Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - FIRST NIAGARA FINANCIAL GROUP INC | Financial_Report.xls |
EX-32 - EXHIBIT 32 - FIRST NIAGARA FINANCIAL GROUP INC | c06050exv32.htm |
EX-31.1 - EXHIBIT 31.1 - FIRST NIAGARA FINANCIAL GROUP INC | c06050exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - FIRST NIAGARA FINANCIAL GROUP INC | c06050exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-23975
FIRST NIAGARA FINANCIAL GROUP, INC.
(exact name of registrant as specified in its charter)
Delaware | 42-1556195 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
726 Exchange Street, Suite 618, Buffalo, NY | 14210 | |
(Address of principal executive offices) | (Zip Code) |
(716) 819-5500
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ NO 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).
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
YES o NO o
As of November 1, 2010, there were issued and outstanding 209,099,027 shares of the Registrants
Common Stock, $0.01 par value.
FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2010
TABLE OF CONTENTS
FORM 10-Q
For the Quarterly Period Ended September 30, 2010
TABLE OF CONTENTS
Item Number | Page Number | |||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
27 | ||||||||
47 | ||||||||
47 | ||||||||
47 | ||||||||
48 | ||||||||
48 | ||||||||
48 | ||||||||
4. [Removed and Reserved] |
||||||||
48 | ||||||||
48 | ||||||||
49 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Condition
(in thousands, except share amounts)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 315,608 | $ | 236,268 | ||||
Investment securities: |
||||||||
Available for sale, at fair value (amortized cost of $7,129,924
and $4,393,199 in 2010 and 2009) |
7,341,505 | 4,421,678 | ||||||
Held to maturity, at amortized cost (fair value of $1,172,182 and
$1,106,650 in 2010 and 2009) |
1,125,184 | 1,093,552 | ||||||
Federal Home Loan Bank and Federal Reserve Bank common stock,
at amortized cost and fair value |
171,814 | 79,014 | ||||||
Loans held for sale |
50,092 | 32,270 | ||||||
Loans and leases, net of allowance for credit losses of $94,532
and $88,303 in 2010 and 2009 |
9,978,952 | 7,208,883 | ||||||
Bank owned life insurance |
228,723 | 132,414 | ||||||
Premises and equipment, net |
209,508 | 156,213 | ||||||
Goodwill |
1,012,815 | 879,107 | ||||||
Core deposit and other intangibles, net |
86,631 | 56,277 | ||||||
Other assets |
350,708 | 289,157 | ||||||
Total assets |
$ | 20,871,540 | $ | 14,584,833 | ||||
Liabilities and Stockholders Equity |
||||||||
Liabilities: |
||||||||
Deposits |
$ | 13,395,183 | $ | 9,729,524 | ||||
Short-term borrowings |
1,634,481 | 1,674,761 | ||||||
Long-term borrowings |
2,708,639 | 627,519 | ||||||
Other liabilities |
326,676 | 179,368 | ||||||
Total liabilities |
18,064,979 | 12,211,172 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value, 50,000,000 shares authorized;
none issued |
| | ||||||
Common stock, $0.01 par value, 500,000,000 and 250,000,000 shares
authorized in 2010 and 2009; 215,105,566 and 194,810,261 shares issued
in 2010 and 2009 |
2,151 | 1,948 | ||||||
Additional paid-in capital |
2,428,555 | 2,128,196 | ||||||
Retained earnings |
361,844 | 352,948 | ||||||
Accumulated other comprehensive income, net of taxes |
117,331 | 2,514 | ||||||
Common stock held by employee stock ownership plan; 2,683,354
and 2,874,196 shares in 2010 and 2009 |
(21,155 | ) | (22,382 | ) | ||||
Treasury stock, at cost; 6,046,959 and 6,595,500 shares
in 2010 and 2009 |
(82,165 | ) | (89,563 | ) | ||||
Total stockholders equity |
2,806,561 | 2,373,661 | ||||||
Total liabilities and stockholders equity |
$ | 20,871,540 | $ | 14,584,833 | ||||
See accompanying notes to consolidated financial statements.
3
Table of Contents
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
(in thousands, except per share amounts)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest income: |
||||||||||||||||
Loans and leases |
$ | 131,862 | $ | 89,856 | $ | 362,006 | $ | 263,742 | ||||||||
Investment securities and other |
68,774 | 38,932 | 178,262 | 81,659 | ||||||||||||
Total interest income |
200,636 | 128,788 | 540,268 | 345,401 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
19,244 | 16,266 | 54,325 | 56,159 | ||||||||||||
Borrowings |
20,113 | 13,600 | 55,737 | 37,745 | ||||||||||||
Total interest expense |
39,357 | 29,866 | 110,062 | 93,904 | ||||||||||||
Net interest income |
161,279 | 98,922 | 430,206 | 251,497 | ||||||||||||
Provision for credit losses |
11,000 | 15,000 | 35,131 | 32,650 | ||||||||||||
Net interest income after provision for credit losses |
150,279 | 83,922 | 395,075 | 218,847 | ||||||||||||
Noninterest income: |
||||||||||||||||
Banking services |
21,007 | 12,499 | 58,543 | 32,522 | ||||||||||||
Insurance and benefits consulting |
13,573 | 12,172 | 38,504 | 37,884 | ||||||||||||
Wealth management services |
5,939 | 1,848 | 14,898 | 5,900 | ||||||||||||
Lending and leasing |
6,365 | 2,950 | 13,777 | 7,174 | ||||||||||||
Bank owned life insurance |
2,067 | 1,301 | 5,267 | 3,931 | ||||||||||||
Other |
554 | 2,454 | 1,514 | 3,047 | ||||||||||||
Total noninterest income |
49,505 | 33,224 | 132,503 | 90,458 | ||||||||||||
Noninterest expense: |
||||||||||||||||
Salaries and employee benefits |
68,603 | 42,223 | 180,921 | 110,629 | ||||||||||||
Occupancy and equipment |
15,582 | 7,620 | 38,911 | 19,987 | ||||||||||||
Technology and communications |
12,769 | 6,095 | 32,821 | 16,499 | ||||||||||||
Marketing and advertising |
5,782 | 2,550 | 15,005 | 7,663 | ||||||||||||
Professional services |
4,426 | 1,481 | 10,990 | 3,990 | ||||||||||||
Amortization of intangibles |
5,453 | 2,266 | 14,011 | 6,004 | ||||||||||||
Federal deposit insurance premiums |
4,630 | 3,854 | 13,052 | 12,333 | ||||||||||||
Merger and acquisition integration expenses |
1,916 | 23,354 | 35,750 | 27,458 | ||||||||||||
Charitable contributions |
474 | 5,169 | 9,483 | 5,525 | ||||||||||||
Other |
12,974 | 6,108 | 33,050 | 21,864 | ||||||||||||
Total noninterest expense |
132,609 | 100,720 | 383,994 | 231,952 | ||||||||||||
Income before income taxes |
67,175 | 16,426 | 143,584 | 77,353 | ||||||||||||
Income taxes |
21,579 | 5,495 | 49,086 | 26,880 | ||||||||||||
Net income |
45,596 | 10,931 | 94,498 | 50,473 | ||||||||||||
Preferred stock dividend and discount accretion |
| | | 12,046 | ||||||||||||
Net income available to common stockholders |
$ | 45,596 | $ | 10,931 | $ | 94,498 | $ | 38,427 | ||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 0.22 | $ | 0.07 | $ | 0.48 | $ | 0.29 | ||||||||
Diluted |
$ | 0.22 | $ | 0.07 | $ | 0.47 | $ | 0.29 | ||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Basic |
205,821 | 146,834 | 198,378 | 134,022 | ||||||||||||
Diluted |
206,058 | 147,184 | 198,686 | 134,386 | ||||||||||||
Dividends per common share |
$ | 0.14 | $ | 0.14 | $ | 0.42 | $ | 0.42 |
See accompanying notes to consolidated financial statements.
4
Table of Contents
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited)
(in thousands)
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 45,596 | $ | 10,931 | $ | 94,498 | $ | 50,473 | ||||||||
Other comprehensive income, net of income taxes: |
||||||||||||||||
Net unrealized gains on securities available for sale
arising during the period |
14,150 | 30,994 | 114,366 | 46,773 | ||||||||||||
Net unrealized gains (losses) on interest rate swaps designated
as cash flow hedges arising during the period |
162 | (116 | ) | 332 | 77 | |||||||||||
Amortization of net loss related to pension and
post-retirement plans |
161 | 190 | 119 | 568 | ||||||||||||
Total other comprehensive income |
14,473 | 31,068 | 114,817 | 47,418 | ||||||||||||
Total comprehensive income |
$ | 60,069 | $ | 41,999 | $ | 209,315 | $ | 97,891 | ||||||||
See accompanying notes to consolidated financial statements.
5
Table of Contents
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders Equity
(unaudited)
(in thousands, except share and per share amounts)
Accumulated | Common | |||||||||||||||||||||||||||||||
Additional | other | stock | ||||||||||||||||||||||||||||||
Common | paid-in | Retained | comprehensive | held by | Treasury | |||||||||||||||||||||||||||
stock | capital | earnings | income | ESOP | stock | Total | ||||||||||||||||||||||||||
Balances at January 1, 2010 |
$ | 1,948 | $ | 2,128,196 | $ | 352,948 | $ | 2,514 | $ | (22,382 | ) | $ | (89,563 | ) | $ | 2,373,661 | ||||||||||||||||
Net income |
| | 94,498 | | | | 94,498 | |||||||||||||||||||||||||
Total other comprehensive income, net |
| | | 114,817 | | | 114,817 | |||||||||||||||||||||||||
Acquisition of Harleysville National Corporation
(20,295,305 shares) |
203 | 299,700 | | | | | 299,903 | |||||||||||||||||||||||||
Purchase of noncontrolling interest in
consolidated subsidiary, net of tax |
| (614 | ) | | | | | (614 | ) | |||||||||||||||||||||||
ESOP shares committed to be released
(190,842 shares) |
| 838 | | | 1,227 | | 2,065 | |||||||||||||||||||||||||
Stock-based compensation expense |
| 4,066 | | | | | 4,066 | |||||||||||||||||||||||||
Excess tax benefit from stock-based
compensation |
| 827 | | | | | 827 | |||||||||||||||||||||||||
Exercise of stock options and
restricted stock activity (548,541 shares) |
| (4,458 | ) | (1,888 | ) | | | 7,398 | 1,052 | |||||||||||||||||||||||
Common stock dividend of
$0.42 per share |
| | (83,714 | ) | | | | (83,714 | ) | |||||||||||||||||||||||
Balances at September 30, 2010 |
$ | 2,151 | $ | 2,428,555 | $ | 361,844 | $ | 117,331 | $ | (21,155 | ) | $ | (82,165 | ) | $ | 2,806,561 | ||||||||||||||||
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, 2009 |
$ | 176,719 | $ | 1,254 | $ | 1,326,159 | $ | 369,671 | $ | (29,429 | ) | $ | (23,843 | ) | $ | (93,268 | ) | $ | 1,727,263 | |||||||||||||
Net income |
| | | 50,473 | | | | 50,473 | ||||||||||||||||||||||||
Total other comprehensive income, net |
| | | | 47,418 | | | 47,418 | ||||||||||||||||||||||||
Proceeds from follow-on stock offering,
net of related expenses (31,050,000 shares) |
| 694 | 801,521 | | | | | 802,215 | ||||||||||||||||||||||||
Preferred stock redemption |
(184,011 | ) | | | | | | | (184,011 | ) | ||||||||||||||||||||||
Repurchase of common stock warrant |
| | (2,700 | ) | | | | | (2,700 | ) | ||||||||||||||||||||||
ESOP shares committed to be released
(173,099 shares) |
| | 640 | | | 1,136 | | 1,776 | ||||||||||||||||||||||||
Stock-based compensation expense |
| | 3,735 | | | | | 3,735 | ||||||||||||||||||||||||
Excess tax expense from stock-based
compensation |
| | (65 | ) | | | | | (65 | ) | ||||||||||||||||||||||
Exercise of stock options and
restricted stock activity (198,160 shares) |
| | (2,571 | ) | (763 | ) | | | 2,831 | (503 | ) | |||||||||||||||||||||
Accretion of preferred stock discount |
8,315 | | | (8,315 | ) | | | | | |||||||||||||||||||||||
Cumulative preferred stock dividend |
(1,023 | ) | | | (3,731 | ) | | | | (4,754 | ) | |||||||||||||||||||||
Common stock dividend of
$0.42 per share |
| | | (57,243 | ) | | | | (57,243 | ) | ||||||||||||||||||||||
Balances at September 30, 2009 |
$ | | $ | 1,948 | $ | 2,126,719 | $ | 350,092 | $ | 17,989 | $ | (22,707 | ) | $ | (90,437 | ) | $ | 2,383,604 | ||||||||||||||
See accompanying notes to consolidated financial statements.
6
Table of Contents
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Nine months ended September 30, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 94,498 | $ | 50,473 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||
(Accretion) amortization of fees and discounts, net |
(1,400 | ) | 15,963 | |||||
Provision for credit losses |
35,131 | 32,650 | ||||||
Depreciation of premises and equipment |
17,242 | 9,451 | ||||||
Amortization of intangibles |
14,011 | 6,004 | ||||||
Originations of loans held for sale |
(441,777 | ) | (364,602 | ) | ||||
Proceeds from sales of loans held for sale |
426,098 | 342,926 | ||||||
ESOP and stock-based compensation expense |
6,131 | 5,511 | ||||||
Deferred income tax expense |
29,785 | 3,625 | ||||||
Income from bank owned life insurance |
(5,267 | ) | (3,931 | ) | ||||
Other, net |
40,711 | 29,635 | ||||||
Net cash provided by operating activities |
215,163 | 127,705 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from maturities of securities available for sale |
583,549 | 1,043,918 | ||||||
Proceeds from sale of securities available for sale |
122,655 | 995 | ||||||
Principal payments received on securities available for sale |
714,094 | 400,635 | ||||||
Purchases of securities available for sale |
(3,227,060 | ) | (3,354,707 | ) | ||||
Principal payments received on securities held to maturity |
165,949 | 18,384 | ||||||
Purchases of securities held to maturity |
(204,629 | ) | (1,105,937 | ) | ||||
Net increase in loans and leases |
(181,475 | ) | (47,869 | ) | ||||
Acquisitions, net of cash and cash equivalents |
1,144,427 | 3,083,547 | ||||||
Other, net |
(55,586 | ) | (5,790 | ) | ||||
Net cash used in investing activities |
(938,076 | ) | 33,176 | |||||
Cash flows from financing activities: |
||||||||
Net (decrease) increase in deposits |
(255,127 | ) | 17,646 | |||||
Repayments of short-term borrowings, net |
(457,494 | ) | (166,451 | ) | ||||
Proceeds from long-term borrowings |
1,746,534 | 150,000 | ||||||
Repayments of long-term borrowings |
(150,000 | ) | (7,135 | ) | ||||
Proceeds from exercise of stock options |
1,216 | 305 | ||||||
Excess tax benefit (expense) from stock-based compensation |
827 | (65 | ) | |||||
Issuance of common stock in follow-on stock offering, net |
| 802,215 | ||||||
Repurchase of common stock warrant |
| (2,700 | ) | |||||
Redemption of preferred stock |
| (184,011 | ) | |||||
Dividends paid on cumulative preferred stock |
| (4,754 | ) | |||||
Dividends paid on common stock |
(83,703 | ) | (57,239 | ) | ||||
Net cash provided by financing activities |
802,253 | 547,811 | ||||||
Net increase in cash and cash equivalents |
79,340 | 708,692 | ||||||
Cash and cash equivalents at beginning of period |
236,268 | 114,551 | ||||||
Cash and cash equivalents at end of period |
$ | 315,608 | $ | 823,243 | ||||
Supplemental disclosures |
||||||||
Cash paid during the period for: |
||||||||
Income taxes |
$ | 30,209 | $ | 28,681 | ||||
Interest expense |
125,886 | 92,838 | ||||||
Acquisition of noncash assets and liabilities: |
||||||||
Assets acquired |
4,153,049 | 911,610 | ||||||
Liabilities assumed |
4,998,057 | 3,974,134 | ||||||
Other noncash transactions: |
||||||||
Loans transferred to other real estate owned |
5,107 | 8,207 | ||||||
Securities available for sale purchased not settled |
15,479 | 99,793 | ||||||
Capital lease obligation |
| 11,928 |
See accompanying notes to consolidated financial statements.
7
Table of Contents
FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except as noted and per share amounts)
The accompanying consolidated financial statements of First Niagara Financial Group, Inc. (the
Company), including its wholly owned subsidiary First Niagara Bank, N.A. (the Bank), have been
prepared using U.S. generally accepted accounting principles (GAAP) for interim financial
information. On April 9, 2010, the Company became a bank holding company subject to supervision
and regulation by the Board of Governors of the Federal Reserve System, and First Niagara Bank was
renamed First Niagara Bank, N.A. as it became a national bank subject to supervision and regulation
by the Office of the Comptroller of the Currency.
These consolidated financial statements do not include all of the information and footnotes
required by GAAP for a full year presentation and certain disclosures have been condensed or
omitted in accordance with rules and regulations of the Securities and Exchange Commission. In our
opinion, all adjustments necessary for a fair presentation have been included. These consolidated
financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in our 2009 Annual Report on Form 10-K, as amended. Results
for the nine months ended September 30, 2010 do not necessarily reflect the results that may be
expected for the year ending December 31, 2010. We reviewed subsequent events and determined that
no further disclosures or adjustments were required. Amounts in prior period financial statements
are reclassified whenever necessary to conform to the current period presentation. The Company and
the Bank are referred to collectively as we or us or our.
Note 1. Acquisition
Harleysville National Corporation
On April 9, 2010, the Company acquired all of the outstanding common shares of Harleysville
National Corporation (Harleysville), the parent company of Harleysville National Bank and Trust
Company, and thereby acquired all of Harleysville National Bank and Trust Companys 83 branch
locations across nine Eastern Pennsylvania counties. Under the terms of the merger agreement,
Harleysville stockholders received 0.474 shares of First Niagara Financial Group, Inc. common stock
in exchange for each share of Harleysville common stock, resulting in us issuing 20.3 million
common shares of First Niagara Financial Group, Inc. common stock with an acquisition date fair
value of $298.7 million. Also under the terms of the merger agreement, Harleysville employees
became 100% vested in any Harleysville stock options they held. These options had a fair value of
$1.1 million on the date of acquisition. The merger with Harleysville enabled us to expand into
the Eastern Pennsylvania market, improve our core deposit base, and add additional scale in banking
operations.
The results of Harleysvilles operations are included in our Consolidated Statements of Income from
the date of acquisition. In connection with the merger, the consideration paid, the assets
acquired, and the liabilities assumed were recorded at fair value on the date of acquisition, as
summarized in the following table.
Consideration paid: |
||||
First Niagara Financial Group, Inc. common stock issued |
$ | 298,747 | ||
Cash in lieu of fractional shares paid to Harleysville stockholders |
41 | |||
Fair value of Harleysville employee stock options |
1,115 | |||
Total consideration paid |
$ | 299,903 | ||
Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value: |
||||
Cash and cash equivalents |
$ | 1,148,704 | ||
Investment securities available for sale |
945,570 | |||
Loans |
2,644,256 | |||
Federal Home Loan Bank common stock |
42,992 | |||
Bank owned life insurance |
91,042 | |||
Premises and equipment |
44,511 | |||
Core deposit intangible |
42,200 | |||
Other assets |
205,692 | |||
Deposits |
(3,953,333 | ) | ||
Borrowings |
(960,259 | ) | ||
Other liabilities |
(82,361 | ) | ||
Total identifiable net assets |
169,014 | |||
Goodwill |
130,889 | |||
$ | 299,903 | |||
8
Table of Contents
The
above recognized amount of loans, at fair value, is a preliminary
estimate and is subject to adjustment but is not expected to be
materially different than the amount shown.
We estimated the fair value for most loans acquired from Harleysville by utilizing a methodology
wherein loans with comparable characteristics were aggregated by type of collateral, remaining
maturity, and repricing terms. Cash flows for each pool were determined by estimating future
credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to
present value using a risk-adjusted market rate for similar loans. To estimate the fair value of
the remaining loans, we analyzed the value of the underlying collateral of the loans, assuming the
fair values of the loans were derived from the eventual sale of the collateral. The value of the
collateral was based on recently completed appraisals adjusted to the valuation date based on
recognized industry indices. We discounted those values using market derived rates of return, with
consideration given to the period of time and costs associated with the foreclosure and disposition
of the collateral. There was no carryover of Harleysvilles allowance for credit losses associated
with the loans we acquired as the loans were initially recorded at fair value. Information about
the acquired Harleysville loan portfolio as of April 9, 2010 is as follows:
Contractually required principal and interest at acquisition |
$ | 3,383,245 | ||
Contractual cash flows not expected to be collected (nonaccretable discount) |
(326,287 | ) | ||
Expected cash flows at acquisition |
3,056,958 | |||
Interest component of expected cash flows (accretable discount) |
(412,702 | ) | ||
Fair value of acquired loans |
$ | 2,644,256 | ||
The core deposit intangible asset recognized as part of the Harleysville merger 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 not
deductible for tax purposes.
The fair value of savings and transaction deposit accounts acquired from Harleysville was assumed
to approximate the carrying value as these accounts have no stated maturity and are payable on
demand. Certificates of deposit were valued by comparing the contractual cost of the portfolio to
an identical portfolio bearing current market rates. The projected cash flows from maturing
certificates were calculated based on contractual rates. The fair value of the certificates of
deposit was calculated by discounting their contractual cash flows at a market rate for a
certificate of deposit with a corresponding maturity.
The fair value of borrowings assumed was determined by estimating projected future cash outflows
and discounting them at a market rate of interest.
Direct costs related to the Harleysville acquisition were expensed as incurred. During the nine
months ended September 30, 2010, we incurred $34.4 million in merger and acquisition integration
expenses related to the Harleysville transaction, including $9.5 million in salaries and benefits,
$5.7 million in technology and communications, $1.3 million in occupancy and equipment, $4.1
million in marketing and advertising, $10.8 million in professional services, and $3.0 million in
other noninterest expenses.
The following table presents financial information regarding the former Harleysville operations
included in our Consolidated Statement of Income from the date of acquisition through September 30,
2010. The amounts presented do not include merger and acquisition costs or a $7.5 million
contribution to First Niagara Bank Foundation in support of charitable giving in Eastern
Pennsylvania.
9
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The following table also presents unaudited pro forma information as if the acquisition of
Harleysville had occurred on January 1, 2009. This pro forma information gives effect to certain
adjustments, including purchase accounting fair value adjustments, amortization of core deposit and
other intangibles and related income tax effects. The pro forma information does not necessarily
reflect the results of operations that would
have occurred had the Company merged with Harleysville at the beginning of 2009. In particular,
$34.4 million of merger and acquisition integration costs incurred by us during the nine months
ended September 30, 2010 were not reflected in the unaudited pro forma amounts for the nine months
ended September 30, 2009 and cost savings are not reflected in the unaudited pro forma amounts for
the nine months ended September 30, 2010 and 2009. In addition, the pro forma results for the nine
months ended September 30, 2009 do not reflect any adjustment to eliminate Harleysvilles
historical goodwill impairment charge of $214.5 million. The unaudited pro forma information for
the nine months ended September 30, 2009 also does not include any amounts related to the September
2009 National City Bank (NatCity) branch acquisition as it did 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.
Actual from | Pro forma | |||||||||||
acquisition date through | Nine months ended September 30, | |||||||||||
September 30, 2010 | 2010 | 2009 | ||||||||||
Net interest income |
$ | 86,121 | $ | 464,667 | $ | 380,524 | ||||||
Noninterest income |
16,875 | 145,818 | 140,603 | |||||||||
Net income (loss)(1) |
27,565 | 86,714 | (172,981 | ) | ||||||||
Pro forma earnings (loss) per share(1): |
||||||||||||
Basic |
$ | 0.43 | $ | (1.12 | ) | |||||||
Diluted |
0.42 | (1.12 | ) |
(1) | Pro forma net loss and loss per share for the nine months ended September 30, 2009 include the $215 million goodwill impairment recorded by Harleysville prior to the merger with the Company. |
NewAlliance Bancshares, Inc.
On August 19, 2010, the Company and NewAlliance Bancshares, Inc. (NewAlliance), the parent
company of NewAlliance Bank, jointly announced a definitive merger agreement under which
NewAlliance will merge into the Company. At September 30, 2010, NewAlliance had total assets of
approximately $8.8 billion, including $5.0 billion in loans, and deposits of approximately $5.1
billion in 88 bank branches across eight counties from Greenwich, Connecticut to Springfield,
Massachusetts. Under the terms of the merger agreement, as amended, each outstanding share of
NewAlliance common stock will be converted into the right to receive either 1.10 shares of common
stock of the Company, or $14.28 in cash, or a combination thereof, subject to adjustment, election
and allocation procedures described in the merger agreement, as amended. The cash price will
remain fixed while the value of the stock consideration will likely change prior to closing due to
fluctuations in the market price of common stock of the Company. In addition, under the terms of
the merger agreement, as amended, each NewAlliance employee stock option will automatically vest
and convert into an option to purchase 1.10 shares of Company common stock, with an exercise price
equal to the NewAlliance stock option exercise price divided by 1.10. The merger is expected to be
completed in the second quarter of 2011 and is subject to the approvals of NewAlliance stockholders
and the applicable regulatory agencies. During the quarter ended September 30, 2010, we incurred
$1.1 million in merger and acquisition expenses related to the merger with NewAlliance.
10
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Note 2. Investment Securities
The amortized cost, gross unrealized gains and losses, and approximate fair value of our investment
securities at September 30, 2010 and December 31, 2009 are summarized as follows:
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
September 30, 2010: | cost | gains | losses | value | ||||||||||||
Investment securities available for sale: |
||||||||||||||||
Debt securities: |
||||||||||||||||
States and political subdivisions |
$ | 532,393 | $ | 10,952 | $ | (304 | ) | $ | 543,041 | |||||||
U.S. government sponsored enterprises |
201,522 | 5,837 | | 207,359 | ||||||||||||
Corporate |
93,988 | 1,395 | (950 | ) | 94,433 | |||||||||||
Total debt securities |
827,903 | 18,184 | (1,254 | ) | 844,833 | |||||||||||
Residential mortgage-backed securities: |
||||||||||||||||
Government National Mortgage Association |
81,066 | 2,631 | | 83,697 | ||||||||||||
Federal National Mortgage Association |
184,900 | 7,057 | (8 | ) | 191,949 | |||||||||||
Federal Home Loan Mortgage Corporation |
136,209 | 5,413 | (10 | ) | 141,612 | |||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Government National Mortgage Association |
4,658,503 | 145,024 | (625 | ) | 4,802,902 | |||||||||||
Federal National Mortgage Association |
608,859 | 19,053 | (190 | ) | 627,722 | |||||||||||
Federal Home Loan Mortgage Corporation |
465,900 | 14,156 | (119 | ) | 479,937 | |||||||||||
Non-agency issued |
140,852 | 3,780 | (1,304 | ) | 143,328 | |||||||||||
Total collateralized mortgage obligations |
5,874,114 | 182,013 | (2,238 | ) | 6,053,889 | |||||||||||
Total mortgage-backed securities |
6,276,289 | 197,114 | (2,256 | ) | 6,471,147 | |||||||||||
Asset-backed securities |
2,826 | | (19 | ) | 2,807 | |||||||||||
Other |
22,276 | 500 | (58 | ) | 22,718 | |||||||||||
Total securities available for sale |
$ | 7,129,294 | $ | 215,798 | $ | (3,587 | ) | $ | 7,341,505 | |||||||
Investment securities held to maturity: |
||||||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Government National Mortgage Association |
$ | 523,742 | $ | 20,153 | $ | | $ | 543,895 | ||||||||
Federal National Mortgage Association |
284,435 | 11,628 | | 296,063 | ||||||||||||
Federal Home Loan Mortgage Corporation |
317,007 | 15,217 | | 332,224 | ||||||||||||
Total securities held to maturity |
$ | 1,125,184 | $ | 46,998 | $ | | $ | 1,172,182 | ||||||||
11
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Amortized | Unrealized | Unrealized | Fair | |||||||||||||
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 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 | |||||||
The table below details certain information regarding our investment securities that were in an
unrealized loss position at September 30, 2010 and December 31, 2009 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 | |||||||||||||||||||
September 30, 2010: | value | losses | value | losses | value | losses | ||||||||||||||||||
Investment securities available for sale: |
||||||||||||||||||||||||
Debt securities: |
||||||||||||||||||||||||
States and political subdivisions |
$ | 25,182 | $ | (304 | ) | $ | | $ | | $ | 25,182 | $ | (304 | ) | ||||||||||
Corporate |
5,360 | (87 | ) | 775 | (863 | ) | 6,135 | (950 | ) | |||||||||||||||
Total debt securities |
30,542 | (391 | ) | 775 | (863 | ) | 31,317 | (1,254 | ) | |||||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||||||
Federal National Mortgage Association |
3,756 | (8 | ) | | | 3,756 | (8 | ) | ||||||||||||||||
Federal Home Loan Mortgage Corporation |
453 | (10 | ) | | | 453 | (10 | ) | ||||||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||||||||||
Government National Mortgage Association |
180,702 | (625 | ) | | | 180,702 | (625 | ) | ||||||||||||||||
Federal National Mortgage Association |
14,760 | (190 | ) | | | 14,760 | (190 | ) | ||||||||||||||||
Federal Home Loan Mortgage Corporation |
13,319 | (119 | ) | | | 13,319 | (119 | ) | ||||||||||||||||
Non-agency issued |
4,393 | (60 | ) | 36,090 | (1,244 | ) | 40,483 | (1,304 | ) | |||||||||||||||
Total collateralized mortgage obligations |
213,174 | (994 | ) | 36,090 | (1,244 | ) | 249,264 | (2,238 | ) | |||||||||||||||
Total mortgage-backed securities |
217,383 | (1,012 | ) | 36,090 | (1,244 | ) | 253,473 | (2,256 | ) | |||||||||||||||
Asset-backed securities |
| | 2,807 | (19 | ) | 2,807 | (19 | ) | ||||||||||||||||
Other |
1,297 | (58 | ) | | | 1,297 | (58 | ) | ||||||||||||||||
Total securities available for sale in an unrealized loss position |
$ | 249,222 | $ | (1,461 | ) | $ | 39,672 | $ | (2,126 | ) | $ | 288,894 | $ | (3,587 | ) | |||||||||
12
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Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
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 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 | ) | ||||||||||
In the discussion of our investment portfolio below, we have included certain credit rating
information because the information indicates the degree of credit risk to which we are exposed,
and significant changes in ratings classifications for our investment portfolio could result in
increased risk for us.
Non-Agency Collateralized Mortgage Obligations
Our non-agency collateralized mortgage obligations (CMO) portfolio consists primarily of
investment grade securities at September 30, 2010, as 88% of this portfolio is rated investment
grade, and 80% is rated A- or higher. All of our non-agency CMOs 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 consider the security to be other than
temporarily impaired and write down the credit component of the unrealized loss through a charge to
current period earnings.
At September 30, 2010, of the 18 non-agency CMOs in an unrealized loss position, nine were in a
continuous unrealized loss position for 12 months or more. 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. We have assessed these securities in an unrealized loss position at
September 30, 2010 and December 31, 2009 and determined that the declines in fair value below
amortized cost were temporary. We believe the initial decline in fair value below amortized cost
was caused by the significant widening in liquidity spreads during the financial crisis. As market
conditions have stabilized, those spreads have begun to normalize; however, sufficient volatility
remained in the market place preventing a full retracement in liquidity spreads and a subsequent
return of our amortized cost basis at period end. In making the determination that the impairment was
temporary we considered the period of time the securities were in a loss position, the percentage
decline in comparison to the securities amortized costs, the securities credit ratings, the
delinquency or default rates of the underlying collateral and levels of credit enhancement. We
also 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 bases, 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 in the non-agency CMO market.
13
Table of Contents
Scheduled contractual maturities of our investment securities at September 30, 2010 are as follows:
Amortized | Fair | |||||||
cost | value | |||||||
Debt securities: |
||||||||
Within one year |
$ | 156,544 | $ | 157,238 | ||||
After one year through five years |
316,028 | 326,375 | ||||||
After five years through ten years |
282,161 | 287,137 | ||||||
After ten years |
73,170 | 74,083 | ||||||
Total debt securities |
827,903 | 844,833 | ||||||
Asset-backed securities |
2,826 | 2,807 | ||||||
Mortgage-backed securities |
7,401,473 | 7,643,329 | ||||||
Other |
22,276 | 22,718 | ||||||
$ | 8,254,478 | $ | 8,513,687 | |||||
While the contractual maturities of our mortgage-backed securities, asset-backed securities, and
other securities 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 mortgage-backed,
asset-backed, and other securities that we own. The weighted average estimated remaining life of
our securities available for sale was 3.4 years at September 30, 2010, as compared to 2.9 years at
December 31, 2009.
Note 3. Loans and Leases
The following is a summary of our loans and leases at the dates indicated:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Commercial: |
||||||||
Real estate |
$ | 3,846,101 | $ | 2,713,542 | ||||
Construction |
437,321 | 348,040 | ||||||
Business |
2,043,738 | 1,481,845 | ||||||
Specialized lending(1) |
226,941 | 207,749 | ||||||
Total commercial |
6,554,101 | 4,751,176 | ||||||
Residential real estate |
1,752,078 | 1,642,691 | ||||||
Home equity |
1,470,619 | 691,069 | ||||||
Other consumer |
270,578 | 186,341 | ||||||
Total loans and leases |
10,047,376 | 7,271,277 | ||||||
Net deferred costs and unearned discounts |
26,108 | 25,909 | ||||||
Allowance for credit losses |
(94,532 | ) | (88,303 | ) | ||||
Total loans and leases, net |
$ | 9,978,952 | $ | 7,208,883 | ||||
(1) | Includes commercial leases and financed insurance premiums. |
14
Table of Contents
The outstanding principal balance and the related carrying amount of the acquired Harleysville
loans and the loans we acquired from NatCity in September 2009 included in our Consolidated
Statements of Condition at the dates indicated are as follows:
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Outstanding principal balance |
$ | 2,932,883 | $ | 697,699 | ||||
Carrying amount |
2,833,545 | 660,426 |
The following table presents changes in the accretable discount on loans acquired in the NatCity
and Harleysville acquisitions for the nine months ended September 30, 2010:
Balance at December 31, 2009 |
$ | (79,388 | ) | |
Harleysville acquisition |
(412,702 | ) | ||
Accretion |
92,514 | |||
Balance at September 30, 2010 |
$ | (399,576 | ) | |
The following table presents the activity in the allowance for credit losses for the periods
indicated:
Nine months ended September 30, | ||||||||
2010 | 2009 | |||||||
Balance at beginning of period |
$ | 88,303 | $ | 77,793 | ||||
Charge-offs |
(31,512 | ) | (28,761 | ) | ||||
Recoveries |
2,610 | 1,395 | ||||||
Provision for credit losses |
35,131 | 32,650 | ||||||
Balance at end of period |
$ | 94,532 | $ | 83,077 | ||||
The following table details additional information on our loans as of September 30:
2010 | 2009 | |||||||
Nonaccrual loans |
$ | 94,180 | $ | 66,806 | ||||
Year to date interest income that would have been recorded if nonaccrual
loans had been performing in accordance with original terms |
4,392 | 733 | ||||||
Aggregate recorded investment of impaired loans with terms
modified through a troubled debt restructuring |
47,029 | 20,392 | ||||||
Aggregate recorded investment of impaired loans with terms
modified through a troubled debt restructuring accruing interest |
18,932 | 6,916 | ||||||
Loans 90 days past due and accruing interest (1) |
56,716 | |
(1) | All such loans represent acquired loans that were originally recorded at fair value upon acquisition. These loans are considered to be accruing as we primarily recognize interest income through the accretion of the difference between the carrying value of these loans and their expected cash flows. |
15
Table of Contents
The following table details the amount of impaired loans with no related allowance for credit
losses, as well as the amount of impaired loans for which there is a related allowance for credit
losses as of September 30, 2010 and December 31, 2009. Loans with no related allowance for credit
losses have adequate collateral securing their carrying value and in some circumstances, have been
charged down to their current carrying value.
September 30, 2010 | December 31, 2009 | |||||||||||||||
Related | Related | |||||||||||||||
Impaired | allowance for | Impaired | allowance for | |||||||||||||
loans | credit losses | loans | credit losses | |||||||||||||
Impaired loans with no related allowance for credit losses |
$ | 24,476 | $ | | $ | 696 | $ | | ||||||||
Impaired loans with a related allowance for credit losses |
49,958 | 10,994 | 54,248 | 9,170 | ||||||||||||
Total impaired loans |
$ | 74,434 | $ | 10,994 | $ | 54,944 | $ | 9,170 | ||||||||
The difference between total nonaccrual loans and impaired loans in the tables above is primarily
due to nonaccruing smaller balance homogeneous loans (primarily residential real estate, home
equity, and other consumer loans) which are not evaluated individually for impairment, unless they
are restructured in a troubled debt restructuring.
Note 4. Borrowings
In connection with our April 9, 2010 merger with Harleysville, we acquired six statutory trust
affiliates (the Trusts). The Trusts were formed to issue mandatorily redeemable trust preferred
securities to investors and loan the proceeds to us for general corporate purposes. The Trusts
hold, as their sole assets, junior subordinated debentures of the holding company totaling $105.5
million at September 30, 2010. Each Trusts preferred securities represent undivided beneficial
interests in the assets of the Trusts. The carrying value of the trust preferred subordinated
debentures, net of the unamortized fair value adjustment of approximately $28.2 million from the
merger with Harleysville, is $80.6 million at September 30, 2010. We own all of the common
securities of the Trusts and have accordingly recorded $3.3 million in other assets on our
Consolidated Statement of Condition at September 30, 2010 representing our investment in those
common securities. As the shareholders of the trust preferred securities are the primary
beneficiaries of these trusts, and because the Trusts qualify as variable interest entities, the
Trusts are not consolidated in our financial statements.
The trust preferred securities require quarterly distributions to the holders of the trust
preferred securities at a rate per annum equal to the interest rate on the debentures held by that
trust. We have the right to defer payment of interest on the subordinated debentures, at any time
or from time to time for a period not exceeding five years, provided that no extension period may
extend beyond the stated maturity of the debentures. During any such extension period,
distributions on the trust securities will also be deferred, and we may not pay dividends or
distributions on, or redeem, purchase, or acquire any shares of our common stock.
The trust preferred securities must be redeemed upon the stated maturity dates of the junior
subordinated debentures. We may redeem the debentures, in whole but not in part (except for
Harleysville National Corporation Statutory Trust II and Willow Grove Statutory Trust I which may
be redeemed in whole or in part) at any time within 90 days at the specified special event
redemption price following the occurrence of a capital disqualification event, an investment
company event or a tax event as set forth in the indentures relating to the trust preferred
securities and in each case subject to regulatory approval. For Harleysville National Corporation
Statutory Trust II, III and IV, East Penn Statutory Trust I and Willow Grove Statutory Trust I, we
also may redeem the debentures, in whole or in part, at the stated optional redemption dates (after
five years from the issuance date) and quarterly thereafter, subject to regulatory approval if
required. The optional redemption price is equal to 100% of the principal amount of the debentures
being redeemed plus accrued and unpaid interest on the debentures to the redemption date. For
Harleysville National Corporation Statutory Trust I, we may redeem the debt securities, in whole or
in part, at the stated optional redemption date of February 22, 2011 and semi-annually thereafter,
subject to regulatory approval, if required. The redemption price on February 22, 2011 is equal to
105.1% of the principal amount, and declines annually to 100% on February 22, 2021 and thereafter,
plus accrued and unpaid interest on the debentures to the redemption date.
Additionally, we have $12.4 million of subordinated debentures related to the First Niagara
Financial Group Statutory Trust I which 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. These
debentures are also redeemable in whole at any time upon the occurrence of specific events defined
within the trust indenture.
Our obligations under the debentures and related documents, taken together, constitute a full and
unconditional guarantee by the Company of the Trusts obligations under the trust preferred
securities.
16
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The following table is a summary of our subordinated debentures at the dates indicated:
Principal amount of | Stated amount of | Carrying value of | ||||||||||
subordinated | trust preferred | subordinated | ||||||||||
debentures | securities | debentures | ||||||||||
September 30, 2010: |
||||||||||||
Issued to Harleysville National Corporation Statutory Trust I in February 2001,
matures in February 2031, interest rate of 10.20% per annum |
$ | 5,155 | $ | 5,000 | $ | 5,429 | ||||||
Issued to Harleysville National Corporation Statutory Trust II in March 2004,
matures in April 2034, interest rate of three month London Interbank Offered
Rate (LIBOR) plus 2.70% per annum |
20,619 | 20,000 | 16,538 | |||||||||
Issued to Harleysville National Corporation Statutory Trust III in September 2005,
matures in November 2035, bearing interest at 5.67% per annum through November 2010 LIBOR
and thereafter three month plus 1.40% per annum |
25,774 | 25,000 | 17,786 | |||||||||
Issued to Harleysville National Corporation Statutory Trust IV in August 2007,
matures in October 2037, bearing interest at 6.35% per annum through October 2012 plus 1.28%
and thereafter three month LIBOR per annum |
23,196 | 22,500 | 16,921 | |||||||||
Issued to East Penn Statutory Trust I in July 2003, matures in September 2033, interest
rate of three month LIBOR plus 3.10% per annum |
8,248 | 8,000 | 6,942 | |||||||||
Issued to Willow Grove Statutory Trust I in March 2006, matures in June 2036, interest
rate of three month LIBOR plus 1.31% per annum |
25,774 | 25,000 | 16,975 | |||||||||
Issued to First Niagara Financial Group Statutory Trust I, matures in June 2034, interest
rate of three month LIBOR plus 2.70% per annum |
12,372 | 12,000 | 12,372 | |||||||||
$ | 121,138 | $ | 117,500 | $ | 92,963 | |||||||
December 31, 2009: |
||||||||||||
Issued to First Niagara Financial Group Statutory Trust I, matures in June 2034, interest
rate of three month LIBOR plus 2.70% per annum |
$ | 12,372 | $ | 12,000 | $ | 12,372 | ||||||
The carrying value differs from the principal amount of subordinated debentures due to fair value
adjustments recorded upon assumption of the subordinated debentures.
Note 5. 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
entered into with counterparties that meet established credit standards and may contain master
netting and bilateral 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
due to changes in interest rates, 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 designated as cash flow hedges in order to hedge the variability in our
cash outflows of LIBOR based borrowings attributable to changes in LIBOR.
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 swaps are not accounted for as hedging
instruments and are recorded at fair value with any changes in fair value recorded in our
Consolidated Statement of Income. In addition, 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 netting
and collateral provisions within the interest rate swap agreements.
17
Table of Contents
The following table presents information regarding our derivative financial instruments, at the
dates indicated:
Asset Derivatives | Liability Derivatives | |||||||||||||||
Notional | Notional | |||||||||||||||
amount | Fair value(1) | amount | Fair value(2) | |||||||||||||
September 30, 2010 |
||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||
Interest rate swap agreements |
$ | 300,000 | $ | 103 | $ | 66,065 | $ | 3,971 | ||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||
Interest rate swap agreements |
341,178 | 30,926 | 341,178 | 31,155 | ||||||||||||
Total derivatives |
$ | 641,178 | $ | 31,029 | $ | 407,243 | $ | 35,126 | ||||||||
December 31, 2009 |
||||||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||
Interest rate swap agreements |
$ | | $ | | $ | 57,687 | $ | 2,218 | ||||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||
Interest rate swap agreements |
206,247 | 9,629 | 206,247 | 9,831 | ||||||||||||
Total derivatives |
$ | 206,247 | $ | 9,629 | $ | 263,934 | $ | 12,049 | ||||||||
(1) | Included in other assets in our Consolidated Statements of Condition. | |
(2) | Included in other liabilities in our Consolidated Statements of Condition. |
The following tables present information about amounts recognized for our derivative financial
instruments for the periods indicated:
Gain (loss)(1) | ||||||||||||||||
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||||||
Interest rate swap agreements |
$ | (4 | ) | $ | | $ | (482 | ) | $ | | ||||||
Derivatives not designated as hedging instruments: |
||||||||||||||||
Interest rate swap agreements |
(570 | ) | (409 | ) | (715 | ) | (230 | ) |
(1) | Included in other noninterest income in our Consolidated Statements of Income |
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Derivatives in cash flow hedging relationships: | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Gain (loss) recognized in other comprehensive income, net of tax |
$ | 162 | $ | (116 | ) | $ | 332 | $ | 77 | |||||||
Loss reclassified from accumulated other comprehensive income into income (1) |
(382 | ) | (362 | ) | (1,163 | ) | (905 | ) |
(1) | Included in interest expense on borrowings in our Consolidated Statements of Income. |
18
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Note 6. Earnings Per Share
The following table is a computation of our basic and diluted earnings per share using the
two-class method for the periods indicated:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income available to common stockholders |
$ | 45,596 | $ | 10,931 | $ | 94,498 | $ | 38,427 | ||||||||
Less income allocable to unvested restricted stock awards |
108 | 29 | 232 | 114 | ||||||||||||
Net income allocable to common stockholders |
$ | 45,488 | $ | 10,902 | $ | 94,266 | $ | 38,313 | ||||||||
Weighted average common shares outstanding: |
||||||||||||||||
Total shares issued |
215,106 | 156,886 | 207,820 | 144,212 | ||||||||||||
Unallocated
employee stock ownership plan shares |
(2,742 | ) | (2,978 | ) | (2,801 | ) | (3,035 | ) | ||||||||
Unvested restricted stock awards |
(489 | ) | (400 | ) | (483 | ) | (423 | ) | ||||||||
Treasury shares |
(6,054 | ) | (6,674 | ) | (6,158 | ) | (6,732 | ) | ||||||||
Total basic weighted average common shares outstanding |
205,821 | 146,834 | 198,378 | 134,022 | ||||||||||||
Incremental shares from assumed exercise of stock options |
22 | 129 | 104 | 136 | ||||||||||||
Incremental shares from assumed vesting of restricted stock awards |
215 | 221 | 204 | 228 | ||||||||||||
Total diluted weighted average common shares outstanding |
206,058 | 147,184 | 198,686 | 134,386 | ||||||||||||
Basic earnings per common share |
$ | 0.22 | $ | 0.07 | $ | 0.48 | $ | 0.29 | ||||||||
Diluted earnings per common share |
$ | 0.22 | $ | 0.07 | $ | 0.47 | $ | 0.29 | ||||||||
Anti-dilutive stock options and restricted stock awards excluded from the diluted weighted average common share calculations |
3,319 | 2,303 | 1,841 | 2,681 | ||||||||||||
Note 7. Pension and Other Postretirement 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
future years of credited service are not considered when computing an employees benefits under the
Plan.
Periodic pension and postretirement cost, which is recorded as part of salaries and employee
benefits expense in our Consolidated Statements of Income, is comprised of the following for the
periods indicated:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Pension plans: |
||||||||||||||||
Service cost |
$ | 24 | $ | 49 | $ | 74 | $ | 145 | ||||||||
Interest cost |
1,016 | 1,006 | 3,048 | 3,020 | ||||||||||||
Expected return on plan assets |
(789 | ) | (737 | ) | (2,368 | ) | (2,215 | ) | ||||||||
Amortization of unrecognized loss |
265 | 313 | 797 | 943 | ||||||||||||
Net pension cost |
$ | 516 | $ | 631 | $ | 1,551 | $ | 1,893 | ||||||||
Other postretirement plans: |
||||||||||||||||
Interest cost |
$ | 111 | $ | 127 | $ | 335 | $ | 381 | ||||||||
Amortization of unrecognized loss |
| 8 | | 20 | ||||||||||||
Amortization of unrecognized prior service liability |
(16 | ) | (16 | ) | (48 | ) | (48 | ) | ||||||||
Net postretirement cost |
$ | 95 | $ | 119 | $ | 287 | $ | 353 | ||||||||
19
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Note 8. 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 (Level 1). However, as quoted prices of identical securities
are not often available, the fair value estimate for almost our entire investment portfolio is
based on quoted market prices of similar securities, adjusted for differences between the
securities (Level 2). 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 third parties.
Due to the lack of observable market data, we have classified our collateralized debt obligations
(CDOs), included in corporate debt securities, 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 a 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 bilateral 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 significant 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.
20
Table of Contents
The following table summarizes our assets and liabilities measured at fair value on a recurring
basis at the dates indicated:
Fair Value Measurements | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
September 30, 2010 |
||||||||||||||||
Assets: |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
Debt securities: |
||||||||||||||||
States and political subdivisions |
$ | 543,041 | $ | | $ | 543,041 | $ | | ||||||||
U.S. government sponsored enterprises |
207,359 | | 207,359 | | ||||||||||||
Corporate |
94,433 | | 93,549 | 884 | ||||||||||||
Total debt securities |
844,833 | | 843,949 | 884 | ||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||
Government National Mortgage Association |
83,697 | | 83,697 | | ||||||||||||
Federal National Mortgage Association |
191,949 | | 191,949 | | ||||||||||||
Federal Home Loan Mortgage Corporation |
141,612 | | 141,612 | | ||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Government National Mortgage Association |
4,802,902 | | 4,802,902 | | ||||||||||||
Federal National Mortgage Association |
627,722 | | 627,722 | | ||||||||||||
Federal Home Loan Mortgage Corporation |
479,937 | | 479,937 | | ||||||||||||
Non-agency issued |
143,328 | | 143,328 | | ||||||||||||
Total collateralized mortgage obligations |
6,053,889 | | 6,053,889 | | ||||||||||||
Total mortgage-backed securities |
6,471,147 | | 6,471,147 | | ||||||||||||
Asset-backed securities |
2,807 | | 2,807 | | ||||||||||||
Other |
22,718 | | 22,718 | | ||||||||||||
Total securities available for sale |
7,341,505 | | 7,340,621 | 884 | ||||||||||||
Interest rate swaps |
31,029 | | 31,029 | | ||||||||||||
Total assets |
$ | 7,372,534 | $ | | $ | 7,371,650 | $ | 884 | ||||||||
Liabilities: |
||||||||||||||||
Interest rate swaps |
$ | 35,126 | $ | | $ | 35,126 | $ | | ||||||||
There were no significant transfers of assets or liabilities into or out of Level 1, Level 2,
or Level 3 of the fair value hierarchy during the nine months ended September 30, 2010.
21
Table of Contents
Fair Value Measurements | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
December 31, 2009 |
||||||||||||||||
Assets: |
||||||||||||||||
Investment securities available for sale: |
||||||||||||||||
Debt securities: |
||||||||||||||||
States and political subdivisions |
$ | 422,844 | $ | | $ | 422,844 | $ | | ||||||||
U.S. government sponsored enterprises |
339,832 | | 339,832 | | ||||||||||||
Corporate |
2,213 | | 1,733 | 480 | ||||||||||||
Total debt securities |
764,889 | | 764,409 | 480 | ||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||
Government National Mortgage Association |
30,833 | | 30,833 | | ||||||||||||
Federal National Mortgage Association |
105,039 | | 105,039 | | ||||||||||||
Federal Home Loan Mortgage Corporation |
62,746 | | 62,746 | | ||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Government National Mortgage Association |
1,976,881 | | 1,976,881 | | ||||||||||||
Federal National Mortgage Association |
705,257 | | 705,257 | | ||||||||||||
Federal Home Loan Mortgage Corporation |
602,023 | | 602,023 | | ||||||||||||
Non-agency issued |
167,279 | | 167,279 | | ||||||||||||
Total collateralized mortgage obligations |
3,451,440 | | 3,451,440 | | ||||||||||||
Total mortgage-backed securities |
3,650,058 | | 3,650,058 | | ||||||||||||
Asset-backed securities |
3,067 | | 3,067 | | ||||||||||||
Other |
3,664 | | 3,664 | | ||||||||||||
Total 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 | $ | | ||||||||
The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring
basis for the periods indicated were as follows:
Nine months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Balance at beginning of period |
$ | 480 | $ | 564 | ||||
Total gains (losses): |
||||||||
Included in earnings |
| (162 | ) | |||||
Included in other comprehensive income |
404 | 66 | ||||||
Balance at end of period |
$ | 884 | $ | 468 | ||||
Total 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 | ) |
22
Table of Contents
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 less estimated costs to sell the
collateral, as described in Critical Accounting Policies and Estimates in Item 2,
Managements Discussion and Analysis of Financial Condition and Results of Operations, under the heading Allowance for Credit Losses. In cases
where the carrying value of the loan exceeds the fair value of the collateral less estimated costs
to sell, an impairment charge is recognized. Real estate collateral is typically valued using
independent appraisals that we review for acceptability, 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. We obtain new appraisals from an appraiser included on a list of certified appraisers
approved by our Board of Directors. Updated appraisals are obtained when necessary but at least
every 18 to 24 months.
During
the nine months ended September 30, 2010, we recorded a
$10.7 million net increase to our
allowance for credit losses as a result of adjusting the carrying value and estimated fair value of
collateral dependent impaired loans to $62.7 million. During the nine months ended September 30,
2009, we recorded an $18.6 million net increase to our allowance for credit losses as a result of
adjusting the carrying value and estimated fair value of collateral dependent impaired loans to
$24.6 million.
Mortgage Servicing Rights
The fair value of our mortgage servicing rights (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. We recorded a $0.3 million and $0.8 million and provision for impairment on our
MSRs during the nine months ended September 30, 2010 and 2009, respectively, because the carrying
value of certain strata of our MSRs exceeded their estimated fair value due to an increase in
prepayment speeds.
Real Estate Owned
The fair value of our real estate owned was estimated using Level 2 inputs based on appraisals
obtained from third parties. Our appraisal process for real estate owned is similar to our
appraisal process for collateral dependent impaired loans. During the nine months ended September
30, 2009, we recorded a reduction to real estate owned of $0.5 million as a result of adjusting the
carrying value and estimated fair value of certain real estate owned to $0.8 million. At
September 30, 2010, real estate owned was not carried at fair value on a nonrecurring basis as the
fair value of each property comprising our real estate owned was not less than its carrying value.
The following table summarizes our assets and liabilities measured at fair value on a
nonrecurring basis for the periods indicated:
Fair Value Measurements | Total | |||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | (losses) | ||||||||||||||||
Nine months ended September 30, 2010: |
||||||||||||||||||||
Collateral dependent impaired loans |
$ | 62,652 | $ | | $ | 62,652 | $ | | $ | (10,674 | ) | |||||||||
Mortgage servicing rights |
10,396 | | | 10,396 | (269 | ) | ||||||||||||||
Nine months ended September 30, 2009: |
||||||||||||||||||||
Collateral dependent impaired loans |
$ | 24,614 | $ | | $ | 24,614 | $ | | $ | (18,589 | ) | |||||||||
Mortgage servicing rights |
5,881 | | | 5,881 | (793 | ) | ||||||||||||||
Real estate owned |
800 | | 800 | | (512 | ) |
23
Table of Contents
The carrying value and estimated fair value of our financial instruments, including those that
are not measured and reported at fair value on a recurring basis or nonrecurring basis, at the
dates indicated are as follows:
September 30, 2010 | December 31, 2009 | |||||||||||||||
Estimated fair | Estimated fair | |||||||||||||||
Carrying value | value | Carrying value | value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 315,608 | $ | 315,608 | $ | 236,268 | $ | 236,268 | ||||||||
Investment securities available for sale |
7,341,505 | 7,341,505 | 4,421,678 | 4,421,678 | ||||||||||||
Investment securities held to maturity |
1,125,184 | 1,172,182 | 1,093,552 | 1,106,650 | ||||||||||||
Federal Home Loan Bank and Federal Reserve Bank
common stock |
171,814 | 171,814 | 79,014 | 79,014 | ||||||||||||
Loans held for sale |
50,092 | 50,693 | 32,270 | 35,845 | ||||||||||||
Loans and leases, net |
9,978,952 | 10,313,335 | 7,208,883 | 7,408,189 | ||||||||||||
Mortgage servicing rights |
10,504 | 11,110 | 6,596 | 6,699 | ||||||||||||
Interest rate swap agreements |
31,029 | 31,029 | 9,629 | 9,629 | ||||||||||||
Accrued interest receivable |
71,350 | 71,350 | 50,455 | 50,455 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Deposits |
$ | 13,395,183 | $ | 13,454,225 | $ | 9,729,524 | $ | 9,763,604 | ||||||||
Borrowings |
4,343,120 | 4,396,523 | 2,302,280 | 2,309,330 | ||||||||||||
Interest rate swap agreements |
35,126 | 35,126 | 12,049 | 12,049 | ||||||||||||
Accrued interest payable |
34,020 | 34,020 | 5,498 | 5,498 |
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.
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 necessarily
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.
Investment Securities
The fair value estimates of available for sale securities are based on quoted market prices of
identical securities, where available. However, as quoted prices of identical securities are not
often available, the fair value estimate for almost our entire investment portfolio 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 third parties.
Federal Home Loan Bank and Federal Reserve Board Common Stock
The carrying value of our Federal Home Loan Bank and Federal Reserve Board common stock
approximates fair value.
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
period 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.
Accrued Interest Receivable and Accrued Interest Payable
The carrying value of accrued interest receivable and accrued interest payable approximates fair
value.
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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
period 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 period end market rates for borrowings of similar remaining maturities.
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.
Note 9. Segment Information
We have two business segments: banking and financial services. Our banking segment includes all
of our retail and commercial banking operations. Our 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.
Selected financial information for our segments follows for the periods indicated:
Financial | Consolidated | |||||||||||
Three months ended: | Banking | services | total | |||||||||
September 30, 2010 |
||||||||||||
Net interest income |
$ | 161,279 | $ | | $ | 161,279 | ||||||
Provision for credit losses |
11,000 | | 11,000 | |||||||||
Net interest income after provision for credit losses |
150,279 | | 150,279 | |||||||||
Noninterest income |
36,343 | 13,162 | 49,505 | |||||||||
Amortization of intangibles |
4,757 | 696 | 5,453 | |||||||||
Other noninterest expense |
115,933 | 11,223 | 127,156 | |||||||||
Income before income taxes |
65,932 | 1,243 | 67,175 | |||||||||
Income tax expense |
21,082 | 497 | 21,579 | |||||||||
Net income |
$ | 44,850 | $ | 746 | $ | 45,596 | ||||||
September 30, 2009 |
||||||||||||
Net interest income |
$ | 98,922 | $ | | $ | 98,922 | ||||||
Provision for credit losses |
15,000 | | 15,000 | |||||||||
Net interest income after provision for credit losses |
83,922 | | 83,922 | |||||||||
Noninterest income |
21,027 | 12,197 | 33,224 | |||||||||
Amortization of intangibles |
1,520 | 746 | 2,266 | |||||||||
Other noninterest expense |
88,355 | 10,099 | 98,454 | |||||||||
Income before income taxes |
15,074 | 1,352 | 16,426 | |||||||||
Income tax expense |
4,954 | 541 | 5,495 | |||||||||
Net income |
$ | 10,120 | $ | 811 | $ | 10,931 | ||||||
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Financial | Consolidated | |||||||||||
Nine months ended: | Banking | services | total | |||||||||
September 30, 2010 |
||||||||||||
Net interest income |
$ | 430,206 | $ | | $ | 430,206 | ||||||
Provision for credit losses |
35,131 | | 35,131 | |||||||||
Net interest income after provision for credit losses |
395,075 | | 395,075 | |||||||||
Noninterest income |
94,824 | 37,679 | 132,503 | |||||||||
Amortization of intangibles |
11,969 | 2,042 | 14,011 | |||||||||
Other noninterest expense |
338,766 | 31,217 | 369,983 | |||||||||
Income before income taxes |
139,164 | 4,420 | 143,584 | |||||||||
Income tax expense |
47,319 | 1,767 | 49,086 | |||||||||
Net income |
$ | 91,845 | $ | 2,653 | $ | 94,498 | ||||||
September 30, 2009 |
||||||||||||
Net interest income |
$ | 251,497 | $ | | $ | 251,497 | ||||||
Provision for credit losses |
32,650 | | 32,650 | |||||||||
Net interest income after provision for credit losses |
218,847 | | 218,847 | |||||||||
Noninterest income |
52,465 | 37,993 | 90,458 | |||||||||
Amortization of intangibles |
3,654 | 2,350 | 6,004 | |||||||||
Other noninterest expense |
195,377 | 30,571 | 225,948 | |||||||||
Income before income taxes |
72,281 | 5,072 | 77,353 | |||||||||
Income tax expense |
24,851 | 2,029 | 26,880 | |||||||||
Net income |
$ | 47,430 | $ | 3,043 | $ | 50,473 | ||||||
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ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis is intended to provide greater details of our results of
operations and financial condition and should be read in conjunction with our consolidated
financial statements and the notes thereto included elsewhere in this document. Certain statements
under this caption constitute forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which involve risks and uncertainties. These forward-looking statements relate to, among
other things, expectations of the business environment in which First Niagara Financial Group, Inc.
and its subsidiaries operate, projections of future performance and perceived opportunities in the
market. Our actual results may differ significantly from the results, performance, and
achievements expressed or implied in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, economic conditions, competition in the
geographic and business areas in which we conduct our operations, fluctuation in interest rates,
changes in the credit quality of our borrowers and obligors on investment securities we own,
increased regulation of financial institutions or other effects of recently enacted legislation,
and other factors discussed in our Annual Report on Form 10-K,
as amended, for the year ended December 31, 2009,
under Item 1A. Risk Factors. First Niagara Financial Group, Inc. does not undertake, and
specifically disclaims, any obligation to update any forward-looking statements to reflect the
occurrence of events or circumstances after the date of such statements.
OVERVIEW
First Niagara Financial Group, Inc. is a Delaware corporation and on April 9, 2010, became a bank
holding company, subject to supervision and regulation by the Board of Governors of the Federal
Reserve System (the Federal Reserve), serving both retail and commercial customers through our
bank subsidiary, First Niagara Bank, N.A. (the Bank), which became a national bank subject to
supervision and regulation by the Office of the Comptroller of the Currency (the OCC) on that
same date. At September 30, 2010, we had $20.9 billion in assets, $13.4 billion in deposits, and
255 full-service branch locations across Upstate New York and Pennsylvania.
On April 9, 2010, we acquired all of the outstanding common shares of Harleysville National
Corporation (Harleysville), the parent company of Harleysville National Bank and Trust Company,
and thereby acquired all of Harleysville National Banks 83 branch locations in Eastern
Pennsylvania. As a result of the merger, we acquired assets with a fair value of $5.3 billion,
including cash of $1.1 billion and loans with a fair value of $2.6 billion, and we assumed deposits
with a fair value of $4.0 billion and borrowings with a fair value of $960 million. Under the
terms of the merger agreement, Harleysville stockholders received 20.3 million shares of First
Niagara Financial Group, Inc. common stock.
On August 19, 2010, First Niagara Financial Group, Inc. and NewAlliance Bancshares, Inc.
(NewAlliance), the parent company of NewAlliance Bank, jointly announced a definitive merger
agreement under which NewAlliance will merge into the Company. At September 30, 2010, NewAlliance
had total assets of approximately $8.8 billion, including $5.0 billion in loans, and deposits of
approximately $5.1 billion in 88 bank branches across eight counties from Greenwich, Connecticut to
Springfield, Massachusetts. The merger is expected to be completed in the second quarter of 2011
and is subject to the approvals of NewAlliance stockholders and the applicable regulatory agencies.
BUSINESS AND INDUSTRY
We operate as a community oriented bank that provides customers with a full range of products and
services delivered through our customer focused business units. These products include commercial
and residential real estate loans, commercial business loans and leases, home equity and other
consumer loans, wealth management products, as well as various retail consumer and commercial
deposit products. Additionally, we offer insurance and employee benefits consulting services
through a wholly-owned subsidiary of the Bank.
Our profitability is primarily dependent on the difference between the interest we receive on loans
and investment securities, and the interest we pay on deposits and borrowings. The rates we earn
on our assets and the rates we pay on our liabilities are a function of the general level of
interest rates and competition within our markets. This net interest spread is also highly
sensitive to conditions that are beyond our control, such as inflation, economic growth, and
unemployment, as well as policies of the federal government and its regulatory agencies. We manage
our interest rate risk as described in Item 3, Quantitative and Qualitative Disclosures about
Market Risk.
The Federal Reserve implements national monetary policies (with objectives such as curbing
inflation and combating recession) through its open-market operations in U.S. Government
securities, by adjusting depository institutions reserve requirements, and by varying the target
federal funds and discount rates. The actions of the Federal Reserve in these areas influence the
growth of our loans, investments, and deposits, and also affect interest rates that we earn on
interest-earning assets and that we pay on interest-bearing liabilities.
MARKET AREAS AND COMPETITION
Our business operations are concentrated in Upstate New York and Pennsylvania; therefore, our
financial results are affected by economic conditions in these geographic areas. If economic
conditions in our markets deteriorate further or if we are unable to sustain our competitive
posture, our ability to expand our business and the quality of our loan portfolio could materially
impact our financial results. In addition, our pending merger with NewAlliance will expand our
market to Connecticut and Western Massachusetts. Our financial results could be materially
impacted by deteriorating economic conditions in these areas.
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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 they have a high concentration of financial institutions, some of which are
significantly larger than we are and have greater financial resources. Our competition for loans
comes principally from other commercial banks, savings and loan associations, mortgage banking
companies, credit unions, and other financial services companies. Our most direct competition for
deposits has historically come from other 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. In these marketplaces, opportunities to grow and
expand are primarily a function of how we are able to differentiate our product offerings and
customer experience from our competitors.
REGULATORY REFORM
Dodd-Frank Act
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act). The Dodd-Frank Act will result in sweeping changes in
the regulation of financial institutions aimed at strengthening the sound operation of the
financial services sector. The Dodd-Frank Acts provisions that have received the most public
attention generally have been those applying to or more likely to affect larger institutions.
However, it contains numerous other provisions that will affect all banks and bank holding
companies, and will fundamentally change the system of oversight described in Part I, Item 1 of
our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2009 under the caption
Supervision and Regulation. The Dodd-Frank Act includes provisions that, among other things:
| Change the assessment base for federal deposit insurance from the amount of insured deposits to average consolidated assets less average tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (the DIF), and increase the floor applicable to the size of the DIF, which generally will require an increase in the level of assessments for institutions such as the Bank with assets in excess of $10 billion. | ||
| Make permanent the $250 thousand limit on deposits for federal deposit insurance, and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions. | ||
| Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. | ||
| Centralize responsibility for consumer financial protection by creating a new agency responsible for implementing, examining, and enforcing compliance with federal consumer financial laws. | ||
| Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks, such as the Bank, from availing themselves of such preemption. | ||
| Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, which, among other things as applied to the Company, going forward will preclude us from including in Tier 1 Capital trust preferred securities or cumulative preferred stock, if any, issued on or after May 19, 2010. | ||
| Require the OCC to seek to make its capital requirements for national banks, such as the Bank, countercyclical. | ||
| Impose comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself. | ||
| Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions. | ||
| Amend the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers, such as the Bank, having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. | ||
| Increase the authority of the Federal Reserve to examine the Company and any non-bank subsidiaries. |
Some of these provisions may have the consequence of increasing our expenses, decreasing our
revenues, and changing the activities in which we choose to engage. The environment in which
banking organizations will operate, including legislative and regulatory changes affecting
capital, liquidity, supervision, permissible activities, corporate governance and compensation,
changes in fiscal policy and steps to eliminate government support for banking organizations,
may have long-term effects on the business model and profitability of banking organizations that
cannot now be foreseen. The specific impact of the Dodd-Frank Act on our current activities or
new financial activities we may consider in the future, our financial performance, and the
markets in which we operate will depend on the manner in which the relevant agencies develop and
implement the required rules and the reaction of market participants to these regulatory
developments.
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Basel III
On September 12, 2010, the Basel Committee on Banking Supervision published its calibrated
capital standards for major banking institutions and established phase-in periods for its
revised capital standards and new liquidity standards initially proposed in December 2009 and
referred to as Basel III. Under these standards, when fully phased-in on January 1, 2019,
banking institutions will be required to satisfy three risk-based capital ratios:
| a Tier 1 common equity ratio of at least 7.0%, 4.5% attributable to a minimum Tier 1 common equity ratio and 2.5% attributable to a capital conservation buffer; | ||
| a Tier 1 capital ratio of at least 6.0%, exclusive of the capital conservation buffer (8.5% upon full implementation of the capital conservation buffer); and | ||
| a total capital ratio of at least 8.0%, exclusive of the capital conservation buffer (10.5% upon full implementation of the capital conservation buffer). |
The capital conservation buffer is designed to absorb losses during periods of economic stress.
Banking institutions with a Tier 1 common equity ratio falling above the minimum level but below
the conservation buffer could face constraints on dividends, equity repurchases and compensation
based on the amount of such shortfall.
In addition, the Basel Committee agreed to test a global minimum Tier 1 leverage ratio (that is,
Tier 1 capital to average consolidated assets) of 3% during a parallel run period lasting from
January 1, 2013 until January 1, 2017, with planned implementation on January 1, 2018.
The Basel Committee proposes that the phase-in of these new capital requirements commence on
January 1, 2015. Application of the Basel Committees proposals to U.S. banks is subject to
interpretation and implementation by the U.S. banking agencies.
Basel III also includes two liquidity ratios the liquidity coverage ratio (LCR), which is designed
to address short-term liquidity needs over a 30 day time horizon, and the net stable funding
ratio, (NSFR), which is intended to promote more medium and long-term funding of
the assets and activities of banks over a one year time horizon. On July 16, 2010, the Basel
Committee announced modifications to the LCR as initially proposed, and indicated that, although
the Committee remains committed to the introduction of the NSFR as a longer term structural
component to the LCR, the NSFR as initially proposed need to be modified. The Basel Committee
indicated that it would re-propose the NSFR at the end of this year, with the objective of
finalizing and introducing a revised NSFR as a minimum standard by January 1, 2018.
Given that Basel III rules are subject to change, including in their U.S. implementation, we
cannot be certain of the impact the new rules will have on our capital ratios or liquidity
management. However, based on our current interpretation of the proposals, we expect we will substantially exceed the anticipated regulatory thresholds associated with the Basel III
guidelines.
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. Additional accounting policies are more fully described in Note 1 in the Notes to
Consolidated Financial Statements presented in our 2009 Annual Report on Form 10-K, as amended. A description
of our current accounting policies involving significant management judgment follows:
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 net 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 ensure it is adequate to cover losses inherent in our loan portfolio.
In addition, various regulatory agencies, as an integral part of their examination process,
periodically review our allowance for credit losses.
Commercial loans greater than $200 thousand are subject to individual impairment consideration.
For impaired loans, we consider the fair value of the underlying collateral, if collateral
dependent, or present value of estimated future cash flows in determining the estimates of
impairment and any related allowance for credit losses for these loans.
In the normal course of our loan monitoring process, we review all pass graded individual
commercial real estate and business loans and/or total loan concentration to one borrower
greater than $500 thousand and less than $1 million no less frequently than every 36 months and
those loans over $1 million no less frequently than every 18 months.
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We estimate the inherent risk of loss on commercial impaired loans less than $200 thousand, as
well as non-impaired commercial loans and retail homogeneous loans by common categories
(commercial real estate, multi-family, residential, home equity, consumer, etc.) based primarily
on our historical net loss experience, industry trends, trends in the local real estate market,
and the current business and economic environment in our market areas.
Our evaluation of our allowance for credit losses is based on a continuous 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 use an internal loan grading system with eight
categories of loan grades used in evaluating our commercial loan portfolio. In our loan
grading system, pass loans are graded 1 through 4, special mention loans are graded 5,
substandard loans are graded 6, doubtful loans are graded 7 and loss loans (which are fully
charged off) are graded 8. The definitions of special mention, substandard, doubtful and
loss are consistent with bank regulatory definitions. As part of our credit monitoring
process, our loan officers perform formal reviews based upon the credit attributes of the
respective loans. Pass graded loans are continually monitored through our review of current
information related to each loan. The nature of the current information available and used by
us includes, as applicable, review of payment status and delinquency reporting, receipt and
analysis of interim and annual financial statements, rent roll data, delinquent property tax
searches, periodic loan officer inspections of properties, and loan officer knowledge of their
borrowers, as well as the business environment in their respective market areas. We perform a
formal review on a more frequent basis if the above considerations indicate that such review is
warranted. Further, based upon consideration of the above information, if appropriate, loan
grading and loan classifications can be reevaluated prior to the scheduled full review.
Substandard loans, including all impaired commercial loans greater than $200 thousand, are
reviewed on a quarterly basis by either the Classified Loan Review Committee (for such loans
greater than $1 million) or by a senior credit manager (for such loans between $200 thousand and
$1 million). Such review considers, as applicable, current payment status, payment history,
charge-off amounts, collateral valuation information (including appraisal dates), and commentary
on collateral valuations, guarantor information, interim financial data, cash flow historical
data and projections, rent roll data, account history, as well as loan grading, loan
classification, and related allowance for credit losses conclusions and justifications. Similar
information is also reviewed for all special mention loans greater than $250 thousand and
substandard or worse loans greater than $200 thousand and less than $1 million by a Senior
Credit Manager. Such loans below these thresholds are reviewed by a loan officer on a quarterly
basis ensuring that loan grading and classifications are appropriate.
Substandard loans greater than $1 million are required to have an appraisal performed at least
every 18 months on real estate collateral, and substandard loans greater than $500 thousand to
$1 million are required to have an appraisal performed at least every 24 months. However, a
more current appraisal is obtained prior to the required time frames when it is determined to be
appropriate in the judgment of management. Non-real estate collateral is reappraised on an
as-needed basis, as determined by the loan officer, our Classified Loan Review Committee, or by
credit risk management based upon the facts and circumstances of the individual
relationship.
Among other things, our quarterly reviews consist of an assessment of the fair value of
collateral for all loans reviewed, including collateral dependent impaired loans. During this
review process, an internal estimate of collateral value, as of each quarterly review date, is
determined utilizing current information such as comparables from more current appraisals in our
possession for similar collateral in our portfolio, recent sale information, current rent rolls,
operating statements and cash flow information for the specific collateral. Further, we have a
Member of the Appraisal Institute (MAI) appraiser available on staff for consultation during
our quarterly estimation of collateral fair value. This current information is compared to the
assumptions made in the most recent appraisal as well as in previous quarters. Quarterly
adjustments to the estimated fair value of the collateral are made as determined necessary in
the judgment of our experienced senior credit officers to reflect current market conditions and
current operating results for the specific collateral. Adjustments are made each quarter to the
related allowance for credit losses for collateral dependent impaired loans to reflect the
change, if any, in the estimated fair value of the collateral less estimated costs to sell as
compared to the previous quarter. The determination of the appropriateness of obtaining new
appraisals is also specifically addressed in each quarterly review. New appraisals will be
obtained prior to the above noted required time frames if it is determined appropriate during
these quarterly reviews. Further, our MAI appraiser is available for consultation regarding the
need for new appraisals.
In addition to the credit monitoring procedures described above, our loan review department,
which is independent of the lending function and is part of our risk management function,
verifies the accuracy of loan grading, classification, and related allowance for credit losses,
if applicable.
When current information and events indicate that it is probable that we will be unable to
collect all amounts of principal and interest due under the original terms of a non-homogeneous
loan, such loan will be classified as impaired. Typically, such impaired loan would have been
already previously classified as substandard based upon our loan grading system, and therefore,
we may have a current appraisal. Current appraisals are obtained from the listing of certified
appraisers approved by our Board of Directors for all collateral dependent loans with continued
updated data obtained thereafter and new appraisals obtained when necessary but at least every
18 to 24 months as noted above. We receive appraisals within 60 days of ordering the appraisal.
Upon receipt of the independent third-party appraisal, our MAI appraiser conducts a review of
the appraisal to determine its acceptability. In circumstances where receipt of an appraisal is
pending at a quarter end, our analysis of our allowance for credit losses will include an
estimate of the collateral value based upon the quarterly analysis discussed above which
includes consideration of our knowledge of the property, the quality of the property based upon
loan officer visitations, information related to similar collateral, and, if necessary,
inquiries will be made with the certified appraiser performing the appraisal. When external
appraisals or our continual re-evaluation of collateral reflect a decline in fair value, the
allowance for credit losses related to such a loan would be increased and a charge-off may be
recorded if it becomes evident that we will not fully collect all or a portion of the loan
balance.
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Acquired Loans
Loans that we acquire in acquisitions subsequent to January 1, 2009 are recorded at
fair value with no carryover of the related allowance for credit losses. Determining the 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 represents 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
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. In addition, charge-offs on such loans would be first applied to the nonaccretable discount
portion of the fair value adjustment.
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, if we can reasonably estimate the timing and amount of the expected cash flows on such
loans and if we expect to fully collect the new carrying 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.
Investment Securities
We use third party pricing services to value our investment securities portfolio, which is
comprised almost entirely of Level 2 fair value measured 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 determined using valuation models that consider cash
flow, security structure, and other observable information. We validate the prices received from
these third parties, on a quarterly basis, by comparing them to prices provided by a different
independent pricing service. We have also reviewed detailed valuation methodology white papers
provided to us by our pricing services and have found that the methodologies used by each are
consistent with those used by other market participants to determined fair values of investment
securities. We did not adjust any of the prices provided to us by the independent pricing services
at September 30, 2010 or December 31, 2009. Where sufficient information is not available to the
pricing services to produce a reliable valuation, fair value is based on broker quotes.
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 fair value 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 earnings. 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.
Our investment securities portfolio includes residential mortgage backed securities and
collateralized mortgage obligations. As the underlying collateral of each of these securities is
comprised of a large number of similar residential mortgage loans for which prepayments are
probable and the timing and amount of such prepayments can be reasonably estimated, we consider
estimates of future principal prepayments of these underlying residential mortgage loans in our
calculation of the constant effective yield used to apply the interest method. In order to more
accurately apply the interest method of interest income recognition during the quarter ended
September 30, 2010, we refined our estimates of future principal payments. The estimates were
changed from a constant prepayment rate assumption to a vector based approach whereby prepayment
rates may differ for each future period.
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.
A more detailed description of our methodology for testing goodwill for impairment and the related
assumptions made can be found within the Critical Accounting Policies and Estimates section in
Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations of our 2009 Annual Report on Form 10-K, as amended.
31
Table of Contents
SELECTED FINANCIAL DATA
2010 | 2009 | |||||||||||||||||||
At or for the quarter ended | September 30 | June 30 | March 31 | December 31 | September 30 | |||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||
Selected financial condition data: |
||||||||||||||||||||
Total assets |
$ | 20,871,540 | $ | 20,518,359 | $ | 14,968,078 | $ | 14,584,833 | $ | 14,137,504 | ||||||||||
Loans and leases, net (1) |
10,029,044 | 9,950,685 | 7,318,718 | 7,241,153 | 7,132,685 | |||||||||||||||
Investment securities: |
||||||||||||||||||||
Available for sale |
7,341,505 | 7,131,393 | 4,876,925 | 4,421,678 | 3,652,261 | |||||||||||||||
Held to maturity |
1,125,184 | 1,038,866 | 1,038,566 | 1,093,552 | 1,085,258 | |||||||||||||||
Goodwill and other intangibles |
1,099,446 | 1,099,155 | 931,347 | 935,384 | 938,687 | |||||||||||||||
Deposits |
13,395,183 | 13,758,174 | 9,794,461 | 9,729,524 | 9,923,368 | |||||||||||||||
Borrowings |
4,343,120 | 3,666,557 | 2,481,628 | 2,302,280 | 1,515,148 | |||||||||||||||
Stockholders equity |
$ | 2,806,561 | $ | 2,773,465 | $ | 2,406,622 | $ | 2,373,661 | $ | 2,383,604 | ||||||||||
Common shares outstanding |
209,059 | 209,040 | 188,719 | 188,215 | 188,151 | |||||||||||||||
Selected operations data: |
||||||||||||||||||||
Interest income |
$ | 200,636 | $ | 195,129 | $ | 144,503 | $ | 145,357 | $ | 128,788 | ||||||||||
Interest expense |
39,357 | 40,371 | 30,334 | 32,454 | 29,866 | |||||||||||||||
Net interest income |
161,279 | 154,758 | 114,169 | 112,903 | 98,922 | |||||||||||||||
Provision for credit losses |
11,000 | 11,000 | 13,131 | 11,000 | 15,000 | |||||||||||||||
Net interest income after provision for credit losses |
150,279 | 143,758 | 101,038 | 101,903 | 83,922 | |||||||||||||||
Noninterest income |
49,505 | 46,050 | 36,948 | 35,517 | 33,224 | |||||||||||||||
Noninterest expense |
132,609 | 158,203 | 93,182 | 94,720 | 100,720 | |||||||||||||||
Income before income taxes |
67,175 | 31,605 | 44,804 | 42,700 | 16,426 | |||||||||||||||
Income taxes |
21,579 | 11,602 | 15,905 | 13,796 | 5,495 | |||||||||||||||
Net income |
$ | 45,596 | $ | 20,003 | $ | 28,899 | $ | 28,904 | $ | 10,931 | ||||||||||
Stock and related per share data: |
||||||||||||||||||||
Earnings per common share: |
||||||||||||||||||||
Basic |
$ | 0.22 | $ | 0.10 | $ | 0.16 | $ | 0.16 | $ | 0.07 | ||||||||||
Diluted |
0.22 | 0.10 | 0.16 | 0.16 | 0.07 | |||||||||||||||
Cash dividends |
0.14 | 0.14 | 0.14 | 0.14 | 0.14 | |||||||||||||||
Book value |
13.63 | 13.48 | 12.98 | 12.84 | 12.90 | |||||||||||||||
Market Price (NASDAQ: FNFG): |
||||||||||||||||||||
High |
13.79 | 14.88 | 14.86 | 14.47 | 14.06 | |||||||||||||||
Low |
11.23 | 12.25 | 13.00 | 12.40 | 10.73 | |||||||||||||||
Close |
$ | 11.65 | $ | 12.53 | $ | 14.23 | $ | 13.91 | $ | 12.33 |
(1) | Includes loans held for sale. |
32
Table of Contents
2010 | 2009 | |||||||||||||||||||
At or for the quarter ended | September 30 | June 30 | March 31 | December 31 | September 30 | |||||||||||||||
(Dollar amounts in thousands) | ||||||||||||||||||||
Selected financial ratios and other data: |
||||||||||||||||||||
Performance ratios(1): |
||||||||||||||||||||
Return on average assets |
0.88 | % | 0.41 | % | 0.81 | % | 0.82 | % | 0.35 | % | ||||||||||
Return on average equity |
6.44 | 2.97 | 4.88 | 4.79 | 2.24 | |||||||||||||||
Return on average tangible equity(2) |
10.59 | 5.05 | 7.98 | 7.86 | 3.84 | |||||||||||||||
Net interest rate spread |
3.47 | 3.52 | 3.42 | 3.46 | 3.47 | |||||||||||||||
Net interest rate margin |
3.61 | 3.68 | 3.61 | 3.69 | 3.66 | |||||||||||||||
Efficiency ratio (3) |
62.9 | 78.8 | 61.7 | 63.8 | 76.2 | |||||||||||||||
Dividend payout ratio |
63.64 | % | 140.00 | % | 87.50 | % | 87.50 | % | 200.00 | % | ||||||||||
Capital ratios: |
||||||||||||||||||||
First
Niagara Bank, N.A.: |
||||||||||||||||||||
Tier 1 risk-based capital |
11.88 | % | 11.59 | % | 13.08 | % | 12.63 | % | 10.92 | % | ||||||||||
Total risk-based capital |
12.72 | 12.40 | 14.20 | 13.73 | 11.96 | |||||||||||||||
Leverage ratio(4) |
6.97 | 7.10 | | | | |||||||||||||||
Tangible capital(4) |
| | 7.55 | 7.48 | 6.67 | |||||||||||||||
Consolidated equity: |
||||||||||||||||||||
Ratio of stockholders equity to total assets |
13.45 | 13.52 | 16.08 | 16.27 | 16.86 | |||||||||||||||
Ratio of tangible stockholders equity to tangible assets(5) |
8.63 | % | 8.62 | % | 10.51 | % | 10.54 | % | 10.95 | % | ||||||||||
Asset quality: |
||||||||||||||||||||
Total nonaccruing loans |
$ | 94,180 | $ | 74,338 | $ | 77,920 | $ | 68,561 | $ | 66,806 | ||||||||||
Other nonperforming assets |
8,619 | 8,559 | 6,774 | 7,057 | 8,872 | |||||||||||||||
Allowance for credit losses |
94,532 | 90,409 | 89,488 | 88,303 | 83,077 | |||||||||||||||
Net loan charge-offs |
$ | 6,877 | $ | 10,079 | $ | 11,946 | $ | 5,774 | $ | 14,465 | ||||||||||
Net charge-offs to average loans (annualized) |
0.27 | % | 0.41 | % | 0.66 | % | 0.32 | % | 0.87 | % | ||||||||||
Provision to average loans (annualized) |
0.43 | 0.45 | 0.73 | 0.61 | 0.90 | |||||||||||||||
Total nonaccruing loans to total loans |
0.93 | 0.74 | 1.05 | 0.94 | 0.93 | |||||||||||||||
Total nonperforming assets to total assets |
0.49 | 0.40 | 0.57 | 0.52 | 0.54 | |||||||||||||||
Allowance for credit losses to total loans |
0.93 | 0.90 | 1.21 | 1.20 | 1.15 | |||||||||||||||
Allowance for credit losses to nonaccruing loans |
100.4 | % | 121.6 | % | 114.9 | % | 128.8 | % | 124.4 | % | ||||||||||
Other data: |
||||||||||||||||||||
Full time equivalent employees |
3,725 | 3,748 | 2,966 | 2,816 | 2,672 | |||||||||||||||
Number of branches |
255 | 255 | 172 | 171 | 170 |
(1) | Computed using daily averages. Annualized where appropriate. | |
(2) | Average tangible equity excludes average goodwill and other intangibles of $1.1 billion, $1.1 billion, $933 million, $937 million, and $811 million for the quarters ended September 30, 2010, June 30, 2010, March 31, 2010, December 31, 2009, and September 30, 2009, 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. | |
(3) | Computed by dividing noninterest expense by the sum of net interest income and noninterest income. | |
(4) | Tangible capital ratio presented for periods ended prior to First Niagara Banks conversion to a national bank regulated by the OCC. Leverage ratio presented for periods ended subsequent to such conversion. | |
(5) | Tangible common stockholders equity and tangible assets exclude goodwill and other intangibles. 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
Table of Contents
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
Overview
Net income for the three and nine months ended September 30, 2010 increased to $46 million and $94
million, respectively, compared to $11 million and $50 million for the three and nine months ended
September 30, 2009, respectively, reflecting the impact of our Western Pennsylvania branch
acquisition in September 2009 from National City Bank (NatCity) and our Eastern Pennsylvania
merger with Harleysville in April 2010.
Our diluted earnings per common share for the quarter ended September 30, 2010 increased to $0.22,
from $0.07 for the quarter ended September 30, 2009, and increased to $0.47 for the nine
months ended September 30, 2010, from $0.29 for same period in the prior year. The diluted
earnings per share comparisons to the prior year reflected the impact of an incremental 69 million
shares that were issued in two 2009 equity offerings to bolster our capital position and provide
funds for our strategic growth initiatives, as well as the 20 million shares we issued to
Harleysville stockholders. Diluted earnings per share for the nine months ended September 30, 2009
include the effect of $12 million in preferred stock dividends and discount accretion related to
our redemption in May 2009 of our preferred stock issued to the U.S. Department of the Treasury.
Our returns on average assets were 0.88% and 0.35% for the quarters ended September 30, 2010 and
2009, respectively, and 0.70% and 0.63% for the nine months ended September 30, 2010 and 2009,
respectively. Our returns on average common equity were 6.44% and 2.24% for the quarter ended
September 30, 2010 and 2009, respectively, and 4.79% and 2.88% for the nine months ended September
30, 2010 and 2009, respectively.
Results for the first nine months of 2010 compared to the first nine months of 2009 were most
significantly impacted by a $182 million, or 71%, increase in our taxable equivalent net interest
income driven by our expansion into Pennsylvania, which increased our average interest-earning
assets by 71% and our average interest-bearing liabilities by 73%. Additionally, our net interest
spread widened by nine basis points. Banking services revenue increased 80% to $59 million for the
nine months ended September 30, 2010, from $33 million for the first nine months of 2009.
Substantially all of this increase is due to our expansion into Pennsylvania as a result of the
NatCity branch acquisition and merger with Harleysville.
Those increases were partially offset by a $152 million increase in noninterest expenses during the
first nine months of 2010, compared to the same period in the prior year. The largest component of
the increase in noninterest expense was a $70 million increase in salaries and benefits expense to
$181 million, primarily due to our September 2009 NatCity branch acquisition and April 2010 merger
with Harleysville, as well as the increase in our supporting infrastructure, resulting in an
increase in the number full time equivalent employees from 2,816 at December 31, 2009 to 3,725 at
September 30, 2010. Additional increases in noninterest expenses for the nine months ended September 30,
2010 from the nine months ended September 30, 2009 included $8 million in merger and acquisition integration expenses and $4
million in charitable contributions.
34
Table of Contents
Net Interest Income
The following table presents our condensed average balance sheet information as well as taxable
equivalent interest income and yields. We use a taxable equivalent basis in order to provide the
most comparative yields among all types of interest-earning assets. Yields earned on
interest-earning assets, rates paid on interest-bearing liabilities and average balances are based
on average daily balances (amounts in thousands):
Three months ended September 30, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Average | Interest | Average | Interest | |||||||||||||||||||||
outstanding | earned/ | Yield/ | outstanding | earned/ | Yield/ | |||||||||||||||||||
balance | paid | rate | balance | paid | rate | |||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans and leases(1) |
||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Real estate |
$ | 4,245,670 | $ | 60,812 | 5.70 | % | $ | 2,748,701 | $ | 40,425 | 5.85 | % | ||||||||||||
Business |
1,979,065 | 23,351 | 4.68 | 1,091,131 | 11,444 | 4.16 | ||||||||||||||||||
Specialized lending |
231,223 | 3,529 | 6.11 | 198,944 | 3,353 | 6.74 | ||||||||||||||||||
Total commercial loans |
6,455,958 | 87,692 | 5.40 | 4,038,776 | 55,222 | 5.44 | ||||||||||||||||||
Residential |
1,853,018 | 23,390 | 5.04 | 1,778,591 | 23,561 | 5.29 | ||||||||||||||||||
Home equity |
1,460,801 | 16,559 | 4.50 | 663,220 | 8,299 | 4.97 | ||||||||||||||||||
Other consumer |
270,416 | 5,150 | 7.56 | 149,321 | 3,047 | 8.10 | ||||||||||||||||||
Total loans |
10,040,193 | 132,791 | 5.26 | 6,629,908 | 90,129 | 5.41 | ||||||||||||||||||
Securities and other investments(2) |
8,105,419 | 70,785 | 3.49 | 4,325,361 | 40,156 | 3.71 | ||||||||||||||||||
Total interest-earning assets |
18,145,612 | $ | 203,576 | 4.47 | % | 10,955,269 | $ | 130,285 | 4.74 | % | ||||||||||||||
Noninterest-earning assets(3)(4) |
2,313,178 | 1,388,579 | ||||||||||||||||||||||
Total assets |
$ | 20,458,790 | $ | 12,343,848 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Savings deposits |
$ | 1,260,792 | $ | 390 | 0.12 | % | $ | 837,852 | $ | 511 | 0.24 | % | ||||||||||||
Checking deposits |
1,734,463 | 884 | 0.20 | 676,786 | 245 | 0.14 | ||||||||||||||||||
Money market deposits |
4,881,109 | 7,233 | 0.59 | 2,783,435 | 6,539 | 0.93 | ||||||||||||||||||
Certificates of deposit |
3,822,620 | 10,737 | 1.11 | 2,113,778 | 8,971 | 1.68 | ||||||||||||||||||
Borrowed funds |
3,833,711 | 20,113 | 2.07 | 2,900,715 | 13,600 | 1.85 | ||||||||||||||||||
Total interest-bearing liabilities |
15,532,695 | $ | 39,357 | 1.00 | % | 9,312,566 | $ | 29,866 | 1.27 | % | ||||||||||||||
Noninterest-bearing deposits |
1,814,399 | 914,407 | ||||||||||||||||||||||
Other noninterest-bearing liabilities |
303,199 | 177,057 | ||||||||||||||||||||||
Total liabilities |
17,650,293 | 10,404,030 | ||||||||||||||||||||||
Stockholders equity(3) |
2,808,497 | 1,939,818 | ||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 20,458,790 | $ | 12,343,848 | ||||||||||||||||||||
Net interest income (taxable equivalent) |
$ | 164,219 | $ | 100,419 | ||||||||||||||||||||
Net interest rate spread |
3.47 | % | 3.47 | % | ||||||||||||||||||||
Net earning assets |
$ | 2,612,917 | $ | 1,642,703 | ||||||||||||||||||||
Net interest rate margin |
3.61 | % | 3.66 | % | ||||||||||||||||||||
Ratio of average interest-earning assests
to average interest-bearing liabilities |
117 | % | 118 | % | ||||||||||||||||||||
35
Table of Contents
Nine months ended September 30, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Average | Interest | Average | Interest | |||||||||||||||||||||
outstanding | earned/ | Yield/ | outstanding | earned/ | Yield/ | |||||||||||||||||||
balance | paid | rate | balance | paid | rate | |||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans and leases(1) |
||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||
Real estate |
$ | 3,845,569 | $ | 166,510 | 5.77 | % | $ | 2,643,337 | $ | 115,037 | 5.80 | % | ||||||||||||
Business |
1,783,649 | 62,763 | 4.70 | 1,008,214 | 32,777 | 4.35 | ||||||||||||||||||
Specialized lending |
218,491 | 10,463 | 6.39 | 188,259 | 9,497 | 6.73 | ||||||||||||||||||
Total commercial loans |
5,847,709 | 239,736 | 5.47 | 3,839,810 | 157,311 | 5.47 | ||||||||||||||||||
Residential |
1,800,487 | 69,412 | 5.14 | 1,873,195 | 74,392 | 5.30 | ||||||||||||||||||
Home equity |
1,182,602 | 41,570 | 4.70 | 649,891 | 24,496 | 5.04 | ||||||||||||||||||
Other consumer |
239,852 | 13,376 | 7.46 | 143,373 | 8,320 | 7.76 | ||||||||||||||||||
Total loans |
9,070,650 | 364,094 | 5.36 | 6,506,269 | 264,519 | 5.43 | ||||||||||||||||||
Securities and other investments(2) |
7,010,422 | 183,885 | 3.52 | 2,889,368 | 85,179 | 3.93 | ||||||||||||||||||
Total interest-earning assets |
16,081,072 | $ | 547,979 | 4.55 | % | 9,395,637 | $ | 349,698 | 4.97 | % | ||||||||||||||
Noninterest-earning assets(3)(4) |
2,057,741 | 1,294,345 | ||||||||||||||||||||||
Total assets |
$ | 18,138,813 | $ | 10,689,982 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Savings deposits |
$ | 1,141,338 | $ | 1,239 | 0.15 | % | $ | 803,414 | $ | 1,441 | 0.24 | % | ||||||||||||
Checking deposits |
1,484,172 | 2,265 | 0.20 | 558,534 | 626 | 0.15 | ||||||||||||||||||
Money market deposits |
4,436,314 | 21,577 | 0.65 | 2,399,352 | 20,334 | 1.13 | ||||||||||||||||||
Certificates of deposit |
3,554,944 | 29,244 | 1.10 | 2,013,790 | 33,758 | 2.24 | ||||||||||||||||||
Borrowed funds |
3,025,419 | 55,737 | 2.45 | 2,089,621 | 37,745 | 2.41 | ||||||||||||||||||
Total interest-bearing liabilities |
13,642,187 | $ | 110,062 | 1.08 | % | 7,864,711 | $ | 93,904 | 1.59 | % | ||||||||||||||
Noninterest-bearing deposits |
1,598,356 | 783,192 | ||||||||||||||||||||||
Other noninterest-bearing liabilities |
260,347 | 160,748 | ||||||||||||||||||||||
Total liabilities |
15,500,890 | 8,808,651 | ||||||||||||||||||||||
Stockholders equity(3) |
2,637,923 | 1,881,331 | ||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 18,138,813 | $ | 10,689,982 | ||||||||||||||||||||
Net interest income (taxable equivalent) |
$ | 437,917 | $ | 255,794 | ||||||||||||||||||||
Net interest rate spread |
3.47 | % | 3.38 | % | ||||||||||||||||||||
Net earning assets |
$ | 2,438,885 | $ | 1,530,926 | ||||||||||||||||||||
Net interest rate margin |
3.63 | % | 3.63 | % | ||||||||||||||||||||
Ratio of average interest-earning assests
to average interest-bearing liabilities |
118 | % | 119 | % | ||||||||||||||||||||
(1) | Average outstanding balances are net of deferred costs and net premiums and include nonperforming loans and loans held for sale. | |
(2) | Average outstanding balances are at amortized cost. | |
(3) | Average outstanding balances include unrealized gains/losses on securities available for sale. | |
(4) | Average outstanding balances include allowance for credit losses and bank owned life insurance, earnings from which are reflected in noninterest income. |
Our taxable equivalent net interest income increased $182 million, or 71%, in the first nine
months of 2010 compared to the first nine months of 2009. This increase resulted from a $6.7
billion, or 71%, increase in our average interest-earning assets, and a $5.8 billion, or 73%,
increase in our interest-bearing liabilities. The increase in average interest-earning assets and
liabilities was primarily due to the NatCity branch acquisition and Harleysville merger. Our
taxable equivalent net interest margin remained unchanged for the first nine months of 2010
compared to the first nine months of 2009, while our net interest rate spread increased nine basis
points, reflecting:
| More favorable funding mix, resulting in a 51 basis point decrease in the interest rate paid on liabilities, due to a shift from certificates of deposit accounts to lower rate money market and other core deposit accounts. |
| An $815 million, or 104%, increase in noninterest-bearing deposits. |
| Lower yields earned on earning assets, primarily on securities and other investments, due to the continued low interest rate environment. |
| An increase in average borrowings at a rate four basis points higher than the same period in the prior year. |
Our taxable equivalent net interest income increased $64 million, or 64%, in the quarter ended
September 30, 2010 compared to the same period in the prior year. This increase resulted from a
$7.2 billion, or 66%, increase in our average interest-earning assets, and a $6.2 billion, or 67%,
increase in our interest-bearing liabilities. The increase in average interest-earning assets and
liabilities was primarily due to the NatCity branch acquisition and Harleysville merger. Our
taxable equivalent net interest margin decreased by five basis points, while our net interest rate
spread remained constant, reflecting lower yields earned on loans and investment securities, due to
the continued low interest rate environment, coupled with lower rates paid on money market and
certificates of deposit, as we continued to lower the rates offered on these products.
36
Table of Contents
Provision for Credit Losses
Our provision for credit losses is based upon our assessment of the adequacy of our allowance for
credit losses with consideration given to such interrelated factors as the composition of and
credit risk in our loan portfolio, the level of our nonaccruing and delinquent loans, and related
collateral or government guarantees, net charge-offs, and economic considerations. The provision
charged to income amounted to $11 million, or 0.43% of average loans, for the quarter ended
September 30, 2010, compared to $11 million, or 0.45% of average loans, for the quarter ended June
30, 2010 and $15 million, or 0.90% of average loans, for the quarter ended September 30, 2009,
reflecting continued low levels of charge-offs offset by continuing economic uncertainty and
overall growth in the loan portfolio. The provision charged to income amounted to $35 million, or
0.52% of average loans, for the nine months ended September 30, 2010, compared to $33 million, or
0.67% of average loans, for the nine months ended September 30, 2009.
Noninterest Income
Noninterest income increased $16 million, or 49%, to $50 million for the quarter ended September
30, 2010, compared to the same quarter in 2009, which was primarily attributable to the 140 Eastern
and Western Pennsylvania branch locations we recently acquired. Our Eastern and Western
Pennsylvania branch locations each contributed $4 million of the increase in revenues from fee
based banking services, where higher other service charges were partially offset by lower
nonsufficient funds fee revenue resulting from new regulations. Of the $4 million increase in
revenues from wealth management services for the quarter ended September 30, 2010 compared to the
same quarter in 2009, our Eastern and Western Pennsylvania branch locations each contributed $2
million.
Noninterest income increased $42 million, or 46%, to $133 million for the nine months ended
September 30, 2010 compared to the same period in 2009, which was primarily attributable to our
additional Pennsylvania branch locations. The increase in revenues from fee based banking services
includes $9 million and $18 million from our Eastern and Western Pennsylvania branch locations,
respectively. These branches also contributed $4 million and $5 million, respectively, to the $9
million increase in revenues from wealth management services.
As a percent of total revenues, our noninterest income decreased to 23% for the quarter ended
September 30, 2010 compared to 25% for the same quarter in 2009, and decreased to 24% for the nine
months ended September 30, 2010 compared to 26% for the same period in 2009. This decrease is
reflective of the growth of our net interest income due to the assets acquired in the NatCity
branch acquisition and the Harleysville merger.
Noninterest Expense
For the quarter ended September 30, 2010, noninterest expenses increased $32 million to $133
million, compared to the same quarter in 2009, reflecting the impact of more than doubling the
number of our branch locations to 255 primarily as a result of our NatCity branch acquisition and
merger with Harleysville, offset by a $21 million decrease in merger and acquisition integration
expenses. Noninterest expenses for the third quarter of 2010 included $2 million in merger and
acquisition integration expenses primarily related to our merger with Harleysville and anticipated
merger with NewAlliance.
Noninterest expenses increased $152 million to $384 million for the nine months ended September 30,
2010 from $232 million for the nine months ended September 30, 2009 primarily due to an $8 million
increase in merger and acquisition integration expenses, the increase in the size of our branch
network resulting from our NatCity branch acquisition and merger with Harleysville, and the
increase in our supporting infrastructure.
The addition of our Pennsylvania workforce in the third quarter of 2009 and second quarter of 2010
was the primary contributor to the increase in salaries and benefits for both the third quarter of
2010 from the third quarter of 2009 and for the first nine months of 2010 from the first nine
months of 2009. Eastern and Western Pennsylvania salaries for the third quarter of 2010 amounted
to $9 million and $8 million, respectively, and for the first nine months of 2010 amounted to $16
million and $23 million, respectively. The remaining increase is attributable to infrastructure
growth, routine merit increases, and an increase in performance-based incentive compensation. Both
occupancy and equipment and technology and communications expenses increased due primarily to the
additional Pennsylvania branches and the increase in our supporting infrastructure. Our federal
deposit insurance premiums increased $6 million for the first nine months of 2010 from the same
period in 2009, excluding the $5 million special assessment in the second quarter of 2009, due to
the increase in our deposit base through organic growth and acquisition as well as a Federal
Deposit Insurance Corporation mandated industry wide increase in the assessment rate.
Merger and acquisition integration expenses of $36 million for the nine months ended September 30,
2010 included $9 million in salaries and benefits, $6 million in technology and communications, $2
million in occupancy and equipment, $4 million in marketing and advertising, $11 million in
professional services, and $4 million in other
noninterest expenses. We also contributed $8 million to the First Niagara Bank Foundation during
the nine months ended September 30, 2010 to support charitable giving in Eastern Pennsylvania,
where the Harleysville branches are located.
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Our efficiency ratio for the current quarter decreased to 62.9% compared to 76.2% for the same
quarter in 2009 and increased to 68.2% for the nine months ended September 30, 2010 compared to
67.8% for the nine months ended September 30, 2009 mainly due to merger and acquisition integration
expenses. Excluding merger and acquisition integration expenses in 2010 and 2009 and the $5
million charitable contribution to the First Niagara Bank Foundation in 2009, our efficiency ratio
increased to 62.0% for the quarter ended September 30, 2010 compared to 54.8% for the same quarter
in 2009. Excluding merger and acquisition integration expenses in 2010 and 2009, the $8 million
and $5 million charitable contributions to First Niagara Bank Foundation in 2010 and 2009, and the
$3 million litigation settlement in 2009, our efficiency ratio increased to 60.4% for the nine
months ended September 30, 2010 compared to 57.5% for the same period in 2009. 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.
Income Taxes
Our effective tax rate for the three months ended September 30, 2010 decreased to 32.1% compared to
33.5% for the same period in the prior year, primarily due to the positive resolution in the third
quarter of tax positions for which reserves had been previously provided. Excluding these discrete
items, our effective tax rate would have been 34.5% for the three months ended September 30, 2010.
Our effective tax rate for the nine months ended September 30, 2010 decreased to 34.2% compared to
34.7% for the same period in the prior year, primarily due to the above
mentioned positive resolution of certain tax positions, partially offset by a reduction of our
state deferred tax asset in the second quarter to reflect the apportionment of our income between
Pennsylvania and New York resulting from the Harleysville merger. Excluding the impact of these
discrete events, our effective tax rate would have been 34.8% for the nine months ended September
30, 2010.
ANALYSIS OF FINANCIAL CONDITION AT SEPTEMBER 30, 2010
Overview
Total assets increased $6.3 billion from $14.6 billion at December 31, 2009 to $20.9 billion at
September 30, 2010 primarily due to our merger with Harleysville whereby we acquired assets with a
fair value of $5.3 billion. In addition, we noted the following balance trends during 2010
(excludes the balances acquired in the merger with Harleysville):
| Commercial loans increased in Upstate New York and Western Pennsylvania by a total of $515 million, or 15% annualized, since December 31, 2009. |
| Core deposits increased $666 million, or 13% annualized, across retail, commercial, and municipal customers. |
| Higher cost certificate of deposit account balances decreased $954 million, or 43% annualized, as we continued to execute our strategy of letting higher priced certificate of deposits run off while we focused on building our lower cost relationship based deposit customers. |
| Investment securities available for sale and held to maturity increased by $2.0 billion, with new investments made primarily in collateralized mortgage obligations guaranteed by the Government National Mortgage Association. |
| Total borrowings increased $1.1 billion as we replaced a portion of our short-term borrowings with long-term borrowings, including $300 million of 6.75% senior notes issued March 2010. |
Lending Activities
Our primary lending activity is the origination of commercial real estate and business loans, as
well as residential mortgages to customers located within our primary market areas. Our commercial
real estate and business loans portfolio provides opportunities to cross sell other banking
services. Consistent with our long-term customer relationship focus, we have historically retained
the servicing rights on fixed rate, longer maturity residential mortgage loans that we sell
resulting in monthly servicing fee income to us. We also originate and retain in our lending
portfolio various types of home equity and consumer loan products given their customer relationship
building benefits.
We mitigate our risk with regard to commercial real estate and multi-family loans by emphasizing
geographic distribution within our market areas and diversification of our exposure to various
property types. 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 90% for any project.
Our LTV requirements for residential real estate loans vary depending on the loan program. For
loans with LTVs in excess of 85%, we require the borrower to obtain private mortgage insurance. We
generally originate loans that meet accepted secondary market underwriting standards.
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The following table presents the composition of our loan and lease portfolios at the dates
indicated (amounts in thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
Commercial: |
||||||||||||||||
Real estate |
$ | 3,846,101 | 38.3 | % | $ | 2,713,542 | 37.3 | % | ||||||||
Construction |
437,321 | 4.4 | 348,040 | 4.8 | ||||||||||||
Business |
2,043,738 | 20.3 | 1,481,845 | 20.4 | ||||||||||||
Specialized lending (1) |
226,941 | 2.3 | 207,749 | 2.9 | ||||||||||||
Total commercial loans |
6,554,101 | 65.3 | 4,751,176 | 65.4 | ||||||||||||
Residential real estate |
1,752,078 | 17.4 | 1,642,691 | 22.6 | ||||||||||||
Home equity |
1,470,619 | 14.6 | 691,069 | 9.5 | ||||||||||||
Other consumer |
270,578 | 2.7 | 186,341 | 2.5 | ||||||||||||
Total loans and leases |
10,047,376 | 100.0 | % | 7,271,277 | 100.0 | % | ||||||||||
Net deferred costs and unearned discounts |
26,108 | 25,909 | ||||||||||||||
Allowance for credit losses |
(94,532 | ) | (88,303 | ) | ||||||||||||
Total loans and leases, net |
$ | 9,978,952 | $ | 7,208,883 | ||||||||||||
(1) | Includes commercial leases and financed insurance premiums. |
Included in the table above are acquired loans with a carrying value of $2.8 billion and $660
million at September 30, 2010 and December 31, 2009, respectively. Such loans were acquired in the
NatCity branch acquisition and the Harleysville merger and were initially recorded at fair value
with no carryover of any related allowance for credit losses. At September 30, 2010 and December
31, 2009 there was no allowance for credit losses related to these acquired loans.
During the quarter ended June 30, 2010, we sold loans acquired in the Harleysville merger with a
total principal balance of $288 million and a fair value of $160 million that were recorded at fair
value upon acquisition, there was no gain or loss recognized through earnings as a result of the
sale.
The table below presents the composition of our loan and lease portfolios by originating branch
location at the dates indicated (in thousands):
Upstate New | Western | Eastern | Total loans | |||||||||||||
York | Pennsylvania | Pennsylvania | and leases | |||||||||||||
September 30, 2010: |
||||||||||||||||
Commercial: |
||||||||||||||||
Real estate |
$ | 2,541,886 | $ | 354,142 | $ | 950,073 | $ | 3,846,101 | ||||||||
Construction |
379,816 | 9,893 | 47,612 | 437,321 | ||||||||||||
Business |
1,151,249 | 545,512 | 346,977 | 2,043,738 | ||||||||||||
Specialized lending |
216,531 | 7,751 | 2,659 | 226,941 | ||||||||||||
Total commercial |
4,289,482 | 917,298 | 1,347,321 | 6,554,101 | ||||||||||||
Residential real estate |
1,468,317 | 19,770 | 263,991 | 1,752,078 | ||||||||||||
Home equity |
750,989 | 72,558 | 647,072 | 1,470,619 | ||||||||||||
Other consumer |
152,802 | 61,636 | 56,140 | 270,578 | ||||||||||||
Total loans and leases |
$ | 6,661,590 | $ | 1,071,262 | $ | 2,314,524 | $ | 10,047,376 | ||||||||
December 31, 2009: |
||||||||||||||||
Commercial: |
||||||||||||||||
Real estate |
$ | 2,414,478 | $ | 264,137 | $ | 34,927 | (1) | $ | 2,713,542 | |||||||
Construction |
348,040 | | | 348,040 | ||||||||||||
Business |
1,013,995 | 443,091 | 24,759 | (1) | 1,481,845 | |||||||||||
Specialized lending |
207,749 | | | 207,749 | ||||||||||||
Total commercial |
3,984,262 | 707,228 | 59,686 | 4,751,176 | ||||||||||||
Residential real estate |
1,635,150 | 7,541 | | 1,642,691 | ||||||||||||
Home equity |
674,047 | 17,022 | | 691,069 | ||||||||||||
Other consumer |
120,293 | 66,048 | | 186,341 | ||||||||||||
Total loans and leases |
$ | 6,413,752 | $ | 797,839 | $ | 59,686 | $ | 7,271,277 | ||||||||
(1) | Performing loans purchased from Harleysville in December 2009. |
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Our commercial loan portfolio increased $305 million, or 10% annualized, in Upstate New York
and $210 million, or 40% annualized, in Western Pennsylvania during the first nine months of 2010,
as a result of our continued strategic focus on the portfolio. This increase was concentrated in
both commercial real estate loans and business loans. Commercial loan originations, including line
of credit advances, increased to $2.1 billion in Upstate New York during the nine months ended
September 30, 2010, from $1.7 billion during the same period in 2009. Commercial loan originations
and line of credit advances totaled $1.0 billion in Western Pennsylvania for the nine months
ended September 30, 2010 and $395 million in Eastern Pennsylvania since our April 9, 2010
acquisition.
While we originated $520 million in new residential loans during the first nine months of 2010, our
residential real estate loan portfolio decreased by $209 million, excluding $318 million acquired
in the Harleysville merger, as ongoing consumer preference is for long-term fixed rate products
which we generally do not hold in our portfolio and prepayments have increased as a result of the
current rate environment.
Our home equity loan portfolio increased $56 million in Western Pennsylvania
during the first nine months of 2010. While we did not acquire any home equity loans in our 2009
NatCity branch acquisition, we have been successful in our efforts to offer this product to our Western
Pennsylvania acquired customer base. The properties underlying these home equity loans are located
in Western Pennsylvania and have been underwritten using our normal underwriting standards.
Investment Securities Portfolio
Our investment securities portfolio is comprised primarily of debt securities issued by U.S.
government sponsored enterprises; mortgage backed securities and collateralized mortgage
obligations guaranteed by U.S. government agencies and government sponsored enterprises; and to a lesser extent,
non-agency issued collateralized mortgage obligations; and obligations of states and political
subdivisions. Portions of our portfolio are utilized to meet pledging requirements for deposits of
state and local governments, securities sold under repurchase agreements, and Federal Home Loan Bank (FHLB) advances.
The $2.9 billion increase in our investment securities available for sale portfolio to $7.3 billion
at September 30, 2010 from December 31, 2009 was primarily attributable to the $946 million of
investment securities acquired in the Harleysville merger and our continued investment of our
multiple sources of liquidity, including the $1.1 billion in cash we acquired in the Harleysville
merger. The majority of the funds were invested in mortgage-backed securities guaranteed by the
Government National Mortgage Association. 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 3.4 years at September 30, 2010, compared to 2.9 years at December 31, 2009.
This increase in the weighted average life is a result of purchasing investments during 2010 with
longer expected weighted average lives than the investments in our portfolio at December 31, 2009.
The investments purchased in 2010 include longer dated nonamortizating bonds and longer duration collateralized mortgage obligations.
At September 30, 2010, the pre-tax net unrealized gains on our available for sale investment
securities increased to $212 million from $28 million at December 31, 2009. The unrealized gain
represents the difference between the estimated fair value and the amortized cost of our
securities. Generally, the value of our investment securities fluctuates in response to changes in
market interest rates, changes in credit spreads, or levels of liquidity in the market. The
increase in the unrealized net gains was primarily due to market participants requiring a lower
rate of return on mortgage-backed securities and collateralized mortgage obligations at September
30, 2010 as compared to December 31, 2009, thereby causing the fair value of our existing
mortgage-backed securities and collateralized mortgage obligations to increase.
Deposits
The following table illustrates the composition of our deposits at the dates indicated (amounts in
thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||||||
Amount | Percent | Amount | Percent | Increase | ||||||||||||||||
Core deposits: |
||||||||||||||||||||
Savings |
$ | 1,235,201 | 9.2 | % | $ | 916,854 | 9.4 | % | $ | 318,347 | ||||||||||
Interest-bearing checking |
1,783,788 | 13.3 | 1,063,065 | 10.9 | 720,723 | |||||||||||||||
Money market deposits |
4,941,989 | 36.9 | 3,535,736 | 36.4 | 1,406,253 | |||||||||||||||
Noninterest-bearing |
1,815,201 | 13.6 | 1,256,537 | 12.9 | 558,664 | |||||||||||||||
Total core deposits |
9,776,179 | 73.0 | 6,772,192 | 69.6 | 3,003,987 | |||||||||||||||
Certificates |
3,619,004 | 27.0 | 2,957,332 | 30.4 | 661,672 | |||||||||||||||
Total deposits |
$ | 13,395,183 | 100.0 | % | $ | 9,729,524 | 100.0 | % | $ | 3,665,659 | ||||||||||
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The table below contains selected information on the composition of our deposits, by
originating branch location at the dates indicated (in thousands):
Upstate New | Western | Eastern | Total | |||||||||||||
York | Pennsylvania | Pennsylvania | deposits | |||||||||||||
At September 30, 2010 |
||||||||||||||||
Core deposits: |
||||||||||||||||
Savings |
$ | 869,249 | $ | 126,993 | $ | 238,959 | $ | 1,235,201 | ||||||||
Interest-bearing checking |
621,892 | 486,499 | 675,397 | 1,783,788 | ||||||||||||
Money market deposits |
3,090,407 | 961,102 | 890,480 | 4,941,989 | ||||||||||||
Noninterest-bearing |
899,921 | 465,711 | 449,569 | 1,815,201 | ||||||||||||
Total core deposits |
5,481,469 | 2,040,305 | 2,254,405 | 9,776,179 | ||||||||||||
Certificates |
1,294,040 | 1,131,864 | 1,193,100 | 3,619,004 | ||||||||||||
Total deposits |
$ | 6,775,509 | $ | 3,172,169 | $ | 3,447,505 | $ | 13,395,183 | ||||||||
At December 31, 2009 |
||||||||||||||||
Core deposits: |
||||||||||||||||
Savings |
$ | 796,845 | $ | 120,009 | $ | | $ | 916,854 | ||||||||
Interest-bearing checking |
537,767 | 525,298 | | 1,063,065 | ||||||||||||
Money market deposits |
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 | ||||||||
Our focus on growing low cost profitable relationships and a customer preference for short-term
products resulted in organic core deposit growth of $666 million, or 13% annualized, during the
first nine months of 2010, excluding the $2.3 billion in core deposits we acquired from
Harleysville. Money market deposit accounts in our Upstate New York market increased by $436
million, or 22% annualized, as customers continue to migrate towards this product. Additionally,
our participation in a program whereby we receive money market deposits through a financial
intermediary contributed $218 million to the increase in money market deposits. The maturation of
higher rate certificates resulted in a $440 million, or 37% annualized, decrease in certificates of
deposit accounts in Western Pennsylvania during the first nine months of 2010 and a $423 million
decrease in certificates of deposit accounts in Eastern Pennsylvania since acquisition.
Municipal deposits increased from $987 million at December 31, 2009 to $1.5 billion at September
30, 2010, including $183 million acquired in the Harleysville merger. Excluding these municipal
deposits acquired from Harleysville, the 46% annualized increase from December 31, 2009, primarily
in interest-bearing checking and certificates of deposit accounts, is due to the seasonal inflow of
tax collection payments.
Borrowings
Short-term borrowings decreased $336 million from December 31, 2009 to September 30, 2010,
excluding $296 million in short-term borrowings assumed from Harleysville. Long-term borrowings
increased $1.4 billion during that same period, excluding $664 million in long-term borrowings
assumed from Harleysville. In late 2009, we entered into short-term borrowings that matured in
2010, which we replaced with long-term financing. In addition, in March 2010, we issued $300
million in 6.75% senior notes due March 19, 2020 and used a portion of the proceeds to repay $150
million in 12.00% senior notes we had issued in September 2009.
Capital Resources
During the first nine months of 2010, our stockholders equity increased $433 million due primarily
to our merger with
Harleysville. Other contributing factors included net income of $94 million and $114 million in
net unrealized gains, net of taxes, on our securities available for sale arising during the
nine months ended September 30, 2010. These amounts were partially offset by common stock
dividends paid during this period.
For the nine months ended September 30, 2010, we declared common stock dividends of $0.42 per
share, or $84 million, representing a payout ratio of 87.5%. On October 21, 2010, we announced an
increase in our quarterly common dividend to $0.15 per share, payable to stockholders of record as
of November 2, 2010.
At September 30, 2010, we held more than 6.0 million shares of our common stock as treasury shares.
While we did not make any repurchases of our common stock during the first nine months of 2010, we
currently have authorization from our Board of Directors to repurchase up to 21 million shares of
our common stock as part of our capital management initiatives. We issued 0.5 million shares from
treasury stock in connection with the exercise of stock options and grants of restricted stock
awards during the first nine months of 2010. Although treasury stock purchases are an important
component of our capital management strategy, the extent to which we repurchase shares in the
future will depend on a number of factors including the market price of our stock and alternative
uses for our capital.
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On April 29, 2010, we amended our certificate of incorporation increasing our authorized common
shares from 250 million to 500 million. This increase was approved by our stockholders at our
Annual Meeting on April 27, 2010.
The capital ratios for the Company and First Niagara Bank, N.A. continue to exceed the regulatory
guidelines for well-capitalized institutions. The following table shows the Companys and the
Banks ratios as of September 30, 2010. The regulatory guidelines are intended to reflect the
varying degrees of risk associated with different on- and off-balance sheet items (amounts in
thousands).
Actual | ||||||||
Amount | Ratio | |||||||
First Niagara Financial Group, Inc.: |
||||||||
Leverage ratio |
$ | 1,602,115 | 8.37 | % | ||||
Tier 1 risk based capital |
1,602,115 | 14.25 | ||||||
Total risk based capital |
1,696,846 | 15.10 | ||||||
First Niagara Bank, N.A.: |
||||||||
Leverage ratio |
1,333,036 | 6.97 | ||||||
Tier 1 risk based capital |
1,333,036 | 11.88 | ||||||
Total risk based capital |
1,427,767 | 12.72 |
To be well-capitalized under the OCCs prompt corrective action provisions, First Niagara Bank,
N.A. must maintain a leverage ratio of at least 5.00%, a tier 1 risk based capital ratio of at
least 6.00% and a total risk based capital ratio of at least 10.00%.
We manage our capital position to ensure that our capital base is sufficient to support our current
and future business needs, satisfy existing regulatory requirements, and meet appropriate standards
of safety and soundness.
We also consider certain non-GAAP financial measures, on a consolidated basis, to be meaningful
measures of capital quality. Tangible equity to tangible assets represents stockholders equity
less goodwill of $1.0 billion and $879 million at September 30, 2010 and December 31, 2009,
respectively, and core deposit and other intangibles of $87 million and $56 million at September
30, 2010 and December 31, 2009, respectively, divided by total assets less goodwill and core
deposit and other intangibles. This ratio decreased to 8.63% at September 30, 2010, compared to
10.54% at December 31, 2009. Tangible equity to risk-weighted assets represents stockholders
equity less goodwill and core deposit and other intangibles divided by risk-weighted assets. This
ratio decreased to 15.2% at September 30, 2010 from 17.8% at December 31, 2009.
RISK MANAGEMENT
Credit Risk
Allowance for Credit Losses and Nonperforming Assets
Credit risk is the risk associated with the potential inability of some of our borrowers to repay
their loans according to their contractual terms. This inability to repay could result in higher
levels of nonperforming assets and credit losses, which could potentially reduce our earnings.
The following table presents the activity in our allowance for credit losses for the periods
indicated (amounts in thousands):
Nine months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Balance at beginning of period |
$ | 88,303 | $ | 77,793 | ||||
Charge-offs |
(31,512 | ) | (28,761 | ) | ||||
Recoveries |
2,610 | 1,395 | ||||||
Net charge-offs |
(28,902 | ) | (27,366 | ) | ||||
Provision for credit losses |
35,131 | 32,650 | ||||||
Balance at end of period |
$ | 94,532 | $ | 83,077 | ||||
Ratio of annualized net charge-offs to average loans
outstanding during the period |
0.43 | % | 0.56 | % | ||||
Ratio of annualized provision for credit losses to average
loans outstanding during the period |
0.52 | % | 0.67 | % |
The primary indicators of credit quality are the level of our nonaccruing loans as well as the
net charge-off ratio which measures net charge-offs as a percentage of average total loans
outstanding. For non-acquired loans, we place loans on nonaccrual status when they become more
than 90 days past due, or earlier if we do not expect the full collection of interest or principal.
When a loan is placed on nonaccrual status, any interest previously accrued and not collected is
reversed from interest income.
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The following table details our net charge-offs by loan category for the periods indicated (in
thousands):
Nine months ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Commercial: |
||||||||
Real estate |
$ | 16,202 | $ | 7,623 | ||||
Business |
9,268 | 13,306 | ||||||
Specialized lending |
1,712 | 4,557 | ||||||
Total commercial |
27,182 | 25,486 | ||||||
Residential real estate |
275 | 146 | ||||||
Home equity |
716 | 573 | ||||||
Other consumer |
729 | 1,161 | ||||||
$ | 28,902 | $ | 27,366 | |||||
The increase in our net charge-offs for the nine months ended September 30, 2010 compared to
the nine months ended September 30, 2009 was primarily the result of the $6 million charge-off of
one business loan in the first quarter of 2010, coupled with higher commercial real estate
charge-offs, including a $3 million charge-off on a commercial real estate construction loan.
The following table presents our nonaccruing loans and nonperforming assets at the dates indicated
(amounts in thousands):
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Nonaccruing loans: |
||||||||
Commercial real estate |
$ | 49,271 | $ | 37,687 | ||||
Commercial business |
24,391 | 15,604 | ||||||
Specialized lending |
1,533 | 1,962 | ||||||
Residential real estate |
13,156 | 9,468 | ||||||
Home equity |
4,809 | 2,330 | ||||||
Other consumer |
1,020 | 1,510 | ||||||
Total nonaccruing loans |
94,180 | 68,561 | ||||||
Real estate owned |
8,619 | 7,057 | ||||||
Total nonperforming assets |
$ | 102,799 | $ | 75,618 | ||||
Acquired loans 90 days past due and accruing interest(1) |
$ | 56,716 | $ | | ||||
Total nonaccruing loans to total loans |
0.93 | % | 0.94 | % | ||||
Total nonperforming assets to total assets |
0.49 | % | 0.52 | % | ||||
Allowance for credit losses to total loans |
0.93 | % | 1.20 | % | ||||
Allowance for credit losses to nonaccruing loans |
100 | % | 129 | % |
(1) | All such loans represent acquired loans that were originally recorded at fair value. These loans are considered to be performing as we primarily recognize interest income through the accretion of the difference between the carrying value of these loans and their expected cash flows. |
Our nonaccruing loans increased $26 million at
September 30, 2010 as compared to December 31,
2009. This increase is primarily concentrated in three commercial business relationships totaling $16
million that were placed on nonaccrual during the quarter ended September 30, 2010.
The ratio of our allowance for credit losses to nonaccruing loans decreased to 100%
as of September 30, 2010 as compared to 129% as of December 31, 2009 primarily due to $24 million of nonaccruing loans which had no related allowance for credit losses at
September 30, 2010. These loans were primarily comprised of
collateral dependent impaired loans which have been charged off down
to the fair value of the underlying collateral, less estimated costs to sell, and therefore, no
related allowance for credit losses was necessary.
Our ratio of nonaccruing loans to total loans decreased from 0.94% at December 31, 2009 to 0.93% at
September 30, 2010, and our ratio of nonperforming assets to total assets decreased from 0.52% at
December 31, 2009 to 0.49% at September 30, 2010, despite the increase in nonaccrual loans and
nonperforming assets. These decreases are primarily due to the loans and assets acquired from
Harleysville, offset by the higher levels of nonaccrual loans and nonperforming assets at September
30, 2010 compared to December 31, 2009. These loans acquired from Harleysville, which were
initially recorded at fair value, are considered to be performing as we recognize interest income
through the accretion of the difference between the carrying value of these loans and their
expected cash flows. At September 30, 2010 and December 31, 2009, the carrying value of loans
acquired from Harleysville and NatCity was $2.8 billion and $660 million, respectively. These
acquired loans are also the primary reason for the decrease in the ratio of the allowance for
credit losses to total loans, as there was no carryover of the historical Harleysville or NatCity
allowance for credit losses related to these loans.
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We consider loans 90 days past due and accruing interest to be potential problem loans. At
September 30, 2010, all such loans meeting this definition were comprised of loans acquired from
Harleysville and originally recorded at fair value. These loans are considered to be performing as
we primarily recognize interest income through the accretion of the difference between the carrying
value of these loans and their expected cash flows.
Our aggregate recorded investment in impaired loans modified through troubled debt restructurings
(TDRs) amounted to $47 million and $29 million at September 30, 2010 and December 31, 2009,
respectively. Of these balances, $19 million and $12 million were accruing interest at September
30, 2010 and December 31, 2009, respectively. The modifications made to these restructured loans
typically consist of an extension of the payment terms or providing for a period with interest-only
payments with deferred principal payments paid during the remainder of the term. These
modifications were considered to be concessions provided to the respective borrower due to the
borrowers financial distress. We accrue interest on a TDR once the borrower has demonstrated the
ability to perform in accordance with the restructured terms for a period of six consecutive
months.
Certain pass-graded commercial loans may have repayment dates extended at or near original maturity
dates in the normal course of business. When such extensions are considered to be concessions and
provided as a result of the financial distress of the borrower, these loans are classified as TDRs
and considered to be impaired. However, if such extensions or other concessions at or near the
original maturity date or at any time during the life of a loan are not made as a result of
financial distress related to the borrower, such loan would not be classified as a TDR or as an
impaired loan. Repayment extensions typically provided in a TDR are for periods of greater than
six months. When providing loan modifications because of the financial distress of the borrowers,
we consider that, after the modification, the borrower would be in a better position to continue
with the payment of principal and interest. While such loans may be collateralized, they are not
typically considered to be collateral dependent.
Investments
We have assessed our securities that were in an unrealized loss position at September 30, 2010 and
December 31, 2009 and determined that any decline in fair value below amortized cost was 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 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 bases, which may be at maturity.
Liquidity Risk
Liquidity risk is the risk to earnings or capital arising from our inability to meet our
obligations as they come due. Liquidity risk arises from our failure to recognize or address
changes in market conditions that affect the ability to liquidate assets quickly or to obtain
adequate funding to continue to operate profitably.
Liquidity refers to our ability to obtain cash, or to convert assets into cash timely, efficiently,
and economically. Our Asset and Liability Committee, consisting of members of senior and executive
management, establishes procedures, guidelines and limits for managing and monitoring our liquidity
to ensure we maintain adequate liquidity at all times. We manage our liquidity to ensure that we
have sufficient cash to:
| Support our operating activities, |
| Meet increases in demand for loans and other assets, and |
| Provide for repayments of deposits and borrowings. |
Factors or conditions that could affect our liquidity management objectives include changes in the
mix of assets and liabilities on our balance sheet; our investment, loan, and deposit balances; our reputation; and
our credit rating. A significant change in our financial performance or credit rating could reduce
the availability, or increase the cost, of funding from the national markets. To date, we have not
seen any negative impact in availability of funding as a result of the broader credit and liquidity
issues being seen elsewhere.
Sources of liquidity
We obtain our liquidity from multiple sources, including gathering deposit balances, cash generated
by our investment and loan portfolios, short and long-term borrowings, as well as short-term
federal funds, internally generated capital, and other credit facilities. The primary source of
our non-deposit borrowings is the FHLB, from which we had $1.6 billion in borrowings outstanding at
September 30, 2010.
Cash, interest-bearing demand accounts at correspondent banks and brokerage houses, federal funds
sold, and short-term money market investments are our most liquid assets. The levels of those
assets are monitored daily and are dependent on operating, financing, lending, and investing
activities during any given period. Excess short-term liquidity is usually invested in overnight
federal funds sold. In the event that funds beyond those generated internally are required due to
higher than expected loan demand, deposit outflows, or the amount of debt maturing, additional
sources of funds are available through the use of FHLB advances, repurchase agreements, the sale of
loans or investments, or the use of our lines of credit.
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As of September 30, 2010, our total available cash, interest-bearing demand accounts, federal funds
sold, and other money market investments was $316 million. In addition to cash flow from
operations, deposits, and borrowings, funding is provided from the principal and interest payments
received on loans and investment securities. While maturities and scheduled amortization of loans
and securities are predictable sources of funds, deposit balances and the pace of mortgage
prepayments are greatly influenced by the level of interest rates, the economic environment, and
local competitive conditions.
We have a total borrowing capacity of up to $8.0 billion from various funding sources which include
the FHLB, Federal Reserve Bank, and commercial banks that we can use to fund
lending activities, liquidity needs, and/or to adjust and manage our asset and liability position,
of which $3.9 billion was utilized as of September 30, 2010. In March of 2010, we issued $300
million of 6.75% senior notes due March 19, 2020 in order to provide us with an alternative funding
source and to repay the $150 million, 12% senior notes we had issued in September of 2009.
Our standing in the national markets, and our ability to obtain funding from them, are taken into
consideration as part of our liquidity management strategies. Our credit rating is investment
grade, and substantiates our financial stability and consistency of our earnings. Fitch Ratings
has assigned us a long-term issuer default rating of BBB and a short-term issuer rating of F2, and
in January 2010, Moodys Investors Service and Standard & Poors Ratings Service assigned us first
time long-term issuer credit ratings of Baa1 and BBB-, respectively. These ratings increase our
ability to efficiently access the capital markets to meet our liquidity needs, as evidenced by our
$300 million issuance of 6.75% senior notes in March of 2010.
Uses of liquidity
The primary uses of our liquidity are to support our operating activities, fund loans or obtain
other assets, and provide for repayments of deposits and borrowings.
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 the customer. 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. 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. At
September 30, 2010, we had outstanding commitments to originate residential real estate, commercial
real estate and business, and consumer loans of approximately $3.3 billion.
Included in these commitments are lines of credit to both consumer and commercial customers. The
borrower is able to draw on these lines as needed, therefore our funding requirements for these
products are generally more difficult to predict. Our credit risk involved in issuing these
commitments is essentially the same as that involved in extending loans to customers and is limited
to the total amount of these instruments. Unused commercial lines of credit amounted to $1.9
billion at September 30, 2010 and generally have an expiration period of less than one year. Home
equity and other consumer unused lines of credit totaled $963 million at September 30, 2010 and
have an expiration period of up to ten years.
In addition to the commitments discussed above, we issue standby letters of credit to third parties
that guarantee payments on behalf of our commercial customers in the event the customer fails to
perform under the terms of the contract between our customer and the third party. Standby letters
of credit amounted to $202 million at September 30, 2010 and generally have an expiration period of
less than two years. 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 obligation
under the above commitment amounts may be substantially less than the amounts reported. It is
anticipated that we will have sufficient funds available to meet our current loan commitments and
other obligations through our normal business operations.
Given the current interest rate environment and current customer preference for long-term fixed
rate mortgages, coupled with our desire to not hold these assets in our portfolio, we were
committed to sell $139 million in residential mortgages at September 30, 2010.
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Loan Maturity and Repricing Schedule
The following table sets forth certain information at September 30, 2010 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):
Within one | One through | |||||||||||||||
year | five years | After five years | Total | |||||||||||||
Commercial: |
||||||||||||||||
Real estate |
$ | 1,649,905 | $ | 1,871,089 | $ | 325,107 | $ | 3,846,101 | ||||||||
Construction |
392,674 | 39,162 | 5,485 | 437,321 | ||||||||||||
Business |
1,660,223 | 287,115 | 96,400 | 2,043,738 | ||||||||||||
Specialized lending |
79,317 | 147,624 | | 226,941 | ||||||||||||
Total commercial |
3,782,119 | 2,344,990 | 426,992 | 6,554,101 | ||||||||||||
Residential real estate |
570,970 | 819,280 | 361,828 | 1,752,078 | ||||||||||||
Home equity |
911,144 | 327,038 | 232,437 | 1,470,619 | ||||||||||||
Other consumer |
116,203 | 88,087 | 66,288 | 270,578 | ||||||||||||
Total loans and leases |
$ | 5,380,436 | $ | 3,579,395 | $ | 1,087,545 | $ | 10,047,376 | ||||||||
For the loans reported in the preceding table, the following sets forth at September 30, 2010,
the dollar amount of all of our fixed-rate and adjustable-rate loans due after September 30, 2011
(in thousands):
Fixed | Adjustable | Total | ||||||||||
Commercial: |
||||||||||||
Real estate |
$ | 1,059,302 | $ | 1,136,894 | $ | 2,196,196 | ||||||
Construction |
30,553 | 14,094 | 44,647 | |||||||||
Business |
342,240 | 41,275 | 383,515 | |||||||||
Specialized lending |
147,624 | | 147,624 | |||||||||
Total commercial |
1,579,719 | 1,192,263 | 2,771,982 | |||||||||
Residential real estate |
1,121,576 | 59,532 | 1,181,108 | |||||||||
Home equity |
559,475 | | 559,475 | |||||||||
Other consumer |
154,375 | | 154,375 | |||||||||
Total loans and leases |
$ | 3,415,145 | $ | 1,251,795 | $ | 4,666,940 | ||||||
Our primary investing activities are the origination of loans, the purchase of investment
securities, and the acquisition of banking and financial services companies. Our higher level of
commercial loan growth in 2010 has been funded primarily by liquidity obtained in the NatCity
acquisition and Harleysville merger.
Interest Rate and Market Risk
Our primary market risk is interest rate risk, which is defined as the potential variability of our
earnings that arises from changes and volatility in market interest rates. Changes in market
interest rates, whether they are increases or decreases, and the pace at which the changes occur
can trigger repricings and changes in the pace of payments, which individually or in combination
may affect our net income, net interest income and net interest margin, either positively or
negatively.
Most of the yields on our earning assets, including floating-rate loans and investments, and the
rates we pay on interest-bearing deposits and liabilities are related to market interest rates.
Interest rate risk occurs when the interest income (yields) we earn on our assets changes at a pace
that differs from the interest expense (rates) we pay on liabilities.
Our Asset and Liability Committee, which is comprised of members of executive management, monitors
our sensitivity to interest rates and approves strategies to manage our exposure to interest rate
risk. Our goal is to maximize the growth of net interest income on a consistent basis by
minimizing the effects of fluctuations associated with changing market interest rates.
The primary tool we use to assess our exposure to interest rate risk is a computer modeling
technique that simulates the effects of variations in interest rates on net interest income. These
simulations, which we conduct at least quarterly, compare multiple hypothetical interest rate
scenarios to a stable or current interest rate environment.
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The following table shows the estimated impact on net interest income for the next 12 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 indices 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):
Calcuated decrease at September 30, 2010 | ||||||||
Changes in interest rates(1) | Net interest income | % change | ||||||
(in thousands) | ||||||||
+200 basis points |
$ | (4,970 | ) | (0.77 | )% | |||
+100 basis points |
(4,096 | ) | (0.63 | ) |
(1) | The Federal Reserve benchmark overnight federal funds rate was 0.25% at September 30, 2010, therefore, the calculation of the effect of a decrease in interest rates is not measurable. |
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
A discussion regarding our management of market risk is included in the section entitled Interest
Rate and Market Risk included within Item 2 of this Form 10-Q
ITEM 4. | Controls and Procedures |
In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of September
30, 2010 under the supervision and with the participation of our management, including our
Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act. Based on that evaluation, our Principal Executive Officer and Principal
Financial Officer have concluded that our disclosure controls and procedures are effective as of
September 30, 2010.
During the quarter ended September 30, 2010, there have been no changes in our internal controls
over financial reporting that have materially affected, or are reasonably likely to materially
affect, our internal controls over
financial reporting.
PART II OTHER INFORMATION
ITEM 1. | 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:
In late July and early August 2009, four shareholder derivative actions were filed in the Court of
Common Pleas, Philadelphia County, Pennsylvania, naming Harleysville and its directors as
defendants: Valerius v. Geraghty, et al.; Silver v. Bergey, et al.; Davis v. Geraghty, et al.; and
Forbes v. Geraghty, et al. Each of these actions charges Harleysville and its directors with
breaching their fiduciary duties to Harleysville shareholders by failing to negotiate a fair price
for Harleysville stock in connection with the merger. In addition, the plaintiffs claim that the
process leading to the merger was unfair. As pleaded, the complaints seek to enjoin and/or rescind
the merger, an award of attorneys fees and costs, and various additional relief. Because the
merger was consummated on April 9, 2010, the plaintiffs requests to enjoin the merger have been
mooted. The cases are currently stayed, and no discovery has taken place. We intend to move to
dismiss the complaints. We believe that the claims in the complaints are without merit.
Complaints making similar claims were also filed in the Court of Common Pleas, Montgomery County,
Pennsylvania and in the United States District Court, Eastern District of Pennsylvania; however,
all of those cases were voluntarily withdrawn by the plaintiffs.
In late August and September 2010, seven purported class actions were filed in the State of
Connecticut Superior Court, naming NewAlliance, the Company, and NewAlliances directors as
defendants: Stanley Kops v. NewAlliance Bancshares, Inc., et al.; Cynthia Kops v. NewAlliance
Bancshares, Inc., et al.; Southwest Ohio Regional Council of Carpenters Pension Plan v. Patterson,
et al., Caldarella v. Patterson, et al.; Rubin v. NewAlliance Bancshares, Inc., et al.; Levine and
Nitkin v. Patterson, et al.; and Port Authority of Alleghany County Retirement & Disability
Allowance Plan for Employees Represented by Local 85 of the Amalgamated Transit Union v.
NewAlliance Bancshares, Inc., et al. Certain of these actions also name FNFG Merger Sub, Inc., a
wholly owned subsidiary of the Company, and certain NewAlliance officers as defendants. On October
19 and 20, 2010, all seven actions were
transferred to the complex litigation docket in the Judicial District of Stamford and consolidated
into a single action, and the plaintiffs filed a consolidated
complaint on October 22, 2010. On
November 2, 2010, the City of New Haven filed a motion to
intervene in the consolidated Connecticut action.
In September 2010, three purported class actions were filed in the Court of Chancery of the State
of Delaware, naming the same defendants as the Connecticut actions: Kahn v. Patterson, et al.;
Eilenberg v. NewAlliance Bancshares, Inc., et al.; and Erie County Employees Retirement System v.
Patterson, et al. On September 28, 2010, these three actions were consolidated into In re
NewAlliance Bancshares, Inc. Shareholders Litigation.
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Each of the Connecticut and Delaware actions alleges, among other things, that NewAlliances
directors breached their fiduciary duties to NewAlliance stockholders by failing to maximize
stockholder value in approving the merger agreement with the Company and by providing incomplete
disclosures to stockholders in advance of their upcoming vote whether to approve the merger. Each
action further alleges that NewAlliance and the Company aided and abetted these alleged breaches of
fiduciary duty. These actions seek to enjoin the proposed merger on the agreed upon terms and also
seek attorneys and experts fees. The plaintiffs in both actions have indicated that
they intend to seek to preliminarily enjoin the defendants from taking any action to consummate
the merger and, on November 5, 2010, advised NewAlliance that they have agreed to pursue the
preliminary injunction in the Connecticut proceeding alone. A hearing on the preliminary
injunction has not yet been scheduled.
ITEM 1A. | Risk Factors |
There are no material changes to the risk factors as previously discussed in Item 1A, to Part I of
our 2009 Annual Report on Form 10-K, as amended.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
a) | Not applicable. |
b) | Not applicable. |
c) | We did not repurchase any shares of our common stock during the second quarter of 2010. |
ITEM 3. | Defaults Upon Senior Securities |
Not applicable.
ITEM 5. | Other Information |
(a) | Not applicable. |
(b) | Not applicable. |
ITEM 6. | Exhibits |
The following exhibits are filed herewith:
Exhibits | ||||
31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|||
32 | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
FIRST NIAGARA FINANCIAL GROUP, INC. |
||||
Date: November 9, 2010 | By: | /s/ John R. Koelmel | ||
John R. Koelmel | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
Date: November 9, 2010 | By: | /s/ Michael W. Harrington | ||
Michael W. Harrington | ||||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
49