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, 1999
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 August 2, 1999
Par share 11,018,733 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 Changes in Shareholders' Equity and
Comprehensive Income
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk
PART II -- OTHER INFORMATION
Item 1. Changes in Securities
Item 2. Submission of Matters to a Vote of Security Holders
Item 3. 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)
(unaudited)
June 30, December 31,
1999 1998
----------- -----------
ASSETS
Cash, due from banks and
interest-bearing deposits $ 22,616 26,365
Federal funds sold 6,027 16,478
Securities available for sale,
at fair value 182,449 157,022
Securities held to maturity
(fair value of $87,957 at
June 30, 1999 and $92,428
at December 31, 1998) 87,933 91,016
Loans: 701,845 655,427
Allowance for loan losses (10,124) (9,570)
----------- -----------
Loans, net 691,721 645,857
Premises and equipment, net 17,034 18,081
Intangible assets 3,538 3,957
Other assets 18,888 17,409
----------- -----------
Total assets $ 1,030,206 $ 976,185
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 129,128 128,216
Savings, money market and
interest-bearing
Checking 280,657 273,630
Certificates of deposit 459,969 448,609
----------- -----------
Total deposits 869,754 850,455
Accrued expenses and other
liabilities 14,719 15,290
Short-term borrowings 19,028 5,362
Long-term borrowings 13,354 8,500
----------- -----------
Total liabilities $ 916,855 $ 879,607
----------- -----------
Shareholders' equity:
3% cumulative preferred stock, $100
par value, authorized 10,000
shares, issued and outstanding
1,829 shares at June 30, 1999 and
1,842 shares at December 31, 1998 183 184
8.48% cumulative preferred stock,
$100 par value, authorized 200,000
shares, issued and outstanding
176,734 shares at June 30, 1999
and December 31, 1998 17,673 17,673
Common stock, $0.01 par value,
authorized 50,000,000 shares,
issued 11,303,533 shares at June
30, 1999 and 10,200,400 shares
December 31, 1998 113 102
Additional paid-in capital 16,558 2,837
Retained earnings 80,549 75,167
Accumulated other comprehensive
income (loss) (1,199) 1,141
1
Treasury stock--common, at
cost--284,800 shares at June 30,
1999 and December 31, 1998 (526) (526)
----------- -----------
Total shareholders' equity 113,351 96,578
----------- -----------
Total liabilities and
shareholders' equity $ 1,030,206 $ 976,185
=========== ===========
See accompanying notes to consolidated financial statements.
2
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,
------------------ -----------------
1999 1998 1999 1998
-------- ------- ------- -------
Interest income:
Loans $15,340 $14,695 $30,100 $29,117
Securities 3,763 3,250 7,301 6,290
Other 91 186 245 394
------- ------- ------- -------
Total interest income 19,194 18,131 37,646 35,801
------- ------- ------- -------
Interest expense:
Deposits 7,446 7,589 14,809 14,822
Borrowings 336 196 609 416
------- ------- ------- -------
Total interest expense 7,782 7,785 15,418 15,238
------- ------- ------- -------
Net interest income 11,412 10,346 22,228 20,563
Provision for loan losses 531 573 1,056 1,146
------- ------- ------- -------
Net interest income after
provision for loan losses 10,881 9,773 21,172 19,417
------- ------- ------- -------
Noninterest income:
Service charges on deposits 1,049 782 2,002 1,450
Gain on sale of assets 104 49 211 90
Loan servicing fees 310 293 607 583
Other 437 417 905 768
------- ------- ------- -------
Total noninterest income 1,900 1,541 3,725 2,891
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 3,667 3,256 7,191 6,364
Occupancy and equipment 1,247 865 2,293 1,808
Supplies and postage 308 294 654 587
Amortization of intangibles 210 210 419 419
Professional fees 129 140 255 261
Other 1,200 1,132 2,270 2,136
------- ------- ------- -------
Total noninterest expense 6,761 5,897 13,082 11,575
------- ------- ------- -------
Income before income taxes 6,020 5,417 11,815 10,733
Income taxes 2,135 1,934 4,184 3,864
------- ------- ------- -------
Net income 3,885 3,483 7,631 6,869
Preferred stock dividends 376 376 752 754
------- ------- ------- -------
Net income available to
common shareholders $ 3,509 $ 3,107 $ 6,879 $ 6,115
======= ======= ======= =======
3
Net income per common share
Basic $ 0.35 $ 0.31 $ 0.69 $ 0.62
======= ======= ======= =======
Diluted $ 0.35 $ 0.31 $ 0.69 $ 0.62
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
4
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Six Months Ended June 30,
1999 1998
-------- ---------
Cash flows from operating activities:
Net income $ 7,631 $ 6,869
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 1,885 1,469
Provision for loan losses 1,056 1,146
Deferred income tax benefit (405) (386)
Gain on sale of securities
available for sale, net (74) 0
Gain on sale of loans and
premises and equipment (137) (90)
Minority interest in net
income of subsidiary banks 37 35
(Increase) decrease in other
assets 544 (529)
Increase (decrease) in accrued
expenses and other liabilities (238) 962
-------- --------
Net cash provided by operating
activities 10,299 9,476
-------- --------
Cash flows from investing activities:
Purchase of securities:
Available for sale (67,981) (66,614)
Held to maturity (16,306) (26,228)
Proceeds from maturities of
securities:
Available for sale 36,369 44,835
Held to maturity 19,203 28,613
Proceeds from sales of securities
available for sale 2,092 0
Net increase in loans (46,852) (21,168)
Purchase (Sale) of premises and
equipment, net 33 (1,640)
-------- --------
Net cash used in investing
activities (73,442) (42,202)
-------- --------
Cash flows from financing activities:
Net increase in deposits 19,299 18,831
Increase in short-term borrowings, net 13,666 3,698
Proceeds from long-term borrowings 4,907 3,314
Repayment of long-term borrowings (53) (31)
Repurchase of preferred and common
shares, net (1) (223)
Dividends paid (2,606) (2,244)
Proceeds from issuance of common
stock, net of offering costs 13,731 0
-------- --------
Net cash provided by financing
activities 48,943 23,345
-------- --------
Net decrease in cash and cash
equivalents (14,200) (9,381)
Cash and cash equivalents at
beginning of the period 42,843 40,175
-------- --------
Cash and cash equivalents at
end of the period $ 28,643 $ 30,794
======== ========
Supplemental disclosure of cash flow
information:
5
Cash paid during period for:
Interest $ 15,268 $ 14,918
======== ========
Income taxes $ 3,796 $ 3,959
======== ========
See accompanying notes to consolidated financial statements.
6
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollars in Thousands, except per share amounts)
(Unaudited)
Accumulated
Preferred Other Total
Stock Additional Comprehen- Share-
-------------------- Common Paid-In Retained sive Income Treasury holders
3% 8.48% Stock Capital Earnings (Loss) Stock Equity
-------- -------- -------- -------- -------- -------- -------- --------
Balance-December 31, 1998 $ 184 $ 17,673 $ 102 $ 2,837 $ 75,167 $ 1,141 $ (526) $ 96,578
Purchase of 13 shares of
3% preferred stock: (1) 1 --
Comprehensive income:
Net Income 7,631 7,631
Unrealized loss on
securities available
for sale, net (2,340) (2,340)
-------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive
income 5,291
-------- -------- -------- -------- -------- -------- -------- --------
Cash dividends declared:
3%preferred-$1.50
per share (3) (3)
8.48%preferred-$4.24
per share (749) (749)
Common--$0.151 per share (1,497) (1,497)
Proceeds from initial
public offering of
common stock, net 11 13,720 13,731
-------- -------- -------- -------- -------- -------- -------- --------
Balance--June 30, 1999 $ 183 $ 17,673 $ 113 $ 16,558 $ 80,549 $ (1,199) $ (526) $113,351
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
7
FINANCIAL INSTITUTIONS. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 and 1998
(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, The National Bank of Geneva,
The Pavilion State Bank, and First Tier Bank & Trust, (collectively the
"Banks").
The consolidated financial statements have been prepared in accordance with the
rules and regulations of the Securities and Exchange Commission related to
interim financial statements. Accordingly, these unaudited consolidated
financial statements do not include all disclosures provided in the annual
financial statements. In the opinion of management, all adjustments consisting
of only normal recurring adjustments or accruals which are necessary for a fair
presentation of the financial statements have been made at and for the three and
six month periods ended June 30, 1999 and June 30, 1998. The results of
operations for the three and six month period ended June 30, 1999 are not
necessarily indicative of the results which may be expected for an entire fiscal
year. The condensed financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's prospectus
dated June 25, 1999 which is included in the Registration Statement on Form S-1
as filed with the Securities and Exchange Commission (file no. 333-76865).
The consolidated financial statements include the accounts of the Company, the
Banks and the Company's non-banking subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
2. INITITAL PUBLIC OFFERING
On June 25, 1999, the Company priced its initial public offering of 903,133
shares at an offering price of $14.00 per share. In addition, on June 29, 1999,
the underwriters exercised the entire over-allotment option and purchased an
additional 200,000 shares of the Company's common stock, $.01 par value per
share, at a price of $14.00 per share, less underwriting discounts and
commissions. These transactions closed on June 30, 1999 and the Company realized
proceeds of $13,731,792 net of underwriting and other offering costs of
approximately $1,712,000.
3. EARNINGS PER SHARE
The following a summary of basic and diluted net income per common share
calculation:
Income Shares Per Share Amount
- --------------------------------------------------------------------------------
Net Income per common share
for three months
Ended June 30, 1999 $3,885,025
Less: Preferred Stock
Dividends 376,048
----------
BASIC EPS 3,508,977 9,929,024 $ 0.35
Effect of dilutive
securities:
Stock Options N/A 1,302
---------- ---------
DILUTED EPS $3,508,977 9,929,024 $ 0.35
- --------------------------------------------------------------------------------
Net Income per common share
for three months
Ended June 30, 1998 $3,483,035
Less: Preferred Stock
Dividends 376,099
----------
8
BASIC EPS 3,106,935 9,915,956 $ 0.31
Effect of dilutive
securities:
Stock Options N/A N/A
---------- ---------
DILUTED EPS $3,106,935 9,915,956 $ 0.31
- --------------------------------------------------------------------------------
Net Income per common share
for six months
Ended June 30, 1999 $7,631,033
Less: Preferred Stock
Dividends 752,096
----------
BASIC EPS 6,878,937 9,921,695 $ 0.69
Effect of dilutive
securities:
Stock Options N/A 654
---------- ---------
DILUTED EPS $6,878,937 9,922,349 $ 0.69
- --------------------------------------------------------------------------------
Net Income per common share
for six months
Ended June 30, 1998 $6,869,012
Less: Preferred Stock
Dividends 753,630
----------
BASIC EPS 6,115,382 9,922,194 $ 0.62
Effect of dilutive
securities:
Stock Options N/A N/A
---------- ---------
DILUTED EPS $6,115,382 9,922,194 $ 0.62
================================================================================
See accompanying notes to consolidated financial statements.
9
4. OTHER COMPREHENSIVE INCOME
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the six months ended June 30,
1999 1998
- --------------------------------------------------------------------------------
Other comprehensive income, before tax:
Unrealized gains (losses) on securities
available for sale:
Change in unrealized holding gains
and losses arising during period $(3,887,804) $ 191,090
Less: reclassification adjustment
for gains included in net income (73,692) 0
- --------------------------------------------------------------------------------
Other comprehensive income, before tax (3,961,496) 191,090
Income tax expense related to items of
other comprehensive income 1,622,031 (77,923)
- --------------------------------------------------------------------------------
Other comprehensive income, net of tax (2,339,465) 113,167
================================================================================
See accompanying notes to consolidated financial statements.
10
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
As of As of
June 30, December 31,
1998 1998
--------- -----------
Commercial $ 134,055 $ 117,750
Commercial mortgage 117,474 106,948
Agricultural 133,768 123,754
Residential real estate 183,692 182,177
Consumer & home equity 133,232 125,198
--------- ---------
Loans, gross $ 702,221 $ 655,827
--------- ---------
Net deferred fees (376) (400)
Allowance for loan loss (10,124) (9,570)
--------- ---------
Total loans, net $ 691,721 $ 645,857
========= =========
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,
1999 1998 1999 1998
------- ------- ------- -------
Balance at the beginning
of the period $ 9,860 $ 8,551 $ 9,570 $ 8,145
Charge-Offs:
Commercial 40 23 136 29
Commercial real estate 29 34 79
Agricultural 12 12
Residential real
Estate 154 89 220 99
Consumer and home
Equity 138 119 257 239
------- ------- ------- -------
Total charge-offs 373 231 659 446
------- ------- ------- -------
Recoveries:
Commercial 5 88 37 94
Commercial real estate 63 1 84
Agricultural
Residential real
Estate 69 7 69 7
Consumer and home
Equity 32 31 50 52
------- ------- ------- -------
Total recoveries 106 189 157 237
------- ------- ------- -------
Net charge-offs 267 42 502 209
Provision for loan
losses 531 573 1,056 1,146
------- ------- ------- -------
11
Balance at the end
of the period $10,124 $ 9,082 $10,124 $ 9,082
======= ======= ======= =======
Ratio of net charge-offs
to average loans
(annualized) 0.15% 0.07%
Allowance for loan losses
to total loans 1.44% 1.46%
Allowance for loan losses
to nonperforming loans 138.65% 117.42%
Allowance for loan losses
to nonperforming loans,
net of government
guaranteed portion (1) 165.77% 147.49%
(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 SBA or FSA.
12
The following table presents information regarding nonperforming assets at the
dates indicated:
As of As of
June 30, December 31,
1999 1998
-------- ------------
Nonaccruing loans (1):
Commercial $1,023 $1,250
Commercial real estate 2,044 995
Agricultural 1,755 2,340
Residential real estate 1,030 733
Consumer and home equity 334 423
------ ------
Total loans 6,186 5,741
Accruing loans 90 days or
more delinquent 1,116 360
------ ------
Total nonperforming loans 7,302 6,101
Other real estate owned (2) 1,352 2,084
------ ------
Total nonperforming assets 8,654 8,185
Less: government guaranteed portion
of nonperforming loans 1,195 1,421
------ ------
Total nonperforming assets, net of
government guaranteed portion $7,459 $6,764
====== ======
Nonperforming loans to total loans 1.04% 0.93%
====== ======
Nonperforming loans, net of
government guaranteed portion,
to total loans (3) 0.87% 0.71%
====== ======
Nonperforming assets to total
loans and other real estate 1.23% 1.24%
====== ======
Nonperforming assets, net of
government guaranteed portion,
to total loans and other real
estate 1.06% 1.03%
====== ======
(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.
13
6. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued 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
certain reclassification of securities to the available for sale category from
the held to maturity category.
7. 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, as well as discussion regarding the "Year 2000
issue," 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.
14
Item 2. Management's Discussion and Analysis of Financial Condition and of
Operations
The purpose of this discussion is to present material changes in Financial
Institutions, Inc.'s financial condition and results of operations during the
three and six months ended June 30, 1999 to supplement the information in the
consolidated financial statements included in this report.
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
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,
1999 1998 $ Change % Change
---------- --------- -------- --------
Per common share data:
Net income - basic $0.35 $0.31 $0.04 12.9%
Net income - diluted $0.35 $0.31 $0.04 12.9%
Cash dividends declared $0.0755 $0.0500 $0.0255 51.0%
Book value $8.67 $7.47 $1.20 16.1%
Tangible book value $8.35 $7.03 $1.32 18.8%
Common shares outstanding:
Weighted average shares - diluted 9,929,024 9,915,956
Period end 11,018,733 9,907,000
Performance ratios, annualized:
Return on average assets 1.53% 1.53%
Return on average common equity 17.22% 17.11%
Net interest margin
(tax-equivalent) 4.95% 5.04%
Efficiency ratio 48.59% 47.57%
Asset quality ratios:
Excluding impact of government
guarantees on ortion of loan
portfolio:
Nonperforming loans to total
loans 1.04% 1.24%
Nonperforming assets to total
loans and other real estate 1.23% 1.60%
Net loan charge-offs to average
loans 0.16% 0.03%
Allowance for loan losses to
total loans 1.44% 1.46%
Allowance for loan losses to
nonperforming loans 138.65% 117.42%
Including impact of government
guarantees on portion of
loan portfolio:
Nonperforming loans to total loans 0.87% 0.99%
Nonperforming assets to total loans
and other real estate 1.06% 1.35%
Allowance for loan losses to
nonperforming loans 165.77% 147.49%
Capital ratios:
Average common equity to average
total assets 8.02% 7.99%
Leverage ratio 10.97% 9.50%
Tier 1 risk based capital ratio 15.46% 13.76%
Risk-based capital ratio 16.71% 15.01%
Intangible assets to tangible
common equity 3.85% 6.29%
15
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
For The Six months ended June 30,
1999 1998 $ Change % Change
---------- --------- -------- --------
Per common share data:
Net income - basic $0.69 $0.62 $0.07 11.3%
Net income - diluted $0.69 $0.62 $0.07 11.3%
Cash dividends declared $0.1510 $0.1000 $0.0510 51.0%
Common shares outstanding:
Weighted average shares - diluted 9,922,349 9,922,194
Period end 11,018,733 9,907,000
Performance ratios, annualized:
Return on average assets 1.54% 1.55%
Return on average common equity 17.13% 17.19%
Net interest margin (tax-equivalent) 4.95% 5.12%
Efficiency ratio 48.17% 47.24%
Net loan charge-offs to average loans 0.15% 0.07%
16
Primarily as a result of the factors described below, the Company's net income
for the second quarter of 1999 increased 11.5% to $3,885,000 compared to
$3,483,000 for the second quarter of 1998. Net income for the first six months
of 1999 increased 11.1% to $7,631,000 compared to $6,869,000 for the same period
in 1998. Diluted earnings per share rose 12.9% to $.35 for the second quarter of
1999 from $.31 in the second quarter of 1998. For the first six months of 1999
diluted earnings per share of $.69 were 11.3% higher than the $.62 for the same
period in 1998. Return on average common equity was an annualized 17.13% for the
six months ended June 30,1999 compared to 17.19% in the same period in 1998.
Net interest income increased 10.3% to $11,412,000 for the second quarter of
1999 compared to $10,346,000 for the second quarter of 1998. The increase
resulted from 12.7% growth in average earning assets more than offsetting a 9
basis point decline in net interest margin. Average earning assets for the
second quarter of 1999 increased to $968.2 million from $859.3 million in the
second quarter of 1998. Net interest margin for the second quarter of 1999 was
4.95% compared to 5.04% for the same period in 1998. Net interest income for the
first six months of 1999 was $22,228,000, an increase of 8.1% from $20,563,000
for the first six months of 1998. Net interest margin of 4.95% for the first six
months of 1999 compares to 5.12% for the same period in 1998. The margin
compression is attributed to heightened competition for loan assets.
Noninterest income of $1,900,000 for the second quarter of 1999 increased 23.3%
from $1,541,000 for the same period in 1998. The increase is principally from an
increase in deposit service charges together with a $74,000 increase in
investment security gains. Noninterest income for the first six months of 1999
increased 28.8% to $3,725,000 compared to $2,891,000 for the same period last
year.
Noninterest expense for the second quarter of 1999 was up 14.7% to $6,761,000
from $5,897,000 for the second quarter of 1998. The Company's efficiency ratio
for the second quarter of 1999 was 48.59% compared to 47.57% for the same period
a year ago. For the six months ended June 30,1999 noninterest expense increased
13.0% to $13,082,000 from $11,575,000 for the same period in 1998. The increases
in both periods are largely the result of increases in 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.
Provision for loan losses for the second quarter of 1999 was down 7.3% to
$531,000 from $573,000 for the same period a year ago. For the first six months
of 1999 the provision was $1,056,000, down 7.9% from $1,146,000 for the same
period a year ago. Nonperforming assets at June 30, 1999 were $8.7 million, a
decrease of $1.3 million from $10.0 million at June 30,1998. When including the
impact of government guarantees, nonperforming assets at June 30, 1999 were $7.5
million, a decrease of $900,000 from $8.4 million at June 30, 1998.
Income tax expense increased to $2.1 million for the Second Quarter 1999 from
$1.9 million for the Second Quarter 1998. The effective tax rate for the Second
Quarter 1999 was 35.5%, compared to 35.7% for the Second Quarter 1998.
At June 30, 1999 the Company had total assets of $1.03 billion, an increase of
5.5% from $976.2 million at December 31, 1998. Loans increased 7.1% to $701.8
million at June 30, 1999 from $655.4 million at December 31, 1998. Total
deposits were $869.8 million at the recent quarter-end, compared with $850.5
million at December 31, 1998. Total shareholders' equity increased 17.4% to
$113.4 million at June 30, 1999, from $96.6 million at December 31, 1998. 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, 1999 was $8.67, an increase of 9.2% from
$7.94 at December 31, 1998. Tangible book value per common share was $8.35 at
June 30, 1999, an increase of 10.7% from $7.54 at December 31, 1998.
17
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 quarters ending June 30,
--------------------------------
1999 1998
--------- --------
(dollars in thousands) Average Interest Annualized Average Interest Annualized
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ---------- ----------- -------- ----------
Interest-earning assets
Federal funds sold and
interest-bearing deposits $ 7,277 $ 87 4.80% $ 13,157 $ 179 5.46%
Investment securities (1) 278,855 4,308 6.20% 230,803 3,707 6.44%
Loans (2)
Commercial and agricultural 371,799 8,309 8.96% 320,341 7,645 9.57%
Residential real estate 181,112 3,981 8.82% 173,547 4,063 9.39%
Consumer and home equity 129,172 3,051 9.47% 121,452 2,986 9.86%
-------- -------- ------ -------- -------- ------
Total loans 682,083 15,341 9.02% 615,340 14,694 9.58%
-------- -------- ------ -------- -------- ------
Total interest-earning assets 968,215 19,736 8.18% 859,300 18,580 8.67%
-------- -------- ------ -------- -------- ------
Interest-bearing liabilities
Interest-bearing checking 100,906 336 1.34% 90,263 328 1.46%
Savings and money market 184,321 1,102 2.40% 161,059 1,058 2.63%
Certificates of deposit 467,744 6,009 5.15% 435,199 6,203 5.72%
Borrowed funds 25,040 335 5.37% 13,679 196 5.75%
-------- -------- ------ -------- -------- ------
Total interest-bearing
liabilities 778,011 7,782 4.01% 700,200 7,785 4.46%
-------- -------- ------ -------- -------- ------
Net interest income $ 11,954 $ 10,795
======== ========
Net interest rate spread 4.17% 4.21%
====== ======
Net earning assets $190,204 $159,100
======== ========
Net interest margin on earning
assets (3) 4.95% 5.04%
====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities 124.45% 122.72%
====== ======
18
(1) Amounts shown are amortized cost. 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 expenses.
(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 prior rate); (2) changes attributable to changes in rate
(changes in rate multiplied by the prior 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 1999 Compared to 2nd Quarter 1998
---------------------------------------------
Increase (Decrease) Due to Total Increase
-------------------------- --------------
Volume Rate (Decrease)
--------- -------- --------------
Interest-earning assets:
Federal funds sold and
interest-bearing deposits $ (71) $ (21) $ (92)
Investment securities 743 (142) 601
Loans:
Commercial 423 (251) 172
Commercial real estate 353 (135) 218
Agricultural 376 (102) 274
Residential real estate 164 (246) (82)
Consumer and home equity 183 (118) 65
------- ------- -------
Total loans 1,499 (852) 647
------- ------- -------
Total interest-earning
assets 2,171 (1,015) 1,156
------- ------- -------
Interest-bearing liabilities
Interest-bearing checking 35 (27) 8
Savings and money market 138 (94) 44
Certificates of deposit 420 (614) (194)
Borrowed funds 152 (13) 139
------- ------- -------
Total interest-bearing
liabilities 745 748 (3)
------- ------- -------
Net interest income $ 1,426 $ (267) $ 1,159
======= ======= =======
YEAR 2000 COMPLIANCE
General
The Year 2000 risk involves computer programs and computer software that are not
able to perform into the Year 2000 without interruption. If computer systems do
not correctly recognize the date change from December 31, 1999 to January 1,
2000, computer applications that rely on the date field could fail or create
erroneous results. Such
19
erroneous results could affect interest, payment, or due dates or cause a
temporary inability to process transactions, send invoices or engage in similar
normal business activities. If these issues are not addressed by us, our
suppliers and our borrowers, there could be a material adverse impact on our
financial condition or results of operations.
State Of Readiness
We formally initiated our Year 2000 project plan in September 1997 to ensure
that our operational and financial systems would not be adversely affected by
Year 2000 problems. We have formed a Year 2000 project team and our Board of
Directors and management, as well as those of our subsidiary banks, are
supporting all compliance efforts and allocating the necessary resources to
ensure completion. An inventory of all systems and products (including both
information technology and non-informational technology systems) that could be
affected by the Year 2000 date change has been developed, verified and
categorized as to its importance to us. Also, an assessment of all major
information technology and critical non-information technology systems has been
completed. This assessment involved inputting test data which simulates the Year
2000 date change into such information technology systems and reviewing the
system output for accuracy. Our assessment of critical non-information
technology systems involved reviewing such systems to determine whether they
were date dependent. Based on such assessment, we believe that none of our
critical non-information technology systems is date dependent.
The software for our systems is provided through software vendors. We have
contacted all of our third party vendors and software providers and required
them to demonstrate and represent that their products are or will be Year 2000
compliant. The recommended version upgrades were completed and vendors that were
unable to demonstrate that they were Year 2000 compliant were replaced. We have
in place an ongoing program of testing compliance with these representations and
warranties. Our core banking software provider, which supports substantially all
of our data processing functions, has warranted in writing that its software is
Year 2000 compliant and complies with applicable regulatory guidelines. We have
performed tests to verify this assertion. The results were validated and
accepted with no exceptions noted. We believe we would have recourse against
these vendors and software providers for actual damages incurred by us in the
event the vendors or software providers breach this warranty. In addition, our
compliance and that of our banks with Year 2000 directives and guidelines issued
by the Federal Financial Institutions Examination Council ("FFIEC") and other
bank regulatory agencies has been reviewed by the FDIC, the Federal Reserve
Board, the Office of Comptroller of the Currency and the New York State Banking
Department in 1998 and 1999.
We have completed the following phases of our Year 2000 plan:
Identifying Year 2000 issues;
Assessing the impact of Year 2000 issues on our mission critical systems;
Upgrading our systems as necessary to resolve those Year 2000 issues which have
been identified; and
Testing and implementing those systems that have been upgraded.
Costs of Compliance
We do not expect that the costs of bringing our systems into Year 2000
compliance will have a material adverse effect on our financial condition,
results of operations or liquidity. We have budgeted $250,000 to address Year
2000 issues and approximately $129,000 of the budget has been expended through
June 30, 1999. The largest potential risk to us concerning Year 2000 is the
malfunction of our data processing system. In the event our data processing
system does not function properly, we are prepared to perform critical functions
manually. We believe we are in compliance with regulatory guidelines regarding
Year 2000 compliance, including the timetable for achieving compliance.
Risks Related to Third Parties
We cannot accurately gauge the impact of Year 2000 noncompliance by third
parties with which our banks and we transact business. We have identified our
largest dollar deposit customers (which are aggregate deposits over $250,000)
and our largest commercial/agricultural loan customers (which are loans over
$100,000). Based on information available to us, we conducted a preliminary
evaluation to determine which of
20
those customers are likely to be affected by Year 2000 issues. We then surveyed
those customers deemed at risk to determine their readiness with respect to Year
2000 issues, including (1) their awareness of Year 2000 issues, (2) plans to
address such issues and (3) progress with respect to such plans. The survey
included 100% of all depositors with average balances of $250,000 or greater,
which approximately 30% of our total dollar deposit base. The survey also
included approximately 90% of our commercial/agricultural borrowers of $100,000
or more, which is approximately 50% of our total dollar loan base. The responses
to these surveys were due by December 31, 1998. We are continuing to follow up
with those borrowers who have not responded to the surveys. We will continue to
review such responses as they are returned and will encourage customers to
resolve any identified problems. To the extent a problem is identified, we
intend to monitor the customer's progress in resolving such problem. In the
event that Year 2000 noncompliance adversely affects a borrower, we may be
required to charge-off the loan to that borrower. In the event that Year 2000
noncompliance causes a depositor to withdraw funds, we plan to maintain
additional cash on hand. With respect to our borrowers, we include in our loan
documents a Year 2000 disclosure form and an addendum to the loan agreements in
which the borrower represents and warrants its Year 2000 compliance to the bank.
Contingency Plans
We are finalizing our contingency planning with respect to the Year 2000 date
change and believe that if our own systems should fail, we could convert to a
manual entry system for a period of up to three months without significant
losses. We believe that any mission critical systems could be recovered and
operating within seven days. In the event that the Federal Reserve is unable to
handle electronic funds transfers and check clearing, we do not expect the
impact to be material to our financial condition or results of operations as
long as we are able to utilize an alternative electronic funds transfer and
clearing source. As part of our contingency planning, we have reviewed our loan
customer base and the potential impact on capital of Year 2000 noncompliance.
Based upon such review, using what we consider to be a reasonably likely worst
case scenario, we have assumed that certain of our commercial borrowers whose
businesses are most likely to be affected by Year 2000 noncompliance would be
unable to repay their loans, resulting in charge-off's of loan amounts in excess
of collateral values. If this occurs, we believe that it is unlikely that our
exposure would exceed $280,000, although we cannot assure you of this amount and
the amount could be higher. We do not believe that this amount is material
enough for us to adjust our current methodology for making provisions to the
allowance for loan losses. In addition, we plan to maintain additional cash on
hand to meet any unusual deposit withdrawal activity.
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)
21
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.
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 1. Changes in securities
Item 2. Submission of matters to a vote of security holders
At the annual meeting of the shareholders held on May 27, 1999, the
shareholders of the Company, by written consent, approved the following
matters:
1. an amendment to the Company's Articles of Incorporation to replace
the corporate purposes clause to provide for general purposes;
2. an amendment to the Company's Articles of Incorporation to delete
the provision relating to voting of stock in other corporations;
3. an amendment to the Company's Articles of Incorporation to change
the par value of the common shares from $1.00 par value per share to
$.01 par value per share and increase the aggregate number of shares
which the corporation shall have the authority to issue from a total
of 410,000 shares to a total of 50,210,000 shares, 50,000,000 of
which shall be shares of common stock with a par value of $0.01 per
share and 210,000 of which shall be preferred stock with a par value
of $100.00 per share.
4. an amendment to the Company's Articles of Incorporation to conform
the voting rights of the holders of the Class A Preferred Stock to
the voting rights provided in the Business Corporation Law for
nonvoting stock;
5. an amendment to the Company's Articles of Incorporation to eliminate
the voting rights of holders of the Class B-1 Preferred Stock;
6. an amendment to the Company's Articles of Incorporation to eliminate
the preemptive rights applicable to the common stock;
7. an amendment to the Company's Articles of Incorporation to add a
provision limiting the liability of directors;
8. an amendment to the Company's Articles of Incorporation to provide
that shareholders may take action by written consent signed by
holders having not less than the minimum of votes required to
authorize such action at a meeting of shareholders;
9. an amendment to the Company's Articles of Incorporation to appoint
the Secretary of State as agent upon whom any process against the
corporation may be served and provide an address to which the
Secretary of State may mail a copy of any process;
22
10. The Stockholders approved the following eleven (11) directors for
the term indicated below, and until their successors are elected and
qualified. The following table reflects the tabulation of the votes
with respects to each director who was elected at the 1999 Annual
Meeting:
B-1 Preferred Share
Term Common Share Votes (8.48%) Votes
Name Ends For Withheld For Withheld
- ------------------ ---- ------ ----------- ------- --------
W.J. Humphrey, III 2000 88,340 0 164,651 0
Donald I. Wickham 2000 88,340 0 164,651 0
James H. Wyckoff 2000 88,340 0 164,651 0
Thomas L. Kime 2001 88,340 0 164,651 0
W.J. Humphrey, Jr 2001 88,340 0 164,651 0
Jon J. Cooper 2001 88,340 0 164,651 0
James R. Hardie 2001 88,340 0 164,651 0
Peter G. Humphrey 2002 88,340 0 164,651 0
Barton P. Dambra 2002 88,340 0 164,651 0
Donald G. Humphrey 2002 88,340 0 164,651 0
H. Jack South 2002 88,340 0 164,651 0
11. The adoption of the Financial Institutions, Inc. 1999 Management
Stock Incentive Plan providing for the grant of incentive stock
options, non-qualified stock options, stock appreciation rights, as
well as restricted stock grants to officers and employees of the
Company;
12. the adoption of the Financial Institutions, Inc. 1999 Directors
Stock Incentive Plan providing for the grant of non-qualified stock
options to the directors of the Company;
13. approved the Amended and Restated By-Laws of the Company, which
changed the term of Director to three (3) years, as well as other
technical changes.
Item 3. 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 Six Months ended June 30, 1999
* Incorporated by reference to the corresponding exhibit filed with
the Registrant's Registration Statement on Form S-1 (File No.
333-76865).
(b) Reports on Form 8-K
None
23
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, 1999 /s/ Peter G. Humphrey
Date ----------------------------------
Peter G. Humphrey, President & CEO
August 9, 1999 /s/ Ronald A. Miller
Date ----------------------------------
Ronald A. Miller, SVP & CFO
INDEX OF EXHIBITS
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 Six Months ended June 30, 1999
* Incorporated by reference to the corresponding exhibit filed with
the Registrant's Registration Statement on Form S-1 (File No.
333-76865).
24