BUFFALO, N.Y., October 18, 2013 – First Niagara Financial Group, Inc. (NASDAQ:FNFG) today reported net income available to common shareholders of $71.6 million or $0.20 per diluted share for the third quarter of 2013, highlighted by strong balance sheet growth, consistent credit quality and positive operating leverage.
“We delivered another quarter of strong earnings despite the challenges presented by the macro-economic and competitive environment,” said Gary M. Crosby, Interim President and Chief Executive Officer. “We are very focused on maximizing returns and expect to continue to deliver industry leading loan growth while maintaining our high underwriting standards. We will continue to diligently invest in opportunities that drive revenue production, achieve operating leverage and enhance risk mitigation capabilities to position us well for the future.”
Third Quarter Results
In the third quarter of 2013, First Niagara reported net income available to common shareholders of $71.6 million, or $0.20 per diluted share. In the third quarter of 2012, First Niagara reported net income available to common shareholders of $50.8 million, or $0.14 per diluted share, that included $29.4 million in pre-tax acquisition and restructuring expenses incurred primarily in connection with the closing of the HSBC branch acquisition in May 2012. For the second quarter of 2013, net income to common shareholders was $63.6 million, or $0.18 per diluted share.
Balance sheet growth remained strong as average loans increased 10% annualized compared to the prior quarter. Average commercial business and real estate loans increased 7% annualized over the prior quarter driven by a 9% increase in commercial real estate loans. Average consumer loans increased 14% annualized driven by continued growth in indirect auto loan balances, partially offset by a decline in residential mortgage loans. Average transaction deposit balances, which include interest-bearing and noninterest bearing checking accounts, increased an annualized 2% over the prior quarter and currently represent 35% of the company’s deposit balances, up from 31% a year ago.
Operating revenues increased 1% in the third quarter of 2013 compared to the prior quarter. Net interest income increased 3% in the third quarter compared to the prior quarter. Net interest margin was 3.40%, as compared to 3.36% in the second quarter of 2013. Noninterest income decreased $4.1 million or 4% from the prior quarter primarily due to lower mortgage banking revenues.
The provision for loan losses on originated loans totaled $25.4 million in the third quarter of 2013, including $12.5 million to support loan growth and $12.9 million to cover net charge-offs during the quarter. At September 30, 2013, nonperforming originated loans comprised 0.89% of originated loans, which equaled a 13 basis point improvement from the prior quarter. Net charge-offs equaled 33 basis points of average originated loans, consistent with the second quarter.
In the third quarter of 2013, the company continued to generate positive operating leverage, as operating revenues increased 1% and operating expenses decreased 2% relative to the second quarter.
“During the third quarter, we continued to generate strong loan growth despite an intensifying competitive landscape, while adhering to our prudent underwriting standards,” said Gregory W. Norwood, Chief Financial Officer. “Net interest income benefitted from the continuation of strong balance sheet growth as well as certain favorable adjustments in our collateralized mortgage obligations book related to the rapid increase in mortgage rates which, in turn, negatively impacted mortgage banking revenues.”
Average total loans increased 10% annualized from the prior quarter, driven by strong growth in the company’s commercial lending businesses, particularly commercial real estate (CRE), and as well as sustained momentum in the company’s indirect auto business.
Average CRE loans increased 9% annualized to $7.6 billion compared to the second quarter of 2013. Commercial & Industrial (C&I) loans averaged $5.2 billion, representing a 4% annualized increase over the prior quarter. Average commercial loans in the company’s New England and Eastern Pennsylvania markets increased at double-digit annualized growth rates of 13% and 10%, respectively.
Average indirect auto loan balances increased $280 million to $1.2 billion. During the third quarter, indirect auto originations totaled $379 million at an average customer FICO score of 753 and yielded 3.1%, net of dealer reserve. Average residential real estate loans declined by $32 million, or 4% annualized reflecting elevated prepayment levels. Home equity balances increased 3% annualized from the prior quarter.
The company continued to focus its efforts to grow its core customer base, re-position its account mix and lower its deposit costs. Average transaction deposit balances, which include interest-bearing and noninterest bearing checking accounts, increased an annualized 2% over the prior quarter and currently represent 35% of the company’s deposit balances, up from 31% a year ago. The average cost of interest-bearing deposits of 0.23% was unchanged from the prior quarter.
Average noninterest-bearing checking deposits increased 6% annualized compared to the prior quarter, driven by seasonal strength in commercial account balances. Interest-bearing checking balances averaged $4.5 billion and decreased an annualized 2% from the second quarter.
Money market and time deposit balances declined 9% and 8% annualized, respectively, driven by the company’s continued pricing actions.
In response to changing consumer banking behaviors, First Niagara continues to invest in enhancing its online, mobile and telephonic banking capabilities for retail and small business customers, while continuing to transform its branch network and in-branch experience.
Net Interest Income
Third quarter 2013 net interest income increased 3% from the prior quarter to $278 million and was driven by a 3% annualized increase in average earning assets together with a four basis points improvement in the net interest margin to 3.40%. Growth in average earning assets reflected continued strong loan growth which was moderated by lower investment securities balances. Average investment securities declined 9% or $264 million from the prior quarter reflecting the planned rotation of such securities into more profitable loans.
The four basis point increase in net interest margin in the third quarter of 2013 reflected the benefits of reinvestment of cash flows from lower-yielding investment securities into higher yielding loans
and securities as well as lower premium amortization on the company’s residential mortgage backed securities (RMBS) portfolio. These benefits were partially offset by continued compression of loan yields from prepayments and reinvestments at current market rates.
In the third quarter, premium amortization on the RMBS portfolio was $6 million, net of a $1.8 million retrospective adjustment to reflect prepayment speeds that were slower than the company’s previous assessment. The premium amortization on the RMBS portfolio in the second quarter of 2013 was $11 million.
At September 30, 2013, the allowance for loan losses was $198.0 million, compared to $183.7 million at June 30, 2013. Nonperforming assets to total assets were 0.53%, up only modestly from the prior quarter. A decrease in nonperforming originated loans was offset by transfer of three acquired loans that were previously designated as loans 90 days past due but accruing to other real estate owned (OREO) assets.
The provision for loan losses on originated loans totaled $25.4 million, compared to $23.9 million in the prior quarter. This provision included $12.5 million to support sequential originated loan growth of $1.1 billion, compared to $11.7 million in the prior quarter that supported $1.0 billion of originated loan growth. Net charge-offs equaled $12.9 million or 33 basis points of average originated loans in the third quarter of 2013, consistent with the second quarter.
At September 30, 2013, nonperforming originated loans comprised 0.89% of originated loans, compared to 1.02% at June 30, 2013. Nonperforming originated loan balances declined 6% from the prior quarter in part driven by paydowns.
At September 30, 2013, the allowance for loan losses on originated loans totaled $195.0 million or 1.20% of such loans, compared to $182.5 million or 1.21% of loans at June 30, 2013.
The provision for losses on acquired loans totaled $1.8 million, up from $0.9 million in the prior quarter. Net charge-offs on those portfolios totaled $0.1 million during the quarter, compared to $0.9 million in the prior period. At September 30, 2013, the allowance for loan losses on acquired loans totaled $3.0 million, compared to $1.3 million at June 30, 2013. Acquired nonperforming loans totaled $30.4 million, compared to $27.6 million at the end of the prior quarter. At September 30, 2013, remaining credit marks available to absorb losses on a pool-by-pool basis totaled $129 million.
Third quarter 2013 noninterest income of $91.4 million decreased 4% or $4.1 million compared to the prior quarter driven exclusively by weakness in mortgage banking gain-on-sale revenues which was partially offset by increases in most other fee income categories.
Mortgage banking revenues declined $4.6 million, or 67%, from the second quarter, driven by decreases in locked application volumes and gain-on-sale margins. Wealth management revenue increased 2% from the second quarter reflecting the continued demand in the market place for fixed annuity products. Deposit service charges increased 2% from the prior quarter and were driven by a seasonal increase in NSF incidence as well as sustained higher collection rates. Insurance commissions and merchant and card fees both increased modestly from the second quarter. Other income decreased $1.4 million from the second quarter.
Third quarter noninterest expenses were $231.2 million, 2% lower than the prior quarter. Salaries and benefit expenses declined by $1.3 million from the prior quarter driven primarily by a decrease in revenue-dependent variable compensation expenses. Occupancy and equipment expenses declined by $1.9 million from the second quarter due in large part to expenses related to consolidation of branches in the prior period. The amortization of intangibles decreased $3.1 million from the prior quarter primarily reflecting the decline in amortization of the HSBC transaction-related core deposit intangible.
In the third quarter of 2013, the efficiency ratio improved to 62.7% from 64.4% in the prior quarter and reflected the positive operating leverage achieved.
At September 30, 2013, the company’s estimated consolidated Total Risk Based capital and Tier 1 Common Risk Based capital ratios were 11.4% and 7.7% respectively. The company remains well above current regulatory guidelines for well-capitalized institutions.
About First Niagara First Niagara, through its wholly owned subsidiary, First Niagara Bank, N.A., is a multi-state community-oriented bank with approximately 420 branches, $37 billion in assets, $27 billion in deposits, and approximately 5,800 employees providing financial services to individuals, families and businesses across New York, Pennsylvania, Connecticut and Massachusetts.
A conference call will be held at 10:00 a.m. Eastern Time on Friday, October 18, 2013 to discuss the company’s financial results. Those wishing to participate in the call may dial toll-free 1-888-968-3512 with the passcode: FNFG. Presentation slides will be used during the earnings conference call and are available under the investor relations tab of our website at www.firstniagara.com. A replay of the call will be available until November 1, 2013 by dialing 1-866-451-8971, passcode: 532337.
Non-GAAP Measures - This news release contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP). The company believes that non-GAAP financial measures provide a meaningful comparison of the underlying operational performance of the company, and facilitate investors’ assessments of business and performance trends in comparison to others in the financial services industry. In addition, the company believes the exclusion of these non-operating items enables management to perform a more effective evaluation and comparison of the company’s results and to assess performance in relation to the company’s ongoing operations. These disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Where non-GAAP disclosures are used in this news release, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in this document.
Forward-Looking Statements - This press release contains forward-looking statements with respect to the financial condition and results of operations of First Niagara Financial Group, Inc. including, without limitations, statements relating to the earnings outlook of the company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) changes in the interest rate environment; (2) competitive pressure among financial services companies; (3) general economic conditions including an increase in non-performing loans that could result from an economic downturn; (4) changes in legislation or regulatory requirements; (5) difficulties in continuing to improve operating efficiencies; (6) difficulties in the integration of acquired businesses; and (7) increased risk associated with an increase in commercial real estate and business loans and non-performing loans.