|
|
131,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
161,548 |
|
|
|
133,785 |
|
|
|
125,697 |
|
Merger and acquisition integration expenses |
|
|
31,467 |
|
|
|
2,186 |
|
|
|
86 |
|
Occupancy and equipment |
|
|
29,113 |
|
|
|
23,823 |
|
|
|
28,550 |
|
Technology and communications |
|
|
24,770 |
|
|
|
19,849 |
|
|
|
19,454 |
|
Federal deposit insurance premiums |
|
|
16,668 |
|
|
|
1,265 |
|
|
|
916 |
|
Marketing and advertising |
|
|
10,281 |
|
|
|
10,496 |
|
|
|
8,341 |
|
Amortization of core deposit and other intangibles |
|
|
9,418 |
|
|
|
8,824 |
|
|
|
10,433 |
|
Professional services |
|
|
6,131 |
|
|
|
4,659 |
|
|
|
4,385 |
|
Charitable contributions |
|
|
6,037 |
|
|
|
531 |
|
|
|
649 |
|
Other |
|
|
31,239 |
|
|
|
22,992 |
|
|
|
23,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
326,672 |
|
|
|
228,410 |
|
|
|
222,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
120,053 |
|
|
|
133,402 |
|
|
|
125,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
40,676 |
|
|
|
44,964 |
|
|
|
40,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
79,377 |
|
|
|
88,438 |
|
|
|
84,085 |
|
Preferred stock dividend |
|
|
3,731 |
|
|
|
1,022 |
|
|
|
|
|
Accretion of preferred stock discount |
|
|
8,315 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
67,331 |
|
|
|
87,254 |
|
|
|
84,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.46 |
|
|
|
0.81 |
|
|
|
0.82 |
|
Diluted |
|
|
0.46 |
|
|
|
0.81 |
|
|
|
0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
146,833 |
|
|
|
107,531 |
|
|
|
102,838 |
|
Diluted |
|
|
147,205 |
|
|
|
108,174 |
|
|
|
103,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share |
|
$ |
0.56 |
|
|
|
0.56 |
|
|
|
0.54 |
|
See accompanying notes to consolidated financial statements.
64
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
79,377 |
|
|
|
88,438 |
|
|
|
84,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) arising during the year |
|
|
30,652 |
|
|
|
(12,692 |
) |
|
|
10,884 |
|
Reclassification adjustment for realized (gains) losses
included in net income |
|
|
(731 |
) |
|
|
|
|
|
|
3,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,921 |
|
|
|
(12,692 |
) |
|
|
14,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on interest rate swaps arising during the period |
|
|
206 |
|
|
|
(1,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and post-retirement actuarial gain (loss) |
|
|
1,816 |
|
|
|
(12,773 |
) |
|
|
3,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
31,943 |
|
|
|
(26,825 |
) |
|
|
17,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
111,320 |
|
|
|
61,613 |
|
|
|
101,358 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
65
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
other |
|
|
stock |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
paid-in |
|
|
Retained |
|
|
comprehensive |
|
|
held by |
|
|
Treasury |
|
|
|
|
|
|
stock |
|
|
stock |
|
|
capital |
|
|
earnings |
|
|
(loss) income |
|
|
ESOP |
|
|
stock |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2007 |
|
$ |
|
|
|
|
1,200 |
|
|
|
1,237,816 |
|
|
|
322,745 |
|
|
|
(19,877 |
) |
|
|
(26,816 |
) |
|
|
(127,871 |
) |
|
|
1,387,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,085 |
|
Total other comprehensive income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,273 |
|
|
|
|
|
|
|
|
|
|
|
17,273 |
|
Purchase of treasury stock (6,964,565 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,690 |
) |
|
|
(95,690 |
) |
ESOP shares released (221,291 shares) |
|
|
|
|
|
|
|
|
|
|
1,544 |
|
|
|
|
|
|
|
|
|
|
|
1,466 |
|
|
|
|
|
|
|
3,010 |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
6,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,288 |
|
Net tax benefit related to stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
2,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,241 |
|
Exercise of stock options and restricted
stock activity (1,016,144 shares) |
|
|
|
|
|
|
|
|
|
|
(3,123 |
) |
|
|
(6,275 |
) |
|
|
|
|
|
|
|
|
|
|
14,072 |
|
|
|
4,674 |
|
Common stock dividends of $0.54 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007 |
|
$ |
|
|
|
|
1,200 |
|
|
|
1,244,766 |
|
|
|
344,656 |
|
|
|
(2,604 |
) |
|
|
(25,350 |
) |
|
|
(209,489 |
) |
|
|
1,353,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accounting for defined
benefit plans, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2008 |
|
|
|
|
|
|
1,200 |
|
|
|
1,244,766 |
|
|
|
344,539 |
|
|
|
(2,604 |
) |
|
|
(25,350 |
) |
|
|
(209,489 |
) |
|
|
1,353,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,438 |
|
Total other comprehensive loss, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,825 |
) |
|
|
|
|
|
|
|
|
|
|
(26,825 |
) |
Purchase of treasury stock (625,000 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,795 |
) |
|
|
(6,795 |
) |
Common stock issued for the acquisition of
Great Lakes Bancorp, Inc. (5,374,525 shares) |
|
|
|
|
|
|
54 |
|
|
|
73,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,782 |
|
Proceeds from follow-on stock offering, net of
related expenses (8,515,419 shares) |
|
|
|
|
|
|
|
|
|
|
(6,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,817 |
|
|
|
108,838 |
|
Preferred stock issued, net of related
expenses (184,011 shares) |
|
|
175,697 |
|
|
|
|
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,615 |
|
Accretion of preferred stock discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(162 |
) |
Warrant issued (1,906,191 shares) |
|
|
|
|
|
|
|
|
|
|
8,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,476 |
|
ESOP shares released (229,297 shares) |
|
|
|
|
|
|
|
|
|
|
1,683 |
|
|
|
|
|
|
|
|
|
|
|
1,507 |
|
|
|
|
|
|
|
3,190 |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
5,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,633 |
|
Net tax benefit related to stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
714 |
|
Exercise of stock options and restricted
stock activity (526,506 shares) |
|
|
|
|
|
|
|
|
|
|
(1,780 |
) |
|
|
(2,051 |
) |
|
|
|
|
|
|
|
|
|
|
7,199 |
|
|
|
3,368 |
|
Cumulative dividends on preferred stock |
|
|
1,022 |
|
|
|
|
|
|
|
|
|
|
|
(1,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends of $0.56 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008 |
|
$ |
176,719 |
|
|
|
1,254 |
|
|
|
1,326,159 |
|
|
|
369,671 |
|
|
|
(29,429 |
) |
|
|
(23,843 |
) |
|
|
(93,268 |
) |
|
|
1,727,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,377 |
|
Total other comprehensive income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,943 |
|
|
|
|
|
|
|
|
|
|
|
31,943 |
|
Proceeds from follow-on stock offerings, net of
related expenses (69,391,000 shares) |
|
|
|
|
|
|
694 |
|
|
|
801,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
802,215 |
|
Preferred stock redemption |
|
|
(184,011 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184,011 |
) |
Repurchase of common stock warrant |
|
|
|
|
|
|
|
|
|
|
(2,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,700 |
) |
ESOP shares released (220,169 shares) |
|
|
|
|
|
|
|
|
|
|
1,322 |
|
|
|
|
|
|
|
|
|
|
|
1,461 |
|
|
|
|
|
|
|
2,783 |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
5,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,186 |
|
Net tax expense related to stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
Exercise of stock options and restricted
stock activity (262,054 shares) |
|
|
|
|
|
|
|
|
|
|
(3,282 |
) |
|
|
(896 |
) |
|
|
|
|
|
|
|
|
|
|
3,705 |
|
|
|
(473 |
) |
Accretion of preferred stock discount |
|
|
8,315 |
|
|
|
|
|
|
|
|
|
|
|
(8,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on cumulative preferred stock |
|
|
(1,023 |
) |
|
|
|
|
|
|
|
|
|
|
(3,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,754 |
) |
Common stock dividends of $0.56 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009 |
|
$ |
|
|
|
|
1,948 |
|
|
|
2,128,196 |
|
|
|
352,948 |
|
|
|
2,514 |
|
|
|
(22,382 |
) |
|
|
(89,563 |
) |
|
|
2,373,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
66
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
79,377 |
|
|
|
88,438 |
|
|
|
84,085 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of fees and discounts, net |
|
|
22,299 |
|
|
|
6,566 |
|
|
|
5,695 |
|
Provision for credit losses |
|
|
43,650 |
|
|
|
22,500 |
|
|
|
8,500 |
|
Depreciation of premises and equipment |
|
|
13,338 |
|
|
|
10,637 |
|
|
|
11,763 |
|
Amortization of core deposit and other intangibles |
|
|
9,418 |
|
|
|
8,824 |
|
|
|
10,433 |
|
Origination of loans held for sale |
|
|
(474,450 |
) |
|
|
(100,072 |
) |
|
|
(91,399 |
) |
Proceeds from sales of loans held for sale |
|
|
443,874 |
|
|
|
101,821 |
|
|
|
91,606 |
|
Increase in
prepaid FDIC insurance |
|
|
(38,269 |
) |
|
|
|
|
|
|
|
|
Gain on sale of branches |
|
|
|
|
|
|
|
|
|
|
(21,564 |
) |
ESOP and stock based compensation expense |
|
|
7,969 |
|
|
|
8,823 |
|
|
|
9,281 |
|
Deferred income tax expense (benefit) |
|
|
3,547 |
|
|
|
2,911 |
|
|
|
(3,895 |
) |
Other, net |
|
|
5,815 |
|
|
|
(12,628 |
) |
|
|
(1,838 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
116,568 |
|
|
|
137,820 |
|
|
|
102,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of securities available for sale |
|
|
143,651 |
|
|
|
|
|
|
|
194,481 |
|
Proceeds from maturities of securities available for sale |
|
|
1,103,383 |
|
|
|
431,035 |
|
|
|
274,272 |
|
Principal payments received on securities available for sale |
|
|
548,486 |
|
|
|
197,284 |
|
|
|
153,457 |
|
Purchases of securities available for sale |
|
|
(4,603,803 |
) |
|
|
(797,290 |
) |
|
|
(594,923 |
) |
Principal payments received on securities held to maturity |
|
|
60,742 |
|
|
|
|
|
|
|
|
|
Purchases of securities held to maturity |
|
|
(1,157,858 |
) |
|
|
|
|
|
|
|
|
Loan originations in excess of principal payments |
|
|
(164,071 |
) |
|
|
(214,148 |
) |
|
|
(271,011 |
) |
Advance to Harleysville National Corporation |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
Cash received from (paid for) acquisitions |
|
|
3,062,415 |
|
|
|
(83,744 |
) |
|
|
(10,806 |
) |
Net cash distributed for branch sales |
|
|
|
|
|
|
|
|
|
|
(93,143 |
) |
Other, net |
|
|
(53,359 |
) |
|
|
(13,308 |
) |
|
|
(26,988 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,110,414 |
) |
|
|
(480,171 |
) |
|
|
(374,661 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in deposits |
|
|
(176,292 |
) |
|
|
(198,871 |
) |
|
|
(6,211 |
) |
Proceeds from (repayments of) short-term borrowings, net |
|
|
758,389 |
|
|
|
(18,180 |
) |
|
|
(28,893 |
) |
Proceeds from long-term borrowings |
|
|
150,000 |
|
|
|
363,500 |
|
|
|
406,100 |
|
Repayments of long-term borrowings |
|
|
(144,454 |
) |
|
|
(34,868 |
) |
|
|
(27,225 |
) |
Proceeds from exercise of stock options |
|
|
332 |
|
|
|
3,715 |
|
|
|
4,910 |
|
Excess tax (expense) benefit from stock based compensation |
|
|
(10 |
) |
|
|
714 |
|
|
|
2,241 |
|
(Redemption) issuance of preferred stock, net |
|
|
(184,011 |
) |
|
|
175,453 |
|
|
|
|
|
Issuance of common stock in follow-on stock offerings, net |
|
|
802,215 |
|
|
|
108,838 |
|
|
|
|
|
(Repurchase) issuance of common stock warrant |
|
|
(2,700 |
) |
|
|
8,476 |
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
(6,795 |
) |
|
|
(95,690 |
) |
Dividends paid on cumulative preferred stock |
|
|
(4,754 |
) |
|
|
|
|
|
|
|
|
Dividends paid on common stock |
|
|
(83,152 |
) |
|
|
(60,071 |
) |
|
|
(55,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,115,563 |
|
|
|
341,911 |
|
|
|
199,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
121,717 |
|
|
|
(440 |
) |
|
|
(72,661 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
114,551 |
|
|
|
114,991 |
|
|
|
187,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
236,268 |
|
|
|
114,551 |
|
|
|
114,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
31,218 |
|
|
|
45,965 |
|
|
|
37,204 |
|
Interest expense |
|
|
127,405 |
|
|
|
172,856 |
|
|
|
196,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash activity: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans transferred to other real estate owned |
|
$ |
8,630 |
|
|
|
4,232 |
|
|
|
430 |
|
Loans securitized |
|
|
|
|
|
|
|
|
|
|
164,284 |
|
Change in funded status of benefit plans |
|
|
490 |
|
|
|
(21,337 |
) |
|
|
6,811 |
|
Capital lease obligation |
|
|
11,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and dispositions of noncash assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired, net of dispositions |
|
$ |
911,719 |
|
|
|
908,466 |
|
|
|
11,370 |
|
Liabilities assumed, net of dispositions |
|
|
3,974,134 |
|
|
|
750,943 |
|
|
|
563 |
|
Assets sold in branch sales |
|
|
|
|
|
|
|
|
|
|
38,638 |
|
Liabilities sold in branch sales |
|
|
|
|
|
|
|
|
|
|
154,541 |
|
See accompanying notes to consolidated financial statements.
67
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years ended December 31, 2009, 2008, and 2007
(Amounts in thousands, except as noted and per share amounts)
Note 1. Summary of Significant Accounting Policies
First Niagara Financial Group, Inc. (the Company), a Delaware corporation, and its
subsidiary bank provide financial services to individuals and businesses in Upstate New York and
Western Pennsylvania. We provide a full range of products and services through our retail
consumer, commercial, business services, and wealth management operations, including retail
banking, residential and commercial lending, leasing, cash management, insurance and wealth
management products, as well as employee benefits consulting services.
The Company owns all of the capital stock of First Niagara Bank (the Bank), a federally
chartered savings bank. First Niagara Commercial Bank, a wholly-owned subsidiary of the Bank, is
a New York State chartered commercial bank whose primary purpose is to accept municipal deposits,
which under New York State law cannot be accepted by federally chartered savings banks.
Our accounting and reporting policies conform to general practices within the banking industry
and to U.S. generally accepted accounting principles (GAAP). Reclassifications of prior years
amounts are made whenever necessary to conform to the current years presentation. The following
is a description of our significant accounting policies:
Principles of Consolidation
Our Consolidated Financial Statements include the accounts of the Company and its
subsidiaries. We have eliminated all significant intercompany balances in consolidation.
Subsequent Events
We reviewed subsequent events and determined
that no further disclosures were required.
Cash and Cash Equivalents
For purposes of our Consolidated Statement of Cash Flows, cash and cash equivalents include
cash and due from banks, restricted
cash, federal funds sold, and money market investments which have a term of less than three
months at the time of purchase.
Restricted Cash
Our restricted cash is comprised of funds held in escrow pending the final settlement of a
lawsuit acquired in our acquisition of Great Lakes Bancorp, Inc. and funds pledged as collateral
for a mortgage servicing agreement with the Federal National Mortgage Association (FNMA).
Investment Securities
We have classified our investments in debt and equity securities as held to maturity or
available for sale. We classify investment securities as held to maturity if we have the
positive intent and ability to hold them to maturity. Held to maturity securities are reported
at amortized cost. We classify investment securities not classified as held to maturity as
available for sale, and report them at fair value with unrealized gains and losses, net of
deferred taxes, reported in other comprehensive income as a separate component of stockholders
equity. Fair value is based upon quoted market prices of identical securities, where available.
Where sufficient data is not available to produce a fair valuation, fair value is based on broker
quotes of similar securities. Broker quotes may be adjusted to ensure that investment securities
are recorded at fair value. Adjustments may include amounts to reflect counterparty credit
quality as well as unobservable parameters. If quoted prices are not available, fair value is
based upon valuation models that use cash flow, security structure, and other observable
information.
68
We conduct a quarterly review and evaluation of our investment securities portfolio to determine
if any declines in fair value below amortized cost are other than temporary. In making this
determination we consider some or all of the following factors: the period of time the securities
were in an unrealized loss position, the percentage decline in comparison to the securities
amortized cost, credit rating, the financial condition of the issuer and guarantor, where
applicable, the delinquency or default rates of underlying collateral, credit enhancement,
projected losses, level of credit loss, and projected cash flows. Any valuation decline below
amortized cost that we determine to be other than temporary would require us to write down the credit component
of such unrealized loss through a charge to current period operations. If we intend to sell a
security with a fair value below amortized cost or if it is more likely than not that we will be
required to sell such a security, we would record an other than temporary impairment charge
through current period earnings for the full decline in fair value below amortized cost.
Purchases of investment securities are recorded at trade date, with realized gains and losses on
sales included in our Consolidated Statements of Income using the specific identification
method. We amortize premiums and accrete discounts on our investment securities to interest
income utilizing the interest method.
Loans and Leases
Loans we originate and intend to hold in our portfolio are stated at the principal amount
outstanding, adjusted for unamortized deferred fees and costs as well as discounts and
premiums, all of which we amortize to income over the expected life of the loan using the
interest method. We discontinue accrual of interest on loans after payments become more than
ninety days delinquent, unless the status of a particular loan clearly indicates earlier
discontinuance is more appropriate. The delinquency status is based upon the contractual terms
of the loans. We reverse all uncollected interest income that we previously recognized on
nonaccrual loans and subsequently recognize interest income only to the extent that we receive
payments. When we have doubt as to the collectibility of a loans principal, we apply interest
payments to principal. We generally return a loan to accrual status when principal and
interest payments are current, we are reasonably assured of full collectibility of principal
and interest, and a consistent repayment record, generally six months, has been demonstrated.
We charge loans off against our allowance for credit losses when it becomes evident that we will
not fully collect the balance of the loan. We consider a loan impaired when, based on current
information and events, it is probable that we will be unable to collect all amounts of principal
and interest due under the original terms of the agreement. We measure the impairment in these
loans based on the present value of expected future cash flows discounted at the loans effective
interest rate or, as a practical alternative, the loans observable market price or the fair
value of the underlying collateral, if the loan is collateral dependent.
A determination is made whether a loan will be held in our portfolio or is
intended for sale in the secondary market. Our accounting policy is to record loans held for
sale at the lower of the aggregate cost or fair value based upon observable market prices or
prices that we obtain from a third party. We recognize any subsequent decreases in fair value in
a valuation allowance through a charge to earnings at the time the decline in value occurs. We
generally include gains and losses on sales of our loans held for sale in lending and leasing
income when the applicable sale criteria are met.
We capitalize the mortgage servicing rights (MSRs) based on an estimate of the net servicing
revenues which we amortize in proportion to and over the period of estimated net servicing income.
We assess our MSRs on a quarterly basis
for temporary impairment based on their current fair value. If any temporary impairment results
after current market assumptions are applied, we will reduce the carrying value of our MSRs
through a valuation allowance and a charge to earnings.
We enter into direct financing equipment lease transactions with certain commercial customers.
At the beginning of the lease, we record the transaction based on the estimate of the present
value of future rentals and the lease residual value. We capitalize unearned interest income,
sales commissions, and other direct costs that we incur and amortize them to interest income over
the lease term utilizing the interest method.
Acquired Loans
Loans that we acquire in connection with acquisitions subsequent to January 1, 2009 are
recorded at fair value with no carryover of the related allowance for credit losses. Fair value of the
loans involves estimating the amount and timing of principal and interest cash flows expected to
be collected on the loans and discounting those cash flows at a market rate of interest.
69
The excess of cash flows expected at acquisition over the estimated fair value is referred to as
the accretable discount and is recognized into interest income over the remaining life of the
loan. The difference between contractually required payments at acquisition and the cash flows
expected to be collected at acquisition is referred to as the nonaccretable discount. The
nonaccretable discount includes estimated future credit losses expected to be incurred over the
life of the loan. Subsequent decreases to the expected cash flows will require us to evaluate
the need for an additional allowance for credit losses. Subsequent improvement in expected cash
flows will result in the reversal of a corresponding amount of the nonaccretable discount which
we will then reclassify as accretable discount that will be recognized into interest income over
the remaining life of the loan.
Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be
considered performing upon acquisition, regardless of whether the customer is contractually
delinquent. We expect to fully collect the new carrying value (i.e., fair value) of
the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and
may accrue interest on these loans, including the impact of any accretable purchase accounting
fair value discount. In addition, charge-offs on such loans would be first applied to the
nonaccretable difference portion of the fair value adjustment.
Allowance for Credit Losses
We establish our allowance for credit losses through charges to our provision for credit
losses. We evaluate our allowance based on a continuing review of our loan portfolio. We
review impaired loans individually and we consider the fair value of any
underlying collateral, if collateral dependent, or estimated future cash flows in determining
estimates of impairment for those loans. We estimate losses in smaller balance, homogeneous
loans not considered to be impaired based on our historical experience, industry trends and current trends in the real estate
market and the current economic environment in our market areas. The adequacy of our allowance
for credit losses is based on our evaluation of various conditions including the following:
changes in the composition of and growth in our loan portfolio; industry and regional
conditions; the strength and duration of the current business cycle; existing general economic
and business conditions in our lending areas; credit quality trends, including trends in our
nonaccruing loans; our historical loan charge-off experience; and the results of bank regulatory
examinations.
Premises and Equipment
Our premises and equipment are carried at cost, net of accumulated depreciation and
amortization. We compute depreciation on the straight-line method over the estimated useful
lives of the assets. We amortize our leasehold improvements on the straight-line method over
the lesser of the life of the improvements or the lease term. We generally depreciate
buildings over a period of 20 to 39 years, furniture and equipment over a period of 3 to 10
years, and capital leases over the lesser of the useful life or the respective lease term.
Goodwill and Intangible Assets
We record the excess of the cost of acquired entities over the fair value of identifiable
tangible and intangible assets acquired, less the fair value of liabilities assumed, as goodwill.
We amortize our acquired intangible assets with definite useful economic lives over their useful
economic life utilizing an accelerated amortization method. On a periodic basis, we assess
whether events or changes in circumstances indicate that the carrying amounts of our core deposit
and other intangible assets may be impaired. We do not amortize goodwill and any acquired
intangible assets with an indefinite useful economic life, but we review them for impairment at
our reporting unit level on an annual basis, or when events or changes in circumstances indicate
that the carrying amounts may be impaired. A reporting unit is defined as any distinct,
separately identifiable component of one of our operating segments for which complete, discrete
financial information is available and reviewed regularly by the segments management.
We test goodwill for impairment annually, as of November 1, using a two-step process that begins
with an estimation of the fair value of a reporting unit. Goodwill impairment exists when a
reporting units carrying value of goodwill exceeds its implied fair value. Goodwill is also
tested for impairment on an interim basis if an event occurs or circumstances change between
annual tests that would more likely than not reduce the fair value of the reporting unit below
its carrying amount. Significant judgment is applied when goodwill is assessed for impairment.
This judgment includes developing cash flow projections, selecting appropriate discount rates,
identifying relevant market comparables, incorporating general economic and market conditions and
selecting an appropriate control premium. The selection and weighting of the various fair value
techniques may result in a higher or lower fair value. Judgment is applied in
determining the weightings that are most representative of fair value. The assumptions used in
the goodwill impairment assessment and the application of these estimates and assumptions are
discussed below.
70
The first step (Step 1) of impairment testing requires a comparison of each reporting units
fair value to carrying value to identify potential impairment. We have two reporting units:
banking and financial services.
For our banking reporting unit, we utilize both the income and market approaches to determine
fair value. The income approach is based on discounted cash flows derived from assumptions of
balance sheet and income statement activity. For the market approach, earnings and market
capitalization multiples of comparable public companies are selected and applied to the Banking
reporting units applicable metrics.
For our financial services reporting unit, we utilize both the income and market approaches to
determine fair value. The income approach is primarily based on discounted cash flows derived
from assumptions of income statement activity. For the market approach, earnings and tangible
book value multiples of comparable companies are selected and applied to the financial services
reporting units applicable metrics.
The aggregate fair market values are compared to our market capitalization as an assessment of
the appropriateness of the fair value measurements. A control premium analysis is performed to
determine whether the implied control premium was within range of overall control premiums
observed in the market place.
The second step (Step 2) of impairment testing is necessary only if a reporting units carrying
amount exceeds its fair value. Step 2 compares the implied fair value of the reporting unit
goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair
value of goodwill is determined in the same manner as goodwill that is recognized in a business
combination. Significant judgment and estimates are involved in estimating the fair value of
the assets and liabilities of the reporting unit.
Interest Rate Swaps
We use interest rate swaps to manage our interest rate risk. We also act as an interest
rate swap counterparty for certain commercial customers, and manage this risk by entering into
corresponding and offsetting interest rate swap agreements with third parties. Interest rate
swaps are recorded on our consolidated statements of condition as either an asset or liability at
estimated fair value. If an interest rate swap qualifies for hedge accounting, any changes in
estimated fair value are recognized in either other comprehensive income or earnings depending on
the designation as either a cash flow or fair value hedge instrument, respectively. We formally
document our risk management objectives, strategy, and the relationship between the hedging
instrument and the hedged items. We evaluate the effectiveness of the hedge relationship both at
inception of the hedge and on an ongoing basis. If the interest rate swap does not qualify as a
hedge, gains or losses reflecting changes in fair value are reported in earnings.
Employee Benefits
Contributions due under our defined contribution plans are accrued as earned by employees.
We also maintain a noncontributory, qualified, defined benefit pension plan for certain employees
who meet age and service requirements. We provide post-retirement benefits, principally health
care and group life insurance, to employees who meet certain age and service requirement. We
have frozen all benefit participation in our pension and post-retirement plans. Pension plans
that we acquired in connection with our previous whole-bank acquisitions were frozen prior to or
shortly after the completion of the transactions. The actuarially determined pension benefit in
the form of a life annuity is based on the employees combined years of service, age, and
compensation. Our policy is to at least fund the minimum amount required by the Employment
Retirement Income Security Act of 1974 (ERISA). The cost of our pension plan is based on
actuarial computations of current and future benefits for employees, and is charged to current
operating expenses.
We recognize in our financial statements an asset for a plans overfunded status or a liability
for a plans underfunded status. We report changes in the funded status of our pension and
postretirement plan as a component of other comprehensive income, net of applicable taxes, in the
year in which changes occur.
Beginning in 2008, we measure our plans assets and obligations that determine its future
funded status as of each December 31st.
71
Stock-Based Compensation
We maintain various long-term incentive stock benefit plans under which we grant stock
options, restricted stock awards, and restricted stock units to certain directors and key employees.
We recognize compensation expense in our income statement over the requisite service period,
based on the grant-date fair value of the award. The fair values of options are estimated
using the Black-Scholes option pricing model. For restricted stock awards and units, we
recognize compensation expense on a straight-line basis over the vesting period for the fair
market value of the award, measured at the grant date.
Income Taxes
We account for income taxes under the asset and liability method. Our deferred tax
assets and liabilities
are reflected at currently enacted income tax rates applicable to the periods in which we
expect the deferred tax assets or liabilities to be realized or settled. As changes in tax
laws or rates are enacted, we adjust our deferred tax assets and liabilities through income tax
expense. We recognize penalties and accrued interest related to unrecognized tax benefits in
income tax expense.
Earnings per Share
We compute earnings per common share (EPS) in accordance with the two-class method,
which requires that our unvested restricted stock awards that contain nonforfeitable rights to
dividends be treated as participating securities in the computation of EPS pursuant to the
two-class method. The two-class method is an earnings allocation that determines EPS for each
class of common stock and participating security. Our basic EPS is computed by dividing net
income allocable to common stockholders, which reflects the preferred stock dividend and
discount accretion, by the weighted average number of our common shares outstanding for the
period. Our diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in our earnings.
Investment and Fiduciary Services
Assets that we hold in a fiduciary or agency capacity for our customers are not included in
our accompanying Consolidated Statements of Condition, since these assets are not our assets. We
recognize fee income on the accrual method based on the fair value of assets administered.
Use of Estimates
We have made a number of estimates and assumptions relating to the reporting of assets and
liabilities and disclosure of contingent assets and liabilities in order to prepare these
financial statements in conformity with GAAP. The estimates and assumptions that we deem to be
critical involve our accounting policies relating to our allowance for credit losses, the other
than temporary impairment analysis and valuation of our investment securities portfolio, the
accounting treatment and valuation of acquired loans, and the analysis of the carrying value of
goodwill for impairment. These estimates and assumptions are based on managements best
estimates and judgment and we evaluate them on an ongoing basis using historical experience and
other factors, including the current economic environment. We adjust our estimates and
assumptions when facts and circumstances dictate. Illiquid credit markets and volatile equity
markets have combined with declines in consumer spending to increase the uncertainty inherent in
our estimates and assumptions. As future events cannot be determined with precision, actual
results could differ significantly from our estimates.
Accounting Standards Adopted in 2009
In 2007, the Financial Accounting Standards Board (FASB) released revised guidance surrounding
the accounting for business combinations. This revised guidance requires an acquiror to recognize
the assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree at
acquisition date, measured at their fair values as of that date, with limited exceptions. The
revised guidance also
requires that certain acquisition related costs and restructuring costs be expensed as incurred, and
eliminates the recognition of a separate valuation allowance, such as an
allowance for credit losses, as of the acquisition date for assets acquired in a business combination
that are measured at their acquisition date fair values because the effects of uncertainty about future
cash flows are included in the fair value measurement of those assets. This guidance was effective for
business combinations consummated in fiscal years beginning on or after December 15, 2008, and therefore
we are required to apply this guidance for any business combinations entered into during 2009 and beyond.
Accounting Standards Not Adopted as of December 31, 2009
In June 2009, the FASB released new guidance
to improve the relevance, representational faithfulness, and comparability of the information
that we provide in our financial statements about a transfer of financial assets; the effects of
a transfer on our financial position, financial performance, and cash flows; and our continuing
involvement, if any, in transferred financial assets. Additionally, this guidance removes the
concept of a qualifying special-purpose entity from current accounting guidance. This new
guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after November 15, 2009. This guidance is to be applied prospectively to transfers of financial
assets beginning January 1, 2010 and is not expected to have a material impact on our Consolidated
Financial Statements.
72
In June 2009, the FASB released new guidance which addresses the
effects on certain provisions of current accounting guidance relating to the consolidation of
variable interest entities, as a result of the elimination of the qualifying special-purpose
entity concept. It addresses concerns about the application of certain
key provisions of current accounting guidance, including those in which the accounting and
disclosures do not always provide timely and useful information about a companys involvement
in a variable interest entity. This guidance requires us to perform an analysis to determine
whether any of our variable interests give us a controlling financial interest in a variable
interest entity. In addition, this guidance requires ongoing assessments of whether we are the
primary beneficiary of a variable interest entity. This guidance is effective for fiscal
years, and interim periods within those fiscal years, beginning after November 15, 2009. This
guidance is not expected to have a material impact on our Consolidated Financial Statements.
In January 2010, the FASB released new guidance requiring entities to make new disclosures
about recurring and nonrecurring fair value measurements, including significant transfers into
and out of Level 1 and Level 2 fair value measurements. This guidance also requires
information on purchases, sales, issuances, and settlements on a gross basis in the
reconciliation of Level 3 fair value measurements. This guidance is effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2009, except
for the detailed Level 3 rollforward disclosures, which is effective for fiscal years, and
interim periods within those fiscal years, beginning on after December 15, 2010. Early
adoption is permitted. We intend to comply with the disclosure provisions of this new
guidance.
Note 2. Acquisitions
National City Bank branches
On September 4, 2009 we acquired 57 Western Pennsylvania branch locations (the Branch
Acquisition) from National City Bank (NatCity), a subsidiary of The PNC Financial Services
Group, Inc. (PNC). We paid a deposit premium of $52.1 million, or 1.3% of the 30 day average
daily balance of the deposits acquired. Pro forma income statement information is not
presented because the Branch Acquisition does not
represent the acquisition of a business which has continuity both before and after the
acquisition and for which financial statements are available or relevant.
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition:
|
|
|
|
|
Cash and cash equivalents, net |
|
$ |
3,062,789 |
|
Loans, net |
|
|
717,328 |
|
Premises and equipment |
|
|
26,731 |
|
Goodwill |
|
|
130,079 |
|
Core deposit intangible |
|
|
29,800 |
|
Other assets |
|
|
7,407 |
|
|
|
|
|
Total assets acquired |
|
$ |
3,974,134 |
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
3,961,702 |
|
Other liabilities |
|
|
12,432 |
|
|
|
|
|
Total liabilities assumed |
|
$ |
3,974,134 |
|
|
|
|
|
The assets acquired and liabilities assumed from NatCity were recorded at fair value on the date
of acquisition, and costs related to the acquisition, primarily investment banking and
professional fees, were expensed as incurred. Acquired loans include $657.3 million in
commercial loans and deposits assumed include $104.1 million of customer commercial repurchase
agreements. All loans acquired from NatCity were performing as of the acquisition date. During
the year ended December 31, 2009, we incurred $26.5 million in merger and acquisition integration
expenses related to the Branch Acquisition.
The core deposit intangible asset is being amortized over its estimated useful life of
approximately nine years utilizing an accelerated method. The goodwill, which is not amortized
for book purposes, was assigned to our banking segment and is deductible for tax purposes. The
goodwill will be amortized over 15 years for tax purposes utilizing the straight line method.
We estimated the fair value for loans acquired from NatCity utilizing a pooling methodology
wherein loans with comparable characteristics were aggregated by type of collateral, remaining
maturity, and repricing terms. Cash flows for each pool were estimated using an estimate of
future credit losses and an estimated rate of
prepayments. Projected monthly cash flows were then discounted to present value using a
risk-adjusted market rate for similar loans in existence at the acquisition date.
There was no carryover of NatCitys allowance for credit losses associated with the loans we
acquired.
73
The fair value for savings and transaction deposit accounts acquired from NatCity was assumed
to approximate the carrying value as these accounts have no stated maturity and are payable on
demand. Certificates of deposit accounts were valued comparing the contractual cost of the
portfolio to an identical portfolio bearing current market rates. The portfolio was segregated
into monthly pools. For each pool, the projected cash flows from maturing certificates were
then calculated based on contractual rates and prevailing market rates. The valuation
adjustment for each pool is equal to the present value of the difference of these two cash
flows, discounted at the assumed market rate for a certificate with a corresponding maturity.
Harleysville National Corporation
On July 26, 2009, First Niagara Financial Group, Inc. and Harleysville National
Corporation (Harleysville), the holding company for Harleysville National Bank, jointly
announced a definitive merger agreement under which Harleysville will merge into the Company in
a transaction valued at approximately $237.0 million on the day of announcement. At December
31, 2009, Harleysville had total assets of approximately $5.2 billion, including $3.0 billion
in loans, and deposits of approximately $3.9 billion in 83 bank branches across nine
Southeastern Pennsylvania counties. Harleysvilles shareholders voted to approve the merger on
January 22, 2010. The merger is expected to be completed in the second quarter of 2010 and is
subject to the approvals of the applicable regulatory agencies.
In December 2009, we lent $50.0 million to Harleysville, the proceeds of
which contributed to Harleysville National Bank as Tier 1
capital. Harleysville pledged the stock of Harleysville National Bank to us
to secure repayment of the loan. In addition, in December 2009, First Niagara Bank purchased
performing commercial loans with a fair value of $62.2 million from Harleysville National Bank.
The results of Harleysvilles operations will be included in our 2010 Consolidated Statement of
Income from the date of acquisition. We incurred $4.5 million in merger and acquisition
integration expenses related to the merger during the year ended December 31, 2009.
74
Note 3. Investment Securities
The amortized cost, gross unrealized gains and losses, and approximate fair value of our
investment securities at December 31, 2009 and 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
At December 31, 2009: |
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
Investment securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
416,847 |
|
|
$ |
6,037 |
|
|
$ |
(40 |
) |
|
$ |
422,844 |
|
U.S. government agencies and government
sponsored enterprises |
|
|
340,806 |
|
|
|
190 |
|
|
|
(1,164 |
) |
|
|
339,832 |
|
Corporate |
|
|
3,395 |
|
|
|
40 |
|
|
|
(1,222 |
) |
|
|
2,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
761,048 |
|
|
|
6,267 |
|
|
|
(2,426 |
) |
|
|
764,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association |
|
|
30,906 |
|
|
|
170 |
|
|
|
(243 |
) |
|
|
30,833 |
|
Federal National Mortgage Association |
|
|
101,578 |
|
|
|
3,471 |
|
|
|
(10 |
) |
|
|
105,039 |
|
Federal Home Loan Mortgage Corporation |
|
|
59,527 |
|
|
|
3,229 |
|
|
|
(10 |
) |
|
|
62,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association |
|
|
1,977,458 |
|
|
|
15,319 |
|
|
|
(15,896 |
) |
|
|
1,976,881 |
|
Federal National Mortgage Association |
|
|
692,614 |
|
|
|
14,290 |
|
|
|
(1,647 |
) |
|
|
705,257 |
|
Federal Home Loan Mortgage Corporation |
|
|
590,172 |
|
|
|
12,604 |
|
|
|
(753 |
) |
|
|
602,023 |
|
Non-agency issued |
|
|
173,080 |
|
|
|
1,344 |
|
|
|
(7,145 |
) |
|
|
167,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
3,433,324 |
|
|
|
43,557 |
|
|
|
(25,441 |
) |
|
|
3,451,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
3,625,335 |
|
|
|
50,427 |
|
|
|
(25,704 |
) |
|
|
3,650,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
3,165 |
|
|
|
|
|
|
|
(98 |
) |
|
|
3,067 |
|
Other |
|
|
3,651 |
|
|
|
13 |
|
|
|
|
|
|
|
3,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
4,393,199 |
|
|
$ |
56,707 |
|
|
$ |
(28,228 |
) |
|
$ |
4,421,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association |
|
|
467,473 |
|
|
|
4,792 |
|
|
|
(455 |
) |
|
|
471,810 |
|
Federal National Mortgage Association |
|
|
319,190 |
|
|
|
4,195 |
|
|
|
(107 |
) |
|
|
323,278 |
|
Federal Home Loan Mortgage Corporation |
|
|
306,889 |
|
|
|
4,673 |
|
|
|
|
|
|
|
311,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity |
|
$ |
1,093,552 |
|
|
$ |
13,660 |
|
|
$ |
(562 |
) |
|
$ |
1,106,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
At December 31, 2008: |
|
cost |
|
|
gains |
|
|
losses |
|
|
value |
|
Investment securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
295,639 |
|
|
$ |
4,160 |
|
|
$ |
(52 |
) |
|
$ |
299,747 |
|
U.S. government agencies and government
sponsored enterprises |
|
|
29,968 |
|
|
|
50 |
|
|
|
(20 |
) |
|
|
29,998 |
|
Corporate |
|
|
5,028 |
|
|
|
1 |
|
|
|
(1,589 |
) |
|
|
3,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
330,635 |
|
|
|
4,211 |
|
|
|
(1,661 |
) |
|
|
333,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association |
|
|
11,711 |
|
|
|
64 |
|
|
|
(399 |
) |
|
|
11,376 |
|
Federal National Mortgage Association |
|
|
146,646 |
|
|
|
2,916 |
|
|
|
(300 |
) |
|
|
149,262 |
|
Federal Home Loan Mortgage Corporation |
|
|
182,929 |
|
|
|
5,921 |
|
|
|
(12 |
) |
|
|
188,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association |
|
|
24,257 |
|
|
|
87 |
|
|
|
(404 |
) |
|
|
23,940 |
|
Federal National Mortgage Association |
|
|
179,657 |
|
|
|
1,398 |
|
|
|
(1,194 |
) |
|
|
179,861 |
|
Federal Home Loan Mortgage Corporation |
|
|
446,086 |
|
|
|
4,074 |
|
|
|
(69 |
) |
|
|
450,091 |
|
Non-agency issued |
|
|
263,432 |
|
|
|
106 |
|
|
|
(34,523 |
) |
|
|
229,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
913,432 |
|
|
|
5,665 |
|
|
|
(36,190 |
) |
|
|
882,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
1,254,718 |
|
|
|
14,566 |
|
|
|
(36,901 |
) |
|
|
1,232,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
3,499 |
|
|
|
|
|
|
|
(122 |
) |
|
|
3,377 |
|
Other |
|
|
5,307 |
|
|
|
8 |
|
|
|
(1,159 |
) |
|
|
4,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
1,594,159 |
|
|
$ |
18,785 |
|
|
$ |
(39,843 |
) |
|
$ |
1,573,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
The table below details certain information regarding our investment securities that were in
an unrealized loss position at December 31, 2009 and 2008 by the length of time those securities
were in a continuous loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
At December 31, 2009: |
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
Investment securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
11,268 |
|
|
$ |
26 |
|
|
$ |
1,260 |
|
|
$ |
14 |
|
|
$ |
12,528 |
|
|
$ |
40 |
|
U.S. government agencies and government sponsored enterprises |
|
|
261,543 |
|
|
|
1,164 |
|
|
|
|
|
|
|
|
|
|
|
261,543 |
|
|
|
1,164 |
|
Corporate |
|
|
70 |
|
|
|
2 |
|
|
|
410 |
|
|
|
1,220 |
|
|
|
480 |
|
|
|
1,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
272,881 |
|
|
|
1,192 |
|
|
|
1,670 |
|
|
|
1,234 |
|
|
|
274,551 |
|
|
|
2,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association |
|
|
19,987 |
|
|
|
86 |
|
|
|
8,269 |
|
|
|
157 |
|
|
|
28,256 |
|
|
|
243 |
|
Federal National Mortgage Association |
|
|
116 |
|
|
|
1 |
|
|
|
551 |
|
|
|
9 |
|
|
|
667 |
|
|
|
10 |
|
Federal Home Loan Mortgage Corporation |
|
|
87 |
|
|
|
1 |
|
|
|
412 |
|
|
|
9 |
|
|
|
499 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association |
|
|
875,059 |
|
|
|
15,896 |
|
|
|
|
|
|
|
|
|
|
|
875,059 |
|
|
|
15,896 |
|
Federal National Mortgage Association |
|
|
47,705 |
|
|
|
1,647 |
|
|
|
|
|
|
|
|
|
|
|
47,705 |
|
|
|
1,647 |
|
Federal Home Loan Mortgage Corporation |
|
|
69,198 |
|
|
|
753 |
|
|
|
|
|
|
|
|
|
|
|
69,198 |
|
|
|
753 |
|
Non-agency issued |
|
|
46,294 |
|
|
|
772 |
|
|
|
73,607 |
|
|
|
6,373 |
|
|
|
119,901 |
|
|
|
7,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
1,038,256 |
|
|
|
19,068 |
|
|
|
73,607 |
|
|
|
6,373 |
|
|
|
1,111,863 |
|
|
|
25,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
1,058,446 |
|
|
|
19,156 |
|
|
|
82,839 |
|
|
|
6,548 |
|
|
|
1,141,285 |
|
|
|
25,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
3,067 |
|
|
|
98 |
|
|
|
3,067 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale in an unrealized loss
position |
|
$ |
1,331,327 |
|
|
$ |
20,348 |
|
|
$ |
87,576 |
|
|
$ |
7,880 |
|
|
$ |
1,418,903 |
|
|
$ |
28,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association |
|
$ |
51,389 |
|
|
$ |
455 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
51,389 |
|
|
$ |
455 |
|
Federal National Mortgage Association |
|
|
38,216 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
38,216 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity in an unrealized loss
position |
|
$ |
89,605 |
|
|
$ |
562 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
89,605 |
|
|
$ |
562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
At December 31, 2008: |
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
Investment securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States and political subdivisions |
|
$ |
6,116 |
|
|
$ |
48 |
|
|
$ |
379 |
|
|
$ |
4 |
|
|
$ |
6,495 |
|
|
$ |
52 |
|
U.S. government agencies and government sponsored enterprises |
|
|
1,971 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
1,971 |
|
|
|
20 |
|
Corporate |
|
|
1,689 |
|
|
|
1,589 |
|
|
|
|
|
|
|
|
|
|
|
1,689 |
|
|
|
1,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
9,776 |
|
|
|
1,657 |
|
|
|
379 |
|
|
|
4 |
|
|
|
10,155 |
|
|
|
1,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association |
|
|
9,550 |
|
|
|
395 |
|
|
|
121 |
|
|
|
4 |
|
|
|
9,671 |
|
|
|
399 |
|
Federal National Mortgage Association |
|
|
31,438 |
|
|
|
258 |
|
|
|
2,282 |
|
|
|
42 |
|
|
|
33,720 |
|
|
|
300 |
|
Federal Home Loan Mortgage Corporation |
|
|
111 |
|
|
|
1 |
|
|
|
976 |
|
|
|
11 |
|
|
|
1,087 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government National Mortgage Association |
|
|
13,193 |
|
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
13,193 |
|
|
|
404 |
|
Federal National Mortgage Association |
|
|
44,695 |
|
|
|
1,192 |
|
|
|
702 |
|
|
|
2 |
|
|
|
45,397 |
|
|
|
1,194 |
|
Federal Home Loan Mortgage Corporation |
|
|
23,318 |
|
|
|
29 |
|
|
|
3,863 |
|
|
|
40 |
|
|
|
27,181 |
|
|
|
69 |
|
Non-agency issued |
|
|
201,193 |
|
|
|
33,433 |
|
|
|
24,954 |
|
|
|
1,090 |
|
|
|
226,147 |
|
|
|
34,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
282,399 |
|
|
|
35,058 |
|
|
|
29,519 |
|
|
|
1,132 |
|
|
|
311,918 |
|
|
|
36,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
323,498 |
|
|
|
35,712 |
|
|
|
32,898 |
|
|
|
1,189 |
|
|
|
356,396 |
|
|
|
36,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
3,149 |
|
|
|
79 |
|
|
|
228 |
|
|
|
43 |
|
|
|
3,377 |
|
|
|
122 |
|
Other |
|
|
351 |
|
|
|
3 |
|
|
|
3,297 |
|
|
|
1,156 |
|
|
|
3,648 |
|
|
|
1,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale in an unrealized loss
position |
|
$ |
336,774 |
|
|
$ |
37,451 |
|
|
$ |
36,802 |
|
|
$ |
2,392 |
|
|
$ |
373,576 |
|
|
$ |
39,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations
The Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation
(FHLMC) or Government National Mortgage Association (GNMA) guarantees the contractual cash
flows of our mortgage-backed securities. FNMA and FHLMC are government sponsored enterprises that
are under the conservatorship of the U.S. government. Our GNMA mortgage-backed securities are
backed by the full faith and credit of the U.S. government.
At December 31, 2009, of the 76 U.S. government sponsored enterprise mortgage-backed securities in
an unrealized loss position, 10 were in a continuous unrealized loss position for 12 months or
more. At December 31, 2008, of the 74 U.S. government sponsored enterprise mortgage-backed securities
in an unrealized loss position, 22 were in a continuous unrealized loss position for 12 months or more.
The unrealized losses at December 31, 2009 and 2008 were primarily due to changes in interest rates
and continued illiquidity and uncertainty in the markets. We do not consider these securities
other than temporarily impaired due to the guarantee provided as to the full payment of principal
and interest and the fact that we do not intend to sell these securities and it is not more likely
than not that we will be required to sell these securities before the recovery of their amortized
cost basis, which may be at maturity.
Non-Agency Collateralized Mortgage Obligations
Our non-agency collateralized mortgage obligations (CMO) consists primarily of investment grade securities. 96% of our non-agency
CMO portfolio is rated investment grade, and 89% of our non-agency portfolio is rated A- or higher.
All of our non-agency collateralized mortgage obligations carry various amounts of credit
enhancement and none are collateralized with loans that were considered to be sub-prime at
origination. These securities were purchased based on the underlying loan characteristics such as
loan-to-value ratio, credit scores, property type, location, and the level of credit enhancement.
Current characteristics of each security such as credit rating, delinquency and foreclosure levels,
credit enhancement, projected collateral losses, and the level of credit loss and coverage are
reviewed regularly by management. If the level of credit enhancement is sufficient based on our
expectations of future collateral losses, we conclude that we will receive all of the originally
scheduled cash flows. When the level of credit loss coverage for an individual security
significantly deteriorates, we expand our analysis of the security to include detailed cash flow
projections based upon loan level credit characteristics and prepayment assumptions. If the
present value of the cash flows indicates that we should not expect to recover the amortized cost
basis of the security, we would write down the credit component of the unrealized loss through a
charge to current period operations.
78
At December 31, 2009, of the 38 non-agency CMOs in an unrealized
loss position, 20 were in a continuous unrealized loss position for 12 months or more.
At December 31, 2008, of the 49 non-agency collateralized mortgage obligations in an unrealized
loss position, five were in a continuous unrealized loss position for 12 months or more. We have
assessed these securities in an unrealized loss position at December 31, 2009 and 2008
and determined that the decline in fair value was temporary. We believe the decline in fair value
was caused by the significant widening in liquidity spreads across sectors related to the
continued illiquidity and uncertainty in the markets and not the credit quality of the individual
issuer or underlying assets. In making this determination we considered the period of time the
securities were in a loss position, the percentage decline in comparison to the securities
amortized cost, the securities credit ratings, the delinquency or default rates of the underlying
collateral and levels of credit enhancement. In addition to the analysis of cash flow projections
and level of credit support noted above, we do not intend to sell these securities and it is not
more likely than not that we will be required to sell these securities before the recovery of
their amortized cost basis, which may be at maturity. It is possible that the underlying loan
collateral of these securities will perform worse than expectations, which may lead to adverse
changes in cash flows on these securities and potential future other than temporary impairment
losses. Events that may trigger material declines in fair values for these securities in the
future would include, but are not limited to, deterioration of credit metrics, such as
significantly higher levels of default and severity of loss on the underlying collateral,
deteriorating credit enhancement and loss coverage ratios, or further illiquidity.
Municipal, Corporate Debt and Other Securities
Our municipal bond portfolio consists primarily of investment grade securities rated A or
better. Less than two percent of this portfolio has either no investment rating or a rating below
investment grade. We have assessed the remaining securities in our municipal bond and corporate
debt available for sale portfolio that were in an unrealized loss position at December 31, 2009 and 2008.
We have determined that such declines in fair value below amortized cost were temporary. We
believe the decline
in fair value of the remaining securities below amortized cost was caused by changes in interest
rates and the significant widening in liquidity spreads across sectors related to the continued
illiquidity and uncertainty in the markets and not the credit quality of the individual issuer or
underlying assets. In making this determination, we also considered the period of time the
securities were in an unrealized loss position, the percentage decline in comparison to the
securities amortized cost, the financial condition of the issuer and guarantor, where applicable,
and the delinquency or default rates of the underlying collateral. In addition, we do not have the
intent to sell these securities and it is not more likely than not that we will be required to sell
these securities before the recovery of their amortized cost basis, which may be at maturity. At
December 31, 2009, of the 41 municipal, corporate debt and other securities in a
continuous unrealized loss position, 24 were in a continuous unrealized loss position for 12 months
or more. At December 31, 2008, of the 62 municipal, corporate debt and other securities in a continuous unrealized
loss position, 11 were in a continuous unrealized loss position for 12 months or more.
During 2009, we recorded $2.0 million of other than temporary impairment on three of our investment
securities, which is included in other noninterest income in our Consolidated Statement of Income.
This impairment primarily resulted from our intention to sell certain investment securities that
were in an unrealized loss position at December 31, 2009.
Realized gains and losses on sales and calls of our securities available for sale are included in
other noninterest income and are summarized as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Gross realized gains |
|
$ |
7,458 |
|
|
$ |
|
|
|
$ |
215 |
|
Gross realized losses |
|
|
(6,247 |
) |
|
|
|
|
|
|
(5,610 |
) |
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
$ |
1,211 |
|
|
$ |
|
|
|
$ |
(5,395 |
) |
|
|
|
|
|
|
|
|
|
|
79
Scheduled contractual maturities of our investment securities at December 31, 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
|
cost |
|
|
value |
|
Debt securities: |
|
|
|
|
|
|
|
|
Within one year |
|
$ |
280,538 |
|
|
$ |
282,579 |
|
After one year through five years |
|
|
446,875 |
|
|
|
449,396 |
|
After five years through ten years |
|
|
29,770 |
|
|
|
30,210 |
|
After ten years |
|
|
3,865 |
|
|
|
2,704 |
|
|
|
|
|
|
|
|
Total debt securities |
|
|
761,048 |
|
|
|
764,889 |
|
Asset-backed securities |
|
|
3,165 |
|
|
|
3,067 |
|
Mortgage-backed securities |
|
|
4,718,887 |
|
|
|
4,756,708 |
|
Other |
|
|
3,651 |
|
|
|
3,664 |
|
|
|
|
|
|
|
|
|
|
$ |
5,486,751 |
|
|
$ |
5,528,328 |
|
|
|
|
|
|
|
|
While the contractual maturities of our mortgage-backed securities (MBS) and
asset-backed securities (ABS) generally exceed ten years, we expect the effective lives to be
significantly shorter due to prepayments of the underlying loans and the nature of the MBS and ABS
structures that we own.
At December 31, 2009 and 2008, $3.2 billion and $1.2 billion, respectively, of our investment
securities were pledged to secure borrowings and lines of credit from the FHLB and Federal Reserve Bank (FRB), as well as
repurchase agreements and certain deposits. At December 31, 2009, our investment portfolio
included securities issued by the FHLMC with a fair value of $1.1 billion, FNMA with a fair value
of $1.2 billion, and GNMA with a fair value of $2.5 billion. We had no other investments in
securities of a single issuer that exceeded 10% of our stockholders equity.
Note 4. Loans and Leases
Our loans and leases receivable, including loans held for sale, consisted of the
following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Commercial: |
|
|
|
|
|
|
|
|
Real estate |
|
$ |
2,713,542 |
|
|
$ |
2,211,402 |
|
Construction |
|
|
348,040 |
|
|
|
340,564 |
|
Business |
|
|
1,481,845 |
|
|
|
940,304 |
|
Specialized lending |
|
|
207,749 |
|
|
|
178,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial |
|
|
4,751,176 |
|
|
|
3,671,186 |
|
Residential real estate |
|
|
1,674,961 |
|
|
|
1,990,784 |
|
Home equity |
|
|
691,069 |
|
|
|
624,495 |
|
Other consumer |
|
|
186,341 |
|
|
|
143,989 |
|
|
|
|
|
|
|
|
Total loans and leases |
|
|
7,303,547 |
|
|
|
6,430,454 |
|
Net deferred costs and unearned discounts |
|
|
25,909 |
|
|
|
33,321 |
|
Allowance for credit losses |
|
|
(88,303 |
) |
|
|
(77,793 |
) |
|
|
|
|
|
|
|
Total loans and leases, net |
|
$ |
7,241,153 |
|
|
$ |
6,385,982 |
|
|
|
|
|
|
|
|
80
The table below details additional information on our loans as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Nonaccrual loans |
|
$ |
68,561 |
|
|
$ |
46,417 |
|
|
$ |
28,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income that would have been recorded if loans had
been performing in accordance with original terms |
|
|
947 |
|
|
|
847 |
|
|
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of impaired loans |
|
|
54,944 |
|
|
|
42,512 |
|
|
|
22,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance relating to impaired loans included in allowance
for credit losses |
|
|
9,170 |
|
|
|
3,768 |
|
|
|
4,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate recorded investment of impaired loans with terms
modified through a troubled debt restructuring |
|
|
29,307 |
|
|
|
6,856 |
|
|
|
6,052 |
|
We had no loans past due 90 days or more that were still accruing interest at December 31,
2009, 2008 or 2007.
Information about our residential mortgage loans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Loans classified as held for sale included in residential mortgage loans |
|
$ |
32,270 |
|
|
$ |
1,698 |
|
|
$ |
3,278 |
|
Loans sold during the year |
|
|
443,877 |
|
|
|
101,652 |
|
|
|
91,216 |
|
Gains on sale of loans, net |
|
|
4,197 |
|
|
|
735 |
|
|
|
716 |
|
Mortgages serviced for others |
|
|
823,889 |
|
|
|
568,767 |
|
|
|
553,631 |
|
Mortgage servicing asset recorded for loans serviced for others |
|
|
6,596 |
|
|
|
4,295 |
|
|
|
4,312 |
|
Total credit facilities extended to certain of our officers and directors and affiliates
amounted to $3.2 million and $4.1 million at December 31, 2009 and 2008, respectively. The
balances due from these insiders under these facilities amounted to $2.4
million and $2.6 million at December 31, 2009 and 2008, respectively. During 2009, new loans
to these officers and directors amounted to $346 thousand and principal repayments amounted to $150
thousand. The remaining change from 2008 to 2009 is due to changes in
insiders status.
Changes in our allowance for credit losses for the years ended December 31, are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Balance at beginning of year |
|
$ |
77,793 |
|
|
$ |
70,247 |
|
|
$ |
71,913 |
|
Acquired at acquisition date |
|
|
|
|
|
|
2,890 |
|
|
|
|
|
Provision for credit losses |
|
|
43,650 |
|
|
|
22,500 |
|
|
|
8,500 |
|
Charge-offs |
|
|
(35,146 |
) |
|
|
(20,122 |
) |
|
|
(11,901 |
) |
Recoveries |
|
|
2,006 |
|
|
|
2,278 |
|
|
|
1,817 |
|
Loans sold |
|
|
|
|
|
|
|
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
88,303 |
|
|
$ |
77,793 |
|
|
$ |
70,247 |
|
|
|
|
|
|
|
|
|
|
|
Note 5. Premises and Equipment
A summary of our premises and equipment at December 31, 2009 and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Land |
|
$ |
16,787 |
|
|
$ |
10,869 |
|
Buildings and leasehold improvements(1) |
|
|
115,046 |
|
|
|
81,809 |
|
Furniture and equipment |
|
|
98,160 |
|
|
|
65,622 |
|
|
|
|
|
|
|
|
|
|
|
229,993 |
|
|
|
158,300 |
|
Accumulated depreciation |
|
|
(73,780 |
) |
|
|
(62,322 |
) |
|
|
|
|
|
|
|
Premises and equipment, net |
|
$ |
156,213 |
|
|
$ |
95,978 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in buildings and leasehold improvements are assets for
properties classified as held-for-sale, which had a carrying value of $3.2 million and
$3.6 million at December 31, 2009 and December 31, 2008, respectively. |
Our rent expense was $7.1 million, $6.3 million, and $6.4 million for 2009, 2008, and 2007,
respectively.
81
Note 6. Goodwill and Other Intangible Assets
The following table shows information regarding our goodwill for 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Consolidated |
|
|
|
Banking |
|
|
services |
|
|
total |
|
Balances at January 1, 2008 |
|
$ |
659,080 |
|
|
$ |
47,844 |
|
|
$ |
706,924 |
|
Great Lakes Bancorp, Inc. acquisition |
|
|
41,769 |
|
|
|
|
|
|
|
41,769 |
|
Contingent earn-out |
|
|
|
|
|
|
352 |
|
|
|
352 |
|
Unrecognized tax benefit adjustment |
|
|
(74 |
) |
|
|
|
|
|
|
(74 |
) |
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008 |
|
|
700,775 |
|
|
|
48,196 |
|
|
|
748,971 |
|
NatCity branch acquisition |
|
|
130,079 |
|
|
|
|
|
|
|
130,079 |
|
Contingent earn-out |
|
|
|
|
|
|
57 |
|
|
|
57 |
|
Reclassification adjustment |
|
|
2,050 |
|
|
|
(2,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009 |
|
$ |
832,904 |
|
|
$ |
46,203 |
|
|
$ |
879,107 |
|
|
|
|
|
|
|
|
|
|
|
We have performed the required annual goodwill impairment tests and have determined that goodwill
is not impaired as of November 1, 2009 and 2008.
The following table provides information regarding our amortizing intangible assets at December 31,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Customer lists |
|
$ |
34,240 |
|
|
$ |
33,923 |
|
Accumulated amortization |
|
|
(24,275 |
) |
|
|
(21,190 |
) |
|
|
|
|
|
|
|
Net carrying amount |
|
|
9,965 |
|
|
|
12,733 |
|
|
|
|
|
|
|
|
Core deposit intangible |
|
|
84,340 |
|
|
|
54,540 |
|
Accumulated amortization |
|
|
(38,028 |
) |
|
|
(31,695 |
) |
|
|
|
|
|
|
|
Net carrying amount |
|
|
46,312 |
|
|
|
22,845 |
|
|
|
|
|
|
|
|
Total amortizing intangible assets, net |
|
$ |
56,277 |
|
|
$ |
35,578 |
|
|
|
|
|
|
|
|
Our estimated future amortization expense over the next five years for identifiable
intangible assets is as follows: $12.3 million in 2010, $9.6 million in 2011, $8.2 million in 2012,
$6.9 million in 2013, and $6.1 million in 2014.
Note 7. Mortgage Servicing Rights
Changes in our Mortgage Servicing Rights (MSRs) for the years ended December 31, 2009
and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Balance at beginning of year |
|
$ |
4,295 |
|
|
$ |
4,312 |
|
Addition of mortgage servicing rights |
|
|
4,202 |
|
|
|
566 |
|
Amortization |
|
|
(1,368 |
) |
|
|
(583 |
) |
|
|
|
|
|
|
|
Balance at end of year |
|
|
7,129 |
|
|
|
4,295 |
|
Valuation allowance |
|
|
(533 |
) |
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights, net |
|
$ |
6,596 |
|
|
$ |
4,295 |
|
|
|
|
|
|
|
|
82
Our MSRs are initially recorded at their fair value in other assets in our Consolidated
Statements of Condition. We amortize MSRs in proportion to the estimated net servicing revenues.
We assess the fair value of our MSRs based on market prices for similar assets, if available, and
the present value of expected future cash flows associated with the servicing right calculated
using assumptions that market participants would use in estimating future servicing income and
expense. Such assumptions include estimates of the cost of servicing the loans, an appropriate
discount rate, loan default rates, and prepayment speeds.
For purposes of evaluating and measuring impairment, we stratify our MSRs based on the predominant
risk characteristics which include such factors as loan type and term. If the fair value of a
stratum is less than the carrying value, we will reduce the carrying value through a valuation
allowance. During the year ended December 31, 2009, a provision for impairment of $533 thousand
was recognized to establish a valuation allowance for MSRs because the carrying value of certain
strata of MSRs exceeded estimated fair value primarily due to an increase in prepayment
projections as a result of declines in residential mortgage interest rates.
Note 8. Other Assets
A summary of other assets at December 31, 2009 and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
FHLB stock |
|
$ |
79,014 |
|
|
$ |
62,301 |
|
Net deferred tax assets (see Note 15) |
|
|
72,985 |
|
|
|
97,591 |
|
Accrued interest receivable |
|
|
50,455 |
|
|
|
33,255 |
|
Receivable from Harleysville National Corporation |
|
|
50,000 |
|
|
|
|
|
Prepaid Federal Deposit Insurance Corporation premiums |
|
|
38,498 |
|
|
|
229 |
|
Real estate and other investments |
|
|
23,918 |
|
|
|
18,675 |
|
Other receivables and prepaid assets |
|
|
23,723 |
|
|
|
17,210 |
|
Other |
|
|
29,578 |
|
|
|
20,799 |
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
368,171 |
|
|
$ |
250,060 |
|
|
|
|
|
|
|
|
In December 2009, we lent Harleysville $50.0 million as part of a recapitalization
plan to ensure that Harleysville and its bank subsidiary meet the general regulatory ratios to be
designated well-capitalized under federal banking laws. The loan is secured by a pledge of all
of the stock of Harleysville National Bank and interest is payable at an annual rate of 5.25%.
Included in our real estate and other investments are $10.1 million and $8.4 million of limited
partnership investments at December 31, 2009 and 2008, respectively, that we have determined to be
variable interest entities for which we are not the primary beneficiary. These investments were
made primarily to support our community reinvestment initiatives and are accounted for under the
equity method. Our exposure related to these entities is limited to our recorded investment plus
additional amounts committed. At December 31, 2009, we have committed to invest an additional $2.1
million in these partnerships.
83
Note 9. Deposits
Our deposits consist of the following at December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
average |
|
|
|
Balance |
|
|
rate |
|
|
Balance |
|
|
rate |
|
Core deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings |
|
$ |
916,854 |
|
|
|
0.14 |
% |
|
$ |
788,767 |
|
|
|
0.24 |
% |
Interest-bearing checking |
|
|
1,063,065 |
|
|
|
0.13 |
|
|
|
485,220 |
|
|
|
0.17 |
|
Money market deposit accounts |
|
|
3,535,736 |
|
|
|
0.72 |
|
|
|
1,940,136 |
|
|
|
1.47 |
|
Noninterest-bearing |
|
|
1,256,537 |
|
|
|
|
|
|
|
718,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core deposits |
|
|
6,772,192 |
|
|
|
0.41 |
|
|
|
3,932,716 |
|
|
|
0.79 |
|
|
Certificates |
|
|
2,957,332 |
|
|
|
1.52 |
|
|
|
2,010,897 |
|
|
|
2.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
9,729,524 |
|
|
|
0.75 |
% |
|
$ |
5,943,613 |
|
|
|
1.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on our deposits is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Certificates |
|
$ |
42,924 |
|
|
$ |
71,534 |
|
|
$ |
101,161 |
|
Money market deposit accounts |
|
|
27,700 |
|
|
|
43,573 |
|
|
|
52,249 |
|
Savings |
|
|
1,931 |
|
|
|
2,198 |
|
|
|
3,918 |
|
Interest-bearing checking |
|
|
996 |
|
|
|
1,378 |
|
|
|
2,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
73,551 |
|
|
$ |
118,683 |
|
|
$ |
159,371 |
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit that we issued in amounts over $100 thousand amounted to
$865.3 million, $663.3 million, and $548.8 million at December 31, 2009, 2008, and 2007,
respectively. Interest expense on certificates of deposit over $100 thousand totaled $18.0
million, $20.8 million, and $29.4 million in 2009, 2008, and 2007, respectively. Included in
certificates of deposit issued in amounts over $100 thousand at December 31, 2009 are $142.1
million of brokered deposits in the Certificate of Deposit Account Registry Service (CDARS)
administered by the Promontory Financial Network. Interest rates on our certificates range from
0.25% to 6.58% at December 31, 2009.
Included in total deposits were municipal deposits totaling $987.0 million and $684.4 million at
December 31, 2009 and 2008, respectively.
Note 10. Borrowings
Our outstanding borrowings at December 31, 2009 and 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
308,612 |
|
|
$ |
443,454 |
|
Repurchase agreements |
|
|
1,316,149 |
|
|
|
214,010 |
|
Commercial bank line of credit |
|
|
50,000 |
|
|
|
60,000 |
|
|
|
|
|
|
|
|
Total short-term borrowings |
|
|
1,674,761 |
|
|
|
717,464 |
|
|
|
|
|
|
|
|
Long-term borrowings: |
|
|
|
|
|
|
|
|
FHLB advances |
|
|
323,091 |
|
|
|
562,013 |
|
Repurchase agreements |
|
|
142,056 |
|
|
|
248,408 |
|
Senior notes |
|
|
150,000 |
|
|
|
|
|
Subordinated debentures |
|
|
12,372 |
|
|
|
12,342 |
|
|
|
|
|
|
|
|
Total long-term borrowings |
|
|
627,519 |
|
|
|
822,763 |
|
|
|
|
|
|
|
|
Total borrowings |
|
$ |
2,302,280 |
|
|
$ |
1,540,227 |
|
|
|
|
|
|
|
|
Our FHLB advances bear fixed interest rates ranging from 0.33% to 5.54% and had a
weighted average rate of 3.53% at December 31, 2009 and 3.63% at December 31, 2008. Our repurchase
agreements bear fixed interest rates ranging from 0.33% to 6.32% and had a weighted average rate of
1.18% at December 31, 2009 and 3.31% at December 31, 2008. Our senior notes bear interest at an
annual rate of 12.00%.
84
Interest expense on our borrowings is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
FHLB advances |
|
$ |
31,359 |
|
|
$ |
37,715 |
|
|
$ |
22,047 |
|
Senior notes |
|
|
5,658 |
|
|
|
|
|
|
|
|
|
Repurchase agreements |
|
|
12,819 |
|
|
|
13,486 |
|
|
|
16,761 |
|
Other |
|
|
2,971 |
|
|
|
2,677 |
|
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52,807 |
|
|
$ |
53,878 |
|
|
$ |
39,223 |
|
|
|
|
|
|
|
|
|
|
|
We have lines of credit with the FHLB, FRB, and two commercial banks that serve as
secondary funding sources for lending, liquidity, and asset and liability management. At
December 31, 2009, the FHLB facility totaled $2.2 billion of which $631.7 million was utilized
and secured by approximately $967.0 million of our commercial real estate, residential mortgage,
and multifamily loans. As of December 31, 2009, the lines of credit with the FRB and commercial
banks totaled $759.5 million, of which $50.0 million was utilized. Under our committed
commercial bank line of credit agreement, we have a negative pledge against our First Niagara
Bank stock and maintain certain standard financial covenants. The interest rate on outstanding
borrowings under this line of credit is, at our election, equal to the LIBOR rate plus 150 basis
points resetting every 30, 60 or 90 days or the Prime Rate less 25 basis points. We also have
an unsecured demand line of credit with a second commercial bank, with interest payable at the
overnight federal funds rate.
As of December 31, 2009, we had entered into repurchase agreements with the FHLB and various
broker-dealers, whereby our securities available for sale with a fair value of $2.3 billion were
pledged to collateralize the borrowings. We treat these as financing transactions and our
obligation to repurchase is reflected as a borrowing in our Consolidated Statements of
Condition. The dollar amount of our securities underlying the agreements is included in our
securities available for sale in our Consolidated Statements of Condition. These securities
however, are delivered to the dealer with whom we execute each transaction. The dealers may
sell, loan or otherwise dispose of these securities to other parties in the normal course of
their business, but they agree to resell to us the same securities at the maturity of the
agreements. We also retain the right of substitution of collateral throughout the terms of the
agreements. At December 31, 2009, we had no amounts at risk under repurchase agreements with
any individual counterparty or group of related counterparties that exceeded 10% of our stockholders equity. The amount at
risk to us is equal to the excess of our carrying value (or fair value if greater) of the
securities sold under agreements to repurchase over the amount of our repurchase liability.
Concurrent with the closing of the NatCity Branch Acquisition on September 4, 2009, we issued,
and NatCity purchased, $150.0 million of 12% Senior Notes due September 10, 2014 (the Senior
Notes). The Senior Notes are redeemable, in whole or in part (in increments of $10.0 million),
prior to September 10, 2014. The Senior Notes are senior unsecured obligations of the Company
and rank equal in right of payment with our existing and future indebtedness that is not
contractually subordinated to the Senior Notes.
Included in other long-term borrowings is $12.4 million of subordinated debentures related to the
First Niagara Financial Group Statutory Trust I, which was acquired from Great Lakes Bancorp,
Inc. The debentures are redeemable prior to the maturity date of June 17, 2034, at our option,
in whole at any time thereafter or in part from time to time thereafter. The debentures are also
redeemable in whole at any time upon the occurrence of specific events defined within the trust
indenture.
The aggregate maturities of our long-term borrowings at December 31, 2009 are as follows (by year
of maturity):
|
|
|
|
|
2011 |
|
$ |
202,453 |
|
2012 |
|
|
168,130 |
|
2013 |
|
|
64,406 |
|
2014 |
|
|
162,403 |
|
Thereafter |
|
|
30,127 |
|
|
|
|
|
|
|
$ |
627,519 |
|
|
|
|
|
Included in our borrowing amounts in the preceding table are $71.1 million in repurchase
agreements that have call provisions that could accelerate their maturity during 2010 if interest
rates were to rise significantly from current levels.
85
Note 11. Derivative Financial Instruments
We are a party to derivative financial instruments in the normal course of business to
meet the financing needs of our customers and to manage our own exposure to fluctuations in
interest rates. These financial instruments have been limited to interest rate swap agreements
which are generally entered into with counterparties that meet established credit standards and
often contain master netting and collateral provisions protecting the party at risk.
We designate interest rate swap agreements used to manage interest rate risk as either fair
value hedges or cash flow hedges. To hedge the exposure against changes in fair value of
certain loans, we have entered into interest rate swap agreements that have been designated as
fair value hedges. To hedge the interest rate risk on certain variable rate long-term
borrowings, we entered into interest rate swaps designated as cash flow hedges. We entered into these swaps
in order to hedge the variability in the cash outflows of London Inter-Bank Offered Rate (LIBOR)
based borrowings attributable to changes in interest rates.
We also act as an interest rate swap counterparty for certain commercial borrowers. In order to
mitigate our exposure to these interest rate swaps, we enter into corresponding and offsetting
interest rate swaps with third parties that mirror the terms of the interest rate swaps we have
with the commercial borrowers. These interest rate swap agreements are entered into
simultaneously, mitigating our exposure to interest rate risk. We believe that the credit risk
inherent in these contracts is minimal based on our credit standards and the presence of the
netting and collateral provisions within the interest rate swap agreements.
The following table presents information regarding our derivative financial instruments, as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
Statement of condition |
|
Notional |
|
|
|
|
|
|
Statement of condition |
|
Notional |
|
|
|
|
|
|
category |
|
amount |
|
|
Fair value |
|
|
category |
|
amount |
|
|
Fair value |
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
Other assets |
|
$ |
|
|
|
$ |
|
|
|
Other liabilities |
|
$ |
57,687 |
|
|
$ |
2,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
Other assets |
|
|
206,247 |
|
|
|
9,629 |
|
|
Other liabilities |
|
|
206,247 |
|
|
|
9,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
$ |
206,247 |
|
|
$ |
9,629 |
|
|
|
|
$ |
263,934 |
|
|
$ |
12,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present information about amounts recognized for our derivative
financial instruments during 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
Income statement category |
|
(Loss) gain |
|
|
|
|
|
|
|
|
|
|
Derivatives in fair value hedging relationships: |
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
|
|
Other Noninterest Income |
|
$ |
(307 |
) |
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
|
|
Other Noninterest Income |
|
|
182 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
(125 |
) |
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of loss |
|
|
|
Amount of gain |
|
|
|
|
|
reclassified from |
|
|
|
recognized in other |
|
|
Location of loss reclassified from |
|
|
accumulated other |
|
|
|
comprehensive income, |
|
|
accumulated other comprehensive |
|
|
comprehensive |
|
|
|
net of tax |
|
|
income into income |
|
|
income into income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in cash flow hedging relationships: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
$206 |
|
|
Interest expense - borrowings |
|
$(1,301) |
|
Note 12. Commitments and Contingent Liabilities
Loan Commitments
In the ordinary course of business, we extend commitments to originate commercial and
residential mortgages, commercial loans, and other consumer loans. Commitments to extend credit
are agreements to lend to a customer as long as conditions established under the contract are not
violated. Our commitments generally have fixed expiration dates or other termination clauses,
and may require payment of a fee by our customer. Since we do not expect all of the commitments
to be funded, the total commitment amounts do not necessarily represent our future cash
requirements. We evaluate each customers creditworthiness on a case-by-case basis. We may
obtain collateral based upon our assessment of the customers creditworthiness. In addition, we
may extend commitments on fixed rate loans which expose us to interest rate risk given the
possibility that market rates may change between the commitment date and the actual extension of
credit.
We also extend credit to our retail and commercial customers, up to a specified amount, through
lines of credit. The borrower is able to draw on these lines as needed, therefore our funding
requirements for these products are generally more difficult to predict. In addition to the
above, we issue standby letters of credit to third parties that guarantee payments on behalf of
our commercial customers in the event our customer fails to perform under the terms of the
contract between our customer and the third party. Since a significant portion of our unused
commercial lines of credit and the majority of our outstanding standby letters of credit expire
without being funded, our expectation is that our obligation to fund the commitment amounts shown
below may be substantially less than the amounts that we report. Our credit risk involved in
issuing these commitments is essentially the same as that involved in extending loans to our
customers and is limited to
the total amount of these instruments. Information pertaining to our loan commitments is as
follows as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Outstanding commitments to originate loans: |
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
100,325 |
|
|
$ |
94,330 |
|
Variable rate |
|
|
157,413 |
|
|
|
129,634 |
|
|
|
|
|
|
|
|
Total commitments outstanding |
|
$ |
257,738 |
|
|
$ |
223,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unused lines of credit |
|
$ |
1,900,686 |
|
|
$ |
978,973 |
|
Standby letters of credit |
|
|
142,900 |
|
|
|
98,120 |
|
Commitments to sell residential mortgages |
|
|
84,106 |
|
|
|
30,896 |
|
To assist with our asset and liability management and to provide us cash flow to support our
loan growth, we generally sell our newly originated conventional 15 to 30 year fixed rate and FHA
and VA loans in the secondary market to government sponsored enterprises such as FNMA and FHLMC or
to wholesale lenders. When we retain the servicing rights on residential mortgage loans that we
sell, we recognize a mortgage servicing asset upon sale and monthly service fee income thereafter,
net of servicing asset amortization.
Lease Obligations
Our future minimum rental commitments for premises and equipment under non-cancelable
operating leases at December 31, 2009 were $9.8 million in 2010; $9.1 million in 2011; $7.8
million in 2012; $7.5 million in
2013; $7.2 million in 2014; and a total of $34.4 million thereafter through 2041. Under these
leases we are obligated for real estate taxes, insurance, and maintenance expenses.
Our future commitments under capital lease obligations at December 31, 2009 were $439 thousand in
2010; $439 thousand in 2011; $1.5 million in 2012; $1.5 million in 2013; $1.6 million in 2014;
and a total of $20.0 million thereafter through 2032. Under
these leases we are obligated for real estate taxes, insurance, and
maintenance expenses.
87
Contingent Liabilities
In the ordinary course of our business there are various threatened and pending legal
proceedings against us. Based on consultation with our outside legal counsel, we believe that
the aggregate liability, if any, arising from such litigation would not have a material adverse
effect on our Consolidated Financial Statements at December 31, 2009.
Note 13. Preferred stock and Warrant
Preferred Stock and Warrant
On November 21, 2008, we entered into a Letter Agreement (Agreement) with the United
States Department of the Treasury (Treasury) under the Troubled Asset Relief Program (TARP)
Capital Purchase Program (CPP), whereby we issued and sold to the Treasury 184 thousand shares
of fixed rate cumulative preferred stock with a par value of $0.01 and a liquidation amount of
$1,000 per share, for a total price of $184.0 million. In addition, the Treasury received a
warrant to purchase 1.9 million shares of our common stock at an exercise price of $14.48 per
share. The allocated carrying values of the preferred stock and the warrant, based on their
relative fair values, were $175.5 million and $8.5 million, respectively.
On May 27, 2009, we repaid the preferred stock and the related final accrued dividend for a total
of $184.3 million. At the time of the payment, all rights of the Treasury, as the holder of the
preferred stock, terminated. The redemption of the preferred stock, which had a carrying value
of $176.3 million, required us to record $7.7 million of discount accretion for the difference
between the redemption price and the carrying value of the preferred stock. Pursuant to the
terms of the Agreement, the number of shares of common stock available under the warrant was
reduced by one-half as a result of the capital we raised in our April 2009 common stock offering.
On June 24, 2009, we entered into a Warrant Repurchase Agreement with the Treasury to repurchase
the warrant for the
remaining 953 thousand shares of our common stock that we had issued and sold to the Treasury. As
a result of the repurchase, our stockholders equity decreased by $2.7 million.
Note 14. Capital
Bank Capital
Office of Thrift Supervision (OTS) regulations require savings institutions such as First
Niagara Bank to maintain a minimum ratio of tangible capital to total adjusted assets of 1.5%, a
minimum ratio of tier 1 (core) capital to total adjusted assets of 4.0%, and a minimum ratio of
total (core and supplementary) capital to risk-weighted assets of 8.0%. First Niagara Commercial
Bank, our New York State chartered commercial bank, is also subject to minimum capital requirements
imposed by the Federal Deposit Insurance Corporation (FDIC) that are substantially similar to the
capital requirements imposed on First Niagara Bank. The FDIC regulations require our Commercial
Bank to maintain a minimum ratio of tier 1 capital to risk-weighted assets of 4.0% and a minimum
ratio of total capital to risk-weighted assets of 8.0%. In addition, under the minimum
leverage-based capital requirement adopted by the FDIC, our Commercial Bank must maintain a ratio
of tier 1 capital to average total assets (leverage ratio) of at least 3% to 5%, depending on its
CAMELS composite examination rating.
Under prompt corrective action regulations, an institutions respective regulatory authority is
required to take certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such
actions could have a direct material effect on the institutions financial statements. The
regulations establish a framework for the classification of banks into five categories
well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. Generally, an institution is considered well-capitalized if it has a
tier 1 (core) capital ratio of at least 5.0%, a tier 1 risk-based capital ratio of at least 6.0%,
and a total risk-based capital ratio of at least 10.0%.
88
The actual capital amounts
and ratios for First Niagara
Bank and First Niagara
Commercial Bank at December
31, 2009 and 2008 are
presented in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well-capitalized |
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
under prompt corrective |
|
|
|
Actual |
|
|
|
|
|
|
capital adequacy |
|
|
action provisions |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
First Niagara Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital |
|
$ |
1,009,885 |
|
|
|
7.48 |
% |
|
$ |
202,386 |
|
|
|
1.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
Tier 1 (core) capital |
|
|
1,009,885 |
|
|
|
7.48 |
|
|
|
539,696 |
|
|
|
4.00 |
|
|
$ |
674,620 |
|
|
|
5.00 |
% |
Tier 1 risk-based capital |
|
|
1,009,885 |
|
|
|
12.63 |
|
|
|
319,893 |
|
|
|
4.00 |
|
|
|
479,839 |
|
|
|
6.00 |
|
Total risk-based capital |
|
|
1,098,188 |
|
|
|
13.73 |
|
|
|
639,785 |
|
|
|
8.00 |
|
|
|
799,732 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible capital |
|
$ |
717,078 |
|
|
|
8.47 |
% |
|
$ |
127,037 |
|
|
|
1.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
Tier 1 (core) capital |
|
|
717,078 |
|
|
|
8.47 |
|
|
|
338,766 |
|
|
|
4.00 |
|
|
$ |
423,457 |
|
|
|
5.00 |
% |
Tier 1 risk-based capital |
|
|
717,078 |
|
|
|
11.48 |
|
|
|
249,908 |
|
|
|
4.00 |
|
|
|
374,862 |
|
|
|
6.00 |
|
Total risk-based capital |
|
|
794,872 |
|
|
|
12.72 |
|
|
|
499,816 |
|
|
|
8.00 |
|
|
|
624,770 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Niagara Commercial Bank: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio |
|
$ |
56,376 |
|
|
|
5.25 |
% |
|
$ |
32,244 |
|
|
|
3.00 |
% |
|
$ |
53,739 |
|
|
|
5.00 |
% |
Tier 1 risk-based capital |
|
|
56,376 |
|
|
|
27.63 |
|
|
|
8,162 |
|
|
|
4.00 |
|
|
|
12,243 |
|
|
|
6.00 |
|
Total risk-based capital |
|
|
56,376 |
|
|
|
27.63 |
|
|
|
16,324 |
|
|
|
8.00 |
|
|
|
20,405 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio |
|
$ |
39,988 |
|
|
|
6.23 |
% |
|
$ |
19,256 |
|
|
|
3.00 |
% |
|
$ |
32,094 |
|
|
|
5.00 |
% |
Tier 1 risk-based capital |
|
|
39,988 |
|
|
|
28.42 |
|
|
|
5,629 |
|
|
|
4.00 |
|
|
|
8,443 |
|
|
|
6.00 |
|
Total risk-based capital |
|
|
39,988 |
|
|
|
28.42 |
|
|
|
11,257 |
|
|
|
8.00 |
|
|
|
14,071 |
|
|
|
10.00 |
|
The foregoing capital ratios are based in part on specific quantitative measures of
assets, liabilities, and certain off balance sheet items that we calculate under regulatory
accounting practices. Capital amounts and classifications are also subject to qualitative
judgments by the OTS and FDIC about capital components, risk weightings and other factors. These
capital requirements apply only to First Niagara Bank and First Niagara Commercial Bank, and do
not consider additional capital retained by the holding company.
As of December 31, 2009, the Bank met all capital adequacy requirements to which they were
subject. The most recent FDIC notification categorized the Bank as well-capitalized under the
prompt corrective action regulations. We are unaware of any conditions or events since the latest
notification from federal regulators that have changed the capital adequacy category of the Bank.
Our ability to pay dividends to our stockholders is substantially dependent upon the ability of
the Bank to pay dividends to the Company. The payment of dividends by
the Bank to the Company is subject to continued compliance with minimum regulatory capital requirements. The OTS
may disapprove a dividend if: the Bank would be undercapitalized following the distribution; the
proposed capital distribution raises safety and soundness concerns; or the capital distribution
would violate a prohibition contained in any statute, regulation or agreement. We do not believe
these regulatory requirements will affect the Banks ability to pay dividends in the future given
its well-capitalized position.
Consolidated Capital
During 2009, we issued 69.4 million shares in two syndicated follow-on stock offerings.
Net proceeds totaled approximately $802.2 million after deducting underwriting discounts and
commissions and offering expenses of $38.2 million. We did not repurchase any shares of our
common stock during 2009 and as of December 31, 2009, we are authorized to repurchase 3.5 million shares.
89
Note 15. Income Taxes
Our total income taxes for the years ended December 31, were allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Income tax expense |
|
$ |
40,676 |
|
|
$ |
44,964 |
|
|
$ |
40,938 |
|
Stockholders equity |
|
|
20,966 |
|
|
|
(18,312 |
) |
|
|
9,246 |
|
The components of our income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
30,985 |
|
|
$ |
37,412 |
|
|
$ |
41,222 |
|
State |
|
|
6,144 |
|
|
|
4,641 |
|
|
|
3,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,129 |
|
|
|
42,053 |
|
|
|
44,833 |
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
4,257 |
|
|
|
3,022 |
|
|
|
(3,392 |
) |
State |
|
|
(710 |
) |
|
|
(111 |
) |
|
|
(503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,547 |
|
|
|
2,911 |
|
|
|
(3,895 |
) |
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
$ |
40,676 |
|
|
$ |
44,964 |
|
|
$ |
40,938 |
|
|
|
|
|
|
|
|
|
|
|
Our effective tax rate for 2009, 2008, and 2007 was 33.9%, 33.7%, and 32.7%, respectively.
Our income tax expense differs from our expected tax expense (computed by applying the Federal
corporate tax rate of 35% to income before income taxes) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Tax expense at statutory rate |
|
$ |
42,019 |
|
|
|
46,691 |
|
|
|
43,758 |
|
Increase (decrease) attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of Federal benefit |
|
|
3,274 |
|
|
|
2,923 |
|
|
|
1,529 |
|
Bank owned life insurance income |
|
|
(1,838 |
) |
|
|
(1,907 |
) |
|
|
(1,697 |
) |
Municipal interest |
|
|
(3,937 |
) |
|
|
(4,087 |
) |
|
|
(3,528 |
) |
Nondeductible ESOP expense |
|
|
219 |
|
|
|
531 |
|
|
|
436 |
|
Amortization of nondeductible intangibles |
|
|
186 |
|
|
|
186 |
|
|
|
186 |
|
Other |
|
|
753 |
|
|
|
627 |
|
|
|
254 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
40,676 |
|
|
|
44,964 |
|
|
|
40,938 |
|
|
|
|
|
|
|
|
|
|
|
90
The tax effects of our temporary differences that give rise to significant portions of our
deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are presented below:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards acquired |
|
$ |
50,972 |
|
|
$ |
55,241 |
|
Financial statement allowance for credit losses |
|
|
34,584 |
|
|
|
29,742 |
|
Premises and equipment |
|
|
5,492 |
|
|
|
5,862 |
|
Stock-based compensation |
|
|
4,501 |
|
|
|
3,993 |
|
Deferred compensation |
|
|
3,939 |
|
|
|
4,233 |
|
Post-retirement benefit obligation |
|
|
3,512 |
|
|
|
3,478 |
|
Tax credit carryforwards acquired |
|
|
3,170 |
|
|
|
3,170 |
|
Pension benefits |
|
|
2,988 |
|
|
|
3,190 |
|
Other accrued expenses not currently deductible |
|
|
2,265 |
|
|
|
2,432 |
|
Unrealized loss on securities available for sale |
|
|
|
|
|
|
8,342 |
|
SOP 03-3 adjustment |
|
|
509 |
|
|
|
755 |
|
Other |
|
|
3,846 |
|
|
|
2,026 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
115,778 |
|
|
|
122,464 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Unrealized gain on investment securities available for sale |
|
|
(11,288 |
) |
|
|
|
|
Securitizations |
|
|
(11,201 |
) |
|
|
(8,948 |
) |
Acquired intangibles |
|
|
(10,668 |
) |
|
|
(11,423 |
) |
Prepaid expenses |
|
|
(3,861 |
) |
|
|
|
|
Net purchase premium on acquired companies |
|
|
(2,051 |
) |
|
|
(1,533 |
) |
Tax return allowance for credit losses, in excess of base year amount |
|
|
(513 |
) |
|
|
(1,557 |
) |
Other |
|
|
(3,211 |
) |
|
|
(1,412 |
) |
|
|
|
|
|
|
|
Total gross deferred tax liabilities |
|
|
(42,793 |
) |
|
|
(24,873 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
72,985 |
|
|
$ |
97,591 |
|
|
|
|
|
|
|
|
In assessing the realizability of our deferred tax assets, we consider whether it is
more likely than not that we will not realize some portion or all of our deferred tax assets. Our
ultimate realization of our deferred tax assets is dependent upon our generation of future taxable
income during the periods in which those temporary differences become deductible. We consider the
scheduled reversal of our deferred tax liabilities, availability of operating loss carry backs,
our projected future taxable income, and our tax planning strategies in making this assessment.
Based upon the level of our historical taxable income, the opportunity for our net operating loss
carry backs, and projections for our future taxable income over the periods which our deferred tax
assets are deductible, we believe it is more likely than not that we will realize the benefits of
these deductible differences at December 31, 2009.
We may carry net operating losses back to the preceding two taxable years for federal income tax
purposes and forward to the succeeding twenty taxable years for federal and New York State income
tax purposes, subject to certain limitations. At December 31, 2009, we had net operating loss
carryforwards of $145.6 million for federal income tax purposes, which will begin to expire in
2020. These losses, subject to an annual limitation, were obtained through our acquisition of Great
Lakes Bancorp, Inc.
We have federal alternative minimum tax credits of approximately $3.2 million that have an
unlimited carryforward period.
Under current federal law, bad debt reserves created prior to January 1, 1988 are subject to
recapture into taxable income should our Bank make certain non-dividend distributions, make distributions
in excess of earnings and profits, as defined, or cease to
maintain a banking type charter. At December 31, 2009, our Federal pre-1988 reserve, for which we have
made no Federal income tax provision, was approximately $42.0 million.
A reconciliation of our unrecognized tax benefits for the year ended December 31, 2009 is as
follows:
|
|
|
|
|
Balance at beginning of year |
|
$ |
9,451 |
|
Additions based on tax positions related to
the current year |
|
|
9 |
|
Adjustments for tax positions of prior years |
|
|
(491 |
) |
|
|
|
|
Balance at end of year |
|
$ |
8,969 |
|
|
|
|
|
The entire balance of unrecognized tax benefits, if recognized, would favorably affect our
effective income tax rate. We recognize penalties and accrued interest related to unrecognized
tax benefits in tax expense. During the year ended December 31, 2009, we accrued approximately
$582 thousand of penalties and interest. Accrued penalties and interest amounted to $1.6 and
$1.0 million at December 31, 2009, and 2008, respectively.
91
We are subject to routine audits of our tax returns by the Internal Revenue Service and various
state taxing authorities. With few exceptions, we are no longer subject to federal and state
income tax examinations by tax authorities for years before 2004. The New York State Department
of Taxation and Finance commenced an examination of our New York State income tax returns for 2004
through 2006 during the second quarter of 2008, which is expected to be completed during the first
quarter of 2010. We do not anticipate a material change to our financial position due to the
settlement of this audit.
Note 16. Earnings Per Share
The following table is a computation of our basic and diluted earnings per share using
the two-class method for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 (1) |
|
|
2007 (1) |
|
Net income available to common stockholders |
|
$ |
67,331 |
|
|
$ |
87,254 |
|
|
$ |
84,085 |
|
Less income allocable to unvested restricted stock awards |
|
|
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocable to common stockholders |
|
$ |
67,144 |
|
|
$ |
87,254 |
|
|
$ |
84,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Total shares issued |
|
|
156,966 |
|
|
|
124,758 |
|
|
|
120,045 |
|
Unallocated ESOP shares |
|
|
(3,007 |
) |
|
|
(3,228 |
) |
|
|
(3,486 |
) |
Unvested restricted stock awards |
|
|
(423 |
) |
|
|
(552 |
) |
|
|
(554 |
) |
Treasury shares |
|
|
(6,703 |
) |
|
|
(13,447 |
) |
|
|
(13,167 |
) |
|
|
|
|
|
|
|
|
|
|
Total basic weighted average common shares outstanding |
|
|
146,833 |
|
|
|
107,531 |
|
|
|
102,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental shares from assumed exercise of stock options |
|
|
137 |
|
|
|
381 |
|
|
|
490 |
|
Incremental shares from assumed vesting of restricted stock awards |
|
|
235 |
|
|
|
262 |
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
Total diluted weighted average common shares outstanding |
|
|
147,205 |
|
|
|
108,174 |
|
|
|
103,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.46 |
|
|
|
0.81 |
|
|
|
0.82 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.46 |
|
|
|
0.81 |
|
|
|
0.81 |
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive warrants, stock options, and restricted stock awards excluded
from the diluted weighted average common share calculations |
|
|
2,308 |
|
|
|
751 |
|
|
|
897 |
|
|
|
|
|
|
|
|
|
|
|
(1) The effect of the two-class method in prior years was immaterial.
Note 17. Stock-Based Compensation
We offer
several stock-based incentive plans which are described below.
Stock Option Plans
We have
two stock-based compensation plans under which we may grant options to our directors
and key employees. Our 1999 Stock Option Plan, which expired during 2009, authorized us to issue
up to 3.6 million shares of common stock. The Amended and Restated 2002 Long-Term Incentive Stock
Benefit Plan authorizes us to issue up to 8.0 million shares of common stock for grants of stock
options, stock appreciation rights, accelerated ownership option rights, restricted stock awards
or restricted stock units. During 2009, we granted both stock options and stock awards and units
under the 2002 plan. We grant stock options with an exercise price
equal to the market price of our stock on the date of grant. All options have a ten year term and
become fully vested and exercisable over a period of three to five years from the grant date. When
option recipients exercise their options, we typically issue shares from treasury stock and record
the proceeds as additions to capital. At December 31, 2009, we had approximately 3.6 million
shares available for grant under the 2002 plan.
92
Restricted Stock Plan
Our 1999 Recognition and Retention Plan, which expired during 2009, authorized us to issue up
to 1.4 million shares of restricted stock to directors and key employees. As discussed above,
restricted stock awards and restricted stock units may also be granted under the Amended and
Restated 2002 Long-Term Incentive Stock Benefit Plan. Restricted stock grants generally vest over
three to five years from the
grant date. When restricted stock grants are forfeited before they vest, we reacquire the shares
into treasury stock, and hold them to use for new awards.
Long-Term Performance Plan
We also have a Long-Term Performance Plan (the LTPP Plan) which provides our key
executives and other employees with long term incentives based primarily on performance, as a
motivation for future performance and as a retention tool for continued employment. The LTPP
plan is a multi-year performance plan, with stock-based incentive award opportunities if certain
company performance targets are met. The LTPP Plan will be funded by shares previously approved
and authorized under our existing stock-based compensation plans. For the year ended December
31, 2009, we allocated approximately 168 thousand shares to the LTPP plan.
At December 31, 2009, we held approximately 6.6 million shares of our stock as treasury shares,
which is adequate to meet the share requirements of our current stock-based compensation plans.
During 2009, we issued 332 thousand shares from treasury stock in connection with the exercise of
stock options and grants of restricted stock.
Our results for 2009 and 2008 include stock-based compensation expense under these plans totaling
$5.2 million and $5.6 million, respectively. We have recorded these amounts in salaries and
employee benefits expense in our Consolidated Statements of Income.
Stock Option Grants
The following is a summary of our stock option activity for 2009:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted average |
|
|
|
shares |
|
|
exercise price |
|
Outstanding at January 1, 2009 |
|
|
2,845 |
|
|
$ |
12.41 |
|
Granted |
|
|
364 |
|
|
|
12.91 |
|
Exercised |
|
|
(70 |
) |
|
|
6.17 |
|
Forfeited |
|
|
(7 |
) |
|
|
13.11 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
3,132 |
|
|
$ |
12.61 |
|
|
|
|
|
|
|
|
|
93
The following is a summary of our stock options outstanding at December 31, 2009, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
average |
|
|
average |
|
|
|
|
|
|
average |
|
|
|
Options |
|
|
exercise |
|
|
remaining |
|
|
Options |
|
|
exercise |
|
Exercise price |
|
outstanding |
|
|
price |
|
|
life (years) |
|
|
exercisable |
|
|
price |
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.50 - $12.02 |
|
|
798 |
|
|
$ |
10.00 |
|
|
|
5.3 |
|
|
|
496 |
|
|
$ |
8.84 |
|
$12.17 - $12.91 |
|
|
993 |
|
|
|
12.85 |
|
|
|
5.1 |
|
|
|
960 |
|
|
|
12.88 |
|
$12.93 - $14.58 |
|
|
785 |
|
|
|
13.36 |
|
|
|
6.3 |
|
|
|
406 |
|
|
|
13.61 |
|
$14.70 - $16.21 |
|
|
556 |
|
|
|
14.86 |
|
|
|
6.4 |
|
|
|
453 |
|
|
|
14.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,132 |
|
|
|
12.61 |
|
|
|
5.7 |
|
|
|
2,315 |
|
|
|
12.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.50 - $12.02 |
|
|
844 |
|
|
$ |
9.65 |
|
|
|
5.8 |
|
|
|
427 |
|
|
$ |
7.39 |
|
$12.17 - $12.91 |
|
|
996 |
|
|
|
12.85 |
|
|
|
6.1 |
|
|
|
813 |
|
|
|
12.89 |
|
$13.28 - $14.70 |
|
|
719 |
|
|
|
14.02 |
|
|
|
6.2 |
|
|
|
456 |
|
|
|
13.81 |
|
$14.83 - $16.21 |
|
|
286 |
|
|
|
15.00 |
|
|
|
6.8 |
|
|
|
245 |
|
|
|
15.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,845 |
|
|
|
12.41 |
|
|
|
6.1 |
|
|
|
1,941 |
|
|
|
12.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.49 - $12.87 |
|
|
1,059 |
|
|
$ |
9.18 |
|
|
|
4.3 |
|
|
|
965 |
|
|
$ |
8.83 |
|
$12.91 |
|
|
725 |
|
|
|
12.91 |
|
|
|
7.2 |
|
|
|
402 |
|
|
|
12.91 |
|
$13.28 - $14.70 |
|
|
802 |
|
|
|
13.97 |
|
|
|
7.3 |
|
|
|
393 |
|
|
|
13.54 |
|
$14.83 - $16.21 |
|
|
305 |
|
|
|
14.99 |
|
|
|
7.6 |
|
|
|
161 |
|
|
|
15.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,891 |
|
|
|
12.06 |
|
|
|
6.2 |
|
|
|
1,921 |
|
|
|
11.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Aggregate |
|
|
Weighted average |
|
December 31, 2009 |
|
shares |
|
|
intrinsic value (1) |
|
|
remaining contractual term |
|
Options outstanding |
|
|
3,132 |
|
|
$ |
4,656 |
|
|
|
5.7 |
|
Options currently exercisable |
|
|
2,315 |
|
|
|
3,682 |
|
|
|
4.7 |
|
|
|
|
(1) |
|
Intrinsic value is the difference between the fair value of
our stock at December 31, 2009 and the exercise price of the stock award. |
The total intrinsic value of stock options exercised during 2009, 2008, and 2007 was
$470 thousand, $2.4 million, and $6.6 million, respectively. As of December 31, 2009, we have $2.8
million of unrecognized compensation cost related to unvested options that we have granted. We
expect this cost to be recognized over a weighted average period of 1.5 years.
To estimate the fair value of our stock option awards, we use the Black-Scholes valuation method.
This method is dependent upon certain assumptions. The following is a summary of our stock options
granted for the years ended December 31, as well as the weighted average assumptions that we
utilized to compute the fair value of the options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Options granted |
|
|
364 |
|
|
|
466 |
|
|
|
372 |
|
Grant date weighted average fair value per share |
|
$ |
2.88 |
|
|
$ |
1.83 |
|
|
$ |
3.31 |
|
Grant date weighted average share price |
|
$ |
12.91 |
|
|
$ |
11.98 |
|
|
$ |
14.50 |
|
Dividend yield |
|
|
4.34 |
% |
|
|
4.68 |
% |
|
|
3.59 |
% |
Risk-free interest rate |
|
|
1.98 |
% |
|
|
3.13 |
% |
|
|
4.71 |
% |
Expected volatility factor |
|
|
35.61 |
% |
|
|
24.72 |
% |
|
|
26.68 |
% |
Expected life (in years) |
|
|
5.7 |
|
|
|
5.7 |
|
|
|
6.2 |
|
In the table above the risk-free interest rate is the zero coupon U.S. Treasury rate
commensurate with the expected life of options on the date of their grant. We based the volatility
of our stock on historical volatility over a span of time equal to the expected life of the
options.
Restricted Stock Awards
We expense the grant date fair value of our restricted stock awards over their respective
vesting periods. At December 31, 2009 we have $2.5 million of unrecognized compensation cost
related to unvested restricted stock awards and we expect this cost to be recognized over a
weighted average period of 1.3 years.
94
The following is a summary of our restricted stock activity for 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average |
|
|
|
Number of |
|
|
grant date fair |
|
|
|
shares |
|
|
value |
|
Unvested at January 1, 2009 |
|
|
496 |
|
|
$ |
14.13 |
|
Awarded |
|
|
153 |
|
|
|
12.75 |
|
Vested |
|
|
(234 |
) |
|
|
14.35 |
|
Forfeited |
|
|
(3 |
) |
|
|
13.42 |
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2009 |
|
|
412 |
|
|
$ |
13.50 |
|
|
|
|
|
|
|
|
|
The fair value of restricted stock awards that vested during 2009, 2008, and 2007 was $3.0
million, $1.8 million, and $1.5 million, respectively.
Restricted Stock Units
During 2009, we granted 10,188 restricted stock units, with a weighted average grant date
fair value of $13.25, to members of our Board of Directors. These grants vested on December 31,
2009 but are not released until the board member retires. Dividend equivalent units earned during
2009 on these restricted stock units totaled 458 shares.
Note 18. Benefit Plans
We account for our pension and postretirement plans by recognizing in our financial
statements an asset for a plans overfunded status or a liability for a plans underfunded
status. We report changes in the funded status of our pension and postretirement plan as a
component of other comprehensive income, net of applicable taxes, in the year in which changes
occur.
In 2008, we adopted the measurement provisions set forth by the FASB which requires our plans
assets and obligations that determine its future funded status to be measured as of the end of
our fiscal year. As a result of our change in measurement date, we recorded an adjustment to our
January 1, 2008 retained earnings, net of tax, of $117 thousand.
Pension Plans
We maintain a legacy employer sponsored defined benefit pension plan (the Plan) for which
participation and benefit accruals have been frozen since 2002. Additionally, any pension plans acquired in connection with
previous whole-bank acquisitions, and subsequently merged into the Plan were frozen prior to or
shortly after completion of the transactions. Accordingly, no employees are permitted to commence
participation in the Plan and future salary increases and years of credited service are not
considered when computing an employees benefits under the Plan. As of December 31, 2009, we have
met all minimum ERISA funding requirements.
We also have an unfunded senior executive retirement plan (SERP) for which we have recorded an
accumulated other comprehensive loss of $461 thousand at December 31, 2009 and $487 thousand at
December 31, 2008. We had assumed this plan in connection with a previous acquisition, therefore
no employees are eligible to commence participation in the SERP. The projected benefit obligation
and accumulated benefit obligation for the SERP was $1.4 million and $1.5 million, respectively, at
December 31, 2009 and 2008.
95
Information regarding our pension plans at December 31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
$ |
70,455 |
|
|
$ |
64,114 |
|
Service cost |
|
|
193 |
|
|
|
|
|
Interest cost |
|
|
4,113 |
|
|
|
4,869 |
|
Actuarial loss |
|
|
3,569 |
|
|
|
6,266 |
|
Benefits paid |
|
|
(4,108 |
) |
|
|
(4,794 |
) |
|
|
|
|
|
|
|
Projected benefit obligation at end of year |
|
|
74,222 |
|
|
|
70,455 |
|
|
|
|
|
|
|
|
Change in fair value of plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
60,889 |
|
|
|
76,499 |
|
Employer contributions |
|
|
155 |
|
|
|
155 |
|
Actual return on plan assets |
|
|
8,209 |
|
|
|
(11,009 |
) |
Benefits paid |
|
|
(4,022 |
) |
|
|
(4,756 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
65,231 |
|
|
|
60,889 |
|
|
|
|
|
|
|
|
Underfunded status at year end |
|
$ |
(8,991 |
) |
|
$ |
(9,566 |
) |
|
|
|
|
|
|
|
Net pension cost is comprised of the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
193 |
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
4,113 |
|
|
|
3,895 |
|
|
|
3,818 |
|
Expected return on plan assets |
|
|
(2,953 |
) |
|
|
(3,739 |
) |
|
|
(4,971 |
) |
Amortization of unrecognized loss |
|
|
1,272 |
|
|
|
12 |
|
|
|
161 |
|
Amortization of unrecognized prior service liability |
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
Settlement charge |
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
2,641 |
|
|
$ |
184 |
|
|
$ |
(892 |
) |
|
|
|
|
|
|
|
|
|
|
Changes in plan assets and benefit obligations recognized in other comprehensive income
during 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Net (gain) loss |
|
$ |
(3,045 |
) |
|
$ |
21,930 |
|
Amortization of prior service cost |
|
|
(16 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
Total (gain) loss recognized in other comprehensive income |
|
$ |
(3,061 |
) |
|
$ |
21,914 |
|
|
|
|
|
|
|
|
Total recognized in net periodic pension cost and other
comprehensive income |
|
$ |
(420 |
) |
|
$ |
22,098 |
|
|
|
|
|
|
|
|
The principal actuarial assumptions we used were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
Expected long-term rate of return on plan assets |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
7.00 |
% |
The discount rate that we used in the measurement of our pension obligation is
determined by modeling the pension plan expected future retirement payment cash flows to the
Citigroup Pension Liability Index as of the measurement date. The expected long-term rate of
return on plan assets reflects long-term earnings expectations on existing plan assets and those
contributions expected to be received during the
current plan year. In estimating that rate, we gave appropriate consideration to historical
returns earned by plan assets in the fund and the rates of return expected to be available for
reinvestment. We adjusted rates of return to reflect current capital market assumptions and
changes in investment allocations.
96
Our overall investment strategy with respect to the Plans assets is primarily for preservation
of capital and to provide regular dividend and interest payments. The Plans target asset
allocation is 75% fixed income securities, 20% equity securities and 5% cash. The fixed income
portion of the Plan assets is to be managed as a high-grade intermediate term
fixed income account. Equity securities primarily include investments in
Large Cap value and growth stocks. We assumed equity securities to earn a return in the range of
8.0% to 9.0% and fixed income securities to earn a return in the range of 4.5% to 5.5%. The
long-term inflation rate was estimated to be 2.75%. When these overall return expectations are
applied to our Plans target allocation, we expect the rate of return to be approximately 5.0%.
The fair values of the Plans assets at December 31, 2009, by asset category and level within the
fair value hierarchy, are as follows:
Fair Value Measurements at
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Cash |
|
$ |
3,746 |
|
|
$ |
3,746 |
|
|
$ |
|
|
|
$ |
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Niagara Financial Group common stock |
|
|
342 |
|
|
|
342 |
|
|
|
|
|
|
|
|
|
Large cap growth |
|
|
7,302 |
|
|
|
7,302 |
|
|
|
|
|
|
|
|
|
Large cap value |
|
|
3,923 |
|
|
|
3,923 |
|
|
|
|
|
|
|
|
|
Other |
|
|
2,299 |
|
|
|
2,299 |
|
|
|
|
|
|
|
|
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
|
|
183 |
|
|
|
|
|
|
|
183 |
|
|
|
|
|
Government bonds |
|
|
201 |
|
|
|
|
|
|
|
201 |
|
|
|
|
|
Government agency bonds |
|
|
1,949 |
|
|
|
1,949 |
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
484 |
|
|
|
|
|
|
|
484 |
|
|
|
|
|
Mortgage-backed securities |
|
|
1,948 |
|
|
|
1,948 |
|
|
|
|
|
|
|
|
|
Total return mutual fund |
|
|
23,481 |
|
|
|
23,481 |
|
|
|
|
|
|
|
|
|
Intermediate term bond fund |
|
|
19,373 |
|
|
|
19,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65,231 |
|
|
$ |
64,363 |
|
|
$ |
868 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Plan did not hold any assets classified as Level 3 during 2009.
Our target allocation for investment in equity mutual funds and exchange traded funds is
10% 30%, with a mix between large cap core and value, small cap, and international companies.
Our target allocation for bond investments (which includes mutual funds, U.S. government bonds,
and cash) is 70% 90% with a mix between actively managed and index bond funds. This
allocation is consistent with our goal of diversifying the Plans assets in order to preserve
capital while achieving investment results that will contribute to the proper funding of pension
obligations and cash flow requirements. Asset rebalancing is performed at least annually, with
interim
adjustments made when the investment mix varies by more than 10% from the target.
Estimated benefit payments under our pension plans over the next ten years at December 31, 2009 are
as follows:
|
|
|
|
|
2010 |
|
$ |
4,281 |
|
2011 |
|
|
4,152 |
|
2012 |
|
|
4,327 |
|
2013 |
|
|
4,525 |
|
2014 |
|
|
4,375 |
|
2015-2019 |
|
|
23,512 |
|
97
Other Post-retirement Benefits
We have an unfunded post-retirement medical plan which we have modified so that participation
is closed to those employees who did not meet the retirement eligibility requirements by December
31, 2001. Information regarding the post-retirement plan at December 31, 2009 and 2008 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Change in accumulated post-retirement benefit obligation: |
|
|
|
|
|
|
|
|
Accumulated post-retirement benefit obligation at beginning of year |
|
$ |
8,778 |
|
|
$ |
9,392 |
|
Interest cost |
|
|
506 |
|
|
|
631 |
|
Actuarial loss (gain) |
|
|
18 |
|
|
|
(731 |
) |
Benefits paid |
|
|
(439 |
) |
|
|
(514 |
) |
|
|
|
|
|
|
|
Accumulated post-retirement benefit obligation at end of year |
|
$ |
8,863 |
|
|
$ |
8,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status at year end |
|
$ |
(8,863 |
) |
|
$ |
(8,778 |
) |
|
|
|
|
|
|
|
The components of net periodic post-retirement benefit cost for the years ended December 31,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Interest cost |
|
$ |
506 |
|
|
$ |
631 |
|
|
$ |
462 |
|
Amortization of unrecognized loss |
|
|
30 |
|
|
|
112 |
|
|
|
15 |
|
Amortization of unrecognized prior service cost |
|
|
(64 |
) |
|
|
(81 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
Total periodic post-retirement cost |
|
$ |
472 |
|
|
$ |
662 |
|
|
$ |
413 |
|
|
|
|
|
|
|
|
|
|
|
Changes in plan benefit obligations recognized in other comprehensive income during the years
ended December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Net loss (gain) |
|
$ |
18 |
|
|
$ |
(842 |
) |
Amortization of unrecognized loss |
|
|
(30 |
) |
|
|
|
|
Amortization of prior service cost |
|
|
64 |
|
|
|
81 |
|
|
|
|
|
|
|
|
Total loss (gain) recognized in other comprehensive income |
|
|
52 |
|
|
|
(761 |
) |
|
|
|
|
|
|
|
Total recognized in net periodic post-retirement cost and
other comprehensive income |
|
$ |
524 |
|
|
$ |
(99 |
) |
|
|
|
|
|
|
|
The principal actuarial assumptions used were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Accumulated post-retirement benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.75 |
% |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total periodic cost: |
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
The discount rate that we used in the measurement of our post-retirement obligation is
based on the Moodys Seasoned Aaa and Aa corporate bond rates as of the measurement date. The
assumed health care cost trend rate used in measuring the accumulated post-retirement benefit
obligation was 8.2% for 2010, and gradually decreased to 5.9% by 2017. This assumption can have a
significant effect on the amounts reported. If the rate were increased one percent, our
accumulated post-retirement benefit obligation as of December 31, 2009 and our total periodic
cost for 2009 would have each increased by 8%. If the rate were decreased one percent, our
accumulated post-retirement benefit obligation as of December 31,
2009 and our total periodic cost would have each decreased by 4%. We do not anticipate making any
contributions to the post-retirement plan in 2010, except to continue funding benefit payments as
they come due.
98
Estimated benefit payments under the post-retirement plan over the next ten years at
December 31, 2009 are as follows:
|
|
|
|
|
2010 |
|
$ |
836 |
|
2011 |
|
|
819 |
|
2013 |
|
|
775 |
|
2014 |
|
|
738 |
|
2015 |
|
|
716 |
|
2015-2019 |
|
|
3,416 |
|
Amounts recognized in our Consolidated Statements of Condition related to our pension and
post-retirement plans for the years ended December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Other liabilities: |
|
|
|
|
|
|
|
|
Projected benefit obligation in excess of fair value of pension plan |
|
$ |
8,991 |
|
|
$ |
9,566 |
|
Accumulated post-retirement benefit obligation |
|
|
8,863 |
|
|
|
8,778 |
|
|
|
|
|
|
|
|
|
|
$ |
17,854 |
|
|
$ |
18,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of taxes: |
|
|
|
|
|
|
|
|
Pension plans |
|
$ |
13,022 |
|
|
$ |
14,870 |
|
Post-retirement benefit plan |
|
|
516 |
|
|
|
484 |
|
|
|
|
|
|
|
|
|
|
$ |
13,538 |
|
|
$ |
15,354 |
|
|
|
|
|
|
|
|
401(k) Plan
Our employees that meet certain age and service requirements are eligible to participate in
our employer sponsored 401(k) plan. Under the plan, participants may make contributions, in the
form of salary deferrals, up to the maximum Internal Revenue Code limit. We contribute to the plan
an amount equal to 100% of the first 4% of employee contributions plus 50% of employee
contributions between 5% and 6%. Our total contributions to the 401(k) plan amounted to $4.2
million, $3.2 million, and $3.5 million for 2009, 2008, and 2007, respectively.
Employee Stock Ownership Plan (ESOP)
Our employees that meet certain age and service requirements are eligible to participate in
our ESOP. Our ESOP holds shares of First Niagara Financial Group common stock that were
purchased in our 1998 initial public offering and in the open market. The purchased shares were
funded by loans in 1998 and 2003 from the Company to the Bank payable in equal annual
installments over 30 years bearing a fixed interest rate. Loan payments are funded by cash
contributions from the Bank and dividends on allocated and unallocated First Niagara Financial
Group stock held by the ESOP. The loan can be prepaid without penalty. Shares purchased by the
ESOP are maintained in a suspense account and held for allocation among the participants. As annual loan
payments are made, shares are released and allocated to employee accounts. We recognize compensation expense
in an amount equal to the average market price of the shares released during the respective year.
Compensation expense of $2.0 million, $2.5 million, and $2.5 million was recognized for 2009, 2008,
and 2007, respectively, in connection with 220 thousand shares allocated to participants during 2009,
229 thousand shares allocated to participants during 2008, and 221 thousand shares allocated to
participants during 2007. The amount of unallocated and allocated shares held by the ESOP were
2.9 million and 1.5 million respectively, at December 31, 2009 and 3.1 million and 1.3 million,
respectively, at December 31, 2008. The fair value of unallocated ESOP shares was $40.0 million
and $50.0 million at December 31, 2009 and 2008, respectively.
Other Plans
We also sponsor various nonqualified compensation plans for officers and employees.
Awards are payable if certain earnings and performance objectives are met. Expenses under
these plans amounted to $12.5 million, $10.0 million and $3.4 million for 2009, 2008, and 2007, respectively.
99
Note 19. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement
date. Current accounting guidance establishes a fair value hierarchy based on the transparency
of inputs participants use to price an asset or liability. The fair value hierarchy prioritizes
these inputs into the following three levels:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities
that are available at the measurement date.
Level 2 Inputs - Inputs other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly. These might include quoted prices for
similar assets or liabilities in active markets, quoted prices for identical or similar assets
or liabilities in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability (such as interest rates, volatilities, prepayment speeds,
credit risks, etc.) or inputs that are derived principally from or corroborated by market data
by correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair value of the asset or liability and
are based on the entitys own assumptions about the assumptions that market participants would
use to price the asset or liability.
A financial instruments categorization within the valuation hierarchy is based on the lowest
level of input that is significant to the fair value measurement. A description of the
valuation methodologies used for instruments measured at fair value, as well as the general
classification of such instruments pursuant to the valuation hierarchy is set forth below.
Our valuation methodologies may produce a fair value calculation that may not be indicative of
net realizable value or reflective of future fair values. While we believe our valuation
methodologies are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could
result in a different estimate of fair value at each measurement date.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Securities Available for Sale
The fair value estimates of available for sale securities are based on quoted market prices of
identical securities, where available. When quoted prices of identical securities are not
available, the fair value estimate is based on quoted market prices of similar securities, adjusted
for differences between the securities. Adjustments may include amounts to reflect differences in
underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit
quality. We obtain fair value measurements from a third party.
Due to the lack of observable market data, we have classified our collateralized debt obligations
(CDO) in Level 3 of the fair value hierarchy. We determined the fair value of these securities
using a projected cash flow model that considers prepayment speeds, discount rates, defaults,
subordination protection, and contractual payments.
Interest Rate Swaps
We obtain fair value measurements of our interest rate swaps from a third party. The fair value
measurements are determined using the market standard methodology of netting discounted future
fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).
Variable cash payments (or receipts) are based on an expectation of future interest rates derived
from observable market interest rate curves. Credit valuation adjustments are incorporated to
appropriately reflect our nonperformance risk as well as the counterpartys nonperformance risk.
The impact of netting and any applicable credit enhancements, such as collateral postings,
thresholds, mutual puts, and guarantees are also considered in the fair value measurement.
The fair value of our interest rate swaps was estimated using primarily Level 2 inputs. However,
Level 3 inputs were used to determine credit valuation adjustments, such as estimates of current
credit spreads to evaluate the likelihood of default. We have determined that the impact of these
credit valuation adjustments is not material to the overall valuation of our interest rate swaps.
Therefore, we have classified the entire fair value of our interest rate swaps in Level 2 of the
fair value hierarchy.
100
The following table summarized our assets and liabilities measured at fair value on a recurring
basis at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
At December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale |
|
$ |
4,421,678 |
|
|
$ |
|
|
|
$ |
4,421,198 |
|
|
$ |
480 |
|
Interest rate swaps |
|
|
9,629 |
|
|
|
|
|
|
|
9,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,431,307 |
|
|
$ |
|
|
|
$ |
4,430,827 |
|
|
$ |
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
12,049 |
|
|
$ |
|
|
|
$ |
12,049 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale |
|
$ |
1,573,101 |
|
|
$ |
|
|
|
|
1,572,537 |
|
|
$ |
564 |
|
Interest rate swaps |
|
|
7,509 |
|
|
|
|
|
|
|
7,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,580,610 |
|
|
$ |
|
|
|
$ |
1,580,046 |
|
|
$ |
564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
9,965 |
|
|
$ |
|
|
|
$ |
9,965 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring
basis during the years ended December 31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
Investment Securities |
|
|
|
Available for Sale |
|
Balance at January 1, 2008 |
|
$ |
|
|
Total losses: |
|
|
|
|
Included in earnings |
|
|
(700 |
) |
Included in other comprehensive income |
|
|
(36 |
) |
Purchases, issuances, and settlements, net |
|
|
|
|
Transfers in and/or out of Level 3 |
|
|
1,300 |
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
564 |
|
|
|
|
|
|
|
|
|
|
The amount of total gains or losses for the period included
in earnings attributable to the change in unrealized gains or
losses relating to assets still held at the reporting date |
|
$ |
(700 |
) |
|
|
|
|
|
|
|
Investment Securities |
|
|
|
Available for Sale |
|
Balance at December 31, 2008 |
|
$ |
564 |
|
Total gains (losses): |
|
|
|
|
Included in earnings |
|
|
(162 |
) |
Included in other comprehensive income |
|
|
78 |
|
Purchases, issuances, and settlements, net |
|
|
|
|
Transfers in and/or out of Level 3 |
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
480 |
|
|
|
|
|
|
|
|
|
|
The amount of total gains or losses for the period included
in earnings attributable to the change in unrealized gains or
losses relating to assets still held at the reporting date |
|
$ |
(162 |
) |
101
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Impaired Loans
We periodically record nonrecurring adjustments to the carrying value of collateral dependent
impaired loans when establishing the allowance for credit losses. Such amounts are generally
based on the fair value of the underlying collateral supporting the loan. In cases where the
carrying value of the loan exceeds the fair value of the collateral, an impairment charge is
recognized. Real estate collateral is typically valued using independent appraisals or other
indications of value based on recent comparable sales of similar properties or assumptions
generally observable in the marketplace and the related nonrecurring fair value measurement
adjustments have been classified as Level 2. During 2009, we recorded a $5.9 million increase to
our specific reserve as a result of adjusting the carrying value and estimated fair value of
certain impaired loans to $20.5 million. During 2008, we recorded an $11.0 million increase to
our specific reserve as a result of adjusting the carrying value and estimated fair value of
certain impaired loans to $10.6 million.
Mortgage Servicing Rights
The fair value of our MSRs was estimated using Level 3 inputs. MSRs do not trade in an active,
open market with readily observable prices. As such, we determine the fair value of our MSRs
using a projected cash flow model that considers loan type, loan rate and maturity, discount rate
assumptions, estimated fee income and cost to service, and estimated prepayment speeds. During
2009, we recorded a $533 thousand provision for impairment on our MSRs because the carrying value
of certain strata of our MSRs exceeded their estimated fair value due to an increase in prepayment
speeds. No adjustment to the carrying value of our MSRs was required in 2008.
Real Estate Owned
Real estate owned is typically valued using independent appraisals or other indications of value
based on recent comparable sales of similar properties or assumptions generally observable in the
marketplace and the related nonrecurring fair value measurement adjustments have been classified
as Level 2. During 2009, we recorded a reduction to real estate owned of $586 thousand as a
result of adjusting the carrying value and estimated fair value of certain properties to $770
thousand.
The carrying value and estimated fair value of our financial instruments at December 31, 2009 and
2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Estimated fair |
|
|
|
|
|
|
Estimated fair |
|
|
|
Carrying value |
|
|
value |
|
|
Carrying value |
|
|
value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
236,268 |
|
|
$ |
236,268 |
|
|
$ |
114,551 |
|
|
$ |
114,551 |
|
Investment securities available for sale |
|
|
4,421,678 |
|
|
|
4,421,678 |
|
|
|
1,573,101 |
|
|
|
1,573,101 |
|
Investment securities held to maturity |
|
|
1,093,552 |
|
|
|
1,106,650 |
|
|
|
|
|
|
|
|
|
Loans and leases, net(1) |
|
|
7,241,153 |
|
|
|
7,444,034 |
|
|
|
6,385,982 |
|
|
|
6,612,111 |
|
FHLB stock |
|
|
79,014 |
|
|
|
79,014 |
|
|
|
62,301 |
|
|
|
62,301 |
|
Accrued interest receivable |
|
|
50,455 |
|
|
|
50,455 |
|
|
|
33,255 |
|
|
|
33,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
9,729,524 |
|
|
$ |
9,763,604 |
|
|
$ |
5,943,613 |
|
|
$ |
5,953,692 |
|
Borrowings |
|
|
2,302,280 |
|
|
|
2,309,330 |
|
|
|
1,540,227 |
|
|
|
1,589,659 |
|
Accrued interest payable |
|
|
5,498 |
|
|
|
5,498 |
|
|
|
6,548 |
|
|
|
6,548 |
|
|
|
|
(1) |
|
Included in loans and leases, net are residential mortgage loans held for sale with a
carrying value of $32.3 million and a fair value of $35.8 million at December 31, 2009. |
Our fair value estimates are based on our existing on and off balance sheet financial
instruments without attempting to estimate the value of any anticipated future business and the
value of assets and liabilities that are not considered financial instruments. In addition, the
tax ramifications related to the realization of the unrealized gains and losses can have a
significant effect on our fair value estimates and have not been considered in these estimates.
102
Our fair value estimates are made as of the dates indicated, based on relevant market information
and information about the financial instruments, including our judgments regarding future expected
loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in our assumptions could significantly affect the
estimates. Our fair value estimates, methods, and assumptions are set forth below for each type
of financial instrument. The method of estimating the fair value of the financial instruments
disclosed in the table above does not incorporate the exit price concept used to record financial
instruments at fair value in our Consolidated Statements of Condition.
Cash and Cash Equivalents
The carrying value of our cash and cash equivalents approximates fair value because these
instruments have original maturities of three months or less.
Loans and Leases
Our variable-rate loans reprice as the associated rate index changes. Therefore, the carrying
value of these loans approximates fair value. We calculated the fair value of our fixed-rate
loans and leases by discounting scheduled cash flows through the estimated maturity using credit
adjusted year end origination rates. Our estimate of maturity is based on the contractual cash
flows adjusted for prepayment estimates based on current economic and lending conditions.
Investment Securities
The fair value estimates of our investment securities are based on quoted market prices of
identical securities, where available. When quoted prices of identical securities are not
available, the fair value estimate is based on quoted market prices of similar securities,
adjusted for differences between the securities. Adjustments may include amounts to reflect
differences in underlying collateral, interest rates, estimated prepayment
speeds, and counterparty credit quality. We obtain fair value measurements from a third party.
FHLB Stock
The carrying value of our FHLB stock approximates fair value.
Accrued Interest Receivable
The carrying value of accrued interest receivable approximates fair value.
Deposits
The fair value of our deposits with no stated maturity, such as savings and checking, as well as
mortgagors payments held in escrow, is equal to the amount payable on demand. The fair value of
our certificates of deposit is based on the discounted value of contractual cash flows, using the
year end rates offered for deposits of similar remaining maturities.
Borrowings
The fair value of our borrowings is calculated by discounting scheduled cash flows through the
estimated maturity using year end market rates for borrowings of similar remaining maturities.
Accrued Interest Payable
The carrying value of accrued interest payable approximates fair value.
Commitments
The fair value of our commitments to extend credit, standby letters of credit, and financial
guarantees are not included in the above table as the carrying value generally approximates fair
value. These instruments generate fees that approximate those currently charged to originate
similar commitments. Additional information about these instruments is included in Note 12.
103
Note 20. Segment Information
We have two business segments: banking and financial services. The banking segment includes all
of our retail and commercial banking operations. The financial services segment includes our
insurance and employee benefits consulting operations. Substantially all of our assets relate to
the banking segment. Transactions between our banking and financial services segments are
eliminated in consolidation.
Information for our segments for the years ended December 31, 2009, 2008, and 2007 is presented in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Consolidated |
|
|
|
Banking |
|
|
services |
|
|
total |
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
364,400 |
|
|
$ |
|
|
|
$ |
364,400 |
|
Provision for credit losses |
|
|
43,650 |
|
|
|
|
|
|
|
43,650 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses |
|
|
320,750 |
|
|
|
|
|
|
|
320,750 |
|
Noninterest income |
|
|
76,882 |
|
|
|
49,093 |
|
|
|
125,975 |
|
Amortization of core deposit and other intangibles |
|
|
6,347 |
|
|
|
3,071 |
|
|
|
9,418 |
|
Other noninterest expense |
|
|
276,268 |
|
|
|
40,986 |
|
|
|
317,254 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
115,017 |
|
|
|
5,036 |
|
|
|
120,053 |
|
Income tax expense |
|
|
38,661 |
|
|
|
2,015 |
|
|
|
40,676 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
76,356 |
|
|
$ |
3,021 |
|
|
$ |
79,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
268,576 |
|
|
$ |
1 |
|
|
$ |
268,577 |
|
Provision for credit losses |
|
|
22,500 |
|
|
|
|
|
|
|
22,500 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses |
|
|
246,076 |
|
|
|
1 |
|
|
|
246,077 |
|
Noninterest income |
|
|
65,861 |
|
|
|
49,874 |
|
|
|
115,735 |
|
Amortization of core deposit and other intangibles |
|
|
5,126 |
|
|
|
3,698 |
|
|
|
8,824 |
|
Other noninterest expense |
|
|
179,963 |
|
|
|
39,623 |
|
|
|
219,586 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
126,848 |
|
|
|
6,554 |
|
|
|
133,402 |
|
Income tax expense |
|
|
42,135 |
|
|
|
2,829 |
|
|
|
44,964 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
84,713 |
|
|
$ |
3,725 |
|
|
$ |
88,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
224,166 |
|
|
$ |
12 |
|
|
$ |
224,178 |
|
Provision for credit losses |
|
|
8,500 |
|
|
|
|
|
|
|
8,500 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for credit losses |
|
|
215,666 |
|
|
|
12 |
|
|
|
215,678 |
|
Noninterest income |
|
|
80,051 |
|
|
|
51,760 |
|
|
|
131,811 |
|
Amortization of core deposit and other intangibles |
|
|
6,262 |
|
|
|
4,171 |
|
|
|
10,433 |
|
Other noninterest expense |
|
|
172,979 |
|
|
|
39,054 |
|
|
|
212,033 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
116,476 |
|
|
|
8,547 |
|
|
|
125,023 |
|
Income tax expense |
|
|
37,632 |
|
|
|
3,306 |
|
|
|
40,938 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
78,844 |
|
|
$ |
5,241 |
|
|
$ |
84,085 |
|
|
|
|
|
|
|
|
|
|
|
104
Note 21. Condensed Parent Company Only Financial Statements
The following condensed statements of condition of the Company as of December 31, 2009 and 2008 and
the related condensed statements of income and cash flows for 2009, 2008 and 2007 should be read in
conjunction with our Consolidated Financial Statements and related notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Condition |
|
2009 |
|
|
2008 |
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
485,372 |
|
|
$ |
212,391 |
|
|
|
|
|
Restricted cash |
|
|
4,000 |
|
|
|
3,999 |
|
|
|
|
|
Investment securities available for sale |
|
|
18,260 |
|
|
|
21,380 |
|
|
|
|
|
Loan receivable from ESOP |
|
|
25,991 |
|
|
|
27,318 |
|
|
|
|
|
Investment in subsidiary |
|
|
1,945,407 |
|
|
|
1,469,696 |
|
|
|
|
|
Receivable from Harleysville National Corporation |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
Deferred taxes |
|
|
46,881 |
|
|
|
54,562 |
|
|
|
|
|
Other assets |
|
|
20,297 |
|
|
|
17,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,596,208 |
|
|
$ |
1,806,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
10,175 |
|
|
$ |
6,862 |
|
|
|
|
|
Borrowings |
|
|
212,372 |
|
|
|
72,342 |
|
|
|
|
|
Stockholders equity |
|
|
2,373,661 |
|
|
|
1,727,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
2,596,208 |
|
|
$ |
1,806,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Income |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Interest income |
|
$ |
2,294 |
|
|
$ |
2,469 |
|
|
$ |
1,591 |
|
Dividends received from subsidiary |
|
|
|
|
|
|
56,400 |
|
|
|
96,000 |
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income |
|
|
2,294 |
|
|
|
58,869 |
|
|
|
97,591 |
|
Interest expense |
|
|
7,327 |
|
|
|
2,620 |
|
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
Net interest (expense) income |
|
|
(5,033 |
) |
|
|
56,249 |
|
|
|
97,176 |
|
Noninterest income |
|
|
755 |
|
|
|
107 |
|
|
|
384 |
|
Noninterest expense |
|
|
9,490 |
|
|
|
8,558 |
|
|
|
9,452 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and undisbursed (overdistributed)
income of subsidiary |
|
|
(13,768 |
) |
|
|
47,798 |
|
|
|
88,108 |
|
Income tax benefit |
|
|
(5,055 |
) |
|
|
(3,733 |
) |
|
|
(3,464 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) income before undisbursed (overdistributed) income of subsidiary |
|
|
(8,713 |
) |
|
|
51,531 |
|
|
|
91,572 |
|
Undisbursed (overdistributed) income of subsidiary |
|
|
88,090 |
|
|
|
36,907 |
|
|
|
(7,487 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
79,377 |
|
|
|
88,438 |
|
|
|
84,085 |
|
Accrued preferred stock dividend |
|
|
3,731 |
|
|
|
1,022 |
|
|
|
|
|
Accretion of preferred stock discount |
|
|
8,315 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
67,331 |
|
|
$ |
87,254 |
|
|
$ |
84,085 |
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Cash Flows |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
79,377 |
|
|
$ |
88,438 |
|
|
$ |
84,085 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Undisbursed) overdistributed income of subsidiary |
|
|
(88,090 |
) |
|
|
(36,907 |
) |
|
|
7,487 |
|
Stock based compensation expense |
|
|
5,186 |
|
|
|
5,633 |
|
|
|
6,271 |
|
Deferred income tax expense (benefit) |
|
|
7,115 |
|
|
|
5,492 |
|
|
|
(1,798 |
) |
(Increase) decrease in other assets |
|
|
(1,405 |
) |
|
|
(1,478 |
) |
|
|
864 |
|
Increase (decrease) in other liabilities |
|
|
1,472 |
|
|
|
(916 |
) |
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,655 |
|
|
|
60,262 |
|
|
|
96,819 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities of securities available for sale |
|
|
3,000 |
|
|
|
5,000 |
|
|
|
|
|
Principal payments received on securities available for sale |
|
|
7,686 |
|
|
|
5,870 |
|
|
|
|
|
Purchases of securities available for sale |
|
|
(7,006 |
) |
|
|
(12,948 |
) |
|
|
|
|
Proceeds from sales of securities available for sale |
|
|
623 |
|
|
|
|
|
|
|
1,213 |
|
Advance to Harleysville National Corporation |
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
Acquisitions, net of cash and cash equivalents |
|
|
|
|
|
|
(52,262 |
) |
|
|
|
|
Repayment of ESOP loan receivable |
|
|
1,327 |
|
|
|
1,287 |
|
|
|
1,215 |
|
Other, net |
|
|
(633 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(45,003 |
) |
|
|
(53,053 |
) |
|
|
2,428 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Repayments of) proceeds from short term borrowings, net |
|
|
(10,000 |
) |
|
|
60,000 |
|
|
|
|
|
Proceeds from long-term borrowings |
|
|
150,000 |
|
|
|
|
|
|
|
|
|
Capital contributed to subsidiary |
|
|
(353,600 |
) |
|
|
(92,006 |
) |
|
|
|
|
Issuance of common stock in follow-on stock offerings, net |
|
|
802,215 |
|
|
|
108,838 |
|
|
|
|
|
(Repurchase of) issuance of preferred stock, net |
|
|
(184,011 |
) |
|
|
175,453 |
|
|
|
|
|
(Repurchase of) issuance of common stock warrant |
|
|
(2,700 |
) |
|
|
8,476 |
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
(6,795 |
) |
|
|
(95,690 |
) |
Proceeds from exercise of stock options |
|
|
332 |
|
|
|
3,715 |
|
|
|
4,910 |
|
Dividends paid on preferred stock |
|
|
(4,754 |
) |
|
|
|
|
|
|
|
|
Dividends paid on common stock |
|
|
(83,152 |
) |
|
|
(60,071 |
) |
|
|
(55,899 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
314,330 |
|
|
|
197,610 |
|
|
|
(146,679 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
272,982 |
|
|
|
204,819 |
|
|
|
(47,432 |
) |
Cash and cash equivalents at beginning of year |
|
|
216,390 |
|
|
|
11,571 |
|
|
|
59,003 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
489,372 |
|
|
$ |
216,390 |
|
|
$ |
11,571 |
|
|
|
|
|
|
|
|
|
|
|
106
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Managements Report on Internal Control Over Financial Reporting Filed herewith under Part II,
Item 8, Financial Statements and Supplementary Data.
Evaluation of Disclosure Controls and Procedures With the participation of management, the
Principal Executive Officer and Principal Financial Officer have evaluated the effectiveness of the
design and operation of the Companys disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2009. Based upon that
evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of
that date, the Companys 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 Commissions rules and forms. There has been no
change in the Companys internal control over financial reporting during the most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
107
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information regarding directors, executive officers, and corporate governance of the Company in the
Proxy Statement for the 2010 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation in the Proxy Statement for the 2010 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information regarding security ownership of certain beneficial owners and the Companys management
in the Proxy Statement for the 2010 Annual Meeting of Stockholders is incorporated herein by
reference.
All of our equity compensation plans were approved by stockholders. Shown below is certain
information as of December 31, 2009 regarding equity compensation to our directors and employees
that have been approved by stockholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities to be issued |
|
|
|
|
|
|
Number of securities |
|
Equity compensation plans approved by |
|
upon exercise of outstanding |
|
|
Weighted average |
|
|
remaining available for |
|
stockholders |
|
options and rights |
|
|
exercise price |
|
|
issuance under the plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Niagara Financial Group, Inc. 1999 Stock Option Plan |
|
|
293,974 |
|
|
$ |
6.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Niagara Financial Group, Inc. 1999 Recognition and Retention Plan |
|
|
34,859 |
(1) |
|
Not Applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Niagara Financial Group, Inc. Amended and Restated 2002 Long-term Incentive Stock Benefit Plan |
|
|
3,213,499 |
|
|
$ |
13.20 |
|
|
|
3,615,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,542,332 |
|
|
|
|
|
|
|
3,615,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents shares that have been granted but have not yet vested. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions, and director independence in
the Proxy Statement for the 2010 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding the fees paid to and services provided by KPMG LLP, the Companys independent
registered public accounting firm, in the Proxy Statement for the 2010 Annual Meeting of
Stockholders is incorporated herein by reference.
108
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial statements are filed as part of this Annual Report on Form 10-K. See Part II, Item
8. Financial Statements and Supplementary Data.
(b) Exhibits
The exhibits listed below are filed herewith or are incorporated by reference to other filings.
|
|
|
Exhibit Index to Form 10-K |
|
|
|
|
|
Exhibit 2.1
|
|
Agreement and Plan of Merger by and
between First Niagara Financial Group, Inc. and Harleysville
National Corporation(1) |
|
|
|
Exhibit 3.1
|
|
Certificate of
Incorporation(2) |
|
|
|
Exhibit 3.2
|
|
Certificate of
Incorporation(3) |
|
|
|
Exhibit 3.3
|
|
Amended and Restated
Bylaws(4) |
|
|
|
Exhibit 4.1
|
|
Form of Common Stock Certificate of
First Niagara Financial Group, Inc.(2) |
|
|
|
Exhibit 4.2
|
|
Senior Notes Indenture, and First
Supplemental Indenture to Senior Notes Indenture, each dated as of
September 4, 2009, between First Niagara Financial Group, Inc. and
The Bank of New York Mellon, Trustee(5) |
|
|
|
Exhibit 10.1
|
|
First Niagara Financial Group, Inc. Amended and Restated Change in Control Agreement with John R.
Koelmel(6) |
|
|
|
Exhibit 10.2
|
|
First Niagara Financial Group, Inc. Form of
Amended and Restated Change in Control
Agreement(6) |
|
|
|
Exhibit 10.3
|
|
First Niagara Financial Group, Inc. Amended and Restated CEO
Executive Severance
Plan(6) |
|
|
|
Exhibit 10.4
|
|
First Niagara Financial Group, Inc. Executive Severance Plan
(for executive officers other than Mr.
Koelmel) (6) |
|
|
|
Exhibit 10.5
|
|
First Niagara Financial Group, Inc. 1999
Stock Option
Plan(7) |
|
|
|
Exhibit 10.6
|
|
First Niagara Financial Group, Inc. 1999 Recognition and
Retention Plan(8) |
|
|
|
Exhibit 10.7
|
|
First Niagara Financial Group, Inc. Amended and Restated 2002 Long-Term Incentive Stock Benefit
Plan(7) |
|
|
|
Exhibit 10.8
|
|
Amended and Restated First Niagara Bank and First Niagara Financial Group, Inc. Directors Deferred Fees
Plan(6) |
|
|
|
Exhibit 10.9
|
|
First Niagara Financial Group, Inc. Pinnacle Incentive
Compensation
Plan(6) |
|
|
|
Exhibit 10.10
|
|
First Amended and Restated Revolving Credit Promissory
Note with Fifth Third
Bank(9) |
|
|
|
Exhibit 10.11
|
|
Residential Mortgage Program Agreement with Homestead
Funding Corp.(10) |
|
|
|
Exhibit 10.12
|
|
First Niagara Financial Group, Inc. 2005 Long-Term Performance
Plan(11) |
|
|
|
Exhibit 11
|
|
Calculations of Basic Earnings Per Share and Diluted Earnings Per Share (See Note 16 of Notes to
Consolidated Financial Statements) |
|
|
|
Exhibit 21
|
|
Subsidiary of First Niagara Financial Group, Inc. (See Part I, Item 1 of Form 10-K) |
|
|
|
Exhibit 23
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
Exhibit 31.1
|
|
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
Exhibit 31.2
|
|
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
Exhibit 32
|
|
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Incorporated by reference to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on July 27, 2009. |
|
(2) |
|
Incorporated by reference to our Registration Statement on Form S-1,
originally filed with the Securities and Exchange Commission on September 18, 2002. |
|
(3) |
|
Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on November 25, 2008. |
|
(4) |
|
Incorporated by reference to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 30, 2009. |
|
(5) |
|
Incorporated by reference to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on
September 9, 2009. |
|
(6) |
|
Incorporated by reference to our 2008 Annual Report on Form 10-K filed with
the Securities and Exchange Commission on February 27, 2009. |
|
(7) |
|
Incorporated by reference to our 2005 Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 15, 2006. |
|
(8) |
|
Incorporated by reference to our Proxy Statement for the 1999 Annual Meeting
of Stockholders filed with the Securities and Exchange Commission on March 31, 1999. |
|
(9) |
|
Incorporated by reference to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 11, 2008. |
|
(10) |
|
Incorporated by reference to our 2004 Annual Report on Form 10-K filed with
the Securities and Exchange Commission on March 15, 2005 and to the Current Report on
8-K filed with the Securities and Exchange Commission on December 12, 2008. |
|
(11) |
|
Incorporated by reference to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 23, 2005. |
109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 26, 2010 |
By: |
/s/ John R. Koelmel
|
|
|
|
John R. Koelmel |
|
|
|
President and Chief Executive Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signatures |
|
Title |
|
Date |
|
|
|
|
|
/s/ John R. Koelmel
John R. Koelmel
|
|
Director, President & CEO
|
|
February 26, 2010 |
|
|
|
|
|
/s/ Michael W. Harrington
Michael W. Harrington
|
|
Chief Financial Officer
|
|
February 26, 2010 |
|
|
|
|
|
/s/ Thomas E. Baker
Thomas E. Baker
|
|
Director
|
|
February 26, 2010 |
|
|
|
|
|
/s/ G. Thomas Bowers
G. Thomas Bowers
|
|
Director, Chairman
|
|
February 26, 2010 |
|
|
|
|
|
/s/ Carl A. Florio
Carl A. Florio
|
|
Director
|
|
February 26, 2010 |
|
|
|
|
|
/s/ William H. Jones
William H. Jones
|
|
Director
|
|
February 26, 2010 |
|
|
|
|
|
/s/ Daniel W. Judge
Daniel W. Judge
|
|
Director
|
|
February 26, 2010 |
|
|
|
|
|
/s/ George M. Philip
George M. Philip
|
|
Director
|
|
February 26, 2010 |
|
|
|
|
|
/s/ Louise Woerner
Louise Woerner
|
|
Director
|
|
February 26, 2010 |
|
|
|
|
|
/s/ David M. Zebro
David M. Zebro
|
|
Director, Vice Chairman
|
|
February 26, 2010 |
110