First Niagara Financial : 07/29/16 First Niagara Reports Second Quarter 2016 Results

• Second quarter operating earnings of $0.18 per diluted share
  
  • Second quarter GAAP earnings of $0.11 per diluted share, including merger-related integration expenses and loss associated with de-risking high-yield energy bond exposure
• Average loans increased 4% YOY
  
  • Average commercial loans (CRE and commercial business) up 5% YOY
  • Average consumer loans increased 4% YOY
• Average transactional deposit balances increased 6% YOY
  
  • Average interest-bearing checking deposit balances increased 6% YOY
  • Average noninterest-bearing deposit balances increased 5% YOY
• Originated net charge-offs averaged 0.27% of originated loans, down 4 basis points YOY
  

BUFFALO, N.Y., July 29, 2016 (GLOBE NEWSWIRE) -- First Niagara Financial Group, Inc. (NASDAQ:FNFG) today reported GAAP net income available to common shareholders of $38.9 million, or $0.11 per diluted share for the second quarter of 2016, compared to $40.8 million, or $0.11 per diluted share, for the quarter ended March 31, 2016. Excluding the impact of $7 million in after-tax losses on the sale of the company's entire high-yield energy bond exposure as well as $17 million in after-tax merger-related costs incurred during the second quarter of 2016, operating net income available to common shareholders was $62.7 million, or $0.18 per diluted share.

'Our second quarter performance is more evidence of the strength of our lending and deposit franchises,' said Gary M. Crosby, President and Chief Executive Officer. 'During the second quarter, our core businesses continued to demonstrate positive momentum, with 5% year-over-year growth in average commercial loans and 6% growth in average transactional deposit balances. Consistent with our time-tested policy of prudent and disciplined credit underwriting, our commercial and consumer loan portfolios continue to perform well as evidenced by our stable credit metrics. The First Niagara team delivered this solid performance while at the same time staying very focused on preparing for the completion of our merger with KeyCorp.'

'Given an expected prolonged uncertain economic environment, in early June we significantly de-risked our investment securities portfolio by exiting positions in high-yield energy bonds resulting in an after-tax loss of $7 million,' said Gregory W. Norwood, Chief Financial Officer. 'Noninterest income, excluding this loss, increased 1% from the first quarter driven by higher insurance commissions, increased derivative and syndication volumes and higher mortgage banking income.'

Second Quarter Results

In the second quarter of 2016, First Niagara reported GAAP net income available to common shareholders of $38.9 million, or $0.11 per diluted share, compared to $40.8 million, or $0.11 per diluted share in the first quarter of 2016. Second quarter 2016 results were impacted by $17 million in after-tax merger integration related and restructuring costs as well as $7 million in after-tax losses on the sale of the company's entire high-yield energy bond exposure. In the first quarter of 2016, after-tax merger integration related and restructuring costs totaled $9 million. Excluding these items, operating net income available to common shareholders was $62.7 million, or $0.18 per diluted share in the second quarter of 2016, compared to $49.9 million, or $0.14 per diluted share in the first quarter of 2016.

Compared to the first quarter of 2016, the change in operating net income available to common shareholders was primarily driven by:

• A $5 million or 2% decrease in net interest income driven primarily by the impact of lower reinvestment rates on cashflows from the investment securities portfolio, and continued mix shift towards non-credit investment securities.
• An $11 million decrease in provision for credit losses from elevated first quarter levels that included a reserve build towards the company's exposure to scrap metal companies and demolition companies whose profitability is partially dependent on the sale of scrap metal.
• A $1 million or 1% increase in operating noninterest income driven by higher capital markets income due to higher syndication and derivative volumes, higher insurance commissions, and greater mortgage banking revenues.
• A $9 million or 4% decrease in operating noninterest expenses primarily driven by lower employee count and the associated impact on compensation and other benefits expenses, lower professional services and marketing spend, lower building maintenance costs and lower OREO expenses.
• A lower effective tax rate attributable primarily to benefits from certain tax-advantaged investments.

In the second quarter of 2015, First Niagara reported GAAP net income available to common shareholders of $53.5 million, or $0.15 per diluted share. Compared to the second quarter of 2015, the change in operating net income available to common shareholders was primarily driven by:

• A modest decline of $1 million in net interest income from the year-ago quarter that included $3 million of benefits from discount accretion on payoffs of certain Collateralized Loan Obligations (CLOs) and acquired loans, offset by a 4% increase in average earning asset balances.
• A $9 million decrease in provision for loan losses driven primarily by lower net charge-offs.
• An 8% decrease in noninterest income, driven by lower wealth management income, insurance commissions, investment gains and capital markets income.
• A 6% or $15 million decline in noninterest expense driven primarily by lower third party professional services expenses, lower marketing spend, lower amortization of intangibles and lower compensation and benefits expenses.

Loans

Average loans increased 2% annualized from the prior quarter to $24.2 billion, driven primarily by increases in the company's commercial real estate (CRE), commercial business (C&I), and indirect auto portfolios. On an end-of-period basis, total loans increased 3% annualized from the prior quarter driven by a 12% annualized increase in indirect auto loans and 5% increase in commercial real estate loans.

Average commercial loans, which include commercial business (C&I) and commercial real estate (CRE) loans, increased 2% annualized from prior quarter to $14.8 billion, primarily driven by growth in the company's New York, New England, and Western Pennsylvania regions.

• Average CRE loans increased 2% annualized from the prior quarter to $8.7 billion driven by new commercial mortgage term financing as well as construction lending volumes.
• Average C&I loans increased 3% annualized QOQ to $6.1 billion reflecting middle market origination activity across the company's footprint, partially offset by pay-downs in the capital markets loan portfolio.

Average consumer loans increased 2% annualized from prior quarter to $9.4 billion.

• Average indirect auto loan balances increased 13% annualized or by $80 million to $2.5 billion, as strong new origination activity was partially offset by increased pay-downs. Indirect auto originations during the quarter totaled $328 million. New originations in the second quarter yielded 3.50%, net of dealer reserve, compared to 3.41% on originations in the prior quarter.
• Average residential real estate and home equity loan balances were down modestly from the prior quarter reflecting higher customer refinancing activity given low mortgage interest rates.
• Credit card balances were down $9 million, or 12% annualized due to seasonal factors.

Credit Quality

At June 30, 2016, the allowance for loan losses was $253 million, unchanged from March 31, 2016. In the second quarter, provision for loan losses totaled $12.4 million, compared to $22.5 million in the prior quarter. Nonperforming assets comprised 0.60% of total assets, essentially flat compared to March 31, 2016. Information for both the originated and acquired portfolios follows.

Originated loans

The second quarter 2016 provision for loan losses on originated loans totaled $14 million, compared to $23 million in the first quarter of 2016. The decrease in provision expense from the linked quarter was driven by a $7 million reserve release attributable specifically to favorable resolutions and pay-downs in the company's exposure to scrap metal and demolition companies and borrowers that serve the energy sector, and offset by higher net charge-offs. At June 30, 2016, the allowance for loan losses on originated loans totaled $248 million or 1.14% of such loans, compared to $248 million or 1.16% of such loans at March 31, 2016. The decrease in allowance coverage ratio primarily reflects the aforementioned draw-down of reserves previously built toward the company's exposure to borrowers serving the energy sector as well as scrap metal and demolition companies.

Originated net charge-offs in the first quarter equaled $14 million or 27 basis points of average originated loans, compared to 22 basis points in the first quarter of 2016. The sequential increase in net charge-offs was driven in large part by lower commercial recoveries from elevated first quarter levels.

At June 30, 2016, nonperforming originated loans totaled $198 million, or 0.91% of originated loans, largely unchanged from March 31, 2016.

Acquired loans

In the second quarter of 2016, the provision for loan losses related to the acquired loan portfolio was a negative $2 million, compared to zero provision in the prior quarter. The negative provision was consistent with a $2 million net recovery on loans previously charged-off. At June 30, 2016, the allowance for loan losses on acquired loans totaled $5 million, unchanged from March 31, 2016. Acquired nonperforming loans totaled $25 million, also unchanged from the prior quarter. At June 30, 2016, remaining credit marks available to absorb losses on a pool-by-pool basis totaled $54 million.

Deposits

Average deposits increased 5% annualized from the prior quarter to $29.2 billion.

• Average non-interest checking deposit balances increased 3% annualized from the prior quarter to $5.7 billion, driven by retail and business deposit balances, particularly in the company's Tri-state markets.
  
• Time deposits increased 24% annualized to $3.9 billion, driven primarily by a $182 million increase in retail certificate of deposit (CD) balances across the company's footprint.
  
• Money market deposit balances were down 3% annualized from the prior quarter driven by decreases in municipal and business deposit balances.
  
• Average transactional deposit balances, which include interest-bearing and noninterest-bearing checking account balances, increased 6% from the year-ago period and 5% annualized from the prior quarter. These balances currently represent 38% of the company's deposit balances, unchanged from the prior quarter.
  
• The 7% annualized increase in interest-checking deposit balances was driven by a $102 million increase in retail interest checking balances, primarily in the company's New York and Western Pennsylvania markets.
  
• Average savings balances increased 9% annualized from the prior quarter driven by higher retail balances across the company's footprint.

Net Interest Income

Second quarter 2016 GAAP net interest income of $262 million decreased $5 million from the prior quarter, driven primarily by the impact of lower reinvestment rates on cashflows from the investment securities portfolio, continued mix shift towards lower yielding non-credit investment securities, and to a lesser extent, higher borrowing costs attributable to higher short-term interest rates. Normalized net interest margin of 2.94% was down 5 basis points from the prior quarter.

• Yields on loans decreased 1 basis point to 3.72% primarily reflecting a mix shift within loan categories as well as greater mortgage prepayment and refinancing activity.
• Yields on investment securities decreased 15 basis points to 2.77% reflecting reinvestment of cashflows from residential mortgage-backed securities at lower interest rates and a mix shift toward lower yielding non-credit investment securities, and to a lesser extent, the impact of the sale of high-yield energy bonds.
• The average cost of interest-bearing deposits increased 2 basis points from the prior quarter to 0.34%.

Noninterest Income

On a reported basis, second quarter 2016 noninterest income was $69 million and reflected $11 million in pre-tax losses incurred on the sale of the company's entire high-yield energy bond exposure following recent recovery in their prices. Excluding this loss, operating fee income was $80 million, and increased $1 million or 1% from the prior quarter.

• Deposit service charges increased 2% from the seasonally low levels in the first quarter.
• Insurance commissions increased $1 million or 8% sequentially, driven in large part by both commercial and personal lines.
• Merchant and card fees increased $1 million or 7% driven by higher purchase volumes.
• Wealth management revenue decreased $1 million from prior quarter driven in part by equity market volatility.
• Capital markets income, which includes income from derivatives and syndications, increased $2 million, primarily driven by robust derivatives and syndication volumes in the quarter.
• Mortgage banking revenues were $2 million higher than the prior quarter reflecting strong locked volumes driven by low mortgage rates. Locked volumes and gain-on-sale margin increased QOQ.
• Other noninterest income decreased $5 million from the prior quarter driven by lower investment gains as well as higher amortization of historic tax credit investments.

Noninterest Expense

Excluding $25 million in merger integration related costs, operating noninterest expenses totaled $233 million in the second quarter of 2016, or 4% lower than first quarter 2016 levels. The quarter-over-quarter decrease was primarily driven by lower employee-related expenses, marketing and professional services expenses and other volume-related costs.

• Salaries and benefits expense of $112 million declined 2% or $3 million from the prior quarter driven by lower employee count and the associated impact on compensation and other benefits expenses.
• Occupancy and equipment expenses decreased 4%, due primarily to lower building maintenance expenses.
• Technology and communications increased 2% from prior quarter due to higher technology outsourcing expenses.
• Marketing and advertising expenses were $2 million lower compared to first quarter levels, reflecting lower promotional campaigns in the second quarter.
• Professional services fees decreased $3 million or 21% from first quarter levels and continued to be driven by pause of certain projects and the associated decline in third party services expenses.
• Other expenses decreased $2 million sequentially driven in part by lower other real estate (ORE) valuation write-downs and other volume-related corporate expenses.

In the second quarter of 2016, the operating efficiency ratio was 68.2%, compared to 69.8% in the prior quarter.

Capital

Beginning in the first quarter of 2015, all regulatory capital ratios and amounts were calculated under the Basel III standardized transitional approach. At June 30, 2016, the company's consolidated Total Risk Based capital and Common Equity Tier 1 capital ratios were 12.2% and 8.7%, respectively, up from 12.1% and 8.6% at March 31, 2016. 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 390 branches, $40 billion in assets, $29 billion in deposits, and approximately 5,300 employees providing financial services to individuals, families and businesses across New York, Pennsylvania, Connecticut and Massachusetts. For more information, visit www.firstniagara.com.

Safe Harbor Statement

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; and (6) impact of the pending merger agreement on customers and employees.