FIRST NIAGARA FINANCIAL GROUP INC - FORM 8-K - EX-99.2 - EXHIBIT 99.2

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8-K - FORM 8-K - FIRST NIAGARA FINANCIAL GROUP INC	c20978e8vk.htm
EX-99.1 - EXHIBIT 99.1 - FIRST NIAGARA FINANCIAL GROUP INC	c20978exv99w1.htm

Exhibit 99.2

UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION RELATING TO
THE NEWALLIANCE MERGER

The following unaudited pro forma combined condensed consolidated financial information has been prepared using the acquisition method of accounting, giving effect to First Niagara Financial Group Inc.’s (“First Niagara”) April 15, 2011 merger with NewAlliance Bancshares, Inc. (“NewAlliance”). The unaudited pro forma combined condensed consolidated statement of financial condition combines the historical financial information of First Niagara and NewAlliance as of March 31, 2011, and assumes that the merger was completed on that date. The unaudited pro forma combined condensed consolidated statement of operations gives effect to the NewAlliance merger as if the merger had been completed on January 1, 2010.

The unaudited pro forma combined condensed consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations or financial condition had the NewAlliance merger been completed on the dates described above, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities.

The pro forma financial information includes estimated adjustments to record assets and liabilities of NewAlliance at their respective fair values and represents First Niagara’s estimates based on available information. The pro forma adjustments included herein are subject to change as additional information becomes available and additional analyses are performed. The final allocation of the purchase price for the acquisition of NewAlliance will be determined after analyses to determine the fair value of NewAlliance’s tangible and identifiable intangible assets and liabilities are completed. Increases or decreases in the estimated fair values of the net assets as compared with the information shown in the unaudited pro forma combined condensed consolidated financial information may result in a change in the amount of the purchase price allocated to goodwill and other assets and liabilities from the amount currently allocated based on the estimate of fair values reflected in the pro forma financial information, and may impact First Niagara’s actual statement of operations due to adjustments in yield and/or amortization of the adjusted assets or liabilities. The final adjustments may be materially different from those reflected in the unaudited pro forma adjustments presented herein.

First Niagara anticipates that the NewAlliance merger will provide the combined company with financial benefits that include reduced operating expenses. However, First Niagara cannot guarantee any such financial benefit will actually materialize. Even if the anticipated financial benefits materialize, they may prove to be less than what First Niagara anticipated. First Niagara may not be able to retain NewAlliance’s customers, and/or costs to integrate NewAlliance into First Niagara may be greater than what First Niagara estimated. The pro forma financial information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the potential benefits of expected cost savings, opportunities to earn additional revenue, or potential costs relating to customer retention, integration or otherwise, and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had First Niagara and NewAlliance been combined during the period presented below.

The unaudited pro forma combined condensed consolidated financial information has been derived from and should be read in conjunction with the historical consolidated financial statements and the related notes of First Niagara and NewAlliance.

The unaudited pro forma stockholders’ equity and net income are qualified by the statements set forth above and below and should not be considered indicative of the market value of First Niagara’s common stock or the actual or future results of operations of First Niagara for any period. Actual results may be materially different than the pro forma financial information presented.

Unaudited Pro Forma Combined Condensed Consolidated Statement of Financial Condition
As of March 31, 2011


			NewAlliance Merger
	First Niagara		NewAlliance		Pro forma merger			First Niagara
	historical		historical		adjustments			pro forma
	(in thousands)
Assets:
Cash and cash equivalents	$	220,997	$	104,638	$	196,904	⁽¹⁾	$	522,539
Investment securities		8,621,408		2,938,389		(458,722	^{) (2}⁾		11,101,075
Loans held for sale		26,955		9,671		—			36,626
Loans		10,711,243		5,181,997		(81,950	) ⁽³⁾		15,811,290
Less: Allowance for loan losses		100,126		55,283		(55,283	) ⁽³⁾		100,126

Net loans and leases		10,611,117		5,126,714		(26,667	)		15,711,164
Bank-owned life insurance		232,748		137,487		—			370,235
Premises and equipment, net		227,136		58,742		26,380	⁽⁴⁾		312,258
Goodwill		1,023,977		527,167		124,002	⁽⁵⁾		1,675,146
Other identifiable intangibles		84,834		25,595		(1,795	) ⁽⁶⁾		108,634
Other assets		390,673		112,359		38,494	⁽⁷⁾		541,526

Total assets	$	21,439,845	$	9,040,762	$	(101,404	)	$	30,379,203


Liabilities and Stockholders’ Equity:
Savings	$	1,271,494	$	1,680,415	$	—		$	2,951,909
Interest-bearing checking		1,726,379		403,803		—			2,130,182
Money market deposit accounts		5,177,242		1,082,514		—			6,259,756
Noninterest-bearing		2,050,034		616,721		—			2,666,755
Certificates of deposit		3,230,674		1,500,166		29,078	⁽⁸⁾		4,759,918

Total deposits		13,455,823		5,283,619		29,078			18,768,520

Borrowings		4,904,053		2,197,386		63,814	⁽⁹⁾		7,165,253
Other liabilities		304,937		90,720		—			395,657

Total liabilities		18,664,813		7,571,725		92,892			26,329,430
Stockholders’ equity		2,775,032		1,469,037		(194,296	) ⁽¹⁰⁾		4,049,773

Total liabilities and stockholders’ equity	$	21,439,845	$	9,040,762	$	(101,404	)	$	30,379,203

(See “Notes to the Unaudited Pro Forma Combined Condensed Consolidated Financial Information” on following pages)

Unaudited Pro Forma Combined Condensed Consolidated Statement of Operations
For the Three Months Ended March 31, 2011


			NewAlliance						Pro forma
						Pro forma			combined
	First Niagara					merger			First Niagara/
	historical		Historical			adjustments			NewAlliance
	(in thousands, except per share amounts)
Interest income:
Loans and leases	$	132,117	$	62,682		$	(3,542	⁾⁽¹¹⁾	$	191,257
Investment securities and other		76,767		23,524			(2,932	)⁽¹¹⁾		97,359

Total interest income		208,884		86,206			(6,474	)		288,616

Interest expense:
Deposits		15,621		11,761			(1,610	)⁽¹¹⁾		25,772
Borrowings		20,395		13,774			(3,809	)⁽¹¹⁾		30,360

Total interest expense		36,016		25,535			(5,419	)		56,132


Net interest income		172,868		60,671			(1,055	)		232,484
Provision for credit losses		12,900		1,800	⁽¹²⁾		—	⁽¹²⁾		14,700


Net interest income after provision for credit losses		159,968		58,871			(1,055	)		217,784


Noninterest income:
Banking services		19,006		6,177			—			25,183
Insurance commissions		15,755		—			—			15,755
Mortgage banking		1,263		713						1,976
Lending and leasing		3,763		1,002			—			4,765
Wealth management services		6,734		2,841			—			9,575
Bank owned life insurance		2,030		820			—			2,850
Other		3,523		(744	)		—			2,779

Total noninterest income		52,074		10,809			—	⁽¹³⁾		62,883

Noninterest expense:
Salaries and employee benefits		74,511		23,078			—			97,589
Occupancy and equipment		16,197		6,657			1,319	⁽¹⁴⁾		24,173
Technology and communications		12,871		—			—			12,871
Federal deposit insurance premiums		6,195		1,974			—			8,169
Marketing and advertising		2,692		1,515			—			4,207
Amortization of core deposit and other intangibles		5,489		1,953			1,214	⁽¹⁵⁾		8,656
Professional services		6,360		4,187			—			10,547
Merger and acquisition integration expenses		6,176		1,349			(7,345	)⁽¹⁶⁾		180
Other		14,659		3,214			—			17,873

Total noninterest expense		145,150		43,927			(4,812	)⁽¹⁷⁾		184,265

Income before income taxes		66,892		25,753			3,757			96,402
Income tax expense		21,974		8,899			1,428	⁽¹⁸⁾		32,301

Net income	$	44,918	$	16,854		$	2,329		$	64,101


Earnings per common share:
Basic	$	0.22	$	0.17					$	0.21
Diluted	$	0.22	$	0.17					$	0.21

Weighted average common shares outstanding:
Basic		206,124		98,939			(5,343	)⁽²⁰⁾		299,720
Diluted		206,644		99,509			(5,373	)⁽²⁰⁾		300,780

(See “Notes to the Unaudited Pro Forma Combined Consolidated Financial Information” on following pages)

NOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Note A — Basis of Presentation

The unaudited pro forma combined condensed consolidated financial information and explanatory notes show the impact on the historical financial condition and results of operations of First Niagara resulting from the April 15, 2011 merger with NewAlliance under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of NewAlliance are recorded by First Niagara at their respective fair values on the date the NewAlliance merger was completed. The unaudited pro forma combined condensed consolidated statement of financial condition combines the historical financial information of First Niagara and NewAlliance as of March 31, 2011, and assumes that the merger was completed on that date. The unaudited pro forma combined condensed consolidated statement of operations gives effect to the NewAlliance merger as if the merger had been completed on January 1, 2010.

As the merger is recorded using the acquisition method of accounting, all loans are recorded at fair value, including adjustments for credit, and no allowance for loan losses is carried over to First Niagara’s statement of financial condition.

Note B — Merger and Acquisition Integration Costs

The historical results of Firsts Niagara for the three months ended March 31, 2011 include merger and acquisition integration costs of $6.0 million related to the NewAlliance merger. These integration costs primarily consist of professional services, severance, charitable contributions, and marketing and advertising expenses and are eliminated as a pro forma adjustment.

The historical results of NewAlliance include merger and acquisition integration costs of $1.3 million for the three months ended March 31, 2011, respectively, related to its merger with First Niagara. These integration costs primarily consist of investment banking, and compensation expenses and are eliminated as a pro forma adjustment.

First Niagara expects to incur a total of $104 million in merger and acquisition integration expenses in connection with the NewAlliance merger, primarily severance, professional, legal and conversion related expenditures, which are not reflected in the pro forma financial information.

Note C — Estimated Annual Cost Savings

First Niagara expects to realize cost savings of approximately 20-25% of NewAlliance’s operating expenses following the merger. These cost savings are not reflected in the pro forma financial information and there can be no assurance they will be achieved in the amount or manner currently contemplated.

Note D — Pro Forma Adjustments

The following pro forma adjustments have been reflected in the unaudited pro forma combined condensed financial information. All adjustments are based on current assumptions and valuations, which are subject to change.


(1)		The adjustment results from a sale of NewAlliance investment securities, partially offset by the cash First Niagara will use to pay for the following items:


	(in thousands)
Investment securities sales	$	477,396
Merger consideration		(198,681	)
Capital expenditures		(25,000	)
After tax merger and integration expenses		(56,811	)


Total	$	196,904


(2)		In part to fund the cash component of the NewAlliance merger consideration, First Niagara sold $477.4 million of investment securities acquired from NewAlliance. This amount is reflected as a pro forma adjustment. This adjustment is partially offset by an estimated fair value adjustment to investment securities held by First Niagara of $18.7 million.

(3)		Represents the estimated fair value adjustment to loans, which includes an estimate of lifetime credit losses. Accordingly, the existing NewAlliance allowance for loan losses is not carried over.

(4)		Represents the fair value adjustment to premises and equipment of $1.4 million and anticipated capital expenditures for occupancy, technology, and communications of $25.0 million.

(5)		Represents adjustments to goodwill resulting from recording the assets and liabilities of NewAlliance at fair value. These adjustments are preliminary and are subject to change. The excess of consideration paid over the fair value of net assets acquired was recorded as goodwill and can be summarized as follows:


				(in thousands)
First Niagara common stock issued				$	1,315,786	^(a)
Cash payments to NewAlliance stockholders					198,681
Fair value of NewAlliance employee stock options					15,766	^(b)

Total consideration				$	1,530,233


Carrying value of NewAlliance net assets at March 31, 2011				$	1,469,037

Fair value adjustments (debit/(credit)):
Write-off of NewAlliance goodwill	$	(527,167	)
Write-off of NewAlliance other identifiable intangibles		(25,595	)
Investment securities		18,674
Loans, net		(26,667	)
Core deposit intangible		23,800
Premises and equipment		1,380
Deferred taxes		38,494
Certificates of deposit		(29,078	)
Borrowings		(63,814	)

Total fair value adjustments					(589,973	)

Fair value of net assets acquired at March 31, 2011				$	879,064

Excess of consideration paid over fair value of net assets acquired (goodwill)				$	651,169


^(a)		Based on NewAlliance common shares outstanding at April 15, 2011 and $14.00 closing price per share of First Niagara common stock on April 15, 2011.

^(b)		Under the terms of the merger agreement, each NewAlliance employee stock option was automatically vested and converted into an option to purchase 1.10 shares of First Niagara common stock, with an exercise price equal to the NewAlliance stock option exercise price divided by 1.10. The converted stock options were valued using the Black-Scholes option pricing model.


(6)		Represents the elimination of existing NewAlliance identifiable intangibles, partially offset by the recognition of the fair value of a core deposit intangible asset of $23.8 million.

(7)		Represents a net deferred tax asset resulting from the fair value adjustments related to the acquired assets and liabilities. The net deferred tax asset was computed using First Niagara’s combined income tax rate of 38% (35% federal statutory rate and combined state rate of 3%)

(8)		Represents the estimated fair value adjustment to certificate of deposit liabilities.

(9)		Represents the estimated fair value adjustment to borrowings.

(10)		The net impact of the adjustments to stockholders’ equity is detailed in the table below. The fair value of the shares of common stock and employee stock options exchanged represents the fair value of the actual merger consideration exchanged on April 15, 2011, the date of the NewAlliance merger, and was computed using the $14.00 closing price per share of First Niagara’s common stock on that date.


	(in thousands)
Fair value of First Niagara common stock to be issued	$	1,315,786
Fair value of NewAlliance employee stock options		15,766
Elimination of NewAlliance stockholders’ equity		(1,469,037	)
After tax merger and integration expenses		(56,811	)


Total stockholders’ equity adjustment	$	(194,296	)


(11)		The amortization/accretion of fair value adjustments related to loans, investment securities, deposits, and borrowings utilizing the interest method over the estimated lives of the related asset or liability.

The estimated increase (decrease) on pre-tax income from the purchase accounting adjustments for the five years succeeding the NewAlliance merger is as follows:


	Year 1			Year 2			Year 3			Year 4			Year 5			Total
	(in thousands)
Investment securities	$	(11,165	)	$	(11,727	)	$	(9,389	)	$	(5,274	)	$	(685	)	$	(38,240	)
Loans		(16,419	)		(14,169	)		(11,918	)		(9,668	)		(7,417	)		(59,591	)
Deposits		16,218			6,439			4,092			2,329			—			29,078
Borrowings		25,326			15,235			9,125			5,753			4,198			59,637


TOTAL	$	13,960		$	(4,222	)	$	(8,090	)	$	(6,860	)	$	(3,904	)	$	(9,116	)


(12)		While the recording of the acquired loans at their fair value will impact the prospective determination of the provision for loan losses and the allowance for loan losses, we assumed no adjustments to the historical amount of NewAlliance’s provision for credit losses. If such adjustments were estimated, there could be a reduction in the historical amount of NewAlliance’s provision for credit losses presented.

(13)		Noninterest income does not reflect revenue enhancement opportunities.

(14)		Depreciation of anticipated capital expenditures utilizing the straight line method over a five year period.

(15)		Incremental amortization of core deposit intangible using an accelerated method over a useful life of seven years.


(16)		Represents the elimination of historical merger and acquisition integration expenses related to the NewAlliance merger.

(17)		Noninterest expenses do not reflect anticipated cost savings.

(18)		Reflects the tax impact of the pro forma merger adjustments at First Niagara’s combined income tax rate of 38% (35% federal statutory rate and combined state rate of 3%.)

(19)		Adjustment reflects the elimination of NewAlliance weighted average shares outstanding, offset by the 94 million shares of common stock issued in connection with the NewAlliance merger.

Note E — Effect of Hypothetical Adjustments on NewAlliance’s Historical Financial Statements

The unaudited pro forma combined condensed consolidated statement of operations presents the pro forma results assuming the NewAlliance merger occurred on January 1, 2010. As required by Regulation S-X Article 11, the pro forma financial statement for the three months ended March 31, 2011 does not reflect any adjustments to eliminate NewAlliance’s historical provision for credit losses.

NewAlliance’s provision for credit losses for the period presented relates to loans that First Niagara is required to initially record at fair value. Such fair value adjustments include a component related to the expected lifetime credit losses on those loan portfolios. First Niagara believes that these provisions would not have been recorded in First Niagara’s combined consolidated financial statements for the periods presented had the NewAlliance merger been completed on January 1, 2010.

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