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, 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 November 12, 1999
Par share 11,017,733 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 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)
(unaudited)
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Cash, due from banks and interest-bearing deposits $ 30,564 $ 26,365
Federal funds sold 4,313 16,478
Securities available for sale, at fair value 189,873 157,022
Securities held to maturity (fair value of
$83,725 at September 30, 1999 and $92,428 at
December 31, 1998) 84,028 91,016
Loans: 732,271 655,427
Allowance for loan losses (10,748) (9,570)
----------- -----------
Loans, net 721,523 645,857
Premises and equipment, net 16,859 18,081
Intangible assets 3,328 3,957
Other assets 22,191 17,409
----------- -----------
Total assets $ 1,072,679 $ 976,185
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 132,498 $ 128,216
Savings, money market and interest-bearing
Checking 302,187 273,630
Certificates of deposit 485,658 448,609
----------- -----------
Total deposits 920,343 850,455
Short-term borrowings 12,944 5,362
Long-term borrowings 10,318 8,500
Accrued expenses and other liabilities 13,951 15,290
----------- -----------
Total liabilities 957,556 879,607
----------- -----------
Shareholders' equity:
3% cumulative preferred stock, $100 par
value, authorized 10,000 shares, issued
and outstanding 1,809 shares at September
30, 1999 and 1,842 shares at December 31, 1998 181 184
8.48% cumulative preferred stock, $100 par
value, authorized 200,000 shares, issued
and outstanding 176,428 shares at
September 30, 1999 and 176,734 shares at
December 31, 1998 17,643 17,673
Common stock, $0.01 par value, authorized
50,000,000 shares, issued 11,303,533
shares at September 30, 1999 and
10,200,400 shares at December 31, 1998 113 102
Additional paid-in capital 16,471 2,837
Retained earnings 83,453 75,167
1
Accumulated other comprehensive income (loss) (2,204) 1,141
Treasury stock--common, at cost--285,800
shares at September 30, 1999 and 284,800
December 31, 1998 (534) (526)
----------- -----------
Total shareholders' equity 115,123 96,578
----------- -----------
Total liabilities and shareholders' equity $ 1,072,679 $ 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 Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Interest income:
Loans $ 16,341 $ 14,913 $ 46,441 $ 44,030
Securities 3,773 3,250 11,074 9,540
Other 72 203 317 596
-------- -------- -------- --------
Total interest income 20,186 18,366 57,832 54,166
-------- -------- -------- --------
Interest expense:
Deposits 7,573 7,629 22,382 22,452
Borrowings 384 209 993 623
-------- -------- -------- --------
Total interest expense 7,957 7,838 23,375 23,075
-------- -------- -------- --------
Net interest income 12,229 10,528 34,457 31,091
Provision for loan losses 933 603 1,989 1,749
-------- -------- -------- --------
Net interest income after provision
for loan losses 11,296 9,925 32,468 29,342
-------- -------- -------- --------
Noninterest income:
Service charges on deposits 1,117 868 3,119 2,318
Gain (loss) on sale of securities and
loans 55 (29) 266 61
Loan servicing fees 287 299 894 882
Other 716 644 1,621 1,412
-------- -------- -------- --------
Total noninterest income 2,175 1,782 5,900 4,673
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits 3,833 3,354 11,024 9,718
Occupancy and equipment 1,100 973 3,393 2,781
Supplies and postage 303 303 957 889
Amortization of intangibles 210 210 629 629
Professional fees 172 244 427 506
Other 1,237 1,114 3,507 3,250
-------- -------- -------- --------
Total noninterest expense 6,855 6,198 19,937 17,773
-------- -------- -------- --------
Income before income taxes 6,616 5,509 18,431 16,242
Income taxes 2,455 1,963 6,639 5,827
-------- -------- -------- --------
Net income 4,161 3,546 11,792 10,415
Preferred stock dividends 375 376 1,128 1,130
-------- -------- -------- --------
3
Net income available to common
shareholders $ 3,786 $ 3,170 $ 10,664 $ 9,285
======== ======== ======== ========
Net income per common share
Basic $ 0.34 $ 0.32 $ 1.04 $ 0.94
======== ======== ======== ========
Diluted $ 0.34 $ 0.32 $ 1.04 $ 0.94
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Nine Months Ended Sept. 30,
1999 1998
--------- ---------
Cash flows from operating activities:
Net income $ 11,792 $ 10,415
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,781 2,136
Provision for loan losses 1,989 1,749
Deferred income tax benefit (579) (455)
Gain on sale of loans, premises and equipment,
and securities available for sale, net (266) (61)
Minority interest in net income of subsidiary
banks 57 54
(Increase) in other assets (1,889) (2,998)
(Decrease) in accrued expenses and other
liabilities (1,154) (236)
--------- ---------
Net cash provided by operating activities 12,731 10,604
--------- ---------
Cash flows from investing activities:
Purchase of securities:
Available for sale (84,418) (94,761)
Held to maturity (17,780) (35,810)
Proceeds from maturities of securities:
Available for sale 43,577 63,319
Held to maturity 24,494 43,929
Proceeds from sales of securities available for sale 2,092 0
Net increase in loans (77,532) (32,477)
(Purchase) Sale of premises and equipment, net (292) (2,867)
--------- ---------
Net cash used in investing activities (109,859) (58,667)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 69,889 48,655
Increase (decrease) in short-term borrowings, net 7,583 (3,585)
Proceeds from long-term borrowings 1,907 3,310
Repayment of long-term borrowings (89) (44)
Repurchase of preferred and common shares, net (44) (203)
Dividends paid (3,731) (3,115)
Proceeds from issuance of common stock, net of
offering costs 13,647 0
--------- ---------
Net cash provided by financing activities 89,162 45,018
--------- ---------
Net decrease in cash and cash equivalents (7,966) (3,045)
Cash and cash equivalents at beginning of the period 42,843 40,175
--------- ---------
Cash and cash equivalents at end of the period $ 34,877 $ 37,130
========= =========
Supplemental disclosure of cash flow information:
5
Cash paid during period for:
Interest $ 23,484 $ 24,114
========= =========
Income taxes $ 6,199 $ 6,141
========= =========
See accompanying notes to consolidated financial statements.
6
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 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 33
shares of 3%
preferred stock (3) 2 (1)
Purchase of 306
shares of 8.48%
preferred stock (30) (4) (34)
Purchase of 1,000
shares of
common stock (8) (8)
Comprehensive income:
Net Income 11,792 11,792
Unrealized loss
on securities
available for
sale, net (3,345) (3,345)
Total
comprehensive
income 8,447
Cash dividends declared:
3% preferred-$2.25
per share (4) (4)
8.48% preferred-$6.36
per share (1,123) (1,123)
Common--$0.231
per share (2,379) (2,379)
Proceeds from
initial public
offering of
common stock,
net 11 13,636 13,647
------- ------- ------- ------- ------- ------- ------- --------
Balance--September
30, 1999 $ 181 $17,643 $ 113 $16,471 $83,453 $(2,204) $ (534) $115,123
======= ======= ======= ======= ======= ======= ======= ========
See accompanying notes to consolidated financial statements.
7
FINANCIAL INSTITUTIONS. INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
SEPTEMBER 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 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, 1999 and
September 30, 1998. The results of operations for the three and nine month
period ended September 30, 1999 are not necessarily indicative of the results
which may be expected for the year ending December 31, 1999.
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. INITIAL 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 $13,647,000 net of underwriting and other offering costs of
approximately $1,796,000.
3. EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares outstanding
during the periods indicated. The Company's basic and diluted earnings per share
calculations are identical in the periods presented, as there is, currently, no
dilutive effect. The computation of basic and diluted earnings per common share
for the three and nine month periods ended September 30, 1999 and 1998 are as
follows:
Income Shares Per Share Amount
- -------------------------------------------------------------------------------------------------
Net Income per common share for three months
Ended September 30, 1999 $ 4,161,024
Less: Preferred Stock Dividends 375,422
-----------
BASIC EPS AND DILUTED EPS 3,785,602 11,018,711 $0.34
- -------------------------------------------------------------------------------------------------
Net Income per common share for three months
Ended September 30, 1998 $ 3,545,742
Less: Preferred Stock Dividends 376,099
-----------
BASIC EPS AND DILUTED EPS 3,169,643 9,907,272 $0.32
- -------------------------------------------------------------------------------------------------
Net Income per common share for nine months
8
Ended September 30, 1999 $11,792,057
Less: Preferred Stock Dividends 1,127,518
-----------
BASIC EPS AND DILUTED EPS 10,664,539 10,291,385 $1.04
- -------------------------------------------------------------------------------------------------
Net Income per common share for nine months
Ended September 30, 1998 $10,414,754
Less: Preferred Stock Dividends 1,129,729
-----------
BASIC EPS AND DILUTED EPS 9,285,025 9,917,165 $0.94
=================================================================================================
9
4. OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) for the nine month periods
ended September 30, 1999 and 1998 are as follows:
For the nine months ended
September 30,
1999 1998
- ------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities available
for sale:
Change in unrealized holding gains and losses
arising during period $ (5,590,591) $ 428,591
Less: reclassification adjustment for gains
included in net income (73,137) 0
- ------------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax (5,663,728) 428,591
Income tax expense related to items of other comprehensive
income 2,318,936 (175,374)
- ------------------------------------------------------------------------------------------------
Other comprehensive income, net of income taxes (3,344,793) 253,217
Plus: Net Income 11,792,057 10,414,917
- ------------------------------------------------------------------------------------------------
Comprehensive income $ 8,447,264 $ 10,668,134
================================================================================================
See accompanying notes to consolidated financial statements.
10
5. 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
September 30, December 31,
(in thousands) 1999 1998
------------- ------------
Commercial $ 135,429 $ 117,750
Commercial mortgage 127,758 106,948
Agricultural 142,406 123,754
Residential real estate 187,620 182,177
Consumer & home equity 139,425 125,198
--------- ---------
Loans, gross 732,638 655,827
--------- ---------
Net deferred fees (367) (400)
Allowance for loan losses (10,748) (9,570)
--------- ---------
Total loans, net $ 721,523 $ 645,857
========= =========
The following table presents an analysis of the allowance for loan losses and
other related data for the periods indicated.
Three Months Ended Nine Months Ended
(in thousands) September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
Balance at the beginning
of the period $10,124 $ 9,082 $ 9,570 $ 8,145
Charge-Offs:
Commercial 51 102 186 130
Commercial real estate 57 228 91 308
Agricultural 0 15 12 15
Residential real
estate 81 57 301 156
Consumer and home
equity 215 97 473 336
------- ------- ------- -------
Total charge-offs 404 499 1,063 945
------- ------- ------- -------
Recoveries:
Commercial 47 1 84 95
Commercial real estate 9 10 84
Agricultural
Residential real
estate 10 17 79 24
Consumer and home
equity 29 34 79 86
------- ------- ------- -------
Total recoveries 95 52 252 289
------- ------- ------- -------
11
Net charge-offs 309 447 811 656
Provision for loan losses 933 603 1,989 1,749
------- ------- ------- -------
Balance at the end of the
period $10,748 $ 9,238 $10,748 $ 9,238
======= ======= ======= =======
Ratio of net charge-offs
to average loans
(annualized) 0.15% 0.13%
Allowance for loan losses
to total loans 1.47% 1.46%
Allowance for loan losses
to nonperforming loans 176.00% 99.74%
Allowance for loan losses
to nonperforming
loans, net of
government guaranteed
portion (1) 208.01% 126.79%
(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
September 30, December 31,
1999 1998
(in thousands) ------ ------
Nonaccruing loans (1):
Commercial $1,187 $1,250
Commercial real estate 1,439 995
Agricultural 1,581 2,340
Residential real estate 728 733
Consumer and home equity 313 423
------ ------
Total loans 5,248 5,741
Accruing loans 90 days or more delinquent 858 360
------ ------
Total nonperforming loans 6,106 6,101
Other real estate owned (2) 1,649 2,084
------ ------
Total nonperforming assets 7,755 8,185
Less: government guaranteed portion of
nonperforming loans 940 1,421
------ ------
Total nonperforming assets, net of government
guaranteed portion $6,815 $6,764
====== ======
Nonperforming loans to total loans 0.83% 0.93%
====== ======
Nonperforming loans, net of government
guaranteed portion, to total loans (3) 0.71% 0.71%
====== ======
Nonperforming assets to total loans and other
real estate 1.06% 1.24%
====== ======
Nonperforming assets, net of government
guaranteed portion, to total loans and
other real estate 0.93% 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
a reclassification of securities to the available for sale category from the
held to maturity category, at the time the standard is adopted.
7. SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which requires publicly-held companies
to report financial and other information about key revenue producing segments
of the entity for which such information is available and is utilized by the
chief operating decision maker. Specific information to be reported for
individual segments include profit or loss, certain specific revenue and expense
items, and total assets. SFAS No. 131 did not have an impact on the Company's
statement of financial condition or statement of operations.
14
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, 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.
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, 1999 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 Sept. 30,
1999 1998 $ Change % Change
---------- --------- -------- --------
Per common share data:
Net income - basic $0.34 $0.32 $0.02 6.3%
Net income - diluted $0.34 $0.32 $0.02 6.3%
Cash dividends declared $0.08 $0.05 $0.03 60.0%
Book value $8.83 $7.75 $1.08 13.9%
Tangible book value $8.53 $7.33 $1.20 16.4%
Common shares outstanding:
Weighted average shares - diluted 11,018,711 9,907,272
Period end 11,017,733 9,910,000
Performance ratios, annualized:
Return on average assets 1.57% 1.53%
Return on average common equity 15.51% 16.65%
Net interest margin (tax-equivalent) 5.07% 5.02%
Efficiency ratio 45.64% 48.38%
Asset quality ratios:
Excluding impact of government guarantees on
portion of loan portfolio:
Nonperforming loans to total loans 0.83% 1.46%
Nonperforming assets to total loans and other
real estate 1.06% 1.92%
15
Net loan charge-offs to average loans
(annualized) 0.17% 0.29%
Allowance for loan losses to total loans 1.47% 1.46%
Allowance for loan losses to nonperforming loans 176.00% 99.74%
Including impact of government guarantees on
portion of loan portfolio:
Nonperforming loans to total loans 0.71% 1.15%
Nonperforming assets to total loans and other
real estate 0.93% 1.61%
Allowance for loan losses to nonperforming loans 208.01% 126.79%
Capital ratios:
Average common equity to average total assets 9.22% 8.20%
Leverage ratio 10.93% 9.67%
Tier 1 risk based capital ratio 15.18% 13.81%
Risk-based capital ratio 16.43% 15.06%
Intangible assets to tangible common equity 3.54% 5.73%
16
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
At or For The Nine Months Ended Sept. 30,
1999 1998 $ Change % Change
---------- --------- -------- --------
Per common share data:
Net income - basic $ 1.04 $ 0.94 $ 0.10 10.6%
Net income - diluted $ 1.04 $ 0.94 $ 0.10 10.6%
Cash dividends declared $0.231 $ 0.15 $0.081 54.0%
Common shares outstanding:
Weighted average shares - diluted 10,291,385 9,917,165
Period end 11,017,733 9,910,000
Performance ratios, annualized:
Return on average assets 1.55% 1.54%
Return on average common equity 16.52% 17.00%
Net interest margin (tax-equivalent) 4.99% 5.09%
Efficiency ratio 47.33% 47.68%
Net loan charge-offs to average loans 0.15% 0.13%
17
The Company's net income for the third quarter of 1999 increased 17.3% to
$4,161,000 compared to $3,546,000 for the third quarter of 1998. Net income for
the first nine months of 1999 increased 13.2% to $11,792,000 compared to
$10,415,000 for the same period in 1998. Earnings per share rose 6.3% to $.34
for the third quarter of 1999 from $.32 in the third quarter of 1998. For the
first nine months of 1999 diluted earnings per share of $1.04 were 10.6% higher
than the $.94 for the same period in 1998. Return on average common equity was
16.52% for the nine months ended September 30,1999 compared to 17.00% in the
same period in 1998.
Net interest income increased 16.2% to $12,229,000 for the third quarter of 1999
compared to $10,528,000 for the third quarter of 1998. The increase resulted
from a 14.8% growth in average earning assets and a 5 basis point increase in
net interest margin. Average earning assets for the third quarter of 1999
increased to $997.1 million from $868.5 million in the third quarter of 1998.
Net interest margin for the third quarter of 1999 was 5.07% compared to 5.02%
for the same period in 1998. Net interest income for the first nine months of
1999 was $34,457,000, an increase of 10.8% from $31,091,000 for the first nine
months of 1998. Net interest margin of 4.99% for the first nine months of 1999
compares to 5.09% for the same period in 1998. The nine month margin compression
is attributed to heightened competition for loan assets which drove down the
earning asset yield, while the yield on interest-bearing liabilities also
declined, but to a lesser degree. With the recent increase in market rates, net
interest margin showed an increase during the third quarter of 1999.
Noninterest income of $2,175,000 for the third quarter of 1999 increased 22.1%
from $1,782,000 for the same period in 1998. The increase is principally related
to deposit service charges, an increase in commissions on the sale of credit
life and disability insurance, together with an $84,000 increase in the gain on
sales of assets. Noninterest income for the first nine months of 1999 increased
26.3% to $5,900,000 compared to $4,673,000 for the same period last year.
Noninterest expense for the third quarter of 1999 was up 10.6% to $6,855,000
from $6,198,000 for the third quarter of 1998. For the nine months ended
September 30,1999 noninterest expense increased 12.2% to $19,937,000 from
$17,773,000 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 new branch offices in
contiguous markets. The Company has effectively deployed resources whereby the
Company's efficiency ratio for the third quarter of 1999 was 45.64% compared to
48.38% for the same period a year ago.
Provision for loan losses for the third quarter of 1999 was $933,000 compared to
$603,000 for the same period a year ago. For the first nine months of 1999 the
provision was $1,989,000,up 13.7% from $1,749,000 for the same period a year
ago. The increase in provision for loan losses is primarily attributed to the
growth in the loan portfolio. Nonperforming assets at September 30, 1999 were
$7.8 million, a decrease of $4.4 million from $12.2 million at September
30,1998. When including the impact of government guarantees, nonperforming
assets at September 30, 1999 were $6.8 million, a decrease of $3.5 million from
$10.3 million at September 30, 1998.
At September 30, 1999 the Company had total assets of $1,072.7 million, an
increase of 9.9% from $976.2 million at December 31, 1998. Loans increased 11.7%
to $732.3 million at September 30, 1999 from $655.4 million at December 31,
1998. Total deposits were $920.3 million at the recent quarter-end, compared
with $850.5 million at December 31, 1998. Total shareholders' equity increased
19.2% to $115.1 million at September 30, 1999, from $96.6 million at December
31, 1998. Book value per common share at September 30, 1999 was $8.83, an
increase of 11.2% from $7.94 at December 31, 1998. Tangible book value per
common share was $8.53 at September 30, 1999, an increase of 13.1% from $7.54 at
December 31, 1998.
18
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,
---------------------------------------------
1999 1998
---- ----
Average Interest Annualized Average Interest Annualized
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
(in thousands) Balance Paid Rate Balance Paid Rate
----------- -------- ---------- ----------- -------- ----------
Interest-earning assets
Federal funds sold and
interest-bearing
deposits $ 5,191 $ 68 5.20% $ 14,436 $ 199 5.47%
Investment securities (1) 273,095 4,297 6.24% 226,698 3,723 6.52%
Loans (2)
Commercial and agricultural 398,586 9,051 9.01% 326,831 7,810 9.48%
Residential real estate 184,615 4,043 8.69% 175,757 4,036 9.11%
Consumer and home equity 135,608 3,247 9.50% 124,749 3,067 9.75%
-------- -------- ------ -------- -------- ------
Total loans 718,809 16,341 9.02% 627,337 14,913 9.43%
-------- -------- ------ -------- -------- ------
Total interest-earning assets 997,095 20,706 8.24% 868,471 18,835 8.60%
-------- -------- ------ -------- -------- ------
Interest-bearing liabilities
Interest-bearing checking 107,705 361 1.33% 92,468 353 1.51%
Savings and money market 183,084 1,099 2.38% 163,575 1,093 2.65%
Certificates of deposit 473,062 6,113 5.13% 431,409 6,184 5.69%
Borrowed funds 27,370 384 5.57% 13,661 207 6.01%
-------- -------- ------ -------- -------- ------
Total interest-bearing
liabilities 791,221 7,957 3.99% 701,113 7,837 4.43%
-------- -------- ------ -------- -------- ------
Net interest income $ 12,749 $ 10,998
======== ========
Net interest rate spread 4.25% 4.17%
====== ======
Net earning assets $205,874 $167,358
======== ========
Net interest margin on
earning assets (3) 5.07% 5.02%
====== ======
Ratio of average
interest-earning assets to
average interest-bearing
liabilities 126.02% 123.87%
====== ======
19
(1) Amounts shown are fair value for available-for-sale securities and
amortized cost for held-to-maturity 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 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.
3rd Quarter 1999 Compared to 3rd Quarter 1998
(in thousands) ---------------------------------------------
Increase (Decrease) Due to Total Increase
------------------------- --------------
Volume Rate (Decrease)
-------- ------- ----------
Interest-earning assets:
Federal funds sold and
interest-bearing deposits $ (121) $ (10) $ (131)
Investment securities 729 (155) 574
Loans:
Commercial 568 (115) 453
Commercial real estate 558 (116) 442
Agricultural 505 (159) 346
Residential real estate 194 (187) 7
Consumer and home equity 260 (80) 180
------- ------- -------
Total loans 2,085 (657) 1,428
------- ------- -------
Total interest-earning assets 2,693 (822) 1,871
------- ------- -------
Interest-bearing liabilities
Interest-bearing checking 51 (43) 8
Savings and money market 117 (111) 6
Certificates of deposit 538 (609) (71)
Borrowed funds 192 (15) 177
------- ------- -------
Total interest-bearing liabilities 898 (778) 120
------- ------- -------
Net interest income $ 1,795 $ (44) $ 1,751
======= ======= =======
20
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 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. 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 to address Year 2000 issues
and approximately $262,000 has been expended through September 30, 1999. Further
costs are not expected to be material. 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.
21
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 an evaluation to
determine which of 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 is 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
followed up with those borrowers who had not responded to the surveys. We
reviewed such responses as were returned and worked individually with customers
to resolve any identified problems. To the extent a problem is identified, the
loan officer worked with customers 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. Through loan loss reserve analysis a
specific allocation has been made for these potential losses. In the event that
Year 2000 noncompliance causes a depositor to withdraw funds, we plan to
maintain additional cash on hand, and an increased level of federal funds sold.
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-offs of loan amounts in excess
of collateral values. These potential charge-offs are 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
22
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 prospectus dated June 25, 1999 which is included in
the Registration Statement on Form S-1 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 Nine Months ended September 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)
November 12, 1999 /s/ Peter G. Humphrey
- ----------------- ----------------------------------
Date Peter G. Humphrey, President & CEO
November 12, 1999 /s/ Ronald A. Miller
- ----------------- ----------------------------------
Date Ronald A. Miller, SVP & CFO
24