First Niagara Financial Group on Tuesday reported a 18 percent drop in first-quarter profits and announced plans to cut costs by slashing more than 100 jobs statewide, closing some branches, and selling other offices and unneeded real estate.
ir,2.2i,5p3 The Lockport-based company said profits fell to $18.5 million, or 17 cents per share, from $22.6 million, or 21 cents per share, a year ago, as the bank struggles to grow revenues.
Those results included a $2.4 million restructuring charge, mostly for severance, as the bank eliminates the positions, including 30 in Western New York, by late June. But even taking out that charge and severance in prior quarters, earnings still fell 11.5 percent to $20 million, or 19 cents per share, as total revenues fell 5 percent to $84.1 million.
Results fell short of analysts' expectations by a penny. Shares fell 25 cents Tuesday, closing at $13.88.
"The company reported disappointing quarterly results," analyst Joseph Fenech of Sandler O'Neill & Partners LP wrote in a research report.
First Niagara is cutting staff and restructuring its operations to reduce expenses as it struggles to boost revenues. Officials cited an improved mix of loans, continued good credit quality and a "high level" of fee incomes as positives for the quarter, but blamed pressure on the bank's lending profit margin and tough competition for deposits for hindering profits.
"We believe first-quarter results reflect a solid core performance in a challenging operating environment," said President and CEO John R. Koelmel, on the conference call with analysts.
Banks have been battling for several quarters to overcome a narrowing of the net interest margin -- the difference between what banks earn on loans and pay on deposits -- because short-term rates have risen faster than long-term rates. Also, heightened competition for deposits in many markets, including upstate New York, has forced banks to pay up.
And First Niagara executives said they don't expect the situation to improve soon, especially since the savings bank operates in slower-growth markets than other parts of the country. The restructuring review actually started in the second half of 2006, but the bank sped it up in response to market conditions.
"We're just trying to be proactive," said Chief Financial Officer Michael Harrington, in an interview. "We're not going to assume and wait for the market to get better. We want to manage the business under the current environment, and we think this is the best way to do that."
The job cuts are occurring across the bank's upstate New York operations, but are concentrated in the trust business, where the bank reorganized how it delivers services, and in back-office and corporate functions, where it eliminated redundant operations. About one third will be cut through attrition, as the positions are already vacant. Affected employees have already been notified and will receive severance, outplacement assistance, and priority consideration for other bank jobs. Additional jobs will be cut as the bank closes at least four branches in eastern New York. That's on top of past closings there after First Niagara bought two overlapping banks.
In all, the bank expects to cut as much as 6 percent of its 1,900 employees, or about 115. The restructuring will reduce annual operating expenses by about 5 percent, or roughly$10 million, from the $207 million reported for 2006. About 70 percent of that is from salaries, with the rest from occupancy.
Officials also plan to review the rest of the bank's branch network of 119 offices and will close or sell other branches in "nonstrategic" markets, mostly in eastern New York. That could result in additional job loss later. First Niagara owns 56 of its branches and leases 63.
Finally, the bank is examining other real estate it owns -- office buildings, annexes and old headquarters buildings from acquired banks -- to see what can be sold. Officials expect to make decisions within 60 days.
"We've got excess real estate," Koelmel said. "The cost to carry is just a burden that we really don't think makes sense for us."
For the quarter, net interest income from taking deposits and making loans fell 10 percent to $56.2 million, as the net interest margin fell.
Average total loans rose $15.5 million during the quarter to $5.67 billion, driven by a 25 percent annualized rise in commercial loans. Annualized means one quarter's growth rate is converted across four quarters. The bank reported $829 million in committed commercial lines of credit and $319 million in outstanding lines, both up 35 percent.
Bad loans ticked up slightly, but officials noted they had been at unusually low levels before. The increase was caused by a single loan to a health-related borrower that the bank gained from one of its acquisitions, and has been monitoring for a while. The bank set aside $1.6 million for loan losses, down 30 percent from a year ago.
Average deposits held steady at $5.4 billion, as strong competition and seasonality in business deposits hindered growth. Customers also shifted more funds to higher-cost certificates of deposit and money market accounts to capture the best rates.
Fees rose 7.7 percent to $27.9 million, and represented 33 percent of total revenues. Insurance revenues rose 8.2 percent to $11.7 million, comprising the largest single portion of total fees, as new business growth and the acquisition of the Gernold Agency on Jan. 1 combined to overcome the lower premiums of a "soft" insurance market. Banking services fees dropped very slightly.
Operating expenses, not including severance and other related costs, were $52.2 million, only slightly higher than a year ago.