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 September 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 November 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)
September 30, December 31,
2000 1999
ASSETS ----------- -----------
(unaudited)
Cash, due from banks and interest-bearing deposits $ 35,442 $ 49,672
Federal funds sold 112 11,554
Securities available for sale, at fair value 253,937 200,272
Securities held to maturity (fair value of $81,366 at
September 30, 2000 and $80,902 at December 31, 1999) 81,605 81,356
Loans 858,442 763,745
Allowance for loan losses (13,180) (11,421)
----------- -----------
Loans, net 845,262 752,324
Premises and equipment, net 17,538 17,009
Other assets 27,844 24,273
----------- -----------
Total assets $ 1,261,740 $ 1,136,460
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 142,375 $ 141,800
Savings, money market and interest-bearing
checking 317,115 306,813
Certificates of deposit 590,380 500,918
----------- -----------
Total deposits 1,049,870 949,531
Short-term borrowings 56,746 46,096
Long-term borrowings 12,520 10,240
Accrued expenses and other liabilities 16,139 13,054
----------- -----------
Total liabilities 1,135,275 1,018,921
----------- -----------
Shareholders' equity:
3% cumulative preferred stock, $100 par value,
authorized 10,000 shares, issued and
outstanding 1,711 shares at September 30, 2000
and 1,759 shares at December 31, 1999 171 176
8.48% cumulative preferred stock, $100 par value,
authorized 200,000 shares, issued and outstanding
175,866 shares at September 30, 2000 and 176,356
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 September 30,
2000 and December 31, 1999 113 113
Additional paid-in capital 16,472 16,448
Retained earnings 95,239 86,361
Accumulated other comprehensive loss (2,188) (2,661)
Treasury stock--common, at cost--316,862 shares at
September 30, 2000 and 285,800 shares at December 31, 1999 (929) (534)
----------- -----------
Total shareholders' equity 126,465 117,539
----------- -----------
Total liabilities and shareholders' equity $ 1,261,740 $ 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 Nine Months Ended
September 30, September 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
Interest income:
Loans $20,513 $16,341 $57,327 $46,441
Securities 4,554 3,773 13,022 11,074
Other 65 72 154 317
------- ------- ------- -------
Total interest income 25,132 20,186 70,503 57,832
------- ------- ------- -------
Interest expense:
Deposits 10,607 7,573 28,276 22,382
Borrowings 1,040 384 2,853 993
------- ------- ------- -------
Total interest expense 11,647 7,957 31,129 23,375
------- ------- ------- -------
Net interest income 13,485 12,229 39,374 34,457
Provision for loan losses 1,100 933 3,107 1,989
------- ------- ------- -------
Net interest income after provision for loan
losses 12,385 11,296 36,267 32,468
------- ------- ------- -------
Noninterest income:
Service charges on deposits 1,310 1,117 3,663 3,119
Gain on sale of securities, loans, and
equipment 96 55 278 266
Loan servicing fees 277 287 882 894
Mutual fund fees 237 154 760 420
Other 455 562 1,164 1,201
------- ------- ------- -------
Total noninterest income 2,375 2,175 6,747 5,900
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 4,300 3,833 12,439 11,024
Occupancy and equipment 1,173 1,100 3,415 3,393
Amortization of intangibles 176 210 562 629
Other 1,880 1,712 5,695 4,891
------- ------- ------- -------
Total noninterest expense 7,529 6,855 22,111 19,937
------- ------- ------- -------
Income before income taxes 7,231 6,616 20,903 18,431
Income taxes 2,566 2,455 7,495 6,639
------- ------- ------- -------
Net income 4,665 4,161 13,408 11,792
Preferred stock dividends 374 375 1,122 1,128
------- ------- ------- -------
Net income available to common shareholders $ 4,291 $ 3,786 $12,286 $10,664
======= ======= ======= =======
Net income per common share
Basic $ 0.39 $ 0.34 $ 1.12 $ 1.04
======= ======= ======= =======
Diluted $ 0.39 $ 0.34 $ 1.12 $ 1.04
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
2
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Nine Months Ended September 30,
2000 1999
--------- ---------
Cash flows from operating activities:
Net income $ 13,408 $ 11,792
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,268 2,781
Provision for loan losses 3,107 1,989
Deferred income tax benefit (506) (579)
Gain on sale of securities, loans, and equipment (278) (266)
Minority interest in net income of subsidiary banks 66 57
Increase in other assets (3,954) (1,889)
Increase (decrease) in accrued expenses and other
liabilities 2,691 (1,154)
--------- ---------
Net cash provided by operating activities 16,802 12,731
--------- ---------
Cash flows from investing activities:
Purchase of securities:
Available for sale (78,550) (84,418)
Held to maturity (17,115) (17,780)
Proceeds from maturities of securities:
Available for sale 22,843 43,577
Held to maturity 16,647 24,494
Proceeds from sales of securities available for sale 2,741 2,092
Net increase in loans (95,804) (77,532)
Proceeds from sales of premises and equipment 41 436
Purchase of premises and equipment (1,916) (728)
--------- ---------
Net cash used in investing activities (151,113) (109,859)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 100,340 69,889
Increase in short-term borrowings, net 10,650 7,583
Proceeds from long-term borrowings 4,104 1,907
Repayment of long-term borrowings (1,825) (89)
Repurchase of preferred and common shares, net of
director plan issuance (425) (44)
Dividends paid (4,205) (3,731)
Proceeds from issuance of common stock, net of offering costs 0 13,647
--------- ---------
Net cash provided by financing activities 108,639 89,162
--------- ---------
Net decrease in cash and cash equivalents (25,672) (7,966)
Cash and cash equivalents at beginning of the period 61,226 42,843
--------- ---------
Cash and cash equivalents at end of the period $ 35,554 $ 34,877
========= =========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest $ 28,826 $ 23,484
========= =========
Income taxes $ 8,173 $ 6,199
========= =========
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)
Preferred Stock Accumulated Total
----------------- Common Additional Retained Other Comprehen- Treasury Share-holders'
3% 8.48% Stock Paid-In Capital Earnings sive Loss Stock Equity
------ -------- ------ --------------- -------- --------- ------ --------
Balance-December 31, 1999 $ 176 $ 17,636 $ 113 $ 16,448 $ 86,361 $ (2,661) $ (534) $117,539
Repurchase of 48 shares of
3% preferred stock (5) 3 (2)
Repurchase of 490 shares
of 8.48% preferred stock (49) (2) (51)
Repurchase 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 13,408 13,408
Unrealized gain on
securities available
for sale, net of tax
effect 473 473
--------
Total comprehensive
income 13,881
Cash dividends declared:
3% preferred-$2.25 per
share (4) (4)
8.48% preferred-$6.36
per share (1,118) (1,118)
Common-$0.31 per share (3,408) (3,408)
------ -------- ------ -------- -------- -------- ------ --------
Balance-September 30, 2000 $ 171 $ 17,587 $ 113 $ 16,472 $ 95,239 $ (2,188) $ (929) $126,465
====== ======== ====== ======== ======== ======== ====== ========
See accompanying notes to consolidated financial statements.
4
FINANCIAL INSTITUTIONS. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
SEPTEMBER 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 nine month periods ended September 30, 2000 and
September 30, 1999. The results of operations for the three and nine month
periods ended September 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 computations of basic and diluted earnings per
common share for the three month and nine month periods ended September 30, 2000
and 1999 are as follows:
Income Shares Per Share Amount
- ----------------------------------------------------------------------------------------------------------
Net Income for three months
ended September 30, 2000 $ 4,665,000
Less: Preferred Stock Dividends 374,000
-----------
BASIC EPS 4,291,000 10,986,721 $0.39
Effect of dilutive securities:
Stock Options N/A 3,507
----------- -----------
DILUTED EPS $ 4,291,000 10,990,228 $0.39
- ----------------------------------------------------------------------------------------------------------
Net Income for three months
ended September 30, 1999 $ 4,161,000
Less: Preferred Stock Dividends 375,000
-----------
BASIC EPS 3,786,000 11,018,711 $0.34
Effect of dilutive securities:
Stock Options N/A 0
----------- -----------
DILUTED EPS $ 3,786,000 11,018,711 $0.34
- ----------------------------------------------------------------------------------------------------------
Net Income for nine months
ended September 30, 2000 $13,408,000
Less: Preferred Stock Dividends 1,122,000
-----------
BASIC EPS 12,286,000 10,998,171 $1.12
Effect of dilutive securities:
Stock Options N/A 335
----------- -----------
DILUTED EPS $12,286,000 10,998,506 $1.12
- ----------------------------------------------------------------------------------------------------------
Net Income for nine months
ended September 30, 1999 $11,792,000
Less: Preferred Stock Dividends 1,128,000
-----------
BASIC EPS 10,664,000 10,291,385 $1.04
Effect of dilutive securities:
Stock Options N/A 0
----------- -----------
DILUTED EPS $10,664,000 10,291,385 $1.04
=========================================================================================================
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
September 30, As of
2000 December 31, 1999
------------ -----------------
Commercial $ 161,355 $ 140,376
Commercial real estate 158,557 137,694
Agricultural 160,767 151,534
Residential real estate 198,264 189,466
Consumer & home equity 179,862 145,038
--------- ---------
Loans, gross 858,805 764,108
Net deferred fees (363) (363)
Allowance for loan losses (13,180) (11,421)
--------- ---------
Total loans, net $ 845,262 $ 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 Nine Months Ended
-------------------- --------------------
September 30, September 30,
2000 1999 2000 1999
------- ------- ------- -------
Balance at the beginning of
the period $12,581 $10,124 $11,421 $ 9,570
Charge-Offs:
Commercial 76 51 254 186
Commercial real estate 216 57 581 91
Agricultural -- -- 29 12
Residential real
estate 42 81 105 301
Consumer and home
equity 248 215 655 473
------- ------- ------- -------
Total charge-offs 582 404 1,624 1,063
------- ------- ------- -------
Recoveries:
Commercial 12 47 81 84
Commercial real estate 19 9 20 10
Agricultural -- -- 1 --
Residential real
estate 9 10 10 79
Consumer and home
equity 41 29 164 79
------- ------- ------- -------
Total recoveries 81 95 276 252
------- ------- ------- -------
Net charge-offs 501 309 1,348 811
Provision for loan losses 1,100 933 3,107 1,989
------- ------- ------- -------
Balance at the end of the
period $13,180 $10,748 $13,180 $10,748
======= ======= ======= =======
Ratio of net charge-offs to
average loans (annualized) 0.22% 0.15%
Allowance for loan losses to
total loans 1.54% 1.47%
Allowance for loan losses to
nonperforming loans 172.14% 176.00%
Allowance for loan losses to
nonperforming loans, net of
government guaranteed
portion (1) 223.28% 208.01%
(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 September 30, 2000 and 1999, the recorded investment in loans that are
considered to be impaired totaled $6,448,000 and $3,478,000, respectively. The
average recorded investments in impaired loans during the nine months ended
September 30, 2000 and 1999 were approximately $4,722,000 and $4,184,000,
respectively. At September 30, 2000 and 1999, the Company had specific
allocations for impaired loans included in the allowance for loan losses of
$1,099,000 and $805,000, respectively.
6
The following table presents information regarding nonperforming assets at the
dates indicated:
As of As of
September 30, December 31,
2000 1999
------ ------
Nonaccruing loans (1):
Commercial $1,207 $1,159
Commercial real estate 1,348 1,373
Agricultural 2,986 1,455
Residential real estate 848 413
Consumer and home equity 310 375
------ ------
Total loans 6,699 4,775
Accruing loans 90 days or more delinquent 958 969
------ ------
Total nonperforming loans 7,657 5,744
Other real estate owned (2) 1,100 969
------ ------
Total nonperforming assets 8,757 6,713
Less: government guaranteed portion of nonperforming
loans 1,754 734
------ ------
Total nonperforming assets, net of government
guaranteed portion $7,003 $5,979
====== ======
Nonperforming loans to total loans 0.89% 0.75%
====== ======
Nonperforming loans, net of government guaranteed
portion, to total loans (3) 0.69% 0.66%
====== ======
Nonperforming assets to total loans and other real
estate 1.02% 0.88%
====== ======
Nonperforming assets, net of government guaranteed
portion, to total loans and other real estate 0.81% 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.
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, 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 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. 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.
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 nine month periods ended September 30, 2000 and
1999 follows:
(Dollars in thousands) 2000 1999
----------- -----------
Net interest income:
WCB ............................................ $ 16,071 $ 14,318
NBG ............................................ 13,603 11,853
PSB ............................................ 5,316 4,714
FTB ............................................ 3,841 3,493
----------- -----------
Total segment net interest income ............ 38,831 34,378
Parent Company, FIGI, and eliminations, net ...... 543 79
----------- -----------
Total net interest income .................... $ 39,374 $ 34,457
=========== ===========
Net interest income plus non-interest income:
WCB ............................................ $ 18,599 $ 16,432
NBG ............................................ 16,115 14,002
PSB ............................................ 6,205 5,702
FTB ............................................ 4,526 4,161
----------- -----------
Total segment net interest
income plus non-interest income ........... 45,445 40,297
Parent Company, FIGI, and eliminations, net ...... 676 60
----------- -----------
Total net interest income plus
non-interest income ....................... $ 46,121 $ 40,357
=========== ===========
Net income:
WCB ............................................ $ 5,635 $ 5,060
NBG ............................................ 5,244 4,442
PSB ............................................ 1,441 1,550
FTB ............................................ 1,108 1,021
----------- -----------
Total segment net income ..................... 13,428 12,073
Parent Company, FIGI, and eliminations, net ...... (20) (281)
----------- -----------
Total net income ............................. $ 13,408 $ 11,792
=========== ===========
Assets:
WCB ............................................ $ 498,678 $ 418,187
NBG ............................................ 465,878 398,445
PSB ............................................ 162,713 135,247
FTB ............................................ 131,418 115,360
----------- -----------
Total segment net assets ..................... 1,258,687 1,067,239
Parent Company, FIGI, and eliminations, net ...... 3,053 5,440
----------- -----------
Total assets ................................. $ 1,261,740 $ 1,072,679
=========== ===========
6. SUBSEQUENT EVENT
On November 2, 2000, the Company reached a definitive agreement to acquire all
the stock of Bath National Corporation ("BNC"), and its wholly-owned subsidiary
bank, Bath National Bank ("BNB"). Consolidated assets of BNC were $287.3 million
as of September 30, 2000. BNB is a full service community bank headquartered in
Bath, New York which has 11 branch locations in Steuben, Yates, Ontario and
Schuyler Counties. The Company has agreed to pay $48.00 per share in cash for
each of the outstanding shares of BNC common stock with an aggregate purchase
price of approximately $62.6 million. The acquisition, subject to approval by
BNC shareholders and various regulatory agencies, will be accounted for using
the purchase method of accounting and is currently scheduled to be completed
early in the second quarter of 2001.
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 and nine months
ended September 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:
At or for the Three months ended
September 30,
2000 1999 $ Change % Change
---------- ---------- -------- --------
Per common share data:
Net income - basic $0.39 $0.34 $0.05 14.7%
Net income - diluted $0.39 $0.34 $0.05 14.7%
Cash dividends declared $0.11 $0.08 $0.03 37.5%
Book value $9.89 $8.83 $1.06 12.0%
Tangible book value $9.66 $8.53 $1.13 13.2%
Common shares outstanding:
Weighted average shares - diluted 10,990,228 11,018,711
Period end 10,986,721 11,017,733
Performance ratios, annualized:
Return on average assets 1.52% 1.57%
Return on average common equity 16.03% 15.51%
Net interest margin (tax-equivalent) 4.84% 5.07%
Efficiency ratio 45.32% 45.64%
Asset quality ratios:
Excluding impact of government guarantees on
portion of loan portfolio:
Nonperforming loans to total loans 0.89% 0.83%
Nonperforming assets to total loans and other real estate 1.02% 1.06%
Net loan charge-offs to average loans 0.24% 0.17%
Allowance for loan losses to total loans 1.54% 1.47%
Allowance for loan losses to nonperforming loans 172.14% 176.00%
Including impact of government guarantees on
portion of loan portfolio:
Nonperforming loans to total loans 0.69% 0.71%
Nonperforming assets to total loans and other real estate 0.81% 0.93%
Allowance for loan losses to nonperforming loans 223.28% 208.01%
Capital ratios:
Average common equity to average total assets 8.70% 9.22%
Leverage ratio 10.37% 10.93%
Tier 1 risk based capital ratio 14.07% 15.18%
Risk-based capital ratio 15.32% 16.43%
Intangible assets to tangible common equity 2.41% 3.54%
9
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
For The Nine Months Ended September 30,
2000 1999 $ Change % Change
--------- ---------- -------- --------
Per common share data:
Net income - basic $1.12 $1.04 $0.08 7.7%
Net income - diluted $1.12 $1.04 $0.08 7.7%
Cash dividends declared $0.31 $0.23 $0.08 34.8%
Common shares outstanding:
Weighted average shares - diluted 10,998,506 10,291,385
Period end 10,986,721 11,017,733
Performance ratios, annualized:
Return on average assets 1.53% 1.55%
Return on average common equity 15.89% 16.52%
Net interest margin (tax-equivalent) 4.93% 4.99%
Efficiency ratio 45.90% 47.33%
Net loan charge-offs to average loans 0.22% 0.15%
10
The Company's net income for the third quarter of 2000 increased 12.1% to
$4,665,000 ($0.39 per share) compared to $4,161,000 ($0.34 per share) for the
third quarter of 1999. Net income for the first nine months of 2000 was
$13,408,000, a 13.7% increase compared to $11,792,000 for the same period in
1999. Net income available to common shareholders increased 15.2% to $12,286,000
($1.12 per share) for the nine months ended September 30, 2000 compared to
$10,664,000 ($1.04 per share) for the same period last year.
Net interest income increased 10.3% to $13,485,000 for the third quarter of 2000
compared to $12,229,000 for the third quarter of 1999. Net interest income for
the first nine months of 2000 was $39,374,000, an increase of 14.3% from
$34,457,000 for the first nine months of 1999. The third quarter of 2000
increase in net interest income was driven by 16.9% growth in average earning
assets, which more than compensated for a decrease in net interest margin of 23
basis points to 4.84%. Average earning asset growth was substantially driven by
commercial and agricultural loan growth of 19.6% resulting from increased sales
efforts in our existing markets as well as expansion into the contiguous Erie
and Monroe County markets. Net interest margin decreased to 4.93% for the first
nine months of 2000 from 4.99% for the same period in 1999. The 43 basis point
increase in earning asset yield to 8.65% was a result of higher levels of market
interest rates and an increased percentage of loans to earning assets. This was
more than offset by an increase in the cost of funds of 49 basis points to
3.73%, the result of higher market rates and a shift in the mix of funding
sources to higher cost funds. The shift in mix of funding sources to higher cost
funds is management's response to the trend of loan growth outpacing core
deposit growth. To leverage the growth in loans, alternative funding sources
have been utilized, namely brokered deposits and Federal Home Loan Bank term
borrowings.
Noninterest income of $2,375,000 for the third quarter of 2000 increased 9.2%
from $2,175,000 for the same period in 1999. Noninterest income for the first
nine months of 2000 increased 14.4% to $6,747,000 compared to $5,900,000 for the
same period last year. These increases reflect the benefit of the growth in core
deposits and the resulting service fees, an increase in income from the sale of
mutual funds and annuities, and an increase in trust fees.
Noninterest expense for the third quarter of 2000 was up 9.8% to $7,529,000 from
$6,855,000 for the third quarter of 1999. For the nine months ended September
30, 2000 noninterest expense increased 10.9% to $22,111,000 from $19,937,000 for
the same period in 1999. While the increases are primarily due to increased
staffing and technology resources necessary to support expanded lending
activities, product lines and delivery channels, effectively leveraging our
resources has enabled us to achieve further improvement in the Company's
efficiency ratio on both a quarterly and year to date basis. The efficiency
ratio for the third quarter of 2000 was improved to 45.3% compared to 45.6% for
the same period a year ago, while the ratio improved to 45.9% for the nine
months ended September 30, 2000 from 47.3% in 1999.
The provision for loan losses for the third quarter of 2000 was $1,100,000
compared to $933,000 for the same period in 1999. For the first nine months of
2000 the provision was $3,107,000, up 56.2% from $1,989,000 for the same period
in 1999. The increase reflects the significant growth in commercial and consumer
loans and an increase in nonperforming agricultural loans. As a result of the
higher provision in 2000, the ratio of the allowance for loan losses to total
loans increased to 1.54% at September 30, 2000, up from the 1.47% level of a
year ago. Nonperforming loans at September 30, 2000 totaled $7,657,000 compared
to $6,106,000 at September 30, 1999. The ratio of nonperforming loans to total
loans was .89% at September 30, 2000 as compared to .83% a year ago. The ratio
of the allowance for loan losses to nonperforming loans was 172.14% at September
30, 2000, comparable to 176.00% a year ago.
Return on average common equity was 15.89% for the nine months ended September
30, 2000 compared to 16.52% in the same period last year. While this performance
measure continues to be impacted by a strong capital position, capital
management continues to be a top priority of the Company. The Company remains
committed to providing an appropriate return on shareholders' investment.
11
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 September 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 $ 3,959 $ 65 6.53% $ 5,191 $ 68 5.20%
Investment securities (1) 314,849 5,220 6.63% 273,095 4,297 6.24%
Loans (2)
Commercial and agricultural 476,892 11,794 9.84% 398,586 9,051 9.01%
Residential real estate 195,712 4,417 9.03% 184,615 4,043 8.69%
Consumer and home equity 174,914 4,302 9.78% 135,608 3,247 9.50%
---------- ---------- ------ ---------- ---------- ------
Total loans 847,518 20,513 9.64% 718,809 16,341 9.02%
---------- ---------- ------ ---------- ---------- ------
Total interest-earning assets 1,166,326 25,798 8.82% 997,095 20,706 8.24%
---------- ---------- ------ ---------- ---------- ------
Interest-bearing liabilities
Interest-bearing checking 113,034 395 1.39% 107,705 361 1.33%
Savings and money market 191,404 1,308 2.72% 183,084 1,099 2.38%
Certificates of deposit 575,948 8,904 6.15% 473,062 6,113 5.13%
Borrowed funds 64,274 1,040 6.44% 27,370 384 5.57%
---------- ---------- ------ ---------- ---------- ------
Total interest-bearing
liabilities 944,660 11,647 4.91% 791,221 7,957 3.99%
---------- ---------- ------ ---------- ---------- ------
Net interest income $ 14,151 $ 12,749
========== ==========
Net interest rate spread 3.91% 4.25%
====== ======
Net earning assets $ 221,666 $ 205,874
========== ==========
Net interest margin on earning
assets (3) 4.84% 5.07%
====== ======
Ratio of average interest-earning
assets to average
interest-bearing liabilities 123.47% 126.02%
====== ======
(1) Amounts shown are amortized cost for Held to Maturity securities and fair
value for Available for Sale securities. In order for pre-tax income and
resultant yields on tax-exempt securities to be 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.
12
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.
Three Months Three Months
Ended September 30, Ended September 30,
2000 Compared to 1999
(Dollars in thousands) --------------------------------------------------
Increase (Decrease) Due to
-------------------------- Total Increase
Volume Rate (Decrease)
------- ------- ----------
Interest-earning assets:
Federal funds sold and interest-bearing
deposits $ (20) $ 17 $ (3)
Investment securities 655 268 923
Loans:
Commercial 696 324 1,020
Commercial real estate 691 116 807
Agricultural 520 396 916
Residential real estate 225 148 373
Consumer and home equity 960 95 1,055
------- ------- -------
Total loans 3,092 1,079 4,171
------- ------- -------
Total interest-earning assets 3,727 1,364 5,091
------- ------- -------
Interest-bearing liabilities:
Interest-bearing checking 18 16 34
Savings and money market 53 155 208
Certificates of deposit 1,575 1,217 2,792
Borrowed funds 596 59 655
------- ------- -------
Total interest-bearing liabilities 2,242 1,447 3,689
------- ------- -------
Net interest income $ 1,485 $ (83) $ 1,402
======= ======= =======
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 sensitivity to future changes
in interest rates. Accordingly, management considers interest rate risk to be
the Company's most significant market risk.
13
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.
14
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 September 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).
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
The Company filed on November 2, 2000 a Current Report on Form 8-K dated
November 2, 2000, which disclosed that it had reached an agreement to
acquire Bath National Corporation and its banking subsidiary, Bath
National Bank. Such report, as a Item 7 exhibit included a copy of the
Company's press release dated November 2, 2000.
15
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)
November 10, 2000 /s/ Peter G. Humphrey
----------------- ---------------------
Date Peter G. Humphrey, President & CEO
November 10, 2000 /s/ Ronald A. Miller
----------------- --------------------
Date Ronald A. Miller, SVP & CFO