First Niagara Reports Second Quarter 2014 Results

Second Quarter Highlights:

• Earnings of $0.19 per diluted share
• Revenues increased 1.5% QOQ
  • Noninterest income improved 5% QOQ driven by seasonal increases in various categories
  • Net interest income stable as balance sheet growth was offset by margin compression
• Organic loan growth continues, with average loans up 7% annualized QOQ
  • Average commercial business and real estate loans increased 8% QOQ
  • Momentum in average indirect auto loans continues with $137 million increase
• Transactional deposits up 12% QOQ driven by higher customer balances and account acquisitions
  • Noninterest-bearing and interest-bearing checking deposit balances increased 18% and 7% QOQ
  • Transactional deposits averaged 36% of deposits, up from 34% a year-ago
• Strong credit quality maintained
  • NCOs decreased six basis points QOQ to 0.30% of average originated loans

BUFFALO, N.Y., July 25, 2014 (GLOBE NEWSWIRE) -- First Niagara Financial Group, Inc. (Nasdaq:FNFG) today reported second quarter results, highlighted by continued balance sheet growth, consistent credit quality and sequential noninterest income growth.

"During the second quarter, we continued to deliver strong day-to-day execution in each of our business lines, as evidenced in particular by our strong loan growth, while at the same time advancing our previously announced Strategic Investment Plan to better position First Niagara for superior financial performance," said Gary M. Crosby, President and Chief Executive Officer. "A significant portion of our investments are focused on improving the customer experience by enhancing our product and service offerings and enabling customers to bank seamlessly with us across our branch network as well as digital and other self-service channels. We are on-time and on-budget so far and we have the right resources, people, skills and oversight in place to effectively execute on our strategy to deliver long term value to our shareholders."

"In the second quarter of 2014, average loans increased 7% annualized led by 8% growth in average commercial loans and a 5% increase in average consumer loan balances," said Gregory W. Norwood, Chief Financial Officer. "Fee income rebounded from typical seasonal lows experienced in the first quarter as mortgage banking, insurance commissions, and merchant and card fees experienced sequential growth. As expected, operating expenses increased modestly from the prior quarter."

Second Quarter Results

In the second quarter of 2014, First Niagara reported net income available to common shareholders of $66.2 million, or $0.19 per diluted share. In the first quarter of 2014, First Niagara reported net income available to common shareholders of $51.9 million, or $0.15 per diluted share, which included $8.3 million in after-tax restructuring and severance expenses, or $0.02 per diluted share, incurred primarily in connection with the previously announced branch staffing realignment and consolidation of certain branches completed earlier this year. For the second quarter of 2013, net income available to common shareholders was $63.6 million, or $0.18 per diluted share.

Balance sheet growth remained strong as average loans increased 7% annualized compared to the prior quarter. Average commercial business and real estate loans increased 8% annualized over the prior quarter, while average consumer loans increased 5% annualized driven by continued growth in indirect auto loan balances. Average transactional deposit balances, which include interest-bearing and noninterest bearing checking accounts, increased 12% over the prior year quarter and currently represent 36% of the company's deposit balances, up from 34% a year ago.

Operating revenues increased by $5 million or 1.5% in the second quarter of 2014 compared to the prior quarter. Net interest income increased $1 million in the second quarter compared to the prior quarter driven by the benefits of a 6% annualized increase in average earning assets and an extra day in the quarter which were partially offset by a decrease in net interest margin. Net interest margin was 3.26%, as compared to 3.33% in the first quarter of 2014. Noninterest income improved $4 million or 5% from the prior quarter primarily due to increases in insurance commissions, merchant and card fees, and mortgage banking.

The provision for loan losses on originated loans totaled $22.1 million in the second quarter of 2014, including $8.8 million of additions to the loan loss reserve to support organic loan growth and $13.2 million to cover net charge-offs during the quarter. Net charge-offs equaled 0.30% of average originated loans, a decrease of six basis points from 0.36% in the first quarter. At June 30, 2014, nonperforming originated loans comprised 0.86% of originated loans, compared to 0.82% at the end of the prior quarter.

Operating expenses for second quarter of 2014 were $244 million, a decrease of $5 million from the prior quarter, which included $10 million in restructuring expenses primarily related to branch staffing realignment and consolidation of branches. Excluding the restructuring expenses in the prior quarter, the increase was driven by volume-related growth, increased marketing spend, higher FDIC premiums, legal expenses, as well as depreciation, personnel and consulting expenses related to the previously announced strategic investment plan.

Loans

Average total loans increased 7% annualized from the prior quarter, driven by continued growth in the company's commercial lending, indirect auto and home equity portfolios.

Average commercial loans, which include commercial business (C&I) and commercial real estate (CRE) loans, increased to $13.5 billion, or an 8% annualized increase from the prior quarter. Commercial & Industrial (C&I) loans averaged $5.6 billion, or an 11% annualized increase over the prior quarter. Average CRE loans increased 5% annualized to $7.9 billion. Compared to the first quarter of 2014, double-digit increases in average loans in the company's Western Pennsylvania and Tri-State markets contributed to more than half the increase in average commercial loans.

Average indirect auto loan balances increased $137 million to $1.8 billion. During the second quarter, indirect auto originations totaled $368 million at an average customer FICO score of 763 and yielded 2.88%, net of dealer reserve. Average residential real estate loans declined by $55 million, or 6% annualized. Home equity balances increased 6% annualized from the prior quarter reflecting the benefits of promotional and cross-sell campaigns.

Deposits

The company's focus remains on efforts to grow its core deposit customer base, re-position its account mix and introduce new products and services that further enhance its value proposition to customers. Recent investments in mobile banking and remote deposit capture have further enhanced customers' ability to transact in the delivery channel of their choice while at the same time lowering the company's cost to acquire and serve such customers. Current and anticipated investments as part of the company's strategic investment plan in new digital features and functionalities such as online account opening will further enhance customers' ability to seamlessly transact across all delivery channels.

Average transactional deposit balances, which include interest-bearing and noninterest bearing checking accounts, increased an annualized 12% over the prior quarter and currently represent 36% of the company's deposit balances, up from 34% a year ago. The average cost of interest-bearing deposits of 0.24% was one basis point higher than the prior quarter.

Average noninterest-bearing checking deposit balances increased 18% annualized compared to the prior quarter, driven by seasonal strength in commercial account balances. Interest-bearing checking balances averaged $4.8 billion and increased 7% annualized from the prior quarter driven by recent promotional campaigns and resulting strength in checking account sales, particularly in the company's New York market.

Money market balances increased 3% reflecting early results of a promotional deposit campaign. Average time deposits increased 36% annualized driven by brokered deposit growth.

Net Interest Income

Second quarter 2014 net interest income increased $1.1 million from the prior quarter to $271.8 million. The benefits of a 6% annualized increase in average earning assets were partially offset by a seven basis point decline in the net interest margin. Growth in average earning assets reflected continued strong loan growth, particularly commercial loans and indirect auto loans. Average investment securities increased modestly from the prior quarter.

The seven basis point decrease in net interest margin in the second quarter of 2014 reflected continued compression of commercial and consumer loan yields from prepayments and reinvestments at current market rates and to a lesser extent, the impact of one additional day in the quarter.

In the second quarter, premium amortization on the Residential Mortgage Backed Securities (RMBS) portfolio was $5 million. There were no retroactive adjustments in the second quarter related to prepayment speeds on the RMBS portfolio. The premium amortization on the RMBS portfolio in the first quarter of 2014 was $4 million, which included a $1 million retroactive reduction to reflect updated lowering of estimates of future prepayment speeds.

Credit Quality

At June 30, 2014, the allowance for loan losses was $223.5 million, compared to $215.0 million at March 31, 2014. Nonperforming assets to total assets were 0.55%, up three basis points from the prior quarter, driven by an increase in nonperforming originated loans.

Information for both the originated and acquired portfolios follows. 

Originated loans

The provision for loan losses on originated loans totaled $22.1 million, compared to $21.2 million in the prior quarter. This provision included $8.8 million of additions to the loan loss reserve to support organic loan growth during the quarter compared to $5.5 million in the prior quarter. Net charge-offs equaled $13.2 million or 30 basis points of average originated loans in the second quarter of 2014, compared to $15.6 million or 36 basis points in the prior quarter.

At June 30, 2014, nonperforming originated loans comprised 0.86% of originated loans, compared to 0.82% at March 31, 2014. The increase was driven primarily by the transfer of two commercial credits to nonaccrual status.

At June 30, 2014, the allowance for loan losses on originated loans totaled $219.7 million or 1.21% of such loans, compared to $210.8 million or 1.21% of such loans at March 31, 2014.

Acquired loans

The provision for losses on acquired loans totaled $0.3 million, down from $3.2 million in the prior quarter. Net charge-offs on those portfolios totaled $0.7 million during the quarter, compared to $3.0 million in the prior period. At June 30, 2014, the allowance for loan losses on acquired loans totaled $3.8 million, compared to $4.2 million at March 31, 2014. Acquired nonperforming loans totaled $32.5 million, compared to $30.6 million at the end of the prior quarter. At June 30, 2014, remaining credit marks available to absorb losses on a pool-by-pool basis totaled $105 million.

Fee Income

Second quarter 2014 noninterest income of $80.9 million increased 5% or $4.1 million compared to the prior quarter driven primarily by increases in mortgage banking revenues, insurance commissions, and merchant and card fees. These seasonal increases were partially offset by decreases in capital markets income and bank owned life insurance.

Mortgage banking revenues improved $1.8 million from the first quarter of 2014, driven by higher gain-on-sale revenues from increased locked mortgage volumes. Consistent with seasonal patterns, insurance commissions increased $1.7 million. Merchant and card fees increased $1.3 million from the prior quarter and were driven by seasonally greater debit and credit card purchase volume activity. Other fee income increased $1.6 million from the prior quarter and was driven by higher investment income. Offsetting these increases, capital markets revenue decreased $0.7 million from the first quarter reflecting lower syndication income. Bank owned life insurance income declined by $2.3 million reflecting normalization from elevated first quarter 2014 levels.

Noninterest Expense

Second quarter noninterest expenses were $244.1 million. Excluding a $10.4 million restructuring charge incurred in the first quarter, operating expenses increased $5.7 million or 2% sequentially. Salaries and benefits expenses were essentially flat compared to the first quarter as lower medical expenses were offset by higher employee headcount. Occupancy and equipment expense increased $0.7 million and was driven by an accelerated write-off of certain leasehold improvements. Technology and communications expense increased $0.8 million from the prior quarter primarily reflecting higher depreciation expenses partially offset by lower technology vendor costs. Marketing and advertising expenses increased $1.1 million from the prior quarter reflecting promotional deposit campaigns. Professional services expenses increased $1.1 million from the prior quarter and reflected higher legal expenses as well as consulting fees incurred in connection with the company's strategic investment plan. The increase in FDIC premium expense reflects the impact of higher construction loan balances which carry a higher assessment.

In the second quarter of 2014, the operating efficiency ratio was 69.2% compared to 68.6% in the prior quarter.

Capital

At June 30, 2014, the company's estimated consolidated Total Risk Based capital and Tier 1 Common Risk Based capital ratios were 11.5% and 7.9% respectively. The company remains well above current regulatory guidelines for well-capitalized institutions. 

Effective Tax Rate

In the second quarter of 2014, the company's effective tax rate declined to 14.0% from 19.6% in the prior quarter reflecting the receipt of state tax credits from prior years.

About First Niagara

First Niagara, through its wholly owned subsidiary, First Niagara Bank, N.A., is a multi-state community-oriented bank with approximately 410 branches, $39 billion in assets, $27 billion in deposits, and 5,900 employees providing financial services to individuals, families and businesses across New York, Pennsylvania, Connecticut and Massachusetts. For more information, visit www.firstniagara.com.

Investor Call

A conference call will be held at 10:00 a.m. Eastern Time on Friday, July 25, 2014 to discuss the company's financial results. Those wishing to participate in the call may dial toll-free 1-800-857-5166 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 September 1, 2014 by dialing 1-888-568-0543, passcode: 5142.

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) execution risk associated with the announced investment plan.

CONTACT: First Niagara Contacts
         
         Investors:
         Ram Shankar
         Senior Vice President, Investor Relations
         (716) 270-8623
         ram.shankar@fnfg.com

         News Media:
         David Lanzillo
         Senior Vice President, Corporate Communications
         (716) 819-5780
         david.lanzillo@fnfg.com