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 June 30, 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 practicable date.
TITLE OUTSTANDING
----- -----------
Common Stock , $0.01 par value Outstanding at August 1, 2000
Per share 10,986,721 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)
June 30, December 31,
2000 1999
ASSETS ----------- -----------
(unaudited)
Cash, due from banks and interest-bearing deposits $ 28,758 $ 49,672
Federal funds sold 0 11,554
Securities available for sale, at fair value 226,535 200,272
Securities held to maturity (fair value of
$79,446 at June 30, 2000 and $80,902 at
December 31, 1999) 80,202 81,356
Loans 836,862 763,745
Allowance for loan losses (12,581) (11,421)
----------- -----------
Loans, net 824,281 752,324
Premises and equipment, net 17,240 17,009
Other assets 26,874 24,273
----------- -----------
Total assets $ 1,203,890 $ 1,136,460
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 132,222 $ 141,800
Savings, money market and interest-bearing
checking 304,579 306,813
Certificates of deposit 551,954 500,918
----------- -----------
Total deposits 988,755 949,531
Short-term borrowings 65,857 46,096
Long-term borrowings 12,558 10,240
Accrued expenses and other liabilities 14,819 13,054
----------- -----------
Total liabilities 1,081,989 1,018,921
----------- -----------
Shareholders' equity:
3% cumulative preferred stock, $100 par value,
authorized 10,000 shares, issued and
outstanding 1,759 shares at June 30, 2000
and at December 31, 1999 176 176
8.48% cumulative preferred stock, $100 par
value, authorized 200,000 shares, issued
and outstanding 175,869 shares at June 30,
2000 and 176,359 shares at December 31,
1999 17,587 17,636
Common stock, $0.01 par value, authorized
50,000,000 shares, issued 11,303,533 shares
at June 30, 2000 and December 31, 1999 113 113
Additional paid-in capital 16,469 16,448
Retained earnings 92,151 86,361
Accumulated other comprehensive loss (3,666) (2,661)
Treasury stock--common, at cost--316,812 shares
at June 30, 2000 and 285,800 shares at
December 31, 1999 (929) (534)
----------- -----------
Total shareholders' equity 121,901 117,539
----------- -----------
Total liabilities and shareholders' equity $ 1,203,890 $ 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 Six Months Ended
June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
Interest income: ------- ------- ------- -------
Loans $19,095 $15,340 $36,814 $30,100
Securities 4,377 3,763 8,468 7,301
Other 42 91 89 245
------- ------- ------- -------
Total interest income 23,514 19,194 45,371 37,646
------- ------- ------- -------
Interest expense:
Deposits 9,289 7,446 17,669 14,809
Borrowings 1,021 336 1,813 609
------- ------- ------- -------
Total interest expense 10,310 7,782 19,482 15,418
------- ------- ------- -------
Net interest income 13,204 11,412 25,889 22,228
Provision for loan losses 1,172 531 2,007 1,056
------- ------- ------- -------
Net interest income after provision
for loan losses 12,032 10,881 23,882 21,172
------- ------- ------- -------
Noninterest income:
Service charges on deposits 1,259 1,049 2,353 2,002
Gain on sale of securities, loans, and
equipment 65 104 182 211
Loan servicing fees 303 310 605 607
Mutual fund fees 350 129 523 266
Other 326 308 709 639
------- ------- ------- -------
Total noninterest income 2,303 1,900 4,372 3,725
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 4,103 3,667 8,139 7,191
Occupancy and equipment 1,117 1,247 2,242 2,293
Supplies and postage 351 308 731 654
Amortization of intangibles 176 210 386 419
Other 1,628 1,329 3,084 2,525
------- ------- ------- -------
Total noninterest expense 7,375 6,761 14,582 13,082
------- ------- ------- -------
Income before income taxes 6,960 6,020 13,672 11,815
Income taxes 2,511 2,135 4,929 4,184
------- ------- ------- -------
Net income 4,449 3,885 8,743 7,631
Preferred stock dividends 374 376 748 752
------- ------- ------- -------
Net income available to common
shareholders $ 4,075 $ 3,509 $ 7,995 $ 6,879
======= ======= ======= =======
Net income per common share
Basic $ 0.37 $ 0.35 $ 0.73 $ 0.69
======= ======= ======= =======
Diluted $ 0.37 $ 0.35 $ 0.73 $ 0.69
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
2
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Six Months Ended June 30,
2000 1999
--------- ---------
Cash flows from operating activities:
Net income $ 8,743 $ 7,631
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,529 1,885
Provision for loan losses 2,007 1,056
Deferred income tax benefit (506) (405)
Gain on sale of securities, loans, and equipment (182) (211)
Minority interest in net income of subsidiary
banks 43 37
(Increase) decrease in other assets (1,784) 544
Increase (decrease) in accrued expenses and
other liabilities 1,506 (238)
--------- ---------
Net cash provided by operating activities 11,356 10,299
--------- ---------
Cash flows from investing activities:
Purchase of securities:
Available for sale (49,453) (67,981)
Held to maturity (13,056) (16,306)
Proceeds from maturities of securities:
Available for sale 21,413 36,369
Held to maturity 14,059 19,203
Proceeds from sales of securities available for sale 0 2,092
Net increase in loans (73,819) (46,852)
Sale/disposal of premises and equipment 24 436
Purchase of premises and equipment (1,139) (403)
--------- ---------
Net cash used in investing activities (101,971) (73,442)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 39,224 19,299
Increase in short-term borrowings, net 19,761 13,666
Proceeds from long-term borrowings 4,088 4,907
Repayment of long-term borrowings (1,772) (53)
Repurchase of preferred and common shares (422) (1)
Dividends paid (2,732) (2,606)
Proceeds from issuance of common stock, net of
offering costs 0 13,731
--------- ---------
Net cash provided by financing activities 58,147 48,943
--------- ---------
Net decrease in cash and cash equivalents (32,468) (14,200)
Cash and cash equivalents at beginning of the period 61,226 42,843
--------- ---------
Cash and cash equivalents at end of the period $ 28,758 $ 28,643
========= =========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 17,873 $ 15,268
========= =========
Income taxes $ 5,444 $ 3,796
========= =========
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 Total
Stock Additional Comprehen- Share-
--------------- Common Paid-In Retained sive Treasury holders'
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 490
shares of 8.48%
preferred stock (49) (2) (51)
Purchase of
33,300 shares of
common stock (401) (401)
Issue 2,288
shares of common
stock -
directors plan 23 6 29
Comprehensive
income:
Net Income 8,743 8,743
Unrealized loss
on securities
available for
sale, net of
tax effect (1,005) (1,005)
--------
Total
comprehensive
income 7,738
Cash dividends
declared:
3% preferred-
$1.50 per share (3) (3)
8.48%
preferred-$4.24
per share (745) (745)
Common--$0.20
per share (2,205) (2,205)
------ ------- ------- ---------- -------- ----------- -------- --------
Balance--June 30,
2000 $ 176 $17,587 $ 113 $ 16,469 $ 92,151 $ (3,666) $ (929) $121,901
====== ======= ======= ========== ======== =========== ======== ========
See accompanying notes to consolidated financial statements.
4
FINANCIAL INSTITUTIONS. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 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 and six month periods ended June 30, 2000 and June
30, 1999. The results of operations for the three and six month periods ended
June 30, 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 FIGI. 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 computation of basic and diluted earnings per
common share for the three month and six month periods ended June 30, 2000 and
1999 are as follows:
Income Shares Per Share Amount
- -----------------------------------------------------------------------------------------------------
Net Income for three months
Ended June 30, 2000 $4,449,000
Less: Preferred Stock Dividends 374,000
------------
BASIC EPS 4,075,000 10,991,867 $0.37
Effect of dilutive securities:
Stock Options N/A 954
------------ ------------
DILUTED EPS $4,075,000 10,992,821 $0.37
- -----------------------------------------------------------------------------------------------------
Net Income for three months
ended June 30, 1999 $3,885,000
Less: Preferred Stock Dividends 376,000
------------
BASIC EPS 3,509,000 9,927,722 $0.35
Effect of dilutive securities:
Stock Options N/A 1,302
------------ ------------
DILUTED EPS $3,509,000 9,929,024 $0.35
- -----------------------------------------------------------------------------------------------------
Net Income for six months
ended June 30, 2000 $8,743,000
Less: Preferred Stock Dividends 748,000
------------
BASIC EPS 7,995,000 11,003,959 $0.73
Effect of dilutive securities:
Stock Options N/A 3
------------ ------------
DILUTED EPS $7,995,000 11,003,962 $0.73
- -----------------------------------------------------------------------------------------------------
Net Income for six months
ended June 30, 1999 $7,631,000
Less: Preferred Stock Dividends 752,000
-----------
BASIC EPS 6,879,000 9,921,695 $0.69
Effect of dilutive securities:
Stock Options N/A 654
------------ ------------
DILUTED EPS $6,879,000 9,922,349 $0.69
=====================================================================================================
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
June 30, December 31,
2000 1999
---------- ------------
Commercial $157,723 $140,376
Commercial real estate 154,037 137,694
Agricultural 160,401 151,534
Residential real estate 194,819 189,466
Consumer & home equity 170,251 145,038
---------- ----------
Loans, gross 837,231 764,108
Net deferred fees (369) (363)
Allowance for loan losses (12,581) (11,421)
---------- ----------
Total loans, net $824,281 $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 Six Months Ended
------------------- ------------------
June 30, June 30,
2000 1999 2000 1999
------- ------- ------- -------
Balance at the beginning
of the period $11,907 $ 9,860 $11,421 $ 9,570
Charge-Offs:
Commercial 24 40 178 136
Commercial real estate 360 29 364 34
Agricultural 29 12 29 12
Residential real
estate 63 154 63 220
Consumer and home
equity 154 138 407 257
------- ------- ------- -------
Total charge-offs 630 373 1,041 659
------- ------- ------- -------
Recoveries:
Commercial 66 5 69 37
Commercial real estate 1 -- 1 1
Agricultural -- -- 1 --
Residential real
estate -- 69 -- 69
Consumer and home
equity 65 32 123 50
------- ------- ------- -------
Total recoveries 132 106 194 157
------- ------- ------- -------
Net charge-offs 498 267 847. 502
Provision for loan losses 1,172 531 2,007 1,056
------- ------- ------- -------
Balance at the end of the
period $12,581 $10,124 $12,581 $10,124
======= ======= ======= =======
Ratio of net charge-offs
to average loans
(annualized) 0.21% 0.15%
Allowance for loan losses
to total loans 1.50% 1.46%
Allowance for loan losses
to nonperforming loans 158.72% 138.65%
Allowance for loan losses
to nonperforming
loans, net of
government guaranteed
portion (1) 199.19% 165.77%
(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").
6
At June 30, 2000 and 1999, the recorded investment in loans that are considered
to be impaired totaled $5,270,000 and $4,034,000, respectively. The average
recorded investments in impaired loans during the six months ended June 30, 2000
and 1999 were approximately $4,147,000 and $4,419,000, respectively. At June 30,
2000 and 1999, the Company had specific allocations for impaired loans included
in the allowance for loan losses of $860,000 and $923,000, respectively.
7
The following table presents information regarding nonperforming assets at the
dates indicated:
As of As of
June 30, December 31,
2000 1999
-------- ------------
Nonaccruing loans (1):
Commercial $1,120 $1,159
Commercial real estate 1,450 1,373
Agricultural 2,890 1,455
Residential real estate 819 413
Consumer and home equity 418 375
------ ------
Total loans 6,697 4,775
Accruing loans 90 days or more delinquent 1,230 969
------ ------
Total nonperforming loans 7,927 5,744
Other real estate owned (2) 1,127 969
------ ------
Total nonperforming assets 9,054 6,713
Less: government guaranteed portion of
nonperforming loans 1,611 734
------ ------
Total nonperforming assets, net of government
guaranteed portion $7,443 $5,979
====== ======
Nonperforming loans to total loans 0.95% 0.75%
====== ======
Nonperforming loans, net of government
guaranteed portion, to total loans (3) 0.75% 0.66%
====== ======
Nonperforming assets to total loans and other
real estate 1.08% 0.88%
====== ======
Nonperforming assets, net of government
guaranteed portion, to total loans and
other real estate 0.89% 0.78%
====== ======
(1) Loans are placed on nonaccrual status when they become 90 days past due if
there is 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.
8
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, as amended by SFAS No. 138,
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 manages and
evaluates performance on an individual bank basis. The reportable segment
information as of and for the six month periods ended June 30, 2000 and 1999
follows:
(Dollars in thousands) 2000 1999
---- ----
Net interest income:
WCB .............................................. $ 10,562 $ 9,312
NBG .............................................. 8,961 7,638
PSB .............................................. 3,483 3,058
FTB .............................................. 2,527 2,278
---------- ----------
Total segment net interest income .............. 25,533 22,286
Parent Company, FIGI, and eliminations, net ........ 356 (58)
---------- ----------
Total net interest income ...................... $ 25,889 $ 22,228
========== ==========
Net interest income plus non-interest income:
WCB .............................................. $ 12,188 $ 10,580
NBG .............................................. 10,610 9,009
PSB .............................................. 4,032 3,719
FTB .............................................. 2,991 2,714
---------- ----------
Total segment net interest
income plus non-interest income ............. 29,821 26,022
Parent Company, FIGI, and eliminations, net ........ 440 (69)
---------- ----------
Total net interest income plus
non-interest income ......................... $ 30,261 $ 25,953
========== ==========
Net income:
WCB .............................................. $ 3,646 $ 3,337
NBG .............................................. 3,425 2,857
PSB .............................................. 952 1,002
FTB .............................................. 738 664
---------- ----------
Total segment net income ....................... 8,761 7,860
Parent Company, FIGI, and eliminations, net ........ (18) (229)
---------- ----------
Total net income ............................... $ 8,743 $ 7,631
========== ==========
Assets:
WCB .............................................. $ 486,630 $ 396,148
NBG .............................................. 437,614 384,295
PSB .............................................. 160,012 129,008
FTB .............................................. 129,196 116,408
---------- ----------
Total segment net assets ....................... 1,213,452 1,025,859
Parent Company, FIGI, and eliminations, net ........ (9,562) 4,347
---------- ----------
Total assets ................................... $1,203,890 $1,030,206
========== ==========
9
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 and six months
ended June 30, 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:
For The Three months ended June 30,
2000 1999 $ Change % Change
---------- ---------- -------- --------
Per common share data:
Net income - basic $0.37 $0.35 $0.02 5.7%
Net income - diluted $0.37 $0.35 $0.02 5.7%
Cash dividends declared $0.10 $0.0755 $0.245 32.5%
Book value $9.48 $8.67 $0.81 9.3%
Tangible book value $9.23 $8.35 $0.88 10.5%
Common shares outstanding:
Weighted average shares - diluted 10,992,639 9,929,024
Period end 10,986,721 11,018,733
Performance ratios, annualized:
Return on average assets 1.53% 1.53%
Return on average common equity 15.94% 17.22%
Net interest margin (tax-equivalent) 4.95% 4.95%
Efficiency ratio 45.74% 48.59%
Asset quality ratios:
Excluding impact of government guarantees on
portion of loan portfolio:
Nonperforming loans to total loans 0.95% 1.04%
Nonperforming assets to total loans and other
real estate 1.08% 1.23%
Net loan charge-offs to average loans 0.24% 0.16%
Allowance for loan losses to total loans 1.50% 1.46%
Allowance for loan losses to nonperforming loans 158.72% 138.65%
Including impact of government guarantees on
portion of loan portfolio:
Nonperforming loans to total loans 0.75% 0.87%
Nonperforming assets to total loans and other
real estate 0.89% 1.06%
Allowance for loan losses to nonperforming loans 199.19% 165.77%
Capital ratios:
Average common equity to average total assets 8.77% 8.02%
Leverage ratio 10.54% 10.97%
Tier 1 risk based capital ratio 14.19% 15.46%
Risk-based capital ratio 15.44% 16.71%
Intangible assets to tangible common equity 2.69% 3.85%
10
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
For The Six Months Ended June 30,
1999 1998 $ Change % Change
---------- ---------- -------- --------
Per common share data:
Net income - basic $0.73 $0.69 $0.04 5.8%
Net income - diluted $0.73 $0.69 $0.04 5.8%
Cash dividends declared $0.20 $0.151 $0.049 32.5%
Common shares outstanding:
Weighted average shares - diluted 11,003,962 9,922,349
Period end 10,986,721 11,018,733
Performance ratios, annualized:
Return on average assets 1.54% 1.54%
Return on average common equity 15.82% 17.13%
Net interest margin (tax-equivalent) 4.97% 4.95%
Efficiency ratio 46.20% 48.17%
Net loan charge-offs to average loans 0.21% 0.15%
11
The Company's net income for the second quarter of 2000 increased 14.5% to
$4,449,000 compared to $3,885,000 for the second quarter of 1999. Net income for
the first six months of 2000 increased 14.6% to $8,743,000 compared to
$7,631,000 for the same period in 1999. Diluted earnings per common share rose
5.7% to $0.37 for the second quarter of 2000 from $0.35 in the second quarter of
1999. For the first six months of 2000 diluted earnings per common share of
$0.73 were 5.8% higher than the $0.69 for the same period in 1999. Return on
average common equity was an annualized 15.82% for the six months ended June 30,
2000 compared to 17.13% in the same period in 1999.
Net interest income increased 15.7% to $13,204,000 for the second quarter of
2000 compared to $11,412,000 for the second quarter of 1999. The increase
resulted from 15.5% growth in average earning assets while net interest margin
was 4.95% in both quarters. Average earning assets for the second quarter of
2000 increased to $1,117.8 million from $968.2 million in the second quarter of
1999. Net interest income for the first six months of 2000 was $25,889,000, an
increase of 16.5% from $22,228,000 for the first six months of 1999. Net
interest margin of 4.97% for the first six months of 2000 compares to 4.95% for
the same period in 1999. Most of the earning asset growth has occurred in the
Commercial and Agricultural loan portfolios as a result of increased sales
efforts in the Company's primary markets as well as expansion into the
contiguous Erie and Monroe County markets.
Noninterest income of $2,303,000 for the second quarter of 2000 increased 21.2%
from $1,900,000 for the same period in 1999. Noninterest income for the first
six months of 2000 increased 17.4% to $4,372,000 compared to $3,725,000 for the
same period last year. The increases are principally from deposit service
charges, sales of mutual funds, and trust fees.
Noninterest expense for the second quarter of 2000 was up 9.1% to $7,375,000
from $6,761,000 for the second quarter of 1999. The Company's efficiency ratio
for the second quarter of 2000 was 45.74% compared to 48.59% for the same period
a year ago. For the six months ended June 30, 2000 noninterest expense increased
11.5% to $14,582,000 from $13,082,000 for the same period in 1999. The Company's
efficiency ratios for the first six months of 2000 and 1999 were 46.20% and
48.17%, respectively. The increases in noninterest expense compared to both 1999
periods primarily occurred in staffing and technology resources to support
expanding lending activities, product lines and delivery channels, and the
opening of two new branch offices in a contiguous market.
Provision for loan losses for the second quarter of 2000 was $1,172,000 compared
to $531,000 for the same period a year ago. For the first six months of 2000 the
provision was $2,007,000 compared to $1,056,000 for the same period a year ago.
The ratio of net loan charge-offs to average loans was 0.21% for the first six
months of 2000 compared to 0.15% for the same period in 1999. The increased
provision for loan losses is reflective of strong loan portfolio growth
particularly in indirect consumer lending and commercial loan activity in new
markets.
Nonperforming assets at June 30, 2000 were $9.1 million, an increase of $0.4
million from $8.7 million at June 30, 1999. The June 30, 2000 level of
nonperforming assets was an increase of $2.4 million from December 31, 1999 with
$1.4 million of the increase accounted for in agricultural loans, reflecting the
current decline in milk prices and an unusually wet growing season. Partially
mitigating the $1.4 million increase in nonperforming agricultural loans are
government guarantees on $0.9 million of the increase. When including the impact
of government guarantees, total nonperforming assets at June 30, 2000 were $7.4
million, down slightly from $7.5 million at June 30, 1999.
Income tax expense increased to $2.5 million for the second quarter 1999 from
$2.1 million for the second quarter 1999. The effective tax rate for the second
quarter 2000 was 36.1% compared to 35.5% for the second quarter 1999. For the
first six month of 2000, income tax expense was $4.9 million compared to $4.2
million, an increase of 17.8%.
At June 30, 2000 the Company had total assets of $1,203.9 million, an increase
of 5.9% from $1,136.5 million at December 31, 1999. Loans increased 9.6% to
$836.9 million at
12
June 30, 2000 from $763.7 million at December 31, 1999. Total deposits were
$988.8 million at the recent quarter-end, compared with $949.5 million at
December 31, 1999. Total shareholders' equity increased 3.7% to $121.9 million
at June 30, 2000, from $117.5 million at December 31, 1999. During the second
quarter of 1999 the Company completed an initial public offering of 1,103,133
shares of common stock that raised $13.7 million in net capital. Book value per
common share at June 30, 2000 was $9.48, an increase of 4.8% from $9.05 at
December 31, 1999. Tangible book value per common share was $9.23 at June 30,
2000, an increase of 5.2% from $8.77 at December 31, 1999.
13
SUPPLEMENTAL SCHEDULES
The following table presents, for the periods indicated, the total dollar amount
of average balances, interest income from average interest-earning assets, the
resulting yields and interest expense on average interest-bearing liabilities
expressed both in dollars 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 June 30,
----------------------------------------------
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 $2,781 $42 6.07% $7,277 $87 4.80%
Investment securities (1) 300,563 4,978 6.63% 278,855 4,308 6.20%
Loans (2)
Commercial and agricultural 460,246 11,034 9.64% 371,799 8,309 8.96%
Residential real estate 191,982 4,247 8.85% 181,112 3,981 8.82%
Consumer and home equity 162,248 3,814 9.45% 129,172 3,051 9.47%
---------- ---------- ---------- ---------- ---------- ----------
Total loans 814,476 19,095 9.42% 682,083 15,341 9.02%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 1,117,820 24,115 8.66% 968,215 19,736 8.18%
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities
Interest-bearing checking 111,289 374 1.35% 100,906 336 1.34%
Savings and money market 192,055 1,248 2.61% 184,321 1,102 2.40%
Certificates of deposit 537,260 7,667 5.74% 467,744 6,009 5.15%
Borrowed funds 63,765 1,022 6.45% 25,040 335 5.37%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities 904,369 10,311 4.59% 778,011 7,782 4.01%
---------- ---------- ---------- ---------- ---------- ----------
Net interest income $13,804 $11,954
======= =======
Net interest rate spread 4.07% 4.17%
===== =====
Net earning assets $213,451 $190,204
======== ========
Net interest margin on
earning assets (3) 4.95% 4.95%
===== =====
Ratio of average interest-
earning assets to
average interest-bearing
liabilities 123.60% 124.45%
======= =======
14
(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.
(Dollars in thousands) 2nd Quarter 2000 Compared to 2nd Quarter 1999
---------------------------------------------
Increase (Decrease) Due to
---------------------------- Total Increase
Volume Rate (Decrease)
--------- --------- ---------
Interest-earning assets:
Federal funds sold and
interest-bearing deposits $(68) $23 $(45)
Investment securities 360 310 670
Loans:
Commercial 665 281 946
Commercial real estate 750 115 865
Agricultural 677 237 914
Residential real estate 252 14 266
Consumer and home equity 769 (6) 763
--------- --------- ---------
Total loans 3,113 641 3,754
--------- --------- ---------
Total interest-earning assets 3,405 974 4,379
--------- --------- ---------
Interest-bearing liabilities:
Interest-bearing checking 35 3 38
Savings and money market 48 98 146
Certificates of deposit 973 685 1,658
Borrowed funds 620 67 687
--------- --------- ---------
Total interest-bearing liabilities 1,676 853 2,529
--------- --------- ---------
Net interest income $1,729 $121 $1,850
========= ========= =========
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-earning 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
15
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.
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 June 30, 2000
o * Incorporated by reference to the corresponding exhibit filed with the
Registrant's Registration Statement on Form S-1 (File No. 333-76865).
16
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
17
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)
August 9, 2000 /s/ Peter G. Humphrey
-------------- ---------------------
Date Peter G. Humphrey, President & CEO
August 9, 2000 /s/ Ronald A. Miller
-------------- --------------------
Date Ronald A. Miller, SVP & CFO
18