<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23975
FIRST NIAGARA FINANCIAL GROUP, INC.
(exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 16-1545669
-------- ----------
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
6950 South Transit Road, P.O. Box 514, Lockport, NY 14095-0514
--------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
(716)625-7500
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------------- -------------
The Registrant had 25,585,320 shares of Common Stock, $.01 par value,
outstanding as of August 11, 2000.
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<PAGE>
FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item Number Page Number
----------- -----------
<S> <C> <C>
PART I - FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Condition as of
June 30, 2000 (unaudited) and December 31, 1999....................................... 3
Condensed Consolidated Statements of Income for the
three and six months ended June 30, 2000 and 1999 (unaudited)......................... 4
Condensed Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 2000 and 1999 (unaudited)......................... 5
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the three and six months ended June 30, 2000 and 1999 (unaudited)................. 6
Condensed Consolidated Statements of Cash Flows for the
three and six months ended June 30, 2000 and 1999 (unaudited)......................... 7
Notes to Condensed Consolidated Financial Statements (unaudited)........................ 8
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 12
3. Quantitative and Qualitative Disclosures about Market Risk.............................. 22
PART II - OTHER INFORMATION
1. Legal Proceedings....................................................................... 23
2. Changes in Securities and Use of Proceeds............................................... 23
3. Defaults upon Senior Securities......................................................... 23
4. Submission of Matters to a Vote of Security Holders..................................... 23
5. Other Information....................................................................... 23
6. Exhibits and Reports on Form 8-K........................................................ 24
Signatures....................................................................................... 24
Exhibit Index.................................................................................... 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------------------------------------------------------------------
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Condition
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- ----------------
(unaudited)
(Amounts in thousands)
<S> <C> <C>
Assets
------
Cash and cash equivalents:
Cash and due from banks....................................... $ 26,518 24,449
Federal funds sold and securities purchased
under resale agreements.................................... 24,400 17,500
---------------- ----------------
Total cash and cash equivalents........................ 50,918 41,949
Securities available for sale..................................... 474,578 563,473
Loans, net........................................................ 1,133,948 985,628
Premises and equipment, net....................................... 26,501 25,886
Goodwill.......................................................... 27,917 13,450
Other assets...................................................... 87,001 81,326
---------------- ----------------
$ 1,800,863 1,711,712
================ ================
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits........................................................ $ 1,223,326 1,113,302
Short-term borrowings........................................... 75,180 90,005
Long-term borrowings............................................ 237,510 245,640
Other liabilities............................................... 35,852 30,149
---------------- ----------------
1,571,868 1,479,096
---------------- ----------------
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued................................... - -
Common stock, $.01 par value, 45,000,000 shares
authorized, 29,756,250 shares issued...................... 298 298
Additional paid-in capital.................................... 135,881 135,964
Retained earnings............................................. 157,611 151,341
Accumulated other comprehensive loss.......................... (8,844) (8,893)
Common stock held by ESOP..................................... (12,722) (13,076)
Treasury stock, at cost, 4,140,930 and 2,338,050 shares
in 2000 and 1999, respectively.............................. (43,229) (33,018)
---------------- ----------------
228,995 232,616
---------------- ----------------
$ 1,800,863 1,711,712
================ ================
</TABLE>
3
<PAGE>
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------ -------------- ------------- -------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans................................................. $ 21,953 15,967 41,500 31,000
Investment securities................................. 8,161 10,052 16,998 19,055
Federal funds sold and securities purchased
under resale agreements........................... 344 244 510 835
Other................................................. 378 316 787 630
------------ ------------- ------------ ------------
Total interest income........................ 30,836 26,579 59,795 51,520
Interest expense:
Deposits.............................................. 12,181 10,332 23,225 20,805
Borrowings............................................ 4,546 3,520 9,261 5,924
------------ ------------- ------------ ------------
Total interest expense....................... 16,727 13,852 32,486 26,729
------------ ------------- ------------ ------------
Net interest income...................................... 14,109 12,727 27,309 24,791
Provision for credit losses.............................. 554 547 971 1,368
------------ ------------- ------------ ------------
Net interest income after provision
for credit losses........................ 13,555 12,180 26,338 23,423
------------ ------------- ------------ ------------
Noninterest income:
Banking service charges and fees...................... 1,678 1,201 3,162 2,266
Loan fees............................................. 422 465 750 915
Insurance services and fees........................... 4,349 3,951 8,331 7,951
Bank-owned life insurance earnings.................... 504 335 986 664
Annuity and mutual fund sales commissions............. 421 373 716 697
Covered call option premium........................... 308 293 590 797
Leasing income........................................ 369 - 667 -
Net gain (loss) on sales of securities available for
sale................................................ 7 4 (17) 182
Other................................................. 275 228 624 298
------------ ------------- ------------ ------------
Total noninterest income..................... 8,333 6,850 15,809 13,770
------------ ------------- ------------ ------------
Noninterest expense:
Salaries and employee benefits........................ 8,021 6,802 15,614 13,288
Occupancy and equipment............................... 1,329 1,103 2,608 2,244
Technology and communications......................... 1,271 922 2,479 1,816
Marketing and advertising............................. 886 511 1,579 1,019
Goodwill amortization................................. 609 374 1,061 747
Other................................................. 2,257 1,985 4,219 3,878
------------ ------------- ------------ ------------
Total noninterest expense.................... 14,373 11,697 27,560 22,992
------------ ------------- ------------ ------------
Income before income taxes.................. 7,515 7,333 14,587 14,201
Income tax expense ...................................... 2,653 2,633 5,069 4,996
------------ ------------- ------------ ------------
Net income ................................. $ 4,862 4,700 9,518 9,205
============ ============= ============ ============
Earnings per common share:
Basic and diluted........................... $ 0.20 0.17 0.38 0.33
Cash dividends per common share.......................... $ 0.07 0.04 0.13 0.08
Weighted average common shares outstanding:
Basic............................................. 24,739 27,026 25,058 27,455
Diluted........................................... 24,753 27,026 25,065 27,455
</TABLE>
4
<PAGE>
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Net income............................................... $ 4,862 4,700 9,518 9,205
Other comprehensive income (loss), net of income taxes:
Net unrealized gains (losses) on securities available
for sale arising during the period................. (540) (4,582) 39 (6,570)
Less: Reclassification adjustment for gains
(losses) included in net income.................... 4 2 (10) 107
------------ ------------ ------------ ------------
Total other comprehensive income (loss) ......... (544) (4,584) 49 (6,677)
------------ ------------ ------------ ------------
Total comprehensive income................. $ 4,318 116 9,567 2,528
============ ============ ============ ============
</TABLE>
5
<PAGE>
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(unaudited)
<TABLE>
<CAPTION>
Additional Other
Common paid-in Retained comprehensive ESOP Treasury
stock capital earnings income (loss) shares stock Total
----------- ------------ ----------- ------------- ------------- ----------- -----------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1999............ $ 298 136,114 136,602 4,587 (13,776) - 263,825
Net income.......................... - - 9,205 - - - 9,205
Unrealized loss on securities
available for sale, net of
reclassification adjustment....... - - - (6,677) - - (6,677)
Purchase of treasury stock
(2,338,050 shares)................ - - - - - (24,972) (24,972)
ESOP shares committed to be
released (26,885 shares).......... - (79) - - 355 - 276
Common stock dividend of $0.04 per
share............................. - - (2,148) - - - (2,148)
----------- ------------ ----------- ------------- ------------- ----------- -----------
Balances at June 30, 1999.............. $ 298 136,035 143,659 (2,090) (13,421) (24,972) 239,509
=========== ============ =========== ============= ============= =========== ===========
Balances at January 1, 2000............ $ 298 135,964 151,341 (8,893) (13,076) (33,018) 232,616
Net income.......................... - - 9,518 - - - 9,518
Unrealized gain on securities
available for sale, net of
reclassification adjustment....... - - - 49 - - 49
Purchase of treasury stock
(1,063,300 shares)................ - - - - - (10,550) (10,550)
ESOP shares committed to be
released (26,775 shares).......... - (101) - - 354 - 253
Vested restricted stock plan awards
(33,220 shares) .................. - 18 - - - 339 357
Common stock dividend of $0.13 per
share............................. - - (3,248) - - - (3,248)
----------- ------------ ----------- ------------- ------------- ----------- -----------
Balances at June 30, 2000.............. $ 298 135,881 157,611 (8,844) (12,722) (43,229) 228,995
=========== ============ =========== ============= ============= =========== ===========
</TABLE>
6
<PAGE>
First Niagara Financial Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
--------- ---------
(Amounts in thousands)
<S> <C> <C>
Net cash provided by operating activities:........................... $ 17,741 9,165
Cash flows from investing activities:
Proceeds from sales of securities available for sale.............. 51,398 10,175
Proceeds from maturities of securities available for sale......... 15,545 10,040
Principal payments received on securities available for sale...... 41,656 114,089
Purchases of securities available for sale........................ (20,281) (221,651)
Net increase in loans............................................. (87,812) (117,121)
Acquisitions, net of cash acquired:
Warren-Hoffman & Associates, Inc................................ - (11,260)
Empire National Leasing, Inc.................................... (3,566) -
Albion Banc Corp, Inc........................................... (2,598) -
Niagara Investment Advisors, Inc................................ (1,666) -
Other, net........................................................ (1,875) (8,934)
--------- ---------
Net cash used by investing activities................. (9,199) (224,662)
--------- ---------
Cash flows from financing activities:
Net increase in deposits........................................... 48,346 27,421
Proceeds from (repayments of) short-term borrowings................ (33,891) 39,890
Proceeds from long-term borrowings................................. - 89,260
Repayments of long-term borrowings................................. (230) (216)
Purchase of treasury stock......................................... (10,550) (24,972)
Dividends paid on common stock..................................... (3,248) (1,953)
--------- ---------
Net cash provided by financing activities............. 427 129,430
--------- ---------
Net increase (decrease) in cash and cash equivalents.. 8,969 (86,067)
Cash and cash equivalents at beginning of period..................... 41,949 111,263
--------- ---------
Cash and cash equivalents at end of period........................... $ 50,918 25,196
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes............................................... $ 5,413 7,868
Interest expense........................................... 32,123 26,105
========= =========
Acquisition of banks and financial services companies:
Fair value of:
Assets acquired (noncash)........................................ $ 65,218 2,889
Liabilities assumed.............................................. 75,541 3,655
Purchase price payable........................................... $ 2,320 2,919
========= =========
</TABLE>
7
<PAGE>
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Financial Statement Presentation
The accompanying condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments necessary for a fair presentation have been
included. Results for the three and six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. Certain reclassification adjustments were made to the 1999
financial statements to conform them to the 2000 presentation.
(2) Business
First Niagara Financial Group, Inc., formerly Niagara Bancorp, Inc., (the
"Company"), is a Delaware corporation organized in December 1997 by First
Niagara Bank (the "Bank"). The Company was organized in connection with the
conversion of the Bank from a New York chartered mutual savings bank to a New
York chartered stock savings bank and the reorganization to a two-tiered mutual
holding company. The business and management of the Company consist primarily of
the business and management of the Bank. Currently, the Company neither owns nor
leases any property, but instead uses the premises, equipment and furniture of
the Bank. At the present time, the Company does not have any employees but
utilizes certain officers and support staff of the Bank. Employees will be hired
as appropriate to the extent the Company expands its business in the future.
During the second half of 2000, the Company will become a multi-bank holding
company through its acquisitions of community banks that will continue to
maintain their own identities by operating as wholly owned subsidiaries of the
Company under the direction of their own management teams and Boards of
Directors.
The Bank operates as a wholly owned subsidiary of the Company and is a
traditional, full-service, community-oriented savings bank. The Bank's business
is primarily accepting deposits from customers through its twenty-two branch
offices in the Western New York counties of Niagara, Orleans, Erie, Genesee and
Monroe and investing those deposits, together with funds generated from
operations and borrowings, in various loan and investment products.
Additionally, the Bank provides consumer, commercial, investment advisory and
electronic banking services, as well as a variety of insurance, leasing and
investment products.
In recognition of the Company's anticipated multi-bank holding company
structure, as well as the continued diversification of its financial service and
product offerings, the Company, at its 2000 Annual Meeting, received shareholder
approval to change its name to First Niagara Financial Group, Inc., which became
effective May 16, 2000.
(3) Acquisitions
On May 31, 2000, the Bank completed the acquisition of 100% of the common stock
of Niagara Investment Advisors, Inc. ("NIA"). NIA, which will operate as a
wholly owned subsidiary of the Bank, provides investment advisory and management
services to individuals, pension plans, corporations and charitable
institutions. This acquisition further enhances the Company's ability to provide
a unique array of financial services, as well as provides an additional source
of fee-based revenue. The acquisition has been accounted for as a purchase
transaction, and accordingly, the excess of the purchase price over the fair
value of identifiable assets acquired less liabilities assumed, has been
recorded by the Company as goodwill. Approximately, $2.7 million of such
goodwill is being amortized on a straight-line basis over a period of ten years.
8
<PAGE>
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
On July 7, 2000, the Company acquired all of the common stock of CNY Financial
Corporation ("CNY") with approximately $282 million in assets, and its
subsidiary bank, Cortland Savings Bank ("Cortland"). Cortland, a full service
community bank headquartered in Cortland, New York, which has three branch
locations and two loan production offices, will retain its current name and
charter and operates as a wholly owned subsidiary of the Company. The Company
paid $18.75 per share in cash for each of the outstanding shares and options of
CNY common stock for an aggregate purchase price of $86.3 million. This
acquisition further emphasizes the Company's commitment to become a
multi-community bank holding company and will be accounted for as a purchase
transaction.
During the first quarter of 2000, the Company continued to increase its presence
in Central New York State and announced that it had signed a definitive merger
agreement to acquire all of the stock of Iroquois Bancorp, Inc. ("Iroquois").
Iroquois, with over $615 million in assets, is the holding company of Cayuga
Bank, of Auburn, New York and The Homestead Savings FA, of Utica, New York. The
Company intends to merge the branches of Homestead Savings into Cayuga Bank's
branch network. As a result, Cayuga Bank will become a wholly owned subsidiary
of the Company and operate as a state chartered commercial bank. Under the terms
of the agreement, the Company will pay $33.25 per share in cash for each of the
outstanding shares and options of Iroquois' common stock for an aggregate
purchase price of approximately $80.3 million. The transaction, which will be
accounted for under the purchase method of accounting, was approved by Iroquois'
shareholders on July 27, 2000 and is subject to approval by various regulatory
agencies, is expected to close in the fourth quarter of 2000.
(4) Earnings per Share
Earnings per share is based on the weighted average number of shares outstanding
during the periods presented. The Company's "basic" and "diluted" earnings per
share computations are presented below.
Set forth below is the computation of basic earnings per share for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June, 30
------------------------------ -----------------------------
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income available to common stockholders................ $ 4,861,845 4,700,043 9,517,881 9,204,925
------------ ------------- ------------ ------------
Weighted average shares outstanding:
Total shares issued................................. 29,756,250 29,756,250 29,756,250 29,756,250
Unallocated ESOP shares............................. (987,810) (1,040,718) (987,810) (1,040,718)
ESOP shares committed to be released during the 17,754 13,579 8,950 6,901
period............................................
Treasury shares..................................... (4,062,370) (1,703,108) (3,727,113) (1,267,717)
Vested restricted stock awards...................... 15,332 - 7,666 -
------------ ------------- ------------ ------------
Total weighted average shares outstanding.................. 24,739,156 27,026,003 25,057,943 27,454,716
------------ ------------- ------------ ------------
Basic earnings per share for the period.................... $ 0.20 0.17 0.38 0.33
============ ============= ============ ============
</TABLE>
9
<PAGE>
First Niagara Financial Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Set forth below is the computation of diluted earnings per share for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June, 30
------------------------------ -----------------------------
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income available to common stockholders................ $ 4,861,845 4,700,043 9,517,881 9,204,925
------------ ------------- ------------ ------------
Weighted average shares outstanding:
Total shares issued................................. 29,756,250 29,756,250 29,756,250 29,756,250
Unallocated ESOP shares............................. (987,810) (1,040,718) (987,810) (1,040,718)
ESOP shares committed to be released during the
period........................................... 17,754 13,579 8,950 6,901
Treasury shares..................................... (4,062,370) (1,703,108) (3,727,113) (1,267,717)
Vested restricted stock awards...................... 15,332 - 7,666 -
Incremental shares from assumed conversion of
stock options..................................... 9,182 - 4,591 -
Incremental shares from assumed conversion of
restricted stock awards........................... 4,868 - 2,434 -
------------ ------------- ------------ ------------
Total weighted average shares outstanding.................. 24,753,206 27,026,003 25,064,968 27,454,716
------------ ------------- ------------ ------------
Diluted earnings per share for the period.................. $ 0.20 0.17 0.38 0.33
============ ============= ============ ============
</TABLE>
(5) Treasury Stock
The Company repurchased 406,800 shares of common stock outstanding at an average
cost of $9.90 per share as part of the Company's stock buyback programs during
the quarter ended June 30, 2000. Under several buyback programs, the Company has
repurchased approximately 4.2 million shares of common stock outstanding since
the beginning of 1999. The purchases were made in the open market at an average
cost of $10.43 per share.
(6) Dividends
On July 18, 2000, the Board reviewed the Company's second quarter 2000 results
and approved and declared a regular quarterly dividend of $0.07 (seven cents)
per common share. The dividend will be paid on August 15, 2000 to shareholders
of record as of August 1, 2000.
(7) Segment Information
Based on the "management approach" model, the Company has determined that it has
two primary business segments, its banking franchise and its insurance
activities. For the three and six month periods ended June 30, 1999, the
Company's insurance activities consisted of those conducted through its
Warren-Hoffman & Associates, Inc. ("WHA") and Nova Healthcare Administrators,
Inc. ("NOVA") subsidiaries, as well as through the Company's relationship with
Saving Bank Life Insurance ("SBLI"). Effective January 1, 2000, as a result of
the reorganization of SBLI into a mutual insurance company, the Company's
insurance activities through SBLI have been limited to the servicing of life
insurance policies and the collection of income generated by insurance sales.
Information about the Company's segments is presented in the following table for
the periods indicated (amounts in thousands):
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------------------------------------------
2000 1999
------------------------------------------ -----------------------------------------
Banking Insurance Banking Insurance
activities activities Total activities activities Total
------------- ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income...................... $ 14,105 4 14,109 12,718 9 12,727
Provision for credit losses ............. 554 - 554 547 - 547
------------- ------------ ------------- ------------ ------------ ------------
Net interest income after provision
for credit losses................. 13,551 4 13,555 12,171 9 12,180
Noninterest income....................... 4,005 4,321 8,326 2,895 3,951 6,846
Net securities gains..................... 7 - 7 4 - 4
Noninterest expense...................... 10,611 3,762 14,373 8,360 3,337 11,697
------------- ------------ ------------- ------------ ------------ ------------
Income before income taxes.......... 6,952 563 7,515 6,710 623 7,333
Income tax expense....................... 2,265 388 2,653 2,264 369 2,633
------------- ------------ ------------- ------------ ------------ ------------
Net income.......................... $ 4,687 175 4,862 4,446 254 4,700
============= ============ ============= ============ ============ ============
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------------------------
2000 1999
------------------------------------------ -----------------------------------------
Banking Insurance Banking Insurance
activities activities Total activities activities Total
------------- ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income...................... $ 27,299 10 27,309 24,778 13 24,791
Provision for credit losses ............. 971 - 971 1,368 - 1,368
------------- ------------ ------------- ------------ ------------ ------------
Net interest income after provision
for credit losses................. 26,328 10 26,338 23,410 13 23,423
Noninterest income....................... 7,542 8,284 15,826 5,637 7,951 13,588
Net securities gains (losses)............ (17) - (17) 182 - 182
Noninterest expense...................... 20,112 7,448 27,560 16,576 6,416 22,992
------------- ------------ ------------- ------------ ------------ ------------
Income before income taxes.......... 13,741 846 14,587 12,653 1,548 14,201
Income tax expense....................... 4,410 659 5,069 4,120 876 4,996
------------- ------------ ------------- ------------ ------------ ------------
Net income.......................... $ 9,331 187 9,518 8,533 672 9,205
============= ============ ============= ============ ============ ============
</TABLE>
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------
General
-------
This Quarterly Report on Form 10-Q may contain certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1993, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this report, or in the documents incorporated by
reference herein, the words "anticipate", "believe", "estimate", "expect",
"intend", "may", and similar expressions identify such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. These forward-looking statements are based largely on the
expectations of the Company or the Company's management and are subject to a
number of risks and uncertainties, including but not limited to, economic,
competitive, regulatory, and other factors affecting the Company's operations,
markets, products and services, as well as expansion strategies and other
factors discussed elsewhere in this report filed by the Company with the
Securities and Exchange Commission. Many of these factors are beyond the
Company's control.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on loans and
securities and the Company's cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
provision for credit losses, investment activities, loan origination, sale and
servicing activities, service charges and fees collected on deposit accounts,
and insurance services and fees. Noninterest expense primarily consists of
salaries and employee benefits, occupancy and equipment expense, marketing
expenses, and other expenses.
12
<PAGE>
Analysis of Financial Condition
-------------------------------
Average Balance Sheet. The following table presents, for the periods indicated,
the total dollar amount of interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates. No tax
equivalent adjustments were made. All average balances are average daily
balances. Non-accruing loans have been excluded from the yield calculations in
these tables.
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------------------------------
2000 1999
-------------------------------- --------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ----- ----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and securities purchased
under resale agreements ....................... $ 20,886 $ 344 6.61% 20,482 244 4.78
Investment securities (1) ......................... 150,886 2,138 5.67 192,806 2,741 5.69
Mortgage related securities (1) ................... 365,068 6,023 6.60 461,418 7,311 6.34
Loans (2) ......................................... 1,112,401 21,953 7.89 824,140 15,967 7.75
Other interest-earning assets (3) ................. 20,689 378 7.33 19,545 316 6.48
----------- -------- ---------- -------
Total interest-earning assets .................. 1,669,930 $ 30,836 7.39% 1,518,391 26,579 7.00
----------- -------- ---------- -------
Allowance for credit losses ....................... (10,854) (9,034)
Other noninterest-earning assets (4) (5) .......... 127,554 108,682
----------- ----------
Total assets .................................. $ 1,786,630 1,618,039
=========== ==========
Interest-bearing liabilities:
Savings accounts ................................ $ 311,953 $ 2,195 2.82% 307,312 2,304 3.01
Interest-bearing checking ....................... 378,951 3,765 3.99 299,028 2,530 3.39
Certificates of deposit ......................... 467,648 6,167 5.29 430,283 5,454 5.08
Mortgagors' payments held in escrow ............. 12,738 54 1.70 10,528 44 1.68
Borrowed funds .................................. 317,183 4,546 5.75 257,693 3,520 5.48
----------- -------- ---------- -------
Total interest-bearing liabilities ............ 1,488,473 $ 16,727 4.51% 1,304,844 13,852 4.26
----------- -------- ---------- -------
Noninterest-bearing demand deposits ............... 35,504 31,511
Other noninterest-bearing liabilities ............. 35,461 32,792
----------- ----------
Total liabilities ............................. 1,559,438 1,369,147
Stockholders' equity (4) .......................... 227,192 248,892
----------- ----------
Total liabilities and stockholders'
equity ...................................... $ 1,786,630 1,618,039
=========== ==========
Net interest income ............................... $ 14,109 12,727
======== =======
Net interest rate spread 2.88% 2.74
===== =====
Net earning assets ................................ $ 181,457 213,547
=========== ==========
Net interest income as a percentage of average
interest-earning assets ........................... 3.39% 3.36
======== =======
Ratio of average interest-earning assets to
average interest-bearing liabilities ............ 112.19% 116.37
======== =======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------------------
2000 1999
----------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and securities purchased
under resale agreements...................... $ 16,736 $ 510 6.11% 33,870 835 4.97
Investment securities (1)...................... 160,804 4,511 5.61 190,281 5,442 5.72
Mortgage related securities (1)................ 379,662 12,487 6.58 429,680 13,613 6.34
Loans (2)...................................... 1,061,001 41,500 7.82 796,365 31,000 7.79
Other interest-earning assets (3).............. 22,546 787 7.00 19,180 630 6.62
----------- -------- ----------- --------
Total interest-earning assets.................. 1,640,749 $ 59,795 7.29% 1,469,376 51,520 7.01
----------- -------- ----------- --------
Allowance for credit losses.................... (10,513) (8,688)
Other noninterest-earning assets (4) (5)...... 120,322 109,599
----------- -----------
Total assets................................... $ 1,750,558 1,570,287
=========== ===========
Interest-bearing liabilities:
Savings accounts............................... $ 303,985 $ 4,415 2.91% 302,114 4,505 3.01
Interest-bearing checking...................... 363,830 7,030 3.88 284,981 4,790 3.39
Certificates of deposit........................ 449,672 11,680 5.21 439,335 11,432 5.25
Mortgagors' payments held in escrow............ 11,470 100 1.75 9,357 78 1.68
Borrowed funds................................. 322,591 9,261 5.76 216,767 5,924 5.51
----------- -------- ----------- --------
Total interest-bearing liabilities............. 1,451,548 $ 32,486 4.49% 1,252,554 26,729 4.30
----------- -------- ----------- --------
Noninterest-bearing demand deposits............ 34,254 31,046
Other noninterest-bearing liabilities.......... 35,756 33,641
----------- -----------
Total liabilities.............................. 1,521,558 1,317,241
Stockholders' equity (4)....................... 229,000 253,046
----------- -----------
Total liabilities and stockholders' equity..... $ 1,750,558 1,570,287
=========== ===========
Net interest income............................ $ 27,309 24,791
======== ========
Net interest rate spread....................... 2.80% 2.71
===== =====
Net earning assets............................. $ 189,201 216,822
=========== ===========
Net interest income as a percentage of
average interest-earning assets.............. 3.36% 3.40
======== ========
Ratio of average interest-earning assets to
average interest-bearing liabilities......... 113.03% 117.31
======== ========
</TABLE>
-------------------------------
(1) Amounts shown are at amortized cost.
(2) Net of deferred loan fees and expenses, loan discounts, loans-in-process
and non-accruing loans.
(3) Includes Federal Home Loan Bank stock and interest-bearing demand accounts.
(4) Includes unrealized gains (losses) on securities available for sale.
(5) Includes bank-owned life insurance earnings on which are reflected in other
noninterest income.
14
<PAGE>
Lending Activities
The total lending portfolio increased 15% to $1.14 billion at June 30, 2000 from
$990.6 million at December 31, 1999. The purchase of approximately $63.8 million
of loans resulting from the Albion acquisition during the first quarter of 2000
partially contributed to this loan growth. The residential real estate and home
equity lending portfolios increased a combined 15%, or $92.8 million, since the
year ended December 31, 1999, with $61.4 million of one-to four-family
residential real estate and fixed and variable rate home equity loans acquired
through the Albion transaction. The Company continued to expand its presence in
the small business commercial lending market with a variety of commercial-based
products and services during the second quarter of 2000. This expansion resulted
in the commercial real estate and business lending portfolios increasing 32%
during the six month period ending June 30, 2000.
Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and allowances for credit losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
-----------------
One-to four-family........... $ 690,811 60.49% 609,742 61.55
Home equity.................. 34,220 3.00 22,499 2.27
Multi-family................. 79,372 6.95 74,652 7.54
Commercial real estate....... 158,156 13.85 120,758 12.19
Construction................. 24,908 2.18 28,413 2.87
---------- ------ ------- ------
Total real estate loans........ 987,467 86.47 856,064 86.42
---------- ------ ------- ------
Consumer loans:
--------------
Mobile home.................. 24,351 2.13 25,957 2.62
Recreational vehicle......... 26,837 2.35 23,389 2.36
Vehicle...................... 32,472 2.84 24,289 2.45
Personal..................... 15,230 1.33 15,771 1.59
Home improvement............. 7,925 0.69 7,983 0.81
Guaranteed education......... 14,041 1.23 12,564 1.27
Other consumer............... 665 0.06 280 0.03
---------- ------ ------- ------
Total consumer loans........ 121,521 10.63 110,233 11.13
Commercial business loans and
leases...................... 33,013 2.90 24,301 2.45
---------- ------ ------- ------
Total loans................. 1,142,001 100.00% 990,598 100.00
---------- ====== ------- ======
Net deferred costs and unearned
discounts................... 2,938 4,892
Allowance for credit losses.. (10,991) (9,862)
---------- -------
Total loans, net............... $1,133,948 985,628
========== =======
</TABLE>
Despite the significant growth in the Company's lending portfolio total
non-performing loans as a percentage of total loans decreased from 0.22% at June
30, 1999 to 0.17% at June 30, 2000. The allowance for credit losses as a
percentage of total non-performing loans increased to 553.15% at June 30, 2000
compared to 475.14% at June 30, 1999. The positive trend in credit quality in
the loan portfolio allowed management to reduce the provision for credit losses
to $971,000 for the six month period ended June 30, 2000 compared to $1.4
million for the same period in 1999. The allowance for credit losses as a
percentage of total loans decreased to 0.96% at June 30, 2000 compared to 1.05%
at June 30, 1999. The adequacy of the Company's allowance for credit losses is
reviewed quarterly with consideration given to potential risk inherent within
the loan portfolio, the status of particular loans, historical loan loss
experience, as well as current and anticipated economic and market conditions.
While management uses available information to recognize losses on loans, future
credit loss provisions may be necessary based on changes in economic conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for credit losses and may
require the Company to recognize additional provisions based on their judgement
of information available to them at the time of their examination.
15
<PAGE>
Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and non-performing assets.
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Non-accruing loans (1):
One-to four-family............................................ $ 1,209 895
Home equity................................................... 17 71
Commercial real estate and multi-family....................... 487 693
Consumer ..................................................... 42 76
Commercial business........................................... 232 184
------------ -------------
Total.................................................... 1,987 1,919
------------ ------------
Non-performing assets............................................ $ 237 1,039
------------ ------------
Total non-accruing loans and non-performing assets............... $ 2,225 2,958
============ ============
Total non-accruing loans and non-performing assets
as a percentage of total assets............................... 0.12% 0.18
============ ============
Total non-accruing loans to total loans ......................... 0.17% 0.22
============ ============
</TABLE>
---------------------
(1) Loans are placed on non-accrual status when they become 90 days or more
past due or if they have been identified by the Company as presenting
uncertainty with respect to the collectibility of interest or principal.
Analysis of the Allowance For Credit Losses. The following table sets forth the
analysis of the allowance for credit losses for the periods indicated.
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------------------
2000 1999
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period....................................... $ 9,862 8,010
Net charge-offs:
Charge-offs....................................................... (304) (302)
Recoveries........................................................ 162 42
------------ ------------
Total net charge-offs................................................ (142) (260)
Provision for credit losses.......................................... 971 1,368
Allowance obtained through acquisitions.............................. 300 -
------------ ------------
Balance at end of period............................................. $ 10,991 9,118
============ ============
Ratio of net charge-offs during the period to
average loans outstanding during the period....................... 0.01% 0.03
============ ============
Allowance for credit losses to total loans at end of period.......... 0.96% 1.05
============ ============
Allowance for credit losses to non-accruing loans at end of period... 553.15% 475.14
============ ============
</TABLE>
16
<PAGE>
Investing Activities
The Company's investment securities portfolio decreased from $563.5 million at
December 31, 1999 to $474.6 million at June 30, 2000. Approximately, $66.9
million of sales and maturities, primarily in the collaterized mortgage
obligations, mortgage-backed and asset-backed securities portfolios and $41.7
million of principal payments resulted in $108.6 million in available funds
during the first six months of 2000. These amounts were utilized to fund loan
growth, repay matured borrowings and consummate the various acquisition
activities initiated by the Company. The six month principal payment amount
represents a 63%, or $72.4 million decrease from the same six month period in
1999 reflecting the general increase in market interest rates.
Funding Activities
Total deposits increased $110.0 million during the first six months of 2000,
primarily as a result of $61.7 million in deposit liabilities acquired from
Albion. Additionally, deposits increased due to increased activity and usage of
the online home banking product and the opening of two new branch locations by
the Bank.
Other borrowed funds decreased to $312.7 million at June 30, 2000 from $335.6
million at December 31, 1999 due to the scheduled maturities of various FHLB
advances and repurchase agreements that were originally booked as part of the
Company's leveraging program.
Equity Activities
Stockholders' equity decreased to $229.0 million for the period ended June 30,
2000 as compared to $232.6 million at December 31, 1999. The decrease was
primarily attributable to the continuation of the Company's stock repurchase
program. During the six month period ended June 30, 2000, the Company
repurchased 1,063,300 shares of common stock at an average cost per share of
$9.92.
17
<PAGE>
Results of Operations for the Three Months Ended June 30, 2000
--------------------------------------------------------------
Net Income
The Company recorded earnings of $4.9 million for the quarter ended June 30,
2000, an increase of 3% from $4.7 million for the same quarter in 1999.
Additionally, earnings per share for the second quarter of 2000 increased 18% to
$0.20 per share from $0.17 per share for the second quarter of 1999. This
increase primarily reflects the Company's efforts to increase fee-based sources
of revenue and income associated with strong loan growth. Net income represented
a return on average assets of 1.09% for the quarter ended June 30, 2000 compared
to 1.17% for the same period in 1999. The return on average equity for the
second quarter of 2000 increased to 8.61% compared to 7.57% for the second
quarter of 1999.
Net Interest Income
The net interest margin as a percentage of average interest-earning assets
increased slightly to 3.39% for the three months ended June 30, 2000 compared to
3.36% for the same quarter in 1999. The Company's net interest-earning assets,
when comparing the same two quarters, decreased by $32.1 million as funds
previously available for investment in interest-earning assets were utilized to
fund the Company's stock buyback programs and various acquisitions.
Interest income increased $4.3 million, or 16%, for the three month period
ending June 30, 2000 compared to the three month period ending June 30, 1999.
This increase reflects the $151.5 million, or 10%, increase in average
interest-earning assets to $1.67 billion for the second quarter of 2000 from
$1.52 billion for the second quarter of 1999. The increased interest-earning
assets resulted primarily from investments and loans funded through the
Company's leverage program. Due to the increase in market borrowing rates during
the first six months of 2000, the Company did not continue its leveraging
program.
The increase in interest income also reflects a 39 basis point increase in the
overall yield on interest-earning assets from 7.00% for the three months ended
June 30, 1999 to 7.39% for the same period in 2000. The increase in overall
yield resulted primarily from the overall general increase in market interest
rates and the redeployment of funds from the lower yielding investment and
mortgage related securities into the higher yielding loan portfolio. The average
balance of loans outstanding increased 35% from the second quarter of 1999 to
the second quarter of 2000. Correspondingly, interest income on loans increased
37% to $22.0 million for the quarter ended June 30, 2000 from $16.0 million for
the same period in 1999.
Interest expense increased 21% from the second quarter of 1999 to the second
quarter of 2000, primarily due to the $183.6 million increase in average
interest-bearing liabilities. This increase resulted primarily from deposits and
borrowings acquired through the acquisition of Albion in addition to borrowings
entered into by the Company as part of its leverage program. Also contributing
to the increase in interest expense was the 27 basis point increase paid on
deposits and borrowings resulting from the overall general increase in market
interest rates, as well as an inflow of deposits into the money market deposit
account product, which carries a market-based cost of funds that is slightly
higher than the other interest-bearing deposits of the Company.
Provision for Credit Losses
Despite the significant increase in the loan portfolio balances, management of
the Company deemed the slight increase in the provision for credit losses to be
appropriate in light of the high credit quality of the loan portfolio, as
reflected by the low non-performing loan to total loans ratio and the high
non-performing loan to allowance for credit losses ratio. The adequacy of the
Company's allowance for credit losses is reviewed quarterly with consideration
given to potential risk inherent within the loan portfolio, the status of
particular loans, historical loan loss experience, as well as current and
anticipated economic and market conditions.
Noninterest Income
Noninterest income increased to $8.3 million for the three months ended June 30,
2000 from $6.9 million for the same period in 1999. This 22% increase is
reflective of the Company's efforts to become less reliant on net interest
income and the inherent risks associated with fluctuating market interest rates
and to diversify its product and service offerings to include insurance,
third-party benefit administration, leasing and most recently, investment
advisory services. In addition to these activities, conducted primarily through
subsidiary companies acquired during 1999 and 2000, service charges on checking
accounts, as well as tax-exempt earnings on additional purchases of bank owned
life insurance contributed to the increase in noninterest income.
18
<PAGE>
Noninterest Expense
Noninterest expense totaled $14.4 million for the second quarter of 2000
reflecting a $2.7 million increase over the second quarter of 1999 total of
$11.7 million. This increase was primarily in salaries and benefits related to
the expansion of the Company's lending, leasing and insurance activities, as
well as the addition of four branch locations. Occupancy and equipment costs
increased as a result of the new branches and the relocation of some of the
insurance and leasing activities to larger premises. Computer hardware and
software and data communication costs associated with the new branches, as well
as third party processing charges for the increased debit card usage are
reflected in the increase in technology and communication expenses. Costs
incurred as a result of the Company's corporate branding campaign and name
change and amortization of goodwill associated with the Company's most recent
acquisitions are also reflected in the increase in noninterest expenses.
Results of Operations for the Six Months Ended June 30, 2000
------------------------------------------------------------
Net Income
Net income increased to $9.5 million, or $0.38 per share for the six month
period ended June 30, 2000 compared to $9.2 million for the same period in 1999.
This increase was driven by growth sustained in the loan portfolios, as well as
a continued emphasis on the development of additional sources of noninterest
income. The return on average assets was 1.09% for the six months ended June 30,
2000 compared to 1.18% for the same period in 1999. The return on average equity
for the first six months of 2000 was 8.36% compared to 7.34% for the same period
in 1999.
Net Interest Income
Net interest income increased 10% to $27.3 million for the six months ended June
30, 2000 compared to $24.8 million for the same period in 1999 despite a $27.6
million decrease in the average net interest-earning assets between the two
periods. The decrease in average net interest-earning assets, which resulted
primarily from previously held assets being utilized to fund the Company's stock
buy-back program and recent acquisitions, was offset by a 9 basis point increase
in the net interest rate spread from 2.71% at June 30, 1999 to 2.80% at June 30,
2000. The increase is reflective of the general increase in market interest
rates and the redeployment of funds into the higher yielding loan portfolio.
Interest income, which increased 16% for the six months ended June 30, 2000
compared to the six months ended June 30, 1999, reflects a $10.5 million
increase in interest income on loans resulting from the shift of funds into this
higher yielding loan portfolio. Interest expense, which increased $5.8 million,
or 22%, for the six months ended June 30, 2000 compared to the six months ended
June 30, 1999, was also impacted by the increase in market interest rates, the
Company's leverage program, as well as deposit and borrowing liabilities
acquired in the Albion acquisition.
The net interest margin was 3.36% for the first six months of 2000 compared to
3.40% for the same period in 1999. Net interest-earning assets increased
primarily due to increased loan activity, but was partially offset by decreases
in interest-earning assets resulting from the utilization of funds for the
Company's stock buyback program, the purchase of the ENL, Albion and NIA
subsidiaries, as well as investments in bank-owned life insurance, earnings on
which are recognized as noninterest income.
Provision for Credit Losses
Despite the growth sustained in the loan portfolio, the provision for credit
losses decreased slightly to $1.3 million for the six months ended June 30, 2000
compared to $1.4 million for the same period in 1999, reflecting the high credit
quality of the portfolio. The provision for credit losses is based on
management's quarterly assessment of the adequacy of the allowance for credit
losses with consideration given on such interrelated factors as the composition
and inherent risk within the loan portfolio, the level of nonperforming loans
and charge-offs, both current and historic economic conditions, as well as
current trends related to regulatory supervision.
Noninterest Income
Noninterest income increased 15% to $15.8 million for the six months ended June
30, 2000 from $13.8 million for the same period in 1999. The increase in
noninterest income recognized during the first six months of 2000 was primarily
related to the insurance, leasing and investment advisory activities. Tax-exempt
earnings on additional purchases of bank-owned life insurance, increased bank
service charges and fees related to checking accounts and continued growth in
debit card usage contributed to the additional noninterest income realized by
the Company. These increases were partially offset by a decrease in gains on the
sale of securities available for sale and a market related decrease in premiums
earned on the Company's covered call option program.
19
<PAGE>
Noninterest Expense
Noninterest expense totaled $27.6 million for the period ended June 30, 2000
reflecting a $4.6 million increase over the second quarter of 1999 total of
$23.0 million. The increases in salaries and benefits, occupancy and equipment
costs, as well as goodwill amortization are primarily resultant from the
acquisitions of ENL, Albion and NIA and expansion of the Bank's branch network.
Additionally, the Company has incurred approximately $662,700 associated with
the corporate branding initiative and name change, which began in February 2000.
Income Taxes
Income tax expense totaled $5.1 million and $5.0 million for the six month
periods ended June 30, 2000 and 1999, respectively, with an effective tax rate
of 35% for both periods.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, borrowings, proceeds from
the principal and interest payments on loans, mortgage related and debt and
equity securities, as well as proceeds from the limited sale of fixed rate
mortgage loans to the secondary market. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
outflows, mortgage prepayments, mortgage loan sales, and borrowings are greatly
influenced by market interest rates, economic conditions and competition.
Principal repayments on loans and mortgage related and other available for sale
securities provided $80.7 million and $41.7 million, respectively, of liquidity
for the six months ended June 30, 2000 compared to $114.1 million and $75.5
million, respectively, for the six months ended June 30, 1999. The decrease in
prepayments reflects the general increase in market interest rates that has
resulted in a significant slow down in refinancing activity.
The primary investing activities of the Company are the origination of both
residential one- to four-family and commercial real estate loans and the
purchase of mortgage related and debt and equity securities. During the first
six months of 2000 and 1999, loan originations totaled $187.9 million and $183.4
million, respectively. Purchases of investment securities totaled $20.3 million
for the six months ended June 30, 2000 compared to $221.7 million for the six
months ended June 30, 1999. For the first six months of 1999, such purchases
were funded by FHLB advances and repurchase agreements as part of the Company's
leveraging strategy and by the redeployment of funds from federal funds sold.
Due to the increase in market borrowing rates during the first six months of
2000, the Company did not continue its leveraging program. During the first six
months of 2000, $33.9 million of liquidity was utilized to repay matured
borrowings and $7.8 million was used to complete the acquisitions of ENL, Albion
and NIA.
At June 30, 2000, outstanding loan commitments totaled $110.2 million. These
commitments do not necessarily represent future cash requirements since certain
of these instruments may expire without being funded and others may not be fully
drawn upon. It is anticipated that there will be sufficient funds available to
meet the current loan commitments and other obligations.
Cash, interest-bearing demand accounts at correspondent banks, federal funds
sold and securities purchased under resale agreements are the Company's most
liquid assets. The levels of these assets are monitored daily and are dependent
on operating, financing, lending and investing activities during any given
period. Excess short-term liquidity is usually invested in overnight federal
funds sold. In the event that funds beyond those generated internally are
required, additional sources of funds are available through the use of reverse
repurchase agreements and FHLB advances. As of June 30, 2000, the total of cash,
interest-bearing demand accounts, federal funds sold and securities purchased
under resale agreements was $50.9 million, or 2.8% of total assets.
On July 7, 2000, the Company funded its $86.3 million acquisition of CNY
utilizing existing cash and cash equivalents and short-term borrowings. The
short-term borrowings were subsequently repaid from the cash and cash
equivalents obtained from CNY. The Company intends to fund the $80.3 million
purchase price for its acquisition of Iroquois with currently held cash and cash
equivalents, sales of available for sale securities and short-term borrowings
during the fourth quarter of 2000.
20
<PAGE>
At June 30, 2000, the Company exceeded all regulatory capital requirements. The
current requirements and the actual levels for the Company are detailed in the
following table.
<TABLE>
<CAPTION>
As of June 30, 2000
------------------------------------------------------------------------------
Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- -------- ----- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk-weighted assets).... $ 222,588 20.68 % 86,112 8.00 107,639 10.00
Tier 1 Capital (to risk-weighted assets)... 209,919 19.50 43,056 4.00 64,584 6.00
Leverage Capital (to average assets)....... $ 209,919 11.99 % 52,518 3.00 87,530 5.00
</TABLE>
21
<PAGE>
Item 3. Quantitative and Qualitative Disclosure about Market Risk
--------------------------------------------------------------------------------
Net Income and Net Portfolio Value Analysis
Market risk is the risk of loss from adverse changes in market prices and/or
interest rates of the Company's financial instruments. The primary market risk
the Company is exposed to is interest rate risk. Interest rate risk occurs when
assets and liabilities reprice at different times as interest rates change. The
company monitors this interest rate sensitivity partially through the use of a
net income model, which generates estimates of changes in net income over a
range of interest rate scenarios.
The Asset-Liability Committee, which includes members of senior management,
monitors the Company's interest rate sensitivity. When deemed prudent,
management has taken actions, and intends to do so in the future, to mitigate
exposure to interest rate risk through the use of on- or off-balance sheet
financial instruments. Possible actions include, but are not limited to, changes
in the pricing of loan and deposit products, modifying the composition of
interest-earning assets and interest-bearing liabilities, and the use of
interest rate swap agreements.
The accompanying table as of June 30, 2000 sets forth the estimated impact on
the Company's net income resulting from changes in the interest rates during the
next twelve months. These estimates require making certain assumptions including
loan and mortgage-related investment prepayment speeds, reinvestment rates, and
deposit maturities and decay rates. These assumptions are inherently uncertain
and, as a result, the Company cannot precisely predict the impact of changes in
interest rates on net income. Actual results may differ significantly due to
timing, magnitude and frequency of interest rate changes and changes in market
condition.
Calculated increase (decrease) at June 30, 2000
Changes in ---------------------------------------------------------
interest rates Net Income Net Portfolio Value
------------------ --------------------------- -------------------------
$ Change % Change $ Change % Change
------------ ---------- ---------- ----------
(Dollars in thousands)
+200 basis points $ (2,293) (9.8) % (28,379) (12.5)
+100 basis points (1,110) (4.7) (14,311) (6.3)
-100 basis points 1,099 4.7 10,085 4.5
-200 basis points $ 2,101 8.9 % 17,484 7.7
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------------------------------------------------------------
There are no material pending legal proceedings to which the Company
or its subsidiaries are a party other than ordinary routine litigation
incidental to their respective businesses.
Item 2. Changes in Securities and Use of Proceeds
--------------------------------------------------------------------------------
Not applicable.
Item 3. Defaults upon Senior Securities
--------------------------------------------------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
--------------------------------------------------------------------------------
The 2000 Annual Meeting of Stockholders of First Niagara Financial
Group, Inc. was held on May 2, 2000. The Annual Meeting was conducted
for the purpose of considering and acting upon the election of four
directors for a three year term, the approval of an amendment to the
Company's certificate of incorporation to change its name to First
Niagara Financial Group, Inc., the ratification of the appointment of
KPMG LLP as independent auditors for the Company for the year ending
December 31, 2000 and a shareholder proposal to take necessary steps
to achieve a sale or merger of the Company. The following table
reflects the tabulation of the votes with respect to each matter voted
upon at the 2000 Annual Meeting.
<TABLE>
<CAPTION>
Number of Votes
-------------------------------------------------
Matter Considered For Against Withheld
---------------------------------------------------------- ---------- ------- -----------
<S> <C> <C> <C>
(1) Election of Directors
Nominees
-------------------
Christa R. Caldwell 23,874,198 - 385,753
Gary B. Fitch 23,908,306 - 351,645
Daniel W. Judge 23,910,198 - 349,753
James Miklinski 23,911,281 - 348,670
(2) Approval of the amendment of the certificate of
incorporation of Niagara Bancorp to change the name
to First Niagara Financial Group, Inc. 24,029,195 115,105 115,650
(3) Ratification of KPMG LLP as independent
auditors for the Company for the year ending
December 31, 2000 24,108,060 27,471 114,419
(4) Stockholder proposal to take the necessary steps to
achieve a sale or merger of the Company 1,209,383 21,038,342 161,533
</TABLE>
Item 5. Other Information
--------------------------------------------------------------------------------
Not applicable.
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------------------------------------------------------
(a) The following exhibits are filed herewith or are incorporated by
reference to other filings:
Exhibit No.
-----------
99.1 Summary of Quarterly Financial Data
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed on July 24, 2000 a Current Report on Form 8-K dated
July 7, 2000, which disclosed that the acquisition of CNY Financial
Corporation and its wholly owned subsidiary, Cortland Savings Bank was
completed on July 7, 2000.
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: August 11, 2000 By: /s/ William E. Swan
------------------------------------
William E. Swan
President and Chief Executive Officer
Date: August 11, 2000 By: /s/ Paul J. Kolkmeyer
------------------------------------
Paul J. Kolkmeyer
Executive Vice President and Chief Operating
Officer
24
<PAGE>
EXHIBIT INDEX
Exhibit
Number
-------------
99.1 Summary of Quarterly Financial Data. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
25
