FORM 10-Q
----------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
Commission file number 0-26481
FINANCIAL INSTITUTIONS, INC.
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-0816610
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 Liberty Street, Warsaw, New York 14569
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
716-786-1100
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
TITLE OUTSTANDING
----- -----------
Common Stock , $0.01 par value Outstanding at May 08, 2000
Par share 10,984,433 shares
================================================================================
INDEX
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Financial Condition
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBITS
ITEM 1. FINANCIAL STATEMENTS
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share amounts)
March 31, December 31,
2000 1999
----------- -----------
(unaudited)
ASSETS
Cash, due from banks and interest-bearing deposits $ 31,881 $ 49,672
Federal funds sold 0 11,554
Securities available for sale, at fair value 213,121 200,272
Securities held to maturity (fair value of
$79,709 at March 31, 2000 and $80,902 at
December 31, 1999) 80,617 81,356
Loans: 788,188 763,745
Allowance for loan losses (11,907) (11,421)
----------- -----------
Loans, net 776,281 752,324
Premises and equipment, net 16,904 17,009
Other assets 26,059 24,273
----------- -----------
Total assets $ 1,144,863 $ 1,136,460
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 139,090 $ 141,800
Savings, money market and interest-bearing
checking 300,874 306,813
Certificates of deposit 509,447 500,918
----------- -----------
Total deposits 949,411 949,531
Short-term borrowings 48,012 46,096
Long-term borrowings 12,506 10,240
Accrued expenses and other liabilities 15,879 13,054
----------- -----------
Total liabilities 1,025,808 1,018,921
----------- -----------
Shareholders' equity:
3% cumulative preferred stock, $100 par value,
authorized 10,000 shares, issued and
outstanding 1,759 shares at March 31,
2000 and at December 31, 1999 176 176
8.48% cumulative preferred stock, $100 par
value, authorized 200,000 shares, issued
and outstanding 175,954 shares at March 31,
2000 and 176,359 shares at December
31, 1999 17,595 17,636
Common stock, $0.01 par value, authorized
50,000,000 shares, issued 11,303,533
shares at March 31, 2000 and at December
31, 1999 113 113
Additional paid-in capital 16,446 16,448
Retained earnings 89,180 86,361
Accumulated other comprehensive income (loss) (3,798) (2,661)
Treasury stock--common, at cost--296,800
shares at March 31, 2000 and 285,800
shares at December 31, 1999 (657) (534)
----------- -----------
Total shareholders' equity 119,055 117,539
----------- -----------
Total liabilities and shareholders' equity $ 1,144,863 $ 1,136,460
=========== ===========
See accompanying notes to consolidated financial statements.
1
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share
amounts)
(unaudited)
Three Months Ended
March 31,
---------------------
2000 1999
------- -------
Interest income:
Loans $17,719 $14,759
Securities 4,091 3,538
Other 47 155
------- -------
Total interest income 21,857 18,452
------- -------
Interest expense:
Deposits 8,380 7,362
Borrowings 792 274
------- -------
Total interest expense 9,172 7,636
------- -------
Net interest income 12,685 10,816
Provision for loan losses 835 525
------- -------
Net interest income after provision
for loan losses 11,850 10,291
------- -------
Noninterest income:
Service charges on deposits 1,094 953
Gain on sale of securities and loans 117 107
Loan servicing fees 302 297
Mutual fund fees 173 157
Other 383 311
------- -------
Total noninterest income 2,069 1,825
------- -------
Noninterest expense:
Salaries and employee benefits 4,036 3,524
Occupancy and equipment 1,125 1,045
Supplies and postage 380 346
Amortization of intangibles 210 210
Professional fees 195 126
Other 1,261 1,070
------- -------
Total noninterest expense 7,207 6,321
------- -------
Income before income taxes 6,712 5,795
Income taxes 2,418 2,049
------- -------
Net income 4,294 3,746
Preferred stock dividends 374 376
------- -------
Net income available to common
shareholders $ 3,920 $ 3,370
======= =======
Net income per common share
Basic $ 0.36 $ 0.34
======= =======
Diluted $ 0.36 $ 0.34
======= =======
See accompanying notes to consolidated financial statements.
2
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Three Months Ended March 31,
2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 4,294 $ 3,746
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 812 845
Provision for loan losses 835 525
Deferred income tax benefit (238) (153)
Gain on sale of securities and loans (117) (107)
Minority interest in net income of subsidiary
banks 21 18
Increase in other assets (969) (281)
Increase (decrease) in accrued expenses and
other liabilities 2,591 (313)
-------- --------
Net cash provided by operating activities 7,229 4,280
-------- --------
Cash flows from investing activities:
Purchase of securities:
Available for sale (20,997) (51,445)
Held to maturity (1,898) (8,635)
Proceeds from sales and maturities of securities:
Available for sale 6,160 24,001
Held to maturity 2,561 6,763
Net increase in loans (24,687) (5,167)
Sale/disposal of premises and equipment 8 429
Purchase of premises and equipment (360) (153)
-------- --------
Net cash used in investing activities (39,213) (34,207)
-------- --------
Cash flows from financing activities:
Net increase (decrease)in deposits (120) 9,633
Increase in short-term borrowings, net 1,916 4,439
Proceeds from long-term borrowings 10,000 1,650
Repayment of long-term borrowings (7,734) (22)
Repurchase of preferred and common shares, net (166) 0
Dividends paid (1,257) (1,482)
-------- --------
Net cash provided by financing activities 2,639 14,218
-------- --------
Net decrease in cash and cash equivalents (29,345) (15,709)
Cash and cash equivalents at beginning of the period 61,226 42,843
-------- --------
Cash and cash equivalents at end of the period $ 31,881 $ 27,134
======== ========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 8,795 $ 7,351
======== ========
Income taxes $ 582 $ 1,360
======== ========
See accompanying notes to consolidated financial statements.
3
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in Thousands, except per share amounts)
(Unaudited)
Accumulated
Preferred Other
Stock Additional Comprehen- Total
----------- Common Paid-In Retained sive Income Treasury Shareholders
3% 8.48% Stock Capital Earnings (Loss) Stock Equity
--- ------ ------- --------- -------- ----------- -------- --------
Balance-December
31, 1999 $176 $17,636 $ 113 $ 16,448 $ 86,361 $ (2,661) $(534) $117,539
Purchase of 405
shares of 8.48%
preferred stock (41) (2) (43)
Purchase of
11,000 shares
of common stock (123) (123)
Comprehensive
income:
Net Income 4,294 4,294
Unrealized loss
on securities
available for
sale, net of
tax effect (1,137) (1,137)
Total comprehensive
income 3,157
Cash dividends
declared:
3%
preferred-$0.75
per share (1) (1)
8.48%
preferred-$2.12
per share (373) (373)
Common--$0.10
per share (1,101) (1,101)
---- ------- ----- -------- -------- -------- ----- --------
Balance--March 31,
2000 $176 $17,595 $ 113 $ 16,446 $ 89,180 $ (3,798) $(657) $119,055
==== ======= ===== ======== ======== ======== ===== ========
See accompanying notes to consolidated financial statements.
4
FINANCIAL INSTITUTIONS. INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 2000 and 1999
(Unaudited)
1. BASIS OF PRESENTATION
Financial Institutions. Inc. (the "Company") is a bank holding company that was
formed in 1931. The Company owns four commercial banks that operate in Western
and Central New York State: Wyoming County Bank ("WCB"), The National Bank of
Geneva ("NBG"), The Pavilion State Bank ("PSB"), and First Tier Bank & Trust
("FTB") (collectively the "Banks"). The Company is also the parent company of
The FI Group, Inc. ("FIGI"), a brokerage subsidiary that commenced operations on
March 22, 2000.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments necessary for a fair presentation have been included
in the results for the three month periods ended March 31, 2000 and March 31,
1999. The results of operations for the three month period ended March 31, 2000
are not necessarily indicative of the results which may be expected for the year
ending December 31, 2000.
The consolidated financial statements include the accounts of the Company, the
Banks and the Company's non-banking subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
2. EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares outstanding
during the periods indicated. The Company's basic and diluted earnings per share
calculations are identical in the periods presented, as there are, currently, no
instruments having a dilutive effect. The computation of basic and diluted
earnings per common share for the three month periods ended March 31, 2000 and
1999 are as follows:
Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------
Net Income for three months
ended March 31, 2000 $4,294,000
Less: Preferred Stock Dividends 374,000
----------
BASIC EPS AND DILUTED EPS 3,920,000 11,016,052 $0.36
- ------------------------------------------------------------------------------------------
Net Income for three months
ended March 31, 1999 $3,746,000
Less: Preferred Stock Dividends 376,000
----------
BASIC EPS AND DILUTED EPS 3,370,000 9,915,600 $0.34
==========================================================================================
5
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The following table summarizes, at the dates indicated, the Company's loan
portfolio by type:
As of As of
March 31, December 31,
(Dollars in thousands) 2000 1999
--------- ------------
Commercial $145,815 $140,376
Commercial real estate 143,739 137,694
Agricultural 154,067 151,534
Residential real estate 190,271 189,466
Consumer & home equity 154,654 145,038
-------- --------
Loans, gross 788,546 764,108
Net deferred fees (358) (363)
Allowance for loan losses (11,907) (11,421)
-------- --------
Total loans, net $776,281 $752,324
======== ========
The following table presents an analysis of the allowance for loan losses and
other related data for the periods indicated.
(Dollars in thousands)
Three Months Ended
------------------
March 31,
2000 1999
------- -------
Balance at the beginning
of the period $11,421 $ 9,570
Charge-Offs:
Commercial 154 95
Commercial real estate 4 4
Residential real estate -- 67
Consumer and home equity 252 120
------- -------
Total charge-offs 410 286
------- -------
Recoveries:
Commercial 3 31
Commercial real estate -- 1
Agricultural 1 --
Consumer and home equity 57 19
------- -------
Total recoveries 61 51
------- -------
Net charge-offs 349 235
Provision for loan losses 835 525
------- -------
Balance at the end of the period $11,907 $ 9,860
======= =======
Ratio of net charge-offs
to average loans (annualized) 0.18% 0.14%
Allowance for loan losses
to total loans 1.51% 1.49%
Allowance for loan losses
to nonperforming loans 171.97% 160.90%
Allowance for loan losses to
nonperforming loans, net of
government guaranteed portion (1) 192.07% 211.00%
(1) Nonperforming loans, net of government guaranteed portion, is total
nonperforming loans less the portion of the principal amount of all
nonperforming loans that is guaranteed by the Small Business
Administration ("SBA") or Farm Service Agency ("FSA").
At March 31, 2000 and 1999, the recorded investment in loans that are considered
to be impaired totaled $3,490,000 and $4,157,000, respectively. The average
recorded investments in impaired loans during the three months ended March 31,
2000 and 1999 were approximately $3,586,000 and $4,611,000, respectively. At
March 31, 2000 and 1999, the Company had specific allocations for impaired loans
included in the allowance for loan losses of $747,000 and $859,000,
respectively.
6
The following table presents information regarding nonperforming assets at the
dates indicated:
As of As of
March 31, December 31,
2000 1999
(Dollars in thousands) ------ ------------
Nonaccruing loans (1):
Commercial $1,097 $1,159
Commercial real estate 2,122 1,373
Agricultural 1,451 1,455
Residential real estate 945 413
Consumer and home equity 422 375
------ ------
Total loans 6,037 4,775
Accruing loans 90 days or more delinquent 887 969
------ ------
Total nonperforming loans 6,924 5,744
Other real estate owned (2) 900 969
------ ------
Total nonperforming assets 7,824 6,713
Less: government guaranteed portion of
nonperforming loans 725 734
------ ------
Total nonperforming assets, net of government
guaranteed portion $7,099 $5,979
====== ======
Nonperforming loans to total loans 0.88% 0.75%
===== =====
Nonperforming loans, net of government
guaranteed portion, to total loans (3) 0.79% 0.66%
===== =====
Nonperforming assets to total loans and other
real estate 0.99% 0.88%
===== =====
Nonperforming assets, net of government
guaranteed portion, to total loans and
other real estate 0.90% 0.78%
===== =====
(1) Loans are placed on nonaccrual status when they become 90 days past due if
they have been identified as presenting uncertainty with respect to the
collectibility of interest or principal.
(2) Other real estate owned balances are shown net of related allowances.
(3) Nonperforming loans, net of government guaranteed portion, is total
nonperforming loans less the portion of the principal amount of all
nonperforming loans that is guaranteed by the SBA or FSA.
7
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires the Company to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for gains and losses resulting from
changes in fair value of the derivative instrument depends on the intended use
of the derivative and the type of risk being hedged. SFAS No. 133's effective
date was deferred in June 1999 by FASB's issuance of SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133" and is now effective for fiscal years beginning
after June 15, 2000, although earlier adoption is permitted. Based upon current
activities, the adoption of this statement will not have an effect on the
Company's financial position or results of operations. SFAS No. 133 also permits
a reclassification of securities to the available for sale category from the
held to maturity category, at the time the standard is adopted.
5. SEGMENT INFORMATION
Segments are determined based upon the individual subsidiary banks. Reportable
segments are comprised of WCB, NBG, PSB and FTB as the Company evaluates
performance on an individual bank basis. The reportable segment information as
of and for the quarters ended March 31, 2000 and 1999 follows:
(Dollars in thousands) 2000 1999
----------- -----------
Net interest income:
WCB ............................................ $ 5,229 $ 4,546
NBG ............................................ 4,365 3,707
PSB ............................................ 1,677 1,474
FTB ............................................ 1,254 1,118
----------- -----------
Total segment net interest income ............ 12,525 10,845
Parent Company, FIGI, and eliminations, net ...... 160 (29)
----------- -----------
Total net interest income .................... $ 12,685 $ 10,816
=========== ===========
Net interest income plus non-interest income:
WCB ............................................ $ 5,971 $ 5,177
NBG ............................................ 5,210 4,378
PSB ............................................ 1,925 1,729
FTB ............................................ 1,490 1,394
----------- -----------
Total segment net interest
income plus non-interest income ........... 14,596 12,678
Parent Company, FIGI, and eliminations, net ...... 158 (37)
----------- -----------
Total net interest income plus
non-interest income ....................... $ 14,754 $ 12,641
=========== ===========
Net income:
WCB ............................................ $ 1,857 $ 1,663
NBG ............................................ 1,669 1,366
PSB ............................................ 435 460
FTB ............................................ 390 348
----------- -----------
Total segment net income ..................... 4,351 3,837
Parent Company, FIGI, and eliminations, net ...... (57) (91)
----------- -----------
Total net income ............................. $ 4,294 $ 3,746
=========== ===========
Assets:
WCB ............................................ $ 457,823 $ 388,675
NBG ............................................ 420,041 370,782
PSB ............................................ 144,684 124,396
FTB ............................................ 122,823 106,437
----------- -----------
Total segment net assets ..................... 1,145,371 990,290
Parent Company, FIGI, and eliminations, net ...... (508) 2,880
----------- -----------
Total assets ................................. $ 1,144,863 $ 993,170
=========== ===========
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
This quarterly report contains certain "forward-looking statements" covered by
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. When used or incorporated by reference in the Company's disclosure
documents, the words "anticipate," "estimate," "expect," "project," "target,"
"goal" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act. Such
forward-looking statements are subject to certain risks, uncertainties and
assumptions, including, but not limited to changes in (1) general economic
conditions, (2) the real estate markets, and (3) interest rates. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, expected or projected. These forward-looking statements
speak only as of the date of the document. The Company expressly disclaims any
obligation or undertaking to publicly release any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectation with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
The purpose of this discussion is to present material changes in the Company's
financial condition and results of operations during the three months ended
March 31, 2000 to supplement the information in the consolidated financial
statements included in this report.
The following table presents certain information and ratios that management of
the Company considers important in evaluating the Company's performance:
At or For The Three Months Ended March 31,
2000 1999 $ Change % Change
---------- ---------- --------- --------
Per common share data:
Net income - basic $0.36 $0.34 $0.02 5.9%
Net income - diluted $0.36 $0.34 $0.02 5.9%
Cash dividends declared $0.10 $0.0755 $0.0245 32.5%
Book value $9.20 $8.13 $1.07 13.2%
Tangible book value $8.94 $7.76 $1.18 15.2%
Common shares outstanding:
Weighted average shares - diluted 11,016,052 9,915,600
Period end 11,006,733 9,915,600
Performance ratios, annualized:
Return on average assets 1.55% 1.55%
Return on average common equity 15.69% 17.05%
Net interest margin (tax-equivalent) 5.00% 4.94%
Efficiency ratio 46.68% 47.74%
Asset quality ratios:
Excluding impact of government guarantees on
portion of loan portfolio:
Nonperforming loans to total loans 0.88% 0.93%
Nonperforming assets to total loans and other
real estate 0.99% 1.22%
Net loan charge-offs to average
loans (annualized) 0.18% 0.14%
Allowance for loan losses to total loans 1.51% 1.49%
Allowance for loan losses to nonperforming loans 171.97% 160.90%
Including impact of government guarantees on
portion of loan portfolio:
Nonperforming loans to total loans 0.79% 0.71%
Nonperforming assets to total loans and other
real estate 0.90% 1.00%
Allowance for loan losses to nonperforming loans 192.07% 211.00%
Capital ratios:
Average common equity to average total assets 8.99% 8.15%
Leverage ratio 10.81% 9.63%
Tier 1 risk based capital ratio 14.72% 13.89%
Risk-based capital ratio 15.97% 15.15%
Intangible assets to tangible common equity 2.96% 4.87%
9
The Company's net income for the first quarter of 2000 increased 14.6% to
$4,294,000 compared to $3,746,000 for the first quarter of 1999. Earnings per
share rose 5.9% to $.36 for the first quarter of 2000 from $.34 in the first
quarter of 1999. Return on average common equity was 15.69% for the three months
ended March 31, 2000 compared to 17.05% in the same period in 1999.
Net interest income increased 17.3% to $12,685,000 for the first quarter of 2000
compared to $10,816,000 for the first quarter of 1999. The increase resulted
from a 14.1% growth in average earning assets and a 6 basis point increase in
net interest margin. Average earning assets for the first quarter of 2000
increased to $1,062.4 million from $931.0 million in the first quarter of 1999.
Net interest margin for the first quarter of 2000 was 5.00% compared to 4.94%
for the same period in 1999.
Noninterest income of $2,069,000 for the first quarter of 2000 increased 13.4%
from $1,825,000 for the same period in 1999. The increase is principally derived
from deposit service charges at all four Banks plus increased trust fee income
from the National Bank of Geneva that began offering trust services late in the
fourth quarter of 1999.
Noninterest expense for the first quarter of 2000 was up 14.0% to $7,207,000
from $6,321,000 for the first quarter of 1999. The increase is associated
primarily with staffing levels from expanding lending activities, technological
expenditures associated with expanding the Company's product line and
distribution channels and the opening of a new branch office in a contiguous
market. The Company has effectively deployed resources whereby the Company's
efficiency ratio for the first quarter of 2000 was 46.68% compared to 47.74% for
the same period a year ago.
Provision for loan losses for the first quarter of 2000 was $835,000 compared to
$525,000 for the same period a year ago. The increase in provision for loan
losses is primarily attributed to the growth in the loan portfolio.
Nonperforming assets at March 31, 2000 were $7.8 million, a decrease of 3.1%
from $8.1 million at March 31, 1999. When including the impact of government
guarantees, nonperforming assets at March 31, 2000 were $7.1 million compared to
$6.6 million at March 31, 1999.
At March 31, 2000 the Company had total assets of $1,144.9 million, an increase
of 0.7% from $1,136.5 million at December 31, 1999. Loans increased 3.2% to
$788.2 million at March 31, 2000 from $763.7 million at December 31, 1999. Total
deposits were $949.4 million at the recent quarter-end, compared with $949.5
million at December 31, 1999 which reflect normal seasonal trends for the
Company. Total shareholders' equity increased 1.3% to $119.1 million at March
31, 2000, from $117.5 million at December 31, 1999. Book value per common share
at March 31, 2000 was $9.20, an increase of 1.7% from $9.05 at December 31,
1999. Tangible book value per common share was $8.94 at March 31, 2000, an
increase of 1.9% from $8.77 at December 31, 1999.
10
SUPPLEMENTAL SCHEDULES
The following table presents, for the periods indicated, the total dollar amount
of average balances, interest income from average interest-earning assets,
interest expense on average interest-bearing liabilities, and the resulting
yields and rates. Except as indicated in the footnotes to this table, no
tax-equivalent adjustments have been made and all average balances are daily
average balances. Nonaccruing loans have been included in the yield calculation
in this table.
For the Three Months Ended March 31,
------------------------------------
2000 1999
------- -------
Average Interest Annualized Average Interest Annualized
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
(Dollars in thousands) Balance Paid Rate Balance Paid Rate
--------- -------- -------- ----------- -------- ----------
Interest-earning assets
Federal funds sold and
interest-bearing
deposits $3,479 $47 5.43% $12,667 $155 4.96%
Investment securities (1) 287,881 4,654 6.46% 261,465 4,066 6.31%
Loans (2)
Commercial and agricultural 434,544 10,147 9.39% 352,112 7,781 8.96%
Residential real estate 188,882 4,103 8.69% 179,837 4,007 9.04%
Consumer and home equity 147,600 3,469 9.45% 124,959 2,971 9.64%
--------- ------ ---- ------- ------ ----
Total loans 771,026 17,719 9.23% 656,908 14,759 9.11%
--------- ------ ---- ------- ------ ----
Total interest-earning assets 1,062,386 22,420 8.47% 931,040 18,980 8.27%
--------- ------ ---- ------- ------ ----
Interest-bearing liabilities
Interest-bearing checking 109,585 366 1.34% 97,284 334 1.39%
Savings and money market 190,771 1,195 2.52% 176,415 1,079 2.48%
Certificates of deposit 502,450 6,819 5.46% 454,867 5,949 5.30%
Borrowed funds 53,675 792 5.93% 20,709 274 5.37%
--------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities 856,481 9,172 4.31% 749,275 7,636 4.13%
--------- ------ ---- ------- ------ ----
Net interest income $13,248 $11,344
======= =======
Net interest rate spread 4.16% 4.14%
====== ======
Net earning assets $205,905 $181,765
======== ========
Net interest margin on
earning assets (3) 5.00% 4.94%
====== ======
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities 124.04% 124.26%
======= =======
11
(1) Amounts shown are amortized cost for Held To Maturity securities and fair
value for Available for Sale securities. In order to make pre-tax income
and resultant yields on tax-exempt securities comparable to those on
taxable securities and loans, a tax-equivalent adjustment to interest
earned from tax-exempt securities has been computed using a federal income
tax rate of 35%.
(2) Net of deferred loan fees and costs.
(3) The net interest margin is equal to net interest income divided by average
interest-earning assets and is presented on an annualized basis.
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (1) changes attributable to changes in volume (changes in volume
multiplied by the current year rate); (2) changes attributable to changes in
rate (changes in rate multiplied by the prior year volume); and (3) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and changes due to
rate.
1st Quarter 2000 Compared to 1st Quarter 1999
(Dollars in thousands) ---------------------------------------------
Increase (Decrease) Due to
---------------------------- Total Increase
Volume Rate (Decrease)
------ ------ --------------
Interest-earning assets:
Federal funds sold and
interest-bearing deposits $(123) $15 $(108)
Investment securities 485 103 588
Loans:
Commercial 595 173 768
Commercial real estate 718 38 756
Agricultural 673 169 842
Residential real estate 298 (202) 96
Consumer and home equity 556 (58) 498
------ ----- ------
Total loans 2,840 120 2,960
------ ----- ------
Total interest-earning assets 3,202 238 3,440
------ ----- ------
Interest-bearing liabilities
Interest-bearing checking 43 (11) 32
Savings and money market 99 17 116
Certificates of deposit 692 178 870
Borrowed funds 489 29 518
------ ----- ------
Total interest-bearing liabilities 1,323 213 1,536
------ ----- ------
Net interest income $1,879 $ 25 $1,904
====== ===== ======
12
Year 2000 ("Y2K")
Concerns over the arrival of the Year 2000 ("Y2K") and its impact on the
embedded computer technologies used by financial institutions, among others, led
bank regulatory authorities to require substantial advance testing and
preparations by all banking organizations, including the Company. As of the date
of this filing, the Company has experienced no problems in connection with Y2K,
either in connection with the services and products it provides to its customers
or in connection with the services and products it receives from third party
vendors or suppliers.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
The Company realizes income principally from the differential or spread between
the interest earned on loans, investments and other interest-earnings assets and
the interest paid on deposits and borrowings. Loan volumes and yields, as well
as the volume of and rates on investments, deposits and borrowings, are affected
by market interest rates. Additionally, because of the terms and conditions of
many of the Company's loan documents and deposit accounts, a change in interest
rates could also affect the projected maturities of the loan portfolio and/or
the deposit base, which could alter the Company's sensitivity to future changes
in interest rates. Accordingly, management considers interest rate risk to be
the Company's most significant market risk.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board approved policy limits while taking into
consideration, among other factors, the Company's overall credit, operating
income, operating cost, and capital profile. The Company's Asset/Liability
Committee (ALCO), which includes senior management and reports to the Board of
Directors, monitors and manages interest rate risk to maintain an acceptable
level of change to net interest income as a result of changes in interest rates.
Management of the Company's interest rate risk requires the selection of
appropriate techniques and instruments to be utilized after considering the
benefits, costs and risks associated with available alternatives. Since the
Company does not utilize derivative instruments, management's techniques usually
consider one or more of the following: (1) interest rates offered on products,
(2) maturity terms offered on products, (3) types of products offered, and (4)
products available to the Company in the wholesale market such as advances from
the FHLB.
The Company uses a net interest income and economic value of equity model as one
method to identify and manage its interest rate risk profile. The model is based
on expected cash flows and repricing characteristics for all financial
instruments and incorporates market-based assumptions regarding the impact of
changing interest rates on these financial instruments. Assumptions based on the
historical behavior of deposit rates and balances in relation to changes in
interest rates are also incorporated into the model. These assumptions are
inherently uncertain and, as a result, the model cannot precisely measure net
interest income or precisely predict the impact of fluctuations in interest
rates on net interest income. Actual results will differ from simulated results
due to timing, magnitude, and frequency of interest rate changes as well as
changes in market conditions and management strategies. The Company has
experienced no significant changes in market risk due to changes in interest
rates since the Company's Annual Report on Form 10-K as of December 31, 1999
dated March 28, 2000 as filed with the Securities and Exchange Commission.
Management also uses the static gap analysis to identify and manage the
Company's interest rate risk profile. Interest sensitivity gap ("gap") analysis
measures the difference between the assets and liabilities repricing or maturing
within specific time periods.
13
PART II -- OTHER INFORMATION
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant, as amended *
3.2 By-laws of the Registrant, as amended *
4.1 Form of Certificate for the Registrant's Common Stock *
10.1 1999 Management Stock Incentive Plan of the Registrant **
10.2 1999 Directors' Stock Incentive Plan of the Registrant **
27 Financial Data Schedule for the Three Months ended March 31, 2000
o * Incorporated by reference to the corresponding exhibit filed with the
Registrant's Registration Statement on Form S-1 (File No. 333-76865).
o ** Incorporated by reference to the corresponding exhibit filed with the
Registrant's 1999 Annual Report on Form 10-K.
(b) Reports on Form 8-K
None
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL INSTITUTIONS, INC.
(Registrant)
May 11, 2000 /s/ Peter G. Humphrey
------------ ---------------------
Date Peter G. Humphrey, President & CEO
May 11, 2000 /s/ Ronald A. Miller
------------ --------------------
Date Ronald A. Miller, SVP & CFO
15