BUFFALO - First Niagara Financial Group, Inc. recently 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 percent annualized compared to the prior quarter. Average commercial business and real estate loans increased 7 percent annualized over the prior quarter driven by a 9 percent increase in commercial real estate loans. Average consumer loans increased 14 percent 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 percent over the prior quarter and currently represent 35 percent of the company's deposit balances, up from 31 percent a year ago.
Operating revenues increased 1 percent in the third quarter of 2013 compared to the prior quarter. Net interest income increased 3 percent in the third quarter compared to the prior quarter. Net interest margin was 3.40 percent, as compared to 3.36 percent in the second quarter of 2013. Noninterest income decreased $4.1 million or 4 percent from the prior quarter primarily due to lower mortgage banking revenues.
Third quarter highlights
Earnings increased 13 percent QOQ to $71.6 million, of $0.20 per diluted share
Pre-tax pre-provision income increased 6 percent QOQ
Net interest margin increased four basis points from the second quarter to 3.40 percent
Free income declined 4 percent driven by lower mortgage banking revenues
Organic loan growth continues, with average loans up 10 percent QOQ
Idirect auto loans continued momentum with a $280 million increase
Noininterest-bearing checking balances increased 6 percent QOQ
Transactional deposits averages 35 percent of deposits, up from 31 percent a year ago
Continued investment in mobile and digital banking to match evolving consumer banking preferences
Strong credit quality maintained
NCOs remained flat compared to the prior quarter at 0.33 percent average originated loans
Nonperforming originated loans declined 6 percent QOQ
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 percent 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 percent and operating expenses decreased 2 percent 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 percent 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 percent annualized to $7.6 billion compared to the second quarter of 2013. Commercial & Industrial (C&I) loans averaged $5.2 billion, representing a 4 percent 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 percent and 10 percent, 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 percent, net of dealer reserve. Average residential real estate loans declined by $32 million, or 4 percent annualized reflecting elevated prepayment levels. Home equity balances increased 3 percent 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 percent over the prior quarter and currently represent 35 percent of the company's deposit balances, up from 31 percent a year ago. The average cost of interest-bearing deposits of 0.23 percent was unchanged from the prior quarter.
Average noninterest-bearing checking deposits increased 6 percent 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 percent from the second quarter.
Money market and time deposit balances declined 9 percent and 8 percent 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 percent from the prior quarter to $278 million and was driven by a 3 percent annualized increase in average earning assets together with a four basis points improvement in the net interest margin to 3.40 percent. Growth in average earning assets reflected continued strong loan growth which was moderated by lower investment securities balances. Average investment securities declined 9 percent 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 Sept. 30, the allowance for loan losses was $198.0 million, compared to $183.7 million at June 30. Nonperforming assets to total assets were 0.53 percent, 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 assets.